Why Should You Retain American Tower (AMT) in Your Kitty Now?
American Tower Corporation’s AMT extensive and geographically diversified communication real estate portfolio positions it well to ride the growth curve amid rising capital spending by wireless carriers on the incremental demand from global 4G and 5G deployment efforts.
Its expansionary efforts and disciplined capital-allocation strategy augur well for long-term growth. However, customer concentration and high interest rates pose key concerns for the company.
What’s Aiding It?
With the advancement in mobile technology, such as 4G and 5G networks, and the proliferation of bandwidth-intensive applications, mobile data usage has increased significantly globally. The excessive use of network-intensive applications for video conferencing, cloud services and hybrid-working scenarios is likely to fuel the rise.
This has led to greater capital spending by wireless carriers due to the incremental demand from global 4G and 5G deployment efforts, growing wireless penetration and spectrum auctions, driving demand for AMT’s wireless communication infrastructure. This upbeat trend is likely to continue in the upcoming period, boosting demand for the company’s assets and driving healthy leasing activity.
American Tower has a solid track record of delivering healthy performance due to the robust demand for its global macro-tower-oriented asset base. It has witnessed strong growth in key financial metrics while continuing platform expansion.
In the third quarter of 2023, the company recorded healthy year-over-year organic tenant billings growth of 6.3% and total tenant billings growth of 7.3%. Also, in the nine months ended Sep 30, 2023, revenues from the property segment and adjusted EBITDA increased 5.2% and 7.9% on a year-over-year basis, respectively.
Between 2012 and 2022, American Tower’s revenues from the property segment and adjusted EBITDA grew at CAGRs of 14.1% and 13.4%, respectively. Amid secular growth trends in the wireless industry, the healthy performance is expected to continue in 2023, with management projecting property revenues and adjusted EBITDA growth of 4.5% and 6.1%, respectively, at the midpoint.
To capitalize on the secular trends of the industry, AMT is consistently focusing on macro-tower investment opportunities and expansionary efforts across global markets. It has built more than 45,000 international sites since it began expanding internationally. Around 8,000 of these sites have been built in Africa as carriers continue to invest in their network coverage and densification needs.
In November 2023, through its Africa operations (ATC Africa), American Tower entered into an agreement with MTN Nigeria to enhance wireless connectivity in the region. In the nine months ended Sep 30, 2023, it purchased 69 communications sites, as well as other communications infrastructure assets, in the United States, Canada, France, Poland and Spain for $65.7 million.
Apart from having a robust operating platform, American Tower has a robust operating platform and ample liquidity to support its debt servicing. Its consistent adjusted EBITDA margins and revenue growth, as well as favorable return on invested capital, indicate strength in its underlying core business and support its ability to manage its near-term obligations.
The company's net leverage ratio for the third quarter of 2023 was 5. As of Sep 30, 2023, the company had $9.7 billion in total liquidity. In addition, with a weighted average remaining term of debt of 6.1 years, it has decent financial flexibility.
American Tower has a disciplined capital allocation strategy and remains committed to increasing shareholder value through regular dividend hikes. This December, the company announced a 4.9% hike in its quarterly dividend on the company’s common stock to $1.70 per share. It has consistently increased its quarterly dividends since 2012, and its average annual dividend per share has grown more than 20% since then.
In the last five years, American Tower increased its dividend 19 times, and the annualized dividend growth rate for this period is 15.10%. Moreover, it has a lower dividend payout compared with its industry. Such disbursements highlight its operational strength and commitment to rewarding shareholders handsomely. This is attractive to income investors and represents a steady income stream. Check American Tower’s dividend history here.
Further, backed by robust operating fundamentals, between 2012 and 2022, American Tower’s consolidated adjusted FFO (AFFO) witnessed a CAGR of 12.4%. We expect year-over-year growth of 3% in consolidated AFFO in 2023. Hence, with these factors in place, we expect the company’s dividend distribution to be sustainable in the upcoming period.
Shares of this Zacks Rank #3 (Hold) company have rallied 33.2% in the past three months against the industry’s increase of 18.5%.
Image Source: Zacks Investment Research
What’s Hurting It?
Customer concentration is high for American Tower, with the company’s top three customers in terms of property revenues for third-quarter 2023 being T-Mobile (17%), AT&T (13%) and Verizon Wireless (12%). The loss of any of these customers, consolidation among them or reduction in network spending leads to a material impact on the company’s top line.
The elevated churn is a concern in emerging markets where the company operates. The merger between T-Mobile and Sprint, which closed in April 2020, resulted in tower site overlap for American Tower.
During the nine months ended Sep 30, 2023, the churn was roughly 3% of its tenant billings, mainly driven by the churn in its U.S. & Canada property segment. Given the contractual lease cancellations and non-renewals by T-Mobile, including legacy Sprint Corporation leases, management expects the churn rate in its U.S. & Canada property segment to remain elevated for several years through 2025.
A high interest rate environment is a concern for American Tower. Essentially, elevated rates imply a high borrowing cost for the company, which will affect its ability to purchase or develop real estate.
American Tower has a substantial debt burden, and its total consolidated debt as of Sep 30, 2023, was approximately $38.6 billion. We expect a year-over-year rise of 23.9% in the company’s interest expenses this year. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Lamar Advertising Company LAMR and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Lamar’s current-year FFO per share has been revised 1.7% upward over the past two months to $7.31.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past two months to $2.28.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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