There was no negative article about American Tower Corporation (New York Stock Exchange: AMT) since October 2022, and you’ll need to go back to December 2021 to find another. I find it difficult to understand the reason for this large number Shareholders are fascinated by AMT. I’m not saying AMT isn’t a good company, because they have global control of the wireless infrastructure. AMT operates spans 6 continents and has 226,000 locations in 26 countries. I really love working because AMT is a multi-tenant telecom property owner, operator and developer and generates over 98% of its revenue from leasing its fiber, telecommunications and data center properties and assets. We live in a world where communication is as second nature as breathing, and AMT technology is helping build the backbone of this industry. I have several issues with AMT as an investment, as the dividend yield is 3.23% on her book The value is a fraction of the share price, and it’s very expensive compared to other REITs I’d rather invest in. AMT would need to turn down a lot for me to consider adding to my income portfolio.
Why risk equity in search of return in this environment if the return is less than 5%?
Since March 2022, the Fed has raised interest rates 10 times in a row, increasing rates from 0.25% to 5.25%. Jerome Powell was clear that the Fed would do what was necessary to tame inflation and ensure it was eliminated from the system. The only leverage for the Fed is to increase or decrease the federal funds rate. The next meeting of the FOMC will begin on June 14, and the CME Federal Market Watch tool indicates that there is a 25.7% chance that the Fed will move interest rates to 5.5%.
With prices rising, the yield-hungry market we’re used to has faded away. Gone are the days of the 2-3% that some considered high yielding. Today, with the federal funds rate at 5.25%, cash is no longer trash, and generating a healthy return from non-risky assets is a dime-a-dozen. There are many CDs that offer 4.75% – 5.2% on APY for 1 year and up to 4.5% on APY for 5 years. You can buy a 2-year Treasury note at 4.308%, or a 10-year note at 3.712%.
If you’re looking for a return in 2023, there’s no shortage, and if you’re not looking for a return, I doubt investing in REITs is a popular choice. So, sticking to the premise of investing in REITs to generate passive income and produce a greater return than you could find from a non-risky asset, why would AMT be such an interesting option? AMT has a current yield of 3.23% and is stuck in a downtrend. Back in January 2023, AMT was trading at around $220, which put its return at the start of the year at 2.84%. Looking at AMT through the lens of an underappreciated asset and making an investment with the assumption that it will grow and generate capital appreciation while shelling out modest profits is one thing, but that’s not why you should invest in REITs. There are many companies that I feel are undervalued. If I were looking for an investment to raise capital, I would allocate capital to Amazon (AMZN), Truist Financial Corporation (TFC) or Palantir (PLTR) long before AMT. It’s hard for me to get excited about dividend yields below 5% when I can get 5% on CD.
I’ve reviewed the financials and compared AMT to its peer group and to the REITs that I’m invested in and have come to the conclusion that if I were to allocate more capital to REITs, AMT is not cutting.
AMT has been a growth machine, and I can see why people are excited about it. This is a company that has increased revenue by 221.98% over the past decade as its revenue grew from $3.29 billion to $10.58 billion. At TTM, AMT generated $4.96 billion in funds from operations (FFO) and $6.6 billion in EBITDA. AMT has strong margins as it generates a 46.89% FFO margin and a 62.55% EBITDA margin. Many may have heard Charlie Munger discuss his disdain when people use EBITDA as a measure of profitability, but in the REIT world, this is an important metric. Credit rating agencies determine a REIT’s leverage ratio by looking at a REIT’s debt versus EBITDA. The other key measure is FFO which is determined by taking GAAP net income and adding depreciation and amortization, then subtracting the gains on real estate sales. When it comes to REITs, FFO is more important than traditional earnings because, under GAAP, depreciation and amortization are deducted from net income. For REITs where real estate values rise over time, depreciation and amortization charges artificially reduce EPS and can make dividend payout ratios appear artificially high if you use traditional valuation methods. This is why FFO is a more popular measure for determining REITs’ operating cash flow and for looking at the safety of a dividend. AMT has done a tremendous job of driving its bottom line higher with FFO up 294.75% to $4.54 billion since 2013 and EBITDA up 217.58% to $6.62 billion in the same period.
Investors were rewarded with an increased dividend as AMT delivered 10 consecutive years of dividend growth. Over the past five years, AMT has achieved an average annual earnings growth rate of 16.96%. Quarterly dividend grew 500% from $0.26 to $1.56. AMT has a forward FFO of $9.84, which puts its annual dividend of $6.24 to a payout rate of 63.41%. From an earnings growth perspective, AMT has been exceptional, and its track record of both top and bottom line earnings growth indicates that future earnings growth is on the horizon.
So if I think its growth is good top and bottom line, and its dividend growth is solid, why wouldn’t I like AMT as an investment? For starters, AMT has a dividend yield of 3.23% which is not attractive to me for REITs. AMT also has $46.9 billion in debt on the balance sheet, and while EBITDA puts the debt-to-EBITDA ratio in an acceptable range to me, the amount of debt affected AMT’s book value. Some people don’t care about the book and its tangible biblical value, but I do. AMT has a book value of $11.60 and a tangible book value of – $54.13. It’s hard for me to get excited about AMT when it’s trading at a premium of 1,567.84% to its book value, and when you dump intangibles, its tangible book value is negative.
Seeking Alpha has the AMT cloud listed as follows:
- Crown Castle (CCI)
- SBA Communications Corporation (SBAC)
- Equinix (EQIX)
- Public Storage (PSA)
In addition to its low dividend yield and large premium to book value, AMT has the second largest price-to-FFO ratio of 19.66x and the largest 2-day debt-to-EBITDA ratio of 7.09x. I’m cheap, I want to pay a low FFO REIT, and if I’m going to debt to more than 7 percent, that should make sense.
I’ve compared AMT to 6 REITs that I invest in to see what they look like. Compare it to:
- real estate income (O)
- NNN REIT (NNN)
- Simon Real Estate Group (SPG)
- SL Green Realty (SLG)
- Medicinal Properties Fund (MPW)
- Omega Healthcare (OHI)
The 6 REITs that I compared with AMT have a dividend yield range of 5.07% to 14.83%, while AMT is at 3.23%. From an income perspective, don’t be tempted by AMT. I’m not a productivity chaser, I do my due diligence, and after a lot of research, I’m OK with the risks of owning an MPW and SLG.
AMT has the largest price-to-FFO ratio of these companies at 19.66x, while O is the second largest at 14.65x. The SLG, MPW, and SPG all have single-digit price-to-FFO ratios. In addition to the lowest return, I will pay the largest FFO rate for AMT, which does not suit me.
From a debt-to-EBITDA perspective, AMT looks pretty good compared to my chosen REITs. Yes, SLG has a very high debt-to-EBITDA ratio. I’m not worried because it has to be cut significantly this year because they’re selling off some non-core assets and setting aside a significant amount of money to lighten their balance sheet.
From a discount to book perspective, SLG and MPW trade significantly below book value. Even if their assets were reclassified and took a 30% writedown, they would still be trading below book value. It’s also very hard for me to consider AMT’s valuation when I can pay 38.84% on the book for an O, which is arguably the gold standard in REITs.
Do I want to own a REIT that is the backbone of the telecom sector? Sure, but not at this yield or valuation. I need at least a 5% return to be excited about a REIT, especially when I can get 5% on a risk free investment. I think AMT is a strong company, but the numbers just don’t work for me today to allocate capital to it. I’m agnostic about AMT because there’s no doubt it can grow higher and the bottom line as earnings increase, but from a value perspective, I’d rather invest in other RIETs that have more compelling valuations and much larger returns. Investing in AMT could be good, but it is not for me.