.Crown Castle (NYSE: CCI) recently agreed to provide the city of Pittsburgh with the first unified fiber connectivity network. The deal showcases the infrastructure REIT’s (real estate investment trust) fiber optic cable service offerings, which investors have questioned in the past.
Here's a closer look at how it's helping the city and why it sees a bright future in fiber.
Connecting the Steel City
Pittsburgh used to be a steel town. However, the city has become an innovation hub in recent years. All five of the biggest tech giants -- Alphabet (Google), Amazon, Apple, Facebook, and Microsoft -- along with a host of smaller technology companies have all set up shop in the Steel City to take advantage of its highly educated workforce.
Now the city of Pittsburgh is moving into the 21st century by working with Crown Castle. The infrastructure REIT will help connect all 131 city facilities on a single network, including EMS stations, fire stations, recreation and healthy living centers, and critical safety infrastructure. By connecting all these facilities to one high-speed network -- more than half currently operate on various institutional networks -- it will enhance the city's ability to deliver services to residents.
The 10-year, roughly $10 million agreement will also support the city's plan to turn rec centers into learning labs where kids can gain coding and video game design skills. In addition, it will allow the city to advance its Smart Corridors initiative to improve traffic efficiency. Finally, it will enable the city to deploy public Wi-Fi networks in city neighborhoods.
Crown Castle's fiber ambitions
Fiber solutions are part of Crown Castle's broad infrastructure offerings, which also include cell towers and small cells. The REIT currently operates roughly 80,000 route miles of fiber along with more than 40,000 communications towers and about 80,000 small cells either on-air or in its backlog. All three infrastructure assets are essential for deploying 5G networks, while fiber also plays a vital role in supporting the increased usage of data.
Through acquisitions and organic expansions, Crown Castle has spent about $17 billion building out its fiber network over the past decade. It made a string of deals in 2017 to rapidly scale its fiber business:
- FiberNet: The $1.5 billion deal added 11,500 route miles of fiber in Florida and Texas.
- Lightower: The $7.1 billion transaction added 32,000 route miles of fiber in top metro markets across the Northeast, including Boston, New York, and Philadelphia.
- Wilcon: The $600 million purchase added 1,900 route miles of fiber, primarily in Los Angeles and San Diego.
Crown Castle made such a big bet on fiber because the REIT sees it as an important long-term growth driver since it complements its tower and small-cell businesses. Fiber is essential in transporting data quickly over networks.
However, the company's investments in fiber haven't generated returns on par with its tower business. For example, its $22.9 billion investment to expand its tower portfolio over the years is generating a cash yield of 11%. Fiber, on the other hand, has a lower cash yield of about 7.3%. That's due in large part to a lower tenancy. Its average tower has 2.2 tenants, while it averages less than one tenant on a fiber network.
This lower return on investment has had investors and analysts questioning its fiber strategy in the past. However, Crown Castle has maintained that it can boost its returns over time as it scales the business, much like it did with towers that had an initial 3% yield. The company noted that when it can combine fiber with small cells, it earns higher yields. Thus, as 5G networks roll out, its fiber business will become even more valuable in the future.
An important part of the future
Crown Castle firmly believes that its fiber investments will pay bigger future dividends. That's why it continues to forecast dividend growth of 7% to 8% per year over the next decade, which it bumped up when it initially bolstered its fiber business in 2017. Its recent deal with the city of Pittsburgh, while small, showcases one of the many ways it can grow that business and create value from it for shareholders.