AMT Q3 2024: The Crowd Gets Confused by AFFO

For American Tower (AMT), Q3 2024 had a sharply different feeling from Q2 2024. However, “feeling” was the key difference. The real estate performance was very similar.

Summary

• American Tower introduced a new AFFO metric. The new metric is due to sale of India assets. Naming could use work. We’ll just call it “AFFO as Adjusted”. Requires a bit of explaining. Wall Street analysts were confused. You won't be when you finish this article.
• American Tower's guidance was up or down, depending on how you look at it. There’s actually good arguments from different sides.
• Underlying real estate portfolio performed well and American Tower continued to manage their overhead effectively.
• Some investors included non-recurring sources of revenue in AFFO, which resulted in "surprises" when AMT provided numbers excluding the impact of India.

Types of AFFO for American Tower

• AFFO = AFFO as American Tower usually calculates it. This is the actual value for the year.
• AFFO as Adjusted = AFFO if American Tower had sold the assets in India at the start of the year and paid down debt. Management is providing this to help analysts and shareholders model out projections for 2025. Thank you management!

There is one other thing investors should remember. American Tower didn’t know precisely when the deal (selling their assets in India) would close. Consequently, prior guidance levels were announced based on the deal being postponed to the end of the year. Consequently, the figure was naturally going to be high. We knew that. It was a big point in the prior quarter’s update.

American Tower's New Guidance for AFFO Per Share

This guidance was reduced in total, but the reduction was less than the India impact. Since prior guidance assumed the India sale would not close until the end of the year, it was naturally high. 

The impact of removing India from American Tower's guidance for Q4 2024 was around $.12.

• Prior Guidance: $10.60.
• Prior Guidance adjusted for India Closing: $10.48
• New Guidance: $10.535.
• Result: Impact of India reduced guidance by $.12, partially offset by other positives adding $.055 per share. Net reduction can be seen as $.065, or investors can focus on the $.055 improvement excluding India.

This AFFO per share metric includes all of the actual values from India during the year, which makes it a bit more complicated.

Guidance for AFFO, as Adjusted Per Share

These are the figures that exclude the entire impact of India over the course of the year.

• Prior Retroactive Guidance (not in Q2 2024 presentation): $9.95
• New Guidance $9.95 (rounded from $9.945)
• Result: Basically flat, but the prior guidance wasn’t listed in the prior presentation.

Note: I don’t find this confusing, but I understand it may seem odd to some people.

This is the figure that should be used as the baseline for growth in 2025. This was a challenge with selling the assets in India, because the sale was going to happen at a relatively high cap rate. That particular market has some unattractive traits that create greater uncertainty and lead to demanding higher cash returns today.

If investors don’t use this figure for growth (and some won’t), then it will appear that American Tower is producing much weaker growth because they sold some assets at a high yield. I can already see the articles coming where investors proclaim that American Tower's growth is dead because they sold these assets.

American Tower Projected Growth for 2025 Using AFFO, As Adjusted Per Share

On the earnings call, American Tower management shared expectations for mid-single-digit growth in 2025 from this baseline figure. Management is expecting their initial guidance for 2025 will be somewhere around $10.50. I appreciate this explicit reference on the earnings call, because it allows analysts to confirm that they are reading the figures correctly.

Here’s the quote:

“And as we said, we look forward to mid-single-digit growth rates kind of going forward and that holds true for 2025. So that would put us into next year on an apples-to-apples basis the $9.95. We think we can grow that into the $10.50 range for 2025 and that would be AFFO from continuing operations.”

Note 1: “Mid-single-digit” (4% to 6%) may be concerning as analysts would like to see “high-single-digit” (7% to 9%). That growth goes along with the 3.3% dividend yield. However, American Tower is still getting through the end of the Sprint churn, facing higher interest rates, and has exposure to foreign currency fluctuations.

Note 2: Here management uses the term "AFFO from continuing operations". It was one of a few terms used to refer to the "AFFO, as Adjusted" value.

AFFO Impact of India Larger Than Analysts Expected

One of the first questions on American Tower's earnings call referenced the annualized impact to AFFO per share being in the $.58 to $.65 range ($.15 to $.16 per quarter)

Ric Prentiss (from Raymond James) was expecting an annualized impact of about $.32 per share, or $.08 per quarter. Clearly the $.58 to $.65 range is higher than $.32.

I went back to check my own notes from that. Sure enough, I referenced expectations for a hit of about $.09 per share per quarter. So what gives?

We have a difference between what I might call “Recurring / Normalized AFFO” and “AFFO”.

Edit: I want to be clear that I'm not bashing on Ric Prentiss. I think many of the analysts didn't know the answer. He was simply selected first to ask questions and he tackled the issue many analysts may have had off in their model. That was good. It can be hard to ask those questions (revealing that your model had a flaw in projections), but it's important for someone to ask.

Recurring AFFO Per Share Impact

Based on my prior comments about $.09 per share per quarter, we get $.36 annually. However, the gap in management’s figures for “AFFO, as Adjusted” and “AFFO” indicate an impact of about $.58 to $.65. That’s bigger than $.36 per share by $.22 to $.29. To understand the impact, we need to shift to the total numbers for the company.

Adjusted for shares outstanding, we have $103 to $136 million. Can we find something included in “AFFO” from India that isn’t part of what I would call “Recurring / Normalized AFFO”? Absolutely.

You remember from my prior earnings articles on AMT that AFFO per share guidance was increased due to changes in “India Revenue Reserves”. This is a contra-revenue (negative revenue) account. Essentially, AMT was being cautious and proactively recorded some negative revenue. Then things turned out better, so AMT reversed the charge.

• In Q1 2024, they had a benefit of $45 million from reversing part of a charge.
• In Q2 2024, they had a benefit of $116 million from reversing even more. However, $50 million of this would not count in AFFO because it was straight line.
• Therefore, India’s contribution in 2025 was inflated by roughly $45 + $116 - $50 = $111 million. That lines up nicely with the $103 to $136 million. 

So the actual impact on “Recurring / Normalized AFFO” is somewhere around $.36 per share, as I said initially. But the impact appears bigger because “2024 AFFO per share” includes some non-recurring contributions from India (worth about $.237 per share) in addition to the actual cash net operating income from India. Should I have said it louder? 

In the Q2 2024 AMT earnings article, I pulled two slides from the Q2 2024 presentation. I wrote warnings about treating these non-recurring revenue items as recurring on both slides.

Other Notes

American Tower’s retail-oriented data center strategy is delivering returns on invested capital in the mid-teens. AMT was planning $480 million in development at the midpoint of guidance. They expect to meet or exceed that guidance due to the opportunities they are seeing. Management is not so interested in the hyperscale developments presently unless it offers some other benefits like launching a new campus. They prefer the high yield on their current type of project.

FX (foreign exchange) neutral results would’ve been better for year-over-year growth. That means changes in foreign exchange rates were bad. Reduced results measured in dollars.

There was a tiny increase to revenue guidance excluding India. Even after FX headwind, still a slight boost to non-India revenue guidance. That’s good.

Guidance on organic tenant billings growth unchanged in most regions. The “International” category rose from 5% to 6%. That’s good. This reflects signing new tenants + raising prices. APAC region (India) removed because it was sold.

Adjusted for the removal of India, guidance for adjusted EBITDA is up by a rounding error. However, it’s a bit better than that. Cash margins on towers improved a bit. The margins were being offset by some bad debt expense (happens) and the foreign exchange headwind.

Overall: Pretty good quarter. It is at least a little funny when investors and analysts are surprised by the gap between “AFFO” and “AFFO, as Adjusted” because they didn’t make adjustments previously for the non-recurring portion of AFFO caused by revenue reserves.

Disclosure: Long AMT, CCI, and SBAC.