American Tower Corporation (AMT) Earnings Call Transcript & Summary

Well, good morning, and welcome to Citi's 2023 Communications Media and Entertainment Conference. For those of you I have not had an opportunity to meet, I'm Mike Rollins, and I cover communication services and infrastructure for Citi.

Everyone knows you.

You never know. Before we got started, I'd like to mention that we have disclosures available at the registration desk and on the Citi Velocity page from which you're streaming the audio. It's a real pleasure to welcome back Tom Bartlett, President and CEO of American Tower. Thank you so much for being with us today.

It's great to be here, Mike. As always, great way to start off the year.

It is. And looking forward to hearing what's new with American Tower. Before we get started though, I do want to just share a couple of thoughts. We're going to look to incorporate all of our audience questions into today's discussion. So for those of us around the table that have microphones, if you light it up with a button, we'll try to get you included into this discussion live. If you're streaming the connection, there should be a question box on the page for you to ask questions. And continuing on this tradition of using live surveys, they're completely anonymous, by the way. We are not tracking who you are. We're just aggregating responses. It could be accessed through these QR codes that are here on the table. Also on the streaming portion of the site. And you can use your connected devices, whether it's here or online to enter in your responses.

So with all of that out of the way, Tom, it's a real pleasure to have an opportunity to just delve in and maybe start with an update on the strategic and operating priorities for American Tower this year and how they might be a little bit different than where we were at this time last year?

A fair question, Mike. I think that just kind of stepping back a moment. We're really looking to build on the successes and the strategy that we have been able to execute over the last several years. These -- to kind of take a step back, you look over the last 2 to 3 years, and we built just under 20,000 sites globally. We've acquired probably in the 35,000 to 40,000 sites globally. And we've built out a significant presence in Europe, which is really a new beachfront really for us to be able to further develop. Even over the last couple of years, we've entered into or amended close to 75 master lease agreements with our customers around the world. We've clearly built out a new class of infrastructure in the United States and the data center business with CoreSite. We've built on our management team that we have in place over the last couple of years, built on our strong culture. So it's really building on the successes that we have been able to initiate over the last several years. And I think we're in a really good spot, given the beginning of '23 in terms of being able to do that. The broadest category that we're looking to do is continue to scale the Core. And those are common words within the American Tower family and we're doing that through organic growth. We want to take advantage of everything that's going on in the 4G and 5G world. Our customers are, in our markets, going to be probably spending north of $60 billion on their networks. Now they've spent over $150 billion on spectrum. So they want to put that spectrum to use. And so we really want to position ourselves and be able to take advantage of that on the organic side. Inorganically, we want to continue with our build program. Through kind of life to date on our build program, we probably are generating upwards of $700 million, $800 million of revenue, generates a significant day 1 yield for us. In '22, we're coming off building 6,000 -- 6,500 sites. And so I've got my sights on building 40,000 to 50,000 sites over the next several years. And we do that -- we don't do that on spec, we do that underneath a formal master lease agreement program with our carriers. And as more and more spectrum gets deployed and as higher and higher bands of spectrum gets deployed, we're going to see that need for further densification and colocation in our marketplace. So that's the number one -- is being able to take advantage of the organic world, being able to build out our sites around the world. And then lastly, within kind of scale the core, is to make ourselves more efficient. We're a really good international business. We're not yet a global business. And while we have capability and assets in 27 markets around the world, I think that the opportunity for us is to be able to provide that global value proposition, particularly as the Edge more fully gets developed. And so I think we would be able to take advantage of that value proposition, particularly with the cloud players. There -- nobody around the world has the kind of coverage, the kind of scope that we have in the kinds of markets that we're in with the types of customers that we have. And so I think that that's a real opportunity for us and one that we really need to get after and take advantage of. And we'll continue to further operationalize our business, make ourselves more efficient, drive more margin performance and those types of things. So that's everything I kind of talk about when I say scale the core. The second major initiative for us is what we call platform extensions. And we really have 2 platforms now within our business. Clearly, the Tower platform, which is the principal platform within our business. And we really want to extend the capabilities that we're providing at the site level. We were just talking a few minutes ago -- the fundamental competitive advantage we have in our business is our exclusive pieces of real estate. We've got a longitude and a latitude on every one of those pieces of real estate. And they are strategically positioned, within all of the markets that we're in, to be able to support our customer base. In essence, we have a moat really around it. And so for us, it's to drive as much activity as we can in that site and to produce as much activity from within that site. And so you think of things like power and fuel, which in many of our markets is a critical element to the service we provide, particularly in markets in Africa, India, even to a certain extent, down in Latin America. And I think it's going to become even more important here within -- in the United States. And we've invested probably $300 million to $400 million over the last several years in terms of really developing our power and fuel capability. So it's not just those things that are really behind the meter, which are the things that we're doing within the site that aren't metered, that we provide for our customers and pass through to our customers. But it's also things that are looking in front of the meter and what other opportunities might be there for us. It's not only the right thing to do for our customers. It's the right thing to do for us, but it's clearly the right thing to do for the environment itself. And the Edge also fits within -- and I know we'll, I'm sure, talk a bit more about the Edge and how that fits into our overall plans. But that also gets encompassed within the platform extension, kind of the strategic initiative that we have. I'd say the third one is really becoming more strategic with our customers. As I mentioned, we've entered into 75 kind of new or improved master lease agreements around the world. And we want to become closer and closer to them in terms of being able to help them. They've spent an awful lot on spectrum, as I mentioned. They're committed to an awful lot of capital in our markets. And I think that's a real opportunity for us, to be able to provide higher levels of service for them. Part and parcel to that are kind of the holistic arrangements that we've entered into in the United States with the big carriers. Those are ways for us to become more strategically aligned with them so that we're not bickering about, okay, what's going to be the cost to go on this particular site. And that's really played out really well for us. So we kind of led the market in terms of deploying those kinds of pricing schemes and we've really been able to, I think, take it to the next level. And I think our customers have really appreciated that, particularly when time to market is so important for them, getting on air is so important for them. And to the extent you can take out kind of the bickering on pricing as a typical landlord does, it really does help the overall relationship, if you will. And the other elements, I think, of what we're trying to really focus on is continue to develop our team. We're getting into some new lines of business. We want to make sure that we've got the capabilities and the skill sets within the business to be able to extend the kind of leadership position that we have. And foundational to that is our culture and really building on kind of that leading ESG platform that we have, making our business really purposeful. And I found that over the years that I've been in business is that to the extent that our employee body can really find purpose in what they're doing, the ownership and the accountability and the drive to provide higher levels of customer service and -- it just comes together so much better. And not that compensation and all the other elements and opportunities for growth aren't important, because they are. But finding purpose in what they're doing on individual basis is incredibly important. So those are kind of the broad categories. There's nothing significantly new in there, as I said, in terms of kind of building on the successes that we've had over the last 2 to 3 years. But it's more of an emphasis in acceleration. And we're continually looking at driving a strong dividend growth, which is what we've done over the past several years. We're looking to find ways to continue to delever within our business. We're kind of at the 5.5x. We're looking to get down to the 5x level. I think that's probably a more appropriate place for us. We're continually looking at -- and these are all tactical. We're continually looking at other forms of capital. We've, over the last 2 years, with some of the transactions that we've done, have brought in third-party capital, which has worked really well for us, particularly in Europe as well as now in the United States. And so we continue to try to uncover other forms of capital that we can continue to look at and deploy. And we'll also look at even some of the markets that we're in that are of less scale if you're within the market, whether those markets make sense or whether there is capital there that we might look to monetize and deploy in other areas. And that's not different. We've done that for our -- over the last dozen years, we've gotten out of some business, certain asset classes here in the United States as well as internationally, but we'll continue to look at different areas of our business and are there more optimal ways of being able to utilize that capital.

Great. This gives us a lot to drill into and -- but first, we'll tease out the first survey question and get people involved. And the first question that we're going to throw up to our audience, and you can use the QR codes to log in here at the table -- is what is the biggest risk to future consensus AFFO per share growth for American Tower? And the choices are not concerned, customer consolidation or rationalization including T-Mobile churn, rising rates, currency, slower domestic growth and slower international growth. And we'll see what the audience comes back with. But before we get to that, maybe starting in the domestic business, you talked about the MLA progression that you've been making, and you had an announcement this past year as well in regards to those holistic deals. Where does American Tower sit today in terms of that visibility? You've given that long-term trajectory of average organic growth, I believe it's 5% including T-Mobile churn, 6% without T-Mobile churn. Where are you on that visibility path? And what are the things that are not in these agreements, that could add some potential upside or downside to the aspirations of American Tower.

Well, first of all, I mean, our business, and I think what I like and I think what investors have always liked is kind of the predictability of our revenue streams. We enter into long-term leasing arrangements with our customers, with escalators, some fixed internationally, as you all know, based upon the kind of CPI. So that gives a good baseline of revenue. On top of that, there's a layer of the pricing mechanisms that you were just referring to. With all of the major carriers here in the United States, we have these long-term holistic, comprehensive type pricing schemes, which are the ones that I was talking about before in terms of our ability to work even more closely with our customers. They have a pricing scheme which they can budget more appropriately, and they can then come back and amend the sites that are part of that agreement, which gives them some predictability in terms of their own budgeting and gives us then predictability in terms of what that revenue growth will look like, right? Because they are committed just to paying us at those levels. And in the United States, it's probably 70% to 80% of our revenue growth is tied to one of those revenue schemes. So that gives us good comfort in terms of what that growth is. And I think that's why we can come out and say with certainty that we're at the 5% without the Sprint churn, and we're with the 6% with it. And we have that visibility going forward because those pricing schemes that we put in place are multiyear. And with the arrangement that then we just negotiated with Verizon, that kind of put the bow around, okay, all of the carriers now in the United States, the major carriers are under that kind of pricing scheme. So then we have the other 20%. Now keep in mind that we do probably have 1,500 customers in the United States. Now the big carriers probably represents 80% of that, but there are a number of customers that make up that 20%. And we have good visibility in terms of where they are in their own life cycles, what kinds of renewals we would expect. We have that on a site-by-site, customer-by-customer basis. And so as I said, we have, I think, really good visibility and comfort into that underlying U.S. growth rate. Now what could change that? Well, on the big carriers, the way those schemes -- I don't want to get into the particulars on each one of them, but they're largely based on space on the tower. And they're largely in place for amendment type of activity. So to the extent that 5G continues to take off and evolve, and there's more of a need for further densification. There could be an opportunity for more co-location going on within the business. And that generally is not an element of that because we're really talking about coming back to an existing site given a certain space that the customer has available to them and filling out that space. What we found out early on when we put the first holistic in place back with a carrier was that, candidly, they underestimated the amount of space that was going to be required. And so that we actually were able to enjoy growth over and above kind of that holistic arrangement. Not certain whether that's going to happen now. My guess is that further along in the 5G cycle, it has the higher potential for that as more densification is then required until you might see that. In terms of the other 20%, again, it comes back to 5G demand, what their own use cases would look like and what their own underlying requirements might be. But I think the 80% that we have that kind of real good visibility into, I think, gives us comfort that, that kind of 5% is really a baseline of revenue growth going forward. On top of that, if you start to think about some of the other players that might come into the marketplace, you start to take a look at some of the cable players, whether they might be looking. For them, it's math-based, at a certain customer level that they might be enjoying at an MVNO level. Where does it make sense for them to want to start to build out some of their own networks, if you will. As I said, we're really comfortable with that U.S. growth rate and particularly over the last couple of years, coming off of a 1% kind of growth rate with the Sprint churn, it's nice to get back into these kinds of levels. And candidly, I would expect the colo amendment activity to really start to increase even further than we enjoyed in '22. And that's not -- just not a phenomenon in the United States. It's a phenomenon that I would expect to see globally. So we feel good about that U.S. growth.

So I was going to ask you about that because we're getting through this mid-band spectrum build cycle where the focus by the national carriers in the U.S. particularly was just as you were describing, using more space on the tower and putting up more antennas and radios and things of that nature. In your pipeline and in the search rings that you get, are you starting to see more densification requests and interest kind of on top of the amendment type of activity you've enjoyed start to see more colo?

A bit. I think we're still a little bit early for that. And kind of going back to 3G life cycle and the 4G life cycle, really didn't start to see that kind of colocation requirement until kind of the middle. And they were using at the time kind of more lower band spectrum, right? And so I would expect as more of the C-band spectrum starts to get deployed, we should start to see that a little bit more quickly. So as I said, I haven't necessarily seen it yet, Mike, but I would expect to see that going forward. One of the interesting phenomenon is -- with the kind of the 5G cycle -- is even the carrier success that they're having with fixed wireless. And that could also be another element of growth that 3 or 4 years ago, when I was starting to think about the -- kind of the 5G opportunity that I didn't consider, that perhaps there is an opportunity -- on that fixed wireless side that the customers are enjoying, that will largely fall on the site. I mean there can be smaller sites that you might find to be able to support that kind of activity going forward. But right now, the carriers are really supporting that fixed wireless component element value proposition with additional infrastructure on our sites.

And maybe I'll turn to the survey. And again, if you want to ask a question, by the way, just turn the light on your microphone. And let's see what investors are thinking about in terms of the risk to the future AFFO per share. So 2% -- sorry, 12%, not concerned -- 12% customer consolidation or rationalization, 41% rising rates, 18% slower domestic growth and 18% slower international growth. So you've laid out this multiyear AFFO target is, I believe the average over the next number of years is 10% plus -- is the goal that you've laid out. As you think...

That's what we've enjoyed over the last dozen years or so.

And so how do you think about some of these issues that kind of came back, the rising rates, risk of carrier consolidation and slower international growth? Like what are the things that investors should be mindful of in 2023 as they think about the opportunity for American Tower to continue to grow that AFFO per share?

Well, I mean those risks are real. And we deal with -- and that's what we do. I mean we deal with them each and every day. On the carrier consolidation, we've had carrier consolidation back over the last 20 years. The most significant one being the Sprint and T-Mobile carrier consolidation, but we've had it in Latin America, we'll continue to have it in Latin America. We've had it in Africa, particularly in South Africa. So that's -- the way to be able to deal with that is to enter into long-term relationships, to be able to enter into markets where there's a good rule of law where you're able to monetize those relationships. And if that carrier leaves the market, that you're able to be able to have some type of a settlement to be able to take advantage of that. As that carrier does get and consolidated, that customer that is being consolidated into again, has the wherewithal and the ability to satisfy the obligation that, that underlying customer may have. So we've been dealing with carrier consolidation from day 1, Mike. And sure, it does bring in relative levels of risk within the business. We do a significant market scan to be able to look at that before we even get into a market. Diversification, I think, has been very helpful. There are certain markets that we might be suffering a little bit from carrier consolidation, but with diversification in other markets been able to step up. And those cycles happen year in and year out. So I think from a carrier consolidation perspective, we've been able to manage that risk, that exposure from a number of perspectives pretty well. I think in terms of the growth that you also had in survey, if I remember the survey questions, and we've talked about the U.S. growth. We haven't really talked about the international top line growth. But we're bullish on that growth. And again, it comes back to building out the 4G and 5G technology and using multiple spectrum bands to be able to do that. That always works well for a tower company when companies are using multiple bands of spectrum because it's still very difficult to integrate multiple bands. And generally, when you're doing that, you're bringing it down to the lowest common denominator. So it's going to require further densification going forward. And if you -- I think you guys also produce these -- the growth rates for broadband data going forward isn't slowing down. And the use cases for 5G, have really yet to be developed. We haven't been able to even see the benefits of 5G. We've seen speed, some latency benefits, but the use cases haven't even really been developed. And so I think that's going to drive that incremental demand. And so we see growth over prior years in terms of new colocation and amendment activity. So I'm not concerned at all about the growth rate. I think it's there. And I think we're well positioned to be able to realize it. The one nuance, particularly over the last several months going in this year, are interest rates, and that's a fact. I mean, you can take a look at our balance sheet. You can see what their -- that side of the balance sheet looks like, and we have a sizable amount of floating rate debt out there in terms of our overall fixed floating types of relationships. We've got a fair amount of fixed, that needs to be refinanced over the next 12 months, $3 billion worth. So that absolutely is going to provide some headwinds if you will, in terms of our overall AFFO per share growth, not -- obviously, not at the revenue or the EBITDA line. I think we're going to see strong growth there and the business model being intact, I think we're going to be able to see that support. And so that's -- I'm not sure what the percentage was relative to picking that one, but that's probably the single largest headwind that we have in front of us.

Let me throw up our second survey question, and this will be a preview of where we're going in a few minutes. When will AMT begin to recognize material synergies and financial benefits from its data centers?

It already has. We generated $700 million, $800 million of revenue in the last past year. So I'd say we already have. I think if you're thinking about the opportunity at the edge, I still think that's a few years away. When we think about the data center business or why -- first of all, I think it's just a great infrastructure class. I mean I had a fair amount of experience being on the board of a very large data center company. And so I have that visibility in terms of what kind of margin performance, what kind of growth could be for a certain type of data center company, which both Equinix and CoreSite are. We're really looking to leverage the -- kind of that interconnection capability to really drive more value at that tower site that I talked about before that we have that exclusive right to be able to utilize. In the meantime, we're able to enjoy the -- kind of that interconnection cloud on-ramp rich marketplace. And in CoreSite, we talked about this on the third call, they set record levels of growth of sales in 2022. And I expect to grow on that in '23. And so their model is selling to the cloud, selling to the enterprise, as well as sending to the MNOs. And they're doing a terrific job in terms of being able to accomplish that. They have a core set of assets that are really premier in the marketplace, and they're very tactical in terms of looking at where are those next opportunities for growth. And so what we've been able to enjoy over the last 12 months is while those kind of Edge applications are in the formation stage, the relationships that we've been able to build out with cloud players over the last 12 months has been significant. We have an Edge Advisory Board that are made up of industry experts. We have the lab that we've set up to be able to trial new types of applications and work with different entities to be able to explore what the opportunities would look like out at the Edge. In a couple of weeks, we have a significant number of meetings with cloud players. And so those conversations, if there's a synergy -- those conversations would not have existed without having CoreSite as a base. And so as CoreSite continues to move its capabilities from the core NFL cities out -- we're continually looking at what are those 1,000 sites that we have where we can bring in a megawatt of power. And so I would expect to see those types of -- those synergies, if you will, develop over the next several years. But I couldn't be more excited about the opportunity of bringing these 2 asset classes together to really build something very unique and something that I think we'll have a significant amount of say in, in terms of how that network architecture gets developed.

Right. And that's -- and for the survey, that's exactly what we were asking in terms of when that Edge might come through and be a synergy. And we asked, is it going to be '23, '24, '25 or unlikely to happen in the next 3 to 5 years. And it was very mixed in terms of results, 17%, '23; 17%, '24; and then 1/3, '25 and 1/3 unlikely to happen in the next 3 to 5 years. So it sounds like your time frame is still over the next few years for these Edge synergies to really emerge?