American Tower (AMT) is unlike most real estate investment trusts (REITs).
The company’s business model has very low maintenance capital needs, throws off excellent free cash flow each year, provides recession-resistant services, and consistently enjoys renewal rates close to 100%.
While American Tower isn’t one of the 28 best high dividend stocks for current income and only began paying dividends less than six years ago, the company has nearly tripled its quarterly payment over this time and raised its payout each and every quarter.
With management targeting at least 20% annual dividend growth forward, let’s take a closer look at this unique REIT.
American Tower was founded in 1995 and converted to a REIT business structure in late 2011, minimizing its taxes on its real estate assets and kicking off its dividend program.
The company owns a portfolio of approximately 147,000 towers that it leases out to wireless carriers (most towers have capacity for at least four tenants).
American Tower’s infrastructure is used by carriers to provide wireless service to consumers and businesses, transmitting signals between towers and mobile devices.
American Tower operates similarly to a triple-net lease REIT in that its tenants pay for almost everything needed to transmit signals (e.g. communications equipment, cables, antennae) except the tower and land that American Tower maintains (i.e. the company’s maintenance costs are very low for a REIT).
Approximately 56% of American Tower’s property revenue and more than 70% of its total profit are generated in the U.S. with the rest from international markets (Asia 18% of revenue, Latin America 17%, EMEA 9%).
However, over 70% of the company’s communications sites are located internationally (prices and capacity utilization are lower in those regions today).
American Tower’s large international reach results in reasonable tenant diversification. The company’s largest customers are AT&T (16% of revenue), Verizon (15%), Sprint (10%), and T-Mobile (8%).
American Tower has arguably one of the most predictable and lucrative business models of any dividend stock in the market.
First, the company enjoys very high visibility into future earnings thanks to its long-term leases with wireless service providers.
Almost all of American Tower’s leases are non-cancellable and usually include an initial term of at least 5-10 years with multiple 5-year renewal periods.
Price escalators are embedded into American Tower’s leases as well, with the U.S. averaging 3% annual price increases and international markets’ escalators typically based on local inflation indices. These predictable gains provide a dependable base for organic growth.
The company currently has commitments of approximately $31 billion in non-cancellable tenant lease revenue, which provides great visibility because that amount is worth more than five times the company’s 2016 property revenue.
You can also see that two-thirds of American Tower’s global leases are not up for renewal until at least 2021, further reducing the potential for surprises any single year.
When leases have come up for renewal, the company has historically enjoyed 98-99% annual renewal rates based on property revenue, reflecting the limited alternative sites that tenants have to choose from when their leases come up for renewal (regulation and zoning requirements help limit supply).
Another reason why American Tower enjoys such strong renewal rates is because it’s cheaper for wireless carriers to outsource their communications site infrastructure needs rather than build and operate their own tower sites.
By spinning off their towers to companies such as American Tower, wireless service providers free up capital that can be used to pay down debt and reinvest in their networks’ quality, which is core to their businesses.
American Tower has historically benefited from wireless carriers exiting the operations of their tower sites.
For example, the company acquired exclusive rights to lease and operate more than 11,000 wireless communications towers from Verizon in 2015 for approximately $5 billion.
These towers had existing average tenancy of 1.4 tenants per tower, well under their available capacity.
Other notable deals include American Tower’s purchase of a controlling stake in Viom Networks, an Indian cell tower company, for $1.2 billion in 2015.
The company also entered into Nigeria, Africa’s most populous country, in a $1 billion deal in 2014.
American Tower can capture incremental leasing activity on these assets and spread its fixed costs over a greater number of towers, driving its returns on invested capital higher over time.
Adding additional tenants and equipment to existing towers is extremely profitable, with incremental gross margins of 97%.
In fact, the company’s return on investment for each tower increases from 3% with one tenant to 13% and 24% with two and three tenants, respectively.
Unlike many REITs, American Tower’s maintenance capital expenditure needs are very low, too. Maintenance spending is expected to total $160 million in 2017, which represents less than 3% of American Tower’s 2016 revenue ($5.8 billion).
As a result, the company has been a free cash flow machine over the years:
With a global average of 1.9 tenants per tower (less than half of available capacity), the company has substantial room available to add future tenants.
As American Tower gradually fills out its towers around the world, its assets will likely earn significantly higher returns on capital because the incremental cost of adding a new tenant or additional equipment to an existing tower is very low.
Roughly 30% to 40% annual growth in mobile data traffic in the U.S. and the increased adoption of smartphones around the world is fueling the need for wireless carriers to continue investing in their networks’ density to meet demand.
This is particularly true in markets outside of the U.S., where smartphone penetration in many regions is less than 50% today.
The technologies deployed in most emerging markets are oftentimes 2G and 3G (i.e. much less advanced than those in the U.S. market), and American Tower’s occupancy rates are low by design, about 1.5 tenants per tower.
Wireless service providers in these markets will need to invest more in their networks to expand and improve their coverage, and increased adoption of wireless data applications (e.g. email, internet, video) and lower cost smartphones will put further upward pressure on network spending.
As you can see below, most developing and evolving markets significantly trail the U.S. in both wireless penetration rates and mobile broadband (3G/4G) penetration.
Closing this gap will take years, if not decades, but American Tower’s strategically-located infrastructure is positioned nicely for the increasing proliferation of wireless devices and the