SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

[Audio Gap] '21 Virtual Global Property CEO Conference. I'm Mike Rollins with Citi Research, and we're pleased to have with us SBA Communications and CEO, Jeff Stoops. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. And for those of you joining us here today, to ask management any questions, simply type on the question box on the screen, and they'll come directly to us -- and our best to ask those questions during our time with Jeff today. So Jeff, I'll turn this over to you in just a moment to introduce your company and answer the following question just to start, and we're asking this of all of our participating executives. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in SBA Communications?

They should invest in SBA Communications because predictability, growth and the clarity around the demand for communications infrastructure has never been clearer.

I think I want to get into each of those over the course of our time together today. Just to start us off with, Jeff, I know it's only been a little while since you reported the earnings. Can you review for us the strategic and operating priorities for the coming year?

Sure, Mike. And it's a pleasure, as always, to join you at this conference. A better pleasure when we're together, but next year.

Look forward to that.

Yes, yes. So this year, much like all years for us, we're an execution-oriented company. So we're focused on executing well for our customers, focusing on their needs, coverage, capacity, whatever it takes and whatever the things are that we can help them with. And I think this year, there will be many. We do intend to stay fully invested, given our optimism around the future. And when I talk about staying fully invested, that's through a leverage target of net debt-to-EBITDA which for us is currently, and I think will remain for this year and the foreseeable future at 7 to 7.5x. As we look through the year, we think in the U.S., it's going to be a changing and improving year in terms of activity as you see, particularly Verizon and AT&T start to really get moving at some point in the second half around the Category A block of the C-band, which commanded the highest price because it's the first available. And then this -- and as you know, we've signed a new MLA with them, which kind of documents a long-standing, good relationship we've had with them. And as they've well stated, they intend to really get at it in the second half of the year as well. Internationally -- our markets internationally were harder hit by COVID than a number of the U.S. markets, and Brazil continues to be relatively hard hit. We do see though with the advent of the vaccines and the belief that those will be much more universally distributed throughout the course of the year, we see those markets picking up and the carriers getting back to more normalized patterns of spending because clearly, those are markets where wireless communications are in many cases, the predominant way of accessing the Internet. So the need continues. The consumer demand is there, and we just need to get past this virus in a couple of these markets.

Maybe starting with one of the first things you discussed, which was predictability. And one of the questions that we're getting just as the tower industry has evolved is how unique or differentiated is a tower location for towers today relative to the 15- to 20-year span of network evolution? How unique are these locations? And then how does that feed into how you look at this predictability of demand going forward?

Well, over the years, Mike, we've tracked really the types of distances that our customers, the carriers, would hire us for on the site acquisition side and really the range of different locations that they would find suitable in their RF planning because, because as you know, cellular is named that because it kind of works like the human cell, where everything feeds off the adjacent antennas. So that distance has shrunk consistently over the years, both as a result of the spectrum that's being used, but really more as a result of the traffic that is being pumped through the system and the constant over time cells porting, cells porting, cells porting. So today, I would say that really the usable optionality, for lack of a better word, of moving a cell site is maybe a half mile at best. It's probably even less than that in the most dense urban areas. So to that point, I would say they're very differentiated, and they're very unique because they fit so precisely in our customers' long-term network plans. And then if you think about macro sites, in particular, which, of course, are the bread and butter and the backbones of the tower industry or the backbones of the leasing revenue, and you compare them to things like small cells and other types of wireless delivery, macro sites are the only forms of that architecture that really have the hardening and the backup power and the durability and the things that you put generators around to make sure that they stay running in the events of disasters, things like that. And the statistics are out there. The number of macro sites continues to rise every single year. We just don't see a change to that. So I would say the macro site and the resilience in demand for those with respect to tower leasing is alive and well. We expect it to stay that way.

And is there anything that you see -- you mentioned technology and just the evolution of spectrum band. Is there anything that you see today that changes the role that these macro sites play for wireless networks and wireless connectivity, whether it's in the mature U.S. market or in some of your emerging international markets?

I don't see anything that changes macro sites as the backbone of the network, given the power outputs and the capacity and coverage that they can provide, basically the economic bang for the buck that they can provide our customers. Now there will continue to be a lot of kind of infill and capacity and things that work in conjunction with the macro site networks. But I've not seen in all the -- and I've been doing this now for 20 years-plus, Mike, and now seeing a number of different carriers and how they've approached it. And now we have the front row seat on DISH, who's building a brand-new network from scratch. And it's all based on a backbone of macro sites. So I don't -- we never want to be naive about the ongoing changes in technology. And I will say that technological improvements over the years have increased the capacity of all the equipment, including macro sites, but not anything that actually would take away from macro site backbone as a core to a wireless network.

You mentioned DISH. And another question that we've been getting is that the idea of DISH building from scratch or that mid-band spectrum might prioritize urban markets. Does -- I guess, is there a location preference that you see for this next round of leasing? And does that change the opportunities for one tower provider over another?

I don't think once you get out into the specifics of siting because as I mentioned, the usable distances and the usable optionality in RF planning has gotten fairly, fairly narrow. I do think that DISH is going to do what every other carrier has done in history when they move from one G to the next, they start in the NFL cities and move out because -- excuse me. I mean, that's where the people are, right? And that's where you get the biggest population coverage. And DISH has, of course, some population coverage requirements by date certain. So they will no doubt follow that tried-and-true path, but that's just kind of a timing issue, which quickly spills out into suburbia and the rest of the country, where really the towers are located. So I don't see this really being much, if any, different than the way wireless has rolled out over the last 20 years.

And with respect to DISH, how should investors think about those leasing opportunities for SBA in terms of magnitude over time? Or just the timing of when you could start to see those contributions come through?

Yes. Well, certainly, the MLA is good. We had a great relationship with DISH. This now codifies it, streamlines it, makes the administrative side of things that much smoother. But DISH and SBA have committed to deploy thousands of sites on SBA towers over a multiyear period. It's a little less committed as to when those thousands of sites will be committed. There are certain guidelines as to how many by what date. So it's going to be meaningful for us, certainly on the leasing side. And also, we believe, on the services side as well as there are commitments on the site acquisition and consulting side and some opportunities for the construction work as well. We actually think that there will start to be activity and activity, meaning the first steps of what's necessary to begin to recognize revenue at some point. Activity will be picking up and we think getting fairly strong in the second half. Maybe you see some revenue on the leasing side in the end -- in the fourth quarter, but we would certainly expect it to be a 2021 event and picking up as you move through the year.

And if we take a step back and think of DISH, you think of C-band, think of T-Mobile. How should investors look at the profile for domestic organic revenue growth over the next few years? And how does the role of churn just given the merger-related decommissioning that you've talked publicly before, how does that play into these growth expectations?

Well, obviously, it's going to -- the net will be somewhat less than the gross, given what we're expecting with the Sprint-T-Mobile churn. But we think as you -- T-Mobile still got some -- plenty of things that they'd like to accomplish. And then you have all of this new C-band, which can't begin to earn a return on that investment without being deployed. And then, of course, you have DISH, who has to build out a brand-new network. These are all multiyear propositions, which will get started, we're relatively confident, by all at a fairly good pace at the end of this year. So as we report growth, it's on a trailing 12-month basis. So I would think that there's a good chance that as we move into 2021, you start to see the growth rate increase from where we exit 2020, 2021 as we move into 2022 and continue to increase until we get to that mid- to high single-digit gross growth level. And then you're going to have the churn so that -- which we expect -- and we've got fairly well quantified in terms of our Sprint-T-Mobile exposure. So I think the net is going to be in the mid-single digits during that next 2- to 3-year period of time as we move through the combination of the higher growth and the Sprint-T-Mobile churn.

And so given that the gross is currently in mid-single digits, and your net, you think, can get to -- back to those mid-single digits, is that just -- the math just suggests gross should be high single?

Yes. Yes. I mean, in the 7 to 8 range. I wouldn't go to the top of what you're suggesting, but yes.

And that's over the next couple of years as you think about that?

Well, just based on -- I mean, activity levels will get there quicker. But just everyone needs to keep in mind the way we calculate that metric, it's on a trailing 12-month basis.

And if we take a step back and just think about the broader opportunities for the tower business model and as you have a global portfolio, how do you think about pursuing all the different adjacencies, whether it's fiber, the edge or far edge data center colocation or even other things. You mentioned generators and power backups. Do you have kind of a framework to think about what SBA should do along these lines? And then maybe a sizing of how incremental those adjacencies could be to your current revenue base?

Yes. There are a tremendous number of opportunities, Mike, and they appear to be growing rather than shrinking in terms of the substantive areas. We look for things that our clients need. We look for assets and relationships that have the long-term, predictable, recurring nature we talked about right upfront as to why somebody should want to own SBA stock. And then we decide, is this the right thing for us to do? And the beauty of that is that these are all shareholder-driven decisions and not so much strategic in the sense that I need to offer this product to make the rest of SBA's products work or it's all a very segmented analysis. And I'm thankful that our business is able to work that way. And what it does do is it gives us tremendous yes-no ability to look at opportunities and say, "Well, this is right for our company and for our shareholders and our customers or not." Plenty of opportunities out there. And they can be brought to scale very quickly if you want to buy them and less quickly if you want to organically develop them. But in either case, I think it's important for our investors to know that when you're talking about adjacencies, these are things that are nice to have and nice to do provided that they fit with the overall theme of the company and are done for the creation of shareholder value, not because you need to do them for any particular reason.

You mentioned in the past that you've learned a lot, for example, by buying a couple of data center businesses and trying to understand the connectivity model. What was the most surprising things that you walked away with so far from that experience? And how does that inform you in terms of -- just the biggest question we have is, where is all this edge compute going to sit? Tower, some kind of location that's surrounded by a bunch of towers inside a carrier central office, old telecom carriers for those less familiar. What have you found? And what have you -- what do you think this means in terms of what this far edge might look like as there's a demand for more compute and lower latency?

Yes. Well, we have found, first of all, that there is a seemingly unquenchable thirst for additional data storage. And we've also found that these are businesses that we can run and are very good at the operational side. Whether we should run them or not still remains to be seen as to how the last part of your question actually shakes out. And really, you have one side of the narrative that's trying to be shaped by our customers, which is more around the C-band and their needs for this. And that could be more central offices. Then you have the other narrative, which, frankly, has just not yet been fully baked or grown yet, which is that the true mobile users, the gamers, the cars, the Teladocs, they will need that could -- or the Netflixes or the folks who are streaming over the wireless networks to the folks with the iPads and the phones, those will be the folks who need to be at the tower site. What needs to be -- what will decide that issue is the apps, obviously, the business characteristics, and the latency. Will that latency need, as you so correctly put, be that great, by enough people to justify a warrant compute at the tower site. Because if that's the case, then obviously, all the things we've been doing will be well served. And that's why we've been doing it in the belief that, that is ultimately where things are headed.

Is there commercial logic for a large tower company to get together, either with an alliance or a merger with a data center company, to try to comprehensively provide a solution for what could be this growing demand?

I think there are -- there's a lot of industrial logic to continuing to find ways to bridge that convergence that ultimately, we believe, will exist between data centers and tower sites. Yes. Whether it's in the same capital structure or not, I think, is a different story. That's one that's much more largely determined by the investment community. Obviously, you see that quite often on the private side, the private equity side. I don't know that you see it quite that often if ever on the public side. But certainly, in terms of collaboration, partnerships, arrangements, sure.

Switching gears for a moment. One of the questions that we're asking all of the participating companies at the conference is what are your top 3 priorities to improve your ESG score next year?

Improve our diversity, improve our carbon footprint, reduce our emissions, and those are our top 2. Let me see if I can come up with our top 3 because those 2 are really our big focus areas. How about I just stick with those 2?

That works. Going over to the international markets, you mentioned earlier that the long-term demand case for the international markets, the reliance on wireless communications. You've also recently on the earnings call talked about some churn that you have to process. What's the right way to think about the long-term growth of these international markets? And does the experience with the pandemic and the importance of connectivity potentially accelerate demand for capacity deployments from your customers as these regions and companies and the populations get through this?

We think it will. I mean, the -- I'm not sure if everyone on this call knows this, but in many of these markets, you had strict lockdowns like you didn't have in the U.S. in the sense that not even your tower crews could get out there and work. So you had a limited, as a result of the virus, CapEx year last year. The fourth quarter was improving for most -- all the current carriers in our Latin American markets. And to your point, there is a tremendous amount of pent-up demand and necessity because of the reliance on wireless as the primary means of communications and the connection with the Internet. But they do have to get through the virus, and they do have to reach some point of stabilization there, which I'm optimistic, as I mentioned earlier, will come sometime this year. But if we can get back to the -- when we get back to the pre-COVID environment, I'm tremendously optimistic that with the stage of those networks, less mature, the fact that there's so much more reliance in terms of the population on wireless, the spectrum options, which many of these countries have on their books, I think we should definitely see the ability to get back to high single-digit, low double-digit revenue growth in some, if not all these markets on a constant currency basis. We have to watch and manage the currency as best we can. But certainly, on a constant currency basis, all the operational attributes are pretty optimistic.

If we go back to one of the earlier comments that you also made that demand has never been clearer. And you take the domestic revenue growth opportunities you highlighted, the international growth opportunities that you highlighted. How should investors think about your opportunity to grow AFFO per share on a multiyear basis?

We have, I hope, clearly articulated the goal of growing AFFO per share at a double-digit clip for the foreseeable future. And I -- that remains the goal, and I feel very good about that goal. Our guidance this year, which has a lot of timing issues associated with C-band and DISH and all that, I believe, is about 8.5%, still without a lot of additional capital investment in there. So I think that low double-digit compound growth over the course of several years is certainly what we're looking for and no reason why we shouldn't get there.

And how does a rising rate or inflationary environment impact the business as well as those bottom line growth aspirations?

Well, I mean, to the extent we have to refinance into those environments, it may have a spot impact on that current instrument's debt. I think the bigger impact, Mike, is just what it means to investors in terms of relative attractiveness of investments and people who particularly use DCF analysis. That's where it's going to come in to play. Inflation, I mean unless inflation gets really, really high, which I, frankly, don't believe that it will, our -- most of our international leases are tied to inflation, that's CPI escalators. In the U.S., we averaged north of the 3% escalator. I really don't think that's going to happen. So we've actually benefited from that for forever, frankly. So it's really just how folks value things. I don't think it's going to cause us to change the way we operate. I mean, our AFFO will continue to grow. Maybe we tweak our leverage a little bit here or there. But primarily, more than anything else, it's going to be how people value things on that DCF model.

And just -- you've spoken a bunch in the past about T Mobile-related churn for the Sprint deal. Just for our audience and investors, just to summarize, how is the churn profile from this merger-related churn size up in total? And how does the flow of it maybe compare similarly or differently to some of your competitors that are out there?

Well, I don't memorize what theirs is, but I can tell you that ours is -- for this year, we're looking at about $8 million. Next year, we'll have a jump to around $30 million. And then it comes back to around what it is now, maybe $10 million in 2023. And then the last 2 years that I have at my fingertips, '25 and '26 are probably around $40 million, $40 million each. And those would be our biggest years.

So it just takes time for it to all come through?

Yes. Yes. Yes.

And you're seeing -- on the other side of the equation, are you seeing their growth activity pick up with the expectation that you had in terms of contributions?

Oh, sure. I mean, that's -- when we talked about our fourth quarter results and the big pickup in activity, that was mostly all T-Mobile. Yes. Well, the pickup was all T-Mobile.

And just another question on something you talked about over the last number of weeks is the PGE deal. And the question for that deal is, can you frame how that transaction may open up new opportunities for acquisitions or partnerships with the utility industry who may have a number of these colocations around the tree?

Sure. Yes. We love that deal. It's in a very, very attractive part of California, a very difficult spot to site towers. And I think this next part of my comment would apply to most any utility and why there are perhaps potential opportunities with others. It is not the utility company's first, second, third or fourth priority to put telecommunications carriers on their towers. It's just not what they do. It's a pain for them. It requires people be redirected, and it's just -- it's a difficult process. So for us to come into something like that, you have by definition, an underserved, underutilized asset. And that's going to be to the benefit of our customers. It's going to be to the benefit of PG&E, and it's going to be to the benefit of our shareholders. So this particular deal, we liked a lot because of its location, because of the revenue -- the proven revenue that was already on there and obviously, the price, the structure of the deal. Now whether there will be others that could fit the bill like that, there sure could be, but it remains to be seen.

And I think this was -- was it 700 locations this...

Over 700 location, over 900 leases, licenses, I guess they're called out there. And a lot of additional towers that we have the rights to market.

And that was it, 20,000?

28,000.

28,000.

28,000.

And do you have a sense around the country if there's 700 just in Northern California locations that have site leasing. Do you know how many are actively leased locations by the utilities around the country just to think about what the size of opportunity might be for SBA?

I do not. I do not. But I know here in Florida, that Florida Power & Light has a number of wireless installations on their transmission towers. And as I think, if you drive around the country, you'll see ready examples of that. But no, I do not know the aggregate amount of wireless tenancy on the -- but I will know that the next time we speak.

Well, that's one of the things that I'm following in the tower industry. Now that -- I was driving around, I see towers. I see antennas. I don't see sometimes the scenery that sits behind it.

You probably know the answer to that question, but I do not.

Well, Jeff, are you ready for some rapid-fire questions?

Sure.

Great. So I got to ask rapid fire. We got 4 today. First, when we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over that preceding 12 months?

I would say, well, there's SBA again outperforming expectations.

Second question, what do you think your corporate travel budget will be next year as a rough percentage of what you spent in 2019?

It will be less. I'm going to guess 50%. What -- that is one thing that will change, I think, certainly for our company and I'd hazard a guess for all companies that -- you will get back to business travel, but you -- everyone has proven that you can definitely take a notch -- take it a notch lower.

What will same-store NOI growth be for your property sector overall, equivalent to tower gross profit, not for your company in 2022?

For our...

I call it domestic, call it, domestic tower category. What would same-store NOI or tower gross profit growth be for 2022? So not SBA specific.

Go back and read the 3 earnings transcripts, add them up and average them. How do you like that one?

It's an answer. Final one. What will the 10-year U.S. treasury yield be 1 year from today? And I think today, it's around 1.5%.

1.75%.

Okay. Jeff, it's a pleasure to see you. Thank you for your time. I hope everyone on our virtual meeting stays safe and well. And we'll look forward to doing this in-person hopefully in the future.

Absolutely. Mike, thank you very much for having us, and we'll see you soon.

Thank you for being here. Thanks.

Bye-bye.