American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower second quarter 2023 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'd like to ask a question, please press one, then zero on your device. I would now like to turn the call over to your host, Adam Smith, Senior Vice President of Investor Relations. Please go ahead, sir. Good morning.

Good morning. And thank you for joining American Tower's second quarter 2023 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. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our international business. And then Rod Smith, our executive vice president, CFO and treasurer, will discuss our Q2 2023 results and revised full year outlook. After these comments, we will open up the call for your questions. Before we begin our reminder 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 2023 outlook capital allocation and future operating performance. Our collections expectations associated with Vodafone idea 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, 2022, as updated in our upcoming Form 10-Q for the six months ended June 30th, 2023, 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. With that, I'll turn the call over to Tom.

Thanks, Adam. Thanks to everyone for joining this morning's call. Consistent with our past practice, my comments today will focus on our international segment, which consists of a well-diversified, high-growth portfolio of assets across key developed and emerging geographies outside of the United States. Before diving into our international operations, though, in light of the recent excitement surrounding the potential arising from AI workloads, I'd like to spend a moment highlighting the demand we're seeing in our core site data center business, where we've seen 9% year-over-year growth in both revenue and operating profit through the first six months of the year. Following record levels of signed new business in 2022 and Q1 of 23, We continue to see demand for data centers outstripping supply and our initial underwriting expectations elevated pre-leashing in a pipeline that points to an extended opportunity for increasingly profitable growth. Each of these factors is contributing to strong pricing trends and the ability to be selective in terms of signing new logos and expansions from existing customers, ensuring accretion to the value of the interconnection ecosystem and overall AFFO growth, particularly once we begin commencing the remainder of the record new business we've signed over the last year and a half. This is all before factoring in expectations for elevated demand from AI use cases. While much of the immediate demand in the market today is coming from hyperscale requirements, the longer-term opportunity for an interconnection hub like CoreSight is just as significant and is arising from several key demand drivers. First, we've already seen an acceleration in outsourcing to core site as hybrid IT and multi-cloud access are becoming more relevant for continued digital transformation across all workloads. As enterprises increasingly leverage new generative AI models for business and customer applications, they'll need to deploy servers that require more power and cooling than on-premises data centers can typically handle. At the same time, we expect existing enterprise customers who are building AI into their products and operating models will expand their power and space requirements, and Coresight, with its flexible and scalable model and speed-to-market benefits, is already well-positioned to support these expected use cases today. Second, we're seeing today's cloud-enabled large language models requiring connections to proprietary distributed data sets used for training, which CoreSight, as an interconnection ecosystem with a nationwide distribution of cloud on-ramps, is well-situated to serve. And finally, we see a significant incremental opportunity arising from the use of hybrid and custom large language models for training and inferencing, where low latency, high power density, and distributed high performance compute is expected to result in elevated activity across our existing core site campus footprint. Over time, we see a potential for these dynamic requirements to push demand for a more distributed compute infrastructure, for which our core site portfolio and ultimately our distributed footprint of land parcels under tower sites may be ideal locations over the long term. Simply put, the ongoing demand trends in the data center space and the emergence of generative AI use cases are providing American Tower and CoreSight an opportunity to play a central role as an infrastructure provider against a backdrop of technology evolution that's expected to drive a step-up function increase in computing power demand. As a result, we see a compelling opportunity to continue delivering the industry-leading yields on invested capital that CoreSight has historically achieved, which Rod will touch on more later. With that, let's turn to our international tower business, where our objectives have remained clear since we began expansion over two decades ago. leverage our proven capabilities and expertise to selectively invest in the world's largest free market democracies with regulatory structures that are supportive of the neutral host tower model, healthy competitive wireless industries, and high quality assets and counterparties. At the same time, we focused on investing in markets that are in various stages of network technology development and where we see a path to establishing nationwide scale. By bringing these factors together, we believe we could both augment and extend our growth trajectory, leverage our platform and expertise to create incremental value in selected markets, and add to an already compelling total return profile for American Tower shareholders. As a critical component of this portfolio management and capital allocation program, we measure and analyze our assets on an ongoing basis to ensure the merits identified in our initial investment underwriting remain consistent today. As you've seen recently, such evaluation has led to select divestitures, including our Mexico fiber business and operations in Poland, and a strategic review of our India business. The takeaways from these analyses, together with our on-the-ground experiences across our global business, continue to shape and evolve our approach to capital allocation and the criteria we use to support ongoing capital investment and the setting of appropriate risk-adjusted rates of return. Today, we have a leading international portfolio of nearly 183,000 sites. that are contributing approximately 45% and 36% towards consolidated property revenues and operating profit, respectively, and are expected to deliver more than 8.5% in total tenant billings growth, including greater than a 6.5% organic growth in 2023. The secular demand trends deriving our international growth remain consistent, Similar to the U.S., industry estimates forecast roughly $35 billion in carrier capex across our non-U.S. markets in 2023, and forecasts suggest mobile data consumption is set to grow in the 20% to 30% range on average in these markets over the next several years, which would mark a continuation of the trends we've seen over the better part of the last two decades. Globally, we've anchored our portfolio in key markets, which are in varying stages of network development relative to that of the U.S., where some level of 5G coverage deployed over a combination of low and mid-band spectrum has reached approximately 95% of the population. In Europe, that number is closer to 60%, while Africa and Latin America are closer to 7% to 8%, suggesting a long tail of 5G. and other next-generation technology investments, requiring significant incremental network density and cell site points of presence. Critical to our expansion strategy has been our discipline in establishing appropriate contract structures with the leading MNOs in each geography. Although we've experienced certain consolidation-driven churn events across our international portfolios over the past several years, We believe that through our proactive steps to increase exposure to leading multinational counterparties, we strategically reset our international customer base, enhancing the quality of our earnings and predictability of growth. In fact, in Africa, approximately 90% of our Q2 property revenues are derived by market leaders Airtel, MTN, Vodafone, and Orange, as compared to roughly 80% five years ago. In Europe, we similarly see over 80% of property revenues supported by Telefonica, Orange, Vodafone, and Deutsche Telekom, versus less than 60% at the same time in 2018. In Latin America, which has a more fragmented customer base given our operations across eight markets, we're still generating approximately 75% of our property revenues from Telefonica, AT&T, America Mobile, and Timb. up from a little over 60% over the same time period. In addition to focusing on partnerships with market leaders, we've underwritten attractive leasing terms, including real estate rights and CPI-linked escalators in the vast majority of our contracts outside of India. This disciplined approach to securing growth through critical contract terms is evident in our results in Q2. With a combination of gross organic new business and our escalator generated just under 13.5% growth in aggregate for Latin America, Europe, and Africa, roughly 300 basis points over our trailing five-year average. This reflects our ability to complement new site leasing with attractive amendment growth across our international operations, as we've done in the U.S. historically. In fact, looking again at Latin America, Europe, and Africa, of the roughly $100 million we've generated through co-location and amendment growth over the past 12 months, around half, both in each region and in the aggregate, has come in the form of amendments, illustrating our ability to monetize various stages of network investment cycles and our success in franchising our proven U.S. tower model throughout our global operations. There's perhaps no better example of the benefits of remaining disciplined in terms of contract structure than Europe, where over the last several quarters, CPI-linked escalators in Germany and Spain have provided a boost to our organic growth profile, and where again, roughly half of our new business growth has been driven by 5G-related amendment activity on existing sites. In 2023, these factors, as well as a healthy leasing environment, are coming together to drive an expectation for approximately 8% organic tenant buildings growth in Europe, including an expectation for an acceleration in growth from co-locations as we exit the year. As the 5G investment cycle continues, our contract structures, along with our work to develop leading operating capabilities in the region, and an ongoing expectation for low churn, should allow us to deliver solid organic growth in the region for the foreseeable future. Furthermore, The importance of the scale we've built as a distinct competitive advantage has never been clearer. Through our global diversified presence and decades-long track record of operational excellence, we've established American Tower as a trusted strategic partner for our customers. This is exemplified by our new build program, where we've partnered with leading carriers to rapidly deploy new sites, which has driven some of our highest returns on invested capital. In fact, since we began expanding internationally, we've built over 45,000 international sites, which are achieving an NOI yield of approximately 25%. And approximately 65% of these sites have been built since the start of 2017 alone, shortly after we crossed the 100,000 international site mark. Nearly 8,000 of these sites have been built in Africa, where our scaled presence and strategic relationships with key wireless operators have afforded us the opportunity to build several thousand new sites in recent years that typically deliver mid-teen yields on day one. As we continue to augment our scale in key markets across the region, 4G investments, which are very much in the middle innings today, are driving compelling organic tenant billings growth in our existing assets. including an expectation for greater than 11% growth in 2023, of which approximately 7% is coming from co-locations and amendments, the highest of any region. And as the 4G cycle rounds out over the next few years and we move toward 5G and the densification requirements that come with it, we expect capacity utilization across the assets we've built over the last several years to result in ongoing compelling growth. Meanwhile, our regional scale and leading capabilities have resulted in the opportunity to invest in accretive platform extensions, such as our Power as a Service program in Africa. As you'll see in our recently published sustainability report, through 2022, we've invested approximately $345 million in this program, primarily in solar arrays and lithium ion battery solutions. As a result, we've decreased annual diesel consumption at our sites in the region by an estimated 43.5 million liters when compared to business as usual operations, and we've reduced our greenhouse gas emissions intensity per tower by 21% against our 2019 baseline. Based on the demand to extend this program, it seems clear that this solution provides compelling, differentiated value to our customers. At the same time, the program advances our progress toward meeting our science-based targets and supports our customers' network sustainability goals. Meanwhile, similar to our new build program, these investments have been among the highest return opportunities we've seen. And as more power-intensive 5G begins to be deployed at scale more broadly, we believe we'll be well-positioned to continue extending the reach of this high return program to new geographies over time. Finally, we're more focused than ever on leveraging the benefits of our scale to maximize the margin profile of the business. For example, through our global business services organization, we've invested in standardization across lease management and other transactional processes that's driving both significant increase in productivity and run rate savings on an annual basis. Through our procurement organization, we're beginning to truly leverage our scale as a buyer to reduce input costs in our build-to-suit programs, drive cost optimization when it comes to power and energy components, and work with other critical vendors in our supply chain to realize incremental efficiencies. And while we're beginning to see the benefits of these and many other initiatives in our operations today, We believe we have a significant opportunity to transform our organization into one that is truly global and capable of maximizing the operating leverage inherent to the business to expand on an already attractive margin profile. In summary, we believe our global platform of assets is exceptionally positioned to benefit from what we expect to be a massive wave of incremental infrastructure demand required to support the technological advancements in network capabilities we're beginning to see in the market today. By complementing our U.S. platform with a continued disciplined approach to international growth and a focus on leveraging our scale, capabilities, and learnings from over two decades of international U.S. operations, we can provide compelling growth and margin expansion, an augmented return opportunity for investors, and a differentiated value proposition for our customers for many years to come. With that, I'll turn the call over to Rod to go through the quarterly results and updated outlook.