SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Well, welcome to the 1 p.m. session at Citi's 2023 Global Property CEO Conference. I'm Mike Rollins with Citi Research, and we're pleased to have with us SBA Communications and CEO, Jeff Stoops. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or on the webcast, you could sign into liveqa.com and enter your code Citi 2023 to submit any questions, if you don't want to raise your hand. If you do want to raise your hand or even better, just push the button on your microphone, the red light will go on and we'll work to incorporate your questions into our discussion. Jeff, welcome back to the conference. It's great to see you. I'm going to turn it over to you to introduce SBA to our audience here today as well as any members of the management team that are with you, provide opening remarks, if you like, and then we'll get into our questions.

Yes. I'm here today with Louis Friend, who runs, amongst a number of things, our treasury function and is one of our principal investor contact. So if you don't know, Louis, I would encourage you to get to know Louis and he'll take care of you. So for those of you who don't know SBA, we are one of the three U.S.-based public tower companies. We are a global company with about 40,000 towers spread in 16 countries, the U.S. being our largest by far, followed by Brazil and South Africa. We got into the business back in 1997 off of the change in the laws, which really gave rise to the independent tower industry and Telecommunications Act of 1996. I have had the pleasure of leading SBA in a variety of functions. And most recently as CEO, which I was appointed January 1, 2002. And for those of you who may not know, I've announced I'll be retiring at the end of this year, which I imagine Mike will talk about a little bit. We have always had, I think, more of a focused approach to the business. We do primarily macro towers. We think we do that better than anybody. And we think over time, our execution, our industry knowledge and kind of our opportunism have served us and have served you as our shareholders well. So how's that for opening?

That's great. Well, congrats again on the upcoming succession to Chairman, and it's a great place to start the conversation. One of the questions that I think investors have been curious about is, as you look at the upcoming succession, you're taking on the role of Chairman. You appointed Brendan as CEO, you're going to announce the new CFO in the future. What are the priorities and preferences that have been guiding the Board's decisions as you look at the succession opportunities?

We have been talking about this day for quite some time. So it's been a very long, thoughtful process at the board level, and we considered all the things that should be considered and landed fairly early on as with -- on Brendan as my successor for a variety of reasons. He has knowledge of SBA in the industry without parallel. He really has been part and parcel of everything important that we've done. I mean, he's been with the company 25 years, been CFO for over 10. And he really was the best athlete for the job. I believe what that will mean going forward is there will be no material changes in strategy unless there are material changes in the world that would dictate such. But Brendan will be his own man, and we'll do the things that he will do, and there'll be nuances and tweaks here and there, which I think are very healthy and good. But what I'd like to what I'd like to say and make sure I get it out before we run out of time is many of you have been involved with us for a long period of time. I hope you'd agree. It's been quite a journey, and I want to thank everybody who has been with us for the -- as long as you have because you've all helped with the journey, and I'm greatly appreciative. I think in terms of our CFO, one of the benefits that comes with appointing Brendan, we now have extremely strong history, extremely strong financial talent. So while we have some internal candidates that will be looked at very carefully, we have the luxury now at that position of finding the best athlete, which doesn't necessarily mean to be someone from within the tower industry, given all the stability and experience that Brendan has and that the rest of our team has. And that I will continue to provide as Chairman of the Board. So I think people should look for stability, but with the flexibility to continue to be the opportunistic value-creating company that we've been over time.

We are starting mining these sessions off with a similar question. What are the top three reasons that investors should buy your stock today?

We're about ready to have our largest organic revenue add, what we call on the bridge, the U.S. domestic and international organically added revenue that we've ever had this year. Our customers continue to be very busy. The amount of work that remains to be done to deploy 5G on our sites is vast. We are delevering very quickly. And we are intent on improving our numbers and moving things up by finding good uses of the capital that we're creating in the capacity, much similar to what we did last year with the Tanzania and GTS deals. So all of that, a lot of stability, a lot of room for investment and with the desire to do exactly that.

You mentioned about the growth and this being the largest organic revenue year. Can you share what's going into the opportunity for 2023 in terms of growth? And then maybe we'll go into some of the opportunities that come afterwards as well?

You want to -- was your question organic or growth in general?

Organic growth domestically, we could start with.

Yes. A lot of our $72 million on the domestic bridge was the result of activity that we saw in 2022. The rest of that bridge is resulting from where we see our backlogs as of when we put our guidance out and our customer commentary. So when you mix all that together, that's where we ended up. Where we see opportunities in that is in the second half of the year, additional work done by, for example, T-Mobile and the C-band work by DISH around their 2025 requirements and any kind of positive continuation or acceleration by AT&T and Verizon would impact favorably upon all that. But what it really was, was where we've been where we were at that time in terms of backlog and then on the remainder of the year because our visibility and our backlog really only goes out about 6 months as it always has. So we took our customer commentary, and that's where we ended up.

And as you're getting now deeper into the first half of this year, are you seeing any changes of activity that add more visibility to what this back half of '23 might look like? And what investors are asking us a lot is then what does that mean for '24. I realize we're only in March '23, but there is a curiosity of how this -- how growth...

Yes. I mean big are going as expected. I don't want to get too fine a point on whether we're going to be changing our $72 million or not next earnings, which we'll address when we get there. But I would say that customers are busy, and we have a great degree of optimism in large part because of the amount of work yet to be done, deploying 5G on our towers.

As you look at the opportunities over time, you mentioned that there's still vast opportunities for the customers to deploy 5G on your towers. Is there a way that you measure that in particular that you're able to share with us to give us a sense of what the incremental longer-term opportunity is for those types of deployments?

Well, I would say that less than 50% of our towers sites by -- if you aggregate all the tenancies on our towers less than 50% of them have been touched yet with 5G. So I think there's a substantial runway left. It's harder to kind of assess when that runway -- over what period of time does that runway extend, but there's a lot of work left to do, which we believe -- history says that it will ultimately get done because otherwise, the spectrum that was a lot of money was invested in it doesn't provide a return.

And just for a background for our audience, can you share with us how SBA approaches pricing and the leasing relationships with your customers? And how that may be different than some of your competitors?

Yes. We have historically approached pricing on a transaction-by-transaction basis or what some people call a la carte pricing. And that matches up the time of the activity with the amount of new equipment that's added or changed on the site. And that -- it most directly, I think, reflects what's going on with our customers in terms of their deployments. I think it served us very well over the years. There is another model that is being used, which is more of a -- you agree on a certain price and then the customer can use as much as little as they choose, and you agree to that construct over some period of time. Depending on exactly how you strike those deals, how much is paid for that right, over what time, what other limitations are on there, that could be a very attractive result as well. And so we don't -- I want to make clear that we don't have any particular prohibition or religious opposition to any type of structure. But we do take a look very carefully financially to make sure that we end up with the best result for both parties. And that's what's led us to where we've been so far.

Does the a la carte approach -- as you look at the longer-term prospects, does that a la carte approach for your team lead to better average organic leasing growth rates over time?

We think historically, it has because if it doesn't then our customers have probably paid more than they should have on the other model.

And when you look at that model, and we're in an environment that's dealing with some inflation, does that give you any incremental opportunities to price your towers? And use this environment to help the monetization of your platform?

Yes, in the sense that you would change the pricing of the amendment or the new activity that you're pricing on an a la carte basis. It doesn't really change, Mike, the escalators. Those are usually the function of a very long-term master terms agreement. So where you would -- where you would deal with inflation, it will be on pricing new activity.

That's helpful. And then -- and just maybe to round up this discussion on the domestic activity for some of the carriers that you mentioned, any incremental commentary just in terms of the types of activity you're seeing from a DISH who's entering into the category with a network or the pace at which you see some of your other customers upgrade into the mid-band spectrum that they've purchased?

Yes. They're generally busy in the aggregate, which supports our $72 million organic growth number domestically in 2023. They are varied by customer, as you would expect. But the level of activity in general is pretty strong.

And moving over to the international markets. Can you talk about the international strategy and the types of organic leasing growth that you're targeting in those markets relative to what you typically achieve in a domestic market?

Yes. I mean we -- we head down a path internationally of primarily a financial orientation. We want to go into countries where we can do well and produce increased value for our shareholders. And I contrast that with another approach, which you might want to be in just one market or you might want to move into several different countries because you think it's strategic. We have found that every country stands on its own. There's not a lot of strategic benefits even from countries that are next door to each other, given their differences. So our motivation is primarily financial. So when we look at that, we look at all the things that go into whether a particular country is going to be a good wireless market. Operationally, all markets are pretty much the same. Wireless networks are deployed generally the same throughout the world. One difference that we do see in Africa is that in most of Africa, excluding South Africa, we're also responsible for the provisioning of power and that's different than most other places in the world. So when we are deciding whether to move into a new country or not, we're looking at the demographics, we're looking at wireless penetration. We're looking at the maturity of the networks. We're looking at the numerosity of the carriers, the strength of the carriers, the market share of the carriers, the more balanced, the better. And then we're looking at the history of the currency translations, assuming as in most cases, the currency are denominated in local currencies. And basically, the political and tax temperature and posture in those countries at the time. And then we take into -- we take all that into a mix and spend a fair amount of time deciding whether we're going to go into that opportunity or not. That's how we make the decision. And I'm pleased with the decisions that we made in the markets that we're in today. And we will be looking for other markets using the same kind of opportunistic financial criteria.

When I think about the international markets, one thing that SBA has been digesting over the last few years is just some consolidation-related churn. What inning are you in, in terms of getting to a point where a lot of these markets are in a more mature market structure position?

I think we're getting to late innings. I mean there's still a couple of our international markets where there are four operating carriers. I think the sweet spot is three. So we've seen a lot of consolidation, most recently, Brazil where four has gone to three, which we had commented on for quite some time, we thought would be a healthier atmosphere, and we continue to believe that. So I think we're late innings, Mike. But there's still an inning or two left.

And in Brazil, specifically, with Oi, can you unpack how that's going in terms of you mentioned, I think, on the earnings call, that there still may be some work to do to come to some new agreements on -- with some of the carriers that bought the wireless assets? And is there any implication for Oi's recent filing as it relates to SBA?

Yes. The -- two separate issues. The recent filing was their wireline assets where we do have -- where they do use wireless and some of the towers that we own there on or backhaul and support for their wireline operations. And we believe they'll continue to do that as long as they're pursuing a reorganization type structure as opposed to a liquidation. So that -- I think that will play itself out, and it will be -- it will not be a big issue. On the wireless side, that was the deal where Oi Wireless was sold off into the other three, TIM, Claro and Vivo. We've talked consistently and this hasn't changed where we believe the churn, the decommissioning churn that will come from network rationalization there will be $25 million to $30 million spread over a period of time. We increased that by $3 million when we did the GTS deal, which we knew was coming. So we've accelerated $10 million of that. We didn't increase the number, but we accelerated $10 million recognizing that when we did the deal with TIM, which gives us a lot of benefits of committed revenue stream, new business and longer tenure. And we will see if similar types of arrangements are desired by and able to be reached with our other customers.

And in terms of the opportunities to keep investing in the existing markets, can you share with us how SBA has been evaluating build-to-suits and the potential return opportunities from those?

Yes. We have always thought that there is no better investment than a well-executed build-to-suit. We do a lot of build-to-suits. We don't do more than what we are currently doing usually because we see that some of the financial terms that have crept into these other opportunities are not as good. So the new builds that we're seeking are going to be from day 1, very high single-digit or double-digit cash-on-cash returns and then the ability to move that up materially with the addition of a second tenant. Those are the kind of things we're looking for. And in the markets, some of these international markets where there is still a basic coverage need, we're going to see some good opportunities for them.

And historically, you've had an annual target of portfolio growth overall of 5% to 10%. So is that inclusive of both acquisition opportunities and the build-to-suits?

It does Yes. It does. Last year, we did 15%. So if you look at it over time, I think over the last 10 years, we've grown the portfolio by an average rate of about 13%.

And one question we're also asking all of our companies at this conference is what your #1 ESG priority is for 2023?

You may have seen that last year, we committed to a science-based target to reduce carbon footprint and emissions -- the way that process works is we committed to do that. And then we have until the fall of this year to actually come up with the targets and submit them to the organization, which ultimately will say yes or no. So that is our biggest initiative this year is to come up with finalize and submit for approval our science-based targets.

One question from our audience is, has your view on the appropriate amount of leverage changed with higher interest rates? And can you discuss your cost of debt and consider how you're considering paying down debt that would need to be refinanced at higher rates with free cash flow?

I would say, operationally, the business remains stronger than ever in terms of its ability to service debt and it should be appropriately levered. And our history has done that, and I think it's created a lot of value. But the other side of that is if you are purely focused on financial returns and creating the most value for your shareholders, the cost of debt obviously matters and where you use it and how you use it matters. So while we are looking for great portfolio growth opportunities or an accretive stock repurchase all of which are very attractive and portfolio growth will always be -- our for the right price is always our top priority because we think growing the company, growing the EBITDA line and the top line is very important. But you have an opportunity today for us to also pay down our revolver and lock in north of 6% returns by saving, that's the cost on our revolver today. So you may see us do that, and you should not mistake that for a change in our overall belief around the power of the right use of leverage to create value for stockholders. What it's doing today is creating a lot of capacity for us for the time, which we believe will come again when rates decline and we can -- we'll have even more capacity to source return leverage to our historical levels and use those proceeds to create a lot of value for our shareholders. So it's more of a tactical shift than it is a philosophical shift.

Question over here at my right.

Yes. I want to return for a second to the topic of MLAs versus a la carte. I'm just wondering, over the life of a deployment of new spectrum, would SBA see the same amount of leasing if you had an a la carte sort of approach to it versus a MLA. And I guess I was just wondering, is there a reason for the carriers to favor those under -- with MLAs more so than an ala carte -- or those with a la carte.

That's a great question. What that gets to is the engineering specificity by which they have to go to certain sites. And what we have found over time is all generational technologies, 1G, 2G, 3G, they all build on the prior. So with that understanding, we have always taken the position that at some point in time, we are going to get our appropriate share because of the specificity with which those networks are engineered.

So it's a matter -- so then it becomes a matter of timing?

Yes.

Would it -- if the carriers do slow the 5G deployment, would you expect them to I'm just wondering under the MLAs, are they agreed upon the deployment schedules, and therefore, maybe you might see a little more slowing in the near term, not longer term, but near term versus some of those with that MLAs? Or is it just -- yes.

I -- we haven't seen that. I mean, but as you're -- that's a theoretically possible result. Those -- the MLAs don't really -- they're not really -- they're structured over periods of time. So if a carrier were to choose to use an MLA, I mean they would -- the reason that there hasn't been a big variation is there's still a tremendous amount of capital that a carrier has to put into the deployed, the MLA doesn't -- it just solves the rent issue, but the much bigger cost for our customers and why MLAs don't really steer activity the way your question would suggest is they spend hundreds of thousands of dollars on the radio equipment.

So you mentioned earlier the interest in buying assets at the right price, are you seeing any closing of the gap between, I think, some of the observations previously between private and public markets that might get you closer to those considerations?

We are. We are seeing at closing. There is still a gap. It has not closed entirely. But we've seen that gap close, I think, most clearly by a number of failed processes particularly internationally, where there hasn't -- transactions have not occurred.

Another question that we're getting from our audience, and it raises the topic of the dividend payout strategy. They're asking about the payout ratio and where it can go on a 3-, 5-, 7-year basis, can you share with us how SBA approaches dividend policy and how to think about that evolution?

Yes. We started with a very low dividend. And we did that deliberately to maximize the length of time that will benefit from NOLs, but also to be able to offer our shareholders material growth year-over-year. And that's what we've done. This year, we grew the dividend 20% and off of our outlook, that's still only about 27% of AFFO. So we have many years left of being able to grow the dividend materially, perhaps even above what AFFO is going to grow that particular year, but still have relatively low. And I think certainly amongst the tower companies, the lowest payout ratio. And we kind of did that deliberately because we think it's an attractive opportunity for our shareholders.

Over the last few years, there's been a lot of focus on this mid-band 5G deployment cycle. And as you're thinking about the future on a multiyear period of time, how should investors set their compass in terms of the type of long-term -- that's not the end. So we still got time for the question. How should investors set their compass in terms of that direction of longer-term revenue growth and then how AFFO per share should perform relative to that revenue growth?

I don't want to get into specifics long term, but I'll tell you how the last 20, 25 years has turned. There is always more work to be done because the physical relationship between data, Internet, wireless traffic and the amount of equipment necessary to service that is really iron clad. So if you look at the growth in wireless over the years, you see a corresponding growth in the amount of network and equipment. I don't believe that ever breaks down. So what that presents for a company like ours is a long continued growth path. It will vary. It will vary based on where customer priorities are and where they want to spend their money and actually what their other perhaps conflicting uses of capital are. But as long as data continues to grow, if you want to provide similar levels of service, you have to have more equipment in the network. And that -- I mean, that's a very simplistic statement, but that's really been our guiding star over the last 25 years, and I don't see that changing.

Going back to that observation that private market valuations are different and presumably above public market valuations from what you're seeing in the tower category. Has that led the management team and the Board down a path of considering some creative options for SBA in terms of the way you could recycle some of your capital or consider joint ventures or just other ways of approaching investment that maybe SBA hasn't done historically?

Yes. We talk about that a lot because it's a correct way to think about what -- we would call that harvesting. We've not really done that for a variety of reasons. And they're mostly tax and contractual -- collateral reasons. But there are ways to work through all that. And that is something that, while we have not done it yet, I would definitely say that, that is not something you should assume we would never do. It's -- we generally agree with constant.

One other question before we get to our rapid fire. So a couple of years ago, you announced a deal for towers or I should say, site locations with PG&E and it was fairly unique. I'm curious, as you look at what you've been able to do with that transaction and you look at the landscape, are there other nontraditional ways of trying to grow your portfolio in the U.S. market.

There are, and we're constantly looking to uncover those and take advantage of opportunities. What we have come to find out, though, with the PG&E experience was that it was somewhat unique because they were coming out of bankruptcy. They had kind of wiped their regulatory slate clean and did not have a lot of tax issues that went along with selling those assets. A traditional utility company holds those types of towers in what's called their rate base. So if you were -- and if you sell rate base assets, particularly at a big profit, you can have the unintended consequence of reducing the rates to your customers. So the PG&E situation was somewhat unique. I don't know if it's going to replicate itself or not. We're very happy with the opportunity that we had because they're in Northern California, great locations, irreplaceable assets, but we'll keep looking.

So we'll jump into our rapid fire. Same-store NOI growth for your property sector overall, not your company, what would that be in 2024?

Is that gross or net?

Net growth, same-store NOI.

That would...

Like a tower gross profit growth rate for the category.

Yes. I would say mid mid- to upper mid-single digits.

Best real estate decisions? Real quick buy, sell, build, redevelop or hold?

Build and hold.

And finally, will your property sector have more same or fewer companies a year from now?

The same.

Jeff, thank you very much. Great to see you.

Thank you.