[AMT – American Tower; CCI – Crown Castle] Legacy advantages and incremental returns
In the US, tower companies have enjoyed a 20-year growth tailwind that shows no signs of fatigue. The population of wireless subscribers has grown at a high single digit rate, from fewer than 130mn in 2001 to 440mn in 2018. In turn, network standards have evolved – from 2G (voice, SMS; 2000-2006) to 3G (mobile web browsing; 2005-2011) to 4G (mobile video; 2011 –) to eventually 5G (IoT, automation, immersive experiences) – accommodating 30%-40% annual growth in data traffic, fueling steady demand for network infrastructure (capex from US wireless carriers has run between $20bn-$30bn in each of the last dozen years)
Essential to meeting the irrepressible flood of data are ~150k of these:
That’s a cell tower. These used to be owned and operated by wireless carriers but following two decades of consolidation are today managed by third-parties like American Tower and Crown Castle who, by consolidating tenancies from multiple carriers, can rent out more space on the tower, and do so faster and cheaper than any carrier could on its own1. A cell tower receives and propagates radio waves that allow one cell phone to connect to another. It’s basically a vertical structure on a small plot of land with antennas hanging off it. Those antennas are hooked up to coax cables or fiber, threaded up and down the tower, that carry radio signals to and from a base station, which connects to the fiber backhaul of the big telcos. Around the tower, you might find a generator for emergency backup power and a shelter that houses radio and networking equipment.
Sometimes cell towers are camouflaged as palm trees for aesthetic reasons
A tower operator owns the tower and leases the underlying land while wireless carriers own and operate all the equipment, cable, and shelters. In the US, carriers lease space from tower operators under non-cancellable contracts with an initial term of 5 to 10 years, followed by 5-year renewal periods, embedded with 3%-4% price escalators. The more stuff a wireless carrier puts on the tower and the heavier the stuff, the more it pays. To get a tower up and running, an operator might invest ~$275k upfront for construction and then incur ~$12k/year in ongoing costs of ground rent, insurance, real estate taxes, and utilities, plus ~$1.5k annually on upkeep, repairs, and other basic maintenance expenses. A single tenant might pay ~$20k/year for rent, producing gross profits after MCX of ~$6k, a piddling 2% return on investment.