American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Corporation third 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 would like to ask a question, please press 1 then 0 on your telephone keypad. You will hear acknowledgement tone that your line has been placed in queue. I would now like to turn the conference over to your host, Igor Kislovsky. Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining American Tower's third 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 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 third quarter. Next, Tom Bartlett, our president and CEO, will provide an update on our platform expansion initiatives and how we are positioned to benefit from continued wireless technology evolution. And finally, Rod Smith, our executive vice president, CFO, and treasurer, we'll discuss our third 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 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 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 third quarter. During the quarter, our property revenue increased 3.4 percent to nearly $2 billion. Our adjusted EBITDA grew by 5.6 percent to approximately $1.3 billion. And our consolidated AFFO and consolidated AFFO per share increased by 14.7 and 14.5 percent, respectively, to $1.02 billion and $2.29. On an FX-neutral basis, growth rates for property revenue, adjusted EBITDA, and consolidated AFFO per share would have been 8.1%, 9.7%, and 19.5% respectively. Finally, net income attributable to American Tower Corporation common stockholders decreased by roughly 7% to $464 million, or $1.04 per diluted common share. The decrease included the impacts of an FX loss of about $49 million in the quarter and a loss on retirement of long-term obligations of roughly $37 million. And with that, I'll turn the call over to Tom.

Thanks, Igor. Good morning, everyone. Consistent with our past practice, for our third quarter reports, my remarks today will center largely around the evolution of mobile technology and how we are positioning American Tower to benefit. specifically how we aim to extend our core neutral host exclusive real estate portfolio to a digital multi-product, multi-service platform, offering incremental value to existing and new customers. I'll also go into a bit more depth around two specific platform expansion initiatives, one in the United States and one outside of our core U.S. market. But before I elaborate on that topic, I wanted to briefly cover a few key points on the Comprehensive Master Lease Agreement, or MLA, that we signed with T-Mobile in mid-September. This agreement, which lasts through early 2035, augments our strategic relationship with T-Mobile, positions us to capture significant new business with them over an extended period of time, and preserves the potential for incremental upside for us, particularly later on in the contract terms. The MLA maintains the typical annual base escalator that we will recognize on the entire portfolio of included leases over the nearly 15-year term. This escalator is consistent with our historical 3% to 3.5% average rate included in our other U.S.-based customer lease agreements. In addition to the base escalator, as is typical with our other comprehensive MLA agreements, there's an annual use fee or bonus escalator component. This additional annual use fee, calculated as a percentage of the prior year's lease run rate, is in force over the entire term of the agreement and allows T-Mobile to add equipment on certain sites up to pre-agreed loading levels. As a result of this use fee, we lock in contractually guaranteed revenue growth over and above the base escalator while T-Mobile will be able to more efficiently deploy their network, a win for both parties. In total, between the contracted backlog we already had in place before the deal, the approximately $17 billion in incremental contractual backlog from the agreement, and the 10% or so of our T-Mobile revenues that sit outside of the MLA, we expect to generate at least $23 billion in total revenue from T-Mobile's through the contract term and bring our total consolidated contractually committed revenue to more than $58 billion as of the end of Q3. This backlog incorporates the impact of cancellations included within the agreement, which in total is expected to represent around 4% of our consolidated property revenue at the time they occur. Included in these contractual terminations are principally the legacy sprint revenues, that we extended for 10 years back in 2011. As you may recall, through that contract, we were able to delay the significant item churn that our peers experienced for more than five years. Having realized the NPV benefits from that, we will now see some of that deferred to commissioning flow through our run rate over a multi-year period. Once that is complete, we would expect to incur minimal levels of cancellations from T-Mobile, over the remaining life of this agreement. Taken as a whole, we believe that our expanded relationship with T-Mobile will be important as we seek to generate double-digit annual growth in the combination of our consolidated AFFO per share and dividend yield over the next decade. These types of comprehensive agreements have been incredibly valuable and strategic for us as we are better able to service our customers and consequently become more strategic to them as they densify their networks and deploy new spectrum. As a result, our cash flow generation becomes even more predictable, providing us a solid foundation for continued investment in our business and generating further shareholder value. With that said, let me now turn our attention back to discussing how we are positioning American Tower to further benefit from the evolution of mobile technology. Our core global macro tower business has been and will continue to be the foundation of our success and the primary driver of future cash flows. In fact, our conviction around macro towers being the primary infrastructure for 5G deployments has only increased. As more and more mid-band spectrum is deployed to support 5G, and as network usage continues to grow at upwards of 30% per year and even faster internationally, We believe that significant additional macro tower-oriented network densification is inevitable. Recall that today we believe our consolidated customer base is spending upwards of $60 billion per year on building out their networks. Going forward, there will be the need for even more equipment on more of our sites as carriers deploy massive MIMO and utilize DSS, ORAN, and the many other tools they have at their disposal. to optimize their network performance and efficiency. In addition, as 5G and the surrounding ecosystem develops in the U.S., and as network technology continues to advance throughout our international footprint, we expect to have compelling opportunities to extend our core value proposition into new, related, accretive product and service offerings to expand our total addressable market. One of the key trends driving these opportunities is the continued convergence of wireless and wireline networks. We believe that this convergence, along with increasing digitalization, network virtualization, and the agility of cloud-native software-defined services will lead to increasing demand for distributed, interconnected, global edge compute processing. As a result, the first mile of cloud on-ramps at this edge should become a more critical component of our customers' network architecture. And notably, this edge is exactly where our exclusive communications real estate assets are located. To capitalize on the opportunities this network evolution is likely to present, we are focused on developing communications infrastructure business models that augment the value of our existing assets, expand our revenue base beyond traditional tenants, and enhance our leadership role in the wireless ecosystem. At the highest level, our goal is to selectively extend our digital infrastructure core capabilities to further encapsulate neutral host wireless connectivity, transport, and compute functions as part of our comprehensive ATC platform. We can then offer tenants an integrated suite of complementary solutions that fit well within their ever more complex network designs. Within this framework, we intend to remain disciplined in terms of how we deploy capital and believe ventures with select partners could be the most efficient way to develop this platform extension. We expect our investments to focus on business models with several key elements. First, contracted long-term revenue commitments from Tier 1 customers. Second, increasing ROIC with multi-tenancy and multi-service offerings requiring modest ongoing maintenance capex Third, operating leverage characteristics similar to towers with focus on our fixed costs. And fourth, synergies and adjacencies with existing ATC assets and skill sets. So with that general backdrop in mind, let me dive deeper into a few specific areas where we are currently focusing our efforts, with one example in the United States and one offshore. In the United States, as 5G deployments accelerate, we expect the proliferation of lower latency applications and incremental cloud-based customer demand for application level and network compute functions at the edge. There are two distinct solutions within this emerging ecosystem that we are paying attention to, distributed compute and mobile edge compute. We believe that these two offerings will develop at different timelines and will allow us to provide differentiated value propositions for our customers. On the distributed compute side, enterprise workloads continue to move to the public cloud, and a growing near-term market segment is the use of on- or off-prem private cloud computing as a hybrid solution. Small and medium-sized businesses are often willing to move legacy workloads to more responsive, proximate, cost-effective data centers, and we believe that many data centers at some of our macro towers can represent optimal locations for these installations. We have started to deploy micro data center facilities at select tower sites and have seen early indications of solid demand in collaboration with partners like Flexential. In the near term, this solution enables us to develop operational excellence around the technology and iron out the kinks on a small scale. With that said, we don't necessarily think this use case alone will be the long-term driver of significant value for us. We expect true 5G mobile edge compute solutions to represent a much larger long-term opportunity. The foundational concept of our mobile edge strategy is the expectation that localized neutral host, multi-operator, multi-cloud micro data centers can be the most cost and technology efficient means through which latency can be reduced at the edge. and that these facilities can be optimally located at select macro tower sites that already have power, fiber, and multiple wireless tenants. Rather than each cloud provider and carrier forging ahead with their own connectivity arrangements, our vision is to serve as the neutral host for these low-latency relationships, which would drive cost efficiency, improve inter-MNO application performance, and accelerate deployment of these facilities throughout the network. We expect this to be a multi-year re-architecture process, and we are in the early stages of leveraging the knowledge that we have developed through COLO ATL and the small-scale deployments at the tower sites I mentioned earlier to determine the specifics of our go-forward strategy. As I also mentioned, these offerings in all likelihood will involve partnerships and joint ventures as we continue to explore where in the value chain we can drive the most incremental upsides. At this point, we think a scaled solution is still at least a few years away, but there is tangible progress being made, and we're excited about the possibilities. Underlying this excitement are the potential future 5G-related use cases that we expect to drive rapid uptake of mobile edge compute functions. Immersive AR and VR gaming applications are obvious examples. Autonomous vehicle connectivity is another, including our involvement in CV2X with partners like Qualcomm and Audi. Next-generation drone delivery networks, real-time sensor-based data collection and analytics, and a host of other enterprise-oriented solutions are also on the way and will require significant levels of compute power on the network edge. Our objective today is to position American Tower to be ready to act decisively when the time is right to be a meaningful player in the space. Meanwhile, on the international side, most of our markets are at least five years behind the U.S. in terms of deployed network technology. As a result, the edge compute opportunity and other potential 5G-enabled business models are further down the road. The strategic advantage that we expect to have in these areas, similar to what we did with our core tower business, is the ability to prove out these models in the United States first and then export them internationally when the time is right. Over time, we believe that our global interconnected reach will be critical in the context of an ever more global multinational customer base and their need to support their customers' global needs. In the meantime, one of the main focus areas of our platform extension efforts today, throughout Africa and India especially, is on developing power as a service to drive operational efficiency and cost savings while materially reducing the carbon footprint of the wireless industry Throughout much of Africa and India, the electric grid is inherently unreliable, and as part of our service offerings, we are responsible for providing on-site power for our tenants. In the past, this was almost exclusively delivered through diesel generators, with significant daily runtimes and diesel usage at considerable expense. More recently, as solar and lithium-ion battery technologies improved, while becoming more cost-effective, we have accelerated our adoption of these technologies to make power provision at our sites more efficient and environmentally friendly. In fact, as of the end of 2019, we had 12.3 megawatts of solar capacity already online with more than 4,500 sites utilizing lithium-ion batteries. To date, we've invested nearly $135 million on fuel and power optimization solutions, and expect to continue to make these investments as we improve site reliability levels for our tenants. As we disclosed in our latest sustainability report, our long-term target is to reduce our Scope 1 fossil fuel consumption and diesel-related greenhouse gas emissions in Africa and India by more than 60%, or 140 million liters of diesel annually, by 2027. Already, we have made significant progress towards that objective, having reduced annual diesel consumption by 65 million liters since 2017 after normalizing for site count growth. To give you a sense for what that translates to, it's essentially the equivalent of taking more than 35,000 cars off the road for a full year or preserving more than 65,000 acres of forest. In addition, we are currently exploring the development of science-based emissions targets consistent with the Paris Agreement goals. These initiatives are in their early stages, and we are excited about the impact that we can make going forward. Just like in the United States, where we are seeking to leverage our expanding platform to augment the value of our communication sites, we believe that we can translate our expertise and industry leadership in fuel and power internationally into tremendous added value, reducing the total cost of ownership for our tenants, further improving uptimes and developing more efficient clean, renewable networks will benefit stakeholders across the value chain, and we're committed to making substantial additional progress over the long term. And just like in the United States, where we are working on a number of other initiatives, we're continuing to look at things like fiber to the tower, fiber to the home, and other transport models in many of our international markets as ways to further broaden our addressable market and add value. These value propositions would all be predicated on long-term contractual commitments with multi-tenant and multi-service elements that mirror our existing tower model. In closing, on a global basis, we are in a time of tremendous technological digital transformation. Access to ubiquitous broadband connectivity has never been more important, particularly in the context of the ongoing pandemic. There are new use cases emerging every day, with modern wireless networks becoming more and more dynamic, responsive, and critical. As providers of the underlying infrastructure that supports mobile connectivity for billions of people around the world, we have a unique vantage point from which to observe all of these developments. And I think we also have an incredible opportunity to pair our advantages in scale, financial resources, and global reach with our platform expansion initiatives to drive tremendous incremental value for our stakeholders over time in a sustainable way. With that, let me turn the call over to Rod to go through our third quarter results and updated full year 2020 outlook.