The cell phone tower market is highly liquid, and the rent from these towers provides a large amount of cash flow. Each tower can be leased out to about four tenants, but the national occupancy average is just around 2.2 tenants per tower. Peppertree Capital, a company that invests in communication infrastructure, reports that towers with even just two tenants can be sold for more than 20x Tower Cash Flow (TCF), which is the rental revenue minus direct expenses on tower sites. Evidently, investors have attributed immense value to these rental operations given this lofty valuation metric. An initial investment to build a tower averages around $225,000, but Peppertree reports that even a low-end return (assuming a conservative 16x cash flow) yields around $550,000 for the investor. Towers yield such a large return because of low fixed maintenance costs that stay constant even while adding additional tenants.
The services provided by cell phone towers are also increasingly high in demand, a trend that is expected to continue in the coming years. Tower services typically address two main problems for wireless providers. First, they try to maximize coverage, establishing cell access to the largest area possible. Secondly, they aim to limit user congestion, trying to accommodate large numbers of bandwidth users. According to FierceWireless, 90 percent of Sprint customers are on unlimited data plans. 2018 was already a record-breaking year in terms of data usage according to Wells Fargo, and the Ericsson Mobility Report predicts that there will be 1 billion 5G subscribers by 2023. As the world becomes increasingly dependent on staying plugged-in to cell services, its demand for data will likely increase exponentially. This resultant consumer demand will also generate more data-related opportunities for corporations looking to analyze the data usage of its customers, augmenting the importance of these towers for companies outside the cell phone industry.
Cell phone towers are also very unlikely to be replaced. The most likely competitors for towers are satellites, small cells and a complete transition to Wi-Fi, says Hoya Capital Real Estate. However, according to Globalcom, satellites are incredibly costly compared to the other alternatives. Companies are often unwilling to commit hundreds of millions of dollars for the initial investment. The subsequent maintenance expenses and complications for satellites are also huge barriers to expanding the industry.
Small cells have recently become more well-known in the telecom industry. As defined by RCR Wireless, small cells are “low-powered radio access nodes that help provide service to both indoor and outdoor areas.” While the low level of initial investment required may be enticing, computer equipment company Fujitsu details how it would take 40 small cells to cover the area of one smaller-end tower. Thus, small cells are only a solution for small, high-congestion areas such as sporting arenas or urban centers where tower construction is difficult.
Finally, Wi-Fi, while convenient and cheaper for subscribers in stationary environments, is not applicable to mobile customers. Highly mobile Wi-Fi, such as personal hotspots, must be operated off of a cellular signal, which ultimately depends on cell towers. Unless new cell signal technology is rapidly developed, towers are unlikely to experience significant competition for the foreseeable future.
The current and forecasted behavior of cell phone companies points towards positive growth in the U.S. tower market. Guggenheim Partners forecasts an eight percent net organic growth domestically. According to a team of Wells Fargo equity analysts, the expected merger of T-Mobile and Sprint will likely have a very positive impact on the industry. As this consolidated company looks to increase its subscriber base and become a more direct competitor with Verizon, it will most likely begin to expand tower coverage. Verizon has remained a steady spender on towers, and AT&T has recently had success building new towers rather than replacing outdated ones. Cell service companies have recently begun competing to win the title of having the most coverage in both urban and, more recently, rural areas. This competition will further fuel the demand for more towers.
Demand for cell phone towers is also growing internationally, especially in South and Latin America. The need to keep up with other countries’ data speed and consistent coverage to remain competitive has sparked a recent Latin American movement to increase cell tower presence. According to Gutman, Brazilian carriers have been greatly increasing their spending on towers. RCR Wireless reports that Guatemalan tower company Continental Towers received an investment of $120 million in 2012, and it has been steadily growing its presence since. The company has towers in several other Latin American countries as well, such as Colombia.
In 2017, Cision’s PR Newswire called the tower industry “the multibillion-dollar industry that’s hidden in plain sight.” With the increased focus on the aesthetic appeal of public spaces, coupled with the unsightly nature of cell towers, there has been a growing number of towers disguised as pine trees, palm trees and art installations. In this sense, Cision’s statement can be taken quite literally. Figuratively, however, individual investors have largely remained blind to this growing industry hidden “in plain sight.” PR Newswire reports that most of the industry’s capital comes from the investments of specialized private equity companies, infrastructure funds and other alternative investment platforms. These infrastructure-specialized investors have more access to data about the cell tower industry than the average industry-agnostic investor. According to Hoya Capital Real Estate, the most widely owned real-estate exchange-traded funds (ETFs) do not include cell-towers despite their high returns, indicating that even major institutional investors have been avoiding this surging industry. Individual investors likely overlook cell tower companies because they focus on investing in service providers themselves, giving less thought to the resource networks that help them operate.
In the future, all investors should keep an eye on the tower market. Looking forward, the market for these towers will likely remain standing tall.