American Tower Corporation (AMT) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our second day of the Wells Fargo TMT Summit. I'm Eric Luebchow, Senior Analyst covering the communications infrastructure sector and really pleased this morning to be joined by Rod Smith, the CFO of American Tower. Rod, thanks for joining us.

Yes. Good morning, Eric, it's good to be here. Good morning, everyone.

So Rod, I wanted to jump into something that's obviously been really topical given the recent announcement, and that's your acquisition -- announced acquisition of CoreSite. We certainly heard your thoughts about the synergies with the metro and mobile edge. But perhaps you could share your general view on why data centers are an asset class you need to own versus partner with? And then why specifically CoreSite and why now if many of the mobile edge type of synergies will not really be realized for several more years?

Yes. Great, Eric. I think it's a great place to start because I think you're right, it is very topical. And as you know, we announced the acquisition of CoreSite. We're Working through the tender offer now and we could close that transaction later this month. I guess, I would start by just highlighting the fact that we are strong believers in the edge and edge computing and anticipate that it will really be driven by a sharp increase in 5G-driven data consumption. We also think that the idea of cloud native networks is taking hold, and that will include mobile networks at some point, a lot of the applications that mobile users will want to access will be hosted in the cloud. So getting that mobile network access through the cloud. And the final point would be, and they want to access these things in the cloud in a way that reduces latency that keeps up with some of the things, some of the new applications that will be coming down the pipe, everything from increased high definition, high audio, streaming, to the automated vehicles, to all kinds of automated services, including automated surgery and things like that, that will be happening down the pike. But a lot of enterprise users too also want lower latency in terms of accessing their data and kind of going back and forth. So, we do see this developing. I think you're absolutely right that it will be developing over the next few years and probably won't take hold for a couple of years. But with that said, we -- if you start getting ready when it's already here, you're too late. So our view is -- let's begin to get ready now. You saw us a couple a year ago and a few months ago, we dabbled a little bit in the data center space. We bought a couple of data centers. That was really understanding the data center operations the way they work, the power requirements, the space and cooling requirements, the way those data center customers interact with 1 another through the interconnects, how cloud service providers interact within the data center community and how network companies engage in that community as well. So, we've learned an awful lot there. And our conviction around an eventual push to the edge is stronger today than it was a year ago. And that -- those are some of the things that kind of led us to announce that we're acquiring CoreSite. So, we do think that will be happening. In terms of the idea of do you have to own, can you partner or you can own or you could partner or you could do both. And we're open to all of those things. I would also take a step back and look at CoreSite assets very specifically because not just as though all towers are not the same, all data centers are not the same, all data center portfolio. Portfolios are not all the same. This one, in particular, we look at it, we think it's a very good asset, unmatched really in the U.S. certainly, but globally as well. It's the scale is about right for us. That $10 billion purchase price. They've got 21 critical cloud on-ramps through their 8 major metro market presence. They've got over 32,000 interconnections with different companies and networking companies all connected in together. And they've got 20 centers. So it's a manageable size portfolio for us. Others in the U.S., there are some that are much, much larger, and there are some that are smaller and there are some that are more wholesale in nature without the high-quality cloud on-ramps and interconnect facility. So this 1 really was 1 that really hits the sweet spot for us in terms of size and scale and what it brings to the table in terms of that, advancing our ambition around mobile edge down the line. We don't intend to be a direct competitor in the data center community. We're really looking at this in terms of how do we leverage the 40,000-plus towers we have in the U.S., the [ 220,000 ] towers we have globally over time, and leverage the interconnection, the cloud on-ramp so that we could try to drive additional revenues on to our tower sites in the U.S. and eventually globally as mobile edge data takes hold. So that's really the way that we're looking at it. And a couple of points that I would make with regard to the CoreSite acquisition. Number one, We've done extensive analysis, of course, and we're paying $170 per share for the business. That business stands alone in support to that purchase price. We can clear a couple of hundred, almost 150-plus basis points over our WACC based on acquiring that business the way it is, continuing to run it the way it is, maybe increasing or accelerating the CapEx modestly to help them advance some select projects that they have in the pipeline that they may not have gotten to us quickly. So there's a little bit of [indiscernible] that we can certainly do. We do think that the business can support itself in terms of the run rate capital investments as well as this modest incremental CapEx that will go into it. So it stands alone, it supports its own valuation, and it's accretive to our AFFO per share out of the gate, and we do think it's supportive of our ambition to grow AFFO per share 10% on average over the next several years going out to 2027. So from that perspective, it's a good solid asset. It's a good financial transaction, but it also gives us that optionality around continuing to try to push and drive business to our distributed assets, our tower assets, as we see this emergence of edge. And the edge doesn't just come from mobile networks in, in terms of the edge access and that lower latency. But it's also going to be the cloud providers trying to distribute their cloud access points further beyond the major metro areas around the country and get that more distributed out into the, deeper into the communities that they -- where their customers reside. So our assets, our tower assets could be great locations for those going both ways, allowing the cloud providers to get access to their cloud on ramps further into the communities as well as getting edge computing and mobile computing closer to the mobile networks and connecting into the mobile network operators. So that's kind of how we think about it. And again, in terms of the timing, we'd rather be getting ready ahead of the actual emergence of it, computing or the need for edge computing and lower latency and now is that time. But you won't see a lot of direct activity there. You won't see new incremental revenue at our sites probably for, it may feather in over the next couple of years, but it is a couple of years away before you see anything material, I think.

Got it. That's helpful overview, Rod. On one other thing you mentioned on the acquisition conference call was that you want to expand CoreSite into new markets domestically and internationally. So I guess, how do you think about new market expansion in terms of greenfield or brownfield development versus M&A? I personally thought it might be hard to replicate the highly interconnect dense ecosystems that CoreSite has by building and would think that it would almost be easier to acquire existing assets that have those capabilities already? So maybe you can talk about that mix as you look to bring the CoreSite platform into more than 8 markets?

Yes. I think you could see both, Eric. I really do think you could see both. Certainly, that's the way a lot of business developed. That's the way, we've seen data center businesses develop around the globe. A lot of building happened in the U.S., a little building happened over in Europe. And then there were acquisitions that the bigger data center companies made to supplement and augment their portfolios. In our case, we do think there's an opportunity for CoreSite to benefit as a business based on our ability to move assets and invest internationally with our global footprint. We also think that CoreSite could benefit from increasing their investments just here in the U.S. Again, I would center us on the fact that in the next couple of years, I think you'd see modest investments. They typically invest $150 million or so in capital into their business. You may see that go up to $200 million or $250 million, that kind of a range over the next couple of years. That extra capital will be centered most likely in the U.S. initially. It will be to build out some excess capacity that they may have in some of their facilities today that exists that they just haven't gotten to. We could accelerate a little bit of that. They also own some land adjacent to or in close proximity to other centers that they have which we could accelerate the build out of those, if the demand was there, which we think it is, and have those connected into their existing facilities. So certainly, in the U.S., you could see a path where it makes a lot of sense to build new facilities and leverage all the interconnected cloud onramps that they already have. Now, when you take that next step beyond building out their existing facilities and building out land that they own, that's in proximity to their existing facilities. Getting into a few new markets around the U.S., that's possible. It probably won't happen right away. But over the next few years, we'll be evaluating market expansion and whether or not we need another center or 2 around the country strategically located really in a way to drive more value through the core side assets by extending their interconnection as well as making sure that those are placed in ways that we think supports our 40,000 towers in the U.S. and gives us the maximum potential to drive additional revenue in an edge compute environment out to our site. So you may see that internationally. We absolutely think there's an opportunity for the combination of American Tower and CoreSite to expand internationally. But it's not a priority at the moment. It's not something that you would -- that you should expect to see in any material way over the next couple of years. In the next couple of years, we'll be focused on the U.S. we'll be focused on maximizing the value creation in the CoreSite assets in the U.S. We'll be focused on structuring and setting our plan and our strategy to drive business to our sites through an edge compute in the U.S. We'll prove out that model. And then I think you might see us, if we -- if all that works well, the way we expect it to, and we prove that out, then you might see us take a step internationally begin to prepare. And again, we don't need to do everything by building the assets. Some of them could be purchased, but we don't need to do it all on our own as well. So a few minutes ago, I said you could own the asset, you could partner your way into this or you can do a combination of the both. We'll be looking at everything going forward. We'll still continue to look at partnerships with data center companies in the U.S. and outside the U.S., and we'll be looking at partnerships with other people potentially, that could be strategic operating partnerships. It could also be capital financial partnerships around the globe. So we'll be looking at a lot. But our goal is not to become the next data set, a global kind of data center company competitor where we're going at this a little bit differently, and it's really about leveraging the high-quality interconnection that CoreSite has, the cloud on-ramps and combining them with all of our expertise in distributed land in the U.S. and globally to create value for our shareholders.

That's great, Rod. One of the other questions that we've been getting is around pro forma leverage for the CoreSite deal. I know you've said in the past, you did it with Telxius, you're willing to go up the mid- to high 5x leverage range. But how do you balance that with the potential for additional tower M&A? There are some large assets reportedly for sale in Europe, in Latin America, in Southeast Asia, Do you -- do the CoreSite -- sorry, the Telxius path where maybe you don't take leverage up quite as much to preserve some flexibility to go pursue additional tower assets? Do you leverage joint venture partners, if you wanted to do tower deals? How do you think about all the moving pieces in your leverage target and how you finance the CoreSite deal?

Yes, it's a great question. I think you will see this financing of CoreSite, it will look a lot like what we did with Telxius in the outset and probably not with private capital in the outset, but that's always possible. It's a tool in our tool belt. So when we did the Telxius transaction, we did raise over $3 billion of private capital with CDPQ in Allianz over in Europe. We also have PGGM that is also invested in our European business. We like that model very much. And it's not just a financial transactional model. Our investors are world-class global investors, specifically in telecom and the ones that we have are specific to Europe in terms of the local teams there that we're using. So they made a lot of good relationships. They bring a lot of operational expertise to the table, and that's certainly beneficial. We will want to continue to grow in Europe without a doubt. And as we do grow in Europe, we will be leveraging private capital. That's the way our entity structure -- is structured today in Europe. So I would expect that CDPQ, Allianz and potentially PGGM as well would all play a role in expanding our business in Europe. And there's always the opportunity to bring additional private capital players into the frame in Europe specifically. So with the CoreSite transaction, you will see our leverage come back up into the high 5s. It will be a debt and an equity component. That equity component could be split into mandatory or common or and potentially some feathering in of some private capital, but that's not a big focus today certainly. So you could see a lot of different things there. I would highlight the fact that we've -- we've levered up a few times in our history. We did it when we bought Telxius. We did it when we bought Verizon. I think we did it maybe back in the day with some other large transactions 10 years ago or more. And we have a history of delevering very quickly. So we'll -- that will be our focus is we'll complete the CoreSite transaction, it will be accretive right out of the gate that will be supportive of our longer-term ambitions to grow AFFO per share by 10%. Our business throws off a lot of cash flow annually. We have a lot of things that we would like to do with that cash. But delevering is 1 that we'll do, we are likely to delever fairly quickly. And you can delever in a couple of ways, right, by paying down debt, but also by increasing your EBITDA. So we'll be working globally to drive an outperformance in terms of our business. that helps. And that's kind of the way that we've done it in the past. We delever very quickly after Telxius. This go around our plan is a couple of years, we'll be back down to [ 5x ] or below is the way that we that we look at it. But we'll also be working behind the scenes to find ways to delever a little bit quicker. But when it comes to capital allocation and priorities, #1 priority is our dividend, and not only paying out the dividend, but growing that dividend double digits year-over-year, and we'll continue to do that. Going forward, CoreSite does not interrupt that at all. So we'll have a double-digit growth rate on our dividend as we go forward. Our basic philosophy around the dividend is we pay out. We target to pay out 100% of our pretax income. Of course, every year and every quarter, that's subject to our board approval, but that's the way that -- That's the way that we do it. After that, then we satisfy CapEx projects. We'll spend about $1.5 billion this year with CapEx investments around the globe, including building almost 7,500 towers globally. So that we get very high returns from those investments. So we do that. And then we look with the remaining capital we look to in this environment, we'll want to delever over the next couple of years, let's say, but probably quicker than that, but also evaluating M&A transactions and share buybacks, right. I wouldn't want you or the investors to lose sight of the opportunity for American Tower to buy back shares. We haven't done it in a couple of years, but a few years back, we were active in buying back shares. And I do think there will be a time when we're active in buying back shares again. And that is a priority to us when the time when the time is right. So that's kind of how we work through. And I would say when you think about -- we'll buy CoreSite and integrate it, but we'll continue to scour the globe in terms of M&A. We'll be disciplined. We'll continue to look at our discounted cash flows and underwriting these deals in a way that makes sense in terms of the AFFO accretion, the returns, the spread over WACC, the risk-adjusted rate of return is very important. So everything we do is risk adjusted, of course. And you're correct, we do see some opportunity in Europe that looks interesting. It's really hard to say when that may unfold. And if those deals will have the right terms and conditions. If they do, we think there's a way for us to certainly be very active in there and we expect to be. It doesn't mean we're going to close the transaction because we are very disciplined in terms of the models and what we buy. You saw us being very patient in Europe for a long time. And we made a move. It doesn't mean we're going to make another 1 right away. But I can guarantee you, we'll be active in looking in Europe as a priority. In Asia, there are some interesting things happening in Asia, in India as well as in other countries around Southeast Asia and in the region. So we're certainly actively looking there. So I think once we get CoreSite closed and integrated, we'll continue to look for acquisitions around the globe, but we'll only move on those, if the terms and conditions are right, if the asset is right, the pricing is right. And if not, we'll continue to kind of follow our regular capital allocation priorities, which would include delevering and potentially buying back shares at some point in the future.

Yes. Yes. That's great. That's great, Rod. So I guess, we should probably touch on your larger segment, the top of business. I know you've probably gotten a ton of questions on data centers, so it's really good to get your perspective. But So in the U.S. Tower business, you've talked about, obviously, recent trends being really strong. We've heard that from your peers. There have been some questions around the FAA related delay for C-band. I'm just wondering, is there any impact whatsoever to your business? I know you have a comprehensive agreement with AT&T. So I think now with them I know there are some moving pieces with Verizon with 1 of the comprehensive MLAs expiring at the end of this year. Maybe you could just walk us through, is there any impact with a 1-month delay? Would there be any impact if the delay for whatever reason, elongated longer than 1 month for the spectrum clearing? That would be helpful.

Yes, absolutely. So it's a good question. We don't see the delay with the FAA, FCC kind of disagreement here being something that will last a tremendous period of time. Out of the -- right off the bat here, I would say that we don't currently see any negative impacts any slowdown. And it's important, I think, to highlight that in 2 different -- from 2 different perspectives. One is in terms of our '21 and '22 revenue streams, we don't expect any impact. We don't see any impacts. And impacts really aren't possible in the vast majority of our revenues. As you highlighted, we have holistic agreements with AT&T, with DISH and with T-Mobile. So any kind of physical slowdown in activity does not affect the revenue stream in the short term here in '21, '22. So that can happen with Verizon, they are moving into an ala-carte mode and coming out of their holistic agreement. But with that said, that's the revenue stream and the predictability, the visibility and the security that we see in our revenue stream going out, particularly as it relates to the FAA, FCC issue. But probably as important, if not more important, the level of activity that we're seeing from all these carriers, their actual work that's happening on the ground. We have not seen a disruption there in any way, shape or form kind of across the board. So the carriers are still moving forward. They spent an awful lot of money, $80 billion to $90 billion on the C-band spectrum. They're continuing to work through their operational execution to deploy that spectrum. So that is moving right along here. So we expect that this will get worked out, and it won't have any short-term or longer-term impacts. It just doesn't make sense to us that it would have a long-term impact that these carriers spend so much money spectrum is being used successfully in other parts of the world without any interference. So it does feel as though they're going to work things out and be back on track. There's also been a recent agreement announced with AT&T, Verizon in these agencies that they would turn down power while they kind of go through their evaluation in certain locations. And that fully suggests that they're continuing to build out the network and expect to use it at some point, but are willing to turn down the power a little bit. But in order to turn down the power, you have to have the spectrum deployed. You have to have the antennas and radios out in the field. So that work continues. So we think it's more of a short-term issue that needs to be worked through, and we don't see any impacts. We don't expect any impact. So we think it will be worked through pretty quickly.

Yes. No, that's great. I guess your implied guidance for next year in the U.S., tenant billings growth is around 1%. I guess as you look at the Verizon contract, the holistic portion expiring at the end of this year, and you decide whether to renew that to go a la carte or pay by the drink. Does that really have any impact on kind of your trajectory of revenue streams for Verizon next year or really any impact on that 1% target that you put out earlier this year?

Yes. When you have a major deal that could be negotiated, there always could be impacts to the way you think about the business and what might happen. We do have the guidance that we put out for next year, which we put out our formal guidance in February, but with our longer-term plans and some of the other numbers that we've given out, you can kind of back into what we're expecting to happen in 2022, which is approximately 1% growth is the way we're thinking about it. That includes Verizon kind of going Ala carte. So that's the assumption that's kind of built in there into 2022. If in fact, we strike an MLA with them depending on the terms and conditions that could push and pull move some things around the beauty of the MLAs really is that it is equivalent to the ala carte over time in terms of the revenue uplift we would expect. We basically price out what the carrier is going to do over the next few years. We'll smooth that revenue stream and build out that revenue stream over time, and they can work at their own pace. So they can go faster in 1 quarter, slower than another, but the revenue stream stays consistent, but they do work within the framework of the rights that we've priced out and given to them. So they have access to do a certain amount of work and they can do it when they want and they pay us a certain fee and over the term of the holistic deal, the our revenue stream shouldn't be materially different, whether we're in an ala carte or holistic. But within the years and the quarters, it could vary a little bit on an ala carte where it's more consistent on a holistic. But the real beauty is administratively, it's much more effective and efficient for the carriers. It slows -- it speeds up the administration. It makes the application process shorter. It makes the evaluation [ eloquent ] through an individual pricing process and those sorts of things. So there certainly are benefits to the MLA structure with us. But in our guidance, we have the Verizon going at ala carte. That's what we're planning and working for. But we're open to either scenario with Verizon, we're here to support them and to help them realize their network ambitions and roll out their networks. And as I said, whenever you're negotiating big deal, you can have pushes and pulls and things could change a little bit, but not materially, I wouldn't expect.

That's great. So Rod, we only have a couple more minutes. But maybe, if we could just do a quick tour around the world. I wanted to just get your perspective on what international markets you're particularly excited about? It seems like there's some positive trends happening recent spectrum auction in Brazil, upcoming auctions in Nigeria and South Africa, favorable ruling on AGR and Spectrum news in India. And then obviously, what you're doing in Europe with Telxius and new entrant in the German market? So maybe you could just give us a quick rundown of the markets you're particularly excited about as we into next year internationally?

Yes. Yes, sounds great. I'll turn to do this quickly, but if you look around the globe, we've got a fantastic set of assets across the globe in many regions. I'll hit Europe first. Europe is a place where we did just invest over $9.5 billion, it will be $10 billion, including build-to-suits over a few years. And the good news there is that integration is going extremely well. We're seeing organic tenant billings growth rise in Europe consistently quarter-over-quarter throughout 2021 and even if you go back into 2022. We've seen a lot of the legacy churn, the structural churn that's been in that market is fading, and that's been really good. And we're also seeing colocation and amendment activity rising. So that's a great combination. We had 5.5% organic tenant billings growth in the region in Q3. And Germany, in particular, would have been higher than that number. And based on our long-term guide, and you've got the first 3 quarters, that -- if you backed into Q4, you'd be looking at something almost 100 basis points higher, certainly north of [ 6% ]. So we think Europe is really trending in a great direction for us right where we expected it to be, so that we couldn't be more happy with our Telxius transaction, the timing of that and taking advantage of that marketplace having worked through their legacy churn issues are now benefiting from the very initial deployments of 5G. So we're in really good shape from that perspective. If you jump over to Asia, then we've had many, several years of negative organic tenant billings growth because we went through a multiple year period of high levels of churn because of a lot of issues in India. We're seeing some really good things happen in India today. So we did see the government provided a release package for all the telecoms in India. That certainly helps Voda and Airtel. I won't go through the details of that. We really don't have the time. But that's a big deal, and it gives Voda and Airtel and others much more control over their short and longer term, multiple year control over their balance sheet and cash flow. They can defer a lot of their AGR and penalties and interest related to that. So that's tremendous. We also saw the carriers increase tariffs across the board in the range of 20%, 25%. That's going to be very good. We do think the market can handle that well. And with Airtel and RGL raising prices in addition to Voda, we think that's going to help Voda shore up their subscriber base and stem the subscriber losses and put them in a better position. With all that being said, we had our first quarter of positive organic tenant billings growth in India in Q3, where we were just over 0.5% positive. And if you kind of back in, based on the guidance we gave you for the full year and you look at the first 3 quarters and you back into Q4, we're looking at a [ 200 ] basis points of positive growth in India for Q4. That will be the first time we've seen that. And as we look out, we think that trend will continue. So we're very excited about where India is at this point. And now the construct of the backdrop is really good because you've got 3 commercial carriers plus BSNL and the government is supportive in it, just it looks like a really good environment as we go forward. So we're optimistic there. Africa, we've seen really strong growth. Q3, it was growing north of [ 9% ] for the full year. We're expecting it to grow over [ 8% ]. I would highlight we have a few churn issues. In Africa, you will see -- again, if you look at our full year 2021 guide for Africa and then you look at the first 3 quarters, you'll notice that we're expecting a drop down by maybe even a 200 basis points for Q4. That's where we're seeing a growth in colocation and amendments even in Q4, but we are seeing higher levels of churn coming primarily with Airtel in Ghana in a few places and then C Cell then South Africa, we've got some churn that we're working through there. And that churn will come off in Q4, and it will impact 2022 as well. And then if you jump over to Latin America, the story is somewhat similarly, we are seeing solid and stable levels of colocation amendment activity kind of across the region. We are seeing escalators. We saw escalators increase by and large in 2021 given some of the inflation numbers, particularly in Brazil, but in some other markets, not all markets, but some other markets. So that's been good. But in -- In Latin America, we are also seeing higher levels of churn at the end of this year. And again, that will kind of go into next year. But we have some churn with Nextel down in Brazil. We had some in 2021. That will have more in the -- at the end of the year here. That will affect going into next year. And then Telefónica, we've got a little bit of churn and a little bit of churn with AT&T down in Mexico, pretty normal stuff. But the Nextel churn, the Telefónica churn, probably a little bit higher than what we are used to seeing there, and that will affect our Q4 numbers as well as going into 2022. And again, if you think about this year, based on the first 3 quarters of LatAm organic tenant billings growth, we were at 7% in Q3 and we've given you the full year guide, that implies when you get into Q4, it's going to be -- could be a couple 200 basis points lower than the 7% we saw in Q3 as you get into Q4. And then that will kind of bleed into 2022 in general. So we see, we think we have a great portfolio globally. We like the way it performs every now and again, you work through churn issues in some of these markets. But there's no question that the demand environment has been pretty strong throughout -- around the globe, and we're particularly very bullish on the U.S., Europe and now what we see happening in India, very excited about the portfolio and where it sits.

Great. That's really comprehensive, Rod. And fortunately, we're out of time, but I really appreciate you spending some time with us today virtually and hoping to do this in person at some point next year.

Yes. It's great seeing you, and thanks for hosting and looking forward to it. So anytime, would love to be with you.

Okay. I appreciate it, Rod. Take care.

Take care.