8 Signs the Tower Industry is Maturing
The publicly traded tower companies like American Tower continue to set new earnings records and stock market highs. Margins are growing, and valuation multiples are often double that of their primary customers, the wireless carriers. Yet the tower industry may be nearing or even past the peak of its high earning growth stage. The good news is that even if high growth rates are not in future, exceedingly strong cash flows are a sure bet for years to come.
American Tower: ‘Optimistic attitude’ to 2011
As hinted in the above article, here are 10 signs that the tower industry has reached the maturity stage of the growth cycle:
- Tower companies are moving into international markets to increase their portfolios. Exhibit 1 – American Tower added 8,000 towers in 2010, but only 1,000 were in the U.S.
- A close look at financial statements shows that revenue growth is coming from existing tenants rather than from new towers.
- More money is chasing towers than there are towers available. Several tower industry veterans with millions of equity investor funds at their disposal cannot find towers for sale.
- The build to suit market is ultra-competitive. Many firms that have built towers to meet carrier new site needs have left the market as competition has erased profit margins.
- Tower companies are seeking other uses for their cash. The most common tactic is to buy out the leases under their towers. Others are considering increased dividend payments
- At least one major tower company is considering changing to a Real Estate Investment Trust (REIT) structure. REIT status provided significant tax benefits to companies who pay out large portions of their earnings as dividends to their investors.
- Tower Companies are developing additional service offerings for the carriers in order to find new revenue growth engines. Likewise, tower companies are investing in ownership of fiber and microwave networks that carry wireless traffic from cell sites to switching centers.
- Tower companies have traded upside revenue for from new rents for 4G equipment in exchange for extending the term length on their existing collocation agreements.
If the growth phase is indeed over, then tower companies will still remain attractive investments. There will just be a shift in the type of investor from those seeking capital appreciation to those who seek stable and growing dividend payments. If the tower companies succeed in expanding their services and international presence, they will have plenty of cash to fuel a new round of growth.