American Tower Corporation (NYSE:AMT) 2022 Goldman Sachs Communacopia + Technology Conference Call September 13, 2022 1:45 PM ET
Company Participants
Rod Smith – Executive Vice President, Chief Financial Officer & Treasurer
Conference Call Participants
Brett Feldman – Goldman Sachs
Brett Feldman
Welcome everyone. It is my pleasure to welcome to our Communacopia + Technology Conference. Rod Smith, the CFO and Treasurer of American Tower. Rod, thank you so much for being here.
Rod Smith
Yes, you’re welcome. It’s great to be here. Good morning, everyone.
Brett Feldman
I have had the pleasure of covering American Tower in various capacities for almost 20 years now, actually. And so it was very interesting to see one of your largest and most recent acquisitions of CoreSite, it looks like the business is evolving. And you’re still very much a tower company but you are beginning a more significant step towards being more of a diversified digital infrastructure provider.
And so the question is maybe getting the vision for the company here, the role of mobile infrastructure and how you see some of these additional assets fitting in over the long term?
Rod Smith
Yes. No, that sounds great. It’s a great opening. And I think you hit one of the most important pieces of this topic which is we are a tower company. We’re a global tower company. We have been for a long time. That’s where the majority of our revenue comes from. And we expect to be a tower company well into the future here. That doesn’t mean that towers will be the only thing that we own and invest in.
And when it comes to the CoreSite acquisition specifically, one of the key considerations there was the fact that we see this convergence of networks in a 5G environment, both on the wireless side but also on the wireline side, becoming much more cloud-centric in terms of their network architecture, much more network dense and certainly, this interconnection that everyone wants to drive through the networks is becoming more important. And CoreSite delivers all of those things.
And then with the idea of the networks becoming more cloud-centric, we also think that there’s a very likely scenario where there will be a need to further distribute cloud on-ramps outside of the traditional data centers that exist today further out and closer to the edge of the networks.
And when I say edge of the networks, what I mean in a wireless context is closer to where the base radios reside. And today, the base radios reside at the tower site. So the upside here in the CoreSite acquisition in one of the prime considerations for us is we do believe that the CoreSite assets are of a high quality, well distributed throughout the U.S. and will potentially drive an incremental revenue stream at our tower sites and create value at the tower site for our tower.
So it is a way of supporting our tower business and also respecting and understanding the way these networks are going to potentially evolve over time and what role our tower sites could play in that.
And then to maybe peel back the onion a little bit further, we also see really good growth in this CoreSite asset in the U.S. It’s — the growth rates are incremental and accretive to our U.S. growth rates. We underwrote this transaction with economic growth in the range of 6% to 8%. We’re outpacing that this year, our first full year of actually owning CoreSite. And we don’t see that peeling back anytime soon given the level of demand that we see for these assets across the country.
So that’s been really compelling. And then also we see very limited downside given the interconnection richness of these CoreSite assets and the fact that we have cloud on-ramps in — across these assets as well with this very limited downside here.
The interconnection is what makes these assets really special and the fact that there’s cloud on-ramps in all of them. So in this context, our customers — it’s not the type of a business where we’re just babysitting servers. Our customers can’t just unplug a server and go put it somewhere else.
If they move out of these facilities, they lose all the interconnections that they’ve made with all these other customers of ours within these networks. So we see very limited downside, accretive growth to our U.S. business and a tremendous upside in terms of driving incremental revenue at the tower site.
And if we are able to place cloud on-ramps at our tower site in the U.S., over time, we could expand that internationally and take advantage of the other couple of hundred thousand sites that we have around the globe in time when it’s right when we’ve proven out the model in the U.S.
Brett Feldman
I want to get in. I’m going to talk more about the data center business, the tower business all individually. But since we’re sort of — we kicked off with kind of strategic questions, I’m going to follow up with one as well. And if I think back to when American Tower really first commenced the international strategy. And it had a legacy of being in parts of Latin America and it was around 2007 that the Board under Jim Takei’s leadership, really decided there was an opportunity to be a much more global tower operator. And for a long time, we heard American Tower talk about his business being domestic or international. And the international piece of it generally meant emerging markets.
If I look at the last 2 big acquisitions you’ve done with CoreSite and Telxius, we’ve gotten some international and we’ve gotten some U.S. We’ve gotten some towers. We’ve gotten some data centers but interestingly, neither we’re really expanding your scope in developing markets anymore. It looks like the company was maybe rewarranting a bit towards the developed world. Is that a fair assessment? Are you thinking — as you think about the revenue footprint of the company, are you looking to maybe get a little more balance back towards developed markets regardless of what type of infrastructure you’re investing in?
Rod Smith
I think, Brett, the way that I would kind of answer that is with the acquisition of Telxius and CoreSite, the outcome is that there’s a little bit of a shift towards developed markets, right? That’s undeniable. I wouldn’t say that, that means that our appetite for emerging market or developing market investments has waned.
We just follow where we can get the best risk-adjusted rates of return in the assets that we feel are strategic at the time that they’re available and kind of what they — what we expect that they’ll do for us over the long term. And when we look at the landscape, the transaction in Europe that we did, the Telefonica assets, the Telxius assets, really high-quality set of assets in the right markets in Europe, centered in Germany with a high-quality counterparty with the right terms and conditions for us — better terms and conditions that more aligned with our requirements than any other transaction we’ve seen happen in Europe over the last several years. So that was an important one for us to execute on. And so we did that. And some people say, “Well, it was a high price but it was a really good set of assets with really good growth and really good terms and conditions. And we are seeing that I think you guys are all seeing that in the growth rates that we’re posting now in Europe.
We’ve had double-digit organic tenant billings growth rates in Europe this year. We expect that to be high single-digit growth rates for the full year. That outpaces anything we’ve seen in Europe over the last many years. So you’re seeing the results of the high-quality nature of these assets. And then we just talked about why we did the CoreSite transaction. In that transaction, we’re also seeing high single-digit growth rates beyond our original expectation of the 6% to 8% growth rate. We feel really good about the demand for those assets going forward. So it’s really the economic outcomes and the strategic value that they play in company, not necessarily we’re buying them because they’re in developed markets or they’re not. It just happens to be that, that’s what became available. Those are really interesting acquisitions for us.
And with that, it ends up pushing our revenues from U.S. and Europe into the 70% range, right? And 30% of our revenues are coming from more emerging or developing markets around the globe. And there is no litmus test for us. We don’t — there’s no threshold there but we do take risk tolerance pretty seriously. We do take our underwriting process pretty seriously. But there’s no hard and fast kind of red line that we need to stay below or above. We’ll go where we see the best opportunities, the right risk-adjusted rates of return. And we go into markets where we can assess the risks and mitigate the risks and enjoy the upside but maybe mitigate the risk. We’ve learned a lot in the last 10 to 15 years being in many more emerging markets. And that’s also helped us refine our underwriting process going forward.
Brett Feldman
Okay. Well, we’ll come back and talk about some of those individual markets. But I want to start with your U.S. tower leasing business which is still by far your biggest business, your legacy business. Your outlook for this year is that your U.S. organic tenant billings growth which is effectively your same-store sales for lack of a better phrase, is only going to be about 1% in which we’ve known and that in many ways understates the underlying demand environment because you’ve essentially front-loaded the Sprint churn in your holistic agreement that you have with T-Mobile.
And I believe earlier this year you even expressed a lot of optimism that the leasing activity we’re seeing was poised to increase on a quarterly basis by about 25% up in the third quarter and fourth quarter relative to what we saw in the second quarter. Your business generally has a high degree of visibility. And so the question is, what’s driving that? And what does that tell us about the positioning of the company, the run rate opportunity for leasing as we start looking into next year?
Rod Smith
Yes. I think the U.S. environment looks really good for us, really strong going forward. We are at the beginning of 5G deployments in the U.S. without that. We have a new entrant in the U.S. with DISH playing a role to revenue contribution for us and other tower companies in the U.S. For us, in particular, we do have holistic agreements in the U.S. with all of our carriers at this point. So we have a very high level of visibility in our growth rates going forward. And we are seeing an acceleration in gross activity in the U.S. and that’s not just 1 customer or a couple. It’s really everyone is kind of picking up in terms of kind of where they’re headed with 5G.
The industry in the U.S. has worked through a lot of let’s say, challenging events over the last several years with the merger of Sprint and T-Mobile and getting that offset the introduction of DISH, getting the C-band auctions kind of done and behind us. A lot of that stuff now is, in fact, behind us and the deployments of 5G have begun but we’re at the very early stages of it. And we are seeing an escalation in contribution from amendments and colos in our colocations in our business for sure. What that means for growth rates, if you look at the U.S., we are projecting 1% organic tender billings growth this year. That includes the largest piece — the largest piece of churn driven by Sprint and T-Mobile that we’ll see for all of the Sprint churn. So, there’s a pretty big step down this year in October, in just a few weeks, we’ll have another step down much less than what we saw last year. And you can see all those numbers. I won’t go through those.
Now but if you normalize for that Sprint churn this year, we’d be up around 5%, probably. So this 400 basis points of headwind because of Sprint churn in this year. When we look out from next year out to 2027, we’ve talked about the U.S. business, long-term guidance of being around 5% organic growth rates. That’s all in as reported. That includes the next few steps of Sprint churn. If you normalize for this sprint churn, it would be up around 6%. So that’s where today, if you normalize for the Sprint churn, we’re at 5%. If you normalize it for ’23 and beyond, we’d average about 6%. And within that, that shows the escalation in gross demand. And even within that, we can see kind of an escalating environment in the U.S., so that 6% growth rate for the U.S. adjusted for Sprint churn is an average over that time period. We have — and there’s a lot of reasons for that. One is we’ve got these step-ups within our holistic deal with the carriers.
We’re also seeing growing demand in terms of getting C-band deployed and some of the activity levels that we’re seeing and expecting. And then also, we have DISH as a new entrants into the market and we’ve got a contract with them that gives DISH the right to use many of our sites and it has step-ups in revenue for us this year going into next year and beyond. So that’s all kind of contracted in there. So the environment in the U.S. looks really strong for us. And in that mid-single-digit growth rate. And the other thing I would say is as 5G takes hold and you see more 5G handsets in the environment, more 5G capable applications on those handsets and you see an increase in the traffic on the networks being 5G instead of 4G. It’s very likely that you’ll end up seeing more colocations in the U.S. and network densification in the U.S. to offset the lower coverage that you might get from the mid-band spectrum, the C-band spectrum that we’ll be doing the bulk of the work on the 5G network.
So that could be a whole another leg of continued growth in the U.S. So we’re really bullish on the U.S. business, the current environment and kind of where it’s headed in this 5G deployment cycle.
Brett Feldman
A couple of follow-up questions on that. That’s great color and I’m going to start off with something you just alluded to which is that, typically, these new technology generations that frequently involve the deployment of new spectrum follow exactly the path you talked about. The first thing you do is you upgrade sites you already have. And that’s the amendments that yet you’re seeing, it sounds like we’re in that phase right now. And then you said you’re anticipating that we will likely see a return to densification, particularly because we’re working with higher frequency bands.
There’s been some debate among investors about whether the densification phase of 5G is going to follow the path we have seen with 3G and 4G, meaning we need new tower-based sites or whether it could be a pivot to other forms of infrastructure. At this phase, how much insight do you actually have into what the carriers are thinking about dealing with their networks as they look to fully deploy their mid-band spectrum, not just on their existing sites but more broadly?
Rod Smith
Yes. I mean I don’t want to speak for the carriers. I don’t want to get into too much of their network plans. They do a really good job of sharing that for themselves. But I would say as a tower owner, looking at the towers that we have across the U.S., upgrading these towers to mid-band spectrum. The one thing we know for sure is that, that mid-band spectrum will propagate less far than the lower levels, the lower-band spectrum, the 600, 700, 800, 900 megahertz spectrum bands. That means the coverage that you get from that mid-band spectrum is going to be less.
To the extent you want to duplicate that level of true 5G service that you get from mid-band across the country, you need to fill in with mid-band spectrum. And in order to do that, I think you need more co-locations. So we do — I do — we do believe that there will be a time and over the next several years that as, again, 5G takes hold and you see a growth in 5G traffic and the majority, let’s say, of the traffic in the U.S. networks becoming 5G, requiring that lower latency, requiring the faster speeds and the capacities and other things, network densification feels very likely. And that being driven on additional colocations on macro sites, also feels like the right approach.
Brett Feldman
You also mentioned DISH and I know that there’s only so much you can say about any individual customer relationship but you’ve revealed a little bit here. One of the questions we get is — how important is durable demand from this new entrant to the industry to the outlook that you’ve given? Because DISH obviously has a build-out requirement that they have to meet a population build that requirement. They have to meet next year. They have some other requirements they have to get to. After they satisfy those, they do have 2 significant MVNO relationships. They could just decide it makes more sense for a period of time to not add to their network anymore. And so as you think about that multiyear, that 5% CAGR that you’ve put out there, does that require DISH to be a durable source of new leasing beyond ‘23? Or is there some more conservatism in there?
Rod Smith
Yes. It’s not by saying we certainly wish DISH the best in terms of their network aspirations, building up the network. We’re here to help them deploy that. We do have a holistic agreement with DISH. We’ve said this before in public settings that the revenue that we’ve included in our outlook really is the minimum contracted revenue within the DISH network. So — and it’s not linked to their level of actual activity. So the way that they wanted to structure the deal and that we also want the structure of the deal is that there’s a certain number of — there’s a certain level of activity that they can conduct on our site. There’s a certain number of towers that they can access on our site. And for that, there are revenue step-ups along the way. So we’ve included that minimum contracted revenue and those step-ups in our guidance.
That means if they don’t deploy a network, they still have minimum revenue commitments to us and that’s what’s in our guidance. To the extent that their deployments accelerate and they want to do more than what has been contemplated in the agreement there is upside for us from that perspective. And depending on which way they go with the MVNOs and building out their network, whatever they decide to do, we’re here to support them in doing that. We’ve got the contract now that I think is going to work really well for them in terms of getting their deployments done. And to the extent they want to accelerate that, we’re here to help them do that as well.
Brett Feldman
All right. Well, sticking with the U.S. but now moving on to your data center business which you talked a little bit about at the front end of this conversation. You are seeing a decent growth there. Now that you have closed and you’ve integrated the acquisition. What are your priorities for the data center asset right now?
Rod Smith
It’s really — there’s a couple of things that I would say. Number one is our priority when it comes to the data centers that we acquired from CoreSite is to make sure that we maximize the growth, the economic growth within those facilities. That means we want to always have enough capacity within those assets to satisfy the demand that we see coming down the pipe.
For us, that means we want to have really 2 years’ worth of net absorption in terms of capacity available for our customers. Quite frankly, one of the things that CoreSite stumbled with a little bit in prior years as they didn’t have that capacity available when it was needed and therefore, they lost some revenue opportunities. We want to make sure that, that doesn’t happen. We do feel as though we can always have that 2 years of net absorption capacity available if we’re investing in the range of $200 million to $300 million a year in CapEx in that business.
That’s really our objectives and priorities when it comes to that business is maximize economic growth, completely satisfy all of our existing and new customers that want to use those assets and adding capacity where we need it on a 2-year net absorption basis, our goal is not to scale that business up in the U.S. by doing other acquisitions, larger acquisitions and trying to build out a more dense nationwide set of data center assets. So it’s not where we’re headed. And then we want to take those assets and really work with our customers, the cloud carrier, the cloud customers as well as the wireless carriers and landline telecom, traditional telecom networking companies to help them change these networks in a way that’s going to work for them which is getting those cloud on ramps further distributed and out the tower sites. That’s a priority.
So we’re not ignoring the CoreSite assets. We want to make sure we maximize the economic growth there. We’ll reinvest in that business. Typically, it will be their cash flow getting kind of reinvested back into the business to make sure we’re always capable of satisfying demand. And then we want to push the cloud on ramps out to the tower side.
Brett Feldman
You said, no major U.S. M&A for the data center business. How do you think about the need or opportunity to have a more international data center business?
Rod Smith
I think our focus at the moment is really the U.S., the U.S. asset again making sure that we have the capacity to drive that growth. And then we want to develop that edge business here in the U.S. And then internationally, we’d like to — we see a future where edge computing is going to be needed in Europe. It probably will be needed down in Brazil and in Mexico and in other places, eventually in Africa and in India over time. And we want to be able to have the capability of deploying those edge facilities when the time is right. But in order to do that, we don’t necessarily need a CoreSite like asset all around the globe. The cloud players that we have here in the U.S. will probably be the same cloud players, of course, that will help us in Europe and in other places around the world. So the value that we’re getting out of CoreSite in the U.S. can be transferred into value creation internationally by deploying edge sites.
That doesn’t mean we won’t need a few traditional CoreSite like facilities internationally but that’s not a focus of ours today. Today, it’s driving economic growth in CoreSite, reinvesting the CoreSite cash flow to ensure that we have capacity required and then getting these cloud on-ramps pushed out to the network edge in the U.S., proving all that out, then we’ll look to expand that into Europe and other places.
Brett Feldman
And when do you expect or what’s the time line you see right now for having Edge being an actual revenue driver even it’s really recent one?
Rod Smith
Yes, there’s a lot of work going on right now. And I’m glad we own those assets today because a lot of the deal-making is happening today and will happen over the next several quarters — over the next couple of years. But we don’t expect to see real Edge compute revenue at our tower sites for a few years.
I mean I think we’re at least a few years away from seeing anything material from Edge compute. With that said, we’re doing trials. We are deploying some edge-like assets. We’ve got a few — a half dozen or so down in the Southeast area of the U.S., where we’re trialing different things. And a lot of that is really just getting the physical aspects of what size shelters we need in data centers, how we power and cool them and getting all that kind of figure.
Brett Feldman
And in these early-stage Edge trials, are these quite literally taking advantage of the existing American Tower, tower locations? Or is that all still being sort through?
Rod Smith
Yes, definitely taking advantage of the American Tower, tower locations. And over time, we want to expand that to taking advantage of the current relationships. We have commercial relationships with the cloud players and the carriers in getting true trial set up where we have cloud on ramps and we have wireless customers using that and we’re proving out the latency issues that kind of underpin the whole Edge computing need in the U.S.
Brett Feldman
So if we pivot over to Europe and you talked about how happy you are with the performance of the Telxius assets since you acquired them. Maybe just give us a lay of the land, what is the leasing environment like across your European business?
Rod Smith
The leasing environment is really strong. And I would say the whole environment in Europe is quite strong from a wireless network deployment cycle. So we are seeing an acceleration of gross demand for our tower assets, particularly in Germany but also in France and Spain, that is noticeably coupled with the reduction in churn that we’re seeing in that environment. And those 2 things together, kind of like the old baseball saying, right, run saved as a run earned. So we’re seeing churn subside in Europe and that’s noticeable in our growth rate. So we’re seeing that from both sides.
And now we’re also seeing kind of an increase in inflation in our CPI escalations in Europe. They’re all tied to inflation. So we’re seeing kind of a tick-up in that. So when you think of those main drivers of our organic tenant billings growth rate, the gross growth, the escalator and the churn they’re all going in the right direction for us. And that’s giving us the confidence for the full year of this year to see organic tenant billings growth in the upper single-digit level. So it could be — and that’s without a lot of contributions from the new entrant in Germany, Drillisch 11, who’s building a 5G-only greenfield network across the region. We have a framework agreed with them in a contract with them. And we would expect them to be a contributor to revenue, maybe late this year and certainly going into next year and for several years beyond that.
So the environment there looks really good. And we saw a lot of these things developing. And of course, they were present in our underwriting for the Telxius assets. And it’s — a lot of these things that we’re seeing now is what gave us the confidence to buy that big asset in Europe and integrate it into our existing European business.
Brett Feldman
And how are you thinking about the need or opportunity to continue expanding your European tower portfolio, whether it’s just through your own organic construction or maybe looking to acquire existing portfolios because you did this deal with some capital partners. And so you do have a lot of sources of liquidity you can tap into if you wanted to do more.
Rod Smith
Yes, absolutely. And we definitely would like to continue to grow our assets in Europe without a doubt. It’s all part of an underwriting process, right? So to the extent we can get good returns, we want to have more assets. If we can deploy capital and hit our hurdle rates and do it with the right counterparties and having the right risk-adjusted growth rates and returns, then we’ll do it. And today, in Europe, we see that through our build-to-suit program. So we’re building hundreds of sites across Europe with Telefonica as a counterparty with Orange as a counterparty, seeing really good returns with that with some — in the right markets in Germany and in Spain and in France. So we’re building assets in those markets.
I guess the way I think about it, the way we think about it in Europe, we don’t need to be a lot bigger than we are today. If there are opportunities to be larger, more scaled in the region and within individual markets. I’m sure I would love to do that. But only if the terms and conditions are right, only if the risk-adjusted growth rates and risk-adjusted returns were there and that met our criteria. And then, of course, when you think about how do you finance those things, we have a lot of different options. And I think we’ve proven that in the way we’ve financed the Telxius assets couple of years ago and the way we financed the CoreSite assets just recently.
Brett Feldman
A large carrier portfolio did just trade in Europe and you obviously were not the winning bidder. I realize you can’t talk a lot about these things specifically but maybe if we just take it at a high level, can you just remind us like what are the general characteristics that you look for, particularly if you’re looking to make a fairly sizable acquisition? And then are there any examples of conditions that sometimes pop up in these types of transactions that are just kind of a no-go for you and you just can’t do it?
Rod Smith
Yes. It’s a great question. And Europe is a very interesting market when it comes to M&A. We’ve seen a wide variety of terms and conditions come with towers that have traded over the last several years and some that are recently trading now and I’m not suggesting that those terms and conditions are bad terms and conditions but many of them are not right for us. And they could be right for other people, particularly private equity investors when we look at transactions, we are a capital appreciation company. We want to deliver a growing share price for all of our investors. In order to do that, there’s a certain level of AFFO per share growth that we look to kind of underwrite with the right risk-adjusted kind of view there and then also the risk-adjusted rates of return. So it’s a growth in return together are important for us.
When you look at the terms and conditions that come with portfolios in Europe and around the globe, a lot of those terms and conditions directly impact your ability to grow the portfolio, right? So any terms and conditions that reduce the growth rate to a point where it doesn’t work for us, that’s something that we look for. And of course, we understand these terms and conditions very well. And we’re very disciplined. So we’ll pass on portfolios that don’t give us the growth rates that we require and the return, the risk-adjusted rates of return. Both of those things are important to us.
I think in the transaction that just happened I think DT actually put out a deck with all the terms and conditions in there. If you go through that, I think you’ll probably see some things that you would say, yes, these things work for private investors and maybe other folks that kind of manage investments. But for us, given our focus on operating these assets, holding them for a long term, driving certain levels of growth rate that are supportive of our long-term growth aspirations that we’ve talked about, let’s say, 10% AFFO per share. You’ll see in that deck that there are some things in there that probably don’t match up. I’ll leave it for you guys to kind of figure out which ones those are.
But in more general, carriers that want buyback rights doesn’t really work for us when they want to restrict the right of the new owner to lease the site that doesn’t necessarily work for us. When they want to big reserve buckets and access to the sites, sometimes that’s a muting effect on growth. That doesn’t work that well for us when they cap escalations or remove escalations on CPI that is a value hit, it’s also a growth hit. So those things — we struggle with those.
But I can tell you there’s so many things happening around the globe, there’s no shortage of opportunities for us to invest capital. So we really are in a good position to be very selective and to move on the things and only the things that really meet our criteria that we — that will drive value for our shareholders in both the capital appreciation and the outright return on invested capital.
Brett Feldman
The European tower market is finally starting to look a little bit more like what we’ve seen in the U.S. and a pretty significant lag. And I think back to the early days when I was beginning to look at the space, in addition to seeing the tower companies acquired portfolios from carriers. You had a period of time when the independent tower companies were merging with each other as well. Do you think that’s something that should happen in Europe or something you’d be interested in participating in?
Rod Smith
Yes. I mean absolutely. I do think there’s still a lot of towers in Europe. And even many of them that have changed hands in the last several years that have not yet found their permanent resting spot that they will continue to trade over time. The financial investors over time may sell portfolios. There are publicly traded portfolios where there’s opportunities where there could be some consolidation amongst ours. We’ve got a really nice set of assets in the right locations. So we like the countries we’re in. There are a few other countries that we would be interested in getting in, in the Europe market. So I would say there’s nothing off the table when it comes to things that could happen in Europe over the longer term, let’s say, over the next 3 to 5 years, 2 to 5 years. I think there’s a lot of interesting things that can happen in Europe.
And particularly in this economic cycle that we’re seeing and the fact that interest rates are rising quite rapidly, us being a large global tower operator with an investment-grade balance sheet and a time of uncertain economic conditions, that could be a really good time for us to get the right terms and conditions at prices that could be much more attractive than what we’ve seen in the last few years. I don’t know that, that will happen. But to the extent it does, we’ll be here and ready to take advantage of those cycles with a very strong balance sheet with private capital partners at our disposal that could help us move in certain ways at certain times but I think everyone recognizes that there’s been an awful lot of capital in the world looking for infrastructure assets.
And with very low rate environment, that kind of fuel — that added fuel to the fire. And with those rates changing and kind of the economic outlook changing, it is, in our estimation, possible that you could see a pullback from some of the private capital over the next year. Certainly, cost of capitals are going up for everybody. So to the extent that means that there would be fewer buyers and less money chasing these assets. And still, like I said, a lot of assets in Europe that need to find their permanent place. Over the next several years, it could be — our balance sheet could become a real strategic advantage to us in an M&A cycle at a time of higher rates and economic uncertainty.
Brett Feldman
Let’s talk a little bit about India. India went through a period of time that was probably a little more difficult than some investors had anticipated. But you’re now at the point where you’re anticipating low single-digit growth even with still somewhat elevated churn in that market. Can you just give us a brief update on the state of the wireless market in India and the outlook you see for that business looking even beyond 2022?
Rod Smith
Yes. So I think everyone knows we’ve been in India for quite a while. We’ve seen a fair amount of consolidation in that environment. The good news is we’re down to 3 commercial carriers with the BSNL as a government-backed entity. So we do think that we’ve got the right number of carriers in the market, the government has been publicly supportive of 3 commercial players. So that certainly is a good sign.
We’ve seen the carriers increase their tariffs on their subscribers. So that’s brought in more EBITDA into their financial statements and into the market. We also have seen a couple of instances where the government has provided some support to the industry by deferring some of the adjusted gross revenue, interest and penalties that they assessed on these carriers. Over time, they’ve allowed them to defer that out into the future which gives really a much longer runway for certain players within the market to figure out their balance sheets and liquidity and those sorts of things. So that is a big deal in terms of shoring up and stabilizing that market. It’s not the last thing that has to happen. There’s still challenges in India but we see the backdrop there looking pretty good.
When it comes to collections, there is still uncertainty in the collections environment in India. In Q1 of this year, many of you probably saw we took an increased provision for bad debt in India because of some short payments. In Q2, it was much better and we got full payments in Q2 which was really helpful. And in Q3, we haven’t quite gotten there yet. The other thing in India is one of the things when it comes to collections, you don’t know where your quarter is going to end until the quarter is already passed. So many times, it’s kind of in the last couple of weeks is where you’re getting payments and kind of figuring things out.
So we have yet to see what will happen here in Q3 but the collections issue is kind of ebbs and flows. You have your peaks and valleys. Even in the last few months, we’ve seen that again, with a shortfall in Q1, more than 100% in Q2 and kind of a pullback in terms of the amount of collections in Q3. So we’re working through that. We’re keeping an eye on collections. But certainly, collections is a point of uncertainty in India here at least in the short term.
Brett Feldman
Is the magnitude of what you’re seeing this quarter, any different than what you saw in the first quarter?
Rod Smith
I would say that the cadence is always a little bit different. And again, we’re not through the quarter, so I can’t really comment on exactly what it looks like. I don’t know where will end up. It’s — there’s no secret here that the government is in the process of converting some payments from Vodafone into equity which seems to be sort of a linchpin for some other financing activities within Voda. And that equity conversion hasn’t happened yet. And I think that’s what’s disrupting some of the short-term payment cycles and collections activity in the market there. So with that said, we’re supportive of the carriers. We want to see all 3 of our commercial carriers do well.
We want to see BSNL do well. But there is collections uncertainty that’s happening here which I do believe is at least at the moment is kind of a short-term issue until we see the government convert their payments into equity and then some other things kind of fall in line. On the flip side, another positive is the government just did provide additional funding into BSNL which could be an uplift in terms of revenue activity and activity from BSNL kind of moving forward.
So in a place like India, like all of our markets, it’s not all good and it’s not all bad. There’s always kind of a risk rude. We see a lot of positive trends in India. Collections right now at the moment is the one thing we’re watching on the short term.
Brett Feldman
All right. Well, we have just a few minutes left and I have the CFO, so I have to ask about the balance sheet. It looks like you will have net leverage about 5.5 turns pro forma for the minority sale in the data center business targets about 5 turns. It’s still what you’re looking to get to over the next few years. Because considering the interest rate environment we’re in, how should we think about your capital allocation priorities between now and the time you actually get down to 5 turns? And do you think you have an ability to continue to do M&A while further delevering?
Rod Smith
Yes, it’s a great question. So we are pro forma after the private capital that we raised from Stonepeak to complete the permanent financing, of course, site. We’re at about 5.5 turns. We do expect to get down to 5 turns or below over the next couple of years. That’s a commitment we’ve made with the rating agencies in terms of maintaining investment grade and kind of getting on that glide path. We’ve been on that delevering path since we executed on the CoreSite transaction and we’ve been ahead of the process in terms of what we’ve agreed with the rating agency.
So that’s all good. Our capital allocation priorities, some of them haven’t changed at all, so certainly funding the dividend and the growing dividend, a double-digit growth rate on the dividend and funding that now and into the future is absolutely a priority. So we’re — with board approval on a quarterly basis, that’s what we’re looking to do. We deploy about $2 billion in CapEx, building sites around the globe, deploying other types of capital to buy some ground in the U.S. to deploy some generators and build towers in India, Africa, Europe and Latin America. We get really good returns. So that is solid.
Beyond that, we’re open for M&A if there’s things that meet our criteria that we want to execute on. And the other thing I would say is we’re open to share buybacks as well. So as long as we’re ahead of the delevering path from the rating agency perspective. And we see dips in our equity price in this time of uncertain market conditions, we want to be ready to execute on some share buybacks if we have the opportunity to do that.
And we’re also open for M&A. Now with that any large-scale M&A that we would want to do, given our leverage would require equity, could require some additional private capital and those sorts of things. But the good news there is we understand how all that works. We’ve been through it a few times. So if the right opportunity was presented to us, we have ways of getting things done but the priority is funding our dividend, funding our CapEx program and delevering.
And then from there, we’ll make opportunistic decisions around share buybacks, smaller M&A, larger M&A that may require equity. We’ll make those decisions based on what’s actually happening in the underwriting that we go through for any capital allocation decision.
Brett Feldman
All right. Well, that’s a great place to end. Thanks so much, Rod.
Rod Smith
Thank you, Brett. Thanks, everyone.
Question-and-Answer Session
End of Q&A
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