Crown Castle Stock: A Bargain Relative To American Tower (NYSE:CCI)

On our last coverage of Crown Castle Inc. (NYSE:CCI), we were in the camp that the growth story was way past done and the stock likely would test the $100 mark soon. We offered the best trade for those that were bullish.

Funds like CBRE Global Real Estate Income Fund (IGR) and Aberdeen Global Premier Properties Fund (AWP) have relied on capital appreciation to fund those massive yields and as stocks slide they are forced to sell every month to balance their leverage ratios and fund distributions. We see these as major forces for the sector, and CCI will be impacted more than other REITs. We rate the stock a hold at present and would get more constructive under $100. In the interim. The $100 Covered calls would be the best “option” for those wanting some income.

Source: Growth Story Done, Look Under $100.

The stock had underperformed the broader Vanguard Real Estate ETF (VNQ) from then up until the Q2 results yesterday by over 20%.

The stock dropped another 5% pre-market after the results. We look at the released Q2-2023 results and update our thesis.

Crown Castle Q2 2023 Earnings Results

At first glance, pretty much everything looked really good for CCI. Site rental revenues were up 10%, and the company managed to leverage that to a 14% growth in adjusted funds from operations (AFFO). CCI is one of those rare real estate investment trusts, or REITs, that is extremely stingy with its share issuance, and the AFFO growth actually translated into the same AFFO growth per share.

The AFFO also “beat” estimates for the quarter by 2%, so there was not much to disappoint investors. Unfortunately, the problems came in the guidance. The drops are small compared to the previous numbers, but nonetheless are sending a clear message to investors: growth looks done.

The drop has to be also considered in light of the higher than expected Q2 2023 numbers. The back half of 2023 will produce just $3.58 in AFFO versus $3.96 for the front half. What is causing this pressure?

The company did mention the key story again, which seems to be compensating for the “data usage is only going up” bull thesis.

Sprint Cancellations. Included in site rental revenues is a $100 million net contribution to Site Rental Billings from lease cancellations related to the previously disclosed T-Mobile and Sprint network consolidation (“Sprint Cancellations”), consisting of $97 million to small cells and $3 million to fiber solutions. Also included in site rental revenues is $57 million in accelerated prepaid rent amortization associated with Sprint Cancellations related to small cells.

Source: Q2, 2023 Results.

But if you look at the change in outlook versus that shown in Q1-2023, revenues seem to be unchanged. Instead, the problem was with the services revenue category, which will drop by $90 million.

As the carriers have reduced network spending, we anticipate lower tower activity for the remainder of this year, resulting in lower contribution from services and a decrease to our full year 2023 outlook. Due to the long-term leasing agreements we have entered into with our customers, this reduction in tower activity is expected to have little impact on our site rental revenues.”

Source: Q2-2023 Results.

What is even more interesting here is that the drop in AFFO is less than the drop in services revenue.

In fact, when you add up the higher interest expense to the service revenue drop, it is quite impressive that AFFO is only going to fall by 9 cents. This is due to cost-cutting measures that CCI is implementing. While that sounds good, cost-cutting is generally a poor way to repair a broken growth thesis.

Balance Sheet

One thing that the company does deserve credit for is the remarkable strength of their balance sheet. CCI took advantage of the inverted yield curve (you can see this for corporate bonds as well, not just Treasuries) and issued longer-dated debt at 5%

Financing activity. In April 2023, Crown Castle issued $1.35 billion in aggregate principal of senior unsecured notes in a combination of 5-year and 10-year maturities with a weighted average maturity and coupon of 8 years and approximately 5.0%, respectively. Net proceeds from the offering were used to repay a portion of the indebtedness under the existing revolving credit facility and pay related fees and expenses.

Source: Q2-2023 Results.

This was used to pay down the credit facility costing 6.3%, and that 6.3% was likely going up in the back half of 2023.

The debt to EBITDA looks fantastic for a REIT with that level of stability in revenues. Yes, there is some pressure on the growth aspect, but we see the core business with a 4.6X multiple as more compatible with an “A minus” rating rather than the BBB+ which Fitch has.

The debt maturities bear this out as well.

CI Stock Valuation & Verdict

You would have to be living under a lead rock to not be aware of the recent news about AT&T (T) and Verizon Communications (VZ). While we think the longer-term impact of the lead cables issue will be modest, even in the worst case scenario, don’t expect the two to open up their pocketbooks any time soon. CEOs and CFOs take cues from their stock price for spending and where they can defer capex or negotiate better prices, they will. Expect this to weigh on CCI, though.

For CCI, the current outlook is for flat AFFO in 2023, 2024 and 2025. All of that was before this quarterly result and before the T and VZ story. So, a slightly lower outlook for 2024 and 2025 should not surprise anyone. The company is now getting into a “value zone,” though. As we write this, it is trading at $108.05, down nearly 5% pre-market.

At 14.4X AFFO, yes CCI, it is getting cheap. If you look at the AFFO multiple on time, investors went absolutely bonkers right at the end of 2021, where they paid 29X for an expected 2022 AFFO. We have chopped off half of that. That is great, and here is a point where you can take a 10-year positive stance and buy. You don’t need much to go right to make money over the next 10 years that beats the 10-Year Treasury (US10Y) rate.

CCI has couple of other things going for it as well. The current NAV estimate for CCI is near $170.00 per share, though confidence in this measure is low as there is only 1 analyst that is projecting a NAV. The stock is still about the furthest below this measure that we have ever seen. The stock is also 25% below the mean price target, which again is the lowest it has been.

Finally, there are some big differences creeping in relative to American Tower Corporation (AMT). AMT is trading at over 19.0X AFFO multiples for 2024 and is barely 7% below its NAV estimate. AMT’s AFFO will contract in 2023, and while analysts are happy pushing decent growth numbers for 2024, we think a flat outcome is most likely. AMT also carries a 5.1X debt to EBITDA, a good deal higher than CCI. So, our point here is that at least relative to AMT and its own history, CCI is now quite cheap. CCI gets a 4 on our potential pain scale rating.

We still think a sub $100 is coming for Crown Castle Inc., but the stock is certainly starting to look good for long-term buyers expecting 7-8% annual total returns. Look to add post the earnings bloodbath.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.