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American Tower (AMT) Stock | NYSE: AMT

Sky-High Competitive Advantages

American Tower holds the most important real estate infrastructure in the 21st Century – tens of thousands of towers scattered across the globe holding equipment that helps us stay connected to friends and family, access the internet from anywhere, and revolutionize the world.

American Tower is quietly building an empire that will benefit millions. Connecting to the internet or making a phone call is a regular part of life in North America, but not everywhere. Many regions that lack fixed-line infrastructure or the financing and time to construct it are looking to wireless technology and towers to build out network coverage. Wireless communications enable citizens of the world to engage in the digital economy and improve their quality of life and American Tower is working hard to make this happen.

Growth

46

Valuation

60

Quality

70
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Where Are We Now

Updated on: 11/1/2021

Conviction Score

8

American Tower is not just a real estate company – it enables global connectivity. Our phones are with us everywhere and mobile data usage is growing quickly as the world buys more advanced smartphones and ground-breaking new technologies hit the market. Today, we think American Tower is at a fair valuation and always has a place in a long-term portfolio.

  • American Tower added another ~5,000 communications sites — primarily in international markets — to deepen its international scale advantages.

  • American Tower’s current global strategy has served the business well as most revenue growth comes from Africa and Latin America.

Investment Thesis

  1. American Tower is a global infrastructure titan, operating over 200,000 wireless communications towers around the world to enable the flow of telephony, mobile data, broadcast TV and radio, and machine to machine communications.

  2. American Tower can raise prices year after year given its network effects and high switching costs. The industry is also protected with high barriers to entry, preventing small operators from growing large and competing against incumbents, such as American Tower.

  3. Operating leverage allows American Tower to expand returns on investment as network operators increase 5G spend and densify wireless networks to meet the exponentially growing global demand for data.

  4. Risks to our thesis include wireless carrier consolidation, foreign currency risks, local economic downturns, political risks, and poor M&A execution could adversely impact American Tower’s financial position.

  5. Outside its core asset holdings, American Tower is expanding aggressively around the world to take advantage of higher ROI towers and exercising optionality by opening a few data centres around the US amid the growing use cases of edge computing.

The Basics

American Tower is one of the largest global Real Estate Investment Trusts (“REIT”). A REIT is a corporate structure that does not pay any federal tax in the US under the condition that over 90% of its taxable income is paid out to shareholders as dividends.

Originally a subsidiary of American Radio established in 1995, it was later spun off after American Radio was sold to CBS / Viacom. In 1999, operations in Mexico were launched where American Tower was the largest independent tower operator with 3,000 sites.

American Tower became the largest tower company in the US after merging with SpectraSite, Inc. in 2005. It was not until 2012 when American Tower officially became a REIT and continued laying its massive global footprint with major acquisitions of Verizon sites and investments in India, Argentina, Africa, Canada, and Australia.

Its primary business is the leasing of space on communications towers (99% of total revenues) mainly to wireless service and data providers, television and radio broadcast companies, and government agencies and municipalities. American Tower also provides ancillary services such as site application and zoning, permitting, and structural analysis to support the site leasing business and adding new tenants and equipment on sites.

Tenants lease towers for many purposes – telephony, mobile data, broadcast TV and radio, and machine to machine communications. These assets are designed and built with the expectation that multiple tenants will occupy vertical space on the tower and land around it for equipment. Most of these towers are owned by American Tower while the others are leased under long-term contracts. Tenants typically own and operate their own equipment and equipment storage.

Lease amounts come down to three major factors:

  1. Property location;

  2. Vertical tower square footage occupied; and

  3. Weight of equipment.

These tenant leases are typically non-cancellable, include an initial term of 5 to 10 years with multiple renewals embedded in the initial contract, and rents escalate by 3% per year in the US and around local inflation rates in international markets.

American Tower owns hundreds of thousands of communications sites around the world, most of which are located outside the US and Canada. Revenues are predominantly generated in the US and Canada.

American Tower Revenue by Region (Q3 2021)

Source: American Tower Investor Relations

Towers Operated / Managed by American Tower (Q3 2021)

Source: American Tower Investor Relations

In contrast, Crown Castle - American Tower’s main competitor - owns 80,000 small cell sites, over 40,000 towers and 80,000 route miles of fibre in the US with no international exposure.

SBA Communications, another major competitor, owns fewer than 34,000 towers worldwide. Other competitors in the US are much smaller in size – American Tower, Crown Castle, and SBA Communications own three-quarters of all US towers.

AMT Competition ChartSource: WirelessEstimator.com

Towering Competitive Advantages

American Tower operates in an industry with near-impenetrable barriers to entry. The cell tower business is capital and time intensive to scale at a meaningful level. A lone cell tower is not expensive to build (up to $300,000 in the US and Canada) but obtaining regulatory approvals and complying with zoning restrictions on federal, state, and local levels deters companies and investors from entering this industry as it may take years to approve a new tower build.

The nature of American Tower’s lease agreements results in substantial switching costs. According to Crown Castle, a tenant would incur between $35,000 and $40,000 to switch from one tower to a neighbouring one, roughly 20 to 30 times the average monthly lease amount. Additionally, American Tower’s initial contracts with tenants are generally non-cancellable for a period of 5 to 10 years.

The result? Average annual historical churn between 1-2% and non-cancellable tenant lease revenue completely dwarfing standard property revenue. Non-cancellable tenant lease revenues are around 7x times the amount of property revenues.

When we think of network effects, we mainly think of our flashy iPhones and the benefits of all our friends using iMessage or AirDrop, or the stickiness and appeal of Lululemon gear to the yoga community. Who knew boring steel or lattice towers benefit from network effects too? Typically, when a wireless carrier places equipment on a tower in a new location, it now becomes the best interest of every other competing carrier to place their equipment on the same tower.

Enduring the long regulatory process for building a new tower is a costly endeavour – one that could result in many lost customers. Even if a carrier could magically build a new tower within a few days, it would still make more sense to lease a tower due to the amount of money saved versus building its own tower.

These barriers to entry, switching costs, and network effects, combined with American Tower’s aggressive expansion strategy and fixed operating structure allowed the company to become the behemoth that it is today. American Tower has powerful operating leverage – as more tenants occupy a tower, the greater the ROI.

Capital maintenance requirements are low, whereby spend per tower is typically no greater than $1700 in the US and $800 in international markets. Based on American Tower’s illustrative example of new macro tower build economics, there are negligible operating costs associated with added tenants on a tower. As more tenants are added to occupied towers, margins expand and cash flows to the bank.

AMT Tenants GraphicSource: American Tower Investor Relations

We can see these economics at play through American Tower's stable gross profit when looked at relative to the number of towers operated.

We can be confident in saying that as American Tower builds or acquires new towers, it will add non-dilutive growth to the bottom line.

In other words, the gross profit per tower stays the same over time even though new builds may not have any carriers leasing them yet or acquired assets are underutilized.

Eventually, American Tower tends to ramp-up leases of its towers and we believe this metric is an important one to follow.

Building a Global Empire

The 3% US rent escalation is rather low and American Tower makes up for this by conducting M&A and building new towers particularly in global markets where returns are higher than the US. There are several reasons for this on the “buy” and “sell” side of the transaction:

  1. It is generally cheaper to buy existing towers or build new ones abroad than it is in the US and Canada.

  2. Smartphone adoption and mobile data usage is expected to grow faster in emerging markets than the mature US wireless market due to lower wireless coverage in these regions versus North America.

  3. Voice networks continue to be deployed and data networks are being established for the first time in certain regions.

  4. New international market entrants create demand for cell towers.

  5. Densification efforts and new technology rollouts are spurring strong carrier demand for new sites.

These trends hold true to varying degrees in emerging, evolving, and advanced international markets. In other words, demand is strong across all three market types, showcasing the durability of, and sticky demand for towers as wireless technology becomes more advanced over time.

  • Emerging markets lack fixed infrastructure, making wireless communication the simplest and most cost-effective choice.

  • Evolving economies are densifying 3G networks while 4G build-outs are accelerating.

  • Advanced economies are densifying 4G networks while accelerating 5G build-outs.

Most recently, American Tower purchased Telxius Towers for $9.4 billion. The deal captured 31,000 existing sites with 3,300 future committed builds across Germany, Spain, and Latin America. The transaction is expected to immediately boost American Tower’s Consolidated Adjusted Funds from Operations (“AFFO”). We believe this transaction is exemplary of American Tower’s ability to buy big, buy smart, and ultimately reap the benefits of international market expansion while its main competitors operate at a much smaller scale internationally (SBA Communications) or operate solely within the US (Crown Castle).

American Tower’s international efforts should help drive high single-digit revenue growth, on average, over the next 5 to 10 years.

5G and Beyond

Wireless network technologies typically last approximately 20 years. Although 5G rollouts have begun, 4G is still the prominent connectivity standard we use today.

However, 5G rollouts are accelerating quickly. By 2025, 5G is expected to capture almost 50% of the US market. The implications of 5G rollouts are quite profound as we enter a decade of many new expected devices, technologies, and use cases of 5G that 4G simply could not support.

5G Connectivity GraphSource: American Tower Investor Relations

Macro cell towers will remain in strong demand throughout the 5G cycle, which will likely be around until at least the mid-2030s. We believe they will also remain in strong demand for developments beyond 5G (i.e., 6G, 7G, etc.).

Macro cell towers are the bedrock of wireless networks under which DAS, Rooftops, Wi-Fi, and Small Cell networks complement coverage in denser, higher-traffic regions. As such, we do not believe Crown Castle’s small cell real estate is a threat to American Tower in the sense that small cells “replace” traditional tower demand.

As the world begins to reopen and return to some level of normalcy, wireless carriers are ramping up capital expenditures on initial 5G coverage across the US north of $30 billion per year combined from which tower companies will benefit tremendously.

AMT Capex GraphSource: American Tower Investor Relations

Lastly, mobile data traffic is expected to grow at almost 25% per year through 2026 globally. Many emerging and developing markets will lead this growth, however, the North American CAGR through 2026 is expected to be around 27% per year.

Ericsson believes all this mobile data will be consumed by over 6 billion people using smartphones, laptops, and other new devices that hit the market at that time. Improved device capabilities, increasing demand for data-intensive content, and new generations of network technologies enabling greater throughput will support demand for mobile data.

In markets such as India, traffic will explode due to high growth in number of smartphone users and average usage per smartphone. In mature markets such as North America, investments in 5G will facilitate the adoption of VR and AR, IoT technologies and devices, edge computing, and autonomous vehicle networks, in turn likely driving more demand for 5G technology and ultimately, tower space.

Mobile Traffic graph around the worldSource: Ericsson Mobile Data Traffic Outlook

Edge Computing

American Tower believes in these technologies and has begun making strides to expand its portfolio outside of towers by opening strategically located edge data centres on its own ground space where towers are placed.

Currently, there are only six locations spread across the US but we believe there will be many more to come. American Tower aims to provide its tenants with both tower and edge data collocation services to improve network architecture closer to key users and simplify network deployment.

This should allow telcos to save time and money when looking for real estate to deploy their equipment for wireless and build out their edge networks to provide customers with high-bandwidth, low-latency computing solutions. Areas such as healthcare, emergency response, traffic congestion, industrial safety, and manufacturing safety will benefit astoundingly from the rollout of these solutions. We believe edge data centres provide American Tower with superb optionality and growth opportunities throughout the next decade.

World-Class Capital Allocation

In many respects, American Tower behaves like an investment company, looking to allocate capital in the most efficient and effective way possible for investors. Despite M&A being so large it swallows most or all free cash flow on a yearly basis, American Tower has been able to grow Consolidated AFFO at a staggering low double-digit rate considering its size and capital-intensive nature, especially when looking at initial site start-up costs.

American Tower Historical M&A Activity & FCF ($M) (Q3 2021)

Aggressive M&A could result in many unexpected costs or underwhelming returns if not synergized properly. We believe American Tower has proven time and time again, year after year, that it is one of the best acquirers on the planet.

While American Tower seeks to acquire nearly every tower in existence, shareholders have been rewarded with over 20% per year dividend growth since 2012. The payout ratio is healthy (~50%), implying American Tower can adequately cover these dividend payments and sustain a high dividend growth rate.

American Tower Annual Dividends per Share ($) (Q3 2021)

If you thought it ends there, it doesn’t – share repurchases are never off the table. In fact, American Tower repurchases tons of shares, providing a boost to AFFO and dividends per share. We believe American Tower is a best-in-class capital allocator that puts its shareholders first.

Indebted to Growth

American Tower holds debt on its balance sheet – lots of it. Debt excluding leases and other obligations is around $30 billion, more than half of total assets. We are not overly concerned with American Tower’s debt position for the following reasons:

AMT Return on Invested Capital ChartSource: American Tower Investor Relations
  • American Tower has no problem covering its interest costs. Since 2011, adjusted EBITDA has covered interest costs 4.5x or greater. Management is also committed to keeping the net leverage ratio in line with history, in the 3-5x range. Currently, the net leverage ratio is almost 5.0x.

  • The tower industry has a long growth runway with some of the most stable and recession-proof cash flows in the world. It’s highly unlikely wireless carriers would remove equipment from towers and reduce network coverage when mobile data usage is accelerating.

  • Return on Invested Capital (“ROIC”) is substantially above American Tower’s cost of borrowing and implied cost of equity (i.e., AFFO yield, or the inverse of the P/AFFO ratio).

American Tower tends to finance acquisitions and new builds mainly with debt. We believe if ROIC remains in the 9-11% range, there is no major cause for concern. In fact, we are encouraged by American Tower’s efforts to aggressively expand internationally to build its high-return portfolio, create value for shareholders, and secure its position as a global tower monster while Crown Castle focuses on the US and SBA Communications does international at a smaller scale.

Even more encouraging is American Tower's ability to maintain its leverage ratio (net debt / EBITDA) as it aggressively expands its global asset portfolio.

Risks

One may get the sense that American Tower comes without any risks. Unfortunately, even for this tower behemoth, there are some risks all investors should consider:

  1. American Tower’s largest international market, India, continues to face headwinds due to carrier consolidation and capital expenditure pullback due to India’s Supreme Court enacting multi-billion-dollar spectrum fees and other costs.

  2. Churn related to the merger of T-Mobile and Sprint will weigh on financial results in the near term as the two companies consolidate operations.

  3. Future international carrier consolidation can weigh on financials; domestic carrier consolidation is a lower risk due to AT&T, Verizon, and T-Mobile already making up almost the whole US wireless market.

  4. American Tower’s large international operations exposes the company to unfavourable foreign currency risks, local economic downturns, and political risks that may result in carriers pulling back spending due to regulatory concerns, waiving of customer subscription fees in recessions, or in severe cases, seizure of tower assets or forced stoppage of services.

  5. American Tower relies heavily on expansion to fuel growth. Poor M&A execution, rising asset prices, or increased costs to build towers due to inflation could significantly alter American Tower’s current financials and outlook.

Bottom Line

American Tower benefits from sky-high competitive advantages related to network effects, barriers to entry, customer switching costs, and economies of scale. Along with a rich history of an aggressive and acquisitive growth strategy, American Tower’s moat provides shareholders with recession-proof cash flows, high returns on capital, and a value-first capital allocation strategy.

Although the company has meaningful scale around the world, its growth runway is far from over. International data growth and investments into newer wireless technologies, domestic push into 5G and other new technologies, and edge computing offer ample opportunities for American Tower to grow and outweigh the potential risks of operating in this industry.

On top of this, prudent capital allocation and debt management help shareholders sleep soundly at night while American Tower builds its empire.

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