5G REITs: Where Tech Meets Real Estate

There is a revolution going on. You’ve probably heard the term 5G technology. It is the latest, or “fifth generation,” of cellular wireless technology just starting to be rolled out, notes industry-leading income specialist Tom Hutchinson, a contributor to MoneyShow.com and editor of Cabot Dividend Investor.

But it’s much more than just an incremental generational cell phone advancement. It will thrust the world into a new age. A new generation rolls around every 10 years or so, from the initial one that enabled cell phones in the first place to the third and fourth generations that enabled smartphones and mobile data.

Each generation marks an improvement in speed and latency, the amount of time it takes devices to communicate with each other. This generation is projected to feature Internet connectivity with far superior speed, scope and scale.

The implications go well beyond phones. It is a crucial tipping point of critical mass: 5G enables virtually instantaneous internet connectivity, providing the technology for a new range of advancements like self-driving cars, robotics, artificial intelligence, smart cities and much more.

Until now, the digital age was like a dirt road. It’s now about to become a 10-lane highway with speed rails and air traffic. You ain’t seen nothin’ yet!

How important is it? It is such a game changer that it is considered a national security imperative. It is a big part of the current trade war with China and the struggle for dominance and power.

The U.S. National Security Council has warned that if China gets 5G first it “will win economically and militarily.” In fact, 5G technology is considered so crucial that the FCC streamlined the rules so that the 5G rollout can continue in haste.

5G is based on infrastructure. Every new generation requires more and better cell towers and supporting structures. This new generation requires even more because, although it provides great speeds and power, it doesn’t have the cell signal range of previous generations. Therefore, it requires more towers and supporting technologies to increase the range and relieve congestion.

Aside from the major cell phone providers, there are three big players in 5G technology, and they’re all real estate investment trusts (REITs). It’s a business that provides both growth, with the 5G rollout, and defense, as the rollout will continue rain or shine, in a good economy or a bad one. Right now, these three 5G technology REITs are an incredible opportunity for income investors.

American Tower Corp. (AMT)

American Tower is the largest U.S. cellular infrastructure REIT. It owns and operates 170,000 cell towers, 41,000 in the U.S. and 130,000 abroad, primarily in India and Brazil. And it’s growing. It added 20,000 cell towers in 2018. It leases these towers to cellular service providers under long-term contracts, acting as a mobile technology landlord.

Business is good. The stock has blown away both the returns of the overall market as well as its REIT peers. American Tower has provided a better than 21% average annual return over the past 10 years, and a year-to-date return of 54%. It is benefitting in the U.S. from the voracious anticipation for the 5G rollout as well as in emerging markets, as low-cost smartphones proliferate at a torrid pace.

Lately, the returns are accelerating. The stock has gained 49% over the past year and 40% year to date. Revenues and earnings continue to grow with no end in sight and this market has noticed.

The biggest drawback is that the REIT isn’t cheap and it only pays a 1.43% yield. That said, it is forecasted to grow earnings at a better than 21% annual clip over the next five years. That’s serious growth for a real estate investment trust. It is also worth noting the defensive nature of this growth business. Even during the financial crisis year of 2008, American Tower still grew its revenues at 8%.

SBA Communications Corp. (SBA)

SBA Communications is the smallest of the cellular infrastructure real estate investment trusts with about 30,000 cell towers in North, Central and South America. It has a huge presence in Brazil but generates about three quarters of revenue in the good ole USA.

It has essentially the same business model as American Tower in that it leases space on its towers to cellular service providers under long-term contracts. The key differentiating point is size, which is both a blessing and a curse.

On the downside, all the earnings go back into growth and it doesn’t even pay a dividend. Who ever heard of a REIT that doesn’t pay a dividend? On the positive side, the upside is juiced. Smaller companies can grow faster and SBA Communications has past returns that are even better than those of American Tower.

While American Tower is forecasted to grow earnings better than 20% over the next five years, SBA Communications is projected to grow at a better than 80% annual clip. It’s really a growth stock disguised as a real estate investment trust. But it’s in the right place at the right time.

Crown Castle International Corp. (CCI)

Crown Castle International leases a portfolio of properties that currently includes 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to the four largest wireless service providers in the U.S.

It has the same basic business model as the other two, but I like this one best for several reasons. For one, it actually pays a decent dividend, currently a 3.02% yield. Another reason is that it operates exclusively in the U.S. The 5G story is so good that I don’t want to risk any crazy emerging market shenanigans messing things up. But perhaps the most important advantage is the small cells.

The current 5G buildout plays right into Crown Castle’s hands. Although speed and latency will improve by staggering amounts, this generation lacks something previous ones had — range. A 5G signal only travels about half a mile, compared to several miles for earlier generations. That means that small cell towers will be required all over the place in order to increase the range and relieve congestion.

Crown Castle is the small tower king. Small towers are about the size of a pizza box, and will soon decorate almost every street corner. AT&T claims that 300,000 new small towers will be needed for 5G. Only 220,000 currently exist.

The real estate investment trust already owns 65,000 (more than any other company in the country) and has recently signed multi-billion dollar contracts with the four largest cell providers (Verizon, AT&T , Sprint and T-Mobile ) to provide more.

The company built 7,000 small towers is 2018 and it will put up an estimated 15,000 more this year. By some estimates, the infrastructure REIT will have 240,000 such towers by 2025.

Crown Castle International is also projected to have robust earnings growth over the next five years, which is unusual for a real estate investment trust. While the upside potential of this REIT is probably less than the other two, it’s a more stable performer. The growth is there but it also offers more downside protection if the market turns south.

MoneyShow — an industry pioneer in investor education since 1981 — is a global, financial media company, operating the world's leading investment and trading conferences...