American Tower Corporation (AMT) Earnings Call Transcript & Summary

All right. Thanks for joining us. My name is Phil Cusick. I cover the comm services and infrastructure space here at JPMorgan. I want to welcome Tom Bartlett, the President and CEO of American Tower. Tom, congratulations on your promotion, and thank you for spending some time with us today. We're really happy.

Thanks, Phil. It's great to be here even virtually. Look forward to when we can do this back down at the waterfront, face to face.

Yes, for sure.

Just first, given these unprecedented times, can you talk about what American Tower is doing to address this pandemic with customers and employees?

Well, Phil, it's interesting. I took this role on the very day that the baseball season were -- was canceled. So the last 60 days or so has been all about business continuity and keeping our people safe. So as many businesses and yours is doing around the world, it's all about preserving the health and safety of our people as well as keeping business going and keep servicing our customers. And so all of our people around the world, virtually all, are working outside of the office and we actually have been able to do it really, really well. Our IT staffs have ensured that we have full connectivity and being able to communicate with each other and operate the business and continue to service our customers. And I think we're going to be doing that for some period of time, and we now have a program office working on remobilizing when it makes sense. My hope is that we'll be able to continue, and our business lends itself to it, to be able to operate outside of the office. And so we're going to be different on a post-COVID world, I think, in terms of our work processes and who needs to be in the office and who doesn't need to be in the office. But my sense is that we're going to go through several waves of in the office, perhaps not being able to be in the office until we have kind of full vaccines. But we've been able to weather these storms really, I think, quite well. We've been able to continue to service our customers on a remote basis. Globally, we're in 19 markets, and each one of them are very different in terms of where they are from a government directive and a process perspective. But -- and we're working very closely with outside advisers in getting best practices, whether it's the World Economic Forum or the Business Roundtable as well as even Mass General are actually supporting us now in terms of giving us advice in terms of how to deal with this pandemic. But I think we're doing really well, and I hope you all are as well.

Okay. Okay. Just before I continue, I neglected to say that we have a chat feature, where if you want to ask questions, you can put those in, and I can monitor that and pass them along to Tom, if that makes sense. Tom, you're welcome to put any questions, too.

Thanks, Phil.

Since we're still in your first 100 days, can you talk about any changes that you see for American Tower under your leadership versus Jim's?

Well, Jim and I worked very closely for the last decade on our strategy as well as with the other -- my other colleagues in our business. And so we've been very close in terms of how we thought about the business, obviously, in terms of the direction of the business, in terms of how we think about financial policy, investment policy, how we allocate capital, the markets that we're going into, the types of agreements that we're entering into, how we're trying to extend the core of our business. And so a couple of years ago, we started on and embarked on a new Stand and Deliver strategy, which has several components to it. So I'm very confident in that strategy, Phil, and looking forward to continue to develop that strategy over the next several years. I mean there -- given market conditions and things like that, we may lean into some things that are a little bit different than today, for example, or we may try to leverage some strengths that we have, but we're very committed to the strategy that we had in place. Our management team is very stable. I've worked with these guys for, again, for 10 years. And so we're very confident in the position that we have. And so now it's just up to us to continue to execute on the blueprint that we've got in place.

And as you said, you've guided a massive international expansion for the last 10 years, but the company's mission is pretty much unchanged. Do you think investors would recognize the American Tower of 2030 is essentially unchanged as well?

Yes. No, I think they would. I mean I think there are a couple of key assumptions there. And one is that we're going to continue to see the rate of growth in wireless data usage for the next 10 years. And every forecast that's out there continues to show incredible growth in how we are going to be using the networks. And video, I think, is even going to become a bigger part of our overall usage pattern. So we would expect usage to continue to put a lot of strain and stress on the networks. I continue to think that the tower itself is going to be a -- constitute kind of the fundamental backbone of the wireless networks that are out there. It's the best way, the most effective way, most efficient way to be able to propagate a quality signal to their particular customers. So kind of given that as a backdrop, I think we will look similar to how we look today, assuming -- making those 2 assumptions. I mean we're going to continue to lean in on and extend the core of what we do. So there'll be perhaps some very related adjacencies that we're involved in and extending our own platform, if you will, in this kind of an environment. So it will start with our basic real estate, our exclusive real estate and our towers itself. But we'll continue to evolve more into more types of power solutions, utilizing transport, involved in compute in different ways. But I think that the fundamental business will very much look as it does today. I'm compensated based upon AFFO per share growth and ROIC, and so it's very simple. And so everything that we do, every new dollar that we allocate within the business will be to drive those 2 metrics in a very high-quality way. So I think we'll look hopefully very much the same in driving and creating the same kind of value that we've been able to do for many years.

Okay. Okay. Let's dig into the U.S. business. We've seen activity pretty slow against the first half of '19 comparison. But your outlook is for a significant acceleration in the back half. What drives the return to elevated growth from here? And how has your visibility there changed over the last few months?

Well, it's the -- as we've said, it's the inflection of T-Mobile, the new T-Mobile starting to be aggressive in terms of building out their integrated network. And they have some, I think, some very specific plans in place. They have some very specific objectives that they want to get going on and accelerate. And so that's what we would expect to drive our second half of the year growth, if you will, in terms of new applications, new business. We've been very open in terms of saying we haven't seen a lot of that activity for the last several months as they have been working on closing the deal with Sprint. So now that, that's behind them, we would expect to see some significant levels of activity. We've seen some. We've seen some things kind of trickle in working on -- as they continue to work on rolling out 600. But as they start to, I think, integrate the network, we expect to start to see a lot of activity in the second half and the back half of the year.

Are those active conversations now that are leading to your sort of confidence there?

They are. As you would expect, they're big -- both customers were very big customers of ours. And now the combined customer is significant within the -- in our portfolio. And so those conversations are actively ongoing to no one's surprise, as you would expect. They have some very specific requirements in terms of getting to 5G coverage, what is 97% in the next 3 years. And so they very much want to get on that and get that done. So yes, there are a lot of active conversations going on as we speak.

Okay. And you said something earlier or last week about tightening the conversion time from activity to actually booking revenue. Can you expand on that, please?

Well, a lot of it deals with our -- 2 things. One is a typical new master lease agreement may take a year to put in place. I mean they're 2 feet thick. We've talked about this in the past in terms of all the various elements of them. And so they can take a long time. When I first came on board I think 10 years ago, it took us a year to kind of put in place the one with Sprint. I mean they just -- a lot of ongoing conversations and elements to put those together because those are very long-term contracts. We have very strong relationships with T-Mobile as we did with Sprint. And so we would hope that the time it takes to put a contract in place, a new master lease agreement in place, an amended master lease agreement in place with them would be much more -- would be able to be done much more quickly than a traditional long-term agreement. So that's one element of it. And as you and I just talked, there are a lot of ongoing conversations to put that in place. My sense is that there will also be another element of it, which will be this holistic type of an arrangement that we've entered into with a number of customers, which allow for the normal escalator, but then a right-to-use fee that goes on top of that, which then kind of clears the runway for them to be able to put a gear, put equipment radios, antennas on our -- on their existing sites. And so it takes away a lot of that site-by-site work that needs to be done in a normal course for them to be able to add equipment to it. And so as a result, what we've found is that it significantly reduces the cycle times in terms of when a customer is actually able to put -- initiate equipment to go on at a particular site and then when they are actually able to get it on the site and to get it active. So we have a lot of experience. We've worked with a lot of customers this way. And as I said, it reduces, as a result, the cycle times significantly to be able to allow us to start booking revenue more quickly, but more importantly, to allow our customers to get that network up and active.

Okay. That makes sense. And your contracts with Sprint, for the most part, end at the end of '21. Are you confident in where you are in discussions now that investors won't see a big churn event in '22?

Yes. I mean we sure hope so, Phil. I mean it -- we do have a sizable amount of Sprint activity that does come due at the end -- second half of 2021. And we'll work very closely. We've done this in the past. You can't say for certain on anything. But we'll work hopefully very closely with T-Mobile to try to blend this in. We did this, as you recall, with Sprint and Nextel. And time will tell. We'll see how that whole conversation shakes out.

Okay. Maybe help us understand American's relationship with DISH today. Where are you in terms of maybe helping them think through their network and preparing for a build, in addition to showing them your sites and where they can actually physically locate?

Yes. I mean we've been working with DISH for several years. I mean they're a customer of ours. It's not a significant one as you would expect, but we've been working with their senior leadership team for several years on trying to help them think through what a network build might look like or network configuration might look like. I think as networks have evolved, they very much are looking at a very much of a cloud-based open network from a core perspective that I think is very interesting. It doesn't change what the RAN will look like and what -- how their signal will get propagated at the end of the day. But in terms of their backhaul and how, from an operation perspective, how they might manage it, might look very different than some of our other existing customers. And so my sense, we have conversations going on as we speak, negotiations going on as we speak. And my sense is that there will be some trials as they look to deploy this new network. And so there might be certain geographies that we -- again, nothing for certain. I'm just kind of guessing here in terms of how things might shake out. But there may be some trials, Phil, that go on in certain geographies that they are then able to kind of explore and look at the kind of technologies that they're looking to deploy and see how they are received in the network, see what the signals look like and then use that as a basis for determining how aggressive or what their future build plans may look like. But listening to their calls and listening to what they're saying publicly, they continue to -- it seems as though they want to build out a network on a nationwide basis, probably not a lot in 2020. And we don't have any of this activity in our 2020 guidance. So I think this will be more of a 2021, 2022 type of an event. But we're cautiously optimistic that they're going to want to invest in this network and build out, to at least some extent, across the United States.

As you said, the DISH architecture may be very different, but the RAN looks similar. Does that mean that you would expect sort of a typical tower -- new tower lease structure and rough level?

We would. We would. I mean there might be less ground space just as the carriers are looking and even C-RAN today. And so you may need less ground space at the site itself. But in terms of the bands that they'll be utilizing, I mean, the antenna structure, the radio structure, the transport up and down the tower itself should look very similar to a traditional configuration.

Okay. And you discussed the edge in some detail on the first quarter call. Can you provide us more details on your main initiative there? How's the edge opportunity developing?

Yes. I mean the way we're thinking about this, I do think of it kind of an ATC platform in our own stack, if you will. So even tower companies can think of stacks and platforms. But the compute element, the edge compute element of it is clearly one of the layers on the stack that we would see be evolving over time. I kind of think of the edge in kind of 2 areas: one is really just traditional kind of distributed edge compute; one is in the more mobile edge compute. Today, what we're experiencing is the distributed edge compute. We have containers out at several sites that have servers in them that are supporting really midsized, some large enterprises, but companies looking for additional redundancy, additional compute power at that particular location. Their proximity is close to where the site is, and they're looking for some additional compute power at that level. And so we've been active in terms of understanding what that looks like and what kind of configuration, how to price it and those types of things. We also have, as you know, a small data center meet-me room facility in Atlanta, which has proximity to a DLR data center in Atlanta. So we can actually, through our own network, provide some type of cloud access and interconnection through that kind of a facility. So I put that whole category in that distribute element. And then the other more broad one is on the mobile edge. And those -- and that's really the area that we continue to try to figure out what kind of a role that our sites may be able to play in that. And then we have some trials going on and some partnerships, lots of conversations. Again, very early innings on that deployment and that part of the overall compute capability that we're thinking. I don't think we'll be able to scale that appropriately until you see more of those low-latency types of offerings that our customers' customers are going to be looking for, and that could be several years away, Phil. But it's all part of this platform that we're trying to create, that we're trying to extend. And so you asked the question about what we might look like in 10 years' time. It's all our ability to extend this core platform, our real estate, our passive infrastructure, looking at transport, particularly in our international markets, in those high-capillary types of areas and really then kind of finish with how we might be able to participate in this whole mobile edge compute environment. So a lot more to unfold there. As I said, we're very early innings in on it. But a lot of terrific conversations going on. We've got some interesting real estate that I think -- exclusive real estate that I think could be very interesting to the hyperscalers, the carriers, the data center companies on a global basis. But again, uncertain as to how that all is going to unfold over time.

That will be interesting. Can you help scale for us in however many there are where you have storage or compute sitting at the edge of a -- or at a tower? What's the monthly rent of that versus a typical tower lease? Is it [ a 10 ]?

Yes. I mean a typical tower could be in the $2,500, $3,000 per month range. You're looking probably 10%, 20% of that for this. I mean it's -- we're not taking up a large piece of real estate. We have to have power. We have to have the infrastructure there to be able to support it. But it puts a lot less of a strain on that particular site than a traditional wireless lease that we would have with one of our customers. And by the way, that's also one of the things that we're trying to trial, Phil. What does pricing look like? Do we price that like a typical cage, a typical cabinet that a data center company might look at it? We're not taking up nearly as much space. We're not providing nearly as much power. We're providing a -- the service much closer to their premise. So the proximity is there. They're able to take advantage of that lower latency as a result of us being there. But that's one of the elements that we're really trying to understand.

Okay. And historically, the company has talked about a 6% to 8% organic growth rate in the U.S. I spoke to Jim a couple of years ago, and he said the law of large numbers was catching up to us, and maybe that wasn't -- the high end of that wasn't sustainable anymore. And yet, recently, we're pretty much there. Do you think between all these new initiatives and then a new carrier being built that we can probably sustain the upper level of that for the next few years with 5G going along as well?

Well, it's -- as you well know, I mean, our growth rates correlate to capital spend. And over the last several years, the carriers have spent in the United States $30-plus billion. If that number goes up to $40 billion, our growth rate is going to go up. So it will all depend upon how aggressive AT&T and Verizon and the new T-Mobile are going to be. And if DISH comes in and is spending billions of dollars on building out a new network, you would expect our growth rates to go up. It's kind of simple math from that perspective. So time will tell what that may look like. We are getting bigger, and that may put 50 bps of pressure on our overall growth rates. We have the escalators that are fundamental to our contracts in the United States in kind of that 3% kind of range. And so we'll see what the carriers are willing and able to spend. And again, as we continue to kind of push our own platform, what incremental value might be able to be created from that.

Okay. Let's shift to the international business. And first, to talk about currency and how you think about it going forward. The last 6 or 7 years has been marked by a huge increase in the value of the dollar relative to most of your international currencies. Looking back, did your investment calculates then put enough of a discount factor on currency risk? And do you think of it any differently going forward?

I mean if you look at it over the last 12 to 13 years, I would say up until probably 2018, our fundamental CPI escalators were probably offset much of the depreciation that we've seen in the currencies. As you said, the last couple of years, 3 years, it's outweighed the CPI escalator we had in there. But if you step back and if you take a look at how we look at investments in our international markets, we do burden them with a sizable country risk premium when we're looking at the hurdle rates themselves. And so when we're looking at investments in Africa, for example, oftentimes, we're looking for cost of capital that have an additional 800 to 1,000 basis points on them when we're looking at the fundamental cost of capital. So we may be looking at cost of capital up at the 15%, 16%, 17%, 18% levels. And so -- and as a result, the reason that we do that is to care for some of the additional exposure that we would see from the currency themselves. And so that has helped significantly to be able to mitigate some of the kind of the investment pressure that you might see from the currency themselves. And then fundamental in terms of how we underwrite a lot of the transaction itself, the contracts are largely local currency, expenses are in local currency. We do have the CPI escalator based in there. That's a function of what the inflation is on in the market. We reinvest the cash largely back into the market. And so what we've seen is a lot of this translational exposure, which, by the way, is not insignificant, but it's translational exposure. It's not really cash flow exposure on the business itself. To the extent that we're moving cash between countries or back to the United States or we're investing, we may choose to actually hedge some of those currencies as we're investing in the markets themselves. But I don't see a real fundamental change in terms of how we've looked at hedging or foreign currency. We'll continue to look at the significant country risk premiums that we burden the markets with and when we're looking at the cost of capital. When we look at the fundamental value, we're looking at 10-year cash flows. We make assumptions in terms of what the FX exposure is going to be in that local market and bring it back into a local country NPV and then bring it back into dollars. So I think we're caring for the -- at least what our expectations would be for FX depreciation in those particular markets. Hedging in the emerging markets is very expensive, as you well know. And so while we can look at it, we'll continue to look at it. It just hasn't proven to be a good use of shareholder money in terms of kind of hedging some of those exposures. But as I said, we have a large country risk premium that it cares for the country risk, which includes FX. And then we think we have a number of ways that we're actually underwriting some of that exposure in the markets themselves. And so it -- and just in the last couple of years, it's been outsized. This particular year with what we've just announced as guidance, clearly, is outsized. And I think a lot of it is related to the pandemic and oil and a number of different factors. But over a long term, we would expect it to kind of average back to what we've seen historically over the last 15, 18 years, where the CPI escalator and the inflation is kind of a good gauge for what we would see the delta being between the U.S. dollar and that particular local market's currency.

Okay. Okay. And given the rally in global infrastructure names, is it harder now to reach a return hurdle on new international efforts? Or does the rally in your stock as a currency offset a lot of that?

I mean the rally in the currency, the stock does help a lot of that. But there is a lot of competition for assets in the markets that we're in, a lot more than it was 4 or 5 years ago, no doubt about it. But I think the -- we've still been able to be very successful in terms of looking at inorganic opportunities to grow. There's still a sizable amount of sites inventory, if you will, in the 19 markets that we're in. And so that we think we're in a really unique position to be able to kind of execute on our blueprint. Growth is clearly a piece of it, both organic and inorganically. And we have a sizable amount of liquidity that's available to us, so we can close very quickly on transactions. And so there is a lot of business development going on, as you would expect, in that kind of a pandemic that we're living in right now. There's -- there are a lot of liquidity issues out in the markets themselves. And so we'll look at each one of those with the discipline that we've always used to see if there aren't any particular assets that we might be able to pick up and to be able to -- and then mold and integrate back into our own network. But time will tell on how that unfolds. But there's a lot of activity out in the markets as we speak.

With that inventory, have you seen carriers maybe in distress over the last couple of months starting to look to shape that inventory loose a little faster?

They are.

Anything you guys [ think of ] to a particular reason?

They are. And by the way, we've seen this before. Unfortunately, in many cases, I mean to be able to look at a crisis like this. But yes, I mean, there are a number of customers, carriers, existing tower companies themselves that are looking for additional liquidity, looking to monetize some of their portfolios. And we're involved just because of who we are and where we are. We're looking at all of them. And now whether any of them pan out or any of them come to roost, who knows? But there is a lot of activity out in around the markets that we're in.

Okay. I wanted to dive into India just for a couple of minutes. Vodafone, I think, this morning reported and said that they still don't want to put any more capital into it and looking for a little bit of a bailout from the Indian government. What's your sort of status on India right now? What are you seeing from carriers?

I mean there's definitely spend going on in the marketplace. You looked at the first quarter, our gross, I think, was 10% to 12%. So there's definitely activity in the market, including from Vodafone, Vodafone-Airtel as well as R-Jio. So all 3 are spending. The build -- the newbuild activity is lowered a little bit, and we reflected that in our guidance that we released a couple of weeks ago. So I do expect that to be temporary, but we may not pick up that incremental build. We'll probably build 3,000, 4,000 sites in the market. So it's not insignificant, but our original plans were probably up at 5,000, 6,000 sites. So some of that has come down a bit. So the carriers there are continuing to invest into their networks. The market itself is still in lockdown, so we would expect them to come out of lockdown probably over the next couple of months. This whole AGR process has kind of been put on the side, if you will, and the government itself is really trying to continue to drive this Digital India type of a strategy, and there's still a lot of Indians who still don't have Internet access. And so they continually are trying to impose upon the carriers to invest in their networks and to get them to roll out and get a signal, an appropriate signal to as many Indians as they possibly can on a nationwide basis. So my sense is that this AGR process is going to, again, sit on the sideline for a while before it gets ultimately addressed. The way it was left was that the carriers are looking for relief on really the length by which they would have to make the payments, but I think they're also still looking for some relief on the amount that they're going to be paying. And time will tell how that one unfolds. Whether it happens this year or next year, it's hard to say. But I think that right now, they're being encouraged to invest in their networks and to be able to expand their overall platforms that they have in the market, just given the sense of urgency and the sense of issues that the country has.

Okay. Last one with a little bit of your CFO as well as CEO hat on. As you think about appropriate leverage in this business, interest rates keep coming down, your interest coverage at the same leverage level improves. And there are other REIT categories out there that run a lot more leverage than towers do. How do you think about the appropriate leverage? And what's the conversation with the rating agency look like in terms of them being comfortable with your current or maybe more leverage over time?

Well, we just got an upgrade from Fitch to BBB+. The Moody's and S&P are still equivalent of kind of a BBB-. I mean they're very positive. I met with them not too long ago. They're very positive on, I think, on the business model. I think we've been -- we've created a lot of credibility in terms of how we've managed the business. I continue to think that 4 to 5x, 3 to 5 is our bounds. But we've been in that 4 to 5x for many, many years now. And as a result, we've been able to keep a very solid financial position in the marketplace. We've been able to drive kind of leading AFFO per share growth numbers as well as fundamental organic business growth numbers. So it hasn't inhibited our ability to grow the business at all. To the extent that there is something very significant, we've demonstrated that we could take that back to the agencies and show them the significance of it and the strategic nature of it. And they've been -- they've given us some leeway in terms of levering up, but then bringing that leverage back down to that 4.5x or whatever it's been. So I feel very good about our overall financial policy, where we have been, how we manage the balance sheet and don't expect to see any changes really in terms of how we think about leverage going forward.

Okay. That's a good place to stop. But Tom, thanks very much, and congratulations again.

Thanks, Phil. Thank you so much. Look forward to seeing you in person.

Yes, next year.

You bet.

Thanks.

All right. Be well. Stay safe. Thanks.

Bye.