SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Good afternoon. My name is Colby Synesael, and I'm the Communications Infrastructure and Telco Services analyst here at Cowen. Welcome to Day 1 of Cowen's Virtual Communications Infrastructure Summit. For this presentation we have SBA and from SBA would be company's CEO, Jeff Stoops. This will go for 40 minutes. I have prepared a bunch of questions, which I'll go through. But you think you have some of your own questions, feel free to put those into the chat or the questions component of the dashboard. And those will pop up on the screen to my left here. And I'll try to get to as many of those as I can. So with that, Jeff, thank you so much for being here. Really appreciate it.

Nice to see you, not quite Colorado, but it's good to be with you.

Yes, and it looks like you're in your office.

I am. And it feels great, to be honest with you. We just reopened within the last couple of weeks here in Boca on a purely voluntary basis. And we've got about 25% of the capacity here back. And it's great. I mean, for the folks who have -- who have chosen to come back, they're extremely pleased to be here. We've, of course, got the utmost safety protocols in place, and it's just nice to really feel like we're getting back to one day where we were and where we ultimately will be again. So funny how that change of scenery makes such a change in folks' attitudes and just physical kind of state of mind. So happy to be broadcasting from Boca Raton's.

Good. Well, I'm broadcasting from Brooklyn. And like you, I enjoy getting out. So it's nice to do that and glad to see that you guys are doing that. So I wanted to jump right into it. My first question is probably around surprised deals with T-Mobile and some of the comments that were made on your second quarter earnings call. So on the 2Q call, you noted that T-Mobile activity had ramped up at a slower-than-expected pace through the second quarter, which pushed you to reduce your 2020 organic growth guidance, having also said since July, you've seen an acceleration in activity and expect bookings to steadily increase to the year-end. In terms of the actual work that T-Mobile is doing, which I think, for the most part, includes adding equipment to support the 2.5 on the T-Mobile cell sites, can you give us a sense of what type of equipment you're seeing being put up there and what the magnitude of financial benefit that is to T-Mobile or to SBA?

Sure. The -- you're right. A lot of -- a lot, I would say, most of the work right now for us is in the form of amendments. And it's not just 2.5, it's still a lot of 600 work. And just about every amendment involves new antennas and new remote radio heads. And it can either be in the form of a brand-new ad of antennas and radios or a swap out of old antennas and radios for new antennas and radios. But it's always radios, always antennas, and there could be some cabling, there could be some fiber but it's generally that and the pricing -- I don't want to get too specific, but the pricing is as we've expected. And as you know, we had -- going into the merger, we had agreements with both T-Mobile and Sprint, which actually have had and still covers a lot of activity, not everything, but a lot of the activity. So we are in a position to kind of move forward fairly easily with each other. So we're ready to go.

Got it. So to your point, you're working underneath the agreements which have been in place between both T-Mobile and Sprint. But just to kind of continue on that theme, on the first quarter earnings call, management had noted that MLA discussions with T-Mobile were positive and that a agreement was months versus quarters away. Is it still your hope to sign a new agreement before year-end? And I guess what would be some of the things you're looking for, particularly since what sounds like the agreements that you already have in place seem to be working.

Yes, I'm not sure that we've said exactly that, if we did that, we misspoke. I mean I think what we said is that if we -- once we got started on discussions, it shouldn't take long. But because the existing agreements kind of cover a lot of what's being done, I'm not sure either party feels any particular rush or need to get new MLAs done. I think clearly, there are some things that probably would be best addressed if we did amend or enter into new MLAs, but it's not as if any of that's needed for us and T-Mobile to move forward and get the work done. But I do think it wouldn't take a long period of time once we actually said about doing that. But right now, we're more focused on answering amendments and getting the actual work done.

It's interesting some of the comments you just mentioned. Let's just say I'm making this number up that out of the 20,000 or so cell sites you have in the United States that 5,000 of those are -- T-Mobile's is a satellite customer in 5,000 of those. Is that 5,000 number, they're all kind of under one holistic agreement, or do you have like 2,000 are under one agreement and 1,000 are under another and 2,000 are under another. And therefore, depending on what tower they touch, it's a completely different financial arrangement?

Yes, we only have one agreement with T-Mobile and one with Sprint. But within those agreements, there are stratifications of various groupings of towers. So they're not all exactly treated the same, and they're definitely not treated the same in terms of end dates or termination dates or anything like that. So there is some differentiation amongst the portfolio.

Got it. And I would assume that when you -- if you were to do an MLA, the value would be twofold. One would be to protect your downside as it relates to churn, and then the other one would be to extend out the contract term, I would think, as long as possible to kind of give you that predictability and visibility that you would so want. Is there any other dynamic that we should be taking into consideration, at least from the SBA perspective when you're starting to go through that process in terms of what you're looking for?

No. And I -- again, I don't want anybody to think it's always a foregone conclusion that that's we're headed as those who've been following SBA for some time. Sometimes we've got MLA, sometimes we haven't. But from the tower industry side, that is typically what the benefit is for our industry. It's predictability. It is term, it's duration. And obviously, on the customer side, it's flexibility, it's capacity and it's price. And you kind of work together to see if there's a match made that brings all that together.

When I think back to 2013, 2014 with 4G in -- for SBA, you saw a notable acceleration in that time period as 4G got built out in size. But when I think about 5G and I think about what's happening with T-Mobile as part of that, it feels like this time around, it's less about seeing a notable acceleration in growth and it's more about locking in stability of growth or predictability of growth. Do you think that, that at a high level is an appropriate framework to think from?

Well, yes and no. I mean, whether there's MLA or not, T-Mobile knows what it needs to do and it knows what sites it needs to work on and amend and it knows which Sprint sites is going to be commissioned. And I don't know that MLAs are necessarily going to change all that without it basically equalizing itself out over time. But as I said earlier, if there's obviously pros on one side and pros on the other, and we're not opposed to them, we have one in place today. So obviously, there's always the opportunity to extend and continue to move that forward. But I think the big picture is we're working together now with what we have and expect to continue to do that.

Great. And my last question on T-Mobile specifically. So on its 2Q call last week, T-Mobile said that they've already started to decommission towers. I'm just curious, have you seen any of this yet? And I guess, to the extent you listened to the call or you've heard anything what your takeaways were for some of the comments as it relates to your business?

Yes, I think there have been a few Sprint decommissionings where they have term dates that end within a very short period of time. But for us, that's been very, very few, and that would have been in our churn numbers. But I mean, to be able to do that, it has to match up with end dates that are very near-term, and as I think we reported, we have a fairly long average remaining term on our Sprint leases. So I think they're going to do that where they've figured out where they don't need a site. And the term dates match up with their ability, as I think everyone would expect them to do.

Okay. So I want to shift a little bit and talk more about just the broader growth outlook for SBA, obviously, some of which will come from T-Mobile, but obviously, you have other customers that are important to that calculation as well. But given T-Mobile's activity is ramping in 3Q in a typical 6-month book-to-bill, it sounds like we'll start to see that revenue hit in the first quarter of 2021, thus giving you a full year benefit relative to what you're seeing in 2020. When you think about the number of towers or cell sites to which you have with T-Mobile and Sprint and what's happening, is it fair to assume that, that will be a material driver of an acceleration in aggregate growth in 2021?

Well, I guess, it depends on your definition of material. But I mean, it was...

Trying to give you flexibility.

Yes, T-Mobile and Sprint growth were -- and as you know, the way we define growth rates it's a trailing 12 month. So I certainly believe that as we exit 2021, you will have a materially higher growth rate than when you exit 2020. So I would say the answer to your question is yes.

Okay. And then as you noted on your 2Q earnings call, the C-band auction starting up later this year is expected to be a catalyst for increased amendment activity, both from Verizon and AT&T, do you think they'll be able to do their work on their cell sites ahead of actually receiving the spectrum to prepare -- to deploy the C-band?

I think they'll be able to do some site acquisition work, some preliminary work, some permitting where it's necessary and some -- if they need to reconfigure some things at the site, maybe in terms of amounts, things like that, you could do all that. It will remain to be seen how quickly things get cleared. I think T-Mobile prove it. You can clear things pretty quickly with the 600. This will be a little different, obviously, since it's satellite. But yes, there would be some work that can be done ahead of time.

And we spoke with Verizon earlier today, Adam Koeppe out of their group. And he was mentioning that to deploy C-band would require them to put up incremental radios and antennas. Is that your understanding that pretty much across the board for each of the nationwide U.S. carriers that they would have to deploy incrementally new equipment to support C-band. And I guess, CBRS, for that matter?

Well, focusing mostly on the C-band. I think I don't know that they would have to, in every instance, but my understanding is to get the most bang for their buck with that spectrum, they would want to deploy massive MIMO architecture. And if that is, in fact, what they want to do, which would be sensible, I think, if it were me, the answer is yes.

Right? And to your plan for the audience, and correct me if I'm wrong, Jeff, the massive MIMO equipment is bigger than what it is.

It's bigger, it's new radios. It's the architecture that has many, many more little antennas and radios inside that really maximizes the use of that mid-band spectrum, which is the reason why everyone believes it is so attractive and is in many people's opinion why T-Mobile bought Sprint and why many people believe that the C-band auction will be so widely attractive to folks.

And then just following up here on AT&T. The pushback on AT&T that we get is that they've been aggressively building out for FirstNet the last few years and subsequently might pull back on their investments in 2021 and you could even argue perhaps because of free cash flow considerations as well. And thus while, T-Mobile and Verizon might be spending more, T-Mobile for obvious reasons as it relates to the integration, Verizon arguably because of what they want to do with C-band, the thought is that AT&T could really pull back. I guess, any color on what you would think about that? And even if that was the case, would that prevent you from seeing that acceleration in growth that you're currently anticipating?

Well, AT&T, they're very smart folks. I guess if they felt from a competitive position that they could afford to do that, they would. So they would be -- I guess, the argument would be that they would sit back while 2 -- they're only 2 at that point, competitors would be deploying mid-band spectrum, which many think is the true 5G spectrum while they were -- I don't know, maybe -- I guess they can make that decision. It sounds -- it doesn't really sound -- it doesn't sound like from a competitive position that, that might be the way to go. But I mean, ultimately, it will be AT&T's decision. If they've spent the money on the spectrum and are otherwise ready to go, I don't know why they wouldn't deploy it from a competitive reason. But ultimately that would be their call.

And we've heard that as well when we've posed this question to others, which is even if they were to pull back, it'd be somewhat minimal, you would think, given the fact that they can't really risk bond too far behind the curve, if you will, relative to the significant investments that T-Mobile and Verizon will be making at that time. And therefore, not to overly get concerned about what that pullback could potentially look like?

I certainly believe that. But of course that answer favors the tower company. So I guess I could be accused to talk in my own book there, but I think that's the more logical conclusion.

And then my last question, just on the domestic growth outlook. You mentioned that you feel pretty confident that effectively the growth rates exiting '21 will be stronger than the growth rates exiting 2020. And I think, at least based on our calculation with your guidance is only 2 quarters left in the year, you'll be somewhere in the mid-3s for what that growth rate likely looks like on an organic basis in the U.S., in the fourth quarter of 2020. Do you think, though, that when you look at your growth rates in fourth quarter of 2021, that we'll be still seeing an acceleration. In other words, the growth rates through the course of the year will have accelerated to a point where even '22 then starts to look better just given the run rate to which you'll be exiting?

Well, because we calculate on a trailing 12, it will certainly be increasing all the way through this -- until you get to at least the second half of 2021. And then we'll have to see.

Okay...

Yes I can easily call the first half. But I don't want to get too far ahead of ourselves.

Okay. And I guess to that point, in terms of incremental catalysts in '21, there's DISH, who talked about on their call deploying, I think, fairly meaningfully more so in the back half of '21 than before. But there's also a lot of -- there's obviously a lot of conjecture in the market that DISH wouldn't actually complete its build-out, as they've stated, based on some of the fault steps that they've made in the past. Based on your conversations that you're having with them, where do you come out on all of this?

We continue to have regular and fairly deep interactions with DISH. And from all of our interactions, they are fully committed to building out a wireless network and very serious about it and have amassed a very capable and credible team to do so.

Do you get the sense that DISH is relying on a partner to provide additional funding to meet their network build-out requirements?

Well, I mean, they've talked about partners. They've talked about additional financing actually produced, I think I read either your or your partner's report, though, where they had a pretty good quarter in terms of generating their own free cash flow this last quarter.

Yes. No, they did.

So they -- I mean they are going to obviously need financing to do it. I don't know if it has to be a partner, but there'll be something there. And I sure would not bet against DISH.

Fair enough. And then you noted on your second quarter earnings call that DISH is not included in your guidance since the primary focus at this stage is in planning, but you're helping them with that, and we'll see DISH -- but that -- but you are helping them with that. And I would assume that -- and we'll see that show up in your services revenue, is it fair that we could potentially start to see that show up services revenue this year?

It's not in the outlook. It could happen, but it would be a pleasant surprise.

Okay. I want to shift over and talk about international and more specifically, I guess, Brazil. So on your 2Q earnings call, you reduced your international net organic growth guidance modestly to 7.9% from what was 8.2%. As COVID-19 headwinds drived reduced carrier spending in both Brazil and South Africa. Does guidance assume that, that level of spend in the countries continues to worsen through the course of the year? And if so, does that imply that we could see growth further worsen in 2021?

Slight deceleration as we move through the year. And then, I guess, the answer to next year, it depends. I mean, if you look at these countries, and you look at how they have responded to COVID, some of them, particularly not South Africa, but the Latin American countries have in many cases, not Brazil so much, but the rest of some of our markets, the government has imposed some payment holidays to the consumer on wireless. Obviously, that pressures our customers' cash flows, and you have to face reality. If their cash flows are going to be squeezed for a little bit, it's going to manifest itself in their CapEx budgets until these things turn themselves around. So we're going to have to watch out these things and how the COVID goes in their markets and how the economy turns. So we're hopeful that things continue or begin to improve. I'm not sure they have started yet in some of these markets. But I do -- we continue to be very happy to be in these markets because long-term wireless is the -- really the only way that these folks get their broadband. They're certainly not going to see fiber investments in a big way during this period of time. And it's just all going to depend on the economy and when that turns. And when the economy turns, the demand will obviously be there. And the money will flow and it will flow to the carriers, and they will invest in their networks.

I think it's a good point because even on your call, you said that this is temporary for the reasons that you're outlining right now, which is many of these countries and these individuals in these countries are dependent on their mobile devices for their internet connectivity, given the lack of wireline infrastructure in many of these markets. So certainly, from a demand perspective, that's there. But the opposite argument is that they don't have a lot of capital. They don't have a lot of funds necessary to pay for these services and then ultimately the carriers don't have a lot of funds to invest in these. And it seems like, at some point, something has to give. It seems like right now, it's to the negative, where we're probably seeing a pullback. But you would think that at some point, we had to hit this inflection, whether it's government funded or it's actually just a true improvement in the economies. But it seems like that's probably an outer year opportunity.

Yes. It's -- we take a lot of comfort in the history that we've had. I've been around a long time. If you go back to the 2008 Great Recession here in the United States that was the time when wireless and mobile proved that it was a staple and not really a discretionary item because theaters and dining out all those things got cut back tremendously, but nobody turned off their cell phones. Now it was a little different in the United States. Obviously, ARPUs are much higher, carrier spending continued all through that period of time, even though it was a horrible time for many, many people, many businesses. But that lesson, I think, will hold true that when things begin to turn, and they will, in these markets that the spending will come back and it will -- because it's so important. I mean it's arguably more important in these markets than it was at that time in the United States. I mean, I think the argument is easier to -- clearly easier to make that wireless is much more important to the daily lives in these markets than in the U.S.

In Brazil for Oi, you know that a consortium of the 3 other carriers in Brazil have submitted a bid for Oi's mobile wireless assets. Do you have a sense when this might get resolved?

No, I don't. This is the beginning of a process that will -- what they're trying to establish now -- and there are several different pieces that Oi is working on here. But they're trying to establish what we talk about here in this country is stalking horse bids and once that status gets established, they still need judicial approval and creditor approval then they actually have to go out and run an auction. So I think it's going to be a very long time, well not this year by any stretch and maybe not even next year. So it will be a while, yes.

I mean to your point, it was important that I thought Brendan mentioned this on the call, which is they're still paying you. So the payments are still coming in and really less of a financial impact to you guys. Shifting over and talking about leverage, portfolio growth and ultimately capital allocation. So you still have a goal of hitting at least the low end of your 5% to 10% portfolio growth in 2020, that's what you said on your 2Q call. But also on the 2Q call, you seem to suggest that while there are enough assets out there for a sale to do so -- that are for sale to do so that from a quality and valuation perspective, you might be less interested. Taking all this into consideration and the amount of capital you've deployed year-to-date, do you think that it's likely that you'll see you hitting that target? Or do you think we're going to see a notable step-up in buybacks in the back half of this year?

Well, I don't know how you define notable, but I think it is likely that we do more than we did in the first half.

You did $203 million in the first half.

Right. I know that. Thank you.

Well, I think that's for the audience.

So I -- but I got to tell you, as we've said every time we get asked, we'd rather put the money in high-quality, high-growth exclusive assets. But to the extent they are not there to be had, we will find the right time. And I think our stock is attractive today from an intrinsic value. So because of that, I think it is, yes. The answer to your question is unless we're going to find a bunch of assets that meet the criteria that we look for, you probably will see more stock repurchases in the second half.

Has your criteria for M&A, whether it's in the U.S. or international changed in light of COVID-19?

Not really. I mean, many people call this a Black Swan event. I don't think that we have real -- I mean, it has changed deal-making, for sure. I mean, it's harder to do deals, they're still doable, but I don't necessarily think -- because we look at owning assets forever, I mean we're not private equity or folks who have limited horizons of ownership. So we really don't write in a Black Swan event for a forever kind of DCF analysis, which is how we kind of look at things. So the long-winded answer to your question or to cut it down is no. But it definitely makes deal-making more challenging, particularly in the international markets, and it makes it very difficult if you're looking at markets that you've never been in before.

So that also would further support this argument that doing M&A to kind of hit that 5% minimum target is going to be even more challenging than it otherwise would be, and I guess, more of the argument then that we could see the money shift to other purposes such as buybacks.

You could argue that, but you're not going to get me to give up on the 5% portfolio growth.

Okay. I won't push it. In addition, you did note that you would like to prevent leverage from falling further, given your growth and where current interest rates are. With that said, is there a leverage level that you just don't want to see the company going below?

Well, I mean there's clearly leverage levels that if we fell below would be suboptimum. I mean we've said -- I don't have an exact number for you, but I mean, if you kind of back into our historical comments, we have said many times, we don't feel a need to be investment grade. So that is generally 5x EBITDA. So we don't want to be there, and I actually think the number is probably higher. However, I'm very hesitant to put any numbers in that -- produce an automatic rote response of buying things that you just buy for the sake of buying to keep leverage at a certain level. That's just an intellectually bad spot to be in. So I'm forever resistant to do that. So the job is to keep leverage at the right level and find the right things to buy for the right price, which is what we've done, I think, for a long time and why we've created the value that we have. And that's really what I spent most all my time on is making sure that, that equation always works out for the good of our shareholders.

Okay. That's very helpful. So I wanted to shift over and talk about CBRS for a moment. As it relates to CBRS, last week, it was reported that the auction has reached over $1 billion. I think it's gone even well above that since then. Do you believe CBRS will create new and different opportunities for SBA as you think about your opportunity, I think particularly with the in-building side of things?

Yes, I do. And I think I read something today where it's actually close to $3 billion. So it's picking up some steam pretty quick. I do and I think the primary reason is it's going to open up the number of venues that heretofore were uneconomic from a DAS deployment perspective. And whether that's 10x the number or 50x the number, I don't think we know yet. But it's going to be some multiple, which -- so you're going to have a much bigger universe. And I think it's going to allow different models to be developed. Traditionally, the model was -- you had to have direct customer, wireless carrier involvement. I think now you're going to have a lot more enterprise customers, whether they're the real estate owner or the industrial company, the building owner, it's just going to be a much bigger ecosystem and much bigger universe. And we're excited about what the opportunity is going to be.

Do you have a rule of thumb that you've historically thought of where a commercial DAS under the legacy model has made sense? I mean is it buildings that are north of 1 million square feet or anything of that nature that you kind of think of?

There is an answer to that question because my guys who are running that business, talk about that all the time, but I don't know what it is. I'm [ ashamed what's that ].

But the point though is CBRS...

The point is there is -- the point is whatever that number was in DAS, we think it will be less with CBRS. Yes, which means that the universe is going to be bigger.

Okay. Just shifting over to my last topic. And again, if anybody else has any questions, please feel free to put those through. But I want to talk about Edge. So subsequent to the second quarter, SBA purchased its second data center in the United States, the JaxNAP to develop deeper data center capabilities to enhance your SBA Edge strategy. As you continue to explore the ways in which you can monetize your assets at the Edge, is it fair to expect more M&A?

Possibly. But ultimately, to maximize the value -- or the shareholder value creation here, we need to be greenfield developing these opportunities at our tower sites. So any additional M&A would only be to facilitate the ultimate greenfield development of that real estate. Because that's ultimately just as it is on the tower side where the most value can be created.

I guess to that point, have you determined if you'll need to have a traditional data center like the 2 that you've just purchased. In each region, you deploy your Edge strategy to augment the neutral host model at your actual towers?

That's partially why we bought the second one. We're going to figure that out. We bought it to figure out the answer to that question, and people should not assume that operationally if the answer is yes, we have to be the owner. We can partner, we can outsource, we can do a lot of things, but the real -- the question that has to be answered upfront is how much of a data center presence, how close to the Edge needs to be found and had to make the true micro Edge architecture viable.

Got it. With that, we have 2 minutes left, rather than go into another topic, I'm actually just going to conclude here. Otherwise, we're going to end up going over. So thank you so much. Really appreciate your time, as always. And...

It was great to see you, Colby, and I look forward to next year where I really do hope and believe that we'll be back in Colorado together in-person.

Mark DeRussy, I know you heard that. So remember that. All right, guys, thank you so much.

Thank you.

Take care.