Could this global infrastructure title have more room for growth?
American Tower (NYSE: AMT) is by far the largest real estate investment trust, or REIT, in the market. However, despite a massive portfolio of communications infrastructure assets around the world, there could still be a ton of growth potential as Fool.com contributor Matt Frankel, CFP and senior analyst Asit Sharma discuss in this September 13 fool live Video clip.
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Matt Frankel: It is the American tower. I am known as the real estate guy. A lot of infrastructure is real estate. It’s actually a much better fit for what I’m doing than a lot of people might think at first glance. This is American Tower, which is the largest real estate company in the world. A lot of people don’t realize that the biggest real estate investment trust is the company that owns those big, ugly cell phone towers you see when you are driving down the road. Despite the name, and I’ll be sharing my screen for just a second here.
You don’t hurt me not to use visuals, but other people on Fool Live do, so I always bring a point of view. If you see that, despite the name, American Tower doesn’t just focus on the US market, not at all. It is a truly global business. They have 214,000 communication sites including cell towers, so-called small or urban cells, smaller and more densified versions, and fiber optic network sites. In between all these things, they have 214,000 communication sites in the world. Only about 43,000 of them are in the United States.
They have these big cell phone towers that you see by the side of the road. I mentioned the fiber networks, the small cells. There are a lot of catalysts with this business that have propelled themselves forward over the past few years and should continue. 5G deploys the one we have always talked about when we talk about these infrastructure REITs. 5G needs more transmission sites, called small cells, at smaller distances from each other. In other words, they need more densified networks. They should be great long-term catalysts for businesses to benefit. The reason I ranked it lower than the other infrastructure real estate company that we’ll get to in a minute is because I think 5G rollout is going to take a long time in many markets. of American Tower.
In the United States, it will probably be in the next five years, the 5G rollout will be roughly in the United States. In many emerging markets, they are still working on their 4G deployments. It will be much longer. The general volume of data is becoming more and more complex, sophisticated and abundant in the world. Low-cost smartphones are increasingly available in many American Tower markets. It is a catalyst that is quite unique to them because they are very present in emerging markets. Right now in the US, we don’t really think access to reasonably priced smartphones is a problem. But in many of their markets around the world, it really is. I’ll share my screen again for a second if you don’t mind. One of the reasons this is such an important enabler is the economy of the tower business.
The next time you pass one of these towers, look up. You will see rings of these infrastructures around the summit. If one company is renting space on the tower, it will look like the one on your left, two will look like the one in the middle. Most cell phone towers you see in the United States will have at least two of these rings. The reason is that adding another tenant to an existing tower doesn’t cost the company much. The economy is getting really good as more companies need places to broadcast and add more infrastructure to existing US towers.
Look at the bottom line of that. Return on investment on a tower, construction costs approximately $ 275,000. The ROI is around three percent if you get a tenant to use the top space. Two tenants, that climbs to 13%. Three tenants who leap up to a 24% ROI. You can see that the tower economy is getting fantastic as it grows and more and more businesses are leasing space. Now if you think all the space is leased to large wireless carriers like T Mobile (NASDAQ: TMUS), Verizon (NYSE: VZ), AT&T (NYSE: T), you would be right. It’s about three-quarters. There are also the cable companies that rent space at the top. Other wireless infrastructure providers who also lease additional space. Adding tenants isn’t as difficult as you might think over time, especially as the need for wireless infrastructure around the world grows and grows. You can’t really dispute the results. American Tower has increased its FFO, Funds From Operations, which is the real estate version of earnings by nearly 14% annualized over the past decade. Pretty impressive returns for a real estate company, which people think are pretty boring. But like I said, out of the three infrastructure REITs I’m going to discuss, this was my lowest ranked, it was the lowest ranked from Jason, and it was the first from Asit. We didn’t quite agree. Asit, I’m curious why you ranked it first of the three real estate stocks I suggested.
Asit Sharma: It’s interesting. I had one that you will discuss. I don’t own American Tower but have discussed it again, alongside Jason on more than one occasion. I really like these economic units you are talking about. That’s probably the mindset of the hours this morning while we were doing the rankings because I had a brief conversation with other crazy people about inflation, where it’s heading. When you look around, it interests me as a company that has such a good element of fixed recurring income and makes great investments, as you mentioned, around the world. Something about the strength of that cash flow appealed to me very much this morning.
Asit Sharma has no position in the mentioned stocks. Matthew Frankel, CFP owns shares of AT&T. The Motley Fool owns shares and recommends American Tower. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.