What Is an Infrastructure Trust?

An infrastructure trust is a type of income trust that exists to finance, construct, own, operate, and maintain different infrastructure projects in a given region or operating area. Infrastructure trusts operate like mutual funds and real estate investment trusts (REITs) whereby investors purchase unit shares of the vehicle. The infrastructure trust will provide distribution payments to the unitholders on a periodic basis.

Key Takeaways

  • An infrastructure trust is a type of income trust that exists to finance, construct, own, operate, and maintain different infrastructure projects in a given region or operating area.
  • Infrastructure trusts are like mutual funds and real estate investment trusts (REITs) whereby investors can purchase unit shares of the vehicle. The infrastructure trust will provide distribution payments to unitholders on a periodic basis.
  • Infrastructure REITs own and manage infrastructure real estate while collecting rent from tenants that occupy or use that property.
  • Infrastructure REIT property types include fiber cables, wireless infrastructure, telecommunications towers, and energy pipelines.

Understanding an Infrastructure Trust

Infrastructure includes a wide breadth of companies and areas, such as utilities, waste management, road construction, telecommunication, airports, and shipping. Infrastructure trusts are investment vehicles that invest in the companies that do business in these areas.

Investors looking to diversify their portfolio would be wise to invest in infrastructure trusts as they typically weather market downturns as infrastructure is always needed, thereby providing a consistent stream of income.

When evaluating an infrastructure trust, it is important to consider the trust's underlying holdings before making a purchasing decision. As with any trust, it is useful to determine the trust's intrinsic value by using any number of valuation techniques, including a discounted cash flow.

Infrastructure REITs

A real estate investment trust is a company that owns, operates, or finances income-producing real estate. For a company to qualify as a REIT, it must meet certain regulatory guidelines, such as distributing 90% of taxable income to shareholders. REITs often trade on major exchanges like other securities and provide investors with a liquid stake in real estate. REITs are also known for their steady income from dividends.

Infrastructure REITs are a class of REITs that own and manage infrastructure real estate while collecting rent from tenants that occupy or use that property. Infrastructure REIT property types include fiber cables, wireless infrastructure, telecommunications towers, and energy pipelines.

Infrastructure REITs can invest domestically or globally. Those that invest in the U.S. domestic market are considered safer investments as the political climate of the country is stable and infrastructure projects are fairly predictable. Infrastructure REITs in other countries, particularly emerging markets, though riskier, typically have better growth prospects.

How to Invest in an Infrastructure Trust

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. There are popular REIT exchange-traded funds (ETFs) like iShares U.S. Real Estate ETF (IYR), Vanguard Real Estate ETF (VNQ), and the Real Estate Select Sector ETF (XLRE). Some REITs are Securities and Exchange Commission (SEC) registered and public but not listed on an exchange; others are private.

Infrastructure trusts that are traded on major exchanges are relatively rare; only a handful are available in the U.S. One reason may be the complexity of their operations. American Tower Corporation, for example, has over 187,000 properties that it manages across an array of different types of communication sites. Capital needs for such companies are high and operations may be subject to weather-related events such as hurricanes and other natural disasters.

In general, when evaluating REITs, earnings per share and P/E ratios aren't helpful. One must look at funds from operations (FFO) rather than net income. Prospective investors should also calculate adjusted funds from operations (AFFO), which deducts the likely expenditures necessary to maintain the real estate portfolio. AFFO provides an excellent tool to measure the REIT's dividend-paying capacity and growth prospects.

Real-World Examples

For example, American Tower Corporation (AMT), one of the largest global REITs, owns, develops, and operates over 187,000 communications sites. It leases space on communications towers, operates outdoor distributed antenna systems and managed rooftops, and provides services speed network deployment. The REIT shares are listed on the NYSE.

Another example of an infrastructure trust is Crown Castle (CCI), which is the U.S.'s largest provider of shared communications infrastructure. Its infrastructure portfolio consists of approximately 40,000 cell towers, 80,000 on-air or under-contract small cell nodes, and 80,000 route miles of fiber.