In the coming years, 5G networks and the Internet of Things (IoT) will be significant growth drivers of mobile data usage. As one of the largest competitors in the telecommunications real estate market, American Tower (AMT) and its shareholders are well positioned to capture value from these technologies.
In addition to being 10-100x faster than 4G, 5G will allow wireless networks to accommodate more devices transmitting real-time data. For this reason, the IoT is expected to experience rapid growth as 5G is deployed.
These innovations have the potential to transform the world in countless ways, some of which haven’t even been imagined yet.
Wearable devices could allow for better monitoring and management of various health conditions. Advanced robotics with real-time data transmission could allow doctors to perform procedures remotely.
Connected roads could process traffic and weather conditions. Connected streetlights could reduce energy consumption. Connected sensors could monitor environmental conditions, such as air quality.
Connected cars, buses, trains, et cetera, could reduce accidents and provide travelers with real-time information.
Connected machinery could improve safety and efficiency in manufacturing and construction. Augmented and virtual reality could be used in classrooms to enhance the educational experience.
These examples just scratch the surface of how 5G and the IoT could change daily life. But in order for any changes to be realized, there must be wireless networks capable of supporting the increases in connected devices and data usage. For this reason, I believe American Tower is a compelling long term investment idea.
American Tower owns and operates telecommunications real estate in the United States and internationally. They generate revenue primarily by leasing vertical tower space to tenants, which utilize this space to install communications equipment.
Most tower sites operated by American Tower are capable of supporting 4 to 5 tenants. These tenants sign long term, typically non-cancellable, leases with built in escalators.
The map shown below depicts the countries in which American Tower operates, as well as the number of tower sites in each country.
American Tower benefits from two important competitive advantages: cost advantages and high switching costs.
The cost advantages arise from their large network of tower sites. They own and/or operate roughly 41,000 sites in the United States and 137,000 sites internationally. A new competitor wishing to enter the market would find it very costly to build out such an extensive network. American Tower estimates that, in the United States, tower construction typically costs $250,000 to $300,000. Further strengthening American Tower’s advantage is the fact that, because most tower sites can support 4 to 5 tenants, it costs almost nothing to add additional tenants to an existing tower.
The high switching costs arise from the fact that it is costly for wireless carriers to remove their equipment and relocate to a different tower. Jay Brown, president and CEO of Crown Castle International (CCI), has stated that it would cost between $35,000 and $40,000 to remove equipment from one site. American Tower estimates that it costs roughly $1,800 per month for a carrier to lease tower space, meaning a carrier would spend as much moving the equipment as they would spend leasing the site for 19 to 22 months.
Data Consumption Trends
An important driver of revenue growth for American Tower has been the increasing number of connected devices combined with increasing data consumption around the globe. In the United States, data usage grew 79% annually from 2006 to 2019.
Source: American Tower Investor Presentations: US Technology and 5G Update.
Historically, as network technology has evolved and data consumption has increased, wireless carriers have spent more to keep their networks competitive. Wireless carrier CapEx was roughly $17 billion per year from 2000-2004 as 2G transitioned to 3G; $23 billion per year from 2005-2009 as 3G reached capacity; and $29 billion per year from 2010-2018 as 4G reached capacity.
In the coming years, this trend will likely continue. 5G and the IoT should act as growth catalysts, driving further increases in connected devices and data usage.
In the United States, the number of connected mobile devices is expected to grow at 8% annually through 2025; within this category, IoT connected devices are expected to grow at 18% annually. And total mobile data traffic is expected to grow at 32% annually over the same time period. To support these changes, wireless carriers will need to make their networks denser. This will result in tenant billings growth for American Tower.
It’s important to note that, despite the United States being the clear leader in mobile broadband penetration, growth is still expected to be strong in the coming years.
The trend is the same internationally, where increases in smartphone penetration and data consumption are expected to drive growth in wireless carrier spending. There are sizable opportunities even in advanced markets like Germany and France; and developing markets like India, which has roughly one-third the mobile broadband penetration of the United States, have even greater potential for future growth.
Source: American Tower Investor Presentation: International Market Overview Presentation (Q4’2019).
American Tower carries a substantial amount of debt. Many of their towers are located on sites operated pursuant to a ground lease, and this makes the business very capital intensive.
As of Q2’2020, the company had over $28 billion in long term debt and lease obligations. The debt-to-equity ratio reached 8.8x, and has been rising steadily for several years. And as debt has risen, shareholder equity and book value per share have decreased accordingly. This is depicted in the chart below.
Source: Created by the author using data from AMT Q2’2020 Earnings Press Release and AMT 10K 2019.
At first glance, American Tower’s balance sheet may be alarming: $28 billion in long term debt and lease obligations, and only $2 billion in cash. However, Fitch recently upgraded American Tower’s long term issuer default risk, senior unsecured notes, and credit facilities rating to BBB+ and Moody’s has given a Baa3 rating to American Tower’s senior unsecured debt—these are investment grade credit ratings. Fitch and Moody’s have also rated the company’s outlook as stable. They believe American Tower is well positioned to benefit from growth in the tower industry in coming years.
Another potential risk is revenue concentration. In Q2’2020, three major wireless carriers in the United States accounted for 51% of revenue: AT&T (20%), T-mobile (17%), and Verizon (14%). Additionally, the United States accounted for 57% of revenue and 68% of operating profit. While American Tower works with many different wireless carriers, they are heavily dependent on the United States and, specifically, these three carriers.
Lastly, I would like to touch on valuation. American Tower currently trades for 31.2x book value and 14.6x sales. When compared to Crown Castle, which trades at 7x book value and 12x sales, American Tower might be considered expensive. However, while Crown Castle and American Tower operate a similar number of U.S. telecommunications real estate sites (~40,000 for Crown Castle vs ~41,000 for American Tower), Crown Castle does not operate internationally. And the international market opportunity is likely to be a key growth driver for American Tower in coming years.
Despite the large amounts of debt, American Tower has posted solid financial results in recent years. Revenue has grown at 13% annually over the past 5 years, and free cash flow has grown at 12% annually in the same time period. This is depicted in the chart below.
Although a significant portion of revenue comes from the United States (57% in Q2’2020), revenue has generally been growing in all geographic regions. The one exception is India (categorized as Asia); revenue from India dropped 21% in 2019—but this was due to the impact of a one time settlement payment from Tata Telecommunications that boosted 2018 revenue by $333.7 million. The chart below shows revenue by geography from 2017 to 2019.
In Q2’2020, total revenue increased only 1.2% to $1,913 million. This deceleration was due in part to a decrease in international property revenue of 4.3%, driven by revenue decreases in both Latin America and India. This was related to the negative impact of foreign currency exchange rates; on an FX-neutral basis, revenue grew 7.3%.
Total tenant billings growth was 9.9%, a combination of 5.0% organic tenant billings growth (I.e. from existing tower sites) and 4.9% new site tenant billings growth (I.e. from new constructions or acquisitions). This indicates a healthy blend of growth from both old and new tower sites. Despite decreased international revenue, organic tenant billings grew in every geographic segment.
Gross margins and operating margins remained relatively consistent at 72% and 36%, respectively. Funds from operations (FFO), a preferred measure of profit for REITs like American Tower, increased 4% to $863 million. When adjusted for capital expenditures and other recurring expenses, adjusted funds from operations (AFFO) increased 1.5% to $2.07 per share.
In Q2’2020, American Tower also raised the dividend to $1.10 per share (~20% higher than Q2’2019). This marks the continuation of a trend of quarterly dividend increases that dates back to 2012.
As 5G networks are deployed, the number of connected devices and data usage will increase across the globe. Wireless carriers will need to update and densify their networks to support these changes. And American Tower looks to be a relatively low-risk investment strategy to capitalize on this trend.
Disclosure: I am/we are long AMT. 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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