American Tower Corporation (AMT) Earnings Call Transcript & Summary

Okay. I definitely want to come back to CoreSite. Let's -- so let's turn to some of your other businesses. India is top of mind for a lot of folks. Obviously, you've been clear that you're looking to sell part or all of that business. It's been a challenging market over time. You said you'll update us when there's an update, so I won't press you on that. Yes. I guess I don't want to dwell on it, and obviously, hindsight is 2020. But what can you share about the decision to offload that business now after you've absorbed so much of the pain and so much of the churn in an environment where buyers might be worried about what the outlook is and what they're willing to pay for it versus having done something sooner?

Yes. Yes. So obviously, very top of mind. We have laid out externally that we are assessing strategic options with our India business. I think the investor -- our investors have been very patient with the India story. And I think for us, we would have anticipated a level of stability following probably a 3- or 4-year cycle of consolidation-driven churn. And while I'd say the steps that the Indian government has taken over the last probably 18 months is we certainly view as positive. So giving a moratorium on spectrum do's and AGR fees, the Indian government taking on an equity interest in Vodafone idea. We think that's all essentially important. But the fact is we are still experiencing a high degree of volatility. And just like everybody in the room as they manage their portfolios, I think from a management perspective, when you have a business that represents a small single-digit percentage of your overall enterprise value, but quite honestly, probably represents a disproportionate amount of volatility from one period to the next, I think certainly in this model, from a management perspective, we have to decide is that the right level of investment for that level of volatility. And that's the assessment that's going on now. And I think one of the -- the good thing for American Tower is we do operate in 25 other markets. And there's a lot of really positive trends also in India. The tenant billings profile is improving, but you certainly have to get paid for it. But there's a lot of positive trends across the globe, and we talked about the U.S. We are constructing over -- around 4,000 towers here across the globe. And we did probably close to 7,000 last year. The CoreSite business performing extremely well. So there's a lot of positive stories and there's a lot of opportunities for us to recycle that capital towards other investments. And that's part of this ongoing assessment. Now I would tell you, there's a price at which the opportunity costs or what you're giving up in terms of an IRR might not make NPV or mathematical sense where you think you can redeploy it. But that's part of the assessment. And I think we owe it to the investor base to certainly kind of evaluate the positioning of the India business overall. I think there's a pathway to constructive growth in the India market. We've been able to achieve good gross growth combined with the new build profile. But I would tell you the risks have certainly exceeded the initial underwriting. And I think there is a good assessment that we need to work through right now.

Okay. As we look prospectively, are there other learnings or takeaways from your ventures in India that you've incorporated into your investment process more generally to kind of improve going forward?

Yes. Yes. I mean we do operate a global portfolio, right? And we have deployed a lot of capital over the last decade plus. And certain investments will perform better than other investments. And I would certainly tell you that what we've seen in India from an underwriting perspective has underperformed relative to what we initially thought. And I think some of it is certainly unique to India. It's -- we kind of do the case study on RGO and the greenfield build, giving data for free, the AGR, the AGR liability. So there's certainly some unique elements. But I think there's also elements that we continue to evolve our underwriting thinking. And whether it's an assessment of counterparty or certainly escalator terms. You know Nick, we've been very keen on making sure we get inflation-based escalators. That's what we were able to achieve with Telxius. But I would tell you, our hurdle rates that we establish on a market basis, a counterparty basis, that's always evolving. And it evolves with the rate environment, but it also evolves with our evolving view of the risk profile in any given market. And what you're seeing today, and really over the last 18 months is an acknowledgment, I think, from American Tower and our management that based on our perception of risk and our hurdle rates globally, we're not really seeing much in terms of what's attractive in the private market to do incremental deals. And that's just part of the evolving perspective of inorganic opportunities for American Tower. So there's certainly learnings that we apply and looking at the counterparty, looking at the market but we're always evaluating and evolving what those hurdle rates are and what that means over the last 18 months is we're much more comfortable paying down debt, strengthening our balance sheet, where we have capacity to do some buybacks like we did back in the fourth quarter of 2022, we'll do a little bit here and there. But there's certainly going to be a mix of performance in a portfolio. And I think certainly, we acknowledge a level of underperformance in this investment. And we're running through the process now to evaluate how best to position the portfolio going forward.

Okay. I want to return to some of those topics you hit on in more detail shortly. And maybe one last on India, as I think about some of the deals you've done in that market in the past, it seems to be a fairly slow market in terms of time from deal signing to actually getting the approvals and closing. Maybe too soon to tell, but if you kind of had to bracket what the duration of time would be between a deal if you were to announce one and when it were to close? Is there any sort of time frame you could share?

It's tough. And it's tough to predict. And it will depend on the counterparty, it will depend on a lot of different factors. So even us doing some of the put options that we've done over the last 5 years, those took a better part of a year, maybe more. And I think from the outside looking in, that would have looked pretty straightforward. So it's probably tough to predict, Nick. And obviously, we don't have a deal to announce. So that makes it even more difficult to predict.

Okay. I'll leave it at that then. Let's turn to Europe which has been a successor in recent years. You certainly scaled that business with Telxius. As you just alluded to a moment ago, you don't see a hold off from an M&A perspective, it looks appealing today. But you've also said, over time, you think that's a market where you'd like to put capital to work if you could. Kind of big picture, if you look out over the coming years, how do you see the tower industry structure evolving in that region? And I guess, as a component of that, I'm interested in your thoughts on how the captive or semi-captive towerco dynamic that's been popular there kind of plays out.

Yes. Yes. I mean we believe and you've probably heard Tom and Rod say this that we certainly believe where the towers are today might not be the final resting spot, right? And you've seen a lot of private capital. You still see a lot of captive tower businesses that exist today. And ultimately, we certainly believe those will be monetized in time. And we believe from an MNO perspective, similar to what we've seen across the globe, there'll probably be some level of attraction to monetize those assets and put towards other core investments. Now with all that said, I would tell you, we're very happy with the scale we have today in Europe. And I think it's certainly a business where scale and relevance really unlocks a lot of incremental opportunities, whether it's build-to-suit, power as a service, mutually beneficial comprehensive MLAs or just typical MLA structures. So I think we've achieved a level of scale certainly in Germany and Spain that we're really happy with. I'd also remind everyone, even though there might be opportunities to evaluate portfolios, it doesn't mean we're going to look to execute on it. We could certainly evaluate it. And we entered Europe, I think 2012 in Germany, pretty modest size portfolio. And it wasn't really until Telxius that we found a portfolio that had the terms and conditions that we believe as a true independent tower operator that were sufficient for us to strategically operate the asset. We've evaluated capped escalators. We've evaluated portfolios where the carrier could actually buyback the portfolio after a set number of years, a level of exclusivity on sites. And what we got with Telxius was really some of those more typical true owner economic type of terms. So even though portfolios could come to the market, it doesn't necessarily mean that we're going to jump on them. It does have to have those same type of terms and conditions. And ultimately, it needs to be a return profile that we find more compelling to the likes of buying back stock as well. So even though things might come to market, and we do believe there might be some opportunities, we'll probably certainly always evaluate them, but it's going to have to be a pretty compelling opportunity for us to look to execute as has always been the case. In terms of how the captive tower market, we believe, could ultimately evolve. I think, like I said earlier, we do believe that there's probably going to be some monetization at some point. But for American Tower, we very much believe that our position as a true independent in these markets does give us a compelling opportunity to differentiate ourselves, whether it's through our capabilities, being a true independent and having a set of assets that we're freely able to monetize and market. So one of the IPs of American Tower is being able to leverage and franchise this model that we've developed globally over the last 20-plus years and a level of expertise, whether it's on the legal side, the operations side, the sales side and deploy that to different parts of the globe. And I think when you're able to demonstrate something like that in a new market, whether it's Spain or significantly built scale in a place like Germany, that's really compelling to a set of MNOs that are operating in a rather nascent independent tower market but also need to rapidly deploy 5G networks. So it adds a different type of competitive dynamic for sure, but one we're familiar with, and I think one where a true independent can really kind of flourish.

Yes. I mean just looking elsewhere, it seems like the trend over a long period of time is towards true independence. So we'll see how that plays out. You've talked a bit in Europe about the success you've had with upstarts like 1&1 that you expect to contribute to growth. What do you see more generally from other incumbents after you purchase the Telxius portfolio and their interest in those assets?

Yes. I mean, not too dissimilar, I guess, from what you see in other parts of the globe. We're still very early in the 5G cycle. So in a lot of ways, it's not that different from the U.S., you have a new entrant that's doing a greenfield build. I think our portfolio is going to be really compelling. And I think we've made a lot of progress from an operational perspective to move forward the ability to improve that colocation model. It is, again, a very nascent third-party tower market when you look at a place like Germany. And there is a lot of regulatory challenges in terms of the process, the permitting process, the EMF process that do add a level of complexities, but we also see that as an opportunity, and we very much assume that in our underwriting as well. So I think we're very well positioned to support 1&1 in their build. We did strike kind of that framework agreement with them last year that gives them access to our sites. But I think when you look at the incumbents, it's not too dissimilar to what you see here in the U.S. I mean initially, they're going to focus on upgrading their sites. There's also a level of regulatory requirements for carriers to focus on call it, like white space or gray areas where there's a level of underserved connectivity. So I think the early part has been very much upgrade focused and regulatory focus, not too dissimilar here to the U.S., but I certainly think over time, we're going to see a good opportunity from a colocation perspective.

Okay. Terrific. Let's talk about CoreSite a bit, your data center platform. It's been posting pretty healthy growth as of late. It's also been absorbing substantial capital to support that growth. We've seen that it appears like Equinix. I believe that one of the motivations behind the deal was that you guys by virtue of your scale and access to capital could help to better support CoreSite's capital needs. Are we seeing that aspect of the thesis play out with your capital availability, accelerating growth? And I guess, more generally, how would you characterize the sales funnel at CoreSite.

No, I think it's playing out exactly. I'll tell you what we're -- I think our guide here in 2023 is about $360 million of development CapEx spend. It's probably a little higher, quite honestly, than we had originally anticipated for 2023, but it's really success-based driven. So CoreSite did sell probably certainly a record level of activity in terms of leasing in 2022. And Q1 of 2023 is another record. So it really is success-based and making sure that we have adequate capacity on an ongoing basis to meet their typical levels of absorption but it's largely being supported by their own internally generated cash flow. So that's kind of more the level of flexibility. I think we're giving them is more looking at CoreSite as a stand-alone business. It rolls up to Juan Font who spent a lot of time with the CoreSite business and up through Steve Vondran but really giving them a level of independence and allowing them more in a self-sufficient manner to reinvest their cash flows into development. And I think it's working extremely well. The ongoing long-term view hasn't changed. We very much look at CoreSite as a unique opportunity and a very differentiated type of asset with an extremely healthy interconnection business that we think is going to be critical as we evaluate the edge. However the edge might play out. I think this very much gives us significantly better seat to evaluate. We have Tom Bartlett and Steve Vondran now with direct commercial relationships with the CSPs, which we didn't have before. And maybe it does ultimately require us to consider new partnerships. I think our position in any partnership is meaningfully more enhanced as a result of this versus just having a land on the tower site. But it could also ultimately, through this evaluation leads us saying it doesn't make economic sense either. And that's fine as well. I think at the end of the day, we've underwritten CoreSite on a stand-alone basis through the merits of their growth profile. And at the end of the day, if the edge doesn't materialize the way we thought, we have a great business in CoreSite as well. So in terms of the activity today, like I said, we had a record level of leasing in 2022. We exceeded our expectations. Another record in Q1 of 2023 and the line of sight is still very healthy. And I think it's also what's exciting is the type of leasing and the type of enterprises that are contributing as well. And its digital platforms that are looking to improve compute and latency, which I think is an interesting leading indicator for maybe evolving edge needs and then hybrid IT solutions, enterprise digital transformation. And the good thing for CoreSite and their differentiated ecosystem and kind of just the nature of the data center business right now, were supply is certainly -- or demand is certainly outstripping supply, we can be very selective in terms of who we want to bring into the ecosystem. And that's a great position for CoreSite to be in as well.

I think CoreSite historically generated best-in-class returns at least as I measure them, which I think is part of what made the business so appealing. Are you getting returns and pricing consistent with what pre-deal CoreSite achieved with the business you've been underwriting since?

Yes. Yes, for sure. And I think, again, we can be very, very selective in terms of where we put the leasing as well just given the dynamics in the market. I think our mark-to-market as well is exceeding kind of that historical range. So we've always kind of said from a ground-up build, the target for CoreSite would be kind of a U.S. yield of 12% to 16%. I don't think that's changed.

Okay. You talked about having CoreSite gives you a much better seat, gives your relationships with some of the folks that might actually eventually want to deploy edge compute. I guess can you drill down a little bit -- is there anything more specific or tangible that you've learned about the opportunity by virtue of having those relationships? Or any kind of green shoots that you can point to that strike you as encouraging?

Yes, probably nothing overly tangible at this point, Nick. We are doing a deployment, kind of a pilot deployment of an aggregation edge data center that you've probably heard Tom talk about on the call. And that very much leverages the capabilities of CoreSite and also our U.S. operations team. And you can imagine, we're in constant discussions with the cloud service providers and other enterprises on what that ultimately could look like. But I think in terms of really tangible evidence that this could lead to x percent of revenue, I think it's probably too early to tell. And I would just reiterate to everybody, we're going to be very disciplined in terms of thinking about how much capital we want to put towards this because if you do start to think about each incremental deployment, I mean, it is capital intensive and ultimately, it could require new partners, both strategic or financial, but it's going to certainly be economic driven. But I think right now, the best thing for CoreSite and for American Tower is the likes of Tom and the likes of Steve being able to have that direct conversation and especially when we start looking at a speed to market type of aggregation edge deployment, that's very critical as well. We already have access to the land. We already have power. We already have fiber, so there's very much a speed to market value proposition that we're able to give as part of these deployments. And I think right now, we're ultimately still evaluating what that model will look like. And is it something we can scale? And is it something that ultimately yields more attractive returns than other areas that we could [ book capital in the business. ]

Okay. Okay. I want to ask a question about Mexico, which is a pretty interesting market. It was your first international market. You've had a lot of success there over the years. But it also feels like the market has changed a bit over the last several years. Telefonica went to a model where it's migrated to AT&T's network, America Movil works with its, again, sort of captive towerco, you've got Red Compartida, the wholesale network, which went through reorganization, it's viability to sort of questionable, I guess. In light of those factors, how do you feel about the underlying leasing potential in that market. Has it really changed much? Do you think it's going to be as healthy as what you see in some other regions?

Yes. No, it's a good question. And what we're working through right now in 2023 and what we work through a bit in 2022 is a level of consolidation-driven churn. And if you kind of take a look at LatAm in general, I think our guide, we're looking at greater than 2% growth. And a lot of that is influenced by a level of elevated churn in the market. So at a LatAm level, we're probably greater than 8% churn. We do view it as peak churn 2023. And probably 2.5% of that is Oi in Brazil. And I'd say a pretty good amount of the remainder is Telefonica in Mexico becoming an MVNO on AT&T's network. So a level of decommissioning on the Telefonica side for which we get a level of settlement revenue, onetime settlement revenue that represents their kind of a present value of their future obligations that they have with us. Probably over the last 5 years, I would say leasing has been really solid in a place like Mexico, and it's come through the Altan wholesale network, a level of leasing by Telefonica and then obviously, AT&T coming in and taking over the Nextel assets in the market. So we have had a period of, I would say, pretty strong growth. And I'd certainly say it's going through an evolution now. 5G has been a little slow to come to the Mexico market. It's not there yet. You do have AT&T integrating the Telefonica network. You do have Altan that's emerging out of the kind of the equivalent of Chapter 11. So I think we certainly need to see how those play out in terms of giving more of a concrete view. I think we're -- from an American Tower perspective, I think, we're probably in the later innings in terms of the consolidation churn. I think once we get past 2023, we'll start to see that subside in a place like Mexico. But there certainly is a level of subdued growth, I would say, from a colocation amendment perspective today. And I think it's going to be certainly dependent on the longer-term strategies for some of our carriers, obviously. So I think right now, we'll work through the churn. We do have CPI-linked escalators that give us a level of economic protection in a market like Mexico. And we'll work very closely with the likes of AT&T and obviously, Altan, who has successfully come out of their process, and it was paying throughout the process. And I think there's certainly a lot of momentum and support for that to be a successful investment from a government perspective. So we're there to support them.

Okay. Now I want to touch on capital allocation, and something you alluded to before. You want to get your leverage down to at least 5 turns or so and that's your #1 priority right now. You've said that the M&A market doesn't look terribly attractive. Barring a shift in the M&A environment, does that mean we should expect a meaningful uptick in repurchase activity once you get to your target leverage ratio.

Very well good. The way we're viewing this, so just to reiterate, we are very much focused on deleveraging down to the sub 5x over the next, call it, 24 months. That's not just something we hold to from a financial policy internally, but something we've committed to the rating agencies when we did the Telxius and CoreSite transaction. So we're laser-focused on meeting that. Now it doesn't necessarily mean we have to get to 5x before we can evaluate share repurchases. To the extent we feel comfortably beyond that trajectory, we could certainly deploy it opportunistically. And we did that to a pretty modest level in Q4 of 2022. I wouldn't point you to probably like a multibillion-dollar program but probably a little bit more opportunistic between now and then. And ultimately, when it comes to $1 of debt repayments or share buybacks, it's where do we think we can get the best yield. And I would also tell you it very much depends on where do we think we're optimizing our weighted average cost of capital. And we're doing an ongoing assessment of what's the most appropriate targeted net leverage, what could that mean from a ratings agency perspective or a ratings perspective? What could that mean in terms of better cost of capital and trying to put that puzzle together to say where are we optimizing our WACC, which ultimately supports where we're optimizing our value, right? And I think it's kind of tough to say exactly once we get to that 24-month period or a couple of year period, what that math will look like, but that's just how we're constantly evaluating, looking to accelerate the deleveraging path or whether or not we find share buybacks more attractive. I think what I would very much emphasize to the group is what Tom and Rod have stated as well, as we see far more value in our equity than anything that's crossed our desks from a private deal perspective externally. And we kind of joke internally, if a deal kind of crossed our desks that had all the characteristics of American Tower and leading U.S. position and global diversification and a differentiated data center platform and it traded at this multiple, probably the best -- that'd certainly be the best deal that'd cross our desk. So whether you kind of look at it through the lens of using our equity as a currency to buy more subscale type of portfolio or through the lens of -- we would just much rather buyback stock, either way, the opportunity cost for our equity right now just doesn't make financial sense.

Yes. Got it. We've got a couple of questions from the audience that they kind of fit together that I want to ask you. And I'll kind of preface it by observing that in the U.S. market over time, I think as people have figure out towers are a good business, the carriers have figured that out too. You've seen developers willing to construct at lower yields. You've seen sellers expect higher multiples, you've seen more investors willing to bid up for it. And it's made -- generally made M&A more challenging. It's made new development more challenging, at least to achieve the sort of returns that you guys target. So one question kind of asked about the gap between what you see in public and private markets in the U.S. today. And the other is sort of a new development where one of your large private competitors or sort of private peers, struck an interesting deal with Verizon a week or so ago where there was sort of a profit-sharing component to new developments. So maybe talk about how you guys kind of reacted to that and if you think it affects you at all?

Yes. So maybe to the earlier one in terms of the public/private, yes, we still see a pretty substantial gap, like every deal is going to be a little bit different, but I think for AMT, we have a leading U.S. presence. We have over 43,000 sites. And I think there comes a point where if you look at 100 sites, does it meaningfully change your relevance in the market, your scale in the market, -- probably not, right? And I think that's for us to really kind of evaluate something at a premium multiple, it would have to meaningfully augment our positioning in the marketplace. And I think as you guys have seen, our positioning has very much afforded us the opportunity to execute on comprehensive MLAs. It's a very critical network or distributed portfolio for the big 3 plus DISH. I think we've proven that with what we've done and the growth that we have communicated externally. And we think it will be critical as we evaluate the mobile edge as well. So I think from a scale perspective, we feel extremely good about our U.S. business. And it would have to be a very compelling strategic opportunity for us to probably justify leveraging our equity to do a deal, and I would just very much reiterate. We don't see that right now. In terms of the deal that you talked about, I'd certainly leave it to Verizon and the peer to talk more about it. I think this isn't anything new. We've always seen the carriers diversify their vendor relationships on the newbuild side. It's not something we feel we have to do. And I don't know the terms and conditions that they have. So I'm certainly not going to weigh in there. But I think at the end of the day, it's a good demonstration or illustration of the need for new cell sites in a 5G world. So I think there's certainly a positive to take out of it. I think the carriers are evaluating and it kind of fits right into the thesis that we've talked about, that there will need to be new cell sites. There's going to have to be new colocation and I don't think they put a volume target on there. So it's tough to say exactly what magnitude this will all kind of look like. But I think it's another good piece of evidence that densification is going to be critical in a 5G world. And -- but working with different type of developers, I mean, we've seen it through the last 5 to 10 years. I think everybody knows in the U.S., we don't really construct a lot of sites. It's like 25 a year. So this isn't -- this doesn't need into a 2,000-build program that we otherwise would have thought we had.

Got it. We're just about out of time. Are there any closing thoughts or messages you wanted to share with the group?

No, no, I certainly appreciate everybody's support. I think we're really excited about the growth that we're seeing across the business, record levels of growth contributions in the U.S. from colocations and amendments, ongoing ability to execute on a very accretive and solid global or international new build program and record levels of leasing that we've experienced since really closing the CoreSite deal. So I think our focus at this point is to operate those assets, focus very, very much on the cost side. We didn't get into the cost side too much Nick, but I think everybody is -- I've been with the company for 13 years. And this is -- I think Q1 is probably the first quarter I can remember where we didn't really have a lot of M&A that kind of in the prior period and the current period that skewed margins and growth profiles. But I think everybody sees we're absent M&A, we're now -- we've always been focused on cost, but it's very much becoming apparent. And when you look at our guide for 2023, it's flat SG&A. I would tell you, Tom Bartlett is very much holding us, as he always had, to a very disciplined and critical cost structure, and I think that's going to continue. And what it results in is 100% conversion rates of our top line growth like we had in Q1, really healthy margin expansion, and it's really demonstrating those inherent benefits of the operating leverage in the tower business. So we're very excited internally just given the leasing growth that we have across multiple portfolios and really driving that down to the AFFO level.

Great. Well, thank you, Adam.

Yes, thanks, Nick.

I appreciate you joining us.