Real estate investment trust (REIT) American Tower (AMT -0.70%) has a unique focus as it supports an increasingly mobile world. That's a great story when you think about the long-term future. However, investors also need to understand that there's a near-term obstacle to overcome. Here's why the next year probably won't be all that exciting for American Tower shareholders.
The long game
Before discussing the negatives, you should know the positives. American Tower owns an enormous global portfolio of cellular towers and it leases space on them to telecommunications providers. These are vital infrastructure assets that make using mobile phones possible for billions of people around the world. On top of that, the REIT has layered a portfolio of data centers, which also supports all of the mobile computing taking place on smartphones. It's a fairly strong combination of assets.
Image source: Getty Images.
To put some numbers on the portfolio, American Tower has about 226,000 "communications sites" spread across the U.S., Argentina, Australia, Bangladesh, Brazil, Burkina Faso, Canada, Chile, Colombia, Costa Rica, France, Germany, Ghana, India, Kenya, Mexico, New Zealand, Niger, Nigeria, Paraguay, Peru, the Philippines, South Africa, Spain, and Uganda. That's a lot of geographic diversification, with more properties outside (182,000) the company's home market, the U.S., than in it (43,000).
Meanwhile, American Tower continues to expand its portfolio, with more than 1,300 new towers installed in the first quarter of 2023 alone. It also reported 10% year-over-year revenue growth in the data-center business. Longer-term, 4G and 5G adoption should facilitate more demand for the assets that American Tower owns. This is all great news.
But there's some bad news to deal with over the next year.
Interest rates
Given the swift rise in inflation, central banks around the world have been increasing interest rates. That is a significant change from the recent past, when rates were stuck at historically low levels. To give some perspective, the U.S. federal funds rate, a key determinant of short-term interest rates, has climbed from near zero at the start of 2022 to 5% today.
This is a problem for companies with variable-rate debt or maturing debt that has to be rolled over and refinanced. At the start of 2022, roughly 31% of American Tower's debt was variable rate. That created an interest rate headwind that is still a problem today, with the REIT entering 2023 with roughly 22% of its debt characterized as variable rate. By the end of the first quarter, that number was down a touch to 20.6%. There's good news and bad news in this trend.
For starters, the company is reducing its exposure to rising rates. That's good. But at roughly 20% or so, rising interest rates can still cause a lot of pain. And debt that's being shifted away from variable rates is likely being locked in at today's higher rates. So the headwind of higher interest costs isn't going away just because there's less exposure to variable-rate debt. In fact, at the start of 2023, management predicted that interest costs would have an 8% negative impact on growth in adjusted funds from operations (FFO) growth, a key metric for REIT performance.
At this point, American Tower is looking for adjusted FFO to come in at about $9.65 per share in 2023. That's an improvement from the previous projection of $9.60, but still down from 2022's $9.76. In other words, over the next year or so, it is likely that American Tower treads water with regard to adjusted FFO because it is working on mending its balance sheet.
Near term versus long term
Businesses don't travel in straight lines; they trace sine curves, with good times followed by bad, and vice versa. Right now American Tower's business growth is being overshadowed by the near-term problem of rising interest rates. Investors probably shouldn't expect much over the next year as management works through this issue, but it is unlikely to be an insurmountable long-term obstacle. In other words, there are still a lot of reasons to like this growing REIT.
