A Real Estate Play That's More Than 'Location, Location, Location'
By Genia Turanova | August 15, 2017 |

One type of investment that's typically shunned in a rising interest rate environment is real estate investment trusts, or REITs. That's because higher rates mean higher borrowing costs -- literally the price of doing business for REITs -- which can weigh on returns for investors. Also, as rates move higher, lower-risk fixed-income investments, including Treasuries, become attractive again.

But not all REITs are created equal. Many can withstand the higher rates because the rising rates usually accompany an improving economy, which in turn is good for business. 

And lest you think real estate is only condos and office buildings, say hello to Crown Castle International Corp. (NYSE: CCI), the largest provider of shared wireless infrastructure in the United States.

Crown Castle is dominant in a sector where barriers to entry are high and the threat of excessive supply is minimal. It's also in a position to improve its business standing because demand for its properties is growing. 

And the good news for investors is that Crown Castle recently committed to increase its dividend -- good news in any kind of market, but especially in this dividend-starved one. 

And because it's a REIT, which means it has to distribute at least 90% of its annual taxable income to shareholders, Crown Castle generates a strong 3.8% yield -- nearly double the average yield of S&P 500 stocks.

Its clients are wireless providers to whom Crown Castle leases wireless towers and other infrastructure. AT&T (NYSE: T) and T-Mobile (Nasdaq: TMUB) are the two largest customers, accounting for about 28% and 23% of revenues, respectively. 

Crown Castle's portfolio of wireless infrastructure includes the top metro U.S. market networks, and consists of approximately 40,000 towers and 26,500 route miles of fiber supporting small cells (wireless nodes of shorter range). CCI expects much of its long-term growth to be driven by towers, thanks to technology upgrades, deployment of additional spectrum, and cell site densification. 

Investing in Crown Castle is a bet on the continued demand for data services, but that's one trend that doesn't look like it will slow down anytime soon. Consumers are using increasingly more data-intensive services on a growing number of devices. Crown Castle has said that mobile data traffic in 2017 is expected to roughly double from 2015 levels. And by 2020, CCI expects mobile data traffic to be six times the level of 2015.

Of course, wireless tower service providers like CCI don't work directly with consumers; wireless carriers are the ones who are in need of constant upgrading of their networks and services. But these enhancements and improvements are all flowing through to CCI, so the company is well-positioned to capitalize on these positive industry trends.

Founded in 1994, Crown Castle has been around for decades, but the company moved to the REIT structure only three years ago, in January of 2014. Indeed, the steady cash flow and stable long-term nature of its business lend itself well to a REIT structure. Cash flow is almost guaranteed by the contract nature of the business (most of CCI's revenue is earned from leasing out its towers and other communication property). The typical contract is long-term (10 years or more), but it usually includes rent increases, which are also good for future revenues and potential dividend hikes. And high switching costs that CCI's customers would incur if they choose to move to another provider nearly guarantee that the business will be stable. 

For the full year ended December 31, the company's adjusted funds from operations (FFO) per share grew 10%, and it increased its dividend by 8%. 

Last month Crown Castle announced it was buying privately held Lightower Fiber Networks in a deal that is expected to close at the end of the year. The purchased will double Crown Castle's fiber assets to about 60,000 route miles, and it will give the company an opportunity to build small cell networks in top northeastern metro markets, such as Boston, New York and Philadelphia. 

Despite the $7.1 billion price tag, it's shaping up to be a good deal for Crown Castle. 

Crown Castle had identified small-cells -- smaller towers, with a smaller area of coverage and a shorter range -- as the next growth area. These are useful, especially in high-density metro areas, because with small cells, telecoms can increase coverage and boost capacity. And with the Lightower acquisition, CCI is doing just that -- making a bold move in the next area of growth in the telecommunication networking market. 

Crown Castle expects the Lightower acquisition to start generating positive cash flow right after the acquisition closes. As a result, the company said it plans to hike its annual dividend by approximately $0.15 to $0.20 per share -- or about 5% -- after the deal closes. 

On top of this, the REIT now targets annual dividend increases of 7% to 8%, strengthening the case for CCI as an income stock for the long haul.

P.S. CCI is just one of many, many securities my The Daily Paycheck subscribers use to earn an extra $1,543, $2,184, or even $4,200 each month. By owning a diverse swath of high-yielders, steady yielders and fast-growing dividend payers (like CCI), we've created an "idiot-proof" system that proves everyday investors can beat Wall Street at their own game. Click here for my special report that shows you how to get started.

This article originally appeared on StreetAuthority.