Veteran fund manager bets big on struggling tower stock

Adrian Helfert, CIO, Westwood Income Opportunity Fund joined TheStreet to discuss why Crown Castle is his single best trade.
Transcript:
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.
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