American Tower Corporation (AMT) Earnings Call Transcript & Summary

Good morning. It's Michael Bilerman. Mike, I didn't know if you were going, you're still on mute. Welcome to Citi's 2021 Global Property CEO Conference. I'm Michael Bilerman, here with Mike Rollins and Citi Research. We're extraordinarily pleased to have with us American Tower and CEO, Tom Bartlett. This session is for our Citi clients only. If media or other individuals are on the line, please disconnect now, and disclosures are up on the webcast. For those joining us here today to ask management any questions, simply type them into the question box from the screen, and they're going to come directly to Mike and myself, and we'll do our best to weave those into the conversation.

Tom, I'm going to turn it over to you to introduce American Tower and if you could answer the following question in your opening comments.

Okay.

Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in American Tower?

Okay. Thanks, Mike. Thanks, by the way, both Mikes for having us here today. It is a great conference, and so we're just excited. And so thank you for having us and hosting us. We're coming into a -- off of obviously a very strange year and moving into a very new year. And I think that there are so many opportunities for a business like ourselves on a global basis that are in front of us. And I think to the extent that we were -- there was only one stock to pick for us. For us, it comes down to kind of 3 items. I'll peel those back a bit. But it comes down to growth, it comes down to predictability and it comes down to our global platform. And so if you -- from a growth perspective, I think the model -- the Tower model individually speaks for itself, exclusive pieces of real estate, multi-tenant, multi-service, really a green type of a service and one that we've been able to demonstrate significant success from a growth perspective over the last 10, 15 years. It's been all about double-digit growth, profitable growth. Most of our revenue falls down to our cash flow. We have 80%, 90% of our top line dollar that's generated falls down to the margins. And so there's a very good growth from just a -- from a pure cash flow perspective, from a profitability perspective. And as I said, we've been able to demonstrate that we can generate double-digit growth. I mean what kind of a model that is supported by long-term contracts with escalators that has the demand growth -- driver being broadband wireless? I mean it's a pretty unique spot to be. And on top of that, then a double-digit growth in our dividend. So for us, we are all about growth. And we'll talk about that from -- I'm sure, from a strategic standpoint in terms of how we continually are trying to extend, if you will, that cycle. The other side of it is predictability. Our customers are largely investment grade, again, long-term contracts. The way that we've constructed, particularly our U.S. business, is that there's a significant amount of visibility into what that growth is going to look like. In fact, 2/3 of our growth going forward over the next 5 to 7 years is already contractually guaranteed today. So that's a nice base of business then to be able to grow and look for other areas to grow. We have $59 billion of contractually committed revenue today, right? And so I think that an investor would like the comfort knowing that the guidance that's being put out by the company is, in fact, very predictable. And we'll, again -- looking over the last 10 years, I think, we've been able to demonstrate that level of predictability. The one item, though, that I think is very unique to us, is the diversified global platform that we are, in fact, building. We're in over 20 different markets. With Telxius, this larger transaction that we're closing this year, we'll have well over 200,000 sites. We have visibility in terms of building 40,000 to 50,000 sites -- at building 40,000 to 50,000 sites, double-digit kind of returns out of the gate for that over the next 4 to 5 years. And what we're now creating are beachhead positions in these large critical markets around the world. Telxius give us significant presence in markets like Germany and Spain. And so while we are a very local business, providing local service to the MNOs in those given markets, for example, in the United States to the Verizons and the AT&Ts, what I think we're building now with this global platform is that single point of contact to offer value to hyperscalers, global data center companies, global enterprise accounts who are going to be looking for that type of global capability, particularly as we start to see the cloud even further moving out into the edge. So that's one area that I think, guys, that we haven't yet seen the value that can be created from it, but we do think that over the next 3 to 5 years, we're going to start to see value being created from the mere footprint that we've created. So again, it's growth, it's predictability and I think it's the global platform that we've been able to create. So hopefully, that gives you a little bit of color on why somebody should invest in American Tower.

Tom, thanks for that. Maybe drilling into one of the things you mentioned. You talked about building a beachhead in different markets. And I remember, back years ago to when American Tower had an analyst meeting and the company was describing the aspiration to be -- and you can -- with this, was it top 2 or was it top 3 provider in each market that you're operating within? And so I'm curious if that's still whatever that view was, you can remind us of that and is that, that's still the aspiration as you're expanding globally to be one of the top providers in every market that you're serving?

It is, Michael. As a matter of fact, it was the top 1 or 2 providers in each one of the markets that we're providing and so -- serving. And so we want to be in those major democracies, develop market developing, democratic countries around the globe, and we want to be that #1 or #2 provider in those markets. And if you look at kind of the growth aspects of our business, we've been fairly aggressive from an M&A perspective. We've been fairly aggressive from a build-to-suit perspective. But even with the kind of density that we have in the markets, we probably only own 1/3 of the inventory in our collective markets. Now you have companies like SBA and Crown in the United States, and so that obviously feeds into owning that 1/3. But we do think that there is still a sizable amount of densification that can go on within the markets that we're serving. And we've got the relationships with the MNOs in those particular markets. We know the markets. We've got management in place systems. We've got all of the infrastructure. And so that gives us a great opportunity to scale. And so clearly, we look for those opportunities. And now they always don't present themselves, right? I mean there's more capital coming after some of those particular assets, and so we look at them very carefully. But we're hopeful, given the value proposition that we have with our customers, that, that puts us in a little bit in a catbird seat in terms of them handing over the keys to their network. If you look at Telefónica, we have a significant relationship with them in Latin America. And so it was a -- and we have a very solid relationship with their key leadership in Madrid, and so it was kind of easy conversations. Now you still have to step up and pay for the sites. But clearly, when you're talking with a CTO of these entities to the extent that you're providing a high-value service for them, they're going to be much more inclined to want to hand over those keys to us than to somebody that doesn't have that same kind of credibility. So that is still our mantra. We still very much want to get deeper and deeper into the markets that we are in a very logical and methodical and disciplined way. But I do think that M&A will continue to be part of our growth story going forward for many, many years.

And American Tower has been very focused for many, many years on return on capital. And we're getting the question from investors how the recent acquisition prices and yields that have been in the mid-single-digits, if you sort of take the multiple and flip it upside down into a yield, how those mid-single-digit percentages compare with the return on capital objectives for American Tower over time? And I believe, again, you can remind our audience, the return on capital, what, today is around 10%?

Yes, it's around -- right around that kind of that 10% to 11%. Yes. No. And so -- by the way, uncompensated based upon 2 things growing, AFFO per share growth and return on invested capital. So I spent an awful lot of time looking at the returns that are being generated within our business. Now the opportunities that we would have for example in a market like Europe, you also need to take a look at the context of what our overall underlying cost of capital is. And so given the opportunities there, first of all, we hope to exceed clearly what -- even some of those projections have been from a growth perspective, but our overall cost of capital is actually quite low in a region like that. And so we have not changed the approach at all, Michael, in terms of how we look at ROIC and investing in markets, everything is done on a risk-adjusted basis. And so we continually look at Africa, for example, largely mid-teen, higher teen kind of required rates of return; to Germany, which is probably one of the lower cost of capital that we've got in our portfolio; to the United States, to Latin America, which is still double-digit in those areas. And so that still is the underlying premise for it for how we look at creating value. And from an allocation perspective, I continually look at, okay, where can we create the most NPV. And you look at the deal that we just did in the United States, we closed on a couple of thousand sites on a particular transaction. Why is that important? Geographically, where does it sit? What's the quality of the asset? The position that we have in Europe with the Telxius assets gives us a really good position, leadership positions really in both markets largely, particularly in Spain now with Telefónica as being in the incumbent. Germany still have obviously DT as being kind of the big kahuna in the marketplace. But given the portfolio that we have there, it really provides us now the capability of supporting new entrants that we expect coming into the market as well as 5G going into the market. So all of those things get dropped into that 10-year DCF in terms of looking at, okay, what do we think the underlying growth rates are going to be in the market and why do we think they're going to be kind of outsized going forward. So there's been no change at all in terms of looking at the return on invested capital. As I said, one of the areas that I don't think that we really baked in at all in terms of our projections, is the value of that global footprint. And what kind of reach and what kind of value might that bring to an Amazon or to a Google who are trying to extend their own reach into areas outside in a big way in the United States.

Tom, how do you think -- I think you're about 70-30 right now in terms of split, U.S. versus...

Yes, thereabouts.

I guess would you envision a time where ex-U.S. is greater than the U.S.?

I don't think so, Mike, just simply because the U.S. is so big, you know and we're continually looking at ways to extend our existing platform to our existing and new customer. So it would be hard to imagine the international business. We definitely would want to get deeper into some markets outside of the United States, but it's hard to envision the makeup of what's outside the United States versus what's in would be significantly different than what it is today. What we think...

Right. Because U.S. will continue to grow as you make international acquisitions. So the mix is going to be similar.

Right. I mean if I take a look at the 20-plus markets that we're in, there's probably -- our customers are probably investing $50 billion to $60 billion into their networks. Over half of that is still within the United States. And so just assuming that kind of investment activity and that brings the largest correlation with what our underlying growth rates are going to look like. And so as a result of that kind of mix, we would expect that the U.S./off-shore kind of mix would look very much the same going forward.

And then you commented that your compensation is tied to ROIC and AFFO growth. As part of that, the cost of capital and how you source the capital are important drivers in supporting, obviously, the per share growth. How do you think about your sources and cost of capital? And are there elements structurally that you can exploit either in your foreign operations or the U.S. operations to lower that cost of capital to drive per share growth even higher and make you a lot more money than you already have.

Yes. I mean there are a couple of things, I think, I can kind of feed into that. One would happen just to be kind of how we're thinking about globalizing our business. Today, the way we've grown, we are still largely a big international business. We're a really good international business, have great presence, great leadership team. But I do think even from a margin perspective, there are ways to further standardize things within our business, how we engineer, how we look at our NOC support, our underlying processes in terms of how we actually handle contracts. And so we are looking and are in the middle of moving a lot of that transactional-based support to large kind of global business service locations. And so I'm hopeful that we can actually drive up our overall operating leverage, if you will, or margin performance within the business over time as an entity. Then there are certain things within the business. If you look at power and fuel, how we've entered into fixed contracts on a power and fuel basis, but we continually drive down the underlying cost of power and fuel. We've taken the diesel component out of our power and fuel down by a half, and we're looking to take that down by another half as we're bringing in solar and lithium-ion and those types of things. So that clearly is an element, again, of increasing the overall kind of value that we have within the firm. And then there are a number of initiatives, Mike, that we're looking at to be able to extend the existing platform that we have utilizing the same model of multi-tenant, multi-service, long-term contracts with solid incumbents. We're in the areas of edge, in the areas of in-building, in the areas of even power as a service. I look at the types of things that we're looking at in Africa with regards to power. And what we potentially could have done in taxes to be able to support that area. We're able to bring in power to store power in ways that we can really help light up villages to the extent that they're suffering from a power perspective. So it kind of fades into the ESG/additional value category that, I think, we can bring to a market. And then the further is just being able to enjoy and densify further into the markets and be able to be better positioned to be able to support our customers that they're rolling out new technology. And so that's why the German and Spain acquisitions, I think, were so important. So we're hopeful that there are a lot of elements to this platform extension model that we're trying to build that while they're not creating billions of dollars of value today, within a 3-year period, that they can really add into the total addressable market that we're participating in.

And then anything just on your capital sources directly? Obviously, you can, obviously, use the stock and unsecured debt, but anything to take advantage of to drive that cost of capital down further? I mean there is a lot of interest in infrastructure assets and towers specifically. And so are you able to get the benefits of all the operating levers that you talked about, but do it on a more capital-light perspective and really increase that AFFO and then increase that dividend even further?

Right. Well, we're looking at private capital even as part of the Telxius transaction. And I don't -- who knows where that's going to ultimately land, and we'll obviously roll that out when we have all of the pieces in line. But there's an incredible amount of interest in terms of pension funds, infrastructure funds being aligned with a strategic company like ourselves. And we're not looking at premiums in terms of what the underlying cost component is. I mean they're very much interested in terms of putting their own capital to work and doing with a company like ourselves who have great credibility in terms of being able to execute. And so I'm hopeful that, that could also be a kind of third or a fourth leg to the capital stool that could help us continually grow in a market like Europe, for example, going forward. And so as opposed to competing against some of this capital in terms of being able to secure some of these underlying portfolios, joining with them and utilizing their capabilities in a very passive way to be able to kind of extend our reach and depth into the markets that we're looking to land.

So Tom, switching gears a little bit to the leasing environment in the U.S. You and the management team put out multiyear leasing guidance on the earnings call. And just curious, if you could just further unpack, are there certain things that you feel like gives you the visibility for this growth that might be underappreciated by the market? And within this question, we got a question from our audience and they're curious about what you think the big 3 carriers may say this week at their analyst meetings. And are there certain things that investors should be paying attention to in those meetings that might give some more insight on how it affects your business?

Okay. Michael, you've got a lot of things going on there. But let me kind of give some visibility in terms of how we think about the next several years. We have a big churn event that's right in front of us, right, and it's going to start in the fourth quarter and kick into 2022. And so as a result of that, we were asked candidly on an earnings call and, I think, you may have as well, about giving longer-term guidance and showing people how the next 5, 6 years is really going to unfold. And we're able to do that largely because much of our revenue growth is contractually committed to today. And so if you take a look at the gross new business, the new business from Colos and amendments as well as the escalators, 2/3 of that is actually in the books today. And so it gives me great comfort in terms of being able to talk to a longer-term view of what that looks like. And so we unpack that in terms of looking at, okay, what does it look like over the next 2 years versus then what does it look like the following 4 or 5 years, right? And so from a gross perspective, in '21 and '22, we rolled out that we would expect our gross new business to be 15% to 20% higher than it was in 2020. And that reflects all of the 3 carriers, absent DISH because DISH really hasn't kicked in yet for '21, being quite aggressive. And we're seeing that already out of the gate, okay? We're seeing a higher application volumes and all, everything that supports kind of the underlying guide that we put out there. And I think all 3 would probably say that they're going to be as aggressive as they possibly can to be able to meet their underlying network need to roll out 5G. They all have 5G spectrum that they're rolling out. They just paid some pretty significant price points for it. So they're going to be -- they're not going to let that sit on the sideline. And so they are going to really be aggressive, I think, as they can in terms of rolling out that, which supports our underlying thesis for kind of the application levels that we're already seeing out of the gate. So we see from a -- over the next 5, 7 years, from a gross perspective, really solid trends going forward. We're still in the early innings with 5G. And so we haven't even really seen, I think, what the ultimate opportunity is going to be in the 5G world, got new spectrum coming in and then we also had DISH coming into the market in the fourth quarter, which will largely be a kind of a 2022 kind of starting event for us. But we do have this underlying churn event that we wanted to even further provide more transparency in terms of when it's going to hit, starting in the fourth quarter, $15 million, $17 million per month and what the impact is going to be in '22. But we also wanted to show then what it looks like coming out the other side. And so without the Sprint churn in the next 2 years, we would be still in that kind of that 5-ish percent range, maybe a little bit higher. But the Sprint churn brings it down into that average 2% range for the next couple of years. And then going forward, we would be back into the north of 5% kind of growth rate without the churn because there's still some legacy churn that's going to kick in, in '23 and '24. But without that, we would be in the 6%, which kind of puts us in the hunt of what we have always talked about being in that 6% to 8% kind of growth range in the United States. Now we're a much bigger business than we were when we rolled out that 6% to 8% several years ago. And that probably has the impact of 100 bps, if you will, on the growth rate. But we are very constructive and very positive in terms of what we see over the next several years from a growth perspective. We've got to get through the Sprint churn. But as I said, on a gross perspective, we expect to see higher levels of new business. As we saw 3G go to 4G, and now we expect 4G go to 5G, the carriers do step up in terms of spending incremental capital on their networks. And so that is something that we would expect going forward. As I mentioned, we see that we're contractually locked in on 2/3, and so the question is, okay, what is that other 1/3, right? And that would go into the likes of, okay, what might DISH do? How do we see DISH building out their network? What are the other 1,900 customers that we have in the United States? We have about 2,000 customers in the United States, what are they going to be doing from a growth perspective? What kind of opportunities do we see at the edge? We have probably a dozen sites with a couple of shelters each with 100, 300 kilowatts of power, 20 cabinets, $2,000 a piece. And so it could be very interesting, I think, what that opportunity might look like going forward. We've got MoUs in place with a number of different players to explore different go-to-market strategies, but we're still in early innings with the kind of cloud-based edge computing. So what that might that look like, though, in 3 to 5 years. So we think that there is a good foundation of growth over the next several years. And we're cautiously optimistic that we're going to see some outsized growth because we're going to be surprised by what 5G might be bringing to our customers' customers and what our customers are going to have to do to ensure that they're able to monetize that opportunity. What might DISH do out 2 to 3 years from now? What might that look like? And then putting all of this spectrum to use in terms of if it just brought speed to individuals like us who have multiple devices, what kind of additional network demand is that going to be putting on their underlying networks and how are they -- carriers going to have to invest in it to meet that demand? So I think there's a really good backdrop candidly going forward, Mike, in terms of what this looks like going forward. We've got to get through this churn issue, I know, within -- with Sprint, which we will. But in terms of a gross perspective, we're really, I think, going to be energized by what we're going to see over the next several years.

So what -- if you take all this guidance together, you've got this multi-year mid-single-digit growth objective in the U.S. business. You discussed previously that international over time can be 200 basis points higher on an organic growth basis. You've got build-to-suits internationally that you've already guided to. Are all of those things and the operating leverage of the business enough to get you to that double-digit AFFO per share growth target on average over these next number of years? Or do you need a kicker, something on the financing side, something in terms of the adjacencies like the far edge data center concept playing out? What does it take to go from the organic growth to the double-digit AFFO per share target for the company over time?

Well, I think they're all contributors, right? It's being good stewards of the capital that we've got in the business. We look at its AFFO per share. And the way we've always looked at allocating capital is to the extent that we can't find any opportunities from an M&A perspective, we turn that into buying back shares. And so that clearly is part of the model. But I think our history kind of speaks for itself, Mike, in terms of what we've been able to do. We've had all of those same elements, all of those same pieces of the puzzle that allowed us to drive double-digit AFFO per share in the past. I think going forward, given the kind of the global footprint that we have and the long-term nature of the contracts that we have, it probably adds even more of an opportunity to be able to drive that kind of performance. EBITDA will be the biggest generator of that AFFO per share growth, right? And so operating leverage is going to be a critical component. So our ability to look at new initiatives, platform extensions that are able to drive that kind of $0.80 of every incremental dollar coming down to the margin is going to be important for us. Our ability to continue to scale our business. We've been largely -- we're driven large by M&A. And so we now have the ability to integrate all of those assets and globalize our businesses such that we can improve the already very high-margin performance that we do have. I do think that maintenance CapEx and interest savings and cash taxes, they'll be part of the puzzle as well. But I'm confident that we're going to be able to drive that kind of performance over an extended period of time.

Tom, we've been asking every company what each company's top 3 priorities are to improve your overall ESG score over the next year. You mentioned some of the sustainability initiatives in a prior comment, but if there are 3 key things that you're focused on, what would they be?

Well, power is clearly one of them, Michael, in terms of our being able to improve the footprint that we're in. And I think that we've made some significant investments in lithium-ion and in solar. And so for us, it's taking them out of the regions where you need to have that kind of success in the Indias and the Africas and finding applications even here within the United States and really being able to improve our overall kind of carbon footprint. So that's one element where, I think, we've been able to demonstrate some significant success, and we will going forward. The second element, I think, would be around connecting the unconnected. We're very much part of a couple of large groups within the World Economic Forum, even within the BRT, when we start to take a look at the infrastructure bill. And so half of the world still doesn't have a broadband connection. And so we've made some major investments into what we call digital villages. We've spoken to this a bit in the past, where we can bring a broadband connection into a village or a community and then all of a sudden, there's commerce, there's e-health, there's e-commerce, there's a number of educational capabilities that are within that village because we brought a broadband connection into that. And we probably have 200 to 300 of these villages that we've invested in, in a couple of critical markets. We need to take that up to 2,000 to 3,000. And so we now have plans in place to really be able to make some heavy strides. We're looking for some investors that will be willing to partner with us to be able to do that. But it's actually to even go on the website. It's core to the west's initiative for connecting the unconnected. And so I would hope that over the next several years, we'll be able to make some major progress on that. And then it's D and I. It's things that we're doing within the business and what we're doing outside of the business to really enable us to be a beacon, if you will, in the communities that we're serving. And there's just a lot of blocking and tackling that needs to go that. It's tone within the business. When George Floyd was murdered just about a year ago, I did an awful lot of my own self-reflection in terms of kind of where am I on this journey and then needed to understand where are we as a business. And so I set up listening sessions. So I got 10 to 12 employees together with me and we just talked. And there were very few calls where tears were not shed, but that led then me with the kind of more of lenses that I was looking through to really better assess where we are. And we brought third parties in to take a look at where we are from a pure data perspective. But it's what are we doing internally and how are we thinking about that journey over time. And so I'm working with a lot of other CEOs and businesses to really be able to share experiences and kind of share where we are. But it's more than just that. It's what are we doing outside the business and what are we doing from a legislative perspective? How are we weighing in with police reform? How are we dealing with some of these big broad issues that we need to be accountable to really, again, improve where we are on this overall journey. And it's not just in the United States. It's global. When I talk about this, I talked about this the other day with a woman, one of our employees from Kenya. She got -- and we started to talk about race. And she says, you know, the first time I ever heard the word race or really even thought about it was when I got off the airport at Logan. And that's when it all of a sudden became very obvious to me what happens from a pure racial perspective. And so they have different types of inequality, whether it's gender, whether it's class, whether it's income, whatever it is. But it's a very different formula, it's a very different journey for people that are living in India versus Sao Paulo versus Joburg. And so our D and I progress is not just within the United States. It needs to be very, very global. And that's part of that overall globalization effort to be top 2 in the business. So a long answer to the story, but those are kind of 3 broad areas that we are very focused on.

I appreciate that. So we have 4 rapid fire as we're ending the sessions. So Tom, when we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

Well, surprises, we don't have a lot of surprises in our business kind of given the predictability of it. But given, I guess, some of your questions before and how I hopefully will see kind of C band being deployed, it could be overall or just organic growth. We're -- while we have visibility in terms of what we think 5G is going to mean to us, I think, we're not looking through all of the lenses in terms of being really able to understand. Now whether that's 12 months or 24 months, Michael, I'm not sure. My sense is that, that could be one of the real interesting things that we see over the next 12 months or so.

Right. What do you think your corporate travel budget will be in 2022, as a rough percentage of what you spent in 2019?

Well, given the fact that we've been cooped up for a year and given the fact that I'm just new into this role for a year, I could find that it could actually be over and above my 2019. We're bringing in a new leader in Asia. We've just picked up all these properties. We will have closed them in Europe. And so I could actually see my travel budget being higher than it was in 2019. So maybe 125%.

Perfect. The lodging guys will like that. This one should be easy. Same-store NOI growth for the Tower sector overall in 2022?

Yes. I think it comes down to, again, kind of what we were just talking about, what might surprise us. I think in the United States, we've probably been in that same-store kind of 6% to 8% range. Internationally, thinking about it on an FX-neutral basis, it's probably been the low double digits. I'm hopeful that it's picked up from there, given the kind of the levels of activity that we're going to be seeing over the next 24 months as even new spectrum comes into the marketplace and as we have a new entrant into the marketplace, I would expect that, again, new business to be generating even higher growths of same-store type of activity.

Okay. And last one, 10-year treasury a year from today, it's 155 right now.

You guys are in a much better position to predict that one. I think it's 12 months from today, I think it's going to be higher. I think that's probably most of predicting kind of in 180, 190 range, I guess. So my sense is that, that's probably as best to guess as any, whether it's two. I don't know. But I would say it could be 20 to 30 bps higher than where it is today.

Great. Thank you so much.

Tom, great to see you.

Yes, Mike, Michael, it's great to see you. Thanks again. Thanks for hosting us, and stay safe.

You too.

You too. Take care.