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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
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
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 site leases is in its infancy (11 or so years old at
the time of this writing), 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
site 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 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 leases be worth
more or less? I'd love to hear your opinion.
Own a cell site? Do you know what it is worth? We set record prices.
Yields on US Treasuries Up, Then Cell Lease Pricing Goes Down
Buyout Firms See It This Way