As chief engineer, Montgomery “Scotty” Scott commanded Captain Kirk (in Star Trek), "Beam me up, Scotty".
That’s what it feels like when I began thinking about the potential for driverless cars. It’s really hard to imagine how autonomous vehicles will transform the economy, but when you think about all of the potential catalysts driving the REIT sector, it’s really not light years away.
Up until recently, I hadn’t thought much about a connection between automated-driving technology and commercial real estate, but Stephen Bersey, senior technology analyst at MUFG Securities Americas, convinced me otherwise.
He said, “the average person generates around 650MB of data a day, through the use of PCs, mobile phones and wearables, but by 2020 projections show that the average person will generate 1.5GB of data a day.”
Of course I have no background in technology, so Bersey explained to me that “in an autonomous car, we have to factor in cameras, radar, sonar, GPS and LIDAR (light detection and ranging) components as essential to this new way of driving pistons, rings and engine blocks.”
This means that each autonomous car will be generating around 4,000GB (4 terabytes) of data a day. That’s more than 2,500 times the amount of data that the average person generates today.
With that in mind, I decided to put together a list of 5 of my favorite technology REIT picks. Certainly these REITs aren’t “risk free” but based upon the demand for data - from cell towers, to fiber, to data centers - the benefits for owning shares in these REITs is obvious.
Tech REIT #1: Crown Castle (CCI)
The Big Why: Crown Castle is the only Cell Tower REIT that focuses exclusively on U.S. assets. The company owns, operates and leases shared wireless infrastructure, including: (1) towers and other structures, such as rooftop towers, and (2) small cell networks supported by fibers. The cell towers have a significant presence in each of the top 100 US markets, as CCI owns approximately 40,000 towers and 60,000 small cells, and 60,000 route miles of fiber.
Feather in its Cap: CCI's core business is providing access, including space or capacity, to wireless infrastructure via long-term contracts in various forms, including license, sublease and lease agreements. By managing CCI's tower assets, the company should be able to extrapolate value, allowing multiple carriers to locate on each structure without competition. CCI's collection of cell tower assets offers unique solutions for the carriers to fill in the gaps and add coverage in high-traffic areas.
Downsides: Possible delays in the deployment of next generation technologies and higher borrowing costs.
Year-to-Date Total Return: +2.7%
Alpha Insider Management Update: The management team expects towers to contribute approximately $125 million to new leasing growth in 2019, which is up nearly 15% from the $110 million expected to see in 2018. They expect small cells to generate new leasing activity of approximately $75 million in 2019, which is more than 35% higher than the $55 million expected in 2018.
Bottom Line: The overall cell tower business model is sound and the secular tailwinds of an increasing demand for wireless connectivity has positioned both Crown Castle and American Tower to capitalize on positive industry trends. Attractive runway of sustained investments and growth support the targeted 7-8% dividend growth target. The activity across macro sites and small cells from all of CCI’s four wireless carriers provides confidence. Maintaining BUY.
Tech REIT #2 American Tower (AMT)
The Big Why: American Tower is a global consolidator, the fastest-growing player in the world of telecommunications infrastructure. The Boston-based company started out as a subsidiary of American Radio and expanded operations in Mexico, Brazil, India, Chile, Colombia, Peru, Ghana, and South Africa.
Feather in its Cap: Tower sites continue to be the preferred solution, as they provide the most technologically efficient and cost-effective option for coverage and capacity requirements. As devices become more advanced, the increasing demand for high-bandwidth applications and higher quality of service result in a narrower range at which signals can be transmitted. As a result, carriers are investing in denser networks.
Downsides: Slower demand in the tower lease business if carriers begin to cut back on spending
Year-to-Date Total Return: 16.5%
Alpha Insider Management Update: In the third quarter, their U.S. property segment delivered strong Organic Tenant Billings Growth of 7.4%, reflecting ongoing investments in 4G technology by our tenants to meet ever-increasing data and video demand.Their International property segment also experienced strong demand for tower space, especially in Latin America. Normalizing for Indian Carrier Consolidation Churn, International Organic Tenant Billings Growth was 8%.
Bottom Line: Healthy and strong fundamentals; great growth potential & earnings potential. We prefer CCI’s higher dividend yield, but we consider AMT’s scale and global footprint to be attractive.
Tech REIT #3: CyrusOne (CONE)
The Big Why: CyrusOne is a data center reits, which potential revenue model could provide some attractive dividend opportunities down the road
Feather in its Cap: Stable outlook: S&P Global Ratings raised its issuer credit rating on CONE to 'BB+'. Scale of economy: CONE is focused on maintaining a strong capital structure so that it can continue to build out its global platform.
Downsides: Largest technology sell-off
Year-to-Date Total Return: -6%
Alpha Insider Management Update: CyrusOne is a premier global data center REIT, today announced it has been selected to provide colocation and interconnection, by Ovation Data Services, Inc. (OvationData), a leading data services provider for multiple industries in Europe and the United States, with a major concentration in seismic data for the purposes of oil and gas exploration. OvationData will deploy the solution on CyrusOne's Houston West Data Center campus.
Bottom Line: Strong buy, strong dividend growth, international expansion and robust development activities.
Tech REIT #4: Digital Realty (DLR)
The Big Why: Digital’s footprint stands at 203 properties located in 32+ global markets (4 Continents and 11 Countries). The company supports the data center, colocation and interconnection strategies of more than 2,300 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.
Feather in its Cap: Further leveraging our leading global platform to cross-sell, in addition to addressing new markets that meet our risk adjusted return criteria. Our top priority is deepening our connections with customers to position us to meet their needs and support their growth.”
Downsides: Rising interest rates and increasing competition in data centers.
Year-to-Date Total Return: 1.1%
Alpha Insider Management Update: Digital Realty's board of directors authorized a cash dividend of $1.01 per share to common stockholders of record as of the close of business on December 14, 2018. The common stock cash dividend will be paid on January 15, 2019.
Bottom Line: Based upon the exceptional growth profile, I believe shares deserve a Buy recommendation (nibble perhaps)
Tech REIT #5: Uniti Group (UNIT)
The Big Why: Uniti is substantially mis-priced and the dynamics driving Uniti Fiber and Uniti Towers are key differentiators in which Uniti REIT is Poised to Profit.
Feather in its Cap: UNIT rapidly evolved from primarily a single-tenant, one-property landlord to servicing nearly 17,200 customer connections through three diverse, but complementary, business segments (fiber strategy; leasing strategy; tower strategy)
Downsides: Most all analysts and investors recognize that one of the biggest risks in owning shares in UNIT is tenant concentration.
Year-to-Date Total Return: 19.9%
Alpha Insider Management Update: UNIT just announced 2 acquisitions within their Uniti Fiber segment. The first acquisition is Information Transport Solutions, a full service provider primarily to educational institutions, many of whom are already utilizing their fiber network. The second transaction is M2 Communications (sic) [M2 Connections], a local fiber provider located in Eastern Alabama. This is a bolt-on acquisition and is a strong strategic fit with their existing Uniti Fiber network.
Bottom Line: It has significant leasable capacity across all of its business units, and because incremental cost of adding new tenants is relatively small, the company can drive attractive incremental yields across all of its asset classes. As the CEO said, “We expect these strategic assets will position as well for sustained organic growth for many years.” We are maintaining a SPEC BUY.
I own shares in UNIT, DLR, CONE, and CCI.
