Description

Description:

American Tower, one of the largest global Real Estate Investment Trusts (REITs), is a leading independent owner, operator and developer of multitenant communications real estate, with a portfolio of over 224,000 communications sites and a highly interconnected footprint of U.S. data center facilities.

Thesis:

I believe the current trading in American Tower offers an attractive entry point today. This is my second go at this having written up the company 3 years ago 10% higher (the stock has actually been flat for about five years).

Here’s what i wrote three years ago:

If VIC members were to contrive of a business from scratch, it would be something close to the tower business. 

Consider some of the primary attributes of the tower business:

1. Scarcity:  existing real estate footprint that is extremely valuable given zoning for towers and strong NIMBY factor. Basically no town wants to put up any more of these than already exist because they are eyesores.

2. Organic Growth: Decades of history of demand growth due to all the factors around data consumption that we all are familiar with. From 2020-2026, data usage per device (devices are growing as well) is expected to increase by 20-25% per annum in the United States. Projections for many of AMT’s international markets are higher as well.
   
   

Overall the company believes it can sustainably (over the next decade) grow revenues mid-single-digit percent and AFFO/share in excess of 10% per year. This is supported by  escalators of 3%, new business of 4-5% less normalized churn of 1-2% as well as margin expansion and capital allocation. Though the next year or so will be challenged (in part why stock has gone down significantly), there are numerous potential bullish tailwinds over the medium/longer term which could spur further growth-- 5G, new networks following spectrum auctions, new dynamic data applications, etc.

3. Strong Unit Economics: The tower model is extremely strong financially assuming the requisite number of “tenants” on its towers. The company estimates on a sample tower that costs around $275,000 to build, it can generate 24% ROIC (using operating margin) with 3 or more tenants. Essentially the variable costs to adding revenue on a tower are extremely low with conversion of revenue to margin at 97+%. In addition, the capital requirements on an existing tower (lighting systems, fence repair, upkeep etc) are also extremely low average around $1,500 per year per tower in the United States. American Tower also does high ROIC redevelopment (shared costs with tenants generally) as well as discretionary and start-up projects to grow its sites. As well, normalized churn is very low in the 1-2% range.
   
   

4. Great Track Record: In the last decade the company has grown AFFO at a 14.8% a CAGR despite its continuing to grow in scale. The company has allocated capital well over the years and has been active in both international acquisitions, new growth projects and opportunistic buybacks. Currently the company pays a dividend yield of around 2.5%
   
   

So what happened in the last three years?

It hasn’t been a disaster but it hasn’t been great either. AFFO/diluted share has increased modestly ($8.44 in 2020 to an estimated $10.53 in 2024), far below the growth rates cited previously of 14.8% per year. There have been a number of factors that have weighed down results in recent years. The biggest of these factors are probably FX and the increase in interest rates. 

A look at their guidance for 2024 illustrates this pretty clearly. The company shows a healthy expected increase in revenues (tenant billings growth which is the core of their revenue is forecasted to increase by 5% including 50 bps of Sprint churn. This growth, however, is producing no leverage this year to the AFFO line which is also forecasted to be up 5%. This is entirely due to the increase in financing costs and FX which represent $100mm and $82mm in additional costs respectively. Without these increases, AFFO per share would be forecasted to be up around 8% for the year. 

There have been additional issues as well. In addition to FX issues, I believe the company’s challenges internationally and churn related to the Spring/T-Mobile combination have both been a little worse than expected a few years back. The good news is that both issues will be significantly reduced or entirely eliminated moving forward.

Positives Going forward

1. The international part of the story will be materially cleaner once the company closes on the sale of its India operations hopefully later in the year. AMT made a big bet on India beginning in 2007 and it’s, frankly, been a bad one. Without delving too deeply in the issues, it essentially went afoul due to more rapid carrier consolidation than expected. This led to negative growth for several years for the company in that region. In addition, additional competitors emerged utlizing a network rolled out with RGO (renewable generation obligation) which was essentially a give away that created a difficult environment for carriers (specifically Vodafone which was ATC’s top client). 

The good news is that the Indian business is being sold to Brookfield for $2.5bn and should hopefully close later in the year. AMT took a $322mm write-down on its Indian operations. In 2025, the company will be around 70% property revenue from the US and Europe where revenue growth should be consistently mid-single-digits. The company also has a higher beta, fast growing (11-12% revenue growth) Africa business which represents around 10-15% of property revenue going forward as well.

2. Sprint related churn should finally subside in the next few years. This is a big deal as it has weighed down growth in the US business by around 100 bps of late.

3. The company has gotten its balance sheet in comparatively good shape. AMT has gotten down to the high end of its target leverage range and is now at 5.0x on a last quarter annualized basis. As well, its debt is now 87% fixed with a 5.8 year average remaining maturity. The company pays a 3.7% dividend yield with is comfortably covered and should continue to increase going forward. 

AMT has a superior balance sheet and dividend yield compared to SBA Communications which is levered at 6.5x and more near term maturities to deal with.

4.  The tower companies are starting to see signs of higher future business from its main carrier customers. The cycle around 5G has come in fits and starts and 2023 saw a slowdown from some carriers in activity. I believe that this is a temporary blip, similar to the pacing experienced during previous upgrade cycles. The simple fact is that ever more data usage requires additional tower equipment and there’s really no primary alternative. On the company’s call this week, this is what they had to say about the dynamic--
   
   

From the company call this week:

As we've moved into the 5G investment cycle from early 2019 to today, we've once again seen mobile data consumption for smartphones grow to almost 30 gigabytes per month in 2024. We've seen early 5G subscribers consuming roughly 2x the mobile data compared to the average 4G subscriber. And we've seen average annual carrier CapEx step up to approximately $36 billion a year. This CapEx investment translated to the approximately $230 million in year-over-year colocation/amendment growth we delivered last year, most of which was attributed to 5G activity, as well as an expectation for growth on a per-site basis in 2024 that significantly exceeds the average seen during the 4G deployment cycle.

That brings us to today, where we continue to see all of our key customers actively working on network upgrades and rollouts, and the 5G cycle playing out in line with the broader expectations underwritten in our long-term guidance. On our last call, we indicated that we expected a year-over-year increase in contributions for our services segment, due in part to early indications of an uptick in our application pipeline, as well as conversations that our teams were having with our customers on the ground.

The activity we saw in Q1 reinforces that expectation. Specifically, contributions in our services segment for the quarter came in ahead of our internal expectations. And on the application side, Q1 volume was over 70% higher than what we saw in Q4 of last year.

In fact, March represented the highest volume level of the trailing 12 months. It was supported by broad-based step-ups across our major U.S. customers. Now, while there's always some level of risk associated with our expectations in the services segment, I'm pleased to say that what we've seen thus far supports the 2024 guidance we provided in February, including approximately $195 million in expected services revenue contributions, approximately 4.7% organic tenant billings growth, and $180 million to $190 million in year-over-year colocation and amendment growth, one of our strongest years to date.

So as we move forward, we believe our U.S. Tower portfolio is uniquely positioned to continue driving compelling growth as 5G, expected increases in mobile data consumption, and associated carrier investments drive increasing demand for our assets over time. Importantly, by leveraging that same expertise to develop our leading global portfolio, we're well-positioned to monetize similar trends across our global footprint, while delivering a differentiated experience and value proposition to our customers. Further, we believe the factors I've taken you through today, as well as the global focus on increasing efficiency in our cost structure, provide a path to continue converting top-line growth at a rate that expands already attractive cash, operating profit margins, and creates incremental shareholder value.

I believe that this is the part of the cycle where it can make sense to invest in tower companies as, often after things heat up it’s too late…..

Valuation/Rates:

I believe a lot of the pushback on towers is that people are worried that these things just trade with bonds and higher rates could cause further declines. Obviously this may be true in the short term but I think it ignores the incredible high quality and predictable growth that the tower business offers. 

AMT is trading at a historically low(!) 16x FFO which I believe will prove far too low for a business of this sort which should grow MSD minimum for a long time predictably. In addition, this concern is extremely hedgeable if one is inclined to do such things. For instance the IYR (iShares US real estate ETF) is down only 9% this year compared to 19% for AMT and offers a 2.9% dividend yield compared to AMT’s 3.7%

Disclaimer: This post is not a recommendation to buy or sell a security but rather intended for a discussion of key bull and bear debates, based on research of public information, including company websites and regulatory filings. This post does not constitute professional or investment advice. Past performance is not indicative of future results. Consult with a licensed professional if needed before making any investment decisions. Investing in public markets can be subject to severe short-term and long-term risks, including resulting in permanent loss of entire invested capital. This post represents my personal opinions and not those of any other entity. I and/or entities that I advise can change views and positioning, at any point in time for any reason, or lack thereof, without any notice. I and/or entities that I advise are not and will not be held liable for any outcomes, including any indirect or consequential damages. I could be absolutely wrong. This article has no guarantee to be accurate, complete, or current, and cannot be relied on as such. Please conduct your own due diligence.

Catalyst

higher, cleaner growth going forward...