American Tower: An Undervalued ‘Blackstone-Style’ REIT (AMT)

Introduction

I doubt I’m breaking any news when I say the era of cheap money is over.

The reason I’m bringing this up is that Bloomberg just published a huge article on Blackstone’s (BX) $339 billion property arm, as the world’s largest real estate investor is moving into riskier assets to find elevated returns.

According to the article, Blackstone, which thrived when rates were low and acquisitions were cheap, is facing unprecedented challenges.

Simply put, with global central banks having raised rates, the era of easy money that propelled the firm’s growth is over.

I used the U.S. 10-year government bond as a proxy for the cost of money, as it is one of the most important rates for the real estate industry.

As a result, Blackstone is diversifying its portfolio away from traditional sectors like offices and retail. Instead, it is aggressively expanding into less mature segments, including logistics, student housing, and life sciences.

Essentially, these sectors are expected to benefit from constrained supply and favorable consumer demands, offering above-average returns in a challenging market.

In general, Blackstone’s Real Estate Partners fund series have all seen consistently elevated internal rates of return.

With that said, as much as I respect Blackstone, I prefer to manage my own money, which also explains why I have no ETF exposure.

To “copy” Blackstone, we don’t even have to take big risks, as the stock market is home to some fantastic public real estate opportunities, including companies that operate in non-traditional segments.

That’s where the American Tower Corporation (NYSE:AMT) comes in. My most recent coverage of this REIT was on March 24, when I went with the title “American Tower: Don’t Be Followed By The Dividend Cut.”

Since then, shares have returned 2.4%, including dividends. While they have lagged the S&P 500’s 7% return, I believe this tower giant remains a fantastic REIT – especially for investors seeking differentiated exposure.

In this article, I’ll update my thesis and explain why American Tower could be a Blackstone-style REIT.

American Tower Remains Impressive

I like real estate.

However, I’m extremely picky, as the performance of the Vanguard Real Estate ETF (VNQ) has been very poor. The average REIT has no moat and is subject to elevated competition.

Since January 2005, the VNQ ETF has returned just 241%. That’s including dividends. The S&P 500 has returned 565% during this period.

American Tower has returned 1,280%.

However, even this giant has started to struggle, as recent underperformance has pushed the AMT/S&P 500 ratio to the lowest level since the end of the Great Financial Crisis – erasing more than a decade of outperformance.

At this point, there are two possibilities:

1. American Tower has become a bad REIT.
2. American Tower has become a victim of a market where investors want to avoid REITs due to elevated inflation and rates.

If it’s option 1, we should just forget about the company.

However, I’m sure it’s option 2, as I believe we’re dealing with a case of throwing the baby out with the bathwater.

During last month’s Nareit REIT Week Conference, the company gave us a lot of valuable information, including comments regarding its focus on the global rollout of 5G technology, which is a major driver of cell tower demand.

Essentially, as carriers improve their networks, the demand for tower infrastructure increases, creating significant revenue opportunities for AMT, which owned more than 220 thousand “communication assets” in 25 nations going into this year.

Last year, the company showed the massive surge in capital needed to support 5G, as the 2020-2023 period saw roughly $34 billion in spending, $5 billion more than the longer 2010-2019 period that was dominated by 4G.

During the Nareit REIT conference, the company reiterated its bullish view.

I mean, we’re — in the U.S., we’re still expecting 20% to 30% growth in mobile data usage annually. And while that’s a little bit lower than 30% to 40% we saw in 4G, the base is exponentially larger. So if you just think about the gigabytes of data that have to be produced, it’s exponentially larger in 5G. – AMT at Nareit REIT Conference

In light of these opportunities, American Tower has another benefit: its size.

As I already briefly mentioned, AMT has a huge international footprint.

Last year, it generated 47% of its revenues in the United States and Canada – excluding data centers. The remaining revenue came from Latin America, Africa, Asia-Pacific, and Europe.

Click to enlarge

Because it’s so large, the company has the flexibility to allocate capital across various nations and regions, allowing it to build towers where the demand and returns are expected to be the highest.

This also includes its venture into CoreSite, the data center company it bought in 2021.

Between 2021 and 2023, global data spending has grown by 14% per year. Even better, last year, the company expected the 2023-2027 period to come with even higher growth of 19% annually.

Please note that CoreSite is mainly focused on hybrid cloud developments by enterprises. It is NOT necessarily an AI-focused business.

However, American Tower made it very clear that because of AI, general pricing is really good in the industry, which also benefits CoreSite.

It also sees strong demand for new capacity it is building.

For the capacity that we’re building, we’ve got about 40 megawatts under construction and about 40% of that is pre-leased already. And that’s kind of a record level of preleasing for CoreSite that derisks the investment, also accelerates the time to your yield. So overall, that business is doing really well, and we’re very happy with it. – AMT at Nareit REIT Conference

On top of that, AMT is putting a bigger emphasis on costs. Especially in an environment of elevated inflation, this seems like a very prudent move.

Based on the midpoint of its 2024 guidance, the company expects to cut selling, general, and administrative costs by $30 million – similar to the savings it saw last year.

In general, the company raised its 2024 guidance earlier this year, expecting 3% property revenue growth on a currency-neutral basis.

Meanwhile, strong margins are expected to boost adjusted funds from operations (“AFFO”) by 7% on a currency-neutral basis.

The company also divested its India business, which was part of a strategic move to recycle capital and deploy proceeds into higher-return opportunities.

According to the company, the challenges in the Indian market, such as the low barriers to entry and strong competitors, limited its ability to achieve the growth rates it was looking for when entering this market.

The $2.5 billion proceeds of this sale will be used to pay down debt, as the company is working on improving its balance sheet.

As of 1Q24, it has a net leverage ratio of 5.0x EBITDA and more than $9 billion in liquidity. Close to 90% of its debt has a fixed rate with a weighted average remaining term of nearly six years.

This balance sheet has an investment-grade rating of BBB- from S&P.

So, what does this mean for shareholders?

Dividends & Valuation

Despite holding the dividend relatively flat in 2023 to focus on its balance sheet, AMT remains committed to a shareholder-friendly dividend policy.

The company aims to pay out 100% of its REIT taxable income over the long term, aligning dividend growth with the expected growth in AFFO.

And that was part of a package of a number of things that we were doing, including reducing our internal CapEx program, focusing on margin expansion to get our debt ratio down to that 5x. We do expect it to start growing again next year, subject to more discretion. Over the longer term, we’re committed to paying out 100% of our REIT taxable income. And over the long term, that should approximate the growth in our AFFO over time. – AMT at Nareit REIT Conference

In other words, next year, we can expect dividend growth to return.

Currently, AMT yields 3.4%, which comes with a 65% 2024E AFFO payout ratio, which is very healthy. It also has a five-year CAGR of 13.7%.

Even better, analysts expect consistent per-share AFFO growth.

I listed the FactSet growth expectations numbers from the FAST Graphs chart below in this table:

Click to enlarge

Additionally, the company trades at a blended P/AFFO ratio of just 19.3x, a few points below its normalized P/AFFO ratio of 23.0x.

Although it will likely require a sustainable path to lower interest rates for the REIT sector to enjoy higher multiples, I stick to my expectations that AMT remains in a great spot to deliver double-digit returns in the years ahead, especially if the REIT sector starts to get some more appreciation.

As such, I obviously stick to my Buy rating and consider AMT to be one of the best REITs on the market.

I also stick to the Pros & Cons list from my prior article.

Takeaway

The days of easy money are behind us, and Blackstone is shifting its strategy, moving into less traditional sectors like logistics and student housing to maintain returns.

While I admire Blackstone, I prefer managing my own investments.

I think the same goes for many readers.

That’s where AMT comes in.

Despite recent underperformance, AMT remains a great choice thanks to its global footprint and growth opportunities tied to the ongoing 5G rollout.

With strong revenue growth, cost-cutting measures, and a healthy dividend outlook, AMT is a prime REIT, poised for elevated double-digit returns once market conditions improve.

I remain bullish on AMT and maintain my Buy rating.

Pros & Cons

Pros:

• Resilient Infrastructure: With a large portfolio of towers and data centers, AMT is a major player in the telecom and IT sector.
• Stable Revenue Streams: Long-term leases with major telecom giants provide earnings visibility.
• Strategic Debt Reduction: AMT’s focus on debt reduction is a smart and necessary move in this environment.
• Future Growth Potential: Analysts expect accelerating growth, fueled by strong secular growth trends like IoT.

Cons:

• Dividend Adjustment: The recent dividend cut may raise concerns. However, while 2024 may not see dividend growth, the future of the dividend looks bright.
• Dependency on Telecom Giants: A significant part of revenue relies on contracts with telecom giants, potentially exposing AMT to their capital spending plans.
• Inflation Risks: Despite protections against inflation, sustained high inflation rates could limit AMT’s pricing power.