Activist Investor Pushes for Change at Crown Castle

Activist investor Elliott Management is advocating for changes at Crown Castle, a communications-infrastructure real estate investment trust (REIT), which could potentially benefit the stocks of all cell-tower REITs.

Focus on Corporate Governance and Fiber-Optic Cable Investments

Elliott Management is urging Crown Castle to improve its corporate governance practices and reconsider its approach to fiber-optic cable investments. According to the hedge fund, these investments have not been generating a satisfactory return. As a result, the company might need to reduce capital expenditures or consider selling the business and associated assets. The market responded positively to Elliott's involvement, with Crown Castle's shares surging by 15% on Monday.

Cell-Tower REITs Show Promising Outlook

Even before Elliott Management's intervention, the three major cell-tower REITs - Crown Castle, American Tower, and SBA Communications - were already presenting an attractive investment opportunity. Despite the overall market favoring REITs, these stocks have underperformed this year, with American Tower down 1% and SBA and Crown Castle experiencing a decline of around 10%. In contrast, the S&P 500 index has delivered a 20% return year-to-date. However, these performance discrepancies are not due to poor fundamentals. The earnings growth has been robust, and now an external factor is turning into a tailwind for these companies.

The Vital Role of Cell-Tower REITs

Cell-tower REITs play a crucial role as landlords for antennas, leasing space on their communication towers to wireless carriers such as Verizon Communications, T-Mobile US, and AT&T in the United States, as well as local equivalents across the globe.

Unlike traditional REITs dependent on a single tenant, tower REITs benefit from leasing space to multiple carriers on the same tower. Their growth is driven by the incessant demand for more data and faster connectivity from mobile-phone users. This demand necessitates the installation of additional antennas in various locations and periodic network technology upgrades. The contracts with wireless carriers typically span several years, offering a clear revenue outlook, and often include annual rent increases that safeguard against inflation.

In conclusion, the involvement of activist investor Elliott Management presents an opportunity for positive change within Crown Castle and the wider cell-tower REIT sector. With their unique role as essential infrastructure providers, the promising outlook for cell-tower REITs is underpinned by the ongoing demand for improved wireless connectivity.

Tower REITs: A Promising Investment Opportunity

While cell-tower REITs have faced underperformance this year, mainly due to higher interest rates impacting their valuations, recent market trends indicate a positive shift. The Federal Reserve's expected rate cuts, coupled with the rally in tower REIT stocks even before Elliott Management's announcement, spell favorable prospects for investors.

The borrowing-dependent REIT industry has felt the weight of increased costs resulting from higher interest rates. As a consequence, dividend yields seem less attractive compared to bond yields. Crown Castle stock currently yields 5.4%, while American Tower offers a yield of 3% and SBA stands at 1.4%.

However, the scenario has reversed as markets anticipate the end of rate hikes and potential cuts by the Federal Reserve. This change has pushed down bond yields, which bodes well for tower REIT stocks. Lukasz Tomicki, managing partner at LRT Capital Management, affirms that tower REITs are a solid investment choice, especially considering the benefits they reap from decreasing interest rates.

Unlike many other REITs that primarily serve as bond proxies for dividend income, cell-tower REITs offer growth potential as well. American Tower is projected to deliver the strongest results in the near future, with an anticipated 5% increase in adjusted funds from operations in 2024 and a further 9% increase in 2025. SBA follows closely behind, while Crown Castle takes on the role of a "fixer-upper" in this trio. Although Crown Castle's numbers are projected to be negative over the next two years, its attractive valuation multiple compensates for this drawback. Moreover, with an activist investor now actively engaging management to turn things around, the potential for improvement is high.

The opportunity for investment in cell-tower REITs is ripe, and it's time for investors to take notice.