American Tower Corporation (AMT) Earnings Call Transcript & Summary

All right. Welcome. I'm Brett Feldman, Goldman's U.S. telecom infrastructure analyst. It is my great pleasure to welcome back to Communacopia in our 30th year, Tom Bartlett, the President and CEO of American Tower. Tom, thanks so much for being with us today.

Hi, Brett. Thanks for having us. As we just spoke, hopefully, we'll be together live next year. But really thank you very much for having us.

Yes, looking forward to doing this face-to-face. But we have you now, so let's jump right into it. Since you became CEO last year...

There you go.

You've navigated American Tower through a global pandemic. You signed a new lease agreement with T-Mobile. I think you actually announced that at this conference last year, and you closed a significant acquisition in Europe. What are your key strategic and operational priorities as you look ahead to 2022?

Just yesterday we were together [indiscernible] amazing way. Our overall mantra continues to be, Brett, a strong, sustainable, profitable growth. Just as we've delivered over the last 10, 12, years, I mean that's our overall objective going forward. And underpinning that are probably 3 or 4 kind of key elements. And I know you'll drill down into each one of these as we have our conversation today. But the first one is growth. right? And that's kind of underpinning to it being a strong growth -- profitable business. And that growth is going to come in a number of different forms. I mean it's going to come from our pure organic growth. which we're seeing around the world. And as we've seen 4G develop, as we've seen 5G develop, new spectrum being dropped into each of our customers' networks, we're seeing strong demand around the globe. And particularly, we're seeing strong growth right here within the United States. So underpinning our overall growth is going to be our organic growth that we see. On top of [indiscernible] around the world for build-to-suits, we'll build up to 6,000, 7,000 sites this year. Our goal over the next several years is to build, and we have line of sight into roughly 40,000 to 50,000 sites. So with new higher band spectrum, with new technology, clearly, we're seeing densification going on around the world. and that's requiring just new site builds. And by the way, it's just not for densification. There's an awful lot of coverage that we're building for as well. And so that would be kind of our second major line of growth. And then we have our inorganic growth. And so we've been fairly aggressive over the last several years in terms of building out our portfolio, most recently in Europe in creating scale in a couple of critical markets there. And if you look at around our total portfolio of 23 countries, we probably own 1/3 of the inventory in those combined markets. So that area, if you will, that are, I think, opportunities for us. And then we'll talk about extending the platform and how we see the edge kind of unfolding, I'm sure, in the next 45 minutes or so. But that would be kind of the way we're seeing the underlying growth. The other key elements that we're seeing clearly go to talent. I spend an awful lot of time on talent and management, making sure that we've got our next group of leaders within the business and our culture. And our culture is so important to our growth going forward and being able to really operationalize the global opportunity we see in front of us. And so I think as I look, those are 3 elements of it, and kind of wrapped around that is our focus on the customer. And we could always do a better job at servicing our customers. I know that and we're working on that to make sure that we are absolutely the preferred vendor that they look to. And I think with the talent that we have around the world, and I'd argue that we've got the best management team in the industry, best global management team in the industry, I know that there are going to be ways that we're going to be able to improve the operationalizing of our business on a global basis. And I would anticipate that, that would improve margins, it would delight more customers and would really position us well going forward. We're also very committed, Brett, all to our ESG efforts. And so that also underpins a lot of our focus over the next 3 to 5 years because it's not just about power in terms of being able to reduce the overall footprint, but it's also about inclusion, it's about diversity, and it's providing that kind of a culture, that kind of environment where people can really grow and strive and be purposeful.

And that was a great overview. So let's start off with a couple of those, and I'll go into organic growth, and we'll start in the U.S. So the outlook you have for this year is that your organic tenant billings growth, which is essentially your organic growth rate in the U.S., it's going to be somewhere around 3%, which would be a deceleration from last year. But on your last earnings call, you pointed out that you expect the incremental monthly run rate on gross new business to increase by more than 20% this year. That would certainly imply that your outlook for tenant billings growth acceleration is getting better, right? Is that a fair statement that as we think about '22, we should expect that, that will be where we start to see the turn in the organic growth profile of the business?

Yes. I mean just to kind of frame it a bit, as we've spoken in the past, we are seeing an environment where the leasing environment is incredibly active. We set records in Q2 for new applications coming into the business. And it's a function of -- in the United States, not just our customers building out 4G to be able to meet you and I using 15, 20 gigs a month, but it's also to drop in 5G on a nationwide basis. and it's also to start to deploy the C-band spectrum. So if you start to think about all of the cylinders firing, I mean the -- our customers are doing just that. They're investing heavily into their networks across a number of different elements of it. If you kind of step back though and you start to take a look at, "Okay. How does that impact our underlying growth?" So we enter into long-term agreements. As part of those agreements, oftentimes, we have kind of fixed rate of pricing, and we've had these kinds of holistic pricing schemes, if you will, within our contracts for many years. And they've really proven to be very, very effective for both ourselves and our customers. So 2/3 of our growth rate in the United States is already kind of in the books. So what we're talking about then is that other third and how can that other 1/3, if you will, kind of impact our growth rates going forward. We do and continue to expect 2021 going into '22 being really outsized years for us in terms of new business. We'll come out in February and talk more broadly about what the impact is on 2022. But those things that might change some of the growth profile. Could be some outsized growth even from DISH, could be outsized growth rates from a number of our customers. But I don't know that it's kind of significantly changed kind of the path that we've kind of laid out for ourselves. We see a lot of gross new business coming in next year. We also have a large churn event coming in from Sprint that you're well aware of. And so that will obviously impact our net organic growth in the marketplace. But then coming out of '22, once we're -- we still have some of that Sprint churn kicking in, in '23. But we would expect to get back to kind of those more traditional 5-plus percent kind of growth rates, 6% kind of growth rates if you back out some of the Sprint churn. And on a larger base than when we were back 3, 4 years ago, that's some significant growth that we expect to experience in the market.

I want to follow up on that. There's a lot of big projects that the major carriers and DISH have talked about, and it certainly seems like anecdotally [ through your stride ]. And really, it's the front end of the 5G cycle. And so I guess I'm interested in your perspective, where are we in that cycle? The carriers have 2/3 of the country covered with low band so they're kind of advertising 5G, but they really haven't gone deep into their portfolios. And you think about what the 4G cycle look like, do you think we're going to see a repeat of that with 5G? Or do you think there's going to be a different shape or maybe even duration to what 5G is going to mean for the tower leasing business?

Traditionally, as you recall, if you go back to even 2G, 3G, there are kind of 10-, 12-year kind of digital cycles, right? 4G was really back in kind of the middle of the last decade, if you will, end of the decade when checks were being written for 700 spectrum to be able to deploy 4G, and we're still well into the 4G life cycle. 5G, we're still at the very early innings of it. I don't think we've even touched what the opportunity is going to be for us in the United States because it's not just about speed, right? It's all about -- to me, it's largely about latency. And so I look at the opportunities for applications, new ways of doing business, new ways of living, new ways that you and I are actually living our lives are going to be impacted by the benefits of 5G. And that's different than we've seen in 4G or 3G. And so I would expect that 5G is going to be here again clearly throughout the decade. And the opportunities in terms of the growth path is going to be very different. I don't know very -- it's going to be outsized, I think, versus even 4G and simply because that additional compute capability, that additional opportunity for low-latency applications is really going to impact more of the processes that we use within our business and within our daily lives. And so I think that's kind of the game changer. And I think that's why the carriers are so excited about what they see 5G could -- how it could develop and kind of the life-changing ways it could have on everything that we do. And that's what's very difficult also to project, right, is to forecast what might that look like? What might that growth be? Right now, looking at some data the other day, the forecasters are projecting us using 30 to 40 gigs of data per month. That's kind of twice what we're using right now over the next 3, 4 years. And you kind of go, "Okay, what's that going to be used on?" And so they have the foresight to look at, okay, well, there are stuff out there. There are applications out there. There are things that 5G is going to allow us to do that we don't even know at this point in time. And that's the difficult [ thing to say ]. But I do see just because of the technology itself affording us the -- I think, the chance to really change the way we do stuff. And with that requires more infrastructure. It requires more equipment on the sites itself, more capability on the sites themselves to be able to deploy it. And so that's why we're so excited about kind of the next 3 to 5 years, if you will, taking advantage of this 5G cycle.

So then I want to follow up on that because you made a point earlier about how in the U.S., essentially, most of your outlook is under your master lease agreements. You have holistic agreements, your master lease agreements with essentially all of your major tenants, and that gives you a significant amount of visibility. The flip side of it is people say, "Well, gee, I guess that means there's no upside," right? They have such good visibility, they can't do better. How do I think about positioning for that type of opportunity? So when you look at what the carriers are doing and you think about the experience you had with 4G and the periods of time when things really accelerated, what do you think might be opportunities to maybe outperform what's been locked in to make that 1/3, a little bit more than 1/3?

Yes. Well, I mean, the one element of it is that holistic pricing structure expires with Verizon this year, and so there will be the opportunity to relook at that and what that might look like over the next several years where Verizon is, what Verizon might be looking for and what we might think makes sense for us. AT&T is in a couple of years. And so there are a couple of big pieces there that could provide some even outsized growth over what we're anticipating because of those kind of pricing mechanisms. If not, if our customers are looking for that, there may be some upside in terms of increasing what that pricing scheme might look like over the next several years. And that's just an ongoing kind of negotiation. They're looking at, okay, what kind of business do they think they're going to project or put out and what kind of business do we think that we're going to experience from them, and then it's just kind of a meeting of the minds. We do think we provide a higher level of service, and we think that they're able to benefit from that as a result of that kind of a relationship. But time will tell. So that in and of itself could provide some upside. DISH in and of themselves could provide some upside. We have an arrangement with them right now where they're going to go on a number of our sites and commit pricing and revenue associated with that. I mean to the extent that they want to be more aggressive on that, that could also prove to be an opportunity for us in our kind of organic growth. And then we have all the elements around the kind of the edge and that's from hardening sites to 2 wide facilities, sites that we might have within the United States. And so that also, I think, is our opportunities for even outsized growth from what we're expecting.

You said edge. I'm going to talk a little bit more about mobile edge compute because you've had some ongoing trials in that space. It's something we've been talking about for a long time. I know it's still very early in your process of evaluating it. But are you at a point where it increasingly feels like it is indeed a natural business for AMT to be in? And how are you thinking about the way you want to be positioned for mobile edge compute?

Yes. No, it's a good question, Brett. Yes, we firmly -- I firmly believe that there is a sizable opportunity for us in this space. Again, taking advantage of kind of latency -- [ desire ] for lower-latency applications, 5 millisecond type of applications. And I think it is going to be very iterative. It will be a bit in serial fashion that we are leasing out to really SMEs, small, midsized type of accounts. We are looking for some additional [indiscernible] tendencies and compute capability. Nothing really to write home about, other than the fact that there is definitely kind of demand, if you will, for even that type of a service. But we have future and kind of visibility into building out up to 2 megawatts of power at not 40,000 sites, but building out to 100 sites, perhaps plus, at least over the next couple of few years, if you will. And we have MOUs in place where we're exploring building that out. I mean if you can bring in a 2-megawatt facility into one of our sites, you may be talking about 100 cabinets. And if you take that up to 100 sites, you're talking about $0.25 billion of revenue per year. You're talking about kind of double-digit ROIs. And so to the extent that we can get really good at that, my goal is to find that next big customer. Now it might come in the form of a lot of little customers, but one segment kind of generating the revenue of one of our large customers. And on top of that, the question then becomes, "Well, where do you go with that? Do you go from that micro edge into the metro?" Because as we see the kind of the world unfolding, it's going to be one that's cloud-based, it's going to be interconnected, and it's going to be one that's very distributed. And if you take a look at our base of sites, we have a very strong competitive global distribution network. And the extent that we can create relationships with whether it's cloud service providers or the kind of global MNOs, we think we can be in a really unique spot in terms of providing some interesting value to those particular accounts. And so if we go up to the metro center, we can start to think about being more interconnected, and then the question will be, well, how far up the stack do you want to get from an active management perspective. Because right now, we're still looking at it as a neutral host, multi-service, multi-tenant kind of passive type of a relationship. I don't have 2,000 sales reps, software engineers, fabric to be able to provide a Google or an Amazon or a CTO and a Verizon, for example, but there are others who do. And I have the very unique real estate that I think is very purposeful, not just here in the United States, but also global. So I think that there is a real opportunity for us there, Brett. As you said, it's not going to happen overnight. But I think it's a very interesting value proposition that we're going to be uniquely positioned to be able to provide. And our goal is to lean into it and to really create a market as a result of it. And 5G is obviously a critical component of it. And so as we see other places around the world starting to develop 5G, we also see that opportunity for growth in those markets as well. And that's why, as I said before, I think it's so important for us to be positioned in these critical markets around the world such that we can provide kind of a global value proposition to FCSP. So yes, we are excited about it, and we're learning each and every day what it's going to take.

You talked about your international presence, so let's pivot a little bit and spend some time talking about your international opportunity. You have over 170,000 international communication sites, which are generating about 45% of your property revenue as of last quarter, so it's a pretty meaningful part of what you do. I have a two-part question. Can you just give us a view, what is the growth potential that you see for that business, broadly speaking? And sort of how does that compare with what you envisioned when you [indiscernible]? And then the second is that there's been something of an evolution in how you are talking about the business. When you completed the initial wave of the Telxius assets, you pointed out that pro forma for that, about 60% of your revenue will be from developed markets. So instead of talking about international versus U.S., you were kind of making a point about developed versus developing. And I'm curious if you can give us some insight as to why your thinking there has maybe evolved to some degree.

Yes. We've always thought of our portfolio in terms of developed versus developing, if you will. And then it's really basic, really looking at kind of the underlying growth rates. In the developing markets, they were traditionally 2 to 3 technology [indiscernible] wireless was really the main form of communication in the marketplace. And so as a result, we would see some sizable [indiscernible] of outsized organic growth versus that we've said in the United States. We look at Europe as being more like the United States just in terms of customer base, just in terms of the growth rate. The other forms of communication, where they are from a technology perspective, 4 or 5 years ago, they were pretty meaningfully behind where the United States was from a technology perspective. And now with new spectrum coming on board and with the aggressiveness of some of our customers, we now start -- really start to see 5G being deployed there. We don't really see 5G being deployed in any meaningful ways in any other market [indiscernible] So when we talk about developed versus developing, it's really kind of where they are from a technology perspective going forward. Now having a spectrum of being one of some outsized growth, I would expect Europe, and I'm really looking in Europe as the total region. And as you well know there, it's a number of markets in and of themselves. But you look at Germany, you look at Spain, we're looking at some really sizable growth there. So we don't have any view in terms of what the right percentages are. When I first started 10, 12 years ago, we kind of set our path on 70-30, 70% would be kind of -- and then all of the other markets are a series of smaller flywheels that would feed into the overall growth of the enterprise and as a result would increase the slope of the curve, right? And our developing markets were always those markets which would extend the rate of growth and increase the rate of growth, which called [indiscernible] will look it that way. To our last point, I also look at, though, is a way of our increasing presence in markets that, to the extent that we can provide a global value proposition for all of those markets developing and developed, we think that's an interesting value prop for the cloud guys in terms of them rolling out more broad global types of service offerings. But we don't have any prescribed view of what that looks like. Europe happened to be a region where we were really underserved. We had a small presence in a couple of markets there. And we have now the opportunity to build on the scale that we've created in that, and it's now in a market that we're looking forward, where we do see some really interesting growth, organic growth as a result of 5G being deployed.

It's a great point to follow up on. So you articulated pretty clearly why you want to be bigger in Europe for the organic opportunity. But it's interesting, you've actually put your European business into a JV structure that has allowed you to bring in some capital partners and private capital partners. And obviously, that helps you towards your delevering goals at a corporate level, but it also basically is a way of framing we have ready access to capital partners, should we believe that that's the right thing to do. And so I'm curious why you felt now was the time to do this, particularly in light of some conversations that have been out there around big portfolios in Europe that could come to market. Do you also see an opportunity to be much more expansive on an inorganic basis?

Yes, the answer is. I mean it -- diversity is so important to our business. From a customer perspective, across the board, if you look at diversification of our customers, you look at diversification of our capital. And so we look at pools of capital that we think we can attract at good rates of return. And to the extent that then we can lock that on with strategic partners like a CDPQ or Allianz, we think that, that is really a great mix and one that can help us grow in the region globally, but in specifically in the European region. And so this is definitely an area -- that market, I mean, it's no surprise that we are looking for additional areas of growth in the region and getting even a larger presence in the market. Whether we're able to do that, Brett, at valuations that are attractive to us, time will tell. But that definitely is a focus for our business development teams as we speak.

Just one more follow-up on this topic. If you think about Europe starting to more closely resemble what you experienced in the [ U.S ] decades, not just from an organic opportunity, but in some ways just the way the market is structured. You have the carriers starting to appreciate. They don't really need to own these portfolios of assets, creates an opportunity for towerco to be able to start to achieve a degree of scale, just like you've seen historically in the U.S. You've made -- in the U.S., you acquired both. You acquired tower portfolios. In some cases, you acquired existing operators, both public and private. Based on that prior experience, as you look at what could become available in Europe, do you have a preference? In other words, you tend to have a better experience buying an established tower operator or a better experience buying a portfolio that you can fit into your own way of operating those assets.

Yes, it's so portfolio-specific. Generally, an independent towerco is already performing from a distribution standpoint, from a customer relation standpoint, oftentimes even invested incremental capital into those sites to be able to support multi-tenant. They've done things to shore up even the ground space to make sure that it's secure for a number of years. So there's definitely benefits already being done on the independent towerco. So question would be in terms of future growth. So that's one form. On acquiring towers from a wireless carrier itself, oftentimes, there's more capital that needs to be dropped into the portfolio itself, just simply to strengthen it and to heighten it and to round out all the permitting and zoning and shore up the land and those types of things. But there ultimately could be more growth as a result of the wireless carrier never really marketing their sites, and they could be in some very unique locations, which they've never really turned open to their competition. So it really is a function of the portfolio themselves. We've done both, as you said, around the world, and both can be very, very attractive. It all comes down to the math in many cases in terms of how much capital is going to have to go into it. Where are the sites? How attractive are they? Where do we see the lease-up, and what does that look like on a discounted cash flow basis, and then how attractive is that to the seller? So a lot of it is driven from motivation, if you will. And what we found, candidly, from the wireless carriers, you're also then entering into an anchor tenant relationship and for a very long period of time, like what we've done with Telefonica. And so that helps you sleep at night as well, knowing that you've got a long-term leasing agreement with escalators and opportunities for growth for amendment activity and things like that, particularly when there is as sound as a company like Telefonica. So they both come with their different attributes, if you will.

I want to move to India for just a moment here. For a number of years, the gross booking activity, so before churn in India has been fairly strong, but your outlook right now is that net is going to be essentially 0 because there's an elevated churn environment for a range of idiosyncratic factors that have played out in that market over the last few years. So the question is, what's your visibility into the gross leasing side right now? Do you see it accelerating or decelerating? What would be the principal swing factors? And then what degree of visibility are you getting into churn coming down such that you can get closer to what you think of as a more durable organic growth rate in that market?

Well, I think the actions that the government took, Brett, over the last 10 days will be very helpful. The issue for our largest customer in India has been one of available cash to be able to reinvest into their networks. And while they have reinvested in [indiscernible] they haven't kept pace with the other 2 large carriers in the marketplace. R Jio and Airtel have continually invested where [indiscernible] their balance sheet. It's no surprise. I mean, they have a significant amount of debt. Most of it is to the government. And so the government is giving them some relief on payments that they're going to have to make for spectrum, for taxes and some of those types of things. And so we're hopeful that, that will now give Vodafone some more air in their tires to be able to turn around and continue to -- or increase the overall investment that they have in the marketplace. And if that's the case, we would see a really good construct for gross new business increasing in the marketplace, right? I mean I think Airtel and R Jio are going to continue to invest heavily in the market. It's a big market. They're going to have -- they have new spectrum in the marketplace. My sense is that they'll have more new spectrum in the marketplace. They'll have more flexibility in terms of how to use it. The overall spectrum licenses are being extended, so it gives them more comfort on rolling out infrastructure within each one of those bands. So I think it's a great backdrop. As you said, for the last 2, 3 years, it's been tough. And when we originally were in the market, we did see some really outsized net growth. But as they've gone through consolidation and gone through some of the regulatory tax issues that they've had, they've clamped down a bit. And so we still see good gross adds just because of the dynamics of how many people are there and what's being deployed, but we have seen some churn. So I'm hopeful that a lot of that churn is going to be largely behind us and that now the -- all of the customers there, including BSNL, which is the government-owned largely venture, are going to now be able to turn the spigots on and start to reinvest back into the market. So it's a case of being patient. We haven't increased really -- we haven't spent a lot of cash into the marketplace. I really have been very much just wanting to see how this whole regulatory environment framed out. They've also increased the opportunity for foreign investment. And so you see big cloud guys in the marketplace as we speak. And so they're also seeing, I think, the opportunity in that particular country, in that particular region. So I'm cautiously optimistic about it, Brett. I do think we'll be able to get back up into those mid-single-digit types of growth rates in the not-too-distant future. And we're really hopeful as a result of the government kind of stepping up and maybe there's even going to be an opportunity for some price increases in the marketplace to give the carries a little bit more flexibility in terms of what they do.

I really have a few minutes left. I'm going to try to squeeze in 1 or 2 more. Talk about your new build program. I believe that your intent is to globally construct about 7,000 communication sites this year. So my first question here is, are you experiencing any issues in your supply chains, either for the materials or the labor that you need to meet your construction goals? And then the extension of that is, are your carrier customers augmenting their deployment plans because they're experiencing any supply chain constraints?

In the United -- the headline is no. In the United States, we're really not talking about build programs. We're talking about servicing all the applications on really largely existing sites. And so our guys are busy. Don't get me wrong. They are really, really busy in working with different construction groups and firms across the country to be able to meet the demand. And they've been able to do it. As a matter of fact, hats off to them because they've been able to do it in largely a work from home, a remote type of an environment. But I believe we are keeping up with all of our customer requests in terms of what they're looking to do and invest in their network. The one area in the United States where we've -- I've had some problems around generators. And so I haven't been able to secure as many generators. But it was more of a "Oh, by the way" kind of a thing. It wasn't -- this is going to get in our way of getting access to generators. So that was really the only issue that we're seeing here in the United States. And from an infrastructure perspective, we're not seeing that our customers are struggling at all in terms of securing what they need to be able to meet their ongoing demand. And similarly, outside the United States, there were some COVID-related issues that stymied us a bit in India for a month or 2. But those groups are back on line and fired on all cylinders in terms of being able to meet the underlying demand. So again, it kind of goes back to the diversification in terms of platform for growth. And while you may have certain issue -- little issues in certain markets, are you able to make up for it in other markets. But generally speaking, we haven't seen a supply chain issue in any parts of the business.

All right. I've got time to squeeze in one last question here. So when you had your, I believe, fourth quarter call last year, you had reaffirmed your aspirational target of double-digit annual AFFO per share growth, I believe, in 2027. Just thinking through all the things we've talked about over the last 40 minutes or so, what gives you confidence that, that's still the right outlook? And what do you think is going to be the biggest opportunity to maybe outperform?

I think just the underlying organic demand that we see going on in the marketplace around the globe. I think, is very constructive to that kind of an aspirational goal. I think the opportunity to lean into certain areas around the world, I think, will give us some incremental AFFO. I'm hopeful for that. I see the numbers of portfolios of assets that are up for -- that could potentially be up for grabs. I don't look at our platform extension opportunities, whether it's in power on the edge. And I think over the next kind of 5 years, we're using that longer a period, we're definitely going to see the opportunities associated with some of those platform extension opportunities. And then I continue to look at kind of what I mentioned upfront was just kind of how we're operationalizing our business. We generate -- this year, we'll generate $200 million, $250 million of services here in the United States. We need to operationalize that and globalize that kind of capability to be able to take advantage of those service opportunities in other markets. And so there's an awful lot of learning, I think, Brett, that we can globalize if you will, in each one of our markets. And so I'm really not just in terms of being able to offer a global value proposition, but also the ability to better even operationalize the market. And so I look at opportunities from a margin perspective. I look across a number of our growth and that gives me real confidence in terms of our ability to be able to achieve that kind of growth over that period of time.

All right, Tom, that was a great overview. Thanks so much for being with us virtually, and we look forward to having you in person next year.

No, that's great, Brett. Good seeing you. Stay safe.