American Tower Corporation (NYSE:AMT) Nareit's REITweek: 2022 Investor Conference Call June 8, 2022 1:15 PM ET
Rod Smith - Executive Vice President, Chief Financial Officer and Treasurer
Conference Call Participants
Brent Penter - Raymond James, Inc.
All right. I think we are good to get started. Thanks, everyone, for being here. I'm Brent Penter with Raymond James Telecom Research. My colleague, Ric Prentiss couldn't be here today because he had his first grandchild about 12 hours ago, I think, so thinking of him and his family and excited for all of them and happy everyone's here in person. So I'm here with Rod Smith, CFO of American Tower. Rod, it's good to see you.
Yes. Good afternoon, Brent. Thanks for joining me here and thanks everyone for joining.
Q - Brent Penter
Yes. So a lot's happened in the last year. Number one, we are back in person. American Tower has been very busy with the acquisition of CoreSite. You had a lot of activity on the U.S. leasing front. You had your first slug of T-Mobile, Sprint churn hit. And then a lot happening on the macro side and interest rates have basically doubled in that time. So all topics that we'll get to, but just want to start with the core U.S. tower leasing business. You all have given guidance not just for 2022, but some higher level guidance out through, I believe it's 2027. So what are the key drivers behind that guidance and what gives American Tower the confidence to give guidance so far in advance?
Yes. Thanks, Brent, and it's great to be here with all of you. A lot of familiar faces in the audience. So thanks for the continued support and attendance. So many of you have heard us talk about our business over the last several weeks as we've been out with investors, but our business is strong. No question about it, not just in the U.S., but around the globe. We have a great set of assets, tower assets primarily around the globe, over 220,000 assets across 26 different countries.
In the demand environment that we see in the U.S., in Europe and in the emerging markets that we're in is shaping up very nicely. The strong demand for our assets around the globe which is really underpinned by the growth in mobile data consumption again, in these developed markets like the U.S. and in Europe, but also around the globe.
The other thing that we see strong demand for around the globe is new assets. So we are building a lot of assets particularly in the emerging markets, but also in Europe. So we will build about 6,500 new towers this year alone. When it comes to the U.S., Brent is correct, we have given out longer-term guidance for our organic tenant billings growth in the U.S. And as a subset of that growth from 2023 out to 2027, we are projecting equal to or greater than 5% growth on average for each year during that time period.
And as reported, means it will include the effects of the Sprint churn throughout all those periods. If you normalize for that Sprint churn, then we are projecting on or above 6% growth on average through that time period. So what that means is we are seeing an acceleration in growth and demand in the U.S. We will grow this year in the U.S. organically at about 1%. That includes the negative impacts of the Sprint churn that came off of our tenant billing growth in the fourth quarter of last year. And that affects the growth rates by about 400 basis points, so normalized for that excluding Sprint churn would be grown in the range of 5% this year.
So when you think about 5% to 6% over the next several years from 2023 to 2027, on average in that acceleration, we will see numbers higher than that 5% over the coming years and that's key. So that really represents the idea of this accelerating growth demand in the U.S. business. We certainly see that with our primary customers being AT&T, T-Mobile and Verizon, all actively building out 5G network components, all bringing in additional spectrum across the U.S. As they do that, they need to build out the infrastructure on the cell sites to handle the additional spectrum. So that includes additional antennas, base radios, cables and lines. That's what fuels our business and is setting us up to guide for an accelerating growth rate out into the near-term.
So when it comes to the U.S., I mean, we couldn't be more pleased with the backdrop that we see. And then on top of the three primary carriers, we do have DISH, who's starting to build up their network from the ground up. They are becoming a revenue contributor this year. They really weren't in our revenue numbers last year in any material where they'll come in this year, their revenues will ramp with us from mid-year to the end of the year on a couple of kind of step-up incremental revenue additions, and then that will continue to step-up throughout next year and the year after.
So the way to think about the DISH commitments and impact is it's really minimum revenues that are fully contracted and committed within their agreements. That's what we have for DISH in our longer-term outlook. So really good backdrop in the U.S., 5G is just beginning to roll. A lot of people ask about the U.S. and 5G and the carriers having a spike in CapEx. And then it'll come down thinking that we'll have a spike in growth rates, and then they come down.
The tower industry and the growth on towers doesn't mirror the CapEx on an annual basis, it's more over time. We do expect to see a spike and then a return to a lower level of CapEx in the industry, that lower level of CapEx will likely be a higher level than what we've seen in the last four or five years. And that sustained multi-year higher level indicates a step-up of investment that's going to be required to increase the cell site capacity. And they do that as and when they need it.
So when you see more and more 5G handsets being utilized in the U.S. market space, when you see that penetration go up and then you see more and more applications running on these handsets that are 5G capable, that creates more demand on the asset on the tower side. And then that causes them to come back out and to deploy more spectrum, more antennas, more base, more radios and the antennas and more cables and lines.
And that's what fuels this kind of repeat amendment business for us during a technology cycle. That really goes on for maybe as long as 10 years. 4G was more than 10-year kind of revenue cycle for us, CapEx cycle for the carriers. And today, even with the spike in CapEx, the amount of capital going towards 5G network starts out as a small percentage of the carriers total CapEx, much of that CapEx is still devoted to increasing the capacity in their 4G networks just to keep up with the demand on that network.
And then over time, you'll see a shift where the 5G spending kind of outpaces it and carries on for five to 10 years. That's what we typically see in these technology upgrade cycles. So we are in a really good position and we do see accelerating growth and we see a return to kind of mid single-digit growth rates in the out years here in the U.S.
And one attractive thing about the tower industry is that connectivity is center of service at this point and towers are essential to the carriers who provide connectivity. So how has the tower business historically performed through different macroeconomic cycles? And as American Tower looks out to the next few years, how are you viewing the macro situation and how you expect American Tower to perform through a variety of different possible conditions there?
Yes. It's a great question. Certainly a timely question and a relevant question. We have had our tower portfolio kind of go through different macroeconomic cycles in the past, certainly through 2008, 2009 timeframe, also back in the early 2000s. And our assets performed exceptionally well during times of economic dislocation or disruption even into recessions or even a rising interest rates, we tend to do pretty well through those time periods.
So our assets, they are critical assets within the networks, the network operators, they tend to run their business on technology cycles not so much cyclical cycles. Certainly that's what we've seen in the U.S. and other developed markets. Emerging markets could be a little bit different. But in a 5G rollout that our view would be that that 5G rollout in the U.S. is not going to be substantially disrupted based on short-term recessionary pressures that you see in the U.S.
The carriers need to upgrade these networks to 5G. It's a multiple year cycle. They'll begin to invest in that now. Once the handsets and applications are available, the subscribers demand it and they want it. And if one company won't provide it, another one will. So they kind of push through the technology cycle and they upgrade to 5G and we benefit from that. Even if there's a recession, we tend to see them continue to push right through it and deploy that upgraded technology.
So we're at the very beginning of 5G. People have anticipated 5G coming for some time. I know subscribers are really looking forward to getting the handsets and being able to take advantage of those higher level services and the increased capacity and speeds and all those sorts of things. So we tend to do very well through those cycles. I would also say we've got a really strong balance sheet, certainly an investment grade balance sheet, really strong balance sheet. We have a broad and deep access to capital.
So in times of rising interest rates, maybe some economic disruption to the extent that we see asset pricing come down and other companies maybe kind of holding or even pausing or retrenching will be in a good position to continue to be active in all sorts of markets. That could be on the M&A front, taking advantage of what could be premier assets coming out for what might be better terms and conditions of pricing if you have fewer buyers chasing those. So it could be a time where we could be potentially active acquiring towers around the globe over the next several years, and really taking advantage of some of the other buyers not having as strong of a balance sheet as we have.
So the other thing I would highlight for our business is it's a very stable cash flow business. The stability within our earnings is really one of our strong points. And of course, in macroeconomic challenges, investors like stability and in the U.S. – in our U.S. business and in our business really around the globe, it's – our growth rates never go negative even in economic turmoil. It's just a matter of how much growth will we have. So it's a great asset class for folks that want that resiliency, that stability and earnings through all kinds of economic cycles.
And then I would also highlight that our European business is doing exceptionally well. So we've seen a change in improvement in the European environment for macro towers and demand for macro towers even in our legacy business beyond just the Telxius acquisition that we had bought and brought into the portfolio in the last year. But our legacy business has come up to about 6% organic tenant billings growth and that centered in France, Germany with a small asset in Poland. A couple of years ago, that asset was growing at 2%, 3% organic tenant billings growth.
There was lower gross growth and there was also higher levels of churn in the business. We saw those trends shifting. Over time we saw the churn subsiding. We saw it getting back to a much more normalized churn environment where churn was – is now and will in the future be driven by RF engineers as they do the network planning. Not a kind of wholesale reduction in the number of cell sites or towers that are in some of the European markets, which is what's been driving some of the churn over the last decade in Europe.
So we saw that churn declining, and we also saw the demands on the 4G networks rising, ARPU is going up as well in the market and the carriers really needing to reinvest in the network at a greater rate to keep pace with the demand. And now they're about to cut over to a 5G network. They're launching that in Germany and France and Spain will follow shortly thereafter.
So we've seen a nice return to that mid-single-digit growth in our European business. We bought the Telxius portfolio, which was a $10 billion roughly acquisition that had concentration of towers in Germany and Spain. And with that portfolio now brought in, our European business is growing at 7% organic tenant billings growth.
So a really strong organic growth rate and a really in a location where we've got access to high-quality economies growing in high populations there, so the really nice asset purchased at exactly the right time, so that we can take advantage of these high organic tenant billings growth rates now and into the future. So that acquisition has been really good for us in terms of bringing it and seeing short-term results that we expect to continue on.
And since you hit on the growth you're seeing in Europe, can you just take us through the entire international portfolio American Tower has and first of all, what you own, but then what you're expecting in terms of growth in those other markets, too?
Yes. Absolutely. So we've got about 220,000 towers spread across almost 26 different markets around the globe. Our anchor location is in the U.S. So we talked about that. We've got about 43,000 towers or so. We did just buy a set of differentiated high-quality data center assets in the U.S., which I'm sure we'll get back to. And we talked about the growth rates there in the U.S. In Europe, we have the legacy portfolio. We just brought in the Telxius portfolio. So we have a concentration in towers in France, Germany and Spain, really nice portfolio with good economics.
We selected the assets that we have very deliberately and very carefully. We passed on a lot of acquisitions in Europe that you guys have seen us kind of look at and walk away from over the last many years, four or five years as other companies were rolling up assets. So we are very selective in our European M&A cycles there. And I think you're seeing the results of that based on our organic growth rates that you're seeing in Europe.
And in Europe, so for this year, we're projecting 9% organic tenant billings growth. And when you get to the back half of the year, that's going to be around 7%, so kind of the run rate, sustainable growth rate is more than 7% as we exit the back half of the year. Dropping down into Latin America, we've got tower assets kind of throughout Latin America, really anchored in Mexico and Brazil. That market is projected to drive greater than 6% organic tenant billings growth for us this year.
And Latin America has been a great set of assets for us over time. We are seeing solid demand on the gross growth line, which is nice. We're also seeing slightly elevated escalators because of inflation. Many of our international markets, the escalator is pegged to local inflation. So that's the way it is in – and across Africa as well as Latin America.
So we're seeing higher levels of escalations in Mexico, Brazil and the other Latin America countries to adjust to that. We are also seeing slightly elevated churn in Latin America centered around some of the Nextel assets down in Brazil and we've got some Telefónica churn up in Mexico, who's joining AT&T as an MVNO on that network.
And we also have seen kind of a slow down and a little bit of a disruption with Altán, which is the government-backed carrier in Mexico. That's building out a network there. We do think those churn events are temporary. We'll get through those and we'll be back to higher levels of growth in Latin America based on the demand that we see there for tower assets combined with a more normalized churn rate more in the 1% to 2%, not the 4% to 5% that we're seeing.
Today, you drop into Africa. We're also seeing growth rates in Africa that are better than 6% organic tenant billings growth. That's down from a year-ago about 8%. We've seen growth rates as high as 11% in Nigeria, which is a nice set of assets. Our assets are concentrated in South Africa, Nigeria, Kenya, Ghana and Uganda, small portfolios in Burkina Faso and Niger as well.
And the story there is a lot like what we're seeing in Latin America. We're seeing strong demand for the assets. We're seeing a slightly higher escalator because it's pegged to inflation – local inflation. So we're seeing about 5% escalated this year in Africa. And then we are seeing elevated churn for a few specific temporary events, primarily for the Cell C portfolio in South Africa where they're taking down sites and becoming an MVNO on another carrier's network there.
And also some churn in Uganda where AirtelTigo combination is exiting that market and a little bit in Nigeria. But we'll work through that and we'll get back to normalized churn. And when we do get back to normalized churn, we expect the growth rates in Africa to be in the high-single digits kind of on a sustainable basis. So Africa is a really good market for us.
And then turning to India, we do have about 70,000 towers across India, a really strong portfolio that's nationwide in India. We are coming out of kind of the recent history where we've had negative growth in India primarily due to what we refer to as consolidation churn. Many of you probably know exactly what that is that the market went through a kind of a rapid consolidation of more than 10 carriers down to about three that of course caused temporary disruption and churn issues. But we are now seeing the marketplace come back to positive growth.
We've seen the churn subside significantly and we're seeing gross growth come back into the range where at least in the direction that we would like to see it. We do think that there's more room for improvement in India. We're projecting growth to be 2% to 3% positive this year. That'll be the first positive organic tenant billings growth we've had in India in five years or so. So that's a good sign. We expect it can get much better than that. But at the moment, we're still cautious kind of watching India and see how they handle some of the transition that they're going through in terms of [RJIL] has been aggressive to drive their market share up. They're about 50% market share just about, and we think that that's a good place for them.
And so without the demand or the priority of gaining market share, they've been able to – the industry by and large across all three carriers have been able to increase their pricing without worrying about RJIL continuing to undercut everyone else. So all the pricing is going up in India for the subscribers, which puts more EBITDA on the P&Ls of all three of the carriers in India. So that's a good sign. They've gone through three cycles of price increases, and they're much healthier now because of it. So the market is stable from that perspective.
And the government has also provided some support when it comes to the timing in the forms of payment around the adjusted gross revenue issue that has been plaguing India as well as the spectrum fees that are due. So they've given the carriers a moratorium, basically no payments for four years. And then at the end of that four years, if the carriers want to pay some of their accumulated interest in the form of equity, instead of cash, they can do that. And some carriers have selected to do that, which once again, just strengthens the balance sheet of all the carriers there. So India is certainly heading in the right direction back to positive organic tenant billings growth for us.
With that said, we are still cautious in terms of watching the way the India market unfolds, but there's no question the demand for infrastructure in that country is strong. I mean, with 1.3 billion people, they need to double the number of cell site transmission points over the next several years in that market from something like 500 million or so to over a 1 billion transmission points. So a lot of infrastructure is needed. We build about 3,500 sites a year in India. And we certainly think there's room to even expand that beyond that number. So India is shaping up nicely for us, but again, we're cautiously kind of watching it over the next year or two.
Great. And you talked about the Telxius acquisition and obviously the other major acquisition you've made recently was CoreSite expanding into the data center business, been on the books for about half a year now, what have you learned so far? And then in addition to that you made some announcements last week regarding the equity financing for that deal. Why has American Tower chosen the financing path they've chosen for CoreSite and what could or should any sort of private capital partner bring to the table?
Yes. So a couple of questions in there. I'll start by giving you a very brief kind of overview of CoreSite. So we bought CoreSite, it's a combination of about 24 buildings that spread across eight different markets. So the geographic location of these assets is important to us. They're in the Silicon Valley, down in LA, in Chicago, down in Denver, they're in Boston, New York, Northern Virginia, and down into Miami. So they're well distributed throughout the U.S.
The thing that CoreSite brings for us, that's really differentiated from other assets that we've seen is the high concentration of cloud on-ramps in these facilities and the number of network companies that are in these facilities, as well as the amount of interconnection that happens within these facilities. And we see the demand for that type of asset being really strong and with limited downside because of the high quality nature of these assets, the locations, and kind of what goes on within the building.
And we see that based on some of the financial metrics that come out, and this is one thing that we've learned through this is that the business is performing exceptionally well, and the demand is strong. We underwrote the transaction with economic growth pegged at about 6% to 8%. We're above that for this year in terms of our guidance and the demand is continuing to accelerate. So we think we've got really good assets here. Assets that are U.S.-based accretive to U.S. growth rates constructive to our goal of achieving 10% per share of AFFO growth from now to 2027 and we think there's limited downside.
With all that said, the optionality and the ability to drive these cloud on-ramps out to the tower sites is really the upside that we are most interested in. We're not interested in just growing a data center business so that we run towers and data centers. That's not the strategy here. The strategy here is how do we maximize the value of our U.S. tower portfolio and eventually our global tower portfolio by taking advantage of technology shifts and networking shifts that we expect to happen as the wireless networks head into 5G and also the landline networks and enterprise customers will be using networks differently than they do today. They'll be using them differently in the future.
One of the big things that'll be different is we think more and more things will be cloud-centric. So the cloud companies will want to get more and more cloud on-ramps distributed throughout the U.S. We look at our tower portfolio and say, that's a perfect place to put smaller, more convenient cloud on-ramps for the cloud companies all over the U.S., hundreds or maybe thousands of those, our tower sites could be perfect places for the cloud companies to place their on-ramps.
They want to do that, so they can provide that service closer to their customer's edge because they see the requirement for latency as being a requirement that's going to come right around the corner in 5G. It's going to come with wireless networks. It will also come in landline networks. And some of the big enterprise cloud customers will want that lower latency in all their compute as well. So we see that happening. And we think tower sites are a good place to put those assets. The cloud companies maybe the ones kind of pushing them out in the first instance.
With that said, we also know the wireless carriers want and need cloud on-ramps and compute power, potentially edge content caching, all in a close proximity of where their base radios are. Right now their base radios are all at our tower sites. So we've got kind of a need from the wireless networking side. We've got a desire from the cloud companies as well.
We've got the towers. We didn't have the cloud on-ramps in the direct commercial relationships with cloud companies and all these other landline networking companies. That's what we pick up with CoreSite, so we can hopefully kind of bring these puzzle pieces together in a way that you get cloud on-ramps at the tower site, it satisfies the lower latency requirements and wireless 5G networks. It gives on-ramps and compute power close proximity to base radios. And then you get landline networks starting to tap into one and also enterprise customers to tap into these sites that are all over the country. That's what we see happening in shifting in the wireless and the landline networks as we go forward.
So with all that said, CoreSite is a highly differentiated high quality asset with good growth rates in the U.S. with limited downside. And it potentially advances this additional revenue stream on our tower sites in the U.S. that then can be exported all around the globe as these networks transition to 5G and beyond. So the end goal and the primary goal in terms of acquiring CoreSite is to make our towers more valuable, have them be better positioned to drive as much value as possible out of the future networks that we see coming down, which will be a little different that everything that happens at the tower will still happen at the tower. We think there's another revenue stream that can be at the base of the tower that could be really interesting.
And can you talk a little bit about the equity portion of the financing there?
Yes. Absolutely. So we did – last week, we offered common equity. We raised about $2.4 billion. We also announced that we have a non-binding term sheet with a private investor that's then negotiated over the last several weeks and even months. So you put those two together and we've raised just about $5 billion to put towards our CoreSite acquisition. That completes the funding for the CoreSite asset. So once we bring in the private capital piece, CoreSite will be completely funded.
Anything you see us do in the capital markets going forward would be more opportunistic, but not related to the CoreSite acquisition. The $5 billion of capital that we're raising now will go to pay down some of the revolver expansions that were dedicated to CoreSite as well as the term loan or two that are dedicated to CoreSite. So those will come out, will come back down to kind of a more normalized amount of revolving credit.
And after we bring in the private capital and we've already brought in the capital from the common equity raise from last week. Once we pay down these term loans and revolvers, we'll be sitting right at about 80-20, in terms of 80% of our capital structure, our debt structure represented by fixed rate instruments and then 20% on the variable side. So that's right where we want to be. So there will be no need for us to go back into the capital markets.
When it comes to private capital partners, there's a few things that are important. One is there's lots of private capital partners that would love to partner with us and invest with us. We saw that when we did the private capital raise in Europe, and we saw that again with the CoreSite raise. So having access to that is important to us, but we have the ability to be very selective in terms of who we work with.
And we certainly look for people that are like-minded that have a particular experience within the space that we want their experience in. And in this case, it's with data centers in the U.S. So that's certainly important and we want them to be at the table in terms of how do we maximize the organic growth in this business kind of going forward and also their experience in terms of how to think through the edge and what some of these players are thinking about.
So we haven't announced who the private partner is here yet. We will, I think relatively soon. But they are a large global in infrastructure investor, and they also have data center investment experience and they own data centers currently. So they're really familiar with the space. So that's kind of one of the added bonuses, benefits of bringing in the private capital partners.
And then at the end of the analysis, it's really all about how do we best position the company now to drive the maximum accretion on an AFFO per share basis for our shareholders and maximize the AFFO per share growth rates going forward. And governance is always important. And in this case, just like in Europe, we have full control of the asset. We have full control in terms of driving and benefiting from the edge development. So we were able to preserve all the upside around the edge, but not having to carry the full capital burden on our own. So that works out well for us.
Great. Well, I think that's all the time we have here. Thank you, Rod, for being with us today, and thank you, everyone, for being here. Everyone stays well.
Yes. Thank you.