American Tower Corporation (AMT) Earnings Call Transcript & Summary

Welcome to 3:00 p.m. session at Citi's 2023 Global Property CEO Conference. For those of you I haven't had an opportunity to meet, I'm Mike Rollins with Citi Research, and we're pleased to have with us American Tower and CEO, Tom Bartlett. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast as well as at the AV desk. [Operator Instructions] So with all those details out of the way, Tom, it's great to see you. Welcome back. I'm going to turn this over to you to introduce American Tower to our audience today. You can introduce any members of the management team that are with you, provide opening remarks, and we'll get into our questions.

No. Thanks, Mike. I mean, [indiscernible] Is here with me, and I know many of you know her from our Investor Relations group. It is a bit like church. There's nobody sitting up here. It's like empty queues going on. But no, Mike, I'll get to your questions if -- and I'm sure I can add some commentary along the way, but I wanted to make sure that we address the kinds of questions that are on your mind and are on the mind of your clients.

Well, great. Well, we'll jump in a question that we're starting off with the companies during our conference today is what are the top 3 reasons an investors should buy your stock today?

Well, the 3 that come to mind is first one is, I would say, their demand based, our business model as well as our execution capability. And so when you think about the demand, particularly for real estate investors who may not know us as well as others. I mean our demand is really driven by increases in broadband wireless. And if you think about your own utilization of your own sets and your own broadband, you know it's significant, particularly if you got kids, and so that phenomenon is not just unique to the United States, but it is clearly a phenomenon that it's around the world. And the way that our customers who are large wireless providers around the world meet that as they invest in their networks. And the way they do that is they get -- they require more space on our sites. And so we are a landlord, there's huge demand in the market. Customers in our markets will probably spend upwards on their networks, $60 billion to $70 billion this year. They spent over the last several years about $150 billion on spectrum. And so this is a lifeline for them. And it's an ongoing source of revenue and demand for us. The second piece is really the business model. It is absolutely the best business model that I did not invent it. But I think the tower model is probably one of the best business models on the planet. We enter into long-term agreements with our customers with escalators to take the space on our sites themselves. There is a huge pass-through of revenue that comes from revenue down to EBITDA. We probably have about this year in our guide, I want to say it's $0.85 or $0.90 of every dollar that's coming down to the -- into the margin. Internationally, we underwrite them with a significant amount of pass-through costs. So probably 80% to 90% of our direct costs are actually passed through to our customers. Escalators are broadly a function of inflation in those particular markets. So we try to underwrite some of the risk that way. So I do think it is, in fact, one of the best business models that exist out there. And what it is really cornered on our ownership of the sites themselves and control of the land. And so that really provides a significant barrier to entry in terms of anybody trying to compete with us. Lastly, it's execution. And I think our history kind of speaks for itself in terms of the kinds of financial metrics that we've been able to deliver. I think we really do lead in the whole area of ESG, power and fuel, which is a critical component of decarbonization globally, is a critical competency that we've developed in Africa. And I see our ability to offer that kind of capability, particularly when they're talking about kind of scope 3 greenhouse gases to our customers. And so we've created spots of competency and leadership, I think, in a number of different areas, that being one of them. We also acquired a significant large data center company in the United States a number of years ago, which was really underwritten just by the cash flows that the business generates. But the opportunity, we think, from interconnection perspective of mirroring their capability, their customer base with our tower capabilities, we think will really create a significant amount of value as the edge develops and as 5G becomes more ubiquitous throughout the world.

We're already getting questions inbound, so keep them coming. We'll work them into the conversation. Tom, when you talked about demand, you referenced that your customers are spending this year on investment between $60 billion and $70 billion. One of the questions that we find investors continue to think about is how to estimate what that annual long-term growth opportunity is for American Tower. Is it related or highly related to that quantum of capital investment that you referenced? Or is there another algorithm that investors should think about engaging the growth prospects for your business over time?

No, it's a great question, Mike. I mean there are 2 elements of it. First of all, our revenue is most highly correlated to the capital that our customers are spending. We have a very diverse market presence, we're in 25 different countries. And the reason that diversity is really powerful is because each of the investors -- each of our customers invest in different levels. It kind of in the form of a sign wave, heavy investment room, heavy investment group. And to the extent that you can layer on 20 to 25 different sign curves, you get a relatively predictable line. And we think, and I've always thought that our investors like that level of predictability when you're looking for ongoing cash flow. On top of that, though, is a pricing structure that we actually have largely had success in the United States for putting in place where we have a very predictable growth profile because of the way that we've constructed our pricing. And as a result, Mike, that also gives a much longer layer of predictability, if you will, that you can layer in over the top of all of those underlying signed curves that we've got within the business.

And remind us where we are. You've given some long-term guidance on the organic leasing opportunity domestic. And then what's the right way to think about how international should compare to that domestic rate of growth?

Sure. I mean last year, we gave some projections that we'll be growing in the United States at least at 5%. And it would be 6%, absent some of the churn that we're still experiencing from the Sprint, T-Mobile merger. And so that's a good baseline, I think, of growth and that represents from a Colo and a member's perspective, probably a $70 million increase of in-year revenue is being generated as a result of it. On top of that, the way we've really characterized our markets is to think about international is probably going a couple of hundred basis points faster and is -- which is also one of the reasons that we're in our international markets because many of the markets that we're in, particularly emerging, don't have a wireline capability to invest in. So the carriers in those markets are largely investing in their wireless businesses. So historically, we've been at a couple of hundred basis points faster. This year, I want to say it's maybe 100 basis points higher than it is in the U.S., which is also driving then our overall kind of core growth upwards in the 9% range.

And when you think about how you've constructed the U.S. business in terms of using comprehensive agreements versus maybe the alternative in a la carte. How do you look at the what you're giving up versus what you're getting? Do you think you can get better long-term growth with this? Or do you give some of that up to get better visibility of growth?

It's both, Mike. The compromise to it is that are we leaving revenue on the table. And so just so that people kind of understand what this construct looks like. In our agreements, we have roughly 3% escalators every year. In the pricing that we're talking about, on top of the escalator is what I call a right-to-use fee. So for a certain fee, our customers pay us that generally at the beginning of the year. And then as a result of having paid that, they can actually unilaterally come and do whatever they want to on the sites that they had at the time that we put the deal in place. And so it gives us that predictability. And so the question Mike is asking is that you're entering into these comprehensive agreements and these terms could be for 3 to 5 years. And so how do you get comfortable that you're not leaving business on the table? And that's really where all of the kind of the war room analysis comes in. We think we know these sites pretty well. We do our own internal drive testing. So we understand where the pockets of growth and the pockets of investment are going to be, it's all we do. And so I think we do a very good job of managing that. And is there some being left on the table? Could very well be. But we do think that having that predictability in the base of business and having and generating that kind of revenue stream, far outstrips the business that we might have otherwise lost. The other benefit is really kind of the quality of service that we're providing to our customers because if we were on kind of this a la carte method that Mike talked about, it's kind of every site that our customers want to be at. We've got to meet them out there and kind of start working on nickel and diming on, okay, you know you're going to pay this, now you're going to pay this? And that delays their overall time to market. And so I think we're actually able to provide a higher level of service as a result of having this kind of construct in place. So -- which also is -- provides a kind of a leadership role and provides a much stronger strategic relationships with our customers going forward.

You discussed earlier the global portfolio that you have, how are American Towers views evolving in terms of which markets you want to invest in and which markets you're thinking about pulling back or divesting?

Well, it all comes back to our sustainable ROI. And so when we underwrite the investments that we have, and I'll just really think about our emerging markets. We made a significant investment in Europe. And so I'll leave our developed markets kind of out of it and just look at our emerging markets. But when we underwrite the investments in those markets, which we've done for the last decade. There are certain levels of risks that we've built into the model and are then driving the ROI on top of that. And so when we start to get outside of our skis, if you will, and are looking at volatility that perhaps in a market that we underestimated, those are markets that we might look at from a portfolio perspective and see at the end of the day, whether they make sense for us long term to be in. Our international strategy was always hinged on the fact that we wanted to be in the major democratic markets around the world, and we are. We have presence and scale in each of those critical markets. There were a lot of other countries, if you will, markets that came along with our entry, if you will, into those large democratic-driven countries. And so those are some of the markets where we might not be able to create the right level of scale. It might be just cost-prohibitive from being doing that. And maybe it makes sense to move out of them. Now having said all that, I can think of on one hand how many markets we had actually moved out of over the last decade or so. But given where the world is and how the world is changing from so many different perspectives, it definitely is a top priority of ours to look at those markets and see whether they all make sense to be a part of.

How does India fit into this picture with some of the comments that you and the team provided in the last earnings call and possibly selling a stake? And can you just walk us through how you're looking at that market today?

Yes. I mean India fits right squarely in the middle of the conversation that we just had. We've been in India for close to 15 years now and have generated some significant growth in the marketplace. India in and of itself has been through a few different obstacles from a telecom perspective over the last 5 years in terms of consolidation, in terms of tax levies that the governments impacted our customers on and so as a result of some of those challenges and a particular challenge that one of our large customers there is having right now I look at some of that outsized volatility that's going on in the marketplace. The government itself is very committed to a -- what they call 3.5-player market, the half being a small government-owned wireless company that they own, but really largely a 3-player market. And they've also stepped up in terms of taking ownership of the customer that we have there who is struggling from an equity perspective. So they own 1/3 of the equity. They own 90% of the debt. So I think they are very much committed to that 3-player market. But it was important to us, and I think it is important to us to look at that portfolio in and of itself and determine, okay, what are the options for us, just as anyone would look at any part of their portfolio, whether we stay, whether we exit or whether we do something in the middle. And so on our last earnings call, we wanted to be very transparent with our investors in terms of what we're doing. And so we introduced the fact that we have a process in place, and we're looking at what the options might be and where we can create the most value going forward. There's no decisions that have been made at this point in time. It's going to come down to valuation partner and what that might look like operationally moving forward and what the impact is on our bottom line. So it's just kind of double-clicking, if you will, Mike, on kind of the portfolio analysis that we do in the business.

And can you give us an update of how you're looking at on the other side, net investing on the acquisition side? Do you see any change in the environment where there could be opportunities for American Tower to make some significant acquisitions or investments at this time?

Yes. From our perspective, I don't see anything, and by the way, we're invited to every party in all of the markets that we're in. So -- but I don't see anything that's compelling. First of all, strategically, what was very important for us was to create the presence in Europe that we did and the relationship and the assets that we bought from Telefónica, which have really proven to be very successful. What was, I think, very important was our asset acquisition of CoreSite in terms of now having additional forms of digital infrastructure and ultimately, creating a very interesting, I think, value proposition with our U.S. tower business. So it's not like we're looking for and need additional scale or competencies in any of the markets that we're serving. So I don't see anything compelling out there for us. Second, I don't see -- I still see wide deltas between the bid and ask -- and so even if we did see something that might be strategic for us, the increases in cost of capital notion hasn't become very obvious to the sellers. And so from that perspective, I don't see anything of interest at all. And we said that on our year-end call as well because there are a lot of rumors in the marketplace in terms of, okay, American Tower is part of this, as part of that, as part of this. And I just wanted people to know the lenses that we're looking at is that I don't see anything compelling strategically, and I don't see anything competitive or compelling financially.

You mentioned CoreSite, we have a question from our audience on that. If you can give us an update on CoreSite, what has gone well? Any hiccups? And have there been any cross-selling opportunities that you could point to?

Yes. I mean they have a terrific year. As we said on our year-end call, they said records in terms of sales. It's a very balanced approach that they're taking from a value proposition perspective, which really drives that -- those interconnection hubs, as I think of them, within the 4 walls of their data center, whether it's on the cloud, whether it's on the service provider or whether it's on the enterprise. They've added a number of logos, but where the -- most of their business is just extending the amount of business that they're doing with their existing customer base. So they've got a great model in place. They've been able to take advantage of being able to increase pricing, particularly across cross-index and interconnection within their sites. So we're very pleased with what they've done. We've got a good pipeline of assets in front of us that they're developing and looking to develop to be able to meet the demand. The demand is strong. It's very consistent that what we see going on in the marketplace. So really excited about the prospects, the '23 going forward into the future. In terms of cross-selling, not yet so much. There are some things that we've been able to do certain customers that we have that we're trying to point them in the direction of CoreSite. Certain partners that we have and vendors that we use also that we're trying to at least get us a seat at the table to be able to demonstrate what our capabilities are. But there hasn't been a significant amount of cross-selling. I think that model, we will see more of as the edge develops and we see more compute capability out at our sites, which is really just an extension of their presence in the data centers themselves, but that's still probably 3, 4 years out.

Another question that we're asking at the companies at our conference is what is your #1 ESG priority in 2023?

We have a number of ESG priorities, whether it's on the people side, on the diversity side, the cultural side is an ongoing opportunity and one that we're -- I'm personally very committed to, I would say everything that's going on in our power and fuel in many of the markets that we do business in, particularly a market like Africa, we are the biggest source of our own power. And so we've invested over the last several years, probably $300 million to $400 million on power and fuel competencies in the marketplace, whether it be bringing in solar, bringing in lithium ion batteries. And we've had a significant impact on taking 5%, 10% of the overall diesel requirement out of the marketplace. Personally, what's good for the environment is good for business, but this really fits squarely in the middle of that. And I think as our customers are consumed part on with dealing with Scope 1, Scope 2 types of gases, Scope 3 is probably the greenhouse gas area that concerns them the most. And so I'm really hopeful that the capabilities that we are building in a market like African can really be a benefit to our customers going forward. We just signed a deal with Airtel, a large global telecommunications company to just build green sites in Africa. And so these sites will never see diesel. They're all solar, they're all lithium-ion. And I'm hopeful that, that's a model going forward. So that's a significant ESG initiative for us, Mike. And as I said, it's good for the environment, good for our customers, and it's good for our business.

On the international front, one of the issues that American Tower has been dealing with is just some of the merger churn, some of the consolidation. What inning are you in at this point of getting to more mature structures in your larger international markets?

I would say probably the later innings, it's very difficult to predict. Clearly the United States with Sprint and T-Mobile was a significant merge and impact on our business, and we're still working through the challenges associated with that kind of a merger. Generally, we enter into long-term contracts. And so as a result, we're able to monetize those assets even if, in fact, we're going through a consolidation of some sort. In Latin America, we see consolidation going on in 2 markets, 2 of our larger markets, Mexico with Telefónica and in Brazil with Oi. So we're hopeful that we'll get down again to kind of that 2 to 3 carrier market there, which will be the foundation of what that market looks like going forward. In Africa, in South Africa, there has been some consolidation in some of our smaller markets like Ghana. There's been some. So hopefully, that's behind us as well. And in India, while we're very hopeful that Vodafone will be a -- VIL will be a strong third-party player. There've always been rumors about them being merged into either Airtel or Jio. I think, as I said, the government is committed to having a third tenant -- or third carrier in the marketplace, but time will tell.

Maybe just a quick couple of follow-ups on India since you just mentioned that, are you getting the collections to date that you've been expecting to get?

We're getting them what we expected to date. It's not at 100%, but it's consistent with what we expect and what we were told.

And since your earnings call, there was a filing from Oi. Is there any incremental churn risk that investors should be mindful of?

No. No, there shouldn't be. I mean, first of all, it's a very small piece of our business from a consolidated perspective. There's a piece of the -- our services that we're providing with them that are going to stay with their wireline business. But the article that you're referring to and the status of that does not impact us.

One of the things that you mentioned earlier when you're talking about, I believe it was on the business model front. You're talking about the flow-through of incremental revenue to EBITDA. And there was an emphasis in, I believe, it was the slides for the earnings call and on the earnings call itself around a strong level of incremental flow-through that you were also just describing. Is that something different than in prior years for American Tower? And are there any sources of these incremental margins that are different than maybe in the past?

Not really, Mike. I mean it varies from year to year. But when you think about it, if you can visualize a tower with one customer on it, when something else gets added to that tower, there's very little expense that needs to be incurred to support that revenue stream. And that's really the flow-through of that revenue that I was referring to. And that's always been in kind of that 80% to 90%. There are some things on the edges that might impact it a bit here and there. But that's always been the kind of the beauty of the business model that we're talking about.

And as you look at the growth opportunity that you guided for 2023, how much of that is coming from the benefit of inflation-based escalators? And from the incremental margin discussion, does it seem like you're getting some positive flow-through from that?

Yes. No, there is, particularly in the international markets. We have a basic general escalator of 3% in the United States. And our escalator has always been a critical component of our organic tenant billings our same tower growth in the marketplace. And there are some markets that are outsized from a growth perspective this year, I mean, Europe is one where there's been some significant inflation. We've got CPI-based escalators and are now enjoying the growth. Latin America has historically been a high-growth market and a good piece of that is coming from the escalator. And from a margin perspective, and the way we've really underwritten a lot of those CPI-based escalators is to offset the impacts of foreign exchange. Because from a margin perspective, we're able to pass through so many of our costs to our customers. So we don't really see the brunt of the cost side of the equation. And from a revenue perspective, it's largely mitigated a lot of the FX exposure. So there's a method to the escalator and the kind of the triple-net nature that we have going on out in the market.

As you look at the opportunity for American Tower to generate and grow AFFO per share, how should investors think about when American Tower gets back on serve where that AFFO per share growth can exceed the revenue growth?

Well, it starts with -- it starts, first of all, with the revenue growth. It starts with the demand and the organic growth. And if you're looking at the slides, you would have seen that our guide for the year is kind of kind of core growth, if you will, when you look at the amount of revenue that's coming from our build-to-suits, kind of organic tenant billing and some of the other elements of our revenue stream. So really solid growth from a core perspective. What's eating into that growth this year is really the increase in the cost of borrowing. And so we have a sizable portfolio of floating rate debt and with the LIBOR going to where it is, coupled with some of the refinancing costs that we have going on in the business, that's roughly 8%. In total headwind versus our core 9. And so that obviously keeps me up at night. And so what's important from our standpoint is a couple of things. First of all, I do believe that's kind of a onetime event in terms of where LIBOR was and where it's gone. It's obviously impossible to predict what that looks like. And so for our own purposes, it's important for us to term out a lot of that floating rate as well as to delever. And so those are 2 high priorities for us in '23 and '24 is to continually look at ways of delevering in the business and terming out that floating rate debt so that we actually minimize some of that volatility that we experienced in '23.

Are you thinking about where you want your leverage ratio to sit from a target perspective differently than in the past?

No. But we want to get there. Right now, we ended the year at 5.4x net-debt-to-EBITDA. Our guide is to get us down to 5.3x net. So getting there to a certain extent, but my objective for my team is to get back down to that 5x. And it's no easy task. It might come from some of the monetization that you asked in the first question, some of that available cash flow that we can use to delever. But that's a critical priority for us in 2023.

You were describing, a moment ago, core growth rates, including the build-to-suits. Can you share a little bit more details about what investors should expect from the build-to-suit program this year and going forward?

Yes. I mean, this year, we'll build -- our plan is to build about 4,000 new sites. We don't build them on spec. We build them for our existing customers. Underneath a master lease agreement with the expectation then of obviously getting that second tenant. So we've actually been very successful in terms of the yields that we're getting on our build-to-suits historically. We've get generally double-digit kind of NOI yields out of the gate. And that's because they come with an anchor tenant right out of the gate. And the demand is very global. I mean, it's a pretty mixed bag of build-to-suits on a global basis, whether it's in Europe, whether it's in Africa, India, we're still building a number of sites. And so that is still a very good source of revenue for us, a very predictable rate of revenue. Last year, we built about 6,000. The demand is there. And so I know if we wanted to ratchet up that, that build-to-suit program, we could do that. And so it still is a really significant piece of our overall growth. There's a lot of development CapEx that we continue to commit to it and it's a very good use of our capital.

When you think about the global exposure that you have, how does the macro fit into demand from your customers, whether it's organic or build-to-suit? Are there certain markets where the macro may matter more and investors should be sensitive to that?

Well, there are certain small markets where we have had outsized inflation in those markets. They perhaps didn't have kind of the monetary capability to really be able to control that kind of outsized inflation. Now again, we're able to realize that outsized inflation with our escalators. But if you have a market with a 20% inflation, that sometimes can be a difficult conversation to have with a customer where all of a sudden, the rates are going up by 20%. We're legally able to, and we are, but that's -- it's not a warming kind of conversation that we have. But there are very few of those types of markets and the broader markets that we have, the bigger markets that we have, whether it's in Europe or Africa, even India, Brazil, Mexico, there are always a really strong monetary policy in place. And so they really are very much trying to control and mitigate a lot of those inflationary impacts.

Ahead of the rapid fires, one other question. Another area of investment for American Tower was Telxius and getting bigger in Europe. Can you share how that's going? And is -- are there certain components of that part of the portfolio that may be underappreciated by investors?

Well, I mean the first thing, it's a long-term contract. A good escalator base in place with that contract. It's with a world-class competitor with Telefónica. 90% of our revenue is really coming from Telefónica. So it's largely that based. The market itself, the continent itself has seen a significant amount of new 5G spectrum put into the market relatively recent over the last kind of 18 months. There are new entrants coming into the marketplace. It's a challenging market to do business, which we've known. We've had presence in Europe for probably the balance of 6, 8 years from a regulatory perspective, from a permitting perspective. So there are challenges. And we're hopeful that given some of the operational capabilities that we've developed in other parts of the world, that, that will give us kind of a leg up in the market and create that kind of leadership role in the marketplace. And so we're really excited about the opportunities there. We have great customers, again, great leadership team in the market, and we should expect some outsized growth, I think, in the market in the years to come.

We'll get to our rapid fire. What will same-store NOI growth or Tower gross profit be for your property sector overall, not your company in 2024?

I'll tell you in February.

So what was that?

I'll tell you in February.

February.

Now we're really skied. I don't want to get into. I think what's important to note is that we've given long-term guidance on the OTBG, Organic Tenant Billings Grow, same-store metric in the United States. And so we've said that hey, we expect that growth to be at least 5%, would be 6% without some of the Sprint rents. And that provides a great foundation for what we would expect our overall growth to be. I mean it's still -- our U.S. presence still represents over 60%, 65% of our business. And the other piece being Europe from a developed market perspective. And so between the 2 of them, which I would expect to be very strong coming in '24. That will provide a good foundation to support solid levels of growth in '24 and forward.

We'll squeeze in the last 2 real quick. Best real estate decision today, buy, sell, build, redevelop or hold?

You're asking me, it's buy.

Will your property sector have more or fewer or the same number of public companies a year from now?

I think the same.

Tom, thanks. Great to see you.

Good to see you. Thank you.