American Tower (AMT -0.46%) is the largest real estate investment trust, or REIT, in the market, and by a wide margin. However, despite having a massive portfolio of communications infrastructure assets all over 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 Sept. 13 Fool Live video clip.
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Matt Frankel: This is American Tower. I'm known as the real estate guy. A lot of infrastructure is real estate. It's actually a much better fit for what I do than a lot of people might think on first glance. This is American Tower, which is the largest real estate company in the world. A lot of people don't realize the largest real estate investment trust is the company that owns those big, ugly cell towers you see when you're driving down the road. Despite its name, and I'm going to share my screen for just a second here.
You guys don't give me a hard time about not using visuals, but other people on Fool Live do, so I always bring a view. If you guys can see that, despite its name, American Tower is not just focused on the American market, not at all. They are a truly global company. They have 214,000 communication sites including cell towers, what are called small cells or urban, smaller more densified versions and fiber optic network sites. Between all those things, they have 214,000 communication sites in the world. Only about 43,000 of those are in the U.S. Despite what you might think with the name, American Tower, this is not a very American company when it comes to where they actually own their products.
They own those big cell towers you see on the side of the road. I mentioned fiber networks, small cells. There are a lot of catalysts with this business that have been propelling forward over the past few years and should continue to. The 5G rollouts the one that people always mentioned when you talk about these infrastructure REITs. 5G needs more transmission sites, which are called small cells, at smaller distances to each other. In other words, they need more densified networks. They should be a big long-term catalysts for the companies to benefit from this. The reason I ranked this lower than the other infrastructure real estate company which we'll get to in a minute, is because I think the 5G rollout is going to take a long time in a lot of American Tower's markets.
In the U.S., it's going to be over the next five years, probably, the 5G rollout will pretty much be done in the US. In a lot of the emerging markets, they are still working on their 4G rollouts. It's going to be a lot longer tailed. The general volume of data is getting much more complex and sophisticated and abundant around the world. Low-cost smartphones are becoming more and more available in a lot of American Tower's markets. That's a catalyst that's pretty unique to them because they have such an emerging markets presence. Right now in the United States, we don't really think of access to reasonably priced smartphones being a problem. But in a lot of their markets around the world it really is. I'm going to share my screen again for a second if you don't mind. One of the reasons that this is such a big catalyst is because of the economics of the tower business.
Next time you're driving by one of these towers, look up. You'll see rings of these infrastructure around the top. 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 three. Most of the cell towers you see in the United States will have two or more of these rings. The reason is adding another tenant to an existing tower doesn't cost the company much at all. The economics get really good as more and more companies are needing places to broadcast, and are adding more infrastructure to American towers existing towers.
Look at the bottom line of this. Return on investment on a tower, construction costs about $275,000. Return on investment is about three percent if you get one tenant to use the space on the top. Two tenants, that jumps up to 13%. Three tenants that jumps up to a 24% ROI. You can see the economics of the tower business gets fantastic as it gets bigger and more and more companies are leasing space. Now, if you think that all of the space is leased to big wireless carriers like T-Mobile (TMUS 0.57%), Verizon (VZ -0.07%), AT&T (T -0.47%), you'd be right. It's about three-quarters. There are also the cable companies that lease some space on the top. Other wireless infrastructure providers that lease space on top as well. It's not as much of a stretch to add tenants as you might think over time, especially as the need for wireless infrastructure throughout the world gets built up and built-out. You can't really argue with the results. American Tower has grown it's FFO, Funds From Operations, which is the real estate version of earnings pretty much by almost 14% annualized for 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 Jason's lowest ranked, and it was Asit's first. We didn't completely see eye to eye. Asit, I'm curious why you ranked this your first out of the three real estate stocks that I suggested.
Asit Sharma: That's interesting. I owned one of them that you're going to discuss. I don't own American Tower but have discussed it again, alongside Jason on more than one occasion. I really like just those unit economics you're talking about. Probably it's the frame of mind hours in this morning while we were doing the rankings because I had a brief conversation with some other Fools about inflation, where it's headed. As you look around the landscape, it appeals to me as a company that's just got such a great fixed recurring revenue component, and it's making great investments, as you've mentioned, around the world. Something about the solidity of those cash flows was really appealing to me this morning.