American Tower Corp: Milestone Agreement Makes This 5G Infrastructure REIT an Even Better Play

American Tower Corp
@alinabuzunova via Twenty20

American Tower Corp up 40% Since March

American Tower Corp (NYSE:AMT) is a real estate investment trust (REIT) that owns and operates one of the largest global networks of telecommunications real estate (think 5G cell towers).

And it’s an excellent infrastructure stock for investors looking to get into the 5G revolution. Why? You can create all the 5G technology you want, but if you can’t get it to your customers, what’s the point?

5G, which simply stands for the fifth and newest generation of wireless networking technology, went online in 2019, but it’s just starting to ramp up. And the demand for cell towers will soar right along with it.

5G is what the tech world has been waiting for. It has significantly lower latency than any other generations and download speeds up to 100 times faster than 4G. This near-instant response time will make the Internet of Things (IoT), autonomous driving, and remote medical procedures a safe reality.

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Unlike older tech, 5G networks use midband and higher-frequency airwaves, thus requiring more cell towers and fiber optic wiring. 5G technology also requires small cell antennas and links to the cloud.

5G has been a boon to infrastructure stocks like American Tower Corp. And will continue to be.

Despite the coronavirus pandemic, AMT was able to report solid underlying results for the second quarter. So much so that it was able to increase its dividend by nearly 20%. The company was also able to further strengthen its balance sheet and construct more than 500 towers across its international markets.

In September, AMT announced that it had inked a 15-year-lease deal with T-Mobile US Inc (NASDAQ:TMUS), providing it with a steady, long-term revenue stream.

Chart courtesy of StockCharts.com

AMT stock has had solid momentum over the last two years. Since the start of 2019, American Tower Corp stock has climbed 60%, and it has increased more than 40% since March. AMT’s momentum was only interrupted by the broad-based crash in March and September sell-off.

Technical investors might be a little uneasy right now. The company’s 200-day moving average appears as though it is about to cross over the 50-day moving average. This is a popular bearish indicator called a “death cross,” and suggests that AMT’s stock could face downward pressure over the near term.

Or, it could just be a short-term reflection of the September sell-off and the fact that many stocks have been trading in a tight range, or sideways, in the lead-up to the November presidential election. The stock market does not like uncertainty, and this election season is unlike any we’ve seen.

Strong third-quarter results and a return to normalcy after the elections could see AMT’s share price break out of its current range.

American Tower Corp Overview

American Tower is a leading independent owner and operator of telecommunications real estate with ~99% of its revenue generated from the leasing of its properties to its international tenants. It also leases fiber and other urban telecommunications assets. (Source: “Introduction to the Tower Industry and American Tower As of June 30, 2020,” American Tower Corporation, June 30, 2020.)

American Tower Corp essentially builds, owns, and operates the real estate and infrastructure necessary for today’s wireless communication networks to operate. That includes about 181,000 communication sites in countries like the U.S., Mexico, France, Germany, Brazil, South Africa, India, and Argentina.

American Tower Corp, as its name suggests, leases out vertical space on its cell towers and portions of the land that its equipment sits on. The more telecommunication giants that rent each cell tower, the better.

It’s all down to the economy of scale. Adding additional tenants, equipment, and upgrades brings in a lot more revenue, while costs stay relatively flat. For example, the return on investment for one tenant on a cell tower is three percent, but that number jumps to 13% for two tenants, and a 24% return on investment with three tenants.

AMT’s biggest clients are AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), and T-Mobile US Inc.

For income-starved investors, it’s important to remember that AMT is a REIT. It has to legally distribute at least 90% of its taxable income to investors in the form of a dividend. Since 2012, AMT has raised its dividend payout every single quarter. (Source: “Dividend History,” American Tower Corp, last accessed October 20, 2020.)

In the first quarter of 2012, it paid out $0.21 per share. In the second quarter of 2020, it paid out a quarterly cash distribution of $1.10 per share. Over the last eight years, AMT’s quarterly dividend payout has increased 414%.

Milestone Agreement with T-Mobile

On September 8, AMT and T-Mobile signed a new long-term, 15-year agreement. The deal provides AMT with a strong recurring revenue stream and enhances T-Mobile’s ability to provide 5G services. (Source: “T-Mobile and American Tower Sign New Milestone Multiyear Agreement,” American Tower Corp, September 8, 2020.)

“Wireless mobility has never been more critical for consumers and businesses alike, and as technology continues to advance into 5G and beyond, that will only increase,” said Neville Ray, president of technology at T-Mobile.

“Through our multiyear agreement with American Tower, we’ve secured T-Mobile’s ability not only to accelerate our aggressive 5G build, but also to continue to deliver connectivity for our customers well into the future,” Ray concluded.

Solid Q2 Results

On July 30, AMT announced that revenue for the third quarter, ended June 30, 2020, increased 1.2% year-over-year to $1.9 billion. Property revenue increased 2.4% to approximately $1.9 billion. (Source: “American Tower Corporation Reports Second Quarter 2020 Financial Results,” American Tower Corp, July 30, 2020.)

Second-quarter net income increased 3.2% to $448.0 million, or $1.00 per share.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 2.4% to $1.2 billion.

Consolidated adjusted funds from operations (AFFO) increased 1.6% to $924.0 million, or $2.07 per share. AFFO is a financial performance measure used by REITs that is similar to cash flow per share.

AMT ended the second quarter with nearly $6.5 billion in total liquidity, plus the ability to borrow up to $4.5 billion under its revolving credit facility.

During the quarter, AMT:

  • Repurchased a total of 51,000 shares under its stock repurchase program for approximately $11.0 million (it still has around $2.0 billion remaining on its existing stock repurchase program)
  • Spent approximately $128.0 million to acquire 350 communication sites, including 19 in its 20th market, Poland
  • Spent $55.0 million to purchase 102 towers under a previously announced sublease agreement with AT&T

Analyst Take

Communication companies have 5G technology, but American Tower Corp is the gatekeeper. Thanks to AMT’s strong, diverse global portfolio, substantial cash position, and capital allocation strategy, it has been able to drive recurring, long-term growth and increase its return on investment.