Infrastructure - SEPTEMBER 3, 2014

Infrastructure REITs hit expansion mode

by Susan Persin

Infrastructure REITs have found a profitable calling in life — assisting the nation’s biggest telecommunication carriers in moving from 3G to 4G wireless networks. The largest infrastructure REITs are benefiting from strong demand generated by the four major wireless carriers, which are upgrading their networks and wireless services.

This transition — combined with growing usage of smartphones, games, music and video services — is driving demand for tower space. In pursuing a strong growth strategy, infrastructure REITs have become highly leveraged. Consolidation among wireless carriers has also made the REITs more dependent on a limited number of tenants. Through the end of August, infrastructure REIT year-to-date returns totaled 19.27 percent, which is well above their 4.8 percent return in 2013 and only slightly below the 20.09 percent FTSE NAREIT All Equity REIT average.

The infrastructure sector’s two largest REITs are in the cell tower industry and comprise more than 99 percent of the sector’s $62.5 billion market cap.

American Tower Corp. is by far the largest infrastructure REIT, with a market cap of more than $37 billion. The company is updating and expanding its domestic network and is also aggressively expanding international operations. American Tower acquired MIP Tower Holdings, which owned Global Tower Partners, for $3.3 billion and added thousands of towers to its portfolio in late 2013. It is among the contenders for a stake in India’s Viom Network, which is the country’s largest independent telecom tower company, with 42,000 towers. VIOM is expected to announce in September whether it will pursue a REIT listing or partial sale.

Crown Castle International, with a market cap of $24.8 billion, adopted the REIT format at the beginning of 2014. The company has expanded significantly to become the largest wireless tower operator in the United States. It also has operations in Australia. CCI added 7,000 distributed antenna systems through its acquisition of NextG Networks, and it acquired 7,200 wireless towers from T-Mobile. In December 2013, the company also completed its $4.85 billion acquisition of 9,700 AT&T wireless towers. During the first half of 2014, net revenue was up 21.5 percent from year-ago levels, and AFFO per share gained 15 percent.

Two other REITs, whose business is not related to cell phone towers, comprise a small part of the infrastructure REIT sector.

  • CorEnergy Infrastructure Trust, with a market cap of $252.1 million, also recently converted to a REIT structure. It primarily owns midstream and downstream U.S. energy infrastructure assets, including pipelines, storage tanks and transmission lines.
  • The fourth and smallest REIT in this sector is Power REIT, with a market cap of $14.8 million. Its assets include 450 acres in Southern California that is the site of a 60-megawatt solar photovoltaic power generation plant that will open in 2014 and a railroad ground lease.

Infrastructure REITs’ solid year-to-date returns reflect current market performance as well as a strong outlook for future growth both nationally and internationally. However, their high leverage and significant exposure to a limited number of tenants increase their risk. After several years of strong returns, the REITs appear to be fully valued or possibly overvalued. Combined with a 1.20 percent dividend yield that is below average for REITs, infrastructure REITs are less attractive than other REITs to some investors.

Hopefully, though, infrastructure REITs will continue to ring up profits — assuming the phone lines to their telecom clients do not go dead anytime soon.

Susan Persin is senior director of research at Trepp.

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