SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

All right. If everybody can Please go ahead and take their seats. I'm Matt Niknam. For those of you who don't know me, I'm infrastructure analyst here at Deutsche Bank. We are very pleased to be joined by Jeff Stoops, CEO of SBA Communications. Jeff, welcome back.

Thanks, Matt. Great to be here.

Great. Great. Well, we've got lots to talk about. But maybe just to start, Jeff, can you talk about your top priorities for the organization in 2022?

Yes. We're in really good shape in the sense that we've got a lot of things to execute on. So we're not necessarily looking for anything new to add to the company, although, obviously, we're always very open to good financial opportunities, good new markets, good portfolios. But what I mean by we've got a very full plate is, as you know, the U.S. market is very, very active. So we want to execute really well against the demand that's out there. Internationally, the same is true; very busy in our international markets, and we just added 2 new markets, the Philippines and Tanzania. So we want to make sure we integrate those, get those off the ground in the right way. So we kind of have a full plate of opportunities to execute on. So this is going to be a big execution year for us.

Okay. Okay. Well, maybe let's start in the U.S. You've talked about an outlook that includes, I think, 7.5-ish percent gross organic growth, 3.5% net growth. And it would imply some pretty nice acceleration in gross activity relative to last year. Can you help us think about what's embedded in that outlook in terms of activity levels from some of your top customers?

Yes. It's -- there's a lot of granularity in there, but most simplistically, it's 2 things. The difference between this year, 2022, and last year is a much heightened sense -- or much heightened level of activity from Verizon, and a much heightened level of activity from DISH, both in terms of the revenue that we expect to recognize from them from leasing activity. T-Mobile, very active, steady year-to-year. AT&T. We're expecting similar levels of revenue recognition in terms of new business this year. Although we do expect AT&T to pick up pretty dramatically in the second half of the year, which will bode well towards our financial results at the end of the year and then moving into 2023.

Got it. Got it. And so on the fourth quarter call, I think you mentioned bookings were the highest quarterly results since 2014. And so as we think about now how that translates into improved gross growth, I know this is sort of a lagging 12-month metric, but how do you expect the cadence of acceleration over the course of the year?

Yes, because it is a lagging 12-month indicator, I know we will be exiting the year at a higher rate than where we are today. And I would expect that we see sequential growth in the rate getting from where we are today to where we end the year each and every quarter.

Okay. Relative to that strength and momentum in 4Q, any commentary in terms of how that's trended into the first quarter?

All good. All good. We continue to -- In some years past, carriers work on a fiscal year basis, and they have taken kind of a bit of a break as they move from 1 fiscal year to the next. But that didn't happen this year when we turned January 1. There were a number of projects underway, multiyear projects. So we really didn't miss a beat as we moved from December into January. Backlogs continue to be at or near -- I'm sitting here today, backlogs continue to be at or near all-time highs. Activity levels are good. So it feels pretty good.

Great. One of the questions we do get is, as you think about the sustainability of this level of elevated spend, I think Verizon and T-Mobile have both talked about bigger declines in wireless spend starting in 2023 as maybe they get into the later innings of their C-band, or we'll call it 5G deployments more generally. How much of a risk does that pose to growth for SBA beyond '22?

It's hard to see that there's going to be a material step down in 2023 for a couple of reasons. There's just a lot to do in terms of the C-band deployments. T-Mobile has still a tremendous amount of work that they want to do. There is another 2.5 gigahertz spectrum auction scheduled for this year. Many people think that T-Mobile will be the odds-on favorite for that. It would make a lot of sense. So if that happens, that kind of is going to support out-year growth. And then you have the pickup in AT&T, which they've commented on, and we believe that, that will be midyear. So I mean, I guess it could happen, but it sure doesn't feel like it today.

Yes. Can we talk a little bit about AT&T? I know they've talked about a sort of one-touch deployment for C-band in the 3.45 spectrum, starting middle of this year. What does that look like for SBA in terms of amendments and potential new colos?

Well, today -- and the one-touch truck roll or one-touch activity, it's basically more on the tower climbing side and the cost of deploying trucks and crews and things like that. And that has been done in years past by both AT&T and actually Verizon. That's -- I think Verizon waited quite a bit in the last couple of years knowing that the C-band was going to come and wanted to make their work efficient. But specifically for AT&T, they have C-band, some of which is in the Phase 1 of the C-band deployments, some of which is in the Phase 2. And then they've just added a lot of 3.45. Today, to deploy C-band and 3.45, it's 2 radios. So that obviously is going to be a revenue opportunity for us. Over time, those devices may get combined into one multiband radio. A number of approvals have to have -- so it's basically about the amount of power that can be put through that equipment. Ideally, and from an efficiency perspective, from AT&T's perspective, they'd like to see it all, the ability to broadcast both of those frequencies in 1 device. Today, that's not possible. And we'll see when and if it gets to the 1 device competency. So that's a long-winded way of saying, to deploy that spectrum, AT&T needs more equipment on the towers, and that's a revenue opportunity for us.

DISH. Obviously, we've started seeing your new bookings skew towards co-locations, in large part due to DISH's deployment, and I think the implication is they've been fairly active based on what we've heard from you guys. How should we think about DISH's contribution to bookings in site leasing revenue today? Where does that sit? Where can that go over time?

Well, we're yet to see the full impact of the activity that we have seen operationally with DISH. The agreement that we have with DISH provides for revenue recognition commencement at the later of a date certain -- excuse me, the earlier of a date certain or construction. So we've signed up a lot that is coming, some of which has started to accrue revenue, but we would expect -- and as part of the growth ramp that we talked about earlier, we would expect more and more revenue contribution from DISH each and every quarter as we run through this year. They're very busy now. They're a big part of our current activity. They're working hard to meet their initial FCC build-out goals. They may take a break for a little while next year after they get their initial work done, but then they have other requirements to meet right after that. So DISH is going to be a multiyear contributor for us, and this will be the first year, 2022, where we really see some real revenue contributions.

Any sort of delays or lags? I know there was maybe some revenue that I think, it sounded like, may have slipped from 4Q into 1Q in terms of rev recognition. Any sort of delays you've encountered with them in terms of just supply chain issues they may have run into?

No, not really on supply chain issues. And that revenue lag, which I don't think was more than $1 million or so in Q4, was really more a function of our estimates as to when we might have had some earlier recognition rather than the date certain. So it had nothing to do with the overall level of activity. It was really purely just a timing issue.

Got it. Got it. One other question we get often times on this is, if you think about the agreement DISH has signed with AT&T, how does that affect the tower business in general? Does that maybe limit any of the opportunity? Network share agreement that DISH has with AT&T.

With AT&T?

Yes, yes.

I don't think so because the frequencies that DISH has to make available are not really the same as the ones AT&T broadcasts on currently. So you're going to need additional equipment and radios and antennas to actually use that equipment and that's very clearly within the parameters of additional revenue opportunity for us. It would be different if they were at exactly the same spectrum, but they don't.

Got it. Got it. And then we talked about the 3 nationals. We talked about DISH. One of the other discussion points from time to time is non-wireless players. If we think about sort of cable, wireless ISPs, I mean what sort of use cases and discussions are you having? Are they making up any sort of meaningful contribution to your bookings at this point?

They continue to be active. But when you say -- so there's a lot of activity. But then when you say, are they going to be a material part of our bookings? Maybe on the low end. I mean, and the reason I say that is the amount of work that we get from the national players and the percentage of revenue that's in the portfolio today and is represented by current activity, it's just so great that even a fair amount of activity from cable and regional players and ISPs and things like that, it's hard to displace the size and the percentage makeup of the national wireless carriers.

Yes. So we talked about a lot of good things happening on the growth side. There's obviously, if we think about churn, there's Sprint site decommissioning that's impacting you and there's also sort of normal course of business churn. Maybe we'll start with Sprint. I mean, can you just update us in terms of what your expectations are for Sprint churn this year and maybe beyond '22? And whether that's sort of in line with expectations, or if there's been any push out.

There's been a little bit of push out, but no change in the overall aggregate multiyear picture of what we think will ultimately get churned. So this year -- last year, when we talked about this year, I think we were talking about $30 million to $35 million. As we sit here today, it probably feels more like $30 million. But that doesn't mean that we've escaped that forever. It just really is more of a timing issue. So all we can say today and the way we would conservatively guide to that is, whatever we originally thought for this year when we put things out several years ago, if it's going to be less than that, then what we're doing is we're just moving that into the next year. So then I think we were $10 million to $15 million for next year. So now we'd be $ 15 million to $20 million or $10 million to $20 million.

Yes, makes sense. And then if we think about sort of normal course of business churn, I think typically you've talked about 1 to 2-ish percent. I think we've been maybe a little bit closer to the higher end recently. Any color in terms of what may be driving that and how to think about that normal course of business churn going forward?

Yes, there's a lot of different things in there. I mean some of it is actually leases that were never turned on air. If you can believe that, there's quite a few of them actually where carriers went out in different designs, and when they had different spectrum pockets to use that they actually leased up space ahead of time and never deployed the equipment. So I mean, that's pretty understandable. Then there's constantly tweaks and changes. Some of the churn is from small business. I mean we still have a small amount of paging and things like that. So you see some of that. So it comes from a lot of different sources, but I don't -- we think the 1% to 2%, and we happen to be closer to the high end of that today than the many years we were at the lower end. We think that's still a good number for years to come.

So we sort of aggregate all the puts and takes we talked about around the U.S., is there sort of a multiyear target for U.S. organic growth we should be considering?

Yes. I think net -- or excuse me, gross will be 7%, 8%, may be higher at certain times. And then on a net basis, it would be mid-single digits.

Okay. Okay. Let's pivot to international. Maybe just to start, can you give us your high-level outlook for the international business this year and maybe the latest you're seeing across some of your top markets?

Sure. Our largest market, Brazil is undergoing a bit of a change in terms of the Oi purchase by the 3 other wireless carriers. That is just really getting started. The final approvals were just obtained within the last couple of weeks and there are some conditions to that. So we expect to see that play out over a multiyear period. In November, they did a big 5G spectrum auction in Brazil, put out a lot of frequencies that are necessary to deploy 5G. So that is really just in its infancy. So the combination of 4 carriers going to 3 and Brazil ending up with 3 extremely evenly matched competitively, much better financially suited customers and this 5G spectrum auction, which all those 3 participated. I think we're going to have multiple years of good demand down there. And last year was a very good year as well. So combine that with a higher CPI escalator, which is part of our contracts in Brazil, I think we're going to see some pretty good gross growth coming out of that market for this year and next. South Africa continues to be a very, very strong market for us. They are, I believe, right in the middle, as we sit here today, of their 5G spectrum auction. And that's being well received and well bid. Obviously, just like in the United States, for the money that gets spent in the spectrum auction to have any value, you have to deploy the spectrum. So the South Africa demand has been great. And then throughout the rest of South and Central America, I think we will have good growth, but we're expecting the most out of our 2 largest markets, Brazil and South Africa.

And when we think about Brazil, so we've now got 3 healthy carriers. I think in the past, you've been very bullish on the investment case given sort of the longer-term opportunity. Can you maybe just refresh us on what that is? And can growth get back to that sort of low double-digit level we saw pre-COVID?

Yes, it can because part of that double-digit growth was CPI escalator driven. And I mean, certainly the same basic operational dynamics as well as the macro scenarios around the CPI can definitely produce that.

Okay. Okay. Africa, I wanted to just touch on that because you recently expanded into Tanzania. What stood out? I mean maybe you can talk a little bit about the opportunity, the attributes in terms of entering the Tanzania market. And then are there other markets on the African continent where you think there's an opportunity to expand into?

So having done business in South Africa, we developed a good degree of comfort with doing business in Africa, although South Africa is very different than Tanzania primarily because of the power grid. But as we continue to look around, we really were very confident that these were markets where we could operate well in and execute well in. And the opportunity was presented to us from some old friends who we've known in the industry for a very long time, a group called Paradigm, which actually were the folks who got American Tower's original Africa entire business off the ground, and they had since left American. But they had this relationship and opportunity with Bharti Airtel in Tanzania. And through that relationship and our partnership, we were presented with an opportunity that we think is really going to be quite special in terms of return on investment and shareholder value creation. And there's a lot of great attributes to that market. There's low wireless penetration. There's probably 1/4 or 1/5 of the cell sites per person as you have in a market like the U.S. So a lot of demand. Those markets go much more directly to wireless for all their needs -- all their broadband needs rather than fiber. And then you combine that with what we believe was an extremely attractive entry price. So a combination of all that, I think, is going to allow us to do well and create some good value for our shareholders.

And do you think maybe this could be -- between South Africa, Tanzania, is there an opportunity to maybe broaden out the portfolio?

There's always a possibility. We don't need to do anything else in Africa to make South Africa and Tanzania successful. But just like we seized on the Tanzanian opportunity, if another one like that presents itself, we would certainly take a hard look. But nothing else in Africa is essential to do well in the markets that we're currently in. But if we do something, it will be because we think we can create a lot of value.

One interesting -- the other new market I thought was very interesting is the Philippines, where you started to build a small number of sites, 7 maybe, small number last quarter. I guess more broadly, I think you've talked about doing more build-to-suits relative to M&A, at least initially, this was my takeaway from the last call. Why more build-to-suits relative to M&A? And then maybe more broadly, what's the opportunity in the Philippines?

Well, I think those comments were geared specifically to the Philippines. And it's really just a question of where we saw the most attractive opportunities. We're not opposed to buying things in the Philippines if we think the terms are conducive to shareholder value. But we do know that we can build a good number of towers there. The demand is tremendous, carriers are strong, the demographics are good, and there's a need for tens of thousands of new cell sites in the Philippines over the next 5 years. So because that's what we do and we're big and solid and give confidence to the counterparties on the other side, we've been able to strike some attractive build-to-suit deals with carriers over there. And our plans are to build hundreds of towers per year in the Philippines for the next couple of years. And if opportunity to buy something that makes sense comes along, we would do that too. But it's not really -- the decision between building versus buying was not so much strategic as it was a function of the opportunities presented.

Understood. We touched on international. One of the other interesting sort of newer revenue opportunities you've been doing some work on is around edge data centers. You've obviously invested in some smaller data center assets, I believe, in Jacksonville; some other small data center in Charlottesville, Chicago...

Jacksonville, Chicago, yes.

What's the revenue potential? And I guess maybe more broadly, when does this become meaningful for the industry?

Yes. I think we are seeing a gradual connection between data centers and regional data centers and aggregation points and the need for smaller data centers to be at the cell site. And that's really the connection that was the impetus for us to get into the regional data center business in the first place is to learn that, understand the connections, grow them. We're in the infancy of that today. I mean, for the vision to be fully realized, we're going to need to see mobile apps that really require very, very small latency, very rich content. They're basically going to require that the computing power be at the cell site. We're not quite there yet in terms of an ecosystem that requires those things. When that happens, that is when the work that we've done and kind of the learning that we're doing and that's kind of what we consider these 2 opportunities or investments, because they're not really material, is to get ready for that day. So we want to continue to monitor the progress of the edge truly moving to the cell site. And we believe it will. And if and when it gets there, we're going to be ready to maximize that opportunity. But to put ourselves in that position, we can continue to act very incrementally in small steps.

Any sort of positive or negative surprises so far?

The tower sites are very well positioned from a zoning, permitting, fiber, power, all those attributes make our sites extremely well suited for micro edge data centers. But what we're really -- that we've learned and the ability to deploy and all that has all been positive. But what we're still waiting and watching for and what I think will be a big turning point in all this is when the computing power actually has to be at the cell site because it is connected to the wireless network.

Got it. So it sounds as though, I mean, I know one of your peers made a larger data center acquisition. It doesn't sound like SBA is looking to sort of jump in head first to make a bigger splash just yet. It sounds like maybe a learning process right now.

Yes. Our focus continues to be, do the things that we need to do and should be doing to ultimately maximize and optimize the value of the cell site. And we think what we're doing now is just the right mix for that. I mean, data centers are a good business, but we're not looking to be in the data center business just for the sake of being in the data center business.

Yes. I'm going to pause and just open it up to the audience. If anybody has any questions, just raise your hand. Somebody should be there with a mic to take the question. All right. Let's pivot back to portfolio growth. I think I ask this every other call for SBA, but I'm curious to get your insights. How do you think about incremental portfolio growth in the U.S. and internationally? And then what's the latest you're seeing in terms of valuations and number of opportunities?

Yes. Portfolio growth has been, for us, very selective for the last couple of years, reflective of higher prices that were being paid. And I think it will continue to be in the same vein as we move forward. Although perhaps, with the current uptick in interest rates and some other things going on in the world, you may see a bit of a pause and perhaps even a bit of a retrenchment in some of the prices that have been paid the last couple of years. I know that some primarily international processes have stalled or been withdrawn because sellers' expectations based on the last couple of years were not being met. And I think interest rates is a contributor to that. So there's a lot of opportunities, more so international than domestic, but still a fair number of opportunities domestically. And we will -- like we've been doing, we don't pick and choose our spots and take those opportunities that we think put us in the best position for shareholder value creation. I mean it's nice to be in a position where we don't need to do anything strategically, but we do want to do things financially that make good sense and can create value for our shareholders. So that continues to be our focus. We continue to target 5% to 10% portfolio growth a year. There'll be some years where we do much better than the 5% and some years where we don't quite get there. But if you look at the CAGR over time, we're well within that 5% to 10% portfolio growth range. And I think that's an appropriate target for us going forward.

And when you think about sort of M&A, is the focus in existing markets? Or is there an opportunity to expand the platform into newer regions? And maybe sub-question within that, Europe, where you're hearing more and more about carrier portfolios coming to market. I'm just curious to get your thoughts there as well.

I mean you do achieve certain synergistic benefits when you add on in existing markets because you've already got the people, the back office and the systems and the processes. But just as we have done most recently with Tanzania and the Philippines, we will go into new markets where we think the opportunities are good and we can create value over time. I mean there does seem to be a fair amount of opportunities that are being discussed in Europe. We have looked a lot in Europe, but have not taken anything to fruition primarily because of our views on value creation and price relative to others. And we'll continue to look and we will see what happens there. It'd be interesting to see what the current global conflict does to some of those opportunities in some of those markets. I don't want to get too specific, but I heard that one process that was about to get initiated in a former Soviet Union market, that's been pulled given churn events. So we'll see.

If we think sort of beyond towers, we talked a little bit about data centers. The other area where I guess we tend to get questions on is having a greater presence within fiber outdoor DAS. And I know it's an area where you haven't necessarily been as bullish on the opportunity given the dynamics don't necessarily match what you have with macro sites. But I'm just curious whether the thinking has changed at all or whether the views have changed at all over the last year?

They really haven't. I mean our traction to a particular asset is most heavily driven by whether it has exclusive characteristics or not, things that -- barriers to entry, hard to replicate. There are certain uses of fiber that have them, but for the most part, fiber does not have those characteristics. It can be overbuilt. It can be replicated. And then you're in the environment today where there's a lot of federal stimulus money for infrastructure specifically targeted to fiber. So I think there's going to be a fair amount of activity and I'm not quite sure everyone at the end of the day is going to be happy with the way all that turns out. The consumer might end up being very happy, but I'm not quite sure where the investors end up in that. So we look at all those things, Matt, but what we really prize above everything else is some type of barrier to entry and exclusivity. So I'll give you a very good example. We have -- because of our partnership with Union Pacific Railroad, we manage all their properties for telecommunications, we have deployed on the back of their positive train control network, a DAS system, in Glenwood Canyon in Colorado. I don't know if you're familiar, but it's one of the most heavily traveled, but impenetrable from a signal perspective, and there's been a lot of historical problems with that, accidents, landslides, things like that. But that is -- I mean it's just an unbelievable exclusive asset that all the carriers are just clamoring to get on because there've been no way to provide service there forever. So those are the -- and those opportunities don't come around every day. But that's an example of an outdoor DAS system where, yes, we were there and we love it, because it does possess those exclusive characteristics that we really like.

In the time we have left, I want to ask a couple of questions on leverage, balance sheet and cash flow. Maybe just to start, I mean, obviously, we're in a tightening cycle. Rates seem like they're going to rise. You might get the first set hike, it seems like sooner than later. How are you thinking about optimal leverage for the business? Does that sort of change how you think about the 7% to 7.5% you traditionally targeted?

Not yet anyway. I mean we can still create a positive accretion to AFFO per share by operating at increased interest rate levels. It's just a question of how much incremental AFFO per share accretion can you create. I don't think from a risk perspective we really have any concerns. We have tremendous access to liquidity and tremendous following in the capital markets. It really is much more of a financial question as to at what point does it make more AFFO per share sense to bring leverage down than not? And right now, we haven't reached that point yet. But obviously, the math becomes fairly straightforward and at some point you will see that. However, as that happens, which would have to take an increase in interest rates, you logically should start to see some improvement in portfolio, pricing and things like that, that would allow you to kind of still stay fully invested. You might be paying higher rates here, but you might be buying cheaper over here. So you have to mix all that together and see what combination produces the best result for AFFO per share.

Complementing the AFFO per share growth also is the dividend and some of the nice growth we've seen in the dividend per share. How are you thinking about dividend per share growth, I guess, on a go-forward basis? And is there sort of an AFFO target or payout target that you're looking at?

There's really not because we've started at such a low percentage payout relative to the rest of the REIT industry. I think what we've talked about is increasing the dividend by at least 20% per year for the foreseeable several next years. And I think that would still produce a relatively very low AFFO per share payout ratio. I mean certainly compared to our 2 public tower peers. So no real cap yet developed on the payout percentage. But I do know, based on where we are and what we see about good future growth, I think we're looking at pretty good dividend increases for the next several years.

We talked a little bit about rates and sort of one or the other, I guess, macro factors are around inflation and supply chain issues. Any meaningful impacts to the business you've seen of late from supply chain constraints or spiking materials costs?

Not on supply chain, not on physical supply chain and costs. I mean we are paying a bit more for labor than we have on a per person basis, and we probably will continue to do that. But because there's so much good activity that we're able to offset that and actually it has not affected margins or profitability going forward. So we're offsetting the increased cost on the SG&A side by increased operating cash flows and revenues.

Got it. And then maybe just last question to sort of wrap this all together. As we think about AFFO per share growth for SBA, how should investors think about that over the next several years? I know I think this year, at the midpoint, you're talking about 9-ish percent growth. I'm just wondering what's sort of the multiyear outlook?

Yes. If you were to stress that 9%, you'd see it wouldn't take very much to move that to double digits, whether it's a little bit more operational activity, a little bit more favorable FX, a little bit of this, a little bit of that. So that's -- when I talk to our troops, that's really the goal. It's double-digit AFFO per share growth. And that will continue to be the goal for the next several years. And I think given the current activity levels that we have, that's very doable.

That's great. I think we'll end it there. We're just about out of time. Jeff, appreciate it. Thank you so much.

Happy to do it. Thanks, Matt. Good to see you.

Good to see you as well.