Crown Castle (NYSE:CCI) is one of the largest pure-play telecom REITs, providing shared communications infrastructure in the US. Its portfolio includes over 40,000 cell towers, 105,000 on-air or under-contract small cell nodes and 90,000 route miles of fiber. The company derives approximately 73% of its revenue from the three major U.S. telecom operators, T-Mobile (NASDAQ:TMUS), AT&T (NYSE:T) and Verizon (NYSE:VZ).
Crown Castle has announced a divestiture of its fiber and small cell assets, repositioning itself as a pure-play tower REIT, a move welcomed by investors.
In this article, I'll walk through the key drivers behind this strategic shift, analyze its impact on Crown Castle's fundamentals and valuation, and explore what lies ahead for shareholders.
The Deal
Crown Castle recently agreed to sell its entire small cell and fiber segment for $8.5 billion in cash, marking a major strategic shift. The deal will see EQT's (NYSE:EQT) Active Core Infrastructure fund acquire Crown Castle's small cell nodes and Zayo Group acquire the fiber assets, each paying $4.25 billion. This decision follows a strategic review prompted by activist investor Elliott Management, which had pushed for changes due to Crown Castle's underperformance.
Although Crown Castle acquired its fiber footprint through multiple transactions (most notably spending $7.1 billion in 2017) and is now selling it for just $4.25 billion, the market viewed the divestiture as a well-calculated move to improve financial stability and refocus on core strengths, with the company adding more than 8% on the day following the news. Even co-founder Ted Miller suggested the company could have fetched as much as $15 billion by selling its fiber assets. Nevertheless, this implies a renewed concentration on its 40,000+ macro cell towers, which historically offer higher margins and more predictable growth than the fiber/small-cell business.
Crown Castle plans to use the $8.5 billion proceeds to pay down debt and fund a $3 billion share buyback program. By reducing debt and repurchasing shares, the company aims to strengthen its balance sheet while also returning capital to shareholders. However, acknowledging the loss of fiber revenue, Crown Castle announced it will reduce its annual dividend to about $4.25 per share starting Q2 2025. This dividend reset (down from $6.26 per share annually in 2024) is intended to realign the payout to roughly 75% to 80% of adjusted funds from operations (AFFO) and enhance financial flexibility. In my opinion, management made a smart move by tying the dividend cut to the asset sale. Typically, such cuts lead to stock selloffs, but the market couldn't care less about the cut.
Crown Castle is forecasting approximately 4.5% organic tower revenue growth in 2025 (a declining trend) and projects long-term annual AFFO growth of around 7% to 8% once current headwinds abate.
The company expects 2025 to be the final year of outsized churn from the T-Mobile/Sprint merger. Once that churn subsides, tower revenue growth should accelerate back to normal levels.
With the fiber review concluded, Crown Castle plans to reduce discretionary capital spending (down $130M in the fiber segment and $61M in towers in 2024), reflecting a more disciplined approach.
The fiber business was more capital-intensive (laying new fiber, and deploying small cells has a long payback period), so exiting it should improve overall ROIC. We might also see reductions in operating costs as certain fiber-related overhead and personnel are transferred to the buyers. Crown Castle's tower business has high EBITDA margins (often around 65% to 75%) because once a tower is built, adding additional tenants incurs little incremental cost (this is the co-location synergies of the business model). By becoming a pure tower REIT, Crown's blended margins should gravitate higher.
The company's cost structure will become leaner, and management's emphasis on capital discipline and operational excellence moving forward, suggesting they are actively looking to streamline operations and improve overall efficiency.
Fundamentals
Crown Castle reported Q4 2024 Earnings, where all key metrics were down compared to the previous year. Despite beating its own revenue guidance by $18 million, revenue dropped 3% year over year (YoY). Net income suffered due to a one-off $5 billion goodwill impairment charge related to the fiber unit, underlining the challenges that segment faced.
Prior to the divestiture, Crown Castle towers have been the core revenue driver. Crown Castle earns rent from wireless tenants that attach equipment to its towers under long-term leases (typically 5 to 10+ year terms with renewal options). The fiber segment (including small cells) generated a substantial portion of revenue (33% of total site rental revenues) but was less profitable.
That said, one concern I have with the core revenue driver is the cash yield on new builds. Although new or acquired builds after 2007 required a higher net invested capital per tower, these post-2007 builds yield nearly half the rental revenue and gross cash margins compared to towers built before 2006. This pressure on margins will create headwinds soon or later in my opinion, something that long-term investors have to monitor closely.
AFFO, a key REIT cash flow metric, was down 7% YoY to $3.0 billion, or $6.98 per share. This drop was largely due to the Sprint/T-Mobile merger churn (lost tower leases) and higher interest costs. Management provided 2025 guidance of between $4.06 and $4.17 AFFO per share on a towers-only basis (the outlook includes the impact of losing the fiber business, but not yet the benefits that will come once the transaction is completed).
Adjusted EBITDA was $4.2 billion, down again by 6% from $4.4B in 2023. We can expect EBITDA to drop once fiber is removed, but EBITDA margins should improve.
Crown Castle employs significant leverage, as is common in infrastructure REITs with stable cash flows. Net debt stood at $24 billion with a weighted average interest rate of 3.9%. The net debt-to-Adjusted EBITDA ratio is 5.7x, slightly lower than management's target leverage of 6.0x to 6.5x to maintain an investment-grade credit rating.
The reduction of debt will add between $210 to $260 million to the AFFO that was previously allocated to the payment of debt interest.
Valuation
Crown Castle's valuation has pulled back considerably over the last two years but has seen a solid rebound since the divestiture announcement. Crown Castle trades at roughly 15x AFFO, a discount compared to its peers.
That said, I have concerns about the forward P/AFFO, even when factoring in the benefits of the divestiture. Management expects annual AFFO between $2.2 and $2.4 billion. For the company to maintain its current market capitalization, its forward P/AFFO would have to trade at 20x, in the same range as the current American Tower's (NYSE:AMT) P/AFFO. However, American Tower deserves to trade at a premium against its peers thanks to its lower leverage ratios (Total Debt/EBITDA and Net Debt/EBITDA), lower EV/EBITDA and higher EBITDA margins.
Crown Castle: Why I'm Selling the Rally
Source: Author
Further Headwinds
Telecom carriers have been tightening their capital spending after years of heavy 5G investments and spectrum purchases. If the top three customers further curb spending or delay 5G expansion, new leasing on towers could be modest in the near term. Additionally, tenant concentration risk is high with the big three wireless carriers accounting for the bulk of Crown Castle's site rental revenues.
The shift to a towers-only company, plus the associated internal changes (cost cuts, process improvements, etc.), will require precise execution. There is a risk that cost savings or efficiency gains take longer or are harder to achieve than expected. Crown Castle will need to seamlessly transition thousands of fiber contracts, employees, and assets to the buyers (EQT and Zayo) over the next year or so. During this period, Crown Castle must keep service levels high for customers (to avoid any penalties or reputation damage) even though that segment is slated to be sold. There's an execution risk in making sure the remaining organization retains key talent.
Conclusion
I believe from a business cycle perspective adding REITs to a portfolio would yield significant value. However, I don't believe Crown Castle is the best-positioned REIT right now and would expect it to underperform the broader market.
The company just announced a dividend cut, which will start in Q2 of 2025. The recent Q4 earnings results were disappointing in my view, even with the announced divestiture. The divestiture could have been handled more effectively and should have come sooner, in my view. The execution by management wasn't the best and despite the market having liked the news, the next few quarters will have to be perfect to split its small cell and fiber business without disruption.
The stock reacted positively to the earnings call and has since rallied more than 20% from its trough. However, I don't see much further upside from current levels.
