American Tower Corporation (AMT) Earnings Call Transcript & Summary

Before we begin, disclosures are available at the registration desk. And for those of you that I have not yet met, I'm Mike Rollins, and I cover communication services and infrastructure for Citi. And we're pleased to welcome Rod Smith Chief Financial Officer of American Tower. Rod, thank you so much for being with us today.

Welcome. Nice being with you, Michael, and thanks, everyone, for attending.

Great to see you. And maybe just to get us started, what are the initiatives that are most critical for American Tower to enhance financial performance and shareholder value and not just for like the remaining few months of this year, but as you're just looking out over the next couple of years.

Yes, it's a great place to start. Certainly, American Tower is a leasing business, a run rate business. So in the near term, we're in really good shape to hit our outlook for 2026, certainly. We always constantly think longer term than that. Being a leasing contracting business, contracts are very important. So we take our time with contracts. We make sure we get those right. And they're not necessarily a here and now type of decision. It's about what's happening with the networks in year 2, years 3, and years down the road, even longer term, we have a great set of tower assets in the U.S. and Europe complemented by some emerging market assets, high-quality assets in the right locations that are critical to the future networks, wireless networks, really the broadband networks around the world. So protecting that value in the contracting is certainly very important. We do see a few catalysts when you look out over the next few years. You heard Steve talk about those on the call recently. The 5G networks in the U.S. have been deployed. We enjoyed the amendment cycle through that. And now most of the carriers are 90%, 95% coverage with the 5G networks as applications become available and bandwidth goes up, they will come in and densify those networks. They will be adding capacity to their existing cell sites that those will be amendment cycles for us by and large. They also will likely turn to densifying the network, which is adding co-locations into their network, so new antenna arrays on towers that they're not currently on, which should be a revenue enhancement, a revenue cycle for us as well. And we do see evidence that build-to-suits in the U.S. are going to be going up. They're going to need to build new towers in the U.S. so that they can use the higher band spectrum across the U.S. filling in places where the high band spectrum today doesn't reach. That could be an amendment cycle or a revenue cycle for us over time. So being well positioned to make sure we can execute and be in a good position to monetize some of those activities and certainly critical. Another catalyst, we see new spectrum coming down the pike over the next few years on a pretty well set schedule, almost 800 megahertz of spectrum. As that spectrum gets acquired by the carriers and deploy those amendment cycles for us, certainly. I mean, I want to say it's right around the corner. It will be coming later in this decade. But the one thing that never sleeps, never slows down, never stops is technology development. So it will be coming on different spectrum with different types of equipment. And we're in a really good position with the assets we have around the world to monetize that. And the fourth catalyst that I would highlight here is AI, not only is it going to change the way we all kind of live and work and communicate and play and entertain ourselves and each other, it fundamentally will change the way the wireless networks work. It will require the asymmetry that's built into the networks today, which favors downlink, in an AI world, the machines will be sending as data through the uplink, more so than any other technology in the past. That will be a fundamental shift in the networks that will have to be built into the networks, which, again, will be -- should be amendment cycles for us over time. So we think there's a lot of demand yet to come for our business. We are really well positioned to execute on that, not only in the U.S., but in Europe and other parts of the world. And we have the data center business, which is a highly interconnected cloud on-ramp centric, network dense set of assets that also benefits from these new technologies and the fact that humans will be consuming more and more bandwidth over time. That is another constant on the planet, which is people just consume more and more bandwidth. And with our CoreSite assets, they're really well positioned, high-quality tower assets. We are in a great position to execute on that. And with all that said, I would say we do see 2026 as a trough year in terms of organic tenant billings growth on the tower side as well as global. Not individually, but in total, if you add it all up, we see that inflecting up in future years. One of the reasons is primarily the absence of the DISH churn kind of going forward. Not only the absence of the DISH churn, but consolidation has happened a lot around the world, and we think churn, on average, over time, like the consolidation of our global portfolio is coming down. That means organic tenant billings growth is going up. That's a really important fact for us going forward. So not only do we have these 4 major catalysts that complement our high-quality tower assets. We know we're going to have less churn across the globe, again, not in every single region. But when you put it all together, when you absence when you have the absence of the reoccurrence of DISH churn. And the healing that is happening in Latin America, we're seeing churn elevated this year and last year, that's going to improve in our view as we head into next year. And then the contracts we have in Europe really are churn light on a contracted basis. So the stability there when you think about the churn, and in Africa, the primary revenue we have, 90% of it comes from the 2 big carriers across Africa, they're building a lot. They need to cover more ground, not less. Churn is unlikely to materially change from where it is because we have some of the smaller customers here and there go away. But when you add it all up, the reduction of churn in the U.S., the stability when it comes to churn in Europe and the reduction of churn in Latin America, that is a really good backdrop. And then we have the CoreSite business that's growing double digits. We're investing more capital into it. And you put all that together, and we are really well positioned globally to have 2026 be a trough year and accelerate into 2027. And I would say, when you think about the changes in the world in these networks, that's a pretty good start to the next several years. So we feel pretty good about the future.

And that should trickle down to AFFO per share growth that can also accelerate?

Yes. It absolutely should trickle down. And in some cases, even be enhanced. So when you think of the revenue growth expanding because of the lack of churn and the stability in the new business, we are -- much of that will automatically through high convert rates expand margins. And we're also actively looking at operating expenses and controlling those, reducing those. I think most people will know, we have a new position in our company of Chief Operating Officer globally, really looking after the way we care for our sites, the way we deploy our sites, the way we run our business, even the way we contract and process leasing around the globe to make it more efficient and to add basis about our margins to unify supply chain and to be smarter about the way we procure things globally to get the best deal. So there is room there to reduce expenses. At the same time, we're adding high conversion rate revenue. So we're looking at 200 to 300 basis points of margin expansion in the tower business over the next couple of years.

So when you look at the big markets that you operate within globally, you mentioned how consolidation is kind of played out quite a bit. Are there any risks left that there could be more consolidation of your carrier customers in certain markets that maybe we're just not anticipating today, whether it's in Europe. I mean, U.S. is -- I think, as you described, has played out, but markets that some of us may be less familiar with Africa or different markets that you operate within in Latin America. As you survey your markets, is there anything significant that we should be mindful of as we look out over the next few years?

Specific to consolidation, I would say no. And that is the U.S. is pretty stable. Three primary carriers unlikely to really change from that perspective. In Europe, there will be carrier consolidation without a doubt. We're somewhat exempt from that immune to that because our revenue is primarily contracted with Telefonica. We have very little exposure to SR in Europe and others. So we think that when you look at the tower companies in Europe, we are more protected from a consolidation perspective than most others, certainly. When you look at Latin America has gone through a lot of consolidation in the big areas in Mexico and Brazil, that's happened. Could there be some small stuff happening in our other markets, there certainly could be. It's not -- it wouldn't rise to the level of being material to the overall footprint of our company. Brazil has gotten itself down to 3 carriers. We think that there is healing there that has happened and will benefit from in the future in Mexico in a similar space. The one risk that I would highlight there is, there is the arbitration with AT&T Mexico and us ongoing. I think people are familiar with that. That arbitration is in process. We may have decisions there at the end of this year, maybe even into next year. And that really was a dispute around the way the parties calculated rent increases. So we'll just see what happens there. But when you're in an arbitration getting through the end of that, seeing what the result of that is having that behind us will be a good thing. In the meantime, we don't know what the arbitrator will decide and when it's decided we'll implement it. I will tell you, they're paying us directly most of the revenue. There is a hold back that they're putting an escrow.

It's like 20% ?

We're reserving about $8 million a quarter, $40 million this year, $30 million last year. So we've got $70 million already reserved -- to the extent that, that reserve is needed post arbitration, that will be a benefit to us. And then we'll see where the arbitration comes out, if there are any changes to the way you calculate rent increases through the through the contracts. So we feel good about it. We don't think we should lose that by any stretch that means. But just to size up kind of the relative potential impacts there of what we're talking about.

As the buy side looks to '27 and just thinking about setting expectations for '27, you just -- until you have resolution, is that $40 million just drawing it straight across into '27 in future years as good of any assumption until you have a finality?

Yes, I think so. until this resolution. We'll give guidance for '27 out in February. By then, we hope to know and build everything into guidance. Outside of us providing guidance, outside of completion and resolution of the arbitration. I think what we're doing today is what we would expect to continue to do. And if there's any change in that, we would update people and you would all know what we're thinking.

And just one last thing on this because this has been something I've been wrestling with. And it's just -- I know it's not a huge amount of total revenue for you that's being reserved. But, is there like a -- because it's just a formula issue, is there a much wider set of like outcomes? Or are outcomes more narrow because it's just definition versus the actual integrity of the lease?

You may be asking the wrong person because I'm not one of the people presiding over the arbitration, they had to decide. We have the obligation to show up and make our case. If you ask me, I think the outcomes are very narrow. And in our favor, the contracts are clear. When you're in an arbitration process in Mexico, they'll decide we won't. So we'll have to just wait and see what they decide. But I think they should be a narrow set of outcomes.

Super helpful. So maybe backing up now to leasing. So you talked about the opportunity for the organic tenant billings growth rate to improve. And I think the question that we get is the conviction that leasing continues at a solid pace going forward as investors are contemplating the maturation of networks, the software upgrade ability of networks. You shared some of the reasons why you believe leasing continues at a solid pace. Can you help unpack that a little more at a high level? And then we'll drill of course down into the U.S. and maybe some of the other markets.

Yes. When you think about our organic tenant billings growth outside of the churn number, it's really made up of 2 components of the annual escalator in the U.S. that is fixed to 3% and outside the U.S. were inflation protected by and large, across the portfolio with very few exceptions. And then it's the new business activity. That new business activity is underpinned really by the carrier investments. They're making those investments because of the growth in mobile data consumption and their desire to keep their subscribers and even add to them. So there's that network quality and competition that is happening. The networks, the carriers invest $30 billion to $35 billion a year into the network. They don't disclose, but a fair amount of that goes to the wireless networks. And a fair amount of that ends up at the tower sites and a lot of it is up in the towers. So that's a function of keeping up with the growth in mobile data consumption. I think we probably all agree that growth in mobile data consumption is going to continue. That's what we believe the carriers will continue to invest in it. They're going to be putting more things on the towers in the form of additional antennas, additional radios, more cables. Sometimes that will be in support of new spectrum. Sometimes it will be reusing existing spectrum more frequently, and they will have to densify the network. So that all underpins 2.5% contribution from new business into our organic tenant billings growth is what we're seeing this year. It's what we saw last year, if you exclude DISH completely. So their contribution is excluded the other guys were 2.5%. We expect that to continue. The investments in the growth in mobile data require the investments, and that really underpins that 2.5%. That's 2.5% plus the 3% escalator in the U.S. put you at 5.5 absent DISH, we're running about 1% churn. Our target is 1% to 2%. So 5.5% less 1% churn, you drop in the 4.5% organic tenant billings growth. That is a number that we think mobile data consumption growth in the U.S. requires that is somewhat consistent. And then some of those catalysts we talked about a few minutes ago, could be incremental over time. So those are upside that from it's new spectrum. It's wholesale densification of the network, certainly. AI workloads, finding their way into the mobile devices, which I believe will happen. Sometimes we won't even know it's happening. It will be happening behind the scenes where you may have connected glasses up linking to the networks constantly with massive amounts of data, that is potentially over and above kind of this 2.5%. And then if we drive a mid-single-digit organic tenant billings growth in the U.S. We know CoreSite is going to be growing much faster, double digits. Not only that, it will be probably expanding the percentage of contribution it makes to our attributable AFFO. So it will be getting bigger. Europe grows faster than the U.S., just given our portfolio there and the cycle we're in. And we -- Europe, Africa is growing high single digit, double digits. It won't always do that. Sometimes there will be a problem. But in general, it will grow faster than than the U.S. and LatAm is recovering. And we're working on operating expenses and our revenue is at a high conversion rate. We should be able to grow AFFO per share at that mid- to upper mid-single-digit rate over time on average. And then the wildcard there, what's happening with FX and what's happening with interest rate headwinds. So if you exclude those 2 things, should our AFFO growth be up in the upper single digits? Absolutely. If we include those things and we're working through a cycle where we're still growing into the higher interest rate environment, that's 100 basis points of headwind typically. FX is typically some devaluation, maybe another 100 basis. But -- so then do you end up in the mid-single digits, higher than 4.5%, maybe on an AFFO per share basis. So that's where we say AFFO per share mid- to high single digits is achievable to us before FX and interest rates. There will be a time when interest rates won't be a problem like it will be that will make us more likely to be in the upper single digits consistently. There will be times like this year where FX is a tailwind, not a headwind. That will accelerate us into the upper single digits. And when FX and interest rates are a headwind, we probably dip back into the mid-single digits. That's the way to think about it.

Is there a scenario that you could foresee where you could get to double digit?

We've consistently say mid- to upper mid-single digits, and I would leave it there.

So of that 2.5% of activity in the U.S., in the past, you've talked about early on when you, a few years ago, set out this multiyear outlook, there was more of it that was committed through comprehensive agreements. And over time, that comes. So implicitly, your customers are electing to spend more with you on an annual basis if that percentage is coming down. Where does that sit today? And does that also foreshadow new comprehensive opportunities with your carrier customers?