American Tower Corporation (AMT) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. It's my great pleasure to welcome Rod Smith from American Tower.

Thank you.

Thanks for being here today. Before we get started, please note that all important disclosures, including personal holding disclosures and the Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. So we've had a lot of conversations across the conference about 5G and about data demand and American Towers at the center of all of it. So why don't you just start, Rod, perhaps talking about the priorities and the opportunities for 2020?

Yes. Yes, that sounds great. Thank you, Simon. It's great to be here with everyone. Thank you for coming. So let me start by just saying a couple of things about 2019. We've just finished a great year in 2019. On a normalized basis, we grew our property revenues globally at about 9%. We ended up growing our organic tenant billing growth was about 7.4%. If you look at our normalized adjusted EBITDA, and our normalized AFFO, consolidated AFFO, it was growing in the range of 12%. And on an AFFO per share basis, normalized again, it was about 11%. And we also acquired about 9,000 sites during the year. We built 4,500 sites during 2019. We increased our dividend by about 20%. And we reduced our interest -- our average interest rate down to about 3.3%. So we really are coming off a very strong year that we feel really good about. We did all these things under the umbrella of Stand and Deliver, which many of you may have heard. Jim talked about it on the earnings call. But that's our multiyear kind of strategic approach to the market. And it has 4 pillars under it. You think about Stand and Deliver, its efficiency, trying to make sure that our business is as efficient as it can be. Primarily, they are focused on ways that we can reduce our internal operating expenses and increase our overall margins and also helping our carriers to be efficient. Leadership is the second pillar. So we really do want to be a leader in our industry. Not just in the tower industry, but the whole telecom industry, and Jim sits on many influential boards and things like that in order to accomplish that goal. Innovation is the third pillar. So we're -- we spend a lot of time with teams globally, thinking about the networks of the future. And trying to figure out if there are additional kind of incremental adjacent asset classes that we can invest in on behalf of our existing customer base that they might want to use connected to the tower sites. And also looking for ways that maybe brand-new customers want to use some of our infrastructure and maybe some of the new infrastructure. So we spend a lot of time on that as well. And then the fourth pillar of Stand and Deliver is growing our assets. And that really shows the focus when we can look back on 2019 and say we've built 4,500 towers around the globe, and we acquired 9,000. So we certainly have a clear focus here on continuing to grow the asset base that we have. Specifically for 2020, we're looking forward to progress all of these pillars, under Stand and Deliver. And specifically, integrating the acquisition of the Eaton Towers across Africa, making sure those are in the systems and fully ready to be leased up by our carriers. We also acquired assets from Intel in Chile and Peru, so we're integrating those rapidly as well. We also look for organic growth. So we spend a lot of time making sure that the assets we have are attracting organic growth and new leases and amendments from the carriers in the U.S. and around the globe. So we certainly spend a lot of time doing that. Specifically, in 2020, we expect to grow our asset base through built towers by another 6,500 towers around the globe. So a pretty robust development program in terms of building assets. And I'll just remind everyone, you probably heard us say it before. But when we build assets, that's our highest return on capital that we deploy. So we can generally get double-digit NOI yields day 1 when we deploy capital and build towers outside the U.S. Most of the towers that I'm talking about, the 4,500 we built in '19 as well as the 6,500 we will build in 2020 will be outside the U.S. We build very few towers today in the U.S. So we're looking forward to a very good 2020. Certainly, with the announcement that T-Mobile and Sprint has kind of gone over another hurdle and got closer to their merger, we think resolving that whole issue and getting that approved is going to be really good for us in the tower industry, by and large.

Sure. We certainly saw that in the stock reaction to the Judge Marrero decision.

Yes.

So let's delve into this a little bit more. Talk about what your guidance is assuming in terms of how the leasing commences and what we'll see in the first half versus the second half?

Yes. So in the U.S., we're looking at about 5% growth. That's the guidance that we put out. That's coming off of a 2019 result of just about a little over 7%, 7.3% or so. So there is kind of a noticeable step-down or deceleration in growth. There's a couple of things for that. Most notably, and we said this on the call the other day, that T-Mobile has paused the second half of 2019. That pause continues, and we're assuming that it -- that will last most of the first half of 2020. We are assuming that in the second half of 2020 that T-Mobile picks up the spending, that the merger gets approved and that they're kind of off and running, and then we'll be working with them to help them facilitate all their network plans, and we have revenue -- incremental revenue planned from them in the second half. I would say that in the case of Verizon and AT&T, the levels in 2020 are similar to what we saw in 2019. A couple of points that I would make relative to the step-down is if you look at '19, the new business that we got from T-Mobile was front-end loaded in '19 and then they slowed down in the second half. That means that revenue had a bigger contribution in '19, and it helped the growth rates in '19. And then because they paused the second half, in the first half of 2020, that incremental growth will have a smaller impact on 2020. So that's a big part of the step down from 7.3% to 5%. And then even if you go back to '18, 2018 was a big year for new biz. It was a record-setting year for us in terms of new business. That 2018 level was kind of prorated through the year. That certainly helped 2019 grow, the growth rates there. And then there was a step down in '19 in overall new biz. So that affected -- that will affect more 2020 even than it did in 2019. So you combine those things, along with the fact that our growing base -- every year, our base grows larger. If we have the same level of new biz, that results in about a 30-basis-point drop in organic growth. So you put those things together and that's how you go down from 7.3% to about 5%.

Now Q1 will have some MLA resets, which will help you?

Yes, we do have a couple of MLAs with our customer base. Some of them have incremental fees that kick in early in the year. The way that you'll see that kind of roll out during the year is, we'll be about 5% organic growth in Q1. That's what we expect. We think we will probably be below 5% in Q2 and Q3. And with the T-Mobile spending picking up again in, let's say, Q3, that will help Q4 and then we expect to be back up above 5% in Q4. You put all that together, and it'll be around 5% for the year.

So you're accelerating exiting the year?

Accelerating exiting the year. Correct. Yes. And certainly, the T-Mobile spend that we expect in the second half will have a nice impact to 2021.

So on 2021, you do have some lease expirations with Sprint coming up. So how do you think about doing some holistic arrangement that kind of manages and flattens out some of that churn?

Yes. Yes, so we do have leases with Sprint that expire in kind of the second half of 2021. And the fact that there's not that much time between, let's say now, but even more importantly, when the T-Mobile-Sprint merger closes, if it closes, there will be, let's say, a year between then and when the Sprint leases come up for renewal. That's a pretty short window, in terms of trying to reengineer that whole network, transfer the subscribers over. So chances are that those leases will have to be extended. So in that regard, we will look to work with T-Mobile, the new T-Mobile, to figure out what sites they want to churn off and when they want to churn off those. Chances are, a lot of them, they won't be ready before 2021. So it will kick them out into a new 5-year lease, and we'll end up negotiating some sort of a deal that helps them build out their network and to challenge AT&T and Verizon to be #2 or #1, which is T-Mobile's goal. And we look to maybe spread that churn out over a long number of years. We do expect that T-Mobile, the new T-Mobile, will probably spend more CapEx than Sprint, and T-Mobile did separately over the last few years. So we do think there'll be a step-up in spending for them to address all the network needs and the network, getting it up into the quality and the coverage zone that they have ambitions to. And that incremental spending will help offset some of the churn. So that churn, to put it in perspective and in terms of numbers, T-Mobile and Sprint each represent about 8% to 9% of our global property revenues. Where Sprint and T-Mobile share a site, where they're both on the same site, that's about half of that. So if you look at about, let's call it, 4% of our global property revenues, that's the revenue that coincides with another lease, let's say, another T-Mobile lease. So that's the amount of churn that we think makes sense that T-Mobile, over time, probably won't want to get on. And we think in a negotiation with T-Mobile that, that 4% can be spread over many years and probably offset by incremental spending from T mobile. As well as potential incremental spending from Verizon and AT&T as all 3 of them begin to race towards the best 4G coverage and maybe the first and best 5G coverage as well. And then in addition to all that, you have DISH that is kind of playing in the negotiations with Sprint and T-Mobile and through the whole approval process, it looks like they're going to come out of the end of this with an agreement where they take over some subs and they build out a nationwide network, they invest $10 billion and a whole lot of macro sites. So that could be a fourth entrant into the U.S. landscape.

That does not -- you don't really have much for that in...

We don't have that in our outlook. So it -- DISH is all upside, and there really is no downside. DISH hasn't been very active in terms of new revenue with us in the last couple of years. So if they continue to do nothing. It's the same as what we've been experiencing. And to the extent that they begin to build a network, we would love to partner with them and work with them and help them do that. And that would be upside revenue for us.

You give them a lot of one-stop shopping with your footprint, right?

Yes. Definitely, yes. We have 40,000 sites in the U.S. and those would be important transmission points for them.

And remind us how that splits between kind of top 100, top 50 markets versus below.

Yes. So we -- our sites, if you think about our portfolio, it's really in the suburban and the rural areas of the U.S. And the important thing there is it's specifically not in the dense urban area. So when you think about DISH rolling out a nationwide 5G data network and/or the other carriers rolling out 5G networks, we believe, and I think we're seeing this happen, where small cells are being deployed in the urban centers. And over time, they'll be deployed in the urban centers using millimeter-wave high-band spectrum. When you look at the suburban areas and the urban areas, where 85% of the population of the U.S. resides, that's where 95% of our towers are, are in these neighborhoods in the suburban and rural areas. In that context, 5G will be deployed, we believe, off of macro towers probably paired with mid-band spectrum. That seems to be the best engineering and economic way for the carriers to get 5G deployed and to take advantage of increased speeds, reduced latency, increased capacity, better spectrum efficiency. They can get all that done in a reasonable way using that mid-band spectrum.

So that's the C-band?

It's the C-band spectrum, right, is a big one. But anything in that 2.9 GHz range up to 4.2 GHz, I think it is in that range. So that's how we think that the 5G networks will be deployed in the U.S. and macros are in a perfect position to help these carriers deploy 5G and allow them to use mid-band spectrum on macro towers.

While we're still on the U.S. Coming to this innovation point, you did buy a data center in Atlanta. So how do you think about that edge opportunity for the company?

Yes. So the edge opportunity, we're still exploring that. But one thing is clear, that networks of the future and use cases in the future will require lower latency and much faster speeds in the network for the functionality that people want when they're talking about gaming or entertainment and other things that they want to do. One of the things that's becoming very clear is having the compute power and the content closer to the end user helps a great deal with that latency. So bringing that content caching and that computing power to the edge, and when I say edge, that doesn't mean like next to Simon or I, it really means being next to the base radios that are in the network. So wherever those base radios end up, that's where the carriers are going to probably want to store their content and do some computing power, so they can get it right into the base radio, and then that sends it right out into the antennas and that reduces the latency significantly so that real-time gaming and things like that work appropriately. So we did buy a data center in Atlanta, we spent about $75 million for it, good financial traction, good returns, and we're seeing good growth. So on its own, it makes a lot of sense from that perspective. From a strategic perspective, we did it to learn more about how you run and operate a data center in these interconnect points and things like that so that we can be prepared and more knowledgeable about data centers and edge computing and edge caching in the future. So we have a few trials. We have about a half a dozen small data centers that we're deploying at our sites, and we're trialing some different things like that. So we're working on that quite a bit. We think that that could be promising. It's clearly, in our view, it's not a 2020 impact. But in 2020, we'll certainly learn -- we'll learn a lot more.

Great. So if we turn to international, obviously, India has been a big focus. I think your guidance assumes basically flat revenues. Is that right for this year, with churn reduced but still ongoing churn? Just talk us through what we should be looking for out of the Supreme Court and next steps?

Yes. So India has been a very interesting situation for us over the last several years. It's a great market. It's a robust wireless market. It's got 1.3 billion people there. There are 2 commercial carriers deploying 3G networks, there's one carrier deploying a 4G network. An interesting data point is if you see the Indian citizens that have access to a 4G network, they actually consume more bandwidth on a monthly basis than the same -- than the people in the U.S. that are on those same devices. So once you get the network up and running and you get the handsets in their hand, they use it, and they use it to an extent greater than what you see in the U.S. I think that's a promising point. We've experienced a lot of consolidation in India. That market collapsed or transitioned from 13 different carriers down into about 3 different commercial carriers and then a fourth government-backed carrier. That consolidation was rapid, and it was pretty deep, and we saw some significant churn in '18 and coming into '19 and we're just coming out of that now in 2020. We'll see a little bit of churn in the first quarter of 2020 from that. And other than that, we think the whole consolidation issue is behind us in India, which is a really good fact. So then you look at the market, and it's a market again with 1.3 billion people, 3 commercial carriers, feels pretty good. Those networks are now transitioning. They're still building out coverage for 3G, and R-Jio is building out 4G. Eventually, they'll all be building out 4G. And eventually, they'll all be building out 5G. So we have 70,000 towers in India. And it's a really nice portfolio, and it's a great market. We think there's a lot of upside opportunity. So we're still very bullish in terms of the long-term returns that we can drive in India. Recently, the Supreme Court in India made a ruling around an old court case that dealt with the definition of adjusted gross revenues and how that transitioned or related to tax payments that the carriers were responsible to pay. This is something that goes back 15 years, the carriers had made their payments. They've been challenging the rulings in different lower-level courts. Along the way, they've been getting favorable rulings, favorable to the carriers. And then recently, the Supreme Court, kind of the final word, defined adjusted gross revenues in a way that was unfavorable to the carriers. It resulted in pretty significant liabilities for the industry. It's about $17 billion spread across current wireless carriers and telecoms as well as some non-telecoms and some telecoms that already exited the market. It's interesting to point out that only 25% of that $17 billion is actually the tax. 75% is the penalties and interests that accumulated over a long period of time, almost 15 years. So the underlying tax is not really a problem for the industry, I don't believe long term. It's really just this onetime penalties and interests. It comes to the order of magnitude, something like $4 billion for Vodafone-Idea, about $4 billion for Airtel as well. R-Jio doesn't really have a liability because they're a new entrant to the market. They weren't in 15 years ago. So we're waiting to see now that telecoms have petitioned the Supreme Court and different courts to get relief and they've been denied. Now they've made a petition to the government, to the Modi government, the executive branch, and they've asked them if they could present their case and ask for leniency and relief from the taxes. And the government said, yes, we'll allow you that opportunity. So that's a good sign. That hearing is scheduled, I think, for March 17th of this year. So they'll go in, they'll present their case and then we'll see what happens there. And if there's relief granted, we'll move forward and react to that. And if not, there'll be some other direction that the industry ends up going in. But if you think about the industry in India. With that many people, the 3 carriers feels pretty good. The India government has stated publicly that they really want to have 3 commercial carriers in India. Reliance Jio is a carrier that was spending billions of dollars building out a 4G network, and they were basically providing the service for free. And they were increasing their net adds quite dramatically. Even along the way, they were saying, we're going to do this until we get to about 45% penetration. And then we're going to increase our tariffs, which is increasing the pricing to their customers, so that they don't continue to increase their penetration. They wanted to hold back at 45%, because they don't want to get over 50% or else they think there will be government scrutiny, government regulation. So that, again, kind of would suggest that you really want 3 players. You don't want any one carrier to be over 50% of the market. So even the other telecoms believe in that, the government believes in that. So we're watching, like everyone else, but it does make sense that the government would provide some relief so that they can have a healthy industry with the 3 carriers. India is also very constructive on what they call digital India. They're trying to transform their whole economy to a digital platform. They've required all citizens to have bank accounts. They access those bank accounts through telecom networks. Most places in India don't have landline network so they access that through wireless networks. So it really is important that they have healthy wireless industry in order to progress their Digital India concept, which, again, is a very significant initiative led by the government, Modi's government in particular.

And of your 6,500 new builds, like 5,000 are in India. So what was the mindset to, like, accelerate the new builds in India?

So it's a great question. So when you look at India, we have, as Simon said earlier, we have 0% organic tenant billing growth planned for 2020. If you look at the bits and pieces under that, we have about 9% growth on a gross basis. We also have 2% escalators across all the contracts in India, and then another 1% for some other things that bring in. So on a gross basis, we're growing the revenue organically at about 12%. So there is activity in India. It's not coming from Vodafone-Idea at the moment, but it's coming from R-Jio, BSNL and Airtel. And then we have 12% churn. Some of that is the India consolidation churn that I talked about that's going to be hitting in the first quarter of 2020. And then a chunk of it is existing like kind of normal churn. And then we have a piece of churn, maybe about half of the overall 12% or a little less than half we've earmarked towards Vodafone, and it's basically an acknowledgment that they won't be spending money this year, depending on how the court case comes out. And to the extent that any of their leases come up for renewal, we're just assuming they're not going to renew them, which I think is probably a conservative viewpoint on a couple of different counts. I'd also just point out that Vodafone has about 4 years left, on average, on their contracts. So they have staggering maturity dates over the 4 years. But on average -- even more than 4 years, but on average, they have 4 years left. So even in a worst-case scenario, there still is underlying contracts there that protect the revenue stream for many years.

Great. So maybe to come back to the Americas. Brazil is an important market for you. Just talk about some of the trends there?

Yes. So we -- in across Latin America, we like the market a lot. We just bought -- not in Brazil, but we just bought another 2,400 sites in Chile and Peru. We've seen good growth in the -- throughout the region. We are looking at 2020 to have revenue growth in the 7% range across Latin America, maybe in that, a touch higher in Brazil and a touch lower in HispAm, but in that general range. So it's pretty good growth rates there. The gross growth is even higher, but we have a little bit of accelerated churn or increased churn because of the Nextel churn issues that we see there. We also have a couple of other carriers that are exiting the market like Oi and potentially Telefónica is merging in with their network and with AT&T up in Mexico. So there are a few things going on. But by and large, when you look across Latin America, we do see these major markets kind of shaping up to have 3 or 4 major carriers similar to the U.S., a healthy population that is demanding the services and carriers that have the money to invest. So we do think that these growth rates throughout Latin America will -- could be at higher levels in the future when the churn issues go through. The other thing that's noticeable is a lot of the markets in Latin America, the leases escalate based on CPI. And the CPI has been lower, and it's been dropping in the last couple of years. So the underlying actual activity is very strong, and the churn has ticked up a little bit and the CPI has come down a little bit. That will probably reverse itself at some point. But we do see all of our international markets, including Latin America, that in general, and over time, that they grow at least a couple of hundred basis points faster than the U.S. business does. That's the same in Brazil and in Mexico. So a lot of the sites that we're building are in Brazil and in Mexico. Of the 6,500 sites that we expect to build in 2020, about 5,000 of them are in India. And most of those are with Airtel. So not with Vodafone and not with R-Jio.

Do you assume lease-up on that? Or are you happy with one tenant?

Yes, with one tenant, we end up coming out of that on a day 1 NOI yield of double digits. So we're happy to build them with 1 tenant. But yes, we do expect to get lease-up over time. But we still have double-digit NOI yields even with the one tenant. So it's a much different build-to-suit market and build-to-suit economics than what you see today in the U.S., which is why in the U.S., we're not building that many towers in the U.S. because it's just so competitive. And those day 1 NOI yields are down in the single -- low single digits. But in India, Latin America and in Africa, we still see very good returns, and in Europe. So we also just signed an agreement with Orange, where we can buy up to 2,000 sites over the next couple of years from Orange in France, where they're basically building the sites, brand-new sites and then flipping to us, and we pay them. So we'll be accounting for that as acquisitions. You'll see it kind of run through our numbers as acquisitions. But it's really like we're partnering with them to build the sites and then we'll own them after they're built. So that's a way where we can increase the scale of our French business and add 2,000 sites. So we've been very constructive and very happy with our build-to-suit programs outside the U.S. for the last couple of years. Again, we built 4,500 towers in 2019, we expect to build 6,500 towers outside the U.S. in 2020.

All right. We've got a couple of minutes left. If anybody has any questions?

Yes. Can you talk about if the situation in India is causing you guys to add any additional parameters to your underwriting?

No, we haven't changed our underwriting process. Our underwriting process is robust. Our -- the way we approach investing is pretty disciplined. To kind of put it in perspective, as we did the modeling and the underwriting in India, we certainly expected that the 13 to 14 carriers that were there would consolidate over time. And just like it did in the U.S. years ago, and it's done in other markets, over time, that usually works out perfectly fine because the demands on our towers are really driven by the amount of data that's consumed, it's not necessarily the number of carriers. So in a place like India, we thought there would be churn. We thought there would be consolidation. That consolidation happened very quickly, much quicker than we thought. So the impact is much more noticeable because it's very acute, and happened at a very short amount of time. We are still very positive on the long-term outlook of India. We still -- we see a market with, again, 1.3 billion people. They need that service. They consume more data when they're on a 4G network than the people in the U.S. do. The government is pushing a digital environment for the economy, which needs a robust wireless market. We have 70,000 towers in India. Across India, there's probably about half -- about 0.5 million cell site transmission points. We think that needs to double and even more than double over the next several years to really get 4G networks to where they need to be and then eventually in a 5G world. So there's a significant amount of upside in India. And we think that is really good. To put it in perspective, in terms of our investment in India, we invested about $3.3 billion in acquisitions. We then further invested another almost $900 million in new towers that we've built and so we've invested a little over $4 billion in India. We've also collected cash from operations of over $2 billion, almost $2.2 billion. So almost half of that investment has been kind of self-funded with the cash that we've generated in India, which brings down our net investment to $2.2 billion, $2.5 billion, somewhere in that range. And like I said, we're still very positive on the long-term opportunity in India and to have 70,000 sites in a market like that that now has 3 carriers and has gone through the consolidation, we're looking forward to the long-term nature of that market. So we're happy with where India is. The AGR issue is, we didn't anticipate that. The new issue with Vodafone. So we'll see how that works out. In Canada, you know, everyone probably knows, we're behind our business case in terms of the investing. But that doesn't change our long-term outlook in terms of India. We think there could be a lot of upside. It's certainly not a market that we want to ignore. We think it's worth the investment to have some assets in India.

Great. Well, Rod, unfortunately, we're out of time. Great overview. Thanks so much.

Great. Thank you. Thanks, everyone.