Elevator Pitch
Around seven months ago, we covered American Tower Corporation (NYSE:AMT), explaining why the stock remained attractively priced, with great total return prospects despite its (then) prolonged rally. Over this period, shares have slid lower by around 16.5%, underperforming the rest of REITs along with the overall market.
Source: Author
Despite that, the company has continued delivering a resilient performance, with great growth prospects and a robust margin of safety due to its essential-to-communicate assets.
With shares slipping lower, we believe that American Tower presents a compelling investment opportunity, especially towards dividend growth investors in the current yield-less world. Hence, we propose that AMT's current price levels make for a great spot to average down or even initiate a position, projecting double-digit returns ahead.
A resilient company
The main characteristic that differentiates cell-tower REITs like American Tower from the rest of its REIT peers is their resilient business model. The unfortunate pandemic caused many issues in the sector, especially on retail properties. In the meantime, the pandemic had almost no effect on American Tower, with every single of its past four quarters delivering positive rental revenue growth.
American Tower owns nearly 43,000 sites in the U.S. and more than 140,000 sites internationally. The company enjoys long-term tenant lease contracts, which are typically non-cancellable, have an initial term of 5-10 years, while embedded in them are above-inflation annual lease escalations, which secure growth in real terms.
Source: Supplemental data
Additionally, AMT is able to organically expand its gross margins since attaching additional tenants to its towers requires little to no additional expenses but scores additional recurring cash flows. Here is an example of how growth in its per-tower tenants contributes to the company's financials in the U.S.
Source: Overview Presentation
Unlike other REITs, whose tenants can move, go out of business, etc., American Tower's business is quite different. Telecom giants need to be able to provide consistent coverage with no disruption in their signal. Hence, American Tower's antennas are unlikely to lose any of their telecom clients. This is evident by the company's churn rate, which has historically hovered at around 1-2%, only subject to minor telecom coverage readjustments over time.
As you can see below, both AMT's revenues and AFFO/share displayed incredible resiliency over the past few quarters.
Source: Supplemental data, Author
The growth story
AMT's growth strategy is quite simple to understand: 1) Acquire more towers, 2) maximize their tenant count, 3) steadily enjoy rental escalations.
As you can see in the graph below, AMT's global presence has been slowly but gradually expanding, currently featuring 8.8% more towers than it did 2 years ago. Remember that AMT is the largest REIT in the world, with Prologis, the second-largest REIT by market cap way behind AMT. With telecom towers being a growing but mature business, an annual growth in the company's sites of around 3-4% is quite reasonable to expect.
Source: Supplemental data, Author
AMT expects to construct 6500 new sites in 2021, implying a growth of 3.5%, as mentioned above. Then, the company expects to enjoy 3-4% of organic tenant billings growth, including the impact of Sprint's churn. Excluding it, growth would be higher than 4%.
Source: Q4 Presentation
The company also expects organic tenant billings growth of at least 5% through 2022 and growth of at least 6% from 2023 to 2027, accelerated by 5G densification, existing comprehensive master lease agreements, and future tower leasing growth. As a result, management aspires to double-digit annual growth in its AFFO/share through 2027.
Keep in mind that the company currently features a 10-year and 5-year AFFO/share CAGR of ~15% and ~10%, respectively. Therefore management's target implies a reasonable slowdown from its historical average growth.
Dividend growth
In the current yieldless world, investors have been hunting any yields they can find left and right, having pushed the yield of S&P500 to as low as 1.5%. AMT's yield is currently below the REIT average of ~3.9%, standing at around 2.2%. Despite the weaker yield, AMT's rapidly growing AFFO/share and low payout ratio have allowed for massive dividend increases at an incredibly consistent rate.
As you can see, AMT's management has kept on growing the dividend at around 20% annually, with no slowdowns, powered by AMT's robust AFFO/share growth.
Source: Seeking Alpha
Of course, since AFFO/share has been growing at a bit humbler rate of ~10%-15%, the company's payout ratio has been progressively getting more and more compressed. Since it is currently standing at ~55%, AMT is likely to continue growing the dividend faster than its underlying AFFO/share growth until it reaches a payout ratio of ~70%, after which an in-line growth and hence deceleration should be expected. 
Source: Seeking Alpha
Investor returns
Now, let's illustrate why the stock's decline over the past few months has created an opportunity for fabulous returns ahead.
Firstly, in-line with the company's (rather conservative) guidance, we expect an AFFO/share of $9.20 in FY2021. We are then projecting an AFFO/share growth of 10% in the medium-term, implying the lowest potential double-digit growth in-line with management's ambitions through 2027.
We then assume FY2021 DPS of $5.57, suggesting a decelerated growth of 15%. We have then modeled its growth at 13% in the medium-term, implying further deceleration as management carefully controls its payout ratio.
We have embedded AMT's current stock price of ~$217.3, our (prudent in our view) estimated growth rates, and range of future potential valuation multiples to account for various valuation scenarios.
As you can see, we believe that investors enjoy a significant margin of safety at AMT's current levels. Even if the stock's valuation was to be compressed further in the low 20s (currently 23.6X FY2021 FFO/share), investors would still enjoy double-digit returns, despite our decelerated estimates. If, on a more positive note, AMT retains its current valuation, or if investors start chasing its reliable yield amid rates declining, causing a slight valuation expansion, annualized returns are likely to be in the mid-teens.
Source: Author
In any case, we believe that the stock offers a compelling investment case with double-digit return potential. These returns can be seen as more attractive than they initially sound. Due to AMT's resilient business model and cash flows, it would make sense for the market to price AMT with weaker returns ahead, as it usually happens with investors pushing quality companies higher. Hence, we consider AMT's current risk/reward an opportunity and rate the stock a Buy.
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