American Tower Corp (AMT) — Q2 2024 Earnings Call Transcript

Good morning, and thank you for joining American Tower's second quarter 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. I'm joined on the call today by Steve Vondran, our President and CEO, and Rod Smith, our Executive Vice President, CFO, and Treasurer. Following our prepared remarks, 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 2024 outlook, capital allocation, and future operating performance, our expectations for the closing of the sale of our India business and the expected impacts of such sale on our business, our collections expectations 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 most recent annual report on Form 10-K, and other risks described in documents we subsequently file from time to time 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 Steve.

Good morning. And thanks to everyone for joining the call today. As you can see from our Q2 results and our revised full-year outlook, we continue to build on the strength we saw in the underlying business at the outset of the year, with further validation of our initial expectations for strong activity across our platforms in 2024. I want to start today's remarks by thanking our teams across the world for their commitment to operational excellence and dedication to maximizing sales, reducing costs, and expanding margins across the portfolio. My comments today will focus on our latest views on our international portfolio and aim to address some of the recurring questions related to our international strategy in both developed and emerging markets that we received from investors in recent months. As we've communicated in the past, our international investment thesis is two-pronged. First, we see that the fundamentals that have driven performance in the US, such as ongoing exponential growth in mobile data consumption and a business model that benefits from tremendous operating leverage generally hold true across international markets. Second, by exporting our successful US model to invest in a diversified portfolio of assets that balance various risk and return profiles, we expect to expand and augment our long-term growth potential. Executing on this thesis has resulted in a footprint that includes diverse and sometimes complicated geographies. In our US markets, our business is focused on creating value while managing two types of risk: operational and financial. On the operational front, I can confidently tell you that we have the best operating teams in each geography across our portfolio. We've consistently overcome operational risks through our shared global expertise and experience. In many cases, we leverage operating challenges to create new business opportunities and enhance existing or introduce new competitive advantages. This capability has been demonstrated through our reliable speed-to-market delivery on new tower builds, a global reputation for sophisticated regulatory approaches that allow us to effectively assess new markets and assets, and the development of innovative power-as-a-service models that provide best-in-class network uptime. This is one of the key synergies American Tower brings—a unique global knowledge and support platform to create value through operational excellence. Our investors benefit from our ability to use that platform to expand our market share, drive best-in-class margins, and leverage cost of capital advantages derived from our global balance sheet. When you take all these factors together, these benefits translate to enhanced value of the assets under the American Tower umbrella, commanding a premium relative to the market implied sum of the parts on a comparable basis. And where this does not hold true, we've taken corrective actions, which I'll touch on later. As I mentioned in previous remarks, our exposure to financial risk has been more acute in our emerging market portfolio, particularly over the past several years, as global macroeconomic factors have had an outsized impact on those markets. In these cases, those financial risks have outpaced what we originally underwrote, combined with market consolidation that contributed to financial results in certain emerging markets falling short of our standards. We're taking action to improve those results. We've talked previously about our focus on cost controls, and I'm happy to say that those are paying off. At the midpoint of our guidance this year, we anticipate savings of over $40 million in SG&A, including bad debt relative to 2023. Our emerging market footprint has been a key contributor to our cost efficiency progress to date, where we're shifting our focus from aggressively growing those portfolios to maximizing the return on our investments. We've also previously commented on raising the hurdle rates for the deployment of additional capital in those markets. These proactive actions and our refined strategic focus have corresponded to an expected 2024 reduction of over 40% in discretionary capital across Latin America, Africa, and APAC compared to 2021. Conversely, in parts of our developed market footprint such as Europe and Corsair, we're underwriting compelling mid-teens US dollar yields and increasing our investments alongside our capital partners. With an expanded developed market platform inclusive of the US and Canada, we've been able to more than double our discretionary capital in those markets over the same period. As a result, the allocation towards emerging markets has been reduced from around two-thirds of our total in 2021 to less than a third in our 2024 guidance. You'll likely see that number continue to trend down as we fulfill our previously contracted obligations in certain markets. We have actively managed our portfolio to ensure a compelling mix of geographies and assets that are well-positioned to support and monetize growing data demand while focusing on maximizing organic growth and reducing capital intensity. Our actions have demonstrated over the past year that we're prepared to make appropriate strategic decisions to ensure that we have a portfolio of the highest quality.

Thanks, Steve. Good morning, and thank you for joining today's call. As highlighted in this morning's press release, we had a strong second quarter driven by resilient demand for our assets, resulting in robust performance across several key areas. Given the critical nature of our global portfolio and the growth trends in mobile data consumption, we head into the back half of the year confident in our ability to drive strong growth, execute our cost management initiatives, enhance our quality of earnings, and deliver compelling total shareholder returns. Before I discuss the specifics of our Q2 results and revised full-year outlook, I'll summarize a few of the highlights. First, activity levels on our tower assets remain strong. Our consolidated organic tenant billings growth of 5.3% continues to demonstrate the strong fundamentals that fuel our business. Our U.S. Services segment performed in line with our expectations for accelerating tower activity in 2024, with revenues and gross profit each increasing over 50% compared to Q1 and more than double that of Q4 of 2023. Next, CoreSite executed another exceptionally strong quarter, posting double-digit revenue growth, their second highest quarter of signed new leasing in the company's history, and a record cash backlog. Additionally, our data center projects currently under development are approximately 60% pre-leased, four times the historical average, providing confidence and visibility to an accelerated pathway to realizing CoreSite's best-in-class returns on invested capital.

Furthermore, in India, the positive collection trends we saw over the last several quarters continued in Q2, allowing us to reverse approximately $67 million of previously reserved revenue and clearing the majority of the outstanding accounts receivable we have with a key customer. Separately, we made further progress in accelerating certain payments included in the approximately $2.5 billion of potential total proceeds associated with our pending sale of ATC India. In the quarter, we repatriated more than $210 million back to the U.S., and we are in the process of repatriating an additional approximately $20 million, largely associated with the monetization of the VIL OCDs net of fees. To date, total accelerated proceeds stand at approximately $345 million, inclusive of funds received in Q1, and we expect the remaining proceeds, potentially around $2.1 billion, to be received at closing as we make progress towards that, which we continue to target for the second half of 2024.

I will touch on these items and how they impact our outlook later. Finally, we continue to effectively execute on our balance sheet initiatives, highlighted in the quarter by the issuance of €1 billion in senior unsecured notes at a weighted average cost of 4%. The proceeds were used to pay down floating rate debt, lowering our ratio back to 89% fixed and 11% floating. Turning to second quarter property revenue and organic tenant billings growth, consolidated property revenue growth was 4.6%, or over 6.5%, excluding non-cash straight-line revenue while absorbing roughly 230 basis points of foreign exchange headwinds. In the U.S. and Canada, property revenue growth was approximately 1%, or over 4% excluding straight-line and includes an approximately 1% negative impact from Sprint churn. International revenue growth was approximately 7%, or over 12%, excluding the impacts of currency fluctuations, which includes an over 8% benefit associated with improved collections in India. Finally, data center revenues increased over 12% as demand for hybrid and multi-cloud IT architecture continues unabated, and AI-driven demand increases as the backlog of record new business signed over the last two years continues to commence. Moving to the right side of the slide, consolidated organic tenant billings growth was 5.3%, supported by robust demand for our assets across our global portfolio. In our U.S. and Canada segment, organic tenant billings growth was 5.1%, and over 6% absent Sprint-related churn. We expect a relatively similar growth rate in Q3 before a step down in Q4 as we commence the final tranche of contracted Sprint churn, all supportive of our 2024 outlook expectation of approximately 4.7%. Our International segment drove 5.5% in organic tenant billings growth, reflecting additional moderation in CPI-linked escalators as expected, and a sequential step down in colocation and amendment contributions, most notably in APAC. However, in Europe, we saw another quarter of accelerating new business, moving organic tenant billings growth in the region to 5.7% and giving us confidence to modestly raise our full-year outlook for the segment, which I'll touch on shortly. Turning to our adjusted EBITDA, it grew 8.1%, or nearly 12% excluding the impacts of non-cash straight line, while absorbing approximately 210 basis points in foreign exchange headwinds. Cash adjusted EBITDA margins improved approximately 300 basis points year-over-year to 64.7%, which includes a roughly 80 basis point benefit in the quarter associated with India reserve reversals compared to a drag of nearly 50 basis points in the year-ago period. Absent these one-time items, we're continuing to demonstrate meaningful cash margin improvements supported by the inherent operating leverage in the tower model and continued cost management throughout the business. In fact, cash SG&A excluding bad debt declined approximately 2.5% year-over-year in the quarter. Now shifting to our revised full-year outlook, I’ll start with a few key updates. First, as I mentioned earlier, we've had a strong start to the year. Core performance remains solid, and our continued focus on driving cost discipline and margin expansion across the business is paying off through exceptional conversion rates of top-line results through adjusted EBITDA and AFFO. Our core results to date and expectations for the remainder of the year are contributing to outperformance across key metrics for 2024 compared to our prior expectations. Next, having now come off two consecutive quarters of solid collections in India, we've reassessed expectations for the year. In our prior outlook, we had assumed nearly $50 million in revenue reserves from Q2 to Q4 or just over $16 million per quarter. Through positive collections in Q2, we reversed $67 million of previously reserved revenue, translating to an $84 million upside compared to our prior outlook assumptions for the quarter. We now have confidence to fully remove our previous reserve assumption for the second half of the year, representing an incremental $32 million in upside, which together with Q2 results is driving an outlook to outlook increase of around $116 million across property revenue, adjusted EBITDA, and attributable AFFO. Finally, we have revised our FX assumptions, providing an incremental headwind of $51 million, $33 million, and $28 million to property revenue, adjusted EBITDA, and attributable AFFO respectively. Turning to our property revenue outlook, we are increasing our expectations by approximately $20 million compared to prior outlook. Outperformance includes $116 million associated with positive collection trends in India, partially offset by a decrease of $45 million, which consists of a decrease of $58 million in pass-through primarily due to fuel costs, net of an increase of $13 million in straight-line revenue. Consolidated core property revenue remains unchanged with certain offsetting movements between segments. Growth was also partially offset by $51 million associated with negative FX impacts. Expectations for consolidated US and Canada, total international, and APAC organic tenant billings growth remain unchanged. However, we have raised expectations for Africa to greater than 12% and Europe to approximately 6%, up from 11% to 12% and 5% to 6% respectively. Additionally, we have lowered our expectations for Latin America to greater than 1.5%, down from approximately 2%. We are increasing our adjusted EBITDA outlook by $130 million compared to the prior outlook. Outperformance is driven by the flow-through of FX-neutral property revenue upside and direct expense savings, partially offset by additional SG&A costs in India and $33 million of FX headwinds. We are raising our expectations for AFFO attributable to common stockholders by $85 million at the midpoint and $0.18 on a per share basis, moving the midpoint to $10.60. Cash adjusted EBITDA outperformance was partially offset by incremental maintenance CapEx split between the US and Canada, where we're prioritizing certain incremental projects and India. Growth is partially offset by $28 million in FX headwinds. Excluding India, outperformance on an FX-neutral basis was $27 million compared to the prior outlook. Turning to slide 14, you'll see our capital allocation plans remain relatively consistent, including unchanged expectations for our 2024 dividend distribution, subject to Board approval. On the capital program side, we are increasing our plan for 2024 by $55 million, including $30 million associated with maintenance CapEx, as I previously mentioned, and additional success-based development investments in our US data center business to maximize sellable capacity on the back of ongoing record demand. Additionally, we have reallocated certain discretionary capital buckets, including an increase towards our strategically important US land acquisition program, partially offset by savings in redevelopment. We remain focused on strengthening our balance sheet and accelerating our pathway to additional financial flexibility. This commitment is demonstrated through our successful execution in the capital markets, including the issuance of over $2 billion in fixed rate debt since the start of the year, a strategic and disciplined approach towards our capital deployment priorities, highlighted by reductions in discretionary capital spend in each of the last several years, together with a rebalancing of strategic priorities between geographies and risk profiles, and a continued cost focus across the business. These strategic actions have translated into meaningful progress towards achieving our net leverage target and an improved fixed to floating rate debt profile over the past 24 months. In summary, we are pleased with our execution through the first half of the year, demonstrating the strength of the fundamentals that underpin our business through solid organic growth and a diligent focus on cost management throughout our company, combined with our prudent approach to capital allocation, while reinforcing and enhancing our balance sheet strength and financial flexibility. We believe we are well positioned to drive strong sustainable growth and long-term shareholder value while being a best-in-class operation for our stakeholders across the globe. With that, operator, we can open the line for questions.

Thanks a lot. Good morning. Steve, thanks for the comments on the international strategy approach. I was wondering if you could just give us a little bit of an update on how you're seeing the opportunities to do additional M&A in the US, Europe, and other developed markets? What are you seeing in terms of interesting properties when SBA last night was talking about the potential for material deals? Are you seeing the same sort of thing here, and how are valuations looking? And then kind of related to that on data centers, you’re continuing to invest heavily in that business. Do you see opportunities for inorganic expansion beyond some of the small tuck-ins you've done either in the US and/or Europe? Thank you.

Yes. Thanks, Simon. So with respect to the material M&A in the US and Europe, there are some rumors of portfolios coming available, and I won't comment on any specific portfolios out there. But what I would reiterate is we're very focused on our current capital allocation priorities, particularly deleveraging down below 5. Now we did go below 5 this quarter as a result of some one-time items, but that will likely increase to above 5% next quarter. So we're focused on sustainably getting below 5. We are also concentrating on our internal CapEx programs and our other capital priorities. At this point, we haven't seen anything that we've evaluated that would divert us from those priorities. So there's nothing we’re currently evaluating that would be compelling for us right now. Just as a reminder, any acquisition we would consider needs to be more beneficial than buying back our own stock. When we assess acquisition opportunities, we look for situations where 1 plus 1 equals 3 versus growth for growth's sake. We're very interested in expanding our portfolios in the US and Europe in the developed markets we are in. Currently, we are not seeing opportunities that present the right price or the right asset group for us to discover that kind of synergy at this point. Having said that, our teams are always reviewing available options, and if anything significant comes to market, we will evaluate it. When it comes to CoreSite, we have ample opportunity to invest in our existing campuses, which will provide the best return for any capital we deploy. To clarify, we currently have 44 megawatts under construction, and approximately 61% of that is pre-leased. This indicates that we are confident in our ability to achieve mid-teens stabilized yields or better on those campuses. There are some tuck-ins, like Miami, that we pursue to build our campuses. We are deeply committed to our business model as it provides us with durable assets with lasting value over time. If we can create more campuses with abundant interconnections, we will proceed to develop those. However, these initiatives require time, and that's why we tend to start small. At this time, we believe we have substantial opportunity to concentrate on our core business, which is performing exceptionally well.

Simon, good morning, this is Rod. To complement what Steve was saying regarding CoreSite, our CapEx investments have indeed increased year-over-year despite a decline in our overall CapEx program due to a focus on balance sheet strength. We have ramped up our CapEx investments in CoreSite for 2024 compared to 2023 by roughly $100 million, mirroring similar increases in previous years. We see very compelling opportunities and lean into them when feasible. While our overall CapEx may have declined, we remain committed to investing in our best opportunities.

Thanks and good morning. A couple of questions. First, I'm curious if you can unpack a bit more of what you're seeing in the US leasing environment with respect to geography and types of activity between densification and amendments? How is A&T potentially differentiating itself compared to the commentary we hear from some of your competitors? Secondly, I’m interested in your current view on dividend policy exiting 2024 and how that should relate to the level and growth of AFFO per share over time? Thanks.

Sure. Thanks for the question. In the US, we're seeing 2024 play out much as we expected. We noticed a modest increase in application volume in Q2 over Q1. It is fairly broad-based. The main driver continues to be our carrier customers continuing to build out their 5G network. So, it is largely still amendment-driven, although we do see an uptick somewhat in new colocations compared to prior years; however, I wouldn't refer to that as a densification phase yet. There's still significant room for carriers to continue expanding their 5G presence. While we're not getting specific about individual carriers, we can say that over half of our sites are now upgraded with mid-band 5G. One carrier is ahead of the other two, with one over 80%, one at just over 60%, and one a little further behind. So there is considerable potential left for them to continue rolling out mid-band 5G across the portfolio, and we expect that to keep going. With respect to our services guide, we’re holding our guidance for the year. There’s always some risk in that services guide because it’s short-term but what we're seeing in our application flow aligns with our service expectations. Thus, we feel good about the US activity levels hitting those targets we set at the beginning of the year. Carrier capital spending projections align with the kind of $34 billion to $36 billion they have publicly stated. It’s supportive of normal development during this phase of growth, so we maintain confidence in the US market's trajectory.

Hey, Michael, this is Rod. Thanks for the question. As everyone on the call knows, we held our dividend flat in 2024. The reasoning behind this decision was to prioritize balance sheet strength and organic growth given the macroeconomic backdrop and uncertainty around rates. We decided to lean into deleveraging as a result. Any decisions regarding our dividend policy need Board approval. As far as our long-term strategy, we expect to see pre-tax income growth in line with AFFO growth, and AFFO per share will reflect this. You can expect a similar growth trajectory over time, although it won't match precisely every year. However, over a multi-year period, we aim for the growth pattern of the dividend to align closely with that of AFFO per share. Anything regarding our dividend policy will require Board approval, as such will be echoed in our future decisions. Thus, you might expect dividend growth to resume in 2025 based on the indications we see in the numbers.

Thanks. Morning, guys. A couple of questions on my side. First, thanks for the update on the India collections process–it’s great to see that cash flow coming in. Can you share how long you anticipate the approval process will take for the India divestiture? And also, how long after approval would you estimate it will take to finalize the transaction?

At this point, Ric, there's no update on that. We're still waiting for the approval. We have maintained that we believe that it will close in the second half of the year. It’s hard to predict exactly when that will happen, but we still expect that timeframe. In terms of closing afterward, you could expect to see it finalized in about four to six weeks.

Thank you. That makes sense and could tie to a month or quarter for accounting purposes. Secondly, thanks for the update on the mid-band spectrum deployment in the U.S. That's helpful to know some over half of the sites and how that varies by carrier. Internationally, can you provide any insights into where 5G deployment currently sits as compared to your competitors and peers?

Sure. I think it varies by geography. In Europe, for example, they've been able to deploy 5G for a large percentage of the population, generally around the high 80s to low 90s in regions like Spain and Germany. This includes both low and mid-band spectrum. There is continued opportunity to expand mid-band deployment there. The situation varies within France, where certain providers are further along compared to others. In Africa, we are seeing some 5G deployments in major cities, but it is still relatively nascent. These markets are still focused on enhancing their 4G networks and improving network quality. Nevertheless, we believe that 5G will increasingly be deployed there as population centers grow. In Latin America, some markets like Brazil have seen some 5G deployment, but they are still quite behind many developed markets. Delays in sending 5G spectrum to the carriers have hampered some of those deployments.

Great. I appreciate you sharing your insights. A last question for me on cost management; is site decommissioning a component of what’s driving costs down? I noticed potentially significant decommissioning in the U.S. and Canada, which may relate to Sprint towers that are now unused. Can you provide context on your current strategy regarding decommissioning towers and its impact on your operating expenses?

Yes. We're exploring all avenues for cost management. Our goal is to enhance our margin profile through both direct cost savings and SG&A. We’re evaluating our portfolio and identifying underperforming assets that don’t anticipate any near-term activity, and we are systematically decommissioning those sites to reduce operational expenses. We are undertaking accelerated decommissioning where necessary to reduce costs.

In terms of our decommissioning, our latest numbers show that we decommissioned about 250 sites in Latin America and around 300 in the U.S. That’s part of our normal portfolio management process. We also try to lease vacant sites, and those that don't perform well are taken down to save costs. However, this is not the only area contributing to cost reductions; we're also seeing lower land rent escalations and have implemented other operational improvements that are beneficial.

I appreciate the clarity. Thanks, guys.

You're welcome, Ric.

Thanks so much for taking the question. You made a bold prediction about activity levels and services accelerating through the course of the year. However, not everyone seems to be seeing the same thing. Assuming that the service revenue guide remains at $195 million, it implies another substantial step-up in quarterly rates in the second half. One might assume that this level of activity is a leading indicator for leasing activity. However, since M&A has already factored those expectations, could you provide clarification? Secondly, with regards to the comprehensive MLA signed with AT&T back in September 2019, could you outline what this means for the business outlook in the second half and into 2025?

Certainly! As for the services aspect, our Q1 services gross margin was about twice that of Q4 2023, and Q2 was about 50% higher than Q1. So we are seeing significant growth in that services business and believe we are on track to meet our full-year services guide. There is inherent risk in that, but our team is confident in our outlook. Regarding the MLAs we previously mentioned, we had a customer roll off one of our MLAs earlier this year, but I won't go into specifics on other roll-offs. What we can say is that comprehensive agreements like those typically span 3 to 5 years. Since we have one customer that has moved off the MLA, it necessitates that we monitor the activity closely, and we'll be adjusting our strategies as necessary.

Thank you very much for taking my questions. First, regarding CoreSite, I noticed you're planning your first aggregation edge data center in Raleigh and launching a joint venture with Stonepeak in Denver. Can you share your goals for these projects and the rationale behind the deal structure in Denver? Should we expect more initiatives like these in the future?

Absolutely. Those are two distinct projects. The Raleigh data center involves our US tower division collaborating with CoreSite. We're leveraging the edge technology due to demand in Raleigh, offering a sandbox environment for products while maintaining profitability. The Denver project represents our first purpose-built data center there. While we have a small presence in Denver, we’re focused on making it a campus-like setting. For this facility, we’re collaborating with partners to mitigate risk by using outside capital instead of reallocating our resources. We will maintain ownership of the land and possible future expansions, as well. Should demand grow, we’ll consider additional similar partnerships to efficiently develop such projects. Regarding emerging market towers, scale is our critical driver of value overseas. We define scale at a high level as either being the number one or number two independent tower company in your market. It conveys strategic relevance to our customers. We can achieve regional scale even in subscale markets by tapping into resources across different markets. Our extensive presence of about 97% in markets where we're the leader in Latin America contributes significantly to our operational efficiency versus those operating in subscale conditions.

Thank you. The comprehensive MLAs have provided clear visibility for domestic growth. Are you seeing opportunities to implement similar strategies internationally? Could this change the growth trajectory? I wanted to follow up regarding AFFO growth since you've exhibited solid revenue growth and cost integrity: if you exclude fluctuations in FX, do you believe we're on a trajectory for high single-digit AFFO growth for the next few years?

Concerning international MLAs, while we have discussed those with partners, the adoption of such contracts internationally hasn't materialized yet. Our international partners have hesitations about joining into long-term agreements because they lack local precedents. We are working to educate them about the benefits, but there is not much to report currently. Regarding your second point on AFFO growth, we concur with your assessment. Much of it hinges on our capacity to grow within the established range of organic tenant billings globally. With strong fundamentals underpinning our operations and supportive revenue growth from our tower assets, we anticipate tracking on par with our higher growth expectations for the upcoming years.

The fundamentals of our global portfolio combined with effective cost management all contribute positively to AFFO growth. Our revenue projections indicate a steady outlook. However, we must keep an eye on potential fluctuations in interest rates and any adverse FX impacts moving forward. Overall, our increasing organic tenant billings growth throughout established markets during the recent quarters remains solid, supporting our outlook for continued high single-digit AFFO growth in the next few years.

Thank you everyone for joining the call today. If you have any questions, please feel free to reach out to the Investor Relations team. Thanks again.