SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Welcome, everybody. I'm Jon Atkin. I cover the tower stocks at RBC. And pleased to spend the next 30 minutes with the Chief Executive Officer of SBA Communications, Jeff Stoops. Welcome.

Thanks, Sean. Happy to be here. Good afternoon.

If there's questions from the audience at any time, just raise your hand, and I will call on you. I want to ask a couple of questions just about -- financially oriented, but your guidance for U.S. leasing, given that you called out on your call, you sound very kind of optimistic about the backlog and current demand, but there is an implied acceleration as we kind of head through the end of the year to get to the full year guide. How do we think about how much of that is contractually locked in versus subject to variability?

Yes. It's substantially all locked in, Jonathan, and subject to very little variability. And as you think about that ramp up, it really reflects the higher levels of operating activity that we saw in the second half of last year. And then that is carried over into this year with the lag between signings and revenue commencement.

Anything that has surprised you year-to-date in terms of just the pace of either lease commencements or lease signings from any of the before...

No, not really. It's gone pretty well as expected. We've been fortunate on the supply and labor side. mean we're posting record services revenues, very high leasing results. So it's hard to say that the -- there's any kind of supply chain or labor issues that are affecting us. But I would say, I think we might even have done a little bit better. So there is a slight edge to the labor and supply chain, but really not material. And obviously, it hasn't really held us back very much at all.

So no shortage of M&A activity in the sector, both domestically and internationally. Any comments on private market valuations and kind of how they have trended or not versus some of the public market valuations in this sector?

We're slowly starting to see some impact. And I see that in the form of some failed transactions primarily overseas. But there clearly is a lag in sellers' expectations to the movements in the 10-year treasury and other capital markets events, and that's always the case. Our job is to stay disciplined and make sure we do the transactions that are going to create the shareholder value we're looking for.

Given inflationary pressures that all cash flow businesses are seeing, particularly those that have fixed escalators, what's the latest thinking on how to -- what can you do to counteract some of those pressures given the fact that in the U.S., the prevailing model is to have fixed escalators rather than inflation-linked contracts?

The suggestion that we move this year to CPI in the U.S. fell on deaf ears with our customers. So they were not really up for that nor were they too upset with the fixed escalators. So that's a topic actually that seems to be fairly well set at this point. And I would tell you that we have 3 MLAs with 3 of the 4 major U.S. customers. And while we don't have the same model as some of our peers, we do have kind of fixed a la carte pricing. And that a la carte pricing escalates every year as well, essentially in line with the fixed escalator that we have for that particular customer. So we're moving up price slowly. I mean is it perfectly matched to this year's inflation? No, of course, not. But I mean you've been around a while, you know that in terms of the long-term view, the fixed escalator for us has been on the better side of inflation much more often than not.

So site modification amendments, is there a little bit of -- are you more nimble in that area as a way to synthetically offset the fact that you have...

We are. And in those cases, where we have fixed a la carte pricing, those escalate as well as we move through time. So we are capturing some increases.

So turning a little bit to the kind of overseas and principally Brazil, maybe level set for us the outlook that you see for that market post Oi and post the spectrum auction.

Well, we're very -- as we've said for many, many, many years, while it's not typical that a tower company would feel better about consolidation in the market. Brazil is the exception to that, and we've always put out the premise that 3 strong carriers there would make for a better market. And that's what we have now. The spectrum auctions, which were recently completed and really not a lot yet done, pending the integration of the Oi mobile assets with the 3 remaining carriers. They're in the middle of their requirements to submit plans to the regulators down there as to exactly how that's going to work for each one of them. We're talking to them and watching all that carefully. But I really do feel very, very bullish about Brazil. There's a lot to do. The demographics are very, very good. The country is benefiting from increased commodity pricing and oil. So Brazil is feeling pretty good. And the biggest issue we've had in Brazil, historically, frankly, the only issue because operations have always gone very, very well is currency, foreign currency exchange. So right now, that equation is actually working much in our favor, at least year to date.

So American Tower, Brazil has been seeing an increased weighting towards co-locations over the past couple of quarters in Brazil operations, curious kind of given that your portfolio has a slightly different category than theirs, what have you been seeing in terms of mix of leasing, colos, amendments or any carriers notably more active than others?

Trying to remember back. I know we gave that specifically on our call. I think it was closer to 50-50 with our first quarter in terms of brand-new leases colos versus amendments. And I believe there's a fairly even spread amongst all 3. I mean always obviously not as active anymore, but amongst TIM, Telefonica and Claro. And I further expect that you will continue to see strong amendment business as they really get into the 5G because that has always been kind of the path that our customers take as they're moving up to the next-generation technology because it's fast and it's easier to start with the amendments.

And you're confident of your ability to monetize that given the contract structures.

Yes.

On the regulatory front or political front, anything you think that affects the carriers or the towercos in Brazil?

No, not, once we're through this Oi, the concession issues have been generally resolved. There's still rule making that comes out, but I don't -- and there has actually been some regulation in Sao Paulo that hardens a little bit the zoning and the use of land. So nothing that's concerning.

There's a third tranche of the Grupo TorreSur assets that could potentially be sold and come into new ownership. You were the buyer of the first tranche. Anything from a structural standpoint that would prevent you from getting kind of a second bite of the apple. And any thoughts on kind of those fixed-line assets in Brazil?

No, we know those guys well. We talk all the time. I do know that they would like to exit things. But that's one of those -- it takes two to tango and you have to have the right meetings of the mind and all that. Like anything else in the markets that we're in and new markets, we take a look at everything. We don't act on nearly as much stuff as we look at. But for the right deal in the right terms, we're always interested.

And then maybe just sticking on Brazil. Beyond traditional tower model, given what's been going on with data centers and as you think about things like active element sharing, Power-as-a-Service in rural areas. How do you see yourself pivoting from kind of straight macro towers and building on kind of the recent data center acquisition to getting more active across adjacent business lines?

Well, interestingly, we have pursued the Brazilian data center for really the same reasons we've pursued in the U.S., except it has 1 additional benefit. We've actually had a number of conversations with our customers who are interested in mobile edge facilities for C-RAN operations. So we've had those conversations, that was enough of a good and not that there's anything material yet to talk about other than a positive conversation with folks who are in a position to really do something about it in an area that would make great sense for us given all the tower sites that we have. So that was one of the impetuses behind the Brazilian data center deal. But really, it's still all about the same thesis for us. It's a very small step investment that is designed to position us for if and when the day comes where the edge truly moves to the tower site. And that is still a question that is yet to be answered.

Any -- just on data centers, is there any recent learnings from some of the smaller deals that you've done domestically?

It's good business. There's a lot of demand. It's a different business than towers. It's much more capital intensive. And the churn rates are higher. But in general, you've got a much bigger audience and market that you can sell to. I would say, generally good business but not obviously, I'm levies, but not as good as towers. And we're happy with the money that we've spent. It probably is maybe not even $100 million on. Our enterprise value, we think that's a very good investment to make sure that if and when that day comes, where the edge does move to the sell side site we're ready.

So Africa, a few months into the closing of Tanzania, up to speed on kind of -- or any kind of update and have the integration is going.

The integration is going well. We partnered with a group who knew the market and knew the carrier extremely well. We had a regime change in Tanzania, kind of mid transaction before we close that has been sometimes better be lucky than smart because that has really been great. It's a very much more pro-Western regime, much more desirous of foreign investment, and we're off to a great start. I mean it's obviously a different market. It's the first rail market for us. We are in South Africa, but South Africa is not really a power market the way some of the rest of sub-Saharan Africa is. So we are knee-deep into the power and service level requirements of that market. That's going very well.

So power is generally provided as the services as you know, it's much less so in your South African portfolio. Maybe go through the basics of that as you get more efficient, is that a margin expansion opportunity for you? How do you manage the costs around...

Yes. The margin impact is a bit unfortunate because it's a pass-through item GAAP requires that you mark up your revenues and your expenses for that amount. If you strip that out, which you would to really get to your true economics, we're at north of 60% EBITDA margins in Tanzania, which was pretty good. Our deal there is structured such that we are not -- we're protected against price increases. We're not protected so much against volume increases in use of power and where we can really distinguish ourselves is to bring more efficient equipment and techniques in. Because as we reduce the power consumption and solar might be a way to do that in other ways, we capture that economics. So we are not exposed materially or even at all with these recent increases in fuel prices that we all read about every day.

So I asked the M&A question earlier kind of domestically focused, but maybe ask a different way, given trends in the interest rate environment, are you seeing an impact on private market pricing for tower assets?

Not as much as we'd like, but I think it will come. And I think the -- I think the folks looking at these deals are hopefully reading the same economics and finance folks that we are. But these are long-lived assets that are best valued on a long-term DCF basis. And you have to take interest rates into account if you're using a leverage structure. But the -- and it's not the public folks that -- I mean we all kind of see the world the same way. It's the folks that tend to be private equity backed and have commitments and money to spend and shorter lives. I mean they dance to a different drummer.

So given their investors and it's often pension and infra, but particularly pension, why shouldn't multiples stay where they are or at least at elevated levels versus the public markets?

Because your pension isn't going to do very well. I mean it's -- the world is the same, really, in terms of demand. And if you are all assuming the same inputs on the revenue side and -- but your cost is way up because of interest, you're just going to make less money. There are obviously folks out in the world that are happy with that. But I mean, at SBA, we continue to hold out for higher returns. Shareholder value creation is always at the fore. And we have been able to do our 5% to 10% portfolio growth over time. I did a slide for our shareholder meeting, which was 2 weeks ago. And in the last 10 years, we've grown the portfolio by a compounded CAGR of 13%. So we're choosing and disciplined, but we're still finding our spots.

So on portfolio growth, you have a very active build-to-suit program. [Operator Instructions] But just given how active you've been on build-to-suit internationally, any impacts you're seeing from supply chain, I think you mentioned earlier, kind of a partial answer, no impact yet. But are you doing anything differently in terms of how you're procuring materials over maybe a different timeframe to mitigate those challenges.

I mean it's not anything that is material because I would know more about it. But I believe we're maybe ordering a little bit further in advance than we used to. I don't think we are stockpiling any material amounts of steel in Africa or the Philippines or places in Latin America, where we're building a lot of towers. I think we're still getting what we need when we need it provided we're maybe a couple of weeks a month ahead of our typical cycle times.

So U.S. -- a couple of U.S. questions. Well, actually, another question about business model adjacencies, but active network sharing outside the U.S. or in rural areas of emerging markets. But just as you kind of dipped your toe in the water on data centers, any other adjacencies that seem attractive to you? Some of you peers have invested in fiber, DAS and so forth.

Well, we actually have an expanding DAS group, and we like DAS provided it is with special assets that have exclusivity and other long-term control tendencies. It is a much different cycle time, sales time, build time market. Our unit economics are great. Our ability to really do a lot of that and put a lot of capital to scale to use to gain scale is not as great. Energy-as-a-Service is something that we are spending a fair amount of time in. We have a number of different trials and engagements going on. That is a natural for us given the land. And everything we do as an adjacency, we feel a need to tie it somehow back to the mother asset, which is the tower sites and the land that we have in all these different markets. So energy, DAS, we are doing some work in smart cities. We're contracting with -- and it's a different kind of sale. Typically, the sale in our business is to our wireless customers. This is more of an enterprise sale to developers who are building major projects, usually mixed residential, commercial and wanting to have a neutral host provider in there and not with the other option being that those developers would have had to choose an AT&T or Verizon or somebody to be their lead. So we're doing some things in that area. And just continuing to look for things that make sense to take advantage of the strengths that we have, whether those be country skills, operational bases or most importantly, the towers in the real estate.

So carrier activity, a lot of positive drivers around demand that you talked about on your earnings calls. How sustainable does it feel to you before we start to level off whether it's C-band deployments from Verizon or AT&T or T-Mobile's integration spend or DISH's initial coverage build-out?

Well, Dave Mayo spoke today at WIA just a couple of hours ago. And Dave basically confirmed there's an awful lot to do to get to 70% in 2023 and then still more to do after that. While we would expect DISH would have quarterly fluctuations while they ramp up and then digest and things like that, they're going to be busy for several years. I think it's well known that AT&T has kind of been waiting for the 3.45 spectrum to clear an equipment to become available before they not only begun to deploy that, but even the C-band that they had. They like to try and be as efficient as they can through the one truck roll. So we still have, for the most part, all of that ahead of us. So I think there's years of elevated activity here. I know there's a big concern about well, gee, this is the last big year. I do not believe that, that to be true. And in our experience, network build-outs of these kinds of multi -- moving from one generation to the next, they're always more difficult. They're always slower than what folks legitimately believe and as a result, it all gets spread out over a longer period of time.

So with the exception of DISH, a lot of the activity seems to be overlays. At what point do we start to see -- have you heard any indications from your customers around the [ densification ]?

The infill and the densification and that's a good segue from my answer. Because what -- I believe what a lot of our customers speak to when they say, what are your peak years of build, they speak to what will need to be accomplished to achieve basic coverage where they can put out the maps that they also famously use and say, okay, we have 5G here, here, here. That doesn't begin to get to your point, which is the densification and the ongoing. So I mean using 2G to 3G and then 3G to 4G as a historical indicator mean that kind of stuff takes 3, 4, 5 years after you get to the basic coverage. And it will change and shift and increase the demand based on how successful 5G is as a consumer uptake.

Non-Big 4 contributors to your core U.S. business accelerating to [indiscernible].

There's always some. But right now, the lion's share is certainly the Big 4. Yes. And it might have actually even been a tad higher in the first quarter than all of last year. They're busy. They're very busy.

And I'm getting to the end of my questions, unless there's anything from the audience. I guess last one for me would be relating to kind of utility assets. So PG&E, other types of rights-of-way, whether it's railroad or other transportation, but what's the -- what does the target set look like to continue along those vectors?

We love the PG&E deal, and we would love to replicate that. And we had a lot of -- they have a flurry of inquiries from other utilities after we announced that deal. Because a mid-20x multiple got their attention. What -- as you dug in, what you found is that PG&E was somewhat unique, and it was obviously unique because it was Northern California and great assets, very hard to replicate. But more so because they were coming out of bankruptcy, did not have the same regulatory and rate issues and tax issues that a healthy utility has. So when they kind of dig in and look at essentially shrinking their rate base and paying taxes on what are, for the most part, fully depreciated assets, they start to -- it doesn't make as much sense to them as it did to PG&E. But we love the asset class. We continue to look for opportunities. And if the stars align, we would certainly do another utility deal.

So interest that came -- that was in a sense created by your announcement. What about other types of infrastructure other types of rights-of-way?

Well, we do a lot with the railroads. We have relationships with CSX and our biggest relationship is with Union Pacific. So we do a lot of right-of-way work there. We're always interested in expanding those relationships. I think we tend to focus first on the quality and exclusivity of the asset. And those can come from anywhere in any source. So anything that meets an exclusive asset, a location that is going to be special for communications needs for years to come. Those are the kind of things that we'll look at for any source.

[indiscernible]

No. And I don't...

So the question is what are the bottlenecks for your...

What are the bottlenecks for our customers. And I don't -- I hope I didn't say AT&T was having a bottleneck. Because the AT&T comment was more about they were really waiting to start to get the 3.45 spectrum, so they could do one truck roll. But we're in the thick of all of that through our services business and deployment. And again, knock on wood, we are not seeing a lot of delays. I've talked to some equipment provider specialists. I mean they think Ericsson and Nokia are pushing the U.S. carriers to the top of the list, making sure they have what they need. The labor issues are not so bad that we're feeling like we can't hit our goals and our numbers and that things are being delayed. I think if anything, things might even be a bit more active if there was more people and equipment out there, but I mean we're having a very, very busy year, and it's hard to say that we're really feeling anything or our customers are from the supply chain. I will tell you that we are sitting on warehouse fulls of equipment that our customers make sure they had put in for a while ago. I mean they're working hard to make sure that there is to slow down. They do not want supply chain and labor to stop what for them is a very competitive build.

Other questions. Maybe just kind of bring it home. We talked about the -- how much of your 2022 guidance is kind of contractual around U.S. leasing. Thinking about AFFO per share growth, which is kind of the lighthouse metric that much of us are using, confidence level in how that can grow and the pace of growth that we can kind of look forward to.

Well, we really are looking to compound AFFO per share growth at a double-digit rate. And based on this year's changes in guidance and where we sit today, I feel extremely good that we'll have that 2022 over 2021. And I know you want me to speak to future guidance, but I'm not going to do that. We'll wait for that.

Fair enough. We'll talk about that tomorrow. All right. Thanks for your time.

Great. Thanks, everybody.