American Tower Corporation (AMT) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us on day 2 of our Global Real Estate Conference 2020. My name is David Barden. I head up telecommunications and communications infrastructure research for the bank based in New York. And as a function of that, I actually cover a number of REITS, surprisingly, and hence, my participation in the conference again this year. And I'm very pleased to have one of the largest REITs actually in the United States, American Tower, here with us. And we've got the SVP of Finance, Igor Khislavsky, joining us today. So thank you, Igor, for being with us at the conference again this year.

Thanks, Dave. Good to join you.

So we've got a big diverse crew on the line right now. And before I begin, I'd like to remind everybody that depending on how you're dialed in, if you're dialed in through the Veracast system, you can just type a question, and I'll try to tether that into our conversation. Alternatively, you can e-mail me directly at david.w.barden@bofa.com. But maybe just to kind of kick things off, Igor, why don't we start with just who is American Tower, how did American Tower get here to where it is. And then we'll kind of kick off talking about the business and capital allocation and other things.

Yes, sure. Absolutely. And so, at a high level, American Tower is a global owner-operator of multi-tenant communications real estate. And so we've got 181,000 towers roughly and other types of communication sites scattered throughout 20 markets. We've been a public company since about 1998, originally spun out of CBS Radio back in the mid-90s. And we started as a U.S. entity, small portfolio of tower sites. We've grown that over the last 25-plus years through organic new builds, a series of acquisitions, some large, some small. And obviously, we've generated a tremendous amount of organic growth as we've leased up the assets in the portfolio over time. And concurrently, we've expanded from a U.S.-only footprint when we started to, obviously, a much more global type of a presence that we have today. The fundamental model is pretty simple. You have a real estate asset in the form of a tower. You've got fixed costs. You have tremendous operating leverage inherent in the model as a result of those fixed costs. And your objective is really to add as much tenancy as you possibly can. Our tenants primarily are investment grade, very large telecom companies. We help facilitate, obviously, the cell phone service that all of us rely on for so many things today. And over time, we've been able to successfully grow not only the portfolio, but also our tenancy and, consequently, our cash flows. And the objective going forward is to really replicate what we've been able to do in the U.S. throughout the international markets where we operate. And so the objective at a high level is to extend our long track record of generating really solid AFFO per share growth and total returns to our stockholders.

All right. That sounds like healthy goals. So thank you for that. So I want to kind of shift gears and kind of talk a little bit about the core fundamental business. I think you guys made news yesterday with the announcement that after some back and forth, you've struck a 15-year holistic M&A deal -- sorry, MLA deal with the newly merged T-Mobile Sprint. Could you kind of talk a little bit about how important that deal is? And kind of what does it mean to American Tower?

Sure, yes. So yes, yesterday, we announced, in a joint release with T-Mobile, that we had reached the agreement that you're referencing. The term of that agreement is nearly 15 years, which is actually the longest comprehensive MLA that we've ever done in the U.S. And as a result of that, we will be able to add roughly $17 billion of incremental contractually committed revenue to our global revenue backlog, which now will stand at almost $60 billion, which is roughly 8 years' worth of our revenues. And so obviously, that is a one element of this deal. I think at a high level, we view this agreement as a clear win-win for both sides. For us, it obviously locks in tremendous long-term visibility into our contractually guaranteed growth path with T-Mobile. It enhances our existing relationship with them. I think it positions us to play an even more important role in their network deployment as they deploy 5G across the country. I think it's -- it also provides us certainty with respect to the churn that we will see over a multiyear period associated with the deal, given that Sprint and T-Mobile have merged and there are some redundant sites. And so we now know what that churn path looks like also. And so I think, overall, it's a strategic deal. It obviously gives us a great level of visibility into the future relative to growth rates, and I think it sets us up to partner with T-Mobile and help to bring that 5G connectivity across the U.S. to all of us.

I think that there's a ton of questions that are kind of related to this. So I can remember a couple of different holistic MLAs, one you signed with AT&T, which was to facilitate their 4G acceleration and there was actually upside opportunity even to that MLA based on the agreement that you guys had made. There was the MLA with Sprint, which was kind of done from a little bit of a defensive standpoint, where you were going to use the Nextel revenue, and the idea was they were going to try to expand Network Vision. So the MLA purpose there was kind of lock in a certain amount of revenue, and then there might be some upsides if the company did the things outside that MLA. This is a situation where it feels a little bit more like the Nextel situation, where you have a lot of Sprint churn coming up likely. At the same time, you've got T-Mobile who wants to accelerate their build to accommodate the migration of Sprint customers onto their network. So how should investors think about this MLA? Is this like a net positive to what we all thought T-Mobile should contribute? Is it a net negative, but it's moderating some of the churn? Is it a flat type of relationship, where things won't change so much from the current levels? Which of these is it?

Sure. So I think going back to your initial point, each one of these types of comprehensive MLA agreements is inherently going to be tailored to the specific situations, to the specific needs of the tenant, et cetera, et cetera. And this one is no different. And so, as you said, there are some churn elements to this. Obviously, with the Sprint and T-Mobile combination, there will be sites that are going to be decommissioned, as folks have expected for some time. On the other hand, this MLA also provides for contractually committed growth for us. And so there are going to be a number of sites and a number of co-locations and a number of amendments that are rolled into this deal that will enable us to generate future growth and are contractual. And so we know the baseline contractual growth that we're going to see from T-Mobile over the next 15 years, really, which is sort of unprecedented. With respect to it being a net positive or net negative or neutral, we view it as a net positive. For some of the reasons that I just listed, you are going to have some level of churn. We're somewhat restricted as to the level of specificity that we can get into for that churn, just given some confidentiality agreements. But at a high level, over a multiyear period, we would expect to see in the ballpark of 4% or so of our go-forward property revenue at the time when this churn hits. That will be the number, right? And 4% of total property revenue is probably somewhere in the ballpark of 6% or 7% of U.S. property revenue. And so that's the total churn number that you have to think about. We can't get into the details of the specific timing of that. But you're absolutely going to see some impacts from that churn relative to our reported growth rates for a period of years. On the other hand, you're also going to see a pretty significant level of revenue growth and contracted revenue growth within this agreement. And so when you look at the totality of the MLA and take a look at the churn elements, the extended term that we're signing, the guaranteed revenue growth that's embedded in it, in our view, this is a pretty clear net positive for us. I think, also, it's a positive for T-Mobile as well because this will enable them to be much more efficient in their build and will help them move quickly. And so there are some different elements here, but at the end of the day, we're pleased with where we ended up. There were some puts and takes, obviously, as you would expect, but I think we're in a good position.

All right. I'm sorry, I got more questions. So you guys in the second quarter flagged that there was 3% to 4% of property revenue. That was on overlapping sites that was going to come due in October, I think, of next year. Some portion of that was take-or-pay that was absolutely going to go away. Some other portion of it was maybe up for debate. So should investors expect that next year, fourth quarter, 3% to 4% of the property revenue goes away? Or as part of this MLA, did you negotiate some sort of stretching out of that number?

Sure. So there is a spread of the overall churn across a multiyear period. At this point, it's really tough for me to get into additional specifics around that. What I would say is that when we guide for 2021 next February, I think we'll be able to kind of ring-fence this a little bit more specifically. But you're absolutely right. In our existing Sprint revenue stream, there were some revenue items that were going to churn, I think, no matter what. And so the term of the bulk of our Sprint revenue was up for renewal in September of next year. This deal alters that, certainly, to some extent. But again, due to that -- the confidentiality provisions in here, as is typical with all of these MLAs, I can't get into the explicit cadence of exactly when this churn will occur. We have given you, obviously, the total ballpark amount, and I think there are ways to kind of triangulate when it's likely to occur. But I can't get into that level of specificity here.

No, that's totally understandable. So I guess my -- one more question on that is you kind of say that the churn number is ring-fenced to 3% to 4%, which is these overlapping sites. But I think that the base case expectation in the market is not that just the overlapping sites will be taken down, but that literally every single sprint site will be ripped out, all 60,000 of them, and replaced by T-Mobile sites in part, per their public statements, to the tune of about maybe 15,000. And so that there's like a net 35,000 to 45,000 sites that are coming out, which is a lot more than just 3% to 4% of revenue. So are you saying that you've kind of locked in a guaranteed maximum 3% to 4% churn of your revenue related to the Sprint T-Mobile merger over this almost 15-year period? Because that's pretty good news if that's true.

Yes. So essentially, what we're saying is, by the time this churn occurs in total, right, it will be over a multiyear period. But in total, if you take the total churn amount, you're going to be roughly 4% of our total property revenue at the time. And so again, that's going to equate to 6% or 7% or somewhere in that ballpark of our overall U.S. revenue. And so you can take a look at the legacy contributions of Sprint, for example, to our total U.S. revenue on a proportional basis and take a look at that 6% or 7% number, give or take, and sort of implicitly figure out what portion of the overall legacy Sprint portfolio maybe coming out of the run rate for now. Now over time, I think it's safe to say that you're going to see that filled in and then some, right, with additional growth, more colocation activity, escalator activity, et cetera, et cetera. But that's how I would sort of frame this. And the number really ballpark, again, is going to be somewhere around 4% of our total company property revenue that will come off facilitated by this agreement. Now the only other point that I'd make is we know what the universe of churn is going to look like. And so the other thing this agreement does is it gives us certainty, not only into the upside relative to the contractual revenue growth, it also provides us with visibility into what our churn numbers will look like. And so, again, it's a pretty robust agreement. We have really good visibility into the overall trajectory of that growth. And all of those components are included in that.

And so, I guess, my last question on this, and then we'll move on to other topics. But if memory serves, American Tower in 1Q '19 had something approaching, if not slightly over, 8% same-store sales organic tower revenue growth domestically. And then for the year, it was guiding to about 7%. And after the second quarter, you guys were guiding to something implying around 4% by the end of the year, and then that excluded T-Mobile. Now we're adding T-Mobile back to the mix. So what does -- ordinarily, if we just said that the industry should grow 5% to 6%, 3% of that is escalators, 2% of that is colocation, to 3%, is that what this T-Mobile agreement looks like? Or does this T-Mobile agreement look really different because of its long tenor and some of these churn insurance policies that you've put in place?

Sure. Well, you can kind of back into some level of implied revenue growth through our disclosures of the incremental backlog that we're securing. What I would say is that you're obviously going to have a decent level of churn here coming through the numbers. And so that will impact your net organic tenant billings growth in those years when that churn is the highest, right? And so in the context of a 7% to 8% number, I think we're above 7% overall organic in the U.S. a couple of years ago. Look, I don't know that, that's the baseline that you should be using. I think before this deal was ever done, we've been pretty forthright in saying that 7% plus is probably not the go-forward run rate for the U.S. business just because those 2 years were really outsized in terms of the activity levels. Now having said that, I think you're entering a time period in the U.S., where you're going to have concurrent 5G builds by multiple carriers. You're going to have a couple of spectrum auctions, one of them just concluded. You're going to have the C-band auction presumably late this year, early next year. There's going to be new spectrum coming onboard. You're going to have a nationwide 5G rollout. You presumably will have a fourth facilities-based operator entering the market in the form of DISH. And so, overall, I think we're very constructive on the demand environment over an extended period of time because, as you know, all of these network builds, 3G, 4G, and we think 5G will really be no different, have taken the better part of a decade at least from start to finish. I think that holds today. And so our expectation is that we're going to be able to generate solid growth over a long period of time in the U.S. We now have really good visibility into many of the components of that growth because we've got, obviously, this T-Mobile deal out there. We signed another comprehensive MLA with AT&T late last year around the same time period. And so you have contractual visibility into a significant portion of your U.S. revenue. Now we don't have a comprehensive MLA with DISH at this point, and so there are still some things to do, obviously. But you could be in a situation here fairly soon where you have visibility into the vast majority of not only your current revenue in the U.S. but what that trajectory looks like going forward. And so that can create some opportunities for us to kind of lay out some of the assumptions that you're asking for potentially over a multiyear period. We're not quite there yet, right? But -- and again, a lot of the near-term growth rates that you will see for us specifically will be dependent on the exact cadence of this churn that was coming through. And obviously, it will be on top of your kind of normal course churn. So you're going to see some years here where the churn rates are elevated relative to our 1% to 2% historical levels, and that will certainly influence that net organic tenant billings number. Long term, though, I think we're really constructive on what the growth path really looks like in the U.S.