American Tower touts expanded European footprint

American Tower is focused on its expanded European presence, having closed most of its Telxius Towers acquisition from Telefónica in the second quarter.

The U.S.-based tower company spent $8.8 billion to acquire more than 27,000 sites, including around 20,000 in Germany and Spain, and over 7,000 in Brazil, Peru, Chile, and Argentina. There are still about 4,000 remaining rooftop sites in Germany that are expected to close in August.

During Thursday’s second-quarter earnings call, American Tower CEO Tom Bartlett highlighted underlying wireless market trends in both Germany and Spain, which help add confidence that the portfolio will deliver positive financial results.

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“We are confident in being able to deliver organic tenant billings growth, at least in the mid-single digits on the European Telxius sites over the next several years, and likely beyond,” Bartlett said, according to a transcript from SeekingAlpha. “This growth rate trajectory would be roughly two times what our legacy European business is generating today.”

Similar to the U.S., mobile data usage is expected to grow at a compound annual growth rate (CAGR) of more than 25% in both countries from 2019 to 2024. He also cited 5G device adoption still in the early days, as well as carrier consolidation that’s already happened – leaving less risk for further consolidation down the line.

“Critically, carriers in both Germany and Spain possess significant spectrum assets across multiple bands,” Bartlett said.

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Three of Germany’s incumbent carriers each have at least 50-megahertz of mid-band 3.5-3.7 GHz spectrum, which is starting to be rolled out for 5G. In Spain, he noted, major carriers have at least 80-megahertz in the mid-band range, as well as significant holdings spanning 800 MHz to 2.1 GHz bands.

Spain also completed an auction for spectrum in the 700 MHz band this month, with operators Orange, Telefonica, and Vodafone collectively spending $1.19 billion.

Across the two markets, carriers are spending more than $6 billion in capital annually, with 5G deployments ramping up, according to Bartlett. American Tower also thinks “substantial further densification efforts will be necessary to augment existing 4G deployments and upcoming 5G rollouts.”

Since the new tower sites are focused in urban areas where deployments are likely to center, “we are well-positioned to drive strong growth over a number of years,” he continued.  

The better growth trajectory for the new sites compared to American Towers legacy footprint in Europe has a lot to do with churn, according to Bartlett, who noted the company has seen churn rates between 2.5%-3% over the past few years as a result of fewer operators because of consolidation.

Telefonica is the existing tenant on most of the new Telxius sites, and American Tower doesn’t expect many cancellations in the foreseeable future, Bartlett said. On average there is non-cancelable lease term of 7-8 years.

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“Simply put, even without assuming any inflection in demand from 5G or new entrants, that churn differential alone should put us solidly in the mid-single digits for organic tenant billings growth on the Telxius sites,” Bartlett said.

If there is an uptick in 5G, he said that American Tower could do even better than that range over time.

In a Thursday note to investors, MoffettNathanson analyst Nick Del Deo noted that the Telxius deal means American Tower now operates in 22 countries outside the U.S.

“Importantly, once the Telxius sites contribute financially at their full run-rate, American Tower’s international business will be reasonably well balanced across its four super-regions,” Del Deo continued.

American Tower has international operations in Latin America, Africa, and Asia.

Del Deo said that in any given period American Tower will face challenges to growth in some regions or countries of its international business but is more likely to be offset by other areas – pointing to growth in Africa, and Europe as set to accelerate.

While already part of American Tower’s overseas investment strategy, the stability that diversification brings “is becoming increasingly relevant as the company adds more markets of size to its platform,” he wrote.

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“The relative stability afforded by the overseas business could prove increasingly valuable as the U.S. faces significant churn from Sprint in the coming years, a bit of a reversal of positions. Domestic new leasing is starting to pick up, while growth in all overseas units accelerated save for India,” Del Deo continued.

In the second quarter American Tower reported adjusted EBITDA of $1.47 billion, up 21.8% year over year and consolidated AFFO of $1.09 billion, up 18.7%. AFFO per share was $2.42, up 16.9% per share.

Total property revenue was up 17.9% to $2.2 billion.