Interest Rate-sensitive stocks: Crown Castle (CCI) under review
Interest rate-sensitive stocks, such as Crown Castle (NYSE: CCI), are gaining attention for their potential to perform well in the US market that have seen declines as interest rates have risen. Crown Castle, a telecommunications-focused Real Estate Investment Trust (REIT), experienced a significant drop in value between 2021 and 2023, losing approximately 50% of its worth, primarily due to increasing interest rates.
As interest rates climbed, Crown Castle’s interest expenses also increased, leading to a sharp rise in its leverage, or times-interest-earned ratio. Additionally, the rising real interest rates impacted the perceived fair value of its dividend, creating further challenges for the company’s valuation.
Telecom REITs, including Crown Castle, have faced a complex market environment shaped by growing trends such as 5G, the Internet of Things (IoT), and artificial intelligence (AI). While these trends are crucial for the future of the industry, they require substantial investments in research, development, and capital expenditure (CapEx). Crown Castle allocates a significant portion of its revenue to maintaining competitiveness, particularly against its major competitor, American Tower (AMT).
Since 2022, Crown Castle has seen an additional 10% drop in its stock price, as revenue growth has slowed and profits, along with cash flow, have declined. The company has also reported rising interest expenses due to its high level of debt, which is an area of concern for investors.
Looking ahead: key factors for Crown Castle’s performance
The future performance of Crown Castle is expected to depend largely on changes in interest rates and broader developments in the telecom sector. With interest rate cuts potentially on the horizon, there could be some relief in the company’s refinancing efforts in the U.S markets. However, any benefits from lower rates will depend on the scale and speed of rate reductions by central banks.
Crown Castle’s financial leverage remains high, with a debt-to-EBITDA ratio of around 6x, and approximately US$2 bni in debt maturities scheduled through 2025. While most of this debt was secured before 2022 at lower rates, refinancing the upcoming maturities could lead to higher interest expenses, especially if interest rates remain elevated.
Additionally, between 2026 and 2029, Crown Castle faces a larger debt maturity wall of around US$9 bn. If interest rates do not fall significantly by then, the company may face further increases in interest costs, which could impact profitability.
Telecom sector challenges
Crown Castle operates primarily through its two business segments: towers and fibre. The towers segment, which represents two-thirds of the company’s revenue and three-quarters of its profits, has been the core of its business, while its fibre expansion has been a more recent development. Despite fibre’s growth potential, it faces greater competition and lower margins compared to the towers business.
In recent months, demand for telecommunications infrastructure, such as towers and fibre, has shown signs of slowing. While 5G technology continues to expand, it has not yet resulted in the substantial revenue growth anticipated in earlier years. Meanwhile, alternative technologies, such as Elon Musk’s Starlink, present potential competition for fibre services in the future.
Crown Castle has responded to these challenges by reducing CapEx and cutting costs, particularly in its fibre business. The company’s focus appears to be shifting towards improving profitability and managing its debt load rather than pursuing aggressive growth.
Conclusion
Crown Castle’s current financial position reflects a mix of opportunities and risks. On one hand, potential interest rate cuts could offer short-term relief, improving its refinancing prospects. On the other hand, long-term challenges, including rising competition, slowing demand for telecom infrastructure, and high leverage, remain concerns for the company.
While the company’s valuation is lower than in previous years, its future performance will likely depend on both interest rate trends and broader market dynamics within the telecommunications sector.
