American Tower Corporation (AMT) Earnings Call Transcript & Summary

2020 Global Property CEO Conference. I'm Mike Rollins with Citi Research, and we're pleased to have with us American Tower and CEO, Jim Taiclet. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or on the webcast, you can sign on to liveqa.com and enter the code Citi2020. That's with a capital C to submit any questions or you can just raise your hand or push the button on your microphone and we'll get you into the conversation over the course of our time here this morning. Jim, I'm going to turn this over to you to introduce your company and your team and provide the audience with 3 reasons why investors should buy your stock today, and then we'll begin the Q&A. So Jim, thanks so much.

Sure, Mike, and good morning, Michael. First of all, at American Tower, we feel we're extremely well positioned at the intersection of real estate and technology. And we're going to benefit directly and continually from the growth in mobile data that we're all experiencing and we're all contributing to, especially as 5G technology is deployed in the U.S. and then later in our international markets. So that's the first reason. Second, as a result of the growth in data usage around the world, we drive significant cash flow growth which then supports robust dividend growth for our company. We've had a CAGR of more than 20% dividend growth since the inception of the dividend in 2012, and we expect to grow at 20% again in 2020 for our guidance. And third, we're executing our comprehensive strategy for the next 5 to 10 years, which we call Stand and Deliver. There's 4 parts to this. First of all, to drive operational efficiency throughout the industry, so that includes our company by maximizing our organic growth and reducing our cost to expand margins. But we're also trying to help our customer base, new and existing, to reduce their cost of operations to doing business with us. So driving operational efficiency is the first part of our strategy. Then we want to grow our portfolio and capabilities as we move along. Our M&A program has been, I think, quite successful over the last 19 years that I've been here. And we want to continue to seek accretive M&A in our target markets using our investment grade balance sheet and by expanding our build-to-suit construction program. This year, we're guiding to 6,500 tower builds around the world, as an example. Those tend to have double-digit IRRs right out of the gate. So growing our asset base and our capabilities, that's our second piece of the strategy. And the third piece is to innovate for a mobile future predominantly by driving more revenue onto our existing assets by working with industry verticals even outside the telecom industry, which is our traditional tenant, and investing in adjacent assets to make our traditional tenants and our new tenants more successful. And then fourth is really broadly taking a leadership role in our industry. And by that, I mean, the mobile Internet industry, the cloud industry, anything that moves bits between your handset or device or in the future, an autonomous vehicle, and the cloud. That's the positioning we want to have because we want to lead our industry into that, into 5G and beyond. And the way we want to position ourselves to do that as a company is to be the leading voice for the telecommunication industry and the commercial real estate industry to create efficient mobile infrastructure for the future. We're also using our leadership position in this space to reduce the mobile industry's carbon footprint. We operate at the highest standards, we think, of corporate governance. And we really strive to support our communities through our philanthropy program, which is designed to enhance educational opportunities using technology for children in need. So those are the kinds of things we think we can lead on, in addition to having great operational execution and a strategic plan that allows us to grow our assets. So Mike, with that, I think those are the 3 things and turn it back over to you for the Q&A.

Great. Our first question to open each of the sessions is on the topic of ESG. ESG is of increasing importance for all company stakeholders. What is the one thing your company is doing to improve your overall ESG score over the next 12 months?

So the platform, first of all, Mike, is that shared telecom infrastructure is inherently efficient, green and supportive of the communities of which we serve because instead of having, say, 4 towers for 4 mobile operators taking up land space, having visual impact on the community, having generators burning fuel, you can have one. I mean so this is an inherently efficient and environmentally friendly business. But something more specific I can point to, it's along our energy management program. So we've invested so far, and we're going to do a lot more of our $100 million on more efficient equipment to provide primary power generation in emerging markets. And so these things include lithium-ion battery sets, solar panel installations on many thousands of our sites actually. And we're going to do thousands more to reduce the carbon footprint of the entire mobile industry in emerging markets. The other thing that does to make these investments is we're going to charge our customers for the benefit of having a more efficient and less costly fuel bill every month for diesel fuel. And at the same time, we make our sites more attractive because we're going to have higher uptime because diesel fuel runs out, but the sun continues to shine in places like Nigeria and India every day. So we have a better uptime on our sites where we've made these investments. It's better for the community and the environment, and our customers are happier. So this is one investment, again, we're going to scale past that $100 million level that will have benefits for ESG and for the customer.

Great. So maybe starting with the domestic business. You just put out a lot of information with the earnings, with the guidance. Can you unpack a little bit more of what's been happening in the domestic business in terms of the deceleration that you're guiding to and put the proposed merger into perspective in terms of the future opportunities and risks that, that provides for the company?

Okay. So Mike, sort of passed this prologue also in our U.S. business. I mean we had outsized growth far in excess, I would say, of our peer group in the last couple of years. So the prologue then is, you've got a bigger base to work off of going forward. There's actually a 30 basis point drag just from the base being bigger on a growth rate that's a little lighter. But the biggest impact, we think, is that while 2 of our traditional customers in the U.S. are spending very similar amounts of new business as they did last year, one of them, which is T-Mobile and Sprint now combined or on the way to being combined, they need the first 6 months of this year to have a network strategy and plan that they've got to then implement. So they're going to be -- is really both of those companies until the merger is completed and the network plan is approved by their Board and communicated to you as an investor, they're going to be a little bit -- in fact, a lot, a bit slower on network deployment in the first 6 months of this year than they were in the first 6 months of last year. And it's basically as simple as that, Michael. That's the biggest impact on our company now. The ramp in the second half, we think, will be significant. And our guidance actually suggests that the absolute value of spend of T-Mobile will be the same in 2020 as it was in 2019, but it's just going to be back-end loaded, so we're only going to have a few months of that spend really hitting our growth rate versus many months of the spend. And then the final piece of the -- a little bit of a decline in growth rate in the U.S. for us this year is our churn rate is going to go up by 30 bps. And it's just sort of nothing specific. It's just the way that the timing of certain leases that are going to roll off have occurred. So Clearwire and other things that are very legacy for us. But we're still going to be within the 1% to 2% range we've always said. It just happens to be 30 bps higher. So you get these 30 bps here, 30 bps there, 50 bps here and then you end up having a growth rate that's a little bit lighter than the last couple of years.

You think our infrastructure is ready to have a crisis where people are all working at home and going through pipes? Are we there yet basically to handle that volume?

I think it's going to be a bit of a challenge. People that rely on the mobile network to do indoor coverage, no. People that still have a cable plant to their home or fiber to the home, that will be much more viable, Michael. And it just goes to speak to, I mean, just look at your own daily life, whether it's in your house, in the mall, in an office building, on the train, would you like your service to be better? More bars, more reliable, less drops and things like that, less spinning circles when you're waiting for something to download, we all would. So the demand for infrastructure deployment is going to be there no matter what. It will probably be emphasized a little bit more in the next few months, Michael. So it's a fair point. Our customer base in the U.S. tends to spend between $30 billion and $35 billion a year on CapEx, which then has to have a deployment space to put that into play. We expect that's going to continue. I think there's a debate among the analyst community with Mike and others that says, well, does that traditionally goes up $5 billion a year with every G that comes out. So 2G was a $15 billion a year spend rate for our customers' industry. 3G was a $20 billion to $25 billion spend rate. 4G was then a $30 billion to $35 billion spend rate. With 5G and the demand on the network that we're seeing, is it going to go up another $5 billion or $10 billion? We're not kind of rep-ing to that or guiding to that, but that's a good question for the future. The demand for bits to go through the mobile network continues to go up 30% a year in the United States, and there's going to have to be infrastructure deployment to serve that.

Do they have the capital and the return profile to make those investments? Is it viable?

We think it is. And one of the reasons, frankly, that we think 5G will be deployed at scale on a pace that's reasonable is that there's a cost benefit to the mobile operator to replace 4G algorithms with 5G algorithms in their network. And it's a little bit technical, but basically, any generation of technology improvement in the mobile space allows the operator to place more bits per hertz of spectrum that they have available to them. And therefore, the cost per gigabit will go down when 5G is deployed widely in the United States. That's important because our customers, Mike and Michael, you're a little bit alluding to this, their revenues tend to go up 2%, 3% a year, but their utilization rate on the network goes up 30% a year.

Right.

And they have to use every mechanism they can to reduce the cost per gigabit so that they can maintain their margins. And 5G is going to help with that.

Two questions came over on LiveQA, both related to India. I'll summarize it. What year do you think India churn will normalize to 4% or whatever your normalized estimate is? What's the latest with India? That was another one. How you'll navigate through all the noise? When could this become a major tailwind given the population growth and where they are in the growth curve? And then instead of that positive, the person said, what's the worst-case scenario? So a little hypersensitive in terms of what this person is thinking about.

Yes. So just to put our Asia business, which is predominantly India, into context, it's about 10% of our investment dollars over the last 10 years. Over 50% of our investment dollars over the last 10 years was actually in the United States. I'm not sure everybody is aware of that. We bought GTP, independent tower operator that was very well-run, and the Verizon towers, which we thought were the best in the industry. We're waiting actually to have the opportunity to make that trade. So we've got investment in India that's fairly modest. It's meant to be a diversification play over a long period of time. So with that, how do we navigate the noise? We go back in the India market as we do with every market that we're involved in and say, okay, what is their trajectory of technology deployment in that country? How many people and subscribers, therefore, are there going to be? What technology are they going to be on and how many gigabits a month are they going to use on the handsets they're going to have over the next 5 to 10 years? So looking out in India, there's about 1.3 billion people. It's 4x the size of the United States as far as subscriber base. They are really, for the most part, on a 3G technology base at the moment. And over the next 10 years, we expect that every subscriber in India is going to be on a 4G network using probably 15 to 20 gigabytes a month. In the U.S., we use 10. And so that's the platform.

Your kids clearly are not using their phones as much as mine.

Yes. Well, yes, there are specific outliers that can cost families a lot of money. But yes, the average in the U.S., and that's everybody, is about 10 gigabits a month. And in India, it's almost double that. So it's going to be almost double that because they have no other access to entertainment or social media or communication than the mobile phone and won't for a long time because, again, there's no cable plant there. There's essentially almost no fiber to the home there. The fiber infrastructure is not as good to begin with in the backbone, so everything goes through mobile. If those are the demand parameters you're working toward, 1.3 billion people in 10 years and 20 gigabits a month, you can backwards model the infrastructure requirement to do that with the spectrum that's available in that country. And so for us, and we do look 5 to 10 years out, we do think that India is going to be a positive investment trajectory for us. Over the years, it needed to be reordered because the original industry structure of the mobile business in India was flawed. It was flawed because of a government auction that happened about 8 or 9 years ago where there was corruption involved on one hand. That led to too many licenses being deployed or transacted, let's say. Early on, there were too many mobile operators. There were more or less 12 national mobile operators in India that had licenses. Because there were so many operators and a limited amount of spectrum, none of them had enough spectrum to deploy a good 3G, let alone 4G network. We knew going into that market that was going to have to change dramatically. And it did change dramatically. So now there are 3 independent plus 1 government mobile operator in the country. Some of the question marks about churn and the AGR, as it's called, the revenue, the tax case that's going through the courts there is around Idea Vodafone, one of those remaining carriers. But at the end of the day, again, that country is going to have to serve over 1 billion people with 20 gigabits a month. If it's 2 or 3 or 4 mobile operators, it's slightly better for the 4 case. The 3 case is acceptable. And it's unlikely to be the 2 case because there's a government operator out there. The bottom line is that the way we're going to navigate the noise, so to speak, and that's the question, Michael, is recall the platform upon which we are operating, the demand that's going to be there 5 to 10 years and the fact that the science and the physics will drive what infrastructure requirements there's going to be. At the end of it all, there'll be twice as many cell sites as there are when the reordering is over, and that's going to be the ramp trajectory that will probably kick in, in the next year or 2. And so that's when I would suggest that our churn rate will get back to the normalized level is going to be in 1 year or 2 once the industry structure is set, the spectrum allocation is final, the taxes are settled, and we know how many operators we have.

And maybe returning back just to the question of the coronavirus. How would you lay out the risks for the company and your customers? And is it different domestically versus how it might look internationally for American Tower?

So I'd say on a short-term basis, we collect lease payments every month on our sites. That's 95%-plus of our revenue line.

And the good news is nobody is going to your site so you have no human contact?

That's right.

At your properties?

That's right. These sites run autonomously, actually, and the leases are paid electronically through means of not having to either collect cash in a storefront or checks or anything like that. So the short-term impact of the coronavirus on our business should be de minimis. The long-term impact should be, I would imagine, neutral to positive depending on how this goes because mobile connectivity could get more important if people want to gather less or congregate less in offices or conferences or whatever it may be. But setting that aside, the only downside scenario is sort of a financial crisis, major recession where our customers scale back their CapEx over a multiyear period of time. I'm not sure that's an outcome that's going to emerge from this, but it's the only one that I can think of that would have any kind of effect on our ramp of cash flow over the next few years.

And we got another question from our online question queue asking about the potential impact of DISH and if we can explore that, but also just explore how investors should expect the flow from the proposed merger more broadly as well in terms of what you would expect from that.

So to put the DISH entry into the industry into context, they've already been a customer of ours in our peer group for many years, mainly on a much smaller scale of license saving, kind of preserving their spectrum asset. So we know how to work with them as an industry. And as a company, we have existing contracts, we'll be able to merge right into their flow as they deploy a serious fourth network. The rate at which that occurs, the trade-off between roaming on T-Mobile's network and implementing their own sites and deploying their own spectrum that they're getting, that's something that only they can decide at DISH with their Board and their communication with their investor base, what's the CapEx contribution of the industry going to be. There's almost no scenario where I can imagine that this is not a neutral to positive outcome for American Tower. We just can't give you data yet on when are the applications starting, what's the bill of materials on the application, how many of them are going to happen in quarter-by-quarter basis. So we didn't put anything about DISH into our guidance for 2020 at American Tower. Once we learn more, we will start introducing that data into our guidance and you'll hear more about it. But it may take, again, T-Mobile, the first half of the year, let alone DISH the first half of the year to create that plan, communicate their requirements to us and then we can incorporate it into our financial model. So it's probably a back half of the year discussion, Mike. And if it happens sooner, we'll communicate it quicker.

A question up on the left here.

Just on DISH, can you explain what's the thing about their network, why does it make sense for them to go deploy a network they don't need, just running on Sprint that, I think, can support 4 networks?

So DISH will be able to do an approach, I would imagine, much like Reliance Jio or Reliance Industries in India, which is without the legacy network in place, they can take advantage of a greenfield design, first of all; free spectrum that they're getting, second of all; roaming prices to get them kind of started into real subscriber recruitment, marketing, sales, et cetera, that no one's ever had before in the United States. The other thing that they'll be able to do is use 4.5 or 5G technology to actually launch the whole network and not have to migrate from a 3 to 4 to 5G technology. There is some software-defined network capabilities that should significantly today reduce the core network cost, so not the radio access network that we participate in, but the core network of switches and data centers and storage. A lot of that hardware has been converted into a software solution, which will be cheaper for DISH to implement. So their core network will be cheaper. They have free spectrum where everybody else had to go out and buy the spectrum. They've got an existing mobile group that knows how to sell and market and bundle this kind of service with their existing services. So they're going to get off to the races, and I think they could be a viable competitor because they have advantages that no other new entrant has really ever had in this industry before. Again, to predict the rate, the subscriber growth, the network demand that then comes from it, the gigabits per month, we don't have enough data on any of that yet, nor does maybe DISH internally have it all complete. But once we get that, we'll be able to quantify it for you.

When you take the comments you just made about technology with the comments that you're looking for adjacencies, has American Tower explored the possibility of owning spectrum and deploying antennas like you do in the small cell DAS business for indoors but taking that outdoors and letting your customers plug-and-play into capacity, whether it's in the U.S. or in the international markets?

So Mike, we've explored that in-depth internally through our investment committee process and our CTO's inputs to that. And at this point in time, we've concluded that large spectrum investments are not something that American Tower is going to plan to do at the moment. We do have, I think, a leadership position in helping to shape how CBRS spectrum, which is a shared resource. Much of it has no cost to use it and is called the general access piece of that spectrum band. And for indoor usage, we think that's a terrific answer because the indoor venues today that have massive demands for data flow are things like stadiums, casinos, shopping malls, et cetera, where you have a lot of throughput and a lot of people. We think we can address a much larger market of multi-tier buildings. In other words, office buildings, condo apartment complexes, the kind of very low-density indoor environments that do not economically support a traditional DAS infrastructure and purchase spectrum into it. So we think we can greatly address the market of indoor venues by like a factor of 10 or more if we can find a low-cost solution to multi-tier buildings, frankly. But as far as us going out and buying large chunks of competitively auction spectrum, I don't necessarily see us doing that.

And can you discuss your efforts to explore the edge a little bit more? The company purchased some data center assets, I think, last year. And where are you in that development of the business opportunity for the edge?

Yes, sure. So edge compute, just to define it, is the deployment of servers and storage units in racks very far forward outside the cloud or beyond the cloud. So typically, you've got the image in your mind of a giant data center with racks and racks and racks and rows and rows and rows of electronic equipment, using lots of electrical power in a giant building. That's where most of the cloud resides today. A lot of that cloud is shared. So companies like Equinix and others will create that facility and lease out space to anybody that wants to use it. Others are proprietary, like Amazon and Google and others have their own big data centers. That's where most of the cloud lives today because the latency between you hitting something on your phone and getting a response, that's about 100 milliseconds using the big iron cloud, so to speak. And that's okay for now. But when you get into 5G, where you've got autonomous and virtual reality services, you have much bigger data throughput requirements that require backhaul costs that go with them. And especially when you have autonomous vehicle management and control, that latency is too long. It's too long of a time for the signal to get back to the cloud, get processed and then sent back to you or the vehicle to make a move, so to speak. So edge compute is going to be a requirement in the next 5 to 10 years for the cloud to operate in a way that 5G can support. And so what we're doing now is we're trying to get to where the puck is going 5 to 10 years from now by working with the cloud providers, working with industry verticals to say, okay, 5G is going to give these kind of capabilities that cloud computing can take advantage of. And the old fashioned, giant data center, cloud-hosting system is not going to be good enough. And it's going to need to first be deployed into local areas like AT&T and Verizon have both announced agreements with cloud providers to use the old central offices to put some racks up there on behalf of the cloud providers. Eventually, those are going to go, we think, to the network interface, to the radio network interface, which is our tower sites and buildings. And so the goal I have or the objective or vision at least is that if we can match up 2 or 3 cloud providers and 2 or 3 mobile operators in our tower sites and do the interconnect right there and have some storage and processing there that makes sense to locate forward deployed, that's a great answer and it really increases the value of our tower sites. So we have 40,000 forward deployed sites with, I think, 2.5 mobile operators per site on average. These are very attractive places for us to get another revenue stream into. And then we're going to figure out the business model now using -- it's really not a full up data center, Mike. It's more of an interconnect facility next to a big data center that's across the street in Atlanta. We need that sort of proof-of-concept platform to connect tower sites to, which we're doing 6 of them now in the Southeast U.S., to then use to demonstrate with these new partners of ours and our existing customers how this might work. And so we're doing proof of concepts with some pretty impactful and important companies in these spaces to figure out how we can use our POC platform, which is the interconnect center in Atlanta and the half dozen sites that we have up and running this year that we will have, to model this in reality and see how it works. And part of it is also to figure out who's going to market this to enterprises. So the cloud compute realm is not for necessarily a consumer, it's more for enterprises, big and small companies to use the Internet more efficiently in running their business. We know who the cloud providers are. We are the infrastructure provider, and we're actually working together to figure out, well, who's going to be marketing this to enterprises because neither one of us want to do it. That's not our core competency nor is it the cloud providers, generally. So this is a very, again, long-cycle program. It's part of our innovation initiative, but we've quantified that initiative to say, look, from our 2017 revenue or in 10 years, we're going to shoot to have 25% of that number come from innovative solutions, innovative adjacent assets and customers we don't have in 2017. And we actually got milestones all along the way to try to get there. And it's analogous, Mike, to something you'll remember because it was at your conference in 2007 where we said we would try to get 25% of our revenues from outside the United States in 10 years from, I think, it was 6% at the time. And we ended up having 45%. So this is a doable thing at this company, but we know it takes 5 to 10 years in an infrastructure business to change the direction of it and to get the rest of industry on board. So that's why we're pursuing all of this.

And so in the few minutes we have left, 2 questions, and then we'll get to the rapid fire. Just to follow on what you were just describing. A lot of times, we get questions of how tower assets in the different portfolios differentiate from one another. Do you see differentiation in your tower assets to succeed on this edge strategy differently than some of your competitors?

I'll speak to the attributes of our sites because I think those attributes are favorable to our traditional leasing business and they're also favorable to these new lines of business that we can address. When we've done inorganic growth, in other words, the M&A program of sale and leaseback of towers to us at scale, our strategy has been to either buy those towers from a legacy A or B-side carrier. If you don't know what that is, back in the days of the '90s when there was only 2 cell phone operators in every territory, those are the A and B. One was the incumbent phone company who got a free license and then some McCaw, someone else showed up and got the other free license. Those sites got first-mover advantage. I mean the Bell Atlantics of the world and the McCaws of the world, there was no industry out there. They tried to pick the very best places where people, wherever the elevation was, where the zoning was favorable to deploy those first towers. There was no rush to doing that and these were pretty well-capitalized companies. And so what they did was they built towers that would have the structural capacity and the ground space to not only have the best location around, but to have the most capacity going forward because they knew they were going to add equipment to these sites, they just didn't know how much and when. So again, the Bell Atlantics of the world, engineering-driven companies built these sites. And so we have towers from companies like Alltel, SBC. Verizon is our biggest acquisition that we've ever done. We think that these legacy A and B carriers have the best locations and the best assets, and that's where we transacted. So that's one advantage, I think, we have. Another one is that we have a history of working with industry verticals as it is. It's about, I think, 10% to 15% of our U.S. revenue base today. These are broadcasters, government authorities, the Gogo product you may use in an airplane. We have 70%, I think, of their sites on our towers, pointing up instead of down. So we have an organization that knows how to work with these different kind of customers. And then the other thing, the advantage we have is we are global, okay? We are positioned as the industry #1 or #2 in our industry, independent mobile infrastructure in 18 countries, all of them are free market democracies. And each of the largest free market democracy on every continent, except Antarctica and Australia, we have the lead position, right, Brazil, United States, Germany, Nigeria and India, okay? So we can now match up much, much better than anyone else can with the cloud providers who are also trying to operate in these same countries that we are. And obviously, ironically, they're not in some of the countries we're not like China and Iran, Russia because those aren't free market democracies where social media and Internet and cloud providers can be successful. So we have a really good matchup with the customers of the future as we do market-by-market with the customers and the presence. So I think those are our advantages is location and capacity from the assets we bought, our global footprint and then our ability to work with new tenants in different sectors.

And so we'll move to the rapid fire. First, will your property sector have more or fewer public companies a year from now?

I would expect the same as far as our side of the industry structure, Mike.

And then what will same-store NOI growth be for your property sector overall in 2021?

So if you look at 2021, we expect that we're going to have our now 3 traditional customers, assuming T-Mobile and Sprint will merge, at full power. AT&T and Verizon will continue to be at full power competing now with them on 5G. 2021 should be a very good year for our industry.

And just real quick, what will the 10-year Treasury yield be 1 year from today?

Well, Mike, I'm a lapsed engineer and I don't speculate on things I don't have data for, so I can't help you on that one.

Thank you very much.

You're welcome.