Analysis: Telco towers, tax and tech: like "a REIT on steroids"

By Saqib Iqbal Ahmed

BANGALORE (BestGrowthStock) – The top three U.S. telecom tower firms will win a new investor base as they look to convert to a Real Estate Investment Trust (REIT) structure in the next few years in a bid to remain tax efficient.

American Tower (AMT.N: ) and smaller rivals Crown Castle International (CCI.N: ) and SBA Communications (SBAC.O: ) use their huge net operating losses (NOLs) — from amortization and depreciation charges incurred on tower assets — as a shield against tax obligations.

But as they burn through available NOLs, the tower companies can’t keep avoiding corporate taxes by using loss carryforwards — the accounting technique that allows for one year’s losses to be applied to future profits.

“The first guy to turn into a REIT will likely be American Tower and that will probably be in 2012,” said Evercore Partners analyst Jonathan Schildkraut.

American Tower CEO Jim Taiclet said in September the company was considering REIT status under the U.S. Internal Revenue Service tax code.

Analysts say moving to a REIT structure is a natural progression for the tower firms as the NOLs dry up. Given their respective NOL positions, Crown Castle and SBA Communications are likely to follow American Tower’s lead, but not until 2015.

Conversion could boost valuations for American Tower and other operators.

“The metrics we currently value them on make them look fully valued, but when you look at them from a REIT’s metric perspective you will see incremental upside,” Schildkraut said.

Tower firms, while they enable wireless and broadcast services, essentially own real estate assets such as the towers themselves and, increasingly, the land they’re built on.

Morgan Joseph & Co analyst Ilya Grozovsky sees the converted companies attracting a whole new class of investors seeking smart tax opportunities that come with a REIT structure, while also being able to invest in technology.

“Investors would be able to think of it as a technology play — with the benefits of the growth of wireless devices — without the risk of product cycles or of consumer buying patterns,” Grozovsky said.

“It would be a very exciting opportunity for traditional REIT investors to invest in — sort of a REIT on steroids.”


By law, U.S. REITs must pay out at least 90 percent of taxable income to shareholders via dividends, but many opt to distribute even more than that.

Tower firms, with their low investment requirements relative to cash flow, could support a high REIT dividend yield.

“Conversion to REIT status would result in a turnover of the investor base to yield-oriented investors,” Peter Zuger of Lee Munder Capital Group said.

Munder Capital Management, which manages equity assets of about $7.2 billion, owns about 40,000 shares of American Tower and 167,000 shares of SBA Communications.

While converting to a REIT structure may attract investors chasing yield, there are concerns that shares could be more volatile as non-REIT funds may be forced to sell holdings.

But Morningstar analyst Imari Love said that while American Tower may lose some potential investors with the move, it would gain some dividend/REIT fund interest.

“So net-net, I think they will be fine,” Love said.

Evercore’s Schildkraut said: “When I look at the top five or ten investors in American Tower, I see that every one of them can hold on to their investment.”

The top investors in American Tower include T.Rowe Price Associates Inc, Fidelity Management & Research, Goldman Sachs Asset Management and Vanguard Group Inc.

(Reporting by Saqib Iqbal Ahmed in BANGALORE, Editing by Ian Geoghegan)

Analysis: Telco towers, tax and tech: like "a REIT on steroids"