American Tower Corporation (REIT) is a US$95b large-cap, real estate investment trust (REIT) based in Boston, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess AMT.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much AMT actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For AMT, its FFO of US$3.7b makes up 71% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether AMT has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take AMT to pay off its debt using its income from its main business activities, and gives us an insight into AMT’s ability to service its borrowings. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AMT 5.65 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at AMT's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 4.53x, it’s safe to say AMT is generating an appropriate amount of cash from its borrowings.
In terms of valuing AMT, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In AMT’s case its P/FFO is 25.44x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
American Tower Corporation (REIT) can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for AMT:
- Future Outlook: What are well-informed industry analysts predicting for AMT’s future growth? Take a look at our free research report of analyst consensus for AMT’s outlook.
- Valuation: What is AMT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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