American Tower's Senior Vice President of Investor Relations, Adam Smith, welcomed listeners to the company's second quarter 2023 earnings conference call. Smith reminded listeners that the call would contain forward-looking statements and that these statements involve a number of risks and uncertainties. Tom Bartlett, the President and CEO, and Rod Smith, the Executive Vice President, CFO and Treasurer, will provide updates on the international business and Q2 2023 results, respectively, before the call is opened for questions.

This paragraph discusses the demand for CoreSite data centers, which has seen 9% year-over-year growth in revenue and operating profits in the first six months of the year. The demand is outstripping supply and is resulting in strong pricing trends and the ability to be selective in signing new customers. This is before factoring in potential demand from AI use cases, which is expected to be significant over the long term.

CoreSite is well-positioned to provide increased power and cooling requirements for AI models, as well as providing an interconnection ecosystem and cloud on-ramps for large language models. American Tower from CoreSite is expected to benefit from this increased demand for computing power, and is in an ideal position to provide a distributed compute infrastructure for the long-term.

CoreSite has achieved industry leading yields on invested capital, and American Tower has been expanding for two decades in free market democracies with supportive regulatory structures, healthy wireless industries, and high quality assets. They focus on markets with a path to establishing nationwide scale, and they measure and analyze their assets to ensure their initial investment underwriting remains consistent. This has led to select divestitures and a strategic review of their India business, which shapes their approach to capital allocation and setting of appropriate risk adjusted rates of return.

This paragraph discusses the international portfolio of sites that are contributing to consolidated property revenues and operating profits. It also outlines the secular demand trends driving international growth, which are similar to those in the U.S. It is noted that 5G coverage has reached 95% of the population in the U.S. but is much lower in other markets. The paragraph also discusses the importance of establishing appropriate contract structures with leading M&A in each geography and the benefits of increasing exposure to leading multinational counterparties. Finally, it is mentioned that in Africa, 90% of property revenues are derived from market leaders Airtel, MTN, Vodafone, and Orange, as compared to 80% five years ago.

This paragraph discusses the success that American Tower has seen in its international operations, specifically in Europe, Latin America, and Africa. It highlights the company's focus on partnerships with market leaders and its ability to secure attractive leasing terms. It also mentions the success of its CPI linked escalators, which have provided a boost to organic growth in Europe, and the success of 5G related amendment activity in these regions. Additionally, it notes that approximately half of the company's new business growth has been driven by amendments.

American Tower has established itself as a trusted partner for customers with its global diversified presence and decades of operational excellence. It has built over 45,000 international sites since expanding internationally, with nearly 8000 of these in Africa. 4G investments are driving organic tenant billings growth, with an expectation for greater than 11% growth in 2023, of which approximately 7% is coming from colocation and amendments. The region is also expected to experience 8% organic growth in Billings in 2023 due to a healthy leasing environment.

4G is coming to an end and 5G is beginning, which will lead to increased capacity utilization of assets built in the last few years. The company has invested $345 million in a power as a service program in Africa, which has decreased diesel consumption and reduced greenhouse gas emissions. Additionally, the Global Business Services Organization has invested in standardization across lease management and other transactional processes, which has increased productivity and run rate savings.

In the second quarter, the company saw strong demand for its global portfolio and successful operational execution, which resulted in positive results. Going forward, the company plans to leverage its scale as a buyer to reduce input costs, optimize energy components, and maximize the operating leverage of the business. This will provide growth and margin expansion, and a differentiated value proposition for customers.

American Tower had a strong second quarter, with over 6% organic tenant billings growth and 4% property revenue growth. They raised $2.7 billion in fixed rate debt, decreasing their exposure to floating rate debt to less than 15%. They also maintained a strong focus on cost management, keeping cash SG&A flat year-over-year and expanding their adjusted EBITDA margin. They are in active discussions with investors regarding the potential sale of a majority equity interest in their India business.

Q2 consolidated year-over-year property revenue growth was over 4%, or over 6% on an FX neutral basis, and organic tenant billings growth was 6.2%. In the U.S. and Canada segment, organic tenant billings growth was 5.1%, excluding Sprint related churn. International segment saw outperformance with Africa, Europe, and APAC producing growth of 12.9%, 8.3%, and 5.6%, respectively. Latin America saw a deceleration of 5.4%. CPI linked escalators were realized across the majority of international markets, and there was a delay in the anticipated churn in Latin America.

This paragraph discusses the strong leasing trends that have driven an improvement in colocation and amendment growth contributions across all segments, resulting in a 40 basis point improvement sequentially. Additionally, adjusted EBITDA grew 5% to over $1.7 billion, attributable AFFO and attributable AFFO per share decreased by less than 1% and 2%, respectively. The strong performance of the business has led to an increase in expectations for property revenue, adjusted EBITDA, attributable AFFO, and attributable AFFO per share.

The company has maintained its VIL revenue reserve assumption of $75 million and has seen similar collection trends in the second quarter as compared to Q1. Additionally, they have assumed lower U.S. services volumes for the rest of the year, resulting in a $40 million reduction in gross margin. They are still expecting over $40 million in services gross margin contribution in the back half of the year, however, and have revised their FX and interest assumptions.

FX impacts are expected to be minimal due to the USD denomination of tenant revenues and the strengthening of other currencies. Property revenue is expected to increase by $125 million, with $65 million from core property revenue and $60 million from straight line and pass-through revenue. Tenant billings growth is expected to be approximately 5% in the U.S. and Canada, and 4% in Latin America.

The company is raising its guidance for Europe and Africa, expecting 8% and greater than 11% growth respectively. They are also raising their adjusted EBITDA outlook by $75 million and AFFO attributable to common stockholders by $25 million. This is due to strong conversion of incremental property revenue, cost controls, and straight line rent, partially offset by a reduction of $40 million associated with their U.S. services business.

CoreSite's capital allocation plans remain consistent relative to prior outlook, with $3 billion in common stock dividends and $1.7 billion in capital expenditures. The company plans to allocate $360 million to the U.S. data center business in 2023, and retail and scale backlog is at record levels. CoreSite is uniquely positioned to support high-performance workloads, and pre-leasing is at 36%, illustrating the robust demand across the space.

American Tower is well-positioned to deliver strong, sustained growth in shareholder returns due to its global portfolio, strong balance sheet, best-in-class operating capabilities, disciplined approach to capital allocation, and focus on driving long-term efficiencies. They have raised $2.7 billion in fixed rate debt and have a net leverage of 5.3 times. They are remaining selective and disciplined in their investment decisions and will remain opportunistic in accessing the debt capital markets.

Rod Smith discussed the slowdown in carrier activity and its effect on service revenues. He noted that activity levels are still equal to or better than the 4G cycle high watermark, and that the long-term guidance for the company is secure through 2027 due to the comprehensive agreements they have in place.

Tom Bartlett and Rod Smith discuss the organic tenant billings growth in the US, which is expected to average 5% from now until 2027, and is not affected by the current slowdown. They also mention that 4-5% of that growth is due to new business. Additionally, they discuss the strength of the data center business, which includes customers from cloud, enterprise, and network. They state that there is a record level of cash backlog, with a pipeline that is up 70%.

CoreSite is experiencing robust growth, with 10% revenue growth in Q1 and high single-digit growth in Q2. The cash mark-to-market is at the high end of the range, churn is well controlled, and interconnection growth is higher than the 6-8% target. CAPEX is at $360 million this year, with an average backlog of $53 million that will be deployed over the next 18-24 months.

Rod Smith addressed the question of deleveraging, noting that their target range is between 3 and 5 times. He also mentioned that reducing overall debt is a priority and that they are focused on this. Additionally, he mentioned that they have not done a lot of deals since the CoreSite deal, but they are starting to think about being more opportunistic on the M&A side and evaluating the returns and growth rates.

Rod and Tom Bartlett discuss the company's capital program and priorities for Q3 which include delevering and reducing their exposure to floating rate debt. They are targeting a debt ratio of 5 times and are deploying 1.7 billion in capital to achieve this goal. They are also prioritizing dividend growth and have reduced their floating rate debt to 15%. They are looking for opportunities to reduce their floating rate debt even further.

Rod Smith answered a question from Matt Niknam about international churn expectations, stating that some of the projected organic tenant billings growth is due to a delay in churn, not a reduced expectation. He also mentioned that the delay in churn is primarily due to oi churn in Latin America, which is expected to pick up in the third and fourth quarters of the year. In Africa, churn is expected to remain consistent.

The company is looking at potential churn in the African and Latin American markets of 6 and 6.5%, respectively. It is also fully engaged in a process in India to sell a majority stake of the business, ranging from 50-100%, with the goal of driving the best outcome for shareholders. The process is in the late stages and is expected to complete a transaction sometime during the second half of this year.

Tom Bartlett explains that the pullback in spending seen in the current network investment cycle is reflective of historic cadence of network investment cycles. He also states that American Tower had anticipated comprehensive MLAs in place for their long-term growth expectations for U.S. and Canada in 2021. He suggests that any further questions about carrier activity should be directed to the carriers themselves.

The current cycle of development includes a period of elevated coverage CAPEX to upgrade existing infrastructure and bring down cost per bit, followed by grooming and later densification. The services business is still at record levels, with customers spending more than in 4G, despite some anticipation of a pull back in 5G spending.

Rod Smith has provided an update on the investment in India, which totals around $5 billion, with $2.5 billion currently on the books. Vodafone Idea is now current and paying in full, and the company has converted $200 million of prior receivables into a financial note receivable. Additionally, the company has slowed down some of its builds in India, likely related to the strategic review process.

Rod Smith has stated that the company is being disciplined and patient when it comes to new builds in India due to the higher cost of capital and their desire to invest in opportunities with higher returns. They are also continuing to build towers in Europe, Africa, and Latin America. The company is prioritizing delevering and wants to get below a 5 times debt leverage ratio while also being opportunistic with stock buybacks.

Tom Bartlett discussed the positive renewal spreads and pricing for CoreSite, which is likely due to higher price list for cabinets and cross connects. He also spoke about the retirement of Dave Mayo from DISH and the uncertainty around it, and how it could affect U.S. leasing trends beyond this year.

Tom Bartlett is confident that the business will not be affected by the loss of Dave, a great engineer, and is seeing a lot of success with their pricing increase and high renewal rates. He is also working on several innovation initiatives around EDGE data centers, with potential customers, and is hopeful that AI inferencing will drive more need out at the customer premises.

Rod Smith answered a question from Greg Williams about the cadence of new leasing in the US, stating that it should be in the low 50s by Q4 and in line with the 220-220+ range. He also stated that there is not a lot of DoD spectrum being deployed and any upside from it would be small in the short-term.

Rod Smith states that they are happy with the scale of their data centers, which are located in eight key markets, and that they have a great ecosystem with cloud on-ramps, network companies, and enterprise customers. They are not seeing any headwinds due to a lack of scale, and they are not overly focused on trying to ramp up the scale. They may add a location here and there, but they are generally satisfied with their current assets.

Rod Smith discussed the slowdown in services, noting that it is not across the board and that some carriers are continuing to move forward. He also mentioned that construction services are a small part of the business and that they focus more on preconstruction activities. Tom Bartlett added that grooming cycles can vary depending on the customer and the geography, with shorter cycles in urban areas.

Rod Smith, from the leadership team, answered a question about ground lease renegotiations and their exposure to short-term spikes in land rent due to inflation. He stated that the majority of their sites have long-term leases and they do a lot of work ahead of lease expirations to renew them. On average, their land rent increases in line with their revenue, around 3-4%. Adam Smith concluded the call by thanking everyone for joining and encouraged them to reach out with any further questions.

This summary was generated with AI and may contain some inaccuracies.