Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph, here with Mike Rollins with Citi Research. We're pleased to have with us American Tower and CEO Steve Vondran. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveQA.com and enter code GPC24 to submit any questions. Steve, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Thank you for inviting me. I'm Steve Vondran, CEO at American Tower.
The geographies we're in, people don't always have broadband to the home. They don't always have a wire line that they can rely on. Their smartphone, their mobile internet, is how they get broadband across the board. We continue to see usage trends go up across the board, every geography we're in, whether it's 4G or 5G that they're relying on. When you think about those demand trends, you pair that with the second element that I talk about, which is our portfolio. We've built an amazing portfolio of assets over the last 20 years, and we're in the largest democracies across the globe. Those assets are typically anchored by the number one or number two carrier in every market where we've acquired or built a portfolio.
So those are the backbones of the networks that are going to continue to evolve to meet this growing demand that we see in mobile data usage today. And if you look at just the growth that we've seen, even in a challenged market, we've had healthy levels of organic growth, organic new business on that portfolio across the globe. And while we've dealt with some carrier consolidation churn, a little bit of foreign translation issues in some of the markets, and some of our customers are having some balance sheet strain because of the macroeconomic conditions, they all continue to grow. And we're posting good growth across the board in new business. So we've got great demand. We have great assets. The third thing that we've developed that I think is unique to American Tower is we have the optionality to keep investing our capital.
We can allocate that capital to where we get the highest risk-adjusted returns. So you've seen us dynamically allocate that capital among the various geographies that we have. We also have the CoreSite asset in the U.S. So when we're looking at capital allocation, you've seen us make a little bit more of a pivot, a little bit away from some of our emerging markets into our developed markets. It's not because we don't think those emerging markets are great opportunities. They're still seeing a ton of growth in terms of new business there. But we've raised our hurdle rates because the macroeconomic conditions are different there. We have the optionality to do that.
So we've created a portfolio where we can move capital around to the best, highest rates of return on a risk-adjusted basis, including our CoreSite portfolio in the U.S., which is also seeing the same demand trends, a little bit different drivers to it. But it's seeing demand trends that are supporting tremendous growth in that asset that still allows us to underpin the same types of returns that CoreSite saw before we bought them. And that's kind of mid-teens returns on invested capital once an asset's fully stabilized. And we're able to put some more capital into CoreSite in the U.S. at those types of anticipated returns. So that third characteristic, it's demand for the existing assets. That's a great portfolio and the ability to continue to invest at good risk-adjusted returns. And the fourth thing I would point to is our people.
We've built an incredible team of people across the globe, and they're the best operators in the market. What that's allowed us to do is be very disciplined about our costs. In 2023, we brought down SG&A from what our levels were in 2022. In our most recent guide for 2024, we anticipate taking another $30 million of SG&A out of the business. What that's allowing us to do is expand our gross margins in an inflationary environment where you could see some pressure on that. A very high percentage of the growth that we're going to see from those demand drivers on that great portfolio is going to drop to the bottom line. We think all that adds up to an algorithm that's going to give our shareholders some nice runway to see accretive returns in the future.
Thanks, Steve. Maybe delving into something that you were describing on the earnings call in terms of one of the opportunities and priorities for the company is the assessment of your markets and products and the internal review. Can you share with us so far? Are there any significant unexpected learnings, good or bad, from this process? And how should investors think about the timing and range of outcomes that may come from this process?
Sure. I want to be clear about what we were saying. It's not a strategic review of a problem that we're looking to solve, okay? It's an ongoing assessment of all the capital allocation decisions we've made over time. It's not something new. We've been doing this throughout our history at the company. We're talking about it a little bit more because we are changing a little bit of our forward-looking capital investments, again, toward those more developed markets. And you're just seeing that play out in some of the guidance that we've given on that. As we look at those portfolios, the things that we look at is the original underwriting criteria. It did have the markets evolve the way we thought they were going to.
I will share a few kind of learnings from it that, again, it's nothing new, nothing specific to what we're doing today, but just learnings over time. One is when you're going into a new geography, you have to be partnered with the number one or number two carrier. That helps you minimize churn in that market. Number two is internationally, you need to have CPI-linked escalators because that's how you help manage the effects that happens over time there. Number three, the contract structures are incredibly important. You need to have the ability to monetize amendments, and you need the ability to minimize churn with your contract structures. I'd say a fourth one is that the fiber and small-cell business is just as challenging internationally as we thought it would be domestically. There's another learning from that.
And so you've seen those kind of learnings play out in the decisions we've made. We were interested in expanding in Europe for a long period of time, but we're very patient to get the right contract terms. And so when we did the Telxius acquisition, it was very important to us that we had the right partner with the right contract terms to drive growth there. And that's playing out very well for us. And you've seen that kind of last learning play out in our divestiture of the Mexico fiber business. It just wasn't panning out the way we originally thought it was. And we thought that we were better to recycle that capital and put it to better use for our shareholders.
Maybe jumping into the domestic business, when you describe the opportunities and outlook for 2024, you describe the potential for an uptick in leasing activity in the second half of 2024 and describe the services business as a leading indicator. Can you unpack more of what you're seeing from carrier customers, the discussions, the applications, and anything else that's been informative for the management team on what the future looks like for leasing?
Sure. So let me kind of decouple the property revenue side from the services side. On the property revenue side, our guide for the year and our multi-year guide that we've put out of approximately 5% growth on average from 2023 to 2027 is underpinned largely by our comprehensive MLAs. And so those have a degree of new business baked into them that happens kind of regardless of the amount of activity on the sides. So you can't read too much into activity levels based on the property revenue guidance because those comprehensive agreements smooth out that cycle over time. What we did guide is a little bit higher services business next year than what we had in the prior year. And that does imply a step up in activity. We do have it back- end loaded in terms of our expectation.
What's really contributing to that is the conversations we're having with our carrier customers. These are boots-on-the-ground folks who are getting ready to deploy a network. Before we get services projects from them, there's a conversation that happens. They start talking about what they think their activity levels are going to be. Sometimes they share site lists of things that they're going to be working on. So we take those conversations, and we kind of roll it up to what our expectations are. I would note it's not a huge jump in our services business. The other thing we talked about is there's a construction services component of that that's a little bit larger piece than we normally do. Construction's kind of a small business for us. We've not grown it dramatically.
We do it in geographies where we have the right resources, and we have a customer demand, and they're asking us to do it. And so when you look at that construction services piece, that's a little more niche part of that business. But we do expect to see more services business next year than we saw this year. We do expect it to be back-loaded. And that's coming from those conversations.
You noted that one of the national wireless carriers is no longer under a comprehensive agreement this year for maybe the first time, probably a few years. Does that change the variability of outcomes for the leasing revenue in the domestic business for 2024 relative to maybe the visibility and confidence coming into prior years?
So over a longer period of time, we're very confident that we're going to get the same amount of revenue, whether it's under a comprehensive agreement or on an à la carte basis. The reason we were explicit about that when rolling off is last year, we were explicit about having everyone under one. So we thought we needed to talk about that. And it also does change the timing and the cadence in which you recognize the revenue. Under the comprehensive agreement, if you look at our Organic Tenant Billings Growth last year, it was a little bit more front-end loaded. We've messaged that it'll be a little bit more balanced throughout the year this year.
Part of that is reflective of not having that comprehensive agreement in place because when you're on an à la carte basis, those leases commence over time throughout the year versus the way a use-right fee does in a comprehensive agreement.
As you talked about the importance of contracts earlier, as you look at the contracts in the domestic business, is there any components of those contracts that might be underappreciated by the market and are important to share?
Look, we've tried to be very transparent about those agreements. So I'll just reiterate some of the key points to them. When we negotiate those agreements, it's not about discounting. The way we negotiate those agreements is we form an opinion on what a business's usual case would be in an à la carte world. And to do that, we've got a pretty good idea about what the carriers are going to do. We look at what equipment's available. There's nothing that's going to be deployed the next few years. It's not already in testing and certification. So you know what that capabilities are. You know what spectrum is going to be available. You've got a pretty good idea of what demand drivers are going to be. And then you've got the analog of 4G, 3G, and 2.5G to look at where those usage patterns are going to take place.
So we spend a lot of time trying to make sure we understand what we think's going to happen with or without an agreement. The key to that contract structure is it gives predictability for both us and our carrier customers. That predictability is good for us. It's good for them. But the key thing that makes it a compelling offer for our customers and for us is the operational ease at which they can get on our assets. It reduces our processing costs. It reduces their costs and the time that it takes to get on air. So we believe that that drives a better user experience. We actually believe that it drives higher usage of our towers over time. If you're easier to get on air and you're not involved in site-by-site negotiations, we think we get more business because of that.
We believe that contract structure does drive a better result for us over the long term because of the customer relationship that it builds.
A couple more questions on domestic, and then we'll switch gears to the international side. When you look at the domestic business, is there an underlying change in how you see market share in the category between you and your large competitors, either over the last couple of years or as you look out to the next few years?
I'm not sure I see a huge change in market share. If you look at the activity that's happening today and again, I'll just talk a little bit about how the carriers build their networks. The first iteration of a new G is POPs covered. That's typically an overlay of your existing sites. So you don't typically see a lot of variability in terms of where they're going to go. They're typically going to upgrade the entire network over time. So we could see a timing benefit in terms of because we're easier to get on air. We have the comprehensive in place. But I think that overall, for that overlay, the overlay is going to happen the way it's going to happen. I think where market share differential can come in is when you get to a densification phase.
Once you get through that initial coverage phase, the carriers will look to see where they have holes in their network, or they'll look to push into previously uncovered areas. I think that's where you can differentiate yourself with the customers and win a larger share of business. We think we've always won our unfair share of the new business, and we'll continue to do that. Then when you think about some of the further phases after you get through that initial phase, you get to more capacity phases, the same kind of dynamic will play out when you get into the densification. I think it's very similar to the way we've seen it play out in the past. I think we'll continue to get our outsized share of new business over time.
And then when you look out over the next number of years, what's the right range of organic tower leasing growth? If you just push to the side the merger-related churn that you're processing at the moment and the industry's processing, how should investors think about that right level or base case range of annual organic domestic leasing growth?
Yeah. So look, I don't want to give guidance for 2025 and beyond what we've already said. So let me reiterate what we've said in the U.S. So for the period of 2023 through 2027, we're anticipating at least 5% OTBG on average over that period of time. If you look at 2023, we finished the year at about 5.3%, and we've forecasted approximately 4.7% this year. That's supportive of that guide. So we expect on average to be at about 5% the next three years. I'd also just remind you that ex-Sprint churn, that's about 6% because we have been dealing with the Sprint churn over that period of time. The last tranche of that Sprint churn happens in October of this year, and that's roughly $70 million.
So if you think about that, that'll carry on into 2025, but we will have 2026 and 2027 free of that Sprint churn overhang. The components of that 5%, we've talked publicly about that. So we anticipate that we'll have churn. Historically, it's been the 1%-2% range. We think it's going to trend down to the lower end of that range over time. We have a 3% average escalator. So that implies that the new business percentage to get to that 5% will be somewhere in that kind of 3%-4% range over that time period. Internationally, we haven't given specific guidance on that. So I think I'll stay away from anything beyond next year beyond this year on that.
Thanks. We have a bunch of questions that are coming in that we'll get to, but some of them are related to data centers, which is where we wanted to turn next anyway. So what have you learned from owning CoreSite in a much larger data center platform with respect to the strategic benefits of owning both data centers and towers?
Sure. So the reason we bought CoreSite is we see over time a convergence between wireline and wireless networks. And we think that owning an interconnection ecosystem and I want to distinguish that from a colocation facility or hyperscale facility, but owning the interconnection environment is going to be critical to be able to monetize edge compute at the towers when it gets here. I say when. We believe more than ever it's when, not if. And what owning the data center platform has done is it's helped us participate in the shaping of that market. And so we don't have large-scale deployments today. Right now, we're doing proofs of concepts with different partners. We're trying to figure out exactly how that market's going to evolve. We've got some niche use cases that we're working on.
One of our partners put a blog out that talked about some of the stuff we're doing in automotive right now to try to help automotive manufacturers update the products on their sites. But those are all very nascent use cases right now. But we wouldn't be in those conversations. We wouldn't be having these proofs of concepts if we didn't have CoreSite and the learnings from that. And so it's given us exactly what we thought it would, which is a fantastic underlying asset that's performing very well as a standalone company. And it's also given us a real seat at the table to help shape that ecosystem. And we think that'll result in outsized returns on our towers over time as compute does move out to that edge eventually.
You mentioned the importance of interconnection. Please let me know if this is not the right recollection. But it feels like CoreSite, on an interconnection basis, had certain markets that were really strong in interconnection, and maybe some other markets were maybe less so, like L.A. being one of the big markets for that. And so as you think about the inputs and the interest in interconnection, does the portfolio give you that minimum efficiency scale for the nation? Or if this starts to take off and interconnection assets are really important, do you need to find more kind of symmetry across the country eventually of these types of data centers?
Sure. So let me touch on the first point. So yes, our L.A. facility is probably the most interconnected facility in the world, I would guess. I don't know exactly if that's the right number, but I'll take credit for it and say it is. But across that portfolio, even our campuses that several years ago might not have had the same level of interconnection have really developed a lot more of that capability. And so for us, having cloud on-ramps, which then attracts networks, is part of the secret sauce there. So if you look at what makes CoreSite different from a colocation facility or hyperscale facility, they've curated a customer mix of clouds, enterprises, and networks. And that facilitates that interconnection. And a very high percentage of our revenue is with customers that have five or more interconnection partners.
They may have multiple interconnections there, but five or more partners. So if you think about that business, that gives us a competitive moat around it. But it also gives you an environment where if you have an edge data center and you do need to interconnect to a lot of people, you land it in that interconnection environment. And we believe that we have sufficient scale. Part of the offering of CoreSite is what we call our OCX. It's basically an exchange platform where you can get access to the ecosystem, and you can do that remotely. So the edge uses that we're piloting with partners include a connection in through our OCX to that ecosystem to give that interconnection experience with others. And again, that's part of the learnings that we've had is anybody can build a container on a site and connect fiber to it.
It's not that useful unless you can talk to other people. When you bring that back to a data center, you need to own the interconnection environment. Otherwise, someone else is going to monetize all those cross-connects.
I think we'll take a couple of questions that have come in. Just a reminder in the room, if you have a question, please push the button on your microphone, and we'll get you into the conversation. One question that came in is, can you rank the regions in relation to best risk-adjusted growth between U.S., Europe, Africa, Asia, and Latin America?
That would be a tough ranking to put out there. Look, here's what I would say. If you just follow our capital allocation decisions, and you'll see where our current thinking is in terms of where the incremental dollars are best placed. And I think that's the best way to look at. And let me be clear. Our emerging markets are still a key part of our strategy going forward. The demand drivers that exist there are going to continue for decades. You continue to have growing populations. You continue to have some GDP growth there. And the demand is pretty much insatiable because, again, a lot of those people don't have landlines to their homes. So we continue to see those emerging markets as good growth areas for us.
However, given the current macroeconomic conditions, including some of the FX translations challenges, the carrier consolidation we're seeing, and the stress on the customer balance sheets, we've pivoted a little bit more capital toward our developed markets right now because we think that's where we're seeing better opportunities today for risk-adjusted returns. Now, we're still building build-to-suits in emerging markets. Those are still good opportunities for us. And those are getting low double-digit NOI yields day one. So we still feel very good about that program. But we've raised our hurdle rates in response to what we're seeing in the market, which we think is just a prudent thing to do now. So we still look at all of our markets as desirable, as having good upside in them. We just think the developed markets right now have a little bit more opportunity.
We've also increased a little bit of the CapEx to CoreSite because we've had two years of record sales. We need to replenish that capacity. Because the supply-demand dynamics in those markets are such that prices are rising, that enables us to continue to underwrite stabilized yields in the mid-teens. That's what our expectation is for the incremental CapEx that we're investing there. So that's a good use of our CapEx as well. So you'll see us continue to kind of dynamically allocate that capital among the various options we have out there. But I wouldn't really want to rank a region. It's more opportunity by opportunity. It's who's the counterparty? What's the terms and conditions of the agreement, etc.? That's going to dictate that next dollar of capital.
We have a couple more questions that have come in related to the data center side. One relates to the AI opportunity. If you can just frame the GenAI opportunity for American Tower, whether it's through your data centers as well as through your broader asset portfolio.
Sure. So if you look at Generative AI, right now, a lot of the investment in that is going to the large learning models. And those are large hyperscale facilities. And that's not our business. And it's not a business that we intend to get into. Again, we're an interconnection hub. But what that does is it makes the perfect fit for inferencing models where you take the interaction between those large learning models and the end user, and you need to distribute that content. You need to have a lot of connections to other people. So we do see some interest in our facilities with the inferencing models. AI has been a driver of our business for a while in terms of machine learning and some of the other types of AI that have been deployed.
And again, our sweet spot is where people need to connect to each other. And so when you think about how that GenAI is going to play out over time, you're going to continue to see interconnection hubs benefiting from the distribution of that content, both directions on it. In terms of the broader portfolio on the tower sites, eventually, I think that the inferencing is going to get to the point that it'll help drive Edge Compute. That's one of the use cases. It'll help drive that ecosystem. We're not there yet. People aren't doing a lot of GenAI on their phones yet.
But I think when you get to the point where you're creating music videos and doing all the interesting stuff that they're predicting us to be able to do on your mobile phone, that's going to drive the need for lower latency, and it's probably going to help develop that Edge Compute environment. But that's a few years away. That's not near term.
We had another question come in about international broadly, specific to LATAM and Europe. I guess the question is just the growth rates of those versus the U.S., even though it still seems that we're going through 4G or 5G cycles in those markets.
Yeah. So what we've said publicly about our expectations for those markets is that we expect that Europe's organic tenant billings growth will be in the mid-single digits this year. And again, that's a combination of a little bit of a ramp-up in activity for new leases and amendments, a little bit lower escalator because we do have CPI-linked escalators. We expect that to be a little bit lower next year. And we still have very low churn in Europe. In Latin America, we are still forecasting some carrier consolidation churn, primarily driven by Oi in Brazil. And what we've got into there is that our overall organic tenant billings growth in Latin America will be in the low single digits.
Another question that came in was asking if you have the cash to fund the data center CapEx. And I think more broadly, if you can unpack AMT's approach to capital allocation and how that might be different than some of your competitors.
Look, I think it's a differentiating characteristic that we have. And that is we have optionality in terms of how we allocate that capital. When you look at our portfolio across the globe and the opportunities we have to do build-to-suits, we can but don't have to build towers for other people for the most part. We may have a few contractual commitments, but they're short-term in nature. And that lets us be very responsive to market conditions on that. With CoreSite, we have a capital partner there. And when we were building our portfolio and thinking about sources of capital, we were very deliberate in who we chose as a partner and what the possibilities there were. So if we chose to fund less CoreSite, I'm pretty confident in our capital partners because the business is doing so well and generating great returns.
We'd be happy to step in and fund more. But we have that dynamic capability to pivot in and out of the different asset classes and the different geographies as we're looking for that highest return that's going to give the best shareholder value.
It's actually an interesting question. You mentioned the JV partner. When you describe CapEx for CoreSite, is that the total quantum of capital going in, or is that just your share of the capital going in?
We consolidate CoreSite in our financials. That would be the total quantum.
Then maybe taking a step back, you look at the just again, some of the international markets. When you look at the churn dynamics and industry rationalization, can you give us a sense of where you're closer to being done and maybe the markets where we just need to watch out for some incremental risk of that?
Yeah. So I think we've been pretty public about the challenges in Latin America that we do foresee carrier consolidation churn to be a challenge for the next couple of years there. So we'd expect that to be a weight on our growth rates there. In Africa, we think we're through most of the carrier consolidation churn there. So that's a market where we think that we're kind of on the backside of what we know about in terms of the carrier consolidation on that side.
In terms of then with respect to capital allocation and getting to the other side of the target leverage ratio of 5x or less for AMT, can you walk us through how the company might approach share buybacks, timing, and other considerations from an acquisition perspective?
Yeah. Look, when we get to our 5x, then we have optionality in terms of what we can do. And at that point, what we'll be weighing is what's the best use of those incremental dollars that we generate? Is it better to deliver more? Is it better to increase our internal CapEx program, which we have the options to do? Is it better to do something inorganic? Is it better to do share buybacks, or is it better to increase the dividend? And those are the different uses that we would have for that incremental cash. And we'll look at that at that time and say what's going to create the most shareholder value. And so I can't tell you today because we're not there. But once we get there, we'll be focused on that.
Again, the guiding principle we have is what creates the most shareholder value.
When you look at the other ways AMT can try to create value over time, of course, we've been talking about the operations, the regions, products. Are there emerging initiatives within the company, ways to monetize the existing assets or new assets that you might be looking at that investors should be mindful of?
Look, there's nothing specific that I'm ready to talk about kind of publicly. We do have a team that's looking at all types of different use cases for the assets. Anything that you're going to need security, power, cooling, distributed geographies for is fair game in terms of use cases for towers. And we do have a team of people that are looking at those. And there's some interesting stuff out there. Nothing's ready to come to market today. But we are always looking at that. In terms of the internal initiatives, we are continuing to look at ways to better serve our customers, lower our cost basis, and drive that outside share of market that we're getting. And some of the things that we've gone live with recently are some automation that's AI-driven internally.
So we've spent a few years gathering drone data on all of our sites in the U.S. And that's enabled us to get really high-quality data that we're able to use to then automate large portions of our colocation process. And so that's been helpful in reducing our costs. But it's also reduced our processing time for our customers. And that data is valuable to them. They want to use that data as they do their network engineering. And so that's helped to drive some of our services revenue as well as providing that kind of better service. And we're continuing to work on that. We think that there's some more progress we can make. And some of the new technologies are going to let us do things that we couldn't do a couple of years ago.
That's an exciting kind of internal operational initiative that we're doing that just makes us even better than we are today.
Ready for a little rapid fire?
Sure.
Okay. What will for your property sector overall, not your company, in 2025? Same-store organic tower revenue growth?
Sorry. Ask that again.
Same-store organic tower revenue growth in 2025?
I'm not going to answer that. But good try.
Will your property sector have more, fewer, or the same number of public companies a year from now?
I think probably the same.
Finally.
Best real estate decision today: buy, sell, develop, redevelop, or repurchase shares?
Look, for us right now, it's our internal build program. That's where we're putting most of our CapEx.
Thank you very much.
Thank you very much.