Fortunately for American Tower Corp. (AMT), everyone is hopelessly addicted to their smartphones. The Boston, Mass.-based REIT will continue to benefit from surging demand for mobile video from rising generations of data junkies, explains Ari Charney, editor of Investing Daily's Utility Forecaster.
Though AMT is at the vanguard of a technological revolution, it’s really just an old-fashioned real estate company at heart. The $45.5 billion REIT owns and operates more than 144,000 cell towers around the world.
AMT leases its towers to telecom companies under long-term contracts. Leases include annual escalation charges, which average around 3% across the company’s U.S. portfolio. Renewals are highly sticky—churn amounts to just 1% to 2% of total property revenue per year.
The best part about AMT’s business is that once a tower has been leased to a tenant, most of the revenue generated from each additional tenant drops to the bottom line. That quickly adds up, with operating margins averaging around 35% over the past five years.
Simply put, the tower business is a cash machine with high earnings visibility — perfect for a REIT, which avoids taxation at the corporate level by distributing at least 90% of taxable income to unitholders.
That’s how you get distribution growth that’s averaged around 22.5% annually over the past five years. And AMT is targeting distribution growth of 20% annually for the foreseeable future.
And the company certainly knows how to deliver on ambitious goals. In 2007, AMT embarked upon its double-double strategy: Successive five-year plans to double its asset base and adjusted FFO. The firm is now on the cusp of doubling both metrics twice within the past 10 years.
AMT’s domestic segment generates nearly three-quarters of operating profits. But the higher-margin U.S. market is maturing, while emerging economies are still one to two generations behind in terms of cell-phone technology.
The company's strategic bet is that as countries such as India, where it owns 60,000 towers, transition to 3G and 4G, the resulting network demand will turbocharge future growth.
As great as AMT’s business model might be, it’s not without risks, including a high degree of customer concentration. AMT risks losing revenue if companies merge and eliminate redundancies.
Meanwhile, AMT’s recent decline allows savvy investors to pick up shares at a more reasonable 17.0 times projected FFO.
Because of its pass-through status, a REIT’s distributions are mostly taxed as ordinary income, so AMT should only be held in tax-advantaged accounts, such as IRAs.
