American Tower Corporation (AMT) Earnings Call Transcript & Summary

Welcome to Citi's 2024 Global Property CEO Conference, Joseph, here with Mike Rollins with Citi Research. We're pleased to have with us American Tower and CEO, Steve Vondran. The session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions. Steve, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today and then we'll get into Q&A.

Thank you for inviting me. I'm Steve Vondran, CEO at American Tower. Alex had my IR guy will be...

I'm sorry, one second. Is that Michael? Okay. Go ahead.

Hi, I'm Steve Vondran, CEO of American Tower. And with me in a few minutes will be Alex Head from my IR team, and I appreciate the invitation here. Why should you invest in American Tower? Well, the reason you should invest in American Tower is that we have a tremendous opportunity to continue to grow our business and create incremental return for our shareholders. And I'll touch on that in kind of 4 categories on it. The first is the demand that has underpinned our outperformance for the last 2 decades continues unabated. If you see the consumer demand for mobile data, it continues to grow across the loop. In the U.S., the analysts are predicting that mobile data usage in the U.S. will grow 20% to 30% a year for the next several years. While that's a little bit of a step down from the 30% to 40% that we saw in 4G, it's on a much larger base. So as an industry, we have to produce a lot more gigabytes of data that we had to incrementally than we had to in 4G. And that's going to require more deployment on towers. Not only are we seeing increases of usage in the U.S., we're seeing a differentiator between 4G and 5G. 5G mobile handset users are using roughly twice as much data as 4G today in the U.S. When you think about those demand drivers and the fact that they keep going up, that's based on existing use cases today. That's not anticipating some new use case that puts incremental demand on the network, that's just the way we're using our phones today to do more and more and more. And that same demand driver, we're seeing play out internationally as well. And in fact, in a lot of our markets, it's going up even faster than that. Because if you think about some of the geographies we're in, people don't always have broadband to the home. They don't always have a wireline that they can rely on. So their smartphone, their mobile Internet is how they get broadband across the board. So we continue to see usage trends go up across the board, every geography we're in, whether it's 4G or 5G that they're relying on. When you think about those demand trends, you pair that with the second element that I talk about, which is our portfolio. We've built an amazing portfolio of assets over the last 20 years. And we're in the largest democracies across the globe. And those assets are typically anchored by the #1 or #2 carrier in every market where we've acquired or built a portfolio. So those are the backbones of the networks that are going to continue to evolve to meet this growing demand that we see from mobile data usage today. And if you look at just the growth that we've seen, even in a challenged market, we've had healthy levels of organic growth -- organic new business on that portfolio across the globe. And while we've dealt with some care consolidation churn, a little bit of foreign translation issues in some of the markets and some of our customers are having some balance sheet strain because of the macroeconomic conditions, they all continue to grow, and we're posting good growth across the board in new business. So we've got great demand. We have great assets. The third thing that we've developed that I think is unique to American Tower is we have the optionality to keep investing our capital and we can allocate that capital to where we get the highest risk-adjusted returns. And so you've seen us dynamically allocate that capital among the various geographies that we have. And we also had the CoreSite asset in the U.S. And so when we're looking at capital allocation, you've seen us make a little bit more of a pivot, a little bit away from some of our emerging markets into our developed markets. It's not because we don't think those emerging markets are great opportunities, they're still seeing a ton of growth in terms of new business there, but we raised our hurdle rates because the macroeconomic conditions are different there. And we have the optionality to do that. So we've created a portfolio where we can move capital around to the best highest rates of return on a risk-adjusted basis, including our CoreSite portfolio in the U.S., which is also seeing the same demand trends, a little bit different drivers to it, but it's seeing demand trends that are supporting tremendous growth in that asset that still allows us to underpin the same types of returns that CoreSite saw before we bought them, and that's kind of mid-teens returns on invested capital once an asset is fully stabilized. And we're able to put some more capital into CoreSite in the U.S. at those types of anticipated returns. So that third characteristic is demand for the existing assets, that's a great portfolio and the ability to continue to invest at good risk-adjusted returns. And the fourth thing I would point to is our people. We've built an incredible team of people across the globe, and they're the best operators in the market. And what that's allowed us to do is be very disciplined about our costs. In 2023, we brought down SG&A from what our levels were in 2022. And on our most recent guide for 2024, we anticipate taking another $30 million of SG&A out of the business. And what that's allowing us to do is expand our gross margins in an inflationary environment where you could see some pressure on that. So a very high percentage of the growth that we're going to see from that -- those demand drivers on that great portfolio is going to drop to the bottom line. So we think all that adds up to an algorithm that's going to give our shareholders, some nice runway to see accretive returns in the future.

Thanks, Steve. Maybe delving into something that you were describing on the earnings call in terms of one of the opportunities and priorities for the company is the assessment of your markets and products and the internal review. Can you share with us so far, are there any significant unexpected learnings, good or bad from this process? And how should investors think about the timing and range of outcomes that may come from this process?

Sure. I want to be clear about what we were saying. It's not a strategic review of a problem that we're looking to solve, okay? It's an ongoing assessment of all the capital allocation decisions we've made over time. It's not something new. We've been doing this throughout our history of the company. We're talking about a little bit more because we are changing a little bit of our forward-looking capital investments, again, toward those more developed markets, and you're just seeing that play out in some of the guidance that we've given on that. As we look at those portfolios, the things that we look at is the original underwriting criteria have the markets evolve the way we thought they were going to. I will share a few kind of learnings from it that again, it's nothing new, nothing specific -- is what we're doing today, but just learnings over time. One is when you're going into a new geography, you have to be partnered with the #1 or #2 carrier. That helps you minimize churn in that market. Number 2 is internationally, you need to have CPI-linked escalators and because that's how you help manage the FX that happens over time there. Number three, the contract structures are incredibly important. You need to have the ability to monetize amendments and you need the ability to minimize churn with their contract structures. I'd say a fourth one is that the fiber and small cell business is just as challenging internationally as we thought it would be domestically. There's another learning from that. And so you've seen those kind of learnings play out in the decisions we've made. We were interested in expanding in Europe for a period of time, but we're very patient to get the right contract terms. And so when we did the Telxius acquisition, it was very important to us that we had the right partner with direct contract terms to drive growth there that's playing out very well for us. And you've seen that kind of last learning play out in our divestiture of the Mexico fiber business. It just wasn't panning out the way we originally thought was, and we thought that we were better to recycle that capital and put it to best for our shareholders.

Maybe jumping into the domestic business. When you described the opportunities and outlook for 2024, you described the potential for an uptick in leasing activity in the second half of '24 and described the services business as a leading indicator. Can you unpack more of what you're seeing from carrier customers, the discussions, the applications -- and anything else that's been informative for the management team on what the future looks like for leasing?

Sure. So let me kind of decouple the property revenue side from the services side. On the property revenue side, our guide for the year and our multiyear guide that we've put out of approximately 5% growth on average from '23 to '27 is underpinned largely by our comprehensive MLAs. And so those have a degree of new business baked into them that happens kind of regardless of the amount of activity on the sites. So you can't read too much in activity rules based on the property revenue guidance because those comprehensive agreements smooth out that cycle over time. What we did get is a little bit higher services business next year than what we had in the prior year. And that does imply a step-up in activity. We do have it back-end loaded in terms of our expectation. And what's really contributing to that is the conversations we're having with our carrier customers. And these are boots-on-the-ground folks who are getting ready to deploy a network. And before we get services projects from them, there's a conversation that happens and they start talking about what they think their activity levels are going to be, sometimes they share site lists of things that they're going to be working on. And so we take those conversations and we kind of roll it up to what our expectations are. I would note it's not a huge jump in our services business. And the other thing we talked about is there's a construction services component in that -- that's a little bit larger piece than we normally do. Construction is kind of a small business for us. We've not grown it dramatically. We do it in geographies where we have the right resources, and we have a customer demand and they're asking us to do it. And so when you look at that construction services piece, that's a little more niche part of that business. But we do expect to see more services business next year than we saw this year. We do expect it to be back-end loaded, and that's coming from those conversations.

You noted that one of the national wireless carriers is no longer under a comprehensive agreement this year for maybe the first time in probably a few years. Does that change the variability of outcomes for the leasing revenue in the domestic business for 2024 relative to maybe the visibility and confidence coming into prior years?

So over a longer period of time, we're very confident that we're going to get the same amount of revenue, whether it's under the comprehensive agreement or on an [ all car ] basis. The reason we were explicit about that when rolling off is last year, we're explicit about having everyone under one. So we thought we needed to talk about that. And it also does change the timing and the cadence in which you recognize revenue. Under the comprehensive agreement, if you look at our organic tenant billings growth last year, it was a little bit more front-end loaded. We've messaged it will be a little bit more balanced throughout the year this year and part of that is reflective of not having that comprehensive agreement in place is when on an [ all car ] basis, those leases commence over time throughout the year versus the way I used to write it does in a comprehensive agreement.

And as you talked about the importance of contracts earlier, as you look at the contracts in the domestic business, is there any components of those contracts that might be underappreciated by the market and are important to share?

Look, we've tried to be very transparent about those agreements. I'll just reiterate some of the key points to them. I'm negotiate those agreements. It's not about discounting. The way we negotiate those agreements is we form an opinion on what a business' usual case would be in an a la carte world. And to do that, we've got a pretty good idea about what the carriers are going to do. We look at what equipment is available. There's nothing that's going to be deployed in the next few years. It's not already in testing certification. So you know what the capabilities are. You know what spectrum is going to be available. You've got a pretty good deal on what demand drivers are going to be. I mean you've got the analog of 4G, 3G, 2.5G to look at where those usage patterns are going to take place. So we spend a lot of time trying to make sure we understand what we think is going to happen with or without an agreement. And the key to that contract structure is it gives predictability for both us and our carrier customers. And that predictability is good for us. It's good for them. But the key thing that makes it a compelling offer for our customers and for us is the operational ease at which they can get on our assets. It reduces our processing costs. It reduces their costs and the time that it takes to get on there. And so we believe that, that drives a better user experience, and we actually believe that it drives higher usage of our towers over time. If you're easier to get on air and you're not involved in site-by-site negotiations, we think we get more business because of that. And so we believe that contract structure does drive better result for us over the long term because of the customer relationship that it builds.

A couple more questions on domestic and we'll turn gear -- switch gears to the international side. When you look at the domestic business, is there an underlying change in how you see market share in the category between you and your large competitors either over the last couple of years or as you look out to the next few years?

I'm not sure I see a huge change in market share. If you look at the activity that's happening today, and again, I'll just talk a little bit about the carriers build their networks. The first iteration of a new GE is POPs covered. And that's typically an overlay of your existing sites. So you don't typically see a lot of variability in terms of where they're going to go. They're typically going to upgrade the entire network over time. So we can see a timing benefit in terms of -- because we're easier to get on there. We have the comprehensives in place. But I think that overall, for that overlay, the overlay is going to happen the way it's going to happen. I think where market share differential can come in is when you get to a densification phase and where once you get through that initial coverage phase, the carriers will look to see where they have holes in their network or they'll look to push into previously uncovered areas. I think that's where you can differentiate yourself with the customers and win a larger share of business. And we think we've always won our unfair share of the new business, and we'll continue to do that. And then when you think about some of the further phases after you get through that initial phase, get to more capacity phases, the same kind of dynamic will play out when you get into the densification. So I think it's very similar to the way we've seen it play out in the past, and I think we'll continue to get our outsized share of new business over time.

And then when you look out over the next number of years, what's the right range of organic tower leasing growth? If you just pushed to the side the merger-related churn that you're processing at the moment and the industry is processing like -- how should investors think about that right level or base case range of annual organic domestic leasing growth?

Yes. So look, I don't want to give guidance for 2025 and beyond what we've already said. So let me reiterate what we've said in the U.S. So for the period of '23 through '27, we're anticipating at least 5% OTBG on average over that period of time. If you look at 2023, we finished the year at about 5.3%. And we forecasted approximately 4.7% this year that's supportive of that guide. So we expect, on average, to be at about 5% for the next 3 years. I'd also just remind you that Sprint churn, that's about 6% because we have been dealing with the Sprint churn over that period of time. The last tranche of that Sprint churn happened in October of this year, and that's roughly $70 million. And so if you think about that, that will carry on into 2025, but we will have 2026 and '27 free of that Sprint churn overhang. We've also -- the components of that 5%, we've talked publicly about that. So we anticipate that we'll have churn historically spend in the 1% to 2% range. We think it's going to trend down to the lower end of that range over time. We have a 3% average escalator. So that implies that the new business percentage to get that 5% will be somewhere in that kind of 3% to 4% range over that time period. Internationally, we haven't given specific guidance on that. So I think I'll stay away from anything beyond next year is kind of on this year on that.

We have a bunch of questions that are coming in that we'll get to, but some of them are related to data centers, which is where we wanted to turn next anyway. So what have you learned from owning CoreSite, in a much larger data center platform with respect to the strategic benefits of owning both data centers and towers?

Sure. So the reason we bought CoreSite is we see over time a convergence between wireline and wireless network. And we think that owning an interconnection ecosystem, and I want to distinguish that from a colocation facility or hyperscale facility, but owning the interconnection environment is going to be critical to be able to monetize edge compute at the towers when it gets here. I say when, we believe more than ever, it's when, not if. And what owning the data center platform has done is it's helped us participate in the shaping of that market. And so we don't have large-scale deployments today. Right now, we're doing proofs of concepts with different partners. We're trying to figure out exactly how that market is going to evolve. We've got some niche use cases that we're working on. One of our partners put a blog out that talked about some of the stuff we're doing in automotive right now to try to help automotive manufacturers, update the products on their sites. But those are all very nascent use cases right now. But we wouldn't be in those conversations. We wouldn't be having these proofs of concepts if we didn't have CoreSite in the learnings from that. And so it's given us exactly what we thought it would, which is a fantastic underlying asset that's performing very well as a stand-alone company, and it's also given us a real seat at the table to help shape that ecosystem, and we think that will result in outside -- outsized returns on our towers over time as compute does move out to that edge eventually.

And you mentioned the importance of interconnection and please let me know if this is not the right recollection, but it feels like CoreSite on an interconnection basis had certain markets that were really strong in interconnection and maybe some other markets were maybe less so, like LA being one of the big markets for that. And so as you think about the inputs of -- and the interest in interconnection, does the portfolio give you that minimum efficient scale for the nation? Or if this starts to take off and interconnection assets are really important, do you need to find more kind of symmetry across the country eventually of these types of data centers?

Sure. So let me touch on the first point. So yes, our LA facility is probably the most interconnected facility in the world, I would guess. I don't know exactly if that's the right number, but I'll take credit for saying this. But across that portfolio, even our campuses that several years ago might not have had the same level of interconnection, have really developed a lot more of that capability. And so for us, having cloud on-ramps, which then attracts networks is part of the secret sauce there. So if you look at what makes CoreSite different from a colocation facility or hyperscale facility, it's the curated customer mix of clouds, enterprises and networks, and that facilitates an interconnection. And a very high percentage of our revenue is with customers that have 5 or more interconnection partners. They may have multiple interconnections there, about 5 or more partners. So if you think about that business, that gives us a competitive moat around it, but it also gives you an environment where if you have an edge data, and you do need to interconnect to a lot of people, you land it in that interconnection environment. And we believe that we have sufficient scale. Part of the offering of CoreSite is what we call our OCX. It's basically an exchange platform where you can get access to the ecosystem and you can do that remotely. So the edge uses that we're piloting with partners include a connection in through our OCX to that ecosystem to get that interconnection experience with others. And again, that's part of the learnings that we've had is anybody can build a container on a site and connect fiber to it. It's not that usefulness you can talk to other people. And when you bring that back to a data center, you need to own the interconnection environment. Otherwise, someone else is going to monetize those cross-connects.

I think we'll take a couple of questions that have come in. And just a reminder in the room, if you have a question, please push the button on your microphone and we'll get you into the conversation. So one question that came in is, can you rank the regions in relation to best risk-adjusted growth between U.S., Europe, Africa, Asia and Latin America?

That would be a tough ranking to put out there. Look, here's what I would say. If you look -- just follow our capital allocation decisions, and you'll see where our current thinking is in terms of where the incremental dollars are best placed. I think that's the best way to look at. And let me be clear, our emerging markets are still a key part of our strategy going forward. The demand drivers that exist there are going to continue for decades you continue to have growing populations. You continue to have some GDP growth there, and the demand is pretty much insatiable because again, a lot of those people don't have landlines to their homes. So we continue to see those emerging markets as good growth areas for us. However, given the current macroeconomic conditions, including some of the FX translations challenges, the care consolidation we're seeing and the stress on the customer balance sheets, we've pivoted a little bit more capital to our developed markets right now because we think that's where we're seeing better opportunities today for risk-adjusted returns. Now we're still building build-to-suits in emerging markets. Those are still good opportunities for us, and those are getting low double-digit NOI yields day 1. So we still feel very good about that program. But we've raised our hurdle rates in response to what we're seeing in the market, which we think is just a prudent thing to do now. So we still look at all of our markets as desirable as having good upside in them. We just think the developed markets right now have a little bit more opportunity. We've also increased a little bit of the CapEx to CoreSite because we've had 2 years of record sales, and we need to replenish that capacity. And because the supply-demand dynamics in those markets are such that prices are rising, that enables us to continue to underwrite stabilized yields in the mid-teens. That's what our expectation is for incremental CapEx that we're investing there. So that's a good use of our CapEx as well. So you'll see us continue to dynamically allocate that capital among various options we have out there. But I wouldn't really want to rank a region. It's more opportunity by opportunity. It's who is the counterparty, what's the terms and conditions of the agreement, et cetera, that's going to dictate that next dollar of capital.

We have a couple more questions that have come in related to the data center side. So one relates to the AI opportunity. And if you can just frame the Gen AI opportunity for American Tower, whether it's through your data centers as well through your broader asset portfolio.

Sure. So if you look at generative AI, right now, a lot of the investment in that is going to the large learning models, and those are large hyperscale facilities. And that's not our business. It's not a business that we intend to get into. Again, we're an interconnection hub. But what that does is it makes us perfect -- the perfect fit for inferencing models, where you take the interaction between those large learning models and the end user and you need to distribute content. You need to have a lot of connections to other people. So we do see some interest in our facilities with the inferencing models. AI has been a driver of our business for a while in terms of machine learning and some of the other types of AI that have been deployed. And again, our sweet spot is where people need to connect to each other. And so when you think about how that Gen AI is going to play out over time, you're going to continue to see interconnection hubs benefiting from the distribution of that content both directions on it. In terms of the broader portfolio and the tower sites, eventually, I think that the inferencing is going to get to the point that will help drive edge compute. That's one of the use cases that will help drive that ecosystem. We're not there yet. People aren't doing a lot of Gen AI on their phones yet. But I think when you get to the point where you're creating music videos and doing all the interesting stuff that they're predicting us to be able to do on your mobile phone, that's going to drive the need for lower latency and it's probably going to help develop that edge compute environment, but that's a few years away. That's not near term.

I made another question come in about international broadly specific to Lat Am in Europe, and I guess the question is just the growth rates of those versus the U.S., even though it still seems that we're going through 4G or 5G cycles in those markets.

Yes. So what we said publicly about our expectations for those markets is that we expect that Europe's organic kind of billings growth will be in the mid-single digits this year. And again, that's a combination of a little bit of a ramp-up in activity for new leases and amendments, a little bit lower escalator because we do CPI and the escalator, we expect that to be a little bit lower next year. And we still have very low churn in Europe. In Latin America, we are still forecasting some care consolidation churn, primarily driven by OI in Brazil. And what we've guided to there is that our overall organic tenant billings growth in Latin America will be in the low single digits.

Another question that came in was asking if you have the cash to fund the data center CapEx. And I think more broadly, if you could unpack AMT's approach to capital allocation and how that might be different than some of your competitors?

Look, I think, it's a differentiating characteristics that we have. And that is we have optionality in terms of how we allocate that capital. When you look at our portfolio across the globe and the opportunities we had to do build-to-suits, we can, but don't have to build towers for other people, for the most part. We may have a few conventional commitments, but they're short-term in nature. And that lets us be very responsive to market conditions out there. With CoreSite, we have a capital partner there. And when we were building our portfolio and thinking about sources of capital, we are very deliberate and who we chose as a partner and what the possibilities there were. So if we chose to fund less CoreSite, I'm pretty confident in our capital partners because the business is doing so well and generating great returns, we'll be happy to step in and fund more. But we have that dynamic capability to pivot in and out of the different asset classes with different geographies as we're looking for that highest return, it's going to give less shareholder value.

It's actually an interesting question. You mentioned the JV partner. So when you describe CapEx for CoreSite, is that the total quantum of capital going in? Or is that just your share of the capital going in?

So we consolidate CoreSite in our financials, so that would be the total quantum.

And then maybe taking a step back as you look at the, just again, some of the international markets, when you look at the churn dynamics and industry rationalization, can you give us a sense of where you're closer to being done and maybe the markets where we just need to watch out for some incremental risk of that?

Yes. So I think we've been pretty public about the challenges in Latin America that we do foresee care consolidation churn to be a challenge for the next couple of years there. So we'd expect that to be a weight on our growth rates there. In Africa, we think we're through most of the carrier consolidation churn there. So that's a market where we think that we're kind of on the backside of what we know about in terms of the care consolidation on that side.

In terms of -- and with respect to capital allocation and getting to the other side of the target leverage ratio of 5x or less for AMT. Can you walk us through how the company might approach share buybacks, timing and other considerations from an acquisition perspective?

Yes. Look, when we get to our 5x, then we have optionality in terms of what we can do. At that point, what we'll be weighing is, what's the best use of those incremental dollars that we generate? Is it better to delever more? Is it better to increase our internal CapEx program, which will have the options to do -- is it better to do something inorganic? Is it better to do share buybacks? Or is it better to increase the dividend? And those are the different uses that we would have for the incremental cash -- and we'll look at that at that time and say what's going to create the more shareholder value. And so I can't tell you today because we're not there. But once we get there, we'll be focused on that. And again, the guiding principle we have is what creates the most shareholder value.

And when you look at the other ways AMT can try to create value over time, of course, we've been talking about the operations, the regions, products, are there emerging initiatives within the company, ways to monetize the existing assets or new assets that you might be looking at that investors should be mindful of?

Look, there's nothing specific that I'm really talking about kind of publicly. We do have a team that's looking at all types of different use cases for the assets. Anything that you're going to need security power, cooling, distributed geographies for is fair game in terms of use cases for towers. And we do have a team of people that are looking at those. And there are some interesting stuff out there, nothing is ready to come to market today. But we are always looking at that. In terms of the internal initiatives, we are continuing to look at ways to better serve our customers, lower our cost basis and drive that outside share of market that we're getting. And some of the things that we've gone live with recently are some automation that's AI-driven internally. So we spent a few years gathering drone data on all of our sites in the U.S. and that's enabled us to get really high-quality data that we're able to use it and then automate large portions of our colocation process. And so that's been helpful in reducing our costs, but it's also reduced our processing time for our customers, and that data is valuable to them. They want to use that data as they do their network engineering. And so that's helped to drive some of our services revenue as well as is providing that kind of better service. And we'll continue to work on that. We think that there's some more progress we can make and some of the new technologies are going to want us do things that we couldn't do a couple of years ago. So that's an exciting kind of internal operational initiatives that we're doing that just makes us even better than we are today.

Ready for a little rapid fire?

Sure.

Okay. So what will, for your property sector overall, not your company in 2025 [indiscernible] same-store organic tower revenue growth?

Sorry, ask that again.

Same-store organic tower revenue growth in '25.

I'm not going to answer that, but good try.

Will your property sector have more, fewer or the same number of a company's a year from now?

I think probably the same.

And finally, best real estate decision today, buy, sell, develop, redevelop or repurchase shares?

Look for us right now. It's our internal build program, and that's where we're putting most of our CapEx.

Thank you very much.

Thank you very much.