American Tower Corp (NYSE:AMT) Bank of America Global Real Estate Conference September 14, 2022 3:40 PM ET
Company Participants
Adam Smith – SVP, IR
Conference Call Participants
David Barden – Bank of America Merrill Lynch
David Barden
Thank you, everybody, for coming and joining us again for Round 2 on the comm infrastructure circuit. My name is Dave Barden. I’m based here in New York. I head up our comm infrastructure research, which kind of entails fiber, data centers, towers, and I’ve got my team, Alex Waters and John Crawford, here with me.
And we’re really pleased to have with us Adam Smith from American Tower. He heads up investor relations and works on some finance-related items. And he’s been a pretty articulate advocate for American Tower. We’ve been a big fan for a long time. And maybe I’ll just ask Adam to kind of just kick it off, give us a little bit of a kind of a business overview update on where we are kind of right now mid-third quarter.
Adam Smith
Yes. No, absolutely. Appreciate the attendance and thanks for having us here today. Look, I think we came into 2022 with some pretty bullish expectations. We laid out an expectation for accelerated 5G deployments in the U.S. with really all the carriers. That was kind of further supported by that gross organic growth really accelerating versus 2021, probably around 15%. We laid out an expectation for 4G and 5G initiatives beginning to ramp up internationally, that was supported not just through a good dollar acceleration on organic gross growth, but also what we would see to be our fourth consecutive year of record be built globally, largely international.
We’ve really completed the integration associated with our Telxius assets, which are performing very well. The terms, the conditions, the assets, the counterparty are not just setting us up well in Europe as we exit this year. But I think together with the framework agreement that was signed with 1&1 in Germany gives us another pause of catalyst together with our CPI-linked escalators, which largely make up our European portfolio, give us another good catalyst as we exit the year.
We obviously just signed the Verizon deal, which now puts all of our major carriers plus in addition to U.S. under comprehensive MLA use. So that gives us really positive visibility as we look into 2022 and beyond. We obviously closed the CoreSite transaction at the end of last year, which is performing very well and actually probably exceeding our initial underwriting expectations. We concluded the financing for CoreSite and bringing in a private capital partner in Stonepeak, which we’re really excited about. I think we ultimately, despite a pretty challenging environment, we got full value for the CoreSite deal, obviously, but also bringing in a strong like-minded partner for the future.
So I really see 2022 is see shaping up. We had bullish expectations for the year. It’s shaping up in a way that further supports those expectations we’ve been able to raise. And I think when you take it together with some of the agreements that we’ve executed on through the course of the year, it’s really setting us up well.
Question-and-Answer Session
Q – David Barden
Great. That’s a good start. And as we kind of go along with the conversation, if you guys want to jump in and throw a question out on a topic that is near and dear to your heart, please do so. Otherwise, I’ll keep covering, Adam.
I guess I want to — the most important part of American Tower is your core domestic macro leasing business. Then it’s kind of looking around the world at the other kind of major macro leasing businesses. But the one I get asked about all the time is 5% of your EBITDA, which is CoreSite.
Adam Smith
It’s taken up a disproportionate amount of —
David Barden
And why don’t we just knock that out?
Adam Smith
Yes.
David Barden
So I mean, tell us how well is it going? And why did you do it? And when will we have an answer as to whether it was a good or bad decision, allocation of capital?
Adam Smith
Yes. No, I mean the American Tower does of course, doesn’t represent American Tower wanting to diversify into the business. I think everyone here is probably that’s been following us know —
David Barden
Including, I have — don’t go there. Just keep going.
Adam Smith
You know, whether it was Tom Bartlett or Jim Taiclet, there’s been this identification what’s that third flywheel [indiscernible] obviously, domestic, international. And then looking at what’s going to be that new opportunity to drive incremental revenue from that leveraging our assets, but also as a company.
And probably the most consistent theme that we’ve identified over the last 5 years has been this concept for the mobile. And that’s the reason we can quote so, is such that it enhances our option to be successful at the mobile as it is launched. And that’s predicated on as 5G evolves, as use case is going to evolve, latency sensitive and ultra-web latency sensitive use cases will require 10 milliseconds, 50 millisecond, 20 routes at times. And quite honestly, that infrastructure, we don’t believe exist today. And by having 43,000 sites across the U.S., we own the land under 35% of the new assets. The other 65% average here is typically power already at the site, security, we add the MNO relationships. We are professionals and one of our core capabilities is managing and redeveloping distributed BMC. So we’ve always thought this would be a natural fit.
What I would say over several years of evaluation, that’s really kind of set out, although we believe we’re well positioned for this, we’re almost kind of at the end of the tail, and it’s almost kind of like having a piece of property along highway and open tower up on it someday. We have very proactively — and I think if you go take a look at CoreSite tender offering, we’ve been extensively evaluating partnerships, and that’s how our relationship with CoreSite is, understanding how we can partner in this to make this work out. While I think there was general recognition that this will be inevitable over time. I think with any partnership, there’s going to be some level of complex, whether that’s maybe participate in seeing this capability to move out beyond your core data point or laws. I think for American Tower, quite honestly, our value proposition, absent CoreSite is much more only diminished to the point where maybe the economics, we don’t necessarily think would be maximized. And I think just with any partnership or relationship, you probably have conflict in full capital allocation priority.
So what we ultimately saw with CoreSite, when it became available is a set of assets, and I would emphasize not every data center company will be attentive to. It was a set of assets that were interconnect in which cloud on-ramp was distributed. And quite honestly, at a reasonable cost that we were able to underwrite this on a stand-alone basis, inclusive of, of course, this development pipeline. And through that lens, we kind of see this as relatively low risk because this doesn’t represent a major diversification in the data centers. You pointed to 5%, 6%, 7% of our operating profit. There is not an expectation in that 15%, 20%, 30%. We do this because we believe now by having the cloud service provider access, now the likes of Tom Bartlett and Steve Vondran are having commercial, strategic relationships and discussions with the likes of AWS, Google, Azure, which we never had before and probably wouldn’t have had any type of partnership or relationship.
This is going to be an ecosystem that will begin to evolve now. I’ve been quite honestly, you’re already kind of seen the recognition of — Verizon partnering with a [indiscernible] that’s now partnering with the cloud provider. I think Verizon has kind of laid out a pretty bullish expectations on what the net could ultimately provide their business over the long term as well.
So for us, our thesis is that the cloud is going to want us to be low cost infrastructure model that I think is not going to be economically efficient to go at this with 3 MNOs plus DISH. And just like Tower model, this could be a model that will be optimized through mutual growth activity.
So we might get to 5 years down the road and maybe the edge has not materialized the way we thought. We might get 5 years down the road and decide we ultimately need to partner with some data center companies, fiber providers. We might get by the road and if decide this doesn’t make economic sense. There appears to be a tangible opportunity here, but it doesn’t have a returns that are ultimately compelling for us. And so that’s all part of the evaluation. But now we actually have a foot in the door to adequately evaluate that versus on the one hand coping somehow this opportunity and in working with it.
So look, I think the near-term focus, CoreSite is performing very well. It’s a little tough to do apples-to-apples on a year-over-year basis because this purchase accounting difference. We obviously have tucked in our legacy data centers into the portfolio as well. But I mean, you’re looking at very healthy upper single-digit growth rates. We have broken ground on SBA, which is part of the appeal for this portfolio to be able to take internally generated cash flow and reinvesting it into high-yield opportunities.
And the bookings this year are at a record-setting pace. So it only kind of set us up pretty well for the growth profile, I think the 2023 and 2024. So our focus is executing on the CoreSite plan, getting more on the financial support and the management support to execute and also balancing that with the level of autonomy in plan to make sure that the investments work.
David Barden
The original kind of top line growth expectation was 58%. I think Rod, your CFO, answered that you see north of that. Is that still the case as we’re heading in the back part of the year?
Adam Smith
I think on a normalized basis, that’s a ballpark and what — I probably put us maybe if we kind of talk about a 6% to 8% range, we are outperforming our original underwriting. So whether that puts to the upper end of the range or kind of closer to approaching the Q1 last year, but in all sides been very positive.
David Barden
So if anyone wants to add more, then jump in, but I’ll shift gears maybe to the domestic macro, which is sort of the meat of the American Tower business. And the thing I think it’s interesting about what’s happened is that we started the year and you guys were saying that about 70% of our revenue for the next foreseeable future, call it 5 year, was essentially contracted. And that the other 30% were the combination of the unknowns around what Verizon might spend and the theoretical unknowns about renewals at the end of these 10, 15, 25 30-year projects. And we kind of know that the renewals historically are about 99% with about a 1% churn rate historically. And now you’ve signed this new Verizon deal. So would it be a mistake to then say that essentially 99% of American Tower’s revenue in the domestic macro leasing market for the next 5-plus years is already known and therefore, will be completely impervious to whatever kind of macro forces or whatever we think might have — could considerably have some sort of effect?
Adam Smith
I mean, look, I think we feel very good about the next 5 years. Maybe to kind of level set on the math, what we said was probably roughly 70% at the start of 2021 was margin locked in over that time period. I would say when you kind of look at the fee part, probably pretty close to 90% to 100% was largely locked in, in ’21 to 2022. Part of that is everybody was under comprehensive MLAs in 2021. and Verizon, just given the mathematical nuances of coming off an MLA in 2021 and kind of ramping up in print as we originally modeled for 2022, just has a kind of a less of an impact than having at 1&1.
So when you’re kind of looking at the different years, it was probably closer to 90% to 100% in ’21 and 2022. It was probably below that 70% when you look to 2022 out to 2027. I think based on our visibility now, isolating 2022 to 2027, you’re looking at probably over 3/4 of new growth will be locked-in. The locked-in portion is really for these comprehensive MLAs and the carriers. So the fact that we have a contracted minimum baseline of activity that’s really supporting the guide, that’s more or less supporting AT&T and T-Mobile and Verizon with upgrade cycle and then obviously, DISH, where our MLA with DISH basically lays out a contracted use it or lose it baseline over the next several weeks as well.
Now when you get some more of the remaining residual variable piece in the outer years, obviously, you have a level of national carrier contributions that aren’t under structure, but also densification. So we actually, in a lot of these cases with these MLAs, preserve a level of upside when you can start to get to more of the densification and the colocations. And I think when you get more to the end of the long-term guide that we laid out, our expectations that will take on a larger proportion of the globe.
So — but look, we’re very excited about what we just signed with Verizon. These things obviously don’t happen overnight. You can probably see that this is quite a while in the making, because we’re always having discussions with all them over how we kind of maximize our relationship and imply to usually a beneficial partnerships. I think —
David Barden
What are the exact terms and conditions?
Adam Smith
Yes, let me give them. So obviously, the press release was pretty high level. But I think it was important for our investors to know — I mean we are being different to day-by-day requirement for . It’s really what it stressed, because ultimately, we think over a long time, over the long term, these upgrades will have gone in size, regardless. I mean, it carries an incentivized, nuanced spectrum, monetized spectrum and adequately you have a experience.
David Barden
One of the things that stood out to me from the press release was that irrespective of the fact that you did sign a holistic MLA with Verizon, there was no increase in the straight-line revenue expectation, which implies that there was no lease extension with regard to this agreement. So what in fact is happening under this agreement that wasn’t already happening?
Adam Smith
So we actually have 2 MLAs between us. One MLA commenced in 2017 when we acquired the Verizon portfolio. That is on a — so just carve that out. I’ll kind of reverting the other pieces of legacy portfolio. That was governed by 2017 MLA that is associated with the legacy portfolio. Now that 2017 MLA has a turn, right? And we haven’t explicitly said what that term is, but we generally know how long. On top of that agreement was a holistic component. And when I say holistic, it means establishing a pricing framework that has a set use fee schedule. So every year, you will go up and implement, separate from your escalate.
And under that, the carrier gets a settlement too. So they’ll be able to upgrade adequate and augment within a permitted envelop. That holistic portion, even though the term of the MLA continues on, that holistic portion that commenced in 2017 expired at the end of 2021. So since then, Verizon has been on what we call [indiscernible], where they will revert to ring cone, to basically execute on their [indiscernible]. So by reinstalling out of this holistic framework, Verizon now has a level of predictability in the rear upgrade cycle. They can now much more efficiently execute on that upgrade cycle.
For us, even though we thought it was a relatively low probability, it takes the downside case of it. It represents incremental growth versus what we kind of ultimately looked at, underwriting over the next several years. It provides a level of incremental attachment rate on sites. And I think just through a strengthened relationship with Verizon, even though these things might be side outside of what’s permitted in this agreement, I think it sets us up well for additional term discussions, densification initiatives and other opportunities to kind of be used in identifying these.
Now the reason you don’t see a straight line on it is because the underlying term hasn’t been so. We still have several years to meeting. But the billion-dollar revenue business, that’s where you see the hundreds of millions of dollars and incremental trade line. You will see a little weak now straight line, but it’s going to be more associated with the straight lining that you see, that’s now contracted over the next several years as opposed to spending $1 billion business for [indiscernible].
So I think for us, the task for both parties was let’s get this agreement with Verizon who wants to accelerate and efficiently roll out their 5G network despite the framework allowed them to do that, where they don’t have to be like regional [indiscernible] operate. And we had to provide value for all. I think it sets us up quite honestly, not just hit our numbers here in 2022. I think what we’re looking at in 2023 is going to be supportive of that long-term growth that see out to 2023 through 2027. I mean what you kind of peel back that our escalator is 3%. We’ve probably got 130 basis points. Our typical U.S. turn rate on that, and I think when that is residual, we’re looking at a pretty healthy acceleration versus kind of the accelerated profile we’ve got here in 2022.
So I think it’s great to get term extensions on the table, but in this case, we still had several years building, I think, to your point, the criticality of these networks. And I think you just get another data point with the criticality of these networks in a few cases and really kind of give us confidence that [indiscernible].
Unidentified Analyst
Can I follow-up on that? [indiscernible].
David Barden
Can I repeat the question just for the webcast. I think the question was really, can you kind of elaborate a little bit on your trade-offs between the — by the drink and the MLA when you look at these carrier negotiations?
Adam Smith
What I would say is we have been successful under either or range. And I would say the IP of American Tower is having folks like Steve Vondran that understand the value of these sites over a long-term deal in a network investment cycle. So we’re not — we’re never going to give up growth and give up that exit rate after x number of years for predictability.
We have been very successful. If you go back and look at 2017, 2018, 2019, some of our best leasing is, we’ve always had a mix, quite honestly of holistics and ala carte. And really, it’s all about mapping out what are our sites, what is the rate card, what is the cadence in which we believe there will be upgrades? What’s the pricing? What are we giving up?
And if you kind of get to the end of the term and option A provides you with an exit rate of x million and option B gives you x million dollars, we’re going to — we’re always going to take the better auction. So I think for investors to interpret the deal we just did with Verizon, we’re never going to compromise growth. So this deal must have either represented equal or more growth for American Tower versus what we think we would have just stood to get absent in MLA. Point 2, is it takes the downside case off of the table.
Unidentified Analyst
So why [indiscernible]
David Barden
Why more growth under MLA than not.
Adam Smith
I think it either could accelerate a level of growth. But I think in terms of the — what we would ultimately deem on the portfolio to be upgraded, I mean that can factor into as well, along with the pricing. So I mean, it’s a team time skit. And there’s a level of variability that comes with going at it on an ala carte basis. You’re not going to get 100%.
You might hope you do, but you probably not. So I mean, what we take all the consideration, what is the pricing under our rate card, so we have an established rate card with Verizon as part of our 2017 agreement. Look at that rate card, look at the current environment, look at the pacing that we think we’re ultimately going to get by not having 1&1. Look at what we think Verizon will ultimately touch under an ala carte basis. And you’ve got to run this through the calculation machine. And if we think that the pricing structure that we will get under these use fees over the next several years, ultimately represents incremental exit rate, and that could mean pricing, it could mean a number of sites, it could mean the pacing at which we think we’re going to be able to execute this. I mean, look, like Verizon has MLAs with the other tower companies. I think this allows us to further step into a decent market share and really kind of set us up well over the next couple of years.
And I think you could flip that question around a little bit to try to understand, well, ask yourself, why would the carriers want to pay American Tower slightly more than they might have to pay [indiscernible] And what they get is when these MLAs come together, there’s usually these use rights, this ability to kind of unilaterally act to access the tower without having to get written permission, paying a fee each time you do it, scheduling and all these other things, they usually come with these rights that can lubricate the process on the part of the carrier and that time to market is worth something to them. And it’s a right that towers don’t have to give to the carriers, and that’s a value that they negotiate. It’s in between doing nothing on an MLA basis and doing something on MLA basis.
Unidentified Analyst
[indiscernible]
Adam Smith
I mean, look, I can tell you on the U.S. Tower team right now, Steve’s got a team dedicated to making sure Verizon is in a position to accelerate their deployments. And this is more or less — I mean, look, we’re always there to support our customers, but this added attention is a result of the strength in partnership and kind of the — how we map out what those upgrades are ultimately are going to look like over the next 12 months.
David Barden
So the question is are we building lots of new towers fight per share? Or are we getting colocation economics from?
Adam Smith
Yes. I think in the near term, it’s just going to remain amendment focus. So a lot of the growth that we’re executing on here in 2022, a lot of the growth we executed on 2021. And I think that probably continues to some extent here in 2023 is going to be margin up. So it’s carriers making their existing footprint 5G compatible and being able to propagate the valuable discussion that they’ve ultimately acquired over the last 12 to 18 months. In 24 months, just to be clear, the land grab is on the part of the carriers trying to put up as many radios as they can on the existing tower portfolio. There are going towers that are being built in America. So it’s all colo-economics and carrier racing to get their footprint up and running and sell it to you as America’s best 5G network.
We’ve got about 43,000 sites in the U.S. We’ll probably built $0.25 each year. So it’s — and there’s developments out there, but it’s a very small part of our business.
Unidentified Analyst
[indiscernible]
Adam Smith
Is DISH unplanned and funded? I’m going to defer strategic points on DISH. I think what I will comment on is DISH has been very active with us. And I think we laid out a framework with DISH that I think kind of supports the growth type of fashion. So we have a comprehensive MLA division. We executed on it in 2021. I mean we really paid DISH full year before we actually commenced cash payments. Those cash payments are starting to commence here in 2022. We had a step function of these over the next several years that are contractually driven as the baseline. So I think you kind of set up a pretty good pay-as-you-go type of framework while giving them flexibility in the near term.
I think for us, we want DISH to be successful. And by all accounts, what they’ve demonstrated to us is a commitment to reach the — really the milestones that they point out and whether or not they’re in enrolling agreement with AT&T and how that could affect demand for our site.
We wanted to be successful in what we’ve built into our long-term guide, again, a contracted base. So like in some experiences they tell you everything tomorrow and it really has no impact at long-term guidance. Now we don’t want that to happen because you’ll get to the end of this and you don’t have a bunch of leases out of market. But it’s really — it’s a partnership and we tried to frame this in doing the section of good level of financial flexibility, but growing as a contributor to our growth profile term.
David Barden
So we’ve got 5 minutes left to talk about the entire global business. So — but let’s just keep asking a question until we go out of time.
Adam Smith
Yes. We haven’t said explicitly. The way to think about it is you kind of have an established long-term agreement. Under that, you have an established escalator, you have an established term.
David Barden
Typically, it will be 10 years. I’m just going to throw it out there.
Adam Smith
So we have not said what the term is. But anyway sidekick here.
David Barden
It’s my job.
Adam Smith
But what this basically does is you kind of think about it as this is a holistic that sits on top of that existing term. Now the original holistic expired at the end of 2021. This reinstalls kind of a whole segment. When I say holistic, it’s kind of establishing a set of real estate rights for which we get predictable revenues from the — that contributes towards the end.
Yes. I mean, look, it’s probably a better question for another 1 of our peers. But for us, we’ve evaluated small. I mean, look, I think 5 small cells will put in overall 5G.
I think for us, it’s where can we drive the most economic value of capital deployments. And we believe being able to further franchise the power model globally. And looking even further beyond that, being able to leverage our existing real estate, the land under our towers, our capabilities as a management and operations team to hopefully drive a pretty tangible opportunity at the mobile work long term, those feel like better core competencies for us and being able to leverage our existing real estate, the ultimate hope.
So really, it kind of comes down to just what’s — where do we think we can drive investment turns. We’ve made some fiber investments internationally, metro fiber businesses, which I think you ultimately really kind of need to roll out a small cell network. And it’s challenging. I mean your customers can be competitors or there’s a high degree of churn. And I’m just talking about our own experience. So we do have businesses in Mexico and Brazil. And I think it’s really kind of further reinforced kind of our thesis on our capabilities as a company, but where we ultimately want to deploy capital where we can drive the best returns going forward and really identify that revenue synergistic that we think we can create by taking our distributed portfolio and other components that kind of drive incremental deal.
So long story short, I think it’s — it will play or it will play a role in 5G. But for us, there’s just other areas.
David Barden
Okay. Well, obviously, I have a lot to talk about at the next real estate meeting that we have, but I know that we’ve kind of run out of time for the day. And so if you guys want to ask me more questions, you can certainly do that. But I know that Jeff has been kind of running a little struggle among all the companies we had at the conference so far and he’s got 3 lightning round questions for you.
I’ll tag on to the debt but which is the following in the greater macro talent based in the U.S. public REIT today. Risk of higher rates, risk of concession, the rise in page.
Adam Smith
I’ll speak from the lens of American now. I think I mean, look, a rising rate environment, we’ll have various headwind I think looking ahead to 2023. We do have some maturities that will come due.
In terms of a recession, I think one thing the tower model has kind of proven is that recession-resilient, whether you’re talking about a consumer that prioritizes you know wallet, their connectivity, the criticality of connectivity. If you’re talking from the government and regulatory perspective, I mean, wireless connectivity is critical for every economy and advancing the port. So we view this as a very resilient business. It’s gone through various economic cycles.
We’re very keen to make sure we’re a very high performing of the revenues being driven by large multinational carriers [Technical Difficulty] T-Mobile, MTN, Airtel, Vodafone, Telefonica is looking for high credit multinational partnerships. And look, I think as we really kind of backstop effect that we do have a high degree of contracted revenue over a multiyear period but ultimately help backstop these as well —
David Barden
This is the lightning round.
Adam Smith
I’m trying to — no cocky. I don’t want to know what the next question is.
David Barden
Next is, which of the following is the greatest sector-specific risk, labor issues, supply or liquid capital market?
Adam Smith
Come again?
David Barden
Which of the following is the greatest sector-specific risk, labor issues, supply, liquid capital?
Adam Smith
I think in general, maybe liquid capital markets. I don’t think it necessarily is American Tower. But I think if you kind of look at the capital that’s been chasing a lot of yield over the last 5 years, what I think at some point, it’s going to have to do some progression. I think that’s why we further prioritize investment break down to make sure we have [indiscernible].
David Barden
And last one, are you seeing any signs of demand?
Adam Smith
I mean what we’re — for all the reasons I mentioned at this point, I think demand has been really strong. I think we obviously have challenges globally. It’s important to have a diversified portfolio. I think, quite honestly, lessons we continue to focus very carefully on, we had a good second quarter, but quite honestly it’s the third quarter where we’ve seen some level of variability. And I think there’s a lot of moving pieces in place that we’re going to close out as we close out the year. But from a demand perspective and a leasing perspective, it’s really setting up well and I think we’re excited.
David Barden
That’s a great place to leave it. Thank you so much for coming.
Adam Smith
Appreciate it. Thanks, everyone.
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