SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Ric Prentiss, Head of Telecom Services Research at Raymond James. Very pleased today to be participating in this virtual session with Nareit. Joining me this morning is Jeff Stoops, the CEO of SBAC. Jeff, good to see you.

Ric, good to see you. And hope everyone in your family and in our audience is safe and healthy during these interesting times.

Yes. I agree. I hope all our listeners' family, friends and employees are doing okay. It certainly is very unusual. Jeff, a lot has changed since your first Nareit meeting last year. You announced and paid your first dividend, then you grew at over 25% on an annual basis. T-Mobile/Sprint merger was approved. And SBAC, you guys entered South African market. Your stock is up 46% or so since this time last year, while the RMZ index is down 15%. And of course, the COVID-19 virus and other issues are changing the way we live and work.

Jeff, let's start with what's been the impact of the pandemic on your business as we look at the different regions, the U.S., Latin America and South America?

Well we started following the virus seriously in February, began to make some internal scenario planning around potentially closing down offices, which we did globally in late March. We have reopened some of our U.S. offices. We have not reopened the main office yet in Boca Raton because the data, even though much around us has reopened, I have not been pleased with some of the test data that I've seen. So we've decided to stay closed a little while longer. Now all through this period of time, we were working, albeit remotely. And for us, that was quite a shift because, as you know us, Ric, we have not historically been a telecommuting company. And -- but we figured it all out in less than a week. And we got 1,500 employees connected and upgraded the IT systems. And of course, as an essential provider, as labeled not only by the U.S. government but all the governments of the other countries we operate in, our field people and the folks at SBA who were not able to work remotely, they continued on just as if there was no coronavirus, albeit now with much different, improved and highly focused health and safety procedures. So we have been operating all through. We have not -- we've been actually very busy. We have not furloughed or laid anyone off, do not have any plans to do that. I do think just the general precautions and safeguards that must be taken, particularly out in the field, may slow some work down. But I'm talking days or a week and not months or quarters. So I do think things are going to continue to progress well there. And obviously, our business, while I think always appreciated for its durability, predictability and just essential nature, I think is even more greatly appreciated now during these times where communications is so vital and so important. Latin American markets have taken it a little bit harder in large part because of the levels -- the different levels of income and GDP there. But at the same time, those countries have no wired infrastructure, at least on a relative basis. So all of their communications is much more dependent on wireless, and we remain vital and busy in those markets as well. So from a business perspective, we have continued to move on quite well but obviously with a lot of focus and changes on the safety and health of our employees and our customers.

Make sense. Good to hear. I get a lot of questions from investors. I sit here and just think towers aren't just resilient, they're really quite strong. What could disrupt the tower model? We get that question a lot from -- particularly the real estate investors that might be newer to the space. They've experienced upward pressures from the other industries, subsectors within real estate. But what could disrupt the tower model as you think about what to worry about?

Well I've been doing this for over 20 years, and we have not seen any evidence nor do I think any material amount of investment or attention is being put into technological alternatives. When we went public back at '99, we were competing at the same time against Iridium and some of the satellite companies which were being marketed for consumer use. And of course, that did not prove out to be viable technically or economically, and I believe that remains true to this day. There will be some satellite providers of wireless, but it will only be in areas that are not served or capable of being served by towers and fiber because the economic proposition is just so different. So unless there is some kind of change in the laws of physics or some new way to communicate mobilely, besides radios and antennas, gets invented, there really is no technological threat. The real -- to the extent there is a threat, it is consumer use and the health -- and then how that directly impacts the health of our customers because ultimately, they're the ones making the investment in the networks and the antennas that ultimately benefit tower companies like ours. Now that demand curve has been great in all of our markets. Our carrier customers are, generally across the board, in extremely good shape, and it's very hard to see how that changes, particularly as we go through this world where communications and connectedness is so important. So that's not really something that we worry about a lot. Although, obviously, we watch for any type of new idea or invention which would pose a risk to the basic model. But we haven't seen one yet.

Good to hear that. So let's bore down a little further into the U.S. business then. When you think about revenue growth rates, what's been the range of your gross and/or net, whichever you'd rather talk about, over the last few years? What kind of range of growth rate of revenues have you seen? And what are you expecting?

We've ranged from about 7% to 8% gross. And then on a net, it's been about 4% to 5.5%. And on a gross basis, I think we're going to be able to sustain that range. And we'll have some periods of time, I think particularly next year and the year after, where we should be able to increase that some based on the results coming out of the T-Mobile/Sprint merger and all the work that needs to be done. We're actually looking forward to a quantum leap in the amount of activity in the industry in the second half of this year, which will manifest itself in financial results and our reported growth rates in 2021.

Okay. You mentioned the Sprint/T-Mobile merger. DISH is kind of around the edges there, too, and what it means. And for the sake of real estate investors who are with us today, what do you expect the Sprint/T-Mobile merger to mean to you guys in the short and medium term? And how does DISH play into this?

Well it's -- it was -- for those who were following the tower industry, you saw the kind of the peaks and valleys in the stock prices as the regulatory scenario played out. And I'll start with DISH first. I mean what DISH does in terms of the final approvals is it provides the replaced fourth nationwide facilities-based carrier that was lost when Sprint was merged into T-Mobile. So we still have a 4-nationwide carrier market, with the benefit being for the tower industry that DISH, except for a few things that they're going to get out of the merger and had going in, are going to have to build a brand-new nationwide network. And we expect, of course, to be a great beneficiary of that alongside our other tower brethren. In terms of T-Mobile, their -- the entire -- well, not entire, but a primary motivation for that transaction was to get the very valuable 2.5 gigahertz mid-band spectrum, which the mid-band spectrum, of course, is now generally believed to be the beachfront property for moving into 5G. And so Sprint had not deployed much of that. T-Mobile has plans to deploy that nationwide and undertook some fairly tough, stringent build-out requirements, obligations to the FCC to get the deal approved. So what that means for us is a lot of activity on and around our towers starting kind of right now and moving forward for the next several years, as both T-Mobile and DISH build out and meet their requirements. And then, of course, you have the C-band auction, which looks like it's now moving forward some of the Intelsat bankruptcy, where they elected to move forward on an accelerated basis, I think, is generally good for our industry. It means the C-band is going to come quicker rather than later. And most people believe that, that will be extremely highly desired by Verizon and AT&T, and lead to an entire new round of build-outs, particularly for macro towers to move their platforms to true 5G. So we're feeling very good about where the industry is, what the macro factors are and the drivers for growth for the next several 3, 4 years.

Great. So it was good to see our friend, Dave Mayo, get announced to be the EVP of capital deployment for DISH as of yesterday.

Yes. I saw that. Congratulations to Dave.

Yes. You mentioned 5G, Jeff. It's not certainly a really deep and interesting topic. A lot of people are confused by 5G. What do you think 5G is? And have you seen any real or promising business thesis that's saying, "Here's where the carriers can make some money to make a return on the capital they need to spend?"

Well I think your last part of your question is key. We want our customers to make a lot of money off of their product offerings because the reality is if they do, they will pump that back into their networks because the demand drivers and the physical requirements of additional infrastructure are just kind of locked solid, that, that's what you have to have to service additional demand. So we want -- we certainly want great success there. Some of the things that I think will be definitely taken up right away, I think gaming, there's a lot of gaming that -- and that may sound small, but it's a very large business. That will immediately benefit from 5G, which is faster speeds, higher quality, lower latency. Some of the other things that I think this COVID-19 has kind of helped crystallize for me is telemedicine. Telemedicine is going to be much more required and much more accepted going forward. People are proving that out now and actually finding a number of advantages to telemedicine. But of course, you're going to need to have fast speeds, great connections, low latency. So those are 2 right off the top that I think will be immediately taken up. And I think as we get into true autonomous driving and other things where you must just have almost instantaneous speeds of connections going back and forth, that's where 5G really is going to shine. And I think it's going to change the way we live and work and operate much as each of the last couple of technological generational improvements in wireless have done.

Yes. One of the open questions out there also is macro towers versus small cells. So talk about this debate a little bit and where you guys come out on the -- where you put your capital to work.

Yes. Really, the difference there, Ric, as you well know, is it's just a difference in the type of delivery equipment. I mean you're still talking radios and antennas, which is the base -- core of what we do. Small cells are the more accepted and desirable distribution method in the dense urban corridors, where when you think about it, there's not really any towers anyway. The macro business in those areas has primarily been a rooftop business, of which we do some, but it's not a large part of the business. So small cells will bring -- they're basically designed to bring the signal down closer to the end consumer. But because of that and because of their size, they don't have the same throughput power. They don't promulgate as far. So they don't have the same economic rationale outside of those dense urban markets. And as soon as you leave the cities is when you start to see the towers. And those are essential because they provide height, which allows the highest amount of power to be pumped through the signal, so you could cover the most amount of ground and pump out the most capacity for the most economic amount of money. And that dynamic really hasn't changed. The reason that we now -- and both now are going to, of course, be necessary. You're seeing that clearly, small cells, preferred choice into big cities. Macros continue to be the preferred choice outside of the big cities. And the very -- so they're both needed, but the reason that we have stayed true to macros and shied away somewhat from -- well, more than somewhat, shied away from small cells is it's purely for us an issue of return on invested capital. To be big in the small cell business, you would typically need to be large in the fiber business. Fiber is a very different business than towers. It has a lot of different economic attributes, less predictable, higher churn. Both -- these are all good, necessary businesses. For us, it's just purely a question of how do we maximize value for our shareholders in terms of the capital we invest.

Makes sense. I'll take a second and just remind the audience with us that you are now able to go to the Q&A area, and you can just send us questions via the web. But we're going to continue along. Jeff, let's go outside of the U.S. If we look at international, update the attendees on what percent of your business, your revenues, are in U.S. dollars. Or what percent are in the U.S. versus international, which is a slightly different question?

Well if you looked at it from a perspective of what percentage of our revenues come from outside the U.S., it's 22%. But of that 22%, 5%, so that's 17%, is still paid in U.S. dollars, which, frankly, it's the currency issues that warrant the most attention. And to the extent there is a negative that has to be considered in going international, it's that one because we found that operationally, certainly, the manner of developing networks is the same, whether it's in the U.S. or in these other markets that we've gone into. So you're really looking at 17% of our revenue base is denominated other than in U.S. dollars.

And pass-throughs are part of that, too, because that's almost like an expense item versus a revenue item. Do you know what the number is ex pass-throughs as well?

Say that again, Ric. You were breaking up a little bit.

Yes. I was just wondering, because you can also take a pass-through because that's kind of almost a reimbursement of an expense rather than real revenue. What would it be ex pass-throughs?

Well if you were to take out the pass-throughs basically, that number drops to around 13% or 14%.

Okay. And Brazil, your largest market, that's not in U.S. dollars. And we are getting a question from an investor. Obviously, we're all concerned about COVID-19 around the world, and Brazil really is getting impacted quite heavily now with COVID-19. So they're wondering what does COVID-19 do to your ability to build towers in the region, the financial health of the carriers there? Maybe just that point on Brazil and COVID-19 and what you're seeing.

Yes. Brazil seems to be the new hot spot. We're certainly taking a lot of precautions down there with our employees and team members and customers. We have seen some evidence of things slowing a little bit. But at the same time, the necessity and the reliance on the wireless networks down there is greater than ever. We'll see how long things last and what kind of long-term impact, if any, it has on our customers. But there are 2 balancing issues going on in Brazil right now. There's the health and safety and economic strength of the ultimate consumer, which is being hurt a little bit by this. But the counterbalance to that is just the utmost recognition of how important wireless is and the need for it to continue to grow and get more developed and hardened in Brazil. So when you balance all that out and you look at the demographics in Brazil, we continue to feel extremely good about that business, although there may be some -- we would expect some delays from COVID-19 this year. But those would be only delays and not ultimately lost business. It would just get pushed out some.

Okay. You brought up FX volatility. How do you balance that risk/reward of international expansion and the U.S. business? And so for you guys to say, "Let's take on that risk of FX," how do you, as a CEO of a company, kind of manage that risk and shareholder return?

Well, we have been fortunate. We've executed well and, I think, made very good decisions. And our operational results in all of the countries that we've gone into outside the United States have well exceeded where we thought we would be. There's a number of benefits that you don't have in the U.S., a lot of lower cost structures, lower labor costs, a variety of things that help the margins. The biggest issue is the foreign currency translation risk. And we manage that by building into our thought processes, our models and our investment returns, depreciation in every market where we go into that's not denominated in U.S. dollars, and we set higher return thresholds. So we're looking for higher returns already with a conservative view of FX built in. And then once you're in these countries, you want to get to EBITDA positive as fast as you can, and we're there in all the countries that we're operating in, and then use those locally -- use those funds generated in local currencies as your primary source of reinvestment. And that's how we manage the international operations. We want to see them with money coming out of the U.S. in U.S. dollars, just to the extent necessary to get everything moving in terms of EBITDA positive and then use the growth in the local markets in local currency to continue our investment in those markets. And that works as a good hedge over time.

Okay. Switching gears. Again, I'll chime in as well. Once again, if people do have questions, please submit them via the webinar application. You'll see a Q&A button over there. Let's go back to the bottom line. Dividends, you guys have issued a dividend not that long ago. You've already raised it once. How should investors, real estate investors, income investors, think about your dividend policy -- obviously, at the discretion of the Board -- but broadly, how should we think about the dividend growth rate and AFFO payout ratios?

Well, we were headed towards an obligatory dividend under the REIT rules or at least to avoid paying taxes at the federal level in 2021. So what we did is we did a lot of analysis and determined that to start the dividend early at a lower level than we would have otherwise been required to pay in 2021 would not only give us a very, very good growth rate for the foreseeable future in the dividend, but it would also allow us to keep the percentage of AFFO that gets paid out reasonably small for a number of years. And that is exactly where we wanted to be because while we are very pleased to be able to return cash to the -- to our shareholders in the form of a dividend, we believe that the greatest value creation will continue to come in the form of portfolio growth, and then to the extent that we still have money left, over smart stock repurchases. So our intent is to grow the dividend rapidly yet keep it at a small percentage of AFFO paid out to give us maximum capital resources to pursue portfolio growth and stock repurchases.

Okay. One of the things we focused on, I think you guys do, too, is the quality of the AFFO. Towers might be one of the easier businesses to understand the accounting and sometimes value, as you can tell when you pull your hair out, how do you think about the quality of the AFFO such as final purchase options, prepaid rent amortization, just the real cash flow of the business versus your dividend now?

Well, I mean, dividends have to come from cash. So you want to -- as an investor, I would think you would be very concerned with the quality, sustainability, predictability and ability to grow those true cash flows. So anything that affects those certainly should be taken into account. And to the extent there's more gray or issues that would be a lesser quality cash flow generating company, I happened to think SBA, who has none of those things that you mentioned, reports extremely high-quality AFFO, which translate directly into cash that's available for dividends or reinvestment. So I don't know why anyone would not take into account the quality of the AFFO stream.

Make sense. We've got one more question that came in from the attendees. Specific to T-Mobile, this investor is hearing about T-Mobile decommissioning already started. Wanted to know how many of your towers are at risk or how much could be offset for the amendment activity in DISH?

Yes. We believe that's true, that they're going to take some of the Sprint leases that terminate or have the ability to nonrenew in this year and next and try and achieve some synergies very quickly. We were kind of expecting that. In terms of -- it's not really our towers that are at risk because it doesn't affect towers. It affects the leases on the towers, and we have about 5% to 6% of our revenues that are in direct overlap, Sprint being -- where Sprint is located on the same tower as T-Mobile. And most of those Sprint leases have an average life left of 5 to 6 years. Now there are some that nonrenew this year and then some that nonrenewed 10 years out, but it's kind of like a bell curve. And the weighted average remaining term on those is 5 to 6 years. We think that while some decommissionings will occur wherever they can for T-Mobile's synergy promises, the bigger reality is that they're going to be more focused on integrating the Sprint customers. They're going to be much more focused on meeting their build-out requirements, which is going to entail a nationwide rollout of 2.5 gigahertz spectrum, completion of the 600 megahertz rollout. So for the next several years, we believe the benefits and the additions to the revenue stream will far offset any losses from Sprint sites that can be nonrenewed in the next year or 2.

Great. Well, we are at our allotted time. Jeff, thanks for joining us today. Look forward to when we can see each other again in person. Thank you to our attendees. But Jeff, thanks for spending time at your second Nareit.

No. Happy to do it. And again, I want to wish everyone health and safety. And hopefully, this will be the last year of the virtual investor conference.

Everyone, be safe and be well. Again, thanks, Jeff. Everyone, have a good day.

Yes. Thanks, Ric.