Credit: Shutterstock photoCell towers are real estate, too. Just ask American Tower, a real estate investment trust, or REIT.
It owns or oversees more than 69,000 cell towers in the U.S. and in a dozen other countries.
As a landlord of sorts,American Tower ( AMT ) rents space on its towers to wireless providers scrambling to increase their capacity and coverage. That way, they can meet growing demand for mobile data in the smartphone age.
Tenants in the U.S. include the "Big Four" wireless service providers:AT&T ( T ),Verizon ( VZ ),Sprint ( S ) andT-Mobile US ( TMUS ).
American Tower CEO Jim Taiclet has pointed to the technology transition from 3G to 4G wireless services -- along with more apps, games, music and video services -- as key demand drivers for tower space.
The Boston-based company has logged double-digit year-over-year revenue gains every quarter for the past few years. Meanwhile, carrier competition for new customers has been heating up. And that's been a boon to American Tower and its two chief tower rivals,Crown Castle International (CCI) andSBA Communications (SBAC).
American Tower is the largest of the three by revenue and market capitalization. SBA is the smallest.
"Price cuts (on data plans) in the U.S. are driving acceleration in mobile data traffic, which is very positive for tower stocks," said analyst Kevin Smithen of Macquarie Research.
A Simple Equation
The more cell traffic, the more tower space is needed.
One tower can handle communications gear for as many as four or five tenants. Leases are typically for 10 years and renewable, with annual rent hikes in the U.S. of around 3%. In international markets, rent changes are usually tied to local inflation rates.
But if price wars get too far out of hand, carrier profits could eventually get squeezed, hindering their capital budgets, Smithen says.
That's a risk for tower stocks, he says. But, he adds, "We don't think that will happen."
If real estate is all about location, American Tower has it. As Wells Fargo Securities analyst Jennifer Fritzsche has pointed out, over 65% of its domestic towers are in the top 100 markets and core corridors.
And fast-growing mobile markets in Brazil and Africa are giving tailwinds to American Tower's international real estate holdings, or towers. The company has towers in Germany and India, too.
"Over the long run, international is going to pay off," Smithen said. "But it adds some volatility," such as foreign exchange swings. "But ultimately the superior growth from international will compensate for those higher risks."
Smithen says that Africa, where he expects American Tower to add scale, is especially fertile. Limited fixed-line and banking infrastructure give mobile phones a leg up in accessing the Internet and conducting financial transactions, he says.
With its big global footprint, American Tower should capture a sizeable portion of the money spent by national and regional wireless carriers on capacity and coverage improvements, noted Fritzsche in a recent report.
Fritzsche said that growth in smartphones, continued LTE (long-term evolution technology) deployments and the "spectrum crunch" all bode well for the cell-tower industry.
Spectrum refers to radio-frequency airwaves, which are needed to transmit wireless communication signals. Spectrum airwaves are typically regulated by the government and auctioned to wireless carriers.
Spectrum For Sale
Analysts believe that spectrum auctions spur carriers to invest in new tower equipment.
A U.S. government auction of radio spectrum is set to take place in mid-November. AT&T, Verizon and T-Mobile are expected to bid.
Meanwhile, Verizon is exploring a possible sale of at least 12,000 of its cell towers. Last year, AT&T sold Crown Castle rights to 9,700 towers for $4.85 billion.
American Tower has expressed interest in the Verizon towers at the right price and terms, Fritzsche noted. "The addition of this portfolio, which is one of the last carrier portfolios of size left, would add significant scale to (American Tower's) already large U.S. portfolio," she wrote.
American Tower has made a number of acquisitions over the last decade to gain scale. Two big buys last year added about 10,000 towers in the U.S., Mexico and Brazil.
Hundreds more were bought this year in and outside the U.S., including more than 400 sites in Brazil.
American Tower has agreed to buy another 154 towers in the U.S. and 2,530 towers in Brazil, plus exclusive use rights for 2,110 more in Brazil. The $1 billion Brazilian deal is expected to close in the fourth quarter.
With more than 4,500 towers in Brazil, South America's largest country is American Tower's largest market outside the U.S. One of its tower tenants in Brazil isAmerica Movil (AMX).
"America Movil, the biggest carrier in Latin America, tells us they are getting to an inflection point in smartphone penetration across the region," Smithen said.
That bodes well for American Tower and rival SBA Communications, which also has towers in Brazil, he says.
Strong growth in the U.S. and even faster growth in international markets will enable American Tower to achieve double-digit annual growth in per-share adjusted funds from operations for the "foreseeable future," CEO Taiclet stated earlier this year.
Adjusted funds from operations, known as AFFO, and earnings before interest, taxes, depreciation and amortization, or EBITDA, are two key REIT metrics.
In the second quarter, management raised its outlook for the year due to "favorable leasing demand for communications real estate," as Taiclet put it.
Total rental and management revenue expected by the firm was raised by $45 million, adjusted EBITDA by $55 million and AFFO by $30 million.
Second-quarter revenue climbed 27.5% over the year-earlier period to a little over $1 billion. Adjusted EBITDA grew 30.2% to $682 million, while AFFO went up 29.4% to $474 million.
Per-share AFFO in the quarter rose 29% to $1.19, the sixth straight quarter of double- or triple-digit year-over-year growth.
Analysts polled by Thomson Reuters expect per-share AFFO for the full year to grow 23% to $4.51 a share. Revenue is seen rising 22% to $4.1 billion.
Smithen says that analysts recently adjusted 2015 growth estimates downward to reflect foreign-currency headwinds due to a dollar that's grown stronger, particularly against Brazil's currency. Revenue in 2015 is expected to grow 11%, while per-share AFFO is seen rising 14%.
Now that investors understand that the revisions were related to currency translations, the changes are "not a big concern," he said.
Third-quarter results will be released on Oct. 30.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
