American Tower Corporation (NYSE:AMT) Bank of America’s 2024 Media, Communications and Entertainment Conference Call September 5, 2024 9:40 AM ET
Company Participants
Steven Vondran – President and Chief Executive Officer
Conference Call Participants
David Barden – Bank of America
David Barden
(Abrupt start) joining us again. We’re super pleased to have Steve Vondran, President and CEO from American Tower, joining us. Kind of playing cleanup for our Tower guests at the conference this year.
Steve, thanks so much for joining us.
Steven Vondran
Well, thanks for inviting me. Great to be here.
Question-and-Answer Session
Q – David Barden
So maybe kick it off to talk about something that’s not fiber to the home for the first time today. Just as the new CEO, you’ve been here for about — in the seat for about six months. You’ve been around American Tower for the longest time. But kind of at your new perch. Could you tell us a little bit about what you see inside the organization that you want to kind of amplify things that you want to steer away from, just kind of the new CEO playbook?
Steven Vondran
Sure. Well, I’ve been part of the leadership team for a number of years, so there’s a lot of consistency in terms of how we think about the business. I think one of the things we’ve been a little more explicit about is some of the actions we’ve already been taking and kind of the direction we’re going with that.
And so, if you look at our near-term priorities, the first focus is on sales and making sure that we’re maximizing organic growth across the enterprise and coupling that with a focus on cost controls. And so, kind of at the midpoint of our guidance, we’re expecting to save about $35 million in SG&A this year, year-on-year plus not having the inflationary effect that you normally have on it. And it’s not just SG&A that we’re looking at. We’re looking at kind of all of our expense line items across the globe.
David Barden
Is that headcount or process?
Steven Vondran
It’s a combination of that. There’s some headcount in there as well. Some of this is long planned things. In the US, we’ve implemented some — using some machine learning, and we’ve been gathering data with high-definition drones on our towers. We’ll be able to automate some of our processes. And some of it is a reflection of some of our shifts in strategic priorities.
So, if you think about how quickly we’ve grown over the past decade, we had a lot of acquisitions, so we’re buying and integrating portfolios. And we were building a lot of sites, particularly in our emerging markets. And as we’ve shifted some of our CapEx away from those initiatives, we’re not buying and building as much as we were. So, there’s just some kind of low hanging fruit in terms of being able to right size the organization there. And then some of it is just kind of some long-planned efficiencies that you get from being a global operator and centralizing a few things, harmonizing some things, using some automation. But so, you kind of couple the focus on sales with the cost control and you get some margin expansion, which is something that we’re very focused on.
And then, looking at our internal CapEx program and making sure that we’re supplementing the growth that we get organically with the right types of inorganic growth in terms of building new sites, investing in CoreSite, investing in new towers, et cetera. And one of the things I think we’ve been a little more explicit about, especially on our last call, is that we’re focused more on developed markets right now.
And if you — that’s not a new thing. If you look at our capital priorities over the past four years, we’ve invested about $25 billion. And that’s really been in Europe with the Telsius transaction, in the US with CoreSite insight in a couple smaller transactions. We haven’t done an emerging market M&A deal in that time period. And we’ve also reduced our internal CapEx program, the emerging markets. In 2021, emerging markets represented about 70% of our internal CapEx program. This year at the midpoint of our guidance, it’s about 40. So, as we’ve kind of looked at our strategic priorities and what we’re trying to do, those are the kind of the first three legs.
Focusing on the balance sheet is also something that we’ve been talking about. Our goal is to get to our target leverage range of five times. And we’re aiming to get there by the end of the year. Now we were below five times a couple quarters this year, but that was underpinned by some one-time beneficial things that happened, particularly collections in India. You’ll probably see that pop up a little bit this quarter. And then 12/31, I don’t know if we’ll be right on it because there’s some time India timing things in there, but we’ll be very close. If not, we’ll get there early next year. And that focus has really been there to give us complete optionality for the future.
So, we want to be able to pursue any attractive M&A that comes our way that fits our strategic priorities or buy our stock back or increase the dividend, further delever or increasing internal CapEx program. So, we sort of have that flexibility. So that balance sheet has been a priority.
And then, we also have some board refreshment that we’re working through. So, you may have seen, we had Neville Ray as a board member, and we had a couple of board members step down. So there’s some governance items as well that we’re working on this here.
David Barden
Yeah. Now it was a good choice. So, I mean, for the longest time, American Tower was kind of the standard bearer for the emerging market tower business model. And it was born out of the success that you guys had in Mexico and Brazil, and then you kind of looked at India and then took it to Africa. And the premise as I understood it was that emerging markets were kind of basically on a direct line to following the US model eventually of just blanketing the market with mobile. And I think that the — and now the pivot, you were the head of the US, now you’re the head of the whole company and you’re kind of steering away from emerging markets. What — I mean, we can pinpoint one thing, probably in each market that’s been problematic, but is the thesis that underpinned the whole idea of emerging markets being attractive for towers no longer true? Or is it just taking wildly longer to play out than hoped or what is really going on?
Steven Vondran
Sure. So let me just kind of — I’ll touch base on that. When we went into the international markets, we had two kind of primary thesis going on. The first is that we could export our operational model that we kind of think we’ve perfected in the US, across the globe, and get some synergies with operating in those geographies.
When you go outside the US, there’s some complexity that comes with operating those geographies. And we thought we could really overcome those challenges because of our experience here. And we also thought that those markets were further behind on the technology curve, so the demand drivers would be there and you’d see a lot of lease up on the assets. That was the first premise.
The second premise is that we would be able to use those factors to elongate our growth curve and that it would actually make us more profitable and grow faster, longer. And when we’ve reflected on how the markets have played out, that first premise has held true. Absolutely. We’ve gotten operational synergies. I would argue that we’re the best operator in every geography we’re in, even better than the carriers themselves in a lot of respects. In Africa we get higher pricing because we’re better at delivering power than they are. On some of our build to suit agreements, we get more than captive tower companies get because we’re better at building. So, I think we’ve proven those synergies from that perspective, and demand has been great. In Africa this year we’ve had near record sales quarter after quarter because the demand from the consumer is there. Their mobile data growth is outstripping the US in some areas. And so, we see the customers continue to invest. So that’s kind of the first premise.
The second premise has not proven true for us, particularly in recent years, and that’s where the financial risks of operating those markets come in. And so, in particular, it’s come in two flavors. The first is care consolidation. And so, we saw that happen in India, and that was one of the major factors. And some of our decisions that we made there, that’s also an issue today in Latin America. We’re seeing some outsized churn right now from Oi in Brazil in particular, and we’ve seen some care consolidation in Mexico in the past and some other Latin American countries, and we’ve seen a little bit of that in Africa as well. And then the other component is really in Africa, it’s FX has really been the headwind that’s reduced the profitability in those markets in US dollars when you translate it back.
And now we knew when we were going international, FX was going to be an issue. We built some mechanisms in to correct for that. Everywhere outside the US, except for India and France, we have CPI escalators. And so that will offset some of the FX over time. But it’s not perfect, it doesn’t offset it completely. We also built in some contractual mechanisms. We do have some dollar pegging in places like Nigeria for a portion of the rents. And we have some natural hedges in the way we structure our agreements so that the majority of our costs in those countries are passed through. So, in Latin America, it’s usually land rent is the biggest cost, about 75% of our expense that’s passed through the carriers. So that’s local currency both ways. And Africa it’s power, and that’s passed through as well. And that’s about 75% of the costs. So, there’s some natural hedges in there.
And so, we’ve done a lot of things to protect ourselves on that. But as we reflected on the kind of the final results and how that’s kind of hit our bottom line, the FX has quite frankly outpaced our expectations. And so, the response that we’ve taken to that has been twofold. The first is we’ve raised the hurdle rates in the emerging markets, because as we look back, we said, if we had higher hurdle rates, we could have overcome more of the FX. And so, we’ve raised the hurdle rates that’ll create fewer investment opportunities.
And the second thing we’ve done is we said we want to decrease the overall enterprise exposure to emerging markets. So, we’re focusing more of our CapEx on the developed markets and we’re not telegraphing more divestitures or anything like that. We just will grow the developed more than we grow the emerging markets. So that percentage will trend down over time.
And pro forma for India, our exposure on an AFFO per share basis to emerging markets will be about 25%, and we expect that to trend down over time as a result of investing more in the developed markets. And so one of the things we’re doing with the emerging markets is we’re repatriating that cash and using it to invest in other priorities. And so, we’ve got some good, durable cash flows in Latin America and Africa and it’s nice to be able to bring that cash back and invest it in the US, Europe and CoreSite.
David Barden
So, when you say developed markets, obviously we’ll talk about the US in a sec. But Europe has been kind of your go to. One of your peers was here yesterday, I asked about the appetite to invest in developed markets and they were kind of very cautious that the European model isn’t as developed as you might think, that consolidation is an issue still, that the profitability and the regulatory environment is such that it’s tougher for the European carriers to make and invest money in their networks.
So, what makes you comfortable that Europe is such a better opportunity than the South Africa’s and the Mexico’s of the world?
Steven Vondran
We’ve been very cautious in Europe as well. So when we were looking to expand in Europe, we waited and waited and waited. A number of transactions happened, a number of portfolios traded. And for us the main factor in that were the terms and conditions. And so, when we’re thinking about how to create long-term value for our shareholders and how to have a good steady growth path, it’s really important for us to have — again, CPI linked escalators even in Europe, to have the ability to monetize amendments with an anchor tenant to be able to lease up every site, you can’t have sites set aside as golden sites, you can’t lease. Some of those portfolios had a right for the carriers to buy back the towers.
And so, we looked at all those terms and conditions and said that’s just not conducive to our business. That may work for somebody else, it doesn’t work for us. So, we waited. And so when we did enter Europe in a more major way with Telsius, we were getting terms and conditions that met our needs on that. And that’s coming with very low churn, very high demand. And so if you look at the new business environment that we’re seeing there, we’re seeing elevated and increasing new business on that business case. The carriers are deploying 5G. It’s a mix of mid and high band there. So, it’s a little bit different than the US. And we’re seeing some regulatory pushes that are actually helpful by the governments because they’re pushing the carriers to cover more rural areas. So that’s actually very beneficial for us in the leasing environment there. You do have a new entrant in Germany with one in one entering that as a true carry on, an MVNO.
So we think there’s some really positive market dynamics that we’re seeing there. And we’re seeing a little more competition based on network quality than you’ve seen in the past. So, we’re very bullish that the demand trends that we’re seeing in Europe will continue. We’re only in three countries there. So, I’m speaking about kind of the countries that we’re in, but we’d be open to other opportunities if the dynamics are right. And so, for us, it’s contract terms and conditions, it’s what’s the price of the portfolio. But there’s also a leasing environment dynamic that’ll be different country by country based on the number of MNOs, how well capitalized they are, and who we can partner with. We want to partner with the strong carriers, not with the weaker carriers, with the anchors.
David Barden
Is that balance sheet contingent? Because I think you guys have been floated as a potential buyer for a number of assets over the last couple of years and you’ve kind of said, no, no, no, no. Like, we’re focused on deleveraging. Like, don’t even think about us being part of that, is now we’re starting to modify that language a little.
Steven Vondran
I’m pretty sure that we’re rumored to be buying everything that’s for sale, even if it’s not there now. We do have M&A teams that look at everything that’s out there because M&A teams like to buy stuff so that we’re probably somebody from the team’s looking at it. But what we’ve said very publicly is our priority is getting to five times leverage to give us that optionality. And there’s nothing that we’re seeing today on my desk or Rod’s desk that’s compelling enough to take us off of that from an M&A perspective. But we are interested inorganic growth again, with the right terms and conditions and the right price there. And we’re hopeful that there will be opportunities in our developed market footprints to do more of that.
In the meantime, we’ve got a great business in Europe that we’re operating, and we’re expanding there by build to suit. This year, we’re expecting to build about 500 sites, which is 100 more than we built last year. So, we do see some growth there. But we’d love to do something inorganic if we can find the right opportunities.
David Barden
So, I think that that probably goes without saying for everybody at the right price. You guys — given that you’re close enough, maybe to your leverage target a few months away, kind of getting there. They’re showing the rating agencies that when you go up in leverage, like you did with CoreSite, you have the capacity to bring back down again. So, once you’ve kind of hit that, I’m sure you’re going to get permission from the rating agencies to lever up if you choose.
Steven Vondran
We just got an upgrade. I’m not sure if you saw that.
David Barden
I have not seen anything.
Steven Vondran
Yes. We just got upgraded triple B flat.
David Barden
Congratulations.
Steven Vondran
Thank you.
David Barden
I want to get to that balance sheet stuff in a second, but just you have the highest multiple of the towers. We’re going to talk a little bit about why that is in a second, too. So, we’ve gotten — your peers have kind of made the argument. I’ve heard this argument from a lot of people that private tower valuations are just beyond where the public valuations are. There’s just the bid ask spread is just far too wide. And that maybe that’s informed by investments and valuations that linger from an earlier time in lower interest rates. But do you feel like it’s possible that there are kind of inorganic transactions that are within reach? That your valuation, your balance sheet, the pliability of the sellers is — there’s a way to bridge that gap.
Steven Vondran
There’s nothing today that we’re looking at that we think that would be compelling for us. But that’s not to say that there won’t be something in the future. And the multiple is one way to value it. But part of that’s what value can you create. If you look at our InSite acquisition, we paid a healthy multiple for that business at the time, but we did that because we knew that we could create more value. We were able to take their sites and their leases, incorporate them into our comprehensive agreements, and outsize the performance of that business. And so we knew that the effective multiple for us would come down very quickly on that. And so that’s the type of thing that let’s us look at a portfolio and decide are we going to be able to monetize something in a way that let’s us pay a little bit more.
David Barden
Yeah. Well, I think people maybe don’t understand, like, so a higher, fuller tower, the Mona Lisa, as Jim Taiclet used to say, is worth a lower multiple because it won’t grow as fast.
Steven Vondran
That’s right.
David Barden
And the opposite is true for say, captive tower portfolios. Inside one carrier, where there’s a 1.1 tenancy, 1.2 tenancy, you pay a much bigger multiple for that.
Steven Vondran
Exactly.
David Barden
Yeah.
Steven Vondran
There’s nothing on the plate today, and we’re very disciplined. We don’t want to overpay for anything. We’re going to be very clear about what’s our potential to make that portfolio perform over the long-term as well.
David Barden
So, let’s come back to the domestic tower business, the majority of the company. So there’s been three challenges that as an industry, the towers have been grappling with. One is the material slowdown in carrier activity levels. The other is the lingering effects of sprint churn. And the last of the big three is the kind of higher for longer impact on rate refinancing and other things. So, you guys have kind of, I think, shown that you’re best-in-class on those three things. And starting with the carrier activity levels, you’ve had the best same-store sales organic growth rate among the peers. And it seems to be related to your MLA’s. Did you anticipate what was happening and it was all skill or was it a little luck too?
Steven Vondran
Every G the care is building in a similar cadence and you have a peak of investment in the first couple of years followed by a pullback. Then there’s a reacceleration and then it steadies off. And so when we look at doing these comprehensive agreements for a period of time, we have a pretty good idea about what activity level is going to be seen over a number of years. So, for us, we’re just trying to, in these comprehensive agreements, take that business we’re going to get anyway and smooth it out. And so, do we know there’s going to be a peak in a valley at some point? Yes, that is going to be as steep as it was and as deep as it was, no. But for us it’s really about that kind of securing the value over the longer term. And those agreements are really operationally efficient for us and the carriers.
It makes it a lot easier to conclude a transaction. Gets them on the air faster, saves them some money in processing, saves us some money in processing. But the purpose of those isn’t to necessarily save ourselves from a valley. It’s more just to smooth it out, give us predictability over time. So, I don’t think there’s anything surprising about what happened. I think that what may be caused by a little bit of surprise is in 4G, the carriers kicked off their builds at different times because they got spectrum at different times, 5G, they got spectrum at the same time. So we had a steeper peak and a steeper valley. But in terms of our comprehensive agreements, one of the purposes is to give us more predictability over time.
David Barden
So, you are also the only tower company, really, that from the beginning of the year through now, which is almost the end of the year, has been saying that you saw activity levels improving and you saw green shoots. And I think that we’ve had other tower companies, I remember, I think Vertical Bridge said something to the effect that only American Tower is seeing this. Why is only American Tower seeing this?
Steven Vondran
Well, I don’t know what they’re seeing. I understand what we’re seeing. And from the beginning of the year, the way to telegraph activity for us is our services guide. And that budget is based not on me or Rod saying, here’s what we want you to hit. It’s based on boots on the ground. I wish it was fun. It would. It’s the boots on the ground people working with the carrier teams, and they tell us what they plan to do on our sites.
Now, services is hard to predict because a couple years ago we did take that guidance up, last year we take it down, but everything we were hearing from the carriers said, there’s a certain level of activity we’re going to do on your sites. And that’s what constructed the guide. In Q1, our application volume was up 70% from Q4. Now Q4 was pretty low, and then we saw another sequential increase in Q2. And that let us reiterate our services guide for the year. That’s inherently risky, but…
David Barden
How’s Q3 going?
Steven Vondran
I’m going to tell you that until Q3. But what I will say is that what we said at the end of Q2 is that we expected a steady pace for the rest of the year from Q2.
David Barden
Flattish from Q2.
Steven Vondran
So that’s what we said at the time.
David Barden
I think I asked that question on the call.
Steven Vondran
I’ll talk actually going in a few weeks.
David Barden
Okay. So, we actually had Marc Montagner, the CFO of SBA, come in and say that he kind of expected that the way that 2025 would shape up would be kind of quarterly steady improvement as densification and that sort of thing occurred. And the belief that that would happen, it was a function of a combination of the kind of activity, conversations that they were having coupled with some of the MLA’s that they have. Do you see the year kind of the progression of that unfolding?
Steven Vondran
I think it’s too early to really for me to opine on what ’25 is going to be. A lot of that depends on the carrier budgets. When I look at the activity that they need to do to complete their 5G build outs, that suggests activity should be picking up. I think what we said very publicly is that one of our carriers is over 80% deployed with mid band 5G. One’s closer to six, this is into Q2. One’s closer to 60 and one’s less than 50. So, if you think about what the carriers need to do to meet the consumer demand on 5G, they need to keep deploying it. So, I think that would imply a step up.
And I think if you look at the CapEx this year that the cares are projecting, it’s kind of $34 billion to $36 billion. That’s kind of right in line with what we thought the average would be during the 5G cycle. So, I think we’ll have to wait and see what their budgets come out as and what their build plans come out. But I think the encouraging thing is they need to do a lot more work to meet the consumer demand. So, you would assume that they’re going to step up the deployments.
David Barden
So, I guess two questions is whether they step up demand or not. Does it really matter for American Tower because of the MLAs, you already know what you’re going to earn, right?
Steven Vondran
Well, we’re only under our comprehensive agreements with two of the top three plus DISH, so there is some variability with the third carrier. So, it does matter a little bit there. But again, it matters more on timing. We have a really good idea about what we’re going to get over a long period of time. That’s what gave us the confidence to come out with a multiyear guide in terms of what our organic billings would be. And so, we expect to get that business over a relevant timeframe. But with somebody off the comprehensive, you are more subject to quarterly or annual variability based on their activity.
David Barden
So that’s AT&T, you kind of came off the holistic at the beginning of the year.
Steven Vondran
We haven’t confirmed who that is.
David Barden
I think you did just now. And so the — but one of the theories was that the reason why you were seeing services revenue activity that other people weren’t was because you’re getting an outsized share of the AT&T open ran initiative that they announced at the beginning of the year. Is that true?
Steven Vondran
We — I don’t talk about specific customer things because I just say…
David Barden
The third player, there’s a player out there that…
Steven Vondran
What we said publicly is that our activity on our sites is broad based.
David Barden
Okay.
Steven Vondran
And so I think that you can read into that what you will, but it’s broad based activity levels across all of our carrier customers.
David Barden
So, the second big challenge for the industry has been sprint churn. And can you tell us about how sprint churn has and will affect the American Tower?
Steven Vondran
So, we’ve had — the majority of our sprint churn is behind us. The last tranche of sprint churn hits in Q4 of this year, and that’s about $70 million. And so, once that’s through, we’re through with the sprint churn from our agreement there.
David Barden
And again, how was it that you decided to — what made you chew through that faster than everyone else was able to chew through it?
Steven Vondran
We had — I think we disclosed this at the time. We entered into an agreement with T-Mobile post the merger, and we took a long-term view of the business and did what we thought was right for the long-term. And that meant taking a little bit of churn earlier on in exchange for the benefits that we got for the long-term relationship.
David Barden
And then the third piece is the kind of balance sheet interest rate exposure. So, there’s guys who have very attractive hedges, but those things are going to get refinanced at much more expensive rates. There’s guys that have bigger towers coming up sooner. It feels like Rod did a pretty good job of stacking the maturity towers through time, but you did have a lot of variable rate debt that you had to chew through. So, kind of give us a snapshot of where we are. And now, philosophically, as we look at a falling rate environment, assuming that’s where we are, what happens next?
Steven Vondran
Sure. So our sort of previous policy was to have about 20% floating rate debt, and that’s kind of the area that we were in previously, and we’ve been pretty aggressively terming out that debt over the past year or so. And so at the end of Q2, we were still double-digits, but kind of low double-digits in terms of our floating rate debt. We have said we’re going to use the proceeds from our India sale to pay down debt. So you can expect that to come down a little bit more when we pay that down.
And then what we’ve done is we’ve published in our supplementals the debt maturities and the rates that they’re out there. So, folks can kind of form their own opinion about the headwinds. But there will be some refinancing headwinds over time based on the rates that are coming down, hopefully a little bit less now that we got the upgrade, but that is out there for folks to be able to take a look at.
David Barden
Is there an appetite to float the floating rate exposure back up again if rates are kind of moving down?
Steven Vondran
Look, I think we’ll make that determination as we kind of get there. We’ll look at the rate environment, the forward-looking curves, and try to decide what we think is going to happen. We’re not in the business of speculating on rates, so I don’t think you’ll see us doing anything that’s too dramatically different. But we’ll look at that and figure out what we think the appropriate exposure is.
David Barden
I think SBA just was saying yesterday that they just did a rated ABS deal at like, 4.5, but they think, like, 10-year paper on a standard basis would be closer to maybe a 5% rate. What do you think American Tower could do on a 10-year piece of paper when we’re modeling our refi for your debt stack?
Steven Vondran
I’ll defer that to Rod. You guys will have to get his math skills on that one.
David Barden
Okay, got it.
Steven Vondran
I don’t want to predict rates or spreads or.
David Barden
Totally understood. So, another piece of the domestic pie is CoreSite data center business. I guess a couple questions on that. So, it’s obviously been doing really, really well, but it’s not really in the AI space, really, is it?
Steven Vondran
It’s not. CoreSite’s not the right location for large learning models. So let me distinguish it from kind of a couple different business models out there. A lot of the hype around AI today is people who are building a single tenant, purpose-built building for a major, large learning model. And so it’s almost like a build a suit for a single tenant office. That’s not our business, so we’re not doing that. So that part of AI doesn’t really belong in CoreSite, but that large learning model has to talk to all the end users so there’s a layer of AI called inferencing, where you need massive distribution, and for that you need an interconnection hub. And that’s really what CoreSite is. It’s an interconnection hub with data center space attached, and it’s a perfect location for that.
So, we are seeing the inferencing layer interest in CoreSite. We’ve written a couple of contracts there, but we have the luxury of being selective about counterparty risk. So we’re not just — there’s a lot of startups in AI, and we’re not going to take a ton of risk there. The other area that AI is benefiting CoreSite, the first thing is just price. Because AI is taking up so much of the capacity in the market, prices across the board have risen. That’s allowed us to raise our prices as well and still secure the business that we want to secure.
And the second piece of it that, frankly, six months ago I didn’t anticipate this, is you have enterprises that are in hybrid cloud deployments, which is kind of our core — that’s our bread and butter customer. And they’re interested in doing large learning models, but they don’t want to put their data in these public models, so they’re interested in creating their own LLM as part of their hybrid cloud deployment. So, we’re seeing interest in actually putting GPU pods as part of those enterprise systems in CoreSite. And that’s new. So there’s a lot of that yet, but as that becomes more ubiquitous, that could be a big driver for us as well.
But at the end of the day, CoreSite is — its core business, is this hybrid cloud deployment by enterprises that needs this interconnection ecosystem. That’s the customer. We want to be there because they need to be in the environment. They’re willing to pay a premium price, churn’s very low, and we’re not subject to the ups and downs of the market with those customers. And there’s a very long tail of that business that’ll be the primary driver of business and CoreSite long after I’m done on this. So, we feel very confident about that part of the business, but AI is helping us, and there are some use cases that are appropriate to be in there.
David Barden
So I was skeptical of this. Maybe I was still a little skeptical when American Tower bought CoreSite. Not that I didn’t think that the data center business was a good one, but that I think Tom kind of bent himself into a pretzel trying to explain how towers and data centers fit together, and that was going to really be a good idea. And where we landed on that was this idea that because you had all the big players who would be creating the applications of the future, that you would have an inside track on learning where the edge would want to live. And if the edge happened to live, maybe where the towers were, there would be a new opportunity for you and you’d be the first one to spot it.
And what was interesting to me was Sampath, the CEO of Verizon Consumer, yesterday said that he was optimistic that AI is kind of creating the platform from which a lot of applications will be born, and many of those will need an edge compute component. Do you have — putting those two things together, have you at this stage, any new learnings about where the edge might live and what the opportunity might be for American Tower there?
Steven Vondran
Yes, I’m more confident than ever that the edge is going to happen. The timing is uncertain with it. And I do want to distinguish, it’s not just a data center that you need with a tower, it’s the interconnection hub, because you can drop an edge facility anywhere and tie it back with a piece of fiber. The key is that fiber has to land in a data center that’s interconnected to other people and other environments and cloud on ramps and things like that. And the cost of connecting to those other people is what’s going to make the edge either economic or uneconomic.
So, us buying CoreSite was really to control that interconnection hub. And that’s the key thing that will help promote edge for us in the future. And we’ll control that hub whether it’s going on a tower site or not, quite frankly. So that was the real thesis behind that is controlling the interconnection hub.
So what we’ve done so far is we have some proofs of concepts with different partners. One’s a little bit more public because IBM’s a partner that blogged about it, and that’s a niche product with an automotive application where automotive companies producing cars, the software in the car is obsolete when it comes off the line. They store them in this huge facility and the update mechanism is through a wireless chip. There’s not enough bandwidth there. So, in that the proof of concept is with IBM and an enterprise and a carrier to do an edge facility to do local breakout and update all the cars. That’s a niche market. And the learnings from that are you have to figure out what the technological challenges are to making that happen and local breakout’s not something that the wireless carriers have been doing a lot of. And so, working with them to figure out the complexities there is helpful and figuring out what the ultimate edge looks like.
We have another proof of concept, I’m not as liberty to talk about, but it’s an AI application and enterprise environment where they need low latency and operational simplicity and that’s got its own set of challenges. So doing these proofs of concepts with these major company players has been very helpful for us in figuring out where we do find that ecosystem. And I’m confident that that convergence that the wireless carriers are talking about is going to happen, and I think we’re in a primary position to be their partner with (indiscernible) does.
David Barden
So kind of where the towers meets the data centers and I’ve kind of taken some tours. One of the things if we’re going to have edge compute or essentially data centers at the tower, we might need more land, we might need more power backup systems, that all requires investment. Those sorts of things probably happen relatively slowly. Are you kind of prepared to make that bet in terms of trying to negotiate expanded footprints at your towers and burying diesel, getting permits to do that in your backyard?
Steven Vondran
We have a lot of sites that are already capable, and so one of the activities that we’ve done is to assess our current portfolio and we’ve identified over a thousand properties that have enough land, there’s fiber presence and there’s enough power availability there to do it. So, we don’t have to make a lot of investments for kind of the proof-of-concept phase and what we’re doing there. And so for now, it’s really about working with these partners and then we’ll figure out what makes sense going forward.
David Barden
For the other 39,000.
Steven Vondran
Well, part of the proof-of-concept is figuring out the economics and making sure this works. And you use the term bet. We’re not going to make bets on this. We don’t have to make bets. We have the scale and the leverage to work with these partners to do these small proofs of concepts to figure out what the economics are going to be. And frankly if I can’t earn better returns on the edge, I can earn in CoreSite. I’d rather invest in CoreSite and then let someone else invest in the edge and we’ll monetize it through our land and our interconnect and those types of things. But I do think the economics are going to work out. I think it’s going to be a multi-tenant facility. It’s going to have the same types of characteristics, but we’re not there yet, so we’re still trying to prove it out.
And one of the things that we just broke ground on a small edge facility in Raleigh, and it’s another sandbox to play, and it’s on a tower site, and that’s one where we’re learning the learnings. What does it cost? What does it take to bring in the extra power? What does it take to bring in the density for an edge use application? And that’ll give us a lot better view of how much CapEx is it going to require, how fast you take? Do you get tenants in the building? What returns do you get? And then we’ll decide, is that where we want to invest, or is that where we want to partner with somebody else?
David Barden
Interesting. So, then again, so kind of wrapping it up, we get to our target five times leverage round numbers at the end of the year, which is kind of interesting. A lot of companies getting to their leverage targets at the end of 2024, after kind of different acquisitions, spectrum and data center companies or whatever. Verizon, obviously, this morning, has decided to choose to use its leverage to buy a new company. It sounds like you’re open to that. But if we kind of cardinal rank at this stage, acquisitions, data center investments, edge experiments, domestic — or sorry, developed market acquisitions, dividend payments, stock repurchase, in order, which ones are we going to do?
Steven Vondran
I don’t know yet, but I’ll tell you why. So what’s been really important for us to do is create optionality. And as we look at our portfolio, there’s no strategic imperative out there today for us to do something. We’ve reached appropriate scale where we need to, and even markets where we’re subscale today. We’ve modified our operations to run those out of regional hubs in a way that, that they’re efficient enough. So, there’s no kind of compelling reason to do something strategically right now in the portfolio. And what that does is it gives us the optionality, once we hit that five times, to look at every incremental dollar of capital and say what’s going to create the most long-term shareholder return, whether it’s a buyback and m and a transaction, internal capex program, further delevering or raising the dividend.
And Rod and I are both very math-based people, and we’re going to run that calculation for every dollar that comes up. And it’s going to depend on what is the opportunity that’s out there, what are the interest rates environment, interest rate environment. What’s our stock trading at? There’s so many variables in there, I just can’t tell you what’s going to be the best use. But whatever it is, it’s going be all focused on that long-term value creation for the shareholder.
End of Q&A
David Barden
Spoken like a true CEO. Steve, thank you so much for coming. Appreciate it.
Steven Vondran
Thanks.
David Barden
Cheers.
GIPHY App Key not set. Please check settings