American Tower Corporation (AMT) Earnings Call Transcript & Summary

[Audio Gap] and infrastructure for Citi. Just a quick housekeeping item. Disclosures are available at the back of the room. If you don't have access or would like another copy, please e-mail me at michael.rollins@citi.com, and we'll get those to you. It's a pleasure to welcome back Steve Vondran, President and CEO of American Tower. Steve, thank you so much for being with us today.

Well, thanks for inviting us.

So maybe to get us started, we'll start maybe high level and get into some of the particulars of the regional segments. But maybe just provide us with an update on American Tower's strategy to enhance financial performance and improve value for shareholders.

Yes, happy to. As we laid out about 18 months ago, we're laser focused on several key priorities for the portfolio. And the first and foremost is to maximize organic growth across the portfolio. That's going to deliver the best bang for the buck for our shareholders. And that's our #1 priority. It's focused on organic growth. Second is we will selectively deploy capital predominantly in our developed markets to further enhance the portfolio, have more assets to sell and that will complement that growth as well. You couple those 2 things with a very disciplined approach to costs. And we've been very successful in bringing down SG&A over the past couple of years. And now we're turning to kind of the bigger cost stack. And the goal there is to keep our costs growing slower than our revenue. And that could be challenging in an inflationary environment, but we think we can do it, and we believe that we'll continue to offer an expanding gross margin that creates value for our shareholders. And then finally, it's focusing on our balance sheet as a strategic asset, making sure that we've got a balance sheet that can withstand the up and downs of the market, that is less subject to volatility than it has been in the past. At one point, our floating rate debt was a little bit higher. We've brought that down, making the balance sheet an asset and making sure that we do have dry powder when there are other opportunities to invest as well. So when you combine all of those with the backdrop of our industry, which is still an incredibly strong industry, mobile data growth continues to grow in our developed markets in that kind of 15% to 20% range. In the emerging markets, it could be around that range or even higher. And that means our carrier customers have to continue to deploy assets across the globe. So we see a very long horizon of investment by the carrier customers that's going to drive tremendous growth and a lot of value for our shareholders over time.

And so maybe drilling down just on some of that for a moment. You mentioned this transition, increasing mix towards the developed markets with the investments. You've also in the past talked about optimization of the portfolio. Are you through all of that optimization? Or is there more to go?

So when you think about the international markets in general, the reason that we originally went into those markets is we've had 2 thesis that underpinned the investment there. The first is that we could leverage our operational capabilities to provide a differentiated value proposition for the customers that would give us the chance to drive better returns than anybody else could in those markets. And we've been phenomenally successful with that. I can tell you without any hesitation, we are the best operator on every continent we operate, and we get paid for that. We get to charge a premium for that operational excellence. The second leg of that was that by investing in those markets that were a little bit further behind the technology curve that we could enhance and elongate our growth curve as a company. And that's where we've struggled a little bit in some of the emerging markets. And it really comes down to kind of 3 categories of things that happen in those markets. The first is additional carrier consolidation beyond what you see in the developed markets, the second is you're more subject to one-off things that happen in those markets and the third is FX has been a little bit more than what we underwrote in those. And I'll actually use Latin America as an example of kind of how those 3 have played out to be more challenging for us. When you look at carrier consolidation in Latin America, and we've been very clear that Latin America is a challenge for the next couple of years for us. We've seen Telefonica exit Mexico. We've seen Oi that kind of sold itself to its 3 competitors in Brazil, and you continue to see some smaller consolidations in the other countries we're in there as well. And so that's put some challenge into the growth there because you're having churn from those carrier consolidation. The second thing is you have more one-off items that happen in the emerging markets, that happen in developed markets. In fact, last quarter, we disclosed that we have a customer who has initiated an arbitration on some of the contractual provisions and the calculation of rents in the market. I actually want to give a little bit more clarity on that than what we gave there. That customer is AT&T Mexico. Their annual rents are about $300 million. And we took an additional reserve in Q2 on that because as part of that, they've stopped paying tower rents this year. So the AR has gone up there. And we feel really good about the contractual provisions, and we intend to fully defend ourselves in the arbitration and use all the legal remedies. But that's an example of the one-off item that can lead to more volatility in those earnings because we may have to book additional reserves if they keep withholding payment. And then the third issue that we see in those developed markets is really FX. And in some years, it's a benefit and in some years, it's a big decrement. And over the past several years, the dollar has been stronger than historically it has against some of those currencies. So it's been a real headwind for us. So when you add all those things together that really leads to more volatility in those markets. But we believe that there are still good markets that will deliver growth in excess of our developed markets over time. But that volatility decreases the quality of earnings that we have and it makes us a little bit more subject to those things that we don't control. And so strategically, what we said is we're going to pivot more of our investments to developed markets. We did divest India. And before we divested India, about 40% of our AFFO came from emerging markets. After we divested India, it's about 25%. And we still think we should decrease that. Now we haven't set a specific target for that. But as we continue to invest in developed markets versus emerging markets that mix will generally kind of come down over time. Again, we think they're an appropriate part of our portfolio. It just needs to be a smaller piece of it. So when we think about strategically where the company needs to be, it's more focused on developed markets, a little bit less interest in the emerging markets and then going back to those kind of key strategic priorities. Now you asked about further divestitures, et cetera. We did also divest fiber in Mexico, in South America -- or South Africa, sorry. And there are some markets that we've designated as kind of noncore or that we are not at our subscale in. But what we've done is, we've changed the way we operate those, to operate them from regional hubs. So there's no compelling need to get rid of them. They're not a drag on the business. So we're not going to do any fire sales. But if we found somebody else who wanted those assets and are willing to pay more than what we think they're worth to our shareholders, we would certainly look at that. Look, I grew up in a family owned business. Everything is for sale at the right price, but I'm not going to do any fire sales in terms of divestitures.

And just going back for a moment. So this customer that you've entered arbitration with, you mentioned $300 million of annual rent, what's the range of outcomes that investors should keep in mind from that process?

Look, we're not going to speculate any kind of worst-case scenarios on that. We feel very good about our contract. We feel that it's very clear in terms of what we should be collecting on it. And so we'll continue to pursue that. And as the arbitration develops, we'll let people know. We just want to be a little more clear on what that disclosure was because if this payment pause continues, we could be taking additional reserves in addition to what we took in Q2.

And the details are very helpful. Maybe moving to the domestic business, the domestic tower business. So when we look at your leasing activity, you seem to be -- American Tower seems to be generating better activity and organic tenant billings growth than some of your competitors when you pull out that merger churn. And you mentioned earlier that you're able to extract a premium for the services that you provide. Are there other factors that go behind what's driving your relative success in the U.S. market?

Sure. Well, I don't want to comment on my competitors, but I'll just tell you what we've done and what we've focused on. The first thing you have to remember is it's a real estate business. And so not every tower is created equal, and we were very thoughtful in constructing our portfolio and some of the most valuable towers in our portfolio go back to those old A and B block carriers that really formed the nucleus of the network and everything was designed around that. So I think we've had some natural advantages from that construction of our portfolio. But then you add on to that, the value proposition we've created for our customers. It's not -- we're not just a landlord, we're a partner to them. Our services business has become a real benefit to the customers. In fact, they're the ones that are driving us to do more. It's not us trying to grow it, it's them wanting to do more with us. We have a shared power program that gives them a little bit of an easy button in terms of that. And the way we maintain and operate our assets decreases their total cost of ownership. Then you add to that the investments we've made in our operational capabilities to get them on air incredibly fast, coupled with those comprehensive MLAs that they're kind of like an easy button in terms of [ upwards ] that really gives them a reason to do more business with us. And I think it's the combination of all that, that's led to us being able to continue to offer more value to our customers and drive higher growth.

What are you seeing in terms of leasing activity? Is it still improving quarter-over-quarter? And do you have some updates just in terms of what you're seeing out of the environment?

Bless you. Yes, we continue to see growth in the pipeline there. And if you look at our guide for the year, it implies a higher growth toward the back end of the year. Our services guide is going down a little bit towards the back end of the year. That's because we had some customers that were kind of front loaded in terms of their efforts. And I think what I would say about the pipeline is you kind of see it mirroring where people are in terms of their network deployments. The folks that are further along in terms of getting their mid-band upgrades done, they're slowing down a little bit. And the folks that are further behind are speeding up a little bit. So we continue to see a robust pipeline. It is building throughout the year and that's a good sign for activity. I would just mention that there's a little bit of decoupling of activity from property revenue sometimes with us because of our comprehensive agreements. So when the customers have the comprehensive agreements, it kind of evens out the revenue piece of it. So if those customers are scaling down a little bit, it doesn't mean that revenues come down because it's a little bit more of a spread on that. But we are still seeing a robust pipeline. We're also seeing a little bit of a mix change. On a percentage basis, it's about the same for colocations and amendments, and that is still about 90% amendments in terms of volume, which you'd expect because we have carriers on a lot of our towers and about 10% colos. But as the overall volumes increased, that means the number of colos has increased, and it's actually up about 200%. So that's a very positive sign as well. So we're excited about the carriers continue to invest. We are seeing densification starting, and that's in line with what we thought was going to happen at this point in the cycle, and we feel very good about the carrier activity that we're seeing and how much work they have left to do.

So with the news last week, can you help us understand the implications of EchoStar selling spectrum to AT&T and how this is going to influence the forward pace of organic leasing growth for American Tower?

Sure. So all we know is what's public. We don't have any specialized knowledge that you guys don't have on this. I think it's too early to tell in terms of some of the knock-on effects of what's going to happen there. I think generally speaking, spectrum in the hands of a well-capitalized carrier promotes more development and more activity over time than it does in the hands of an undercapitalized carrier. Having said that, we don't know exactly what's going to happen with Boost yet. First of all, it hasn't been approved. There's still a government approval process. Second, the terms of that agreement are pretty generic that have been put out there. We don't know how that's going to pan out and exactly what the plans are between AT&T and Boost on that. And so we don't really know exactly what's going to affect this yet. Having said that, if you look at Boost as a customer of ours, what we've been very transparent about in the past is we have a comprehensive MLA in place. The only thing that's baked into our guidance through 2027 is the contractual minimums under that agreement. So as long as they continue to pay under that agreement, it shouldn't have an effect on that piece of it. Beyond that, it remains to be seen what's going to happen on that. And in terms of kind of the downside risks with Boost, again, we feel very good about the contract we have in place. But the worst impacts, if you had churn from it is they represent about 4% of our U.S. business, about 2% of our global business. Now we don't expect the worst to happen, but that's just to size the exposure for everybody there. So we'll continue to evaluate this as it plays out. And when we have more information, we'll be able to give you guys a better feel for how that impacts us.

So we've been getting a bunch of questions, as you may imagine, across the implications. And so One of the questions that we're getting, maybe just to think about the durability of the lease itself. So if EchoStar were to decommission the network, you mentioned you have a comprehensive through '27, but the contract actually goes for longer, right?

It does. We signed that agreement in 2021 and it expires in 2036.

So it's a 15-year deal.

Yes.

What's the durability of a customer who may be decommissioning the network, paying out what's owed on the contract versus the risk that they find a way not to pay the contract?

We do our best when we craft these agreements to protect ourselves on it, and we will aggressively defend our revenue stream on that. So how it's going to play out? I don't know exactly, but rest assured, I'm a lawyer by training. We've done everything we can to protect ourselves on it. But I can't predict what the other party is going to do or what's going to happen with that. So I expect to get paid, but we'll have to see. If something else happens, we'll have to figure that out but I expect to get paid.

And in terms of just thinking conceptually, so one of the interesting things about the sale is AT&T is buying 600 megahertz spectrum, which they currently don't have in their network. Is this an incremental amendment opportunity for American Tower above and beyond what they're doing with the mid-band right now?

It could be if they decide to deploy it. It could be. Again, it's too early for us to know exactly how that's going to pan out and how they plan to use it. But look, any spectrum that a carrier has when they deploy it, they represent opportunity for us. And so we'll just have to see what their plans are because as of yet, they haven't shared with us what they're planning to do with it.

So 1 other question on this, and this is maybe a hard one because it's kind of in the realm of scenario analysis. But with AT&T potentially getting more spectrum with this transaction and the possibility that other carriers get some spectrum as well that could be plug and play. So like maybe more mid-band, maybe more AWS 3. I guess maybe just a quick clarification is if those things happen, those are kind of like plug and play where those are not amendment. If the carrier has that spectrum deployed and they're getting more of it, is that right?

They could be. It's possible that's the outcome on it. Again, I think it depends on who gets what, what they do with it. At the end of the day, though, the additional spectrum is not going to solve their need to densify the networks. If you go back to the CTIA white paper that was published a couple of years ago, they said they needed 400 megahertz of mid-band spectrum by 2027. I think it was 1,400 by 2030 or 2031, somewhere in that time frame. And so the DISH spectrum is a lot shallower than that. It gives them some of it, and they're going to be able to utilize that. And that's a good thing because, quite frankly, it can make some of the other things that they're doing, like fixed wireless more viable for them. So I don't view this as a negative for towers at all in terms of the other 3 carriers. I think this is a positive because it gives our customers another avenue to monetize their network and to invest more in the assets that they're putting on our sites.

Because this has been, I think, one of the concerns is that if there's more spectrum that the carriers have, they densify less? Like, for example, if they're getting maybe on the downlink, 20% to 30% more spectrum, let's just take that as a percentage and network traffic is growing. You mentioned earlier like 15%, 20%, that's at least a year of extra capacity that they can use with spectrum versus other sources. So in the past, when you've seen these kinds of things happen, at least for short term or midterm period of time, does it reduce -- like is it going to affect the trajectory that you're on right now for densification just for a period of time and then you get to the other side of this and it's back to that longer-term path?

Okay. We'll have to see how it plays out. I don't think so. I think if you look at where they need spectrum, where the densification is occurring today, it's a drop in the bucket of what they need to do in terms of accelerating it. If you think about the need to densify and where they need spectrum, it's not uniform across the country. If you're in a rural Montana, you don't need a lot of spectrum. But if you're in a dense urban area, you need a ton of spectrum, and you need it quickly. And if you just think about handset penetration, we just kind of got over 50% mid-band handset penetration this year. That continues to accelerate. 5G mid-band use, those users are using twice as much data as 4G. So I think that where that demand happens is just as important as the fact that it's happening in general. So when I think about that spectrum being deployed and the spectrum that they're getting, they need every tool in the toolkit to meet that demand. So I don't think it's going to delay significantly any types of densification. And when we've seen these types of things in the past, any delays are very short-term, it's really around network planning, trying to figure out what are the -- they have to figure out what they're going to do. And then that's usually where you see a short-term little pause. But even that's pretty short term, and it doesn't affect the most acute need areas that we're seeing them already attacking.

On the second quarter earnings call, American Tower noted that $5 million of leasing revenue got shifted, right, from '25 to '26.