American Tower Corporation (AMT) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. I'm Rick Prentiss. Welcome to the 41st Raymond James Institutional Investor Conference. I'm the head of telecom services research. And we do have a great mix of our wireless satellite data center and also tower companies. A modified fireside chat format for us. The -- a few minutes of prepared remarks by American Tower, followed by a fireside chat and then some time for your Q&A and then down to the breakout session. As for those of you who have been some of the room for me, over the last 2 days, I've got 2 rules, we're not going to call it coronavirus, we're going to call it the virus. Unfortunately, 38% of Americans have been polled and think you get it from drinking beer, is how you get the coronavirus. And some of the Europeans asked me, is that true? I said, yes, unfortunately, it's an indictment on our social media and news sources in America. And yesterday, actually, SBA and I had a Corona beer at the end. We're also -- when we talk about 5G, we're going to talk about business cases, not use cases, because we know we'll use it, but is there going to be money behind it. But we're really excited that American Tower is here today. Igor Khislavsky is here, head of IR. Largest market cap REIT out there. Touching the $100 billion mark depending on whatever is happening in the market and the fed and everything else that's going on. But Igor, a few minutes of prepared remarks, and then we'll head over to the fireside.

Great. Thanks, Ric. Thank you, everybody, for being here this afternoon. I'll kick it off with, like Ric said, just a couple of minutes of prepared remarks, and then we can launch into Q&A. American Tower is a globally diversified provider of multi-tenant communications infrastructure. We operate on 5 continents across 19 different markets. We now have roughly 180,000 sites throughout those markets. And fundamentally, what we're doing is providing the underlying infrastructure to support mobility on a global basis. And as time has evolved, mobility has become more and more important everywhere, as you all know, throughout your daily lives. I look at my screen time every day and I'm horrified. I think I'm probably not alone. And that's the case really, not only in the U.S. which has been a phenomenal market for us over the last 20-plus years, but also now throughout a lot of international markets. And what we've done is we focused on the largest independent democracies across the world in terms of where we have expanded our business: Brazil, Mexico, Nigeria, India, South Africa, a number of other markets as well. And the fundamental thesis that we've had is the model that we've developed in the U.S., which is a fixed cost, very high operating leverage-type model is transferable across markets. And so the really high margins, the solid organic growth that we've been able to sustain over a long-term period in the U.S. is something that we believe we can export internationally on a global basis. And if you look at our track record, we've delivered mid-teens growth in AFFO per share, which is the key REIT metric. We are a REIT, of course, that we're valued on for the last decade-plus. The goal of the company today is to leverage that global secular demand for mobile data usage to extend that track record as long as possible into the future. And what we're doing is we're leveraging the underlying organic growth potential of the business, where you're adding more equipment and more tenants to existing sites and pairing that with inorganic growth through both our new build program, which is accelerating this year, as well as through selective acquisitions on a global basis. That, together with our dividend, which has grown over 20% since its inception in 2012 on an annual basis, we believe will enable us to deliver really solid growth and very strong total stockholder returns over a long-term period. So that's what we're focused on today. And with that, I'll have Ric launch into Q&A.

Here we go. All right. Great. 5G is quite the buzz, right? We had Super Bowl ads, we've got the Sprint, T-Mobile deal approved in large part because of what it can help with 5G in America. A lot of spectrum auctions either happening or about to happen. What does 5G mean to American Tower?

Sure. So clearly, we've all been talking about 5G for, what, a couple of years now. We think that, eventually, it will be really potentially transformational, frankly, in a number of different respects, first and foremost, for industry. In fact, a lot of the initial use cases, if you will, in our view at least, are probably going to be oriented towards enterprise more than the consumer. And as part of that, we look at 5G in much the same way as we've looked at other technology deployments in the past. So you've, obviously, in the U.S. gone from 2G to 3G, as you all know, to 4G, and now you're going to be going to 5G. In all cases, those network builds have taken a decade-plus. So at the highest level, we think we're at the very beginning stage of a decade-plus growth path for 5G. What that will mean for us, we think, is more equipment on more sites and obviously, incremental organic revenue growth as a result of that. And I think as you peel back the onion a little bit, the key components of the 5G buildout as it relates to the tower business is spectrum, right? So what different bands of spectrum are going to be deployed as part of that 5G rollout? And what we see today is 600 megahertz is already being deployed now. What we think will be even more impactful in the future is the mid-band deployment. So obviously, as you alluded to earlier, the Sprint, T-Mobile merger comes along with a whole heck of a lot of 2.5-gig spectrum that Sprint currently owns. We believe, and the new T-Mobile has publicly stated, that they intend to deploy that very aggressively over time. That should be a net positive for the towers. You're going to have other mid-band spectrum assets, we think, coming to market. Presumably, there will be an auction of the C-band maybe sometime this year. That will eventually be deployed. And so as those new bands get deployed, because the propagation distance or the distance the signal travels using mid-band spectrum isn't as great as lower band, which has historically been deployed across macro towers, we think you're going to see a tremendous incremental need for more network density. And again, I hate to come back to the same thing, but what for now density means for us is more equipment, more towers and more revenue. So we feel really good about it. I think it will take time to develop. That time line will be influenced by the availability of spectrum, we think. But we're excited about it. We think it's a big opportunity for the industry.

And I think we coined the acronym, GFT, good for towers, and 5G sounds like GFT.

Absolutely agree.

How about GFSC, good for small cells? And how about, what is your thought on American Tower doing small cells or fiber?

Sure. So we are actually the largest provider -- independent provider of indoor small cells in the U.S. So we've got I think 450, 460 venues where we have distributed antenna systems, which is a form of small cell. These are hotels, casinos, convention centers, NFL stadiums, NASCAR tracks, venue-based locations. And what we found so attractive about these installations historically is you have had real estate exclusivity in these places. So when we come in and build a distributed antenna system in a mall somewhere, no one else can come in and build over us. And we're the only neutral host. Our tenants know that there's a significant amount of foot traffic, it's high-value foot traffic in that location, and they're willing to pay lease rates that are significantly higher than what you would pay on a typical macro site because the cost of deploying DAS are significantly higher as well. So on the indoor side, we've seen really good momentum. The returns are very similar to towers, and we continue to invest in that. On the outdoor small cell side, and these are fiber-linked outdoor small cells, we have been a lot less aggressive in the U.S. And there are a couple of reasons for that. Number one, in our view, you don't have the same real estate exclusivity outdoors that you do in a venue-based solution. And why does that matter? Well, if you go to any significant city in the U.S., and you're on a main road, let's say, you're going to have at least half a dozen different fiber providers to choose from. What that's led to, in the past, is declining price for fiber. So whereas in the tower world, you've got, in the U.S., 3% annual escalators, in the fiber space, traditionally, price has gone down every year. So that's kind of one component. The other component is, in our view, if you're going to be a scaled, small cell operator outdoors, you are also going to have to run enterprise fiber businesses. And not to say that enterprise fiber is a bad business by any means, but it's a different business, in our view. And so you've got much higher churn, you've got much higher levels of SG&A than the tower business. And in our view, the returns around that business are simply not as attractive. In addition to all of that, the small cell business is inherently more capital-intensive than the tower business because even if you have the overall fiber run, every time you're looking to deploy a specific location on that fiber, you've got to trench, you've got to splice the fiber, you've got to make that connection. That all cost money. So when we roll all of that together, again, we don't think it's an unattractive business, but in the context of the overall capital deployment opportunities that we have, not just in the U.S., but really globally, it hasn't risen to the point of justifying deploying that incremental dollar of capital versus all the other alternatives that we have. But to circle back to your original question, I think 5G will be good for small cells. What we don't think will happen is we don't think that 5G inherently changes some of the challenges around the small cell model. So there will be growth there, absolutely, there are decent returns to be had. We continue to think, however, that we can do better elsewhere, and that's really what it comes down to.

I think yesterday, talking with another tower company, I said, whatever floats your boat, but we prefer the moat. And the towers are truly a very moat-able business and a very valuable business. When you think about the return on capital you're getting internationally then, let's talk a little bit initially about why you're doing fiber in some of the LatAm markets and possibly others. And then also, what kind of return on capital hurdle rates do you have as you look at Africa, India, et cetera?

Sure. So on the fiber front, we have selectively deployed a little over $1 billion at this point on fiber and small cell related assets, primarily in Latin America, with small pockets elsewhere. The thesis there is unlike in the U.S., where every tower site is -- that needs fiber basically already has it today as backhaul, in Brazil, in Mexico, just looking at our own portfolio, probably 30% of sites have fiber as opposed to 90%-plus probably in the U.S.

And that's important for 4G, not just 5G?

It's critical for 4G. So the context is when you ramp to a 4G environment, you have a lot more data throughput going through the network. And for backhaul purposes, where historically you could get away with microwave backhaul or copper even, for 4G, it becomes very difficult unless you have a fiber backhaul connection to the tower. So in the U.S. the way that evolved was we left that to third parties. Third-party regional fiber providers laid that fiber. Our tenants took care of those fiber connections. In Latin America, and potentially in select African markets and maybe in India, there's a different dynamic in that, a, there's less available capital for the tenants to deploy; b, unlike in the U.S., where our portfolio is primarily suburban and ex urban and highway corridor-oriented, in Latin America, most of our portfolio is actually urban. And so what we acquired was a company in Mexico, and then we've done a couple of subsequent acquisitions in Brazil, where you had some urban fiber rings that we bought. The initial opportunity was, okay, let's take this fiber and link it up to our own towers as backhaul, that creates really good value for us, makes our sites more attractive for colocation. And then down the line, the theory is as you progress through the 4G evolution in a place like Mexico, one of the other things that came along with this acquisition was about 50,000 to 60,000 cement poles. And so you could say, well, why do you have poles there? Well, in Mexico, fiber is primarily aerial. And so these poles bring that fiber into enterprise. And the theory is you're going to have 50,000 to 60,000 fully scaled, fully approved, from a zoning perspective, locations. You have obviously the fiber there. You have ready access to power. And once you get that 5G- or 4G-driven densification with small cells in these markets, you can market that scaled solution to your tenants. So that's the longer-term opportunity. I think our early progress in these businesses has reinforced to us the viewpoint that fiber is a different business from towers, much more complex. And we've had some challenges. But I think, overall, long term, we're optimistic. We think we are adding value to our sites through those fiber connections. We do have the potential opportunity for small cell growth there. But in terms of returns, we're looking for returns in these markets that are basically identical to what we look for, for towers. And in a place like Mexico or Brazil, your return threshold, and this is all on an unlevered basis, is low to mid-teens for IRR hurdles. In Africa and some places, you're talking about high teens to low 20s. In India, it's more in kind of the low to mid-teens range as well. So for us to deploy capital to fiber or into small cells anywhere, what we're looking for is for the return profile of those deployments to really be equivalent or better than a macro tower deployment in that same market.

Okay. The risks internationally are clearly higher as well. Currency risk, political risk, regulatory risk, India has seen certainly its share of the risks happen. Walk us through and educate some folks about what is happening -- what has happened in India, what's happening right now, and it's still the largest area of where you're building new towers.

It is. So kind of as a high-level view, the Indian market has over 1.3 billion people. Of those 1.3 billion people, probably 1/4 of them have smartphones today. In that, 75% are still using 2G, clamshell-style phones that we were using 20 years ago. And so the long-term opportunity in India, we think, is as you move from a 2G environment to a 4G environment, you're going to need tremendous incremental network density to be able to provide service levels that are high enough to account for the tremendous increases in mobile data usage that will accompany that transition. So that's the long-term view. In the sort of near term, over the last couple of years, what you've seen is a wholesale reorganization of the Indian wireless sector. The starting point was basically you had 14 or 15 wireless carriers in the marketplace, which was far too many.

Not sustainable.

Not sustainable. They all had very small slivers of spectrum, and they were operating in a 2G environment. So not a ton of data, basically just talk and text. And those small slivers of spectrum were more or less sufficient for them to run businesses. They were not sufficient to do anything other than 2G. So you had, a couple of years ago, a new entrant into the market with Reliance Jio that came in and spent $30 billion to $40 billion on a brand-new 4G network. So Reliance Jio came in to a 2G market and basically said, you know what, we're going to completely bypass 2G and go directly into 4G. And so the net impact of that for the industry has been a very rapid consolidation. You've gone from 14 or 15 carriers to 4, including BSNL, which is the government carrier, in the space of basically 2 to 3 years. So on our business, what you've seen as a result of that is high levels of churn. We've been compensated for some of that churn through a settlement agreement. But today, what you have is a much more rational industry structure, in our view. You've got 3 big carriers, plus a government entity. You actually had a significant pricing increase late last year in the industry, which is obviously helpful for everyone. On the other side of that, you had a new issue crop up, and this is called the AGR, or adjusted gross revenue, case that's filtered its way through the Indian Supreme Court. And basically, this is a gross revenue tax, essentially, that had been in dispute for, I think, roughly 15 years between the government and the carriers. The government argued that the carriers had very high liabilities relative to their taxes. The carriers argued that those liabilities should be lower. The Supreme Court weighed in last October and sided with the government, really from 2005, not the current government. And so the impact of that is the carriers have significant obligations to pay. And Airtel, which is a significant carrier in the marketplace, I think is in fairly decent shape. They've raised some money. And then Vodafone-Idea, which is a significant customer of ours, is also being required to pay a significant amount of money under this AGR issue. They're in the process, along with the other carriers, of seeing if there are ways to, a, reduce the amount; and b, potentially stretch the timing of the payment over a longer period of time. So we will let that play out. We don't have an inside track as to how it resolves itself. And I think it's likely to take a bit of time. But longer term, the fact remains that to get from a 2G environment, where we're in today, to a 4G environment. Estimates are that you basically need to double your site count in India. And so for that to happen, the carriers obviously have to be able to invest in the networks. And we're certainly optimistic that this gets resolved in a rational manner and we move forward.

Sure. Let's take a moment and see if there's some questions in the audience. Yes, back there?

With the potential combination of T-Mobile and Sprint, can you walk us through the impact on the 4 customers to 3 customers and how should we think about the forward effect then on that?

So the question is, with the Sprint, T-Mobile merger looking like it's close to being approved, what happens when you go from 4 to 3 carriers? And then I'll add on top of that, DISH may be coming into the equation as well. What's the impact?

Sure. That's a good question. We've always said from day 1 when this merger was announced back a couple of years ago that we felt like, over a long-term period of time, this would be net neutral to net positive for us for a number of different reasons. Number one, the new T-Mobile has said publicly that they expect to spend upwards of $40 billion on CapEx in the first 3 years post-merger. So if you look at that number on an annual basis and compare that to the CapEx spend that those 2 entities had been spending over the last several years, it's probably 30% to 35% higher. So at a minimum, that suggests you're going to see a lot of activity on towers in the immediate term. Then, as Ric noted, you now aren't really going from 4 to 3, it's -- you're kind of going from 4 to 3 initially, but then you have a de facto fourth player emerging in DISH. So anything that DISH does, and they have specific rollout requirements that they will have to meet, will be incremental for us because, at this point, DISH is not a material customer on our sites. So those are 2, I think, fairly clear positives for us. On the other side of it, we do have a number of leases with Sprint that are coming up, most of them for renewal, in late 2021. So late next year. And in theory, you're going to have the risk of some churn. If you look at every site where you have a T-Mobile installation and a Sprint installation on the same site, you're talking about somewhere between 3% and 4% of total company revenue that would be at risk if they took every piece of Sprint equipment off of those sites. And so that's sort of the churn picture. Look, I think the TBD on exactly what churns off, exactly what sites are kept, at a minimum, I think to transition Sprint's customers off of Sprint's network and onto T-Mobile's network, there will have to be significant incremental investments ahead of that to simply handle all the data traffic associated with Sprint's customer base. And so the ultimate equation for us long-term is what is the total volume of data being carried across all these networks in the U.S. I think there's really no indication that that's slowing down at all. Two, what is the aggregate CapEx spend on wireless CapEx across the industry. I think most folks would agree that it seems unlikely that, that aggregate number is going down in the next couple of years. That's probably going up a little bit. And so you stack all those things together, and in our view, long-term, this is probably more of a net positive now that DISH is involved than anything else. And you may have some years where you could have some elevated churn levels theoretically, but I think when you stack it all together, we're actually really constructive on the deal. And I think you sort of saw that in the sector reaction to the court approval.

Right. And I guess the other add-on to the question would be, a lot of times, the industry does master lease agreements, MLAs, or new MLAs, particularly for complicated projects. How long could it take, should it take to kind of put an MLA in place given the complexity?

It's a really good question. If we look historically, and we've had a number of these MLAs in place over the years, some negotiations have been a couple of months, some have been 3 years. So look, I think, in this case, if we do an MLA type of a scenario, one would think that it would be faster than 3 years.

I think because they want the whole thing done in 3 years.

Right. So -- but look, we'll see. I think we're certainly open to -- more than open, frankly, to working with the new T-Mobile to reach a mutually beneficial path forward. I think we're obviously invested in allowing them and enabling them or at least helping to enable them to create the most efficient network they can. And so we're ready to go on that front.

Any other questions from the audience before I toss some more to him? We've got time for probably one last question. I think a lot of people, income, REIT, infrastructure guys, look at the dividend. You guys have done a good job growing the dividend since converting to a REIT and paying your initial distribution. How should we think about the trajectory of the dividend going forward?

Sure. So for 2020, and obviously, this is all subject to the discretion of the Board and their approval, but we would expect to continue to grow the dividend at 20% this year. Longer term, I think the expectation is you're not going to grow 20% in perpetuity, certainly. But we would expect to be able to do double-digit growth for the foreseeable future in that dividend. And I think to add on to that, at this point, in 2019, I think we paid out 47%, 48% of our consolidated AFFO as dividends. That will -- that payout ratio will grow progressively over time. But the typical REIT pays out probably 75% to 80%. We're still well below that. We're retaining quite a bit of capital to be able to reinvest in growth initiatives, and I think that will continue really for the foreseeable future. But the dividend will continue to grow as well. So we view it as a critical component of the overall total return story.

And leverage staying in the investment-grade range of...

Yes. Fully committed to investment-grade. Our overall target is 3 to 5x. We've been sort of in that 4 to 5x range over the last couple of years. I think that's probably a good range in the near term given where we are from an interest rate perspective.

Great. We'll take the rest of them in the breakout session. Thanks.

Great. Thanks, Ric.