SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Okay. And for our audience, if you want to ask questions, just push the button on the microphone, it will light up and we'll get to you. I'll throw out the second survey question. But before we get to this topic, we'll probably discuss international first. But the second question is, what is the best priority for capital allocation after internal development in the build-to-suits over the next 12 to 24 months? And the choice is repurchase shares, accretive acquisitions measured by AFFO, accretive acquisitions measured by tower gross profit multiples, capital recycling, and net debt leverage reductions. So let's see what our audience comes back to. While we're doing that, maybe just moving to international. So what's happening in terms of international markets, LatAm, Africa? What you're seeing in terms of the growth profile heading into 2023?

Yes. Well, we had a very good 2022 in terms of organic leasing activity in our largest market, Brazil, our second largest market, which is South Africa. We obviously added assets in a couple of new markets, either in the year or right at the end of last year. In Tanzania as well as the Philippines, we started a build-to-suit program there. So there's been a lot of activity. It's all been generally pretty positive. We've had certain older markets of ours where we've seen some amount of elevated churn, largely due to either consolidation of carriers or in the case of Digicel and Panama, for instance, where they've announced that they're leaving the market. So things like that. But I would say the actual activity levels have been pretty strong as we've gone through 2022. As we head into '23, we have pretty good relationships across the board with the carriers in the various markets that we operate. A number of the markets have very solid opportunity in terms of network need. And I think we'll continue to see significant investment in a number of those markets that will continue to drive organic growth. So yes, we feel pretty good about our positioning. Every market is a little bit different. Some are better than others. We're in 15 different international markets. So there's a different story for each one, but the largest being Brazil. Outside of what you may want to ask me about the Oi merger, that's a major event down there. But outside of that, we've seen the carriers actually be pretty active, at least up until this point.

Yes. So speaking of which, how should investors think about consolidation churn, particularly in LatAm and Brazil, in 2023? And is this something that also has multiyear ramifications that people should be mindful of?

Yes. In the case of Brazil, which is probably the largest because it's our largest market, you obviously have 4 carriers combining into 3 with Oi now being absorbed partially by each of the other 3 legacy customers. We -- under the existing agreements as they are in terms of churn exposure, we have a number of years left before we would start to see that. However, we're trying to work with the customers. We're in conversations with some of the other carriers there about but there are arrangements that could work equally well for both of us, help them achieve some of their synergies earlier, but maybe give us some other benefits that we would not otherwise perhaps get. So that is really all I can say about that at the moment because those conversations are ongoing to the extent that there was something worked out with them, it's possible to see churn -- some churn pulled earlier as a result. We kind of expect that we're looking at somewhere in the $25 million to $30 million exposure range U.S. dollars from the Oi merger over time. How much of that could happen this year versus later years, really is dependent upon conversations we're having with the carriers. So it's too early for me to say. But...

Does that $25 million to $30 million include the recent acquisition you did in the market? Or is that separate from that?

Yes. The total impact from Oi churn on that acquisition is probably about $3 million. That's probably additive, but would get rolled into any conversations we would have with the carriers, obviously.

And when you think about managing through merger churn, whether it's in the United States or whether it's in a market like Brazil, does the higher rate environment we're in increase your interest to get the cash in sooner and come up with a deal where they could pay you more upfront and wash this thing away that, that cash is more valuable to you today? Or does it lessen the interest and you just rather get it over time on the prescribed contract?

It depends on the situation. If they're not going to be deployed at the site and you're going to get the same amount upfront, perhaps you just take the money upfront, right? If there's the opportunity though, through them staying at the site, that long term things change and they actually need to stay there, obviously, it's better to continue to have them pay you out. Unless you have an alternative use for that space at the time. Obviously, you want to have it free and available to lease up to somebody else. But assuming that's not the case, I think we tend to prefer to have the ongoing relationship last longer, all things being equal because it tends to lead to, I think, better long-term results. They tend to need stuff that they thought maybe they didn't need later and you're more apt to hang on to it if it's there.

Is there anything else about the international markets at this point that you feel are underappreciated by investors for SBA?

That are underappreciated. Well, there's -- I think the need for wireless investment maybe is sometimes a little bit underappreciated. And the fact that in many of these markets, the wireline options and solutions are so limited that wireless is actually more critical to some degree in some of these markets than it is even here. And that criticality means that the underlying infrastructure is that much more important to the entire functioning of that society. And so I think if you thought towers were an important bedrock in the U.S., I think they're even more so perhaps in a number of these international markets. So it gives us great comfort in the long-term stability of the businesses that we're investing in these markets and the sites that we're building because it really is critical to everything else that goes on in many of these places.

And are you using inflation-based escalators in these markets? And should investors think about that as like 0-calorie revenue, so it just gets offset by the change in costs with inflation? Or is there a potential net benefit to the bottom line from inflation-based escalators?

Well, in all the markets that are not U.S. dollar denominated, I believe in every one, we have CPI-based escalators. And so, that's generally the way that it's done, that's market practice across most of the international markets. The -- there's definitely a benefit as inflation has been high, we benefited from it this past year because the margins on the business, the operating margins, are so high. So while there is some impact certainly to expenses, our expense base is fairly small as a percentage of the revenue base. So there's definitely a benefit. And in places like Brazil, which is our largest international market, the ground leases are passed through to the carriers. So even though the ground rents may increase with inflation, it's being passed through to our customers. So actually, there's no cost impact there. So really, the main cost impacts to us are outside of ground leases or overhead cost personnel, that sort of thing. There's not many other expenses.

So moving to some of the questions about capital allocation, let's go to the survey results and see how our audience feels about the best priority for capital allocation after we talk -- what we mentioned is internal development build-to-suits. So 9%, repurchase shares; 36%, accretive acquisitions for AFFO; 0% for deals measured on tower gross profit; 0% for capital recycling; and 55%, net debt reduction. So -- and you kind of teased this out in the beginning that you're thinking about leverage. Can you share with us how you're thinking about leverage for the business maybe differently over the past few years?

Yes. I think -- I actually don't think that we're thinking about it differently. I think that the environment is a little bit different. Our approach has been, for those of you that have been around SBA for -- really for as long as we've been around, it's really not changed that much. We've had the same leverage target probably for the last 15 years of 7 to 7.5 turns net debt to adjusted EBITDA, and we felt that's been the right place. It's been a higher leverage level than our peers, but we felt that the opportunity to invest that incremental capital was the best thing for shareholders, and that's why we've done it. That remains the same today. The real key in all that is the relationship between that cost of debt and the return potential from the assets that you're -- if it's assets or stock or whatever it is, the investment that you're making with that incremental capital. And what we haven't seen totally adjust to this point is you've got -- certainly, the cost of borrowing going way up, but the return thresholds have not adjusted. Because of the competitive environment, some of the other parties that have brought a lot of cash, maybe are using yesterday's balance sheet to fund investments that they're making. We haven't necessarily seen an appropriate recalibration, I think, of price points. And maybe it's just sellers not being able to yet come to grips with lowering the price where they're selling assets. But if that relationship doesn't shift, as long as that relationship stays consistent, we can absorb the higher rates. Frankly, we were levered at these levels, and higher levels, with higher interest rates in our history, and it worked very well. But of course, the price points for the investments we were making were much lower at the time. So if you don't see that adjustment then the appropriate thing is to obviously let leverage come down. And we do delever organically very quickly. And so that will naturally happen over time if we don't see places where we can invest and actually make a nice return, given the cost of the capital. So if we delever, I would say it's not necessarily a shift in strategy, but what it does do is it creates capacity and flexibility for us to be more opportunistic. If the opportunities present themselves down the road, if you see a shift in the macro environment where either pricing comes down or the cost of borrowing comes in, and we can adjust accordingly and go back to something similar to what we've had before. So the approach is very much the same. The environment has shifted and if we need to delever as a result of that shifting environment, then we're more than comfortable doing that because at the end of the day, our focus is on shareholder return. It's a financial analysis more than it is anything else.

And with that analysis, is there a trough that you wouldn't want to go below? So maybe you could share with us or remind us at the end of the third quarter where the net debt leverage was and maybe where it could trough out if this environment persists?

Yes. It's a little hard to call an exact bottom. It'd be hard for me to imagine it being more than a turn lower than it is today. So we finished the third quarter at, I believe, 6.9 turns. We expect that we'll be slightly higher than that, probably at the end of the year because we did the GTS deal in October. So that was after the end of the third quarter. But we'll probably be somewhere around 7 to 7x, I would think, at year-end. And then given how much cash we produce, given the growth in the EBITDA, if we're not actively investing in any material way, we can easily drop a turn off of that in the course of the year. Do I expect that that's what we'll do? Not necessarily. I mean, it's not -- it's frankly not our -- is higher. We would rather be active and be investing in things that we think are value added over the long term. And I think, frankly, we're very good operators and can add value there. But that may not be the opportunity that presents itself. And if it's not, then you'll see leverage come down. But it's hard to imagine it dropping much more than a turn. But we'll see where the environment takes us.

And as you think about the decision set and the discussion in the -- for the executive team and the Board, how do buybacks come into the equation? And is this something where you'd rather be patient and watch first, what happens in the private markets? Are you watching the public markets and your own stock price? How should investors think about the framework to decide whether SBA should be buying stock back?

Well, I can't tell you exactly how we make the decision. But we do certainly play all those things against each other that you're mentioning and try to choose what we think is best. You've seen us be very active stock repurchasers over the last 5 years or so. But it's been done largely in opportunistic moments. And so I would expect that we'll probably buy back some stock this coming year. It'll probably be at points where we see it as an opportunistic purchase. But at the moment, we have a fairly large balance outstanding on our revolving credit facility. We have a place to put incremental cash immediately. That's easy for us to get some immediate benefit from, in paying off that debt. So we don't feel rushed to do that, and we'll see whether opportunities present themselves or not.

And then just making -- maybe taking a step back to the domestic business. We talked a lot about 2022, 2023. How would you rate your longer-term visibility? And maybe we'll ask both for domestic and international. As you look at the growth prospects for your business, how do you rate that visibility?

I would say it's relatively strong in the first part of the year, this coming year. As you get later on, I think long term, the visibility is decent. It's what I mentioned earlier, the timing of it is, I think, what's a little bit hazy because what you can look at is you can see the carriers are holding a certain amount of spectrum that they spend a lot of money on. They need to deploy that spectrum. They have certain windows of time in which to do it. The deployment of that spectrum drives the need for incremental equipment on the tower sites, which is the value-add to us, helps us to grow revenue. So when you see that overall picture, you know that it's there over a multiyear period. It's just how much do they do this year, how much do they defer. And each carrier, I think, is in a little bit different spot. I mean some of our success last year was because one carrier in particular was very aggressive and moving very quickly in T-Mobile and so that helped elevate that. And because of the design of our structure of our agreements, it again, follows the activity levels of the carrier. So if you have all the carriers starting to be active at the same time, that's when you see us have our best years. And if it's only one or 2 carriers that doesn't necessarily play out that way. So it's a long-winded answer, but really what I'm saying is I feel very good about our visibility longer term. The individual components and how it breaks up into individual time periods is where the uncertainty, I think, lies.

And our last question on AFFO per share growth. So as you think about the opportunity to grow the per share AFFO, what are some of the pluses and minuses that investors should be considering that are maybe unique to the environment? Or you got the macro, you have some of the consolidation churn that you were describing. So what are some of the pluses and minuses as people are thinking about the growth for this year that they should be considering?

Well, the pluses are obviously the organic growth opportunity. The carriers have done a lot leading up to it, which helps or will help this year's results. And obviously, the more they continue to be active, will continue to help it. Churn is, of course, a negative. The question -- it could be relatively a positive, I guess, if it's less this year. But then expected, but over time, it's obviously the big overhang. And the other factor is cost of debt. As you look forward to 2023, we have no financings. We just completed a refinancing that has a bit of a negative impact because it was at a higher cost than the debt that we paid off late last year, but that's all known now and disclosed. So you can figure that in. We have no maturity dates until October of 2024. So there's no immediate need to be in the financing markets this year. So you should kind of know where the interest shakes out. But those are probably the main inputs. There are other factors that are probably smaller. Services was very, very big this year. Our services margin contribution probably won't be quite as high this year, but still healthy, I think. So those things are around the margins, but it's the main issues that we seem to talk about every time we're together, leasing activity, interest rates, churn. So it's always the same thing.

Well, Brendan, thank you so much for sharing your time with us today.

Absolutely. Thank you for having me, Mike.

Thank you.

All right. Appreciate it.