SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

All right. If everybody can go ahead and please take their seats. We're going to go ahead and get started with our next session. For those of you who don't know me, I'm Matt Niknam, I cover communications infrastructure here at Deutsche Bank. We're very pleased to welcome back SBA Communications CEO, Jeff Stoops. Jeff, welcome back.

Thank you, Matt. Nice to be here.

So Jeff, you just reported fourth quarter results, given outlook for 2023. Maybe just to get started, if you can share some of your key highlights from your outlook and what's top of mind for SBA as we think about the year?

Yes. We're expecting another very strong year. U.S. customers are very busy. Our international activity, which was really through the roof last year, we expect to be busy again. We are -- so we want to execute very well against what we think are going to be some great opportunities. Execution margins have always been a very strong suit for us. Take advantage of opportunity -- revenue-producing opportunities where we can and use a fairly vast amount of capital that we have available to us to pick and choose investments and allocations that are going to create value for our shareholders. And it's kind of an interesting situation that we're in because we have some money outstanding on the revolver. So we kind of have a default guarantee, no risk return of 6% by just paying down the revolver. So we have that kind of a -- kind of the worst we can do. And then we'll look to do better than that as we look around the globe opportunistically.

It's interesting, if we sort of think about where we're at right now, we're entering a period where we're hearing a lot from carriers, particularly even the last 2 days at this conference, [indiscernible] CapEx likely to decline off its recent peak. Interest rates you referenced, elevated, macro backdrop, likely worsening. So can you talk about the visibility you have around SBA's growth potential over the next several years from both a top and bottom line perspective?

Yes. Well, let me start with AFFO per share because that's really our first and foremost priority. If you look at this year, '23 over '22 and you stripped out the delta in interest expense and the delta and what we've guided for services than what we actually did last year, it'd be -- and everything else is going along well, it would be a year of high single-digit AFFO per share growth. So we have talked about for many years, a goal of, over time, compounding at 10% AFFO per share on a CAGR basis. Now we did better than that '22 over '21 and I think maybe even '21 over '20. This year won't be quite that because of the interest expense. And we'll see where we end up in services. We're off to a good start but that's really how we think about the business. And I think the way we not only execute, I think, the macro demand that will be out there and the way that we, long term, will continue to seek a levered approach will -- I mean, that's going to allow us to continue those goals over time.

And as you sort of think about that, what are the sort of leverage assumptions that are embedded in that outlook? And maybe how do you think about optimal leverage for the business from here in the current environment?

Well, I think in the current environment, we -- if we assume that, that was going to remain forever, we probably would look to reduce our target range, which is 7 to 7.5x. But we don't believe that. We believe that over time, the Fed will do what it says it's going to do and bring about a decline in inflation, which should bring rates down as well. So for now, we look at where we are. We look at what we can generate by paying down debt, building leverage capacity, biding our time. And being in a position where we made power growth opportunities similar to what we found last year in Tanzania and GTS and some other things where we've got some very good assets at what we thought were very good prices. So that will continue to be our primary goal. And leverage -- none of that, of course, was in our outlook because we don't put in deals that we anticipate but aren't actually contracted. So that outlook that we put forth for 2023 without working through acquisitions or stock repurchases, that would have leverage at year-end in the mid-6s, which is a very low number for us. And that if we don't find better uses for capital against that guaranteed 6% return, even though that is our goal, that's where we'll end up. But longer term, we are very comfortable given the strength of the business, the cash flows, that when rates moderate and come back down to something a little bit less than where they are today, we will lever back up and use that capital to grow the company, buy back stock or other value-creating things.

And so maybe if I'm summarizing appropriately, this year, in terms of the guide, you're assuming incremental cash flow at post dividend goes towards paying down short-term debt. You end at 6.5% but to the extent that we think maybe the opportunities beyond that or as you think about '24, '25 the 7 to 7.5x is still an appropriate leverage range?

Yes.

Okay.

Yes. Now of course, we'll -- we're very opportunistic in facts and circumstances kind of management team. So we will -- this is not a time today where, unless it was a really good opportunity, similar again to what we did in Tanzania or GTS, where you'd want to go out and necessarily take on new fixed rate debt today when you didn't have to. But as I mentioned earlier, I think that's going to change. We're going to have some more rational debt markets in years to come, and that's going to be an opportunity for us to re-lever and use that capital in a very value-creating way.

Let's talk a little bit about the U.S. business. If we can maybe hit on your expectations for this year just in terms of gross and net organic growth, what's embedded there in terms of activity levels from some of your top customers?

Well, we guided to an increase in revenue in '23 of $72 million. And that's our biggest number in quite some time. I don't know if we beat that back in the 2014 period, but probably not -- it's probably our biggest number. So there's a lot of activity out there. It varies based on the carrier. And I think it's widely known as to which carriers are further ahead on their mid-band spectrum build-outs and their 5G build-outs than others and -- but our experiences reflect that. But everybody is doing something. So we expect it's going to be another very strong year. But for last year, we're expecting what would be a record service this year for us. So it's pretty busy. And we're -- we've got a lot to do, and I think a lot of opportunities to move numbers as we move through the year. Yes. I mean when you -- one of your first questions was what are your priorities? I mean, our priority is always to find ways to do better than we have told people we were going to do.

Well, maybe if we think about last year, I think in aggregate, you did around $67-ish million, if I remember correctly for new leasing. $72 million for the guide this year. We're obviously starting off, it sounds like very strong in terms of some of the bookings activity that you ended last year. Can you maybe help us think about the cadence of growth over the next several quarters in terms of how we start and how we may end in the second half?

Yes. I mean if you look at the numbers, we ended the fourth quarter with $21 million added revenue. So if you were to annualize that, that is a higher number than the $72 million that we have guided to. So by just looking at the math and where consensus was and where we ended the year, you would see some -- at some point, a decline off of that $21 million run rate. But the way we put that together, Matt, is there's about 6 months of good visibility in the business, and then it's less visible. And you really have to rely much more so not on your backlogs, but what your customers are saying and doing. And they've taken a very conservative approach this year in terms of their commentary about CapEx. So we're not going to get ahead of them. And that -- we took all that into account. We took what we knew, where our backlogs were. And then for the outer parts of the year where we had less of a visibility into backlog, we took carrier commentary, and we mixed all that together, and that's where we got to the $72 million. Could we do better? Sure. But at the end of the day, our customers -- I mean, for those numbers to move, our customers have to spend money. And I remain very optimistic that they will because we know where they are in terms of their build-outs of the mid-band spectrum. And there is tremendous amounts of work left to do. When they choose to do that and what is the catalyst for them to continue to build out, I think we're going to -- we all want to see a 5G demand at the consumer level that makes all run out and must have a 5G device. I'm not sure that exists today, and our customers are very well aware of that. So I think there's a lot of belief on their side that it's coming, but it may not need to come this year.

Got it. And as we think about just the mix of new leases signed, how have those been trending between co-locations and amendments?

Well, because of the large amount of work that we do for DISH, it's actually been about 50-50 with most of the new leases being DISH, although there's an increasing amount of new [indiscernible] coming from the other [indiscernible] as they start to begin where I think it's going to be a very long process of densification. So let's see, it's about 50-50, which is prior to DISH starting their network development, it was always much more skewed to amendments.

So we hit on the gross new leasing, escalators will kind of take a 3%. That's kind of like the run rate. And then I just want to hit on churn real quick. How should investors think about the timing and an impact for when some of the remaining Sprint churn flow through the business?

We have seen a phenomenon where the equipment is on the towers for much longer periods of time than we originally anticipated when we first put out our numbers. Now I don't -- we're not prepared yet to say that that's a permanent change. What we're looking at it as is really a deferral. So last year, I think we only had -- we ended up only having like $18 million of Sprint churn when I think we were initially guiding to $20 million to $30 million was it, Mark? Yes, $20 million, $25 million. So we have taken the tack that, that's getting -- continue to get pushed back. And so this year, we're guiding to $25 million to $30 million. Next year, $15 million to $20 million. Our big years will be '25 and '26 with $50 million anticipated each. So we're not -- and these numbers have been pretty much exactly spot on from the first time we answered this question. But what has happened is the churn has taken longer to realize as the equipment has stayed on the tower. And we think that will continue. So probably some of what we have talked about in '23 gets pushed into '24 and so on and so on.

Okay. And then sort of normal course churn ex Sprint, 1% to 2% still sort of that?

Yes.

Okay. Yes. Got it. All right. So if we think about sort of the puts and takes here and think about the U.S. on a multiyear longer-term growth vision here. Is there a multiyear target for U.S. net organic billings growth we should be considering?

I don't know if I used the word target, but I think if you exclude the Sprint churn, you should be looking at net mid-single-digit growth.

And as we think about -- you just provided a '23 guidance. So I don't want to play the game of getting any commentary on 24. But I'm sure the question has come up and it's on people's mind. So is there any near-term implication in terms of the lower exit rate from '23? What that -- is there any way to maybe predict how growth could trend in '24 with maybe a lower exit rate in some of the moderating CapEx?

Yes. I think I'd like to stay away from that until we get there, particularly given what I said about the second half of the year, it could prove to be much more robust and active than at this point, our guidance would imply.

One more on the U.S. As we think about -- we're past that initial phase of 5G. And I think there's a little bit of a debate between the next phase is going to be more active around cell splitting, macro cell splitting or are we going to see more in the way of small cell activity. I think I know where your answer is going to shake out. But I'm just curious in terms of how you would frame the relative outlook here.

The macros are always the best bang for our customers, but in terms of providing service and network and systems. What I would say gets back a little bit to what I was talking about before, what would be really good for the entire wireless ecosystem would be that killer 5G app, the one that we all have to have and the one that we're all prepared to pay for and pay some extra for and that we can't live our lives without. That doesn't exist yet today, but it could exist in a very short period of time. And when that happens, that is going to give rise to an entire new level of demand and spend. I mean the one thing that hasn't changed in my career at SBA is the physical connection between the amount of data that flows through the networks and the amount of equipment and densification that's needed. There's no way around that. There's no silver bullets to get around those demand requirements for physical infrastructure. So that's really going to be the catalyst is when we all wake up and say, I've got to be on 5G.

Any guesses on what the killer app could be to use it?

There's a lot of different things being worked on. I think some type of gaming and virtual reality, perhaps autonomous cars have been driving. But I think more of the very heavy data usage that you're going to get out of virtual or AI are going to drive those things.

Let's pivot to international. Maybe if you could just talk about your outlook for the international business this year and then maybe some of the commentary and color you're seeing across your top markets.

Yes. We're expecting another very strong year internationally. Our big 3 markets are Brazil, South Africa and Tanzania, all very active, a lot of growth ahead. Brazil had a huge year last year and actually showed very well because not only did we have a huge operational year, which we've had many times in the past, but we actually had some favorable effects from FX currency translations. This year, with Brazil, we think we're going to be working with our customers a little bit on the Oi wireless transaction rationalizations. You might have heard on our call that we have reached an agreement with one of our larger customers, TIM down there to work through their consolidation plans. So we're very pleased with how that turned out. So I think we will -- I'm sure we'll be involved at one point or another with both Vivo and Claro on similar issues. And their focus really is -- they've all said that their focus for '23 is rationalization and integration before they get back to growth. And now what happened last year, which still is ahead of us, they auctioned a lot of 5G spectrum in Brazil. So that's really yet to -- a lot of mid-band spectrum. So that is yet to be deployed, and we're positioned extremely well for that, which -- and that was one of the drivers why we bought that portfolio of towers from GTS. And we think South Africa continues to grow extremely well and Tanzania is off to a very good start. We're just celebrating our 1-year anniversary of moving into that market.

Have you seen -- I mean, it sounds like a pretty robust and resilient growth activity across the regions. Any semblance or indication that a choppier macro or cost inflation headwinds are maybe weighing on carriers' deployment plans at all?

It's market by market. So we're in 15 countries now outside the U.S. They're not all going to be blazing guns. I mean some of the markets in Central America are we think, going to be a little more challenged than some others. But when you look at the big markets for us, and again, Brazil, South Africa and Tanzania, they kind of dwarf the rest of the countries by revenue. Those are the markets that we think are going to continue to be very active.

Maybe just on churn. You referenced Oi. And I know that I think you saw some elevated churn in 2022 on the international side. Can we maybe pick apart some of the Oi churn, what's left? And then also just think about other sort of M&A-related or market exit churn you may be experiencing in the international business?

Yes. The Oi churn over time -- check me, Mark. I believe it's going to be a multiyear process, and we've talked about $25 million to $30 million. And we just took 10 of that or now we've seen clear the path to 10 of that with TIM. So the rest of it, we think will take its course as we said, over the next several years. In terms of some of the other markets, Digicel pulled out of Panama. That was a big customer in the Panamanian market. And then you had Telefonica pulling out of Guatemala and El Salvador. So those transactions, those are the ones that we're working through. We've had some new market entrants come in. So we've set some new master agreements where they've reset kind of where things start, but in exchange for longer guaranteed terms and other committed growth, which is typical for a new relationship. So we think last year and this year will be [indiscernible] Oi will be the big years for those types of churn events in South America and that '24 will be less of the year than '23.

Got it. And is it just thinking about long-term churn for international. Any reason why that would vary from the typical 1% to 2% you see in the U.S.?

No.

I'm going to pause. If anybody has any questions, feel free to raise your hand. We've got people with mics who can bring the mic over to you. All right. Let's pivot now to capital allocation. There's a lot to sort of talk about within the capital allocation discussion. But maybe from a high level, if you can maybe help us think about SBA's framework in terms of cap allocation and use of excess cash.

Well, we have -- we have our dividend now, which we've grown quite materially over the last several years. And obviously, that's first and foremost, and there will always be -- that's the first use of capital. But putting that aside, the -- for a true discretionary decision, we still price portfolio growth over everything else. But it has to make sense. You've heard us talk and others have talked many times about over the last several years that the public and private price disparity has not only emerged but grown. And that continues to this day, although I would tell you it feels like the gap has narrowed a bit. And I think as long -- if rates continue to stay higher for longer, that gap will continue to close because I -- pretty sure the private guys are subject to the same laws of economics that [indiscernible] but that's our first desire. Second would be stock repurchases, to buy stock when we feel like it's below its intrinsic value and to stay appropriately levered as a company. And I mean that's always been a part of, I think, our superior value creation proposition is where we've levered the company. And that has not changed. That will vary as we talked about earlier, based on where interest rates are and where we think they're headed. But we've been very comfortable over the last decade-plus at the 7 to 7.5x leverage levels.

That gap you mentioned between public and private market portfolios. I think as I sort of follow the commentary from yourself and some others, it's been maybe stubbornly wide or maybe it's taken a little bit longer. And I think one of your peers referenced sort of hairline fractures in private market valuations, but nothing really tightening. Do you sense that all else equal, it's just a matter of time before that converges? Or is there a sense that just with the amount of money on the private side chasing returns, chasing digital infrastructure that maybe we see the sort of more permanent gap between valuations on the public and private side?

Well, at some point, I think the latter is going to continue. There is a tremendous amount of money out there. But what hasn't really happened yet is successive exits where those funds or investors have actually had to post returns. And that's coming, and it will remain to be seen whether folks are happy with the way those turn out or not based on some of the prices that have been paid for some of these assets by those types of investors. Again, I think they are subject to the same laws of returns and economics that we are, and I can assure you that they're not any better operating than we are. So we'll see. We'll see. I mean, that has been the challenge. It has -- you would have -- in a more capital-constrained environment, the rise in interest rates would have had a much more immediate and direct impact on prices, but digital infrastructure is a very popular place these days. There's a lot of money out there. And there's a lot of people who are paid to spend money and raise money and different business models. It's not necessarily an operating company model that was valued based on AFFO per share.

Is your focus, as you think about portfolio growth, is the focus in markets you're already in? Or is there maybe an opportunity to further expand the platform into new regions?

Both. We will get the most efficiency by continuing to grow in markets where we have existing scale and infrastructure -- back-office infrastructure. But just as we did last year moving into Tanzania, we're very much open to the right new opportunities for new markets.

Got it. Got it. An interesting deal you did a couple of years ago, the PG&E acquisition, maybe nontraditional incentive, not a macro tower necessarily, but you still get the same level of exclusivity, I think, that you met with your traditional towers. Are there similar deals with high degree of exclusivity you're looking at or that you would look at? And are these structures mainly with utilities? Or are there other entities we should be thinking about?

There's a variety of sources where you might find unique assets, utilities, other types of regulated entities, railroads, different places that you might think. We really love the PG&E deal as it's really working out very well for us. And we had hoped that there would be a lot of other utilities that would be interested in that type of transaction. But as time has progressed, we've realized that the PG&E deal was somewhat unique given their circumstances. They were emerging from bankruptcy. So they had a much -- they have much more flexibility to deal with those. The typical utility has its distribution, transmission towers in what was called the rate base. So if you were to sell those assets out of the rate base generate a profit that gets recycled back into the amounts that you could charge for it. So it gets very complicated for healthy ongoing utilities. And actually, I don't think there's been a utility transaction -- I might be missing one, but I can't think of one that's been done since our PG&E deal.

I know you've been much more cautious in terms of U.S. fiber ownership in the past. I'm just wondering, is that also the case internationally? Or is there more strategic value to fiber ownership overseas?

Well, it's probably less competition and more ability to make it part and parcel of a new build, and you get that worked into the overall relationship with the customer. I mean it's a fine business. It's just -- it does not have the same exclusivity that we're used to seeing and having it in the tower assets and there's a lot of fiber competition. And I think it's going to be interesting to watch what happens when all the federal money starts flowing, which is a lot of that money is going to go to fiber. I know our customers are looking at a lot of that. So good business, but you need to be ready to have somebody [indiscernible].

You mentioned dividend per share growth. I'm just wondering how you're thinking about that growth profile for the dividend as the industry matures and presumably, there may be less in the way of sizable M&A targets out there?

Yes, I think we will always err on the side of fast-growing but low aggregate payout percentages for the foreseeable future. I think it's the right mix for us, I think, to preserve capital for other opportunistic uses, whether they be portfolio growth or stock repurchases, I just think we're going to be able to create more value that way.

Is there sort of a terminal or a longer-term AFFO payout target you'd like to get to over time?

No. I think we'll actually look to manage high annual growth in the dividend but keeping the payout ratio on the lower side or as low as we can. Now over time, you're going to end up with higher payout ratios for sure because -- while we still have a healthy NOL balance, that will, over time, at some point, dissipate, which will cause us to pay out more on a percentage of AFFO basis. But we're in no rush to get there.

Let's maybe pivot back. I want to go to the U.S. and maybe delve in a little bit if we have a little bit of time. I just want to talk a little bit about 4Q bookings. You talked about maybe, I think, a little bit of moderation relative to 3Q, but still far strong. Any updated color you can share in terms of how the cadence of [indiscernible]? We actually heard [indiscernible] talked a lot about fixed wireless and the growth that they're seeing in terms of this newer business model. Is the rise of that business meaningful at all for SBA? Has there been any sort of noticeable increases in activity from them to accommodate the business or right now is it just maybe eating into some excess capacity they've already had?

Yes. T-Mobile, I don't think it's any surprise for us, and I believe the industry was last year's most active customer by far. They will tell you, and I think that when you really parse the numbers, if you will conclude that to do a macro deployment, which is really what -- this is all based on still. For fixed wireless doesn't make a lot of sense in and of itself. But as a byproduct of building out an extremely robust 5G network with the 2.5G spectrum and they have this excess capacity, it was a wonderful thing to be able to offer. So I'm sure there must be some incremental benefit that we've all enjoyed as a result of fixed wireless, and I think we're all better off as a result. But I don't know that many of us are thinking about specific new CapEx that is only designed to further and provide fixed wireless. But it's a -- I mean, it's an interesting dynamic that I'm sure is a source of a lot of discussions amongst our customers, given what T-Mobile is able to do now given how far ahead they are with mid-band spectrum capacity versus Verizon and AT&T. And obviously, they have different views on the benefits of fixed wireless T-Mobile. T-Mobile likes it because they have a lot of ability to put it out there.

Is there upcoming C-band deployment? I think they're getting a slug of C-band that hasn't cleared yet. There's also some 3.4, 5 gigahertz. Is that a meaningful driver of incremental business for SBA?

Yes, I think it will be. I think -- I mean, it remains to be seen how material that becomes, but you're looking at different spectrum bands, which will require some additional radios and depending on how the antenna architecture ultimately sorts out, you could have some incremental antennas out there as well.

We actually heard from AT&T yesterday, and they talked a lot about fairly elevated spend last year, this year, bigger drop off coming next year. We've also heard maybe a little bit more of a pivot or moderation, we'll say, in terms of the cadence of their fiber deployment. So is that translated at all in terms of maybe incremental activity on the wireless side for SBA?

Yes. I mean they're steady. I don't know that it's -- I can tell you that things have moved here recently up or down based on fiber. But I mean, I think that just gets back to the commentary I made earlier about the consumers are not yet requiring and demanding the killer 5G app. I mean, very basically, you can't really have 5G wireless unless you have fiber all through the system. So what those comments are telling me is that they don't yet feel they have to spend that money to close the gap with T-Mobile.

And then we talked a little bit about Verizon, but I want to make sure I hit on DISH just because they are a newer entrants. What's maybe the latest you're seeing from them today? How should we think about their contribution bookings -- contribution to the bookings and site leasing revenue today and where that may be able to go over time?

They're very active. They're very dedicated and determined and on track to hit their 2023 build-out requirements. Next one they have would be 2025. So they will -- we assume, and we've already started some discussions about helping them with those obligations. We will see once they begin service and begin selling product but they don't really have any low-band spectrum. So by way of comparison, if you look at what a nationwide network looks like that has a mix of all different kinds of spectrum. I mean, their competitors, T-Mobile, AT&T, Verizon, those you're talking 60, 70 or 1,000 or more sites. So tremendous possibilities, all of which, of course, are going to be somewhat too entirely dependent upon their long-term business success.

And just last question. Any sort of conversations, inquiries you're having from the nontraditional players that oftentimes get brought up, cable, tech?

Yes. We talk to all of them and have different things going with a number of them, but they all are relatively immaterial compared to the owners of spectrum, which, of course, are the big 4 that we've talked about, AT&T, T-Mobile, Verizon and DISH.

I think it's a great place to end it, Jeff. On behalf of myself and everybody, thank you for joining. It's bitter-sweet. I think it's the last time we're going to have you here, but it's been great. We appreciate it.

I may be back as an audience member.

We'd love to have you. Looking forward to it.

Thank you.