Infrastructure REITs Emerge From Pandemic Stronger, Aiming To Digitize The World
Cell towers are so much a part of the landscape that few people pay them any attention, but these workhorses of the digital age support a niche real estate play that has done well during the coronavirus pandemic and is expected to do well post-pandemic.
A handful of REITs specialize in infrastructure, which largely (but not completely) means cell towers and other structures critical to the transmission of information. Like many other businesses, they suffered from the sudden shock posed by the onset of the pandemic in March 2020. Unlike many businesses, their bounce back was only a matter of months.
“Demand for digital infrastructure is booming globally and the sector has never been busier,” said Madonna Park, global head of Communications Infrastructure Investment Banking at RBC Capital Markets.
“The pandemic further validated the critical nature of digital infrastructure, driving companies to expedite their IT outsourcing plans while attracting record amounts of capital to a resilient industry.”
Infrastructure REITs collectively enjoyed funds from operations, an important REIT metric, of about $1.9B in the fourth quarter of 2019, according to the National Association of Real Estate Investment Trusts. In the fourth quarter of 2020, their collective FFO was just north of $2.2B.
“Infrastructure rallied quite a bit early on, because that's when we realized we were all going to be working from home and using Zoom conferencing and all of that stuff,” Nareit Senior Vice President, Research & Economic Analysis Calvin Schnure said.
Nareit counts six REITs in the infrastructure sector, most of which own digital structures, such as cell towers and fiber optic networks. Other infrastructure REITs hold energy assets, such as pipelines and renewable energy structures, and one, Landmark Infrastructure Partners ($325M market cap), owns billboards as well as communications and renewable energy assets.
The largest infrastructure REIT is Boston-based American Tower Corp., with a market capitalization of about $126.6B. Its holdings include roughly 187,000 communications sites, with more than 43,000 of those in the United States and Canada, and 144,000 elsewhere in the world. Besides leasing space on wireless and broadcast towers, the company owns in-building systems, outdoor distributed antenna systems and other right-of-way options, managed rooftops, and services that speed network deployment.
For American Tower, the pandemic was just a bump in the road, merely slowing down its growth, not reversing it. Even in the trough of the pandemic-inspired recession in the second quarter of 2020, total revenue for the company increased 1.2% year-over-year, net income increased 3.2% for the same period, and FFO was up 1.6% annually.
More recently, the company has returned to stronger growth. For the first quarter of 2021, total revenue increased 8.3% year-over-year, net income increased 55.8%, and FFO was up 23.8%.
The overall net operating income yield of its U.S. property holdings now stands at 11.5%, American Tower President and CEO Tom Bartlett said during the company's Q1 earnings call in April. The sites that have been in the portfolio for at least 10 years are generating more than 20%.
Bartlett said that various industry trends are driving his company's business forward.
“These trends, in large part, center on our customers' 5G network deployments which we expect to meaningfully accelerate over the next several years, giving rise to a more developed 5G world,” he said.
“On the demand side of the equation, mobile data usage growth shows no signs of slowing. The average smartphone user in the U.S. is currently consuming more than 15 gigabits per month and is expected to be using more than 50 gigabits on a monthly basis by 2026.”
Investors have taken note. Before the pandemic, American Tower traded just above $250 a share, with a pandemic onset drop to just below $200. As of Friday, American Tower traded for more than $278 per share.
Other infrastructure REITs, though not as large as American Tower, have seen strong returns since the beginning of the pandemic. Cell tower specialists Crown Castle International Corp. ($87.1B market cap) and SBA Communications ($36B market cap) have both seen their stocks rise since this time in 2019, and while cell tower owner Landmark Infrastructure Partners' ($325M market cap) shares are down from two years ago, their price has partly recovered from its March 2020 low. Fiber and cable specialist Uniti Group ($2.5B market cap) shares are trading for roughly what they did just before the pandemic.
Not quite all infrastructure REITs had a good pandemic. CorEnergy Infrastructure Trust, which specializes in oil and gas pipelines, took a hit last year. Its stock was trading for around $45 per share just before the pandemic and crashed to as low as around $3.60 per share, though shares traded at $6.17 on Friday.
The company had about $119M of cash on hand at the beginning of the pandemic, which not only helped it get through the difficult first months but allowed it to plan ahead for expansion.
“The global pandemic created an unprecedented disruption to energy demand simultaneously with a global supply glut,” CorEnergy President and CEO Dave Schulte told Bisnow in an email. “CorEnergy suffered greatly when two of our four legacy tenants stopped honoring their leases, which had survived prior disruptions in 2016. We subsequently exited both of those negatively impacted assets.”
The other two assets performed steadily, reflecting their regulated nature and more diverse customer base, Schulte said.
“The sustained consistent performance of those assets characterizes our goal in owning infrastructure assets to begin with: long useful lives, stable cash flows, limited commodity price sensitivity at least on a direct basis and reasonable growth opportunities," Schulte said.
Despite these challenges, Schulte said, the company was able to spend the second half of 2020 engaged in due diligence for a major acquisition, culminating in its purchase of Crimson Midstream Holdings for $350M in February. The acquired assets include pipeline systems spanning about 1,800 miles across northern, central and southern California.
“The Crimson transaction created the first real estate investment trust capable of conducting both energy infrastructure operations or leasing,” Schulte said. “It also creates a platform on which we can grow and integrate new assets for decades to come.”
Temporary energy shocks aside, Nareit’s Schnure said that on the whole he believes the infrastructure sector, while certainly boosted by the pandemic, was already on a healthy trajectory because of consistent growth in the demand for communications in recent years.
Also, in a way, the pandemic tested the robustness of modern communications, Schnure said. For the most part, the systems facilitating those communications held up well despite sudden mushrooming demand.
“No one anticipated the surge in volume,” Schnure said. “It's a real testament to the state of the technology that we were able to handle a massive expansion in the amount of data, and do it almost seamlessly.”
Besides merely kicking data usage several notches higher, the pandemic might have a more lasting impact on data use, as corporations rethink their strategies in light of what happened last year.
“Enterprises are continuing to shift to outsourced IT and hybrid cloud models as part of broader digital transformation efforts, while hyperscale cloud providers [and others] are taking up leased capacity,” RBC’s Park said.
Different companies are at different points in their digital transformation, but most are likely to end up in hybrid IT environments, Park said. That will drive continued demand for both colocation and hosted/cloud infrastructure.
The infrastructure bill under consideration by Congress, regardless of the final form it takes, isn't going to be much of a factor in the immediate future for infrastructure REITs, Schnure said, except that, like anyone else, they stand to benefit from better U.S. infrastructure.
“It's important to remember there are various kinds of infrastructure,” Schnure said, pointing out that the bill will mostly support traditional public infrastructure, such as roads and bridges, as well as “human infrastructure,” which is an updated take on what infrastructure means: the systems that help people balance their work and lives, childcare and so forth. Because of this, he said he expects the REIT infrastructure sector won’t be greatly affected by the bill.
Meanwhile, things are starting to slow down for some infrastructure REITs, but Schnure said that isn’t worrisome.
“After November, when the vaccine news came out, other sectors started to come back, and it wasn't a strong period for infrastructure,” Schnure said. “But that's OK. They were already up quite a bit.”