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Tower REITS Drive Margins and Return on Capital


Publicly-traded Tower REITs generally own a network of vertical tower structures upon which their tenants place their communications equipment. Their tenants are large telecommunications firms (i.e. AT&T, Verizon, Sprint) that provide cellular phone service and plans to consumer and business clients. These tenants enter into long term leases with the Tower REITs to host their equipment on the REIT’s towers. Competing telecommunications firms often host their equipment on the same towers in order to leverage the capital investment of the Tower REITs.
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Operated by American Tower (TEN)

  • Tower structure –constructed of galvanized steel with the capacity for multiple tenants
  • Land parcel –owned or operated pursuant to long-term leases

Operated by Tenant (AMT)

  • Antenna equipment, including microwave equipment
  • Tenant shelters containing base-station equipment and HVAC, which tenants own, operate and maintain
  • Coaxial cable
This arrangement benefits both parties as the telecommunication firms can offer similar national coverage networks without having to fund large capital expenditures. The Tower REIT benefits from increased utilization of their tower network, which drives margins and return on capital.

Property Segment Revenue

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American Tower operates a global portfolio of over 170,000 communications sites in over 15 countries. In the US, American Tower’s tenants enter into five to 10-year leases with annual 3% escalators. Return on Investment is tied to tenant concentration and rises from 3% for one tenant to 13% for two tenants to 24% for three tenants, with Gross Margins rising similarly from 40% to 74% to 83%.

Source: American Tower

Consolidated AFFO

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Demand for the towers is driven by macro trends such as the Internet of Things (IoT)*, social media, e-commerce and smart phone penetration. The industry enjoys high barriers to entry (scale, capital, locations) which supports the oligopolistic industry structure globally. Finally, the tower networks are mission critical infrastructure for the telecommunications firms without which, they cannot operate their businesses.

Average Date Used by Activity (in megabytes)

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Note: 1 MB equals 1024 KB
Sources: Altman Vilandrie & Co. research, Verizon, AT&T

U.S. Data Traffic by Device Type (in exabytes / month)

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Forward-looking data points reflect research estimates. 

Notes: IoT based M2M module connections, traffic and data usage; Non-IoT includes everything other than M2M modules (e.g. smartphones, tablets, laptops, and feature phones)
Sources: Cisco VNI 2016, Ericsson Mobility Report June 2018, AV&Co. Research & Analysis.

* Internet of Things (IoT) is the network of devices such as vehicles, and home appliances that contain electronics, software, actuators, and connectivity which allows these things to connect, interact and exchange data.
Tower REIT revenue growth is largely driven by increased data usage by an increasing number of smart phones in circulation. While smartphone unit sales have begun to slow, per capita data consumption continues to grow rapidly. Telecommunications firms add to this momentum by offering more unlimited data plans to subscribers. This in turn drives data usage which drives the need for larger and denser networks to handle all the data traffic. The economies of scale provided by expanding the network drives margin expansion and return on investment for the Tower REITs.

While the U.S. market is a mature smartphone market it still offers tremendous growth potential as data usage continues to grow. Other developing markets such as India, Brazil and South Africa represent even greater growth potential as their populations continue to grow while smartphone penetration and data usage also grow.

Avg. Monthly Smartphone Data Usage (GB)

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