Lines Crossed at American Tower
10/07/2011 2:40 pm EST
On October 3, American Tower (AMT) raised $500 million by selling 5.9%, ten-year debt.
I think there’s good news and bad news in that debt deal, with the balance slightly toward the bad.
It was certainly good news that the company could sell debt at all, when so many companies are either shut out of the market or looking to sell assets at any price. The bad news was that the yield of 5.9% was more expensive than the last time American Tower sold debt, back in December 2010.
At that time, American Tower sold $1 billion in 4.5% notes maturing in 2018. That was 2.15 percentage points more than Treasuries with a similar maturity were yielding then. The October 2011 issue came with a yield that was 4.125 percentage points above the yield on a ten-year Treasury.
Why is that important? (Well, first off, American Tower is a member of my Jubak’s Picks portfolio.)
Because American Tower is planning to convert into a real estate investment trust (REIT) in 2012. I think that’s a good idea, because the company’s business of leasing space on towers to wireless phone companies produces exactly the kind of steady cash flow that income investors pay up for.
But since a REIT has to pay out 90% of its pre-tax income to the folks who own units in the trust, the long-term growth of the company depends on it being able to raise cheap money in the public debt markets, so it can invest in new growth opportunities that have profit margins higher than what the debt cost the company in interest.
Paying 4.125 percentage points over ten-year Treasuries suggests that at least part of the market thinks the company’s cash flow might be more volatile than expected. (I’d note that some investors, myself included, are perplexed by the timing of this deal. The corporate debt markets are extremely volatile right now, and debt offerings are expensive. So why did American Tower have to do this now?)
Maybe the yield was so high because of the company’s very ambitious recent acquisition program. In 2010, the company spent $900 million to buy more towers. In 2011, American Tower has increased this pace by spending $893 million on acquiring towers in just the first half of the year.
Maybe it’s a sense that the acquired towers in Latin America, India, and Africa are riskier assets than those in the United States. Maybe it’s worry that consolidation in the wireless industry—the at-the-moment blocked acquisition of T-Mobile by AT&T (T) being an example—will reduce the number of companies needing to lease tower space.
Standard & Poor’s rates the company’s debt as Baa3, putting it below investment grade, on worries over its aggressive financial policy, including that wave of acquisitions.
The stock has been stuck in a range between $50 and $56.84, the 52-week high, going back to September 2010. I think I’d like to step to the sidelines—that means sell—on this one, until I see how the conversion to a REIT goes—and what the dividend yield and cost of capital are under that structure in 2012.
I’m selling today, October 7, with a gain of 37.5% since I added the shares to Jubak’s Picks on May 10, 2010.
I’d say from the range-bound nature of the stock that more than a few other investors would like to know the answers to those questions too.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of American Tower as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.