Growth stock American Tower playing a different game to PE-backed towercos

TowerXchange has sifted through the American Tower 2012 annual report, associated webcast and dialed into a couple of the conferences on the recent investor junket to share highlights with our readers. Our selective coverage of the international aspects of American Tower’s annual report is a result of TowerXchange’s pre-occupation with emerging market towers, and our current focus on Africa. For the full picture we recommend you download the full 2012 annual report from: www.americantower.com.

The announcement of American Tower’s 2012 annual results re-emphasised their status as the “corporate” towerco participating in emerging markets. American Tower is a growth stock, delivering an impressively consistent 14-15% CAGR in rental and management segment revenue, adjusted EBITDA and AFFO per share over the last five years, targeting a “lengthening and strengthening” of that growth trajectory over the next five to ten years.

While nearly 60% of American Tower’s towers are now situated outside the US, and international markets are growing faster than the mature US tower market, the US continues to represent around 70% of American Tower’s revenue. American Tower Chairman, President and CEO Jim Taiclet describes international markets as the “turbo charger” of their “domestic market Ferrari,” painting a picture of a phased influx of amendment revenue as the US and German markets mature; followed by South Africa, Brazil, Mexico and Columbia; before finally markets like India and Ghana mature on their respective migration paths to 3G and 4G.

Low cost of debt compared to the high cost of capital for PE-backed competitors will continue to give American Tower a financial edge when bidding for assets in “cornerstone” international markets such as Brazil and South Africa. But American Tower has had, and seems likely to continue to have, a limited appetite for country risk. American Tower’s unique global footprint gives them the ability to pick and choose markets, and the discipline to walk away from auctions where bidding has outstripped their valuation. Nonetheless, American Tower remains in pole position for any assets that come to market in premium emerging markets like South Africa.

“American Tower’s growth strategy is based on a simple observable premise: that consumers’ appetite for mobile communications and entertainment is growing dramatically in the US and around the world,” said Taiclet, opening American Tower’s full year 2012 earnings release webcast. “Mobile data traffic grew five times in the first two years of this decade. Moreover, the most recent Cisco forecast predicts that mobile network traffic will grow another ten times over the next five years. The Cisco study also estimates that approximately 75% of this growth will be delivered over traditional macro sites, primarily towers.”

Taiclet continued: “Macro site network infrastructure, which is predominantly tower based, will shoulder the bulk of network expansion, and is expected to grow at a 50% CAGR over the next five year period.” Taiclet emphasised that the installation of additional antennae for 4G or LTE was a key driver of “amendment” revenue, where existing tenants buy additional capacity to hang next generation technology active equipment, increasing the value of existing client relationships.

“As the level of penetration of LTE devices (increases) and VoLTE is added to carriers’ offerings, it is our view that additional cell sites will be needed as a result of the higher signal strength required to effectively deliver acceptable video, and VoLTE applications, to large numbers of users,” said Taiclet. “So as site proximity, and consequently network density, increases, American Tower expects to secure additional leases on our existing towers, as well as more opportunities for new tower construction.”

“Today the US is among the leaders in moving to 4G technology, with the four largest domestic carriers in the process of national deployments right now. However, we believe that access to the broadband data and entertainment services enabled by 4G will be in high demand not only in the US but worldwide.” Taiclet classified South Africa, Mexico, Brazil and Colombia as markets where “3G is still in the process of deployment, while 4G is either in the planning or very early initiation phase... In these countries, the lag time behind the US schedule is we believe about two to five years.” Taiclet described American Tower’s Ghana and India markets as characterised by the continuing expansion of voice coverage, with 3G service still in the introductory stage and 4G to come down the road. Taiclet described such markets as being six to ten years behind the US schedule. “We believe our international presence will lengthen and strengthen AT’s domestic growth trajectory,” concluded Taiclet.

“Beginning in 2007 we established regional teams around the world to explore and cultivate growth opportunities, leveraging our US knowledge base, and our early experiences operating in Mexico and Brazil,” continued American Tower’s Chairman Jim Taiclet. “These teams use their first mover advantage to build leading franchise positions in the most critical and attractive markets in each region. For example, expanding dramatically in Mexico and Brazil, while adding new cornerstone markets such as India, Columbia, South Africa and most recently Germany. Moreover, our teams have secured deeply rooted strategic relationships with some of the world’s leading multi-national MNOs such as Telefonica, MTN and Millicom, further strengthening our international position. So given our geographic strength, and MNO partnerships, I‘d argue that our strategic positioning on the international front is truly exceptional.”

“As a result of our growth prospects in the US and around the world, we’ve set a new aspirational goal to once again double our asset base, and our financial performance, over the next 5-6 year planning horizon,” added Taiclet.  When asked in Q&A how this doubling of the business would breakdown, Taiclet suggested half was supportable from internal growth – leasing on existing sites, with 10-15% from construction of new build to suit sites and the balance from new acquisitions.

“We anticipate that much of this growth will be generated organically through our worldwide portfolio of more than 54,000 sites. We also anticipate that our strategic relationships with our key customers around the globe should support a construction program of 2-3,000 sites per year,” continued Taiclet. “Our significant cash flow generation capabilities should in turn enable us to choose to invest in additional acquisitions that meet our investment criteria. Our management objective is to deliver mid-teens growth and AFFO per share for our investors as we strive to double the business again over these next five years.”

“As a result of the nearly 18,000 sites we’ve added to our international portfolio since the beginning of 2011, and the associated impacts of increased pass through revenue, as well as record levels of organic new business, our international rental and management segment reported revenue increased over 34% to US$863m, with over 50% core revenue growth for the full year,” said Tom Bartlett, EVP and CFO of American Tower. “Core organic growth within our international segment was 13.6%. In 2012 our international pass through revenue was $229m, reflecting an increase of about $53m,” added Bartlett.

In 2012 American Tower constructed 2,111 sites internationally and acquired 5,738 sites, including acquisitions in the Ugandan and German markets with an average tenancy ratio of over 1.3 across the acquisitions. “Given the low average tenancy, expect these sites to generate growth over future years,” added Bartlett.

“We currently expect our reported 2013 adjusted EBITDA to increase to between $2.08 and $2.13bn, representing reported growth of over 11% and core growth of 14.8% at the midpoint,” said American Tower’s CFO Tom Bartlett. “In 2013, we expect to carefully deploy our capital through our capital expenditure programme and selected acquisitions. We currently plan to spend between $550-650m in capex during the year, which includes the construction of 2,250-2,750 new sites.”

In Q&A American Tower Chairman Jim Taiclet indicated that American Tower expected to fund most acquisition opportunities from internal cash flow and access to debt markets. He went on to describe how American Tower had about $2bn of available capital as of the end of 2012 that, after the aforementioned $550-650m capex deployment, and distribution of dividends, left an M&A war chest of approximately $1bn. Taiclet described this as sufficient to fund “mid-sized acquisitions,” adding “if there’s a compelling large scale acquisition that might mean an exception in terms of issuing equity money”. This clearly indicates that American Tower continues to have a lower cost of capital than the PE-backed rival towercos bidding for tower portfolios in emerging markets.

American Tower also believes an increasing number of mobile network operators are opening up to the idea of selling and leasing back tower portfolios. “The willingness of wireless carriers around the world to sell tower assets is increasing. It’s not increasing across the board with every multi-national coming to the same conclusion at the same time, but we do believe that there will be opportunities and activity in pretty much every region that we’re operating in, and we will use our standard evaluation process to determine if any of those assets should trade to us. If we meet our criteria you’ll see us act, and if we don’t you may not see a trade or someone else may get it. But I do think it’s something that many carriers are considering, but they also view it as important and strategic, and that attitude moves over time and not necessarily instantly to sell,” concluded Taiclet.

Core organic growth or “same tower growth” is expected to be around 10% in American Tower’s international markets. When asked which international markets were expected to have outperformed that number in 2012, Taiclet said “I’d put South Africa right at the top of the list. It’s an incredibly busy leasing environment with Telkom, Vodacom and MTN all deploying 3G data at a pretty rapid rate. We were the first mover commercial leasing company in South Africa with our Cell C acquisition and the timing happened to be very fortuitous for us on that one.”

“In Latin America, both Brazil and Mexico drove excellent new business. Both of them had Nextel deploying 3G aggressively, but in Brazil you also had America Movil, Telecom Italia and Oi filling out their 3G networks as well at a pretty rapid pace. All five of those carriers in Brazil are trying to get ready for the World Cup and the Olympics, and there are some requirements for them to have coverage for those events that are pretty extensive. In Mexico, Telefonica was also very active along with Nextel as they tried to stay competitive with Telcel in 3G,” Taiclet added.

In Q&A American Tower were asked to compare the typical capex per site in the different regions in which they were active. Jim Taiclet suggested that while capex varies significantly between and even within markets, a rough average cost per site might be around $250k in the US, $175k in Latin America, $50-60k in India, and $190-200k in Africa.

American Tower were also asked about the average number of tenants on each of their sites, to which they responded “in international markets right now it’s about 1.5 times, 2.6 in US, so overall it’s about 2 times. In our Asian markets it’s up in the 1.7 range, in our African markets it’s probably in the 1.4 range where we’re getting into some of those markets with single tenant towers out of the gate. And in Latin America we’ve picked up some single tenant towers there and it’s probably in the 1.5 times. And in Germany in the deal that we’ve just done, it’s 1.6-1.7 times.”

Let’s conclude with a few headlines numbers from American Tower’s FY2012 annual report. Total revenue increased 17.7% to US$2,876m. Adjusted EBITDA increased 18.6% to US$1,892.4m, with an adjusted EBITDA margin of 66%.

Focusing on American Tower’s international business, international rental and management segment revenue increased 34.4% to US$862.8m, or 30% of total revenues, with a gross margin increase of 30.5% to US$548.7m. International rental and management segment operating profit increased 33.9% to $453.1m at an operating profit margin of 53% (72% excluding the impact of pass-through revenues). That compares to a 77% operating profit margin in American Tower’s domestic rental and management segment.

American Tower’s tower count in Africa increased very slightly in Q4 2012 with the construction of eighteen towers in Ghana, bringing the total to 1,926, two in South Africa (1,604 total) and twelve in Uganda (1,043 total). American Tower owns more towers in Africa than any other independent towerco.

The engineering community refers to the rollout of 4G or LTE in three phases. “Phase one build is dominated by overlays on existing sites, which is driving most of the tower industry’s 4G business right now,” said Jim Taiclet, Chairman, President and CEO of American Tower during his recent 2012 annual report webcast. “Verizon and AT&T are the two leaders in the deployment schedule. Our expectation is for Verizon to have phase one essentially complete, which in our view is 300m pops or more, by the end of 2013. With AT&T our expectation is that they’ll be in the same situation, with 300m pops covered, by the end of 2014. Sprint and T-Mobile will get there in our estimation by the end of 2015. As you sequence those phase one schedules out, phase two tends to follow very quickly after, you’ll see through the end of 2015 overlaps between phase one and phase two among the carriers. And in phase two you see the densification (including commissioning new build to suit towers) happening,” added Taiclet.

So we’re still at the beginning of the impact of LTE, even in the US where less than 10% of handsets are 4G LTE. Given that the monthly network burden goes up five fold when you swap a 3G for a 4G handset, when penetration reaches 30-50% on these phones that need 5x capacity, you can understand why American Tower is bullish that operators will have to keep investing capex and adding more sites to their networks.