American Tower Corporation (NYSE:AMT) Morgan Stanley 2021 Technology, Media and Telecom Conference March 1, 2021 9:30 AM ET
Rod Smith - CFO
Conference Call Participants
Simon Flannery - Morgan Stanley
Good morning, and welcome to the Morgan Stanley TMT Conference 2021 coming to you virtually. It's my great pleasure to welcome Rod Smith from American Tower. Welcome, Rod. Thanks for joining us today. Before we get started, please note for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So welcome, Rod.
Thank you, Simon. It's great to be here with you.
Great. Good to have you with us. So last week, we saw you report your earnings and also put out your guidance, not just for 2021, but also some very long-term guidance. So perhaps we could start with the priorities for the company for 2021.
Yes, that sounds great, Simon. Thanks for having me. It's great to be here with you. And hopefully, we can be together soon at some point and not virtual.
In terms of 2021, we're looking forward to another great year. We just wrapped up 2020 and had a what was really a very good year through 2020 despite the effects of the pandemic and the pandemic itself. One of the things that the pandemic really did demonstrate is that wireless networks and wireless connectivity around the globe is just so critical and so essential. And it highlighted the fact that the infrastructure that supports those networks is also just as critical, not just in the U.S. but really around the globe.
But as we move into 2021, we're looking forward to another great year. We put out guidance at this end of last year, property revenue is expected to grow at 8% next year, adjusted EBITDA growing at about 9.5% for 2021. AFFO per share, up about 8.5% as well. So really solid kind of expectations around the operating performance of the company. We, once again, will expect to grow the dividend and grow at double digits by about 15% in 2021. And we plan to construct almost 6,500 new towers around the globe in 2021.
That's up from a very large number in 2020. We built almost 4,500 in 2020, so that will be up once again to 65 -- to 6,500. And as we look forward into 2021, the spectrum auctions that just happened, C-band drove record pricing for that spectrum, that really highlights the critical nature of that spectrum being needed in the wireless networks to really drive 5G. And we believe -- you've heard us say this before, we continue to believe very strongly that the mid-band spectrum, the C-band spectrum will be deployed off of macro towers as and when it gets deployed. So really couldn't be more excited about that.
And when you look around the globe, the markets that we're in, they're all kind of developing networks, rolling out of 2G, 3G networks into 4G networks and in some cases, like Germany and certainly the U.S. going from 4G to 5G. So the same sort of development phenomena, the development track is around the globe, and data consumption is growing around the globe and that's all really good for these wireless networks. It's great for the people that live in these countries that will get increased connectivity and increased services, and it will be good for the infrastructure companies that provide that backbone to these networks, essentially towers.
Great. And I think turning to your long-term guidance, you put out an aspirational goal of 10%-plus growth in AFFO per share. Perhaps you could just talk about what gives you the confidence. I think it's one of the things that investors really like about the industry is that visibility. But talk about the elements that gave you the confidence to share that with us.
Yes, absolutely. And that's something that we focus on a lot, certainly growing AFFO per share is important to us. It's a key metric for us. So we do spend a lot of time focused on that and driving that. And we do have a high level of confidence that we can achieve that aspirational goal of double-digit AFFO per share growth. That is on average, so it doesn't mean we're going to be at 10% or above every single year. There will be some years where we will be below 10%. But on average, over many years, we expect to be able to drive that 10%.
A highlight 1 year that may be challenging as 2022. As you know, and a lot of the audience will probably know, we have some Sprint churn coming in 2022. And that may be a difficult year to achieve 10% AFFO per share growth. It doesn't mean we won't try. We will and we are planning and doing everything we can to try to drive that. But when you look out over the next 5 to 7 years, 10% AFFO per share growth, it's very achievable on average kind of across that time period. Some of the things that give us confidence is just the stability of this business in our cash flows. We have about $58 billion of contracted revenues kind of locked in. That's a tremendous kind of contracted order book for us to rely on as we move through the next several years.
We have a business that's global, put together through a lot of acquisitions. There's a lot of things operationally that we're doing to try to drive efficiencies, continue to improve margins, reduce SG&A kind of across that spectrum. So we are working from that perspective quite a bit. And then there's other things we can add to the business through M&A. There's still lots of M&A transactions out there and available to us. There are potential new entrants popping in like DISH. Everyone's talking about DISH in the U.S. and potentially others like cable cos and things like that. Not that they make up a big driver in our current outlook, but in modest ways, we expect some activity there, and there could be some upside beyond even that. So when we look at our business, it's really that predictable nature of our cash flows and just how important and relevant these assets are within these wireless networks and at the rate of speed that the consumption of mobile data is growing around the world. It really gives us a lot of confidence that this business is going to continue to grow globally.
Great. And how does that guide incorporate the new future expansion of the portfolio through both organic and inorganic activity versus growth on the base portfolio?
Yes. I would say, Simon, that we're not relying on either of those in any big way to drive the double-digit AFFO per share growth. Certainly, when we go out and look at tower acquisitions and we are active in M&A around the globe, we always drive accretive deals. So if we do pick up towers here and there over the next several years, we would expect those to be accretive. They would help with AFFO over time. But there's not a big assumption in the outlook to drive that. And it's similar with the platform extensions and any sorts of new products, edge computing and those sorts of things.
There's not a lot of current revenues and profits coming from those businesses and the outlook that we laid out last week. So we're -- as you know, we're very generally conservative. We're not going to build a lot of things in an outlook that we don't know where it's coming from, we don't have it kind of in hand. So those would -- both of those things could potentially represent a little bit of upside. Probably in terms of the M&A, again, we do accretive M&A, and we would expect to be able to tuck those in and that's certainly part of that. But if anything was to really happen in a big way in terms of new products, that would be in addition to our long-term outlook.
Okay. Great. If we look at the various regions with -- starting with North America, you have a 4%-plus growth rate. You mentioned the Sprint churn coming in, but help us understand what are the elements that gets you to that 4% number over, I guess, through '27.
Yes. So we laid out the long-term guidance. As you say, we took the guidance out a number of years out to 2027. And in that guidance, we have approximately 4% on average over the 7 years. And that includes -- I'll just highlight that, that does include the Sprint churn that will be starting in 2021 and hitting in 2022, '23 and '24. If you exclude that Sprint churn, then the growth will be more like 5% normalized for that. The other way we look at it is we kind of broke up that 7-year view into a couple of chunks that we felt were really very relevant. So the next couple of years, '21 and '22,
it's about a 2% growth rate, and that's because of the churn that really begins in 2021, will hit kind of substantially in 2022. But then when you get beyond that, we expect the next stage, the '23 to '27 to be more like 5% growth. There'll still be some Sprint churn kind of sprinkled in there. If you exclude the Sprint churn from both of those metrics, the '21 and 22 numbers would be up around 5%. So if it wasn't for that Sprint churn, we would have solid single-digit organic growth expectations in the U.S. heading into the next a couple of years.
And when you look out over that 2023 to 2027 time period, again, if you normalize for that Sprint churn, that will be rolling into '25, out of the '24 time frame, we would expect the growth to be in the range of 6% for that time frame. So it really demonstrates for me and for us that over the long term, the growth in the U.S. is really solid, and it's something we can count on. If it wasn't for that Sprint churn, we would have those numbers there up in the mid-single digits. And the other thing I would just highlight around the Sprint churn. As you may recall, several years ago, when Sprint and Nextel kind of merged together, we went through a lot of that. We avoided a lot of the Nextel churn, the Sprint churn a few years ago.
So we enjoyed several years of that revenue, while our other peers in the industry kind of saw a lot of that cycle off. Now that T-Mobile and Sprint are emerging, we're seeing some of that come off. But we feel really fortunate we were at the hang-on of that revenue as long as we were. Now it's time to let it go. We were able to make a long-term deal with T-Mobile in the process there, which maintains the 3% escalator across the board out over a long period of time. It also has additional use, right, over and above that through the whole time period and added about $17 billion of contracted revenue through that deal. So we feel really good about where we sit in in the U.S. with those organic growth numbers.
Great. And do you see much contribution to the industry this year from early C-band deployment from the DISH build? Or is that really very late in the year into -- early into '22?
Yes. I think it's the latter. I think modest contributions in the second half of this year, but really heating up at the end of this year and into next year. So we think it will be a driver more so for next year than this year.
Okay. Great. And maybe just take us to through the key international regions and what you're expecting in your long-term guide for them.
Yes. So our international business is continuing to do really well. If you look kind of across the globe for us, we have solid growth in Latin America and in Africa, with Latin America being up in the 6% to 7% range. In Africa, it's over 8%. So really solid upper single-digit growth rates in both of those places. We see a lot of the same phenomena that we saw in the U.S. in terms of mobile data growth, things like that in those regions. There is a little bit of churn that we're dealing with in Latin America, down in Brazil.
There's Nextel churn. There's Oi that we'll be working with a few of the other carriers there, but that's all included in these numbers. And we still growing -- there's a little bit of churn in Mexico as well, but the gross growth rates are really solid there. And it's a similar story in Africa with nice, solid, at least for us, it's organic tenant billings. They're our leader and have been the last several quarters, and we expect that to be the case as we roll into 2021. So we'll be seeing north of around 8%, better than 8% organic tenant billings growth. That comes with some contributions from Nigeria that is really kind of heating up.
We expect organic tenant billings growth there to be in the upper single digits, almost 10% across that region. So they continue to perform extremely well. Both of those regions are adding towers through build-to-suits, which is our highest returning way to invest capital. So that's been really good. And we continue to build and strengthen relationships with key wireless carriers on the continent, and that's really helpful for us, not only in the short term, but over the long term as well. And in Europe, the big issue in Europe is we are preparing to close on the Telxius transaction, pretty large transaction for us in Europe.
We currently have businesses in France and Germany, albeit fairly modest in size and a small portfolio of assets in Poland. The one thing I will point out is that in Germany, our legacy business is performing very well. And although there's a slight elevation in churn up in, let's say, the 300 basis points or so, in terms of our top line growth, we're actually seeing an acceleration of gross growth there. So -- and that acceleration is right in line and kind of drives our expectation around the Telxius assets that we're buying in Germany, where we do expect those assets to drive some of amongst the highest organic growth rates in Europe that are available, and that would be in the range of almost 6% in Germany.
And that's all in. And that's -- and that portfolio, that includes -- that's net of churn and everything else kind of in there. So we expect really strong growth in Germany through the Telxius transaction. That's one of the things that really excited us about that transaction. And of course, the fact that it's a high-quality counterparty with Telefónica, their home base kind of in Europe and Spain certainly, but also in Germany. So really good things happening there in Europe. I think we'll continue to be very disciplined as we look at transactions, particularly in Europe. But we do like Europe, and we like the transaction that we're involved in a lot. If you jump over to India, we're projecting, again, almost flat 2021 organic tenant billings growth for 2020, which is just about 0%.
So the issues in India kind of persist in terms of the AGR issue, Vodafone kind of figuring out its strategic path and where it's going to go. They're still in the process of trying to raise either some additional debt or some equity to fund their business. They do have AGR payments that are now stretched out over a number of years. A couple of things I would point out there. One is the carriers in India continue to lobby the government to recalculate the AGR dues, and the government has accepted that challenge and they are kind of engaged with the carriers. We're up until this point, they've said, "No, we're not recalculating." Now they seem to be a little bit more open to having that discussion and recalculating. So that may be a glimmer of hope, a window of hope for all the carriers to reduce their AGR fees.
And because of where they sit with the AGR fees and because of the very aggressive pricing positions that have been in India for the consumer is really led by R-Jio. Voda has been on to some stress, and they and they continue to churn off some sites, some legacy sites as well as some new sites. That really is what's holding down our organic tenant billings growth. If you look at our top line growth, we're driving gross organic growth in India and that's quite high, high single digits, 10% growth. The offset there is churn is equally as high in that range, and it nets down to about 0.
So as we move through this period of churn, and if that churn reduces, then we would expect growth rates in India to begin to rise and potentially rise quite substantially, certainly up into that middle single digits, let's say, over the next several years is entirely realistic and maybe even -- maybe beyond that. A couple of catalysts that we're looking for, Simon, in India, we're looking for pricing to subscribers to go up. So we think that there's some signs that that's beginning to happen again. It happened about 6 months ago, and we think it's beginning to happen again. That will be good for the industry.
It will be good for Voda. We're also looking at watching Voda in their capital raise. We do hope that in the next, let's say, several weeks to maybe a month or 2 that they'll resolve that, and there'll be an infusion in cash there that could help them increase, accelerate their investments in their CapEx and their network and those sorts of things. And then finally, the AGR issue and the issue with the government and the timing of payments and things like that. I do expect that they'll be continue pushing and pulling there, and our hope is that the government makes some decisions here that is supportive of the carriers because the digital India initiative is important to the government.
They want to have a robust wireless infrastructure and they need healthy carriers, and they've had stated the preference to have 3 commercial carriers in India. So we think there's a pathway there. It's taking a little bit longer than we expected, a little bit longer than we had planned and really hoped, but there -- it's certainly a very dynamic and a very -- potentially a very good market for us if we get through these churn issues and get the industry a little bit more stable than it is today.
Yes. Fingers crossed for that. So you talked about the Telxius deal. And I think it was a surprise to some people because it seemed like there's been a ton of activity in Europe and really none of the U.S. tower companies had invested over there for -- in any size as you sort of noted. When you combine that with the InSite deal, you've kind of recalibrated your business mix a little bit between emerging markets and developed markets. Is that just a coincidence? Or has there been -- has Tom wanted to sort of move that or the Board wanted to move that a little bit back towards a heavier developed market focus?
Yes. There's nothing too specific around a shift in strategy. There is no short-term kind of adjustment from what we had been doing over the last many years. So the strategy is very consistent, which is to look across the globe, particularly for key markets where we see really good dynamics in the marketplace, strong, competitive nature amongst a handful of wireless carriers, not too many, but not too few. We look for those things.
And I wouldn't chalk it up to a coincidence because it certainly isn't that, but it's also not a short-term shift. We will continue to be very opportunistic as we grow the portfolio. I fully expect that we'll find additional portfolios in emerging markets with higher growth rates that we're willing to buy and bring into the portfolio. And at the same time, there is a place for developed country investments for us, a place with -- maybe the growth is a little bit lower in Europe than it might be in Africa, but cost of capital and risks and everything else kind of being equal and you look across the board, we look at discounted cash flows and we look at driving spreads over our hurdle rates within those markets, our risk-adjusted hurdle rates, and we make decisions based on that.
So there is a place in our business for emerging market risk and returns, and there is definitely a place in our business for developed lower risk in those kind of assets as well. So you'll continue to see us do a little bit of both there. Some people look at Europe and say, we have looked at a lot of portfolios over many years, and we've passed on all of them. In our view and based on our analysis, none of those portfolios kind of matched up to what we see with the Telefónica assets. That really is the difference in terms of doing this now versus doing -- not doing some of the deals that had come up before.
And as you know, there are deals that have come up after we announced the Telefónica deal, which we did not get. And that's just us being disciplined. Nothing happens anywhere without us knowing about it and us looking at different things in being involved in the analysis. We don't ignore processes, right? We make strategic decisions whether or not they're right for us if the value is right in those sorts of things. So we passed on some before. We decided to really jump on the Telxius deal because we just liked it a lot. And then there are things that happen after that, that we've -- that, again, we didn't jump on. So we'll continue to do the same going forward.
We'll continue to be opportunistic, continue to run our models and be very disciplined, watching our risk-adjusted hurdle rates and making those decisions kind of as and when each portfolio comes up.
And then how open are you to adding new countries? Or would you prefer to grow within your existing markets?
I think, I mean, we would do both. We would continue to be opportunistic. We like adding assets in existing markets. As you pointed out, we added a lot in the U.S. through InSite. We continue to add assets in the U.S. We do every year. We always do. We've added quite a few assets in some of our existing markets in 2020 down in Latin America through some carry-on acquisitions that we had done. And we also acquired several hundred towers in France during 2020. So we're adding assets into existing markets in that regard as well.
And then last year, we built 4,500 towers. Those were built primarily almost exclusively in markets where we were already invested, right? So filling out those markets where we already have a presence, that helps leverage our fixed cost and it drives margins and, so we like that quite a bit. In terms of adding new countries, again, that's something that we're open to. We continue to look at good portfolios coming to market with good counterparties. And we're open to adding additional countries here and there as long as they get through our very disciplined kind of screening process and evaluation process.
Great. And as CFO, you've been busy with the balance sheet. We've got a pretty scary move-in rates last week. How are you thinking about the appropriate leverage levels and how you balance that with rates and bringing the leverage down over time?
Yes. Last week was an interesting week with treasuries popping up the way they did up. So I think they hit 1.6. They're down again now of about 1.4, a little bit over, I think, which is good directionally. In terms of our balance sheet, we ended the fourth quarter -- we ended 2020 at about 5x leverage. So really right at the top of our leverage window. Simon, we've been very active in 2020 in the capital markets, really very purposefully to take advantage of these low rates. We've -- we exercised early redemption of many of our senior notes that were due in the latter part of 2020. We took those out in '19 and even into '20.
We took out all of our 2021 maturities in 2020. So we've got a clear deck now out to 2022, and we've been able to take out those maturities and then replace them with much lower longer-term debt. So we're really using this environment of low interest rates to strengthen our balance sheet. And we've done really well there, lengthening the term and reducing our overall cost of debt. The thing -- when you think about the balance sheet as we go forward, the big event will be the Telxius financing. So that's about a $9.4 billion transaction. There are also build-to-suits that will come with that over the next couple of years.
If you look at all of that capital, it's nearly USD 10 billion. So that transaction certainly will be transformational for our European business. And from a financing standpoint, we're going to go at it in a couple of different ways. One is we are comfortable bringing our leverage up above our stated target. Our financial policies are between 3x and 5x leverage. We still think that that's good for us long term. But certainly, when we have a bench, big acquisitions, we are comfortable going above that. And this go around, when we begin to close on the Telxius assets.
We'll bring our leverage up to the high 5x. We did that once before, back in the Verizon days, and we'll do it again with this -- with the Telxius transaction. And that's after, of course, deep and many discussions with the rating agencies going through their processes and really discussing our plans with them. We think we can do high 5x with no -- without a change in outlook, without any risk of downgrades or anything like that. And when we do that, we'll also have a commitment to delever. And that delevering will be over time. So at least 2 years.
It's not going to be within 2021. It's going to really be like a 2-year window, maybe even a touch longer in terms of us delevering back to 5x or below 5x. So we're very comfortable with that level of leverage because of the predictable nature of our cash flows, really, the importance of these assets globally. Me as a CFO, thinking of leveraging the high 5x, very comfortable with that type of leverage. Investment-grade credit is important to us. We think it drives a lot of value for our shareholders in terms of our cost of debt and access to capital markets and things like that.
So we don't want to jeopardize the investment grade credit, but bringing leverage up is perfectly fine. The other thing we'll do, there'll be a balance there that we'll need to raise to complete the Telxius transaction, and that will come from issuing equity, selling some equity. And we'll do that in a couple of different ways. We're looking at using private capital. We've done it before, and we'll look at it in this go around as well. So we're in kind of, I would say, advanced discussions, very constructive, fruitful discussions with a handful of very large global investors, and we feel very confident that, that could be an attractive source of capital for our shareholders to bring into the mix.
There'll also be an element of us issuing some common equity to kind of fill the gap here. And our view is we want to minimize the dilution of the -- of our existing shareholders. And we want to make sure that we have access to all kinds of pools of capital as long as it's attractively priced and the terms and conditions are attractive. And that's where -- that's what gets us excited, and this go around is that we are doing a lot of work with the private capital. And we're very comfortable with the terms of that private capital, where we're headed. Now if anything was to change, we may change course.
We're not going to enter into agreements here with private capital that aren't advantageous to our shareholders. That's critical. But as of now, I think there's a lot of appetite to these assets, particularly in Europe, and the predictable nature of the cash flows, the pricing of the terms and conditions seem attractive. We certainly -- as a global leader in telecommunications infrastructure, we have a lot of support from some of these investors around our ability to operate these assets and people wanting to be invested alongside.
So the process is going really well, and we are confident that there'll be a mix here of public equity and private capital as well to fund this with the goal really being driving down our overall cost of capital and driving AFFO accretion over the long-term and private capital in this mix at this time in Europe can really help do that.
Great. In our final couple of minutes, Rod, you signed a 15-year master lease agreement with T-Mobile last year, setting records helping with the backlog. You've got Verizon potentially coming up here. DISH could be another one. How are you thinking about the potential for MLAs with both of those, renew MLAs with both of those?
Yes. We're -- I mean, we're certainly open to the concept. So we've done MLAs in the past, and they've worked out well for us. They do a couple of things. Number one is the they kind of lock in value and they make our future revenue stream very predictable or more predictable than if we are à la carte over a couple of years. So that's nice to have that predictable aspect of our recurring revenue. And it also speeds up and makes the application process much more efficient for the carriers. So they can deploy more quickly without a lot of the administrative burden of going site by site to negotiate pricing or MLA terms and conditions and those sorts of things. So that's what it does.
What it specifically does not do is provide discounts to the carriers. We don't discount our assets and the pricing in order to get an MLA. There isn't that offset, right? We basically -- the way that we model this stuff out is we have a really good sense of what the carriers are going to do. They tell us what they need and what they want in the MLA. We understand the spectrum in our assets and how they've been used, how they will be used in the future. We build our own models around what they're going to do with these assets and when and how they're going to need to use them. And then we basically price that all up, and that becomes the price of a holistic deal, and that corresponds with the rights that are given to the carrier for those fees.
And in that way, the carrier can accelerate and slow over time, their fees to us stay flat. And that is good for them because they have predictability in their expenses. We have predictability in the revenue and administratively, it's much easier. When it comes to DISH and Verizon, we're open either way. We're doing -- our process has not changed. We're doing the exact same thing. We will do the same thing, which is if that's good for them, we can make it work for us. Certainly, if they want to go à la carte, that works as well, too, because the nature of our assets and our portfolio is if they need some of our sites that are in certain locations, they need those sites.
So we believe we'll get our fair share of future capital deployments, whether they're in a holistic deal or not in a holistic deal. So either way, we're good either way. And I don't think either way, we'll really change the long-term nature of the value creation here. What it will do is over the first few years, maybe it smooths out the revenue stream, gives a little bit more predictability, but it won't fundamentally change the overall value either way. So that's the way we approach it. That's the way you can expect us to approach it. If there were any new deals coming up in the future, you may see us announce in the end of the day with 1 or 2 of those, you may not. But either way, we're going to -- our assets are going to perform really well under either scenario.
Great. Great. Well, great overview, Rod. That looks like you're going to have a busy year ahead of you. Thank you so much for joining us today.
Yes, you're welcome. Thank you, Simon. It was great seeing you again.
Yes. Take care.
You too. Bye.
End of Q&A