At this point, it's no secret that mobile devices have become an integral part of many people's lives. The adoption of smartphones, tablet PCs and e-readers have grown rapidly, and by the end of 2011, the vast majority of American cellular phones were smartphones. Overall, analysts estimate that global usage of the mini-computers will continue to explode upwards as these devices, which combine various social networking, gaming, and other business functions, have quickly moved from wants to must-haves. To that end, the technology sub-sector funds like the First Trust NASDAQ CEA Smartphone ETF (Nasdaq:FONE) have also grown in popularity as investors try to cash in on the trend. However, while most of the attention in the sector has been firmly placed on the device manufacturers or telecoms that operate the networks, another group of firms stands to benefit as well.
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Renting Some Airspace
Believe it or not, the bulk of the numerous cellular towers that dot our countryside aren't owned by network providers like AT&T (NSYE:T). Instead, providing this vast and critical wireless infrastructure is series of independent firms that are often ignored by investors. Functioning similar to an office or apartment building landlord, the tower firms will build the tower, fill it full of antennas and other equipment and then rent out space along the tower to the various network providers. Leases are generally signed for long terms and come with renewal clauses tied to inflation. High retention rates and low ongoing capital costs for each tower often produce high margins and steady cash flows for the operators.
Despite, the sleepy image, there's plenty of growth happening in the sector. Wireless bandwidth demand is climbing dramatically thanks to the adoption of smartphones. At one point, AT&T reported that the original iPhone crashed networks in some cities and the providers need to expand their networks to keep up. That will directly benefit the tower operators. At the same time, in order to fund some of these upgrades, some wireless providers are turning to sale-lease back transactions. Deutsche Telekom (OTCBB:DTEGY) T-Mobile unit is currently planning to sell its 7,000-plus tower portfolio in order to fund a network build-out. That could mean plenty of opportunities for the tower owners for M&A.
Perhaps the biggest driver for the industry is conversion to real estate investment trust (REIT) status. As noted before, the similarities between wireless tower companies and REITs are striking. The towers, like REITs, manage properties and generate revenue from lease agreements. To that end, many companies in the sector have either converted or have begun the process of measuring FFO and transforming into the REIT tax structure. This will open up the firms to a completely new class of investors and provide a method of expansion.
While several broad-based funds like the Vanguard Telecomm ETF (ARCA:VOX) can be used as proxy for the entire wireless sector, there are only a handful of publicly traded firms that operate in the tower space. The king of them all is American Tower Corporation (NYSE:AMT). Leading the way into REIT conversion, the company owns approximately 39,000 cellular towers across the globe. These include emerging market hotspots such as India, South Africa and Brazil. The company recently announced its first dividend as a REIT, at 21 cents a share. If payouts continue at this level, American Tower has annual yield of 1.3%.
Also catching the REIT bug is Crown Castle (NYSE:CCI). While not fully converted yet, the firm has begun to report FFO metrics with its quarterly earnings announcements. Analysts predict that it's only a matter of time before the company converts. In the meantime, Crown recently raised its second quarter and fiscal 2012 guidance mainly based on the acquisition of two tower networks. Not to be out done, third player SBA Communications (Nasdaq:SBAC) recently added to its holdings, by purchasing 2,300 towers from Oaktree Capital and Mobilitie. Shares of SBAC have surged more than 24% since the beginning of the year.
The Bottom Line
As mobile data usage continues to grow globally, the tower owners and operators look like a great place to be. Functioning as landlords, these firms provide stable cash flows and high operating margins. For investors, the trio of American Tower, SBA and Crown Castle offer a unique position to play the growing surge of smartphones and infrastructure build-outs by network operators like Verizon (NYSE:VZ).
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.