We're good? All right. All right, good morning, everybody. We're going to continue the Nareit tradition of American Tower and Raymond James continues. American Tower converted to a REIT, I think, in 2012, and we hosted you at your first Nareit presentation then. Now we're still here. I'm Ric Prentiss, head of TMT research at Raymond James. To me, TMT means towers, as well as digital infrastructure, media, and telecom and satellite carriers. I want to welcome back to a second Nareit, I think, right? Or second summer Nareit week.
Second summer one, yes.
Second summer one, yep. Steve Vondran, who's the CEO of American Tower. Steve, thanks for coming.
Happy to be here. Thanks, Ric.
Yeah. I want to start out with kind of, since we've been doing this a lot of years with American Tower, and you've been there a long time. Second read week, summer Nareit session. You've been at American Tower a long time. Why don't you give people a little bit of just background?
It'll be 25 years in July. So I've been there for a long time. Lawyer by training, was general counsel for about a decade of the U.S. business.
I can hold that against you.
Some people do. It's all right. I ran the U.S. business for about five years, and I've been in the chair here for about 15 months.
Great. For those not in the audience that do not know, we wrote our first tower report in January of 1999. Literally 26 and a half years ago, we started talking about what this tower industry was going to become. Back then we said it is a pretty simple business model. It is a great, we called it the best business ever, BBE business model, and that the U.S. was really a strong place. It was vertical real estate. Here we are in the real estate conference because it truly is. You do not have walls and windows, but you have long-term contracts with some pretty good tenants.
We do. You do not have the occupancy limitations that you have with other assets, and it is capital light. You can keep adding more revenue without putting a ton of CapEx in it. That is what makes it the best model out there.
Revenue conversion to free cash flow is a beautiful thing. I want to start with what's new or newish since last year's Nareit, when it was your first time here in the summer one. You have sold the India business. You've done some pruning of some of their assets. Why are you selling India? Why are you pruning? And what lessons have you kind of learned?
Sure. The way we think about our jobs as running this company is we have to manage this portfolio of assets that we have better than anybody else out there. It is similar to when you are managing your stock portfolio. We have to look at the investments we have made. Are they performing the way we want them to? Is the balance the right balance? When we looked at our overall portfolio exposure to emerging markets, before we divested India, we had about 40% of our AFFO that was exposed to the fluctuations you get from currency issues and macroeconomic conditions in emerging markets. We thought that was too high. People value us because of the reliable long-term cash flow generation, the growth that we can see.
When you get too much exposure in those emerging markets, you see a lot more volatility in your earnings as a result of that. That is kind of the philosophical thing that we were looking at. India, in particular, was a challenge for us because a lot of the things that we thought would play out in that market when we bought it did not play out. It ended up having mostly captive tower companies, which changed the market dynamics. The terms and conditions, my favorite thing to talk about, Ric, the terms and conditions that evolved there were not conducive to the long-term growth profiles that we saw other places. You had well-capitalized captive tower companies, so that also decreased some of the opportunities to deploy capital there in the right way. We also were exposed to a customer who was financially troubled there.
Because of that, we had some non-payment issues one year. We got paid the next year. Again, that volatility in it. For us, the way we look at portfolio management is, is that portfolio worth more in someone else's hands? If it is, then they should be willing to pay us more than what we think it's worth in our hands. That's what happened in India. We were able to sell to an incumbent who had an advantage there. They already had a partnership with the most dominant carrier there. They already had a presence there. They can better monetize that than we could. It made sense for us to divest it. It fit in with this long-term vision of improving the quality of cash flow. That's a mantra you'll hear from Rod a lot. You'll hear it from me.
We're trying to improve the quality of our cash flow because that's what we think is the most desirable aspect of being a REIT and being a reliable investment that grows.
When you think about allocating new capital, because one of the great things about the tower model is you produce a lot of cash. The question is, what do you do with all that cash? What is the right leverage? What is the dividend rate? What do you do with the excess?
Yeah, absolutely. The way we think about the investment is, first of all, where we're going to put it is important strategically. Because we have looked at that balance in our portfolio, ex-India, we still have about 25% of our cash flow exposed to emerging markets. We think those emerging markets offer great growth opportunities for us over time. We think it's appropriate to have some exposure. We still think 25% is probably a little high. We're allocating more capital toward the developed markets. That's not trying to message we're going to sell stuff. That's just saying that we're going to invest more in developed markets. As those grow over time, the emerging markets will become a smaller percentage of the portfolio over time.
In terms of where we allocate capital, we've worked really hard over the last 18 months or two years to get a lot of capital flexibility. After we had purchased Telxius and CoreSite, we were over our target leverage range. We had a commitment to get down to under our target leverage range.
Of 5.0000?
$5.000. And so we took some tough decisions last year to get there. We cut back on our internal CapEx programs. We paused our dividend, which was a very tough decision to make, paused the growth in our dividend for a year. We made a number of moves in terms of terming out debt on our balance sheet to really get down to where we have flexibility there. The reason we wanted to do that is to make sure, especially in kind of uncertain times, that we can look at every incremental dollar of investable cash and allocate it among kind of the five uses that we see. We have M&A, our internal CapEx program, further delevering, stock buybacks, and dividend payments. The way we think about those is we need to create the most long-term shareholder value. We're not looking to drive short-term catalysts.
We're looking to drive long-term shareholder value. Rod and I are very much in agreement that it's a math equation. We look at each opportunity when it comes in, and they compete against each other. If you see us buy towers, we think it's because they're going to give us a better return than buying our stock. If you see us incrementally invest in CapEx internally, it's because we think it's better than buying any M&A that's out there. That's a really dynamic opportunity to allocate capital because we don't have a strategic imperative. We've gotten the scale we need in the markets that we're in. That's been something we've worked really hard to get to so that we can create the most value.
If you think about the M&A equation out there, a lot of times there's books available in Europe. How do you think about kind of price, growth rates, and quality of assets, terms and conditions? How do you think about M&A opportunities around the world that might be interesting or might not be as interesting in the current environment?
Sure. The first lens is our strategic imperative is to invest in developed markets. That is where we are going to be focused. I have got M&A teams that like to buy stuff. You are going to see them involved in every process because that is what we are doing.
You look at every book.
You're going to look at everything, right? There's nothing that's come across Rod's desk of any scale that's compelling right now. It is part of it is just looking at where it is, what the price is, and what the terms and conditions are, and how constructive the market is. We get a lot of questions about Europe because there are things being sold in Europe. You've got to break Europe apart. It's not one megalith. Each individual market has its own telecom industry. There's going to be different growth aspects that you have to evaluate there. We feel really good about the portfolio that we bought that's predominantly Spain and Germany. We have a small presence in France. We were very patient. We passed up a lot of deals.
As we're looking at the stuff that's coming available, some of those deals are recycled. They didn't buy them the first time. They don't know why to buy them the second time. Some of those deals are just in markets that we don't think are constructive for the long term. Some of them don't have the right terms and conditions. I'm hoping that changes. I hope that we do find opportunities to further increase our scale in the right place at the right time at the right price. It still has to be better than buying our stock. That's kind of hard to do these days. That's really how we think about it.
I think people in the audience like hearing that too. It's like there's opportunities here for your own stock. You're also a data center company. Let's touch on that for a second, and then we'll come back to the tower side. About three and a half years ago, you bought CoreSite. So it's not new since last year. Some of the valuations have been new. Data centers have been on a tear. AI probably helping with some of that. Pricing power helping us. Walk a little bit through data centers, ballpark 10% or so probably of you guys.
It's a little bit less than that. It's kind of high single digits in terms of our overall portfolio. When we bought CoreSite, the strategic rationale behind that was that we see that we're always trying to look to where the puck's going, skate to where the puck's going. We think that edge data centers will eventually be something that drives activity on towers. We were starting to work with our innovation team and some of the ecosystem partners on that. We're trying to figure out what does this look like and what creates value here. We dropped a couple of shelters on sites, took a cable back to a data center, talked to partners about what you need. What we realized was you can't just drop a shelter on a tower.
You've actually got to connect that to an ecosystem of partners that's going to feed that use case. When we were trying to work with data center companies, including CoreSite, we weren't getting very far with that. What we realized is there's going to be a value transfer for connection to the ecosystem. We said, if we're going to have a right to win in this space, eventually we're going to have to control that interconnection ecosystem. We didn't buy CoreSite with a big bet on that. When we valued that acquisition, we did the underwriting just based on the core business and said, is it worth what we're going to have to pay for it? Can we grow it? Will it be accretive to our business? The answer was yes. There's not a penny of revenue in the underwriting for edge.
I look at it as like a free option on the edge for us to be the person that has the right to win there. In the meantime, that asset has performed phenomenally. AI was not really a thing. Machine learning was, but generative AI did not exist. We have had two consecutive years of record sales. We have also had more pricing power because of the supply and demand dynamics in all those markets. We are able to still curate the customer mix that we did before to feed the ecosystem that gives us a competitive moat, low churn, high mark to market. That business is performing phenomenally well. I do get asked, why do not you sell it? The answer is I am looking at long-term value creation. I still believe the edge is going to evolve. It is a little bit later than we thought.
We thought it was going to be a 2026 and 2027 event. It is not. It is going to be a little bit later. Everything that we are working on, the people we are talking to, are still working on it. They have just slowed the timeline a bit. I still think that there is a lot of value creation to be had there. In the meantime, our mandate is to grow that business as much as it possibly can, increase the value there. As long as we are maximizing the value of that asset, that is what our shareholders should care about.
At some point, if the edge does not materialize, and I am not going to put a time limit on myself, but if we are looking out and we say, you know what, this is not going the way we thought it would, then as portfolio managers, we have to ask ourselves, does it still make sense to be part of us? In the meantime, we are going to create a ton of value by growing that business and feeding it. I mentioned flexibility before. When we set up our private capital structure with CoreSite, one of the reasons for doing that was to give us flexibility there. CoreSite can grow as fast as it needs to grow, and we can choose to invest American Tower capital, or we can ask our private capital partners to put some in. Frankly, we did that in Q1 with a separate JV for DE3.
That is us taking advantage of that capital flexibility that we built into the model. I feel great about the asset, how it is performing. I think it is way outstripping what I thought it was going to because of AI, but we still would have hit the business case without AI. It gives us a real option to be the player that gets to win at the edge when that evolves over time.
It is a U.S.-only strategy.
It's a U.S.-only strategy. The edge is going to develop here first. The business model will develop here first. If we can prove that out and make money, we'll figure out if it goes somewhere else or not. For now, it's really focused on how do we maximize the value in the U.S.
Let's come back to the U.S. On the tower side, ConnectX, the WIA Industry Association, had their conference a couple of weeks ago in Chicago. A lot of private tower companies there. They were very bullish on U.S. leasing. They're seeing not just green shoots that we were talking about a year ago, they're seeing really strong applications, dollar terms. Walk us through what you're seeing. One of the tones at that ConnectX meeting was really a lot of new colocations versus amendments. Help us understand in the room why that might be important.
I'm glad that everybody else is finally starting to get on the wagon. We've been talking about this for two years. We saw an inflection last year where we saw the pause that everyone talked about ending.
A pause in the growth.
A pause in the growth of the development of new networks. We have had five sequential quarters of increasing applications coming in. This is nothing new to us. We saw this coming. We knew it was happening. We have seen it over time. I think when you think about some of those private guys, they have very small portfolios with very low tenancies. They are going to see a higher percentage of their contributions from new leases. Some of those folks have portfolios that you cannot monetize the amendments on anyway. They are probably not going to talk about those. If you look at our portfolio, what we have said publicly is on the three major carriers, one of them has deployed mid-band 5G on about 85% of the sites. One is closer to 70% and one is a little bit under half.
That implies there's still a long runway of activity to get to that high 90% of mid-band 5G that we expect to be seen over time. We think there's a lot of pipeline there. We are seeing more new colocations. That comes in really three flavors. Some of it is normal fill-in. When you build in the first phase of a network and a new technology with a new spectrum band, you're going to have holes. It's just natural. You have to fill those in. That usually comes in new sites. The second area that we see is people are painting the map a little bit more. There are some regulatory requirements on some carriers. Some are doing it for strategic reasons. You're seeing people push out into areas they were not in before. We are seeing some activity there.
The third area, which I'm really excited about, is we're starting to see densification activity. Now, the early phase that we see of activity is before applications, before services come in, is information requests. They say, hey, I'm looking at this area. What heights are available on your towers? What's the structural capacity? Are there any barriers on zoning or landlords? We're getting a lot more of that tied to planning for densification. That's exactly what we thought would happen at this phase in the 5G build-out. We're excited about the activity levels that are out there. For us, it's been a steady ramp over five quarters. We think we're getting to a good kind of steady state level on it. We're seeing a little bit more in terms of the colocation mix. We still have a lot of amendments to do.
I'm not expecting a big flip or anything like that.
Okay. One of the more negative things in the news just literally the last few days has been DISH.
I haven't heard that.
No. You have the big three wireless carriers, AT&T, Verizon, T-Mobile. You have the big three public tower stocks, American Tower, Crown, and SBAC, and some large privates and smaller privates. DISH is a very distant, to be blunt, fourth operator in the wireless world. They stopped making an interest payment on Friday. They announced another one Monday. They were not going to make an interest payment. Walk us through how you protect yourself against what might happen to DISH and what kind of the range of outcomes are.
I do not like to talk about individual customers, but I will in this case a little bit because it is such an issue. What I think about DISH as a customer, I think about it, I am not thinking about it from trying to invest in their stock. I am thinking about it from a vendor perspective.
Are you going to get paid?
Am I going to get paid? Is the check going to clear?
Yeah.
They need the network they built to protect the spectrum, which is a hugely valuable asset for them. I expect them to do everything they can to keep the network running, to keep the spectrum. I expect to get paid. When I look at their balance sheet and I look at the actions they have taken, I expect to get paid. There is a lot of speculation out there about them selling spectrum and things like that. If they sell spectrum they are not using, that gives them more cash to pay me. They are not using it on my sites anyway. Maybe somebody else would deploy it and I could monetize it. When you think about how you protect yourself, I am a lawyer. I do not know if I mentioned that. I always try to make sure that we are very careful in our contracting.
are certain things you cannot protect against, like bankruptcies and things like that. That is what it may be. I am not losing a lot of sleep on that, right? I expect to get paid. When you think about our growth, there is a component of DISH in our growth. The only thing we have incorporated into our growth algorithm for our kind of guidance we gave for multiple years is the contractually committed minimums under the contract. I am not banking on anything more from that. I do expect to get paid. If something happened, I can size the exposure for you. DISH represents about 2% of our global revenues, about 4% of our U.S. revenues. In a worst-case scenario, that is the exposure. I do not anticipate the worst-case happening. I expect to continue to get paid.
I think that's how this is going to play out.
Your contract term probably has a lot of years left on it.
We haven't disclosed exactly what that is, but we're okay for a while.
Typically, master lease agreements would be at least five, seven, or 10 years, and they're somewhat into a process.
Generally speaking.
Yes. Okay. One of the other questions we get a lot, it came up yesterday in one of our meetings, that, hey, how come the rating agencies do not appreciate that towers are a really good model? It is because there is concern from people outside of the world, outside of the wireless world, of what is this whole satellite thing? Is not Elon Musk going to come in and just make everybody's cell phone go away and make towers go away? Help us understand, you have an investment in ASTS . Help us understand how you view satellites' role in this ecosystem and what it means to wireless and towers.
We bought the stake in AST to get a board seat there to have a front row seat to what's happening there. If there's any threat, we would know about it. There's no threat. I'll be really clear about that. There's no threat from satellites to towers. Satellites are a great additional component to the network. They're going to satisfy the need in places like rural Montana. I don't want to build towers in rural Montana. It's going to fill the need in sub-Saharan Africa where we don't cover. I don't want to build towers there. When you look at just the physics of spectrum and how much throughput you can get, even if you took every available megahertz of spectrum that exists and put it on satellites, you still couldn't meet the needs for people. It would be a lot more expensive.
Macro towers continue to represent the lowest-cost solution for providing the data throughput that people need. When you think about the densification we're talking about in the U.S., the reason they have to densify is they need to provide more throughput. They have to reuse that spectrum. There's not enough spectrum to just add it to the existing towers and get there. They have to split that spectrum among more cell sites. You'd have the same phenomenon with satellites. It's a good complement to the networks. It's going to help my customers give their customers better service. I think it's probably going to create monetization opportunities for our customers and others in the ecosystem. I think it's a good thing. Who knows?
It might even give us some upside because you might be able to see where there's a data intensity from a satellite that says, hey, go put a tower here. We didn't think we needed one. It is no threat.
Good. Something else that changed from the last time we were here at Nareit, tariffs, macroeconomic, geopolitical, all that stuff.
Yeah.
Talk us through how you view what's happening in the broader scheme, what it means specifically for American Tower.
For me, it just spells a lot of uncertainty. That is really one of the reasons that we have focused on flexibility. That is one of the reasons that we have focused on making sure we have a fortress balance sheet, that we have the optionality. We got our floating rate percentage down to low single digits. We are kind of in a good position no matter what happens. The tariffs do not directly impact us in a significant way. I mean, we buy some things that might have tariffs on them, generators, things like that. That is a small portion of our overall capital plan. Right now, we are not seeing any near-term impacts for that. Longer term, I think it depends on how it affects our customers. I need healthy customers. If what they buy costs more, there could be some negative impacts there.
We do not know how that is going to play out over time. A lot of the impact of the tariffs and the macro uncertainty has to do with our international business and how that affects the FX rates. Quite frankly, when the dollar devalues, which is happening, I have not looked today, but yesterday it was still devaluing, that actually makes the FX a tailwind instead of a headwind. That actually helps in the translation back. There is not a huge impact on the core business. One of the reasons we started talking about the core business in our last earnings call, we put a slide in there kind of laying that out, is to help people understand what is the health of the actual underlying business and what is the variability coming from FX and interest rates and things like that.
Really the biggest impact for us is FX and interest rates, a little bit on the cost structure, but it's manageable. Other than that, it's how it affects my customers.
Great. For people in the audience, we hear steel tariffs. You're probably not building a lot in the United States.
We're not building a lot in the United States. It makes what I've got more valuable because you can't build another one.
Right. It makes the competing concept an even tougher model too.
Exactly. Again, it's not a big mover for us because of the scale that we have. Most of the CapEx that we're doing is smaller augmentations on those existing towers.
Right. One thing that seems to continue is that private multiples, kind of an NAV concept, private multiples are staying higher, feels like low, mid, high 30s, even 40s depending on the towers and terms and conditions. The publics are in the 20s. Why is there the dichotomy of that?
I think there's a few reasons for that. I think one is I think that some of the private capital values the model and looks at the long term on it. They're not looking at a short-term interest rate. They're not looking at short-term carrier dynamics and things like that. They're looking at what's that going to grow over time. I do think that there is an undervaluation in the public market because of the macroeconomic conditions. I also think that there's a little bit of irrational exuberance sometimes in the private markets. Not every tower is created equal. The growth factor on that tower depends on a number of things. How desirable is the location? What are the underlying terms and conditions with the anchor, meaning can you monetize the amendments with the anchor tenant? What's your escalator? Things like that.
I think that sometimes private capital looks at public tower companies and just assumes that everything's going to grow in line. It's a little bit harder around a tower company than people realize. I do think there's some irrational exuberance in there as well. We're seeing a little bit of moderation in some of that. We've seen a couple of portfolios that are not trading for what people thought they were going to. Might have gotten pulled, might have fallen through on that. My hope is that irrational exuberance tamps down, creates more opportunities for us. We'll be there to take advantage of it. The way we underwrite any acquisition is with the business plan per tower. Even when we bought or subleased 11,500 towers a few years ago, I had 11,500 sales plans created for those.
We would have an idea about what that's going to look like. I think that's the kind of discipline you have to have to not overpay.
You touched on the beginning that you held your dividend flat, no growth. Now we are seeing growth again this year. Walk us through what people should think of as the dividend growth part of the story.
Sure. As a real estate investment trust, we're required to dividend out 90% of our taxable income. We believe that the most tax-efficient way to do it is to pay out 100% of our taxable income. Subject to board approval, that's kind of our intent to do that.
From the QRS side.
Yeah. If you think about our AFFO per share growth, that should roughly align with our taxable income growth. You could expect, all things being equal, for us to have a dividend growth rate that kind of mirrors the AFFO per share growth rate. There is some variability you can have with throwbacks and pull forwards and things like that. There are some things that might not affect it. Like when we sold India, that was dilutive on an AFFO per share basis, but it was not part of the REIT, so it did not affect the taxable income. There is a little bit of a disconnect. Broadly speaking, you should expect our dividend to grow in line with our AFFO per share, subject to board approval.
Obviously, interest rates play into that. FX rates play into that. If we think about the business model of a tower company with the mix of assets that you have and data center assets that you have, what should people think of as kind of a targeted range of what AFFO per share might grow over a long time?
Yeah. So the algorithm that we've laid out for folks says that our business model supports mid to high single-digit growth, even absorbing some impact from FX and interest rates. Now, you've got to make some assumptions in terms of what the interest rates and dividends and FX are going to be. We put a chart in that earnings. I'll just kind of walk through the 2025 numbers because I think that's instructive about how to think about the longer term. If you look at that chart, I'll just do it from memory here. Our U.S. business on an organic growth basis is growing at about 4.3% this year on organic tenant billings growth, plus we have a little bit of increase from services business. That translated into what we call a core growth rate of about 6% of additional growth.
Our emerging markets segments, our international segments contribute about 2% of growth on an FX neutral basis. The CoreSite's growing faster, but it's a smaller piece. It contributed about 0.5%. You add all that up, and the core business is growing at about 8.5%. FX was pretty significantly negative for us this year. In particular, Brazil had a pretty big devaluation last year. That cost us about 2.7% of growth this year. We had interest rate headwinds because we were refinancing very low interest rate debt at about 1.7% this year. This year, at the midpoint of our guidance, the AFFO growth rate's about 4.4%. The core business was in mid-eights. We put that in there to kind of illustrate that the core business is healthy. We're writing a lot of new business.
We're organically growing that business. We're working through the churn in various markets. We're getting to that place where it supports that high growth. You have to make your own assumptions about what FX is going to do over time and interest rates. Now, we're coupling that growth. I do want to mention this. We've been very disciplined about seeking cost savings. Over the past two years, we were able to get net reductions in SG&A. Last year was about $35 million. This year, at the midpoint of our guidance, it's an incremental $20 million. That's net reductions. That's absorbing the inflation, cost of raises, etc. We're doing that in a sustainable fashion. That's really as we've done some automation, kind of reshaping our workforce in line with our new strategic priorities, etc.
Earlier this year, I named Bud Noel as the COO of the company to focus on the rest of our cost structure with the goal of bending down the growth rate of the rest of the direct cost curve to always keep that growing lower than our revenue growth base to keep that margin expansion on the tower side. When you kind of couple all that together, we think that's very supportive of a sustainable mid to high single-digit growth rate over time.
Great. Thirty seconds. What do you want to close with? Anything else you want to make sure we hit?
Look, I would just.
Thirty seconds. You got it.
Yeah. I would just reiterate that towers are a great investment for now and the future. As long as people keep using their cell phones and mobile demand keeps increasing, people need to put more stuff on towers. 5G will continue to be deployed across the globe. You will get densification. You will get new use cases. 6G is just around the corner. The standards are going to come out in 2029. We will be deploying shortly after that. This cycle through every G continues to build. We continue to see a long runway of opportunity ahead.
Steve Vondran says it is the BBE best in business ever.
It is the best business ever, Ric.
Thanks. Appreciate it.