American Tower Corporation (AMT) Earnings Call Transcript & Summary

So thank you guys all for joining this session. My name is Dave Barden. I head up the Telecommunications and Comm Infrastructure Research Group for Bank of America in the U.S. and Canada. We're really pleased to have with us today Rod Smith, the Chief Financial Officer from American Tower, joined by [indiscernible] from the IR group here. Thank you guys for joining us at our 2023 real state conference.

Yes, welcome. Happy to be here. Thanks for inviting us, David, and thanks, everyone, for coming and joining us this morning.

So is the very first tower REIT in the U.S. and as the official tower flag bearer at the conference, I have to ask you the 3 conference questions that everyone's been hearing answers to from all our management teams. And the first is on the Fed, do you believe the Fed is done hiking? And yes or no? And do you think the Fed will cut rates in '24 yes or no?

It's a great question. And I want to avoid your first question, but I hate to speculate to what the Fed is going to do. It's really a no win situation. Certainly, the sentiment at the moment is that they would hold rates where they are. And I think that's probably likely at least this go around what that means longer term, we'll just have to let the economic indicators kind of figure out where they're going to go and what the Fed will do. They've done an awful lot of work. They've raised rates quite a bit, and I'm certainly hopeful that they've done enough. That would be good. With that said, we're not overly speculating in terms of where rates go. We kind of see this environment as an environment with uncertainty around rates, and we want to make sure we have a strong kind of defensive balance sheet in light of that. So we are focused on delevering. We're focused on reducing exposure to floating rate debt. That's been important to us. Sure. Is that any better? No. I don't know if there's the mic is even on. How about I just speak up louder? Doesn't feel like the mic is on. So that's kind of the way we think about rates. We want to just be prepared in this environment where rates have gone up and uncertainty run rates continue.

So I noticed that you guys just on my way over here launched a bond offering today. Maybe talk a little bit about that in the context of your thoughts on fixed versus floating. And it looks like you're looking for a 10-year plus 190 that would put you kind of in the 6% type of funding range. How do you feel that fits into your kind of financial plan?

Yes. So we are in the market today. We're looking for a benchmark size, splits between 5 and 10. We'll see where the pricing gets through during the day. So we'll let that kind of unfold. And what we would do with the proceeds is reduced floating rate debt exposure. So we started the year with about $7.5 billion of floating rate that. That was about 20% of our debt structure that was exposed to floating debt. In the first half of the year, we've been able to reduce that down to about $5 billion or about 15% of our overall debt structure. And the market activity that we're in today will help further reduce that, so...

So you're going to take the variable with this...

We will end up taking out the variable and with this and that will likely put us somewhere lower than 15% exposure to floating rate debt. That's a good thing. The fixed -- the floating rate today, the cost of that is a little over 6%. So there is a good chance that this transaction today will be accretive to the overall interest rates modestly but accretive, but it also takes away some uncertainty around rate variable charges going forward, which is a good thing for us.

So does that move towards fixed imply that you don't expect lower rates in 2024 or anytime soon?

No, not necessarily. It really just highlights the fact that we see an environment where rates are uncertain and having and bringing certainty in an uncertain environment, we think is a good thing.

I think that this second big real estate question probably isn't exactly applicable to the power space because I think you guys talked about the bid-ask in American Tower industry in general. But I think that there's an interest level among real estate investors generally about activity levels. Do you think that there are more or fewer or the same amount of deals likely to kind of unfold in the second half of 2023 into 2024?

From an M&A perspective globally?

M&A perspective globally, yes.

It's an interesting question. Again, I hate to speculate on what deals might come up. Certainly, the deal flow is lower than it used to be than it has been in the last several, I guess, if you go back a year ago and you look at the preceding 5 years, there are a lot of deals being done globally. That has slowed down. I think we're going to continue to be in a environment where M&A is a little bit slower. There still is a spread between the bid and the ask. There certainly is a differential between public equity valuations and private company asks at least at the moment. So I think there's a little bit more kind of time that has to lapse before deals begin to really flow like they used to. With all that said, when we look around the globe, there are a number of places and a number of potential assets that we think will come up over the next, let's call it, 5 years, right, maybe not in the next 1.5 years, 2 years. But when you look out over the longer term, there's opportunities for inorganic quotes that will come up. When we look at our portfolio globally, we like right where it sits. We don't feel the need to make changes or buy anything material. We're likely in the countries that we want to be in, whether that's developed or emerging markets, I think we're there. Now it's about building scale within the select markets where we're driving value creation. So we would always be disciplined. We'll continue to be disciplined. But over the longer term, if deals come in that are in the right geography with the right counterparty with the right growth attributes, and we can strike the right terms and conditions with the sales, we want to be prepared to execute on that. I don't see that happening for us, certainly not this year and probably not in the first half of next year. We will continue to be focused on delevering probably through that period.

The -- on the flip side of that is divestitures. Obviously, you've been pretty public about your desire to kind of transact a majority stake out of India. Is there some kind of update on the timetable for that? Is that a 2023 event?

No real update from what we talked about in our last call, we are in the last stages of a process. We have options, discussions continue with very credible well-known global investors that we're talking through. And our expectation is that if we come to agreement, it probably happens in the second half of this year there would also be an approval process through the government to transfer equity and those kind of things. So the closing time frame potentially could happen this year, potentially could be early next year. But I would say look for -- if negotiations continue to go well, look for some announcements second half of this year.

So let me ask just on that topic before we get to the third main question in the middle of the day. A couple of questions on that. One is that there's been, to your point about the difference between the bids and the asks reports out of India are that the valuation for that for a 50% stake in the business is going to be transacting in the $1 billion to $2 billion neighborhood. You guys have kind of talked more about a $4 billion valuation. Who's right...

Yes. It's an interesting way to frame up the question. Certainly, we have a carrying cost in India of about $2.5 billion or so. I think we've invested a little bit more than that into the market. India is a very interesting market. There are public comps there, so you can kind of look and see what the public trading values are for the publicly traded tower companies, that would give you an indication. But certainly, when you look at that public valuation, it's mid-single digits. That's kind of what we see in terms of the public company over there trading, and the value will be the value -- the value of that business is really based on future forward-looking growth prospects. Everyone may have their own view. So -- and we certainly have a view and we'll kind of work through that. That will be part of the negotiation with the parties that we're talking to. But when we look at the market, it's really we're not making this decision based on past experiences. We're making decisions based on what we expect the outcomes to be going forward. And we will end up making what we believe is the best decision for our shareholders going on value creation. And if selling a majority stake and reallocating that capital to a different use and in this environment, it would be to pay down debt, build that capacity potentially for some future use, more accretive, higher return use down the line, then we will be doing that on what and what we get now, it's all about going forward, what are the growth prospects, what are the quality of the earnings, how comparable those earnings in India, what are the alternative uses of cash. That's what we're going to be looking at.

So I've gotten this question from real estate investors that are looking maybe at America Tower at early stages, and -- let me ask you this question. If for the sake of argument, you're selling India at a mid-single-digit multiple. Is there any concern on your part that people started extrapolating, let's put a [ Tele ] on Mexico, let's put an INWIT multiple in Europe, let's put an IHS multiple in Africa. Is there any concern that when you add those all up, what appears to happen at the American Tower consolidated level is that you actually get a rare holding company premium for holdings international assets. Is there some part of you that wonders if maybe expressing this value in India might be a detriment to the stock price and how people look at it and value it?

No, there's not. I mean when I look at our business globally, I think there should be a premium for American Tower management of these assets and figuring out how to deploy capital in these emerging markets as well as balancing that with the capital we deploy in domestic markets. I think India is a unique place for a lot of different reasons, which I won't go into all of the details. But what we see potentially impacting long-term kind of future growth in India is unique to India and not in other markets. So you can have more macro global cycles that cause ups and downs in public equities. I think you're seeing that even in the public equities for towers in the U.S. and you see that globally as well. But I think American Tower has a long-standing history and tradition of making good decisions internationally. And I do think that the India decision that we will ultimately make will reflect well on us in terms of our ability to understand what is happening in India and where that market is going and having the courage to make decisions around redeploying that capital somewhere else. I think that's a good thing for investors. We also recycle some capital out of a small fiber business in Mexico...

[indiscernible] question here, when you finance foreign catalysts, did you use local currency? Or did you use a American currency to build those Towers...

Let me repeat the question, which was from the audience, which was when you are investing in international markets, you use local currency to finance it?

Yes. We do have some local currency, not in every market. India is a market we do have some local currency borrowings. We've had it over time. We've had as much as a few hundred million dollars of local currency debt in India that we've used to fund build-to-suits and investments in India. We are in 25 different markets, but we have local currency borrowing, just in a handful of markets where it makes sense. Our balance sheet has kind of shifted towards more exposure to European Europe debt which we find is helpful now that we have a larger presence in Europe. But the primary way to think about the way we fund our businesses as we raise U.S. dollars, we export those into international markets to do acquisitions. We put into company debt on it. That's a way to get dollars out on a consistent basis from local countries, usually pay back the intercompany interest. And it helps balance cash taxes and getting cash and kind of repaying some of that initial investment.

Just on that, maybe to follow up on that question real quick. Obviously, one of the big movements this past quarter was the Naira revalued pretty substantially in Nigeria. You were actually kind of lucky that the Real and the Peso in Mexico, Brazil kind of offset that effect. I think that, that speaks a little bit to the diversity of the currency and somehow when some are up and some are down, and all kind balances out. But is there anything about that experience in Nigeria that makes you think about hedging in a more serious way or at the margin?

No, it doesn't really change our approach to hedging. A couple of things I would say, first off, with all the deals that we do around the globe, we have -- we underwrite those deals with an expectation of foreign currency impacts and foreign currency devaluation, let's say, over time. And we have that built into the long-term models. So the one thing that we know about foreign currency is it's very difficult to predict on a quarterly basis and even an annual basis, but you have a much better chance when you look over a long period of time, 10 years, 20 years. So we're long-term investors, and we underwrite our international deals with the expected foreign currency devaluation which is the way that it usually is underwritten, the devaluation in currency across Latin America, across Africa. Across many of the emerging markets in India. They naturally have and are expected to see currency devaluation. That makes its way into our long-term models. And now our returns assume that level of devaluation, we feel pretty good that over a long period of time, you're probably going to be in and around that level of devaluation. The way we get to that expected devaluation is looking at the long-term curve for inflation expectations in those local markets up against the inflation expectations in the U.S. and differential translates into foreign currency devaluation or appreciation depending on how it would be. And now that we're in Europe, we see some of that. So that's -- so we do have that underwritten in the investments that we that we make much of the cash flow that we have that we generate in the businesses comes through very high margins. A lot of the expenses in the emerging markets, like power and fuel, get passed through to the carrier, so we don't take the risk of power fuel prices going up and even the foreign currency there. We have protection around the globe for high inflation in local markets because we have generally untapped escalators that are linked directly to inflation. So we're seeing the benefits of that across Latin America. We see the benefits of that in Africa in parts of Europe. In India, India is where we have 2% escalators. That's 1 of the things that, of course, that goes into the underwriting going forward with in India. And I guess I would put it in the category of lessons learned that twofold. One is having a fixed escalator that is expected to be well below the inflation of that country is not a great long-term component of a deal for us. Number 2 is, in certain markets, that could be very difficult to change over time. We thought we could change that over time, maybe with new contracts, new customers. And what we are realizing is it's very difficult to change and quite frankly, probably unlikely to change. And that's going into our thinking around do we stay in India as a full owner or do we sell a majority stake. So that certainly is a lesson learned from that perspective. When it comes to hedging, we do have some local currency borrowings. We have local currency borrowings. In the Euro now, the euro has a different relationship with Africa countries than the U.S. So you do get some differences there. We are seeing continued headwinds from FX in Africa. We're seeing substantial tailwinds in Latin America and in Europe right now. So that portfolio effect, having exposure in multiple currencies helps mitigate the ups and downs that you might see. But we also do feel good about the way we underwrote these assets over the long term.

I do want to get to actually a real business. But I have a third question, which is -- are you using AI to help run your business today? And do you expect to allocate more resources to AI in the near future?

Yes, it's a great question. I mean we are exploring AI just like everyone is exploring AIR. Our IT group as well as our innovation group, we're doing some work on it. We've talked to some companies that have AI tools and technology. We do think AI and the predictive nature of the learnable nature of that, it is potentially helpful to go through unstructured data and trade patterns and then make predictions on that, we're seeing that, that could actually be helpful to a business of our size geographically spread with the amount of data that we have access to within our own business. So yes, we're exploring that. It's not going to be a big investment. So you won't see anything from that perspective. And I would say we're -- of course, we're at the very beginning of that. So more to come later, but I do think it's shaping up to be a nice addition to analytical research to really understanding and using data, we certainly have data warehouses and data lakes. We get all the data from our businesses around the globe into a central repository. We have the ability to extract and analyze and make decisions. And we use that a lot. But we've learned a lot, and based on data and even based on some of the things that we've experienced in India. It's not as though we're just learning our lessons today. We've been learning for the last 10 years about India. Some things are shifting India that make us maybe think now is the right time to sell a majority stake. But we took those lessons learned and we applied them to new underwriting cases over the last several years. And I would highlight, not to get too specific, but there are many portfolios in Asia that were available that we looked at. And we saw some similarities to what we have experienced in India and we didn't execute on any of those deals because we had a different view of the outcomes based on our lessons learned in India. Things like having low to no escalator is in an environment where you have 5% to 6% inflation. It's not a great place to be. And again, changing those terms once you're in the market is very difficult.

You didn't just type that into ChatGPT and get the answer?

No. No, we didn't.

So, along these lines, I mean, America Tower, just to touch on this real quick, American Tower is in the kind of unique position of having -- owning a data center. We just ran -- we're running concurrently our first-ever 2023 AI conference that data center company is presenting there we were lucky enough to talk to Juan Font, who runs your data center business, formerly known as CoreSite, still known as CoreSite inside American Tower. It's a small piece of your total business. But is it fair to say that what this business is outperforming kind of what your expectations were when you acquired it?

Yes, I think that is fair to say. It's just the raw numbers suggest that is outperforming. We underwrote it with roughly a 6% to 8% economic growth rate. And we've been at the high end, if not outside of that range since we bought it. We had -- we experienced our a record-setting level of new business being signed in 2022. We're on pace to have a level of new business signed in '23 that is getting close to the record that we set in '22. The other thing I would say about that is the cycle of actually signing up new business than actually deploying it and getting to the place where you're collecting revenue on it, it can take 18 months to 2 years. So much of that record-setting new business, you won't see in our growth rates until the late stages of '24 and into '25. So not only are we outperforming now with upper single digit. I think it had to be double-digit interconnection growth in the last quarter, we've been up in the single digit revenue growth. But with the record of new business we've experienced in '22, the high rates that we're experiencing in [indiscernible] we've got an order book and a pipeline that is larger than it's ever been. And that speaks really well to a continuation of strong performance and even higher potential growth rates when you get to late '24 and into '25 when we're actually delivering on all the new business that we signed up in '22 and '23. And it's kind of across the board. I mean, we're seeing high levels of economic growth in terms of being up at the higher end of the 6.8% or above that, we're seeing high levels of interconnection growth, again up in the single digits, we're seeing churn at the lower end of the curve, we're able to increase pricing in this environment. So we've been doing that a few times. The other thing that a lot of people ask about on the data center side is power pricing going up and power availability, and we're in really good shape on both of those. Tower, for us, the simple way to think about it on our data center side is we can pass that through to the customers. Some of our assets are in regulated areas where pricing can't change. But when it does, our contracts allow us to pass it through. to the customers, whether they're on a variable contract or a fixed contract, which means they pay us a fixed fee or they pay us for what they use. Either way if pricing goes up, we can readjust the prices at any point and past that factor. So we're protected from power prices in those increases. And in the markets that we're in where based on the activity levels that we're seeing, we're prepurchasing power and making sure that we have a power available to us a year down the line, 2 years down the line. We're looking now to make sure we have land available. We bought a couple of parcels of land recently that will be used to build additional facilities in and around the campuses we already own that all connected to the cloud on all rooms we already have and benefit from the power that's already there. So for us, a lot of the planning is over the longer term, the medium term in the next couple of years is making sure we have the capacity available to build up to meet the demand, and we're in good shape, and we work on that a lot. -- and then to make sure we have the power available to that demand going forward for the next several years as well. And with that said, we've signed up some new power agreements in certain parts of the country, where we know we need more power and the utility now is building out the substation in has committed to delivering that power to us in '24 or '25 when we contracted and when we need it. So we're in good shape from that perspective. But that business is performing exceptionally well, and it is a testament to the high-quality nature of that business It's not your traditional data center business. It's centered around multiple cloud on-ramps in each campus it's centered around hundreds, more than 450 network being present within these campuses and that attracts the highest quality enterprise customers, enterprise retail customers that enjoy a high level of interconnection within that. And when you have that -- when those enterprise customers to access networks to access multiple clouds and impact with one another, it's quite frankly, more difficult for them to unplug and move somewhere else. That's what growth rates up, the churn down gives us the ability to increase prices on our cash mark-to-market in some data center businesses, that's a negative, when a lease for space comes up to renew, you give them the same space for less money. That's kind of not surprising. In our environment, it's always a 3% to 4% increase. And even now, we're seeing it at the upper end and outside of that as well. So the quality of the asset is really good. The performance is really good. So we're very pleased with it.

Sounds exciting.

Yes. And it may lead to being able to connect in tower assets into data centers through the edge at some point some day.

So you mentioned that tower stocks can go through these macro cycles and tower stocks have struggled this year. It's been noticed by everybody. I have a theory. I think there are 3 reasons why that is. Number one, the world has decided that there's not going to be a recession. So we don't need to be in defensive stocks anymore. Number two is rates are up and they look in the no recession environment that they're going to be higher for longer. That means refinancings are more expensive than the old school days, that's having effect on the FFO outlook. And the third is that there's a big slowdown. We all knew it was coming. But in the words of one of your peers, it was more abrupt slowdown than maybe a lot of people expected. And there's not really an obvious catalyst for a reacceleration in carrier spend, which could kind of create surprising upside. American Tower stands out in that third element of performance that has outperformed peers because your domestic growth outlook so much better. And the international diversity that you have actually is a strength. And so I guess the first piece of that, can you talk about, how is it that you can look out and say, I've got 90% visibility of 5% domestic top line growth? And was that an accident? Or are you that good?

Yes. No, it wasn't an accident. And to be modest there, I would say that it's just something that we've been building into our business over a long period of time. So the reason we have such high level of visibility to our growth rates for this year. And then our confidence in being able to provide a long-term guide for organic tenant billings growth in the U.S. that on average, 5% from now to 2027 is because of the nature of the rings that we have in the U.S. and the way that they work and just kind of a simple explanation is we call them comprehensive agreements or holistic agreements. And what it is, is an arrangement between us and a carrier -- with the carrier basically tells us what activity level they want to perform over a year period. We price that up, and then that becomes kind of the revenue step-up, so they use right fee that goes in the agreement. And for that use right, we give them the rights that they were looking for right? So we're not giving them discounts. We're not giving them any other economic benefits. We're basically just they're committing to use our sets in a certain way and to pay for it over the [Audio Gap] period. It takes the variability out of the situation. The real benefit is that it gives them visibility into their expense line based on the work that they expect to do. That way, in that time period, you're not changing pricing tables and that sort of thing is kind of baked in for a multiyear period which is good for them. But the real benefit is that it administratively makes it much easier. So instead of having to file a site license and negotiate a price or even other terms and conditions, and wondering how long it's going to take to get that approved and kind of working through, you can remove literally months out of the cycle. And you remove a lot of unpredictability in that cycle from the carrier's point of view. So now we've got a framework where they already know what they're paying. Those payments just continue to come and they escalate at certain time periods kind of over a multiyear period and they have certain rights, they just file SLAs and turn them in and then they can quickly get their equipment on the site. So it takes out any kind of risk in terms of their network deployment and they're paying what they expect to pay to the activity level that they're providing. We're now in a situation where we have that type of a structure with most of the carriers in the U.S. So we have a high level of visibility into an average 5% organic tenant billings growth from now to 2027. And it sort of decoupled from the actual level of activity that the carriers do from quarter-to-quarter or year-to-year. And the other I would say the carriers will pay for that activity level they committed to, whether they use it or not. And they're really good about using it. So they will use the rights that we've given them. They will pay for those rights as well, and that's what underwrites the 5%. So from that perspective, we're fairly well insulated from a temporary pullback in capital investments from carriers from now to 2027. When I look at later in that period and beyond 2027, there is going to be a need for continued carrier investment in the networks, probably in the range of $35 billion a year to keep their 5G networks up and running. And there will be use cases coming down the pipe that will spur demand for 5G type speeds and reduction in latency and capacities and those sorts of things. That is something that every time you change the cycle of technology going from 2G to 3G, 3G to 4G was huge. And then now 4G, the 5G people wonder why do you need 4G they know when people were still on 3G networks, why they need 4G, the iPhone came in and applications came in, they realized why they need 4G and the spending was there for a long time from the carriers. Same thing is going to happen with 5G. The technology of the 5G, the lower latency, the higher speeds, the broader capacity, the different type of spectrum that's used. That's going to drive use cases, increases in mobile data consumption, and because of the nature of the propagation of the mid-band spectrum, going to drive a need for more investment in the networks to make sure that their networks give you that ubiquitous true 5G experience. So we do think that the slowdown in spending you're seeing today is certainly temporary. We -- even now, what you see is the level of spending that's on par or even ahead of where it was in 4G. It's just not where it was last year. And our expectation was never that the carrier spending was going to stay at north of $40 billion a year. It probably pulls back in somewhere between 30% and 35% and moderates over the longer term in this 5G cycle at around $35 billion a year. That's kind of what we see. So we are protected from volume slowdowns between now and '27. By the time we get to 27, there's going to be needs for long-term capital investments and pretty consistent capital investments.

When you -- [indiscernible], anybody goes from 2, 3 to 4 or 5, [indiscernible] 100% of the upgrade?

Yes, that's the right way to think about it. It's really them upgrading their network. They're operating their antennas, their cables and lines, their software and in that spectrum that they used...

It doesn't affect you monetarily...

It doesn't affect us monetarily. I mean there could be some redevelopment. It's not technology specific. And in the U.S., most of that redevelopment, like strengthening a tower to handle more antennas. We may pay for that and a portion of that or all of that gets passed back through to the carriers. That's kind of how it works in the U.S.

And what percentage of your towers in the country in the United states that you own?

40,000 towers, almost 43,000 towers. There's 2 ways to think about it, this tower...

What percentage?

It's probably in the range of the 30% range, 30% to 35% range in and around there. There's a couple of ways to think about it. One is just towers. Which is one kind of universe of assets, but then there's carrier deployments and a lot of the antennas can be on non-tower assets as well like rooftops and things like to happen. But we've got a -- we're in that kind of ballpark in terms of percentage of towers.

One more question over here.

Could you talk about the -- how this [indiscernible] the 5G impact on your [indiscernible].

So the question was how was fixed wireless access impact tower demand.

Yes. What it does is it basically uses the benefits of the 5G networks, which is higher capacity, lower -- faster speeds, lower latency to give you a faster broadband experience into an in-home environment to the point where it could be and is proving to be competitive with traditional cable companies. What that does is it just opens up a new use case, drives up potential demand on the wireless networks. And that demand on the wireless networks go up, they need more equipment on the towers. And that's how we end up participating in that to the extent that a share of the bandwidth on the wireless networks is consumed by fixed wireless access. That probably means over time, they just have to put more equipment up on the towers, and we benefit from that.

I think we've kind of used up our time. It was a great conversation, Rod. Thank you so much for being a part of this. Thank you guys for all joining us. Next up is lunch upstairs in the fifth floor. But please join us for a conversation with the CEO of Digi Realty right after lunch.