As the calendar turns to 2021 and we talk about the great digital pivot everyone experienced in 2020, one of the many themes that comes up in any digitally focused conversation is 5G. A lot of fun stuff comes up in any 5G talk, including (but not limited to) faster speeds, AR/VR, IoT and autonomous cars. Last month, Verizon’s keynote at the CES trade show talked about how 5G will change the way the typical consumer experiences sporting events, museums, concerts and traffic flow in cities.
While all of this discussion creates a lot of excitement, the conversation that should really be the focus is the whole chicken and egg of it all. The ‘egg’ of 5G cannot be laid without a whole lot of ‘chickens’ – the wireless infrastructure players. And there is some big-time heavy lifting still to do in that regard! For investors, this offers a significant opportunity.
When describing 5G infrastructure, the analogy of a cardiovascular system is useful. Why? Because, like the human body, in a 5G infrastructure deployment there are many important parts that need to work with one another in a dense environment. There are three critical pillars in a healthy cardiovascular system: veins, capillaries and, of course, a beating heart. Bringing that to 5G infrastructure, think of three critical pieces necessary for it all to work: lots of fibres (the veins), small cells (the capillaries at the end of these veins) – but perhaps most critical is the macro towers (that all-important beating heart).
Stating the obvious, none of us can really live without a healthy heart. Similarly, any discussion about all the exciting things that can come with 5G needs to be focused on the essentials of what is necessary to get there.
The more tools that tower companies have in their toolbox, the more carriers will seek their services
For investors, the tower sector has many more catalysts to come. While the sector saw strength in 2020 (group average was up 8%) versus the typical REIT, the group underperformed the S&P’s performance of +16% in 2020. What we believe the market underappreciates is that, for the towers, the 5G ‘roaring twenties’ (on the infrastructure side) have yet to begin.
Each of the three public tower companies – American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC) – is approaching its strategy and portfolio of assets with a somewhat unique edge. But all are expanding their offerings to become more than ‘just tower companies’ and are evolving into more end-to-end wireless infrastructure companies. We view this shift as a significant positive for the sector, as with 5G there is no one-size-fits-all by the carriers. The more tools that tower companies have in their toolbox, the more carriers will seek their services. Simply put, the expansion of these services will allow the tower companies to check more boxes for the wireless carriers’ upcoming ‘asks’.
In our view, there continue to be more tailwinds than headwinds for the tower sector. Three key themes to watch include:
Carriers will need to get busy
In the second half of 2020, the US wireless carriers pulled back in capital spending. This was for different reasons: T-Mobile’s integration of Sprint (acquired in Spring 2020) and lofty prices in the C-Band spectrum (which began in December 2020). However, with 2021 here, times they are a-changin’ (to quote the great Bob Dylan). We believe both these factors (Sprint integration and deployment of the recently auctioned-off spectrum) will drive additional spending in 2021. Spectrum is only valuable if it is put to work through additional cell sites. To that end, we expect each of the carriers to become more urgent and focused with their capital spend, given that significant overhangs (spectrum auctions and merger completion) are now removed. More urgency here means more cell sites deployed (an obvious benefit to towers).
Need for low latency
A key pillar of 5G is low latency. Simply defined, low latency is the ability to process a very high volume of data with minimal delay (latency). For infrastructure, this means there will be a strong need to add more cell sites (both macro towers and small cell) to create a dense (remember that cardiovascular analogy!) network.
Infrastructure bill – a lot more than bridges!
An infrastructure bill is widely expected as part of the Biden presidency. Infrastructure does not just include roads, bridges and airports. In the wake of covid, broadband (both wired and wireless) connectivity has become almost essential as a kind of utility. We believe the Biden administration’s Federal Communications Commission will continue to support additional initiatives to help drive the 5G ecosystem rollout – be it more spectrum, streamlining of regulation, or other moves. Wireless deployment can also be a key factor in narrowing the continued digital divide. As DC sends more support and capital this way, this will be a boon to the players that support wireless infrastructure.
In short: while tower valuations may seem stretched (trading at in the mid-20x 2021 EBITDA estimates) versus the typical REIT, the towers represent one of the few REIT stories with tangible growth opportunities that are not veiled in grey cloud right now. It is difficult to bet on one horse here – as the rising tide of 5G should lift all towers and allow them to continue to stand tall in 2021 and beyond.
