American Tower's Q4 2023 Update

American Tower (AMT) reported a strong fourth quarter:

• AFFO per share ($9.87 for 2023) growth is above the top end of guidance ($9.72 to $9.85) and $.085 above the midpoint of $9.785.
• 2024 AFFO per share guidance ($10.33 at the midpoint) is slightly above consensus estimates for $10.29.

Despite the strong results, AMT’s price took a hit on Tuesday before bouncing back even further on Wednesday.

American Tower wasn’t bouncing back alone. SBA Communications (SBAC) and Crown Castle International (CCI) also saw a bump on Wednesday.

These are the big 3 cell tower REITs.

Disclosure: I am long AMT, SBAC, and CCI.

Notes on 2023 Exceeding Guidance

While the numbers are useful to include, you’re probably looking for the interpretation.

The 2023 performance was almost perfectly in line with the guidance if we adjust guidance for the change in AMT’s India reserve.

Here’s the moderately hard math before I simplify it:

1. AMT’s guidance for 2023 included a reserve of $75 million related to India.
2. That means they were preparing to take a charge of $75 million to revenue for the year. That’s like negative revenue.
3. In the fourth quarter, they determined they could reverse about $38 million of that charge. Reversing negative revenue is a double negative, so this added $38 million.

Here’s a simplified example:

• Your tenant owes you $75 for rent.
• This tenant is a deadbeat and won’t pay it.
• You write off the $75 you can’t collect.
• New evidence indicates you’ll collect $38 of that money.

It isn’t everything they owe, but it’s $38 more than you were expecting.

Splitting $38 Million

AMT improves the results by $38 million.

There are about 467 million shares outstanding.

$38 /467 = $.081 per share.

AFFO was $.085 per share above guidance.

So that mystery is solved.

Note: It turns out the total reserve came in around $27 to $28 million. We want to strip this out for our year-over-year comparison.

Moving on to 2024

Guidance is for AFFO per share to grow by about 4.66%. This is based on AMT’s definition of AFFO. I may provide some updated comparison figures across the sector.

The 4.66% growth rate is pretty good given the headwinds. I’ll convert the following figures after listing them:

• Tailwind: $27 million because the 2023 figures were reduced by $27 million.
• Headwind: $82 million from exchange rates
• Headwind: $100 million from interest rates (using the forward rate curve)

If we strip those out, we would have the following impacts:

• Official AFFO Guidance = 4.66%
• Adjust for the year-over-year reserve: -0.59%
• Add back foreign exchange headwind: +1.78%
• Add back interest rate headwind: +2.17%

Combined:

• Underlying theoretical growth: 8.02%.

Note: This math was simplified. It’s intended to provide a general feel for the performance of the underlying real estate.

If I corrected for a few minor simplifications, it would put the number between 7.9% and 8.0%. I opted for simplicity.

Revenue Guidance

AMT’s guidance on property revenue only implies a growth rate of 1.3%.

If we strip out the foreign exchange rate impact, it would be 3% for “constant currency” property revenue growth.

We calculated about 8% for constant currency growth in AFFO per share controlled for interest costs and the year-over-year impact of reserves.

That’s more than we could reach on only 3% constant currency revenue growth.

AMT’s investment in data centers is looking much better now. When everything plunged, AMT’s decision to buy a data center REIT looked pretty bad despite the strategic fit. Now AMT is forecasting 10% year-over-year growth rates for their data center revenue.

Improved Margins

Management is guiding for improved margins. However, references to stronger margins were using cash SG&A (that’s cash overhead) and cash EBITDA.

When guidance specifically references cash for those metrics (especially cash SG&A), I get suspicious about stock-based compensation expense. I checked it.

In 2023, it was $196 million.

Guidance for 2024 calls for $190 million.

Therefore, they are not enhancing cash margins by hiding expenses in stock-based compensation. I’ll still want to dig into this more because it’s a pretty nice improvement.

India

Guidance beat the consensus midpoint. However, AMT has already reached a deal to sell its assets in India to Brookfield.

This deal is NOT included in the guidance.

This is important because India is a high-cap-rate market. The sale will be dilutive to AFFO because the cap rate is higher than the interest rate of AMT’s floating-rate debt. Proceeds are expected to be used to pay down the debt.

Here’s what you should expect:

• If the deal doesn’t close until 12/31/2024, then it is fully reflected in the guidance.
• If the deal closes on 9/30/2024, then FFO and AFFO would drop by about $.09 per share.
• If the deal closes on 6/30/2024, then FFO and AFFO would drop by about $.18 per share.
• The dilutive impact is $.09 per share per quarter.
• This is a headwind that primarily hits in 2025, only a small part would hit 2024.

To be clear, the higher cap rate reflects lower-quality assets. The India assets were not AMT’s trophy assets.

AMT is enhancing the average quality of its portfolio, but it will create a year-over-year headwind.

Management indicated that they would update guidance after the transaction closes. However, investors should be aware that this means it will be more difficult for management to raise guidance in 2024 since simply closing the deal would reduce guidance.

I would be inclined to model this as closing around late September (management indicated the second half of 2024) and therefore treat guidance as being around $10.24 rather than $10.33. However, by the time we reach the second half of 2024, investors might have forgotten about this.

However, even if we use a figure that is $.09 lower, the constant currency (and interest rate) growth for 2024 would look strong.

Conclusion

I’d say this was a pretty good report. A large portion of the headwinds are foreign exchange rates, as well as the continued impact of higher rates.

However, I would caution investors that 2025 will see some headwinds as well.

We remain bullish on the sector because of the long-term outlook for mobile data consumption. As referenced previously, I expect to see mobile data consumption growth continue to soar higher and thus demand for faster networks to continue. However, the tower REITs are still navigating a double headwind from interest rates since it impacts their financing and their tenant’s willingness to invest in building better networks.