SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Welcome back. I'm Brett Feldman, Goldman's US Telecom Infrastructure Analyst. It is my great pleasure to welcome back to Communacopia in our 30th year, Jeff Stoops, the President and CEO of SBA Communications. Jeff, thanks for being here with us.

Happy to be here, Brett. And good morning to you and the audience.

So domestic leasing activity appears to have hit a positive inflection point over the last few quarters. I think on your most recent call, you noted that bookings were at their highest quarterly level since 2014 and your backlog was at a multi-year high. Can you just reframe for us what's finally starting to show up in the funnel and in the field? What are the big projects? And how much visibility does this give you?

Well, the big picture or reason why we have had the inflection and why the sustained levels of activity should continue is really pretty straightforward. It's the emergence of Dish building out a nationwide wireless network, and it is the material increase in the amount of macro activity that we're beginning to see from Verizon, obviously triggered by the C-band auctions.

One of the things that we get asked about a lot is how do we try to frame what this could ultimately mean for SBA? And when we look at the recent history of the company, I think, it was 2019 was sort of the peak year for gross bookings. It was something like the $63 million range. I think in the past, you've commented that you think you can potentially do better than that as we look ahead. How much confidence do you have? And how do you think about what a durable rate of leasing could be as we really get into a sustainable part of the front end of the 5G cycle?

Yes. I think we are in that sustainable part, Brett, because all of the four nationwide customers, including Dish, are all heavily engaged with projects that are going to extend for quite some period of time. So I feel very good about this new level of activity being sustainable for the foreseeable future. And in terms of actual numbers, I think it was like $63-ish million in 2019, I mean, that's certainly a number that we believe we can achieve when we get around to posting our outlook for next year. I think a lot of it will be shaped by what occurs between now and the end of the year, but it feels like it's going to be pretty good. And of course, that -- those numbers are largely reflective of prior activity. And with our good second quarter activity and what we expect to be continued good activity in Q3 and Q4, it's certainly attainable.

Sometimes the terminology trips people up, you know, when we talk about leasing activity and you report those metrics.

Right.

It's really the culmination of what's already happened over the last 12 months. So that's -- those are contracts that are signed that are now actually creating revenue, compared to a prior period. But then you also have like lease signings. And that's not necessarily a metric that you report, but you give us some color on that. So I guess then really what we try to figure out is and how much visibility you have is, when do you think that pace of new lease signings is going to hit what you think of as being kind of that apex of the 5G world, based on what you know now? Because it's then going to be from that point forward that you start to really benefit from the revenues that they will inevitably bring in.

Yes. You know, I think, we hit a certain level in Q2. I will tell you now that that level is being sustained with the opportunity for continued upward bias in terms of backlog and activity. And you're exactly correct; when I use the word activity, it's about the action that's going on around the company and out in the field today, and that really translates into leased signings. And then, of course, the financial results that we report, those are much more lagging in terms of the benefit from that activity. So I mean, it feels pretty good right now as we move into the end of the year and not seeing anything from a project perspective. And in fact, quite the opposite. These are all long-term endeavors that we're working on. So we're very optimistic about 2022.

I want to touch on some of the carrier projects you sort of alluded to and maybe a few others. You mentioned Verizon and their C-band deployment being a part of what you're already seeing unfolding in your leasing and your revenue outlook. You had signed earlier this year, essentially, a holistic deal designed to facilitate their deployment of the C-band. And you have been very selective over your history in terms of when and why you do those things. Can you just remind us why did it make sense, knowing that Verizon already had so much motivation to move quickly to enter into an agreement? What were some of the win-wins you thought you'd capture?

Well, both parties look for kind of the same thing, and they certainly look for a single word, although it might be different metrics that they're looking for certainty in. But that word certainty. I mean, certainty in terms of term, certainty in terms of volume. Those are things that are important to a tower company. And then on the customer side, certainty in terms of rate and the ability to plan. So when those things can come together and they can be agreed to, the terms can be agreed to in a mutually attractive and acceptable manner, that's when the MLAs get done. And that's exactly what happened with Verizon.

And do you feel that that was a part of stimulating the activity, I mean, you gave them the ability to move more quickly than they might have if they hadn't had all of that certainty outlined in the agreement?

Certainly, there would have been a great deal of activity regardless. But the MLA did provide efficiency. It did eliminate some different types of red tape issues that will allow us to move quicker. And what it basically did is it provided both parties with a sense of -- a greater sense of partnership and working together, which has freed up, I think, all kinds of different activities and avenues for us to keep working together. So when you get the basics right in terms of certainty and terms, and there's a mutual meeting of the mind, just as we have in the past, we're very much in favor of MLS.

Verizon has been pretty vocal about prepositioning its equipment on towers, so that they can take advantage of the C-band very shortly after it's been cleared. They were obviously the biggest winner in the C-band auction, but there were others; AT&T acquired the next largest amount, even T-Mobile took down some C-band spectrum. And so among the other bidders, I guess, with most of the focus being on AT&T, are you beginning to see similar types of prepositioning? Or is that something that maybe you're going to see a little bit further out?

Definitely some. Verizon, I think, has gotten out. I think their commentary is true. They're getting out there ahead of when the spectrum is actually cleared. But whether it's this quarter or next, the -- it's becoming increasingly clear that C-band is going to be -- the deployment is going to be a heavily macro tower weighted event. And those of us in the industry who focus in that area, I think, will benefit certainly.

Does it change the way your customers are thinking about using your macro sites? I mean, if you had asked everyone four years ago, just 3.5 gigahertz spectrum work on towers, they would have said, no way, 2.5 is barely working. As it really -- as the carriers have really invested heavily in that type of spectrum, have you noticed anything different about which sites they want to be on? Where they want to be on the site or anything else?

Not so much what's different, but just the basic high level of attraction to a macro site deployment. And obviously, at the higher frequencies, you're going to have some increasing density requirements. But -- and I think this is evidenced by some variations and fluctuations you've seen in spending from our customers for other types of networks, such as small cells and things. They're all very, very serious about macro. And to a certain extent, it will be the primary and perhaps exclusive for some period of time method of a company like Dish, building out a nationwide network. So I think this particular spectrum band, it's characteristics, the way it promulgates, I think really demonstrates the attractiveness of a macro tower-based model.

Right. You sort of alluded to an interesting point there. In the most recent quarter, about two-thirds of your domestic bookings came from new leases and only about 34% came from amendments. And it's the first time in a long time that we've actually seen new leases be a much bigger driver. Do you think that this is something that's going to be structural for a while, particularly because you do have a tenant in Dish that predominantly needs new sites? Or do you think it was something of a blip?

Well, Dish clearly was the driver for the flip in the revenue splits. That level of activity, I believe, is going to continue for a while. Now whether the amendment activity, which I believe will be the predominant form of deploying a mid-band spectrum by the other three, how far that goes up? Does that eclipse the new lease contribution from Dish? I'm sure there'll be some quarters where there's some flip-flop there. But we are in a bit of a new paradigm for the next couple of years as Dish builds out, because, as you correctly say, it is going to be mostly all branded leases.

One of the questions I sometimes get around this is -- as you will say, well, why do I care? If the leasing is going up on a site that already exists, you get a very high incremental margin on that new rent, whether it's a lease or an amendment. But I got to imagine when you see the new sites going up, it now gives you visibility into an amendment cycle. And so if you think back during periods of time when your leasing was very new co-location heavy as opposed to amendment heavy, did that indeed prove to be a great lead indicator for duration?

Well, without all the basic tenancies, you wouldn't have the amendments. So I mean, from that very basic perspective, I would agree with your perception that new leases are always good.

And on the amendment side, you know, what can you tell us about the value of the amendments you're seeing for these -- this first wave of 5G deployments? Should we be comparing it to 4G or some other historical period?

Probably not. Our volumes are great. I think when you compare it, though, to the rate that we experienced at the height of the 4G build, it's probably going to be a bit less, and that's just purely a function of the weight and load that we experienced in a lot of the 3G to 4G build-out. Now it's going to be substantial; it's going to be material in the 5G builds. But I don't think, on a rate basis, as opposed to a volume basis where I think it will be similar, if not greater. But I think on a rate basis, the 5G amendments will be a touch lower.

And -- okay. That's good color. So then I want to actually come back and ask a different question about Dish, which as everyone knows, AT&T recently signed this strategic network agreement with Dish, where they're going to effectively become their primary network service provider. So basically their biggest MVNO partner and maybe some other elements. And the question we've been getting is, well, what does this mean for the tower sector? On net, is this a negative because it gives Dish greater time to ultimately deploy its own? Or is it a positive because it actually makes them more viable as a wireless carrier over the long-term?

You know, I view it certainly as the latter. And a lot of commentary was written about how this greatly improved Dish's long-term prospects, which I think is the most important thing to our industry, because it's pretty clear what network -- what true nationwide network coverage means. And I would also add, I don't believe that any sharing or roaming that they would do with AT&T would satisfy any of their -- Dish's FCC requirements. So I believe, you know, you still have those requirements, which Dish is going to need to satisfy on its own, and working hard to do that. But bottom line is a more viable, financially stronger Dish, which I believe this makes them -- this deal with AT&T is good for our industry.

I know you've gotten a version of this question in the past, but AT&T does have the potential ability to utilize some of Dish's spectrum under the agreement. Can you just remind us if one of your tenants wants to use someone else's spectrum, what are they committed to do? Or what do they need to come back to you for in order to be able to do that?

You know, our agreements are, as you know, fairly strictly written, narrowly written, and they don't permit uses of other entities spectrum. Although I don't -- so you have that issue. But I think the more practical issue is a lot of the spectrum that AT&T would be using isn't really an overlap with its existing spectrum. So you're going to need new gear anyway to fully utilize that spectrum. And obviously, new gear is something without question is something we can capitalize on.

I'd talk a little bit about T-Mobile. You have an existing lease agreement or lease agreements with T-Mobile and Sprint, which -- predate their merger. Can you just give us any update? What's the conversation been like with T-Mobile about potentially consolidating?

Well, they are consolidating. They are adding 600 to -- Sprint leases that they're going to be keeping. They're adding a lot of 2.5 spectrum to T-Mobile leases. So there's a lot of rationalization and consolidation going on. I mean, we have great relationship with T-Mobile; they're a highly valued customer as all of the big four are. And we are working under that agreement. We've been tweaking it and extending it as necessary. But we've got a framework in place that is allowing some very high levels of activity to occur smoothly and efficiently.

I know you've talked about certainty being an important part of any holistic or master lease agreement. How do you think about what some of the key elements of certainty are that are important to you as you look at potentially consolidating the leases of merging carriers? So for example, you've given us visibility on Sprint churn. Is augmenting that churn cycle important? Or would there something be -- be something else that might matter more?

Well, term and certainty of the revenue stream and volume. There's a lot of work additionally to be done. Managing existing churn is, I guess, a short-term benefit, but I think a longer-term issue. I mean, our customers are all smart, they all understand network engineering and ultimately what sites that they need and what sites that they don't. And if you impose some kind of artificial extension of a site that is no longer needed, I think that just creates additional friction points between the two parties. So we'd be less concerned with that than we would be with focusing on the long-term needs of T-Mobile. And I think they know those today and facilitating those and, in exchange, getting certainty of volume and time.

Just speaking to churn, as I said, you had given us your outlook for how that -- how Sprint consolidation churn is likely to affect your business over the next couple of years. What have you seen so far? Are you beginning to see more of an inflow of termination request from T-Mobile? And how do those align with what your expectations would have been?

Yes, we have started to see terminations. I think T-Mobile has done a fabulous job of engineering and understanding what they want to do, so those are starting to happen. But we continue to think that the numbers that we've previously put forth continue to be the right ones in terms of churn, the amounts, and when they're going -- when it's going to hit.

I want to talk about a deal from earlier in the year, you acquired 900 wireless tenant license agreements on over 700 utility transmission structures from the utility company, PG&E. Can you just give us a little bit of update here? I mean, how did you think about the quality and the location of these assets relative to traditional tower sites? Why did it make sense to do this unique deal now when in the past you hadn't?

First, I would say, geography. The Northern California area where these sites are located, where you've got San Francisco and Oakland and Sacramento, Santa Clara, very, very attractive, very, very difficult to build infrastructure. The fact that we know, going all the way back to our days working for PacBell in those markets, that those were desirable infrastructure points for carriers. But because of the differences in priorities, it was always extremely difficult for carriers to get on that infrastructure. So we believe that there was some still unmet and unsatisfied demand. And frankly, we got it at what we thought was a very attractive price relative to where we were seeing other high-quality US assets trade for. So the combination of all those things, the timing ahead of Dish and Verizon, but of course, believing that those activity levels would be increasing, made all that the right deal for us in terms of the actual assets and the timing.

And PG&E has obviously been in a unique situation, but there's clearly energy infrastructure assets all across the country. Do you think that this might be a repeatable structure? Or was it maybe just a unique opportunity that presented itself?

I think, it'll -- somewhere in the middle. PG&E did have some unique needs; not every utilities assets are going to be as attractive, at least to us as the PG&E assets were. And the assets that we bought were the transmission towers, the big ones. And those are typically held in a utility company's rate base, a regulated part of their business where they have to be careful with selling assets and recording gains and things because it affects -- it goes into the entire annual or semiannual give and take that occurs between a utility company and the public service commissions about setting rates to consumers. So it is complicated. And for that reason, it's not probably going to be an everyday occurrence. But I think there were a number of calls, we've had a number of conversations with other utilities who were -- who have their eyes open to the potential. So it would not surprise -- and we were not first, by the way, there was at least two other utility -- similar type utility deals that have been done by a private tower company, and that's at least our knowledge, maybe there are more. So we think this, kind of thing can and will continue to happen, but perhaps not with the same frequency that you see other tower deals.

As the carriers are taking advantage of higher frequency spectrum, so mid-band at higher frequencies than they've used and increasingly millimeter wave. Are there other asset classes or areas of real estate or infrastructure that historically may not have been interesting to you, but increasingly are? Rooftops could be an example. And then I'll have a follow-up because you're looking at edge compute as a potential area to grow over time. And I'm wondering if that's changing your view on franchise real estate?

Yes, the rooftops are always going to be -- well, you kind of answered your question the way that you asked it. For the right rooftop that's very exclusive, yes, we would be interested. But in many cases, where there's a rooftop, there's another one next to it. And next to that. So it doesn't have necessarily the same exclusivity that we really price and look for. But there's going to be all kinds of different uses, areas where you actually get in early and build as part of the new area construction or a city redevelopment project where you build in the opportunities and the control of the infrastructure. So I think there will be continuing novel and new infrastructure opportunities that we will avail ourselves of, and we're looking at a lot of those today. And you mentioned the mobile edge computing. We continue to believe that that is an area that is going to prove high demand and very attractive in years to come. We've -- I think we've got four or five units now constructed and operating. We have been able to provide some synergies between those units and our two data centers. And that's another area that we're starting to see some real possibilities in. I think it's got a long way to go. I think you need to see some applications out in the consumer world where you really have the need for that instantaneous, low latency and demand, but it's coming. I believe that's all coming.

You had done a previous, I guess I'd call it, infrastructure experiment where you had been an investor in ExteNet. You were essentially trying to learn the small cell business, figure out whether it made sense, and you ultimately decided you didn't think it did. And we're not going back down that road. So I'm [indiscernible] pleasure. I realized it's still early with what you've done on the data center space, but any preliminary read on the economics, on the synergy, of being in that business with the other businesses that you're in?

Yes. We like the data center space in the sense that it is a landlord tenant business. It is -- clearly, there are better assets out there than others, just like towers. It has all the characteristics of exclusivity -- can have all the characteristics of exclusivity that we like. And it's a business that finds itself, just as towers, in a very good tailwind environment. So we like that business. And we will look to -- continue to look for opportunities there, and particularly where we can take the inherent advantage that we have around the many, many, many thousands of sites that we control and use that real estate for mobile edge computing. But a combination of a product where you have mobile edge computing and some data center capability where the geography allows all that, I think, is going to prove to be pretty attractive.

And just to be clear, you know, your comfort with being in the data center business and the potential to maybe invest more in it. Is it necessary that it'd be synergistic with mobile edge compute? Or would you just make more acquisitions of data center assets, because it just happened to look like good assets?

Certainly, the former is better, but there are certain data center assets out there. Frankly, we've been very pleased and surprised with the lease-up and the growth. Now they don't show up, because they're not material, but the two data centers that we have, we're pretty happy with the results that we've got.

The last question on mobile edge compute, has it all changed your view on what makes a macro site location valuable? And I asked because I would imagine that where you're deploying those facilities, you need to have a different view on the power availability, you probably need to have a different view on the ability to harden the location. But then, of course, all of that presumably makes it a much more valuable piece of franchise real estate.

Yes. I mean, not every site is as -- on the tower site is as attractive for mobile edge computing as another site. So to your point, entitlements, real estate entitlements, the amount of land that you have, obviously, the power, the fiber, all those things matter.

I'm going to move on to your international business and Brazil, which is your second largest market. Oi has been going through a sale process, I was hoping we could get your update on as we come out of that, what is your outlook for what the leasing environment could look like as that's done? And then how do you think about the risk or maybe opportunities that could be associated with further carrier consolidation?

I think there's going to be further carrier consolidation in Brazil. And as we've said for quite some time, we think the market will be more rational without -- or with three than with four when you had a fourth that was struggling. And I think that view extends to pretty much all the emerging markets, and it gets to, I think, a very simple point. These carriers in these markets, they engineer their networks the same way, they buy the equipment from the same people, but their ARPU is a fraction of what it is here in the United States. So you're not -- it's going to be very unusual, where in a true emerging market, are you going to have four robust carriers. So we think the three-carrier market is much more optimal there. It's going to allow for greater profitability, greater investment. And we know the path, because we've seen it play out in the United States. And then Brazil, they're now expecting to pull off in October, the big 5G spectrum auction, which really has all the spectrum necessary for the country to move to the next level of 5G. And they're just all going to be better positioned to do that, I think, in a three-carrier market as opposed to a four. So we feel very good about Brazil. It's actually having a better year than last year, even though they still have some COVID challenges, they seem to be coming out of that, but we continue to like Brazil quite a bit.

Had the carriers in that market begun having any preliminary discussions with you about how they might deploy 5G spectrum, depending on what they get in the auction or they tend to wait until they see what they've won?

They typically tend to wait. And we have such a developed relationship that they kind of know how it's all going to work, and we know how it's all going to work with them, and we're very up to speed on their networks and what they're likely to need to go forward. So it's -- there's not as much mystery in how these things play out once the spectrum is auctioned off.

You recently announced an intention to expand into Tanzania. You're going to be acquiring 1,400 sites from Airtel, Tanzania, and it's actually through a JV. And so I was hoping you could give us some insights here. Having already established a bit of a beachhead in Africa, what was it about this market that made it the next most obvious place to go based on your assessment of it? And why a JV?

Well, we don't really approach things from trying to figure out next most obvious. We actually approach things more on an opportunistic basis and look then to confirm that this is a good thing for us to do. And that's exactly how the Tanzania opportunity came about. It was brought to us by our joint venture partners, which really explains the answer to your question as to why a JV. These are ex-American tower guys, who developed American's African business. So they actually knew and have been negotiating with Airtel for a long period of time. What happened was a change in the law in Tanzania, a favorable change as we perceived it, which basically no longer required a Tanzanian tower company to have to list a portion of its securities publicly, which, of course, would not have been practical. So with that gone and with these fellows maintaining their relations and the fact that we've known them for years and respected them and they respect us and like us, it was a good match. And they have a lot of experience in markets where power is more of an issue than not as we contrast that with our South African market where almost everything is based on a fairly reliable power grid.

Yes. That was going to be my next question is that Tanzania looks more like a lot of other African markets, much more so than, say, South Africa does. And so are you getting to the point where you're feeling like it makes sense and you're comfortable and you see the opportunities to potentially have a much bigger presence across Africa?

We could, but it's all going to be, I think, opportunistically driven. And I mean, the one thing we haven't talked about here on this call is we're entering Tanzania at an extremely attractive price. If we see those kinds of circumstances arise again, good market, growth market, good price, good assets, good counterparties, we will certainly be very interested. But does that also signal some additional need to expand in Africa? No, absolutely not. We might only ever be in South Africa and Tanzania. It will all really depend on the facts and circumstances, but we will go to other places where we think we can create great shareholder value, but we don't have to go anywhere else.

How global is the opportunity set that you're assessing to potentially go somewhere else?

We're looking everywhere as you would, I think, expect us to do. However, the opportunities that fit the bill, like the Tanzania or even how we entered into South Africa, they're not that plentiful.

Bigger picture, because you've had for a very long time, this target of 5% to 10% annual portfolio growth.

Right.

When you think about the organic opportunities to develop in markets where you exist and the inorganic potential funnel that's out there, does that continue to feel like the right target?

Certainly the 5%, and we're going to -- I think, get closer to the 10% this year, assuming we closed the Tanzanian deal by year-end. But yes, I think that's a healthy and doable goal, and that is -- continues to be our preference in terms of capital allocation. Again, it's finding the right terms, but we like portfolio growth above all else.

So that was going to be my next question. Your net leverage is right in the middle of your target range of 7 times to 7.5 times. We're obviously in a very low-cost funding environment. Your equity has traded very well. A lot of tower valuations in the private space seem to be at fairly high valuations right now. As you look at the opportunity set to reinvest in the business, to make acquisitions and, of course, to buy back your stock, which way is the scale tipping these days?

It tips differently every single day, depending on the opportunities of the day in terms of our stock price versus the growth -- the portfolio growth opportunities that are out there. I think, Brett, that we will continue to do some of both. But really the most important -- well, one key element of value creation has been our ability to use leverage. And we really do in this interest rate environment, want to stay fully invested. Now whether that tips more to portfolio growth or stock repurchases this year, we're going to have a big portfolio growth here. Last year, we didn't. But the key thing is staying within that 7.0 turns to 7.5 turns of leverage, because we really do believe that that create superior value for our shareholders.

When you initially announced that you'd be transitioning to a REIT with the dividend, you had anticipated that you would likely lower your leverage as a result of that. And ultimately, you so far continue to operate in a range that you'd established quite a while ago. Is it -- I guess what changed your mind or gave you more comfort to stay where you were? Is it just because the rate environment has remained lower for longer? Or are there other things about operating as a REIT that you gain greater confidence in?

Well, we believe in the stability and predictability and long tenure of the business model and the revenue stream. Clearly, the lower interest rate can allow you to pay out a lower percentage of AFFO to get to the same numbers than you would have otherwise if you had a higher interest rate. So there's a certain element of that. And we're also -- we haven't really felt any pressure yet to change, and we may change in the future. I think the logic of the more you pay out, the more pressure that will put on the leverage side. I'm not arguing that. And I think that will be a part of our future. But with a 22% payout ratio now and the opportunities looking the way that they do in terms of future growth, we just -- we're very happy today at the 7 times to 7.5 times. Now five years from now, where we have a different conversation, perhaps.

All right. Well, I certainly hope that conversation is in person. Thank you so much for being here with us, and I do look forward to see you in real life, hopefully.

No, last year, we said we would -- that would be the one and only, now this is two. So let's not try this the third time, and I look forward to seeing you as well in person next year.

Great. Thanks, Jeff.

Thank you, Brett.