American Tower: Beware Storm Clouds On The Horizon

Summary:

• AMT’s international expansion strategy has begun to pay off, with strong growth across Europe, Africa and Latin America offsetting slowdowns in the Asia-Pacific and US & Canada.
• The strategy of horizontal expansion in foreign markets should provide reliable growth for years to come.
• But the company likely overpaid in its $10.1 billion acquisition of CoreSite. Aggressive expansion into additional verticals could jeopardize their domestic market dominance.
• Management must also address declining financial and operating metrics, which are deteriorating relative to peers.

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Introduction

American Tower Corporation (NYSE:AMT) is a global provider of wireless communications infrastructure. Founded in 1995, the company now operates in 26 countries and has roughly 6,400 employees. In this article, we’ll explore key aspects of American Tower’s products, competition, and management.

If I had to summarize the company’s overall strategy in one phrase, it would be: horizontal expansion abroad and vertical integration at home. Given that demand for cell towers will likely grow as emerging economies continue to develop technologically, I believe that their global approach is sound. However, I have my reservations regarding their domestic strategy, which may distract from core operations and jeopardize AMT’s market leadership.

My outlook for the company’s common stock is an equal-weight, given uncertainties about their acquisition strategy going forward. While there are clear opportunities for growth abroad, the domestic U.S. market is becoming increasingly saturated. An acquisition-oriented growth strategy may not be enough to succeed going forward in the US. Operating and financial metrics have also continued to deteriorate relative to peers, which brings cause for concern as well.

Business Model

AMT’s main product is their line of cell towers. The company builds and operates cell towers, and then leases out space on these towers to broadcasters and wireless carriers. The advantage for tenants is that they are able to provide targeted coverage to their own customers without needing to handle all the logistical and maintenance work that American Tower does. Tenants are free to install and maintain their own equipment on their leased cell tower space.

American Tower is able to lock-in customers to long-term leases with contractual rent escalations. These lease agreements generally have an initial non-cancellable term of 5-10 years, with options for renewal. Provisions in these agreements allow for inflation-adjustment, which enables AMT to secure some degree of long-term revenue growth. According to the company’s most recent 10K, they expect to generate over $62 billion from non-cancellable tenant lease revenue over the coming years.

Other revenue sources include their managed DAS (distributed antenna systems) networks, fiber assets, data centers, property interests, and shared generators. These comprised roughly 6% of revenue from 2020-2022. The company also provides tower-related services, including site application, zoning, permitting, etc. But these sources only accounted for roughly 2% of revenue over recent years.

Here is a breakdown of their revenue metrics across different geographies, excluding data centers:

	US & Canada	Asia-Pacific	Africa	Europe	Latin America
% of Total Revenue	47%	10%	11%	7%	16%
YoY Revenue Growth	2%	-10%	19%	48%	15%

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The company has pursued an aggressive international expansion strategy in recent years, and it may be poised to benefit if carriers in emerging markets grow at a strong pace. Revenue growth in Europe, Africa, and Latin America have offset slowdowns in the US & Canada and Asia Pacific segments. The company has suffered from disruptions in India, as one of its largest customers (VIL) failed to meet its contractual obligations. As a result, management has stated its intent to retrench in India, potentially via an asset sale.

Competitive Landscape

American Tower has two main competitors: Crown Castle International (CCI) and SBA Communications (SBAC). These firms comprise the big three of tower companies, and they all offer similar core services of leasing space on cell towers to wireless carriers and communications providers. Their lease agreements generally offer similar terms to customers, so these providers have tended to compete on location and site features rather than just pricing.

Although American Tower is the largest of the three, Crown Castle and SBA have their own distinct advantages. Notably, Crown Castle leads in the deployment of small cells, which are low-powered antennas that offer coverage by using both fiber optics and radio waves. These small cells can provide enhanced, targeted coverage that large towers simply aren’t capable of. Additionally, these nodes can be installed onto (or as part of) existing infrastructure, such as utility poles or streetlights. This makes small cells more discreet, aesthetically appealing, and less expensive to install. Looking forward, these small cell stations may become the backbone of 5G networks, providing Crown Castle a significant head start on competitors.

SBA on the other hand, is more concentrated on domestic, rather than international, markets. According to its 2022 Annual Report, SBA derived 76% of its site leasing revenue from the United States. SBA is the smallest of the three firms, but its growth and profitability have kept pace with AMT and CCI. Unique elements of their overall strategy include controlling the underlying land on which their towers are built and exploring ancillary services to add value to their existing assets.

Looking forward, domestic competition is set to intensify with the continued rollout of 5G across the US. Recent coverage maps indicate that the leading carriers currently provide 5G coverage of between 13-54%. Over the next few years, 5G access will continue to expand, which means that the demand for technology like small cells can be expected to grow as well. While AMT has engaged in a global expansion strategy in recent years, this approach jeopardizes their leading position in the US segment, which accounts for the lion’s share of their revenue.

Strategy

In December 2021, American Tower acquired CoreSite Realty for $10.4 billion. This acquisition enabled American Tower to expand its data center assets, with 28 data centers and 3.1 million net rentable square feet (NRSF) in total. The transaction was expected to help AMT expand into the mobile edge computing business, by integrating its cell tower properties with the new data centers. By connecting these facilities, latency can be reduced when users access cloud applications and compute power on their mobile devices.

Although data center and digital infrastructure REITs have declined markedly since late 2021, the ultimate value of this acquisition may take years to determine. By now it’s clear that AMT could have purchased CoreSite at a significantly cheaper price had they waited just 6-12 months. Furthermore, the company has yet to announce any major developments regarding the integration of the CoreSite assets, and we’re already 18 months past the acquisition date. Other analysts have also expressed skepticism about the CoreSite deal as well, citing concerns about operational and strategic complications that could arise from integrating these two businesses.

As things currently stand, this acquisition appears to have been a mistake, if not on strategy then at least on timing/price. In my opinion, the company may have an opportunity to offload these assets in the future, but they may have to wait a few years for the M&A pipeline to pick up again.

American Tower’s core business remains vulnerable to disruption from peers like Crown Castle, which has greater fiber and small cell assets. The two companies even express differing tones on the potential for new innovations to affect their businesses. While American Tower generally cites new technologies as a key risk, Crown Castle discusses how the adoption of new technologies may actually fuel their growth. These contrasting views perhaps reflect how prepared each company is positioned to provide the communications infrastructure of the future.

Management and Governance

Thomas Bartlett has been the President and CEO of American Tower since March 2020. He joined the company in 2009 and has since served as Treasurer, CFO, and Executive Vice President. Prior to his time at American Tower, Bartlett worked at Verizon and its affiliates for nearly 25 years. While shareholder returns have been flat since Bartlett assumed the CEO role, the data is still limited to only three years and AMT’s performance is in line with its peers, CCI and SBAC.

The company’s leadership team has a wide range of experience across the telecommunications and technology industries, with executives who have previously worked at Nokia, Qualcomm, and United Technologies. It also includes a number of legal professionals and financiers, who may be particularly useful when it comes to the company’s inorganic growth strategy. However, I find that this approach may be unsuitable for the advanced U.S. market, where the mobile edge market is only expected to reach $3 billion by 2026 (according to management).

In evaluating management, it’s important to look at some of the key decisions that have been made. In Bartlett’s tenure as CEO, the company has already acquired CoreSite and Telxius Towers, which was purchased for €7.7 billion in 2021. The Telxius transaction brought 31,000 existing communication sites into AMT’s portfolio across Germany, Spain, Brazil, Chile, Peru and Argentina. The company has also launched operations in the Philippines and Bangladesh to expand its Asia-Pacific presence, although it seems to be retreating in India. While the CoreSite acquisition has yet to bear any fruit, I think that the other moves have been smart, as they’ve helped to offset recent slowdowns in India and the US.

Regarding other governance matters, here’s a rundown of some key items:

• The company’s CEO and Chair roles are separated, which contributes to greater board independence.

• In 2022, all directors were elected with approval rates of 89% or higher, which demonstrates a high degree of overall support.

• The director to receive the lowest level of approval was Pamela Reeve, who also serves as Chair of the Board. This indicates that shareholders may seek an adjustment in board leadership, but not necessarily in board composition.

• On compensation, shareholders overwhelmingly approved the Company’s executive compensation plan. Total actual compensation for the CEO was $16.1 million in 2021, which is relatively high, but not unreasonable given the size of the company’s operations.

• The company’s CEO and named executive officers (NEOS) held significant stock ownership positions, ranging from 22x to 178x of their base salary. Combined with standard anti-hedging and pledging policies, AMT’s officers and directors have meaningful skin in the game, which ensures an alignment of interests with shareholders.

Overall, management is certainly committed to the company and is capable of delivering strong performance, but uncertainty remains as to whether or not they are taking the company in the right strategic direction. I think that 1-2 years from now, we’ll have ample time to properly evaluate the consequences of these acquisitions, and figure out what changes need to be made.

Financial and Operating Performance

AMT’s lease renewal rates are fairly high, with a historical churn rate around 1-2% of tenant billings per year. Although the company signed a new 15-year master lease agreement with T-Mobile in late 2020, American Tower’s churn rate in the U.S. & Canada segment has remained elevated around 4-5%. The company had noted in its annual report that lease cancellations and non-renewals by T-Mobile (which now holds Sprint’s legacy leases) were driving the uptick in churn. This churn will be fully worked through by 2025, with most of the decline already behind us. The new master lease agreement was expected to help American Tower provide 5G deployments for T-Mobile, and has been expected to deliver up to $17 billion in incremental revenue for American Tower.

Regarding dilution, American Tower’s total shares outstanding have grown at a moderate pace in recent years. At the end of 2022, the number of outstanding shares was 2% higher than the year prior, compared with no growth at Crown Castle and a -1.6% decline at SBA.

The firm holds investment grade credit ratings, which are comparable with that of their peers:

	AMT	CCI	SBAC
Fitch	BBB+	BBB+	–
Moody’s	Baa3	Baa3	BA3
S&P	BBB-	BBB	BB+

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Debt levels are moderate, with total liabilities standing at $54.7 billion compared to total assets of $67.2 billion. However, it is worth noting that goodwill and other net intangible assets account for a combined $31 billion of book value. These items include properties and data center assets from acquisitions, along with excess tower capacity, assumptions for tenant renewals, and licenses. The accuracy of these assumptions could significantly impact the company’s market value.

Historically, American Tower boasts strong top-line growth. In 2022, annual revenue reached $10.7 billion, tripling from just $3.4 billion in 2013. While gross profit growth has also been strong, net income remains highly volatile, declining roughly 31% through 2022. This decline also reduced AMT’s return on assets (ROA) from 4.2% to 2.6% in 2022. Similar levels of volatility did not occur for CCI and SBA, with ROAs of 4.3% and 4.5% each.

American Tower’s operating margin has also declined in recent years, from 36.1% in 2013 down to 28.3% in 2022. On the other hand, Crown Castle and SBA have been able to stabilize or grow their operating margins. The firm’s operating cash flow has also been less favorable, declining 23% in 2022, while Crown Castle and SBA increased 3% and 8% each.

In the past 5 years however, total shareholder returns have outperformed those of peers, offering cumulative gains of 55% compared to 33% (CCI) and 52% (SBA). Dividend growth has also been strong historically, rising from $0.21 per share in Q1/2012 to $1.56 per share in Q4/2022. But despite these gains, Crown Castle offers a much more attractive dividend yield at 5.1%. SBA lags behind at a 1.35% dividend offering.

Over the past 1 year, AMT’s share price has declined by -21%, which is relatively stable compared to the declines by CCI (-35%) and SBA (-28%). However, the sharper decline in the market value of peers may present more attractive valuation opportunities outside of AMT. REITs are commonly valued using Price / Funds From Operations (P/FFO) because this metric accounts for depreciation, amortization, and sales of real estate assets. One may also look to Tangible Book Value to measure the value of a business:

	AMT	CCI	SBAC
P/FFO	20x	16x	21x
TBV	-$25.22B	-$6.36B	-$7.96B
YoY Operating Revenue Growth (Dec. 2022)	-11.7%	21.6%	19.0%

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Compared with its peers, AMT is slightly expensive, given the subpar operating revenue growth and the deeply negative tangible book value. In a situation like this, the company has little room for error and their current valuation provides no margin of safety to investors.

Conclusion

American Tower remains a giant in the cell tower space, but strategic mistakes and technological disruptions may eventually detract from their competitiveness over the long run. The company must also correct deficiencies in its operating performance to reinforce investor confidence, and there is no indication from management that such changes are underway. From a relative value standpoint, the company is neither attractive nor unattractive.

The key concerns I have are:

• Will the mobile edge compute business be large enough to justify the CoreSite deal? If not, then is leadership prepared to offload those assets and redirect capital elsewhere?

• How aggressive will management be in its use of acquisitions to drive inorganic growth?

• Will AMT’s focus on international expansion enable competitors to siphon off domestic market share, particularly with the use of small cells that enable 5G connectivity?

• What steps will the company take to improve operating and financial efficiency, which have deteriorated in recent years?

Until we see how these developments play out, I would maintain an equal-weight position on American Tower. My suggestion is to remain invested in AMT, but to limit one’s exposure in light of the emerging risks we’ve highlighted in this article. If this asset is part of your portfolio, size it similarly to your average position (e.g., 2% for a portfolio of 50 assets). I currently expect the stock to perform in-line with peers over the next 12-24 months.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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