Summary

• American Tower is one of the world’s largest REITs with a very different risk profile than most real estate sector names including a unique counter-cyclical (or counter-COVID) portfolio characteristics.
• The company has a lucrative multi-tenant communications property model exposed to all sorts of high-growth technological trends like the shift to 5G.
• The company has a track record of delivering to shareholders and also has an attractive dividend yield.
• Much of the Real Estate sector is exposed to the potential fallout of COVID-19 and the lack of mobility that can occur with lockdowns; AMT allows for stable high-growth exposure to the Real Estate sector as uncertainty around the virus increases.
• The company has an extensive geographic footprint and is breaking into many high-growth markets. As wireless data becomes a larger and larger part of our economy and life, this company should continue to reliably and steadily benefit.

July is a hot month during the apex of summer. Also, not the easiest of months in markets, so we’ve focused on a good long-term buy that is insulated from the fickle headlines of our time. While it may seem an active month in many ways, it has been a historically difficult month to make money in the market (relative to others). Our Head of Research, Tom Lee, advised our subscribers in June that July was likely to be a “choppy month” with poor returns relative to one of the strongest first halves in modern memory. Old investing adages such as “sell in May and go away” should give investors some insight as to what the doldrums of hot summer markets have in store for them regularly, let alone a year where we calculated a higher than average probability of market turmoil in Julius Caesar’s moniker month.

Monday and the last month generally have been a challenging period for many Epicenter stocks and reflationary names, and we realize that there was much frustration and gnashing of teeth. When markets drop the way they did on Monday, we feel the same way you do. We never predict the future and are just as much behind a veil of ignorance as to what the future holds as the rest of the human race.

Here’s another thing, we are huge proponents of using the equity asset class the way it has been most successful in generating wealth for many individuals, with a lot of patience and time. The stock market seems so complex and intimidating because there are so many variables, so many conflicting opinions, complicated math and relationships. We want to remind you that the saying less is more is perhaps nowhere more applicable to a successful strategy than in the stock market.

When you’re getting that unscratchable itch, that fear and loathing that builds as the tape sinks, and that deep sense of panic and shame at your losses, this is most often a sign that you should not sell. After all, the most successful retail accounts at Fidelity belonged to those investors who had literally forgotten about them. What did these now rich folks do during the myriad of panics and corrections their portfolios were subject to? NOTHING. Less. Is. More. Also, one more thing. We NEVER advise that retail investors use derivatives. Buying and holding shares is a winning game, and trading options is a losing one for all but the best and most dedicated in this high-octane corner of markets (statistically speaking, we know there are exceptions to all ‘rules’). Derivatives can have a lot of utility in defining and mitigating risk, but many investors seem not to be using them in this way. While the future is always uncertain, owning equities over the long term is one of the safest and most lucrative ways to build wealth over time. This isn’t to say there isn’t risk. The majority of stocks have gone to zero over time, so discretion is a must.

What Is A Tower And What Drives Prospects For Growth

Cell phone towers are some of the most vital infrastructure in existence in this modern world. They were essential before COVID-19. We would assert that on a relative basis, the pandemic has increased the value of this asset, while emphasizing the true dependency engraved within the modern era on the telecom industry. Cell phone carriers experienced a 20%-40% increase in demand for data throughout the pandemic, requiring inevitable capital spending and upgrades. When new technology is necessary for wireless communications, it is a direct boom to the company. Right now, American Tower is a leader in the tenant per property at 1.9. This metric is only growing over the long-term, translating into a broadened profit margin and eventually an appreciated share price. However, in Europe and America’s core and more safe markets, the technological trends will likely result in this vital number going up. There are few business strategies as insulated from the litany of headline risks affecting financial markets that are publicly traded. It seems on many planes; the worst is behind this company.

Sources: Company Reports

The assumptions you could make about many Commercial Real Estate (CRE) projects seem less inevitable in a world recently marked by the literal prohibition of the most common forms of economic activity. Whereas you could assume foot traffic would never drop to near-zero in a pre-COVID world that reality is now a thing of the past. What can you probably assume in this day and age, regardless of what happens with COVID-19? You can assume that the consumer’s voracious demand for data will continue increasing. You can assume that mobile carriers and technology will continually improve, and if these trends continue, AMT will continue providing steady and lucrative returns to shareholders.

Source: Company Reports

Also, as you can see, despite being closely adjacent to the capital-intensive telecommunications business, it is not a business that requires a lot of CAPEX or research and development, which frees up capital to be returned to shareholders through dividends. Like last week’s pick, this company is a beneficiary of the great clash of Titans (in this case, American mobile carriers) and the elevated levels of CAPEX and competition that this will likely engender. This means that growth in revenue from their more mature American assets could well be above what is expected (and EPS) because this trend converges with other positive trends in the industry like the 5G upgrade super-cycle that is likely on the horizon and the increased use of C-band. We will also elaborate on the mix of domestic US and International business that the company has acquired, which we think will end up being high-growth and a more superior combination than chief competitors.

Source: Company Reports

Some similar strategies or outcomes in other industries may give some investors some pause. It is undoubtedly true that the currency risks and political risks (and the threat from COVID-19) are more acute for the country in the many under-developed and low-income nations that most of its sites are in. However, the company’s recent acquisition of Telxius Towers was significantly accretive and is quite a bit more of a sophisticated strategy than simply chasing the inevitable emerging market growth in cellular phone use and data usage. Its acquisition gave it significant market-altering exposure in high-growth, high-risk areas like Latina America and in the more stable and less risky European market, which will be enjoying a boon from the 5G upgrade cycle.

AMT Is An Ivory Tower Sequestered From Many Risks Of The Day

Real-Estate for a safe and steady portfolio component in the age of COVID? Yes. Real Estate was historically a safe haven for money because no matter what happened, people still went to malls, right? Well, that logic is undoubtedly no longer air-tight. We know it may sound strange, especially since Real Estate’s profitability is often tied to mobility and foot traffic. Still, the sector is also experiencing a stealth rally and now is neck and neck with Energy for the leading sector of 2021. The Sharpe Ratio is also looking enticing for the sector. This company is in the unique position of being the largest component of the Real Estate sector, sharing the benefits of that distinction while also not having many of the weaknesses unique to our times that most of the beleaguered sector experiences.

Source: Sectorspdr.com

Real Estate is based on tenant payments which are based on freedom of movement, which is obviously affected by the pandemic. Therefore, when COVID-19 restrictions are implemented, many commercial real estate investments experienced a true near-apocalypse. No people means no money for businesses which means no rent income from tenants. Also, the rising uncertainty concerning the Delta variant may lead to a re-emergence of these issues.

However, our base case is that the market will likely overreact to the impact of the new ubiquitous variant. What about if your tenants will keep paying regardless of mobility? Perhaps demand will even increase if mobility is again curtailed by the fourth wave of rising hospitalizations and deaths? This is the economics of American Tower’s revenue. They are very insulated from the risks of COVID-19 related curtailment of regular economic activity. The behavior of the company’s debt, which was subject to adverse price action during the initial COVID-19 panic of March 2020, has been exemplary in the following waves.

Source: Bloomberg

Yet, the company enjoys many of the appealing aspects of the stolid but consistently rewarding sector. It is completely insulated from the usual risk factors affecting many commercial real estate properties. Also, it holds the sector-wide benefit of being a great hedge against inflation (because of its massive land holdings)—the ‘tenants’ rent vertical space on towers for a variety of communications functions. While the tower market is much more mature in the saturated, glued-to-our-phone nation of the United States, there is massive potential for high growth in developing economies that have yet to have the adoption and prevalence of cellular communication we have reached in the West.

The majority of the company’s properties are in higher growth markets, but the revenue is split about 50/50. As developed markets follow American usage patterns, the profitability and revenue associated with this massive footprint will likely significantly improve. The acquisition is an example of management consistently implementing a sound and steady strategy. The management team appears to be taking a philosophically similar approach (obviously, the assets are pretty different) of a barbell to its lucrative portfolio. In the developed markets of America and Europe, the company has many non-cancellable contracts with some of the highest quality companies – such as T-Mobile and Verizon – in both regions in terms of credit quality. Non-cancellable contracts along with a strong market positioning, ensures that despite the competitive and expanding telecommunications market, AMT-3.32%  will be paid. Its dramatically expanded global footprint concentrates on promising markets where there are prospects for high and accelerating growth, such as India, Brazil, Mexico, and many others.

Source: Telxius Towers Merger Proposal Deck

Risks And Where Could Be Wrong

The risks for this name are certainly reduced compared to many of our picks, and that is purposeful. As Charlie Munger says, the stock market is actually a lot like gambling. Just not the kind of gambling you think. For an optimal strategy in horse racing, you want to have some ‘sure-things’ that pay lower odds mixed with some “dark horses” whose victory will pay off far higher. If you only buy dark horses, your returns won’t likely be covered by the losses given their lower chance of succeeding. Thus, if you want exposure to high-risk, high-reward opportunities, you should also have some safer, longer-term plays that will anchor your portfolio (and hopefully make that feeling in your stomach on the bad days a bit more endurable.

As far as business plans go, it’s tough to find a public company with more solid assumptions. The other thing about the tower industry is that it knows how to use lawyers quite well. It has some seriously bullet-proof and long-term contracts.

Anytime a company expands globally, there is the chance of management stumbles and costly mistakes. Luckily, AMT has managed its international expansion very adeptly and has successfully attracted top talent in the countries it operates in. This decentralized approach to management seems to be the path more traveled (at least successfully so) by companies with rapid global expansions like AMT.

We would say the primary risk for these guys is that a revolutionary technology undermines the ubiquity and utility of what they’re selling. Starlink is a primary example of a potential competitor. A crypto-protocol called Helium also has a solution that certainly looks like it could eventually replace towers. Still, we think the timeline on this gives you plenty of time to reap the benefits of AMT’s sound strategy over the foreseeable future.

Could a technology rapidly undermine the company’s core product? This is certainly possible. However, let’s remember that the Gatling Gun was available for use during the entire Civil War but was never deployed in any significant way. The intransigence of Napoleonic military thinking in an age of superior weaponry is probably a good mirror for the many regulatory complexities and zoning laws that tower builders have to navigate. A revolutionary technological change likely won’t happen overnight, in other words, and even if it did, the carriers would be locked in contracts for a while in many cases. One barrier to competition is that it is significantly cost-prohibitive for a wireless carrier to change towers. AMT is the most significant player, giving it an advantage in a market with an extremely limited number of customers. This fact is a risk in itself that the industry must deal with, but again, we’d point out that this narrow group of customers has credit quality that is barely distinguishable from the full faith and credit of the US Government. Pristine. All and all, this stock has a great strategy and risk-adjusted return. This is one you’ll want to hold onto.