American Tower Corporation (AMT) Earnings Call Transcript & Summary

Hi. My name is Richard Choe. I cover communications infrastructure here at JPMorgan. I'd like to thank Steve Vondran, President and CEO of American Tower for joining us today.

Thanks. Great to be here.

Great to see you. You took over as President and CEO at the start of the year. As you kind of look out, what are your top priorities for this year? And how do you see the overall space evolving over the next few years?

Yes. Thanks for the question. So yes, I've been with the company for almost 24 years now. And so kind of my perspective as CEO is kind of informed by my prior roles, I've been a member of U.S. Tower for a period of time, I was part of the executive team for the last 5 years. So if you think about kind of our strategic priorities, you should expect to see a lot of continuity in terms of the way that we think about the business. In terms of the short to midterm, our primary focus right now is -- number one, it's trying to maximize the organic growth that we're seeing. So working with our sales teams and our operating teams across the globe to give our customers a great customer service and to drive sales as much as we can. We complement that with selective investments in our internal CapEx program. We have the ability to move capital around in different places around the globe. And so we have a healthy build-to-suit program that we're pursuing in some of our markets and as well as our CoreSite asset to do some construction there. So you take those 2 kind of revenue growth lines and you complement that with a focus on margin expansion. So if you look at kind of the midpoint of our guide this year, we're actually projecting to bring SG&A down by about $30 million year-over-year. And we'll continue to focus on the kind of that bottom line and taking the opportunity to optimize our cost structure. If you think about the way we've grown over the past decade or so, we've been very active in acquiring assets and integrating them and aggressive in growing all of our markets. When you're doing that, you don't have the chance to focus on your cost structure as much. And so we've got some opportunity now to look at that and really harvest some of the efficiencies in that. So that's kind of the third pillar. And then fourth, it's really focused on our balance sheet. We're kind of laser-focused on bringing our leverage ratio under the top end of our range. So trying to get underneath that 5.0 leverage ratio is kind of the fourth priority there.

No, that makes a lot of sense. And then in terms of, I think, with the U.S. tower business, people feel like -- that the growth might not be there that you've seen in kind of past cycles. Like we saw big upgrades from 3G to 4G and now 4G to 5G. Do you think that there's still a decent amount of growth laying ahead as we move into a world where -- and we can talk about a little bit more later in terms of AI and data centers, but like there seems to be just as much data being produced and used and that's ending up on your mobile phone.

Absolutely. Look -- I look at 5G, and I see where we are in the cycle, it reminds me of the prior Gs. And every investment cycle that the carriers undertake, there's always an initial period whether investing the highest CapEx is the first couple of years because we're investing in the core as well as the radio access network. And that first phase is coverage. They're trying to get to 200 million POPs, 350 million POPs, whatever their number is, and then there's always a little bit of a slowdown. Now last year, it slowed down a bit more abruptly than in 4G. But I think that's more the cadence of when they started than anything else. In 4G, we had a more of a staggered start by each of the carriers because they got their spectrum at different times. For 5G mid-band, they got them kind of at the same time. So you had a spike up and then you've had a little bit more of a pullback. But what we see is mobile data usage continues to increase at 20% to 30% per year in the U.S. Now that's a little bit lower percentage-wise than 4G, where it was like 30% to 40%. But the base is so much larger today, that the amount of gigabytes that our customers have to produce is exponentially larger in 5G than it was in 4G. And 5G is giving them a much lower cost per gigabyte, which they need to be able to continue to provide the service that we're demanding at kind of the same rate plans and preserve their margins. So I think 5G is a success story for the industry. If you look at our kind of long-term guide that we put out, we said that in the U.S., our organic tenant billings growth in the U.S. would be at least 5% on average from 2023 through 2027. And that 6% if you normalize for spring churn, those are healthy levels of growth and what we're seeing in the market kind of bears that out.

I think, the thing that doesn't get as appreciated as much is that you're still seeing a good amount of growth, but you're also being able to optimize. And I think the carriers are doing the same thing in that they're seeing still healthy levels of growth. In this world of, I guess, a much larger base and moving from 4G to 5G, do you feel like there's a decent amount of effort that needs to go into the optimization of networks and your business overall?

Look, I think our carrier is doing an amazing job of engineering kind of the best networks in the world. And they're dealing with the complexities of still having to support prior Gs as they're developing that. And when you look at 5G, there are sort of different levels of 5G that give you different levels of performance and different cost levels. So for example, if you don't have stand-alone 5G, it's not as efficient as if you do have stand-alone 5G. So I do think that there's some optimization yet to be done there. But again, I look at what our care customers are doing, they continue to deploy 5G. Again, we're in the phase now. We're starting to see a ramp-up this year. We saw higher application flow in Q1 than we saw in Q4 of last year, and March was the best month we've had in the last 12. So again, we continue to see green shoots that the carriers are restarting that build activity, and that implies that they're continuing to look at those networks and optimize them.

And that's something you mentioned on your earnings call, was that at the end of last year, there was a little bit of a slowdown. But as the year started, things seem to be picking back up. Has that continued? And I guess the nice position that you're in is that you have a lot of your growth already kind of contracted out. But let's start with what you're just seeing in the past recent days.

And maybe I'll talk about those 2 components, the rental revenue and the services. So our rental revenue is supported by our comprehensive MLA agreements. So there's a little bit of a disconnect between the activity levels and the actual revenue guide because what those comprehensive agreements do is they smooth out some of the peaks and valleys that you see in activity. So underpinning our kind of revenue guide is the minimum contracted level in the MLAs plus the activity levels that we see happening. Our services business is, number one, harder to predict, but number two, it's much more driven by volumes. And so this year, we did predict an uptick in our services business. 2 components to that, one is construction management, which is a smaller piece. And that's much more of a niche market and not nationwide, it's not for every carrier. So that one doesn't give you a broader read across. But we also have our acquisitions zoning and permitting and our engineering services, which are more broad-based. And we've predicted an uptick in both of those as the year goes along. And the activity levels that we saw in Q1 and the uptick of conversations with customers in Q1 gave us the confidence to reiterate our guide for that services business through the year, which implies an increasing level of activity throughout the year.

Yes. And I feel like the services business, you've mentioned in the past is more volatile, but it seems like it's on a better or a good run rate right now. And is that level of confidence kind of something you see increasing through the year? Or how do you kind of...

Well, Q1 was good. It came in ahead of our expectations. And because of that, and then also the conversations we have with those customers, and when we're setting the services guide, those aren't C-suite-level conversations. That's talking to the boots on the ground, they're actually deploying the networks. And everything we're hearing from them supports the guide that we set out. That's why we're able to reiterate it.

No, that's great. In terms of -- I feel like, initially, there was a lot of momentum activity. When you saw 3G to 4G, there's usually amendments. And then there's colocation that ends up happening and it takes time. Are you starting to see that co-location activity? Or is it mainly amendment activity right now, and that's going to sustain the build for a while?

We're seeing some uptick in colocations. But again, that first phase of that build and that kind of repeatable cadence they do is mostly amendment driven because they're just trying to get to a coverage area. Then when you get through that coverage area, you look at your network and you're going to find some places that need to be optimized. So you need some fill insights. So you see an uptick in colocation there. And then there is a big push to continue to push coverage out in parts of America that don't have good coverage. So you'll see a little bit of new sites there. But we still don't have ubiquitous mid-band 5G everywhere on the existing sites. I think what we said publicly is one of our carriers is over 80%. One is a little bit over half and one is a little bit under half. So that implies a long level of activity still to get to that ubiquitous nationwide coverage for mid-band 5G. So we still expect there to be a healthy level of amendments as we get through that. Even once you get to kind of full coverage, once people are using the network, and when they first deploy it, there aren't a ton of users that have mid-band 5G capable phones at first. Now we're starting to see more uptick in handsets -- so you're going to see more pressure on the network. So they'll need to go back and amend those sites again to put more equipment on to add capacity to the existing sites. So we still think there's a lot of amendment work to be done, both to get to full 5G everywhere and then to densify the network once the usage upticks.

And something that a lot of people have been asking and it's -- it could be difficult for you to be able to see on a kind of side-by-side or from your level. But fixed wireless has really taken hold the carriers, first T-Mobile then Verizon, but now AT&T, it just seems like that's a great incremental opportunity for them to use their mobile networks. Are you able to see that at all in terms of your densification or build?

So today, the carriers say that they're using the excess capacity on their existing networks to do that. And I believe them. And so today, we're not seeing stand-alone fixed wireless applications by the major carriers, and we haven't seen a huge change in their behavior on that. I'm hopeful, though, that as they continue to add subs that, that will be something that drives densification of the networks at some point. And that's kind of incremental to our business case that we've laid out. When I reiterate that kind of longer-term guide, that's based on kind of the current view shed of what we have of mobile data consumption. Look, fixed wireless is exciting. This industry has been trying to deploy it for 20 years. I first worked on some projects with one of our carriers 20 years ago, and the technology just didn't work. Today, it does. So I think fixed wireless is an exciting use case. And I'm glad my customers are able to monetize it. And I hope to see that they grow it and it becomes a new driver for us as well.

You mentioned a little bit earlier about bringing our leverage down, but one of the reasons your leverage was up, was buying CoreSite. And in your most recent quarter, the bookings level was one of the strongest it's been for a little while. Can you talk a little bit about how CoreSite is doing? How that acquisition has turned out for American? And then where could we see it go over time?

Look, we're very excited about CoreSite. In fact, the last 2 years, we've had record levels of new business in the past 2 years. In Q1, what we had was a record level of -- the highest in a few years, retail sales, it's one specific segment of it. I don't know if we're going to have another record year of sales overall. We set a pretty high bar for ourselves last year. But what I would say is the pipeline this year is very robust, and it's going to be in excess of what they typically saw before we bought them. So it's going to be another great year. CoreSite benefits from a couple of trends that are happening in the industry. The main driver of new business in CoreSite is hybrid cloud deployments by enterprises. And that's people who either still have their computers in their offices and want to move into a data center to take advantage of cloud tools or people who want cloud native or all cloud, and they're finding it too expensive to host their data there. So they end up doing what's kind of called a hybrid cloud, and you need to be in an interconnected data center like CoreSite to do that. And we see a very long tail of that business. That will continue to drive sales in CoreSite for the foreseeable future. And that's a very sustainable new business pipeline for us. AI is also providing an incremental new use case for CoreSite. Now we're not the right venue for hosting large learning models and some of the hyperscale that you're seeing a lot of money being invested in. But we are a good location for what's called the inferencing layer. So it's taking those large learning models then talking to all of us. And so that's a use case that we are seeing interested in signing business in CoreSite. But all these different use cases are driving, though, is a lot of demand for the asset. And the AI use cases that are happening in other parts of the industry are taking a lot of available capacity. And that's creating an imbalance between supply and demand that's driving prices up. And so we're certainly able to take advantage of the higher prices while still continuing to kind of stick to our core business, which is serving this curated mix of networks, clouds and enterprises to create that interconnection ecosystem that's so critical to that business plan. So we're very excited about CoreSite. Right now, the majority of our investments are going into replacing the capacity we've sold. And so record years of sales, we're replenishing that. We've got about 40 megawatts of construction going on today. And we brought some online earlier in the year. And in that 40 megawatts, about 35% is pre-leased. That's high relative to what CoreSite traditionally had in terms of pre-leasing. And what that does for us is it derisks that investment, accelerates the time to stabilization and gives us a lot of visibility to that revenue stream for the future. So we're very excited about what's going on there. You also saw us buy a small data center in Miami about 18 months ago. And you might see us look at another Tier 2 market or two. Why are we doing that? That's trying to sow the seeds of a new campus. So we'll start out small, try to get that mix of clouds, networks enterprises going and hopefully build some new campuses to give us more chances to invest later.

So just to clarify a little bit, it seems like a lot of the CoreSite business and the bookings and the growth there, has been on the existing overall business and kind of, call it, their bread-and-butter type of growth, and it's not necessarily all like AI-driven these days.

That's correct. We -- we've had some incremental new business from AI and then prices have gone up across the ecosystem because of AI. But the main driver of our business continues to be that hybrid cloud deployment.

And something that we're hearing a lot more about is that it is difficult to continue to provide the supply in terms of power, space, LIN and you're spending a decent amount of CapEx this year to, I would say, keep up with the capacity and demand that you've been -- how do you see this evolving over the next few years? And how do you kind of manage that with the overall business?

Yes. So in terms of the CapEx, one of the things that differentiates us, I think, from other companies is, we've been able to build a portfolio of assets, we have a lot of flexibility in terms of how much CapEx we put in. And when we brought private capital into CoreSite as one of our partners, part of that was giving us more optionality in terms of how we fund it. And so we have the option to invest American Tower capital or we can rely on our capital partners to invest more if we don't want to put as much in. And the business is going well. We're underwriting great yields. So I'm sure they could be very willing to do that. In terms of looking forward, you might see CapEx tick up a bit as we're replacing these kind of record levels of new sales. But that's a good use of our CapEx because you're talking about an investment that once you get to a stabilized facility is earning us yields in the mid-teens. And that's what we're underwriting there. And so we feel very good about that asset and the chances to invest in it. But we also have the option to pull back on that if we decided to. Now when it comes to power, which is one of the biggest limiting factors in data center capacity today, I'm very fortunate that we bought a company that had a very forward-looking group of people. And so we've got power secured for everything under construction today and everything we think we need to build in the next couple of years. And then we have pipelines of power that we're pursuing for all of the future developments that we have. So you may commit to sub-station today for a building that you are not going to build for 10 years. And that's just good planning for it. Now we're selling faster than we thought. So we need to provide more power. But I'd also say that there's a good pipeline there, and we feel good about that. I guess one other thing I would mention is, our Northern Virginia campus is in Reston. It's not in Loudoun County. So we don't -- we're not on the same transmission line, so we don't have the same constraints that they had in Loudoun County.

And that was kind of one of my other questions is that power is becoming so much more of an issue. But it seems like given the planning and the management of that business that they've already thought of that and it's not going to be something that you have to worry about at least in the next few years.

For our core business and the expansions that we plan, we're in good shape on that.

One of the nice things about American outside of just CoreSite and the U.S. business is you have a large international portfolio. And it seems like you can pick and choose where to allocate capital over time, a market you decided to exit is India. Can you give us an update on how that process is going? And what should we expect there?

Sure. Well, there's not a lot of new news on that. We did sign a definitive agreement to sell our India business at the beginning of the year and that we have projected that, that will close in the second half of the year. And so that's still -- the approvals are pending. The most significant approval is the Competition Commission in India, and we're just waiting for that process to play out. What we were able to do this year is if you look at the total proceeds of that transaction, it was about $2.5 billion, and that's enterprise value of about $2 billion, and then there were certain receivables that we were taking the rights to as well as we have an optionally convertible debenture, an OCD, that secured some of the receivables. And so earlier this year, we had collections that were pretty healthy. And we were able to dividend out about $100 million net of withholding tax back to the parent company, repatriated that capital, pay down debt with it. We also converted 90% of the OCD and we're able to sell that stock. And the net proceeds were about $216 million, which we will repatriate. We haven't done it yet, but we'll bring that back to the U.S. and pay down debt with it. So we've accelerated about $300 million of the proceeds. And so there's still another roughly $200 million with receivables and also the ticking fee that's part of that transaction. And so we expect to realize the remaining $2.2 billion as the transaction closes.