American Tower is a global infrastructure titan, operating over 200,000 wireless communications towers around the world to enable the flow of telephony, mobile data, broadcast TV and radio, and machine to machine communications.
American Tower can raise prices year after year given its network effects and high switching costs. The industry is also protected with high barriers to entry, preventing small operators from growing large and competing against incumbents, such as American Tower.
Operating leverage allows American Tower to expand returns on investment as network operators increase 5G spend and densify wireless networks to meet the exponentially growing global demand for data.
Risks to our thesis include wireless carrier consolidation, foreign currency risks, local economic downturns, political risks, and poor M&A execution could adversely impact American Tower's financial position.
Outside its core asset holdings, American Tower is expanding aggressively around the world to take advantage of higher ROI towers and exercising optionality by opening a few data centres around the US amid the growing use cases of edge computing.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
American Tower operates in an industry with near-impenetrable barriers to entry. The cell tower business is capital and time intensive to scale at a meaningful level. A lone cell tower is not expensive to build (up to $300,000 in the US and Canada) but obtaining regulatory approvals and complying with zoning restrictions on federal, state, and local levels deters companies and investors from entering this industry as it may take years to approve a new tower build.
The nature of American Tower’s lease agreements results in substantial switching costs. According to Crown Castle, a tenant would incur between $35,000 and $40,000 to switch from one tower to a neighbouring one, roughly 20 to 30 times the average monthly lease amount. Additionally, American Tower’s initial contracts with tenants are generally non-cancellable for a period of 5 to 10 years.
The result? Average annual historical churn between 1-2% and non-cancellable tenant lease revenue completely dwarfing standard property revenue. Non-cancellable tenant lease revenues are around 7x times the amount of property revenues.
When we think of network effects, we mainly think of our flashy iPhones and the benefits of all our friends using iMessage or AirDrop, or the stickiness and appeal of Lululemon gear to the yoga community. Who knew boring steel or lattice towers benefit from network effects too? Typically, when a wireless carrier places equipment on a tower in a new location, it now becomes the best interest of every other competing carrier to place their equipment on the same tower.
Enduring the long regulatory process for building a new tower is a costly endeavour – one that could result in many lost customers. Even if a carrier could magically build a new tower within a few days, it would still make more sense to lease a tower due to the amount of money saved versus building its own tower.
These barriers to entry, switching costs, and network effects, combined with American Tower's aggressive expansion strategy and fixed operating structure allowed the company to become the behemoth that it is today. American Tower has powerful operating leverage – as more tenants occupy a tower, the greater the ROI.
Capital maintenance requirements are low, whereby spend per tower is typically no greater than $1700 in the US and $800 in international markets. Based on American Tower’s illustrative example of new macro tower build economics, there are negligible operating costs associated with added tenants on a tower. As more tenants are added to occupied towers, margins expand and cash flows to the bank.
We can see these economics at play through American Tower's stable gross profit when looked at relative to the number of towers operated.
We can be confident in saying that as American Tower builds or acquires new towers, it will add non-dilutive growth to the bottom line.
In other words, the gross profit per tower stays the same over time even though new builds may not have any carriers leasing them yet or acquired assets are underutilized.
Eventually, American Tower tends to ramp-up leases of its towers and we believe this metric is an important one to follow.
American Tower is building out a global empire. The 3% US rent escalation found in American Tower's contracts is rather low, but it makes up for this by conducting M&A and building new towers particularly in global markets where returns are higher than the US. There are several reasons for this on the "buy" and "sell" side of the transaction: (1) it is cheaper to buy or build towers abroad (2) smartphone adoption and mobile data usage is growing drastically (3) voice and data networks are expanding rapidly in international markets (4) new entrants in these markets creates demand for cell towers (5) carrier densification efforts and new technology rollouts are increasing demand for new tower sites. Most recently, American Tower purchased Telxius Towers for $9.4 billion. The deal captured 31,000 existing sites with 3,300 future committed builds across Germany, Spain, and Latin America.
American Tower's real estate will be in demand through 5G rollouts and beyond. Wireless network technologies typically last approximately 20 years. Although 5G rollouts have begun, 4G is still the prominent connectivity standard we use today. However, 5G rollouts are accelerating quickly. By 2025, 5G is expected to capture almost 50% of the US market. The implications of 5G rollouts are quite profound as we enter a decade of many new expected devices, technologies, and use cases of 5G that 4G simply could not support. Macro cell towers will remain in strong demand throughout the 5G cycle, which will likely be around until at least the mid-2030s. We believe they will also remain in strong demand for developments beyond 5G (i.e., 6G, 7G, etc.).
Macro cell towers are the bedrock of wireless networks under which DAS, Rooftops, Wi-Fi, and Small Cell networks complement coverage in denser, higher-traffic regions. As such, we do not believe Crown Castle's small cell real estate is a threat to American Tower in the sense that small cells "replace" traditional tower demand.
Edge computing should help American Tower provide deep value to its tenants. American Tower believes in these technologies and has begun making strides to expand its portfolio outside of towers by opening strategically located edge data centres on its own ground space where towers are placed. We believe edge data centres provide American Tower with superb optionality and growth opportunities throughout the next decade. Recently, American Tower closed on its $10 billion deal to acquire CoreSite, a data centre operator in the US. Through that acquisition, American Tower was able to integrate another 25 data centres, 21 cloud on-ramps, and over 30,000 interconnections in the US. We think this acquisition will be highly complementary to American Tower's plans with edge computing in the US and potentially beyond the US too.
American Tower is a world-class capital allocator. American Tower has plenty of reinvestment opportunities abroad, both in the macro tower and data centre businesses. Given the company's low cost of capital compared to the high returns American Tower can generate, it makes sense for the company to reinvest as much as it can. The company conducts robust M&A internationally to get ahead of its US peers, who simply cannot match the scale American Tower operates on. Additionally, American Tower must pay a dividend as a REIT, which has grown at double digits for some time. We believe shareholders will continue to be rewarded as American Tower expands.
One may get the sense that American Tower comes without any risks. Unfortunately, even for this tower behemoth, there are some risks all investors should consider:
American Tower's largest international market, India, continues to face headwinds due to carrier consolidation and capital expenditure pullback due to India's Supreme Court enacting multi-billion-dollar spectrum fees and other costs.
Churn related to the merger of T-Mobile and Sprint will weigh on financial results in the near term as the two companies consolidate operations.
Future international carrier consolidation can weigh on financials; domestic carrier consolidation is a lower risk due to AT&T, Verizon, and T-Mobile already making up almost the whole US wireless market.
American Tower's large international operations exposes the company to unfavourable foreign currency risks, local economic downturns, and political risks that may result in carriers pulling back spending due to regulatory concerns, waiving of customer subscription fees in recessions, or in severe cases, seizure of tower assets or forced stoppage of services.
American Tower relies heavily on expansion to fuel growth. Poor M&A execution, rising asset prices, or increased costs to build towers due to inflation could significantly alter American Tower’s current financials and outlook.