American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Second Quarter 2021 Earnings Conference Call. As a reminder, today's conference call 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. You will hear acknowledgement that your line has been placed in queue. I would now like to turn the call over to your host, Igor Kislovsky, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining American Tower's second quarter 2021 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. On this morning's call, Tom Bartlett, our President and CEO, will provide a strategic update on our international business with a focus on our newly expanded European portfolio. And then, Rob Smith, our Executive Vice President, CFO, and Treasurer, will discuss our Q2 2021 results and revised full-year outlook. After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation, and future operating performance, our expectations regarding the impacts of COVID-19, our expectations regarding the closing of the remaining TELSIUS sites, our expectations regarding the closing of our signed agreements with CDPQ and Allianz, 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, 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. And with that, I'll turn the call over to Tom.

Mr. Thanks, Igor. Good morning, everyone. I hope that you are all healthy and well. You know, as is typical on our second quarter calls, my remarks today will center on our international business, now spans more than 171,000 communication sites and accounted for 37% of our property segment gross margin in the second quarter. Given our recent Telseus transaction, I'll focus much of my commentary on our European portfolio, but I do want to first cover some of the key tenets that drive our global strategy and touch on a few important metrics for our international business as a whole. Since entering Brazil and Mexico more than two decades ago to provide geographic diversification to our foundational U.S. assets, we've oriented our international growth around partnering with large, multinational wireless carriers in select markets with strong property rights, solid rules of law, and vibrant wireless industries. Since day one, our international expansion mandate has been clear, acquire, construct, and market franchise real estate assets to drive strong organic growth, long-term margin expansion, and compelling total returns, and do so with an emphasis on building leading market positions in the largest democracies around the world in various stages of wireless technology development, all while driving enhanced connectivity for billions of people and being a good corporate citizen. Bottom line, our goal was to replicate the model we built in the United States, to increase the slope of the growth curve and extend it. As a result of our adherence to these core principles and the tremendous contributions from our global leadership teams and employees, we have been able to drive solid results across our international business over the last decade. Markets outside the United States have made meaningful contributions to our long track record of generating strong organic growth while delivering double-digit annual consolidated AFFO per share growth and attractive returns on invested capital. In fact, as of the end of the second quarter, international sites that we've owned and operated since before 2010 were generating U.S. dollar NOI yields of 30%, with our oldest vintage of sites in Latin America driving NOI yields closer to 40%. And international sites we've built and acquired since 2010, excluding the Telseus assets that we just closed, are generating an average U.S. dollar NOI yield of 10%, with what we believe to be substantial future upside potential. Further, on sites we've constructed ourselves internationally across all vintages, the NOI yield as of the end of the second quarter was 25%, demonstrating the tremendous return potential of our new build program. Finally, it's important to note that just as we've done in the past, we expect to focus on constructing sites for high quality, primarily investment grade tenants as we drive toward our goal of 40 to 50,000 new builds worldwide over the next five years. We're focused not only on generating strong growth and returns internationally, but also in doing so in a sustainable way. This is reflected in our accelerating power-related investments in lithium-ion battery storage, solar, and other clean energy solutions as we seek to reduce our global carbon footprint and lead the overall telecom industry to a greener, more sustainable future. Moreover, we believe that shared use of renewable energy combined with storage has the potential to reduce operating costs over time, which can benefit the entire telecom ecosystem as demand for mobile data usage continues to rise. In addition, we're working to make a positive difference in our markets through programs like our Digital Communities Initiative, which seeks to expand access to education and technology to underserved populations by leveraging power and connectivity at our tower sites. To date, this program has enabled well over 100,000 students across six markets to gain critical access to the Internet while developing digital literacy skills, and has recently garnered recognition from the UN World Summit on Information Society. Looking forward, by working with partners, the World Economic Forum, and other stakeholders, we expect to meaningfully expand the reach of our digital communities efforts as part of our overall commitment to making a positive difference in our served markets, particularly given the critical need for pervasive mobile broadband connectivity. This criticality for broadband connectivity was amplified by the COVID-19 pandemic and fits squarely within our belief that the network technology evolution we've seen in the United States will be replicated internationally, and that as owners and operators of mission-critical communications real estate, our sights will be at the forefront. As mobile data usage continues to grow rapidly and as 2G and 3G networks outside of the United States are upgraded to 4G and 5G, We expect network densification and augmentation to take center stage, resulting in long-term, sustainable, predictable growth for us. Importantly, the international tower model, just like the U.S. business, is predicated on optimizing operating leverage, signing value-additive, strategic long-term contracts, and providing high levels of service to our customers, while carefully and selectively deploying capital to high-quality, accretive growth investments. With mobile network operators across our international markets spending upwards of $35 billion in wireless CapEx annually, and the need for communications infrastructure only expanding, we believe we position ourselves for long-term success. One critical element of our international strategy is a balanced approach to market selection. We've always sought to not only diversify the business from the perspective of the United States versus the international, but also to drive diversification within our international operations themselves. As a result, we operate in a mix of developed and developing markets, and as I mentioned earlier, have exposure to multiple concurrent technology cycles throughout our operations. We've been quite purposeful in ensuring that we are not too overweight in any one market or region, and that is reflected in our portfolio today. Our recent TELSIUS transaction is a clear reflection of this long-held strategy Not only were we able to secure what we believe to be premier assets centered in two highly attractive European countries, but the deal also enabled us to further balance our emerging market presence with communication sites in more mature markets. In fact, on a total company run rate basis, around 60% of our property revenue is now derived from developed technology advanced markets. We expect the incremental diversification we have gained through the TelSIS deal to yield benefits over the long term on many fronts, including with deeper access to the attractive European capital market, both public and private, the addition of incremental Euro-denominated revenues, and of course, a much stronger competitive position on the continent itself. So with that, I'd like to now take a deeper dive into why we're so excited about our European business, and particularly our newly scaled presence in Germany and Spain. We've always said that we view the concept of Europe being a singular tower market as a misnomer, and that remains true today. Europe is a collection of vastly different markets with highly variable characteristics on the regulatory wireless market structure and historical network development sides, among others. And we've seen this reflected in many portfolios we've evaluated over the years that we ultimately did not acquire. To that point, our Telseus transaction is less an indication of a sea change across Europe as a whole and much more a reflection of the assets themselves being superior in our view. The wireless market structure and dynamics, regulatory regimes, and carrier CapEx trends in Germany and Spain are favorable, and Telefonica is a high-quality anchor tenant. We also perform significant due diligence on the sites and accompanying contracts, both on the customer side and on the landlord side, and viewed the outcome of that diligence as a positive differentiator as compared to some of the other portfolios we've evaluated. As a result, we're confident that we can drive attractive economics across the portfolio, including high margin flow through from collocation and amendment growth, complemented by a new bill program that we expect will further accelerate over the next few years. This confidence is underpinned by strong underlying wireless market trends in both countries. Mobile data usage from 2019 through 24, for example, is projected to grow at a CAGR of more than 25% in Germany and Spain, similar to the United States. Meanwhile, ARPUs have been relatively steady over an extended period of time. The mobile network operators are solidly profitable, and 5G device penetration, like in the United States, is still in its infancy. Wireless market structure is also favorable, with significant carrier consolidation having already occurred, leaving three major incumbent carriers in Germany and four in Spain. Consequently, we believe the downside risk related to further consolidation in these markets is modest for us. Critically, carriers in both Germany and Spain possess significant spectrum assets across multiple bands. For instance, the three incumbents in Germany, along with one in one, all have at least 50 megahertz in the 3.5 to 3.7 gigahertz range, which is now starting to be deployed for 5G rollouts. Meanwhile, in Spain, all four major carriers have at least 80 megahertz in this same globally harmonized mid-band range, along with significant spectrum assets from 800 megahertz to 2.1 gigahertz and 700 megahertz spectrum coming to auction shortly. Further, between the two markets, mobile wireless carriers are spending more than $6 billion in wireless capex annually, with a new entrant in Germany and accelerating 5G deployments potentially leading to enhanced CapEx deployment in the future. Finally, over the last several years, unlike in many other European markets, communication site counts have been increasing, and we believe that substantial further densification efforts will be necessary to augment existing 4G deployments and upcoming 5G rollouts. Just like in the United States, as higher band spectrum is deployed for 5G, Networks will need to become denser to provide a true 5G experience. With our expanded footprint focused in the urban areas where these deployments are likely to be concentrated, we are well positioned to drive strong growth over a number of years. In fact, as we laid out when we announced the transaction, we are confident in being able to deliver organic tenant buildings growth at least in the mid-single digits on the European Telsea sites over the next several years and likely beyond. This growth rate trajectory would be roughly two times what our legacy European business is generating today. On the surface, that may seem like a disconnect, but peeling back the onion a bit reveals that the math is quite straightforward. In large part, the difference is driven by churn. On our legacy sites, we are working through the impacts of some carrier consolidation, and as a result, our churn rates over the past few years have been in the 2.5% to 3% range. On the Telsea sites, on the other hand, we expect minimal cancellations for the foreseeable future, given most of the existing tenancies represented by Telefonica, with an average non-cancellable lease term of between seven and eight years. Simply put, even without assuming any inflection in demand from 5G or new entrants, that churn differential alone should put us solidly in the mid single digits for organic tenant buildings growth on the Telsea sites. And to the extent that there is an uptick in activity from 5G, and the other dynamics I referenced earlier, we believe that we have the potential to outperform that range over time. One of the key elements that we expect to backstop this strong growth is the fundamental structure of both our tenant leases of our rooftop and ground leases. This has been a much debated topic across the region, and we've seen a variety of different contract terms and various portfolios that we've evaluated over the years. In many cases, those terms, in our view, were such that future growth and profitability would have been significantly constrained. This is not the case on the Telusias assets, which was a critical element of why they were so attractive to us. There are revenue shares in place on certain sites, and there are some capacity constraints with respect to a portion of the rooftop assets. But overall, we expect to drive conversion rates on organic growth that will be nearly comparable to what we've seen in the United States, which is extremely important for us. One additional element of our European business that I want to address is our plans for future expansion. As is, we believe that we now have the scale we need to be successful in both Germany and Spain. With more than 26,000 sites between the two markets, performer for the additional German rooftops we expect to close over the next week or so, we are solidly established as a significant player in European communications real estate. Further, we expect to leverage our new build program to drive additional scale over time in the region, including 2,400 or so contracted BTS sites in Germany that we anticipate building over the next three to five years. As 4G and 5G-driven densification accelerates, the need for new sites in select markets should continue to grow. On the M&A front, we expect to continue to use our longstanding proven capital deployment methodology to evaluate potential transactions in the future. We have been patient, deliberate, and selective in Europe to this point, and that will continue going forward. Each portfolio will be examined on its own merits with long-term growth potential, AFFO per share accretion, and long-term return on invested capital continuing to guide our M&A strategy. With CDPQ and Allianz joining PGGM as our strategic partners in the region, we believe that we are in a better position than ever to prudently expand the business through M&A, should the right opportunities present themselves. And if not, we will do what we have always done, deploy capital elsewhere on a global basis to drive the best possible risk-adjusted return across the business. We also believe that our broader European footprint can further enhance the competitive advantage that we derive from our worldwide shared infrastructure platform. Digital transformation on a global scale is being driven by cloud computing and ubiquitous connectivity, and we believe that our existing and future distributed real estate can play a pivotal role in providing mission-critical applications with access to the cloud on-ramps required to support them. One example of this is on the edge compute side where a significantly expanded presence in Europe rounds out our position as a global provider of edge compute solutions to support the transition to cloud-native telecom functions. Similar to the United States, we are still years away from deploying meaningful capital and generating significant revenue from edge compute in Germany, Spain, and France, but the same long-term trend is pointing to a sizable market opportunity in the U.S. also exists in these markets. In addition, we are continuing to explore smart city connectivity, private and shared indoor networks, and other innovative next-generation solutions based on Wi-Fi, ORAN, and 5G. In closing, we continue to believe that our comprehensive existing global portfolio and ability to be flexible, strategic, and selective with respect to future international growth investments positions us well for a prolonged period of solid sustainable growth. With our newly expanded presence on the continent, Europe is going to be a significantly more important component of this path forward. We're also excited about adding high-quality strategic partners in the region to potentially further enhance our growth profile. Meanwhile, the rest of our international business, spread across attractive markets in various stages of wireless technology deployment, continues to provide meaningful opportunities for both organic and inorganic growth. Taken together with our foundational U.S. asset base, we believe this diverse international portfolio will not only help us drive compelling returns over the long term, but will also enable us to bring critical mobile broadband connectivity to billions of people, advancing our vision of making wireless communications possible everywhere. With that, let me hand it over to Rod to go through the details of our results and the updated outlook. Rod?