San Francisco is on track to become the first U.S. city to ban the use of facial recognition by police and other city agencies, reflecting a growing backlash against a technology that’s creeping into airports, motor vehicle departments, stores, stadiums and home security cameras.
Government agencies across the U.S. have used the technology for more than a decade to scan databases for suspects and prevent identity fraud. But recent advances in artificial intelligence have created more sophisticated computer vision tools, making it easier for police to pinpoint a missing child or protester in a moving crowd or for retailers to analyze a shopper’s facial expressions as they peruse store shelves.
Efforts to restrict its use are getting pushback from law enforcement groups and the tech industry, though it’s far from a united front. Microsoft, while opposed to an outright ban, has urged lawmakers to set limits on the technology, warning that leaving it unchecked could enable an oppressive dystopia reminiscent of George Orwell’s novel “1984.”
“Face recognition is one of those technologies that people get how creepy it is,” said Alvaro Bedoya, who directs Georgetown University’s Center on Privacy and Technology. “It’s not like cookies on a browser. There’s something about this technology that really sets the hairs on the back of people’s heads up.”
Without regulations barring law enforcement from accessing driver’s license databases, people who have never been arrested could be part of virtual police line-ups without their knowledge, skeptics of the technology say.
They worry people will one day not be able to go to a park, store or school without being identified and tracked.
Already, a handful of big-box stores across the U.S. are trying out cameras with facial recognition that can guess their customers’ age, gender or mood as they walk by, with the goal of showing them targeted, real-time ads on in-store video screens.
If San Francisco adopts a ban, other cities, states or even Congress could follow, with lawmakers from both parties looking to curtail government surveillance and others hoping to restrict how businesses analyze the faces, emotions and gaits of an unsuspecting public.
The California Legislature is considering a proposal prohibiting the use of facial ID technology on body cameras. A bipartisan bill in the U.S. Senate would exempt police applications but set limits on businesses analyzing people’s faces without their consent.
Legislation similar to San Francisco’s is pending in Oakland, and on Thursday another proposed ban was introduced in Somerville, Mass.
Bedoya said a ban in San Francisco, the “most technologically advanced city in our country,” would send a warning to other police departments thinking of trying out the imperfect technology. But Daniel Castro, vice president of the industry-backed Information Technology and Innovation Foundation, said the ordinance is too extreme to serve as a model.
“It might find success in San Francisco, but I will be surprised if it finds success in a lot of other cities,” he said.
San Francisco is home to tech innovators such as Uber, Airbnb and Twitter, but the city’s relationship with the industry is testy. Some supervisors in City Hall are calling for a tax on stock-based compensation in response to a wave of San Francisco companies going public, including Lyft and Pinterest.
At the same time, San Francisco is big on protecting immigrants, civil liberties and privacy. In November, nearly 60% of voters approved a proposition to strengthen data privacy guidelines.
The city’s proposed face-recognition ban is part of broader legislation aimed at regulating the use of surveillance by city departments. The legislation applies only to San Francisco government and would not affect companies or people who want to use the technology. It also would not affect the use of facial recognition at San Francisco International Airport, where security is mostly overseen by federal agencies.
The Board of Supervisors is scheduled to vote on the bill Tuesday.
San Francisco police say they stopped testing face recognition in 2017. Spokesman David Stevenson said in a statement that the department looks forward to “developing legislation that addresses the privacy concerns of technology while balancing the public safety concerns of our growing, international city.”
Supervisor Aaron Peskin acknowledges his legislation, called the “Stop Secret Surveillance Ordinance,” isn’t very tech-friendly. But public oversight is crucial given the potential for abuse, he said.
The technology often misfires. Studies have shown error rates in facial-analysis systems built by Amazon, IBM and Microsoft were far higher for darker-skinned women than lighter-skinned men.
Even if facial recognition were perfectly accurate, its use would pose a severe threat to civil rights, especially in a city with a rich history of protest and expression, said Matt Cagle, an attorney at the ACLU of Northern California.
“If facial recognition were added to body cameras or public-facing surveillance feeds, it would threaten the ability of people to go to a protest or hang out in Dolores Park without having their identity tracked by the city,” he said, referring to a popular park in San Francisco’s Mission District.
Local critics of San Francisco’s legislation, however, worry about hampering police investigations in a city with a high number of vehicle break-ins and several high-profile annual parades. They want to make sure police can keep using merchants and residents’ video surveillance in investigations without bureaucratic hassles.
Joel Engardio, vice president of the grass-roots group Stop Crime SF, wants the city to be flexible.
“Our point of view is, rather than a blanket ban forever, why not a moratorium so we’re not using problematic technology, but we open the door for when technology improves?” he said.
Such a moratorium is under consideration in the Massachusetts Legislature, where it has the backing of Republican and Democratic senators.
Often, a government’s facial-recognition efforts happen in secret or go unnoticed. In Massachusetts, the motor vehicle registry has used the technology since 2006 to prevent driver’s license fraud, and some police agencies have used it as a tool for detectives.
“It is technology we use,” said Massachusetts State Police Lt. Tom Ryan, adding that “we tend not to get too involved in publicizing” that fact. Ryan and the agency declined to answer further questions about how it’s used.
Massachusetts Sen. Cynthia Creem, a Democrat and sponsor of the moratorium bill, said she worries about a lack of standards protecting the public from inaccurate or biased facial-recognition technology. Until better guidelines exist, she said, “it shouldn’t be used” by government.
The California Highway Patrol does not use face-recognition technology, spokeswoman Fran Clader said.
California Department of Motor Vehicles spokesman Marty Greenstein said facial-recognition technology “is specifically not allowed on DMV photos.” State Justice Department spokeswoman Jennifer Molina said her agency does not use face ID technology, and policy states that “DOJ and requesters shall not maintain DMV images for the purpose of creating a database” unless authorized.
Legislators also sought a face-recognition moratorium this year in Washington, the home state of Microsoft and Amazon, but it was gutted following industry and police opposition. Microsoft instead backed a lighter-touch proposal as part of a broader data privacy bill, but deliberations stalled before lawmakers adjourned late last month.
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Still recovering from an awkward band phase as a guitarist who dreamt of world tours, Billy now covers the audio beat, spanning everything from headphones to streaming. He lives in the great state of North Carolina where a good biscuit is the only thing that matters. He’s also a Cheez-It expert and a graphic designer on nights and weekends.
The financing sets a post-money valuation of around $19 billion for the San Francisco-based company, “inclusive of SoftBank Vision Fund’s previously announced investment commitment,” Cruise said in a press release issued this morning.
The latest financing brings the company’s total raised since inception to $7.25 billion, it said. In May 2018, SoftBank and GM led a $3.4 billion round that gave the company a post-money valuation of $12.7 billion, according to its Crunchbase profile.
“Developing and deploying self-driving vehicles at massive scale is the engineering challenge of our generation,” said Cruise CEO Dan Ammann, in the press release. “Having deep resources to draw on as we pursue our mission is a critical competitive advantage.”
Besides its San Francisco headquarters, Cruise has offices in Seattle, Pasadena, and Phoenix. Its mission is to build “the world’s most advanced self-driving, all electric vehicles.” GM acquired the six-year-old company, formerly known as Cruise Automation, for $1 billion in 2016. We reached out to the company for more details and will update the story when we have them.
In general, the self-driving space is heating up. Interestingly, SoftBank is funding more than one related initiative. Last month, we reported on how Uber confirmed that its cash-burning self-driving unit received a $1 billion investment from auto giant Toyota Motor, Japanese automotive components manufacturer Denso Corp., and the SoftBank Vision Fund. As part of that, Uber said it would spin out the unit into a newly-formed advanced technologies “entity” focused on “the development and commercialization” of automated ride-hailing services.
Scientists with the Institute for Molecular Engineering at the University of Chicago have made two breakthroughs in the quest to develop quantum technology. In one study, they entangled two quantum bits using sound for the first time; in another, they built the highest-quality long-range link between two qubits to date. The work brings us closer to harnessing quantum technology to make more powerful computers, ultra-sensitive sensors and secure transmissions.
“Both of these are transformative steps forward to quantum communications,” said co-author Andrew Cleland, the John A. MacLean Sr. Professor of Molecular Engineering at the IME and UChicago-affiliated Argonne National Laboratory. A leader in the development of superconducting quantum technology, he led the team that built the first “quantum machine,” demonstrating quantum performance in a mechanical resonator. “One of these experiments shows the precision and accuracy we can now achieve, and the other demonstrates a fundamental new ability for these qubits.”
Scientists and engineers see enormous potential in quantum technology, a field that uses the strange properties of the tiniest particles in nature to manipulate and transmit information. For example, under certain conditions, two particles can be “entangled”—their fates linked even when they’re not physically connected. Entangling particles allows you to do all kinds of cool things, like transmit information instantly to space or make unhackable networks.
But the technology has a long way to go—literally: A huge challenge is sending quantum information any substantial amount of distance, along cables or fibers.
In a study published April 22 in Nature Physics, Cleland’s lab was able to build a system out of superconducting qubits that exchanged quantum information along a track nearly a meter long with extremely strong fidelity—with far higher performance has been previously demonstrated.
“The coupling was so strong that we can demonstrate a quantum phenomenon called ‘quantum ping-pong’—sending and then catching individual photons as they bounce back,” said Youpeng Zhong, a graduate student in Cleland’s group and the first author of the paper.
One of scientists’ breakthroughs was building the right device to send the signal. The key was shaping the pulses correctly—in an arc shape, like opening and closing a valve slowly, at just the right rate. This method of ‘throttling’ the quantum information helped them achieve such clarity that the system could pass a gold standard measurement of quantum entanglement, called a Bell test. This is a first for superconducting qubits, and it could be useful for building quantum computers as well as for quantum communications.
The other study, published April 26 in Science, shows a way to entangle two superconducting qubits using sound.
A challenge for scientists and engineers as they advance quantum technology is to be able to translate quantum signals from one medium to the other. For example, microwave light is perfect for carrying quantum signals around inside chips. “But you can’t send quantum information through the air in microwaves; the signal just gets swamped,” Cleland said.
The team built a system that could translate the qubits’ microwave language into acoustic sound and have it travel across the chip—using a receiver at the other end that could do the reverse translation.
It required some creative engineering: “Microwaves and acoustics are not friends, so we had to separate them onto two different materials and stack those on top of each other,” said Audrey Bienfait, a postdoctoral researcher and first author on the study. “But now that we’ve shown it is possible, it opens some interesting new possibilities for quantum sensors.”
More information: Y. P. Zhong et al. Violating Bell’s inequality with remotely connected superconducting qubits, Nature Physics (2019). DOI: 10.1038/s41567-019-0507-7
Citation: Scientists connect quantum bits with sound over record distances (2019, May 1) retrieved 1 May 2019 from https://phys.org/news/2019-05-scientists-quantum-bits-distances.html
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Phishing, the attempt to steal important data such as login information, passwords, or credit card numbers from unsuspecting users, is still a major threat on today’s Internet. Microsoft’s Security Intelligence report saw phishing emails increase by 250% in 2018 alone.
Most web browsers come with certain defenses, usually in form of blacklists and other defensive measures to detect phishing attacks.
One problem with the approach is that it addresses known phishing sites for the most part. The Inception Bar is a new phishing method designed specifically for mobile.
Many mobile web browsers hide the address bar when a user starts to scroll to expand the content of the active webpage. Since space is a premium on mobile, it makes sense to use the address space for that. Doing so removes the strongest identifying indicator for that webpage, and it also makes way for the new phishing method.
Basically, what the phishing method does is put a fake copy of the address bar at the top of the screen in the fixed location the address bar is found in usually. Browsers would normally display the address bar again when users scroll up but the implementation of a scroll lock on the page prevents that from happening.
The effect is that the fake address bar — that looks similar to the real one — is shown to users and that it becomes difficult to exit the page. Even worse, since it is fake, it is possible to make it display any site URL. A dedicated web developer could create a full copy of Chrome’s address bar and not just a lookalike.
You can see it in action on James Fisher’s website. Note that you will experience this method first hand if you use the mobile version of Chrome to access the site; on desktop, you may watch the animated GIF to see how it works when you connect using mobile devices.
Fisher’s method works in Chrome for mobile; he notes that one could check for the user agent to display similar fake address bars for other mobile web browsers.
I accessed the site on Chrome Stable and Chrome Canary for Android. The replacement worked in Canary but it did not in Chrome Stable. Whether that is caused by a setting in the browser or something else is unclear.
You can get out of it by activating any link on the site if you are stuck in mobile Chrome.
Detecting that it is fake
For now, it is easy to detect whether the address bar is real or fake; the tab and menu icons don’t do a thing, and it is not possible to edit the URL either.
Things could get more complicated if the phishing method is developed further. Someone could use a form instead that accepts input and make the icons behave more or less like they would.
The tab count that is displayed could still be an indicator, and most users probably know the site they accessed and may notice that the new site displayed is different from it.
Now You: What is your take on this method?
New mobile Phishing Method using fake address bar and scroll locking
A new phishing method displays a fake address bar to mobile Internet users and prevents them from scrolling up to display the real one again.
Rumors suggest Apple’s iPhone XR follow-up will upgrade to a dual-lens rear camera in 2019, potentially delivering the company’s advanced photographic technology to an entry-level smartphone model for the first time.
As with the iPhone X and XS, one lens would be wide-angle and the other telephoto, Mac Otakara said on Friday, citing information from Chinese suppliers. The current XR has a single wide-angle lens, identical to recent base level iPhone offerings.
Traditionally Apple has used telephoto lenses for two purposes, the first being 2x optical zoom instead of digital enlargement. The second, though, is Portrait Mode photos accomplished in the iOS Camera app — the telephoto becomes the primary lens, while the wide-angle captures depth data used to isolate the subject and simulate DSLR-style bokeh.
The XR employs specialized algorithms to achieve a similar Portrait effect, but the resulting image is zoomed-out and not necessarily as accurate as its XS counterpart.
Multiple reports have pointed to flagship 5.8- and 6.5-inch “XI” and “XI Max” OLED iPhones coming with a triple-lens camera, the third lens possibly being a super-wide unit. Mac Otakara added that two out of three lenses/sensors may be used as common parts to keep costs down.
Separate design changes may include iPad-style mute switches and the use of 3D-molded rear glass, even covering the phones’ larger camera bumps. That same all-glass design is expected with the dual-camera XR successor, which could rely on a familiar 6.1-inch LCD screen, the report said.
It is also possible that the new phones will include USB-C to Lightning cables and 18-watt USB-C power adapters, but keep Lightning as their wired data type.
In a feat that could eventually unlock the possibility of speech for people with severe medical conditions, scientists have successfully recreated the speech of healthy subjects by tapping directly into their brains. The technology is a long, long way from practical application but the science is real and the promise is there.
Edward Chang, neurosurgeon at UC San Francisco and co-author of the paper published today in Nature, explained the impact of the team’s work in a press release: “For the first time, this study demonstrates that we can generate entire spoken sentences based on an individual’s brain activity. This is an exhilarating proof of principle that with technology that is already within reach, we should be able to build a device that is clinically viable in patients with speech loss.”
To be perfectly clear, this isn’t some magic machine that you sit in and its translates your thoughts into speech. It’s a complex and invasive process that decodes not exactly what the subject is thinking but what they were actually speaking.
Led by speech scientist Gopala Anumanchipalli, the experiment involved subjects who had already had large electrode arrays implanted in their brains for a different medical procedure. The researchers had these lucky people read out several hundred sentences aloud while closely recording the signals detected by the electrodes.
The electrode array in question
See, it happens that the researchers know a certain pattern of brain activity that comes after you think of and arrange words (in cortical areas like Wernicke’s and Broca’s) and before the final signals are sent from the motor cortex to your tongue and mouth muscles. There’s a sort of intermediate signal between those that Anumanchipalli and his co-author, grad student Josh Chartier, previously characterized, and which they thought may work for the purposes of reconstructing speech.
Analyzing the audio directly let the team determine which muscles and movements would be involved when (this is pretty established science), and from this they built a sort of virtual model of the person’s vocal system.
They then mapped the brain activity detected during the session to that virtual model using a machine learning system, essentially allowing a recording of a brain to control a recording of a mouth. It’s important to understand that this isn’t turning abstract thoughts into words — it’s understanding the brain’s concrete instructions to the muscles of the face, and determining from those which words those movements would be forming. It’s brain reading, but it isn’t mind reading.
The resulting synthetic speech, while not exactly crystal clear, is certainly intelligible. And set up correctly, it could be capable of outputting 150 words per minute from a person who may otherwise be incapable of speech.
“We still have a ways to go to perfectly mimic spoken language,” said Chartier. “Still, the levels of accuracy we produced here would be an amazing improvement in real-time communication compared to what’s currently available.”
For comparison, a person so afflicted, for instance with a degenerative muscular disease, often has to speak by spelling out words one letter at a time with their gaze. Picture 5-10 words per minute, with other methods for more disabled individuals going even slower. It’s a miracle in a way that they can communicate at all, but this time-consuming and less than natural method is a far cry from the speed and expressiveness of real speech.
If a person was able to use this method, they would be far closer to ordinary speech, though perhaps at the cost of perfect accuracy. But it’s not a magic bullet.
The problem with this method is that it requires a great deal of carefully collected data from what amounts to a healthy speech system, from brain to tip of the tongue. For many people it’s no longer possible to collect this data, and for others the invasive method of collection will make it impossible for a doctor to recommend. And conditions that have prevented a person from ever talking prevent this method from working as well.
The good news is that it’s a start, and there are plenty of conditions it would work for, theoretically. And collecting that critical brain and speech recording data could be done preemptively in cases where a stroke or degeneration is considered a risk.
The Mars InSight lander has sensed a quake within the planet.
The news: On its 128th day on the red planet, the lander picked up the first definitive sign of shaking from within Mars. The small seismic activity that was measured was similar to the movement detected on the moon during the Apollo missions.
Some background: The InSight lander arrived on Mars in November last year with the goal of learning more about the inside of our planetary neighbor. The crucial piece of hardware, a super-sensitive seismometer made by CNES, the French space agency, has had its ear to the ground since December. The first signal of a quake was picked up on April 6.
What’s next: Although small, the quake is proof that there is seismic activity, and that bigger quakes may yet be detected, which could help researchers deduce the planet’s internal structure. A few other potential quakes have been picked up as well, but they were even weaker, and not as clear in their origins. As InSight principal investigator Bruce Banerdt said in a statement, ”We’ve been collecting background noise up until now, but this first event officially kicks off a new field: Martian seismology.”
The failure of the uncrewed test likely means that astronauts won’t be heading back to space from US soil for a while yet.
The news: During a static fire test of the Dragon Super Draco Engines, the capsule suffered an “anomaly” that produced excessive amounts of smoke on the platform at Cape Canaveral, Florida. The capsule in the test was the one successfully used in the DM-1 uncrewed launch to the International Space Station in March.
So what happened? Not a lot of detail has been supplied yet. An unconfirmed, leaked video of the test shows the capsule engulfed in flame that appears to originate from the top of the craft. If the video is accurate, the capsule was likely destroyed.
What it means: SpaceX has bounced back quickly from setbacks before, but with human lives on the line, substantial delays are likely while the company works to fix whatever went wrong. Boeing also recently pushed back test dates for its crew vehicle, so the launch date for humans from US soil may have to wait until 2020. “This is why we test. We will learn, make the necessary adjustments and safely move forward with the Commercial Crew Program,” NASA adminstrator Jim Bridenstine said in a statement on Twitter.
In our REIT Rankings series, we introduce and update readers to each of the commercial and residential real estate sectors. We analyze REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives. We update these rankings every quarter with new developments.
We encourage readers to follow our Seeking Alpha page (click “Follow” at the top) to continue to stay up to date on our REIT rankings, weekly recaps, and analysis on the REIT and broader real estate sector.
Cell Tower Sector Overview
Cell tower REITs comprise roughly 10% of the REIT ETFs (VNQ and IYR). Within the Hoya Capital Cell Tower REIT Index, we track the three cell tower REITs which account for roughly $160 billion in market value: American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC). Cell tower REITs are on the “growth” side of the real estate spectrum and generally pay a low dividend yield but have achieved some of the highest internal and external growth rates across the real estate sector over the past decade. Investors seeking focused but diversified exposure to this sector should consider the Benchmark Data & Infrastructure Real Estate ETF (SRVR).
More than any other real estate sector, cell tower ownership is highly concentrated. Cell tower REITs own roughly 50-80% of the 100-150k investment-grade macro cell towers in the United States. For this reason, while cell towers may constitute only a tiny portion of total real estate asset value in the United States, they constitute a disproportionally high importance in the market capitalization-weighted investible real estate indexes and in fact, American Tower and Crown Castle are the two single largest REITs. Strong performance from cell tower REITs over the past two years have explained much of the underperformance of the traditional “core” real estate sectors.
Consumers want both speed and mobility, but because of the physics and economics of data transmission, there is often a tradeoff between the two. For pure speed and low-latency, a robust fiber-based or dense 5G small-cell network is ideal. This requires laying thousands of miles of underground cables and/or having hundreds of thousands of small-cell base stations using high-band spectrum. For pure mobility, a wide-reaching macro cellular network using high-powered transmitters at lower and farther-reaching spectrum is ideal. This requires having a network of macro towers, but each tower is capable of servicing tens of thousands of devices each, rather than several dozen or hundreds of customer per small-cell antenna.
Since consumers need both speed and mobility and none of the players are able to fully satisfy both of these needs, a blend of different technologies- including macro cell networks- will continue to be used to meet the growing demand for data connectivity. It’s important to note that both AMT and SBAC have significant international operations, while CCI is a pure-play US operator. AMT and SBAC focus on the macro tower business, while CCI has made significant investments in fiber and small-cell networks in addition to their primary tower business.
Bull & Bear Thesis for Cell Tower REITs
Our research continues to indicate that macro cell towers provide the most economical mix of coverage and capacity, and recent challenges with dense small-cell network deployment have affirmed our belief that macro towers will continue to be the “hub” of next-generation networks for the foreseeable future. While communications technology does change very rapidly, it appears that the physical and economic limitations of the alternative technologies (low-orbit satellites, wide-spread small cell networks, and outdoor Wifi) are unlikely to abate anytime soon and the risk of technological obsolescence in the 5G-era is often overstated.
Cell tower REITs continue to command strong competitive positioning in the telecommunications sector. Cell carriers sold off their tower assets beginning in the mid-2000s to de-lever their balance sheet and free-up capital to expand their networks. Supply growth is almost non-existent in the US as there are significant barriers to entry through the local permitting process. The relative scarcity of cell towers, combined with the absolute necessity of these towers for cell networks, has given these REITs substantial pricing power. While cell carriers have tried to make moves to establish leverage over tower owners by building or acquiring towers themselves, carriers have limited available capital to spend on these initiatives, especially in light of the capital-intensive 5G rollout.
The four-year run of strong performance, however, has pushed cell tower REIT valuations to elevated levels compared with the rest of the real estate sector. The land under cell towers, of course, is worth very little without a functioning macro cell site. While we don’t believe there is an immediate risk of technological obsolesce, it is impossible to predict technological innovation in a decade, much less over multiple decades. Further, there are only four major players in the US carrier industry (and potentially three if the Sprint /T-Mobile merger gets approved), limiting the number of potential tenants for these REITs. Carriers are incentivized to invest capital in alternative technologies like small-cells and DAS to try to reduce the competitive position of cell towers. Perhaps the most significant risk relates to the fact that these REITs own just 30% of the land under their structures and lease the other 70% through (typically long-term) ground leases.
Potential Outcomes of Sprint/T-Mobile Deal
The cell tower REIT industry continues to await the outcome of the Sprint/T-Mobile merger, which has the potential to alter the competitive dynamics within the telecommunications space. Earlier this year, the third and fourth largest US wireless carriers announced a long-awaited merger agreement that would consolidate the industry into three nearly-equal competitors along with AT&T (NYSE:T) and Verizon (NYSE:VZ). Following years of discussions and a failed attempt at a merger in 2014 that was blocked by US regulators, the two firms finally came to terms on the potential $26-billion deal. The combined entity would command a roughly 35% share of total retail wireless connections, including 25% of postpaid phone subscribers and nearly 60% of prepaid phone subscribers.
While revenues from Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) comprise a combined 26% of total industry revenues, the “overlap” between Sprint and T-Mobile cell tower sites is roughly 4% of total industry revenues. This 4% represents a “worst-case-scenario” in which T-Mobile completely shuts down the Sprint network on redundant towers and does not subsequently need to upgrade their equipment to handle the increased capacity. Crown Castle, which is US-focused, would be most affected, while American Tower, which has a significant international presence, would be relatively unscathed.
Last week, The Wall Street Journal reported that the Department of Justice informed T-Mobile and Sprint that the deal is “unlikely to be approved as currently structured.” The general consensus among analysts is that the odds of approval have now decreased from above 75% late last year to below 50% currently. As we discussed during our last update, we believe that the merger approval will likely hinge on the regulator’s assessment of the likelihood and forecast of four key unknown factors, ranked in order of importance.
1) Can Sprint survive without a merger?
2) Would Sprint have other suitors (cable companies, tech companies)?
3) Would a merger help or hurt the growth of 5G?
4) Is wireless broadband a competitor to the home broadband providers?
Given the uncertain answers to these four questions and a wide range of permutations of possible outcomes, analysts are generally split as to whether cell tower REIT investors should be rooting for or against the potential merger. Our assessment is that cell tower REITs would ultimately benefit from a no-deal outcome, but that the downside risk is more significant if Sprint were to indeed fail as a result. We outline our assessment through an analysis of the three possible outcomes.
Scenario 1: Merger Approved
The cellular carrier industry would be consolidated into three players of roughly equal size. With more balance sheet capacity, the merged T-Mobile would likely ramp up network spending in line with Verizon and AT&T, which would translate into an immediate boost to cell tower REIT revenues. With one less competitor, the 5G rollout begins sooner but is focused on higher-value markets and consumer pricing would likely become less competitive, translating into higher margins for carriers, but potentially fueling further network investment. Over time, however, the competitive positioning of cell tower REITs would be diminished. Carrier initiatives to gain leverage over cell tower REITs, including building their own towers or taking over leases from REITs, would be incrementally more successful and growth would moderate but remain at above-inflation levels due to the still-favorable competitive positioning of cell tower REITs.
Probability: 50%. For Cell Tower REITs: Decent/Default Outcome.
The merger gets rejected, but Sprint’s underpriced and valuable network and spectrum assets are attractive to cable broadband providers (Comcast (NASDAQ:CMCSA), Charter Altice) who recognize the mounting and legitimate threat from 5G fixed wireless broadband, which we believe to be underappreciated by the market. Alternatively, a cash-flush technology company (Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), or Microsoft (NASDAQ:MSFT)) sees the assets as an underpriced compliment to their existing data center infrastructure and a new source of distribution to mitigate the competitive threats from the incumbent broadband providers. Sprint is able to leverage this partnership to become a legitimate competitor in the space. Meanwhile, T-Mobile continues its strong run of adding customers at sector-leading rates. The carrier industry remains at four players with T-Mobile and Sprint close behind and consumer pricing competition remains intense. The four carriers battle to become leaders in 5G and access is widespread. Initiatives to gain leverage over cell tower REITs are largely unsuccessful and pricing power remains strong.
Probability 35%. For Cell Tower REITs: Best Outcome.
Scenario 3: Merger Rejected. Sprint Fails
The merger gets rejected Sprint is unable to find a suitable partner. Sprint’s investors, including SoftBank (OTCPK:SFTBY), scale back their investment and the network falls further behind the other three carriers and continues to lose customers until being unable to operate any longer. In bankruptcy, Sprint’s assets are distributed around the telecom sector including to AT&T and Verizon, further strengthening their grip on the emerging duopoly. T-Mobile’s strong run of performance slows down and cannot keep up with the network spending of the two major players without the complementary asset of Sprint. The carrier industry becomes a de-facto duopoly and cell tower REIT competitive positioning is significantly diminished. Consumer pricing becomes significantly less competitive and the 5G rollout continues but is isolated only to the most high-margin deployments. Carrier initiatives to gain leverage over tower REITs are largely successful and the industry becomes more akin to the data center REIT sector over the past several years with below-inflation internal growth rates and weak pricing power over increasingly dominant tenants.
Probability 15%. For Cell Tower REITs: Worst Outcome.
Recent Cell Tower REIT Fundamental Performance
2018 was another strong year for the cell tower sector as the early effects of network densification to fuel 5G networks powered above-trend organic growth. Organic tower revenue, effectively the same-store NOI equivalent, continues to grow at a sector-leading 6%+ rate as carriers continue to invest heavily in network densification and equipment upgrades. With the high degree of operating leverage inherent with the co-location tower model, tower REITs are seeing amplified benefits increased network spending.
These REITs are forecasting an average 8% rise in AFFO per share in 2019, among the strongest rates of growth in the real estate sector. Along with robust organic growth, external growth via strategic acquisitions remains a central focus of cell tower REITs, aided by the cost of capital advantage enjoyed by these firms. As we’ll discuss shortly, cell tower REITs trade at an estimated 30-50% premium to private market-implied net asset values, meaning that external acquisitions, though somewhat limited, are easily accretive to earnings.
The combination of strong organic growth and continued external growth fueled a 16% rise in total property revenues in 2018, rising from the 13% rate achieved in 2017, boosted by the effects of Crown Castle’s merger with small-cell operator Lightower. While appearing to be very conservative, these REITs offered guidance that projects a 5% rise in property revenues in 2019.
Carrier Performance & Capital Spending
Cell tower REITs are inexorably linked with the underlying performance of their cell carrier tenants, who delivered another very strong year. AT&T, Verizon, T-Mobile, and Sprint combined to add more than 4.5 million post-paid wireless customers in 2018, a sharp increase from the 3.8 million added in 2017, and the strongest year ever for cell carriers. Pricing remains highly competitive with customers effectively seeing an average 3% drop in their phone bills.
Capital spending by cell carriers is a key driver of growth for tower REITs. Capex among US carriers had been in a lull for the past two years as much of the available capital has been put towards spectrum acquisition which will power the next generation 5G networks. Capital spending is expected to ramp up again as carriers begin to deploy 5G networks over the next five to ten years.
Recent & Long-Term Stock Performance
Since NAREIT began tracking the sector in 2012, cell tower REITs have outperformed the REIT index in every year besides 2014. Cell towers continue to be one of the few remaining growth engines of the REIT sector and, considering the positive operating environment forecast for 2018-2020, don’t appear to be slowing down anytime soon.
The good times have continued for the cell tower REIT sector this year despite the merger uncertainties. The Hoya Capital Cell Tower REIT Indexhas gained more than 19% this year compared to a 14% gain in the broader REIT index. Receding interest rates and signs of moderating global growth have lifted REIT valuations across the sector following the worst year since the recession.
American Tower has led the way over the last two years, followed by SBA Communications. Investors remain somewhat skeptical on the economic returns from Crown Castle’s significant investment in fiber and small cells over the last several years, explaining some of the underperformance since 2016.
Valuation of Cell Tower REITs
Strong performance over the past four years has pushed cell tower REIT valuations towards the most expensive end of the real estate sector. Cell towers trade at a sizable Free Cash Flow premium (aka AFFO, FAD, CAD) to the REIT average, but after accounting for the sector-leading expected growth rates, cell tower REITs very quite attractively valued based on the FCF/G metric. As discussed above, cell tower REITs trade at some of the widest NAV premiums in the real estate sector, giving these companies the “cheap” equity capital to fuel further external growth.
Cell Tower REIT Dividend Yield
Cell tower REITs are among the lowest-yielding REIT sectors, paying out just 53% of their free cash flow and instead of plowing that capital back into the business to fuel external growth. The sector pays an average 2.2% dividend yield, among the lowest among REITs.
Within the sector, only Crown Castle acts like a typical REIT when it comes to distributions. CCI pays a healthy 3.7% dividend yield, while AMT pays 1.9%, and SBAC does not yet pay a dividend.
Cell Tower REITs & Interest Rates
Cell tower REITs skew towards the “growth” side of the real estate sector, reacting more to economic growth expectations than to changes in interest rates. Among US REIT sectors, cell towers are the third least interest rate sensitive sector and could provide balance to an otherwise rate-sensitive REIT portfolio.
Within the sector, AMT and SBAC are classified as Growth REITs. CCI, which pays a 4% dividend, is a Hybrid REIT and has characteristics that are more aligned with the REIT averages.
Bottom Line: Wireless Broadband is 5G’s Killer App
With 5G on the horizon, Cell Tower REITs have outperformed the broader real estate sector in each of the past four years. 5G technology will fundamentally disrupt the telecommunications industry. We believe that the true “killer app” for 5G will be fixed wireless broadband internet, as dense small cell networks will allow carriers to deliver fiber-like speeds without the wires.
The technological limitations of 5G – notably the small coverage area – mean that macro towers will continue to be the primary hub of cellular networks. Network densification drives cell tower revenues. The Sprint/T-Mobile merger saga continues. Just when a deal appeared imminent, a new curveball emerges. We think that Sprint’s troubles are overstated and that no-deal outcome would benefit tower REITs.
Cell tower REITs continue to benefit from a favorable competitive positioning within the telecommunication sector. Low supply and high demand have translated into substantial pricing power for cell tower operators. We analyzed the three potential merger outcomes and believe that a no-deal scenario would be the best-case scenario for these companies. This analysis, however, is contingent upon our view that wireless broadband does indeed become the “killer app” of 5G and that Sprint is a valuable partner or acquisition target from a third-party (cable or technology) company as a result.
The risk of a no-deal outcome is that the carrier industry devolves into an effective duopoly, which would translate into significant downside risk to the competitive positioning of the cell tower REIT sector. The success of the early 5G fixed wireless broadband tests in a handful of US cities will be closely monitored by all players in the industry and the ultimate fate of Sprint may hinge on its relative success. If wireless broadband is indeed the 5G “killer app” we think it could be, the future looks bright for cell tower REITs and carriers alike.
Disclosure:I am/we are long AMT, VNQ.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. All commentary published by Hoya Capital Real Estate is available free of charge and is for informational purposes only and is not intended as investment advice. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.
Hoya Capital Real Estate advises an ETF. Real Estate and Housing Index definitions are available at HoyaCapital.com.