energyy
Overview
Crown Castle (NYSE:CCI) is one of the largest pure-play telecom REITs, owning over 40,000 cell towers across America. The company derives its revenue mostly from big telecom companies such as AT&T and Verizon.
CCI leases its assets under long-term contracts, which in turn accounts for most of its income. A strength of CCI’s business is that, yes, towers are capital-intensive in the beginning during construction but require minimal maintenance over their long lifespan. This means that the company has low CapEx and offers high margins. The fact that CCI’s clients are all telecom giants with high credit quality means that CCI is shielded from default risk.
The REIT just announced an $8.5B divestiture of its fiber and small cell segments during its latest earnings call. I want to dive into the deal to establish if CCI is worth investing in, following this development.
Latest Earnings Call
CCI announced a beat on both top and bottom line where it posted revenue of $1.65B, a $10M beat and Q4 FFO of $1.80, a 15 cents beat. But the headline came from the $8.5B deal that will unravel through 2 transactions, with EQT fund buying the small cells business and Zayo Group Holdings acquiring the fiber solutions segment. CCI will use the proceeds to repay debt and buy back stock.
CCI believes that the transaction enhances value for shareholders and will position the company for long-term success. Crown Castle will buy back around $3B of its shares thanks to the deal. The market responded fairly well to the news, with the company adding more than 7% at today’s market open.
However, CCI expects to reduce its annual dividend to around $4.25 per share starting in Q2 of this year. This would drop the yield to around 4.2% at a current price of $101.31. It is fairly strong but quite lower than its current yield of 6.58%. The company plans to target a dividend payout of around 75%-80% AFFO ex. Amortization.
Deal Insights
The deal is certainly due to Elliott’s pressure since its 2023 campaign that argued that CCI’s $19B in total fiber acquisition yielded poor market returns. Therefore, the spinoff concludes this strategic review and CCI’s refocus on higher-margin assets.
If we dive deeper into the numbers, the fiber business, which was generating close to $700 million in EBITDA (17.43% of total EBITDA), required heavy CapEX for growth, delivering a lower ROIC compared to regular towers.
Both fiber and small cells delivered stronger growth than towers (between 7-10% compared to 4-5%), which over-strengthened the valuation of this segment. This resulted in a $5B goodwill impairment in the latest earnings report, generating a loss of $3.9B in 2024. Even Ted Miller stated in early 2024 that CCI could fetch up to $15B by selling its fiber assets. Now, even with $8.5B, the company can deleverage significantly in order to maintain an investment grade rating and a target leverage of 6.0-6.5x.
Looking at the strain of dividend payout, before the sale, CCI neared 100% of its AFFO, limiting flexibility, which would now allow the company to reduce its debt more easily.
Another good point for the divestiture would be CCI's competition in the sphere, where it struggles to compete with specialized fiber players like Zayo Holdings, while towers are in theory an oligopoly with stable cash-flows.
Now for 5G, I discovered during my research on CCI that the wireless network operates on a higher frequency than its predecessors. Therefore, it has a shorter range and requires denser networks. That's why CCI was pushing into all network options but now, as 5G reaches maturity, carriers are shifting from small cell-heavy urban constructions to tower expansion in rural areas. This dynamic has been shown in CCI's decision to exit this area.
Another good point of focusing strictly on towers, as mentioned earlier, would be CapEx, but exactly how? Well, towers are 5G scalable where carriers can simply add 5G antennas without significant costs to CCI but add directly site rental revenue and one-time installation fees to upgrade towers.
Valuation Notes
Despite the dividend cut, at a yield of around 4.2%, it still remains higher than both SBA and American Tower, at 1.86% and 3.07% respectively. I still feel, however, that the 3 telecom tower REITS are expensive despite not posting significant growth since the rollout of 5G across the U.S. The company boasts a P/AFFO of 14.79, higher than the sector median of 14.32. EV/EBITDA follows the same trend where it stands at a massive 18.54, again higher than the sector median. FFO Yield is also poor at 6.43%.
The new strategy might also be good to reduce the 18.61% Capex/Sales ratio, which in my opinion is simply too high for such an industry, as the sector median stands at 3.5%. Furthermore, profitability metrics at this point are also poor with a ROE negative, and a ROA of 5.89%, and ROTC at 4.4% while SBAC and AMT stand at 13.14%/9.52% and 5.54/5.2% respectively.
In the case of CCI, I want to wait for higher margins and a better valuation in order to justify buying in the company.
Conclusion
I will rate Crown Castle at a hold at this moment as I understand the strategy to shift solely on towers, yet I want to wait to see if this will boost profitability and the now-cut dividend yield. I'll certainly wait for a pullback in valuation for the whole industry in order to potentially buy shares in the company.
