American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Corporation Second Quarter 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. Following the prepared remarks, we will open the call for questions. If you'd like to ask a question, please press 1 and 0. I would now like to turn the conference over to your host, Igor Kivlosky, Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining American Tower's Second Quarter 2020 Earnings earnings conference call. We've 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 again dialing in remotely from different locations. So to the extent that there are any minor technical difficulties, 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 second quarter. Next, Tom Bartlett, our President and CEO, will provide an overview of our international business and the associated key trends and returns. And then finally, Rod Smith, our Executive Vice President, CFO, and Treasurer, will discuss our second quarter results and updated 2020 outlook. 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 expectations 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 fact. 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 31st, 2019, as updated in our Form 10-Q for the three months ended March 31st, 2020, 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. Now, please turn to slide four of our presentation, which highlights our financial results for the quarter. During the quarter, our property revenue increased 2.4% to nearly $1.9 billion. Our adjusted EBITDA also grew by 2.4%, to over $1.2 billion, and our consolidated AFFO and consolidated AFFO per share increased by 1.6% and 1.5%, respectively, to $924,002.07. On an FX-neutral basis, growth rates for property revenue, adjusted EBITDA, and consolidated AFFO per share would have been 8.6%, 7.6%, and 7.4%, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by roughly 4% to $446 million, or $1 per diluted common share. And with that, I'll turn the call over to Tom.

Hey, thanks, Igor. Good morning, everyone. I hope that you're all healthy and well. As we navigate the ongoing COVID-19 pandemic, our number one priority continues to be the health and safety of our employees, their families, our tenants, suppliers, and surrounding communities. The remote work policies I mentioned on our last call continue to serve us well throughout our global footprint. I'm pleased to say that there are even a few geographies where certain employees have been able to return to the office with numerous incremental safety measures in place. I'm also happy to report that our business continues to perform well as we work closely with our tenants to preserve and enhance mobile connectivity when it is needed the most. And outside of FX impacts, which have moderated slightly over the last few months, we have to this point not seen material impacts from COVID-19 on our operations. As we move forward, we believe we're well positioned to continue to provide high levels of service and drive solid results. The rest of my remarks today, similar to prior second quarter calls, will center on the key trends and return profiles we are seeing across our international business and what we expect in the future. Since we entered Brazil and Mexico back in the late 1990s to provide geographic diversification to our foundational U.S. business, we've added nearly 140,000 communication sites nationwide. in 19 countries outside of the United States, focusing on partnering with large multinational wireless carriers in select markets with strong property rights, rules of law, and vibrant wireless industries. Since day one of our international expansion strategy, our mandate has been clear. Build and acquire multi-tenant exclusive franchise real estate assets that will generate attractive organic growth rates while driving margin expansion and growing returns on invested capital over the long term. And do so with an emphasis on building leading market positions in the largest democracies across the world, with the goal of positioning ourselves as either the top one or two tower company in each market. This strategy has been underpinned by our proven risk underwriting process, including, among other things, contemplating FX movements and local country inflation trends. As we've discussed with you before, all of our investments are evaluated using a 10-year unlevered DCF model with varying IRR hurdles due to the inclusion of appropriate risk adjustments to account for the specific local country risk, the type of asset counterparty, and a host of other factors. These hurdles range from the mid to high single digits in markets like the United States and Western Europe to the mid to high teens in some of our more nascent African markets to ensure that our shareholders are being appropriately compensated for the level of risk being assumed. This balanced approach to market risk has enabled us to evaluate each individual investment opportunity in the context of its risk-adjusted return profile, long-term AFFO accretion potential, and the NPV expected to be generated rather than utilizing a specific cap as to how big any market or region can get or should get in relation to the United States. Operationally, we are also executing a number of risk mitigation strategies. For example, our MLAs include primarily local CPI-based escalators. Our overall portfolio has significant diversification and we selectively issue local currency debt where it makes sense. Further, the vast majority of our local country-generated net cash flows are denominated in local currency, and we are generally reinvesting those same cash flows back into those very same markets. Lastly, we have mechanisms in place through which we are able to pass through the cost of land to our tenants in Latin America and the cost of fuel and power to our tenants across India and Africa helping to further de-risk significant portions of our operating expenses across these regions. Taking all of these items into account, we believe we have a risk evaluation and mitigation framework that will enable us to continue to be successful internationally over the long term. Within this context, the primary thesis underlying our global strategy has always been and continues to be that the evolution of network technology that we've seen in the United States will be replicated internationally, likely at an accelerated pace given the lack of fixed line penetration in many areas. Our U.S. business model and international model are effectively the same. The sites look the same, the structures are comparable, and the MLAs are fundamentally similar but include the risk mitigation terms I discussed earlier. At the core, our international expansion serves as a way to significantly increase our total addressable market. As consumers gain access to advanced smartphone handsets and mobile data usage increases, mobile network operators continue to deploy meaningful wireless CapEx. Service providers in the international markets where we have a presence are expected to spend approximately $30 billion on their networks in 2020, in essence doubling the TAM of our U.S. market alone. With mobile broadband penetration growing, we continue to expect to generate higher organic growth rates internationally than in the United States over the long term, while driving meaningful expansion in our international return on invested capital. Fundamentally, we are utilizing our international strategy to increase and extend our overall global return profile. The ongoing COVID-19 pandemic has served to further highlight the criticality of wireless connectivity internationally, particularly in markets where fixed line penetration is minimal. Unlike in the United States, where most of us are plugging into our Wi-Fi enabled fixed line connections as we work from home, mobile networks serve as the backbone of virtually all work from home functions in these international locations. And as you can imagine, broad-based stay-at-home orders and other restrictions that have been implemented in these markets over the last several months have led to additional strain on existing mobile networks. For example, Vodafone Idea in India noted that they experienced a year's worth of data traffic across their network in a single week following the implementation of lockdown measures. Similarly, major carriers across Latin America, Africa, and Europe have outlined significant spikes in data usage and regulators have allocated additional temporary spectrum and implemented other policies to help maintain connectivity. As I mentioned earlier, we are committed to doing everything we can to support our tenants as they deal with the strain of this increased usage on their networks. Now I'd like to take a few minutes to discuss the attractive economics that we are driving across our international business. In the second quarter, our international operations accounted for roughly 43% of our property revenue and about a third of our property operating profit. Our international tower and DAS properties drove an annualized cash gross margin of over $1.8 billion in the quarter, resulting in a nearly 9.5% NOI yield on our more than $19 billion in total international tower and DAS investments. as you can see on slide six of our earnings presentation. This NOI yield includes both sites that we have recently acquired as well as sites that have been in our portfolio for a number of years, benefiting from long-term tenancy and revenue growth. Our most seasoned vintage of international sites, those built or acquired prior to 2010, is yielding approximately 24 percent in U.S. dollar terms, illustrating the power of operating leverage within our business. We view this type of return profile as a clear indication that international tower assets have the capacity to drive economics that are equal to or better than the United States tower model over the long term. Importantly, I'll note that the NOI yield numbers I'm referencing today are U.S. dollar equivalents. That is, they take into account any foreign currency devaluation in the numerator while freezing the denominator down. at historical exchange rates in the period in which the sites were acquired or built. Over the last 20 years, especially since 2007, we have been steadily growing our international portfolio with a focus on macro towers and some of the largest free market democracies worldwide. Through a combination of our highly efficient new build programs and selective acquisitions, including the Eaton Towers deal we closed at the end of last year, We've added more than 130,000 international sites in just the last decade, including more than 24,000 sites we've built ourselves. These sites typically have lower initial returns due to lower initial tenancy. You can see this on the slide where sites we've added to our international portfolio between 2010 and 2014 are generating yields of 10%, and those added since 2015 are generating yields of around 8%. Over time, our experience across all of our served markets has been that as networks mature, additional spectrum bands are deployed and consumers obtain advanced handsets, mobile data usage grows exponentially, and significant additional network density becomes a necessity. As a result, we've seen sites that have initially produced modest returns attract co-locations and amendments with minimal incremental costs, thereby driving substantial upside over time. no different than what we've experienced in the United States. In Latin America, where we've owned and operated towers for now over two decades, have invested approximately $8 billion and now have over 41,000 sites across eight countries, 4G deployments are in full swing. Our long time presence and scale have resulted in substantial business relationships with key operators in the region, including AT&T, American Mobile, and a number of others. These relationships, coupled with our extensive asset base, has enabled us to drive average organic tenant buildings growth of around 10% in the region over the last five years, backed by strong levels of new business activity and the continuing appetite for mobile data. Although organic growth rates are down a bit in 2020, in part due to falling local CPI, we continue to expect a long trajectory of solid underlying growth. We're also focused on our new build program as network densification efforts accelerate. In fact, we expect to construct over 500 sites across Latin America this year and anticipate strong demand for new builds in the region over a multi-year period. Importantly, these new builds typically have day one NOI yields in the high single-digit range with just one tenant. With an average tenancy ratio around one and a half across the region, We believe we are well positioned to drive meaningful margin and return accretion in Latin America for many years to come. In Africa, a majority of our markets are in earlier stages of the technology evolution, with 4G penetration only around 10% and average mobile data usage being a fraction of LATAM numbers as a result. We've invested approximately $5 billion across the continent, and have an average tenancy of around one and a half on our portfolio of nearly 19,000 sites, which are yielding roughly 11%. Importantly, we've partnered with key telecom operators like Vodafone, MTN, and Airtel to bring enhanced connectivity to hundreds of millions of people. With extremely limited fixed line penetration, young tech-savvy populations, and governments committed to modernizing economies through connectivity, we expect mobile broadband to play a foundational role in Africa's growth story over the next decade plus. We also anticipate the continued organic growth, our new build program, through which we expect to construct well over 1,000 sites this year, and our ongoing business development efforts will enable us to build on the strong foundation we've created in Africa as we deliver solid growth and increasing returns over the long term. At the same time, we're making substantial progress in our commitment to reduce the mobile industry's carbon footprint through our innovative power and fuel program. In African markets where grid power in many areas tends to be unreliable, we are now deploying next generation greener technologies, including lithium ion batteries and solar solutions. We expect to invest more than $60 million in 2020 to enhance the uptime performance of our sites in the region, while reducing greenhouse gas emissions after deploying in excess of $100 million over the last few years. Not only do these initiatives benefit our tenants through higher uptimes and more efficient operating capabilities, but also they represent a critical part of our commitment to being a responsible corporate citizen. These investments have helped enable us to reduce diesel consumption by more than 25% from 2017 to 2019, across our global footprint after normalizing for portfolio growth. Meanwhile, in Europe, where we have nearly 5,000 sites between Germany and France, and recently entered Poland by acquiring a handful of towers, networks are at a fairly mature stage, with 4G having been broadly deployed over the last decade. Organic tenant buildings growth has been modest for us, as expected, in the low single-digit range, and new build opportunities have been somewhat limited. Despite this, we drove NOI yields of 8% across our European asset base as of Q2, largely as a result of the price discipline we displayed when we acquired these assets. We tend to think of our initial investments in the region as beachfront properties, allowing us to have a good position to evaluate other potential opportunities. Consequently, we continue to look for ways to expand our European portfolio, but only at valuations that, with underlying growth expectations, allow us to hit our required return thresholds. Our entry into Poland, although on a small scale initially, is an example of our continued focus on finding macro tower portfolios poised for sustainable growth in markets with attractive regulatory frameworks, supportive regulators, and vibrant wireless sectors, all at sensible valuations. And finally, moving to India, where we will have invested over $5 billion pro forma for redeeming our minority interests, we believe the wireless industry has now completed a much-needed and long-awaited consolidation to enable the deployment of 4G technology throughout the country by the remaining carriers. Through this process, we've experienced high levels of churn, which is reflected in our current 8% NOI yield, although I'd note that The more than $400 million in cash settlement payments we've received from Tata are not incorporated in that number, or it would be higher. More recently, there have been pricing increases by all of the carriers in the marketplace, while the telecom regulator has indicated that it intends to be supportive of the carriers through rational spectrum policies, and the Indian government continues to stress its Digital India initiative. The key near-term issue that needs to get sorted out in the marketplace centers on the AGR decision by the Supreme Court, including finalizing the timeline as to when the wireless carrier payments are to be made, particularly as it relates to Vodafone Idea. We are hopeful that India can return to being a significant growth engine for the company, as it was for nearly a decade before the consolidation process kicked off several years ago. We have several reasons for optimism in this regard. As I just mentioned, the market structure is now much more rational. Price competition in wireless is stabilized, and the regulatory environment seems constructive. The Indian consumer has proven to have a tremendous appetite for mobile data, with average smartphone usage per customer of well over 10 gigabits per month, even before the impacts of COVID-19. With that said, the majority of wireless users in India are still using legacy technologies rather than 4G. in large part because the networks are ill-equipped in their current state to handle 4G levels of traffic from more than a billion people. To get those networks ready, we continue to believe that significant levels of incremental network spending are necessary, accompanied by a material level of network densification. With our nearly 75,000-site existing portfolio and the additional sites we're adding through our new build program, we believe we are well-positioned to benefit from our tenant's network deployments over an extended period of time. Additionally, we're continuing to meaningfully participate in connecting the unconnected in India through our Digital Village program. With more than 150 digital villages in place today and more in development, we are proud to be making a difference in the areas of digital literacy, e-learning, telehealth, as well as providing enhanced access to career opportunities in many rural Indian communities. Looking forward, we believe that we have a compelling opportunity to further enhance our international business by driving organic growth, focusing on operational efficiency, and continuing to build and acquire sites using our proven investment evaluation methodology. Our preference continues to be to add incremental scale to existing markets while strengthening ties with large multinational wireless carriers but there are a handful of additional markets that could be attractive for us as well. We also believe there are additional opportunities to generate margin improvement as we further standardize operational processes, create regional centers of excellence, and further reduce our power and fuel requirements. We also believe there will be demand for many of our innovative initiatives to extend our core platform of capabilities for new and existing tenants. So in summary, we believe that our diverse macro tower-focused international portfolio positions us well for a prolonged period of solid growth and attractive returns on invested capital. We can further augment this through discipline, selective acquisitions, and new builds on a global basis. While we expect our foundational US business to drive the majority of our cash flows for years to come, we think our international operations can enhance and extend our growth trajectory by effectively doubling our total addressable market size. The global demand for mobile connectivity shows no sign of slowing, and we believe we are positioned to play a critical role in extending the reach of mobile broadband while generating strong total returns for our shareholders. So with that, let me hand it over to Rod to go through the details of our results and updated outlook. Rod?