Crown Castle: Excellent Opportunity To Buy This Moat-Worthy REIT (NYSE:CCI)

It’s hard to keep up with the market’s mood swings from day to day. When it comes to investing for short-term gains, on some days you may feel like a genius and on others, you may not want to check your brokerage account at all.

That’s why a better idea may be to invest in solid income generators that own mission-critical assets. These names pay you to hold onto them and may reward you with long-term capital appreciation without keeping you up at night.

This brings me to Crown Castle Inc. (NYSE:CCI), which may be a great pick for bargain seekers who prize an above average yield and strong growth potential.

As shown below, CCI stock currently trades well off its 52-week high of $200 and recently dipped below the $150 mark since the start of this month. Let’s take a look at why now may be a great time to pick up this durable REIT.

Why CCI?

Crown Castle, along with peer American Tower (AMT) are the 2 largest cell tower REITs in the U.S. CCI owns and operates 40K+ cell towers and 85K+ miles of fiber, supporting fiber solutions and small cells across every major market in the U.S. Its moat-worthy collection of assets connects populations to essential data, technology, and wireless service.

It enjoys a very steady income stream as it leases valuable tower space to the top mobile carriers, AT&T (T), T-Mobile (TMUS), and Verizon (VZ). Its business model has natural competitive advantages, as there is little to no need for a competing tower to be built nearby once they are up and running, and leasing out additional space on an existing tower requires minimal additional capital spend.

Meanwhile, CCI continues to churn out decent growth, with site rental revenues growing by 10% for the full year 2022. It’s also seeing positive operating leverage through margin expansion, as adjusted EBITDA grew at a higher rate of 14% YoY. This was driven in part by an industry-leading 6.5% organic tower revenue growth, as CCI’s customers aggressively upgraded existing tower sites with additional spectrum. They also deployed equipment to thousands of tower sites to support their nationwide 5G deployments.

Looking ahead, CCI is making moves to secure its future growth, with management expecting to double the rate of small cell deployments this year to 10K nodes. Half of this deployment is to be co-located on existing fiber, which helps customers to meet their 5G demand. CCI is also in the early innings of this growth runway, as robust 5G spend is expected to continue for years to come. This is reflected by management’s comments during the recent conference call:

We believe our customers will first deploy their spectrum on the majority of their existing sites as they are currently doing before shifting their focus to cell site densification to get the most out of their spectrum assets by reusing it over shorter and shorter distances.

The nature of wireless networks requires that cell site densification will continue as the density of data demand grows and we expect 5G densification to require both towers and small cells at scale to fill in the network.

With that view in mind, we have invested more than $40 billion of capital to-date in towers and more recently, small cells and fiber that are mission-critical for wireless networks to capture as much of this growth opportunity as possible.

Importantly, we are already generating a 10% return on our total invested capital with the opportunity to increase that return over time as we add customers to our tower and fiber assets and grow our cash flow.

Moreover, CCI carries a strong BBB rated balance sheet with 85% fixed rate debt, a weighted average debt maturity of 8 years, and limited maturities through 2024. It also carries a safe net debt to EBITDA ratio of 5x and has an impressive $5.5 billion in available liquidity on its revolving credit facility, giving it plenty of balance sheet flexibility.

Lastly, CCI appears to be good value at $139 with a forward P/FFO of 18.0 sitting below its normal P/FFO of 21.8. It also pays a respectable 4.5% dividend yield, which is covered by an 85% payout ratio. While that may seem slightly high, it’s worth reminding that the steady nature of its cash flow supports a higher payout.

Management grew the dividend by 9% last year, and anticipates long-term 7% to 8% annual dividend growth. This, combined with the current 4.5% yield translates to potential long-term CAGR of ~12%, which is meaningfully higher than the long-term 9% to 10% annual return of the S&P 500 (SPY). Notably, analysts have a consensus Buy rating with an average price target of $155, which translates to a near-term total return potential in the mid-teens.

Investor Takeaway

Crown Castle has positioned itself to capitalize on the accelerating 5G spending wave and recently closed out on a strong year for operating fundamentals. Its growth runway looks promising, and its balance sheet offers plenty of flexibility to pursue more opportunities as they arise. Importantly, it is trading at a meaningful discount relative to its historical P/FFO multiple and offers a strong starting yield at present with potential for strong long-term total returns.