American Tower Corporation (AMT) Earnings Call Transcript & Summary

Okay. Great. We just need to wait a couple of seconds for everything to load through. All right. We can kick it off. All right. Thank you, everyone, for joining us today. I'm Sami Badri, Crédit Suisse's lead analyst on communications infrastructure and telecom and network equipment. We have Rod Smith, the CFO of American Tower today. Thank you, Rod, for joining us.

You're Welcome. Thanks, Sami. Thanks for having me. Look forward to the discussion.

Yes, absolutely. For a lot of the investors that are tuning in, if you want to ask a question, you can click the ask a question button, and that would generate an e-mail to be sent right to me. So you guys can ask a question through that.

Now, Rod, I guess 1 thing that I wanted to cover with you and probably a little bit more timely. Anything really topical that's come out from the last couple of weeks, meeting with investors, with American Tower. Is there like a focus area that has constantly come up that's been the center of focus of all conversations? Or has there been something that simply has just not come up enough, right, in your conversations? I was hoping we could just hit that for initially before we get into the rest of the questions?

Yes, absolutely. It's a great question, Sami. I would say that there are many things that are happening in this industry for American Tower that are really exciting. So -- and of course, the investors talk about that with us, they bring it up and and we do as well. But certainly, the U.S. positioning of the industry is really exciting with the -- with Sprint and T-Mobile now merged and DISH building out a network, with AT&T's announcements of their kind of refocus on the U.S. network and launching 5G, we think that, that's really exciting. That's really been a -- certainly a major point of discussion from the analyst community and the investors as well. And also in Europe, with the transformation that we've just gone through in Europe, buying the Telxius assets and really changing, transforming our positions in both Germany and Spain and having a significant role in those markets now going forward, I think is -- as I said, it's transformational, it's very exciting and it positions us really well. And then we're seeing really good growth around the globe in some of the emerging markets that are there and designed to support additional growth and longer-term growth in our portfolio. We're building a lot of sites around the globe. As you've seen, we expect to build about 6,500 new towers this year, all at really attractive day 1 NOI yields of double digits. So those are some of the things that come up pretty consistently over the last several weeks and really since the first quarter earnings announcements.

All right. All right. Thank you for starting with that. So maybe to get kind of more into the nitty-gritty of stuff, and I'm sure this has probably come up before, but something that we, as a team at CS still want to revisit. So given that the Verizon MLA is rolling off at the end of the year, can you speak to the differences we might be seeing depending upon whether you go a la carte or not with them?

Yes, absolutely. A couple of things I'll point out to begin here is, #1 is, when we talk about the Verizon holistic deal expiring at the end of this year. That really is their comprehensive rights or their use rights, in the use right fee portion. It's specifically not their underlying site license agreements. So there is a number of years left on their leases before they get to final exploration, in the range of about 6 years or so. And then the other thing I would say is from a holistic deal, you are correct, the Verizon holistic deal expires at the end of this year. And going forward, there's really a couple of paths we could take. We'll work with Verizon to determine the best path for them and for us. But it will be either getting back into a holistic deal. Similar to the one we're exiting, which would take us out over the next several years. Or the other option is just reverting back to a traditional a la carte site license by site license approach as they go out and deploy sites and upgrade sites with C-band and those sorts of things. So those are really the 2 different paths that we have. The way we think about that is, certainly, we're here to help our customers, our carrier customers deploy their networks. So we're -- that's always top of mind. And also, we're here to drive value for our shareholders and to protect the value of the assets that we have. So with that said, we will do analysis and modeling around the different options. We don't see, in the way that we negotiate and plan the holistic versus the a la carte is there isn't necessarily a difference in terms of the valuation that drives to us that accrues to us or for the carriers. We basically look at the activity level that, that carrier is going to need to to conduct on our sites over a multiyear period. We'll price that up very specifically in terms of what they want to deploy, when and how they want to deploy, what spectrum bands they might want to pull in, what antennas and cables. And we price that up, and those are the rights that they get, and they get it for the fee that we would normally price up. It gives us the ability to have a multiyear window in terms of the activity level and the pricing. And then we can smooth that out, both for us and for the carrier. But the underlying economics tying in with the activity level are pretty consistent either way is the way we view it. So from that perspective, when it comes to the Verizon MLA specifically, we're agnostic as whether or not we enter a holistic arrangement or an a la carte arrangement because, again, the economics don't change. It's really just the way things are spread. Now with that said, there are some benefits to the holistic deal. Administratively, it's much easier, much quicker process applications than to get antennas and equipment in lines up on the tower. So that is certainly a big difference. But other than that, we really are agnostic. And we think we're in a very good position, not just with Verizon, but with other carriers, given the amount of activity that we're seeing in the U.S. business going into an à la carte environment is perfectly fine with us. And as I say, getting back into a holistic deal with Verizon similar to what we've done with other carriers and with Verizon in the past is perfectly fine as well.

Got it. Got it. Maybe on the same topic of some of your carrier customers, going to the MLA you signed with AT&T. One question is C-band activity and whether that was contemplated as part of MLA. And maybe could you just go through with that, the process that you guys took with AT&T and how that was actually being factored in, in terms of key considerations, how big of an incorporation that actually was into the underwriting?

Yes. Absolutely. I think I can give you some detail around that, without getting into specific terms and conditions within the customer contract, which we always want to stay away from. But similar to what I just mentioned around the Verizon holistic deal. Our philosophy, when it comes to holistic deals, whether it's Verizon, AT&T, T-Mobile or DISH, for that matter, is consistent. So with the AT&T deal, specifically, the way to think about it is that we and and AT&T sat down and planned out what the activity level was going to be for a number of years kind of looking forward. And that, of course, contemplated growth in mobile data consumption across the networks and what need to happen in the networks to handle that and to be able to compensate for that increase, mobile data consumption. Any new spectrum bands that they expected to pull in, any changes that, that will require on the way that they use the towers in terms of cables, antennas and lines going up into the towers as well as the deployment cycle and the timeline for that. So that's kind of how we -- that's kind of how we work up the level of activity of the use rights that would be granted. And that's how we price the economics around what would be in the deal. So from that perspective, it's probably enough information for you and for the audience to sit back and say, okay, there was probably fairly good visibility in terms of how these sites would be used, particularly with C-band in the early stages of 5G and things like that. So I would say that a lot of that is kind of in that initial modeling and therefore, kind of in the comprehensive deal that we have with them in terms of use right fees as well as the economics that we get. But with that said, when you get into the out years, to the extent that there is an increase in CapEx that's sustained over a number of years, that could certainly put the activity level over and above what was contemplated for that multiyear period. And to the extent that, that happens, there is potential upside and there could be additional revenue for us if the sites are being used in a more robust way kind of over that holistic time period.

Got it. Got it. And just staying on AT&T and maybe touching on the divestiture of WarnerMedia from that. At the end of the day, how does that kind of factor into your planning as a CFO and how you address this kind of customer event? Does this mean that wireless CapEx could go up? Does that change the way you're underwriting? Is there an expectation that activity levels will change for certain elements of the customer? Maybe you could just walk us through kind of what your expectation is after a strategic event like that?

Yes, absolutely. I think, certainly, it is a significant event for the industry overall without a doubt. And I think it does reinforce what we've been saying at American Tower for many months, certainly, many quarters, which is with the combination of Sprint and T-Mobile and having a real credible kind of a 3-player market here, where any of the 3 can [indiscernible] to be #1 in a 5G network. We've always said that, that kind of a dynamic would heighten, strengthen and make the competition -- accelerate the competition in the U.S. marketplace. I think we've seen that with some of the early announcements in some of the [indiscernible] coming from all 3 of the carriers in terms of their CapEx plans. Certainly, the way that the C-band spectrum auctions unfolded in the aggressive posturing from the carriers in terms of the pricing that they were willing to pay in to get that spectrum. So we certainly see a very competitive U.S. landscape. I do believe that the AT&T announcements and to the extent that they have more acute focus on their U.S. network kind of going forward in order to maintain their position and increase their position and compete with Verizon and T-Mobile. That will spark competition from the others as well. And I think we are entering into a period, a multiyear period of probably heightened CapEx spend from all the carriers. And that heightened CapEx spend will translate into increase in activity in the U.S. and we're -- we've expected that. So it's not outside the expectation that we had, and a lot of this is kind of built into our multiyear guidance we laid out at the end of Q -- at the end of Q1. But we are seeing that. We have said and we have seen our gross new business accelerate and grow from year-over-year in Q1. And also Q2 over Q1, we expect it to grow again. And we expect gross new bids to accelerate over the next couple of years. So that's something that we've been anticipating. And we're seeing the market dynamics here within the industry. Set up to really support that over a multiyear period. So it really is kind of right in line with what we were thinking and the way we viewed the U.S. market. And why we're so excited about the U.S. business as well as our global -- our global footprint for sure.

Got it. Got it. And then I just wanted to kind of -- you mentioned about the CapEx levels potentially being elevated as we go through this process. I think one thing I wanted to touch on before we kind of got into that, though, was with DISH starting to deploy, how does the domestic market look today versus how the domestic market looked pre-T-Mobile and pre-Sprint merger, right? So when you had those 2 as separate companies, and they were spending, and there was no real DISH deployments going on, how did that environment look different than this environment?

Yes. It's a great question. And if you think back to the 2018 kind of time frame, we had a robust activity going on for sure. We did have all 4 carriers active in the space. We had AT&T deploying FirstNet in addition to just regular CapEx deployment. So it was really robust. I would say it's very difficult to compare kind of this environment to that environment. #1 is it's a little too early, I think, to try to make those comparisons. As we roll through the next couple of years, we can look back and say, how did the activity levels kind of shake out and compare. But certainly, if you look back in the 2018 time frame, it was very robust activity. I believe we are heading into a period that will also be very robust activity with Verizon, AT&T and T-Mobile, all being active. And now with DISH coming into the fray, that certainly sets up a very interesting situation in the U.S. in terms of the activity level. So we are expecting to see activity levels increase, as I mentioned just a minute ago. Exactly the timing of those increases, the longevity, how secure those increases will be over the next couple of years. At that point, we can kind of look back over these next couple of years and see how they compare. But it's going to be very interesting, and I certainly see increase in CapEx spending here in the U.S. I would remind the folks that in terms of our DISH agreement, it's still early days with DISH. I mean they're certainly taking all the right steps if you were planning to build a nationwide competitive 5G network. We won't see revenue from the DISH agreement that we have with them until around 2022. And then from there, it will accelerate into '23 and '24. That's why I say it's a little too early to really draw those comparisons. But yes, I think that in the U.S. market, it's a very interesting market, very competitive market. And I think we are entering a time period where we're going to see heightened CapEx spend from the carry sustained over the next couple of years in support of just keeping up with mobile data consumption as well as launching and preparing and managing their 5G deployments, including the C-band spectrum deployments.

Got it. Got it. I wanted to shift to Europe. And we did actually receive some questions from the audience on Europe, but I'm going to nest those in after kind of like the bigger question I'm going to ask first. So moving to Telxius and -- which is a big chunk that has already recently closed. Can you just walk us through what we should expect from here? And from the most recent developments we've seen hit the press releases and newswires? And we are banking on updated guidance, but there -- is there anything else that we should be taking into account for this deal?

Yes. I would -- a couple of things. Number one is we did close on the European tranches of the towers in Germany and Spain. We did a couple of weeks ago when we sent out press releases. We also closed the Latin America assets as well, just about a week later following the European assets. That's really the bulk of the acquisition. There are about 4,000 rooftop sites remaining in Germany that will close later in the summer. But in terms of the tranches closed, we did put out press releases. And I'll just reiterate that in Europe, we're looking at -- for this year, an impact of about $280 million in revenue and $145 million in gross margin kind of being added to our 2021 numbers. In Latin America, the assets we closed on there will add about $70 million of revenue for this year and about $40 million of gross margin for this year. So that's kind of how to think about the additions to those things. And you're absolutely right, Sami, at the end of Q2, we will be updating our guidance. That guidance will incorporate the impacts of the Telxius closings, both in Europe and Latin America. And it will go right through down to AFFO and incorporate kind of the financing assumptions and activity that we've undertaken there to to close on the assets. So you'll see all that kind of come through at the end of Q2 in the guidance.

Got it. Got it. So I wanted to move -- zoom out a little bit on Europe and the timing of the anti-Telxius deal was actually very unique. It was probably one of the first big signs of the commercialization of Europe and -- of the European towers, at least. So a lot has happened since you guys actually announced the Telxius deal in Europe and a lot of new portfolios have come to market, a lot of new announcements. Has the AMT view of Europe been enhanced or detracted of Europe ever since you saw this huge influx of deal flow and activity hit the region post Telxius?

I would say that post Telxius, our view on Europe is still very positive and enhanced, I would say, from where we -- even were when we did the Telxius deal. So we certainly view Europe as not one kind of monolithic place. It's a series of different countries. They all have different characteristics, different wireless industry structures, regulatory environments as well as carriers themselves. So when we look at Europe, we don't just make decisions based on the region itself. We make decisions based at a very granular level, certainly, country by country. And the countries there can be very different as you kind of move through Europe. We also spent a lot of time looking at the individual counterparties that we potentially will do deals with within those countries. And we look at the country level environment and the structure of the wireless carrier environment and the regulation there. So -- and with the Telxius transaction and that deal specifically, we do view that as the best set of assets that have come to market that we've looked at over the last several years. And we've looked at lots of portfolios in Europe. We're very active globally when it comes to M&A. But we see kind of a very nice setup here in both Germany and Spain. We think Germany is going to have the most attractive growth rates of all the countries in Europe. We're already seeing that in our own German portfolio where we've seen gross organic tenant billings growth in Germany in our core portfolio of around 6% or north of 6% in the last couple of quarters. So when you think of the Telxius transaction and the assets that we're picking up in Germany, we expect that same kind of revenue growth to translate in on the gross growth in Germany. But the way that this transaction is set up, we won't see churn. So that's one of the differentiating factors between this acquisition and our current business. So we'll -- we expect to come out of the gate here with pretty good growth around the Telxius transaction because churn will be very low, both in Germany and in Spain. And we see really nice backdrop around gross organic tenant billings growth in Germany and in Spain, where across the board, we think those 2 portfolios will grow in and around 6%, with Germany being higher than that in Spain probably being a little bit lower than that. But it really represents the most attractive growth that we've seen in Europe. So as we look at Europe, we're getting more excited about the portfolio that we just purchased. And we're beginning to integrate now and we'll be set up and get those marketed and and kind of launch that whole commercialization of those assets. But also as we look at the construct of Europe and the potential additional opportunities in Europe, both in terms of building towers in select markets as well as potential acquisitions going forward.

Got it. Got it. And now I'm going to start factoring in some of the questions that came in from the audience.

Okay.

First question that came in was, will you be considering owning more equipment, kind of like what Cellnex has been doing with the latest Polish deal? And is that a trend that you believe carriers want tower operators to pursue?

It's an interesting question. I think certain carriers may want tower companies to pursue that. For us, we will be kind of very thoughtful and very cautious, I would say, around what other assets we are willing to own in the wireless networks. Certainly, you've heard us talk about platform expansions. You've heard us talk about edge compute centers. We are doing power and fuel in the U.S. with generators as well as some interesting things with lithium ion batteries in Africa. So we're willing to do those sorts of things. We own some active equipment and in-building networks. We think the in-building part of our business could potentially expand as we go forward. So we are interested and open to the idea of extending the platform and going beyond just pure tower ownership. But in terms of what you saw happen in Poland, that's not necessarily the direction of our platform extension ideas where, at the moment, we're not interested in buying wireless networks and turning around and leasing them back to carriers and taking that ownership responsibility. And of course, the counterparty is always very important. So doing that with someone outside, let's say, the top 2 wireless carriers within a market, there are certain enhanced risks there. But being a full network provider in the context of that for a third or a fourth kind of carrier within a market. That's something that's not on the radar screen at the moment. But with that said, we are interested in platform extensions. We're talking to the carriers about a lot of different things. And there certainly are ways that we are willing and we think would be very interesting and very helpful to the carriers in terms of us expanding our platform of assets that we're willing to own and operate on behalf of the carriers.

Got it. Got it. Another follow-up question on AMT and Telxius. And the approximate 50% EBITDA margin that's been kind of discussed. How much expansion potential is expected over the next couple of years as you see the stabilization and potentially further expansion and growth of the European assets? What's the -- what should be the margin profile people should be thinking about as you guys progress through the deal and the integrations?

Yes, it's a great question. A couple of things I would point out. Number one is in that margins that are embedded is pass-through for some of the rooftop leases and some of the ground lease activity in Europe. So that's -- that's what's bringing those margins down to that 50% level, which is lower than what you see, let's say, in the U.S. So that's something similar to what we see in our Latin America business and even in parts of our Africa business where we have certain elements of the expenses that are passed through the carriers. So it increases our revenue, but it also increases our expenses without margin in the middle, and it brings down the overall margin rate. So I would say this business, and certainly, in Europe, we would expect very similar kind of margin expansion trajectory in Europe and with Telxius that we see historically, and we kind of see around the globe, which is as we bring in new tenant billings revenue, that comes through at a very high margin. Certainly north of 80% margins, and then that helps drive expanded gross margins, expanded EBITDA margins, then it also helps drive our return on invested capital over time. So I would say the way that you should think about this is, #1 is there is that pass-through elements that are impacting the margins in Europe, and which is why it's a lower margin than what you see in the U.S. But from that perspective going forward, that margin will expand, just like we see it expand around the globe based on the level of organic tenant billings growth. I don't want to get too specific in terms of numbers and you get ahead of any guidance for next year and what we might put out at the end of Q2. But looking at the way margins expand around the globe relative to new revenue kind of coming on, we expect the same thing to happen in this European portfolio.

Got it. Got it. One thing that we -- I've gone as an analyst and probably -- you've probably gone is how did you manage to come to the decision to sell a 30% stake to CDPQ in Europe and -- or Caisse de depot? So could you just walk us through how you guys came up with that and why 30%? And just kind of like the deal structure there?

Yes, yes, yes, absolutely. So it really is -- a couple of strategic things kind of came into our thinking. Certainly, when we look at that acquisition, it's a significant-sized acquisition. It's the overall capital, including the build-to-suit capital over the next couple of years puts us in around $10 billion or so. We're a pretty large company now globally. So one of the real benefits of it is just expanding our access to capital overall and being able to tap into some of these very large, very strategically important investors. So number one, it was expanding our access to capital and you've seen us do that in other ways as well. We've gone beyond just issuing senior unsecured notes in the U.S. We now are much more active in the European credit market. So that's an expansion of access to capital. We launched an ATM program recently. So we have that available to us as an access to capital. In the past, we have issued equity to support the Verizon deal that we did years ago. We did that again with this transaction. So tapping the equity markets is an expansion in terms of the capital that's available to us. In the past, we have done mandatory converts. So we always look at that. That's always part of the toolkit that we have available to us. So we think it's very prudent to -- given our size and given the acquisitions that are available around the globe, to have full access to capital in all kinds of different ways. So that was part of the thinking. The other one is being able to partner with a world-class investor that brings much more than just capital to the table here. They have certainly a strategic vision. They understand the infrastructure world. They understand Europe, specifically. They have relationships as do we with many of the carriers in Europe and in other regions. So bringing them in was strategically important from that perspective. And then in terms of being able to look for acquisitions in Europe to continue to expand our portfolio there and potentially around the world, having partners that we've got tight relationships with could be beneficial. So that's another reason there. And I would just remind you, Sami, and the group here that we did sell off 30% of our European business. And we have said that we're contemplating additional minority stakes in the European business. So that work there continues. So one thing is clear is we want to have operational control, which we do. And we will, even if we sell additional minority stakes, we will maintain operational control of the business. We will always own more than 51%, 51% or better. So there's no magic in terms of the 30% stake. And you may see us sell off an additional stake or so in the coming months. So -- and the other point that I would make is when we look at the acquisitions and the way we finance it, including whether or not to bring in private capital. A key consideration is the overall AFFO accretion that we drive and the dilution of our existing common shareholders. Those 2 things are very important to us. So certainly, we model all that out, and we look to minimize the dilution of our common shareholders while we maximize the AFFO accretion. So private capital can help in both of those considerations, if things are structured properly. And so for that, those were some of the other reasons that kind of played into our thinking.

Got it. Got it. So we only have a couple of minutes left. And I wanted to ask you this big picture question that I ask myself all the time about AMT, but asking you probably will add significantly more value. And the question is, what will AMT look like in 5 to 10 years from today? You guys have explored and talked about international opportunities versus domestic. You've been active in M&A on both fronts, domestic and international just in the last 6 months. Can you walk us through what the big picture plan is? And you can even factor in CBRS or even edge data center-related views into this just to kind of give us a bigger picture in terms of what the road map could look like?

Yes, absolutely, Sami. It's a very interesting question. And of course, it's hard to predict the future, but there are certain things that we feel very comfortable with. Number one, we do believe that macro towers will be kind of the preferred infrastructure for the wireless carriers as they deploy antennas and propagate RF around the globe. And we do think macro towers will be the primary transmission point for 5G networks and networks of the future. So there will be small cells. We fully believe that. We think that they will be primarily in the dense urban areas and not necessarily a competition to macro towers. We continue to believe that macro towers will be the preferred infrastructure in the networks of the future. So for that reason, we do see our businesses being centered around our macro tower portfolio. Of course, not just now but in the future, 5 and 10 years from now, macro towers will be the primary asset that we own. It's a very important asset class. We think it has the very best fundamentals of everything we've seen to date in terms of driving growth rates, expanding margins, having the ability to expand ROIC over the long term and to create value for our shareholders. So it's a very important asset class. That's why you see us continuing to be very inquisitive around tower assets in developed markets like the U.S. and in Europe. But also in emerging markets, we think there's a nice place for both of those types of investments globally. So you've seen us recently expand our portfolio in the developed markets with high-quality counterparties. Prior to the deal in Europe that we just closed on and prior to a couple of deals that we just did in the U.S. that were sizable, we did roll up a few asset portfolios in emerging markets. So we do think that we'll continue to be inquisitive in developed markets as well as emerging markets. We think there's a place for both of those. We expect to build 40,000 to 50,000 towers in the next several years here at very attractive day 1 NOI yields of double digits around the globe and in places like in India and in Africa and in Latin America. We're building a lot of towers now in Europe. So we certainly look forward to building those towers and trying to find ways to expand the building of those towers. So I'm stressing here that macro towers is key to our -- not only our current business, but 5 and 10 years out, it will be the core asset that we have. With that said, we are interested in leveraging that portfolio and transitioning into expanding our asset base into other adjacencies that not only help support revenue growth on macro towers, but also have pretty compelling stand-alone economics in a business model. Things like edge computing, which we've talked a lot about. We do think with the amount of land that we control globally, the lands proximity, of course, to our towers, the fact that those parcels already have power and telco and other things they're readily available. It could be a very quick and compelling way for carriers to deploy edge compute centers by working with us and leveraging our control of land and our -- and the lands proximity to those existing towers. So that -- we think that could be really compelling. We're also very interested in looking at ways that the in-building environment may change relative with CBRS coming into play in a bigger way. But also as more mid-band spectrum gets deployed on macro towers, we do think one of the natural outcomes from there is that, that coverage in building will be harder to come by when 5G networks are up and running and it's being transmitted on mid-band spectrum. It doesn't propagate quite as far as the 600, 700, 800, 900-megahertz band spectrum. And it doesn't penetrate the buildings quite as well. So we think there could be an opportunity to expand coverage in building through CBR. So we're certainly looking at that. And we're playing a bigger role in power and fuel management in the U.S. with our diesel generators as well as lithium ion batteries in Africa and in India and other parts of the world. So we think we're very well positioned to have full optionality when it comes to the new 5G ecosystem in different ways that we can play and expand our offerings to our existing customers as well as looking at new -- potential new customers that need additional assets and/or tower assets to help them with their way forward. So I think the next 5 to 10 years is going to be really exciting for us. I think our global tower portfolio is really going to shine, not just with the stable cash flows that we've built around some of the core developed markets like the U.S. and Germany and other parts of Europe, but also with the development of wireless networks globally, and particularly where we have portfolios across Asia and Latin America and Africa, it's going to be a really exciting time for towers. And so emphasizing again that towers is our main asset class. We think it's a very compelling economics now and in the future, and we look to supplement that in different ways, investing in adjacencies and things that not only can help drive additional revenue to our tower sites, but also stand-alone with compelling business models.

Got it. Got it. Well, Rod, thank you very much for joining us. And thank you for all the investors who joined us as well. Looking forward to keep working with you and continue the dialogue.

Yes, that sounds great. Thank you, Sami. It's great seeing you.

Absolutely. Thank you.