American Tower Corporation (AMT) Earnings Call Transcript & Summary

We are going to go ahead and get started here with our next session. It's a pleasure to welcome back to the Communacopia + Technology Conference. Rod Smith, the Chief Financial Officer Of American Tower. Rod, thanks for being here.

Yes, you are welcome. Good morning, Brett. Good morning, everyone.

Well, let's jump into it. And I always like to start with something that's a little bit of a big picture view on American Tower. You remain the only major U.S. tower company with a significant international footprint. And the only one that's really made a meaningful investment in data center assets. And I want to start off by getting an update here, what are the key trends that you and Tom and the rest of the senior management team are seeing that gives you confidence that this approach to meeting global infrastructure demand is the right approach as opposed to doing what some other companies have done, which is to be very infrastructure or geographically specific?

Yes, it's a great question, a great question to start with. So our view on the tower business is that we've got a great business in the U.S. with long-term contracts and very stable growth. I think most people probably have heard us talk about our long-term outlook with, on average, 5% organic tenant billings growth in the U.S. And the reason that we have the confidence to put out that longer-term view, which covers the time period from now out to 2027 is because of the comprehensive agreements that we have with the carriers. And those agreements basically underwrite or underpin our growth assumptions, and it gives the carriers access to the towers over a longer period of time. The carriers are, in turn, comfortable signing up for those agreements because of the growth in mobile data consumption they see on the assets and they understand the infrastructure that needs to go up on the towers over time to support that growth. We see that same mobile data consumption growth around the globe in different markets. So we look at a very good business model for the towers. We understand it very well. We understand the contract terms and conditions that go into driving a good tower model and a good tower business and exporting that around the globe makes a lot of sense to us. And around the globe, we have high-quality counterparties. In many cases, our customers are multi-region, multi-country, large players like Vodafone, like Telefonica, like Airtel, MTN in Africa, companies like that. So we think that's a pretty good balance to take this very successful U.S. tower model and export it to select regions and select markets around the globe. We did add some data center assets to the portfolio buying CoreSite a couple of years ago. And CoreSite is a very high quality, very much a differentiated asset that is cloud-centric. So we have multiple cloud on ramps and all of the campuses that we have. We have over in the range of 450, 460 network companies within the 8 campuses, so lots of different network opportunities for our customers. And that ecosystem attracts the highest quality enterprise customers into that environment. So it's a really good asset. Again, it's a U.S.-based asset. It's growing exceptionally well for us, high single digits. And had a record level of new business in that business in '22. We're seeing very high levels of new business in '23. Our pipeline is the highest it's ever been. So we think we have really good assets there that really maybe able to connect into the tower assets in the future through edge computing and some of the demands that are coming down the pike in terms of the 5G networks, applications that require lower latency, that require higher capacity, that could benefit from having compute power closer to the base radios. So we do think the development of an edge compute facility is certainly coming. And we think with the CoreSite assets that we have and the tower assets we have in the U.S., we're in a pretty good position to help drive where those assets might be cited. So we're excited for that. So our business really is U.S. towers. We have a nice portfolio of towers in Europe that we bought a couple of years ago. We're seeing very good growth on that set of assets, 8% organic tenant billings growth in that environment, which is much higher than that Europe has seen in terms of organic tenant billings growth. And that is because of the quality of the assets, the counterparty and the contracts that we were able to put together there. And then we have the CoreSite assets. And then we complement that with again, select emerging market type investments on the tower side.

So let's start by digging in a bit more to your domestic tower business, which is your biggest business. With your most recent results, you did reaffirm the outlook. So you reaffirmed your outlook for organic growth this year. You've talked about that 5% or greater organic growth over the next number of years. But I think one of the big takeaways coming out of the earnings season for tower investors is that we're starting to see some deceleration in the U.S. I think it was expected, we would see it might have kicked off a little sooner than some in the market had anticipated. How would you frame what the leasing environment is like right now in the U.S.? And can you maybe compare what we're seeing now at the tail end of the front end of 5G compared to the same point in time with the 4G cycle.

Yes, absolutely. We think the leasing environment in the U.S. is quite robust. And I would make the point again that in the U.S. specifically, our comprehensive agreements will be what drives that average of 5% organic tenant billings growth over the next several years up to 2027. So even if the carriers pulled back a little bit on CapEx, it doesn't affect our organic tenant billings growth because our contracts are set up that they're independent of any quarterly cycles around capital deployment. So I think that's a really good thing for us. But with that said, the way you frame the question is exactly right, we are at the end of the very beginning of 5G cycle, right? The networks are kind of up and running across the U.S. And that took an unprecedented amount of capital to make happen, right? up over $40 billion in 2022, which is a similar kind of a cycle that we've seen with past technology upgrades. There typically in the early stages, a ramp-up in capital spending and then it pulls back and settles into a more consistent annual capital investment cycle. In the 4G cycle, it ended up settling in. It came up into the mid-30s and it settled back into the high 20s, close to $30 billion. In this cycle, it went up to over $40 billion. and now we're pulling back, and we do think that in a 5G cycle that it's going to settle in, in the mid-30s in terms of $30 billion, $35 billion a year going forward. That's what we see and that's going to be driven. The requirement for that capital spending is going to be based in the growth in mobile data consumption that we expect to see in the networks in the U.S., which is going to be in the mid-25 -- in the mid-20% to 25% annual growth in mobile data consumption through these networks. That's what's going to underpin kind of the need to continue to invest in 5G. The 5G, all the technology investments and upgrades kind of follow a typical pattern. The first wave of it is a coverage aspect. They want to get wireless -- they want to get the new technology coverage kind of broad and why, and that helps bring down their average cost of megabit delivered. It makes the networks a little bit more efficient. The next wave is then people are developing applications, are getting the handsets put out there. Fixed wireless access might as part of this cycle private networks, could be part of the cycle. And then you kind of settle into more consumer-driven applications that are on 5G handsets and that 5G handset penetration is going up, likely to get around 50% or higher in 2024 or so. And when that happens, then you're into a longer cycle of capacity-driven investments where the wireless carriers will continue to invest in that technology to handle the growing capacity demands that the network has. And we've seen that in the 3G cycle. We saw it in the 4G cycle. We expect to see that in the 5G cycle as well. So a long way of saying this is pretty normal in terms of our view. And -- and I would highlight, too, that the spending where the carriers are pulling back to is still higher than where they were in the 4G cycle, and we expect that to continue. So I think the U.S. wireless market and the tower market specifically is very healthy, very robust, and we feel really good about that being the central point of our business kind of globally.

What do you look at as a leading indicator or something that's necessary to create a reacceleration in leasing, something that would be robust enough that you might start breaking through the confines of what's under the master lease agreements. The two things we get asked most about are a use case may be evidence that 5G networks are finally stimulating uses we haven't seen before, whether it's around augmented reality or cars. And then the other one is, how do you think about the importance to American Tower that there is a fourth facilities-based operator over duration. We've seen DISH make a go at it, but that's a debated story as well.

Yes. So we -- our 4 primary carriers in the U.S. now, certainly the large 3 wireless carriers with the addition of DISH in the last couple of years. The thing that I would highlight there is that we do have a master agreement with DISH and what we put into our long-term outlook is kind of their minimum requirements under that agreement. So to the extent that they go beyond their minimum requirements that they build a network that goes beyond the use rights that they've already contracted with us, that could be upside to our longer-term guide. So our portfolio is very well positioned to help DISH continue to roll out their network and to get to that next level if and when they choose to do that. And if they do, that could be upside. So having that robust fourth carrier certainly could be one of those catalysts for us in terms of additional growth beyond the 5% on average that we talk about in the U.S. The other noticeable potential upside could just be use cases coming in earlier than expected maybe more of them than expected, driving that mobile data consumption up beyond the mid-20s growth rate. That certainly could happen with the potential for the fixed wireless access, people downloading and watching 4K movies, true high definition video, the augmented reality, the addition of AI in the workplace and in other consumer-driven applications. All those things, to the extent that those things come earlier in the cycle and drive higher amounts of mobile data consumption, that is likely to be going across mid-band spectrum. And if that's the case, then the networks probably need to get more dense, at least in terms of that 5G, the mid-band spectrum network, adding density to the networks. And the way the carriers will do that is by leasing additional cell sites, putting more antennas out there to kind of fill in. The way to think about it is the lower band spectrum that was the main workhorse in the 4G network propagated pretty far. The mid-band spectrum, which is going to be the workhorse of the 5G networks, driving the lower latency, the higher levels of capacity and speeds. The mid-band spectrum doesn't propagate quite as far. So when you have more and more of the mobile data consumption running across mid-band spectrum, you're going to have holes within the network that you're going to want to fill in. That is when the carriers will get to that network density. And when you see that shift towards amendment-driven revenue for tower companies and you see an increase in the amount of new colocations that the carriers are driving to fill in and densify the network, that could be a catalyst for upside on top of that on average, 5% organic tenant billings growth that we're looking at in the U.S.

The point being, it would be upside that's not what your guidance is based on, that would take you above and beyond if we see it materialize.

Yes, I think that's right. I mean you can kind of think about our master -- our comprehensive agreements. By and large, at this point, centered around amendment use rates. There are some colocation use rights in there for some of the carriers. Certainly, DISH is an example of that because they're building a brand-new network. But with some of the other carriers that's centered around amendments and if and when they turn their new colocations need to densify the network, that is potential upside.

Okay. Well, let's turn to your international tower business. Your expectation is that your international business will grow about 150 basis points faster than what you see in the U.S. One of the questions we get is, is that really just based on higher CPI-based escalators that you see across your international markets? Or are there intrinsically higher organic growth rates in some of those markets based on where they are in the wireless cycle?

Yes, it's a great question. The organic tenant billings growth rates, we do expect the international businesses to grow at a higher rate than the U.S. on average over time. And the real reason for that is where those networks are in their network development and the amount of infrastructure that the different markets require kind of going forward. And there is a couple of different pieces in there. It's the gross growth, which is the colocation and amendment activity. It's the amount of churn that we might see within those markets. And then it is the escalator and the inflation. So they all play a role at the moment. One thing that has been really positive for us is that in our contracts outside the U.S., by and large, we have escalators that are uncapped and tied to inflation. That's a really good fact for us. So we're seeing higher levels of escalator across Europe, across Africa, in Latin America. And that's driving higher levels of organic tenant billings growth for us, which is certainly a good thing. In some markets, we're seeing an uptick in gross activity, colocation and amendment activity. We expect to see that continue. In Africa, we're certainly seeing higher levels of colocation and amendment activity. And in India, we're also seeing higher levels of colocation and amendment activity there. In some of the markets, we are seeing higher levels of churn, which offset some of that growth. So in when you think about Africa, Latin America and India that we are at a time in the development of those networks where we're seeing consolidation. We're seeing the number of carriers in many markets come down from 5 and 6 down to 5 and 4 and 4 and 3. And that's a natural evolution that we see around the globe. So you have to work through that consolidation churn. Once you get the number of carriers down to that stable number and in the markets we look at 3 carriers as kind of being the sweet spot in most places. India has gotten there. Brazil is getting there. Many of the other markets are kind of there or getting there. So once we get through some of these higher levels of churn, then we see those carriers investing in the network, trying to keep up with mobile data consumption and driving gross growth that doesn't have the same level of churn offsetting it, and then you get the benefit of having that escalator tag to inflation. So when you look out over the longer term, yes, we do expect to see gross activity in those markets at a healthy level. We're protected from inflation with the escalator. And we do think over time, churn comes down in those markets. And all that would lead to those markets driving organic tenant billings growth above what we expect to see in the U.S. by a couple of hundred basis points or so.

Let's talk about Europe. We'll start there and we'll hit a few of the other markets. How would you frame what the leasing environment like is Europe? They're still a bit behind the U.S. in terms of 5G. So I would imagine that, that's a creating a degree of tailwind in the business.

Yes, I think it's a great opportunity. Some of the 5G networks are beginning to be deployed in Europe. In Germany, specifically, we also have the addition of Drillisch 101, which is building a greenfield network. We do see colocation and amendment activity that has kicked up a little bit. And we think there's more of that to come. We think that the gross activity in Europe could be and should be and will be higher as the investments in 5G really ramp up. So that is coming. We're also seeing the benefits of our uncapped escalators. And that was, by and large, coming through the Telxius acquisition that we had done a couple of years ago. We got the terms and conditions that we required in that agreement, and we're benefiting from that now with uncapped escalators. So we're seeing higher levels of inflation, which is -- which we are able to monetize into higher levels of rent. And then the other thing that's key in Europe is that we see very modest, very low levels of churn. And again, that was a function of the agreement we did with Telefonica when we bought their assets. They're on long-term contracts, and the churn now is very predictable for us throughout the portfolio in Europe, and we see very low levels of churn, uncapped escalators. And what we hope to see is a growing and escalating level of gross activity -- and we feel confident in that because of where Europe is on the cycle of 5G. Because of the addition of Drillisch 101 and the fact that they're picking up speed, we're seeing them begin to co-locate on more of our assets through the back half of this year. So we feel really good about Europe. Europe this year, we're projecting 8% organic tenant billings growth. So a very nice growth rate and a very stable high-quality economy.

So based on that solid fundamental outlook, do you have an appetite for acquiring more assets in Europe?

Yes. It's a great question. I mean we're in the business of owning and operating assets. We do think scale adds value to our portfolio. At the moment we don't see anything in our pipeline, in our M&A pipeline that gets us to interested or excited. So we've been saying, and we're still in a place where we just don't see any M&A, any material M&A through this year certainly. And I would say, getting into next year, probably deep into next year, we just -- we don't think that, that's going to be the priority. With that said, Europe is a place where if we could find some additional assets at the right price and at the right terms and conditions, with the right counterparty, adding scale in that market could be interesting to us. But we would do it in a very disciplined way. If the terms and conditions don't come our way, we wouldn't be interested. If the Pricing is not quite right, we wouldn't be interested. It's all about the opportunity and being an opportunistic. We like our portfolio the way it is in Europe. So if that's the way that it stays and we continue to drive the compelling growth rates, that's perfectly fine with us if we find really unique, compelling ways to increase the size of the portfolio, then yes, we'd be interested in that. But I would highlight the fact that we just don't see that happening for the foreseeable future here. We are focused on delevering our business, driving down our exposure to floating rate debt and strengthening our balance sheet, driving organic growth through our U.S., Europe and around the globe as well as in CoreSite. That really is our focus, not M&A at the moment.

All right. You mentioned India earlier. You are running a process for your Indian business, and you've said that you're focused on selling the majority stake in that business. What are you ultimately hoping to accomplish with the process in India? What boxes are you trying to check? And how would you think about allocating any proceeds that might come from that?

Yes. It's really pretty simple. I mean we are looking to sell a majority stake of that business, that could be anything north of 50%. It could go up to 100%. We're in sort of the late stages of the process. So we've been at it for a little while. -- and we feel confident in terms of where we're headed for that. And the outcome and the goal is by selling a majority stake, we're looking to reduce our exposure to that market. That's clearly one of the outcomes that we are trying to drive. Selling a majority stake also would mean that we don't have operational control of that business. We would no longer be consolidating it into our numbers and we would be reducing the overall exposure. That really is the goal, right?

The Indian market has performed very differently than potentially every other market outside the U.S. that you went to. Any key takeaways from the experience you've had there that's shaped how you think about evaluating opportunities that you see in other parts of the globe?

Yes, absolutely. We've learned a lot in India. Some of the things that we've learned is that the outcomes that we expected didn't materialize. And there are reasons for that. A couple of simple things. One is we saw rapid consolidation in the market. And we knew there would be consolidation that happened a little quicker than we had anticipated, that ended up creating a churn on our numbers and it turned our growth rates negative. We could have certainly gotten through that and with the amount of people, the amount of infrastructure that's still required in India, the Indian market could have turned a corner and been really productive for us. But there are other things that ended up happening in the India market, primarily the way some of the competition has rolled out with RGO building a 4G network largely by building their own assets, that was a little different, not what we had anticipated when we first got into the market. The government kind of letting that happen was a little different. We learned a lesson there. RGO was basically giving away service or had it priced very low, which created trouble for the other carriers, I think. And then the other thing is we ended up in India with the original contracts being a 2% escalator, not tied, not uncapped and tied to inflation in the market. And of course, that doesn't help create value on our end. We originally were thinking we could try to change that term going forward with other carriers, and it's just proven to be very difficult to do. So many of those lessons that we learned along the way have already been implemented around the globe and in processes that we've looked at over the last several years. So many of the, I guess the way I would frame it up is, many of the portfolios we didn't buy in the last few years were because of lessons we learned in India where we saw some similarities developing. We also scanned our portfolio globally to see are there any of those things that could potentially be coming down the pike in the other markets. And the good news is, I think that India really is very unique in terms of the way that it operates and the outcome on the tower side. We don't see those patterns repeating themselves in any of our other markets; like in Africa, we're seeing really good growth. We're seeing some consolidation shown but that is perfectly normal and expected. We have got the uncapped escalators, so we are good there and we have had really good outcomes in terms of collecting on all the receivables throughout Africa. So it's a totally different situation in Africa and India is somewhat unique.

You touched on Africa. I'd like to quickly touch on Brazil. What do you think is the path to getting to a faster growth profile in Brazil; it had a decent growth at period of time. You're going through some churn right now. Where is that market in the cycle?

I think Brazil is coming into a very interesting place. They've gone through some of the consolidation churn that we have seen in other market and that we're seeing in other markets. So we saw the consolidation of the Nextel portfolio, we are seeing the consolidation of then Oi portfolio. We do think Brazil is kind of turning the corner and getting through their churn, they are down to 3 primary carriers. And those are really good facts for use. We have got the ability to inflation in that market. And they're launching and rolling out 5G, there's going to be new spectrum becoming available. So we think Brazil is in a really good position now that they're getting down to those 3 carriers. There is a little bit more churn that we have to work through in Brazil, notably the Oi churn that will take a couple of years probably to kind of work through. But other than that, the fundamentals are really coming into view, and that market looks very good. And I do think that a lot of the gross growth, the activity level is going to be driven by mobile data consumption across Brazil and it's going to be driven by higher levels of higher technology being deployed in and across Brazil.

Let's turn to CoreSite, your data center business that you acquired in 2021. As you mentioned, it's a high single-digit grower. I think it grew about 9% through the first half of the year. It's actually outperforming the sort of the 6% to 8% target you had set when you acquired it. What's driving the elevated growth?

Yes. It's a great question. We're very pleased with what we're experiencing with the CoreSite acquisition. Right from day 1, we've just seen a very steady and at times, accelerating level of demand for that business. That elevated and steady and elevated level of demand is giving us some pretty good pricing power. So we're being very focused on that as well. And the demand comes in a couple of different forms, and it really is centered around the high-quality nature of these assets. I mentioned it a little bit earlier, but we basically have 8 different campuses. We've got a couple of dozen buildings across these 8 campuses. In each campus, we have multiple on-ramps for cloud access. So there's multiple cloud players represented in each of these campuses. We've got over 450 network companies within these campuses. And much of our business is retail based with enterprise customers coming in and taking space. When those enterprise customers come in, they're coming in because they need access. They want access to the cloud on-ramps. They want to get into the network companies and then they begin to cross-connect with one another. So that is the uniqueness of or the differentiated nature of these assets. I think that's what's driving a lot of the demand is that the high-quality nature of these facilities and what can happen. Much of the demand is our existing customers increasing their footprints, increasing the amount of interconnections that they get. That's one of the differentiated outcomes that you get in this kind of environment, is your current customer want to do more and more? It also helps you hold the churn down because we're not just providing power and cooling and space to these customers where they could easily just negotiate price and go somewhere else if you don't give them the price they want, but they're benefiting from all these interconnections. They're benefiting from the cloud on-ramp. They can't just unplug that stuff and move somewhere else. So that ends up increasing the overall experience the customer has and it ends up holding the churn rates down for us. And we're seeing churn rates at the low end of our original kind of plan the low end of that 6% to 8%. We're closer -- much closer to the 6% at the moment. And on a pure economic activity, we're kind of getting outside of that 6%-8%. And the other thing I would highlight is you've heard us talk about the record level of new business that we saw in 2022. That's new contracts that we signed up that we have yet to deploy for the customers. The cycle to deploy some of that new business can take up to 18 months or even 2 years so we're in the process of deploying that record level of new business. This year, we're having a very strong level of new business being signed up again this year. We won't see and you won't see the benefits of those -- that activity in our growth rates until late in '24 and into '25. So we sit back here, we're already in the upper single-digit growth rates for this business. We're coming off of 2 very good years of new business that we know will help accelerate that growth when you get out to '24 and '25. So we feel really good about the set of assets that we have and the economic results that we're seeing now, but also out a couple of years, '24 and '25, it could even be better.

Got it. And as you mentioned, because you have a retail-oriented business model, this is really being driven by enterprises deploying hybrid multi-cloud architecture, i am afraid. Notice I didn't say AI, but we always get questions, how are you thinking about what the AI opportunity could be for your business as it currently is? And does it shift your perspective on the amount of capital you might want to ultimately put into data center assets, including potentially hyperscale assets?

Yes, it's a great question. We certainly think AI is going to be a big driver of data center -- demand for data center space. Early on here, in the early stages, it's driving a demand for hyperscale space. So we think that's kind of the initial wave. Our business isn't hyperscale centric. We like the balance of the portfolio with cloud on-ramps, networks and enterprise customers. So we don't think AI is going to actually drive a material level of business for us for a couple of years, but we do think it's coming. So that gives us -- the addition of AI here is something that we think is going to be coming within a couple of years that will really be hitting the demand for the types of data center space that we offer. So that's another fact that we look at across this data center space and say this business is really strong and really solid, not only is it in the highest quality economy from around the globe, but the demand is tremendous and the growth rates are probably going to be higher than what we see on the tower side in the U.S. So we like it from that perspective. In AI, once it really comes, once it starts hitting the data center space, it's going to be another leg of demand and growth for the data center business.

Okay. We touched a little bit on capital allocation earlier because you talked about M&A and you sort of said right now, it's not what the focus is. Your net leverage at 5.3 turns is just above the 5x that you target. How do you think about the path to getting to 5, it's not that far away. And then as you hit that, how might you look to evolve your capital allocation priorities?

Yes. So we're at about 5.3 now. We do want to get down back down to 5, maybe even just below 5. We'll be focused on that. And there's also a couple of things I would say about our balance sheet and, let's say, strengthening our already very strong balance sheet. Not only do we want to delever, we also want to reduce our overall aggregate level of debt. Right? So if we do monetize an equity stake of our India business, the proceeds they will go to reducing debt. We did -- we sold a fiber business that we had down in Mexico. We use those proceeds to reduce debt. So we are putting capital towards debt reduction, kind of aggregate debt reduction. And we also want to continue to delever, get down to 5x or just below 5x. And we're also looking to reduce our exposure to floating rate debt. So we started the year at about 20% of our debt structure was exposed to floating rate. We've gotten that down to just about 15%. We took that down from -- in the $7.5 billion of debt that was exposed to floating rate down to about 5%, and we expect to continue on that trend really across all 3, trying to reduce the aggregate debt, working on delevering the balance sheet overall and continuing to work on reducing our exposure to floating rate debt through the balance of this year and probably well into next year.

All right, Rod. That's great point to stop. Thanks so much for being here.

Thank you. Thanks everyone.