American Tower: Growth On Sale
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Summary:
- American Tower’s well-defined operational strategy positions the company to capitalize on the growing demand for wireless infrastructure.
- Challenges in the Indian market and international risks may impact AMT’s growth strategy in certain regions.
- AMT’s current valuation offers a potentially attractive entry point for investors, given the expected acceleration in growth in 2024.
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American Tower (NYSE:AMT), a global real estate investment trust, is strategically positioned to capitalize on the rapidly expanding demand for wireless communication infrastructure. In our view, their operational strategy, focusing on key areas such as increasing occupancy of their existing communications real estate portfolio, investing in and selectively growing their portfolio and service offerings, improving operational performance and efficiency, and maintaining a strong balance sheet, is both robust and well-defined. As advanced wireless technologies such as 4G and 5G networks continue to drive demand, we believe that AMT’s towers have the capacity to accommodate additional tenants with relatively modest capital investments. In this article, we will examine AMT’s growth prospects, risks, and valuation to provide a comprehensive analysis for investors.
Business Analysis
AMT, a global real estate investment trust, is well-positioned to capitalize on the rapidly expanding demand for wireless communication infrastructure. In our view, their operational strategy is both robust and well-defined, focusing on key areas such as increasing occupancy of their existing communications real estate portfolio, investing in and selectively growing their portfolio and service offerings, improving operational performance and efficiency, and maintaining a strong balance sheet. We believe that these efforts will effectively meet the needs of their customers and ultimately enhance the company’s ability to capitalize on the growing demand for wireless infrastructure.
The ongoing development and deployment of advanced wireless technologies, such as 4G and 5G networks, are primary drivers of this demand. We believe that AMT’s towers have the capacity for additional tenants and can be upgraded or augmented to meet future tenant demand with relatively modest capital investment. As a result, we expect their targeted sales and marketing activities to successfully increase the utilization and return on investment of their existing communications sites.
In our opinion, AMT’s capital allocation strategy, which aims to increase adjusted funds from operations per share and return on invested capital over the long term, demonstrates a commitment to long-term growth and value creation. This involves allocating available capital among investment alternatives that meet or exceed their return on investment criteria, including acquisitions and platform expansion initiatives.
Furthermore, we believe that AMT’s international growth strategy, focusing on creating substantial value by either establishing a new or expanding their existing communications real estate leasing business in international markets where their risk-adjusted return objectives can be achieved, is well-founded. Their diversified approach to international growth, operating in a geographically diverse array of markets in various stages of wireless network development, highlights a disciplined approach to expanding their footprint.
Preparing for Q1 Earnings
AMT is set to release its Q1 earnings on April 26, before the market opens. In our view, investors will pay close attention to the company’s commentary regarding the durability of the domestic leasing environment for the latter half of this year and into 2024, particularly as carriers adjust their capital expenditures upon completing key spectrum deployment projects.
In 2022, AMT faced considerable consolidation churn from Sprint, which led to a domestic organic growth of only 1.1%. We believe this headwind is more than halfway resolved, and the drag on AMT’s domestic organic growth should ease moving forward. It is noteworthy that 2/3 of the revenue growth embedded in AMT’s long-term outlook has already been secured through Master Lease Agreements (MLAs) with major carrier customers.
Regarding data centers, we will be closely monitoring the sustainability of recent booking strength, especially given the current volatile macro-economic environment and the slowing revenue growth observed among major Cloud Service Providers. Additionally, investors are likely to focus on data center operators’ repricing initiatives and the potential impact of higher prices on churn rates.
Risks: India and International
As AMT continues to navigate the challenges in the Indian market, investors should be prepared for updates regarding Vodafone Idea (VIL) and the company’s future plans for its India business. AMT recently announced that it is exploring strategic options for its India operations, including the potential sale of an equity stake. Reports from Economic Times suggest a valuation for ATC India of around $1.5B to $2.0B, significantly lower than the estimated $6B that AMT invested in the market.
For the past decade, AMT has tried to convince us that its investments in India would eventually pay off, making the recent announcement quite disappointing. However, given the long-standing issues with its India business, investors may feel a sense of relief that the company is finally addressing these challenges head-on.
The setbacks in AMT’s India operations may also raise concerns about the company’s investments in other international markets. With anticipated churn rates of 6-8% in Africa and Latin America over the next year, investors could question the viability of AMT’s growth strategy in these regions.
Valuation
Note: all data in this section comes from FactSet and AMT’s 2022 10-K.
We believe that AMT has begun to prioritize growing its dividend and expanding its portfolio through opportunistic mergers and acquisitions, which is excellent news for dividend investors. With a competitive dividend yield of around 2.9%, we anticipate that AMT’s dividend could increase by 10% per year going forward.
We believe that AMT will have the highest domestic organic growth rate of any tower operator over the next five years, which should drive peer-leading AFFO/share growth.
AMT has historically experienced robust growth, but its FFO growth took a hit in 2022, primarily due to slowdowns in North America and APAC. In North America, the slowdown was mainly driven by a decrease of $92.5 million resulting from churn in excess of contractual escalations, which we expect to persist for several years due to the terms of the T-Mobile MLA. In Asia, a decrease of $78.3 million in other revenue was primarily attributed to revenue reserves of $52.5 million related to the VIL Shortfall and a decrease of $13.1 million due to straight-line accounting, mainly tied to a write-off of VIL balances.
As a result, 2022 FFO grew by 1.1%. Consensus FFO from FactSet forecasts a growth of 0.1% in 2023, as these issues largely persist. However, we believe that the challenges of Sprint churn and India will soon be behind us, and we agree with the consensus forecast of accelerated growth in 2024, which predicts $10.68 per share, up 9.3% year-over-year.
Currently, AMT is trading at 21x on a Price to forward 1-year consensus FFO basis, towards the low end of its 5-year range of 19 to 32 times. Considering the expected acceleration in growth in 2024, we believe this represents good value for investors.
Conclusion
We believe that AMT’s strategic approach to capitalizing on the expanding wireless communication infrastructure market, coupled with its commitment to long-term growth and value creation, presents a compelling investment opportunity. While challenges in the Indian market and risks in other international markets should be considered, we believe that the company’s diversified approach to global expansion mitigates these concerns. Trading at the lower end of its historical valuation range and with the anticipated acceleration in growth in 2024, we see the potential for AMT to provide attractive returns for investors who can navigate the near-term uncertainties.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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