American Tower Coproration: Robust Financials

In this article, we will analyze the American Tower Corporation (AMT). The company is the world's largest cell-tower REIT, boasting a market cap of $115 billion.

COVID-19 reminded everyone that not all REIT categories are equally safe, with many retail and office real estate assets struggling to perform.

At the same time, it highlighted the resilience of two other categories: data centers and cell-tower REITs. American Tower Corporation is a cell-tower REIT.

In its latest earnings report, the company reported property revenues and tenant billings growth of 8.6% and 9.9%, respectively, on a constant currency basis, signaling impressive growth, despite the ongoing headwinds. It was only because of FX fluctuations, that the actual revenue growth came in lower, at 1.6%.

The company's financials have been robust. The management’s commitment to shareholder returns is evident in its policy to raise the dividend on a quarterly, instead of an annual basis. In fact, over the last four quarters, the company raised its aggregate distributions by nearly 20%.  The company has attracted institutional investors, including Clearbridge Investments.

Despite foreign exchange curbing its results, management guided for FY2020 FFOs growth of around 4.55%. For context, the company's decade long FFO/share CAGR (compound annual growth rate) has been around 16%, as the demand for global cell coverage has been skyrocketing. We believe that the transition to 5G will further strengthen the need for cell towers, and American Tower is well-positioned to take its piece of the pie.

The company enjoys contractually secured cash flows from all the big telecom players. Unlike traditional real estate, telecom firms are very unlikely to miss on their rental payments, since they have to maintain solid coverage at all times.

This makes not only American Tower, but also all cell-tower REITs safe investments in that respect. However, such security comes at a steep price. The company is currently trading at approximately 31.5 times its FY2020 projected FFOs.

In comparison, the REIT sector as a whole is currently valued at around 13 times its current FFOs, which makes for a major contrast. We believe that while American Tower's quality tenant base and rapid international expansion may justify such a high multiple, investors may want to wait for a potential dip before buying, to lock in a higher yield. Judging by the company's historical performance, however, such an opportunity is rarely available.

Despite the merits, American Tower is subject to a couple of risks we would like to highlight. Firstly, while its tenant base of cash-cow big telecom companies may provide considerable safety, as discussed earlier, the sector's consolidation may not be optimal.

The recent merger between T-Mobile and Sprint reduced the already small number of telecom companies, minimizing competition and decreasing American Tower's rental rate negotiating leverage.

Another potential risk is the company's all-time high long-term debt position of $21.8 billion. While the company is able to borrow at a quite low cost of debt of around 3.1%, refinancing in the future may come to a higher price, increasing its interest expense.

Overall, we believe that American Tower is a fantastic company, having rewarded its investors generously by delivering CAGR returns north of 20% over the past decade. While shares are trading at a premium valuation, its cash flows are some of the safest around. Some risks remain, but the stock is a compelling pick for long-term dividend-growth investors who are aiming for capital appreciation as well.