Tower operator Crown Castle is at a crossroads, with activist investor Elliott Management pushing for major changes within the company. Adrian Helfert, CIO, Westwood Income Opportunity Fund joined TheStreet to discuss why Crown Castle is his single best trade and how a strategic review could be the catalyst for growth.
Related: Single Best Trade: Veteran fund manager picks Crown Castle stock
Full Video Transcript Below:
CONWAY GITTENS: Adrian Helfert is Chief Investment Officer at Westwood Income Opportunity Fund. Thank you for joining us here at TheStreet.
ADRIAN HELFERT: Thank you for having me.
CONWAY GITTENS: So you have a single best trade for us. What is it?
ADRIAN HELFERT: Yes, sir. Well back in July, I looked at the single best trade being Crown Castle. Crown Castle, of course as you know it is a tower operator. Primarily a tower operator. They have ventured into providing fiber and small cell. So when you think about that market, you think about providing data, data for the burgeoning data need that we have for our cell phone service, for all the smartphones that we're using. And this is really an aggregated market. It's kind of an oligopoly where you've got American Tower that's involved, you've got small business, SBAC that's involved, and you've got CCI that's involved. CCI is really the second largest in this. They've got about 40,000 towers. These are large towers where they have multiple 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 much higher throughput for their communications.
One thing that Crown Castle has, of course, is a more dense market operation base. So when you look around New York City and Los Angeles and San Francisco, this is a company that is when we see re-urbanization, they're going to make hay. They'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 differently than, say, the likes of American Tower. Now the yields on that small cell have been depressed. And that's led to their depressed valuation. The yields on tower operations the large towers are better. And for that reason they've been discounted relative to their peers strategically. CCI went into this business providing more small cell where their peers went into more international businesses. The market in the United States for towers right now is saturated. There's about 100,000 towers, as I said. CCI runs about 40,000 of those, and it's a saturated market. We're not seeing that 100,000 tower growth. We have what we need. Where we're growing is in dense urbanization and higher data throughput for areas where we need higher output of data.
CONWAY GITTENS: All right. So I don't assume when someone has a single best trade that it's always a buy. You haven't said whether you like it or not. You kind of described the context. So do you like it or do you not like it?
ADRIAN HELFERT: I like it. We hold it. It's a good yield for what it is. We think that there's several catalysts that are going to provide upside to beyond the yield. This is a real estate investment trust. So we're looking at measures like adjusted funds for operations on where they are. And primarily we're looking at a discount on their EV to EBITDA at the cash flow business because it's a real estate investment trust. We think that the discount right now of around 2 to three points relative to its peers appears because of the yields that they are currently getting on their small cell. The catalyst that we're going to see to then realize a better stock price for them is going to be number 1, 2, and 3 is the involvement of Elliott, the activist. Elliott, the activist, has pushed for a replacement of their CEO, which they received. And guess what they hired a CEO from. They hired an individual that was heavily involved in the Grow out at American Tower. That person is now the CEO of CCI and is going to lead the efforts to provide higher yields and yield targeting for the new capital allocation for their business that will bring their multiples back to their peer levels, we believe, and provide an upside to the stock.
CONWAY GITTENS: So you see Elliott Management shaking things up. That's a plus for you as an investor. You see that as a positive?
ADRIAN HELFERT: 100% in this case. And that's not always the case. In this case, Elliott has come and identified areas where they can improve their yields as a real estate investment trust. They've identified number one leadership. The board membership. They've also provided guidance for how they should actually look at yield targeting for capital allocation projects. They go in. And so they're going through a strategic review. Now we're going to see the results of that strategic review. We hope shortly. We don't know when that will happen. But one of the possibilities of the strategic review is selling the small cell and the fiber business of realizing that out and refocusing capital allocation on either better yields in the tower space or even better, better returns for the shareholders.
CONWAY GITTENS: So sometimes an activist investor can go too far and shake things up too much and cause too much distraction. Is that a risk to your outlook on the stock?
ADRIAN HELFERT: In this case, they've been involved for a while. So this is not a brand new involvement of Elliott. They were proposing this back in 2020 and 2023. They went through a re-involvement and went through and re proposed all the things that and they pushed for things like the changes. So at this point, no. And the new CEO coming in, that is an AMT individual that's experienced in the growth of that business is highly positive. And so his leadership, we believe, is key to the business and key to the strategic review of what they're going to do. So we see a good catalyst in the future. We see good yields. We see a depressed valuation we think can be realized.
CONWAY GITTENS: So the stock is in a 52 week range of about $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?
ADRIAN HELFERT: The 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. We think we can trade up to 120 pretty quickly. If we see a strategic review that identifies those things and has a capital allocation plan that is better, and potentially selling those small cell and fiber businesses and focusing on higher yield businesses for what should be a higher yield company.
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CONWAY GITTENS: So there have been talks of course, about M&A right, about them spinning off the fiber and the wireless assets. What would that mean for the company and what would that mean for the stock?
ADRIAN HELFERT: Well them doing that there's a lot of differences between the traditional tower business and small 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. What that means is things like rate sensitivity, really topical right now, of course, because we're at elevated rates and we have a potential dropping interest rate. Or maybe it's going to be elevated if we see inflation kick back up because of fiscal policy. Et cetera. It's going to make them more duration sensitive potentially. They're already very duration sensitive. And you know I'd say that's one thing we've seen when we talk about this back in July. It appreciated very nicely. But it did so in a lot with the appreciation of the 10 year US Treasury. So yields dropping, the price going up. It's going to be more duration sensitive in the future. And that's one key output of what they're doing.
CONWAY GITTENS: All right. You talked a little bit about the benefits. So what are the risks to this stock?
ADRIAN HELFERT: Well risk of the stock are that out of the strategic review. They decide to I believe that they decide to keep the business and be less sensitive to their capital allocation yields that they are providing. That would be a negative. They're going through some churn right now on their sprint subscriber base. What we really need to see is we need to see that offset by growth in their subscriber base and the renters on their towers increase that increases the yields. So if you have a tower that has one tenant on board. Your yield is not as good as if you are aggregating and have two or three tenants on board. So we need to see that happen as a positive. If we don't see that subscriber churn from 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 pickup in growth there, that's going to be a negative for them. But we believe we will.
CONWAY GITTENS: So you've mentioned the strategic review several times. What's the time frame for that. And what's your patience level for the time of whatever decisions are going to come out of this review?
ADRIAN HELFERT: Very good question on the patience level for sure. Time frame on that is, as I say, Elliott's been involved for a while. This isn't a new thing that we then worry about. Primary losses of key individuals at the firm. We've already seen the turnover. We clearly need to see that they've actually been looking for in many directions. We are going to see, I believe, a resolution on the strategic review that is in the coming months. A patience level is not extraordinarily high for that catalyst. Individually, I want to see the outcome of that and that outcome, I believe should be, I call it within the next three to six months, where we'll start to see not only a statement around that, but 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 they're looking for a buyer of those assets, give 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 as well. It's not a long term time frame. As I say. I talk about this back in July. Some changes have happened on the 10 year US Treasury. And this is still a duration sensitive orientation. So you've got a macro influence on the stock itself that investors need to think about. Because if we see drop in rates, that should be very good for this company. If we see increasingly rising rates now, that could be some difficult headwind for them. They've got they've got a load of debt. Still we need to see more information on that. So it's probably three to six months as far as my patience level.
CONWAY GITTENS: So your single best trade is Crown Castle, ticker symbol CCI. And we've been speaking with Adrian Helfert. He's the Chief Investment Officer at Westwood Income Opportunity Fund. And this is TheStreet.
