American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Corporation first quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you should have a question throughout the duration of the call, please press 1 and 0 on your cell phone keypad. If you should require assistance from the operator at any time, please press star followed by the 0. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your hosts. Igor Kislovsky, the Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining American Tower's first quarter 2020 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. Before the rest of my comments, I'll note that due to COVID-19, All of us on the call this morning are dialing in remotely from different locations. So to the extent there are any minor technical difficulties on the call, we would ask that you bear with us. Our agenda for this morning will be as follows. First, I'll quickly summarize our financial results for the first quarter. Next, Tom Bartlett, our President and CEO, will provide some brief commentary on our U.S. business. Next, Rod Smith, our Executive Vice President, CFO, and Treasurer, will discuss our Q1 2020 results and updated 2020 outlook. And finally, our Executive Chairman, Jim Taklett, will share a few closing remarks. After these comments, we will take your questions. I'll remind you that this call 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 2020 outlook, capital allocation, and future operating performance, our expectation regarding the impacts of COVID-19, our expectations regarding the impacts of the AGR decision 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, 2019, 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. please turn to slide four of our presentation, which highlights our financial results for the first quarter. During the quarter, our property revenue increased 10.5% to nearly $2 billion. Our adjusted EBITDA grew by 14.1% to $1.3 billion, and our consolidated AFFO and consolidated AFFO per share increased by roughly 5% to $907 million and $2.03, respectively. These consolidated AFFO metrics were impacted by a one-time cash interest charge of approximately $63 million associated with our purchase of MTN's minority stakes in each of our joint ventures in Ghana and Uganda during the quarter. Absent this one-time item, consolidated AFFO and consolidated AFFO per share would have grown by more than 12%. Finally, net income attributable to American Tower Corporation common stockholders increased by roughly 4.4% to $415 million, or $0.93 per diluted common share. And with that, I'll turn the call over to Tom.

Thanks, Igor. Good morning, everyone. I hope you are all staying safe and well. You know, typically on our first quarter earnings call, we would talk exclusively about our U.S. business and how it is positioned in the markets. But given that there is nothing typical in the world in which we live today, I'd like to first discuss how we are navigating the COVID-19 pandemic, including its historical impact on the global economy. Our number one priority continues to be the health and safety of our employees, their families, our tenants, suppliers, and surrounding communities. Most of our team members globally are working from home. To facilitate this, we've bolstered our IT environment to support more remote work and established alternative business processes and solutions to overcome the need to have work accomplished from our office or at our established operational centers. We're practicing social distancing in the few instances where certain employees need to be in the office and have provided added equipment and supplies for those considered essential and needed to be out at our sites supporting our tenants. We're also in the process of establishing our overall guidelines and procedures for an eventual return to work in our offices across the globe. These guidelines will adhere to government directives and be supplemented by reasonable and practical criteria based on local situational needs and circumstances. The reopening process will be based on safety readiness levels and will not commence until I'm certain we have complete access to the necessary critical resources and supplies. I also want to emphasize that While immersed in all this activity and uncertainty relative to just how long this crisis will last, we remain focused on continuing to meet the needs of our tenants. To that end, I want to note that to this point, the direct effects of the virus on our core business outside of translational FX impacts have been modest. While we're continually monitoring the COVID-19 impacts, our business model globally has demonstrated its resiliency and stability. Now more than ever, our infrastructure is incredibly critical to ensure our tenants are able to keep their customers connected. As a result, in many of our served markets, including the United States, we have received official priority designations that enable tower-related work to continue, largely uninterrupted. In a few locations, we have experienced some limitations and restrictions, particularly with respect to new builds and other discretionary tower work. In fact, in certain locations, new construction is currently prohibited. While these impacts have so far been modest, we do expect some slight delays in our new build pipeline and colocation activity in certain areas, but do believe these delays will be temporary. All in all, our business and operational focus will continue to be to prioritize actions, projects, and capital allocation initiatives that extend, deepen, and secure connectivity throughout our served markets. we are proud to help deliver meaningful connectivity to billions of people around the world at an important time like this and are focused on maintaining its continuity. This then brings me to the original topic I wanted to cover with you this morning, and that's of our business here in the United States. In 2020, at the midpoint of our outlook, our U.S. business is expected to represent about 57% of our consolidated property revenues. and around two-thirds of our consolidated property operating profit. The U.S. operation is the foundation of our consolidated business and will continue to be for many years to come. Mobile data usage growth of at least 30 percent per year has driven significant levels of collocations and amendments on our U.S. assets over the last decade, and we expect that growth to continue for the foreseeable future. In fact, according to industry estimates, the average U.S. smartphone user consumed around 9 gigabytes per month in 2019, which is up some 450% from just five years ago. Incredibly, by 2025, that same user is projected to consume over 45 gigabytes per month. To account for the strain that this usage growth will create on mobile networks, we believe that our tenants will continue to invest significant amounts of capital into our infrastructures. Over the last five years, this spending has averaged upwards of $30 billion per year. In fact, it's increased over the past 20 years as each new technology generation has been deployed, dating back to 2G, and we would expect that number to remain steady, if not rise, over the next few years, particularly given the recent completion of the Sprint T-Mobile merger. A significant portion of our tenants' network investments in future years is expected to be 5G-focused, and I'll take some time to cover our latest high-level thoughts around 5G and what that might mean for our business in a moment. But first, I'd like to spend a few minutes laying out the key characteristics and return profile of our U.S. business. Our U.S. portfolio, comprised of nearly 41,000 sites, has been created over the last 20-plus years through a number of M&A transactions complemented by our internal new build programs. We've consistently focused on sites with premier locations, significant capacity for lease up, attractive land lease arrangements, modest requirements for ongoing maintenance capex. Perhaps the single biggest driver of value in these assets over the long term has been the tenant lease contracts or master lease agreements that accompany them, which we have purposely designed to both deliver compelling value to the tenant and secure attractive economics for American Tower. Our requirement for exclusive franchise real estate locations in mission-critical areas has supported our ability to implement these contract structures to generate a consistent, recurring, growing base of cash flow. As you can see on slide six, that focus on tower and other franchise real estate assets has resulted in sustained, attractive, organic tenant buildings growth for American Tower, averaging more than 6% over the past five years. The combination of strong colocation and amendment trends, annual contractual escalators, and consistently low churn in the U.S. have been key drivers of this growth, as we've capitalized on the deployment and densification of 4G networks across the country. We've translated this strong organic tenant buildings growth into attractive NOI yields across our portfolio, particularly for assets that we've owned over the long term, For example, we're generating yields of 24% on sites we owned prior to 2005 and yields of 17% on sites added to the portfolio from 2005 to 2010. On assets added after 2010, including those from our GTP and Verizon transactions, NOI yields averaged around 6% as of the end of the first quarter. We believe there is significant upside on this vintage of sites as additional equipment is deployed particularly given the expected acceleration of 5G rollouts over the next few years. Our U.S. Tower leadership team has done a terrific job managing our base of assets in the U.S., having locked in more than $28 billion in contractually committed revenue as of the end of the first quarter. Margins in this business, including all of the M&A completed over the last several years, have continued to expand, with the property segment operating profit margin increasing coming in at nearly 79% in Q1, accompanied by cash SG&A as a percentage of revenue of just 4.1%. Additionally, our US business ROIC has continued to rise over the last 10 years, while we have nearly doubled our asset base. We now have around 3,000 tenants in the US, including a vertical segment focusing on non-traditional tenants. This segment, although still in relatively early stages of development, generated more than 15% of our non-MLA-related US no business in the quarter. From an operational perspective over the past year, our US team has been focused on automating tasks to reduce cycle times, implementing a fleet of drones to secure more accurate data on our sites, and implementing several new innovative contract structures, providing process efficiencies for both ourselves and our tenants, and reducing the need for site-specific evaluations. From a macro industry perspective, over the next few years, we see several trends unfolding in the U.S. First, we believe the cloud is going to come closer to the edge. Second, 5G will be deployed using a number of different spectrum bands, depending upon the specific area's coverage and capacity requirements, which will look like, as some have labeled, like a three-layer cake, opening up the network to allow for a multitude of different customer experiences. And third, the variety of end user devices and applications is expected to grow faster than we could possibly imagine. In addition, much of this activity should enable our customers to be able to wirelessly transmit data at a lower cost per bit. The overall increase in our tenants' resulting value proposition, driven by continued 4G and new 5G network deployments on our infrastructure, will, we expect, continue to increase our NOI yields and returns on invested capital. While we expect to have 4G-related infrastructure on our sites for years to come, we believe ubiquitous 5G deployments are also on our doorstep. What is interesting is that, in fact, each of the major carriers have initially deployed 5G in their own unique ways. Multiple spectrum bands have been and will continue to be deployed, spanning the range from high band millimeter wave in cities to low band like 600 megahertz in rural areas and will ultimately be coupled with mid band spectrum to support their customer's needs around suburbs and highway corridors. Importantly, we continue to believe that the majority of the sub six gigahertz spectrum deployments throughout the country will be on macro towers and that mid band spectrum will be a critical component of our tenants 5G networks. We continue to expect mid band deployments to accelerate beginning in the second half of this year as the new T-Mobile builds out more of its 2.5 gig spectrum. For the foreseeable future, and as I mentioned, we also expect spending on 4G networks to continue, given that the migration of the user base from 4G to 5G will take a number of years. Bottom line, we believe that as a result, a tremendous amount of incrementally more complex equipment should end up on our towers across the U.S. over the next 5 to 10 years, allowing our business to continue to excel. As I mentioned, we believe that over the next several years, the cloud is going to get closer to the edge. We're already seeing this trend from the major hyperscalers, and as a result, continue to evaluate the opportunities that might be there for us. What will also be interesting is how the hyperscale and cloud service providers will interact and position themselves with the carriers. So as a result, we continue to explore trials and partnerships with a variety of different players, including hyperscalers, cloud service providers, carriers, data center companies, and equipment suppliers to see just how our infrastructure may plug into this new environment. Using our existing set of assets on the edge data center front, we continue to learn about the rapidly evolving edge ecosystem through our ownership of a metro interconnect facility in Atlanta and initial deployments of several trial edge data facilities at our tower sites. At a high level, we continue to believe that as information generation and processing progressively moves to the network edge, particularly with respect to advanced IoT applications, there will be a greater need for lower latency through distributed storage and compute functionality in close proximity to both wireless and wireline end consumers. Edge compute offerings may eventually serve autonomous vehicle networks, interactive and immersive media delivery, cloud gaming, and any number of other products and services where lower latency is a must and or data needs to be closer to the consumer or machine, where we believe the opportunity for us can truly scale. And while the potential for a scaled mobile edge solution is likely several years away, we are seeing initial positive indications of customer interest in our assets and are also having numerous conversations with a number of parties that are likely to play a significant role in the edge going forward. One such example is with Microsoft, through their Azure Edge Zones program, where we are now a named partner. As time goes on, we are hopeful that other partnerships will develop to help us accelerate the development of the Edge data model. On the indoor connectivity side, we continue to explore ways to leverage carrier-grade Wi-Fi, 4G and 5G, and CBRS spectrum to create converged networks. These targeted neutral host solutions can make sense in a much broader array of venues than traditional DAS. So in other words, drastically increasing the total addressable market. We've been part of the CBRS alliance for many years and have several CBRS-based deployments throughout the country. As demand for better, faster, and more secure network connectivity continues to accelerate in apartment buildings, Class A office space, and other similar locations, We are positioning American Tower to hopefully play a meaningful role in satisfying that demand. Here again, we are likely at least a few years away from potentially scaling CVRS-based neutral host systems, but are already seeing positive indications of demand for fixed wireless access, private networks, and other solutions in these types of locations. As we look at these and other U.S.-based innovation opportunities, I want to underscore that our investment criteria and philosophy remains the same. We're looking for scalable, exclusive, multi-tenant franchise real estate digital infrastructure opportunities that have the potential to deliver consistent, sustainable recurring growth for us with returns that rival those of our existing tower model. Taking these innovation initiatives together with our high-performing existing U.S. business, we are energized about the future. The secular trends driving demand for space on our franchise real estate assets continues to accelerate, and we believe we're optimally positioned to convert that demand into attractive total returns for our stockholders over the long term. Further, our business has performed extremely well through a variety of economic and capital market cycles, and we are confident that American Tower will again stand and deliver through the current turmoil. With that, turn the call over to Rod to go through our results for the quarter and our updated full year outlook. Rod?