Communications actual property funding belief (REIT) American Tower (AMT 2.65%) has had a tricky 12 months. Macroeconomic pressures are weighing on the corporate and in consequence, this top-tier inventory sits down greater than 18% prior to now 12 months.
Does right this moment’s low cost make this main REIT a purchase proper now or is it a inventory to avoid in the interim?
What’s happening with American Tower
Despite headwinds final 12 months, American Tower completed robust in 2022. The REIT, which owns and leases roughly 225,000 communications property starting from cellphone towers, antennas, and knowledge middle services across the globe, noticed income rise 14.5% whereas its adjusted funds from operations (AFFO) a key monetary metric for REITs, rose by 7.1%.
Strong leasing momentum and the acquisition of knowledge middle REIT CoreSite on the finish of 2021 gave earnings a lift final 12 months. However, its forecast for 2023 would not look as encouraging. Its internet earnings within the fourth quarter and the total 12 months for 2022 was down by double-digit percentages. And the corporate predicts its AFFO for the total 12 months will decline from final 12 months. These losses are because of rising rates of interest impacting its price of borrowing.
Because REITs akin to American Tower pay out virtually all earnings as dividends, as required by regulation, they rely closely on debt to develop their portfolio of actual property property. Most instances, this debt is a fixed-rate mortgage with a set rate of interest. But American Tower has a excessive proportion of floating debt (22%) which suggests its rates of interest change instantly as charges rise or lower.
From 2021 to 2022 the federal funds charge rose from almost 0% to 4.75% — the very best and quickest charge improve in historical past. And charge hikes aren’t over but. Economist have predicted that charges might rise to five.75% by the tip of 2023, which dramatically raises the REIT’s price of borrowing.
Is the corporate a purchase proper now?
American Tower has completed a superb job addressing this challenge, decreasing its publicity to floating charge debt by 9% final 12 months and lowering its general debt ratios. However, rising charges will undoubtedly proceed to weigh on the corporate and sure result in a dismal 12 months for earnings. But that does not imply traders should not nonetheless take into account the inventory a long-term purchase.
Demand for its property stays robust. The adoption of 5G expertise helps drive natural income progress, with tenant billings forecast to extend about 5% throughout its world markets in 2023. And it nonetheless has numerous worldwide markets rolling out 5G within the coming years. It additionally advantages from a gentle improve in knowledge utilization on cellular units. Research estimates cellphone knowledge utilization might develop at a compound annual progress charge (CAGR) of between 12.6% and 19.6% in the course of the subsequent 5 years relying on the nationwide market.
Right now, its price-to-AFFO ratio (a metric that works equally to earnings per share) is about 20 instances forecast 2023 AFFO. That’s a bit steep contemplating its excessive floating charge debt publicity and forecasts for 2023. But I do not assume it is unreasonable for an organization with American Tower’s historic efficiency, excessive yield, or long-term progress alternatives.
The REIT has elevated its dividend payouts each quarter for the previous 10 years, understanding to a 500% improve. Normally its yield is about 2% or much less, however its beaten-up share worth as of late has pushed its dividend yield to a historic excessive of greater than 3%. Even with its slight lower in FFO, I imagine its observe report of will increase will proceed this 12 months as its dividend yield is properly lined (making up 67% of its AFFO).
I imagine traders ought to take a long-term strategy to investing, trying on the larger image of the corporate and the position it performs in a high-demand trade. The subsequent 12 months will probably carry lackluster outcomes, however its long-term outlook nonetheless seems wholesome. For that purpose, I imagine the inventory is a stable purchase for affected person traders.