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2011-08-23 20:58:50

Cell Tower Lease Values - A Bubble

With interest rates still at historic lows investment yields need not be enormous to be attractive. Competing with the U. S. 10 year yielding less than 3%, mortgage rates in the 3 to 4% range and money market yields, well forgetaboutit.


What will happen when inflation heats up? Will interest rates have to be raised to stem the tide? How will other investment yields have to be adjusted to compare with the core rates, such as US securities, to remain attractive? Up, is my guess and maybe way up.


How will this affect cellular tower values? Let me give you my thesis in a Reader Digest length version.


U. S. treasuries have been around forever, so it is pretty easy to study their reaction to interest rate hikes, inflation and recessions/depressions. When inflation exceeds the Fed's target their first line of defense is lowering the money supply, making money more scarce there by driving business to have to compete for the funds. The Feds can also raise the discount rates as a last resort.


Either of these choices force all other interest rates to rise and compete for investment dollars. Risk/reward is a real gauge of what someone will pay for a 'return' when the risk is calculated into the equation. E.g. a 10 year U. S. treasury at 3% or a 8 or 10% yield offered by junk bonds? Which is more attractive? Risk vs reward.


The monetization of cellular tower leases is in its infancy (11 or so years old), so there's no real history to study to with regards to what inflation/interest rate hikes will do to the value the cell site leases and what buyers will pay for them. I'm going to make an educated guess and say that they will demand a higher return.


Prices and yields function as opposites. When a bond yielding 3% needs ti yield 4% the price of the bond has to go down since the rate is fixed. This is true of existing bonds. Newly issued securities can begin with a higher rate of return (interest). The problem is that there are trillions upon trillions of dollars in bonds existing that don't have the ability adjust their yields without adjusting their price.


Cellular lease buyers have the same set of financial limitations. Existing cell tower purchases may average an internal rate of return of 10 to 12% (a fair return given the risks involved). Should interest rates rise, the value of these contracts would diminish. New cell site lease purchases would require more of a 'reward' due to the yields rising on less risky financial instruments, therefore the purchases would have to be at a lower price.


What do you think? Interest rates going to go up? Will cell sites be worth more or less? I'd love to hear your opinion.


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