SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Great. Well, welcome to our 11:15 a.m. session at Citi's 2022 Global Property CEO Conference. For those of you I haven't met in person, 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 at the AV desk. For those of you joining us here in person to ask management any questions, please step up to one of the mics here that we have located in the center aisle of the room. And if you're joining us remotely, simply type them into the question box on the screen and they're going to come directly to us, and we will do our best to ask them during the session.

So Jeff, I'm going to turn this over to you with our opening question. So the opening question is, what are the top 3 reasons an investor should buy your stock instead of any other listed property company?

Is this on? Can you hear me? Okay. Good. The top 3 reasons, Mike, and thank you for having me, by the way. I think we are extremely good at capital allocation. I think we have tremendous growth prospects for a number of years. And I think we execute better than anyone in the industry.

Great. Well, maybe jumping into 2022, what are the key strategic and operating priorities that you and the management team are focused on?

Yes. This year is going to be a lot of operational execution. We have a lot of customer demand here, not only in the U.S. but globally. We have 2 new markets to really get up and cranking in Tanzania and the Philippines. So we see a lot of execution and focus on operations this year because we have -- we've kind of built a nice opportunity set that we really want to capitalize on while we have good tailwinds at our back. Now having said that, we will always be on the lookout for another new market, another good asset investment where we think we can create shareholder value, but none of that is essential this year. What is essential as we execute well against what I think is going to be a very good demand environment, and I'm confident we're going to do that.

And maybe taking a step back, this is a question that we discussed before, but just framing the 5- to 10-year opportunity for growth for SBA and particularly in the domestic business, how should investors think about those long-term growth prospects for your business, and maybe some of the drivers that are not just here in the moment in '22, but affect your business over time?

Yes. I think 10 is probably a long time horizon and the crystal ball gets a little cloudy that far out. But 5 years, I think we're going to be -- we're feeling good about high single-digit gross growth, mid-single-digit net growth fueled by what is still in the very early stages of 5G deployments. And what I believe will be a 6G world, I don't know if that will come within the next 5 years, but if not, perhaps shortly after that. I know it's already being worked on. But the amount of densification and frankly, just coverage building that is going on now in 5G, that's going to last for multiple years. And these types of generational upgrades always have 5, 6, 7, 8-year investment cycles.

And for 2022, you're already looking for an improvement in that gross growth number in the U.S. How much of that is being driven by national carriers versus the new entrant into the industry, DISH?

The step-up in our leasing outlook for 2022, the $65 million number we had domestically in our bridge really is comprised of 2 incremental additions that were not so much present in 2021. And that's Verizon, who is now really in earnest deploying C-Band, and we're seeing the financial benefits of that this year and DISH. We signed up a lot of leases last year with DISH, which were not to commence revenue until this year. So those are really the 2 reasons why you have that big incremental step-up, while at the same time, you have steady activity from T-Mobile, in fact, steady at a very elevated level. And AT&T, we expect will remain steady until they really get ramped up with their C-Band and 3.45 deployments midyear once the equipment is made available. So that's one more reason to be optimistic about how long this 5G investment cycle is going to last.

Now for your assets in the U.S., they're all over the country. Are there certain characteristics of towers that are attracting the upgrades or attracting the new colo that might differentiate SBA's portfolio versus some of your competitors?

Well, for the 3 large customers who are already in business and deploying an upgrade to 5G, the most attractive aspect is, are they or are they not already on the tower? Because the way you typically attack a generational upgrade and the same was 3G to 4G, 4G to 5G, if you go back to your existing cell sites, if you're a carrier and you add equipment because you've already got all the other things, the power or the back-haul. So if a carrier is already on a tower, that's going to be the best indicator of whether you're going to participate in the 5G upgrade cycle. Now DISH is entirely different because it's a brand-new greenfield deployment, and DISH was able to engineer its network by taking a look at all the towers in the country. And because we have historically been very good about asset selection and quality of our towers, we are enjoying quite a good level of volume with DISH for these greenfield brand-new colos.

You mentioned earlier the Gs, the 5G, who knows what or when 6G might look like. But the question that we get often is, is this going to be the last upgrade cycle for the carriers on to the towers? And can you talk about what goes underneath the Gs in terms of the way carriers are upgrading equipment and how the next upgrade cycle might look relative to the one that we're going through now?

Yes, I've been in this industry for 25 years, and there was all -- there was forever this fear that, okay, this project would be the last, and that's -- it's never been the case. As long as there is a consumer and commercial demand for better or improved or faster services or artificial reality or all the things that we're still not quite going to get to yet even with 5G, we will have that opportunity for there to be the 6G and the 7G. And what typically happens, certainly in those types of cases where speeds and capacity will be really the most important, you're going to have to have increased densification. I read something on 6G, the other day where people are estimating that each one of us will have a dozen 6G devices in terms of monitoring things and metrics and all that. So that's going to take a lot of densification. There is still spectrum to be deployed. And whenever there is spectrum to be deployed, it typically requires new radios, new antennas just because they have to be tuned to that. So I continue to believe that we still have a lot of legs left, as long as there is a consumer demand for faster, better, improved service.

One of the national carriers was recently talking about the current deployment of antenna technology and then referencing that there might be even another one like a ultra-massive MIMO cycle maybe in a few years. Is that an opportunity for SBA to further monetize the portfolio that you have?

Yes. Any type of deployment where there's densification and particularly macro site densification, we're going to play a role in. We don't play as much of a role in the dense urban roll-outs, that hasn't been something we've chosen really to prioritize. But as long as macros continue to be the backbone of the networks, and we've not seen anything that gives us any reason to doubt that, we will get our fair share. Yes.

And as you look at the outlook for the T-Mobile Sprint merger-related churn, what's the possibility that, that comes faster to some degree or T-Mobile might try to just pay off all the leases upfront and just move on more quickly. Is that a possibility or does this get drawn out over some time?

Yes. I mean, certainly, those are possibilities. I don't think any of them are likely. I think T-Mobile has achieved what it wanted to achieve by announcing certain churn issues and terminations, and they've now been able to put that into a discontinued operations form of accounting. So they've got -- they've been able to fulfill their end of their promises to Wall Street, and that doesn't need them to spend money any faster. And in fact, there's a lot of reasons why we believe that the -- while the aggregate amount may not change, that it occurs over a longer period of time from a cash intake perspective. And that will have no impact at all on what T-Mobile is able to report and talk about in terms of their accomplishments.

You talked earlier about the goal to grow the portfolio 5% to 10% a year. You've been focused more on some of the international opportunities, just in some of the mix of M&A over the last few years, although there's been some domestic acquisitions as well. What drives the thesis for SBA to target 5% to 10% as that annual rate of expansion? And how are you looking at that in terms of specific geographies over the next maybe 1 to 2 years?

Well, all things -- we allocate capital several different ways, portfolio growth, stock repurchases, dividends and some small amount towards maintenance CapEx. But of all the things that we want to do, and we think we'll produce the best value over time is to add assets at good prices. So we're always committed to do that. We start out every year, I mean is the 5% to 10% -- I mean is that a scientifically derived number? No. It is an aspirational goal that at the high end of the 10% would use up most of the capital probably in any given year that we would want to allocate and still stay within our target leverage ratios. So we set that out there because that's what we want to do. Now we've had some years where we haven't met that goal. We've had some years where we have well exceeded it. And if you look at kind of the CAGR over time, we are well within that 5% to 10% range. We are now moving into some areas where we will be able to augment that growth and help bolster those goals through new builds. We expect a bigger -- materially bigger new build year in 2022 than we had in 2021. We'll still have to buy some things to meet those goals. But we generally always find during the course of the year, opportunities that we think are right for us. And that's how we continue to incent and motivate the folks, we want to go -- we want to go find those and we want to hit those goals each and every year. And I think -- I don't think this year will be any different in terms of the opportunity set. I think there'll be enough opportunities out there for us to do just that.

One of the interesting acquisitions over the last 2 years has been the acquisition of site leasing opportunities on utility infrastructure.

Right.

And so can you give us an update on how that deal is performing relative to your underwriting assumptions at the time? And are you seeing more opportunities to expand that portfolio over time?

Yes. That portfolio is doing extremely well because our timing turned out to be very, very good, right, ahead of Verizon and DISH really ramping up their activities, and obviously, with AT&T still yet to come in terms of their mid-band. So we're ahead of plan there and very, very, very happy with the way that deal has turned out. In terms of other opportunities like that, I mean PG&E arguably is a bit unique in the sense that it was coming out of a bankruptcy and had some regulatory advantages, which a typical utility may not see in terms of selling what are called rate base assets because then you get into -- well, if you take those proceeds to the consumers of electricity, get a refund. So it does get complicated. But there are -- we have had a number of conversations, and we're looking because we do believe -- well, we know one thing is for sure, that the utility transmission structures when they're in well-located areas are going to be in high demand, and they are going to have historically been an under-marketed asset because the utility companies really they don't make it easy. So to get us in there, somebody who's got the connections, got the experience with the wireless carriers, we can immediately make those assets more valuable in our hands. So we're continuing to look, but the PG&E deal did have some unique characteristics that really has made it a very good deal for us.

And taking a step back, as you look at the characteristics of the tower business and the competitive landscape, have you seen any shift in the environment, whether it's direct competition for colocation or the competition for the land that sits underneath some of your towers?

There is competition. It's not really material as much as it is, it can be sometimes annoying. But particularly, the land has been something we've been focusing on for a long, long, long period of time and really feel very secure in our control of the land and that brings, of course, the control of the tower. I can't remember an instance where we've lost the tower because we've lost control of the piece of land. But there is competition where you can have competition where you don't have the exclusivity that we've always really priced in terms of our assets. Certainly, the secret is out of the value and the need for communications infrastructure assets. There is a great deal of capital chasing these opportunities. That would be a counter to our last conversation about portfolio growth and what would be the biggest impediments to that, it would be this, the wealth of capital that's out there chasing these opportunities. But we've been at it a long time. We've got assets in good places. We have good contracts. We know how to defend our assets when necessary, and that's what we do.

A number of the common infrastructure providers have taken a more creative approach to capital, especially with respect to international deals, getting private equity or sovereign wealth funds to invest in some degree of the equity, while the comm infrastructure firm maintains control. Is that something that SBA is looking at as an opportunity to maybe expand the addressable market for deals, but still keeping control of wherever you go?

We would consider that, and we have considered that. I mean historically, we've not needed other people's capital to do what we wanted to do. But if there were certain instances where we thought additional capital from another source was smart, we would definitely do some structured relationships. And we're watching all -- we see all that and what can be done in that market, and I think that's just one more arrow in the quiver.

What do you see in terms of inflation for the business in terms of costs, the impacts on investment that SBA is making?

Our biggest cost, if you look at the expense side of the business is the land cost. And those are matched off pretty well with fixed rate escalators over time. We have -- it's only about 6% of our revenue goes -- is represented by SG&A. So while clearly, there is some inflationary pressures in the labor force and fuel, things like that, it's just not a huge part of our income statement. And I mean, we're very thankful that there's such operating leverage in the business. And for that reason, I think while clearly inflation is going to have some impact, probably more so, we would watch that more interestedly from the cost of debt perspective than really what it's going to do to our operating results.

Does this give you an opportunity to push escalators higher at some point if inflation were to last longer?

We would think about that. I mean the counter to that is we tend to have been for the last 20 years on the right side of that equation. And if the Fed's mandate is 2-ish percent, then -- and we get back to that through their activities, I think we'll be very content to stay right where we are.

And just for our audience, remind us the domestic average for your escalators?

It's about 3.25%. Yes. And our international business, that is not denominated in U.S. dollars, where we're international and U.S. dollar-denominated, those are also similar fixed rate escalators, but where it's non-U.S. dollar-denominated, it's almost always a CPI-type escalator.

And the outside the U.S. currencies, low double digits of revenue, is that right?

Yes, with Brazil being the largest and South Africa behind that.

We've got some questions from our clients. So we'll shift just to a few of these just for a few minutes. And, of course, if you have more questions, keep them coming in over the chat system, as well as you're welcome to use the microphones. So one question came in on margins. And so the question is, is why does the guidance in 2022 have a dip in margin? And I believe it was from about 70.5% in '21 to, I think it was 69-ish percent in '22?

It's the growth in the services business. which is actually a very good indicator of overall future leasing activity, but that is a 25% to 30% margin business versus the leasing business, which in the U.S. is, I think, close to 80%, 85% now. And there may be some minor impact from some of our higher build estimates that will come on at lower margins until they get their share of second tenants, but it's going to be mostly due to the impact of the services business.

And in terms of the multi-year perspective on the mid- to high single-digit growth for gross revenues in the U.S., how much of that comes from conviction in the backlog versus the expectations of what carriers are going to do in the future?

Well, for 2022, it's very high conviction. It's based on a substantial amount of backlog already in-house. But, I mean, backlog doesn't -- backlog has a 6- to 12-month [ life ]. So that's about as good as backlogs will get you, and then the rest of it is based on your understanding of where percentage completion is in the overall network deployment conversations with customers and expectations.

Another question from our audience is regarding M&A, are you considering getting larger in Africa, whether it's with private or public portfolios?

If we saw other opportunities like we have enjoyed in South Africa and Tanzania, we would consider that. We think those are going to be tremendous value creators for our shareholders.

And another question is how much of the guidance, and I presume this is for '22 is based on DISH hanging antennas and starting to pay rent?

How much of it depends on them starting to pay rent?

Yes. For DISH to start paying the rent.

Quite a bit. But I mean that's all contractual at this point.

And another question...

I mean remember the big deltas, I think we started out the conversation and that getting to that number was DISH and Verizon.

Yes.

Yes. But the confidence that we have is that the DISH agreements are structured so that the revenue starts at the earlier of a date certain or construction.

Great. And then one other question from our audience. Can you talk about the availability of tower climbers? And are there any labor issues that could cause an extension of the installation cycle for your customers?

Right now, it's a tight market, but not necessarily a limited market in terms of lack of tower climbers causing work that would otherwise get done to not get done. If there were a doubling of demand, you might have some issues. But right now, and particularly, in our case, because we're -- compared to the normal companies that do this work in higher tower climbers, we're very substantial good paying, good benefits organization. So we have not had any real issues. And our internal folks are focused on adding revenue to our own towers. So most of our services work is for one of our customers, but on our own towers. And that's a unique kind of relationship that I think we're going to continue to [ do find ] that regardless of where the overall labor market is.

So one question that we're getting quite a bit these days is regarding the edge. And we're sharing different visions of what the edge is going to look like in terms of the opportunity to push infrastructure closer to end users, the role that tower companies are going to play, and SBA has been looking at this, you've invested in some data centers, can you share with us what you're learning from your investments and your explorations of this edge? And what you -- what this might look like in terms of financial opportunity for SBA?

Yes. So far, we've been pleased with what we have learned, and I would characterize the stage we're in now still in the learning stages. I mean for the edge to be most beneficial to tower companies will require a technological state of affairs where the computers need to be right at the cell site. And the reason they would need to be right at the cell site is because they're tied into the wireless networks. That hasn't happened yet. And it's probably still several years away before we know if that's going to happen and if it's going to happen in scale. If it does, and we believe that there's very good reasons that it will, then the tower sites will be extremely valuable beyond just the tower itself, but as ground-based locations for compute. In the meantime, we've learned that the data center business from the 2 that we bought, if executed well is a good business, a lot of demand, and that there are synergies with data centers and remote locations, which can be housed on tower sites, not because they're tied into the wireless system, but because of the permitting, the zoning, the power and the fact that we've got kind of a great planned opportunity to deploy these things. So it all continues to grow, but we're really still pursuing this because of the possibility, which we believe will be real, that the edge does end up at the tower site.

Earlier, you talked about the priorities for capital and capital allocation. As you look at the opportunities for your business model over time, are there other considerations beyond just data centers and towers and maybe edge data center deployments that SBA is considering in terms of investments or opportunities that would be very complementary for your portfolio, your skill set of your team?

Yes. We've got active groups within the company that focus on in-building and specialty assets, both marketed to wireless carriers and also to enterprises. CBRS, we've done some work for schools in terms of closing the digital divide. We are working in the energy area, energy as a service. We do think that there will be great needs as ESG continues to gain in its importance for our customers to find different sources of power. But I do believe, Mike, that 10 years from today, we are going to be primarily a macro site tower company.

And we spent some time on the growth of the U.S. business. How should investors think about the multi-year growth prospects in a market like Brazil or in the African continent where you've had an increasing level of exposure?

These are markets that are going to grow faster. South Africa is a prime example. The growth that we've seen there in the last 4 years has truly been extraordinary. Tanzania, Philippines, these are all -- and still many of our South American markets, all possess these much greater growth characteristics. I mean the counter to that is they're -- the carriers in these markets, they don't have the same financial resources that they do in the United States. So while the demand is many times greater and the reliance of people on wireless to communicate is many times greater. I mean, in Africa, it's -- in Africa, it's basically the way that business is transacted and money moves around. So demand profiles are really, really good. These -- every place that we're in today, except the United States is, of course, behind the United States in terms of their generational development. So we see a lot of these markets is 5 to, in some cases, 10 years behind the U.S., which is going to give us a long path for continued growth. And what we've really seen in these international markets is our ability to execute and operate very, very well and actually end up with a much lower cost structure than we initially thought going in.

And so one question that we're asking all the companies at the conference is what is the biggest growth opportunity that you believe the market is not giving you credit for?

The biggest growth opportunity, I would say continued portfolio expansion. Yes. We're going to do it, and I'm not sure everyone appreciates that.

And on that topic, there's been evolution in the way your competitors and then peers in comm infrastructure have been doing deals because as you referenced earlier, there's competition for assets, the valuations have been coming up. As you look at the opportunity for that portfolio expansion, do you still see that as a meaningful place for accretion opportunity for the company over time?

I do. We are seeing early signs of private multiples starting to contract. Everyone obviously knows where the public multiples are. But there's been a number of failed processes privately where lofty expectations were not met. And as you continue to see interest rates rise and ultimately stabilize, that's going to be the deciding factor of where these values come in. And there are -- there's a lot of opportunities in number. And I believe because of that, we will continue to pick and choose and find the ones that not only are accretive, but really make the best long-term sense for shareholder value creation.

Another question that we're asking all the companies -- please.

Can you talk about the ZIP codes of what they failed at in terms of multiples or cap rates?

I don't want to get too specific, but basically, there were a number of processes, private equity-backed processes where they didn't get the number that they had set out to get.

And your multiples down 20-some-odd percent this year, I guess, into the mid-20s, I assume these valuations are lofty relative to that?

Yes. But less lofty, and hopefully, less lofty to come.

And so one other question that we're asking all the companies at this conference is, what is your #1 ESG priority for 2022?

We are going to need to make a decision this year as to whether we go with a science-based target for energy or whether we're going to have some type of target for carbon neutrality. And they're different paths. One is a much more third-party kind of evaluated, that's the science-based target approach. But that's what we're working on, which of those 2 we're going to choose, and then that will be something we do this year.

Are you ready for our rapid fire questions?

Yes. I guess. I hope.

So 3 rapid fire, we'll get this done in 1 minute. What will same-store NOI growth be for your property sector overall, not your company in 2023? So, equivalent tower gross profit, we'll call it.

We'll say gross 8%.

Okay. What will the 10-year treasury yield be a year from today?

It will be 2.5%.

And will your property sector have more or fewer public companies a year from now?

It will have -- it will have more.

Jeff, it's so great to see you in person. Thank you for joining us.

Happy to be here. Thanks, Mike.

Thank you.