SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Good morning, welcome to Morgan Stanley's TMT 2021. I'm Simon Flannery. I cover the telecom services and communications infrastructure sectors. And it's my great pleasure to welcome back Jeff Stoops, CEO of SBA. Jeff, welcome to TMT.

Simon, happy to be here, even if it is remote.

Thank you. So before we get started, for important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Jeff, to get started, you had a strong Q4, very good AFFO growth. Talk about 2021. What are the priorities for the company for next -- for this coming year?

Well, we -- as is our usual priority is continue to execute well for our customers, be in a position to capture their needs, help them along with their growth. As we indicated on our call, we see activity in the U.S. building through the year, particularly as we see the C-band spectrum auctions now coming to a close. And as we have concluded our agreement with DISH, DISH has outlined its plans for its build-out, which I think we've all heard now clearly are going to be picking up and accelerating as we move into the end of the year. We want to -- because we have such great optimism and belief about activity levels and growth, not only as we move through this year, but into the following years, we want to stay fully invested. And when I say that, I mean, keep our leverage levels between 7 to 7.5x, really look for minimum portfolio growth of at least 5%. Last year was the first year, and a couple of years we did not get that, but we're off to a fast start this year with our PG&E transaction. And really feel good about what we think will be some very strong activity levels in the U.S. from all 4 nationwide carriers, particularly as we move into the second half of the year. And we think international activity is going to pick up as well after a year where, in many of our markets, Simon, the pandemic hit some of those markets a little bit harder than it did in the U.S. We had some actual lockdowns that lasted for a while in those markets that did affect carrier spending and the ability to do business now. But with the vaccines becoming more available and numbers improving in many of those markets, GDP is expected to improve, and we think better times are ahead compared to 2020 in all of those markets as well. So we're feeling pretty good about this year and particularly moving into 2022 and beyond.

Okay. Great. And just on the pandemic, good to hear that we are seeing some improving trends coming out of that. Any changes to the way that SBA conducts business and in terms of your ability to improve your efficiency going forward or other opportunities you see?

Yes. Well, I mean, there's a big picture answer to that, which is, I think, wireless and communications are certainly ever more important, not that they weren't before that, but certainly now extremely front and center in everyone's minds, particularly in some of our international markets as really the only way to communicate. In terms of how we do business, we went all remote as everybody did a year ago now. And while we did it successfully, I, unlike certain other businesses, particularly in some tech businesses, I don't believe that remote work is -- certainly entirely 100% remote work is going to be a thing for SBA. I believe in the power of collaboration and teamwork, getting us all together, to find those sparks of creativity and collaboration that have made us great all these years. So while we will continue to have some remote positions, we will be moving back to 100% physical work as soon as we can. Down here in Boca office, which is our largest, about 500 employees, we're working at 50% capacity now. And as positivity trends continue to improve, they're rapidly improving down here in South Florida. And the vaccine becomes more available, we expect that sometime in the next several months, that we could improve that capacity level. I do think travel will change. I think, the amount of business travel that we all used to think was necessary perhaps we will conclude won't be. I think we'll still be doing it, but it won't be to the same degree. So perhaps if there are any changes necessary there, that come out of this, it will be there, Simon. But in terms of the field, I mean, there's no changes to the way towers get built, towers get serviced or towers get operated. And in fact, that part of our business never changed from the moment that we went to fully remote work for the office folks. The field people, I mean they couldn't stop, they were central workers and have been out doing the same business that they've done for years for the last year.

Okay. Great. You talked about some of the growth drivers you see in '21 and into '22, particularly. How do you think about the medium-term outlook? We got into this a little bit on the last call, but the gross bookings -- or the gross revenue organic is about 6% right now, give or take. Where do you see that going? Is that a high single-digit number over the next several years?

I think -- I don't know that it will be that this year because that metric for us is reported on a trailing 12 basis. So as we -- we're going to need for that number to move up. We're going to need, and I'm confident that it will. We're going to need some contributions from the C-band auction. And we're going to need some contributions from DISH. And that's all going to happen, but it's not going to really happen on an activity basis until the second half of the year, which means it's not likely to happen on a revenue basis until late, late, late this year or early 2022. So if you think about that on a trailing growth rate calculation basis, we're confident that those mid-to-high single digits of gross domestic growth are going to be -- we're going to reach those again, but it's likely to be later in 2022, 2023 to do that. And again, it's just really timing at when the C-band and the DISH and -- once all 4 nationwide carriers, once their activity levels start really turning into revenue is when you can realistically look for that. We're optimistic that it's going to happen.

Great. And more specifically, on the C-band, there's been a lot of talk, I think, in the satellite industry, perhaps that there might be conversations with the Verizon or an AT&T about accelerating the clearing process. But it sounds like from what you're saying, at least, that's not going to make a material difference this year or maybe some of the late '23 deadlines can be pulled forward for in certain markets for certain parts of the band. But have you got any sense about whether those kind of at the FCC kind of time lines could be accelerated?

Well, they certainly could. I mean we saw that happen before with T-Mobile and the 600 megahertz. And I mean, for purposes of preparing our outlook, we couldn't assume that that acceleration process was going to occur. But you're absolutely right, it can occur. We've heard the same things that those conversations are occurring. We certainly -- I mean, given the prices and the different categories that the C-band auction was parceled into, it's just somewhat common sense that if you're going to spend the higher prices in the A category, you're going -- you did it because you wanted it fastest. Well, if you want it fastest, you're going to do your darndest to get it out there as quickly as possible. So I mean that's all logical. I think there's every chance that it occurs, but that wasn't something that we could actually guide you until it happens.

Great. And in terms of the C-band, the build-outs, I don't know how close you are yet. But if you put a C-band antenna on a, let's say, PCS or an AWS grid, there's a lot of empty space that's not getting a signal, so it requires a lot of densification. How do you see the initial deployments? Do you think it will mostly be on the existing sites and densification to come? Or to really get that decent coverage in urban and suburban, that it'll then need to densify from fairly early on?

Well, perhaps over time, but there's no question that the quickest, most efficient and most economic way for our customers to deploy is on existing sites. You've got the power, you've got the backhaul, you've got the permitting, you've got the designs, and you've got the manpower and the whole tower processes and procedures ready to go. So that I'm very confident based on many years of seeing many generational technologies moving one to the next that, that will be the first -- the first step. And then just as always is the case, there'll be tests and there'll be mapping. And then you'll see where the holes are.

Yes. Great. And the 3.45 to the 3.55 seems to be proceeding at the FCC looking at it in early October auction date. Is that something that you're seeing as another potential demand driver in the medium-term?

Well, I'm confident it will be, given the huge success of the C-band. It comes at a slightly lower frequency. So that will mean it has slightly longer propagation characteristics, which will be attractive. And I'm sure that it will have a fairly high demand in the market.

Okay. Great. And then you recently signed the DISH MLA. I think for investors, it's trying to get a better understanding of what is committed to, what the expectations are.

I know they'd love for us just to post the agreement. But we've promised DISH, we could not do that.

There's a minimum 15,000 sites, but there's this aspirational 50,000 sites. It'd be great to get your perspective on what you're seeing in terms of the intentions there.

Well, we have thousands of sites committed to us, committed, not aspirational. And we have pricing, and we have all the things that you would expect us to have, but we've agreed not to share those because DISH finds that, as do we, proprietary. We have an excellent relationship with DISH, going all the way back to when they were first getting their narrowband plans off the ground and were in need of somebody who was extremely experienced in building networks as we got our start and continue to be. So we have a very comprehensive agreement with DISH that covers all aspects of the equipment and tower build. But it goes beyond that. It covers the services side of the business, site acquisition, zoning, consulting. It does not cover construction, although I will tell you that I have good optimism to believe that we will be helping DISH in that area as well. And I really believe, as we've always commented in our relationship with DISH, it's very good. And we will be a strong partner with DISH, and we'll work our tails off to make them every success that we could.

Great. And I guess you're saying not -- there's not much from DISH included in your '21 guide at this point. Is that correct?

Probably a little bit on the services side, but not on the leasing side. Correct.

Yes. Okay. Great. And then on T-Mobile and Sprint, we've seen one of your peers sign up 15-year MLA. How are you thinking about the growth opportunity there, the churn to come from Sprint and whether you might be interested in doing one of those as well?

Well, we actually have agreements with both Sprint and T-Mobile that survive the merger that deal with a lot of leasing aspects, including the deployment of the 2.5 gigahertz spectrum. And we have fairly long remaining lives on both the Sprint and the T-Mobile leases. And T-Mobile is extremely sharp and prepared in the sites that they're going to keep and the ones that they're not. So not quite sure, in our case, given what's already been agreed to and what's already known and the time frames on the leases that we have that there's the same thing to be gained in our case as there might have been looking to be achieved by others in their MLA. But I mean, we're always open for further discussions, should there be a reason for that. But a lot of the things that I think were sought by others are somewhat already known, in our case have already been covered.

Maybe you could just sort of remind us of the -- I think you have about 30% of the churn from Sprint over the next 3 years. Is that right? Like what does the cadence look?

Yes. It's 8-ish, and these are approximations, 8 million in 2021 is our public -- is our guidance for this year. And that's going to peak in '22 of the -- at least in the next 3 years. And that's going to be around 30 million. And then that drops fairly dramatically in '23 to around 10 million.

Great.

And that's all scheduled out and based on the terms that exist. And then we have a very defined, termed-out stream on both the T-Mobile and the Sprint leases. So it's a little different than -- the one of our peers and the reasons that a lot of folks have speculated that, that deal was entered into.

Okay. Great. So you talked about your organic goal of growing at, at least 5%, and you mentioned the PG&E deal. That was a little bit different for investors. Perhaps you could just talk a little bit about how that came about and what really interested you about that opportunity?

Well, we were contacted by an investment bank. That was a brokered deal. And as we looked at it, we saw an extremely attractive geographic market in Northern California. We saw -- and we actually had some great knowledge of those structures because way back when in the PacBell days. This is long, long, long ago. PacBell has now been subsumed into another network. But we worked for PacBell and worked on a number of those structures. We knew it. We knew the markets were very good, and the structures were very sound. And we knew that because utilities have very different priorities, adding colocation revenues aren't #1, #2 or #3 on the list. So they were underutilized sites. And then as the discussions progressed, we saw that we had an opportunity to, from our perspective, acquire these structures, these leases, this relationship or what we thought would be a very -- for SBA's perspective, a very attractive price. So those 3 things all came together, and the deal happened. So we're extremely pleased. The relationship is off to a great start. We love working with PG&E folks. We're going to work our tails off for them to help them maximize the value of those assets, bring access to our customers that perhaps have not been made readily available before, again, just because of their priorities of the different parties involved. So we're extremely pleased.

Great. So does that lead us to think that they can potentially grow faster than the balance of the domestic portfolio?

Possibly. But it's -- I mean, that's not -- because of the size of this -- even if they did, I don't know that it would move the needle in a way that would end up demonstrating itself in our reported numbers. So it's probably too early for us to speak to that. But we do think there's a lot of opportunity there, and we're going to do our best to maximize it for the benefit of PG&E, our customers and SBA.

And one part of the deal was the agreement to market some sites, which are not currently utilized for wireless.

Yes.

So how sizable do you think that opportunity is? Or are those sites that you see immediate impact? Or is that something that will be gradual over time?

Well, I think the materiality of it will not be immediate. The -- so I would say over time, but we think, again, great opportunities there to work on assets that based on the different priorities of the parties, probably had not gotten a lot of attention historically.

Yes. Okay. And I think you talked on the call about some inbound from others. So is this a model that was particularly special? Or do you think we'll see more of these deals?

Yes. I think it certainly got the attention of the utility executives in the C-suite, and it costs a lot of folks to say, "Huh, that's interesting." So I think there's some thinking going on. Yes.

Okay. Great. Great. So maybe we turn to international for a few minutes. The -- talk about your overall philosophy currently on international. And how you think about growth opportunities there versus the U.S.? You'd historically been in Central and South America, did a deal in South Africa. What are you open to going forward? Are we likely to see more M&A in that area over time?

Well, I mean, let's start really from the basics of why we invest at all. I mean we invest to create value for our shareholders. And given our capital structure and our capital allocation philosophy, we really start with a leverage target and go from there. Portfolio growth has always been our preferred method of capital allocation and then stock repurchases. Now of course, we've added a dividend, which comes from now before either of those, but we've got plenty of dry powders to do portfolio growth and stock repurchases. So the reason we moved internationally, and this is even more true today, is we saw that we would have an amount of capital that was going to exceed the likely U.S. investment opportunities that's still true today. So the reason we invest internationally is we can't satisfy our U.S. -- our portfolio -- our capital allocation goals solely in the U.S. So what does that mean? It means we continue to be very disciplined and look for those areas internationally where we can find the right risk-adjusted returns to produce superior shareholder value creation. And just given the -- our view on where those opportunities that fit our view are the right ones for our shareholders, I think we will continue to do some things internationally. Probably more so in the markets that we currently exist, but there's always a chance that we find a new market that meets the goals that we have, which will look probably more like an old market, once you dissect it. But -- so that's a long-winded way of saying, yes, we will do more international investment.

Great. And in Brazil, it sounds like you're seeing a little bit more activity going into '21 as the pandemic eases. How does the Oi restructuring impacts that industry? Is that going to allow people to be more aggressive with their build-out plans over the next several years? And I think you called out spectrum auctions as well.

We believe it will. We believe it's going to lead to better profitability. The way we understand the government is going to finalize the Oi breakup and purchase, as TIM is going to -- as the reverse of the market share today. So TIM is going to get the most, then Claro and then Telefónica, so there's going to be a very good balance that comes out of this transaction, which is a good competition, good profitability, and I think good for long-term CapEx. The Brazilian GDP is projected to grow dramatically this year over last year. They got hard hit by the pandemic. They will be extremely well served by a more widespread availability of a vaccine down there. And we have enjoyed tremendous operational success in Brazil, Simon. The one issue that we have had that has masked our otherwise great growth and operational success in Brazil has been the foreign currency exchange.

Okay. And talk a little bit about the churn outlook. You called out some specific churn in Central America. Oi could be looking to decommission, but I think you've still got long-term contracts. So what's the expectation over the near term and medium term there?

Well, for Oi, probably very little near term. But if you look at kind of what we expect the worst-case to be, it's maybe $40 million, but that would be over 10 years.

Yes. Yes. And then in Central America?

Yes. There was -- and I think this is down going on over a year. Claro bought certain markets from Telefónica. And one of those markets, Guatemala, there was a fair amount of overlap. So we're going to -- some of those sites we're going to see decommissioned. And then we had one other isolated country where there's one carrier that's really struggling somewhat to ride its operations, and we're going to see some churn this year and probably next. And those 2 combined are the vast lion's share of the $10 million that we expect to see this year. And that may be repeated next year as well.

Okay. Great. So you're still very much macro tower-focused, but you've been making some investments in the edge in data centers. So how are you thinking about what the opportunities there might be there for SBA over the medium term?

Well, we've invested in the data centers to learn as much as we can. And we've learned a lot about ultimately the edge coming to our tower sites. And it's moving in an outward direction. It's not quite to the tower sites yet and won't be until there are 5G applications that require the type of minimum latency and computer power so close that you end up with the edge at the tower site. We think it will happen, but -- and that, of course, will be the trigger that makes all of what we're doing so worthwhile and why we want to be prepared. But that's ultimately what it's all about, Simon. For us, it's to be ready if and when, and we believe it's more of a when, that the edge moves to the tower sites that we will be in a position to -- even if we choose not to be an operator and be more of a landlord or even own the shelters, but in kind of a nonactive electronics way to understand the entire data center ecosystem. And it's been great. I mean we've learned a lot and learned as to how the different aspects of it all fits together and the one big converged universe that we seem to be headed towards. But at the end of the day, for us, it has always been and will continue to be around tying together at the edge data centers and our tower sites.

Great. Well, one last one, you just raised your dividend 25%. You did talk earlier about your leverage target, 7 to 7.5x. How do you balance the 2? Is that something we can continue to see a 20%-plus growth for several years and while still maintaining that leverage?

Yes. I think we'll continue to -- I mean, this year, given some of our portfolio growth and large stock repurchases right at the end of last year, I think you'll see it higher and then continue to move towards the lower -- and as we move into -- of the range as we move into 2022. But we have several more years of being able to sustain high annual dividend increases and maintain our dividend payout ratio in the less than 30% range. And it wouldn't be until we get to that 30% dividend payout range as a function of the AFFO that I -- assuming interest rates stay relatively stable, that I think we would seriously consider dropping into the 6s on a permanent basis.

Right. A high-quality problem. Jeff, it's been great to catch up. Thank you so much for your time today.

Thank you, Simon. Thanks for having me.

Okay. Thanks, everybody.