American Tower (AMT) one of the largest global REITs, is a leading independent owner, operator and developer of multitenant communications real estate with a portfolio of approximately 181,000 communications sites.
Its competitors include Crown Castle (CCI) and SBA Communications
(SBAC).
American Tower has managed to increase dividends annually
since initiating a dividend in 2011. Annual dividends grew from 90 cents/share
in 2012 to $4.53/share in 2020.
American Tower just raised its quarterly dividend to
$1.24/share, which was 3 cents/share higher than the last dividend paid in Q4,
2020. It was also 14.81% higher than the dividend paid during the same time
last year.
As a REIT, the company distributes most of its cashflows to
shareholders in the form of dividends. Instead of looking at earnings per
share, you want to look at Funds from Operations (FFO).
Between 2012 and 2020, American Tower has managed to
increase FFO from $3.01/share to $7.87/share. The company is expected to
generate forward FFO of $9.25/share in 2021.
The company owns and operated cell towers around the world.
It owns 41,000 sites in the US, leased to AT&T, Verizon and
T-Mobile/Sprint. It also owns over 140,000 sites in Mexico, Brazil, Germany,
India and South Africa. Most of its sites are leased on a long-term basis, with
annual built in escalation clauses, which raise rent automatically. There are
renewals every five years or so, which means that getting out of a lease is not
easy, cheap or quick. The tower portfolio provides AMT with a recurring base of
leased revenues from its customers and growth potential to add more tenants and
equipment to these towers from its unused capacity.
Growth in FFO should be a function of several factors.
One includes building additional new sites, which could be
leased to telecom carriers under long-term leases. In 2019, AMT built a record
4,500 new sites, acquired 9,000 more, and entered two new markets.
Another factor includes strategic acquisitions, which could
be accretive to FFO/share, expand the scale and lower per unit costs. The
company is in the process of acquiring Telxius Towers from Telefonica for $9.4
billion. That transaction would add 31,000 towers in Germany, Spain, Brazil,
Chile, Peru and Argentina. This would add close to 775 million in revenues and
over $400 million in profits. Another recent transaction involves InSite
Wireless, which owns 3,000 sites in US and Canada, and will cost $3.5 Billion.
InSite Wireless would add $150 million in revenues and over $115 million in
profits.
A third factor includes the built-in rent escalation clauses
in its long-term leases with telecom carriers, which grow revenues organically.
US rent escalators are usually fixed rate, like 3%/year. Most foreign rent
escalators are based on CPI.
A fourth factor involves signing up additional telecom
carriers to existing tower locations. There is a steep increase in
profitability for towers when it goes from one to two and then three carriers,
according to analysis prepared by the company.
A risk to its growth includes companies that end leases in
certain areas. This could be due to several factors. Another risk closely
aligned is telecom consolidation, which reduces the number of potential
customers, and reduces the potential upside in ROI for towers. As we saw above,
each additional telecom carrier added ends up bringing in a disproportionately
high return on investment. It goes the opposite way when a customer is lost
too.
The risk for consolidation is offset by the fact that a lot
of these carriers sign long-term leases, from which they cannot really get out
easily. It may take up to a few years, before leases can be terminated
successfully. This risk is also offset by the fact that zoning laws typically
make it challenging to place a certain cell towers in a certain place, so navigating
the red tape is a competitive advantage in a way. There is a limited space for
towers, and in congested markets, carriers do not want to lose their spot, or
their service may be affected.
The demand for mobile data usage is only going to grow
worldwide, as a large portion of the world embraces 4G and now 5G.
American Tower is uniquely positioned, as it has
international operations in rapidly growing emerging markets, as well as more
developed ones in Europe. Foreign expansion can help with future growth, and
diversify operations. However, it may also expose it to different risks too, as
each foreign market has its own set of unique challenges that need to be
overcome.
The number of shares outstanding has increased gradually
over the past decade. As a REIT, the company finances transactions through debt
and equity offerings. This explains the increase in shares outstanding. It is
not as bad relative to other REITs, I still want to see flat to declining
shares outstanding over time.
Since initiating its dividend, the FFO Payout Ratio has
steadily increased from 30% in 2012 to 57.56% in 2020. The forward FFO payout
ratio today is at 53.62%. This allows the company to reinvest a portion of FFO
back into the business, which should hopefully fuel future FFO/share growth.
Currently, the stock is selling at 22 times forward FFO and
yields 2.50%. This is a decent valuation within the historical range. I plan to
initiate a small position in this Tower Company, and add on further weakness.
|
Data |
FFO/share |
Dividend/Share |
FFO Payout |
Shares Outstanding |
|
2012 |
$ 3.01 |
$ 0.90 |
29.90% |
399 |
|
2013 |
$ 3.15 |
$ 1.10 |
34.92% |
399 |
|
2014 |
$ 4.19 |
$ 1.40 |
33.41% |
400 |
|
2015 |
$ 4.10 |
$ 1.81 |
44.15% |
423 |
|
2016 |
$ 5.10 |
$ 2.17 |
42.55% |
429 |
|
2017 |
$ 6.25 |
$ 2.62 |
41.92% |
432 |
|
2018 |
$ 7.24 |
$ 3.15 |
43.51% |
443 |
|
2019 |
$ 7.84 |
$ 3.78 |
48.21% |
446 |
|
2020 |
$ 7.87 |
$ 4.53 |
57.56% |
446 |
|
Data |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
2012 |
|
P/FFO High |
34.59 |
30.87 |
23.28 |
24.84 |
23.19 |
25.40 |
25.37 |
27.07 |
25.67 |
|
P/FFO Low |
22.15 |
19.63 |
18.01 |
16.40 |
16.29 |
21.18 |
18.71 |
21.55 |
19.26 |
