American Tower Corporation (AMT) Earnings Call Transcript & Summary

Jon Atkin. I cover the tower sector at RBC and pleased to have a repeat participant. I think every year, you've been involved in our Global Tower event, Olivier Puech from American Tower. Why don't you reintroduce yourself for the benefit of the audience and maybe describe your areas of responsibility.

Sure. Good to see you, Jonathan, finally in person after 2 years from Chicago to Denver. Yes. Olivier Puech, so I've been with the company for about 10 years, and I run a part of international, which is the Europe, Africa and Latin America region based out of the U.S. out of Miami.

Great. So I'm going to maybe drill down a number of disparate operating related topics. First of all, you provide power in various emerging markets, and that's been a theme throughout some of the other international participants we've had here at the conference. Given higher power pricing and rising cost of oil, kind of describe for us your power as a service model and how you manage fuel costs and what are some of the opportunities you see around alternative power initiatives.

Sure. Yes. Well, as you know, most of the countries where we operate, whether it's in Europe, U.S. developed markets or emerging markets, power is a pass-through. So we don't do that everywhere. But in some geographies, what the grid is kind of lacking or nonexistent, we do have this kind of all-in solutions around power management for our customers, in particular, in Africa and India, which are the regions that are already struggling and suffering the most of this thing. So historically, we provided diesel generator solution to power the site, so as a backup of energy. And of course, this is butane. This is very prone to cast and vandalism as well. So we've been evolving in our solution by investing a lot of time, people and money over the past 3 to 5 years in alternative solutions that are more sustainable to the environment and also for our customers to bring more predictability in the model. So initially, we started with lithium-ion batteries. And today, around 60% to 70% of our sites in Africa are all powered through lithium-ion batteries. And we have a series of vendors and arrangement in Africa and in India, in particular, to support the demand and the predictability of those solutions. And then more recently, we invested a lot also in solar and wind solutions to power the sites of our customers. That gives more predictability. This is more sustainable, of course, for the environment. It decreased over time between 40% and 50% the consumption of diesel and all our sites as a blended over the past 3 to 4 years, which is going to the right direction, of course, given the prices of energy that we see today all around the world.

Maybe taking a step back, given your job title essentially a lot of the globe ex India, ex U.S. So maybe focusing on some of the largest economies, Brazil, Mexico, Nigeria and in Europe, what are kind of the macro developments to keep in mind that are driving your organic growth? How is that trending differently now compared to a year ago? Are there certain markets that are becoming relatively more optimistic on and others that are maybe more of a flattish trends? Big question, so we can take your final [indiscernible]

Yes, that a loaded question. Well, we're going through technology cycles that are different, right, in Africa or India versus LatAm, which is probably in the middle of the road versus Europe, which is closer to what we see in the U.S. with 5G deployment acceleration. The macros have been very volatile recently. It was a return on FX, inflation, the health of some of the MNOs consolidation, RAN-sharing. So it's a mixed bag, but I would say all in all, of COVID, what we see is really a resurgence of investment, a big push for renewed investment in the wireless industry, not only from the MNOs, but also driven by the government and the regulators around the world. So you see 5G auctions in markets like Brazil and Chile. You see, of course, acceleration in Europe; the new deal in France, which is a big deal for the President Macron to push the MNOs to invest more money and accelerate now the investment. We see Germany with a new operator in 5G competing with the 3 incumbents. And the same in Africa, so Africa is not about 5G. But yes, but continuing to have a better coverage connect in, connected in most of the markets, a lot of BTS, a lot of new build accelerating now in -- also in Africa and parts of India.

So thinking about Brazil, in particular, there's been some M&A in that market of some larger tranches of assets. You've had an active build program there. You've also grown through acquisition. How do you kind of see the target for additional growth, not just there but elsewhere in LatAm?

Yes. So we've been in Brazil since 2000. We have 24,000 towers right now. So following the Telxius acquisition, which was not only about Europe, also about 4 markets in Latin America, it consolidates our position in Brazil. So today, we have a sizable amount of sites there. All the MNOs are present on our sites, even through the consolidation. As you know, in Brazil, the MNO have gone through a certain level of consolidation. First with Nextel being acquired by Medico Mobile and then, of course, the -- disposal the wireless assets being divided between the 3 big players: America Mobile, Telefonica and Telecom Italia. So we see, again, this part of the new wave of investment now that we think will be even more supported next year by the 5G deployment. So the 5G auction were back in November in Brazil. It doesn't really started yet this year, but we're pretty optimistic regarding next year in acceleration there. And then you have, of course, inflation, which is supportive of high escalators since most, if not all, the contracts that we have CPI basis Caledos that compensate with some level of churn that we've seen in some of the markets, in particular, in Mexico and in Brazil.

And then kind of adjacent opportunities, you've made some investments in fiber. There's -- one of your peers is getting more involved in operating active electronics in places like Poland. But broadly speaking, what are the non-classic macro tower opportunities that you see as most interesting at the moment?

Well, we just spent $10 billion in the U.S. buying CoreSite, right? So that's one of the adjacencies of course. In fiber, [ 2 ] result, I think, in terms of the model and the role we can play towerco in this space. What we see probably outside of the U.S., and I include Europe, is probably an opportunity for third-party players to help or to replace some of the MNOs in terms of deploying CapEx and hiring people to deploy new fiber network, because it's still fragmented. The costs are relatively manageable in most of the geographies. There's no bandwidth and capital from those MNOs to do that by themselves. It's supported very often by regulations that are relatively open to have, I would say, kind of neutral host to support FTTH network. So this is what's interesting and intriguing to us and others. It's not a given because it's a different type of business in terms of the skill sets that you need for your people. It is very CapEx-intensive to deploy a fiber network. Depending on where you are, it's aerial, it's buried. You have a lot of different regulations in the market to do that. And the multi-tenant approach on the fiber network is not obvious. So you have some markets like France, for instance, where it's easier because the regulator has defined kind of exclusivity area where some of those networks can be used or should be used by everyone in the same place. Wherever it's more free, where you have this kind of wild approach to overbuild a fiber network and so on, it's more challenging. So that's a piece that we're still trying to figure out, I think, as an industry and as a company. Still on fiber and the fiber to the tower, that's a different thing because it's in adjacency, which is much closer to the tower, so which is about preparing our tower and our site for the future, especially when you think about densification, 5G and Edge and everything. So there might be also the opportunities, not everywhere, probably not in the U.S., but most of the tower is not all that are already fiberized to play a role there with some of our MNO customers and for some of our towers, at least in the most urban environment that we see.

So you laid out a construction target last year for 40,000 to 50,000 new sites over the next 5 years. Given supply chain challenges, costs of materials and so forth, how are you kind of managing through some of the challenges? And how does that affect the time line around which you would achieve that target?

Look, so far, we haven't been really exposed to any major supply chain disruption. I mean starting with the OEM and the equipment, we've seen the likes of Nokia, Ericsson, Huawei and so on continue to provide the right amount of sites for deployment, whether in some 3G in Africa, 4G or 5G equipment. The rest also of the supply chain has been okay from steel to fuel. It is a lot about operational excellence. You know about the processes that you implement about the people that you hire and you train and about also shared services between the geographies. So when you have scale like we do, for instance, in India and Africa and LatAm with a lot of markets, a lot of sites, big teams, it is a little bit easier to manage your pool of vendors, the supply chain to anticipate some of the demand to take maybe a bit more risk, to spend a bit more CapEx ahead of time because you know this it's coming. It's the case with BTS. So if you look at Africa, for instance, so India, we guided, I think, for 6,000 to 7,000 new sites this year for the company. Most of them are in Africa and India. So you know the demand is there from the likes of Bharti, from the Lifetime out there or Vodafone Orange. And that's what you do for living. It's the India, build those sites and accelerate the deployment for those guys.

So in Germany, one of your peers talked about kind of leveraging third-party efforts to meet the build target for, in their case, Vodafone. So with Telxius Germany, kind of the attachment to O2, talk a little bit about build-to-suit. And can M&A kind of get you to where your customer needs to be? Or is that going to be entirely something that you pursue on their behalf?

Well, Germany now with the Telxius transaction, we have 15,000 sites. So we start in Germany through the ePlus transactions on when KPN sold ePlus to Telefonica. That was the first portfolio that we acquired with around 2,500 sites. Now we have 15,000, a mix of greenfield towers and rooftop. We're in a good place in terms of the demand from the anchor from Telefonica. So the MLA and the agreements that we -- that came from the acquisition with Telefonica comes with 2,500 BTS that we need to build in the very close future. And now, of course, with the new operator in 5G in Germany, one-on-one, there's also, of course, a big demand. We just signed an agreement with those guys [ forecast ] to piggyback on the 15,000 sites that we have to accelerate the deployment and meet some of the regulation goals that have been set for them. And then, of course, Vodafone and Deutsche Telekom are the 2 incumbent customers that we've been, of course, supporting in the market for some time. So kind of business as usual, I would say, in Germany for us now that we have scale, and that the demand is there because of this 5G environment and the new operator also in Germany. There is a roaming agreement between 1&1 and Telefonica, which is also helpful when you look at planning for your resources, whether it's on colocation BTS. So I would say so far, so good.

So the impact of 1&1 in Germany, do you see that as having kind of equivalent impact on the German market as DISH is having in the U.S.? Or is it not quite apples-to-apples?

Probably too early to tell for both of them, right? So I mean, the case of Germany, this is an interesting play because you have an MVNO transforming into an MNO, more than 10 million customers already, so relatively by German standard, good scale. It's an open-run architecture. So they are working with the Rakuten, which also relatively new, if you look at the kind of global environment and how to do that. And of course, the fact that we have the size and the scale day 1 to help them do the development is going to be helpful. So I don't know if it relates completely to what DISH is planning to do in disrupt in the U.S., but it's going to be interesting to see how it plays out.

So again, if there's any audience questions, feel free to raise your hand, and I'll call on you. So last week, there was a tower exchange in Europe. I think some of your team were there. And 2 of the topics raised were indoor DAS is a source of opportunity for towercos in Europe and then the sharing of active elements. I think you spoke a little bit about that last part. But indoor DAS, which you operate since you bought SpectraSite back in 2000 -- whatever 2003 or so, how do you see into DAS plan in Europe with respect to your strategy?

Yes. With [ East ] Europe or the rest of the world, including the U.S., where we have the most scale, we have quite a lot in LatAm as well. Difficult to scale this business when you look at kind of the -- how much does it really impact our revenue and EBITDA level. The Tier 1 venues are kind of all taken, isn't by us, our competitors, by the MNOs. The evolution of technology, I think, is the question mark. And is there anything else we can do with alternative technology? I don't know if it's going to be in Sulige, Wi-Fi, a shift in the business model instead of going -- working for an MNO to secure a venue. You go with potentially landlord in urban areas and you provide this kind of BTS Hotel for operators. So all those kind of tests and trials are underway. I'm not sure it's a kind of key priority in terms of capital allocation for the company moving forward to be front and until and unless there is kind of a proven business model and scale behind this. Now on the active sharing, I think it's interesting because, first of all, we do that in power management already. We do that in fiber. So wherever we have fiber to the home through the ownership of the all T, on T, we do provide active sharing for the multiple tenants that were on the FTTH network in Latin America. And in that sense, of course, this is also going to be a place. So we haven't gone kind of the extra mile, which is to move into the radio access network sharing. We are infrastructure, provided it's on the passive side. That's the history of the telco. Is there room potentially in some geographies, in particular in the rural areas of India or Africa to help the MNOs to potentially share day 1 network, which is lighter in which we take more responsibility as the towerco present in those geographies? It could be because economically, I'm not sure it makes full sense for an MNO to deploy a brand-new network in a fully rural area, where the retail investment is not going to be there. So for this angle, I think that's something. I'm not sure on very developed network on 5G where, because the cost of the spectrum is very high, you guys, towerco need to run it for me MNO. I think this piece, we have not gone this extra money yet.

So on the M&A front, within Europe, there's Belgium, there's Sweden. A couple of things in play, obviously, in Germany and in France. But are the deals that have closed, any sort of observations on what the takeout multiples were? Were you surprised? Anything that causes you to kind of scratch your head around who the buyer was and what they paid?

No. I think on multiple Europe, like the U.S., because of the kind of cost of capital and where interest rates were and we are negative rates in Europe, right, for a long time. not a big surprise. I mean you have a change of environment now with higher inflation, higher interest rates, I think cost of capital are going to go to increase as well in Europe. So I'm not sure this is completely sustainable in terms of the multiple. We have to see the asset class as well. You have all kind of multiple, depending on whether you look at tower, fiber, data center. The peculiarity of Europe, of course, is this kind of dichotomy where you have towercos on one side, guys like us, Cellnex and others. And this is captive telco, right? So you have those 3 big MNOs that made a big bet early on, Telefonica, Orange, Deutsche Telekom and Vodafone, to cover other assets and to try to monetize those assets in a separate vehicle. Telefonica, I came to the conclusion first that it probably wasn't worth continuing this avenue. And together with KKR, they decided to divest and to sell us the towers. For us, it made a lot of sense because of the profile of the anchor, the quality of the asset, the location, the type of market and the MLA. So the terms of calls that have been negotiated initially between Telxius and Telefonica. What will the other 3 guys do with their assets to result? I think nobody knows. They are all weighing their options. I personally see it is very difficult to have a sustainable captive towerco business model for the MNO because, it's you need to carve out big teams. You knew operations need to be really excellent at the top of a few games there. It's very difficult for an incumbent to open up their portfolio, to have their competition, share the network so that you can really take the biggest value out of this portfolio. And this is what we see in the U.S. They tried at the beginning, keep going into this kind of carve-out, separate towercos. They didn't do it. And most of the rest of the world is doing the same, except some part of India and Mexico with stateside, right? So we'll see. And if there is a play for us in the future to continue growing in Europe, we're certainly there for the long run, and we'll have a look at it.

So you mentioned carve-out. So Millicom announced plans to carve out 10,000 towers in Central and South America, wondering kind of how you see that playing out within the overall tower landscape in LatAm.

Millicom is a key partner. We bought their towers in Colombia and Paraguay. So we have already existing relationships. There are neighbors in Miami, so we meet very often as a key customer. We have 48,000 towers now in LatAm. So it's not really about scale. It's not really about entering new markets. We believe they came to market to scale that really have the most potential for growth with there already, the Mexico, the Brazil, the Colombia. But again, depending on the modality, the timing, what they're looking at, that might be something that we will consider. It is a key player in Latin America, for sure.

And then similar for Africa, Vodacom announced plans to carve out its infrastructure business. How do you see the different possibilities of how the ownership structure ends up looking there for that unit?

South Africa is key. Vodafone is a key, a key partner. I don't think they've made any announcement yet as to what they will do with Vodacom and the towerco, except as a first step is this carve out. Different from the Vantage approach, right, which was really this vehicle where most of the European assets, at least the ones that they fully control, can be put all together under one roof. So it was there. It's a key partner in South Africa. We have a little bit of fiber there as well. So we have towers to our fiber. Our headquarters is in South Africa. So the best expertise and talent is probably as they are close to the customer, and we'll look at it carefully.

Okay. And then following on kind of that theme. As you think about your overall geographic footprint, and you -- how do you prioritize expansion into new markets versus scaling up in existing markets?

It's more the latter. I mean, definitely, we try to scale up where it makes sense. Again, I'm talking more the biggest market, biggest population, biggest potential for growth, competitive environment between the MNO. As few towercos as possible, of course, for us. So the big markets, we've done that. Brazil, we've gone from multiple acquisitions over a 20 period -- 20-year period of time with the same in Nigeria, the same in India, now in Germany. So it's also the kind of the key democracies, big market where was there for the -- really for the long run. Some of the markets are smaller and will not require necessarily a lot of additional M&A. And regarding the new markets, where we go through the same disciplined approach when it comes to capital allocation, right? So what's the competitive environment? What's the rule of law? There are some markets in Africa or in the Middle East, Russia, where we'll not be considering any investment in the short term because it doesn't make any sense from a geopolitical kind of rural-load type of environment. Currencies, competitive environment between the MNO, we've seen a lot of consolidation, a lot of runsharing in some of those markets. So again, we have the same careful approach as to capital allocations we've done before.

So with IHS as recent listing, there's now a new public disclosure about Nigeria, Brazil, to some degree, and a lot of markets where you are present sometimes having a different tenant base, but having assets of towers. Anything around that event that you've found kind of interesting? Or how applicable is their growth trend to yours in the markets where you not only compete with each other?

We are very bullish about Brazil and Nigeria. I'd say some similarities, population, kind of the same. Competitive environment, definitely MT and Airtel are going at it in the market in Nigeria, the same now in Brazil with this consolidation around the 3 markets. We have a lot of investment in new technology and innovation. The relatively high oil price is actually good for Nigeria and Brazil because they are big exporters of oil. So that brings some stability to the macros in the markets and also improvement in the local currencies. In the case of Nigeria or some of our contracts are on USD, so gives even more stability. They're all CPI-based, so if the inflation goes up in the case of Brazil right now, we're protected. So yes, we're very bullish. We have 7,500 towers in Nigeria, 24,000 in Brazil that are really key markets for us.

So I asked you earlier about kind of business model adjacencies and you answered data centers. So -- and we're going to have Steve Vondran later. But outside the U.S., and prior to the CoreSite acquisition, you had bought Colo ATL and then were kind of dipping your toe in the water. In the markets where you have responsibility, what do you see as interesting opportunities for either Far Edge or Metro or other types of data center investments or acquisitions?

I think the same model will probably apply. I think it's important first that we set up kind of the basis of our growth in the U.S. So I'll let Steve elaborate. But first, we need to integrate the team. It's a different business model. The same way we've seen that in fiber in the past, it's much bigger in this case. There is an ongoing baseline of the CoreSite business, which is not necessarily the edge. The edge is the cherry on the cake. It's really on top of that. So we need to build these stories all together in the U.S. with Steve, and then see if there are opportunities. For sure, the customer base and the guys you're working with in the data center space is very different from the tower space, right? So you might have MNOs. You definitely have the enterprise. You might have the government and then you have this whole cloud suppliers, hyperscalers that are going to play a major role. Those guys are hungry for more support from us, not only in the U.S., but also outside of the U.S. By having 220,000 towers in 25 markets, can we play a role for those guys moving forward? Probably. When I think the timing is about to be defined, I mean, we have time for that. We still have towercos. We still plenty of investment opportunity in something which is really predictable and that has given a lot of good results around the tower. So it's a good problem to have, but this is about capital allocation and doing the right thing at the right pace.

Okay. We'll get a second bite at the apple on that topic, I guess. Any audience questions? So last one for me then. As we just sort of think about the growth drivers through the remainder of 2022 and into 2023 in each of the international segments for investors that don't have the time, like I do, to think about towers all day long, what would be the top 3 things to kind of monitor as it pertains to trying to figure out organic growth trends in your key international markets?

Well, Europe first, because this now execution under the Telxius assets and some of the -- I would say, the demand that we see in most of the markets in Europe or all the markets in Europe based on what I said before, the new deal in France is spurring new investment from the MNOs, California and Spain, definitely with a huge demand around the assets that we acquired. And then Germany because of this kind of 5G raise between the 3 incumbents and the new player, including Telefonica as well playing a role. So Europe is critical. I would say the BTS, we didn't talk too much about this thing, but this component is really critical to us. The return on investment, and I'm sure it's the same for most of the towercos here, it's better on BTS normally than what you get on paying this up from big multiple on M&A transactions. So we continue to really accelerate the program and allocate a lot of CapEx, most of our CapEx actually to BTS programs in India and Africa. But now with Europe, we see a lot of demand there as well. So it's also working with the regulator on the permitting, the zoning. It's not easy, very similar to what we see in the U.S. in terms of some of the hurdles there. Meanwhile, the regulator and the government pushing very hard on the MNOs to accelerate this plan. So this is really what we -- we're spending a lot of time on this year. And then innovation. It's not necessarily about M&A and doing big transaction like the CoreSite or what we did in fiber in Latin America. It's also looking how we can help our MNO customers who -- local innovation. And Africa, for instance, is a big one. And also what I said about rural areas and the new solution we can bring to those places for the Africa power management and this acceleration towards more sustainable solutions, this is absolutely critical. It fits with the ESG agenda that we have, that the MNOs have. So a big push also there from the government towards the MNO to accelerate this green agenda, if you want. So we'll continue to spend a lot of time there.

Great. I think that wraps up the time together. Appreciate it.

Thank you, Jonathan.

Thanks. Welcome, everybody. I'm Jon Atkin. I cover the data center and tower sectors at RBC, and pleased to have immediately to my left, Dave Ferdman, who is the CEO of CyrusOne; and Steve Vondran, EVP and President of U.S. Towers at American Tower, who -- under whose direction CoreSite is now run. I'd like to welcome both of you and start with a couple of questions for Steve.Maybe really big picture kind of start off. CoreSite was a company that was kind of driven by FFO per share growth, and most tower companies in the U.S. are driven by AFFO per share. And so how does that affect, in your mind, kind of capital allocation and management incentives within CoreSite?

Sure. Well, as we've said, we plan to run CoreSite as a stand-alone business within the U.S. Tower division. And when we underwrote the acquisition, of course, we underwrote it based on their current business model and their plan. And we had -- in addition, we plan to drive additional business through the Edge and other opportunities later, but that's really incremental to the underlying business case that we wrote. So when we think about CoreSite and its underlying business, we'll continue to make capital allocation decisions in that business consistent with the way the CoreSite team was looking at it before. But it is part of the larger -- part of American Tower now, and we'll look at our capital allocation strategy across the entire enterprise kind of the same way. So we look at the CoreSite business. It's a healthy business. It's growing. We see sort of high single-digit growth in that business, and we see the opportunity to continue to reinvest. A lot of the cash that, that business provides -- the cash flow that's generating back into that business, and we'll get incremental opportunities when we look at all of our other capital decisions, and we'll compare that to what we can get, whether it's in towers or another area of the geography that we operate in, and we'll make those decisions accordingly. So we'll continue to grow that business in its kind of own right. And if there's opportunities to create more AFFO in that business and it's better than the other opportunities we're looking at, we'll allocate more capital. But we'll be very selective about that. And at this point, we're focused on running the business according to the CoreSite business plan.

So U.S. Tower is not a terribly capital-intensive business. Most of the build-to-suits are done by mom-and-pops, and then you do M&A kind of on the back end. So fair to say the CoreSite is going to be seen at least as much level, if not more, of CapEx and inventory development going forward?

Well, so if you look at the historical spend at CoreSite, they spent between $150 million and $180 million a year in terms of incremental capital spend to accommodate the demand that they're seeing in their annual sales. Some years, they have a little bit higher spend when they do a ground-up development. And if you look at what we're spending this year, we've projected about $300 million, that includes the first phase of a ground-up build in Silicon Valley. And so we'll continue to invest in CoreSite at those historical levels and we'll do ground up builds when they make sense. So if you look at the capacity that we're trying to accommodate, CoreSite has a history of building to accommodate the demand that it sees. At the end of Q1, we had about 40 megawatts of available capacity and about 20 megawatts under construction. That represents about a 2-year supply for us under historical absorption rates, and we'll continue to invest capital at those rates to continue to feed that demand. If demand accelerates, we might look to accelerate that a little bit. And again, we might selectively choose to enter into Tier 2 or Tier 3 markets if we see the demand to do that.

So Equinix is probably the best proxy as a stand-alone remaining listed company in terms of market segmentation to what CoreSite represents. They're seeing elevated levels of growth in kind of retail enterprise cross connects. How would you kind of comment on the demand environment that you're seeing in that segment?

Look, I said I'm very bullish on the business. I think when we look at our underwriting assumptions and what the business was doing previously and we look at the demand that we're seeing today, it's great. It's -- it's better than I expected when we were looking at the business to begin with. We had a good Q1. We're not releasing specific numbers on that, but we had a nice level of activity in Q1. And I would say that, that's broadly indicative of the demand that we see.

Great. And then last one for you before we kind of pivot to Dave, and I may even throw in some tower questions with the back end given that we just adjust stopes here. But just given what's going on with inflation, materials costs, Equinix on a panel earlier talked about a big initiative around price increases and so forth. Within CoreSite, what is kind of your exposure to higher costs, inflation? How is that affecting the tenor of your relationships with your customers?

Sure. I'll attack that in a couple of different ways. First, with respect to kind of the inflation that we're seeing in supplies and things like that, we do think SV9 will cost a little bit more than when we built SV8 on a per-kilowatt basis because of the inflation. But it's within the business case that we've adopted for that facility and still a nicely accretive build for us. In terms of individual supplies, we're not seeing any material disruptions in our business today. We are watching the supply chain issues. We are seeing a little bit of an elongated cycle time to get certain materials or ordering things in advance a bit. And we're stocking a little bit of inventory, small, nothing that's material. And we're watching to see what happens there. When you look at some of the inflation in utilities in particular, we -- about -- most of our electricity is in regulated markets. And so they have to have the local municipalities' approval to raise rates, and so they can't quickly pass through those rates. In the unregulated markets, about half of those agreements are in kind of long-term lockups, so it rises a little bit slower. So our exposure is really in unregulated markets where we have fixed power agreements with our customers. Now even in those fixed power agreements, we're able to pass through some of those cost increases, it just happens a year later. So in April, we started re-rating some of the power charges on our fixed rate agreements. So overall, we're well protected against the inflationary pressures that we're seeing. And you may see some -- a little bit of near-term margin compression from the utility rates rising in that small segment, but we'll recoup those in future years as we re-rate those utility charges.

So you mentioned SV9, brand-new building but on an existing campus. How do you feel about the -- what is sort of the target mix of selling to maybe 1 large customer, a small number of large customers versus a retail environment where you have kind of an ecosystem that you can develop? How do you feel about kind of the target and fill and mix of customers?

Yes. We'll target the same type of mix that is, of course, that's historically targeted. One of the things we found most attractive about CoreSite as an acquisition target is they've carefully balanced what we call retail scale and hyperscale to create a highly interconnected ecosystem. So SV9 is part of our campus. It will be interconnected to the rest of the buildings in that campus and all the tenants that will have the access to the full ecosystem there. And so we'll continue to target kind of what we see as the mix that gives us the highest yield for our investment there.

So Dave, a lot to unpack. I think in March is when your take-private deal was concluded. What's been going on at the company since in terms of integration, if any? And we can talk more about market trends as well later.

Sure. Look, the transition from being a public company to a private company is pretty dramatic. Your metrics change, you're not thinking about per share. But at the core of it, we're executing. I mean, the company has significant demand. We've got about 17 different developments in progress right now. And so it really -- the silence of not having all the public distractions, believe it or not, has given us a lot of time to be able to focus on just execution. And so the integration, if you will, with the new partners, it's been smooth. I mean, they definitely are -- having 2 different partners in a business like this is unique for us because it's not something we're used to. But both groups, both GIP and KKR, have come to the table with tremendous enthusiasm. And so while there's been a little bit of data center 101, there's just been a lot of helping them understand why we're making the investments we're making. And that all has to do with everything, everybody has been talking about throughout today, and that's just the demand we're all seeing.

So we'll talk a little bit about demand shortly, but given the increase that many -- increase in demand that I think the overall sector has seen kind of invites the discussion of CapEx and how much higher can you flex that. And as a private company, I imagine you would have fewer constraints on how much CapEx can flex higher?

I mean, look, it's definitely a whole different ballgame. We're not constantly doing the math on whether we're going to hit our leverage cap or we're going to go drop the ATM. So at this point, we do have revolvers in place. We do have plenty of cash on the balance sheet. But we are making completely different decisions. So the scale at which we're building is dramatically different than we were even thinking about a year ago. And so we're able to go out and prepurchase kit, purchase slots for kit well, well, well into the future, where in the past, we really weren't making those types of long-term bets. And part of it is because, of course, the supply chain, part of it is just pure demand, and part of it is with a bunch of companies being taken private, I think there's more demand for some of these same resources. And so we're trying to be proactive. We're trying to play a little bit more defense around being able to hit time line. So we think about capital a little bit differently because now we have, I think, a little bit of a longer-term horizon. We're not thinking about having these quarterly conversations about how long land might sit, unproductive land, and those are conversations we don't have to have anymore.

In terms of the pace at which you might enter new geographies, how are you thinking about that versus doubling or tripling down in existing markets?

So the base case is still to get the best risk-adjusted return for our investors, and that is scale in our current markets and is the strategy we announced last year. Continuing to build scale in these digital -- we call them digital gateway markets, our largest markets where we have plenty and plenty of demand is first on the list. So we're building our base case completely around our core markets, staying at home and building scale. We are looking at a few other markets. We are looking at -- we talked in the past about different geographies. But our base case that we're building on is core markets, core markets, home markets and scale markets.

When you last had an Analyst Day last June, I believe, there was some talk about kind of negative renewal spreads. How has the world changed since then around demand and inventory tightening? And have those expectations been met or may be surprised in a positive way?

Yes. I think there was some -- the conversation around the negative renewal spreads was a philosophical conversation about what's the spot rate today versus what's the renewal. So we've been renewing at par, on a GAAP basis, a little bit above par. And so that was before this crazy Russian demand, which we saw starting about 8 months ago. Fundamentally, that's not playing out. We're not seeing renewal spreads. I think we reported negative 18% to 22%, if you might have reminded me, 25x. We never saw it. And so I think we certainly don't think and model about renewal spreads like that at all. I mean we're seeing scarcity. We're certainly not going to the market and being so aggressive and abrasive. But we're certainly not modeling in any kind of crazy churn.

So how has the world changed? And maybe get a little bit more specific on types of demand vectors and the reasons behind it.

So we booked in the last 8 months about the same number of megawatts we booked in the prior 3 years collectively. So we're seeing material, material demand across all markets, across all sectors. It's a very diverse demand. And so what we're doing right now is we're now thinking a little bit further out. Capacity is constrained. Customers know it. I think there's more of a feeling of a feeding frenzy than there is on, "Boy, there's going to be a bunch of capacity." I don't know people really building on spec. I think people were -- our development pipeline is 92% pre-leased. So I think what we're seeing across the sector is significant demand. And I don't think we're the only one seeing it, I mean, from what I understand. The whole market is seeing it. And I can't explain exactly why, every customer is different. But I think part of it is some of the demand is breeding demand. And I think that's helping us. And so there's a whole second tier below the hyperscalers that we're starting to see demand from in addition to just the hyperscalers and the social media companies. So we're going to ride it while we have it and we're going to try to plan ahead and make sure we can deliver on time, and not having the distraction of being a public company is helpful because the truth is, we get the benefit of waking up every day and focusing on just execution. And that's a luxury that we're enjoying.

And then maybe kind of on that theme, and I'd like to get, Steve, to you as well is just the inflation and then you've got higher materials costs, new lease rates presumably going higher. Would you agree with that? And is there an opportunity to maybe become a little bit ambitious, more ambitious around target development yields in the list environments?

Yes. I think we're still tiptoeing. I know some of our peers, public peers are certainly more verbal about how they're going to be able to manage price. We're tiptoeing around it a little bit. These are sensitive relationships. We definitely want to hold our yields. Can we increase our yields? We hope so. There's definitely, I think, short-term ability to be aggressive. I think we're taking a little bit of a lighter touch and working with customers. But fundamentally, we're certainly not -- we're not seeing massive step-ups in price. We're hoping. We'd love for that to be the case. But we're certainly not modeling pricing down. We're not modeling yields up, but we're not modeling them down. So we're seeing big price increases on kit. We're seeing price increases on land. We're seeing price increases on everything that we need to build a data center. So fundamentally, we just need to keep or hold our yields. If we can increase them a little bit, that would be great. Some of our peers are certainly being more aggressive, but we're doing our best to be a little delicate there.

So Steve, any thoughts on that last comment around the velocity of demand, how quickly you think you can fill the 40 megawatts versus, say, beginning of the year, and then at what endpoint in terms of yield that you might end up seeing on that?

Sure. So we're seeing increases in demand, like everyone else is. And we remain focused on being disciplined in our pricing to drive the same types of yields that CoreSite historically has. So they traditionally driven yields from low double digits to mid-teens in terms of their yield, and we're still focused on that. I'd say we're probably winning more deals in that yield curve. And -- but we're going to -- we'll retain our pricing discipline around our assets.

I want to switch gears while you have the mic and just ask about kind of domestic sources of tower-leasing demand. And so you've got a lot of site mod work and integration work from the likes of T-Mobile, AT&T, Verizon and a DeNovo network being built by DISH. How long -- how sustainable do you feel like these levels have elevated at least? Are we talking about quarters, years or longer?

Well, we're definitely in an elevated space today because you have multiple carriers starting to deploy 5G. And we look at the 5G development cycle, very similar to 4G and 3G, and that is you start out with a couple of years of very elevated activity and then it trends down. I don't know if it's going to be 3 years, 2 years, 3 years. We think that last year it was very busy. This year is very busy. You'll still be busy next year. But it's a decade-long deployment, just like 4G was. So you'll have the initial kind of spend that goes out by the carriers, some of that's core development, some of it is launching a coverage network. Once that network is launched and being used by users, you get to the fill-in sites because there will be some gaps, especially with the mid-band spectrum, so there'll be some densification and then the capacity builds follow. So very similar to 4G. You'll see an acceleration for the first few years, then it will level off a bit and then it will accelerate a little bit more as capacity is reached.

So overlay followed by infill?

Exactly.

So given -- and then kind of on the pricing question as it relates to towers, in your U.S. business, I guess, as well as your Indian business, you've got fixed escalators. And so the ability to respond to higher inflation is a little bit more limited except maybe on site modifications or whatnot. However, there is a -- one of your holistic MLAs -- the holistic portion of one of your MLAs expired several months ago. So is there an opportunity there to kind of make up for higher inflation through rate increases?

Look, if you look at our U.S. business overall, we have a roughly 3% escalator across the portfolio, and that is a fixed escalator. And in the past several years, that's been a benefit and we've had lower inflation. It's not as beneficial this year, obviously. We also have conference holistic agreements in place with most of our major carriers. We do have one where we just came out of a holistic agreement. We're in kind of a pay by the drink scenario. And again, if you look at the business from that carrier, you have a component that's the fixed escalator and a component that's the incremental new business, and there's always an opportunity there to negotiate site by site. And we'll see where that pans out.

So audience questions. Raise your hand if there are any. I imagine there might be a few. Kevin?

[indiscernible]

The question is, does the course that model lend itself to Tier 2 markets?

Look, as we're exploring the Edge, and Edge comes in a lot of different flavors, and I'm sure you've talked about the micro-Edge and the macro-Edge and the metro-Edge, yes, I think there's absolutely a possibility of expanding into some Tier 2 markets. We're seeing demand as everyone is, but we're seeing workloads that need to move into different areas. At one point, it was the content delivery networks that were driving some of the remote deployments. Now we're seeing a need to move things because the loads -- or the transport for the workload is too much. So things like AI and some of the compute-intensive technologies are requiring some more remote-based compute. So I absolutely think that some of those markets are an opportunity. We're not there yet. We haven't made a move into one of those markets yet, but it's something that we're exploring within the context of our Edge deployment.

So Dave, a lot of your comments kind of rang through as it pertains to the U.S., but maybe talk a little bit about Europe. Where you through the Zenium acquisition and other activities have gained significant scale there, how are things different there around demand, pricing and so forth?

So they're really not different. I mean, we're seeing significant demand, diverse demand in all markets. It's a hyperscale market for us. I mean, we don't have really enterprise and scale. We've got a few enterprise deals that we've done in Europe, but typically, the hyperscalers grab everything before the enterprise deals could get completed, and so they're kind of boxed out. So we're developing in every market in Europe. We have released everything, we're pretty much developing in Europe. We see material demand. And the conversations in Europe are a little different because in the past, we asked for a longer-term conversation and we couldn't get it. And I think now we're getting a longer-term conversation to be able to plan ahead a little bit. And so it's fantastic demand in all of the markets.

Are there any that are becoming notably more competitive in terms of like new market entrants? And if so, is that all concerning? Or is demand just so strong that you really just focus on your own pipeline and it's unaffected by what others may be doing, I'm thinking Frankfurt specifically?

Frankfurt is competitive, but it's pretty much been -- the capacity has been secured. So everything we're building is incremental to the market. There's not anything giving us price concerns in Frankfurt or London. Everything coming online -- the benefit in Europe is you see it 3 years in advance. So we know everybody who's building, we know when it's coming online, we know when the utility will be there and we know what customers are sniffing around it. So typically, that capacity is eaten up long before it's available. And the development pipeline in Europe, the challenge in Europe is just utility towers. You're securing it, it takes a little longer, a little longer. Some of the permitting challenges in some of the countries is more difficult than others, and we're worried about -- power would be the only thing that would give us concerns. The demand side of it is not our concern in Europe. And so pricing or demand is not the issue. It's just development times and making sure we've got the lockdown on power before we will make -- spend any incremental capital.

So in some markets, we're thinking about -- we're hearing like 2028 is when towers are next available. But if you already have a development project in flight, then you're okay. But is it too soon to think about land banking in those types of geographies?

No. I think we're talking to -- conversations we're having right now. We start talking about land banks that we're buying is certain amount of capacity is coming on '26, '27, '28. So our conversations are right now in '26, '27, '28. We've got on the size of capacity for '22, '23 -- '23, '24, '25. So it's not unusual, and I think that conversation is going to continue to drag out longer and longer. So we're -- as a public company that would have been a harder conversation. And so it's definitely something we can do today, but those are the time lines we're talking about right now when we're dealing with capacity in certain constrained markets.

M&A multiples in both towers and data centers in the private market have been -- seem to be -- remain elevated compared to what the public guys are kind of trading at. Any thoughts on the 15-or-so kind of U.S. deals in aggregate that we've seen? As a bystander, I think, in your case, but thoughts on private market multiples for towers as well as data centers for both of you.

Well, I think the public multiple should match the private multiples. So I -- no, look, when you look at the market, it's hard to comment on any specific deal without knowing the specifics because not every tower is the same, not every portfolio is the same. So you only have to look at the individual characteristics. It's the same thing with data centers. You have to look at the underlying business, what the demand is and what the growth projections are on it. And so I wouldn't want to comment on what somebody paid without having a deep dive into exactly what those growth profiles are on those.

So since your deal was announced, financings got more challenging. And even away from you, there's been kind of -- like there's a single tenant, 40-some-odd campus in Ashburn that recently traded at a fairly tight cap rate. So that's just kind of another proof point beyond QTS, CyrusOne and others. So any sort of observations on what's driving that? And is that sustainable, that these multiples are going to remain elevated?

Yes, I think we've seen the evolution of investors. We've seen the evolution of how we finance these buildings. We've seen the evolution of investment time lines and horizons. And I think where we've entered an era where we have investors with very long-term horizons. They're financing these assets very differently than we have in the past, whether it be 20 years ago, 10 years ago or when we were public. And I think so is lending to the ability for some of these intangible values to be a little higher or even a lot higher. But I think they're still going to make fantastic returns for these investors. And so I just think we're seeing the evolution and the maturing of how we invest and how we finance these assets. And I think we're not going to go back to mid-cap private equity type returns and we're not going to go to a place where we've been in the past. I think we have the right investors. I think our assets are owned by the right investors today. And I think so are all these other transactions that are getting done. And I think it's going to be hard to go back to the kind of the old way. So it's just a process.

Ryan?

[indiscernible]

So the question is what are the retail scale requirements of the hyperscalers?

Look, the way we -- the way our business is constituted is a little bit different. So we're not chasing somebody who's taking 100 racks typically. So we haven't seen -- look, we've seen a lot of incremental demand. We see people that are seeking more contiguous space, and a lot of our new sales come from expansions on existing facilities. So we're definitely seeing people wanting to expand. Again, the way we try to manage our business is to make sure that we have a good balance of retail scale and hyperscale. I'd say, in general, the demand across all those sectors is higher. In last quarter, in particular, our retail and our scale businesses were -- a lot of demand there. So we're seeing increased demand. We are seeing some larger deployments from people who aren't traditional hyperscalers. But our business model is not to go to like a single-tenant facility or something like that. And so our experience is a little bit different maybe than some others.

So Dave, you actually have a retail business. It kind of gets lost in the shuffle, but do you have a perspective on that?

I do. I think the hyperscale deals we see are -- they're a little different because when they come in, in the past, they come in and they did build kind of connection into an interconnection facility. Today, we're seeing hyperscalers come in or big social media companies come in and they're building massive network course into the facilities. And so what that tells us is it gives us kind of a ceiling on how much they can scale. And so the engineering of their network is changing, and they're bringing more data gravity to these large sites. And so for us, it gives us great confidence that we've got really good predictability of a long-term asset there. And we can also see, based on the size of their network core, which we know because we're engineering around it, how much they can scale to on that site. And so whereas we're not an interconnection site, we become a network dense facility for a single tenant or even maybe a couple of tenants. But we typically see the single tenants in those buildings.

Have you guys [indiscernible].

The question is CSP migrate, you mean cloud companies leaving? Or what do you mean by that?

[indiscernible]

Is cloud migration a threat?

So I'll start. So what we see is actually more opportunity there because more people are going to a hybrid cloud environment. And if you look at our interconnection rates in our facilities, a large portion of our revenue is tied to people who have multiple interconnections to multiple other companies there. And that's not just one interconnector. I have met multiple interconnects to multiple people. And that makes it very sticky. It's very hard for someone to leave a facility in that type of environment. And so it's a kind of a virtuous cycle for us. We see as the CSPs come in, as we see more interconnection to them, then the CSPs need to expand their presence so we can wire interconnection from them. And you get more enterprises, you get more networks. And so that's where we see our business continue to grow and it's stickier.

Yes. So we're a little different. We don't have the network density like that. And so we're not an interconnection play. So where we see churn are those little companies going to the cloud. And so now what we have, which has been wonderful, is we have fantastic like literally 100% re-leasing. So when we see somebody go away, we're going to release that space. We're not spending incremental capital. We don't have the stickiness of the network interconnection, which is keeping that customer there. So when we look at our churn, we do a bottoms-up at every facility we know who's going. And it's the little guys, it's 50 kilowatts and under or 100 kilowatts and under and that's where we see the churn. And that's also where it doesn't -- it's insignificant for the scale that we build and the business we have, but we don't have the network dense co-location. So we expect that churn. One of the reasons we did our disposition of Houston, was because we just don't manage that [ retail-co ] anymore. The guys who bought it do. And so fundamentally, one of the things we're trying to do when we manage to recycle those debt capital, it's to basically simplify the business. It's a strategic focus on what we're going to be going forward and let someone else manage that. But we do see churn where we see it is exclusively in that area and only in that area.

I would mention we had some elevated churn in 2019 and 2020, and that was due to some business models that were getting absorbed in the cloud, specifically resellers. But our exposure to that segment has gone down dramatically. So it shouldn't be a meaningful contributor to churn for us in the future.

So last question, we're kind of over time anyway. But I'm going to ask you the same question that Steve got about Tier 2 markets, but maybe put differently, markets that you're not in that seem to have the attention of the hyperscalers and CSPs, so Columbus, Hillsborough, Berlin, Milan, all of Asia where you're not, just name cities that you're not in, to my knowledge Berlin, I forget. But regardless, how do you think about new markets within Europe, within U.S. or APAC as a region?

Yes. So we think about our current markets, expansion markets, we're all in there. We think about those markets you're talking about is adjacent markets, and we're looking. We're sniffing around some of those markets. And then some of those new regions, we'd love to get there. We want to be smart on how we get there to Asia into Latin America, but we are committed to getting there. We just want to be smart.

Excellent. Well, thanks both for your time. Great discussion.