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American Tower’s (AMT; Baa3 sta, BBB- sta, BBB+ neg) 2Q23 release today highlighted the credit benefits of its international tower diversification and Coresite data center business. Highlights from the release include increased FY23 EBITDA and AFFO guidance, accelerating international billings growth and a clear focus on deleveraging in the quarters ahead. Below we juxtapose AMT’s upward guidance revision with CCI’s downward revision to illustrate relative credit considerations. Consistent with CCI’s results and guidance from last week, AMT reported a slowdown in US tower services activity, which resulted in a modest USD40mm reduction to gross margin for the segment in FY23. The slowdown, while occurring a bit quicker than anticipated, was expected as US carrier 5G-related capex tails-off (peak=FY22). At the same time, AMT raised its consolidated FY23 revenue and EBITDA outlook due to top line strength across its intl. assets, noting better-than-expected churn in LATAM and benefit from CPI-linked contract escalators in intl. markets (~35% of EBIT) as key drivers. Africa, Europe, and APAC registered revenue growth of 12.9%, 8.3%, and 5.6% respectively, with each intl. market accelerating from 1Q. In contrast, CCI was forced to reduce guidance and announce a restructuring effort (15% workforce reduction; USD120mm upfront cash charge in 2H23) to manage to its lower ~4% US tower revenue growth potential. Coresite posted 7% revenue growth (+15% from price) in 1H and mgmt. noted backlogs are at a new high-watermark since the 2021 acquisition. We see Coresite as a compliment to AMT’s tower business and believe the differentiated tenant base and business drivers (cloud/generative AI/edge compute) diversify AMT’s cash flow profile. Deleveraging was a hot-topic on the earnings call, with one section of prepared remarks from mgmt. and two discussions during Q&A on the item. AMT ended 2Q23 at 5.3x net leverage, one-tick higher from 1Q due to the softness in 2Q EBITDA. Mgmt. provided clarity on timing and size of its contemplated ATC India sale (2H23; 50-100% stake sale) and mentioned “a portion” of proceeds are earmarked for deleveraging. The sale would provide material proceeds of USD2.0-4.0bn based on recent valuation estimates near ~USD4.0bn. We expect 2Q to be a temporary blip on AMT’s path to <5.0x by year end as mgmt. executes to its (now improved) FY guidance and a portion of the ATC India sale proceeds are used to repay debt. Recommendation: AMT is a globally diversified tower REIT, with a superior potential growth profile and comparable leverage (vs CCI). We see AMT’s re-leveraging risk as muted by today’s high interest rate / high tower multiple environment and supportive comments by mgmt. on the 2Q call, and see divestiture catalysts to aid deleveraging. We suggest looking at AMT 5.55 7/15/2033 vs Sell CCI 6.7 05/01/2033 to pick up 12bp with a view the issues should trade at parity on a spread basis. |