SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for joining us on day 2 of our Global Real Estate Conference 2020. My name is David Barden. I head up U.S. telecommunications and common infrastructure research for the bank. And as a function of that, I actually happen to cover a number of REITs, which were able to join us during this conference. And today, we're really pleased to host Brendan Cavanagh, who's the CFO of SBA Corp., one of the largest tower companies in the United States. Brendan, thank you so much for joining us.

Yes, absolutely happy to be here, David. Thank you.

Brendan, so we've got a mixed crew, I think, on the line. And before I begin, I'd like to invite everyone to recognize we have a conference question system on Veracast. So depending on how you're dialing in, you can maybe e-mail me directly at david.w.barden@bofa.com or ask a question on our Veracast system, and it will show up on my screen, and I'll be able to kind of feather it in to our conversation with Brendan this morning. So again, Brendan, thank you. So why don't we start with who SBA is, how you got to where you are and then let's kind of then start dissecting the business a little bit in terms of growth opportunities, capital allocation priorities, et cetera.

Yes, sure. Happy to do it. Again, thank you for having us here. So SBA has been around now for 31 years. I've personally been with SBA almost 23 of those 31 years. It was originally founded as a services company, providing site acquisition and development services to the wireless carriers. But in 1997, began a transition to tower ownership. And acquired our first towers in 1997. And since that time, we've continued to add towers through both construction and acquisition. And basically, we are, at our core, even though we're part of the telecommunications and technology industry, we're really a real estate company, which is, of course, why we're here at this conference. But we are very much a standard traditional landlord-tenant type of relationship with our customers. But we have an exclusive type of asset. It's a critical asset for support of wireless expansion across not only this country, but all the markets that we're in. And many of our assets are very exclusive in nature for a variety of reasons, including zoning protection, and that allows us a certain stickiness to our revenue streams and cash flow streams, and a certain steadiness of growth because of the expansion of wireless and the deployment of new spectrum and new technologies has continued to provide steady organic growth throughout our history. And so as you mentioned, we're one of the largest tower companies in the world, really 3 public tower companies here in the U.S. And happy to be here and share a little bit about the details of where we stand today.

I think a fun fact is, if I'm not mistaken, that the towers were actually in the original Real Estate Trust Act that was in the 1960s, and it was flagged as a wheel property for the purposes of defining real estate, which I think is an interesting fun fact. For the benefit of the real estate investors present, how much land do you own? Or kind of what percentage of your properties do you own and how do you own them?

Well, in terms of flat-out ownership or kind of a perpetual easement, it's around 30%, 35% that we own underneath the towers. But we do have very long-term ground leases on the other properties. Today, we control the land under our towers. And this includes our international portfolios where some of the rules are a little bit different, but we control for at least 20 years, over 70% of the land under our towers, and our average remaining ground lease terms were somewhere around 35 years, so quite a long time.

So the thesis for the tower industry, I think, coming into 2020 was this notion that for the first time in a long time, we were going to have a lot of capital spending on the part of the wireless carriers with the conclusion of the Sprint, T-Mobile merger, with AT&T's pursuit of FirstNet, with Verizon's kind of perpetual network improvement. And then there was this bonus category of DISH, who would be coming into the market to build. And it kind of feels like that excitement maybe got ahead of itself relative to reality. Could you talk a little bit about kind of the factors that are moving the growth story for towers kind of '19 to '20 and then '20 to '21?

Yes. So we did -- if you go back to 2019, we had a very strong organic leasing activity level that we were seeing in the first half of 2019. And that was driven by a number of the things you mentioned, T-Mobile was very active. AT&T also very active, including their FirstNet initiatives. And we were seeing that kind of growth that we had expected for some time. And then we got to the latter part of 2019, and there were a number of delays that came up with regard to T-Mobile's merger with Sprint. There were legal challenges and other things that were creating some uncertainty around that merger. And as a result, we saw T-Mobile, in particular, put the brakes on and slow down their network investment at that time. Also DISH, who -- their future in terms of being a wireless carrier was very much dependent on what the outcome was around that merger. They also stopped spending where they had been somewhat active prior to that time. And so that did slow down the leasing activity starting, I'd say, middle of third quarter of 2019. And our expectation was that once the merger situation got settled and resolved that we would see an immediate uptick, particularly from T-Mobile as they return to investing heavily in their network because they've made a number of commitments to the FCC and the DOJ in terms of their coverage objectives that they would need in terms of providing 5G nationwide coverage. And so that merger finally got completed April 1 of this year, and we -- while we've seen some uptick and certainly more recently have seen an uptick in activity with T-Mobile, it was a little slower out of the gate than we expected. And when you look back on it, it wasn't unreasonable. There were a lot of things for them to get organized and plan out and make sure that they were doing it right. So I think we mentioned on our last earnings call that it was about 90 to 120 days behind what our previous expectations had been. And so the actual organic leasing activity has been lower than we would have expected for the first part of this year. But as we head into the back half of the year, we're starting to see it pick up, and we would expect that it will actually accelerate as we move into the fourth quarter and then even further, frankly, into 2021.

Okay. So you kind of thought it was 90 to 120 days behind, and we're probably 90 days past -- not quite 90 days past the quarter end. So you're starting to see kind of the levels of activity that you expected to see, and it's kind of trending in the right direction as far as you can tell?

Yes. For sure. Yes, we're definitely starting to see an uptick in activity with T-Mobile in particular. And I think we're not yet at a level where we would expect this is where we'll be. I think there's still opportunity for that to continue to grow as we move through the balance of the year and into next year.

And are we seeing this hit mostly on the services side to start early, and then we're going to start seeing it on the actual tower leasing side later in the game?

Yes. I think we expect definitely to have a much stronger second half of the year in our services business, which is certainly in part related to the uptick in that activity. So it can often be kind of a precursor to increased leasing activity. But it also depends on the specific nature of the services activity that we're seeing. So I think you'll see that trend probably play out. One thing I should probably mention, David, just for clarity, because a lot of people get hung up on some of the organic growth rate numbers and say, oh, well, you said things are picking up, and I don't see that in the number. And I think if you go back over the last couple of years, you'll notice the way that it plays out because the organic growth numbers are really reflective of a trailing 12-month period. They're reflective of what's happened. And when you sign something up, there's usually a delay of, say, 90 to 180 days before the revenue starts to commence. Sometimes it's -- what you see in your revenue growth rates is reflective of what happened 6 to 9 months ago. So I think you'll start to see those numbers increasing as we get into the latter half of next year as a result of some of the pickup in activity at the end of this year and the beginning of next year.

Okay. Well, let me ask a question about that, and then I want to go back a little bit, but so if you've been following the tower industry for any length of time, there was a time when the towers would say same-store sales organic growth should probably be somewhere in the 6% to 8% range, depending on whether CapEx in the industry is running at $20 billion to $25 billion or $25 billion to $30 billion or $30 billion to $35 billion a year. And yet, as the industry has gotten larger and as we've seen consolidation, those numbers seem a little bit aspirational these days. When you think about what you see the industry run rating at as kind of the new normal, what would that number look like? What is a normal kind of reliable same-store sales organic revenue growth rate for the tower industry now?

Yes. I'm not sure how to answer that exactly because it certainly can change a little bit. If you look back over the last few years, we've been in a window where we've seen higher churn, mostly due to consolidations. And we've seen fluctuating levels, as I mentioned earlier, of organic lease up that's been impacted by -- sometimes by things that were unrelated to the customer network needs. And so when you have that happening, you will see higher and then lower or lower and then higher rates. So I don't think it's necessarily this is the number because in periods of increased network activity, we obviously have the opportunity to see those organic growth numbers return to higher levels. And I think that's a real possibility if we get to a point where all of the carriers are investing in 5G-related upgrades. And that is, I think, very likely to be the case next year. So what's the number? I mean lately, on a net basis, it's been in the 4% to 5% range. I think it's certainly possible for it to be a couple of hundred percentage points -- or a couple of hundred basis points higher if we have that ideal activity level where all the carriers are actively spending meaningfully on their networks. And I think that's a possibility next year. But the other thing to keep in mind, of course, is that the bigger we get, the more absolute dollars you need in order to keep the same percentages. So we'll have to see what that could play out.

Yes. Yes. Obviously, that's math. So I agree with that. So all right, I want to go backwards a little bit. So something -- obviously, there was some news yesterday, one of your peers who is staring down the barrel of some merger-related churn as it relates to Sprint, T-Mobile was in some tense negotiations with T-Mobile to forge a more holistic relationship, which they announced yesterday, a 15-year agreement. There's still some stuff we don't know about the gives and the takes about that. But where are you in this process? How big a threat is the Sprint, T-Mobile merger churn to SBA? How concerned do you need to be about that?

Well, it's -- I don't know that it's some large threat. I mean it's been something we've been talking about for years and years in terms of quantifying what the exposures look like. We have roughly -- actually less than 6% of our consolidated leasing revenue comes from Sprint sites that overlap with T-Mobile. So that's certainly the ballpark of what the total exposure would be, but we don't necessarily -- what that doesn't take into account is some of the offsetting incremental spending that needs to take place in order to accommodate those additional subscribers that T-Mobile has as well as to accommodate the transition to the upgraded network. They're going to deploy Sprint's 2.5 spectrum across all of their legacy sites. They're going to deploy the 600 megahertz spectrum across a number of the legacy Sprint sites that they keep. And so where does the net shake out on that? I think when you throw DISH into the mix and their spending, we'll be -- we expect to be ahead. But the timing of when all those things happen remains to be seen. We're obviously in the very early stages of that. And I think T-Mobile will make an effort where they can to be aggressive about canceling leases in the short term that they simply know they don't need in order to start to show some synergies to their investor base. So is it a huge issue? It's something that has to be managed through because they're one of our few large customers, but they have a lot of work to do, too. There's a lot of moving parts. And I think we've had some history with this kind of thing, and I think we'll all be fine and do what's right for both companies.

The last question on that topic would be the pitch on having a 15-year relationship is this idea of kind of immense clarity on the business. Obviously, immense clarity probably comes at some sort of cost to the tower provider. How do you think about that trade-off between clarity and profit maximization? And is there anything about that thinking that's evolved now that we're down to 3 players plus of potential DISH?

Yes. I think there is definitely a value to the certainty of it because if you're looking out 15 years, I'm not sure anybody can tell me exactly what things will look like 7 years from now. So having some -- some certainty around that over an extended period of time certainly has a value. But it also has to be weighed against the -- what we know to be the historical truth about this industry, which is these are a lot of exclusive assets that cannot be easily or even maybe at all replicated. And so they have a value. We trade at multiples that are based on that value that those assets have intrinsically. And it's certainly our responsibility as a management team not to just give away that value either. So the right balance, I think. But there certainly is a value to the long-term certainty of it, and it's something that we would keep in mind, but balanced against what the cost, as you mentioned. There is a cost, I'm sure, to that. What the cost of that is, is the key question in terms of coming to any agreement there.

Right. Okay. So just moving on to kind of the related topic of DISH, and they've been announcing a number of vendors. At their second quarter conference call, they kind of suggested that they're waiting for new hybrid baseband, antenna, radios, which they don't think will come until the second half of next year. So it kind of sounds like DISH is both not building out their old narrowband IoT plan, and they're not yet building out to meet their commitments to the FCC, but that they will be. Is it -- as you think about it, is it -- is it even possible that DISH is a '21 contributor? Or is it really more likely a 2022 kind of turbocharge as we think about the forward growth rate?

Yes. Well, it's certainly -- well, let me say it this way. I guess it depends on -- when you say a material 2021 contributor, we think about that in the context of activity where they're signing up new leases or even amendments, in some cases, on their old leases, but mostly new lease agreements. And I think that there certainly is an opportunity and a strong probability that they will be good contributors in 2021 in that respect. How much of an impact does that have in terms of our revenue mix coming from DISH in 2021? Probably not that much. So if you're looking at it from a P&L impact standpoint, I think you have to roll it back a year. Our relationship with DISH remains very strong. We are certainly making every effort we can to support them in their network development planning. And obviously, making available to them all of our high-quality exclusive infrastructure assets. So I can't really get into specific conversations with them, but they continue to add high-quality wireless people to their team and are working through their planning. So I do expect that we'll begin to see more material contribution to organic lease-up activity starting in 2021.

Yes. We've done a number of calls with their vendors. Obviously, we've had dialogue with SBA for a long time, but talking to some of the other vendors that they've announced like Mavenir and Altiostar and I think that that's right. I think that a lot of the vendors believe that DISH has got a lot of smart serious people on their side of the table and they're very intent on fulfilling what they said they're going to do. So I think that there's debate about how real that is, but all the people that we've talked to seem to think they're very real.

Yes, I think it's very real. They've got a lot at risk. They've got a lot at stake. So...

Yes, I agree with that.

And I think the fact that -- I think, David, just to add to that, I think the fact that it's a little slower and starting is not a sign of it not being real, but rather a sign of the fact that they're taking it actually quite seriously and, I think, trying to do it right. So that's been our experience anyway in our dealings with them.

Yes. Okay. Good. That's good to hear. All right. So then another kind of big driver of the industry has been AT&T's FirstNet build. They've been pretty public about their progression through that process. I think that they've said they want to be 70% done, if they're not already 70% done by this -- by the end of the year. How they define that is a little different. I think it's actually more of a population-based number than an actual physical geographic based number. But is there a worry that one of the engines of growth here might kind of peter out as that project ends?

I don't think so. I mean first of all, with regard to our site, specifically with AT&T, there's still ways to go on FirstNet, which you just kind of indicated, is some of the percentages that I think they're sharing are population based and not necessarily geographic based. And there are a lot of sites that I believe still -- will need to be upgraded. So there's still ways to go. But FirstNet is really only a part of the leasing activity we've had with AT&T in the last couple of years. So we would expect they'll continue to invest in their network doing all the other things that they're doing, deploying tower, spectrum that they're sitting on upgrading or obviously for 5G and just in general, enhancing their coverage and capacity. So I think in terms of how much of an impact getting through the full FirstNet build-out has, it's a little hard to say, but I don't expect that it will be a material slowdown.