Great. Thanks, everyone, joining our next session with American Tower. We're excited to have Rod Smith, EVP and CFO, with us, and I'm Batya Levi, with the communications team at UBS. Rod, thank you so much for joining us.
You're welcome. Thanks for having me. It's great to be here.
Great. Let's start with maybe a quick overview of your strategic focus as we head into next year, 2025.
Yeah, that sounds great. It's a great place to start. So I'll reiterate our strategic focus. You've probably heard this on some of our past public comments and on calls, but we are very focused on driving organic growth in our business in the U.S., in Europe, and around the emerging markets, as well as in CoreSite. That is priority number one. Driving operational efficiencies across the business around the globe, expanding margins, reducing SG&A. We've had a lot of success in the last couple of years doing that. We continue to focus on that.
And then it's about making very smart capital allocation decisions, combining that with a strong balance sheet, reducing leverage, reducing exposure to floating rate debt, and again, being very disciplined with capital allocation. That means over the last couple of years, we've favored delivering over increasing capital investments. M&A has slowed down quite a bit in the last few years. We continue to look and scan the world, but we haven't seen anything compelling that we wanted to act on. And our priority has been balance sheet strength.
So we focused on that, and that's worked out very well. That has led to an upgrade in our credit rating recently. So we are now BBB flat with S&P, BBB plus with Fitch, and still BBB minus with Moody. So we're certainly moving in the right direction. And when we talk about balance sheet strength, we really do target that BBB flat credit rating. From a capital program, you've seen us reduce capital spending, very focused on making sure that every dollar we deploy is done in a disciplined fashion.
So we've reduced capital spending, and that reduction has been primarily in the emerging markets, reductions in Africa, reductions in Latin America. And we've increased capital spending in the U.S. and in Europe and in CoreSite. So not only have we reduced in aggregate, but we've reallocated, favoring high-quality economies in our clearest path towards value creation. We sold India recently. So certainly driving the right quality of earnings has been and continues to be a priority of ours.
And that means us focusing on our earnings and ensuring and prioritizing that our earnings and earnings growth is repeatable, reliable, and durable. India wasn't giving us that, so we made the difficult decision to exit India. But it was really about favoring that predictable, reliable earnings and earnings growth and that higher level of quality of earnings.
That's great. And maybe we start with the U.S. business. So the majority of your business and a lot of questions on the predictability of the growth rate in the U.S. You have guided to about 5% through 2027. Maybe if you could talk about that as we think about the last tranche of T-Mobile churn coming out, can we now start to see an inflection in U.S. organic growth through this period?
Yeah, it's a great question, and I think the premise is absolutely correct, which is we do have our last tranche of Sprint churn. It's the highest tranche in the last couple of years, so we churned off about $70 million of billable revenue off of our rent rolls on October 1st of 2024, so we will be kind of running that through the first three quarters of 2025, and then Sprint churn is over, and all of the Sprint churn is behind us. What that means is that we will have kind of our trough in terms of organic tenant billings growth in the U.S. in 2025, which brings us down to about 4.5%.
I think we signaled that in the last call, and then without Sprint churn recurring when you get into 2026 and 2027, there is an opportunity to see those growth rates come back up. The other thing I would say is that when we laid out our long-term guide from 2023 out to 2027, targeting 5% on average growth rate, naturally, we had clearer visibility in the first few years and more committed revenue in the first few years. Let's say less visibility, but also less committed revenue. So what that means is in the back half of the year, we do have less committed revenue.
We have a major carrier now that's not under holistic, is under à la carte. That by definition means they have less committed. Doesn't mean they will do less. It just means less committed and maybe à la carte. So when you think of getting beyond 2025, we are still committed to the 5% on average over that long period of time. Everything looks really good from that perspective. But there is less of a commitment in 2026 and 2027 than there was at the beginning. So then we look at 2026 and 2027 and say there really is a range of outcomes in the U.S. We have a 3% escalator in the U.S. business.
We always have and we will going forward. Post-Sprint churn, we expect to be on the lower end of the average churn, so more like 1%. So you take the 1% off the 3%. You start with a base of 2% there. And then the activity-based growth could be anywhere from 2.5%-3.5%, 200- 250 or 250 basis points- 350 basis points, which puts the overall organic tenant billings range in that 4.5%-5.5% in that 2026 and 2027 timeframe. And the reason there's a range there is because there is less of a firm commitment and potentially an array of outcomes.
With that said, the U.S. environment is really solid. We have seen an increase in activity levels at the back half of 2024, just like we expected to see and projected in our early outlook of 2024. Volumes and activity levels are much higher at the end of Q3 of 2024 than they were in Q3 of 2023. We expect that level of activity to kind of run into 2025 and beyond. The activity level acceleration is in line with what we originally expected.
Today, it's right in line with the public comments from the carriers and the way they speak about their business, their acceleration of deploying mid-band spectrum, getting their penetration of mid-band spectrum up. It's a really constructive environment as we head into next year. The other thing I would add here is that in the last call, we talked about a mid-10s in terms of attributable AFFO per share as we run into 2025. That's off a pro forma ex India of about 995 or so, and the underlying business from bottoms up, operationally speaking, is really well intact to drive that sort of an outcome.
One of the things that's changed is FX has gotten a little bit worse, so the US dollar has strengthened, so maybe that's a good thing, certainly for the U.S. But the emerging markets have weakened and really as a result of kind of the US election, right? Post-US election, the US dollar strength and emerging markets weakened. That could add like 100 basis points of headwind to that mid-10s attributable AFFO per share. Now, with that said, it's too early to count on that.
And certainly, the strengthening of the US dollar, the weakening of emerging market currencies right at the heels of the election certainly could be an emotional reaction and not rooted in actual policy decisions. So we'll have to wait and see kind of how things unfold. But just wanted to highlight that FX has deteriorated a bit since our last call.
Right, and maybe just to follow up on that, if you could remind us, when you guide in February for 2025, what will your approach to FX inclusion be?
Yeah, we have a very consistent methodology of FX in the projections. We basically take the Bloomberg average of companies forward-looking, which basically takes purchase price parity amongst all of the countries we're in and the U.S. dollar and see the differential in potential inflation rates. And we put that up against the spot rates. So we take a forward-looking average, compare that to the current spot rates. Whichever is worse for us, that's what we use in our outlook. So it's a conservative approach when it comes from an FX standpoint.
I guess if you were guiding today, that mid-10s, let's say 10.50s, I think where most are shaping up would be about $0.10 too high based on FX.
Yeah, based on FX, that's right. FX today is about 100 basis points headwind or about $0.10, maybe a touch higher off of that mid-10s attributable AFFO per share. Now, with that said, there are other moving pieces within the business. The business is very constructive, and the level of activity is very constructive, not just in the US. We're on the heels of closing out our third record year of new business activity in CoreSite. Things are going really well there. Europe, we continue to drive better than mid-single-digit growth rates in that market.
Very high-quality economies and 5G is rolling out across Europe and in our market. So that's a very constructive market. We see solid activity-based growth in Africa. FX has been a little bit of a headwind in Africa, certainly in Ghana and Nigeria primarily. But the activity base in Africa is quite compelling. In Latin America, they're going through transitions, market to market, some consolidation. In Brazil, we've got a little bit of consolidation now or a challenging customer event happening in Colombia with WOM.
Mexico, the level of activity has slowed a bit because of the market dynamics and one carrier being dominant. But that could change. We are looking at lower single-digit growth in Latin America over the next couple of years. We're seeing increasing growth rates across Africa. So very compelling backdrop to the business globally.
Okay. I'm going to dig in on all of those in a bit, but let's go back to the U.S. The carrier that fell off the comprehensive deal, we think still has a lot to do in order to deploy 5G. Maybe around 40% of its towers have been deployed. So to the extent that they're active, do you see that as incrementally better than signing them under an MLA, or it doesn't matter?
It really doesn't matter to us. We are entirely and firmly agnostic to whether we're under a holistic deal or if we go à la carte, and the reason is because over the long term, the value for us and our shareholders is going to be the same in our view, so under a holistic agreement, the carriers would basically commit to a certain amount of activity on a certain amount of our sites. We would price that up. We would commit to giving them the space for that activity, and they would commit to paying us for that, so they are paying for what they use.
The commitment just firms up over a number of years. It gives you more predictability, more confidence in your near-term, early kind of revenue and revenue growth. If you're not under a holistic agreement, the near-term can fluctuate a little bit more because your revenue is tied more to activity, and that can ebb and flow from quarter to quarter. Over the long term, the carriers do not make investment decisions based on whether they're in an à la carte or a holistic deal. They invest in the network to keep up with the quality, the coverage, and the capacity that's needed.
So the revenue will come. The activity will happen, whether it's holistic or à la carte. Under a holistic, we get a little bit more confidence in a multiple-year window in terms of what the growth will be. And what the carriers get is a much expedited, administratively easier process to deploy their equipment. So from that perspective, it's a win-win. But over the long term, it doesn't change really what they end up paying us or what we end up giving them for space because that's driven more on the secular nature of their technology upgrades.
But to the extent that, let's say you sign a holistic deal with that carrier in the beginning of the year, I know there would be a straight line adjustment, which doesn't impact the AFFO. But could we see an uptick to $1.04 of AFFO if you sign a new comprehensive with them?
Yeah, I mean, there is intermittent year impacts depending on when you sign the holistic and when the use rate fees go up, so as an example, if you enter into one of those and the use rate fee starts at the beginning of the year, the first year, you get the full effect of that.
You might have a little bit more growth than if you started it in mid-year, right, but then the next year, if you started at the beginning of the prior year, it mutes the growth potentially in the next year where if you start it in the middle, you might get high, so depending on when in the year you start it and when the use rate kicks in, you can have a variation in growth rates that impact that, but that doesn't affect things over the long term. But that is one of the impacts of getting into a holistic is the specific timing of when you put it in and the short-term nature of the impact on the growth rates in the current year and then the next year.
Okay. And maybe just going back to one of the carriers who is still under a holistic agreement and potentially dropping off, I think beginning of 2026, almost 80% of the towers have been upgraded for 5G. Are you seeing a bit of more densification efforts from that carrier?
Yeah, it's a good question. I can't say that we've seen a significant change in terms of densification. That carrier, without using any names, as part of their network strategy, has been doing a fair amount of colos in the process as well as amending and upgrading their sites for the mid-band spectrum. I do think that going out in the next couple of years, I think there's still 12 months- 24 months of, and I think this kind of is in line with the carrier statements. They would know. I wouldn't.
But it does feel like where they are in terms of deploying mid-band spectrum on tower assets in the U.S., they have another 12 months- 24 months to get the mid-band spectrum on the number of towers that they wanted on in the U.S. to get up to that 300 million covered POPs and to get on 80% or 80% plus of the cell sites. That's going to be another year or two. After that, you may see more of a densification push. That means maybe a shift or a bend towards more colos and fewer amendments for a while. And that could very well be happening.
That's what we expect could happen in this cycle. But the thing that's important in our business is that the aggregate carrier investments across the U.S. from all the wireless carriers together is fairly consistent year after year after year after year. Exactly how and where they spend that money may be a little bit less important, but that cadence of spending is really to keep up with the capacity issues, maybe including densification in their network from time to time. And they will manage their CapEx spending, so there is some predictability, some consistency to it.
And their investments will go well beyond when they get 80% of their sites upgraded with mid-band spectrum. That is what happens in the early part of the technology cycle, but the investments continue. Mobile growth consumption continues at the cell sites, so they continue to kind of invest in the network. And as more 5G-capable applications get out on more 5G-capable handsets and mobile devices, you'll end up seeing bandwidth on the 5G network increase, and you'll see a shift from reducing data consumption on the 4G networks and being replaced with 5G networks.
That means more of the data traffic will be on mid-band spectrum, not lower-band spectrum. That spectrum doesn't propagate as far, so then you need densification, and you need to fill in so that the user can have a ubiquitous level of service on the 5G with the right capacity levels, with the right latency levels. So we do think that densification should be and probably will be a phase of the 5G technology cycle.
And I guess that's especially true if we don't have new spectrum coming up available in the pipeline. I mean, that could change. The new administration probably will push for spectrum policy sooner than later. But how do you think about kind of the next couple of years in terms of that, with the lack of more spectrum becoming available, will we see an acceleration in densification?
Yeah, it's a great question. I think, I mean, the carriers know much more about this than we do, but I think when you look at their networks, there's two forms of densification that could be happening in the future. One is capacity-driven. So a cell site where they already have coverage, they end up with mobile data growth on that cell site to the point where they need more spectrum in order to handle the increase in capacity.
They can get that by bringing more spectrum into the site. But if they don't have access to new spectrum, then what they might do is break that cell site down, create two cell sites, and reuse the spectrum they have more frequently. So they end up with smaller search rings reusing the spectrum more frequently, and that is a densification driven to meet capacity needs. The other densification is when more of the traffic is off of 4G onto 5G, the mid-band spectrum doesn't propagate quite as far. They'll be filling in for coverage in terms of making that mid-band spectrum experience ubiquitous.
So they'll fill in the gaps with the mid-band spectrum, and they might densify from that perspective. So if new spectrum is released and they get access to new spectrum, they may not need to break down as many cell sites to reuse spectrum, but they'll deploy more spectrum on the cell sites they already have, and that could be an amendment opportunity for us as well. So that means they bring in more spectrum to increase the capacity of their cell site. They're going to put more cables, more radio heads in the tower, more antennas in the tower, and of course, the assets that we have benefit from that.
Okay. And in terms of the maybe just activity from DISH, it looks like potentially they have a little bit more runway in terms of the network build. Are you seeing any change in the activity from them?
I don't want to get too specific in a specific customer and their activity level. I guess what I would highlight for DISH is we are ready, able, and look forward to supporting their network ambitions and their deployments. Within our outlook, we have the minimum level of activity kind of built into our outlook plan. So from that perspective, their actual activity level really doesn't affect our outlook at all unless their activity level surpasses their minimum commitments within the contracts that we have going out the next couple of years.
That could be an increase to our outlook. But if their activity levels fall below, they've committed to certain minimums. Now, with all that said, we do see them as active building up the network, moving towards meeting all their current and future coverage requirements. We are very supportive of helping them get their network to the place that they want it over the next several years.
Okay. Network services business has been pretty strong last year, and I think you work with all the carriers, and that's a good precursor for more activities to come. As you go through that business, can you backlog? Can you maybe give us a sense on if that could stay as strong into 2025? And also within that, do you have a sense if the carriers are deploying capacity to support fixed wireless?
Yes. So we are seeing a higher level of activity on our towers today than we were at the end of last year. You see that in our revenues on the services line. So our services revenue is up significantly in Q3 over a prior year, Q3. That activity is broad-based across all the carriers. They're all active. They're all touching their networks and touching our assets. And yes, we certainly could see that continue into 2025 and beyond. Services by nature can kind of ebb and flow. It is based on the activity. So can the carriers slow down? Yeah, they could.
But when you listen to the carriers' rhetoric, when you think about the targets that they're setting out, many of them are pushing towards pushing the limits, increasing their capital investments, accelerating their mid-band spectrum deployments, getting to that 80+% coverage with mid-band spectrum sooner rather than later. All that kind of highlights that keeping that services level kind of at the level that we see it today is certainly possible. And we will know better when we get to February in terms of exactly what the outlook will be for 2025, but it could be very healthy.
With that said, from a fixed wireless, a couple of carriers are having tremendous success with fixed wireless as a product. I can't say that we've seen specific deployments supporting that on our assets. It's not the way that it works. The carriers are basically using available capacity in their wireless network to put fixed wireless subscribers on it. We don't see a difference whether it's a wireless mobile device or a fixed wireless device.
With that said, and they've been deploying available capacity towards that, I think they like what they see, and to the extent that they continue to load fixed wireless subscribers onto their network, that's good for them, good for our customers. It's another revenue opportunity. We like that. We want them to do well, certainly, but that is capacity that gets taken up on the network, so at some point, if you put enough of those fixed wireless subscribers on, then your capital investments are not only supporting mobile devices, but fixed wireless equally, and then the capacity.
It could just help kind of elongate the capital cycle here for us, but it also could be very good for the carriers where they're tapping a prior untapped revenue stream for them. So it could be really good, really interesting for them and really interesting for us.
U.S. is still a very healthy growth market, and you rarely get opportunity for new portfolios to exchange hands. And we saw maybe Shentel selling towers and then Verizon selling towers to Vertical Bridge. Can you talk about you purchased quite a bit of towers from Verizon in the past. Your decision-making process on maybe not to look at these or not to purchase these portfolios?
Yeah. We look at towers no matter where they are. We look at them certainly in the U.S., and in Europe is kind of the priority for us. We also look around the emerging markets. I love towers. I would never say a bad thing about a tower. They're all beautiful in my mind. That doesn't mean every acquisition is right for us. Our priority here over the last couple of years has been what I laid out a little bit ago, right? Increasing the strength of our balance sheet, reducing our leverage, driving organic growth, driving margins up and costs in our business down.
We've been very committed to that process, and although we look at M&A transactions, certainly in the U.S., we would look at them. Nothing was compelling. Not that we don't like the towers themselves, but it's not necessarily a tower that's not all you're buying. You're buying contracts and terms and conditions. You actually are agreeing on a purchase price that has to kind of fit in. Depending on how you're going to pay for it, the cost of that capital is important. You put all that together, we're happy to focus on delivering our balance sheet and sticking with our priorities.
If all that math and equation was different, maybe we would have had a different outcome, but very happy with our focus, strengthening the balance sheet, driving organic growth, increasing margins, reducing costs, and deploying capital in a very disciplined fashion with a priority towards high-quality countries, high-quality economies, and high-quality counterparties.
Got it. Maybe let's shift gears toward CoreSite. Three years since you purchased that asset, it has been, I think, performing better than what you underwrote the growth for. Can you talk a little bit about if we can see that growth repeat into 2025 and what kind of visibility you have? And maybe tie it in terms of your decision to spend a bit more on development CapEx to drive that growth.
Yeah. I can't believe it's been three years. It seems like it was just yesterday that we bought CoreSite. But CoreSite is performing exceptionally well for us. We bought CoreSite three years ago. We underwrote that with an expectation of between 6% and 8% of economic growth in the modeling. We're seeing double-digit economic growth in that business. We are in line, kind of on track to close out our third record year of new business in a row. That means this year has the chance to end with more new business than we secured last year.
Last year was a record. The year before last year was a record at that time. So we are seeing very strong demand. That strong demand is not necessarily AI-driven, which a lot of people kind of think they jump to. All the headlines, it's AI, it must be AI. It's really just more and more companies looking to go to the cloud, to go through data centers that have cloud on-ramp access, which is key to our campuses all across the country, to get into an interconnection environment where they can cross-connect to other big enterprise customers.
They want network access as well, and we have hundreds, over 400 network access networks accessible within our footprint. So we're seeing record level of new business activity year after year, and it is the traditional business, the high-quality business of cloud on-ramps, getting into these network companies and that interconnection. The AI-driven demand in our centers is probably still in the future, and we do think that that will ramp up after a lot of these hyperscale projects get built out, and then you see more use cases.
We think that's a good backdrop for the next several years in our centers. With that said, when we have a record-setting year on new business, it then takes a year or two to actually deliver that space before we enjoy, let's say, the economics of that. We had a record-setting year two years ago. We're now seeing double-digit growth. We didn't have the double-digit growth when we signed those record levels of new business. It's delayed a little bit.
The fact that we had record-setting new business last year and again this year, that does indicate that our growth rate is going to be really healthy for the next couple of years because we'll be delivering all that capacity and starting up those revenue streams in our financials. We're a double-digit economic growth. We think that continues for at least the next couple of years. I would say to everyone in the audience, watch our new business levels. And as long as they continue to be high, our growth rates are going to continue to be solid.
But things look very good over the next couple of years just based on what we've already signed up. The other thing I would add is with the record level of new business, we have a fair amount of megawatts under construction. It's almost 40 MW-45 MW of capacity under construction. We are in the 60-plus percentage range of pre-leasing of all that space. So by the time we get it done, you're already at full utilization of the space, and that's why you've seen our capital investments going up. It's only because it's required to deliver on all the new business that we've signed up.
In that new business, that incremental capital, it all comes with very good financial returns. We target solid mid-teens returns. They can certainly be better if utilization goes up higher. But with the high level of pre-leasing, it's significantly de-risked these investments without compromising the quality of the overall returns. We're still targeting solid mid-teens returns that can go up from there.
Maybe you bought the assets for different reasons. But that's still an opportunity also in the future to play out in terms of edge compute and converting some of your hubs into that facility?
Yes. So we were attracted to the CoreSite assets because we do think and we see a convergence of data center assets and tower assets coming together to allow the edge computing, having cloud on-ramp access points, compute power, and content caching closer to telecommunications-based radios in a wireless network or in a wireline network or even for enterprise customers, right? Having those cloud on-ramps more distributed, closer to the end users with content caching does a couple of things.
It reduces latency within the networks, which is going to be required in a 5G and beyond world, particularly as you see more applications become available. It also reduces transport costs. When you have large amounts of data being run back and forth from landline networks, enterprise customers, wireless customers back and forth into the core, that costs a lot of money to transport back and forth. Storing those things out at the edge, doing some compute manipulation, and then just using it at the edge reduces transport costs over time.
So we are more confident today than we were when we bought CoreSite that that's the world that we're heading into. Exactly when it comes, we're not exactly sure. Probably still a couple of years, which is longer than we originally expected, but we are more confident now that it is coming. And if you listen to public comments from cloud companies, carriers, landline, wireless, I think you'll hear very similar things that these on-ramps and content caching, compute power closer to the end user is going to be a requirement in the networks.
Hopefully, with the combination of our assets, we can help make that a reality, and our shareholders should benefit from that. But that will be the key, though. It will be financially driven decisions whether or not we deploy capital in support of edge. We're doing some trials, working with cloud companies, working with telecoms. If we find the right formula, then we could potentially begin to invest in that to make it a reality.
With that said, one of the other considerations we went through when we decided to buy CoreSite was that we had these synergies between the two assets that we thought could become a reality. But in the meantime, we saw a really high-quality business with a really good backdrop and demand with very little downside risk embedded in it. We saw a company that was a very high-quality customer base and set of assets that maybe suffered from a little bit not enough CapEx going into it.
So we thought we could add value by loosening the CapEx and seeing an economic kind of explosion there and keeping the high-quality nature of it and just really leaning into the investment cycle and expanding that. And that's worked out very well. So it's a great US asset, really good economic backdrop. This is a differentiated asset compared to other data center assets. That is critical. And for anyone who doesn't understand what that means, I would urge you to go back and listen to our other public comments.
But our assets are all centered around multiple cloud on-ramps within the campuses that we're in. We have access. We have hundreds of network companies in our facilities that our enterprise customers get access to. And we have in the 12%-13% of our revenues, our interconnection revenues, where our customers are interconnecting with each other. That is a big deal. The vast majority of our customers enjoy more than five interconnections. And once you start interconnecting, that reduces churn.
Once you start interconnecting, it really does become addictive, and you want to interconnect with more people. And we're seeing double-digit growth in interconnection revenue. It's not the traditional, "We provide cooling and power, and you put your server there. We'll make sure it's safe." This is about accessing clouds, accessing networks, and accessing other enterprise customers.
We're out of time, but I want to squeeze in just one more. With everything you've said, this question of CapEx potentially is coming down. You're spending more on data centers, but build-to-suit towers potentially coming down in Africa. India is out. You're almost inside your leverage target of 5. And M&A, you will continue to look at opportunities, but can we and dividend growth should resume in 2025. Can we expect you potentially start a buyback also in 2025?
Yeah. It's a great question. I do see the zero flashes, but I'll be relatively quickly. We have kind of reached our balance sheet positioning. We are within our target range. Share buybacks are definitely on the table. We could execute on that in the near term, in early 2025 and late 2025. If we see compelling opportunities, we can take advantage of that if we choose to. So it's available to us. It is something that we look forward to doing at the right time when we see the right opportunity. We do expect dividend growth in 2025.
We expect that growth over time and on average over multiple years probably averages roughly where our AFFO per share growth would be. With that said, and this isn't about 2025, but maybe over the next several years, we do see our portfolio of assets being very well positioned for upper mid-single-digit growth rates, mid to upper mid-single-digit growth rates, right? That doesn't mean every single year it'll be upper single-digit growth rates. And we've signaled that next year might be more mid. And we've got a few more FX headwinds brewing for 2025.
So we'll see where that goes. But without the volatility in interest rates and FX, the underlying performance of our business gives management confidence that we have a solid mid to upper mid-single-digit growth rate company. So that's the kind of growth rate you should expect on the dividend on average over a multiple-year period, that mid-single-digit, upper mid-single-digit growth rate on the dividend. The dividend growth rate probably matches the AFFO per share growth rate over time on average.
That's a great place to end it. Thank you so much.
Thank you.