American Tower Corporation (AMT) Earnings Call Transcript & Summary

All right. Good morning still everybody. We'll be going into good afternoon soon. I'm Rick Prentiss, Head of Telecom Services Research for Raymond James. We'll keep NAREIT on schedule, although the [ elevator bank ] is way better here than the [ Waldorf ] for those of us that have been around a long time, so we appreciate this venue.

You're showing your age.

We are. We are. And -- we're happy to be hosting and welcome Tom Bartlett, CEO of American Tower back to REIT Week. I was reminiscing, we would come to a REIT week even before you were REIT.

Yes, going back to, I think, you dragged me to 2010 or -- we had a little table, right, outside of the conference, we couldn't get it.

We were in the club. But now we are. And obviously, Crown Castle, American Tower, SBAC, very large market caps within the REIT space and kind of the tech play on real estate out there.

We changed the mix a bit.

Yes. I want to start because if we think from a REIT Week 22 to REIT Week 23, Obviously, one of the big change is interest rates. Interest rates, much higher, faster to fight inflation. Walk us through bank collapses, recession, there's a lot of stuff going on out there macro-wise. So as we think about the tower business and the data center business, how is that affecting your AFFO per share but also your fundamentals?

Rick, I have to say that from a fundamental perspective, our business has never been as strong. It's not to say that we're not affected by interest rates and those types of things. But the drivers for our business are much different than traditional real estate, as you well know. And it's a function really of how much our customers are spending on a global basis. And that's been very consistent over the years. I mean our customers both the data center platform, but broadly speaking, the tower platform are going to be spending probably $60 billion on their networks across our 25 different markets. And so the demand that they are being driven by, again, are kind of outside of the influence of some of the macro events that have gone on. So if you take a look at our tower platform is what as I referred to it as in the United States, for example, our customers will spend well over $30 billion on their network. They probably spent close to $40 billion. But with 5G, every G, there's an incremental $5 billion or $10 billion that are being spent. And we're still in the very early innings of 5G, but our 4 major customers in the United States have been spending to really generate coverage in the marketplace and which is typical in 1G, 2G, 3G, as you well know, you've got the same background, I do from a AT&T perspective. And so they're initially driving coverage. And that's what they've been going through. And so probably, on average, probably half of our sites in the United States, we have about 42,000, 43,000 of them, have some form of 5G on them, radios, indoor antennas. And so the carriers have yet to go through this kind of major densification stage. And as I've talked to in the past, the way our carriers build is really in the form of sine waves, heavy build, they groom and heavy build and groom depending upon where our usage is. And what we've tried to build in our business is a level of predictability. We think that's very important from a real estate investor perspective. And if you -- every customer builds in a different sine wave. And so if you superimpose all these sine waves, not just in the United States, but then also on a global basis because they all invest differently, you'll get a straight line. And that's what we've really been to up, up and way up and to the right. And that's what we've really been able to drive historically is that kind of predictability and growth. And we do certain things externally to try to even underwrite and mitigate some of the exposure and some of the risk relative to escalators and some of those types of things. But even within the United States, we've also tried to protect ourselves against kind of the major troughs that our carriers are executing with their build program with levels of pricing and committed levels of pricing, consistent levels of pricing. And that has really been able to mitigate slowdowns even in their builds. And that's also in an attempt to provide the consistency and the predictability in the business. So our business has not been strong. If you take a look at our colo and amendment activity, and amendment is one our customers will come in and add something to an existing lease. A co-location is when they'll actually enter into a brand new lease on a tower. And so that colo and amendment activity, we're setting a record level for ourselves in 2023. 0And so we see a significant demand for our sites. And as such, as I said, it's kind of the fundamentals are very strong. Similarly, on the data center platform side of the business, as you well know, a couple of years ago, we acquired a CoreSite. I was on the Board at another data center company and became kind of enthralled with kind of the model that they had built in their business. And where in the tower business, we have a strong barrier to entry from a competitive perspective, which is our exclusive ownership of the real estate itself and control of that real estate, which really gives us a competitive position in the market versus anyone else. On the data center side, we have really a -- what I call a barrier to exit because on the data center side, the way that CoreSite approaches the market and that really got me kind of energized about that model is that it's not just a colocation business. It's really -- I call them interconnection hubs. A certain piece of that particular data center will be leased to enterprise accounts, a certain piece will be service providers. And then a certain piece will be a cloud player. And so our customers have this -- our enterprise customers have this incredible interconnection system within those businesses. As a matter of fact, over 80% of our revenue that we generate within our data center business, those customers have at least 5 connections within that. And so it makes it very difficult then once an enterprise account has that kind of access to suppliers to other customers, obviously has cloud access. It might be multi-cloud access, if we have Microsoft and Amazon, for example, in there, it becomes very difficult for them to leave. And so that's what got me so excited about that particular model in and of itself. And we had 10% growth in the first quarter. We're setting records in terms of sales activity. So the pipeline is very, very strong, and we have a good development plans in place in the United States because they're exclusively within the United States for further build. So the fundamentals that we have going on in the business, again, are different than perhaps most real estate investment. Now having said all that, interest rates have affected us, okay? We had a fair amount of floating rate debt at the end of last year, which we brought down over -- it was roughly 22% of our debt. We brought it down. We just did an offering in the last couple of weeks, and we're standing probably right now at about 15% and continue to look at ways of maybe even taking that down a little bit further. We've monetized a couple of things in our business. We sold some fiber assets in Mexico. We just exited Poland. You didn't cover that. But we just exited Poland, we have a very small business there. And so we do some of those proceeds also to take down some of our floating rate debt. But there's no question, if you take a look at our AFFO per share growth expectations in terms of what our guide is, it's being impacted by that. Hopefully, we'll get that behind us in '23 because the fundamentals of the business are growing high single digit. Organically, we're growing 5-plus percent in the United States. In markets like regions like Africa, we're growing upwards of 9%. Europe, we're growing at high single-digit kind of growth rates. And so again, we have those fundamental elements of our business, which are really doing quite well, and I'm really excited about it. And I do think that they're kind of multiyear types of expectations.

Yes. You hit that very well. I'm reminded of literally that first REIT week we went to and on the side meetings. And a REIT investor asked you what would cause your revenues to go down and you were answering the question of, well, my growth rate could go down. But in REIT world, your revenues can go down in other sectors. So it was really refreshing to hear that if you worry about recession, if you worry about any kind of economic issues, the towers, literally guys, we're just looking at about -- we've got a band of growth, we're going to grow because it's really not tied to economy.

A lot of people ask what's the impact of inflation. And in our international markets, really absent India, our escalators are all based upon CPI. And so that really protects us well from an inflationary perspective. We're also triple net in a lot of cases, right? And so 70%, 80% of our direct costs are passed through. Fuel being the most significant one. But also land costs even in Latin America are pass through. So we've tried to underwrite and mitigate a lot of the risk to try to ensure that, that revenue doesn't go down and that we continue to generate solid organic growth rates.

As we think about REIT investors looking at the stock, dividends are a large part of the story as well, how do you think about the ability to grow long-term AFFO per share, free cash flow per share and then dividend per share?

Well, it's a balance, right? It's living within our means. We don't want to extend ourselves in a situation where we're borrowing to pay a dividend. Our dividend is largely tied to our AFFO being a REIT. And so we've enjoyed kind of 20% growth for much of the last decade. In this decade, we've been growing at kind of the 12%. This year, I think we're growing at 10% subject to the Board but growing it at kind of that 10% level. So my sense is that over time, that's going to grow really kind of the AFFO per share kind of growth rate, which would probably be high single kind of digits in terms of at least how I'm thinking about it. And we balance that because I think it is a strong piece of our total shareholder return. But then we're balancing it with, okay, what are those best capital ideas that we can invest in. So this year, we have a CapEx program of $1.7 billion or $1.8 billion. And we're investing in the highest growth opportunities possible, which is leading with our build-to-suit program. We'll build roughly 4,000 towers in the markets that we operate. We probably built 20,000, 25,000 over the last several years. And so we're generating double-digit types of returns on that build. We don't build on spec. We get a carrier on as an anchor, and we're building in areas where we believe we'll be able to get that second tenant on. So we're really pleased with the kind of results. And that also gets us closer and closer to our customers because as they're densifying their networks, they're looking for competent players out there that are going to be able to deliver on what they say and when they say it. And so that's been a really steady growth for us going forward. The second piece of the capital is back into our data center platform. When we underwrote the CoreSite acquisition, they were a REIT, they were paying a dividend of $200-plus million. And so the way we underwrote that transaction was, okay, we're going to feed that $200 million back into the business for growth. This year, we're probably up in the $3.50 range. But they have a fair amount under development up in San Francisco, New York, Miami, Denver, Virginia to be able to meet kind of that pent-up demand that's going on in the business. And so that's also kind of a double-digit type of return on investment. So we think that, that capital going into those 2 broad areas, it will prove out to drive really good long-term kinds of return opportunities. But it's a balance in terms of looking at the dividend, looking at the cash flow that the business is generating, which we would expect to continue to grow, given the kind of the things you were just referring to. And we'll look at those sweet spots for us to find those best possible return opportunities to invest in.

Great. So consistent growth, predictable, good visibility. But towers, we called it the best business ever in my world because having been an M&A guy at BellSouth, it really is a great attractive business model. It's real estate, but it really is single-use real estate, right, that you're not going to convert an office into migrant hotel. You're not going to do anything else with this real estate. It really a single-use. From a REIT investor standpoint, they're not falling as closely as we do and you do probably, how is the health of then the wireless businesses. If you look at the U.S. and other markets to say, you're really relying on the ability of your customers to keep spending CapEx to keep buying spectrum and deploy on your tower, so how do you view that health of those different carriers in the different segments you operate in?

Well, it comes down to looking at your own underlying use of wireless technology and that's kind of the easiest way for me to explain it. I look back on the history of the wireless industry in terms of how it's developed and our utilization of devices, all kinds of devices and all kinds of different ways. And that's driving demand on our customers' networks, and then that's driving their willingness to spend heavily into their networks. And so I would say that the wireless industry is in a really strong position, largely because the demand is there. Is there a competition? Sure. We said that on global. Is there consolidation? Yes. We have markets in India, for example, when we initially got into the market, there were 15 different carriers. And we knew that wasn't sustainable. By the way, if you look back on the U.S. market back in the early days of wireless, there were probably at least 10 carriers.

We had all our 8 table. Here's the 8 carriers that could offer some...

And then Sprint had -- how many affiliates that sprint -- and so that obviously worked its way down into 4 carriers in the market. But many of the markets that we're in are kind of 2 to 3 probably carrier mix. That seems to be kind of a consistent market dynamic. But each of them are investing, all of them are investing heavily into their networks. And we are all willing to spend for that particular coverage, more in some countries than others. The range is pretty incredible in terms of when you take a look at the average revenue per user or device or however you want to think about it. So there's a lot of variability from that perspective, but the market is really strong. And you take a look at all the new applications. I mean if I had nickel every time I heard AI over the last 2 days, I would need to work.

It's the new drinking...

But if you think of the impact of AI, not just in our data center platform but also from a wireless perspective, again, it's just another application that's going to drive us to utilize wireless devices and wireless technology even more. So I would say it's the wireless industry and our customers are very strong. They're in really good positions. They're investing heavily into their networks. In many cases, they paid a lot for spectrum. So they want to put it to good use. But they're really smart. I was 25 years at Verizon. And so I know how they kind of think and you were on the BellSouth side. And so they're very intentional about how they spend capital and how they manage that. But I think, overall, the industry is in really good shape.

Good. When you think about the international operations, you're in some emerging markets. Walk us through how you get comfortable that you're going to earn your risk-adjusted return there and then touch on maybe India a little bit from a standpoint of you've had some discussions lately, what you're going to do there?

Sure. We've been in markets like Mexico and Brazil for now over 20 years. And the reason that we ventured into international markets are a couple fold. One is, first, the technology is the same, right? The manufacturers are broadly the same. The sites looked the same. So it's not like we were taking a new business into a market and changing the business. And so we were able to be very consistent in terms of how we thought about the growth. The drivers are the same or the types of customers that we have in those markets are broadly the same, large wireless carriers. What's different is that in most of the -- all of the emerging markets we're in, there's very little wireline presence. And so our customers in those markets are throwing everything that they can at their wireless businesses. And so -- and typically, there are 1 to 2 technologies behind. And so as we've developed 4G, they were still on kind of 2G, 3G. I mean we're on 5G, many of the markets are still deploying 4G. And so we felt that as a result of being and having a certain presence in many of these emerging markets, we were going to be able to generate higher rates of growth as well as extended because those technologies were 1 to 2 cycles behind. And that's what we've been able to do. If you go back, look at the last 20 years, the growth rates in our international markets have been a couple of hundred basis points faster than our -- even our U.S. market. And they are this year. You look at market like Africa, it's high single digit. Europe, high single-digit kind of growth rates. And so the thesis is proved to work. When we go into a market, we're very intentional about ensuring that there's a rule of law. They're very intentional about looking at the competitive framework within the market. We're very intentional about, okay, what is the way to get into the market? Is it a build-to-suit program or is it actually M&A? And so there is a checklist that we have, if you will, in terms of making sure that the markets that we're getting into make sense. Now we look at our portfolio, we're in roughly 25 different markets and roughly 1/3 of our business are in some of the emerging markets. But we look at our portfolio as good allocation -- allocators of capital would do to where we can drive the best rates of return. And so we're constantly looking at the various markets because we've initiated the investment, but then they we're committing ongoing levels of capital into those markets. And so we want to make sure that we're being smart and don't have our head in the sand in terms of where we're investing in. And we look at the construct of the market. And when I kind of look at India, which is kind of the second part of your question, we've been entered into India back in '07, '08 and saw over a period of 10 years really solid rates of growth. There have been certain things that have happened in the market that have changed that. Rapid consolidation as a result of one player coming in and offering very low pricing. And in some cases, it was free for a while. We've seen some government activity. From a legislative perspective, it's impacted the ability for certain customers to grow. And so we've seen a lot of consolidation going on in the markets. And some of those mergers have gone better than others. And so I look at the construct of the marketplace. I look at the market terms of the master lease agreements and our ability to change them where we once thought we might be able to change some of them, we haven't had that kind of success. And so as I said, as opposed to keeping our head in the sand, we're looking back and say, okay, are there better uses of some of the capital that we might be able to monetize from those particular investments. And that's the process that we're going through right now. We're looking at, okay, what are those possible outcomes? And where can we best generate the best rate of return for our investors. And I don't know what that outcome is going to look like. I want us to come to a conclusion quickly because that has an impact on people, on the market and those types of things. And so we want to get through this process as quickly as we can, but we want to do it intelligently and thoughtfully. And so it's taking a little bit of time, but hopefully, we'll have that behind us. And we'll see what that structure would look like at the end of the day. And to the extent that then there's available capital, what we would do it. I mean our goal right now is delevering. Our floating is at 15%. I wouldn't mind taking that down a little bit. Our overall leverage ratios are north of 5x. I think we kind of maximize the value of the firm when we're below 5x. So that's really our goal at this point in time. It's not M&A. And so to the extent that we're monetizing certain assets, we have the ability to allocate right back to our balance sheet to strengthen it.

One of the other questions, again, we're deep in the weeds a lot of times on the technology and the customers. REIT investors sometimes aren't as day-to-day involved in it. So the left-field technology question, as I call it, every 5 or 10 years, something new pops up and somebody goes, "Oh, is this going to make towers and wireless go away." One of the more recent ones is the satellite to smartphone connectivity, directed device. Update us on what do you see? You actually are a small investor in one of those satellite companies. But talk a little bit about that directed device, but also what concerns you about? Is there a left-field technology coming that people should be watching or aware of.

We watch that every day, and the answer is no. So the headline is satellites not going to affect the macro environment. I think it's going to supplement it. But the most efficient way for our customers to propagate a signal to get that signal out to a device of ours is through that 150-foot tower. It's just more efficient. It cuts down on interference. They're building on a system that's already been built. I often equate if a customer was going to be taking down their sites, it's kind of a deck of cards. The cards we used to build -- when you take 1 out, kind of the whole thing starts to fall apart. But the most efficient and effective and cost-effective way for customers to deliver service is through that 150-foot site. Now we don't have those terrestrial networks everywhere, right? And so there are certain parts of the world. By the way, there are certain parts of the United States that may be best served from a different type of technology from a satellite technology. I think one of the breakthroughs and one of the things that's really interested at us is AST, which is one of those is the fact that I don't need to go out and buy a different handset. I can utilize my existing handset. And by the way, we're still working through and testing and those types of things, but still able to use my existing handsets as opposed to going out and getting a sat phone that has always been kind of historic way of reaching a sat. But the satellite in terms of speeds, interference, a number of different technical ways is still not going to be able to replicate the kind of experience that we enjoy using handset being delivered over a terrestrial 150-foot tower. But there are absolutely parts of the world that don't have. They have a lot of white space, if you will, and don't have that kind of coverage. And I do think that, that's going to be a really interesting technology for those particular areas. Over the half of the world still doesn't have cellular technology, which is pretty incredible. And so there's a lot of areas out there where I think technologies like that can be very useful.

We've talked about towers, U.S., towers, international, data centers somewhat as well since you guys have gotten involved there. The one thing I will kind of wrap here with maybe is small cells. It's a different technology. It plays into the wireless kit bag, densification will occur. You guys haven't done that really in the U.S. and you're exiting the Mexican fiber business. So walk us through a little bit about your logic on small cells, how you think about it and where you've come out on that.

We've always thought that small cells and fiber are clearly going to be part -- I mean they have from day 1, right? So even smaller [ sites ], however you want to think about them. But they've always been part of the toolkit that our customers have used to be able to get the best possible service out to the customers. But as I said upfront, we look for barriers to entry. And we've never seen that barrier to entry on the small cell side or on the fiber side that we would be able to create. And as a result, you're always going to be subject to volatility on from a return perspective, very capital intensive, lots of competition, lots of different players who are providing those types of services. And so we're trying to stick back to those kind of fundamentals and in areas where we think that there are strong barriers and we do have that really strong market fabric, if you will. And candidly, small cells and fiber just don't fit that mold. We are in building. We do have a pretty sizable in-building. So we're in a lot of casinos and sports venues and things like that. But again, the barrier to entry is the relationship that we have with the landlord and that we then have the exclusive rights to that particular in-building or that building to be able to provide the network. And so that gives us that barrier to entry. But when you're outside of that and building the kind of small cells and fiber that you're talking about, you lose that ability to really compete effectively. And so we've chosen -- and we have other options available to us that will drive, I think, a more sustainable rate of return than those 2 particular product sets.

So what I'm hearing is predictable, consistent growth, good visibility, a competitive moat. What else would you want to tell the investors in the room here or online in our last minute of what else should they know about American Tower that they maybe aren't aware of or that they should be thinking of to invest in you?

Well, I think you picked up on the two critical ones. I think the demand drives the predictability. We've tried to supplement that with certain pricing modes and methodologies to again bring that kind of predictability. We've tried to diversify the portfolio to be able to drive that and again, to get that solid kind of rate of growth. And I think we're good allocators of capital, and we're very patient. We invest for the long. We don't invest for a quarter. We invest for the long periods of time. I look at AI as an example, given the fact that we've talked about AI for so much. The first call that we're going to get for demand from AI are going to -- is going to be the cloud. They're going to be the ones to try to position themselves such that they have significant amounts of capacity for us going forward. Where our balance is, yes, the cloud is definitely a part of that solution, but it's also having the enterprise accounts and the service providers, all part of that community to be able to drive the highest possible yield. And so it's with that kind of intentionality and thoughtfulness, I think that really our driver or really demonstrate kind of the way we think about allocating capital going forward.

Great. Right at mark. I'd see the red light just turned on. Appreciate your time today. Welcome back to NAREIT.

Thanks. Good to see you. Thank you.