SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Hi. My name is Phil Cusick. I follow the comm services and infrastructure space here at JPMorgan. I'm pleased to welcome Jeff Stoops, CEO of SBA Communications. Jeff, thanks for joining us.

Happy to be here, Phil.

I have questions, but if anybody would like to contribute questions, please just hit the Ask a Question button on the conference page, and I'll see that come up. Jeff, the U.S. seems to be more open every week, but other regions of yours are still pretty deep in COVID. Can you sort of contrast what you're seeing in the U.S. with what's going on in the other parts of your business?

Sure. And thanks for all of you out on Zoom to -- for joining us today. We have -- I don't want to overstate this because COVID has, of course, had tremendously negative impacts in many respects. But for the most part, we have been unaffected operationally even from the start. We were deemed an essential provider by the U.S. Our field people were out just as they were pre-COVID. So we really didn't see that much of a change operationally in the U.S. and I have to say today, I don't see any material impact at all in the U.S. I read -- I haven't seen. I read that there's some concern about chip deficiencies and other supply chain shortages that may impact what we're doing in the future. But I have to tell you, I haven't seen any signs of that yet. So in terms of activity in the U.S., I would say it's essentially a return to normal. And it's good because this is the busiest that we have been in many years. So to be able to move about and do our jobs is obviously good. Internationally, as you suggested, it is a different story. South America, Latin America has been hit much harder. And some of those countries have not returned to physical work yet in office locations, which we have here in the U.S. We've been back at a 50% capacity for some time. But I will say that things are getting better internationally. And for the first, whatever this is, 5 months of the year, we're actually ahead of our plan in our international markets, particularly in Brazil and South Africa, our 2 largest countries outside of the U.S. So clearly had an impact last year, clearly impacted carrier spending, seems to be improving. And I think there's good optimism that there will be continued improvement in those markets as we move through the year and into next.

Okay. So let's follow up. Consensus among tower execs seems to be that we saw an inflection in the business in either late 2020 or early '21. And carriers keep raising CapEx guidance, including AT&T just last week. Can you compare your U.S. activity levels today to prior big upgrade phases, including the 4G deployments and the first wave of 5G? And is activity still accelerating?

Activity is accelerating, as measured by the application backlogs that we track. So we're at a high now. It may be -- should've checked this before the call. But maybe -- we may be at an application backlog high. If not, we're certainly close to it. And I do believe that it's very possible that we -- if we're not at that high, we will reach it or exceed it on a volume basis, volume, meaning the number of leases and amendment applications. So as you think about that, that's great, and we expect that to be sustained for a number of years. I will say though that the amount in dollars of the average amendments, I expect will have been higher in the 3G to 4G transition stage than I expect them to be as we move from 4G to 5G, just given the amount of physical load that the 3G -- the 4G upgrade needed compared to what's going to be required now. So great on volume, amendment pricing perhaps a bit less, but all in all, it equals, I think, a very encouraging next several years.

Okay. I want to get back to that amendment pricing in a minute. Domestic revenue seems pretty well locked in for the year, but you highlighted that 2Q activity could create some upside. You're ahead of plan in Brazil and South Africa, that seems to be at record levels. It seems like there might be some upside for the year, although, again, we're getting pretty late in the season to be moving the revenue numbers for this year. Should we be looking for a little bit of upside to your current guidance?

I mean it's possible. We had increases already baked into our outlook as we moved through the year. So we did anticipate some of what we're seeing now. I think a primary driver that will answer your question -- well, first of all, in 2 months, when we release Q2 results, I think we will pretty well -- obviously we will know, to a great extent. It's going to be the pace at which DISH installs because that is a -- under our agreement, that is one revenue trigger. And I'm encouraged by what I'm seeing in terms of when we might actually see those installations occur this year.

That's interesting. We hadn't expected any kind of actual revenue from DISH this year.

We had -- and I think we're going to get some. Now whether it's material enough for us to change the outlook or not, I can't say today. That will be something for more description and discussion in 2 months.

Okay. And you talked about application backlog. Are there any COVID issues that are slowing the conversion from application to sort of build revenue?

No, no. And I touched on this a little bit earlier. We haven't seen any signs of equipment shortages. I mean the labor market is getting tighter because activity is so much greater, but I can't say that labor is an issue today. So that's a long-winded answer to basically say, no, not seeing any COVID issues that would lengthen out the typical application to signed revenue time line.

Okay. Okay. I mean early on, we had heard a lot of municipal sort of backlogs and things like that. But that's not an issue today.

That seems to be all getting back to normal.

Okay. Okay. Good. Let's follow up on that amendment comment. You -- how much of that is a lower load or incremental load or smaller amount of gear being pushed out versus some kind of change in the dynamic of your relationship with carriers? How do you think about that?

Totally the former. It's all weight- and the load-specific. It's just -- I mean, the amounts of equipment that were added and needed to go from 3G to 4G were simply much, much, much greater than the equipment needs that are going to be necessary to go from 4G to 5G.

Okay. I'm curious as well. Inflation is something that people have been asking a lot about very recently. As you look at signing, whether it's sort of long-term pricing schedules or something like that with carriers, is there a change in how you think about the risk of inflation in the business over the last few years versus over the next few?

Not really. I mean our escalators average 3.2%. We've been on the winning side of that for a number of years. And I find it hard to believe that given the monetary policy and government that we have that we will have issues that will cause inflation to be much higher than that versus same period of time. So no, we -- yes, we've kind of settled into a very -- and that's just one of the issues that has been fairly well agreed to between the industry and our customer base. So I think we're all good there.

Okay. I wasn't thinking as much about escalators as the sort of the size of amendments, which is the area where you do have flex over time.

Yes. I mean -- and there is some of that. There is some of that. But I mean if you tracked inflation over 10 years or not even given the last big round of 3G to 4G work, I'm not sure what the cumulative impact of that inflation would be, but I don't think it's very great.

It certainly hasn't been 3%.

No, it has not. It has not.

A nice gift. I think most amendment -- most activity these days is amendment if we sort of take DISH out of the equation. Is that fair?

Yes. Yes. And I think that's normal, particularly normal to be expected because as you look at the 5G work that's now starting to take everyone's main focus, everyone starts with their own network. And they use that as the base and they go from. So that's really the way it was in the last big technology upgrade. It's the way it was from 2G to 3G, 3G to 4G and now 4G to 5G. So we would expect that to continue for a while. And there will be some new leases as well for densification. But I do think you'll see -- you said excluding DISH. If you put DISH back in the mix, and they most clearly are in the mix today, they're very busy. I do think perhaps as early as Q2, if not -- certainly, as we move through the year, you will start to see a mix change that we talk about in terms of where the signed new revenue is coming from.

And if I think about...

Increasing more towards lease. I don't know if we can get over 50%, but moving -- wherever we are today, it will move towards more new leases because, of course, that's what DISH is doing.

All right. Right. And is that -- you mean, driven by DISH? Or do you think that the rest of the industry is shifting toward new leases as well at the same time?

No. No, I think it's going to be more driven, at least early, by DISH because right now, the 5G work is so much more efficiently and quickly done by amendments to existing sites.

Right. I'm surprised with the volume of amendments that we're hearing about that the number of new sites that DISH is going to be signing and going on to is even in the ballpark of 50%, not that it's going to be above or below by a little, but I wouldn't think it'd be anywhere near that.

No, no, no. I was just talking about the movement in the -- whatever we said last time, say we said 70-30.

Yes.

So the 30 is going to be moving up.

Okay. Okay. That makes sense.

Yes.

And we've talked in the past about the sort of application becomes booked revenue, becomes bill revenue. It seems like we're accelerating in application still, which means that the acceleration in revenue is really still to come. I think you're going to exit this year at the fastest revenue growth of the year. Is that fair?

It is. And it's -- as you know, the way we report that metric is a trailing 12 months. So that is perfectly reflective of what's going on this year.

Okay. And as far as accelerating, do you think you accelerate further through '22 at this point?

Certainly, for some period of 2022, I think, yes, because we expect the second half of '21 to be bigger, and we don't see any reason why that would slow an absolute activity as we move into 2022. So as you start to have as growth comparables, the first quarter of '21, the second quarter of '21, you'll see some -- you should see some accelerating growth rates as we start to move through that. Now once you lap the whole year, we'll see.

Okay. That makes sense. And not to put too fine a point on it, but 2019 was a record level of gross new revenue. With smaller amendment fees but offset by DISH coming on, do you think the gross new revenue in '22 or '23 could be bigger than that '19 number?

It could be. I mean we're certainly busy enough and enough to -- there's enough that I see out there that could certainly make that a reality. I think you were careful in your words. You were talking about the absolute dollar amount, which if you focused on that, yes, it'll be hard to look at things on a percentage basis to some of the years we had in '14 and '15, where we were working off a much lower base where we're calculating growth percentages. But in terms of absolute dollars, do we have a chance of beating the $63 million? Yes, I think we do.

Okay. Okay. That's good. Now let's follow up on DISH. Can you dive into what you mean by, I think, the word was a substantial new minimum lease commitment from DISH? And what has to happen for that to turn into booked revenue and cash?

Well, I'll -- the last part of your question, I'll answer first. They have to either install or meet a time date certain. So the earlier of those things to occur begins the accrual revenue. And I'm optimistic, and this -- we talked about this a little bit earlier, but I'm optimistic that their activity levels today, moving through site acquisition into construction, will cause some revenue recognition later this year. Now it depends on when it's going to occur. The later it occurs in the year, obviously the less impact it has even if it's a lot of leases on the revenues, just based on timing. So that's really the key to revenue recognition with the DISH activity. DISH is really busy. And we thought they were going to be busy and they're busier than we thought. So that's all very good. In terms of the commitment, it's thousands of new leases over the life of the lease. It's also services business, both site acquisition and construction. And they're going to be -- they are today and are going to continue to be a large customer.

Okay. You said thousands of new leases. DISH talked about 15,000 cell sites. Thousands would put you in about in the ballpark of your market share in the U.S. Any reason to think that you would be above or below your sort of national market share in terms of cell sites?

I don't think we'll be below. I think we may be -- we have a chance of being above because of our construction and services expertise. I mean we know because we're on all the calls that nobody is outperforming us in terms of delivering to DISH's desires and specifications. And it's a speed game, as you know, and we deliver. And that should give us every opportunity to do more than our fair share. We'll see.

Is there something different about their needs and specifications that we should think about versus what a typical carrier would be doing?

Well, their equipment loads are not as much because they have no legacy network. But other than that, no. It's building a brand-new wireless network, same process, same procedures, same everything. And this is where our history, our culture, our origins really serve us well.

Okay. A question from the line. And just to go back for a second, pretty precise. But if you volume-adjust the 5G amendments against a lower price, do you think that the sort of relative size of volume and time to lower price is equivalent or still lower than the 3G and 4G transitions?

Yes. At this point, I would say, maybe a touch lower. But we should keep asking that question as we move through the cycle.

Does the increased CapEx from Verizon in February and AT&T last week change the way you look at that?

Well, it makes me more optimistic and more believing that we've got a good several years ahead.

Okay. We hear a lot about SBA having a more rural portfolio than some of your peers. Do you think that's accurate? Or is it a misconception?

I think it's not a fair characterization. We have, I think, 60% of our sites in the top 100 BTAs. And if you look at the commitments that T-Mobile and DISH have made to the FCC in terms of substantially covering all the United States and a time certain and then what AT&T and Verizon has put out as their own goals, which are essentially to match the T-Mobile's over some period of time, I think we're going do like we always do, which is just fine. We have great assets that are in good spots, and we will participate very well as we always do.

Okay. Okay. Let's shift to churn, and we don't have to spend a ton of time on this, but I think it's worth exploring. Your team has done a really good job of outlining what seems like the worst-case in Sprint-T-Mobile churn. Is that how you'd characterize what you've put out in the market?

Yes. I think we have put out a conservative case because that's all we know what to say at this point. As we get further into this year and next, we'll be able to fine-tune that. But I do think we've taken a view where it should not be any worse than that.

Okay. And is there a point at which T-Mobile needs to start giving you alerts and data that these sites are actually going to come down and will have a check on...

Yes, we've already received termination notices from T-Mobile. I mean as -- I think everyone in the industry has. T-Mobile's very sharp, very on their network planning. So the merger churn started last quarter. I mean it's not -- it's -- and we report it as it comes. And in some cases, it's not to be realized for some period of time, whenever the lease would have otherwise expired. But T-Mobile is moving along very smartly with terms of network planning and where, ultimately, they need to be and where they don't need to be.

Okay. Are the -- actually, when they turn off a site, they are required to remove that equipment. A few years ago, we went through a period where you were getting paid a lot to remove equipment that I don't know if ever happened or not, but it was a nice margin bump for carriers for quite a while. Should we go through that as well?

We have the same opportunity, yes.

Okay. Okay. Let's turn to the PG&E deal, which was sort of a first for the industry. How do you think about the economics of that compared to new builds or outright tower acquisitions?

Well, it actually was the third, at least that I'm aware of, of a utility company selling or otherwise letting a tower company come in. The other 2 instances were done by a private player. But we think about it, when you compare it to all those opportunities, and what we found with PG&E is extremely unique geography and structures and assets in places that you just weren't otherwise going to be able to get to. So that was its primary attraction to us, just as it would be a tower in downtown Boca Raton here or some places in the suburbs of New York City that you're just not going to be able to replicate. So the exclusive nature of those assets was the first and foremost attraction to us. And we developed a good working relationship with PG&E. We saw that the towers were undermarketed because that was not the first, second or third priority of PG&E. So there's some opportunity there. And we're very excited. We're ahead of plan on those assets, and we're getting a time now where carrier activity in general is really moving higher. So I think it's going to be fine. I think it's going to be very good.

You mentioned...

And we got it at a great price compared to other tower assets that -- I'm not going to get into naming names, but there were lesser-quality assets that have traded numerous times in the 30s -- 30x to 35x multiple compared to the 25x we paid for PG&E. So I'm very, very pleased.

Right. You mentioned the sort of unique geography. I think of that as California is a famously, one, dense; and two, difficult to do anything on a regulatory basis. Is that the right way to interpret your...

That is the right way to think about it. Yes. It's a great market to be in, great demand and not a lot of other ability to create structures there.

You've said you've seen a lot of interest from other utilities coming in. Is this a structure that you're, I guess, more confident in and we could start to see more of these deals?

You could. We've -- the deal definitely got a lot of attention in the utility industry. And there are -- I would hazard to guess that everyone is now considering things like this. It's not -- they're not the easiest deals to do because these structures are generally within the regulated rate base of utility companies and to sell off rate base assets, you run the risk of a re-rating by the public service commissions of the amount of money you can charge for electricity. So it's not something that's easy to do for these companies, but it is something that I think they're all looking at. Now in terms of attractiveness, when we find other PG&Es that have the same geographic and exclusive attractiveness -- not everyone will be that attractive. That I'm sure of. But there could be some others out there where it's the right match.

Okay. I think I asked you a question on your call about your comfort in scenarios where a utility were to go bankrupt, again, for example, with PG&E. Are there scenarios where you have risk? And I wonder if you would compare this to Oi, where there were risks that other players perceived and you were more comfortable.

Yes. In terms of the PG&E situation, the primary steps that were taken against PG&E and their bankruptcy were inverse condemnation, which only applies under California law to a governmental or quasi-governmental regulated entity. So we're not subject to that. And we also took steps to greatly protect even in the event of a future PG&E bankruptcy, which I certainly don't expect, that we would have the full right to continue to utilize the sites for the 100-year term of the agreement. So we're good. We're good for the life of the agreement.

Okay. And again, if I -- it's probably not a great comparison, but in Oi, you were more comfortable in taking on sort of an obligation of Oi than some other people were. Is this another advantage or opportunity where you were sort of more comfortable than the market and took advantage?

It could have been. It could have been. We spent a lot of time getting comfortable with it. I mean it clearly was the issue of the transaction is to make sure that we were getting what we had bargained for, for the life of the deal. And we got that comfort, and here we are. In terms of Oi, the Oi bankruptcy, it's -- I mean, the bankruptcy of Oi was frankly just similar to the way that the early Sprint affiliate bankruptcies went. They continued to pay all their leases. They didn't terminate any leases. So the one thing that comes out of this that we also anticipate going in is that is essentially the only change that's going to come out of all this is that the market is going to go from 4 carriers to 3. And then you'll have some churn where you have overlap, but that is no different than all the other analysis that we do in terms of where is the market, in terms of its number of carriers and are we expecting, at some point, consolidation and we factor that in as risk, and we did. And we're going to, I think, be well-served, ultimately, in Brazil as you move from 4 carriers, who were not quite able to spend as much CapEx as they wanted, to 3, who I think will have a much better financial foundation.

Okay. Well, let's continue for a couple of minutes down the Oi and Brazil path. Just carrier activity, we started with this a little bit. Is this -- has this been -- sounds pretty healthy.

It's not much out here. It was not healthy last year in the midst and throes of COVID. There were payment holidays in some of these countries for the consumers, which obviously made capital-allocation decisions difficult for our customers. All that is greatly improved at this point. It's still not anywhere close to where we are here in the U.S., but it's greatly improved compared to where we were a year or 9 months ago. And it continues to improve. And as I mentioned earlier, we're ahead of plan in most of our international markets for the year. And there's a lot of pent-up demand. There is some big spectrum auctions planned in the next 12 months in Brazil and South Africa, Peru, Chile, and I'm sure some others. So we think things are going to continue to improve internationally.

Okay. And you talked about going from 4 players to 3 as Oi is consolidated. Do you anticipate a period of softer overall growth in your Brazil business because of this?

No, I don't know that we anticipate a softer period of overall growth. I mean we're going to have some churn items in there that maybe when you look at the net, as a result of that, for some period of time, you see that. But I think the top line and the gross revenue growth should continue to go well. I mean in large part because Oi hasn't been a -- they haven't been doing a lot operationally in terms of amending or adding new leasing.

Right. Yes. So on a gross basis, maybe things get better. Is the churn, do you think, substantial enough that -- or small enough that Brazil ex CPI can grow through that?

I do, over a longer period of time. I mean there may be a quarter or 2, depending on timing, where that is not the case, but certainly over a longer period of time as this settles out. No, we -- I mean, Brazil is a market that continues to be much more reliant on wireless for all aspects of life than even in the United States. And the demand for the demographics are such that it's a younger demographic, population's growing faster. So all those things, I believe, are going to continue to drive good growth in that market.

Okay. Okay. Finishing up. With the PG&E deal and some stock buyback in the first quarter, your leverage is, I think, as high as I remember in quite a long time. And you've talked about bringing it down pretty quickly. Do you think you're out of the M&A market for a little while, while this comes down? Or are you just more comfortable in general with leverage even than we had seen over time?

Well, we're very comfortable with the EBITDA growth expectations in the business. So for the right deal, we are always in the market and don't mind taking leverage up above target temporarily by at least a turn, maybe more depending on the opportunity. But that confidence and that optimism all stems from the very firm convictions that we have about continued growth in EBITDA and the quickness that we can delever the business. Obviously, our access to capital is great. We just did a securitization deal over 5 years, fixed at 1.6%, lowest in our history. It was hugely oversubscribed. So we have plenty of access. So the question for us is where do you set those points for those opportunities. And we think we make the right decisions on that front over history, and we'll continue to be opportunistic about that.

Yes, I feel funny asking if leverage should permanently go higher because for the last few years, as you started to pay a dividend, the discussion has been maybe bring it down a little bit. Is there any reason to be bringing that target down regardless of your dividend now?

No, there's not. Other than long-held investor biases in the REIT industry towards lower leverage levels, the characteristics of our business are such that our leverage level is absolutely appropriate. And in this interest rate environment, you have a stronger argument to take it up rather than down, even as a dividend -- I'm not -- I'm making that just to make the point, not that anyone should think that we're going to be moving up our target leverage range because we're not. But what we will be doing is we anticipate an ever-increasing dividend, and we feel good about both of those things, the ability to increase the dividend and maintain our leverage ranges, which I think is the perfect recipe for increased shareholder value.

It's worked really well. I think that's a good place to drop it. Jeff, thanks very much for your time. Thanks, everybody on the line. And...

Great. Thanks, Phil. It's always a pleasure.

Hope to see you soon.

You bet.