American Tower Corporation (AMT) Earnings Call Transcript & Summary

Yes. So we -- I mean, we have seen a significant increase in capital that's going into infrastructure space. I think that really highlights the fact that professional investors around the world are seeing the attractiveness of investing in towers globally because they see the long runway of revenue growth and good solid returns and stability that they provide. So there's no question we've seen a significant uptick in terms of capital coming into this space over the last several years. And that, combined with the low interest rates, really has pushed up pricing. We've seen that in the U.S. We've seen it around the globe. So there's no way of kind of getting around that fact. So it is a much more competitive landscape when it comes to M&A. I think from that perspective, we feel really fortunate that we were very active and opportunistic over the last decade in terms of growing our portfolio. We expanded internationally back in the early 2000s, and we accelerated that expansion in around 2007. So we had the ability to, I guess, see the value in these tower assets around the globe before a lot of other people did, and we got some really good towers. We have a really good global portfolio to build from. From this point forward, we'll continue to be opportunistic. We'll look and choose our spots in the U.S. and around the globe. We'll execute on acquisitions when we see the right value and the right terms and conditions, the right counterparty, the right country when all those things line up. We're still optimistic that we'll be able to find deals that will be attractive for us, similar to the InSite deal that we did. We did the Eaton transaction at the end of the year in Africa last year, which was about 5,500 towers. We did a deal in Chile and Peru at the end of last year from Intel. So we have teams that scour the globe looking for opportunities. We scrub every tower opportunity that comes up, really around the globe, and we pick our spots and we move on the ones that we want. So that's kind of how we look at it. So we're still very optimistic about the -- our ability to continue to pick our spots and grow. If you look at the InSite transaction, we are very pleased with that transaction. It really builds on our base of towers that we have in the U.S., very complementary to our U.S. assets, not much overlap in terms of where the towers are located. So they fit kind of well in our overall portfolio. That transaction is accretive day 1 for us, which is important when we look at different deals. And we do think the growth rate of that asset, both on a revenue base and consolidated AFFO base from that acquisition, will grow faster than our core business. So we do think it's accretive to growth, and it's accretive day 1, and it's accretive to growth kind of going out over the over the longer term. So we think that's all really good. It also is slightly underweighted in terms of the big carriers in the U.S. So about 60% of the revenue comes from the big carriers. We think that's a good sign. It sits at about 2 tenants per tower. So there are some of the Big 3 where they will need to be in the future where they're not on those sites today. We'll continue to see them kind of move out and migrate to those sites. That's what's going to drive that higher growth rate. So we're really optimistic about that portfolio. We really like it a lot. And I would say, the way we value these things, you've heard us say it before, we're very disciplined. We build out discounted cash flows. We do side-by-side analysis. We do due diligence at the site level as well. And that's what drives the value. The multiple is not the way we drive the value. It's really about doing that discounted cash flow and assessing the towers individually, kind of building that up and figuring out what the value there is in any given portfolio. And that's what we've done in this case. So this acquisition is going to be good for us. It fits in nicely. It also has really interesting distributed antenna systems in an in-building setting. It has some nice rooftops around the country, and it has some land assets as well as some towers up in Canada. So we're excited about the opportunity to buy this and integrate it into the U.S. business where we have significant scale, and it's very efficient to move additional towers in and have it kind of absorbed in our overall fixed cost base in the U.S. So when you -- when we're expanding an asset base in a country where we already have scale, it's a great way to drive returns and margins and those sorts of things. So we couldn't be more excited about the fact that they came to market and that we were the company that will be buying those assets.

Great. You mentioned some indoor systems and DAS systems. Let's address the elephant in the room. We were just on the Crown Castle NAREIT presentation before this one. The big debate is macro towers versus small cells. You've got a unique perspective, I think, as CFO of American Tower, but previously CFO of Light Tower, which is a fiber company. So a side note on that question, some people are wondering the DISH lease agreement with Crown Castle seems to imply that fiber is an important aspect to getting macro tower leasing. So first, help us understand where you are right now, given your strong balance sheet and your ability to go into digital infrastructure. How do you view macro towers versus small cell debate? And is it impacting your ability to get towers leased up?

Yes. Yes. So I would start by saying, Ric, that our view on the small cell business in the U.S. has not changed. With that said, we continue to evaluate, and we continue to do work on it. As you said, prior to joining American Tower, I was the Executive Vice President, CFO and a Board member of Light Tower. We were building fiber to the tower back then. We were building outdoor distributed antenna systems, which really are akin to the small systems today. So I've got experience in the way you deploy capital in a fiber business, the way you evaluate new laterals into buildings and to other places that need backhaul. But with that said, we've done an extensive amount of review and work on the small cell opportunity in the U.S. And one thing that I think is worth pointing out is that, although you haven't seen us invest in that business heavily, we've really decided that there are other better opportunities for us to invest, let's say, get a higher risk-adjusted return. We think towers even internationally have less risk than some of the small cell deployments in the U.S. relative to the returns that you're able to get. And a couple of key facts, and first off, the fiber business and the backhauling to small cells. The fact that we haven't invested in it, it doesn't mean that we think it's a terrible business because we don't. It doesn't mean that we don't think fiber will be used to backhaul small cells because we do. There will be small cell deployments. We agree with that. There will be fiber backhaul to those small cells. The real issue is what's the return going to be? What's the longevity? What's the revenue cycle on that? What is colocation in that environment? And are there really economic synergies and benefits to having a second tenant on that fiber? That's where when we do the modeling, and we really think through it. The returns just don't quite match up to other capital places where we can put capital. We look at the small cell business really as a fiber backhaul business. That's really what it is. It's not like towers, it's not like real estate. And then in the places where we see small cells being deployed and where we expect they'll continue to be deployed is going to be in urban centers, and it's a very competitive fiber environment in the urban centers and in lots of other places in the U.S. So we do think it's highly competitive. You don't have that exclusivity. You don't benefit from kind of franchise rights or zoning protection, meaning other fiber carriers can overbuild you. As these things come up for renewal, we do -- one of the elements of a fiber business and backhaul business is you provide more bandwidth for a lower cost upon renewal. That's the way it's always been. So we don't think that the backhaul environment has the ability to monetize growth in mobile data quite the same way as our real estate infrastructure assets do. And we think the returns end up reflecting that. So we -- all of our analysis suggests that the returns that you can get from fiber backhaul is significantly lower than what you'll get in towers. We have returns across our tower portfolio in the low double digits. In fiber businesses, we see that across kind of many fiber businesses where the return on our invested capital is in the mid-single digits. And maybe 6 or 7 on the really high ones, and some are even lower than 5. So -- and that's kind of a function of the industry, and I think it's going to be hard to break that model because it is so competitive. We see the margins there on the small cell fiber backhaul business being lower than what we see on macro towers. We see the returns being lower as well. And it's very capital intensive. So you -- every time you're deploying a small cell, you're running new fiber, you're bringing new fiber. Even when you talk about a second tenant, you're still splicing it in, and that's a big part of the cost. So it doesn't matter if you're running a mile or half a mile or 500 yards, you still have the splicing work at each end. That's labor-intensive. It's highly skilled. You have that even on a very short lateral going across the street or down the street. And when you get a crew set up to go out and roll fiber, a lot of the cost is getting the crew set up and out on the street to roll fiber, and then it's very easy to run it another 100 yards or 500 yards. So a lot of the cost is set up in the prep and getting people deployed. So the cost per, let's say, linear foot of a fiber deployment, when you're talking about short runs, it's much higher than if you do in the long run. So the economics there, we struggle with. With all that said, at the end of the analysis, we see lots of opportunity to continue to invest in towers. We have the skill set to manage those towers. We like the countries that we're in. There are a few more countries we would like to be in. So that's where we've chosen to deploy our capital. We think it's a better place to deploy capital for our shareholders over the long term. And it certainly matches up better with our internal capabilities in the way that we are structured today. So again, I want to maybe emphasize that we don't think backhaul to small cells is a terrible business. It's just not right for us in the U.S. We're continuing to evaluate it in other countries around the globe. And we may find that the environments there are different and maybe the returns are more attractive, and we could do some in international markets, particularly in Mexico or maybe in Brazil, in certain places in Africa. It could be possible to be the first provider of fiber in there, and you get more of an exclusivity. You get connected with customers that aren't competing with you and that don't have their own capability to roll fiber.

And is it impacting your ability to lease-up towers in the U.S. not having a fiber component or an engineering -- large engineering services business?

Yes. No, thanks for reiterating that. I almost left it out. No, not at all. I mean, I don't see that at all as an impact in terms of the tower leasing model. And one of the things that we look at when we think about small cells and fiber, I think -- I honestly think that we are better off not having those 2 things connected because the carriers are very good at pulling those other things in and trying to strike a deal that is good for them across multiple assets. So the fact that we have macro towers and we focus on those, we manage them exceptionally well. We focus on the contracts with the carriers. We don't have any external forces kind of pulling and pushing on pricing based on other assets. We think that's a positive. So we don't -- I don't see any indication that not having a significant fiber presence in the U.S. It just does not impact our ability to lease-up macro towers. I think you've seen that over time in terms of our growth numbers in the U.S., and we certainly don't think that it will have any in the future. Most of our towers today already have fiber to them, so that's just not an issue. And we do see small cells as being complementary to towers, not competing with towers. They deploy small cells in urban dense areas, whether there's a high population count wherein -- particularly in a 5G world, you need more capacity in those dense areas. So there'll be -- the carriers will combine small cells with millimeter wave spectrum, and it will be in the dense urban areas, and we just don't see it competing with macro towers. We continue to believe, and I think there's a lot of evidence to this, including statements -- public statements from carriers, that macro towers continues to be the best, most economical, best from an engineering standpoint, way to propagate RF signals. And in a 5G world, we expect mid-band spectrum to be paired with macro towers in the U.S. and the suburban and rural areas, which are the areas where our towers are. We think that combination will really take the brunt of the 5G deployments outside the core dense urban areas. And the final thing I would say, Ric, is in those dense urban areas, traditionally, the carriers do their own engineering, their own deployments in the urban centers in New York City. They typically -- they're very difficult engineering exercises when you have all the buildings and the steep crevasses from tall buildings and different size and shape buildings and the density of the people and trying to get in-building coverage. So traditionally, the carriers have done their own engineering, work their own deployments, they manage those networks. So the tower companies don't really have a lot of -- they don't have towers certainly in building. We have some rooftops that cover those areas. But it's just a place where the engineers and the carriers have kind of managed on their own. And I think we see that continuing with small cells, even though they are outsourcing some of the backhaul from a fiber standpoint. They're doing their engineering and kind of managing their antennas and cables and lines.

Yes. And I think we're almost out of time, let's just close with, I think the bottom line was towers are a real estate business. It's location, location, location. And that if the carrier needs a spot covered and you're in that spot, you're going to get the business.

I think that's exactly right. Yes, that's exactly right. And it comes down to the quality of the location, the quality of the structure, and contracts have a lot to do with it. And we're exceptionally good at all of those things, and we provide a really good, high-quality asset. And you need kind of different contract structures that help the carriers deploy their networks very efficiently, very effectively. So we think we're a really good partner and will continue to be for not only the large U.S. carriers, but we have the large multinational, international carriers as our customers as well. So we're building deep relationships, deep connections there with the largest global wireless carriers that's important to us. That's kind of how we view the goal. So we take care of our customers, and we take care of our shareholders. They're both important to us.

Great. Well, it's NAREIT. So we don't have to deal with elevator banks like typical, but we do have to keep people on their schedule. I appreciate your time today, Rod. I will ask the people hosting the conference -- there were some questions we weren't able to get to. If it's possible, you can shoot those questions to us, and we'll try and answer back in the future. But again, everyone, have a great day. Stay well and look forward to when we can actually see each other in person in the future. Thanks again, Rod.

That's great. Thank you, Ric. Thanks for being here. Thanks, everyone.

Take care. Stay well.

All right, you too. Bye now.