American Tower Corporation (AMT) Earnings Call Transcript & Summary

Good afternoon, everyone, on East Coast and Mountain time, where Tom and I are at. For those of you who have joined us on the West Coast, good morning still. Really excited to be participating here in the virtual format still. And we have Tom Bartlett, CEO of American Tower, to join us to talk through a little bit about what's happening at American Tower. And I can tell you, working from home has been very helpful as the tower industry is around. So [ the resilient ] and powerful ones. But Tom, thanks for joining us today. Hope you and the family and employees and all our listeners are actually okay.

Yes. No, Ric. I absolutely, exclamation point on that one for everyone that's listening and all their families. Just hope everyone is well.

Yes. Well, a lot has changed in the years since we sat together in New York and [indiscernible].

Right.

The T-Mobile, Sprint merger is approved. Your stock is up 27%. I think I saw the [ REIT index ] RMZ down 15%. And the COVID-19 virus has changed the way that we live and work.

Maybe just take as second to update our listers on what has the pandemic meant to your different regions that you operate in, the U.S., Latin America, India, Africa and Europe? Because clearly, there's a lot of real estate segments that are not doing as well as yours.

Let me step back a little bit, Ric. And as you well know and many, many on the call, I mean, our business model itself and really supported by the asset class that we have is incredibly resilient and sustainable and just about any type of economic environment that we're in. And for a lot of reasons, right? I mean, first of all, we have long-term contracts with really well-capitalized customers. We don't have tens of thousands of customers, but we have 15 or 20 really well-capitalized customers around the globe with -- who have engaged with us on contracts that are 5 to 10 years in length with escalators. So that's kind of a foundational element to our business. The other is that the use of our sites that we have, and we've got 180,000 sites in 19 different countries, is driven by really nontraditional real estate drivers. We're driven by the need for technology. We're driven by our customers' interest in investing in their networks to support significant growth rates in wireless data usage. You look at some of the estimates for usage on a monthly basis, we're using about 9 gigabytes -- or 7 to 9 gigabytes of data per month. Well, that's supposed to grow to 45 in over the next 3 to 5 years. And that same 9 gigabytes was a fraction of what that was just 12 to 18 months ago. So the drivers of our business are very different than kind of the normal drivers that you would see in a real estate model. And our infrastructure is critical. So our employees are designated essential employees around the world. So we've got the free hall pass, if you will, to be able to move around in an environment like we've been in for the next -- for the last couple of months because our infrastructure supports the connectivity for billions of people around the world and enabling them to communicate. And so it's pretty darn important, and clearly in the world that we live in today. So our model really lends itself to being able to operate it remotely. We even use drones to inspect our assets. And our management team that we have in place has been there for more than 10 years. And so we've been able to make the investments in IT and systems and people to invest over the long-term because we've got these long-term contracts in place. And then on top of that, we do have a very strong balance sheet that really we use to be able to support all the kinds of initiatives that we have in the business. So when you kind of step back and you look at what our business is, it really does lend itself to any type of economic environment. Now when you peel each one of the markets back, we're in 19 countries, and they're all at different stages of redeployment, if you will. I mean, the headline is that even when we released earnings, the headline was that, yes, we've had some FX headwinds as a result of kind of the different economic displacement that's going around the world. But from -- bottom line, from a business perspective, we've remain really relatively unchanged, right? And so we're now looking at markets in Europe where they're open for business. And so while our people aren't yet back in the offices, we're working through what that process would be. And candidly, we've got 6,000 employees. We work very well from home. If I didn't have to put any of those 6,000 employees back in the office, Ric, I would really like to go down that path. That's a way for me to ensure that I'm able to keep them safe. But some are going to want to go back into the office, and there are some things that we are more efficient back in the office. And so Europe is probably further ahead in terms of getting back into the office than any others. But the businesses there has remained very steady. There really haven't been any noticeable differences in terms of growth rates. You saw what our growth rates were when we released earnings a month ago or so, very consistent with what we thought. And I would say then, probably the next market that has not really been hit yet, candidly, is in Africa. And while there are cases, COVID cases, and things like that, and they're preparing for it and our teams there are learning from our other teams around the world, we've had the investments in power and those types of things to make sure that our customers could, in fact, stay up and running. And business there has also been very, very consistent. Our build program in Nigeria is probably backed off a little bit. But other than that, the teams there are doing very well and still working largely out of the office. The 2 areas -- you well know where we are in the United States in terms of redeployment and states opening back up. And we've taken a very similar approach to all 19 markets in terms of bringing people back. I want to see a playbook that includes all the major elements before our employees are able to get back into the office. In the United States, from a business perspective, as we expected, it's a little bit slower than in prior years, largely because of the impacts of the T-Mobile and Sprint merger, and we'll, I'm sure, talk about that in a little bit. But if you go to Latin America, again, business is strong, but Latin America are really under great stress right now with the pandemic. And again, our people are out of the offices, we're working well out of the office in terms of managing the -- our business and continuing supporting our customers. As I said, we're all essential employees in there. So it's critical for us to be able to support our customers in this time of need. But Latin America is really suffering right now from a pandemic perspective. Mexico and Brazil, Peru, Colombia, they are all kind of where New Jersey was, where I'm at, just a couple of weeks ago. And then in Asia, they're going through a series of openings. There's still a couple of critical markets there that are still under lockdown. And that's a market where our build program is probably off. We probably expected 4,500 new builds in India, and that we're probably, at this point in time, off probably about 1,000. I believe they're temporary. They're going to be coming back, I'm just not sure, probably over the next 12 months. But their overall build program is behind, which is really what we talked about on earnings. So as I said, I mean, kind of a long rambling answer, but kind of gives you a sense of where we are around the world. But our business model, as I said, kind of lends itself to being able to work from home. The recurring revenue model with well-capitalized companies that are driven by the need for bandwidth and the need for connectivity really serves us well and really all kinds of economic environments, but in particular, in this kind of an environment where connectivity is just so important. Ric, are you there?

All right. I'm back. Sorry. Everybody is unmuting me. Sorry, I was muted while you were answering your question. We get the question a lot from real estate investors in particular. But what could disrupt the tower model? And as you think about it, you're being very resilient in the times, there's a lot of subsectors in the real estate world and you guys are doing well. What should real estate investors in particular worry about or what do you worry about that could disrupt the model?

Well, when you think about the way a signal is propagated or it goes from a site out to a device, an iPad or an iPhone or -- and whatever it would be, the physics really do drive that delivery model, if you will. And the most efficient way for this signal to propagate from a site out to a device is still the 150- to 200-foot tower. It is a very cost-effective way for the carriers to be able to support the needs of their customers. And it has been now for -- since the early '80s when we first started this journey. So 20, 30 years, it's proven to be the best, most efficient, cost-effective way of delivering a signal. And so when you take a look at the capital that the carriers are spending and across our 19 markets, their estimate is they'll probably spend close to $50 billion on their networks. Those investments are all in enhancing their infrastructure which includes our sites. So the carriers are continually investing into their environment and into our infrastructure. And so they're -- and asking kind of the question what might disrupt it? Well, we continually look at new technologies, right? And so whether we're looking at the satellites or balloons or all these other types of things, we continue to look at all those and have a lot of third-party advice on them and study them. We want to make sure our head's not in the sand on any of these new technologies. But candidly, there's nothing that will -- that can replace kind of the physics and the cost effectiveness of delivering a signal from a tower that's already been there and supported for 20 years. And so our growth, if you will, on an organic basis is correlated very, very closely with capital spend, our customers' capital spend. And so in the United States, the carriers have spent upwards of $30 billion a year for the last several years, and that's driven a very consistent kind of core organic growth in our business. And so when you start to think about, well, what could change that curve of it, it would only be that the carriers would stop investing in their networks and stop that $30 billion spend in the United States or $50 billion that we have on a global basis. And we don't think that's going to happen. We think that as the trends continue and the cloud moves to the edge, there's going to be more and more need for higher bandwidth types of services. And as those needs continue and accelerate, the carriers are going to want to continue to invest heavily into their networks. So...

Okay. Makes sense. Now some of the debate out there is, how much of that spend will be at the macro towers versus how much will be in small cells? [indiscernible] had a deliberate focus on macro towers U.S., expanding macro towers internationally, some small cell fiber international. Why do you want people through kind of American Tower's spot of macro towers versus small cells, value of the business opportunities?

Sure. Well, I mean, when you start to think about the macro tower versus other means of being able to propagate a signal, it does largely come back to customer densification and spectrum. And so when customers have and what we've -- and you've referred to them in the past, I know, as kind of a layer cake of spectrum, customers -- our customers have high-band spectrum, they have medium band spectrum and they have low-band spectrum. And the low-band spectrum is largely the base of spectrum that is out there that supports the mass amount of traffic that exists in the United States and around the world. As you start to move up, the kind of the layer cake, if you will, the signal does not propagate as well. And so people refer to kind of the 6 gigahertz, sub-6 gigahertz is spectrum that we believe is going to find itself onto a large 150- to 200-foot site. And the very high-band spectrum, the millimeter wave that people refer to, the very top end of the layer cake, is going to find itself being used in very dense urban markets, just like Verizon is using it today. So the carriers have multiple bands of spectrum. There's more spectrum that's going to be auctioned off this year. And so they'll have a lot of tools in their toolkit to be able to meet their needs of their customers. And whether it's a dense urban market, whether it's in a more suburban or whether it's in a rural. And we still believe that around the world that the -- most of the traffic, by and large, is going to be delivered via that 150- to 200-foot site, which is -- makes up our sites. Now will there be dense urban markets where higher band spectrum is going to be used to meet some of those needs of the customer, like in New York City, for example? And the answer is yes. We don't believe it's going to be a significant piece of the capital spend, but there will definitely be capital that's going to be allocated to that part of the network. Are we participating in that? In the United States, we are on the indoor side. We have the largest complement of indoor facilities where we are using fiber and we are using small cells or small nodes, putting them in malls, sporting venues, you name it, to be able to provide a signal for our customers. What we're trying to do is we're trying to lower the overall cost of that delivery so that we can open that network up, probably using CBRS spectrum to a much greater part of the market. So we're trying to increase our total addressable market from thousands of venues to tens of thousands of venues. So we are, in the United States, very much participating in the kind of that small cell arena, but indoors. On the outdoor side in the United States, there is a significant amount of fiber. It's somewhat of a commodity. And it's not exclusive largely to a tower company. And so we think that in the United States, given the attributes of it, it's a very capital intensive, and it's a part of the business that I don't believe we will be able to create a long-term sustainable advantage. And so as a result, we're not investing in that, but we are outside of the United States. We have several markets outside of the United States where we have secured fiber, and we've secured exclusive pieces of real estate, a longitudinal latitude in dense urban markets, where we can now create a network, if you will, for our customers to be able to provide service to their customers in those very densely populated markets. So it's not that we're not interested in small cells and fiber, we're only interested in it, though, where we think we can create some real value. And not just real value today, we can create a multi-tenant value proposition that will start to look like very much the margins that we're able to enjoy on the tower side, in the 150- to 200-foot tower side. And where we can find those opportunities, we're going to invest in them. So we've just chosen to allocate our capital, Ric, to those areas where we think we can create that kind of value. And in the United States, we haven't seen that opportunity in the small cell outdoor environment.

Now you mentioned CBRS. My friend, [ Walt ], wanted me to ask you, are you seeing any uses or applications or potential future applications for CBRS on macro? Or does CBRS looks like it will be mostly indoor?

No, I mean we see it in both places. I mean, I think I said good mid-band spectrum that both AC as well as the CBRS will find its way on to the macro tower. We also think it's a good, useful spectrum band to be able to support indoor. And there will be an unlicensed and a licensed element of the spectrum. And so we think that, again, we can take our existing DAS environment which has worked well for us, as I said, we have it in 300 to 400 venues. But it's -- candidly, it's clumsy, it's expensive. And so what we're trying to do is lower the overall cost of that offering and to open it up so that it's easier to deploy in venues that aren't like a casino, for example. And so really trying to open it up into tens -- as I mentioned before, kind of tens of thousands of venues as opposed to thousands. It's part of our platform, Ric, that we are developing. And time will tell whether we're able to actually create that kind of a competitive advantage in those kinds of 20,000 venues. Today, our gas business represents 3% of our business. And my constant challenge to that group over the last 10 years is how do we triple that? How do you make that 10% of our business? How do you make that 15% of our business? And that's been a real challenge with the existing technology. And so what we're trying to do is we're trying to increase the overall TAM, lower the overall cost and see whether we can, in fact, create that kind of a sustainable advantage. We have -- what do we really do well? We really manage real estate in land and landlords and -- very, very well. That's what we do for a living. And so we're hoping that we can kind of really take this part of our platform in the United States as well as around the world to the next level and really start to make it meaningful to our overall business.

Yes. Now, do you need anything from an external standpoint Crown to build their small cell fiber footprint on a bunch of different companies to accumulate fiber miles. Is there anything you need to do from an external standpoint to try and hit that going to take it from 3% to 10% or 15%? Or is it something you would just do organically?

Yes. It's really largely organic. It's within those venues themselves. Now what we're also trying to do as part of our platform, and we all see this notion of the cloud moving out to the edge, right? And even looking at the pandemic COVID right now with all of our future work habits, what is the world going to look like on a post pandemic or post-COVID basis, it could accelerate that need for edge type of compute even faster than we would have otherwise thought. And so where -- when you start to think about edge computing, people will scratch their heads, and they'll say, yes, that's probably 3, 4, 5 years out. We see certain hyperscalers doing certain things in certain C-RAN huts and COs across the country. But until it kind of gets to scale, if you will, how are companies going to be positioned in it? And so when we start to think about some of the trials and some of the things that we're doing right now, fiber is a component of that. First of all, we want fiber out to the cell site itself, and we probably have 80%, 85% of our sites right now, have fiber coming from a CLEC or RLEC out actually to a point in the site itself. And so that's going to become important because when there is compute capability and compute going on at the site itself, we're going to need to make sure that we've got a big enough funnel to be able to move that data back to an amalgamation point or some spot if, in fact, we need to. So I think fiber will become on a very point by point basis, even more important out at the site level. But as I said, when you get in those densely populated cities, there is just a glut of fiber. And you get to the quality of fiber. I refer back to Verizon, who, in Boston, I mean, that's their core territory as part of New England Tel going back 100 years. And so you know they have a significant amount of fiber in Boston. What did they do when they came to Boston? They put an entire new layer of network in place. And so -- and they're using that to support their wholesale business, their wireless business, their fixed business, all of the businesses that they have on it. And so they and themselves have really kind of a multi-tenant type of an offering. And that's why I think if you're not one of the big carriers like a Verizon or an AT&T, it's going to be very difficult to create that kind of value long term. But to support now, I think the edge compute, I do think that there will be more fiber out near the site itself to be able to support the on-ramping and off-ramping of data as it goes from enterprise customers, midsized customers out to the site itself.

Yes. One of the other questions we get a lot from real estate investors since we're at NAREIT, and they don't monitor it as often as India. You've got 2 kind of divergent things happening. You have the AGR, adjusted gross revenue tax item, but then you have Facebook making an investment in Reliance Jio and maybe Google investing in Vodafone Idea. How do you look at that market, in particular, India with the negative share, but maybe there are some higher cost to the carriers versus the positive of technology companies wanting to get involved. Do you see technology companies in the U.S. talking to you?

Yes. I think when you step back and you take a look at market like India, first of all, we look at it as part of a diversified portfolio. We've got a few billion dollars invested into the market. And we think that it's a market that is important to be in because the total addressable market is so huge. We've got just so many people there. And their wireline network is in such poor shape. And so that all of the investment that the carriers are doing are in their wireless networks. I mean, R-Jio is a perfect example. They just come in and they put an LTE network in and on a data-only basis, they now offer voice and have created a very attractive model that companies like Facebook are very interested in investing in. And so we look at India. We've been there for probably over a decade. And most of those years were double-digit types of growth rates. It was really only over the last 3 years where we started to see consolidation because we had 15 customers consolidating down to 4, which is what we expected. It happened very quickly, but we had a lot of churn associated with that. And now we have -- the next major obstacle in the industry is this AGR issue, which the carriers are trying to work their way through. But India is a market that is just going to continue to grow. It's going to -- the government themselves are very committed to creating a digital India. And it's going to attract the Googles and the Facebooks of the world, simply because it's a market that just doesn't have any access to that -- those kinds of offerings. And so you get some good quality networks out there like they are. Well, they're strong companies. I mean, they may have been struggling in certain aspects of their business, but particularly with the AGR. But these are all strong operators. And as a result, they're operators who other technology companies want to be a part of. And so we remain cautiously optimistic. There are going to be ups and downs in India, no doubt, as we continue to work through. But this is a market that we're -- from a formation perspective, it's looking very much like the United States, kind of 4 wireless carriers, 2 to 3 tower companies. So we're now at a point where it very much looks like the United States, but there's just an insatiable demand for connectivity in the marketplace. And so we're excited to see these kinds of investments being made by other types of players because we think it just kind of demonstrates the significance of the opportunity that exists in India.

Okay. Time for one final question, again, just for your NAREIT, a lot of the income yield investors. How should we think about the growth rate of AFFO, the growth rate of dividends at the Board discretion and kind of the payout ratio of American Tower over the next, say, 3 to 5 years?

Yes. I mean, our dividend, it very much follows our taxable income, where we'd like to pay out 100% of our taxable income, right? I mean it's -- and so over the last 8 years or so since we became a REIT, it's been growing, TI has been growing in that 20% rate. And we're now paying out, I think, in the 40-some-odd percent of AFFO. I would expect, just given kind of what we see from the asset, from a taxable income perspective, that we'll probably get up into the 60% rate payout, Ric, plus over the next few years. My sense is that the double-digit rate of growth, which is that 20% is going to start to bend a little bit because our taxable income isn't going to continue to grow at that same kind of level. I would expect it to still be double-digit, but probably not at that same kind of 20% kind of levels. And on the AFFO side, again, it comes down to how we're able to grow organically, the kinds of investment that the carriers are making into their networks and then what kind of opportunity we have to be able to grow inorganically. That's been a sizable amount of our growth over the last 10 years. I think when I came onboard over 10 years ago, I don't know, we had 25,000 towers or something like that. And so we've been able to redeploy that capital that we're generating, take advantage of the strength of our -- the investment-grade nature of our balance sheet and being able to reinvest it back into the business. I mean my compensation is AFFO per share growth plus return on invest -- ROIC growth, return on invested capital growth. So those are 2 very important metrics to me and our management team. And so we're going to be continually looking how to drive those 2 as much as we possibly can. We've historically had a lot of success on AFFO per share growth, it's up in the 14%, 15% range over the last 10 years. Is that going to continue? I don't know, not certain. But we're going to do everything we possibly can to redeploy capital in those areas and to be positioned to take our platform to service our customers to even a greater extent and to make some good capital allocation decisions and to continue to drive a really strong dividend. And hopefully, that will be exciting to our investors. I think it will. But that's what the future holds.

Great. Well, we've reached our allotted time. I really appreciate you participating today, Tom. I appreciate the opportunity to moderate, update the real estate investors, in particular where you're at. Glad you're doing well, glad your family is doing well and your businesses are doing well. Look forward to the next time we can get together in person. Thanks, Tom.

Absolutely. Thank you so much, Ric. Great to see you.

Everybody take care and be safe out there. Have a good day. Bye.

Be safe.