American Tower (AMT)
What you don’t know can hurt you
Strong Sell: Target Price $44.57
July 17, 2013
AMT Strong Sell Case
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US$250mm Material Misstatement: Possible Fraud?
Questionable Ethics
Return of Capital is Not Return on Capital
Part Carry Trade / Part Leveraged Directional Currency Bet
Value Destroying Acquisitions
Towers – Soon the Most Expensive Option of Last Resort
REIT issues - Offshore AFFO will Remain Offshore
Significant Exposure to Emerging Market Risks
Wall Street is Setting Investors up Again
AFFO Definition is Consistent in its Inconsistency
Strong Sell, Target Price: $44.57
Material Misstatement (p.1)
• AMT claims to have paid US$585.4mm for 666
towers in Brazil
• US$879,000/site is 33% higher than even recent
US prices
• Financial statements of the acquired company and
Central Bank of Brazil records show a purchase
price of approximately US$300mm
• Sources with direct knowledge confirm transaction
was approximately US$250mm less than
disclosed
• We have provided our research to the SEC
Material Misstatement (p.2)
Valuation of acquired company conducted by dodgy
accounting firm (office up the street, on the right)
Would YOU hire this company to value your
US$585mm acquisition?
AMT an Executive ATM?
• Questionable ethics – 2006 options backdating scandal, but
minimal change in management
• Weak corporate governance
– AMT & NIHD Share an Audit Committee Chairwoman
– Sale & lease-back towers appear on both AMT & NIHD’s
balance sheets
– 34 tower discrepancy between AMT & NIHD accounts
• Mgmt. compensation targets adjusted for currency fluctuations,
but shareholders suffer because F/X is not hedged
• Chairman and CEO sells approx. 90% of shares he receives
from option exercises – shows lack of faith in the stock price
Return of Capital is Not
Return on Capital
• AMT’s De Facto International Lending Business
Distorts Growth
– AMT overpays for towers in exchange for rent
overpayments – a de facto loan
– AMT books loan repayments as rental revenue, artificially
inflating revenue, EBITDA, and AFFO
– Increasing tenancy ratios therefore does not grow the
business as much as investors expect
– At the end of the lease, these rents are likely to be reset at
the market rate, causing negative future growth
– Only way to continue to grow business is to “feed the
beast” with more and bigger acquisitions – impossible to
sustain
Part Carry Trade/ Part Leveraged
Directional Currency Bet
• AMT borrows in US Dollars and invests in
countries with high local interest rates
• AMT often underperforms local government
bonds
• AMT does NOT hedge its F/X exposure, making
levered directional currency bets
• Significant post-investment EM currency
depreciation
Value Destroying Acquisitions
• Based on our research, AMT assets
should be impaired by at least US$1 billion
• Very low return on investment profiles
– India
– Brazil
– Ghana
– Germany
India
• US investors too optimistic about India tower growth
• Analysts who cover Bharti Infratel, a leading Indian tower
company, are much more conservative about India growth
prospects
– Bharti Infratel trades at 6.8x EBITDA, has higher quality assets,
and is a local incumbent operator with strong carrier relationships
• Margin squeeze – rents are falling and costs are growing
• Required cap ex will benefit tenants but not AMT
• Regulatory risks: 8% lisc. fee, renewable energy cap ex,
etc.
• Asset impairments of US$364 million
Brazil
• Unsustainable cash flows:
– Approx. 3x market rent paid on Site Sharing
towers will be renegotiated downwards in the
next 3-5 years
– Recent acquisitions require additional cap ex
• Regulated infrastructure sharing threat
becoming reality
• Asset impairment of US$274 million
Ghana
• 51:49 JV with MTN Ghana
• Growth ceiling of two tenants a tower
– Main carriers each linked with an independent
towerco
– New entrants crowding the market
– Rural expansion will dilute tenants per tower
• Deal valued at US$518MM, but making losses
• Assets potentially overvalued – originally US$430mm but
increased to US$518mm with no explanation
• Asset impairment: $272 million
Germany
• Expensive acquisition
• Low growth potential
– Rural towers are less attractive for collocation
– Carriers all have their own tower networks
• Threat of carrier consolidation
– Anchor tenant is mentioned as potential merger target
• Expansion for expansion sake?
• IRR is only 4%, although in this case, it does
outperform government bonds
• Asset impairment of US$107 million
Technological Risk
• Wi-Fi traffic already exceeds cellular traffic &
provides attractive, cost-effective alternatives
• Increasingly powerful small cells work well
with Wi-Fi
• Network sharing gaining traction
• New markets entrants: cable companies
• Towers: Soon to be the most expensive
option of last resort
US Market
• New tenant growth is expected to stagnate
• Industry consolidation risk exposure on the rise
• Revenue growth primarily fueled by contractual
escalators and contract modification charges
• Data demand is leading to infill capital
expenditures that will largely benefit small cell/WiFi development
• Increasing ground rents eroding margins from
below
REIT Issues
• As the international segment grows, more of the
AFFO will be generated in foreign jurisdictions
• Cost and difficulty of repatriating the cash does
not appear to be considered by AMT or
Investors.
International Risks
• Insufficient international risk management
AMT does poor quality due diligence
– typically only inspecting 10% of towers before
buying
• Volatile markets run by capricious
governments
• AMT’s acquisition models overly optimistic
• Financing poor credit quality counterparties
Wall Street’s View
• Analyst use widely varying assumptions on
their models, from growth rates to the WACC
• Nevertheless, they somehow arrive at the
same valuation
• Investors should be wary of the REIT bubble
whose fortunes are tied to the words of the
Fed
AFFO
• AMT and its analysts compare its AFFO to
traditional REITs
• NAREIT says there is no strict definition of AFFO
• Research into a large number of REITs found that
AFFO is calculated in a number of differing ways
• AMT is not including some of its recurring costs
• AFFO is just not a comparable measure
Valuation
• The stock is worth US$44.57 per share, or 40% less
than the current trading price
– Slowing US growth with technological forces in play that
over time will limit growth and reduce margins
– International markets have considerable operating,
regulatory, currency and country risk
– In key overseas regions AMT is only earning the
equivalent of government bond yields
– We believe management has destroyed at least US$1B of
value in its overseas investments
– Tower company assets depreciate much quicker, require
more capital expenditures to maintain, have much higher
risk of becoming technologically obsolete, and have few if
any alternative uses compared to a traditional REIT