“5G ‘Tollbooth’ Firm Makes America’s Largest Media Companies Pay Through the Nose”

Pitch from The Wealth Advisory says, "Comcast, Verizon, T-Mobile, and even the Department of Defense will have to pay this company a 'toll' to use the 5G network. It trades for $10 right now... but I expect it to climb to $68 in the next five months..."

By Travis Johnson, Stock Gumshoe, March 15, 2021

Briton Ryle at The Wealth Advisory loves to tout the dividend-paying stocks that underly some big trends, and, of course, to hint at them in misleading ways to make them seem every more secretive and special… which doesn’t mean the stocks are necessarily bad ideas, but does mean we should dig deeper and understand the risks and the real story.

The two that have been pushed hardest over the past several years have been his pitch for getting something like royalties on Netflix and Google, which was just a tease about buying a data center REIT (CoreSite, as it happens, a stock I’ve also held for a long time); and, more recently, his pitch about getting back door “Prime Profits” payments from Amazon, which was a tease for the industrial REITs who own warehouses that are leased to Amazon (ProLogis was the clearest one). Those are fine companies, with relatively low risk but, of course, high valuations recently (REITS have been bid up dramatically over the past few years, especially specialty REITs with good dividend growth), and nowhere near as direct a connection to sexy high-growth ideas like Netflix and Amazon as was implied.

I’m sympathetic with the basic strategy, and have had a lot of success with many of the specialty REITs over the years even if the “story” pitch folks use for them is often pretty ridiculous, which means I’m always curious to see what the next one might be. So, what’s the next big spiel from Ryle about? It is, of course, a play on another hot story — in this case, the buildout of 5G mobile networks.

Or, as the first line of the ad letter says, “One tiny firm has America’s biggest media companies by the balls.”

Here’s a bit from the top of the ad:

“5G ‘Tollbooth’ Firm Makes America’s Largest Media Companies Pay Through the Nose

“Comcast, Verizon, T-Mobile, and even the Department of Defense will have to pay this company a ‘toll’ to use the 5G network

“It trades for $10 right now… but I expect it to climb to $68 in the next five months…”

That sounds an awful lot like the many, many teaser pitches we’ve heard about one or all of the “big three” cell tower REITs (American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC))… but none of them have sub-$100 share prices, let alone $10. So at least we’re going to hear something a little different to cut through the boredom of “yep, it’s another pitch for AMT.”

And, of course, it’s super-secret (why else would you pay The Wealth Advisory $49 for the idea?)…

“… this little firm is leading the charge to 5G.

“Even the U.S. government knows it — which is why they’ve decided to partner with it.

“But you’ve likely never heard this company’s name.

“Actually, almost no one has.”

We’re told that this company has already inked deals with the big cable and telecom firms…

“They’ve signed almost ten billion dollars worth of contracts with this little tech firm, and once that money starts rolling in, I expect this stock to be trading for at least $68 a share.”

He also makes the “we need more towers” argument that we often see with 5G chatter — mostly because the part of 5G that uses millimeter wave higher frequency spectrum can’t travel as far or get through obstacles….

“These “M-waves” can’t travel very far from their source (only about 1,500 feet before the signal dies out). And they can’t travel through things, like trees or mountains or buildings.

“So, if we used the towers we have now, you wouldn’t be able to get a 5G signal unless you could actually see the tower the signal was coming from. Can you imagine dropping a call every time you walk under a tree?

“But this company has figured out a way around that….

“Instead of sending everything from one big tower directly to you, they’re going to use a bunch of tiny antennas to relay the signal to you….

“These new antennas will be about the size of a small refrigerator, like the kind you might find in your room at the Holiday Inn.

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“So even though the signal will still initially come from a giant tower, it will bounce off of these smaller antennas to get around anything in its path.”

OK, so that’s part of the standard 5G narrative as well — we’re told that large networks of “small cell” antennas need to be deployed (and are being deployed, especially in urban areas… Crown Castle in particular among the tower REITs has built out a huge network of them already).

And, in fact, that rings all kinds of bells in these parts… to it looks very much like this is mostly a repeat of an ad that we covered a little over a year ago (back then it was an “$8 company” that was the tollbooth, now it’s touted as $10).

So what does this company have that will make these small cells possible? More from the ad….

“… it already has the infrastructure in place that’s required to get these 5G antennas up and running….

“This firm already has an extensive nation-wide fiber network that’s up and running.

“And this network is going to be the lifeblood of 5G.

“It’ll just take these new smaller antennas and attach them right to its fiber network. It’s a simple plug-and-play move.”

And we’re shown that the fast fiber network this company has gives them a big advantage, with more fiber route miles than anyone else — apparently they have 5.6 million miles of fiber in the U.S., which is much more than AT&T or Verizon or the other telecom companies he lists….

“These other companies don’t have nearly as much network laid out as the one I’ve been talking about. And that’s why a lot of them, like Comcast, Windstream, and Verizon, are actually already paying the ‘tolls’ to use this network.”

Ryle even re-uses the same spurious “5G winners are already starting to climb, don’t miss the boat” examples that Jeff Brown used in an ad a couple years ago

The three examples he cites are Galaxy Next Generation (GAXY), Ameristar (AMWK), and Global Energy Networks (GBNW), none of which are what I would call “real” companies — they’re thinly traded penny stocks with no real business or revenue, and they all did have spikes up in their share prices… but those were almost certainly the result of “pump and dump” manipulation that is so common in such tiny names, none are actually connected to 5G in any real way and all of them gave up those headline-generating “gains” of 1,000%+, in most cases almost immediately.

So why are those examples in there? To impact you, dear reader — to make you daydream of 1,000% or 8,580% gains… if a copywriter can get you thinking about life-changing returns, it becomes ever easier to get you to open up your wallet and pull out the credit card to subscribe to The Wealth Advisory. After all, if you’re daydreaming about turning $500 into $58,335, well, what’s $49 for a newsletter subscription? Chump change!

And that’s about it… so what’s the stock? Thinkolator sez, using the handy little route map he provides for confirmation, that this is a rehashing of Ryle’s older pitch for Uniti Group (UNIT).

Which you might not have heard of, I don’t know, but it was essentially created as a REIT spinoff from the big rural phone company Windstream, which spun off its tower and fiber assets into this new company in early 2015.

Here’s how they describe themselves:

“Uniti Group Inc., an internally managed real estate investment trust, is engaged in the acquisition and construction of mission critical communications infrastructure, and is a leading provider of wireless infrastructure solutions for the communications industry. As of December 31, 2020, Uniti owns over 123,000 fiber route miles, approximately 6.9 million fiber strand miles and other communications real estate throughout the United States.”

Briton Ryle has touted this stock for years now — this particular ad is very similar to one he started running a year or so ago, when the the stock was around $8 and the outcome of the Windstream bankruptcy wasn’t very clear yet, but he actually started teasing this stock about five years ago, when the company was still fairly new and was trading in the $20s. It had a different name at the time, it was called Communication Sales and Leasing (ticker CSAL) — they changed names in the Spring of 2017, when they expanded with the purchase of Hunt Telecom. This is how he teased that same stock back in early 2016…

“More recently, I was looking into mobile Internet infrastructure (i.e., smartphone data/Internet), and, lo and behold, I found a fantastic REIT that owns cell towers, fiber loops, and some data center stuff. The stock was selling for around $16 a share, and the dividend was a lofty 15%….

“That dividend was completely covered by one big contract the company had. And the potential for the company to sign more deals with new companies meant that the already big dividend could get even bigger! So I recommended it to Wealth Advisory subscribers, too. And we’ve got 91% gains since February.

[He even quotes a panning that this mystery stock got from gaga guru Jim Cramer over at CNBC:]

“It’s got too high of a yield. It makes me want to worry that it shouldn’t be a red-flag situation. They shouldn’t be that big. If the company wants to come on and talk about it, that’s fine. But it’s not my cup of tea.”

So if he recommended it at $16, which was the lowest point that stock hit in 2015 or 2016, it was looking pretty prescient a few months later when he was teasing it at near $30 a share… but, in fact, you’d still have ended up with a fair amount of disappointment in the ensuing years, because Uniti really fell apart with the ongoing bankruptcy filing by former parent Windstream, which is still their largest tenant (and, frankly, the partial cause of Windstream’s bankruptcy — creditors sued because it looked like Windstream was sneaking their most valuable assets out the back door and hoping their lenders wouldn’t notice).

The stock had its biggest drop in early 2019, right after that Windstream bankruptcy filing, when it finally succumbed to logic and slashed that massive dividend (from 60 cents a quarter to five cents), and the stock went from about $20 down to $8… since then, it has wandered around and mostly been in the $8-10 neighborhood, though it did dip with the COVID crash last year and recovery strongly along with the markets, and, around the same time that they settled their dispute with Windstream as they came out of bankruptcy in September, got a big investment from activist investor Elliott Management (they’re still the largest non-index shareholder, owning almost 9% of the company, and it seems like they are involved mostly because they were also the controlling activist bondholder for Windstream, helping to steer the bankruptcy settlement), so there has been some recovery more recently — the stock has mostly been near $12 for the past few months.

But that’s all water under the bridge… the bankruptcy is over, the tower stocks that are the most obvious comparison companies have mostly come down a bit from their highs in the past few months, so what’s the story now for Uniti?

Now that Windstream is back on its feet, at least for now, the biggest drag for Uniti is probably the debt burden, which is dramatically larger than the other major telecom REITs — so the $3 billion or so of Uniti equity that’s owned by shareholders is really dwarfed by the $5-6 billion in debt. They do own a lot of assets that are valuable, principally their 100,000+ route miles of fiber-optic cable networks and the ongoing leases of those networks (they did own 600 or so towers as well, but they sold those last summer), but they also have huge ongoing debt costs — they still have access to capital, they’ve been able to refinance a lot of that debt to reduce the cost over the past year or two thanks to lower interest rates on junk bonds, so it’s been a good time to be in this situation… but even in these low interest rate days, their borrowing costs are quite high. Their interest costs have recently been close to $500 million a year, which is more than half of the $900 million or so in gross profit they pull in each year.

So that’s why they had to cut the dividend a couple years ago, they were posting about a billion dollars a year in revenue but paying $430 million in dividends and close to $400 million in interest payments, which was not supportable if they wanted to do things like pay their employees, perform maintenance, or perhaps even grow.

Now, though, things are looking a little more interesting — this is a highly risky situation compared to the big tower REITs, mostly because so much of their value is still tied up in the Windstream relationship (with Uniti obligated to invest pretty heavily in improving the fiber networks, some more of which they’re buying from Windstream in the settlement… but also getting Windstream to actually pay its rent, which is critical because that’s still more than half of Uniti’s revenue, and increasing that rent based on the capital spending work that Uniti completes), but, partly because of that concentration risk, Uniti also has a much lower valuation than the telecom tower/data center REITs if you go by the typical REIT metrics like FFO and dividend yield.

The dividend has now been stable for a year, at 15 cents per quarter, and they are guiding investors to expect Adjusted Funds From Operations (AFFO) of $1.50-1.60 or so in 2021, so that dividend is well-covered by either FFO (which should be around $1.25) or AFFO. They didn’t get the windfall they were hoping for out of the Windstream bankruptcy restructuring, but they did get a reasonable-sounding settlement, and if their fiber is as “in demand” as they believe, they may be able to grow as they lease it up.

So that means UNIT is valued at about 10X expected FFO and has a 5% dividend yield. That’s a decent REIT value these days, though you obviously get a good dollop of risk to go along with it. American Tower (AMT) is expected to have about $9.25 in Adjusted FFO this year, so at $218 they’re valued at about 23X expected AFFO, with a dividend yield of about 2.3%, and Crown Castle (CCI) is valued very similarly at 23X FFO, with a dividend yield of about 3.4%. Both of those companies are dramatically larger ($70 billion and $90 billion, versus $3 billion for UNIT), and they’re far more stable and diversified, so those both give me a lot more confidence than UNIT (I own both AMT and CCI)… but because UNIT is so small and carries a lower valuation, and because they do have a lot of fiber networks that they can still lease up, there is certainly more growth potential at Uniti if things go well. If you’re interested in the “communications infrastructure” in general, there’s also the Benchmark Data & Infrastructure Real Estate ETF (SRVR), which owns all three of those plus several other cell tower, data center and similarly oddball companies, many of them dividend-paying REITs.

What do you think? Ready for a wild ride with UNIT? Have other favorite 5G plays? Let us know with a comment below.

Disclosure: I own shares of Amazon, Google parent Alphabet, American Tower and Crown Castle, all of which are mentioned above, and also have some money invested in the Benchmark SRVR ETF. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.


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Azureblue
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Azureblue
March 15, 2021 6:15 pm

Travis, thank you for your article. You mention that you own REIT CoreSite. Are you concerned that their PE is 60+; I understand that REIT’s are not priced solely based on PE valuation, but thought that 60+ might be a bit high. Thoughts? On a side note do you own many utilities?

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Myles
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Myles
March 15, 2021 6:30 pm

I did invest in LUMN and their fiber lines, plus Edge! It’s up 40% and my divie is 10% , now it’s above 7%. Liking the way CenturyLink decided to go! I’ll take a look at UNIT too. Same price range, LUMN is 14!