SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

My name is Phil Cusick, I follow the comm services and infrastructure space here at JPMorgan. Please help me welcome Jeff Stoops, President and CEO of SBA Communications since 2002. Jeff, thanks for joining us.

Hello, Phil.

I have a list questions, but I'll keep an eye on the chat feature. If anybody wants to put in a question, we'll be happy to have them. Jeff, thanks again.

Yes, happy to be here.

Given these unprecedented times, can you talk about what SBA is doing to address this pandemic for customers and employees, please?

Yes, we were labeled early on, both by state, local and then ultimately, federal regulators as an essential business given our role in the telecommunications infrastructure chain. So our field people have been out really every day, working, maintaining the infrastructure, actually adding new business in terms of amendments, new tenancies, keeping the towers accessible and the sites accessible. We're actually doing a lot of things to help our customers get things to the site that they might not otherwise have called on us to do. So it's a very good, cooperative, collegial and very busy time. And for the folks in the field who are essential employees within SBA, we're employing state-of-the-art medical advice to social distance, all the health and safety things that are being put forth today. And really, the health and safety of all of our team members is job priority #1. For those of our employees who do not work out in the field or have essential jobs in the office, we are still staying at home. We have not reopened the offices yet. We became a telecommuting company in about a week, and that was not an easy task. But we did a great job, and the team has responded very, very well. We have some plans to partially reopen next month at a low density, and we'll see how it goes. But again, job -- or the top job of mind right now is the safety and health of the workforce. But I do have to say that everyone has responded extremely well. Morale is good, and the job is getting done. And our customers and communities are getting served well.

Okay. And does the pandemic change how you think about investment in the business and priorities from here, for investment?

Well, it does a couple of things. I think it definitely, in my mind, means we have a changed world. I think there are certain parts of business and assets in the economy that will come out of this stronger and in greater demand. And I think there are other parts of it that will not and come out of it in -- with lower demand. I think the business that we happen to be in will fare on the greater demand side, but I do think about remote workforces and both of ours and our customers and what that means going forward and how those get worked out in office buildings and what types of investment opportunities they will fare for our in-building business and things like that with social distancing. I heard an interesting -- I'm not sure it was not self-serving, but I heard an interesting commentary this morning from someone in the commercial office space that folks will actually be looking for more office space than less because of the need for social distancing. I don't know if that's true or not. But there'll be -- I think there'll be a lot of those questions that will be unanswered for quite some time that will require a lot of thinking.

Okay. So let's start with the U.S. We've seen activity slow lately against the strong first half of '19 comp. But the outlook is for a significant acceleration in activity, at least in the back half. Can you help us understand the level of visibility you have into that second half acceleration?

Yes. When you say we've seen it slow lately, I would say we saw it slow in September, and it stayed slow really with the -- the slowness matched exactly the pace of the participants watching for the outcome of the Sprint-T-Mobile merger, and that, of course, being T-Mobile, Sprint and DISH. And I believe I commented on this many times over that period of time. It was an extremely logical pullback on CapEx for them because they didn't know which way to spend the money. Now with that behind the participants, plans are full speed ahead, and our backlogs and our dialogues are both increasing with the new T-Mobile and DISH. So we're seeing activity now that's hitting backlogs, that's hitting both services and leasing. We're seeing the plans. We're able to actually now really put some meat on the bone in terms of timing. So we have a much greater visibility in terms of backing up our comments about seeing greater activity in the second half. And when we talk about activity, we mean operational activity. And depending on when the -- if it's leasing activity, that could mean, in some cases, instantaneous revenue recognition if it's an amendment, but usually not and there'll be some lag there. But in all cases where it is a new lease and not an amendment to an existing lease, there's going to be some revenue lag. So where you'll really see much greater financial statement contribution will be in 2021.

Okay. And it seems like T-Mobile will be mostly amendments, at least in the first couple of years. Is that fair?

Well, I think so from a most bang for their buck, how do they get the most pops covered to meet the FCC regulations. If you want to solve from that perspective, yes. And particularly to get the most 2.5 gigahertz spectrum rolled out the quickest, the answer to that would be yes. And in fact, they had actually ahead of the merger started in their own leases, started to make provision for amending to 2.5G even before they own the spectrum, which is why they were able to get -- which is one of the reasons why they're going to be able to get out of the gates fairly quickly here.

Okay. And how does that impact your services revenue? As you said, amendments and new leases tend to have different timing. But did you, for the most part, do the services on your tower for them?

We did a lot of the services for T-Mobile and Sprint on our own towers. So when that work dried up for the most part in Q1 and for the most part in Q2, you saw the impact of that in the numbers. Now that is, of course, part of our optimism around the second half of the year. They've always been strong services customers of ours. Now with Sprint gone, now we're just talking about T-Mobile and we would expect that to continue. And that is work mostly around our own towers, work with amendments or new leases, but not entirely. We do third-party work as well.

Okay. And is that everything from permitting all the way through the actual construction? Or is there a point at which you typically hand that off to a local contractor?

No. We will take it from everything after RF planning, all the way through final construction and the handoff and punch-out of the site.

Okay. And that pickup in the back half, how does that impact the glide path of activity into '21? So how should we think about the real growth next year?

Well, it should continue to build certainly from a financial statement perspective because you'll have the growing impact moving into the year and activity levels. We're not giving out guidance yet for 2021, but I see no reason why things should not continue to stay strong as we turn from 2020 into 2021. And you actually -- at least today, we expect that there'll be some additional catalysts as we move through 2021, most importantly, being some initial -- well, you'll have some CBRS stuff. But the more impactful, I believe, for our company will be the beginnings of some C-band deployments.

Okay. We've heard that, that C-band deployment could come pretty quickly once the carriers have good visibility even into the auction happening. A peer of yours had talked about flexibility and compressing the application to commencement time line. What's that typical time line? And how do you think that can be compressed?

Yes, I have heard that. We've always had a very tight time line because we've built a greater percentage of our towers and had, frankly, greater data capabilities because we actually built the tower, knew what we had going in. So our turnaround times are literally -- you're talking hours and no more than a day. So our issues have never been on the SBA side in times of turnaround time. So never once, I think, have we ever heard nor I think you've heard about us, turnaround time is an issue at SBA. But you can always do better. So -- but that's not something that we've ever focused on as a problem. We turn things around extremely quickly because we have -- we think, while I use a strong word, unparalleled mastery of our assets and the criteria, what's available, the heights, the engineering, the structurals, the capacity, all the things that go into quick turnarounds of applications.

And in terms of both turning around the application and then commencement of work and your leasing revenue, is that a pretty standard time frame? Is there a way to tighten...

It can be. The way to tighten it is more of a negotiation. So usually, the -- at -- in every case, the point in time the equipment is installed, that's when rent begins. That's usually -- there's never any argument or negotiation about that. So where the negotiation is if a customer wants to lock down planning or space but they're not necessarily ready to install when does revenue begin in those circumstances, and that's where the negotiation is. So if a customer would like because of either equipment issues or because of budget, they want to lease a certain spot but not want to begin and they're not going to install, but they want to commit to that spot but they don't want to begin payment for, say, the beginning of next year, what do you do in that situation? And we approach those on a case-by-case basis. So that's why there's no hard -- there's an easy operational answer to your question. It's -- it could be when you sign the lease automatically or could be certainly no later than when you install the equipment. But it's oftentimes somewhere in between based on what the customer would like to accomplish from a cash flow planning perspective and what we're willing to accommodate.

Okay. Okay. On the other side, we've seen acquired carrier churn sort of fading off the last couple of years. Where are we now on the remainder of the acquired carrier churn?

I'm not sure the exact amount. I think Brendan did mention it on the call. I think it was $4 million or $5 million, and I think it should be pretty well off by the end of this year, the Metro/Leap Clearwire.

Okay. And then remind us where you are in terms of Sprint contracts. How should we think about that churn ramping up over time?

Well, I don't think it will happen for a little while, several years, as T-Mobile focuses on porting those subscribers over and doing the things they need to do to move that customer base of theirs over, which they'll need that equipment to do. And of course, the big focus on the 2.5G rollout and meeting some of their deadlines. But it will happen, but we think it will likely start happening more, in earnest, 3, 4 years out. The Sprint leases have 6 to 7 years on average. The T-Mobile leases, more like 3 to 4. If you add them all up where they have direct overlap, the remaining average term is like 4.2 years, and the direct overlap sites would comprise about 6% of our revenue.

And so you've got a, sounds like, a 3- to 4-year holiday on major churn. Should we think of churn back at sort of the low end of your typical range for that period?

I would say we'll still be in that 1.5-ish percent. I mean there's a lot of tuning and just things going on out in the networks. There's been so much equipment buildup over the years and a lot of things that are being changed out and added that I think we're probably settling into a world of 1.5-ish percent churn. I don't know if we're ever going to get back to below 1%, but I think we're pretty happy around 1.5-ish, maybe sometimes as high as 2%, sometimes as low as 1%, and that's what we build into our models. And I think everything will continue to work extremely well from a financial output perspective.

And describe with that, that, let's say, 1.5% typical churn is from. You said tuning, but is there also just legacy businesses that are sort of eroding still in the base?

There are. I mean we -- while the vast majority of our business continues to be from Big 4 customers -- well, now Big 3, we still sign up a wide variety of users because for us, it's incremental revenue dollars, not all of those. We report that as lease-up when we get it. But if the business doesn't make it or there are some falloff later on, we, of course, report that as churn. So there's still -- it's not a big number of -- in our revenue base. But when it does happen and the business goes away, you reported this churn. There's some of the Big 4 that continues to Big 3, where they're decommissioning some sites and moving things around and retuning, not much, but that'll continue to go on forever, given just the way that they are always looking to fine-tune and improve their networks. So it's a wide variety of things. Smaller, local roaming carriers who I think are facing some pressure, you see some of that in the numbers as well. So it comes from a wide variety of sources.

Okay. Let's dig into 5G a little bit. What kind of visibility at this point do you have into 5G? And how do you expect to monetize that rollout?

Well, I think it's most clearly visible in the new T-Mobile, where, obviously, they're under FCC mandate as part of the approval process to roll that out. You're seeing it most clearly with the 2.5G spectrum. That's just part and parcel. I think it will become more clear with Verizon when you see the CBR -- at least in the markets that we specialize in, which are not the urban core markets. You've already seen it with Verizon in the millimeter wave urban core markets. But when the CBRS and particularly the C-band auctions come about and that very valuable for 5G mid-band spectrum is made available, that will become more clear. And I think AT&T is somewhere in between. They're moving forward with some lower-band 5G, but I would anticipate they're also going to be very interested in the C-band auction as well. And when that all comes about, I think the visibility will be very clear. What we look for in particular in our markets is the deployment of the massive MIMO antennas.

Why? What does that bring?

Well, it's the -- from a 5G perspective, it's -- at least as I've studied it, it's somewhat of the agreed-upon universal manner in which true 5G is delivered in the mid- to lower-band spectrum frequencies. But what it does for us in particular is it will be a larger, generally much heavier antenna that, in almost every case, will bring an amendment opportunity.

Okay. And is that often bigger and heavier antenna that really drives the amendment? Is that a...

Yes.

Potentially different amendment dollar than would be the average for the last few years or it's sort of typical?

Well, I think it would be -- I mean we've seen larger antennas historically. I mean, you've seen it when we went to 600. You've seen large amendments definitely when we went from 3G to 4G. So I don't want to get too specific around price. But I mean, it will be clearly along the lines of what the industry has seen and observed in the past. And it won't be -- I will say, it won't be nearly as much as a lot of the 3G to 4G amendments because those -- some of those -- some of the path from 3G to 4G just almost doubled the size of the equipment. I don't expect that here, but I do expect a fairly healthy revenue increase for our industry as our customers move to these massive MIMO antennas out in the nonurban markets.

Okay. Beyond the Big 3, we see 2 alternatives. It sounds like a fairly big deployment from DISH and perhaps cable picking up some areas in the future. You called out your relationship with DISH early on. And last week, you said work was voluminous. How do you think about the timing of DISH in 2020 and '21? What type of activity could we be looking for from them?

Well, I -- our experience is entirely in sync with their public comments. There's a lot of discussions going on now. There will be what we call site development work in the second half of the year, which is more of the planning, permitting and preliminary leasing work, which is a services line item for us. It's not construction, and it's not where a lot of CapEx gets spent, but it is work that leads to the beginning of the bigger side of the deployment cycle and what would lead to leasing for the tower industry. And I think that all starts in earnest in 2021.

As you think about helping them with their planning, are you in a position to help them plan once they've decided that they want to be on your tower? Or are you helping them sort of think about search rings and locations, something over and above just your infrastructure type of deal?

Just -- your question is our involvement just SBA specific? No, it's broader than that.

Okay. And can you help us understand, is that an important part of your services acceleration in the back half? Or is that still fairly small and really builds up next year?

No, that would be fairly small because it would only be, as I mentioned, in the site development side, which is a -- it's a good part of the business, but the larger piece of business dollars always come from the construction side of the business.

And the services side, right?

Right.

And does the different network architecture that DISH plans create new business opportunities for you? Is there a different leasing model that could arise? Or does this look fairly standard?

We're always open to new ideas. But I believe, so far, it's taken a fairly standard track, at least in terms of the big picture. Now there's always nuances of how different portions of that traditional relationship get settled. But I would say more along the fairly standard size -- side.

Okay. Charlie has a reputation for negotiating deals pretty aggressively, and you're not -- you're no slouch yourself. Can we assume that there's a relationship here and understanding that DISH will go down the sort of standard tower leasing model that the carriers have established? Or is there any sort of new structure that we should think about?

I would say, at this point, it would be the former, but I would also say that the final innings haven't been played yet.

Okay. On the -- still on the domestic side, what does the market look like for smaller acquisitions in the U.S.? We saw a small tower builder announce that they looked like they got a nice premium on some assets that they had been -- announced they sold a month ago. Are there assets for sale out there in the U.S. that you would be looking at? Or is your M&A efforts more international?

No, we look at everything in the U.S., and we look at everything internationally with few exceptions. The U.S. market is very, very competitive. There are assets that we will pursue aggressively when they are of high-quality exclusive assets that I think have great long-term characteristics. And then there are other assets that don't meet those characteristics that we won't. We're not sure the market is as discerning as that, and that's other people's cup of tea. They have their own opinions. But there are plenty of opportunities out there, but it is competitive.

Okay. Okay. Well, let's switch over to international at that point then. On the first quarter call, you said you increasingly adopt higher FX hurdles as part of your modeling assumptions. Can you expand on that? So what kind of premium are you putting over and above sort of forecast FX rates as you plug numbers in for international M&A?

Well, I'm not sure we've settled in on a COVID-19 premium or a post-coronavirus world premium. We put in a larger premium at a -- in the form of a higher Brazilian reais devaluation as we went into the GTS deal. And obviously, that wasn't enough. That certainly did not take into account what has happened here in 2020. So that -- we have -- we recognize the need to protect against those currency devaluation risks, but I would be lying to you if I said we would have gone into 2020 adequately protected against what we've seen in the Brazilian reais this year. What we believe is going to happen in Brazil is we're going to need to see how this pandemic plays out, and we're going to need to see how the political fallout in large, which is going to, in part, come from their response to this pandemic plays out, before we really see where the reais stabilizes and then draw some conclusions about what we think about the Brazilian reais going forward. We continue to really like Brazil as a market in terms of its dynamic, its population growth, the kinds of -- I mean it's an ideal market for wireless infrastructure growth, but you clearly have to take into account what is the reais doing down there because you are not able to get your contracts denominated in U.S. dollars. So that is something that is definitely, I think, for anybody who is invested in Brazil and will continue to consider investing in Brazil. Probably the single greatest issue is how -- because the underlying operating dynamics are still good, and we expect that to continue to be good. But what are you going to do about the currency is the question.

Okay. Have you heard -- I mean you have relationships with a lot of carriers, both in the Americas and around the world. Have you heard from carriers who are maybe accelerating some tower sale plans given the pandemic and what probably are some real cash crunches?

Yes, there's some discussions amongst some of the ones in our markets in Latin America. There's one in -- well, I don't want to speak about it in particular. But yes, the answer to your question is, yes, we have heard of a few. I wouldn't say everyone is thinking of them, but there are some. And they may become more pronounced if time goes on and we remain in this situation. I mean as you -- I know you know, Phil. I'm not sure everyone knows. But in many of these Latin American markets, the regulators have suspended deferred mostly and not totally waived, but deferred payment requirements by the consumers on their wireless bills. So that, of course, has led to some cash flow issues on behalf of the wireless carriers.

Okay. And then we're running out of time, but I wanted to follow up with one thing. You said recently you're comfortable with leverage today of 7x, but you could bring that down as NOLs run out. But as interest rates fall, why can't leverage stay at this level or even go higher? It seems like everybody wants your leverage lower, but you've been paid really well for keeping it high over time. Does it make sense as interest rates come down, to just raise that up and keep the same sort of EBITDA to interest coverage?

That's a very good question, and I do agree with you that interest rates are going to stay lower for longer. Our dividend will be our top priority. We want to -- going forward now that we've declared a dividend, that's capital allocation, number one. We want to grow that dividend materially as we just did, and we'll do again. And one of the things I know you wanted to talk about, and I'll answer for you, is we will be a once-a-year dividend grower in the first quarter. And we will look -- to answer that question, we'll look to see the relationship between our AFFO payout and the dividend. And the answer to your question is it's not entirely a -- it's not out of the question in a new world order of low interest rates. Those who know me know we manage the balance sheet very well, and it's all about the appropriate risk level, which this industry has demonstrated over time it can operate and it does in the private sector all day long operate at leverage levels much higher than what we operate at. It's really what it was, Phil, to be very honest with you, is as we moved into a new investor base, that was really not used to seeing dividend-paying companies at 7x. It was really a bit of appeasement, for lack of a better word, to that new investor class to see how things were going, but they've reacted extremely well to our business model and our results. And we've gained a great number of new investors now that we are a dividend-paying company. So that is something we will think about. And the reality is we have operated at those levels for 20 years through much worse times than, frankly, this crisis that we're operating in today. So it is something that we clearly could do.

Good. Well, that's a good place to stop. Jeff, thanks very much for your time, and thanks, everybody, for listening. We'll see you at the next one. Thanks, Jeff.

Yes. Thanks, Phil. Thank you.