Morgan Stanley Green Lights Wireless Tower REITs
On Thursday, Morgan Stanley analyst Simon Flannery published a report titled "Upgrading AMT, Overweight All 3 Towers as We Look Ahead to 2016," looking at a 22 percent average total return for the group.
Flannery upgraded wireless REIT American Tower Corp (NYSE: AMT) to Overweight and raised the American Tower Corp target price by 14.8 percent to $116 per share.
Morgan's top pick in the sector remains SBA Communications Corporation (NASDAQ: SBAC), the lone remaining C-Corp of the group. Flannery raised his SBA Communications Corporation target price by over 16 percent to $151 per share.
Crown Castle International Corp (NYSE: CCI) currently pays a distribution yielding ~4 percent; however, the report noted that dedicated real estate investors only hold 2 percent of the Crown Castle International Corp shares.
As more REIT investors become familiar with the wireless tower sector, this could create additional demand for Crown Castle International Corp shares. The Crown Castle International Corp target price remained unchanged at $94 per share, or ~15 percent higher than current levels.
Tales Of The Tape: Past Year And Five-Year Checkup
The MSCI REIT Index (RMZ) is a good proxy for the broader equity REIT sector, and perhaps the best benchmark for this troika of stocks.
While SBA Communications Corporation shareholders have fared best during the past five years, the wireless tower sector has vastly outperformed the RMZ.
Morgan Stanley On Sector Fundamentals
Now that the dust has settled and Q2 earnings are out of the way, Morgan Stanley likes how 2016 and 2017 appear to be shaping up for the wireless tower industry:
- AFFO Growth: Flannery estimates "~7.5 percent organic growth rate, including ~3.5 percent annual rent escalators, and margin expansion, to deliver mid-teens AFFO per share growth."
- Earnings Visibility: "Long-term contracts help protect against carrier consolidation, while fixed debt helps protect against a rising rate environment," according to the report.
- Wireless Data: This sector benefits from the secular growth of wireless data, which is estimated by Morgan Stanley to be ~47 percent CAGR in North America through 2019.
Morgan Stanley On Wireless Towers Versus REITs
In a rising interest rate environment, strong fundamentals driving AFFO growth make this trio attractive relative to REITs in general.
Notably, the Morgan Stanley bull/bear cases, or risk/return for all three of these wireless tower companies, were skewed significantly to the upside.
Morgan Stanley On American Tower Corp: Upgraded To Outperform, $116 PT
American Tower Corp "is tracking ahead of the goal to double 2012 AFFO per share (of $3.06) by 2017," according to Flannery.
Therefore, Morgan Stanley's new $116 target price for American Tower Corp is based on ~18.8x 2017 estimated AFFO of $6.18 per share.
Drivers included, "Domestic site leasing revenue offers 6 percent to 8 percent of organic growth, while international markets provide an additional 200 to 300 bps of organic growth," with Flannery also noting that "American Tower Corp is the only investment grade U.S. tower company."
The report noted that only 4 percent of American Tower Corp shares are in the hands of dedicated REIT investors.
Morgan Stanley On SBA Communications Corporation: Top Sector Pick, $151 PT
The new SBA Communications Corporation's $151 target price is based upon ~18x 2017 estimated AFFO per share.
While SBA Communications Corporation does not pay a dividend, the company has been actively repurchasing its shares, Flannery noted "$150 million shares in May 2015 (at $114.96 / share), and $91.9 million in the third quarter (at $115.50 / share)."
Drivers included strong tower portfolio growth: "Mobilitie acquisition of ~2,300 towers, TowerCo acquisition of ~3,252 towers, Vivo acquisition of 800 towers, and Oi acquisitions of 5,761)."
Additional growth is expected to come from "Leasing up space on Mobilitie and TowerCo towers, as AT&T and Verizon densify their networks," according to the report.
Both American Tower Corp and SBA Communications Corporation have considerable international operations that expose them to foreign exchange headwinds. Conversely, these markets are expected to grow at much faster rates than the more mature North American market.
Crown Castle International Corp will no longer have FX exposure, having previously announced the sale of its Australian business interests. Crown Castle International Corp has recycled this capital into investments in small cell and fiber networks in select U.S. markets.
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Latest Ratings for AMT
|Sep 2016||SunTrust Robinson Humphrey||Initiates Coverage on||Buy|
|Aug 2016||Argus Research||Maintains||Buy|
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