American Tower Corporation (AMT) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the Goldman Sachs Communacopia and Technology Conference. My name is Jim Schneider. I'm the towers analyst here at Goldman Sachs. It's my pleasure to welcome American Tower and President and CEO, Steve Vondran to the stage today. Welcome, Steve.

Thanks. Thanks for inviting us.

Thanks for being here. Maybe, Steve, just kind of starting out at a very high level, company changed a little bit since you were here last, you sold India, domestic market opportunities improved a bit. The data center market continues to evolve. So as you see here today, which segments of the business do you think have the greatest change at this point a year from now?

Yes. Thanks for the question. So I think about how the business has changed in the last year. We laid out a number of strategic priorities. And those haven't changed dramatically. When you think about how we're going to drive the most value focusing on organic growth in our core portfolios, what's going to drive the most value out there. So as we focus on the next year, we're going to continue to focus on that organic growth. And as you mentioned, the demand dynamics continue to improve. We're seeing improved care activity in the U.S. We're seeing healthy growth in Africa and Europe. LatAm is still a little bit challenged. But that existing portfolio of assets is still going to be the biggest growth driver we have, and there's a lot of opportunity to create value on that portfolio. So the second kind of component when I think about that strategy is complementing that with investments predominantly in our developed markets. And that's one of the changes that you referenced. Previously, we were growing faster in our emerging markets. We've reallocated our capital planning toward developed markets. And so I'll touch on a couple of those opportunities in a second, but I just want to kind of reiterate the rest of the strategic pieces. Third element has been cost control, and we've been very successful in bringing down SG&A. We also see an opportunity to bend the cost curve across some of our other expenses, and that's something we're going to be focused on. And then complementing that with our balance sheet. We've done a lot of work on the balance sheet over the past 1.5 years, where we've taken our short-term debt down pretty dramatically. We've also brought our leverage down within our ratios. So we've made a lot of improvements to the overall company quality of earnings. And that's been reflected in both the ratings upgrade on our debt and also in some of the results that you're seeing coming out. So when I think about what's going to drive the investment for the next couple of years, some of the biggest opportunities we continue to see are in the tower space. We're doing a significant number of build-to-suits in Europe, a few hundred build-to-suits in Europe. And that's a great place for us to invest. The second area that we're excited about the growth in is CoreSite. Because of the demand outstripping supply in all of our markets because of the new impetus from AI we see CoreSite having a lot of opportunity to continue to grow. And so we're allocating more capital into that as well. So as I think about next year, I think towers are still going to continue to grow. We're going to see more activity by carriers. And I think CoreSite is going to have that opportunity as well. So you'll probably see that capital allocation continue to follow that. Build-to-suits when we get the right terms and conditions on the towers and then continue to investment in CoreSite.

Very good. One of the initiatives I know you also have underway is to kind take a harder look at your class base. Can you help investors understand the process you're undertaking to optimize things?

Sure. So over the past couple of years, we've been very successful in bringing down SG&A. And if you think about the rotation in our investment philosophy, that's helped with some of that. When you're aggressively growing in markets, you need a larger team that's invested in that growth. We've pulled back on some of those emerging market investments, that let us rightsize some of the teams there. So that's some of that savings. The rest of it has really come from taking a hard look at our kind of global organization and saying, what can we do more efficiently. And so there were some low-hanging fruit. That was kind of the first phase of it. As we look forward, it gets a little bit harder. I think we've picked most of the low-hanging fruit. Not to say there's not more work we can do in SG&A. But the incremental SG&A statements we're going to get now will be driven by things like automation and some optimization of processes and things like that. Earlier this year, we named Bud Knoll as our global COO. And the reason we did that is that we think looking across that global enterprise, there's opportunities in the rest of the cost stack as well. Now there's pieces of that, that you don't have as much control over our land rents, you kind of have some escalators that are kind of contractually based there, but we have a program to buy those out. Utilities, they tend to fluctuate with kind of inflation in the local geographies, but you can do some bulk purchasing. So when you think about all those components of the direct cost stack, a lot of it's fixed, some of it's variable, some of those fixed costs, you can do some longer-term planning around and so as Bud to take a look at that across the entire organization and bend the cost curve. And this is a very simple formula. If we can grow those expenses slower than we're growing the revenue, we'll continue to get margin expansion. And so what I'm planning to do later this year is lay out how we're going to bend that cost curve and what the time line is, et cetera. Bud is still working on it. It's -- this is not easy stuff, but it's not instant. You're not going to see.

Times have taken.

Yes, exactly. But we do have -- we do see some opportunity there as well. So that's how we're looking at it. But I want to also be clear, we can't break the machine. We're a great partner to our customers across the globe. And so kind of the third rail issue I've given my team to look at on this is you've got to keep the customer service levels up. I believe that customers are willing to pay more for superior service, and we've proven that time and again. So we're not changing the way we service our customers, the way we maintain our assets. We're just looking for efficiencies in the process.

Great. Before we dive to the business, I want to ask you one question on capital allocation. You've got a lot of options available to you, dividends, inorganic, organic tower builds, M&A. Just give us some insight as to how you think about the different return hurdles for each of these international and M&A, domestic, ground lease purchases, build-to-suits you mentioned and so on.

Sure. So I'll start with the dividend because it does take the largest share of our cash flow. As a real estate investment trust, we're required to pay out 90% of our taxable income. The most tax efficient way, we believe, to do it is actually pay out 100% of our taxable income, and that's been our policy. We did pause the dividend last year in terms of the growth because we thought it was more important to get within our leverage ratios than to keep increasing the dividend. And we did restart growth this year on that. And what we've indicated very clearly, I think, to people is you should expect the dividend to grow in line with AFFO per share roughly on a multiyear basis because that's how our taxable income should grow in line with kind of AFFO growth. So that will -- that's how we think about the dividend. Past the dividend, we really look at it and say, we can either further delever, we can buy back our own stock, we can fund more internal CapEx or we can do M&A. And we've worked very hard to get the flexibility to make that a math-based exercise where Rod and I can sit down and look at it and say, what's going to create the most shareholder return over the long term on that. And so there's not really a preferential rank of those in terms of how we look at it. Right now, this year, the highest returns that we can drive on that additional cash is our internal CapEx program. We found opportunities to build towers in Europe to increase our investments in CoreSite they are going to give us better yields than the other alternatives there. But we have the flexibility to look at all those options on every year to see what we're going to do with that. And so that mix could change a little bit next year or it could stay the same.

Yes. Great. So maybe digging into your domestic tower business for a moment. You said on your Q2 call, excuse me, application volume activity levels were strong. Services business, quite strong and actually lead activity levels, but I think you slightly lowered your organic growth guidance, which you attributed to timing. So maybe starting with the sort of activity levels is mainly a continuation of what we've seen on rural builds and mid-band 5G deployments? Or is there anything else going on there?

No, we continue to see the carriers invest in getting mid-band 5G rolled out ubiquitously across the portfolio. And so it's broad-based activity there. One of our carriers is kind of over 80% deployed one are kind of in that 75% range and one is still a little bit over half. So there's still a long way to go to get ubiquitous mid-band 5G coverage. And so we expect to continue to see that roll out until they all get into the kind of high 90s in terms of that coverage. But we're also seeing new colocations. So that comes in 3 flavors that I would say. The first is fill insights. And that's just kind of looking at the propagation of the networks, the 3.5 probably gets a little bit differently than the lower bands do. So there will be some infill just to fill in holes in the network. The second area is we're still seeing efforts to increase coverage, kind of paint the map approach. Some of that's being driven by regulatory requirements that people signed up to and then some of these competitive pressures. So we do continue to see that kind of paint the map approach, slowly increasing the coverage of the terrestrial networks. And then the third element that we're starting to see is densification because of capacity-driven constraints on the network. That's a little bit harder for us to measure because carriers don't always say that's what this is for. But when we look back at 3G and 4G and where the cell splitting started there, we're seeing activity in the same location. So we do feel like that we're on the cusp of identification phase as well in terms of cells splitting and new colocations. And it's really all those things that are driving the increased application activity on the portfolio.

Very good. And then as for the downtick in guidance, it sounds like you're confident that's timing related, but -- we believe that's being driven by AT&T and given your expiry of the MLA with that company, maybe does that kind of change how you're thinking about doing an MLA with AT&T?

So it's $5 million change on a $10 million P&L. But I understand it's important to people to telegraph. It's timing. There was a certain -- I think we've been very clear that there's 1 carrier that's not on the comprehensive MLA. So that timing is variable based on when they sign things and when they commence. And we thought the activity was going to happen earlier in the year. It's going to happen later in the year. It's not a question of if, it's when. And if you're long on the stock and you're looking at our portfolio, it's a shift of $5 million and $10 billion P&L. So we feel very confident but that's just a timing-related issue.

Yes. Okay. Very good. U.S. carriers, I think, have upgraded more than 50% of their sites with 5G at this point. Verizon has publicly talked about 80%, 90% of C-Band finished by the end of this year. So given the size of your domestic business, with carrier CapEx seemingly not moving very much, may potentially flat to down for the next few years. Sort of what level of comfort should investors have in your ability to sort of drive 5% organic growth long term?

So when you think about the guidance we've given, the 5% was through 2027. Beyond that, we said is our algorithm supports mid-single digit. When you just look at the carrier deployments and what they're doing, that CapEx funds a lot of things. It's not all just the radio access network on towers. That's also funding fiber and core and things like that. So there's some flexibility within those budgets. Having said that, their CapEx budgets are still roughly $5 billion a year more than they were in 4G. So there is a healthy CapEx budget that the carriers are spending on 5G. And the thing that gives us comfort in knowing that we're going to hit those kind of activity driven milestones that we're looking to hit is really what we're seeing in terms of consumer behavior as the mobile data growth continues to grow at that kind of 15% to 20% in the U.S., a little bit faster than in some of our other geographies and it's the carrier behavior that we see, which is very consistent with what we saw in 3G and 4G. So we feel confident they're all going to get to that high 90s percent mid-band coverage that's coverage. That doesn't give you necessarily the capacity to serve every person that is using the network. And if you look at the handset penetration rates, we just got over 50% mid-band capable handsets kind of earlier this year, I believe, is the stat. So there hasn't been that much activity on the networks compared to like 4G where the handset refresh rate was like 12 months, now it's closer to 2 years. So all those demand dynamics are going to continue to drive investment because capacity will be constrained, they will have to invest more. That's what underlies our guide through 2027, that's kind of what underlies our long-term algorithm guide as well.

Fair enough. EchoStar. I believe your current exposure is $200 million annualized.

We don't get that specific, it's about 4% of our U.S. revenue and about 2% of our global revenue.

Okay. Fair enough. So maybe just help us understand the contracts you have in place with them and their ability to churn? And what years those renewals kind of have come up? And how should that kind of think about. How should we be thinking about your overall churn profile over the next sort of 5 years plus?

So we signed an agreement in 2021. It's a 15-year agreement. The comprehensive portion of that is a shorter period. We haven't been specific about that much shorter. But the noncancelable lease term goes through into 2036. So we would expect to get paid through 2036 under that contract, and that's kind of our contractual position on that.

Okay. Great. I don't think we're worried about 2037 yet. Okay. Can you maybe remind us just in principle, if you have a customer would say, like a 700-megahertz antenna on your tower, they want to deploy 600 megahertz antenna, would that be considered for you a co-location or an amendment? And maybe if you were to kind of change the type of antenna configuration, are there any kind of like multiband antennas going to accommodate both?

The answer is it depends. It depends on what -- who the carriers, what they're doing and what -- who their vendor is on it. There are multi-band antennas out there -- but I don't think we have enough information to speculate as to how that's going to play out in terms of how you deploy it. Generally speaking, the lower the band, you optimize the wavelength of the longer antenna, but you can do a suboptimal installations if you choose to do that. So I don't know yet how that's going to play out. And in terms of the monetization events for us, if they're installing. Generally speaking, if they're installing new equipment, there's usually some monetization opportunity. There are some substitution rights within certain limits on there. So it depends on what they're doing and what that equipment looks like and how it functions. But it's just too early for us to tell what the opportunity set is there for us on that particular question.

Okay. Fair. Maybe just sort of thinking a little bit longer term with changes at the FTC, there seems to be more likelihood of spectrum option come up at some point in the next several years. Based on what you know about the potential spectrum that could be auctioned, do you see those bands as a driver for potential new tower deployments?

Yes, absolutely. When you look at the Spectrum pipeline that's being identified, some of it is to complement 5G, but they're also identifying the future 6G bands. And it's critically important that the U.S. identifying clear that spectrum to drive 6G development. We don't want to be behind the rest of the globe in terms of 6G. And so when you look at some of the things that are identified in the big beautiful bill. There are some things that are in kind of that 6 to 7 gigahertz band that we believe will be the 6G spectrum. And it's just around the corner. I mean those standards are supposed to be out in 2029. So you're looking at commercial deployments in 2031 potentially. And so getting that spectrum identified cleared and sold is incredibly important. So we think that's a huge positive for the industry. When you look at the 5G spectrum, our customers need it. When you look at the CTI put out a white paper that said that they needed 400 megahertz of additional mid-band spectrum by 2027, I think it's 1,400 about 2032. If you're going to get that type of spectrum in the hands of those carriers, you've got to start off it now. So I'm excited to see the government taking proactive action on it. I think it's going to take some time. Most of that spectrum has incumbents in it that you're going to have to relocate. So I don't think there's a lot of that spectrum that's usable today. But I think it's very encouraging to see the government being proactive, identifying the bands, getting a plan in place to clear those and sell them.

Okay. Great. Moving to international for a second. I think last quarter, you increased your organic growth guidance in both Africa and Latin America, maybe walk through these markets starting with Africa, but I think the Colo side and the mineral side of the business has been at a pretty attractive level. Churn has been better. What's driving that trend? Can you maybe help us break down how investors should think about how that region should move in the out years?

So in Africa, we had some care consolidation churn, a lot of [indiscernible] in South Africa and we are through the churn that we foresee happening there. Our exposure in Africa is by and large, to the largest 2 players in each market there now. We have very little exposure to the smaller guys, even if there's additional consolidation, there's a little bit of churn, but not a ton of churn there. So we feel like we're on the kind of through that in Africa. When you look at the care activity there, there's a lot of demand in Africa. 5G is only being rolled out in the kind of major cities right now. And 4G is the bulk of what we're seeing in terms of the activity and most of that's coverage related. And when you think about the need for connectivity in Africa, it's huge. It's not just driving telecommunications and e-mail and people on social media, it's banking, it's telehealth, it's fundamental to their economy. So we see a tremendous amount of demand there. You're seeing it reflected in the amendment and colocation activity. And so that market, in general, should continue to see a demand driver versus kind of going out several years. When we pull back on some of the investments there. It's not because the market is not an attractive market. There are a lot of good demand drivers there. For us, this was really a strategic focus to get the emerging market exposure down because it injects a lot of volatility into the results. You do have FX headwinds that can be more or less in certain years that you do have more episodic events that you see there. So when we think about Africa moving forward, we're very encouraged by what we're seeing there. we just think we've invested enough and that we have a good healthy portfolio there, it's going to see some nice growth. And we just don't want to increase our investments dramatically there because we think we've -- we need to rightsize the exposure to the emerging markets.

Fair enough. LatAm, leasing activities there have been sluggish for a little while now. How are you thinking about how long will you kind of hang out in this kind of low single-digit growth rate? And when can we start to see an improvement in more accurately reflects kind of the underlying trends in the market.

Yes. So the carrier consolidation churn in LatAm has been significant for a couple of years now. And that will at least last through 2027 we do think that we'll be through the bulk of it by the end of 2027. And in Brazil, in particular, we have Oi churn, some of it structured, some of that's the remaining wireline business that will wind down, and that's keeping Brazil constrained. In some of the smaller markets there, we've had other care consolidation that continues kind of to ripple through the numbers. And then in Mexico, we've highlighted an issue in the past week that we have with the customer who's not paying us right now. It's part of a contractual dispute. So when you kind of look at all those things, we expect to be through those issues by 2028. When you think about the dynamics of the markets, we're already seeing an improvement in Brazil. So we're seeing 3 well-capitalized customers. They're starting to accelerate their investments in the market. So we think that market is going to continue to accelerate and get better over time. Mexico is a market still needs to figure out how to get spectrum in the hands of the customers. They don't have the 5G spectrum deployed in a way that they can build robust networks. So we're expecting that to get fixed in the next couple of years. And so you should see some acceleration in Mexico. And with the smaller countries, it's a mixed bag on 5G. So Latin America in general is going to be challenged for us in the next couple of years. And so again, we've tried to telegraph very clearly low single-digit growth because of the carrier consolidation churn that we're seeing there. But we do think we'll be through that, and we'll see an acceleration in 2028 and beyond.

Great. maybe ending up on Europe. You reiterated your organic growth guidance there. I think a lot of investors have been surprised the durability of growth there. Maybe unpack for us what's happening on the ground? And in which countries are you seeing sort of the most demand or the most interesting trends happening?

Sure. This all comes back to being very selective about the portfolios you buy and making sure the terms of conditions are right. And we've talked a lot about why we didn't go bigger into other countries in Europe. And so for us, Europe means Spain, Germany and France. And when you look at the Telefonica portfolio, the Telxius deal that we did, most of the revenue comes from the anchor tenant, Telefonica. So as you've had some churn there, we have a lot less exposure to that than other people do because there's not as much third-party revenue on that portfolio. And we are seeing healthy demand drivers because they're the market leader. So when you think about other carriers deploying to try to get parity and they're trying to get parity to telephonic because they're a market leader. And so for us, the demand is really coming in predominantly Spanish, Germany, France has got healthy growth, but it's a much smaller market for us. And it's largely driven by the same thing that's driving in the U.S. It's mid-band 5G coverage. Europe is just a little over half in terms of their mid-band coverage they have a stated goal of getting more ubiquitous coverage by 2030, and they're a little bit behind on that. So that's going to continue to be a demand driver for us. And then you are seeing new colocations and build-to-suits as well that we're doing in those markets and that's predominantly driven by trying to get better coverage in smaller towns. The networks in Europe are much more skewed toward the population centers, and there have been government incentive programs out there. Some of it is tied to the spectrum licenses and some of it is just tied to antennas to get better 5G coverage in the more -- I won't say, rural areas, but the less urban areas of Europe. And those are really the demand drivers driving the new colocations. And then in Germany, we do have one in one is still building kind of very methodically building their network. So from our perspective, we see these growth trends as being durable because our churn will continue to be low, and they're going to continue to build out 5G and that's going to be a good driver for us going forward.

Got it. Data centers and CoreSite. We cannot get through for 1 of these presentations at the conference without talking about AI. So let me get right to it, we've started to see AI inferencing pick up as a business among many of your customers. I think it's against the reason of CoreSite should benefit from that. How do you think that plays out? And when would you expect to see CoreSite benefits more directly from the inference market?

We're benefiting directly today. So if you look at the new business funnel that's coming in, we have a lot of AI applications coming in. It comes in a couple of different flavors. The AI companies want to host our distribution in a highly interconnected ecosystem. So you'll see them put kind of some smaller installations and just to get connectivity to their customer base in there. But the other thing that we're seeing is the enterprise customer that's been our bread and butter customer for a long time, they're also building their own inferencing models. , So -- and this is something we didn't -- even 6 months ago, we didn't think this was really going to be that material. Now I think it's going to be huge. A company that wants to use cloud tools, that wants to use an LLM to train their own inferencing model, but use their data needs to be highly interconnected right at the source of those cloud on ramps. And the AI companies are putting their own kind of a version of an on-ramp in those same facilities, which is CoreSite. And that's going to continue to feed that ecosystem. So we're seeing that today. We're seeing enterprises that say, okay, I've got my data house here. I've got my machine learning module here. I want to put my GPU stat from my inferencing model right next to it. And we're seeing a lot of demand for that right now. And that's got a very long tail to it. So I think you're going to continue to see CoreSite experience elevated demand for the foreseeable future, and AI is a huge driver of that. And I also think when you think about the interconnection ecosystem, it's even more valuable today than we thought it was 3 years ago when we bought it because that same distribution hub is what has to be used to get to the population centers for the AI inferencing model, at one point, without inferencing not close to the LLMs, it's not going to. That's not where they want to put it. They need to put it near the population. So I'm very excited about what that means for CoreSite, its growth trajectory. And then that will actually spill over the wireless networks, too, because as we start using our phones for more and more AI applications that will put demand on the network. So it's a game changer.

Yes. And I think that sort of edge compute thesis was part of your rationale for doing CoreSite in the beginning. Has that kind of played out as you thought? Or do you think we're now kind of like finally catching up to fulfill that thesis. And have you actually had any discussions with your customers about putting compute at the base of your towers.

So it's later than we thought it was going to be. But yes, I think we're starting to get there now. We are having discussions with customers about it. It's still in the early stages of it though. There's still some technological things that have to be figured out to make it work. And that's why we built a small facility in Raleigh at the base of a tower is to kind of set up a playground so that you can have customers come in there and interact together in a way they never had before, because they've got to figure out some challenges in their networks to make it work. But again, it's -- I look at that as a matter of when not if. It's not happen as fast as we thought, but it's going to play out over time. But even without the edge compute, you are still going to see demand on the wireless networks from AI. Today, it's text and still photos. It's not a high-bandwidth driver. As AI evolves into video applications and things like facial recognition technology and wearables and things like that, that's going to require so much upload capacity that the networks don't have today. That's going to be a driver. When, I don't know, but it's going to be.

Yes. Fair enough. A couple of financials to round this out. With the potential churn from Sprint coming and what other events are on the horizon, how should investors think about the growth algorithm for the company financially over the medium and long term. In other words, X percent topline growth translates to Y EBITDA and FFO?

Yes. Let me just run through the elements of the algorithm for you on that because it's a little complicated. To be clear, we're past Sprint churn. The last tranche was at the end of Q3 last year. So once we get to Q4, we're clean this year on Sprint churn finally. When you think about that long-term algorithm, the mid-single-digit growth, OTBG in the developed markets, plus slightly higher in the emerging markets once we get past the churn. If you just think about -- we actually put a chart out this year, how it affected this year, that's kind of where we were this year, and that led to about 6% growth in AFFO. And then CoreSite and a little bit of savings added another 2.5%. So kind of the core growth rate of the business was about 8.5% this year. And that's kind of what the algorithm over time should give you mid-single-digit growth in the developed markets, a little bit better in the emerging markets. CoreSite growing faster but being a smaller piece, a little bit of cost savings. But then we had some headwinds this year. And those headwinds are going to persist for a little while, refinancing is going to be a headwind for us for a couple of years. If you look at the debt that we have to refinance next year at a similar level than it was this year. And I'm not going to speculate what interest rates are, but if you assume similar headwinds have kind of a similar kind of a deduction from AFFO that we had this year, '27 a little bit higher because we have some asset-backed securities for renewal. But once you get to 2028, a lot of what you're refinancing has already been refinanced to 2023. So those headwinds will die out in the cost of interest rate environment. Interest rates get better, it's a little bit better, worse, a little bit worse, but I'm not going to speculate on that. And then FX continues to be volatile. And when we kind of put that chart out, the Q4 chart that we put out in Q1. It was -- I think we were anticipating headwinds on call it, 2.5%, 3%, somewhere in that range. Now it's looking more like 1%, kind of the forward-looking piece of it, but moderated a bit, but that's going to continue to be a headwind that kind of happens and then the other thing that we're keeping an eye on is cash taxes because in those international markets, as those markets grow, you'll have a little bit of cash tax headwinds on that. So as we put all those things together, we think that gives you a durable mid-to-upper single-digit growth rate over time and the difference between the mid and the upper is how you anticipate some of those headwinds and if you have a little bit of variability in growth year-to-year. And so that's how we think about it. Now that is -- that's kind of on the steady-state business. And so that's not anticipating a huge inflection from AI, spiking up demand in the U.S., it's not anticipating a new carrier or entry or there's a lot of speculation on things that could drive that up and they are absolutely some things that you could be optimistic about and see us doing a little bit better than that. But from an expectation setting perspective, we're looking at it saying that mid-to-upper single digit is in a steady-state business, what we think that we're capable of delivering kind of given the current environment that we're in.

Okay. Very good. I think we'll almost out of time. So when we end it there. But thank you much Steve for being with us. We appreciate it.

Thanks.