The operator introduces the American Tower Third Quarter 2023 Earnings Conference Call and turns it over to Adam Smith, Senior Vice President of Investor Relations. Tom Barlett, President and CEO, will discuss current technology trends and how the company's assets are positioned to benefit. Rod Smith, Executive Vice President, CFO, and Treasurer, will discuss Q3 2023 results and revised full year outlook. Steve Vondran, Executive Vice President and President of the U.S. Tower division, will become the Global Chief Operating Officer on November 1 and the President and CEO on February 1, 2024. The comments may contain forward-looking statements and expectations for future growth, capital allocation, and operating performance.

The speaker discusses the potential factors that could affect the company's future and reminds listeners to consider these when interpreting their statements. They then focus on the technology trends and network investments driving demand for their tower and data center platforms, specifically in the 5G evolution and developments at the edge. They note the significant growth in mobile data consumption and predict continued growth in the next five years, particularly in developed markets.

The 5G investment cycle in the U.S. is expected to follow a similar pattern as previous generations, with three phases driving two peak periods of spending. The first phase is focused on coverage and upgrading existing infrastructure, while also realizing efficiency benefits. As this phase winds down, there is still a long tail of network investment to come, driven by industry growth and contract structures. We are currently transitioning into the second phase of the 5G rollout.

Phase 2 of the 5G rollout is expected to see carriers reaping the benefits of their initial investments and moderating spending. 5G technology will become more prevalent, with over 50% smartphone penetration in North America. This will lead to improved network quality and higher speeds, as well as the emergence of new services and applications. The arrival of end-to-end 5G capabilities will also open up monetization opportunities for enterprises. This will eventually lead to a third phase focused on densification of 5G networks. With the advancements in technology and the potential for mass market use cases, meeting industry forecasts for data consumption growth seems achievable.

Industry estimates show that 5G subscribers consume 2-3 times more mobile data than 4G subscribers, with video streaming being a dominant use case. The average smartphone user currently consumes 21 gigabytes of data per month, with 19 gigabytes attributed to video streaming. With the expected growth in data consumption to 48 gigabytes by 2028, it is clear that 5G is driving increased usage of higher resolution video formats. This trend is expected to continue as 5G adoption increases and new low latency, high bandwidth applications are developed. Therefore, there is a strong case for densification requirements in the deployment of 5G standalone networks.

CoreSite's interconnection centric business is experiencing high demand and strong growth, with record signed new business in 2022 and a target to exceed that in 2023. The business is also seeing elevated growth in interconnection revenue, mark-to-market pricing increases, low churn, and ongoing strong performance. The company is well positioned to deliver compelling results in this segment for years to come, as secular trends such as the migration to hybrid multi-cloud environments and the emergence of AI use cases continue to drive demand. The company is also upgrading its offerings and capabilities to support these emerging use cases, such as launching new capabilities on their software defined networking platform for higher bandwidth virtual connections to major cloud providers and between their data centers.

CoreSite's data centers are designed to support high bandwidth and low latency applications like AI and machine learning. They can accommodate power-intensive GPU services and are flexible for liquid cooling. While currently most AI workloads do not meet their investment criteria, as AI evolves, they expect to see a shift towards specialized inference-based use cases. This will require low latency interconnection and high power density, making CoreSite and their distributed portfolio of real estate assets well-positioned. They are also working on developing an edge model to support more efficient exchange of network traffic and cloud services in a distributed manner.

CoreSite's partnership is proving to be beneficial as they are seeing an increase in customer interest for technologies like private cloud computing, AI, and 5G applications. They have secured future power availability and are able to address power constraints in legacy markets through their distributed land footprint. They also have the potential to offer interconnection benefits and a broader edge for customers interested in revenue opportunities and improved customer experience. By prioritizing their existing real estate, they can also reduce development costs and offer a faster time to market, which could be appealing to customers and improve returns on investment.

American Tower is working towards creating a repeatable and rapidly deployable design for their infrastructure that can be scaled as demand increases. They will only invest in growth opportunities if they align with their long-term strategic vision and meet their investment criteria. The company believes that ongoing technology developments will drive the need for continuous investment in infrastructure and that they are in a unique position to serve these needs. The company has announced changes in leadership, with Steve Vondran becoming the new Global Chief Operating Officer and Bud Noel becoming the new Executive Vice President and President of the U.S. Tower Division. The company has carefully considered succession planning and decided to promote from within the organization.

In the paragraph, it is stated that Steve Vondran, who has been instrumental in the growth of American Tower for the past 23 years, is a clear candidate to lead the company in its next growth phase. The current CEO, Tom Bartlett, will be working closely with Steve and the executive leadership team to ensure a smooth transition. Tom also thanks the employees, customers, and investors for their support during his time with the company. The call is then turned over to Rod Smith, who discusses the company's strong performance, focus on organic growth and cost management, and efforts to strengthen their balance sheet. These efforts, along with evolving technological trends, give the company confidence in their ability to drive sustained growth in the long term.

In the third quarter, the company saw strong performance and positive trends across global operations, leading to increased revenue and expectations for the full year. Cost management efforts resulted in improved margins and the company also made progress on reducing floating rate debt. They are also close to finalizing the strategic review of their India business, which resulted in a goodwill impairment charge of $322 million. The outcome of this process will be communicated to shareholders before the end of the year.

The impairment accurately reflects the current market conditions and increased cost of capital in India. Property revenue and organic tenant billings grew by 7% and 6.3%, respectively, with strong performance in all segments. The data center business revenue increased by over 9% and is expected to continue growing in the next few years. The U.S. and Canada segment saw organic tenant billings growth of 5.3%, while the International segment had outperformance in most regions, resulting in 7.9% organic tenant billings growth.

In the third quarter, the company's adjusted EBITDA grew over 10% and the adjusted EBITDA margin expanded by 290 basis points. This was driven by solid organic growth, effective cost management, and one-time revenue items. Despite inflation, the company was able to maintain a relatively flat cash SG&A profile. Attributable AFFO and AFFO per share also increased by over 9%. The company has raised its full year outlook for property revenue, adjusted EBITDA, and AFFO due to strong performance and momentum. However, there has been a reduction in U.S. services, resulting in a decrease in gross margin. The updated outlook also includes revised FX assumptions that have resulted in headwinds for property revenue, adjusted EBITDA, and AFFO.

The company is increasing their expectations for property revenue by $60 million, driven by outperformance in core property revenue, pass-through and straight-line revenues. This includes $10 million from VIL collections. They are also increasing their expectations for organic tenant billings growth in all segments, with the U.S. and Canada at over 5%, Latin America at approximately 5%, Africa at 12%, and APAC at 5%. This results in a $60 million increase in adjusted EBITDA, with strong conversion of incremental property revenue and cost controls contributing to outperformance.

The company's growth was partially offset by a reduction in their U.S. services business and a negative FX impact. They are raising their expectations for AFFO attributable to common stockholders and plan to distribute $3 billion in common stock dividends. Their full year CapEx spend remains consistent at $1.7 billion and their goal is to create incremental value through organic growth and optimizing operational efficiency while strengthening their financial position.

American Tower is prioritizing balance sheet strength and selective capital expenditures in light of the current economic climate. They anticipate maintaining their dividend per share profile in 2024 and will discuss their plans in more detail on their next earnings call. The company successfully executed financing initiatives in the third quarter, reducing floating rate debt and increasing liquidity. They closed the quarter with a net leverage of approximately 5 times and plan to remain opportunistic in accessing debt capital markets to maintain a strong balance sheet. Overall, their diverse portfolio of global communications assets has shown resiliency and produced attractive growth through organic leasing and cost management.

The company is making progress in strengthening its balance sheet and is committed to managing its capital structure and allocation priorities for long-term returns. The operator opens the line for questions and the first question is about capital allocation. The company plans to bring leverage down more aggressively given the current rate environment and uncertain macro environment. They also discuss the dividend decision and potential opportunities for M&A and buybacks. The company's leverage is currently higher than their stated range, but they expect it to decrease towards the end of the year.

The company's main priorities include reducing leverage, driving organic growth, improving operational efficiency, and increasing margins. They are also focused on controlling SG&A and increasing AFFO and AFFO growth. The target is to reach a leverage ratio of 5.0 and they are diligently working towards this goal. They have reduced their capital plans this year to strengthen their balance sheet and drive total shareholder return. The company believes that holding the dividend flat next year is the best use of capital in the current uncertain rate environment. M&A opportunities are not a priority for capital allocation at this time. The company has a history of growing its dividend at a rate of 20% annually and aligning it with REIT taxable income.

The REIT AI has both recurring and one-time buckets that allow for a predictable dividend growth rate. In 2023, the company plans to increase its dividend by 10%, using one-time items to manage the distribution. In 2024, the company plans to reset REIT AI closer to the run rate, resulting in temporarily flat dividends per share. The company's priorities include strengthening and de-risking its balance sheet, maximizing organic growth, reducing costs, and managing the dividend. This decision is not taken lightly.

The speaker, Michael Rollins, congratulates Tom Bartlett on his upcoming retirement and Steve on his transition to CEO. He then asks about the activity levels in the domestic business and how they will impact growth in the future. He also asks about the delays in Sprint-related churn and how that will affect the decommissioning pace. The speaker, Rod Smith, declines to give specific guidance for 2024 but mentions that activity levels have decreased in recent months.

American Tower expects to achieve an average annual OTBG growth rate of at least 5% in the U.S. and Canada segment between 2023 and 2027, with visibility into a level of organic growth in 2024 that supports this goal. While they do not expect another year of $230 million growth from colocation and amendment activity, their MLAs provide visibility into a level of colocation and movement contributions that exceeds their average over the past several years. The annual impacts of Sprint churn have been $195 million in 2021, $60 million in 2022, and $50 million in 2023, with no change to this cadence in their prior guidance. The delays in churn are not related to Sprint, but rather other items that could be moved out. There is potential for upside in longer-term growth rates, but it is unlikely to materialize in 2024.

David Barden asks a question about the finance side of the company, specifically regarding the increases in non-U.S. regions. He asks for a breakdown of the growth in terms of core organic leasing and inflation-driven escalators, and whether it is sustainable or driven by inflation. He also asks for more information on the India situation and the potential dilution for 2024. Rod Smith responds by addressing the organic tenant billings piece first.

The company is experiencing increases in organic tenant billings across all regions, with the overall organic tenant billings increasing to about 6%. The U.S. is seeing strong performance, but there is some delayed churn expected to hit next year. Latin America and APAC are also seeing increases, but it is mostly due to delayed churn and discounts. Europe is staying in line, while Africa is experiencing higher levels of new business activity. The increases in Africa are expected to be durable and lasting. In response to a question about dilution, the speaker asks for clarification.

The speaker thanks the commenter for their helpful input on the India write-down. They confirm that the write-down is based on internal analysis and indications of value, and provides some financial information on the India business. They also mention that the strategic review is progressing well and they will provide more guidance when it is completed.

The company is confident that they will conclude a deal this year to sell a majority equity stake to a financial investor. They will likely retain a stake between 61% and 100%. The process is expected to be completed in the next couple of months and investors will be informed of the details. The analysts express their gratitude to the departing CEO and discuss the current dividend, which is expected to be flat year-on-year.

The company's intention is to maintain a flat annual dividend to support deleveraging and AFFO growth. The sale of the India business does not impact this decision. The company's focus is on using capital to drive balance sheet strength and total shareholder returns in the uncertain market. The recent small acquisition from AT&T/SBCs is not indicative of a larger trend in the marketplace.

The speaker reiterates that there is a market for smaller portfolios in the US, but prices are still high and not in line with today's cost of capital. The only recent small acquisition was a buyout of a prior SBC sublease. The company routinely reviews their portfolio performance and considers capital recycling opportunities, such as their exit from the Mexico fiber business, and their considerations for the India market.

In the third quarter, services revenue in the U.S. dropped off, potentially due to industry trends. The company constantly evaluates its portfolio and capital deployment, with a focus on driving organic growth and shareholder return. Colo and amendment activity in the U.S. remained stable in the third quarter, with an implied number of $53 million for the fourth quarter.

Tom Bartlett, CEO of a company, responds to a question about the company's expected run rate for the next year. He mentions that the company's service business is difficult to predict and that they have seen a moderation of activity this year. However, he also notes that the company is somewhat insulated from the fluctuations in activity due to their cooperative MLAs. He adds that it is too early to give guidance for 2024 and that the capital spend is still settling at higher levels than in 4G. The company expects customers to continue building throughout the 5G cadence and will give better guidance in February. CFO Rod Smith adds that the company is anticipating a number of around $230 million for co-location amendment additions in the U.S. this year.

Tom Bartlett and Steve Smith were asked about the company's capital allocation plans in light of recent increases in interest rates. Bartlett stated that they will not give guidance until next year, but for modeling purposes, analysts should split the difference between this year and last year. He also mentioned that the services business is still performing well with higher margins, despite a decrease in revenue. Eric Luebchow asked if the increase in interest rates would affect the company's international build-to-suit ambitions, and if they would consider reallocating capital to their data center business.

Rod Smith, speaking to Eric, discusses the company's capital allocation and decision-making process. He mentions that they regularly review and adjust their capital plan to support long-term total shareholder return, taking into account factors such as the cost of capital and interest rates. In the current environment, they may reduce capital and focus on areas that align with their priorities, such as organic growth, quality of earnings, and balance sheet strength. This could mean allocating more capital to higher quality markets, reducing CapEx and increasing debt reduction, or adjusting the dividend growth.

The company is constantly considering its capital allocation and will reveal its plans in February. The churn rate in Latin America is expected to be around 6% in 2023, driven by delays in churn from oi and Telefonica. Inflation in some markets may affect organic tenant billings growth. The company will closely monitor these factors in the coming year.

Tom Bartlett, CEO of American Tower Corporation, discussed the outlook for technology upgrades, particularly the impact of 5G and massive MIMO on the company's business. He believes that the increased spectrum and capacity improvements enabled by 5G will not significantly change the pace of upgrades compared to previous technology upgrades. The demand for data is expected to be high, which will consume much of the available spectrum capacity.

The speaker explains that there is more spectrum available for use in the mid-band, and the usage will likely follow a similar path as seen in 3G and 4G. In terms of dividend growth, it is expected to be in line with taxable income growth, which is likely to be consistent with AFFO and AFFO per share growth. The company typically dividends out 100% of REIT taxable income, but they also manage the dividend payout to match AFFO growth.

The speaker discusses the company's AFFO growth and dividend growth, stating that they will consider capital allocation and the best uses of capital for shareholders each year and quarter. They mention one-time revenue benefits, including a customer equipment removal settlement and settlement fees, which will drop off in the fourth quarter. The speaker also mentions that leverage will end at around 5.2-5.3 at year-end.

The speaker, Rod Smith, is responding to a question about the company's AFFO growth in the next year or two, assuming the sale of India at the end of the year. Smith states that the company's focus is on deleveraging and reducing exposure to floating rate debt, with the goal of reaching a leverage ratio of 5.0 as soon as possible, ideally by 2024. The company is implementing various initiatives to drive operational efficiency and increase margins, which will also help achieve this goal.

The speaker discusses the company's AFFO and how it was impacted by financing costs and other factors. They believe the portfolio is well positioned for growth in the long term, but potential interruptions could come from FX volatility and uncertainty in interest rates. The speaker encourages any further questions to be directed to the Investor Relations team.

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