All right, if everyone could please take their seat. We're gonna go ahead and get started here with our next session. It's a pleasure to welcome back to the Communacopia + Technology Conference , Rod Smith, the Chief Financial Officer of American Tower. Rod, thanks for being here.
Yeah, you're welcome. Good morning, Brett. Good morning, everyone.
Well, let's jump into it, and I always like to start with something that's a little bit of a big picture view on American Tower. You know, you remain the only major U.S. tower company with a significant international footprint, and the only one that's really made a meaningful investment in data center assets. And I wanted to start off by getting an update here. What are the key trends that you and Tom, and the rest of the senior management team are seeing, that gives you confidence that this approach to meeting global infrastructure demand is the right approach, as opposed to doing what some other companies have done, which is to be very infrastructure or geographically specific?
Yeah, it's a great, it's a great question. A great question to start with so. You know, our view on the tower business is that we've got a great business in the U.S. with long-term contracts, and very stable growth. I think most people probably have heard us talk about our long-term outlook with, on average, 5% organic tenant billings growth in the U.S. And the reason that we have the confidence to put out that longer term view, which covers the time period from now out to 2027, is because of the comprehensive agreements that we have with the carriers. And those agreements basically underwrite or underpin our growth assumptions, and it gives the carriers access to the towers over a longer period of time.
The carriers are, in turn, comfortable signing up for those agreements because of the growth in mobile data consumption they see on the assets, and they understand the infrastructure that needs to go up on the towers over time to support that growth. We see that same mobile data consumption growth around the globe in different markets. So you know, we look at a very good business model for the towers. We understand it very well. We understand the contract, you know, terms and conditions that go into driving a good tower model and a good tower business, and exporting that around the globe makes a lot of sense to us. And around the globe, we have high-quality counterparties.
In many cases, our customers are multi-region, multi-country, you know, large, large players like Vodafone, like Telefónica, like Airtel, MTN in Africa, you know, companies like that. So we think that's a pretty good balance to take this very successful U.S. tower model and export it to select regions and select markets around the globe. We did add some data center assets to the portfolio buying CoreSite a couple years ago. And CoreSite is a very high quality, very much a differentiated asset that is cloud-centric, so we have multiple cloud on-ramps on all of the campuses that we have. We have over, you know, in the range of 450-460 network companies within the eight campuses, so lots of different network opportunities for our customers.
That ecosystem attracts the highest quality enterprise customers into that environment. So it's a really good asset. Again, it's a U.S.-based asset. It's growing exceptionally well for us, high single digits. You know, and we've had a record level of new business in that business in 2022. We're seeing very high levels of new business in 2023. Our pipeline is the highest it's ever been. So we think we have really good assets there that really, you know, may be able to connect into the tower assets in the future through edge computing and some of the demands that are coming down the pike in terms of the 5G networks. Applications that require lower latency that require higher capacity, you know, that could benefit from having compute power closer to the base radios.
So we do think the development of an edge compute facility is certainly coming, and we think with the CoreSite assets that we have and the tower assets we have in the U.S., we're in a pretty good position to help drive where those assets might be sited. So we're, you know, excited for that. So our, you know, business really is U.S. towers. We have a nice portfolio of towers in Europe that we bought a couple years ago. We're seeing very good growth on that set of assets, 8% organic tenant billings growth in that environment, which is, you know, much higher than that Europe has seen in terms of organic tenant billings growth.
That is because of the quality of the assets, the counterparty, and the contracts that we were able to put together, there. Then we have the CoreSite assets, and then we complement that with, again, select emerging market-type investments on the tower side.
So let's start by digging in a bit more to your domestic tower business, which is your, your biggest business. With your most recent results, you did reaffirm the outlook. So you reaffirmed your outlook for organic growth this year. You've talked about that 5% or greater organic growth over the next number of years. But I think one of the big takeaways coming out of the earnings season for tower investors is that we're starting to see some deceleration in the U.S. I think it was expected we would see it. It might have kicked off a little sooner than some in the market had anticipated.
How would you frame what the leasing environment is like right now in the U.S., and can you maybe compare what we're seeing now at the tail end of the front end of 5G compared to the same point in time with the 4G cycle?
Yeah, absolutely. We think the leasing environment in the U.S. is quite robust. And I would make the point again, that in the U.S. specifically, our comprehensive agreements will be what drives that average of 5% organic tenant billings growth over the next several years, out to 2027. So even if the carriers pull back a little bit on CapEx, it doesn't affect our organic tenant billings growth, 'cause our contracts are set up that they're independent of any quarterly cycles around capital deployment. So I think that's a really good thing for us. But with that said, the way you framed the question is exactly right. We're at the end of the very beginning of the 5G cycle, right?
The networks are kinda up and running across the U.S., and that took an unprecedented amount of capital to make happen, right? Up over $40 billion in 2022, which is a similar kind of a cycle that we've seen with past technology upgrades. There's typically, in the early stages, a ramp up in capital spending, and then it pulls back and settles into a more consistent annual capital investment cycle. In the 4G cycle, it ended up, you know, settling in. It came up into the mid-30s, and it settled back into the high 20s, close to $30 billion.
In this cycle, it went up to over $40 billion, and now we're pulling back, and we do think that in a 5G cycle, that it's gonna settle in the mid-$30s, in terms of $30 billion-$35 billion a year going forward. That's what we see, and that's gonna be, you know, driven, the requirement for that capital spending is gonna be based in the growth in mobile data consumption that we expect to see in the networks in the U.S., which is gonna be in the mid-20s, you know, 25% annual growth in mobile data consumption through these networks. That's what's gonna underpin kind of the need to continue investing in 5G. The 5G, you know, all the technology investments and upgrades kind of follow a typical pattern.
The first wave of it is a coverage aspect. They wanna get wireless, they wanna get the new technology coverage kind of broad, and, and wide, and that helps bring down their average cost of megabits delivered. It makes the networks a little bit more efficient. The next wave is then people are developing applications. You're getting the handsets put out there. Fixed wireless access is part of this cycle. Private networks could be part of the cycle. And then you kind of settle into more consumer-driven applications that are on 5G handsets, and that 5G handset penetration is going up, likely to get around 50% or higher in 2024 or so.
And when that happens, then you're into a longer cycle of capacity-driven investments, where the wireless carriers will continue to invest in that technology to handle the growing capacity demands that the network has. And we've seen that in the 3G cycle. We saw it in the 4G cycle. We expect to see that in the 5G cycle as well. So, long way of saying this is pretty normal, in terms of our view. And I would highlight, too, that the spending, where the carriers are pulling back, too, is still higher than where they were in the 4G cycle, and we expect that to continue.
I think the U.S. wireless market, and the tower market specifically, is very healthy, very robust, and we feel really good about that being the central point, you know, of our business kinda globally.
What do you look at as a leading indicator or something that's necessary to create a re-acceleration in leasing, something that would be robust enough that you might start breaking through the confines of what's under the master lease agreements? The two things we get asked most about are a use case, maybe evidence that 5G networks are finally stimulating uses we haven't seen before, whether it's around augmented reality or cars. And then the other one is: How do you think about the importance to American Tower that there is a fourth facilities-based operator over duration? We've seen DISH make a go at it, but that's a debated story as well.
Yeah, so we... You know, our four primary carriers in the U.S. now, certainly the large three wireless carriers, with the addition of Dish in the last couple years. The thing that I would highlight there is that, you know, we do have a master agreement with Dish, and what we put into our long-term outlook is kind of their minimum requirements under that agreement. So to the extent that they go beyond their minimum requirements, if they build a network that goes beyond the use rights that they've already contracted with us, that could be upside to our longer-term guide.
So our portfolio is very well positioned to help DISH continue to roll out their network and to get to, you know, that next level, if and when they choose to do that, and if they do, that could be upside. So, you know, having that robust fourth carrier certainly could be one of those catalysts for us in terms of additional growth beyond the 5%, on average that we talk about in the U.S. The other, you know, noticeable potential upside could just be use cases coming in earlier than expected, maybe more of them than expected, driving that mobile data consumption up beyond the mid-20s% growth rate.
That certainly could happen with the, you know, potential for the fixed wireless access, people downloading and watching, 4K movies, true high-definition video, the augmented reality, the addition of AI, in the workplace and in other, consumer-driven, applications. All those things, to the extent that those things come earlier in the cycle and drive higher amounts of mobile data consumption, that is likely to be going across mid-band spectrum, and if that's the case, then the networks probably need to get more dense, at least in terms of that 5G, the mid-band spectrum network, you know, adding density to the networks. And the way the carriers will do that is by leasing additional cell sites, putting more antennas out there to kind of fill in.
You know, the way to think about it is, the lower band spectrum, that was the main workhorse in the 4G networks, propagated pretty far. The mid-band spectrum, which is gonna be the workhorse of the 5G networks, driving the lower latency, the higher levels of capacity, and speeds, that mid-band spectrum doesn't propagate quite as far. So when you have more and more of the mobile data consumption running across mid-band spectrum, you're gonna have holes within the network that you're gonna wanna fill in. That, that is when the carriers will get to that network density.
And when you see that shift towards amendment-driven revenue for tower companies, and you see an increase in the amount of new co-locations that the carriers are driving to fill in and densify the network, that could be a catalyst for upside, on top of that, on average, 5% organic tenant billings growth that we're looking at in the U.S.
The point being, it would be upside. I mean, that's not what your guidance is based on, that would take you above and beyond if we see it materialize.
Yeah, I think that's right. I mean, you can kind of think about our master or our comprehensive agreements, by and large, at this point, centered around amendment, you know, use rights. There are some co-location use rights in there for some of the carriers. Certainly, DISH is an example of that 'cause they're building a brand-new network. But with some of the other carriers, it's centered around amendments, and if and when they turn to new co-locations need to densify the network, that is potential upside.
Okay. Well, let's turn to your international tower business. Your expectation is that your international business will grow about 150 basis points faster than what you see in the U.S. One of the questions we get is: Is that really just based on higher CPI-based escalators that you see across the international markets, or are there intrinsically higher organic growth rates in some of those markets based on where they are in the wireless cycle?
Yeah, it's a great question. The organic tenant billings, you know, growth rates, we do expect the international businesses to grow at a higher rate than the U.S. on average over time. And, you know, the real reason for that is where those networks are in their network development, and the amount of infrastructure that the different markets require kind of going forward. And there's a couple of different pieces in there. It's the gross growth, which is the co-location and amendment activity. It's the amount of churn that we might see within those markets, and then it is the escalator and the inflation. So they all play a role.
At the moment, you know, one thing that has been really positive for us is that in our contracts outside the U.S., by and large, we have escalators that are uncapped and tied to inflation. That's a really good fact for us. So we're seeing higher levels of escalator across Europe, across Africa, in Latin America, and that's driving higher levels of organic tenant billings growth for us, which is certainly a good thing. In some markets, we're seeing an uptick in gross activity, co-location and amendment activity. We expect to see that continue. In Africa, we're certainly seeing higher levels of co-location amendment activity. And in India, we're also seeing higher levels of co-location and amendment activity there. In some of the markets, we are seeing higher levels of churn, which offsets some of that growth.
So in, when you think about Africa, Latin America and India, that we are at a time in the development of those networks where we're seeing consolidation. We're seeing the number of carriers in many markets come down from five and six, down to five and four, and four and three, and that's a natural evolution that we see around the globe. So you have to work through that consolidation churn. Once you get the number of carriers down to that stable number, and in the markets, we look at three carriers as kind of being the sweet spot in most places. India has gotten there, Brazil is getting there, many of the other markets are kind of are there or getting there.
So once we get through some of these higher levels of churn, then we see those carriers investing in their network, trying to keep up with mobile data consumption and driving gross growth that doesn't have the same level of churn offsetting it, and then you get the benefit of having that escalator tagged to inflation. So when you look out over the longer term, yes, we do expect to see gross activity in those markets at a healthy level. We're protected from inflation with the escalator, and we do think over time, churn comes down in those markets. And all that would lead to those markets driving Organic Tenant Billings Growth above what we expect to see in the U.S. by a couple hundred basis points or so.
Let's talk about Europe. We'll start there, and we'll hit a few of the other markets.
Yep.
How would you frame what the leasing environment like in Europe? They're still a bit behind the U.S. in terms of 5G, so I would imagine that that's creating a degree of tailwind in the business.
Yeah, I think it's a great opportunity. So you know, some of the 5G networks are beginning to be deployed in Europe. In Germany specifically, we also have the addition of 1&1 Drillisch , which is building a greenfield network. We do see co-location and amendment activity that has ticked up a little bit, and we think there's more of that to come. We think that the gross activity in Europe could be and should be and will be higher as the investments in 5G really, really ramp up. So that, you know, that is coming. We're also seeing the benefits of our uncapped escalators, and that was by and large coming through the Telxius acquisition that we had done a couple of years ago.
You know, we, we got the terms and conditions that we required in that agreement, and we're benefiting from that now with uncapped escalators. So we're seeing higher levels of inflation, which we are able to monetize into higher levels of, our brand. And then the other thing that's key in Europe is that we see very modest, very low levels of churn. And again, that was a function of the agreement we did with Telefónica when we bought their assets. They're on long-term contracts, and the churn now is very predictable for us throughout the portfolio in Europe, and we see very low levels of churn, uncapped escalators, and, and what we hope to see is a growing, you know, an escalating level of, gross activity.
And we feel confident in that because of where Europe is on the cycle of 5G, because of the addition of 1&1 Drillisch, and the fact that they're picking up speed. We're seeing them begin to co-locate on more of our assets through the back half of this year. So we feel really good about Europe. Europe this year, we're projecting 8% organic tenant billings growth, so a very nice growth rate and a very stable, high quality economy.
So based on that, solid fundamental outlook, do you have an appetite for acquiring more assets in Europe?
Yeah, it's a great question. I mean, we-- we're in the business of owning and operating assets. We do think scale adds value to our portfolio. At the moment, we don't see anything in our pipeline, in our M&A pipeline, that gets us interested or excited. So we've been saying, and we're still in a place where we just don't see any M&A, any material M&A through this year, certainly. And I would say, you know, getting into next year, probably deep into next year, we just-- we don't think that that's gonna be the priority.
With that said, Europe is a place where if we could find some additional assets at the right price and at the right terms and conditions, with the right counterparty, yeah, adding scale in that market could be, could be interesting to us. But we would do it in a very disciplined way. If the terms and conditions don't come our way, we, we wouldn't, you know, be interested. If the pricing is not quite right, we wouldn't be interested. It's all about, you know, the opportunity and being opportunistic. We like our portfolio the way it is in Europe. So if that's the way that it stays, and we continue to drive, you know, the, the compelling growth rates, that's perfectly fine with us.
If we find really unique, compelling ways to increase the size of the portfolio, then, yeah, we'd be interested in that. But I would highlight the fact that we just don't see that happening for the foreseeable future. We are focused on, you know, de-levering our business, driving down our exposure to floating rate debt, and strengthening our balance sheet, driving organic growth through our U.S., Europe, and around the globe, as well as in CoreSite. That really is our focus, not M&A at the moment.
All right. You mentioned India earlier. You are running a process for your Indian business, and you've said that you're focused on selling a majority stake in that business. What are you ultimately hoping to accomplish with the process in India? You know, what boxes are you trying to check, and how would you think about allocating any proceeds that might come from that?
Yeah, it's really pretty simple. I mean, we are looking to sell a majority stake of that business. That could be anything north of 50%. It could go up to 100%. We're in sort of the late stages of the process, so we've been at it for a little while. And we feel confident in terms of where we're headed for that. And the outcome and the goal is by selling a majority stake, we're looking to reduce our exposure to that market. That's clearly, you know, one of the outcomes that we are trying to drive. Selling a majority stake also would mean that we don't have operational control of that business.
We would no longer be consolidating it into our numbers, and we would be reducing, you know, the overall exposure. That really is, you know, the goal.
All right. Yeah, the Indian market has performed very differently than essentially every other market outside the U.S.-
Yeah
... that you went to. Any key takeaways from the experience you've had there that's shaped how you think about evaluating opportunities that you see in other parts of the globe?
Yeah, absolutely. We've learned a lot in India. Some of the things that we've learned is that the outcomes that we expected didn't materialize, and there are reasons, you know, for that. You know, a couple of simple things. One is we saw rapid consolidation in the market, and we knew there would be consolidation. It happened a little quicker than we had anticipated. That ended up, you know, creating a churn on our numbers, and it turned our growth rates negative. We could have, you know, certainly gotten through that, and with the amount of people, the amount of infrastructure that's still required in India, the India market could have turned a corner and been really productive for us.
But there were other things that ended up happening in the India market, primarily the way some of the competition has rolled out with RJio building a 4G, you know, network, you know, largely by building their own assets. That was a little different, you know, not what we had anticipated when we first got into the market. The government kind of letting that happen, you know, was a little different. We learned a lesson there. RJio was basically giving away service or had it very priced very low, you know, which, which created trouble for the other, carriers, I think. And then the, you know, the other thing is we ended up in India with the original contracts being a 2% escalator, not tied, not uncapped, and tied to, inflation, in the market.
Of course, that doesn't help create value on our end. We originally were thinking we could try to change that term going forward with other carriers, and it's just proven to be very difficult to do. So many of those lessons that we learned along the way have already been implemented around the globe and in processes that we've looked at over the last several years. So many of the... I guess the way I would frame it up is many of the portfolios we didn't buy in the last few years were because of lessons we learned in India, where we saw some of the similarities develop, and we've also scanned our portfolio globally to see are there any of those things that could potentially be coming down the pike in the other markets?
The good news is, I think that India really is very unique in terms of the way that it operates and the outcome on the tower side. We don't see those patterns, you know, repeating themselves in any of our other markets. Like in Africa, we're seeing really good growth. You know, we're seeing some consolidation churn, but that's perfectly normal and expected. We've got the uncapped escalator, so we're good there. And, you know, we've had really good outcomes in terms of collecting on all the receivables throughout Africa. So, you know, it's a totally different situation in Africa, and India is somewhat unique.
Right. You touched on Africa. I'd like to quickly touch on Brazil. What do you think is the path to getting to a faster growth profile in Brazil? It's had a decent growth periods of time. You're going through some churn right now.
Yeah.
Where is that market in the cycle?
Yeah, I think Brazil is coming into a very interesting place. They've, they've gone through some of the consolidation churn that we have seen in other markets, that we're seeing in other markets. So you know, we saw the, the consolidation of the Nextel portfolio. We're seeing the consolidation of the Oi portfolio. We do think Brazil is kind of turning a corner and getting through their churn. They're down to three primary carriers, and those are really good facts for us. We've got the ability to monetize inflation in that market. And they're launching and rolling out 5G. There's gonna be new spectrum becoming available. So we think Brazil is in a really good position now that they're getting down to those three carriers.
There is a little bit more churn that we have to work through in Brazil, notably the Oi churn that'll take a couple of years probably to kind of work through. But other than that, the fundamentals are really coming into view, and that market looks very good. And I do think that a lot of the gross growth, the activity level, is gonna be, you know, driven by mobile data consumption across Brazil, and it's gonna be driven by higher levels of higher technology, you know, being deployed in and across Brazil.
Let's turn to CoreSite, your data center business-
Yep.
that you acquired in 2021. As you mentioned, it's a high single-digit grower. I think it grew about 9% through the first half of the year. It's actually outperforming the sort of the 6%-8% target-
Yep
you had set when you acquired it. What, what's driving the elevated growth?
Yeah, it's a great question. We're very pleased with what we're experiencing with the CoreSite acquisition. You know, right from day one, we've just seen a very steady and, at times, accelerating level of demand for that business. That elevated and steady and elevated level of demand is giving us some pretty good pricing power, so we're being very focused on that as well. And the demand comes in a couple of different forms, and it really is, you know, centered around the high quality nature of these assets. I mentioned it a little bit earlier, but, you know, we basically have eight different campuses. We've got a couple of dozen buildings across these eight campuses. In each campus, we have multiple on-ramps for cloud access, so there's multiple cloud players represented in each of these campuses.
We've got, you know, over 450 network companies within these campuses, and much of our business is retail-based, with enterprise customers coming in and taking space. When those enterprise customers come in, they're coming in because they need access. They want access to the cloud on-ramps. They want to get into the network companies, and then they begin to cross-connect with one another. So that is the uniqueness of, or the differentiated nature of these assets. I think that's what's driving a lot of the demand, is that the high quality nature of these facilities and what can happen. Much of the demand is our existing customers increasing their footprints, increasing the amount of interconnections that they get. That's one of the differentiated outcomes that you get in this kind of environment, is your current customers wanna do more and more.
It also helps you hold the churn down because we're not just providing power and cooling and space to these customers, where they could easily just negotiate price and go somewhere else if you don't give them the price they want. But they're benefiting from all these interconnections. They're benefiting from the cloud on-ramps. They can't just unplug that stuff and move somewhere else, so that ends up increasing the overall experience the customer has, and it ends up holding the churn rates down for us. So we're seeing churn rates at the low end of our original kind of plan, the low end of that 6%-8%. You know, we're closer, much closer to the 6% at the moment. And on a pure economic activity, we're kind of getting outside of that 6%-8%.
And the other thing I would highlight is, you've heard us talk about the record level of new business that we saw in 2022. That's new contracts that we signed up that we have yet to deploy for the customers. The cycle to deploy some of that new business can take up to 18 months or even two years, so we're in the process of deploying that record level of new business. This year, we're having a very strong level of new business being signed up again this year. We won't see, and you won't see the benefits of those, that activity in our growth rates until late in 2024 and into 2025. So we sit back here. We're already in the upper single-digit growth rates for this business.
We're coming off of two very good years of new business that we know will help accelerate that growth when you get out to 2024 and 2025. So we feel really good about the set of assets that we have and the economic result that we're seeing now, but also, you know, out a couple of years, 2024 and 2025, it could even be better.
Got it. And as you mentioned, because you have a retail-oriented business model, this is really being driven by enterprises deploying hybrid multi-cloud architecture.
Right.
Notice I didn't say AI, but we-
Right
Always get questions. How are you thinking about what the AI opportunity could be for your business as it currently is? And does it shift your perspective on the amount of capital you might want to ultimately put into data center assets, including potentially hyperscale assets?
Yeah, it's a great question. We certainly think AI is gonna be a big driver of data center demand for data center space. Early on here, in the early stages, it's driving a demand for hyperscale space. So we think that's kind of the initial wave. Our business isn't hyperscale-centric. We like the balance of the portfolio with cloud on-ramps, networks, and enterprise customers. So we don't think AI is gonna actually drive a material, you know, level of business for us for a couple of years. But we do think it's coming. So that gives us the addition of AI here is something that we think is gonna be coming within a couple of years, that'll really be hitting the demand for the types of data center space that we offer.
So that's another, you know, another fact that we look at across this data center space and say, "This business is really strong and really solid." Not only is it in the highest quality economy, you know, from around the globe, but the demand is tremendous, and the growth rates are probably gonna be higher than what we see on the tower side in the U.S. So we like it from that perspective. And AI, once it really comes, once it starts hitting the data center space, it's gonna be another leg of demand and growth for the data center business.
Okay. We touched a little bit on capital allocation earlier because you talked about M&A, and you sort of said right now, it's not what the focus is. Your net leverage at 5.3x is just above the 5x that you target.
Yeah.
How do you think about the path to getting to five? It's not that far away. And then as you hit that, how might you look to evolve your capital allocation priorities?
Yeah, so we're at about 5.3 now. We do wanna get down to, back down to five, maybe even just below five. That's. We'll be focused on that. And there's also a couple of things I would say about the, you know, our balance sheet and, let's say, strengthening our already very strong balance sheet. Not only do we wanna delever, we also wanna reduce our overall, aggregate level of debt, right? So if we do monetize, an equity stake of our India business, the proceeds there will go to reducing debt. We did. We sold a fiber business that we had down in Mexico. We used those proceeds to reduce debt. So, you know, we are putting capital towards debt reduction, kind of aggregate debt reduction.
And we also wanna continue to delever, get down to 5x or just below 5x. And we're also looking to reduce our exposure to floating rate debt. So we started the year at about 20% of our debt structure was exposed to floating rate. We've gotten that down to just about 15%. We took that down from $7.5 billion of debt that was exposed to floating rate, down to about $5 billion, and we expect to continue on that trend, really across all three, trying to reduce the aggregate debt, working on delevering the balance sheet overall, and continuing to work on reducing our exposure to floating rate debt through the balance of this year and probably well into next year.
All right, that's a great place to stop. Thanks so much for being here.
Thank you.
Appreciate it.
Thanks, Brett. Thanks, everyone.