American Tower Corporation (AMT) Earnings Call Transcript & Summary

Okay. Good morning. My name is Colby Synesael. I'm the communications infrastructure analyst here at Cowen. For this fireside chat, we have American Tower. And from American Tower, we have Steve Vondran, the EVP and President of the U.S. tower division. We have about 35, 40 minutes for this fireside chat. I prepared a bunch of questions, so we'll get right to it.

So Steve, thanks so much for being here.

My pleasure.

So I want to start off first talking about demand, obviously, in the U.S., given your area of focus. We've heard anecdotally that the carriers initial focus in their 5G deployment plans is in urban areas to cover the large population centers. I guess is this in line with what American Tower is seeing from the carriers in terms of where they're going first?

Sure. I think with every generation of technology, 2G, 3G and 4G, we saw the carrier start with the NFL cities to get a lot of summer coverage. And that's consistent with this rollout as well. But what I would say is that we are seeing broad-based activity in a lot of areas. And I think that makes sense when you consider that 80% of their customers live outside of that dense urban area. So we are seeing activity a little more broadly in some of the corridors and suburban areas as well. And we expect that to continue over the next several years as this is probably going to be a 10-year rollout just like other generations.

In that 10-year comment that you just mentioned, I mean, I think of a lasting 20 years. 10 is the primary, 10 is the secondary. Your reference there was really that those 10 is the primary they're constantly building to enable that.

Yes, absolutely. I agree completely with the 20-year...

And then given at least a portion of urban area amendments are on rooftops where the economics not be as favorable as it is for a macro site or you don't even have exposure. Would it be fair to assume that for AMT we'll still see a step up in the monetization opportunity for you guys specifically as 5G deployments begin to occur more so outside those urban centers.

Yes. Again, I think, broadly speaking, that's fair to say. As I said, we are seeing some broad-based activity today, but we are expecting the carriers to continue to invest more deeply in those suburban corridor or any of the rural sites as times go on. And we have already messaged that we expect our 2022 results to be a little bit better than 2021.

In terms of the new amendment and colocation type activity.

Exactly.

And then Rod noted on -- Rod, your CFO, noted on the second quarter earnings call that the gross incrementally monthly run rate added will be up 20% to 25% in 2021 versus 2020. Can you provide a little bit more color on what he means by that statement? And how it translates into the new colo and amendment revenue line and which is really about where I think he was focusing his comments?

Sure. So the new monthly revenue is a metric that's measuring the contribution. So if you sign them in for $1, whether you signed it on January 1 or December 1, adds $1 to that metric. And that's what Rob was referencing when he talked about a 20% uplift. Now the way that flows through to the contribution to organic revenue by colos and amendments, depends on timing. So you're not seeing that same step-up in the run rate, the contribution to -- I mean it's colos this year because that business has been spread more throughout the year rather than be more front-end loaded like it was in 2020.

And then obviously then given the run rate benefit you would see then in 2022, it goes back to the comment you mentioned earlier that you would naturally see a step-up in 2022. Just simply based on the annualization, if you will, of that 20%, 25%.

Yes, that's part of it. You'll see that probably flow through at higher gross new revenues.

And then AMT has holistic MLAs in place with each of the U.S. carriers, which provide excellent visibility into growth. That said, are these agreements currently holding back the level of revenue growth you would otherwise see given the level of activity occurring?

So we don't view our holistic agreements is holding us back at all. The purpose of those agreements is to simplify the relationship between us and our customers, and really to spread that revenue kind of evenly over a number of years. So it's not as choppy, and we think they're doing that for us. Our goal when we negotiate these is to make sure we capture the same revenue, the same NPV that we would have gotten if we're going to pay by the drink scenario, and we feel good about that with our current agreements.

And I guess as the carriers get further into their deployments, do you think it's likely you'll see upside beyond the terms of any of those initial agreements? I mean, going back to your NPV logic a thought?

Sure. So in all of those agreements, there's always a mechanism for upside if the activity levels in certain areas are higher than we anticipated. So there probably is some upside to that, but it's probably in the outer years, but that's when the activity levels going to be reaching.

Yes. I mean I've always show these holistic-type agreements, and correct me if I'm wrong, as having a shorter time period to which the total MLAs probably has for its term period. And it's under that shorter-term period where they have the ability to do a lot more, if you will, for some types of standardized type pricing opportunity. And if that is correct, then the point you're making is that once you get past that, to the extent that there's still a high level of activity or even during it, if they surpass those minimal thresholds?

They're all a little bit different. We had multiple components to them. So without getting into the specifics there, what I would say is there are components to them that probably are difference the amount of activity going on, there are components that are tied to levels of activity. And again, they're all a little bit different. But broadly speaking, if they do more of those certain components than we're anticipating, there is a future monetization opportunity there.

And then in 2019, American did plus $200 million of new colocation and amendment revenue, at least by our account, the way you guys disclose things. Can you talk about what was happening in the market at that time that drove that level of revenue recognition? And how that compares to the setup you're seeing building up now?

Sure. So we saw record levels of new business in the 2018 to 2019 time frame that flowed through in that contribution to organic revenue from colos and amendments that you're referring to. And that was also a time when we were at the midpoint of our historical 1% to 2% churn. So when you combine those things together, we were able to achieve organic tenant billings growth of more than 7%. Now as we look forward, I wouldn't use that year as a baseline. For one thing, our business is quite a bit larger than it was back then is we've churned the deal, et cetera. And so if you think about the $200 million that you're referring to, which was the contribution for colos and amendments, I think that would be a stretch in the near term. We have said that we expect 2022 to be higher than the $130 million to $135 million that we're projecting for 2021.

Yes, it's a good point. So you did -- I don't have to run down, but I think like 134 in 2019 or something. I think to your point, you're expecting to do roughly 130, 135 this year. You're probably not going to get to $200 million in 2022, like we saw back in '19, but somewhere in between there is where you're going.

We think we're going to do more, but probably not $70 million a quarter.

Fair enough. And then talking about the 5G opportunity, Tom, your CEO noted during our NAREIT meeting that mid-band 5G amendments are likely to be lower priced than 4G, given their lighter physical load, although this cost differential is expected to be made up for by a greater amount of equipment to which those customers would need. Does this mean that the dollars per amendment are still expected to be similar, but that the mix is different, meaning more pieces of equipment are being added as part of that amendment that was the case with 4G?

Yes. So the pricing for individual components is apparently a factor of their size, weight [indiscernible]. And so if you assume that someone's installing stand-alone, mid-band spectrum antennas are probably going to be smaller and lighter because than the lower band spectrum antennas. So those antennas are probably coming at a lower price. What muddles this up a bit is some of the emerging technologies. So like the massive MIMO technology that's come out or some of the multi-band antennas changed some of those profiles, and those are all included in some of the carriers, 5G amendments. So I think we're going to have to sort of wait and see where the unit price shakes out on some of this as we get further into the deployment. And there's also going to be some variation by carrier as well.

But to your point, I mean, simplistically put a 2.5 or a 3.5 antenna is smaller than it was for 700 or 800. ..But at the same time, you weren't deploying massive MIMO type boxes then when you are now.

Exactly. So it's a little bit more muddled than it was in some of the prior generations.

And then Ed Chan of Verizon, who's on their tech team noted to us back in the spring, that CBRS requires different equipment than C-band despite the close proximity of the bands at that, call it, 3.5 frequency. Does this mean that to the extent a carrier wants to deploy C-band and CBRS require more equipment? In other words, they have to have separate equipment for each deployment?

So that's why we're starting today, but the equipment manufacturers are always evolving their products. So you never know where that's going to end up. At this point, we're not seeing broad-based deployment of CBRS on the towers. So we haven't seen a ton of examples of that to really add a lot of color to that comment. We view CBRS initially as a little bit more of an opportunity in building space, and we see people more interested in deploying it there at this point that we have on the micro towers.

Yes. Okay. And when you look back on the 4G upgrade cycle relative to what you're now seeing with the 5G upgrade cycle, any sense that this one will prove a bigger or a smaller opportunity over, let's just see that 10-year period to which you referenced earlier?

Yes. I think it's a little bit hard to disaggregate 4G and 5G from some of the other things that go on during the cycles, but also drive some of the revenue opportunities. Broadly speaking, we think that 4G -- that 5G will follow the same time frame as 4G, 10 to 20 years, as you noted. And we expect to carry our CapEx to be a few billion dollars higher every year during that cycle. And to realize the full benefits of 5G, you're going to have to densify the network. So we think that, that all translates to really solid growth opportunities for macro towers. But when you try to compare the 2, you also have events like the AT&T, FirstNet and things like that, that were taking place during 4G. So I think it's kind of hard to compare one to the other, not knowing what other things may happen in the cycle as well.

I got this question from a client, an investor client last night. So this was not on paper, but I'm going to ask it to you. Now I'm happy to say what I told them, too. But he basically said something to the extent that if you look at the CapEx profiles for the carriers, AT&T starting in 2022, Verizon this year, T-Mobile this year, you're seeing elevated CapEx, and it's expected to last generally, call it, 3 years for each of the various carriers. And the question is, do you think based on what you're seeing that you'll see those CapEx levels actually remain elevated beyond that time period, just given what's going to be required to kind of build out these networks?

Well, I'm going to have to defer to my customers on that question because if I project their CapEx, you're not going to be happy with me, but I'd love to hear your answer to that.

First off, eager [indiscernible] very well. So kudos...

No. I'm the one who gets the calls if I do that.

No. I mean, my answer was that I think that there has to be actually -- there has to be a monetization opportunity that we don't yet see. In other words, when you think about 5G, there's a lot of talk about what we thought true 5G. In other words, how do you monetize the non-phone opportunity. And some people refer to that as IoT. Some people refer to it as the fourth industrial revolution, however you want to describe it. But the point is that to the extent you actually start to see that come to fruition and they see a way to monetize that then I think that there's a justification to sustain those elevated CapEx levels. To the extent that this is still just about supporting a smartphone, I do think that that's probably a more permanent reduction once they get through that initial building cycle.

I think my customers would love that answer.

Okay. I try. I want to shift over and talk about DISH a little bit. And I know you guys are sensitive about talking about specific area. So I'll keep a high level based on public commentary. But one of AMT's peers noted that the majority of its domestic bookings in 2Q '21 were from new leases driven by DISH. They said 66%. Are you able to share with us the percent of leasing that came from amendments versus new leases in the second quarter? And how that might compare to recent quarters?

So we haven't seen a big shift in our revenue mix from amendments and new leases. But I'm not sure that metric is as relevant to us as it is to some others because when you look at our holistic agreements, a lot of that revenue is characterized as amendments just the way we lay them out. So I don't think that you can do the same read across as you would if we were to pay by the drink scenario with all of our customers.

Okay. Are you able to disclose that metric?

I don't know that we have...

Igor would have already told you, you could. So if you don't know it right now to say...

I don't know it.

All right. Fair enough. Within AMT's U.S. and Canada guidance through 2027, which you guys provided when you gave guidance to kind of give us a sense of how the churn is going to look for T-Mobile. Is there a larger contribution from DISH assumed in the outer years rather than in that 2022, '23 time period, given that the makeup of AMT's footprint actually leans more towards the suburban and perhaps even rural areas?

Yes, I think that's fair to say, but it's not really tied to where they're deploying out geographically, but more to our contextual construct, which has the revenue ramp as they progress and deploy their network.

Okay. So to your point, without knowing obviously the details, the contract is structured in a way where it will ramp or escalate over some period of time. So you're getting a higher set of revenue, I guess, as a growth tied to that in the outer years.

As they deploy their network more, yes.

Okay. And then speaking about Verizon, again, I'll keep it high level. Rod, your CFO noted on the first quarter earnings call that American was in discussions with Verizon regarding a new MLA or master lease agreement, and that you have a current agreement in place that includes a holistic rate which expires at year-end 2021. Can you give us a sense what sites are covered with that agreement? Are those the ones that came from the sale leaseback we did in 2015? Are those the ones that are not included? Is it all sites? Just any color in terms of what's actually included in the current agreement that you have?

Sure. So the majority of our leases that are not part of that portfolio, we acquired the rights to or under the holistic structure. So the portfolio we acquired the rights to as its own separately lease spectrum. But outside of that, I'd say the vast majority of our contracts with Verizon are in that holistic structure.

And are you able to provide us with an update in terms of how those discussions are going in terms of do you anticipate being able to sign a new deal with them sometime soon?

We don't like to disclose specifics of our negotiations. But like we do with all of our customers, we're in constant communication and trying to figure out what makes sense for both parties.

Does it make sense for you guys to sign a new deal?

It all depends on the terms of the new deal. Either way, we're going to be there to support them. If we go into a pay by the drink scenario, we think that works for both parties as well. If we're able to work out a holistic structure, that does streamline some of the processes and can help with solid deployments. But I think it will work equally well for both parties either way.

Okay. And then switching over to AT&T. One of America's largest customers, AT&T recently announced an increase in CapEx between '22 and 2024, following the spin-off of its media unit. How would you describe the opportunity with AT&T relative to Verizon and T-Mobile?

Yes. So we're in a comprehensive long-term agreement with AT&T.

When you say comprehensive, is that my version of holistic?

Yes.

Okay. Just making sure.

So we're in a comprehensive MLA that stretches over a number of years. And it gives us a lot of visibility into our opportunities with them. And again, to the extent that they might exceed some of the parameters of the agreement, there could be some opportunity there to outsize that. But broadly speaking, we're in the middle of that long-term agreement with them.