Boring Factual Information About AFFO For American Tower

Summary:

• Sorry, no jokes in this one. Just running the numbers publicly.
• I wasn’t going to send this to the public side, but I think discussions about AFFO make it important for investors to have the right context.
• AFFO per share growth from 2022 to 2023 looks bad because of non-recurring headwinds. These issues occurred together and resulted in a significant decline in AFFO’s projected figures for the year.

One of the most important lessons for equity REIT investors to understand is that long-term AFFO is primarily (not exclusively!) driven by real estate. The performance for shareholders can be aided or hampered by changes in interest rates and smart (or stupid / greedy) management decisions.

While American Tower’s (NYSE:AMT) purchase of a data center REIT came at an inopportune time (especially with floating rate debt), they have an excellent history of making smart decisions to benefit shareholders. Their expertise has been demonstrated through managing real estate rather than achieving ideal financing terms. Investors should not expect the weak guidance on AFFO per share for 2023 to suggest that growth rates will be poor for years.

The surge we’ve had in short-term interest rates is historic. We will use the “Federal Funds Effective Rate” to measure short-term rates.

2021: Average short-term interest rates were near 0%.

2022: Climbed from below 0.1% in January to 4.1% in December.

2023: Starts at 4.33%. That’s 421 basis points higher than January 2022.

2024: Much easier comparison. Year-over-year, 2024 will get to use 2023 as a base year.

Guidance vs. Projections for AMT

When I prepared some rough projections in 2022, I estimated that higher interest expense year-over-year would hit AMT for about $287 million in 2023. AMT’s guidance suggests an increase in interest expense of $248 million. That’s actually below my projections. However, the total hit from “financing costs” is bigger (at $315 million) due to the full-year impact of the funding arrangement with Stonepeak.

AMT’s guidance also was weighed down by a projected hit of $47 million from foreign exchange rates (due to the strong dollar) and $75 million of reserves related to one weak tenant.

Here are some numbers to understand:

• AMT’s 2021 AFFO per share: $9.54 Actual
• AMT’s 2022 AFFO per share: $9.76 Actual vs. $9.85 consensus estimate from early February.
• AMT’s 2023 AFFO per share guidance: $9.605 midpoint ($9.49 to $9.72) vs consensus estimate $10.18 from early February.
• AMT’s headwind from financing costs, foreign exchange, and reserves per share: –$.936
• AMT’s 2023 Projected AFFO per share growth: -1.6% vs +8.0% without headwinds.

Foreign exchange rates and reserves weighed heavily on growth in AFFO per share for 2023. Looking at 2024, there’s currently no evidence to suggest a big hit in either of those categories. Further, since AMT’s AFFO for 2023 includes a $75 million reserve, simply not taking a reserve in 2024 would generate embedded growth for AFFO.

This is important to understand for year-over-year comparisons.

They don’t need to reverse the charge in the future; simply having it not recur would be enough.

Allow me to simplify the concept. Imagine that you’re running a lap each day and measuring your time to see how much you’re improving. On Tuesday, you trip and fall. Despite improving in your ability to run, that fall causes your performance to be a bit weaker than Monday.

On Wednesday, you can beat Tuesday’s number by simply not falling. There’s nothing magic to it. The fall was included in Tuesday’s time, so not falling would improve your time.

If you only evaluated your improvement from one Sunday to the next, you wouldn’t even notice. However, when you’re measuring each period, you’ll see these lumps in the growth rate.

The impact per share of that one charge is about $.16. For a stock trading between $180 and $200, $.16 is literally a rounding error for the price. It hits AFFO and hurts the “growth rate,” so it can pressure the share price, but the actual impact on the underlying business is minor.

What Did Management Say?

During an AMT presentation, they were explicit.

Analyst:

OK. You’ve laid out targets of 5% net growth through 2027 in the U.S. I think 6%, excluding Sprint. Is it fair to say that DISH is a meaningful contributor to that growth?

Adam Smith (SVP of Investor Relations):

Yes, they’re certainly a good contributor to the growth. The way I would kind of frame DISH, I mean, as of today, I mean, certainly, they started from basically zero a couple of years ago, right? And the way we structured that deal, we didn’t commence lease payments until 2022. So very much kind of a pay-as-you-grow type of arrangement, which we thought was very mutually beneficial.

And as of today, so since you’re starting from zero, they more or less make up less than 1% of our overall American Tower revenue. So it’s still a pretty small customer in the overall scheme of things, and that’s probably less than 2% of our U.S. tower revenues – property revenue.

So starting from a relatively low base, but I’d say if you kind of unpack our growth target and just to make sure everybody here understands what that is, we’ve said at least 5% organic tenant billings growth from 2023 through 2027 on average. When you take out the contracted Sprint churn, that’s at least 6%, which is pretty reflective of the really strong growth that we experienced in the U.S. business from the peaks of the 4G cycle.

So if you kind of peel that back a little bit, we have a 3% escalator. And just given the sheer size of the U.S. business, it’s about a $4.5 billion, $4.6 billion tenant billings business. To move the needle in terms of that escalator, it’s really driven by the big three, the folks with the $1 billion annual revenue streams.

That’s a big statement. AMT has been contesting the low share price by providing some vision on revenues running out through 2023.

Conclusion

I think AMT is a strong buy. I believe the market has significantly undervalued all the cell tower REITs. I think Crown Castle (CCI) and SBA Communications (SBAC) also warrant strong buy ratings today.

For future reference, here are today’s prices:

• AMT: $187.72
• CCI: $111.36
• SBAC: $225.50

Now if you look back on the article in a year or two, you can easily reference how each of the three REITs performed.

Further, my opinion is backed by equity. I have a significant investment in all three REITs.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMT, CCI, SBAC either through stock ownership, options, or other derivatives. 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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