American Tower Corp (AMT) — Q2 2023 Earnings Call Transcript

Good morning. And thank you for joining American Tower’s second quarter 2023 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website, www.americantower.com. On this morning’s call, Tom Bartlett, our President and CEO, will provide an update on our international business, and then Rod Smith, our Executive Vice President, CFO and Treasurer, will discuss our Q2 2023 results and revised full year outlook. After these comments, we will open up the call for your questions. Before we begin, I’ll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2023 outlook; capital allocation, and future operating performance; our collections expectations associated with Vodafone Idea in India and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning’s earnings press release, those set forth in our Form 10-K for the year ended December 31, 2022, as updated in our upcoming Form 10-Q for the six months ended June 30, 2023, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I’ll turn the call over to Tom.

Thanks Adam and thanks to everyone for joining this morning’s call. Consistent with our past practice my comments today will focus on our international segment which consists of a well-diversified, high growth portfolio of assets across key developed and emerging geographies outside of the United States. Before diving into our international operations though and in light of the recent excitement surrounding the potential arising from AI workloads, I'd like to spend a moment highlighting the demand we're seeing in our CoreSite data center business, where we've seen 9% year-over-year growth, in both revenue and operating profit for the first six months of the year. Following record levels of signing new business in 2022 and Q1 of 2023, we continue to see demand for data centers outstripping supply in our initial underwriting expectations, elevated pre-leasing in a pipeline that points to an extended opportunity for increasingly profitable growth. Each of these factors is contributing to strong pricing trends, and the ability to be selective in terms of signing new logos and expansions from existing customers, ensuring accretion to the value of the interconnection ecosystem and overall AFFO growth, particularly once we begin commencing the remainder of the record new business we've signed over the last year and a half. This is all before factoring in expectations for elevated demand from AI use cases. While much of the immediate demand in the market today is coming from hyper scale requirements, the longer-term opportunity for interconnection hubs like CoreSite is just as significant and is arising from several key demand drivers. First, we've already seen an acceleration in outsourcing to CoreSite as hybrid IT and multi-cloud access are becoming more relevant for continued digital transformation across all workloads. As enterprises increasingly leverage new generative AI models for business and customer applications, they'll need to deploy servers that require more power and cooling than on-premises data centers can typically handle. At the same time, we expect existing enterprise customers who are building AI into their products and operating models will expand their power and space requirements in CoreSite. With its flexible and scalable model and speed to market benefits, it is already well positioned to support these expected use cases today. Second, we're seeing today's cloud-enabled large language models requiring connections to proprietary distributed datasets used for training, which CoreSite, as an interconnection ecosystem with a nationwide distribution of cloud on-ramps, is well situated to serve. Finally, we see a significant incremental opportunity arising from the use of hybrid and custom large language models for training and inferencing, where low latency, high power density, and distributed high-performance compute is expected to result in elevated activity across our existing CoreSite campus footprint. Over time, we see a potential for these dynamic requirements to push demand for a more distributed compute infrastructure for which our CoreSite portfolio and ultimately our distributed footprint of land parcels on the Tower sites may be ideal locations over the long term. Simply put, the ongoing demand trends in the data center space and the emergence of generative AI use cases are providing American Tower, from CoreSite, an opportunity to play a central role as an infrastructure provider against a backdrop of technology evolution that's expected to drive a step-up function in increasing computing power demand. As a result, we see a compelling opportunity to continue delivering the industry-leading yields on invested capital that CoreSite has historically achieved, which Rod will touch on more later. With that, let's turn to our international Tower business, where our objectives have remained clear since we began expansion over two decades ago, leverage our proven capabilities and expertise to selectively invest in the world's largest free market democracies with regulatory structures that are supportive of the neutral host tower model, healthy competitive wireless industries, and high-quality assets and counterparties. At the same time, we focused on investing in markets that are in various stages of network technology development, and where we see a path to establishing nationwide scale. By bringing these factors together, we believe we could both augment and extend our growth trajectory, leverage our platform and expertise to create incremental value in selected markets, and add to an already compelling total return profile for American Tower shareholders. As a critical component of this portfolio management and capital allocation program, we measure and analyze our assets on an ongoing basis to ensure the marriage identified and our initial investment underwriting remained consistent today. As you've seen recently, such evaluation has led to select divestitures including our Mexico fiber business and operations in Poland and a strategic review of our India business. The takeaways from these analyses, together with our on-the-ground experiences across our global business, continue to shape and evolve our approach to capital allocation. And the criteria we use to support ongoing capital investment and the setting of appropriate risk-adjusted rates of return. Today, we have a leading international portfolio of nearly 183,000 sites that are contributing approximately 45% and 36% towards consolidated property revenues and operating profit respectively, and are expected to deliver more than 8.5% in total tenant billings growth, including greater than 6.5% organic growth in 2023. The secular demand trends driving our international growth remain consistent. Similar to the U.S., industry estimates forecast roughly $35 billion in carrier CAPEX across our non-U.S. markets in 2023 and forecast suggest mobile data consumption is set to grow in the 20% to 30% range on average in these markets over the next several years, which would mark a continuation of the trends we've seen over the better part of the last two decades. Globally, we've anchored our portfolio in key markets, which are in varying stages of network development relative to that of the U.S., where some level of 5G coverage deployed over a combination of low and mid-band spectrum has reached approximately 95% of the population. In Europe, that number is closer to 60%, while Africa and Latin America are closer to 7% to 8%, suggesting a long tail of 5G and other next-generation technology investments requiring significant incremental network density and sell-side points of presence. Critical to our expansion strategy has been our discipline in establishing appropriate contract structures with the leading companies in each geography. Although we've experienced certain consolidation-driven churn events across our international portfolios over the past several years, we believe that through our proactive steps to increase exposure to leading multinational counterparties, we strategically reset our international customer base, enhancing the quality of our earnings and predictability of growth. In fact, in Africa, approximately 90% of our Q2 property revenues are derived from market leaders Airtel, MTN, Vodafone, and Orange, as compared to roughly 80% five years ago. In Europe, we similarly see over 80% of property revenue supported by Telefonica, Orange, Vodafone, and Deutsche Telekom versus less than 60% at the same time in 2018. In Latin America, which has a more fragmented customer base, given our operations across eight markets, we're still generating approximately 75% of our property revenues from Telefonica, AT&T, American Mobile, and TIM, up from a little over 60% over the same time period. In addition to focusing on partnerships with market leaders, we've underwritten attractive leasing terms, including real estate REITs, and CPI-linked escalators in the vast majority of our contracts outside of India. This disciplined approach to securing growth and critical contract terms is evident in our results in Q2, with a combination of gross organic new business and our escalator generated just under 13.5% growth in aggregate for Latin America, Europe, and Africa, roughly 300 basis points over our trailing five-year average. This reflects our ability to complement new site leasing with attractive amendment growth across our international operations, as we've done in the U.S. historically. In fact, looking again at Latin America, Europe, and Africa, of the roughly $100 million we've generated through colocation and amendment growth over the past 12 months, around half, both in each region and in the aggregate has come in the form of amendments, illustrating our ability to monetize various stages of network investment cycles and our success in franchising our proven U.S. tower model throughout our global operations. There's perhaps no better example of the benefits of remaining disciplined in terms of contract structure in Europe, where over the last several quarters, CPI-linked escalators in Germany and Spain have provided a boost to our organic growth profile. And where again, roughly half of our new business growth has been driven by 5G-related amendment activity on existing sites. In 2023, these factors as well as a healthy leasing environment are coming together to derive an expectation of approximately 8% organic kind of Billings growth in Europe, including an expectation for an acceleration in growth from colocations as we exit the year. As the 5G investment cycle continues, our contract structures along with our work to develop leading operating capabilities in the region, and an ongoing expectation for low churn should allow us to deliver solid organic growth in the region for the foreseeable future. Furthermore, the importance of the scale we built as a distinct competitive advantage has never been clearer. To our global diversified presence, and decades-long track record of operational excellence, we've established American Tower as a trusted, strategic partner for our customers. This is exemplified by our new build program, where we partnered with leading carriers to rapidly deploy new sites, which has driven some of our highest returns on invested capital. In fact, since we began expanding internationally, we have built over 45,000 international sites, which are achieving a NOI yield of approximately 25%. And approximately 65% of these sites have been built since the start of 2017 alone, shortly after we crossed the 100,000 international site mark. Nearly 8000 of these sites have been built in Africa, where our scale presence and strategic relationships with key wireless operators have afforded us the opportunity to build several thousand new sites in recent years that typically deliver mid-teen yields on day one. As we continue to augment our scale in key markets across the region, 4G investments, which are very much in the middle innings today, are driving compelling organic tenant billings growth and our existing assets, including an expectation for greater than 11% growth in 2023, of which approximately 7% is coming from colocation and amendments, the highest of any region. And as the 4G cycle rounds out over the next few years, and we move toward 5G and the densification requirements that come with it, we expect capacity utilization across the assets we've built over the last several years to result in ongoing compelling growth. Meanwhile, our regional scale and leading capabilities have resulted in the opportunity to invest in accretive platform extensions, such as our power as a service program in Africa. As you'll see in our recently published sustainability report, through 2022 we've invested approximately $345 million in this program, primarily in solar arrays and lithium-ion battery solutions. As a result, we decreased annual diesel consumption at our sites in the region by an estimated 43.5 million liters when compared to business-as-usual operations and we've reduced our greenhouse gas emissions intensity per tower by 21%, against our 2019 baseline. Based on the demand to extend this program, it seems clear that this solution provides compelling differentiated value to our customers. At the same time, the program advances our progress toward meeting our science-based targets and supports our customers' network sustainability goals. Meanwhile, similar to our new build program, these investments have been among the highest return opportunities we've seen. And as more power-intensive 5G begins to be deployed at scale more broadly, we believe we'll be well positioned to continue extending the reach of this high-return program to new geographies over time. Finally, we're more focused than ever on leveraging the benefits of our scale to maximize the margin profile of the business. For example, through our Global Business Services Organization, we've invested in standardization across lease management and other transactional processes that's driving both significant increases in productivity and run-rate savings on an annual basis. Through our procurement organization we will begin to truly leverage our scale as a buyer to reduce input costs in our build-to-suit programs, drive cost optimization when it comes to power and energy components, and work with other critical vendors in our supply chain to realize incremental efficiencies. And while we're beginning to see the benefits of these and many other initiatives in our operations today, we believe we have a significant opportunity to transform our organization into one that is truly global and capable of maximizing the operating leverage inherent to the business to expand on an already attractive margin profile. In summary, we believe our global platform of assets is exceptionally positioned to benefit from what we expect to be a massive wave of incremental infrastructure demand required to support the technological advancements and network capabilities we're beginning to see in the market today. By complementing our U.S. platform with a continued disciplined approach to international growth and a focus on leveraging our scale, capabilities, and learnings from over two decades of international U.S. operations, we can provide compelling growth and margin expansion, and augmented return opportunity for investors, and a differentiated value proposition for our customers for many years to come. With that, I'll turn the call over to Rod to go through the quarterly results and updated outlook.

Thanks, Tom. Good morning. And thank you for joining today's call. As you saw in our press release, we had a strong second quarter reflecting a continuation of resilient demand for our diversified global portfolio and solid operational execution across our organization. Before I walk through the details of our Q2 results and revised full year outlook, I'll start with highlighting a few items from the quarter. First, we continued to strengthen our balance sheet, raising approximately $2.7 billion in fixed-rate debt through a combination of Euro and U.S. dollar-denominated senior notes at a weighted average cost of 4.9%. As a result, we decreased our exposure to floating rate debt to approximately $6 billion or less than 15% of our total outstanding debt as of the end of the second quarter. Next, the momentum experienced across our global business in Q1 continued into the second quarter, with outperformance across new business, escalations, and churn, resulting in another quarter of over 6% organic tenant billings growth, allowing us to raise our full year expectations across our Latin America, Europe, and Africa segments. We also had another strong quarter at CoreSite where elevated leasing volumes since our acquisition continued into Q2, and were further supported by solid pricing trends, high renewal rates, and interconnection growth of approximately 10%, which together with our tower business drove property revenue growth of over 4% in the quarter. Complementing top line growth, and as I highlighted last quarter, we are maintaining a strong focus on cost management. Once again in Q2, despite an elevated inflationary environment, we kept cash SG&A roughly flat year-over-year, helping to support an adjusted EBITDA margin expansion of approximately 60 basis points to 63.1% or over 100 basis points when normalizing for VIL reserves. Finally, we continue to engage in active discussions with a focused group of investors around the potential sale of a majority equity interest in our India business as we assess strategic options in the market, and exercise we anticipate completing in the second half of the year. As always, we will remain disciplined and patient with the goal of achieving the best outcome for American Tower and its shareholders. With that, please turn to Slide 6 and I'll review our property revenue and organic tenant billings growth for the quarter. As you can see, Q2 consolidated year-over-year property revenue growth was over 4% or over 6% on an FX-neutral basis. This included U.S. and Canada property revenue growth of over 5%, international growth of nearly 3%, or over 7%, excluding the impacts of currency fluctuations, and over 7% growth in our U.S. data center business. In the quarter we recognized approximately $35 million in revenue reserves associated with VIL short payments, as collection patterns in Q2 were relatively consistent with that of Q1. Moving to the right side of the slide, we achieved another strong quarter of organic tenant billings growth, which stood at 6.2% on a consolidated basis. In our U.S. and Canada segment, organic tenant billings growth was 5.1% and approximately 6.5% absent Sprint-related churn, including another quarter of elevated colocation and amendment growth contributions of nearly $60 million. Our international segment saw outperformance across nearly all reported segments, primarily due to a combination of higher than anticipated colocation and amendment growth and continued churn delays, resulting in organic tenant billings growth of 7.9%, up from 7.5% in Q1. At a segment level, Africa, Europe, and APAC produced growth of 12.9%, 8.3%, and 5.6% respectively, each in acceleration off of Q1, with Africa representing a record for the region, APAC delivering its highest quarter since Q3 of 2017, and Europe demonstrating growth of over 575 basis points above its pre-Telsius average. In Latin America, we did see a modest deceleration of 5.4% as expected. Consistent with the last quarter, we continued to realize benefits associated with CPI-linked escalators across the vast majority of our international markets while a continued delay in anticipated consolidation-driven churn in Latin America has kept reported churn favorable to our initial expectations through the first half of the year. Finally, strong leasing trends across our international business have driven an acceleration in colocation and amendment growth contributions across nearly all of our segments, resulting in an approximately 40 basis point improvement sequentially at a consolidated international level. Organic tenant billings growth was further complemented by the construction of more than 565 sites, with virtually all of the step down relative to Q1 associated with India volumes, as we continue to prioritize capital deployments across our footprint to projects that demonstrate the most attractive risk-adjusted rates of return. Turning to Slide 7, adjusted EBITDA grew nearly 5% to over $1.7 billion or approximately 6% on an FX-neutral basis for the quarter. As I mentioned, adjusted EBITDA margin expanded to 63.1%, driven by elevated organic growth combined with prudent cost controls throughout the business, which allowed for a conversion of over 85% of revenue to adjusted EBITDA growth, again, on a normalized VIL basis. Cash, SG&A as a percent of total property revenue was around 6.8%, and over 20 basis point improvement compared to the prior year. Moving to the right side of the slide, attributable AFFO and attributable AFFO per share decreased by less than 1% and approximately 2%, respectively. This decline includes financing cost headwinds of approximately 7% and 9% against attributable AFFO and attributable AFFO per share growth, respectively, driven by the rise in interest rates over the past year. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers. First, as mentioned earlier, we had a solid second quarter, and the core performance of the business continues to remain strong supporting an increase to our expectations for property revenue, adjusted EBITDA, attributable AFFO, and attributable AFFO per share. Next, consistent with our prior outlook, we have maintained our VIL revenue reserve assumption of $75 million for the year. As I noted, we saw similar collection trends in the second quarter as compared to Q1 bringing our year-to-date reserves associated with VIL to approximately $70 million. Subsequent to the quarter end, VIL made a full payment for July's billings and has committed to paying at least 100% of billings moving forward. In this case, we could potentially see some upside to our outlook assumption. However, we believe it is prudent to leave the full year assumption unchanged at this time. Additionally, we have assumed lower U.S. services volumes through the balance of the year, resulting in an approximately $40 million reduction in gross margin as compared to our prior outlook. While the recent pullback was more abrupt than our initial expectations, moderation in carrier spend following the recent historic levels of activity we've seen in the industry isn't unexpected and is consistent with past network generation investment cycles. Despite this reduction, we're still seeing healthy levels of activity on our sites, which we expect to continue, and our guide still assumes over $40 million in services gross margin contribution in the back half of the year which on an annualized basis is still in excess of any year throughout the 4G cycle. It is also important to note that although our services business is non-run rate, more susceptible to in-period carrier activity and cyclical in nature, our comprehensive MLAs continue to provide us with a high degree of visibility and contractual protection against activity variability in our 2023 property revenue and organic tenant billings guide, as well as the growth we've assumed in our long-term U.S. and Canada organic tenant billings growth target. Finally, on the macro side, we have revised our FX and interest assumptions. Starting with FX, our revised outlook includes the negative impact associated with the recent devaluation in the Nigerian Naira with impacts partially mitigated through the USD denomination of roughly half of our tenant revenues in the market. This is further offset by the strengthening of other currencies in our portfolio, resulting in minimal FX impacts versus our prior outlook. On the interest side, our guidance reflects a modest increase to interest expense based on the updated forward curve estimates of SOFR, partially offset by interest income. With that, let's dive into the numbers. Turning to Slide 8, we are increasing our expectations for property revenue by approximately $125 million as compared to our prior outlook. Outperformance was driven by approximately $65 million in core property revenue supported by increases to the U.S. and Canada segment, which includes the benefits of several non-recurring one-time items along with our U.S. data center and international segments. Complementing our core upside, we're also increasing our outlook by another $60 million, primarily associated with straight-line and pass-through revenue. Moving to Slide 9, we are increasing our expectations for organic tenant billings growth at a consolidated and international level. In the U.S. and Canada, we are maintaining our guidance of approximately 5% or over 6% excluding Sprint churn, with an expectation for at least $220 million in colocation and amendment growth contributions. In Latin America, we have increased our outlook from greater than 2% to approximately 4%, largely driven by continued delays in anticipated consolidation-related churn. In Europe, we are raising our guidance to approximately 8%, up from 7% to 8% previously, supported by modest improvements in our escalator contributions, together with an expectation for colocation and amendment growth to be closer to the upper end of our initial 2% to 3% assumption as we continue to make operational progress in Germany on leasing up our rooftop assets. Next, we're increasing our Africa outlook from approximately 9% to greater than 11%, primarily due to a continuation of solid new business demand. Although we are pleased with the acceleration in organic tenant billings growth in APAC in Q2, we are maintaining our prior outlook of approximately 4% at this time. Moving on to Slide 10, we are raising our adjusted EBITDA outlook by $75 million. This reflects the strong conversion of the incremental property revenue I just mentioned, facilitated through prudent cost controls resulting in an incremental $75 million in cash property gross margin, along with an additional $40 million, primarily due to straight-line. This growth was partially offset by a reduction of $40 million associated with our U.S. services business. Turning to Slide 11. We are raising our expectations for AFFO attributable to common stockholders by $25 million at the midpoint, representing approximately $0.05 on a per share basis moving the midpoint to $9.70 per share. Updates to our expectations include the cash adjusted EBITDA increase of $35 million, partially offset by approximately $10 million in other items, including the impacts of interest expense and also a slightly higher minority interest, which is the product of outperformance in our U.S. data center business. Moving on to Slide 12, while our capital allocation plans remain consistent relative to our prior outlook, primarily consisting of $3 billion in common stock dividends, subject to Board approval and $1.7 billion in capital expenditures, I'd like to spend a moment to review our approach to ensure adequate capacity for our CoreSite business as we support an elevated backlog and expectations for continued future demand. On the left side of the slide, you see our plans continue to assume approximately $360 million in discretionary spend allocated to our U.S. data center business in 2023. This level of spend supports a high watermark of cash backlog, driven by the record levels of leasing since closing our acquisition at the end of 2021. Similarly, our retail and scale backlog, excluding hyperscale, is also at record levels, demonstrating the strength of the core business and diversification of new leasing which we expect to drive incremental ecosystem value and a continuation of the industry-leading returns CoreSite has produced historically. The differentiated nature of the CoreSite assets, representing a network, cloud, and digital platform rich interconnection hub, which in conjunction with large-scale, purpose-built adjacent capacity uniquely positions CoreSite to support the high-performance workloads of today and in the future including expected incremental AI capacity needs. Combined with the favorable supply and demand dynamics we're seeing across the data center industry, we have a high degree of confidence in our ability to drive double-digit stabilized yields on our development investments, largely supported by the reinvestment of CoreSite's own cash flows with further support from American Tower and our partner, Stonepeak. In fact, our pre-leasing at the end of the quarter was approximately 36%, which further derisks our capital investments and illustrates the robust demand we're seeing across the space. While such demand drives the need for incremental investment, we are eager to support the business and realize the attractive rates of return CoreSite has historically proven, while remaining selective and disciplined in current and future development priorities and decisions. Moving to the right side of the slide, and as I mentioned earlier, we continue to execute on our financing initiatives in the quarter raising $2.7 billion in fixed-rate debt, extending our average maturity to over six years while reducing our floating rate debt balance to below 15%. We also closed the quarter with net leverage of approximately 5.3 times ahead of our own deleveraging path towards our targeted range of 3 to 5 times. Moving forward, we'll remain opportunistic in potentially further accessing the debt capital markets to appropriately manage our investment-grade balance sheet. Turning to Slide 13 and in summary, our business continues to demonstrate resiliency and benefit from ongoing demand across our operations while effectively mitigating certain risks and variability through the strength of our customer agreements. Supported by a continuation of positive growth trends in Q2, we were able to increase the full year outlook midpoints across the majority of our key metrics, largely supported by core property outperformance across our tower and data center segments. We believe our global portfolio, strong balance sheet, best-in-class operating capabilities, disciplined approach to capital allocation, and keen focus to drive long-term efficiencies across our organization has American Tower well positioned to deliver strong, sustained growth in shareholder returns as we close 2023 and over the long term. With that, operator, we can open up the line for questions.

Hi, good morning. Thanks for taking the question. So I wanted to touch on the U.S. domestic leasing environment. We heard from one of your peers that carrier activity had slowed substantially during Q2. It looks like you're seeing a little bit of that in your service revenues, but I wanted to talk more about your organic tenant billings growth. Obviously, you reiterated the guide this year, but as we look beyond 2023, I know you have, I think, 75% locked into your long-term guide, but could a sustained slowdown in carrier activity put that 5% number potentially at risk beyond 2023? Maybe you could just walk through some of the puts and takes there?

Good morning, Eric. Thank you for joining the call and for your question. Like other tower companies, we are noticing a slowdown in carrier spending, particularly reflected in our services revenue. As you noted, we have adjusted our guidance from over $200 million to approximately $175 million. However, we have also improved our margins to help offset some of this softness. It's important to highlight that despite the slowdown, the level of activity we're observing in the second half of the year remains comparable to or even better than the peak activity we saw during the 4G cycle. We still consider our services business and activity levels to be quite healthy. This pattern is consistent with previous technology upgrades, where carriers initially increase spending to upgrade their networks, followed by a reduction in CAPEX. Generally, this new CAPEX sustains at a higher level than in the previous cycle, which is what we're anticipating. Regarding long-term guidance, our comprehensive agreements put us in a solid position through 2027. We expect about 5% organic tenant billings growth in the U.S. during this period, and the slowdown does not affect our outlook since most of this revenue is fully contracted. If we exclude the impact from Sprint churn, our growth would be around 6%. We believe this pullback by carriers won't change our perspective, thanks to our comprehensive agreements that shield us from fluctuations in spending quarter over quarter or year over year. Additionally, we foresee 4% to 5% of new business driven by activity-based initiatives within this guidance. Overall, we feel quite confident in our situation.

Great, thanks Rod. And just one follow-up. I wanted to touch on the data center business. Maybe you could give a little more color on the strength you've seen there? Is it coming from more of your traditional retail colocation requirements, or are you starting to see increased demand for larger footprint deals perhaps tied to some of the AI demand we've heard about in the market? And I guess, given the demand backdrop, do you think that maybe CAPEX needs in that business might need to go up in future years, or do you feel kind of comfortable with where you're at in terms of capital intensity with CoreSite?

Eric, maybe I'll start this one, and then Rod can finish on it. I think the mix of customers has actually been pretty consistent across the cloud and enterprise and the network. I think as Rod mentioned in his prepared remarks, we see kind of record levels of cash backlog that's contracted revenue hitting the balance of this year and into 2024 and a little bit into 2025. We see a pipeline that's up roughly 70%. We see pricing and it's up 15% on a year-over-year basis. Even the renewal rate, the MLR renewal rates is up at the 7% level. So there is significant demand for these assets. We have a significant amount under development and a significant amount in the pipeline. So we're really outpacing the way we even underwrote the transaction to begin with. So really pleased with what we're seeing across the data center platform.

Yes, Eric, maybe I would add just a couple of other comments to Tom's answer there. The overall growth that we're seeing in CoreSite is really healthy. We saw 10% overall revenue growth in Q1. We're seeing high single-digit growth in Q2. So you put that together for the first half, and the revenue was up high single digits, which is really robust. We continue to see healthy escalators in that business. The cash mark-to-market is still up in our range, at the high end of our range, even beyond the 3% high end of the range. The churn is well controlled and within our range of 6% to 8%. Interconnection growth, we've always targeted 6% to 8%. We're seeing a higher level of growth than that today. So that's that ecosystem that we have kind of at work producing what we hope to produce. And then hitting the CAPEX part of your question, we've got $360 million this year in CAPEX, we had about $300 million last year. And we do think that's a good run rate. It will fluctuate from time to time, but the purpose of our CAPEX program, of course, is really to make sure that we have the adequate capacity available to satisfy the new business and the demand in the backlog. So you can see from the chart, we have an average backlog of about $53 million, which will be deployed over the next 18 to 24 months or so. So we are ensuring that we have that capacity available. So that $360 million really is going into the 28 locations we have, the campuses either adding buildings into those campuses or adding conditioned space within existing buildings to make sure that we're keeping pace with the demand that we see. And the demand is robust. So certainly, there's opportunities to deploy even a little bit more capital. We'll continue to evaluate the returns and the growth rates and those sorts of things. But all in, we're exceptionally pleased with the way the data center business is performing. And we do think staying in that between $300 million to $360 million is the right place in terms of ensuring we have the capacity available to meet the demand in our current facilities.

Great, thank you for the questions.

Thank you very much. Good morning. Rod, I wanted to come back to the balance sheet if we could. Good updates on the floating rate debt and the leverage. You said in there, you want to continue to delever and I guess this also brings in Tom. You haven't done a lot of deals since the CoreSite deal. And I know you've been in this kind of focus on the balance sheet kind of period. So perhaps you just talk about where you want to get to on the leverage side of things and are you starting to think about being more opportunistic on the M&A side and maybe any commentary on the bid offer spreads. I know you talked about the India deal a little bit, but where do you see the opportunity to find things at a reasonable value, given the move in rates, et cetera? Thank you.

Good morning, Simon, and thank you for being part of the call. I appreciate your question. Reducing our debt levels is a key priority for us, and we've emphasized this for some time. This involves directly lowering our overall debt, and we aim for a target range between three to five times. As of the end of Q2, we were slightly above that range at approximately 5.3 times. We aim to drop below 5 times, focusing our efforts on that objective moving forward. Our capital program priorities remain unchanged. We still prioritize our dividend and its growth, which is crucial for us. We see solid initial yields and returns from our new build program, and this year, we are investing around $1.7 billion in capital, which we believe is a strong allocation of resources for our shareholders. Regarding mergers and acquisitions, as Tom has mentioned before, our current pipeline doesn't present any compelling opportunities. This is due to a mix of terms, conditions, and market factors. We analyze our pipeline on a global scale, but nothing stands out at this time. Given the uncertainty of future interest rates, we feel it is wise to focus on reducing debt. We aim to decrease our floating rate debt exposure, aiming for about 20%. Currently, we have reduced it to around 15%. In Q3, depending on the U.S. rates and the 10-year benchmark, as well as market conditions in Europe, we may return to the capital markets to further cut our floating rate debt exposure. This year and into next, we will continue to prioritize debt reduction to achieve our goal of going below 5 times.

Yes, Simon, I think I'll just underscore. I think it comes back to what Rod's saying is that there's nothing strategic out there. There's nothing compelling. We find it much more advantageous to invest in our own business than through deleveraging, that is through investing through our capital. That's through buying back shares, I mean, given where we're trading. So we find it much more valuable to allocate our capital that way at this point in time than anything we see out in the market.

Hey, thanks for taking the question. Just two on international. I guess, first on the churn expectations. I think, Rod, you had alluded to maybe some reduced expectations for churn at least this year in LatAm, just wondering if you can give us any updates in terms of the outlook, both for LatAm and Africa and whether the ultimate sort of churn expectations have been reduced or is this more of a deferral than anything else? And then secondarily, just on India, if you could maybe give us any additional color in terms of updates on discussions. You mentioned, I think, second half in terms of when you'd like to have the process completed, so any additional color would be great there? Thanks.

Good morning, Matt. Thank you for your question. Regarding the debt, the increases in our organic tenant billings for the remainder of the year are primarily due to deferred churn rather than a significant decrease in churn expectations over the long term. This is mainly affecting Latin America due to delayed operational churn. We expect this to begin accelerating in the third and fourth quarters. The operational churn accounts for about 2% of our overall organic tenant billings growth, reflecting a 200 basis point adjustment to our forecast of approximately 4%. It's essentially a timing matter. In Africa, the situation remains stable with some delays, but nothing substantial, and our long-term outlook for Africa has not changed. We do anticipate some churn from AirtelTigo in Ghana and from Cell C in South Africa, with churn rates around 6% in Africa and about 6.5% in Latin America for the year. Additionally, we are seeing heightened levels of new business activity in Africa, which is promising. Moving to India, we're actively engaged in a thorough evaluation of the market and its future under various scenarios, including assessing potential capital exits from that market as part of our process. We are focused on securing a majority stake sale, aiming for anywhere between 50% to 100%. While I can't provide more specifics at this moment, valuation and the terms of the deal are critical factors for us. We are satisfied with the progress we've made thus far, and we are now in the late stages of this process. As mentioned earlier, we expect to finalize a transaction in the second half of this year. Our objective is to achieve the best outcome for our shareholders while remaining thoughtful, disciplined, and patient during these final stages. We hope to share further updates soon.

Excellent, thank you.

Thanks and good morning. I was hoping to revisit some of the comments that you're providing around the carrier activity in the U.S. and specifically, is there a way to frame what changed relative to the carrier activity expectations that American Tower may have had earlier in the year for the full year 2023? And then given that customers under these comprehensive MLAs can execute a certain amount of capacity and if activity is less, does that mean they're not taking full advantage of the capacity they're paying for and then create some form of greater backlog of deployments that need to come through the system in the future?

Hey Michael, I can start and then Rod can jump in. The questions you're asking are likely better suited for them. T-Mobile has announced it's rolling out more carriers, and Verizon has discussed its deployment and plans for mid-band that will drive the next wave. However, if you step back, the decline in spending we're observing reflects the typical pattern of network investment cycles we've seen historically. We've both witnessed several cycles and how they've unfolded. The 5G cycle appears to follow the same pattern as earlier cycles. In 2021, when we projected our long-term growth expectations for the U.S. and Canada, we anticipated having comprehensive MLAs in place. This gives us a clear view of our growth and the development wave we're experiencing. Typically, these cycles begin with a coverage phase, similar to what we saw with 3G and 4G, involving a multi-year period of increased coverage CAPEX linked to new G spectrum for upgrading infrastructure. This is primarily cost-driven, as carriers implement new technology to lower their overall cost per bit while enhancing their offerings for consumers and enterprises. After that, there's a grooming phase, which we might be entering now, followed by a capacity phase where densification occurs. The services and these cycles can be hard to predict since each customer's cycle is unique. As Rod mentioned, we're looking at around $175 million in services, which is one of the largest amounts on record. In the last two years, we were above $200 million. Nonetheless, it remains a significant year for our services business, and our customers are still spending at record levels compared to their 4G expenditures. While there's much anticipation surrounding 5G and the current spending pullback, we should consider the broader timeline. Our customers have deployed 5G extensively and are continuing to do so, and we still see service activity from them. We expect further investment levels to grow over the decade as they seek to create more value for enterprises and consumers. I'm optimistic that our investors won’t be concerned about this pullback, as it's in line with patterns observed with other technologies. We, along with our customers, will continue to invest heavily in the 5G networks over time.

Thanks.

Thanks, good morning everybody. A couple of questions to follow up on some of the ones we had. Thanks for the updates on India, but a few extra ones. Can you remind us again how much you spent in India? Where is that on your books right now as we look to maybe a transaction getting wrapped up here, hopefully?

Yes, Rick, we've invested around $5 billion into the market. What we have on our books today is in the range of about $2.5 billion.

Okay. And earlier, I appreciate the color that India's Vodafone Idea looks like they're getting current and 100% going forward. At what point did you think you might take a stake on that receivable? Is that kind of on pause as you go through wrapping up the strategic review? And did I hear you say you maybe have slowed down some of the builds in India; is that also related to kind of the process?

When you mention a stake in the receivables, it sounds like you're referring to the possibility of transforming some of the receivables with VIL into a different financial instrument. We have already done this, converting about $200 million of prior receivables into a financial note or note receivable. This strategy is established, and I believe it will benefit us over time. Currently, we are observing a slowdown in new builds in India, which we attribute to a higher cost of capital influencing our pricing and overall willingness to invest in the market. However, this doesn't rule out the possibility of accelerating new builds if opportunities arise with improved pricing and returns. Our focus remains on maximizing returns from our current projects. It's important to note that the demand hasn't decreased; rather, we're being disciplined and patient. We continue to expand our tower operations in Europe, Africa, and a few in Latin America. Given the current environment, we are selective about where we allocate our capital, prioritizing sites that promise the highest growth and best risk-adjusted returns, while also aiming to reduce debt and allocate some capital towards that goal this year and next.

Okay. And then you also mentioned delevering is a priority, makes sense. But that stock buyback might make sense in the future, particularly compared to M&A out there. What would be the timing to think about putting a plan in place and how low does leverage have to get maybe?

Yes, we aim to be opportunistic in this area while also striving to reduce our leverage to below five times. There are several factors to consider. It's important to monitor our leverage as we approach that threshold. We've consistently stayed ahead of our deleveraging schedule with the rating agency, and from that standpoint, we feel confident about our position. Our goal is to accelerate the deleveraging process and reach below five times before the timeline agreed upon with the rating agency, particularly given the current uncertainty surrounding interest rates and the elevated cost of debt. Therefore, it's crucial to keep an eye on our leverage, as reducing it below five times could provide us with greater flexibility in capital allocation. Additionally, we are closely watching the interest rate environment and waiting for more stability. While we aren't making predictions about when rates will peak and decline, we will continue to monitor this situation. Depending on how this evolves, we might consider prioritizing stock buybacks sooner, or perhaps not at all if rates remain high and uncertainty persists. We'll keep an eye on both the U.S. and Euro-denominated borrowing, along with our overall leverage. I hope this clarifies things. The share price is also a factor in our considerations. You are welcome.

Thank you very much. On the strength of CoreSite, Tom, you mentioned positive renewal spreads and pricing. I'm curious if this is due to higher prices for cabinets and cross connects. Is this a strategic move you're implementing for both new business and existing clients? Additionally, could you provide some insight into the source of that strength? I also wanted to briefly ask about DISH, particularly with Dave Mayo retiring and the associated uncertainty. How should we view U.S. leasing trends beyond this year in a general sense? Thank you.

I believe that relative to DISH, Dave has been an excellent partner for us moving forward, along with the entire business. While he will certainly be missed, I have a strong team in place there, Jonathan. I don't think they'll experience any disruption. As I mentioned, Dave is a wonderful individual, an exceptional engineer, very skilled, and has played a crucial role in driving the business. However, they are a large organization, just like ours. If we lost one individual and it altered the direction of the business, that would be unfortunate. They are a substantial institution, and I feel they are well positioned and a good partner for us. Therefore, I do not anticipate any changes there at all. Now, regarding your first question, Jonathan, what was it?

Yes, of course, a little bit more color around the CoreSite, the strength you are seeing?

Right, right. A lot of it is a function of our own pricing increase that we put in place. I mean looking at the market, looking at the demand, they were initiated by ourselves. The volumes are robust, as I said, the pricing is up 15% above first half of 2022. The funnel was healthy. As a matter of fact, on the funnel on the $54 million, I think 80% of it is actually retail and scale. So largely enterprise-driven as opposed to even having a major piece driven by the scale. And on the 7%, historically, we've been in that 2% to 4% rate. So very pleased with the fact of those renewal rates being up significantly above where we've been historically. Yes, we have a number of projects going on within the business, candidly, Jonathan. No news to report. Working on several different pilots with potential customers. As I mentioned in the past, we have a number of sites that have a significant ability to add capacity of power at each one of them. So still very early days, early innings of that. Hopeful that AI inferencing, in particular, will drive even more of that need out at the customer premises. So we continue to explore, continue to work through a number of different pilots and projects, but nothing new to report at this point.

Thank you.

Great, thanks for taking my questions. Just the first one would be on the cadence of your U.S. new leasing going forward. So you hit about 119 in new leasing in the first half of the year, and you're guiding 220 for the full year, that implies a notable step down to like $50 million mark per quarter in the next two quarters. But you did give yourself leg room by saying at least $220 million here in full guidance. So I'm just trying to understand how much of this is conservatism versus taking our estimates down to the low 50s? And just second question, in that new leasing are you seeing a lot of DoD spectrum or dual-band radio spectrum being deployed and if not, could we then see another leg of growth as these dual-band radios and DoD get scaled and ready to deploy?

Hey Greg, thanks for the question. Regarding the cadence here, I think you do want to plan for that lower 50 certainly by the time you get out to Q4. We'll see a slight deceleration from Q3 to Q4. So maybe you're up in the mid-50s and the low 50s by the time you get to Q4, but that's what we do expect and see in terms of the new business in the U.S. going forward. And it's very in line with kind of that 220, 220 plus sort of range. So we're certainly very happy with that, and it drives about a 5% new business growth contribution to that overall organic tenant balance growth. And then in terms of the DoD and the spectrum, we're not seeing a lot of that. I'm not sure, Greg, if I would go out and say that, that upside is certainly not in the short term, if it would, it would probably be clearly small here this year. We wouldn't expect to see much of an impact. And to the extent that it is deployed later some of that may be within our holistic agreements as well with certain carriers.

Got it, thank you.

You are welcome.

Great, thank you. A couple of follow-ups. First, how do you think about your current scale in the data center business against the growing demand that you're experiencing? And on the services side, you did mention that there was an abrupt slowdown in carrier activity. Was that across the board or specific to one or two clients and do you provide the split for installation versus maybe managed services and one of your peers is getting out of the installation business, how do you think about that? Thank you.

Good morning, Batya. Thank you for joining the call. Regarding our data centers, we are pleased with our current scale. We have 28 facilities located in eight key markets, with a robust ecosystem that includes cloud connections, network companies, and enterprise customers. This setup provides us with the necessary backdrop and footprint. We are not encountering any challenges related to scale, which underpins the strong financial results we are achieving. The quality of our ecosystem and the distribution of our facilities across the U.S. are contributing factors, so we feel confident about our data center investments to date. While we have added locations occasionally, even prior to acquiring CoreSite, we are satisfied with our existing assets and are not overly focused on expanding our scale, as we have previously discussed. As for services, we have noticed a slowdown, but it's not necessarily abrupt. It varies among carriers. Some continue their operations steadily, while others have experienced a slowdown, which we find to be expected. Concerning construction services, this segment has always been relatively small within our business. We differ from some competitors in this regard. While we do engage in construction services and deployment, the majority of our efforts focus on permitting, zoning, and engineering during preconstruction activities.

Got it. Thank you.

You are welcome.

Hi, this is Richard for Phil. Just wanted to follow-up on the grooming comment that you made earlier. Does that typically last for just a few quarters or is that something longer? And then I have one more.

Yes, it varies depending on the carrier and the customer. Generally, as we've mentioned before, we observe patterns similar to sign waves. There is a period of heavy activity followed by a lighter phase as demand is met. Carriers will not invest until they recognize the demand in the network. Consequently, certain areas, whether urban or suburban, may experience shorter cycles in terms of grooming. Ultimately, it really comes down to the customer, and it's challenging to establish an overall average.

Got it. And then on the expense side, are you seeing any pressure in the domestic business on ground lease renegotiations on renewals, given where CPI or inflation is?

No, Richard, I would say we're really not. I mean we have long-term leases on the vast majority of these sites. We either own or have 20-year leases on more than 70% of our sites, approaching 75%. So we're in good shape from that perspective. And we do a lot of work well ahead of expirations of the ground leases to renew these things and kind of move the exploration date out or buy the land through our capital program. So we don't see and we're really not exposed to any short-term significant spikes in land rent because of an inflationary environment. On average, our land goes up in line with our revenue in that 3% to 4% range.

Great, thank you.

You are welcome.

Thanks, everyone for joining today's call. Please feel free to reach out to myself or the Investor Relations team with any further questions. Thank you.