Welcome everybody. The tradition continues. We don't have 51 seasons like Saturday Night Live does, but American Tower, and Raymond James and myself, we started doing these presentations at Nareit when American Tower converted in 2012. We were just doing the math. We've been doing this basically six , 14, 15.
14 years, 15th time, I think.
Exactly. 15 x. Actually, the dirty little secret was, before you converted into a REIT, we were still coming to Nareit before Tower companies converted to REITs, we couldn't get a room.
Don't tell Nareit that. They're going to charge you for those past meetings.
We would meet in the restaurant and say, "REIT investors, you need to get to know Tower companies because they're coming, and they're going to be big." Certainly that's played out. You guys are some of the largest group of real estate companies that are out there in the Nareit universe. Today, Steven Vondran's joining us, CFO, CEO, sorry, of American Tower. I'm Ric Prentiss, by the way, sorry about that, Head of TMT research at Raymond James. My definition of TMT: telecom, satellites, media, but more importantly, towers and digital infrastructure. Steven, thanks for coming today.
Thanks for hosting us yet again, Ric.
You betcha. I want to start with, on the 1Q call, you guys talked about how you're feeling this is the strongest strategic footing and setup you've seen in a decade. You've been at American Tower a long time, just like I've been at Raymond.
26 years.
Yeah. We've seen a lot.
We have.
We've lived through this birth, boom, bust, and now rebirth of the Tower industry. What do you mean by the strongest strategic footing, and how do you square that with the stock performance?
Yeah. Thanks, Ric. We've been really focused for the past few years on taking risk out of the business. There have been some headwinds in the business in various areas. When I think about where we are today, from an operational perspective and with our customer base, we're on the strongest footing because we've taken some measures to pull risk out of the portfolio. Our exposure to emerging markets is reduced. Part of that is because we divested India, and part of it is we've changed our capital investment philosophy to direct more of our CapEx toward developed markets where the majority of it used to go to the emerging markets. By doing that, we're reducing our exposure in the emerging markets.
We've also been through kind of a period of reset and repair in a lot of those markets, where some of the weaker players have churned out. Now the vast majority of our revenue in those markets is with the top one or two carriers at each market. We think we're largely through the churn events that have kept growth in those markets back over time and removed some of the uncertainty about the revenue stream. That part of the portfolio is much stronger. Likewise, in the U.S., while we don't like having churn from Dish, and we didn't like having churn from Sprint, those were two weaker players in the market, and it was a little bit more of a question mark. Now if you look at the U.S. revenues and the U.S. growth rates, it's underpinned by the three major carriers.
From a quality of earnings perspective, we've made a number of moves to dramatically increase the safety, the reliability of those underlying cash flows. The balance sheet, we've taken a number of steps on the balance sheet to shore that up as well. Where we sit today is we have the lowest leverage and the highest credit rating among all of our peers and less exposure to interest rate fluctuation than we've had in a long time. When I look at where we sit today, we have a very strong fundamental base, better than we've had in over a decade in terms of not seeing negative shocks happen. There are so many secular tailwinds that are going to promote growth in our business.
When I think about what's underlying our kind of long-term growth algorithm that we've laid out, it's really based on mobile data consumption in the U.S. Mobile data consumption in the U.S. grew at about 35% year on year last year, according to CTIA. It's expected to continue to grow at a pace that requires a doubling of network capacity by the end of the decade. That provides a lot of tailwinds to our business to provide more service to our customers, to get more bandwidth out to people. We also have things that could accelerate that because those projections are just current usage. It's downloading videos. AI is not really factored into that. To the extent that AI comes on devices in a way that's bandwidth intensive, that could accelerate those demand trends. 6G's just around the corner.
If you think about that, the standards are supposed to come out in 2029. That means deployments are probably going to be in 2030, 2031. That's not that far away. As we look toward the future, we see continued investment in the networks at a steady rate in the base case. We see a potential for acceleration for some of these other factors in it, and that's going to give us a lot of growth over the long term that'll continue to drive this business on a more solid base. When we think about that's the more solid fundamental footing. I also want to remind people we have CoreSite. We have a data center company that's not just a data center. It's an interconnection-rich, network-dense environment that gives us another high-growth vehicle. It's growing double digits in the U.S. with phenomenal returns.
Again, when I think about where we sit today versus where we've been in the past, it's a lower-risk business, has a lot of opportunities for upside, and that positions us well to create a lot of shareholder value in the future.
Help us square that with the stock performance. Obviously, interest rates are what they are, and you can't control them.
Well, we're interest rate sensitive. There's a high inverse correlation on that. That's part of it. There's been a lot of kind of short-term noise in the system, and I think people have to look past these short-term things. They're not material in the long term. Another way we've kind of de-risked the way we think about things is we churned Dish at 100%. There shouldn't be an overhang from that. It's out of the numbers, it's out of the projections. Everything that we're telling you guys we plan to do is ex Dish. Now, we're still going to litigate, we're still going to try to collect our money from those guys, but that's just upside from everything that we've said that's out there. I think that there's been some short-term noise that's kind of weighed on the sector. It's that, satellites, and the other stuff.
I'm sure you're going to ask about a couple of these. I'll just tee them up for you. I think that that short-term noise has really created some overhangs, and I hope that we're going to move past that and see past that. When you think about the dislocation between public and private multiples, where private capital is valuing towers at a much higher multiple, I think they're looking past the short-term stuff, and they're looking at it saying, "I don't care about this noise in the short term." I see 5G densification. I see AI. I see 6G. They're looking at that long runway of growth ahead, and that's why they're valued at higher than the public multiples are. Hopefully, we're turning a corner on some of the short-term stuff, right?
It feels like we are. It really feels like the tone this week at Nareit has been, maybe we are finding the base here, or maybe people are getting excited about where things can go. I guess being a wireless tower company, the signal-to-noise ratio. Signal-to-noise is the noise has been controlling it. Maybe people are getting the signal better now.
I hope so. We're trying. We're trying to get the message out.
Yeah. Let's hit one of those, because it definitely was a hot topic. Came up several times, but it feels like a shift is happening. Let's hit the satellite question.
Okay. My favorite topic, Ric.
I know.
First, when it comes to satellites, we have a good perspective on what's going on there. We made an investment in AST SpaceMobile in the early days to get a Board seat, which we still retain. When we talk about what's happening in the satellite space, we're coming from a place of some knowledge here. There's absolutely nothing we see in that space that poses a risk to our business model or our carrier customers. It is a complementary technology, it will supplement the networks, and there are some real positives for both our customers and towers that I'll touch on. When people express concern about towers being disintermediated by satellite, they're not seeing the physics of it. There's not enough bandwidth produced by the satellite networks to be able to replace towers in even lightly populated areas.
The place it's going to be the most effective are where we don't even have towers. If we do have a tower in a place that's that remote, it's certainly not going to be our top-performing tower. When we've looked at it and said, "In all these possible scenarios, what's the risk?" It's just de minimis. You won't even notice it if we did have an effect there. That doesn't mean we don't have to build towers in rural Montana and the Grand Canyon. Yeah, I don't want to build those anyway. From a risk perspective, I don't see it at all. From an opportunity perspective, though, I think it could be huge. The first area of opportunity I think the satellites provide is for my customers.
They're going to provide ubiquitous coverage in a way that they haven't been able to do it before, and that's going to enable new use cases. If you think about some of the what ifs that are out there, people have talked about using the 5G networks to control drone telemetry, or robotics and things like that. You have to have a ubiquitous signal to do that. They haven't had that in the past. Satellite will give them that. I think there are new use cases that can create new revenue streams for my customers that'll spur investment, that'll be good for us. The other thing that I think is going to happen in the satellite world is it's going to actually highlight the places where towers need to be built or where coverage needs to improve.
If you think back to 4G, when carriers first built those networks, they had some holes in their network, so they roamed on each other, and that was getting expensive, paying each other for roaming. We used to talk about roaming overbuilds in 4G. That was a driver of business for us. I think with satellites, you're going to see a similar phenomenon. There are places, at my house, you cannot get a text message out. There's no signal. No one's building it today, but once that satellite coverage is enabled, people are going to use it. They'll be roaming, being paid to the satellite guys, and hopefully, I can convince all three carriers to build that neighborhood, then.
They might have a site they could use, huh?
They could use my rooftop. I'll make it work somehow. Zoning's going to be tough, but I'll try. When I look at it, I just look at this being a complementary technology. It's going to help my customers. It could enable some new tower builds. For me, it's all opportunity. I don't see risk in it at all, and I'm glad to see some of it starting to shift a little bit here this week.
That's definitely been my sense is we came in the beginning of this week, there was still the fear factor, and it feels like people are like, "Wait, this could actually, instead of being bad, satellites, it could be neutral, and it might even be positive." It feels like we've made some education this week.
I hope so. We're trying.
Great. On some of those opportunities, you mentioned drones and robotics and 6G and AI inference, upload, download, I don't think you hit yet, but we'll hit that as well. Some of this stuff was maybe going to be 5G. 5G, let's face it, has maybe underwhelmed. We've got fixed wireless, which has been a great use case. There's been a lot of stuff that didn't come in. Why will 6G be what's different?
I'm still hopeful the end of 5G is going to see some of this. If you go back to 4G, at about this point in 4G, 2016, we hadn't seen the social media take off the way it did later in the cycle. I think there's still time for 5G. With 6G, when I read some of the new white papers coming out, Ericsson's got a great website that lists some of the benefits of it. I think it's creating new capabilities. It's not just more bandwidth, but it's new capabilities. It's spatial tracking, it's things like that. I think there are going to be new use cases, new revenue streams that support that. With 5G, what it really has done for the carriers is reduce the cost per gigabyte.
I think we lose sight sometimes of the fact that they need to keep producing more and more data to meet that burgeoning demand that we have. Without 5G, that would've been impossible to do in an economic way. I think 5G's been a success from that standpoint, and fixed wireless has given them new revenue streams. I wouldn't call 5G a bust. I would just call 5G maybe not as much as we were hoping the customers would get early on. As I look at 6G, it's just a different set of capabilities is what they're hoping to create with that.
One of the topics this week at Nareit has also been the edge. We talked about it years ago, and it kind of quieted down. It's back. What's exciting, and what's different about the edge, and what's it mean for American Tower?
I got very excited about edge at the beginning of 5G because mobile edge computing was something that was enabled by 5G, and I was wrong on the timing. It didn't happen as quickly as I thought it was going to be. It's going to happen, and I'm more convinced than ever it's going to happen, and I'm more convinced than ever that we have a right to win in that space. You're now starting to hear other people talk about it. The wireless carriers are talking about it. You're starting to hear some of the chip manufacturers talking about it. What is edge? That's a question a lot of people are trying to answer. I suspect that everyone's going to have their own definition for a while till we all agree on what it is.
The way we think about edge is it's where the wireless networks and the compute come together to enable low latency and to take some of the strain off the networks, both the wireless networks and the wireline networks, where you're backhauling petabytes of data. It's just not efficient to do that. The reason that we bought CoreSite originally is when you deploy something at the edge, it still needs to be connected back to a data center that has cloud on-ramps and kind of a wider compute capability. We think that controlling both ends of that gives us a right to win in that space. Now I'm not going to predict timelines again because I was wrong the first time, but it is constructive to hear wireless carriers, chip makers, cloud providers, all trying to figure it out. We have been experimenting.
In Raleigh, North Carolina, we deployed a data center on one of our tower sites as kind of a playground for folks. We've got some interesting learnings from that. There's a little bit more demand than I thought for some compute there. It may not be the edge use cases yet that are going to promote that wider ecosystem, but people are working on it, and people are thinking about it. I think we're going to see more developments in that, but I think it's undefined at this point exactly what use cases are going to be there, what that facility looks like, and when they're going to be deployed.
Yeah, makes sense. It feels like AI and inferencing is also going to play into what you need. Let's talk a little bit about downlink versus uplink.
One of the things that we think could be an accelerant in the back half of 5G is the adoption of AI. When you look at all of the mobile data projection, growth projections that are out there, they all have an asterisk on them that says, "Does not assume significant uptake in AI." That's the Ericsson report. It's some of the other projections that folks make. That's because today when you're using AI and you're on your device, it's typically text. You're chatting with ChatGPT. Maybe you upload a photo, but it's not really bandwidth intensive. We're not seeing a lot of machine-to-machine today in the AI. Now you're seeing it on the desktop, and I always believe that whatever's on the desktop today migrates to the wireless device tomorrow. I think that you will see these migrate.
When you start seeing more bandwidth-intensive uses of AI, it may change the architecture of the networks. Some of the early indications that we've heard from some technologists in the field that kind of monitor AI applications have said that they're seeing AI apps use 25% uplink versus traditional networks, which are architected to 10%-15% uplink. When you think about what the customers are going to have to do to provide more robust uplink, that's going to be beneficial for towers. Now, I think everyone's still trying to figure out what does that look like. It's not just adding more spectrum. There's actually a rearchitecture. Some of the customers have talked about that. They're trying to figure out how are they going to do that, and we're there to support them.
When I think about what's going to drive higher bandwidth adoption, what's going to drive more activity on our sites than we're anticipating in the base case, AI is certainly one of those.
One of the things that was headlined out there is the carriers, your tenants, your customers, several of them are focusing on convergence, putting mobile and fixed or broadband at least together. Some of them have said they want to cut CapEx to lower levels. How does that impact what you're saying here and the excitement you're feeling about where this industry is headed?
Sure. Well, they've all put kind of broadband and mobility at the center of their strategies. I don't think anybody's retreating from being a wireless carrier. When you look at their CapEx spend, that funds a lot of different things. It's not just equipment on towers. It's that, it's fiber, it's investments in the core, it's R&D. There's a number of things they're investing in. Even if they do take a modest reduction in CapEx, that doesn't mean they're not going to invest in their wireless networks and add equipment to towers. The best predictor of activity on our sites is mobile data growth because it's the stress on the networks that requires the carriers to upgrade those networks to meet their consumer demand.
While we do look at CapEx as a little bit of a leading indicator on it, there's not a perfect correlation there because they do have optionality on where they do it. They're not going to let their networks get bad enough to see subscriber churn and hurt their business for the sake of saving a few bucks.
You mentioned spectral efficiency can help this mobile demand satisfy it, leasing, but also spectrum. Let's hit spectrum for a second, because I always view that as a really nice indicator of what your business might look like in the future.
Sure. Well, let me just kind of reiterate. We're expecting the networks to need to double their capacity by the end of the decade. If you look at all the projections of baseline mobile data growth, not AI, but baseline growth, double by the end of the decade. We believe about half of that demand will be satisfied by new spectrum being deployed and technology upgrades in 5G. Every time there's a software release, you get more spectrally efficient. The other half is going to have to be solved through densification, adding more sites and more equipment to existing sites. When we think about spectrum, more spectrum is good for towers. It always is.
Yes. GFT, good for towers. We do have some spectrum that's going to come up for auction next year. It'll take a little time to clear it and get deployed. Some of that spectrum may get deployed initially with a software upgrade, but radios are not infinite. Even if they initially use a software upgrade for it, there's a limit to how many megahertz, gigahertz you can put through an antenna. There's a limit to how much traffic is going to be there. It's still a net positive for us because that'll promote more traffic. The more traffic that comes through there, the more equipment they need. Spectrum is good.
What I'm more excited about in the spectrum bill and kind of the pipeline is the identification of 6G spectrum, because the U.S. has been a little bit behind the rest of the world in identifying and clearing that spectrum. If you look at the Big Beautiful Bill, it's directed them to identify spectrum in that kind of 6 GHz, 7 GHz, 8 GHz range, which is predicted to be the ranges for 6G spectrum. That's going to go on towers. At that high of a frequency, it's not going to propagate as well. You're going to need more towers. You're going to need more sites. When I think about 6G, it's the opportunity to get more colocations on existing sites and maybe to build again. Spectrum is good.
The more we get, the better, and there's some that's identified, and I'm anxious for that to get sold, cleared, and come to market.
It's good to see the FCC get the authority to have auctions again. We've got an auction currently underway, a fairly small auction, to get that gear going again and get that machine running.
Absolutely. We need the spectrum pipeline to keep turning.
You touched on data centers. I want to come back to that for a second. Some people kind of forget you guys have got Core. Right now, data centers are trading at a higher multiple than towers. Personally, I believe towers should be probably trading higher. Walk us through what you see with the data center business, why you own a data center business, and how do you get full value for that?
Sure. Well, I agree with you on tower multiples, by the way. It probably comes as no surprise to anybody. Let me first distinguish what CoreSite is and what it is not. I do not even like calling it a data center business. It is an interconnection network-rich hub that lets people communicate to each other. It happens to also be a data center.
You've got to get an acronym out of that. I don't know.
I need a better name for it. If anybody has any suggestions, that'd be great. The reason I differentiate that is it's a different business. There's a lot of noise around, a lot of money flowing into hyperscale, which are kind of powered shells for single-use facilities. That's not what we do. What we do is we bring networks, enterprises, and cloud providers together in an ecosystem where they can trade data directly without having to go out over the internet and backhaul petabytes of data around. We're not a low-cost provider. We're a system that brings customers to clouds and clouds to customers, essentially. Now also AI inferencing is going in those facilities. That's important because that gives us a more competitive moat around it, a more resilient business.
It's a lot safer business, in my opinion, than some of the other stuff that's out there. The reason we bought CoreSite was for that interconnection environment. As we started thinking about the edge and what that looks like, we realized that anybody can drop a shelter somewhere and run a fiber cable to it, but that fiber's got to land back somewhere where it's connected to this rich ecosystem. We tried to partner with CoreSite before we bought them. We tried to partner with some of the other guys as well, and they wanted all the value to go to them instead of to the infrastructure provider. We think that by owning both ends of that gives us a right to win in that space when it evolves to the edge that we see coming eventually. In the meantime, it's a phenomenally performing asset.
Because that interconnection hub is the backbone of how people connect to each other, the AI inferencing is just as dependent on that distribution as the cloud on-ramps were, and so we're seeing tremendous amounts of new business in that. We're dedicating more capital to it. We're building it as quickly as we can. It's a great use of capital. We're continuing to underwrite mid-teens or better stabilized returns, and those get better over time. Those actually get up into the 20% on most of our facilities as they age over time. It's a very low-risk business for us. It's not a huge part of our business. It's about 6% of our attributable AFFO. We hope to grow it bigger than that. In the meantime, it's a double-digit growth engine, and it helps underwrite better growth for us for the long term.
Does it feel like the market's not recognizing the value there, too? Just like public markets are not recognizing what the value of a tower portfolio might be.
We are certainly trying to get the message out on that, Ric, and we do talk about it. We get asked that question. I don't know what all goes into the valuations. I don't always understand where the stock price trades with the current news on it. We are certainly trying to get the message out, and we're trying to provide more information on it, talk about it a little bit more. Again, I think if we can grow it to a larger percentage of the business, maybe people appreciate it a little bit more.
Let's go back to where we started almost was your stock performance. There's a large inverse correlation to interest rates. What does an interest rate environment really mean to your bottom line, AFFO, your fundamentals, and how you invest? Some other real estate sectors, the interest rates can really swing.
When you think about our core business, our interest rate sensitivity in terms of our AFFO is really just our debt stack. I'll refer back to the conversation I started with, which is we've taken a lot of that risk out. We've reduced short-term debt. We've been refinancing things that had a lower interest rate on them previously. We're getting to the tail end of the really cheap debt refinancing. You're starting to refinance stuff that had a higher handle on it. From a cash flow perspective, we've had some headwinds from interest rates. Those are moderating a bit, and those we believe, if interest rates stay where they are, will moderate over time. That's the biggest impact on our cash flow on it. When we think about underwriting our investments, it does affect our cost of capital and how we're sourcing opportunities there.
When we're looking at how to invest to create shareholder value over time, we're looking at what we think the right return criteria is on that. While it may affect our hurdle rates a little bit, that's not what's preventing us from doing things like M&A today. The reason we're not able to participate in that market is we're not finding the right opportunities that give us the right growth for the long term in the right markets with the right characteristics. I would say it's not really the interest rates that are keeping us out of that market. It's more just not having the right deals on the table.
Fundamentally, the leasing activity is driven by mobile demand, not driven by the economy not driven by cyclicality. It's driven by the addictive nature of a wireless device.
They're not addictive. They're just useful. They're great. Don't limit screen time. There's no reason to do that. If you look at the wireless business in general, we've been through numerous business cycles over our careers, and it's proved to be resilient. It's been a recession-proof investment. Investment goes with the technology cycles. You're exactly right. We don't worry about interest rates affecting demand. If you look at the demand from our customers, our current projections that we're putting out for everybody in terms of our growth rates represent a new business rate with the three carriers that's roughly in line with the average new business we've had even when we had six carriers and five carriers and four carriers. We see a healthy demand environment for new business, and we don't see that changing based on interest rates or really anything else other than mobile data growth.
When we think about the growth prospects, let's bring it all back up to the 30,000-foot view level. What should investors think that American Tower can deliver at a revenue and an attributable AFFO per share growth rate and for dividends as you look out over whatever period you're comfortable with?
Sure. What we've done is we've given you guys a long-term growth algorithm, and let me just walk through the elements of that quickly. When we think about what our business is going to deliver, we think we can deliver reliably over time, mid to high single- digit AFFO per share growth. The components of that are this. In our developed markets, we expect our organic tenant billings growth rates to be mid-single digits. That's the U.S. and Europe. In our emerging markets, it should be slightly higher than that. Africa is performing higher today. We've got a little bit of repair in Latin America, but we expect to get through that and get back to that higher growth rate for emerging markets. CoreSite, we expect to have double-digit growth rates over time. We're also going to be investing CapEx in new assets.
That'll provide some additional growth for us. We're also going to expand margins. I committed on our last earnings call that on the tower side, we will expand margins 200-300 basis points over the next several years. We may have a little bit of financing headwinds coming up, and FX is a little bit of a volatility piece there. When you add all those things together, that revenue growth should deliver reliably mid to high single digit AFFO per share growth.
That equates to dividend growth basically, too. A Board decision.
On the dividend side, the guide that we have there is that our policy is to dividend out 100% of our taxable income. Roughly over time, that should equal our AFFO per share growth subject to Board approval. That is how you should think about the dividend, is it should grow roughly in line with our AFFO per share.
Is AI, edge, or any of that stuff in that? Is that one of those asterisked items?
Those are asterisked items. That's upside. Our projections for that mid-single digit growth is based on the baseline case is business as usual. If there are events that change that for the positive, that could be upside from there.
Great. Two, one, zero. We're done. Thank you, sir.