Last week, in these pages, I talked about what I’ve discovered over several decades in Real Estate. Not only these days as a U.S.-based writer, covering Real Estate Investment Trusts (REITs), but also in my time as a developer, investor, and now, experienced analyst.
Today, I thought we’d look ahead, and discuss some of the technology-based REITs, to get a sense of where we’re all headed (at least in a slice of the REIT space).
For example, with the potential for driverless cars, I imagine how autonomous vehicles might transform the economy. The connection between automated-driving technology and commercial real estate became clearer from Stephen Bersey, Senior Technology Analyst at MUFG Securities Americas, who said, “The average person generates around 650MB of data a day, through the use of PCs, mobile phones and wearables, but by 2020 projections show that the average person will generate 1.5GB of data a day.”
Bersey explained, “In an autonomous car, we have to factor in cameras, radar, sonar, GPS and LIDAR (light detection and ranging) components as essential to this new way of driving pistons, rings and engine blocks.”
This means that each autonomous car will be generating around 4,000GB (4 terabytes) of data a day. That’s more than 2,500 times the amount of data that the average person generates today.
With that in mind, I compiled a list of five technology REIT favourites. Certainly, these aren’t without risk, but based on the demand for data – from cell towers, fibre, and data centres – the benefits for owning shares in these REITs is obvious.
Crown Castle (CCI) is the only Cell Tower REIT that focuses exclusively on U.S. assets. The company owns, operates and leases shared wireless infrastructure, including: (1) towers and other structures, such as rooftop towers, and (2) small cell networks supported by fibres. The cell towers have a significant presence in each of the top 100 U.S. markets, as CCI owns approximately 40,000 towers and 60,000 small cells, and 60,000 route miles of fibre. CCI’s core business is providing access, including space or capacity, to wireless infrastructure via long-term contracts in various forms, including license, sublease and lease agreements. By managing CCI’s tower assets, the company should be able to extrapolate value, allowing multiple carriers to locate on each structure without competition. CCI’s collection of cell tower assets offers unique solutions for the carriers to fill in the gaps and add coverage in high-traffic areas.
The downside? Possible delays in deployment of next generation technologies and higher borrowing costs.
Still, the overall cell tower business model is sound, and the secular tailwinds of an increasing demand for wireless connectivity have positioned both CCI and American Tower (AMT) to capitalise on positive industry trends.
As for AMT, the global consolidator is the fastest-growing player in the world of telecommunications infrastructure. Based in Boston, the company started out as a subsidiary of American Radio and expanded operations in Mexico, Brazil, India, Chile, Colombia, Peru, Ghana, and South Africa. Tower sites continue to be the preferred solution, as they provide the most technologically efficient and cost-effective option for coverage and capacity requirements. And as devices become more advanced, the increasing demand for high-bandwidth applications and higher quality of service result in a narrower range at which signals can be transmitted. As a result, carriers are investing in denser networks.
The downside? Slower demand in the tower lease business, if carriers begin to cut back on spending
In the third quarter, their U.S. property segment delivered strong organic tenant billings growth of 7.4%, reflecting ongoing investments in 4G technology by tenants to meet ever-increasing data and video demand. Their international property segment also experienced strong demand for tower space, especially in Latin America.
AMT has healthy and strong fundamentals – great growth potential & earnings potential. While I prefer CCI’s higher dividend yield, AMT’s scale and global footprint is attractive.
CyrusOne (CONE) is a data centre REIT, whose potential revenue model could provide some attractive dividend opportunities down the road. S&P Global Ratings raised its issuer credit rating on CONE to ‘BB+’. CONE is focused on maintaining a strong capital structure so that it can continue to build out its global platform. The downside? Technology sell-offs. Recently, however, CyrusOne was selected to provide colocation and interconnection, by Ovation Data Services, Inc., a leading data services provider for multiple industries in Europe and the U.S., with a major concentration in seismic data for the purposes of oil and gas exploration. My bottom Line: a strong buy, with strong dividend growth, international expansion and robust development activities.
Digital Realty’s (DLR) footprint stands at 203 properties located in 32+ global markets (4 continents and 11 countries). The company supports the data centre, colocation and interconnection strategies of more than 2,300 firms across its secure, network-rich portfolio of data centres located throughout North America, Europe, Asia and Australia. Further leveraging their leading global platform to cross-sell, DLR is addressing new markets that meet their risk-adjusted return criteria, to meet customers’ needs and support their growth. The downside? Rising interest rates and increasing competition in data centres. But based on their exceptional growth profile, I believe shares deserve a Buy recommendation (nibble perhaps).
Finally, Uniti Group (UNIT), whose shares are substantially mis-priced. The dynamics driving Uniti Fiber and Uniti Towers are key differentiators in which the Uniti REIT is poised to profit. UNIT rapidly evolved from primarily a single-tenant, one-property landlord… to servicing nearly 17,200 customer connections through three diverse, yet complementary business segments (fibre strategy, leasing strategy, tower strategy). The biggest risk with UNIT comes from tenant concentration. Uniti has significant leasable capacity across all its business units, and because the cost of adding new tenants is relatively small, the company can drive attractive incremental yields across all of its asset classes. As the CEO said, “We expect these strategic assets will position as well for sustained organic growth for many years.” We are maintaining a SPEC BUY.
Excerpts from this article appeared in a November column at Forbes.com.
