Emerging Markets, 4G Propel American Tower's Growth

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The mobile telecommunications world is growing very fast. The number of cellular subscriptions worldwide more than doubled to 6 billion between 2006 and 2011, estimates the International Telecommunication Union.

That's equivalent to an 87% penetration rate of the global population with developing nations accounting for 76% of global cellular subscriptions.

With such strong growth comes a heightened demand for technology and infrastructure. American Tower ( AMT ) is well-positioned to address that market's needs.

The Boston-based firm operates cellular towers that are leased by wireless carriers and, to a smaller extent, TV and radio broadcast companies. It is the largest third-party tower operator in the U.S. with annual sales of $2.4 billion and a market cap of $27 billion.

The international arena is one of two main areas of growth for American Tower. It has a presence in Mexico, Brazil, Chile, Peru, Colombia, South Africa, Ghana and India. In the first quarter, 28% of revenue came from the international rental and management segment.

"Five years ago, they said that at some point international could be 30% of revenue, and people thought that implied they would stop there," said Colby Synesael, an analyst at Cowen & Co. "They have expectations now to go beyond that long-term target of 30% they once had. When you look at the amount of tower acquisitions, the overwhelming majority have come from international."

It owns 47,000 properties globally. Since the beginning of 2011, it bought or built 11,400 sites overseas. In the latest quarter, it built 597 sites internationally and 29 domestically. It also acquired 800 sites in Brazil and 35 sites in the U.S.

"They've indicated there is a finite amount of markets that make sense to them, so I would not anticipate for them to be doubling the amount of markets they are in today," said Synesael. "But I think there is certainly an opportunity for them to add to their current country portfolio."

International Advantages

There are advantages to doing business internationally vs. domestically. The company can use its existing back-office structure and customer agreements to expand in existing markets. It also typically passes through a portion of its operating expenses, such as ground rent or fuel costs, to the tenant.

But there are risks. Currencies can fluctuate, and the political and regulatory environment can change.

In addition, the cost of building a tower overseas is much lower than in the U.S. In India, a tower costs $40,000 to $60,000. In Latin America, the average cost is $125,000 to $150,000. Compare this with a cost of $225,000 in the U.S.

While revenue per tenant per tower in the U.S. is about $2,000 per month, international rents are at a discount, but not at the same magnitude. This drives higher returns relative to the U.S. business, writes analyst Ben Lowe of Stifel Nicolaus in his report.

In the most recent quarter, international gross margins were at 88% vs. domestic at 81%. The company starts getting incremental returns when leasing the space to more than one tenant, usually three.

Eighty percent of American Tower's revenue comes from 15 tenants. Domestically, the big four areAT&T ( T ),Sprint Nextel ( S ),Verizon ( VZ ) and T-Mobile. Internationally, tenants include Telefonica,Vodafone ( VOD ), Nextel International, Clearwire and MTN.

The second area of growth for American Tower is amendment revenue from increases to existing leases as well as new tower builds.

That's driven by the deployment of 4G networks in the U.S.

"The amendment activity is effectively where you already have a customer on a tower and that customer is simply adding additional equipment to support a new generation of technology," said Synesael.

Whenever a customer adds additional capacity to a tower, they have to negotiate a new price with American Tower.

"You can imagine with AT&T and Verizon building out their 4G network, that's been a really strong area of growth for American Tower, as well as for all the tower providers," he said.

Typically, companies sign non-cancelable leases for five to 10 years with five-year renewal periods. At the end of 2011, American Tower had $18.5 billion in such contracted revenue.

Another interesting area is the purchase of land on which the towers stand. Historically, land was leased from private landlords such as farmers. But this entails risk as landlords can demand higher prices for their land.

"The tower providers have realized in the last two or three years that there is value in actually owning the land," noted Synesael. "So they've been spending more capital in actually purchasing the underlying land that their towers operate on."

The company currently owns or has capital lease agreements on 28% of the land under its towers in the U.S.

Tax Efficiency

As of January, American Tower became a real estate investment trust, or REIT, and issued its first regular dividend of $83 million in March.

"It's ultimately just a tax-efficiency move," said Lowe. "To avoid paying corporate taxes in the U.S., you convert to REIT to shield that."

To maintain the REIT status, the company has to pay out 90% of its taxable income. However, due to past-years' carry-overs of net operating losses, the dividend yield has been depressed.

Once the company works through those losses, dividend yields should increase.

What makes American Tower different than its two main competitors,Crown Castle International (CCI) andSBA Communications (SBAC), is that it has the less debt relative to its earnings, giving it room for more acquisitions.

This year, it plans to spend up to $650 million acquiring 2,300 sites. Another $600 million of capital expenditures are going toward the construction of 2,200 or so new towers.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AMT , S , T , VOD , VZ

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