Adiran Helfert, Chief Investment Officer at Westwood Income Opportunity Fund, explains why Crown Castle is his single best trade.
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00:00Adrian Helford is chief investment officer at Westwood Income Opportunity Fund. Thank you for joining us here at the street
00:06Thank you for having me. So you have a single best trade for us. What is it? Yes, sir
00:10Well, you know back in July I looked at the single best trade being Crown Castle Crown Castle
00:15Of course, as you know, it is a tower operator primarily a tower operator. They have ventured into providing fiber and small-cell
00:22so when you think about that market you think about
00:24Providing data for the burgeoning data need that we have for our cell phone service for all the smartphones that we're using and
00:31This is really an aggregated market
00:33It's it's kind of an oligopoly where you've got American Tower that's involved. You've got small business
00:40SBAC that's involved and you've got CCI that's involved CCI is really the the second largest in this they've got about
00:4640,000 towers
00:47These are large towers where they have
00:50Multiple renters involved on their towers and they've got small cells that are aggregated into highly dense markets and they've got fiber that provides
00:58Much higher throughput for their communications. One thing that Crown Castle has of course is a more dense market
01:06Operation base. So when you look around New York City and Los Angeles and San Francisco
01:10This is a company that is when we see reurbanization. They're going to make hey
01:15They're going to do very well because they're providing that offput of high data throughput through their small cell capabilities and they've built that up
01:23Differently than say the likes of American Tower
01:26Now the yields on that small cell have been depressed and that's led to their depressed evaluation the yields on tower
01:33operations the large towers are better and
01:37For that reason they've been discounted relative to their peers strategically
01:41CCI went into this business of providing more small cell
01:45Where their peers went into more international businesses that the market in the United States for towers right now is saturated
01:51There's about a hundred thousand towers. As I said CCI runs about forty thousand of those and
01:56It's a saturated market. We're not seeing that hundred thousand tower growth
02:00We have what we need where we're growing is in dense
02:03Urbanization and higher data throughput for areas where we need higher output of data
02:09All right
02:09So I don't assume when someone has a single best trade that it's always a buy
02:14you haven't said whether you like it or not you kind of describe the the context so
02:20Do you like it or do you not like it? I like it. We hold it
02:24It's a good yield for what it is
02:25We think that there's several catalysts that are going to provide upside to beyond the yield. This is a real estate investment trust
02:31So we're looking at measures like adjusted funds for operations on where they are and primarily
02:37Looking at a discount on their EV to EBITDA as a cash flow business because it's a real estate investment trust
02:44We think there's a discount right now of around two to three points relative to its peers
02:48Because of the yields that they are currently getting on their small cell
02:52The catalyst that we're going to see to then realize a better stock price for them is going to be
02:58Number one two and three is the involvement of Elliott the activist
03:03Elliott the activist has pushed for a
03:05Replacement of their CEO which they received and guess what?
03:09They hired a CEO from they hired an individual that was heavily involved in the grow out at American Tower
03:16That person is now the CEO of CCI and is going to lead the efforts to
03:21Provide higher yields and yield targeting for the new capital allocation for their business
03:25That will bring their multiples back to their peer levels. We believe and provide an upside to the stock
03:31So you see Elliott management
03:34Shaking things up. That's a plus for you as an investor. You see that as a positive
03:38100% in this case and that's not always the case
03:41In this case Elliott has come and identified areas where they can improve their yields as a real estate investment trust
03:47They've identified number one
03:49leadership
03:50the board membership
03:52They've also provided guidance for how they should actually look at yield targeting for capital allocation projects
03:58They go in and so they're going through a strategic review right now. We're gonna see the results of that strategic review
04:03We hope shortly. We don't know when that will happen
04:05but one of the possibilities of this strategic review is selling the small cell in the fiber business of
04:12realizing that out and refocusing capital allocation on either
04:16Better yields in the tower space or even better
04:20Better returns for the shareholders. So sometimes an activist investor can go too far and shake things up too much and cause too much
04:28Distraction. Is that a risk to your outlook on the stock in this case? They've been involved for a while
04:36So this is not a brand new
04:38Involvement of Elliott. They were they were proposing this back in 2020 and
04:442023 they went they went through a
04:46reinvolvement and
04:47Went through and reproposed all the things that and they pushed for things like the changes
04:51So at this point no and the new CEO coming in that is an X a AMT
04:57Individual that's experienced in the growth of that business is
05:00Highly positive and so his leadership
05:02We believe is key to the business and key to the strategic review of what they're going to do
05:08So we see a good catalyst in the future. We see good yields
05:11We see a depressed valuation we think can be realized. So the stock is in a 52-week range of
05:17$92 to $120. So right now it's pretty much in the middle of that around $100. What's your time horizon for the stock?
05:25The near-term catalyst is a nice thing to have because right now we're trading you're right right about the mid of the range
05:30we think we could trade up to 120 pretty quickly if we see a
05:33strategic review that identifies those things and has a
05:36capital allocation plan that is better and potentially selling those small cell and fiber businesses and
05:43Focusing on higher yield businesses for what should be a higher yield company
05:47So there have been talks of course about you know, M&A right? Yeah about them spinning off
05:55The fiber and the wireless assets, what would that mean for the company? And what would that mean for the stock?
06:02well them doing that there's there's a lot of differences between the traditional tower business and
06:08Small cell and fiber business one of those certainly is the duration of the contracts and things like CPI escalators that they have on these contracts
06:17What that means is things like rate sensitivity
06:20Really topical right now, of course because we're at elevated rates and we have a potential dropping interest rate
06:25Or maybe it's going to be elevated if we see inflation kick back up because of fiscal policy, etc
06:31It's going to make them more duration sensitive potentially
06:35They're already very duration sensitive and I you know, I'd say that's one thing we've seen when we talked about this back in July
06:40It appreciated very nicely, but it did so in a lot with the appreciation of the tenure US Treasury
06:47Though yields dropping the price going up
06:50It's going to be more duration sensitive in the future. And that's that's one key output of what they're doing
06:57So, what are the risks to this stock
07:00well risks of the stock are that out of the strategic review they decide to I
07:05Believe that they decide to keep the business and be less sensitive to their capital allocation yields that they are providing
07:12That would be a negative they're going through some churn right now on their sprint subscriber base
07:17What they what we really need to see is we need to see
07:20That offset by growth and there's some sort of subscriber space and the renters on their towers
07:26Increase that increases the yields
07:27If you have a you have a tower that has one tenant on board
07:31Your yield is not as good as if you are aggregating and have two or three tenants on board
07:36So we need to see that happen as a positive if we don't see that subscriber churn
07:42from the the sprint acquisition that happened and now moved over to things like T-Mobile and AT&T and Verizon if we don't see a
07:49Pickup and growth there that's going to be a negative for them, but we believe we will so you mentioned this strategic review several times
07:55What's the time frame for that? And what's your patience level?
08:00for
08:01The time of whatever decisions are going to come out of this very good question on the patience level for sure
08:08Time frame on that is as I say Elliot's been involved for a while. This isn't this isn't a new thing that we then worry about
08:15Primary losses of key individuals at the firm. We've we've already seen the turnover
08:19We need to see that they've actually been looking for in many directions
08:24We are going to see I believe a resolution on the strategic review that is in the coming months
08:28My patience level is not extraordinarily high for that catalyst
08:33Individually, I want to see the outcome of that and that outcome I believe should be a
08:38Call it within the next three to six months where we'll start to see not only a statement around that
08:43but whether they're going to live up to the statement and start performing the duties that they tell us that they're going to do if
08:47They're looking for a buyer of those assets
08:49Give us an indication of what the valuations that they'd be willing to accept on the valuation of those assets would be would be helpful
08:55As well. It's not a long-term time frame
08:57As I said, I talked about this back in July some changes have happened on the 10-year US Treasury and this is still a duration
09:03sensitive
09:04Orientation, so you've got a macro influence on the stock itself
09:08That investors need to think about because if we see drop in rates
09:11That should be very good for this company if we see increasingly rising rates
09:15Now that could be some difficult headwind for them. They've got a they've got a load of debt still
09:19We need to see more information on that
09:21So it's probably three to six months as far as my patience level your single best trade is Crown Castle ticker symbol C
09:27C I and we've been speaking with Adrian Humphrey
09:31He's the chief investment officer at Westwood income opportunity fund and this is the street