The wireless tower industry appears to be undergoing a makeover of sorts. As of January 1, 2012, the leading cell tower operator American Tower ‘A’ (AMT) had successfully reorganized its business and began functioning as a real estate investment trust (REIT). While many may find this move somewhat strange, it actually makes a great deal of sense considering that as a tower operator, the company is essentially a landlord within the telecom market.
In fact, the similarities between wireless tower companies and REITs have been noted for years. These businesses, like REITs, manage properties and generate revenue from lease agreements. Wireless carriers, such as AT&T (T - Free AT&T Stock Report) and Verizon (VZ - Free Verizon Stock Report), serve as tenants for these cell towers by paying to rent space for antennas and other equipment used to create cellular networks. It, therefore, seems appropriate that REIT metrics be used to evaluate cell towers, although this hasn’t been the case until now.
As a REIT, American Tower will likely be more attractive to income-oriented investors since it will be required to distribute at least 90% of its taxable income to shareholders through dividends. This represents a unique opportunity for REIT investors because tower companies, like AMT, are less exposed to the typical headwinds that affect the REIT industry. American Tower’s performance is tied to expansion in the wireless networking industry, not the real estate market.
Therefore, the company’s top line will probably continue to expand at a rapid pace in response to the increasing need for capacity among wireless carriers, which sets it apart from more typical REITs. This distinctive position in the REIT industry augurs well for the company’s stock. In fact, AMT shares have ticked up almost 6% since its REIT status took effect at the start of this year.
And, it appears as though American Tower’s recent move may be the start of a trend among wireless operators. Crown Castle International Corp. (CCI) recently adopted the REIT metrics of funds from operations (FFO) and adjusted funds from operations (AFFO), which has raised speculation that it may be looking to follow in AMT’s footsteps. Too, SBA Communications (SBAC), (which has yet to adopt any such metrics), has acknowledged that the development of a standard definition of AFFO across the industry would be an ideal goal.
Essentially, it would be very difficult for the wireless tower operators to effectively compete using varied business models, which means than an industry shift toward REIT status is likely in the works. This probably will not be a swift change, however, as the other tower companies may want to watch from the sidelines as American Tower makes the jump before making a leap themselves. But, if AMT shares continue on an upward trend, more of these unique REITs may start popping up, creating an entirely new asset class for income-oriented investors to consider.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.