his spiel from the Motley Fool Canada folks has generated a few reader questions recently… see if this sounds a little familiar:

“In 1952, a struggling paper cup salesman named Ray would never have predicted the absurd fortune that was about to fall into his lap.

“Ray was just a regular guy with big hopes and dreams that never materialized.

“But sure as the sun does rise, Ray stumbled upon what’s considered the greatest wealth creation event in history – and amassed a fortune the size of a small country.”

Got a guess? Yes, that’s Ray Kroc, who built the McDonald’s empire… and the folks at the Motley Fool are telling us that they’ve got an opportunity that might be similar to the early days of McDonald’s. It’s not a restaurant stock, though, it’s a different connection… more from the ad, which is selling subscriptions to Stock Advisor Canada ($99 for the first year):

“But what you may not know is… McDonald’s didn’t balloon because it sold burgers and fries…

“Instead, McDonald’s became a $195 billion behemoth because of something hardly anyone could’ve dreamed up at the time…

“… real estate – buying and leasing restaurant space to its franchisees!

“… last year it was reported that McDonald’s made $30 billion USD from renting real estate.”

So that’s the promise — a company that’s getting rich from leasing real estate. Not as exciting as “next McDonald’s,” perhaps, but we’ll see what the tease is really about. Here’s a little more from the ad:

“The $12.3 trillion ‘leasing’ opportunity of 2022

“Right now, we’ve spotted one little-known company that’s in the unique position McDonald’s was in 60 years ago.”

And they say it’s about the 5G “gold rush,” which tells us we probably know where this is headed — they’re expecting massive advances that we’ve seen as riding on 5G cellular networks, like self-driving cars and remote surgery and more interactive mobile media, but they must be pitching one of the companies that owns the infrastructure… here’s how they put it:

“5G can’t operate with its current infrastructure.

“And that brings me back to the one remarkable company I mentioned earlier.

“You see, 5G requires different towers than 4G to perform… and more land for those towers. Both of which this company holds a lion’s share of the rights to.”

A few more clues…

“As of today, they’ve…

• Signed multi-billion-dollar contracts with America’s four largest cell providers to build 5G towers
• And are estimated to soar from roughly 40,000 locations to more than 240,000 by 2025!

“In short, THIS is the company we think you should consider having in your portfolio if you want to position yourself wisely for the coming 5G boom.”

5G is not the hot story it was in 2019, it’s true, but that’s just because the anticipation of a big technology upgrade is more exciting than the actual upgrade process itself. It’s going to take many more years to build out the 5G antenna network for full coverage, both in the US and overseas, so the economic impact of this latest cellular network upgrade has begun, but is probably far from completion.

What, then, is the favorite 5G “leasing” stock of the Canadian Fools?

Well, it could technically be either of the two largest US cell tower REITs — American Tower (AMT) and Crown Castle (CCI) each have roughly 40,000 locations in the United States, though American Tower has far more locations in total because of their large international presence (Crown Castle has a few overseas towers, but is almost a US-only company). I looked briefly at American Tower last week, when it was being teased by a Wealthpress “Landlord Nation” ad, but we’ll go into the business in a little more detail today.

The magic of these “digital infrastructure” companies comes from two primary factors: First, that they own critical infrastructure that everyone needs — wireless connection is as important as any other service people buy, other, perhaps, than water, and nobody wants to have multiple towers in the same neighborhood so they generally have almost localized monopolies; and second, that they can “double up” on these real estate assets… an apartment owner can’t rent the same space to two different families, but a cell tower owner can sell power and space to more than one customer on a single tower, effectively getting to break-even on their investment by building a tower for AT&T and then also leasing to Verizon and T-Mobile at much higher margins.

The Thinkolator leans toward Crown Castle (CCI) for this particular teaser match, since there are some published estimates about Crown Castle hitting 240,000 locations by 2025 and I’ve found no such match for American Tower — though we should note that a lot of those 240,000 locations will not actually be towers, a number that high means we’re including “small cell” installations, which are likely to be required for better 5G coverage.

Small cells are just what they sound like, smaller antennas, closer together than giant towers can be, to offer the low-frequency, high-bandwidth connections that 5G offers, but which can’t travel as long a distance as higher-frequency 4G connections. You need small cells essentially in every block if you’re going to have good coverage in a city, for example, and it’s a hassle to lease the rooftop or utility pole space and provide power and fiber connections, so companies like Crown Castle who have set up thousands of those locations profit when demand increases — and it remains to be really proven out, but they might be able to “colocate” in some of those small cells and lease access to multiple tenants, just like they do with large towers. Both American Tower and Crown Castle have been recommended by the Motley Fool in the past, according to disclosures on their free articles, but, reading between the lines of disclosures, it looks like the CCI recommendation from Motley Fool Canada was perhaps more recent. The first time we saw the “like McDonald’s” pitch for a cell tower company, it was actually from one of the US-based Motley Fool newsletters, and it was a pitch for American Tower at that time (that was David Gardner back in 2010, teasing AMT as a play on the transition to 4G).

I own both of these companies, which are one and two in the US, as well as the operator of the fourth largest cell tower network in the country (DigitalBridge (DBRG), which is a different animal because it’s largely an asset manager). The other significant US player is third-place operator SBA Communications (SBAC), which like CCI and AMT is a real estate investment trust (REIT), which just means they don’t have to pay corporate taxes as long as they pass along the lion’s share of their net income to shareholders in the form of dividends (the tax is instead paid by you, on your dividends).

Both Crown Castle and American Tower have a lot going for them — they are both good dividend growth REITs, with Crown Castle having a higher current yield and American Tower having both better dividend growth and easier dividend coverage. Crown Castle’s advantage is their network of fiber-linked small cells, which they’ve built up for years but haven’t gotten much credit for at this point… American Tower’s advantage is that they have a large global network, with towers in many other high-growth countries, and they also have a major data center operation following their acquisition of CoreSite last year. Though actually, being US-centric has been good for CCI this year — they don’t have the foreign currency headwinds that AMT has recently faced as the dollar has strengthened against other major currencies.

Crown Castle “missed” the analysts’ forecasts last quarter for Adjusted Funds From Operations (AFFO, that’s their favorite cash flow metric), reporting $1.80 per share when the expectation was $1.91. Revenue grew by 9.5% from last year, hitting $1.73 billion in the quarter, so that was a little higher than expected. They lowered their overall outlook for 2022 slightly, probably mostly because of interest costs, but they did not change their AFFO forecast for 2022 — that’s still expected to be about $7.36 for the full year. That means they’re generating $7.36 in adjusted cash flow per share, ignoring depreciation, and paying out, at the current dividend rate, 80% of that cash, $5.88 per share, to investors. That’s a much higher payout ratio than we typically see from American Tower, which grows its dividend more quickly but pays out a bit less of its AFFO and therefore has more financial flexibility to fund growth, which is why I’ve typically favored AMT at times when the income yield or the overall valuation of the two is similar.

Something close to 25X AFFO has generally been the area that seems like a reasonable maximum valuation for these kinds of companies, with extremely valuable assets and long-term contracts, but with some interest rate sensitivity and fairly modest growth rates. For CCI, that would now be roughly $184, and the dividend yield is recently about 3.2%. For AMT, 25X expected AFFO for 2022 would put them roughly $250, and the dividend is about 2%.

I would still give the edge to AMT when valuations are similar, as they are now, though both stocks are right around my “max buy” price these days. I give the edge to AMT partly because it has for many years consistently grown revenue per share at a slightly better pace… but to some degree we’re splitting hairs, both are strong and foundational companies who own irreplaceable communications assets that are only becoming more important, and sometimes one will outperform the other but they have both been excellent investments. Neither is at a great valuation in my book, which is a little surprising given the spike in interest rates (usually higher rated bring REITs down to more appealing valuations), but I’m still happy to hold them… and I wouldn’t talk you out of buying near these levels if you’ve got the time to wait for returns to compound. Neither company is going to shoot out the lights and show 30% revenue growth in a surprise quarter, for the most part the business is pretty predictable and steady, so if you want above-average returns you might have to wait and pay a below-average price… or, perhaps, be more patient than the average investor in holding through the panic the next time the market decides to vomit up shares.

Interest rates can certainly have an impact on these growth REITs, though the impact has been more muted than I expected so far this year… so if the Fed surprises us next week, that could change the valuation picture, but otherwise the news for AMT and CCI mostly comes out of their earnings calls — we’ve got a little while to wait, Crown Castle should report around October 20, and American Tower’s announcement generally comes about a week later.

Think Crown Castle or American Tower looks appealing here? Have other “digital infrastructure” favorites we should consider? Let us know with a comment below. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of American Tower, Crown Castle and DigitalBridge. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.