American Tower Corporation (AMT) Earnings Call Transcript & Summary

Yes. No, Brett, fair question. Yes, the answer is we do believe that our international markets are going to be growing 200 to 300 basis fast. That's the reason that we're in those markets, right, to be able to kind of extend and grow the overall revenues to really increase the slope of the revenue line. And what's really driving that is where these countries are from a technology perspective. In many countries, we're still at 2G, 3G types of technologies. And as spectrum gets deployed in those particular markets, they'll be able to accelerate where they are from a 4G perspective, and then even into newer technologies that we're experiencing in the United States. And so if you look at even Latin America, we're in the 7-plus percent range. We've experienced in Africa even higher rates of growth. What's kind of kept it back is on a net basis is really where we are in India. And India was kind of in that 0 net, if you will, kind of given the obstacles and the challenges that, that market has had. But if you take it the other 18 international markets that we've got, they're already experiencing that kind of outpaced organic growth. So we would expect that to continue.

Yes. I'm going to come back to India in a minute. Before we do, because we were just talking about your outlook for this year, as of your most recent earnings report, your guidance embedded in it over $300 million currency headwind. This has obviously been a very volatile period for foreign market currencies. And it's one of the more significant headwinds, I think, you've had to face through your trial or your period of working outside the U.S. And so the question is, has this enhanced volatility in this environment changed at all the way you think about risk adjusting for currency in your international businesses? And that's an intentionally very open-ended question.

Yes. We've had a very disciplined approach in terms of how we look at investing in our international markets. From an entry perspective, we do have a sizable risk adjustment that we make to our cost of capital or to our hurdles that we have in terms of entering a market. It can be up to 1,000 points, 1,000 basis points over and above kind of the cost of capital that we see in the United States. So we may be looking at just high teens kinds of rates of return. Historically, what we've seen is that the inflation rates and then the CPI escalator that's measured to that historical inflation rate has really mitigated largely the kind of the deflationary currency that we've seen in these countries. And predominantly in our international markets, we have that CPI-based escalator in those markets. What we've seen over the last year, and really then more significantly, over the last 6 to 8 months, is that the rates of inflation in the markets themselves is relatively low, like we're seeing in the United States. However, we're seeing a significantly outsized currency being depreciated. And that's come back a little bit from where we even saw it and more in the beginning of the year. But we do think it's still a very unique period of time where we're not seeing that -- the mitigation of that -- the depreciation of that currency being offset by the CPI-based escalators. So we're continually looking at what that risk adjustment might look like or be more appropriate in those markets. Having said that, we're investing heavily into the markets themselves. It's not like we're taking cash flow out of those markets. We're investing it in terms of build-to-suits. Our revenues are broadly in local currency. Our expenses are in local currency. So there's a matching there. But we're -- every month, we look at what those cost of capital requirements would be, and it takes into consideration all of the country risk, which includes currency. And we'll continue to monitor it to determine what are the more appropriate hurdle rates that we should be looking at to be able to invest or further invest in the markets that we're in.

Have you made any significant adjustments to how you think about those risk adjustments as you look at market entry?

We haven't. We haven't. I mean, the cost of capital approach has been very consistent. And so I know that we've had these headwinds, as you identified, but it hasn't taken us off of the path that we've historically been on, where there should be significant movements in terms of our underlying cost of capital that we would look at to invest. But we'll continue to monitor it and measure it. We do think it's a rather unique time. And in history, it's kind of causing this dispersion of inflation versus currency depreciation. And -- but we'll keep an eye on it and watch it very, very closely.

Is it creating any interesting potential M&A opportunities? I mean, you have such a broad lens that you can look at the world through considering how wide your footprint is. Should we be preparing for you to be opportunistic?

Well, I mean, we'll always be opportunistic. There is a significant amount of assets that are actually on the market, large portfolios. We just entered Poland, for example, over the last 90 days, looking for opportunities to scale in Poland. So there are some very large global MNOs that are talking about monetizing their portfolios, and then there are a number of smaller opportunities in each one of the markets. And we'll keep the same approach that we've looked at in terms of value creation and looking at growth and seeing whether the math works for us to be able to secure some of these portfolios. We're very geared towards investing in the current markets that we're in. We've got people there, we've got systems there. We've got the relationships there with our customers. We know the markets themselves. We own probably about 1/3 of the inventory in the markets that we're in. So there is ample opportunity to further scale and to further grow in those markets. So that's where our first choice would be. I mean, to the extent that there are some other markets that are kind of sitting next to some of our existing markets where we can manage them efficiently and secure build-to-suit opportunities, we'll look at those. But most of the investment, I think, will be coming from the existing markets that we're in. Globally speaking, Brett, we have roughly $50 billion being spent by our customers on their networks. And so we're able to expand the $30 billion in the United States, almost doubling that, in terms of what our total addressable market is kind of around the globe. And so we're -- we'll be as aggressive as we possibly can looking at opportunities to be able to create some sizable NPV.

I want to come back to India. And you noted earlier that net growth in India right now is negligible. And your shareholders know this, but you sort of had 2 headwinds arrive at the same time. You had a significant amount of consolidation, which has already happened, and then we had some uncertainty around this large fee or fine that a number of the operators have had to pay. It seems like we've gotten some visibility around that. It looks like there's going to be a 10-year payout window for your customers to deal with this, which gives them some relief. How do you feel about the visibility you now have in India with the consolidation done, with visibility around the payment window clear to your customers? Are you already -- or when do you expect to maybe have some insight into when you could start to see some acceleration?

Yes. We are optimistic about what we're seeing in the marketplace. We've been in the market for 13 years now since '07. And if you look at '07 to 2017, we were growing the business organically, high single digit, low double-digit types of growth rates. The market went through this phase of consolidation, as you well know, and throw this additional obstacle in terms of these fines that have been levied on the tower -- on the wireless companies themselves. And so we think now, with the Supreme Court kind of coming down on the 10 years -- I wish it were 30 years, but it's 10 years. But it's giving then our wireless customers some visibility in terms of how they can manage their cash flows going forward. And so, in particular, it gives Vodafone some breathing room in terms of how they're going to be able to kind of manage their business going forward. And the government itself is also looking at ways that it can be supportive to the wireless carriers. I think these last 6, 7 months, have demonstrated to, particularly in India, just how important and how significant having wireless presence and wireless connectivity is in a market like India to bring it back to health. And so they're trying to do as much as they can in terms of lowering fees for spectrum, providing more spectrum, ensuring that they have the ability to raise pricing. I mean, Vodafone most recently has talked about getting back into the market to raise capital, to be able to reinvest into its own business. We've seen a lot of foreign investment coming into the marketplace, which I think demonstrates the opportunity, the significance of the opportunity. And so this is a period of time where, in the last 2 to 3 years, we've kind of had to suck it up and deal with it and move forward. But we're cautiously optimistic about being able to get back to those kinds of growth rates we've experienced in the past. Interestingly enough, if you don't look at the churn, if you just look at the growth that we've seen in the market, on a gross basis, the market has done very, very well from a gross. So the companies are still investing into their networks, which is seeing some of that churn coming out of that India consolidated churn that's been there. But the construct of the market looks very similar to the United States: 4 wireless carriers, really 3 tower companies. So it looks very, very similar. And with over 1 billion people and where the technology is and the amount of people that are still unconnected, we think that there's a long opportunity for growth. But we're measured. We're doing it in a way that it's 1 of 20 markets that we're investing in. It's not like we're putting all of our eggs in one basket, but it is an emerging market where we do think that there's a really solid opportunity going forward.

Just one last question on India. Now that your customers have visibility into what their payment obligations are with the fee and the fines, is there anything you're looking to do with them from their contracts in order to help them reaccelerate their investment? Or is that not necessary?

I mean, all of our customers are looking for ways of ensuring that they've got capital to continue to reinvest in their networks. And so we're always looking with them in terms of, okay, how best can we serve you without giving anything up on our side or even being able to create more value on our side? So those -- when we're looking at kind of the longer-term master lease agreements, particularly in the emerging markets, I mean, those are dialogues that go on day-to-day. And there could be certain opportunities to be able to amend some of these agreements that are able to meet both our customers' needs and our own.

I'm going to move on to Latin America. So you have over 41,000 sites in your Latin American region. Nearly half of them, I think, are in Brazil alone. In Brazil, you have one large tenant, who's potentially going to be taken out. They are going through a bankruptcy. So once again, we have a market where there's going to be potentially some degree of customer rationalization. How do you think about the implications of that for your business in Brazil? And maybe just what's your current outlook for the overall leasing environment in Brazil in light of their own struggle with the pandemic?

Yes. I mean, it's -- by the way, relative to Oi, who you're talking to, we have a long-term master lease agreement in place. I think it's like 7 or 8 years right now, Brett. So no matter where that lands, we will be protected from a customer perspective. And to the extent then that, that brings some further rationalization to the marketplace, i.e., Oi kind of landing with the other 2 to 3 customers or 2 or 3 carriers in the marketplace, we think that's good. I think some of that rationalization is always healthy in a marketplace. This continues to be a market that on a local currency perspective, we continue to outperform. I mean, it's a high local return on invested capital. It's a market that we've been invested in for the better part of 20 years now. It's still an under-invested market in terms of, if you take a comparison of customers for cell site, it's significantly higher than what we have, for example, in the United States. And so there's, we believe, an ongoing need for further gasification in the market itself. And so we've got a solid management team in place, very energized and excited about what they're seeing in the market. I think we've got some exciting things going on with both TIM and Vivo in the marketplace. There has been some consolidation with Nextel and América Móvil in the market. So there could be some limited amounts of churn in the future relative to that. But we're excited about what we're seeing in the market. And while they have struggled with the pandemic, much like the United States, we believe that they'll be very successful in a post COVID type of environment.

You made a significant acquisition in Africa also. You now have over 18,000 towers in that market. Where is that continent on the technology growth curve? And just in general, what has made you step up your investment levels in Africa?

I mean, it's rate of growth. They're still really largely -- some in 2G, but largely 3G, minimal, kind of even 4G types of services. I mean, you get down in South Africa, you're on 4G. And MTN and Airtel are our 2 largest customers in the market, and they're being as aggressive as they possibly can. But it comes down to rate of growth. It comes down to the connected versus the unconnected, the ability to continue to invest from our carriers, and they're continuing to invest heavily in those markets. And so we're able to enjoy those kinds of higher rates of growth. And so that's why it's been such an interesting market for us. The entry price points had been lower, candidly, than in some of the other parts of the world. So the opportunities to create NPV there has been quite significant. We've had great success there over the last several years, and we think it's a good opportunity for growth going forward.

One of the regions where you've never had a particularly significant presence is Europe, and you have made some recent announcements around buying some towers from Orange in France, but it still tends to be a relatively small market. Is anything changing there, where you could potentially have an opportunity to deploy significantly more capital into the European market?

Well, there appears to be more of a need for monetization from existing carriers in the marketplace. And so as a result, that might because of the supply. That may provide us with more of an opportunity to secure some of these portfolios at the right price points. Time will tell, but it does appear there is an increase, if you will, in the momentum of portfolios as well as build-to-suit opportunities that we're seeing in the marketplace. And so we're well positioned in France and in Germany, but still not at the appropriate levels of scale in the market. And as I said, we just entered into Poland, and we continually look at other countries in the region. But it's really going to be a function of the supply and how many towers are coming to market. What are the opportunities? Are there build-to-suit opportunities? And then, for us, it comes down to the growth. I mean, the value that we're putting on the table for some of these is a function of the growth we see in the marketplace. Others may see higher -- have higher expectations for growth based upon their other -- their assumptions. And so as a result, they're seeing more value in some of these underlying portfolios. I don't think anyone has a better position from a cost of capital perspective. So it comes down to our perceptions of what we would expect to see from a growth perspective over a 10-year period.

You mentioned cost of capital. So I actually want to go to the balance sheet and some capital allocation options you have. So your net leverage, your net debt-to-EBITDA is about 4.8 turns as of the most recent quarter. That's at the higher end of your target range of 3 to 5x. Your stock is also trading right around all-time highs. We're in a very low interest rate world. As you think about all those factors, do any of them influence a shift in your capital allocation priorities? And how do you feel about your target net leverage, particularly as your business continues to become increasingly international?

Yes, that's a fair question. I get that question a lot, as you would expect. And we feel very good about the kind of the levels of leverage that we've got in the business. We feel very good about the ranges of net debt-to-EBITDA that we've got within the business. And being investment grade, we think, is very important. It's an important strategic pillar for our business. It provides us with the ability to tap into a lot of different markets from a capital perspective, and it's enabled us to be able to enjoy kind of the cost of debt that we've been able to enjoy. We did a euro deal just over the last couple of weeks. It was an 8-year -- combination of an 8 to 12 year. We're borrowing at less than 80 basis points. We did a deal not that long ago in the United States. We're tapping into the 30-year. So as we continue to extend our master lease agreements, I think we will look to continue to extend the tenors on our borrowings. And so we've been able to extend and bring down our overall cost of borrowing for really the last 5 years and would hopefully be able to continue to do that going forward. We have no real maturities that are coming up for a couple of years, and we'll look to even some higher coupon debt that's out a few years to see if it makes sense to take it out. So I think that there are a lot of opportunities that we have on a capital structure perspective. We invest for the long haul. And so we don't have knee-jerk reactions to changing what our leverage should look like or shouldn't look like based upon just kind of current trading -- the current trading environment. So we feel really good, I think, about the balance sheet in terms of where we are. We think by adding the kind of agreement that we put in today even increases the overall credit profile of our business. When we go into the market, we're trading generally above our weight in a BBB or BBB+ kind of range where Fitch actually has us. So we feel good about where we are and how we're thinking about the balance sheet, and it provides us with ample capacity to the extent that there is that strategic opportunity or inorganic opportunity out there where we can close on it very quickly, much more quickly than some of our other counterparts around the globe, which does give us an advantage in some of those inorganic opportunities.

Great. Well, Tom, we're out of time. Thanks so much for being here with us.

Hey, Brett, it's great seeing you. Look forward to catching up soon face-to-face, hopefully.

Hopefully, yes.

All right. Be well.