American Tower (AMT)

What you don’t know can hurt you

Strong Sell: Target Price $44.57

July 17, 2013

AMT Strong Sell Case• US$250mm Material Misstatement: Possible Fraud?• Questionable Ethics• Return of Capital is Not Return on Capital• Part Carry Trade / Part Leveraged Directional Currency Bet• Value Destroying Acquisitions• Towers – Soon the Most Expensive Option of Last Resort• REIT issues - Offshore AFFO will Remain Offshore• Significant Exposure to Emerging Market Risks• Wall Street is Setting Investors up Again• AFFO Definition is Consistent in its Inconsistency• Strong Sell, Target Price: $44.57

Material Misstatement (p.1)• AMT claims to have paid US$585.4mm for 666

towers in Brazil• US$879,000/site is 33% higher than even recent

US prices• Financial statements of the acquired company and

Central Bank of Brazil records show a purchase price of approximately US$300mm

• Sources with direct knowledge confirm transaction was approximately US$250mm less than disclosed

• We have provided our research to the SEC

Material Misstatement (p.2)Valuation of acquired company conducted by dodgy

accounting firm (office up the street, on the right)

Would YOU hire this company to value your US$585mm acquisition?

AMT an Executive ATM?• Questionable ethics – 2006 options backdating scandal, but

minimal change in management

• Weak corporate governance

– AMT & NIHD Share an Audit Committee Chairwoman

– Sale & lease-back towers appear on both AMT & NIHD’s balance sheets

– 34 tower discrepancy between AMT & NIHD accounts

• Mgmt. compensation targets adjusted for currency fluctuations, but shareholders suffer because F/X is not hedged

• Chairman and CEO sells approx. 90% of shares he receives from option exercises – shows lack of faith in the stock price

Return of Capital is Not Return on Capital

• AMT’s De Facto International Lending Business Distorts Growth– AMT overpays for towers in exchange for rent

overpayments – a de facto loan– AMT books loan repayments as rental revenue, artificially

inflating revenue, EBITDA, and AFFO – Increasing tenancy ratios therefore does not grow the

business as much as investors expect– At the end of the lease, these rents are likely to be reset at

the market rate, causing negative future growth– Only way to continue to grow business is to “feed the

beast” with more and bigger acquisitions – impossible to sustain

Part Carry Trade/ Part Leveraged Directional Currency Bet

• AMT borrows in US Dollars and invests in countries with high local interest rates

• AMT often underperforms local government bonds

• AMT does NOT hedge its F/X exposure, making levered directional currency bets

• Significant post-investment EM currency depreciation

Value Destroying Acquisitions

• Based on our research, AMT assets should be impaired by at least US$1 billion

• Very low return on investment profiles– India– Brazil– Ghana – Germany

India

• US investors too optimistic about India tower growth• Analysts who cover Bharti Infratel, a leading Indian tower

company, are much more conservative about India growth prospects– Bharti Infratel trades at 6.8x EBITDA, has higher quality assets,

and is a local incumbent operator with strong carrier relationships

• Margin squeeze – rents are falling and costs are growing• Required cap ex will benefit tenants but not AMT• Regulatory risks: 8% lisc. fee, renewable energy cap ex,

etc.• Asset impairments of US$364 million

Brazil

• Unsustainable cash flows: – Approx. 3x market rent paid on Site Sharing

towers will be renegotiated downwards in the next 3-5 years

– Recent acquisitions require additional cap ex

• Regulated infrastructure sharing threat becoming reality

• Asset impairment of US$274 million

Ghana

• 51:49 JV with MTN Ghana• Growth ceiling of two tenants a tower

– Main carriers each linked with an independent towerco

– New entrants crowding the market– Rural expansion will dilute tenants per tower

• Deal valued at US$518MM, but making losses• Assets potentially overvalued – originally US$430mm but

increased to US$518mm with no explanation• Asset impairment: $272 million

Germany

• Expensive acquisition• Low growth potential

– Rural towers are less attractive for collocation– Carriers all have their own tower networks

• Threat of carrier consolidation– Anchor tenant is mentioned as potential merger target

• Expansion for expansion sake?• IRR is only 4%, although in this case, it does

outperform government bonds• Asset impairment of US$107 million

Technological Risk

• Wi-Fi traffic already exceeds cellular traffic & provides attractive, cost-effective alternatives

• Increasingly powerful small cells work well with Wi-Fi

• Network sharing gaining traction• New markets entrants: cable companies• Towers: Soon to be the most expensive

option of last resort

US Market

• New tenant growth is expected to stagnate• Industry consolidation risk exposure on the rise• Revenue growth primarily fueled by contractual

escalators and contract modification charges • Data demand is leading to infill capital

expenditures that will largely benefit small cell/Wi-Fi development

• Increasing ground rents eroding margins from below

REIT Issues

• As the international segment grows, more of the AFFO will be generated in foreign jurisdictions

• Cost and difficulty of repatriating the cash does not appear to be considered by AMT or Investors.

International Risks

• Insufficient international risk management AMT does poor quality due diligence – typically only inspecting 10% of towers before

buying

• Volatile markets run by capricious governments

• AMT’s acquisition models overly optimistic

• Financing poor credit quality counterparties

Wall Street’s View

• Analyst use widely varying assumptions on their models, from growth rates to the WACC

• Nevertheless, they somehow arrive at the same valuation

• Investors should be wary of the REIT bubble whose fortunes are tied to the words of the Fed

AFFO

• AMT and its analysts compare its AFFO to traditional REITs

• NAREIT says there is no strict definition of AFFO• Research into a large number of REITs found that

AFFO is calculated in a number of differing ways• AMT is not including some of its recurring costs• AFFO is just not a comparable measure

Valuation• The stock is worth US$44.57 per share, or 40% less

than the current trading price– Slowing US growth with technological forces in play that

over time will limit growth and reduce margins– International markets have considerable operating,

regulatory, currency and country risk– In key overseas regions AMT is only earning the

equivalent of government bond yields – We believe management has destroyed at least US$1B of

value in its overseas investments– Tower company assets depreciate much quicker, require

more capital expenditures to maintain, have much higher risk of becoming technologically obsolete, and have few if any alternative uses compared to a traditional REIT