No. of Recommendations: 19
American Tower Corporation (AMT) is a wireless and broadcast communications infrastructure company that develops, owns, and operates communications sites, including wireless communications towers, broadcast communications towers and distributed antenna system (“DAS”) networks. AMT continues to grow and expand due to mobile subscriber growth and strong demand for wireless voice, broadband wireless data and video networks that require more tower space. For relevance here, the company is actively considering changing its corporate structure to a real estate investment trust (REIT).

AMT operates the largest independent portfolio of wireless communications and broadcast towers in North America. Its primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies, usually 5 to 10 year initial term lease agreements with multiple 5-year renewal periods and with annual lease rate escalations of 3% to 5%. As of the quarter ending 9/30/2010, AT&T Wireless, Sprint Nextel, Verizon Wireless and T-Mobile accounted for about 60% of AMT’s tower revenue; the remainder came from international 20%, U.S. voice and data 12%, U.S. broadcasters 5% and U.S. other 4% customers.

AMT owns the tower structure with a capacity for up to 4-5 tenants and owns or long-term leases the land parcel. The wireless tenant owns, operates and maintains antenna and microwave equipment; tenant shelters containing base-station equipment and HVAC; and coaxial cable. What separates AMT from its competitors is that it has the highest ratio of tenants per tower, a high efficiency that, in turn, makes AMT the most profitable in the industry. Carriers normally renew their contracts upon expiration because moving their equipment from one tower to another is cumbersome and costly. This generates a strong long-term lease up-cycle. The revenue generated from leasing and management of these networks is impressive as over 95% is recurring in nature. The company has more than $9 billion worth of non-cancelable lease backlog; at the current revenue run-rate, this constitutes around 6 years of lease backlog.

AMT also operates and continues to expand internationally in Mexico, Brazil, Peru, Chile, Colombia and India, and will soon operate in South Africa and Ghana. As of 12/31/2010, AMT’s tower portfolio includes 35,074 total sites worldwide with 21,146 in the U.S., 7,797 in India, 2,835 in Mexico, 1,700 in Brazil, 1,008 in Colombia, 475 in Peru and 113 in Chile.

Where does AMT fit in the big picture? Here’s a year-old snapshot article about the global market demand for cell towers:
The global addressable market for cell tower lease revenue is over $81.5 billion per year. The challenge is that most of this opportunity is not capitalized since mobile operators in most countries own and manage their own cell towers. Some partake in cell site sharing to reduce costs, but the model of third-party management is not widely implemented. The U.S. and Indian markets are the two markets where this opportunity hasn't gone unnoticed and third-party companies manage operator's passive infrastructure. In the U.S., cell tower operators like American Tower Corp. and Crown Castle International Corp. managed and/or operated approximately 30% of the over 260,000 cell sites in operation in the United States in 2009. The remaining sites are operator owned and managed or managed by property owners.
North American tower opportunities
In North America, the total opportunity for cell-site leased revenue is $17.86 billion based on 2009 cell site numbers and average revenue per site. This does not include the opportunities for engineering firms to construct or augment existing towers. Only about 21% of this opportunity was realized in 2009. The average revenue per cell tower is $64,150 and average tenancy ratio is about 2.7.
Even in this recession, cell site business is booming as operators are forced to add new sites to reduce churn and remain competitive
[bold my emphasis]. For example America Tower has added 1,300 sites since the third quarter of 2008 and Crown Castle saw a 38% increase in tenant applications and a 12% site rental revenue increase.
The North American cell tower market remains strong even in one of the worst recessions seen since the Great Depression [bold my emphasis].

Asia Pacific landscape
There are lots of opportunities throughout the Asia Pacific region. However, India and China are most interesting due to the strong growth in both countries and over 1.2 billion combined subscribers. Most operators do not rely on third-party companies to manage their cell sites except in India
[bold my emphasis]. India is the second largest market in terms of cell-site lease revenue, but No. 1 in terms of total sites managed. There were over 231,573 sites managed in India in 2009 and cell-site revenues are forecast to reach $3.24 billion. The average revenue per tower is approximately $13,831 per year.
In China, there are approximately 640,000 cell sites between the three mobile operators. China Mobile has the majority of the sites with approximately 62.5% and planned to add 85,000 TD-SCDMA sites in 2009. China Unicom has about 30% of existing cell sites and China Telecom has the rest, adding more than 67,000 base stations in 2009. The government recently approved passive infrastructure sharing and is even encouraging the practice as a means of increasing rural coverage at a reduced cost. New tower management companies such as Q-ZTG are testing the market with a similar business plan to that used in the U.S. market. It is too soon to determine if this company will be successful in convincing operators to relinquish their tower operations. China is a strong market for new cell sites due to 3G deployments and rural expansion for new subscriber growth.

Africa is also ripe with opportunities
There are approximately 137,000 cell sites across Africa and operators are warming up to the idea of passive infrastructure sharing. The African market presents a huge opportunity especially in South Africa and Nigeria, the two largest mobile subscriber markets in the region.

The tower management business is quite lucrative and still remains largely untapped
[bold my emphasis]. Many of the North American companies would like to expand internationally, but are concerned about the stability and profitability of emerging markets. At least two of the top ten tower companies have international business. American Tower has over 6,300 sites in Brazil, India and Mexico, while Crown Castle International has sites in Australia. Primary criteria for international markets include 70% to 80% mobile penetration, stable currency and political climate.
China presents a strong opportunity for growth, but like India, the return will be much lower than the U.S. and other markets. In addition, home grown Chinese companies will have an advantage so tower companies will need to partner with local Chinese companies
[bold my emphasis]. Over 50% of new subscribers are from rural markets as reported by China Mobile, which means there will be a great demand for new towers.

Furthermore, AMT currently is well positioned to greatly benefit from trend predictions for mobile telecommunications, e.g., those assembled and provided by TrendsSpotting, that increase the demand for more tower space.
The following are some of the trend predictions from various sources:

o In 2010, nearly 1.3 billion mobile phones will ship globally, and 250 million of them will be smartphones.

o In the U.S., where smartphone growth is robust, virtually all phones will be smartphones within five years.

o Smartphone adoption will start driving down data plan costs. More consumers than ever will demand the ability to interact fully with the mobile web on their phones.

o Smartphone sales will continue to skyrocket, and carriers are going to realize that they must make the mobile web available at low cost, or lose customers.

o For the first time, there will be over 1 billion mobile devices accessing the Internet by year-end, gaining quickly on the 1.3 billion PCs accessing the Internet (the former are growing at 2.5X the rate of the latter).

o In 2010, mobile advertising is forecast to grow 45% to $3.8 billion, with the breakdown being $3.2 billion SMS advertising, $253 million in mobile display and $321 million mobile search.

o By year-end 2010, 1.2 billion people will carry handsets capable of rich, mobile commerce, providing a rich environment for the convergence of mobility and the Web.

o By 2013, mobile phones will overtake PCs as the most common Web access device worldwide. The combined installed base of smartphones and browser-equipped enhanced phones will exceed 1.82 billion units.

o By 2014, there will be a 90% mobile penetration rate and 6.5 billion mobile connections. Penetration will not be uniform, as continents like Asia (excluding Japan) will see a 68% penetration and Africa will see a 56% mobile penetration.

o By 2015, context will be as influential to mobile consumer services and relationships as search engines are to the Web.

o The Android operating system is expected to ship globally - 8.2 million in 2010.

o Android could start to dominate the smartphone OS market by 2014. Android could be the 3rd most popular OS, shipping on 65 million phones.

o Mobile commerce’s time has arrived - consumers are using their devices to buy books, apparel and other items associated with online shopping on a PC.

According to a 9/14/2010 Pew Internet Project survey, about 35% of U.S. adults have software apps on their phones, but only 24% of adults use those cellphone apps; 29% of cell phone owners have downloaded apps to their phones, and 13% have paid to download apps. Pew researchers see an apps culture emerging among cell phone users and assert that this is a pretty remarkable tech-adoption story, considering that there was no apps culture until 2 years ago.
Apple’s App Store currently has about 350,000 mobile apps; Google’s Android platform has over 170,850 apps according to the site; and there are other app platforms for Blackberry, Palm and Window devices.

According to AMT, as the market migrates toward 4G, the increasing demand for advanced applications and higher quality of service result in a narrower range at which signals can be transmitted. As a result, carriers will need to invest in denser networks, which means more antennas and tower space.

Are there any major downsides? At first glance, AMT’s debt is alarming, but the company has demonstrated the ability to meet its working capital needs and debt interest payments through its cash generation and available credit sources. For the fiscal year ending 12/31/2010, AMT generated a substantial $674.3 million in free cash flow; this high FCF enables the company to reinvest in its business and continue expansion in new domestic and international locations. As of 12/31/2010, AMT had $5.6 billion of total debt outstanding, representing about 61% of its total capitalization. The company has a net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 3.0X, well below peers. For 2011, the company expects to fund its planned capital expenditures of between $400 million and $450 million, which includes the construction of approximately 1,200 to 1,500 new wireless towers and $80 million to $100 million of land purchases.
On the recent 2/23/2011 AMT Conference Call for the 4th Quarter and Full Year 2010, CFO Thomas Bartlett reiterated the company’s philosophy on leveraging:
... we continue to believe that the 3.5x is really our sweet spot and kind of our target leverage, our range is still the kind of 3x to 5x. We do have over $800 million of cash sitting on our balance sheet largely as a result of what we raised at the end of last year. And that was really in anticipation of a lot of the transactions, the kind of the 4,000 towers that I laid out, and Jim and I laid out before. So I mean that cash was earmarked for these deals that we have planned. And so we remain committed to the 3.5x. And our philosophy is not to go out into the market and raise cash ahead of time significantly just because the rates are sufficiently low. We want to make sure from a capital allocation process that we've got a use of proceeds and a use of cash, and we'll continue to manage it that way. That's been our philosophy, and we’re firmly committed to that.

There is also the concern that communications towers someday will be replaced by a new viable disruptive technology. One potential wireless advance in recent news is Alcatel-Lucent’s “lightRadio cube”, developed by Bell Labs and recently introduced and demonstrated at the Mobile World Congress held on 2/14-17/2011 in Barcelona.
The President of Alcatel-Lucent Wireless Division Wim Sweldens has boldly predicted that their new advance for mobile networks is “the death of the base station.” lightRadio still needs to demonstrate viability, i.e., operational performance, reliability, cost effectiveness, scaleability, etc. He announced that they plan to launch trials of the lightRadio cube with key customers in Europe, Asia and the Americas later this year and to begin full production in 2012.
Here’s what AMT Chairman, President & CEO James Taiclet had to say about lightRadio on the 2/23/2011 Conference Call:
On the technology front, we actually look at the lightRadio product as an early-stage technology that's an opportunity for our company in a couple of dimensions. One is, we think we can potentially use it in our DAS systems being an advancement to what we have available today if the promises that are being made by the OEM are going to come true. So there's a plus there for us. And secondly, this is a technology that our external and internal engineer advisors tell us is more suited to really dense urban environments where there really aren't any towers proportionally today. So we see this as a benefit to our carriers and the tough spots where the tower access isn't there anyway. It will make them more successful and then therefore, it will make them able to invest more in the macro sites where we do provide coverage.

Earilier on the AMT Conference Call, Taiclet commented:
Another key factor in the business environment is our view that traditional towers will provide the vast majority of wireless coverage now and even in the future, and even as broadband speeds and capacity requirements increase. Due to a host of technical and operational reasons the benefits of the tower-based macro site are substantial and cannot be replicated with any other transmission technology. At the same time, American Tower has also explored niche technical solutions as potential complementary revenue sources for our core tower base. We feel that we understand this space well as the leading provider of indoor distributing antenna systems, known as DAS, which we've doubled in size since entering the space with our SPECTRO site acquisition.
We extended our DAS expertise into the outdoor area as well. We've also concluded that indoor and outdoor DAS are certainly worth investing in as part of our overall strategy to be the preferred supplier of communications infrastructure. But our experience has been that the tower base macro site remains the clear number one choice for our customers as they deploy and strengthen their networks.

The lightRadio hype does remind investors in communications tower companies to be aware and vigilant about potential disruptive technologies. Michael Howard, co-founder of Infonetics Research (an international market research and consulting firm specializing in data networking and telecom) commented, “LightRadio is the first major attempt to rethink the cell tower itself” and, when asked if any other networking company is working on something like lightRadio, he responded, "If they weren't, they are now."

Finally, AMT is considering changing its corporate structure to a REIT to better shield itself from income taxes. Here’s the latest statement on this matter from AMT on 2/23/2011:
As we review our tax strategy and assess the utilization of our net operating losses, we are actively considering making an election to a real estate investment trust ("REIT") for U.S. federal and, where applicable, state income tax purposes. We may make the determination to elect REIT status for the taxable year beginning January 1, 2012, as early as the second half of 2011, although there is no certainty as to the timing of a REIT election or whether we will make a REIT election at all. If we were to elect REIT status, it would require, among other things, approval from our board of directors and certain amendments to our charter.

A 12/3/2010 Reuters article explains why tower companies are considering conversion to a REIT structure:
American Tower and smaller rivals Crown Castle International and SBA Communications use their huge net operating losses (NOLs) -- from amortization and depreciation charges incurred on tower assets -- as a shield against tax obligations. But as they burn through available NOLs, the tower companies can't keep avoiding corporate taxes by using loss carry forwards -- the accounting technique that allows for one year's losses to be applied to future profits.
"The first guy to turn into a REIT will likely be American Tower and that will probably be in 2012," said an Evercore Partners analyst. American Tower CEO Jim Taiclet said in September the company was considering REIT status under the U.S. Internal Revenue Service tax code.
Analysts say moving to a REIT structure is a natural progression for the tower firms as the NOLs dry up. Given their respective NOL positions, Crown Castle and SBA Communications are likely to follow American Tower's lead, but not until 2015.
Conversion could boost valuations for American Tower and other operators.

An analyst sees the converted companies attracting a whole new class of investors seeking smart tax opportunities that come with a REIT structure, while also being able to invest in technology. "Investors would be able to think of it as a technology play -- with the benefits of the growth of wireless devices -- without the risk of product cycles or of consumer buying patterns. It would be a very exciting opportunity for traditional REIT investors to invest in -- sort of a REIT on steroids [bold my emphasis]."
Tower firms, with their low investment requirements relative to cash flow, could support a high REIT dividend yield.

Responding to a 2/23/2011 AMT Conference Call question if a REIT election would put any significant limitations on the size of and overall strategy for the international side of the business, CFO Bartlett replied, “... not at all. The REIT does not get in our way at all in terms of how we're growing any part of our business any part around the world.” CEO Taiceit added, “Just to cycle back to the proportion of revenue that we're targeting for international, the public statement is still 25% to 30% is what we're looking for.”

So for now, the telecom industry remains highly dependent on the networking of communications towers, and AMT appears to be an attractive telecommunications infrastructure play, and one to watch concerning its REIT status. Due diligence comparing AMT with its two closest rivals will show that AMT is clearly the top gun and in the process of firmly establishing a significant moat. For those interested in more details and information not covered above, I highly recommend taking a look at a recent 1/31/2011, top-notch AMT visual and graphic presentation, Introduction to the Tower Industry & American Tower that provides a business description about the tower asset (i.e., what is a tower, types, its components), the business model, the industry and technology overview, and the drivers of demand.
And here are the presentation materials and transcript for the 2/23/2011 AMT Conference Call for the 4th quarter and full year 2010:
(note: cover page 1 should be dated 2/23/2011 instead of 2/23/2010)

As always, conduct your own due diligence.

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