SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

I think it's probably a mix of both, actually. Ultimately at its simplest term, quality of the network will be defined on how well it is -- whatever it is you're trying to accomplish work on that network. So what gets you there the easiest. To some degree, I can see certain scenarios and it's been the case in the past where a concentration of towers or towers position in the right places with the right antennas and the right frequencies deployed on those structures gets you what you need in order to accomplish it. I think as technology evolves and the needs for reduced latency and faster network speeds and things that we probably haven't even considered yet start to come into play. There will be other factors that matter too. And I have no doubt that involving the cloud more in these dynamics will make a big difference. So I guess I'm punting a little bit, but I think it's going to be a mix of all of those things to optimize whatever the end uses that you're trying to solve for.

Question on inflation. Obviously, we all hope that it ticks back down to more normal levels. If it doesn't, if kind of mid-single-digit type inflation comes entrenched as the new normal. What would need to happen for your escalators to get restructured to levels that are more commensurate with that or change to CPI in the U.S. or is that even feasible given the way that your contracts are structured?

Yes. It would be unlikely to be able to happen today. We have most of our contracts have been in place for a very long time. And over that long time in many cases, we've had escalators that have exceeded inflation during that window of time. So you gained from the good times and maybe you give up a little bit in the bad times but it would be hard for us to change that. We're talking about the U.S. specifically because internationally, most of our leases are actually tied to inflationary indexes in those markets. So that's a different story. However, from a risk standpoint, it's not a major risk, I don't believe, because on the expense side, we have mostly fixed expenses. The largest direct expense we have is our ground leases. Those also have fixed escalators in them on average at a lower rate than the tenant leases. And so in terms of a match, we're in a pretty good spot. And we do have the opportunity to adjust pricing, obviously, on any new leasing that we do, new leases, new amendments. So we're really just talking about escalators on the existing base.

Okay. And with respect to new business, I believe you've articulated in the past that you typically have agreements call it master price list or what not, standard turns with most of your customers. Would it basically have to that would kind of come up for expiration and that would be the time that you could start to reset it for new business.

Yes, in those particular cases where we have agreed to some sort of set pricing on a per equipment basis. Obviously, that only lasts for a period of time and that would be revisited at the end of that.

Okay. Let's talk a bit about your international business. There's a lot going on there. Brazil is your biggest international market you've got some churn in the pipeline related to oil that you've talked about, so it shouldn't surprise anyone. I thought it was interesting that you proactively entered into a master lease agreement with Tim to address that churn versus in the U.S. where at least the realized outcomes of any discussions have been that you kind of let things roll off as they were going to roll off. I guess was there a reason to be more proactive on this front? Where you wanted to address it upfront?

Yes. I don't know that we were necessarily more proactive perhaps they were more proactive in their desire to.

This was customer-driven.

Yes. I mean to some degree, we typically don't go track our customers down to see if we can let them churn out of leases early. So usually, the initial request would come from them. And then it's just a matter of what's the right balance. Obviously, we're giving something up by allowing them to get out earlier than they're contractually entitled to. But if we can secure a longer-term relationship, a certain amount of business commitments and other things around the edges that make sense, then that's a good deal. And we'd be comfortable doing that here. We haven't necessarily gone the route of saying, we're not going to do it in the U.S. That's not really been the approach. It's actually not really been a topic that's been raised with us by our customer. And if they don't need it, it's not really something for us to push. It's really more in need that they have.

Okay. And then, I guess, by extension, to the extent you've suggested there may be additional deals in Brazil to cover the oil churn, it's because those customers have reached out to you and are interested in doing something along those lines.

Yes. But ultimately, there will either be a deal because both sides found it to be worthwhile, obviously, or there may not be. So just because they ask doesn't mean that we necessarily end up in a transaction. It just means that we have those discussions and figure out if there's something we can settle on that actually gets them what they need and also is additive for our shareholders as well.

Okay. You've said for many years with respect to Oi that if the market went from 4 to 3, it would be your view that it's probably a stronger market over time and probably better for SBA. Having had Oi actually gone through the acquisition process and sort of better understanding your customers' initial plans, are you more confident in that statement, equally confident.

Yes. I'm still confident in that statement. I think it's just a matter of time. We're in the period of time where their focus is on the consolidation of those networks and trying to gain synergies and figure out how to operate and put them together, right? So this isn't the window of time where you necessarily would see the benefits of that. What we're really talking about is the longer-term environment because we had a situation there where there were 4 relatively equally spread in terms of market share carriers, which seems good on the surface, but one of them was in a much weaker financial position and just wasn't able to compete effectively. And so you just didn't have the dynamic that you really needed. What we're hoping for and expecting frankly, is that the competition will now be much more driven by network quality. And any time that's the case, we benefit from that because the best way to compete on network quality is to obviously invest in your network, and we're a beneficiary. So I do think that, that will be the case long term and our conversations with the existing incumbents suggest that they have a lot to do. There are recent 5G auctions in Brazil. We're starting to see some applications around that. And so I think the future will be very strong with those 3 carriers. We just need to get through this window right now that we're in.

Does 3 kind of strike is the sweet spot for the number of carriers, the typical market and support?

I think in most markets, that's probably right. It's interesting in the U.S. I don't know if that's necessarily the case, but Brazil has roughly 2/3 of the population that the U.S. does. And we were sort of at 3 carriers, 3.5 here with a new one trying to come along. How could Brazil be at 4. So that was part of the thinking and analysis on the previous comments we were talking about. I think as we look at most markets, that's usually the right balance. In most places where we see more than 3, there's usually somebody who's really struggling there inevitably, that probably doesn't last long term. So that's a long way of saying, yes. Okay. Well, it was a good answer.

It has been a few years since you entered South Africa. You had Tanzania under your umbrella for 1.5 years or so. Recognizing that these are 2 very different markets that happen to be on the same continent. What have your experiences suggested in terms of the appeal of looking at other African markets into which you might expand?

Yes. I think we look at each market kind of on its own merits and the opportunity that we're looking at. In the case of South Africa, it was really a new build greenfield opportunity, the vast majority of sites we have there we built. And so we saw an opportunity a real need from the carriers there. We had some relationships locally, where there were some good opportunities for new builds and it has worked out really, really well. Tanzania was a totally different animal in the sense that the vast majority of sites we bought from a carrier that was already in relationship with somebody else that we partnered with who had kind of a leg up there. So it gave us an opportunity, I think, to do a deal that we might not otherwise have been able to secure without that. And so those were 2 different ways of getting in and they are 2 different markets that have different issues. But I guess if you see opportunities that make sense in our, we believe, going to be very value creating, we are comfortable going into other markets. However, if we don't see that, we're also comfortable staying in the markets that we're in and just leaving it at that. So it's not really a target on Africa or a target on any place else. It's really identifying the specific opportunity and an environment in that market that we think is conducive to our business.

Okay. Okay. In South Africa, I think one of your peers has had some issues with Cell C as a customer. Did you do much business with them?

We have some Cell C leases. It's not nearly as much as they do they bought their towers. So they had a much bigger exposure there. And we've actually had no real -- no issues to date. So I don't foresee it being too material. It's a very small percentage of our overall international revenue as it is. But at this point, they're operating and paying their bills. So no issues.

Okay. Okay. Good. Now as you alluded to in South Africa, you do a lot of new construction outside of the U.S., usually a few hundred towers a year. Are there opportunities to push harder there? Or do you think what you're doing today is kind of effectively the maximum of what you could do in your markets and with meeting your underwriting requirements.

Well, yes, that's really the key. We can definitely do more. There are opportunities to build towers all over the place. It's really just being very specific and disciplined about the opportunity, the quality of the sites that we're building. So I think we can do more in some markets, we've been very successful in doing a lot of builds. Others, we've actually backed off because we've seen certain developments in the market that maybe we haven't found appealing or attractive in terms of terms or the types of sites that carriers are willing to give out to the extent they're new builds. We definitely like to do strategic builds if we see a location that's a high-quality location where there's a need, where we can get out ahead of it. We'll do that in some cases. But that -- the quantity of that is limited just by the nature of what it requires to do those. The easy way to do more is to get new build or I'm sorry, build the suit, awards from existing carriers, but the devil is in the details on those deals and what are the specifics around the terms and are we comfortable with that? And as long as we can be comfortable with it, yes, we can do more. I think we're very good at it. I think it's just a matter of being balanced and making sure that it's not just for tower count, it's for returns.

Right. Right. Now I want to drill into a comment you made about perhaps the terms eroding in certain markets, so you backed off. If I think about the U.S., the new build environment in the U.S. over time, yields got compressed dramatically. I think people realized it was a good business, carriers got smarter and so on. In general, do you find that your risk-adjusted yields on new builds overseas are remaining relatively consistent? Or has there been any compression there?

I guess they have, to some degree, the issue is really probably more on the cost side. The cost of building towers domestically as well, maybe even more so, has gone up in a lot of these places. And so you can't necessarily look at the same leasing revenue arrangements, they don't provide the same return because the costs are just so much higher. So putting that aside, where we're able to do it, we're still targeting similar levels of return as a floating level relative to our cost of capital. So given today's environment, that generally speaking is going higher. That's also a factor, I think and why maybe you've seen a little bit less in terms of the number of builds we've done.

Okay. Okay. That's great. American Mobile and split off its towers outside of Mexico into a separate vehicle. I think they're taking that public at some point if they haven't already and I think Millicom is splitting off its towers in Central America into a separate business. Do you find that these kind of quasi-independent tower companies matter from a competitive perspective?

Well, they do ultimately matter because it's our customers. We talked about there are limited number of customers in each market. And obviously, if your customers in the tower business, that sort of changes the dynamic a little bit, I think though it's been interesting. We found that in many cases, the actual carrier side of those operations sometimes prefers to go with companies like ours as opposed to those companies, but you have to assume over time that whatever those issues are that they get worked out. And so it's important for us to make sure that, again, the towers that we're adding, whether through acquisition or new build are focused in areas where we have hopefully the only game in town. So that doesn't really matter too much. For the most part, you're talking about sites that they're already on carriers. And a lot of times, the other carriers in the market aren't that inclined to go on their competitors' sites so I think that generally works to our advantage. But obviously, if they're nearby sites, that's when it's a problem. You don't want to have competitive sites in the same area. It's not good for us and it's not good for them.

Edge data centers have been a topic of interest and probably less so today than maybe a year or so ago. I think people have come to realize it's going to be a while before that becomes a phenomenon, if it actually develops that way. You've talked about having some success landing fiber regeneration points on your site. So not an edge use case as people may have imagined it, but still incremental revenue. Are these deployments being driven by like fiber-to-the-home construction? Is it people building new enterprises? What's behind that?

I would say most of it is enterprise fiber and or long-haul regeneration points. So there may be some fiber to the home. I think there actually are a couple. There's actually some that was fiber in support of DISH I believe. So there's a variety of uses, but it's really a location driven phenomenon. It's not really the same thing as an edge data center, obviously, but it is an alternative use. We set up a structure at the site and we have a different customer base that's coming in, and it actually helps to some degree in making the site stickier sometimes.

Do you basically just put down a concrete pad and you're done? Or is there more to it than that?

A little more than that. Usually, a lot of times there are shelters. The shelters sometimes are re-purposed old shelters maybe from a legacy carrier, like a Sprint shelter that kind of thing. And a lot of times, there's a generator needed as well, but that's usually the extent of it. So there is a capital investment associated with it, but the returns match up very well with our capital investment because the biggest thing is we've already got the locations, we already have the land. It's already typically along the fiber run for the company that we're talking about. And so it's well suited for that. It's a natural fit.

Okay. As it relates to edge deployments that might fit the longer-term hopes and aspirations, tying together fiber with the actual edge of the wireless network. Any sort of green shoots or expressions of interest from the carriers or cloud companies or CDNs or whoever might ultimately be the customer there that you've observed.

Very minimal. Yes. There's been some -- we've actually had a little bit of success even internationally, where some of the C-RAN developments are benefited by having like an edge facility, but that's very early stages, and the carriers have indicated interest internationally, domestically, not really. Our edge facilities that we have at tower sites today are primarily in service of some of local enterprise. Operator is not really about the wireless interconnection. That's really the key to whether this is actually going to take off at some point, having to compute there at the tower site so that it can be directly interconnecting into the wireless network. How important is that, right? If we reach a point where that is important, then we're obviously well positioned because we have those edge locations, we already have it. But today, I don't think we have seen enough demonstrated to suggest that, that's going to be material at least in the short term. It may be long term. There's certainly promise and there's people who absolutely believe it, but it's going to be a little while.

Okay. Let's talk about the balance sheet a bit. You typically target around 7x net debt-to-EBITDA. You've had that in place for some time now. You've got some known churn events coming up with Sprint and with Hawaii. Are you thinking of entering those years with leverage, call it slightly below your target, such that post churn, you guide up a bit? Or do you think it's small enough that you don't need to make sort of an in-like course correction like that?

Yes. I don't think the churn is going to drive our leverage higher by itself because I believe there will be enough growth that at a minimum, it would equal that churn. And so I don't expect us to go backwards. So it's -- we're not going to -- and we're constantly generating cash. So we would naturally be -- even through those periods, we'll naturally be de-levering. The pace might be a little bit slower than it is without the churn, but it's still on a de-leveraging course in terms of our natural trajectory. So I think as we lead into it, it's possible that our leverage will be lower. It wouldn't be because of that reason necessarily. It would be more just the actual relationship between rates, which are obviously much higher. And the return opportunities of the incremental investments that we can make with that extra capital that's created through that carrying that higher leverage. We haven't necessarily seen a full adjustment in that, that we would like to see and I expect to see ultimately. And so as a result, the better thing to do is, frankly, to delever. And that de-levering is not necessarily an objective to say, "Oh, I want to be lower levered. " I want to be lower levered if that's the best choice. But if we are lower levered that creates flexibility for us in terms of the ability frankly to lever back up. If we see things turn or we see an opportunity to invest in. That's not a promise. That's what's going to happen. That's just a flexible option that we retain, I think, by letting leverage drift down.

Okay. Well, I want to return to that in a sec. Maybe another question on leverage. On the last earnings call, you guys talked about thinking about going to investment grade if rates stay elevated. And maybe it was just my interpretation, but it seemed like it was something you were giving more thought to than perhaps you had historically?

Well I think -- I don't know if we're giving more thought to it because it's a goal -- it is not really a goal. I think we're giving more thought to it because frankly, our ratings are being increased by the rating agencies. So if you look at S&P, we're only one notch below investment grade as it is and that's without changing anything about how we operate our leverage targets, et cetera. At the same time, you have this dynamic that I was just describing a moment ago in terms of our leverage trending down naturally. And if that continues to be the case, we're actually going to be very quickly at a level where under the rating agency's guidance, we would be eligible to be investment grade. I think the primary thing that we'll be lacking is our commitment to be there right? And so the ability to actually do it is not that hard if we want to, but it's one of those things that once you do it, you kind of made that commitment, right? You're going back. So I don't think we're quite ready to do that just yet. But at some point, if things stay similar to, frankly, how they are now, which is a higher interest rate environment, a more challenging environment in terms of deploying capital at accretive levels. Then yes, I think we would, that's where we would go.

What sort of borrowing cost savings do you think you could get if you went that path?

Well, historically, it hasn't been that much of a difference. The main reason or one of the primary reasons we've been levered higher and foregone being investment grade is that we could use secured financing, particularly in the securitization market and have a very similar cost of debt to what our investment-grade peers had. So why not have the additional leverage? If it was very powerful and in the equity value that it created. I think in today's environment, it's a little bit -- it's not quite as close as it was before. I think there is a little bit more of a benefit, although the absolute rates for that are still much higher than our existing debt instruments. So it's hard to swallow that to some degree. But I do think the difference is a little bit greater. And so that's another factor in determining at what point is it right to move in that direction. But there are other elements that we have to consider, mix of secured debt and unsecured debt, and there's other things that would be expected, I think over time if we went that way. But for now, we're just going to let things happen naturally and then we'll make a decision if it's the right thing to do at the time.

Okay. Okay. Well, let's go back to the capital allocation point. You've mentioned that you see fewer assets for sale and what's out there is generally less attractively priced. What do you think is the most -- the driver that's going to be -- that's going to shake stuff loose?

I think the cost of capital flowing through and affecting other buyers, but also a resetting of expectations by sellers. We think we're in the first part of that. I think buyers are starting to say, wait a second, I think -- and in part, that's because they have already deployed a lot of the capital is sitting on their balance sheet before. I think we didn't really see the immediate reaction because they were using somewhat yesterday's money and incentive to get it deployed. And we're talking about pension funds and insurance funds and others, infrastructure funds, et cetera, private equity, all these folks who had maybe different motivations. Well, now that's starting to catch up and I think there's a little bit of a wow the cost of this money is not coming down. It's going up for us. And therefore, we need to pause a little bit but sellers haven't necessarily adjusted to that. So I've seen a lot of deals, particularly internationally that have come to market and haven't necessarily gone for lower prices, but they may be paused or not happened at all. And I think there's been that breakdown. And if we continue to see that trend move in that direction, then I think it brings more rationality to the process and gives us more of an opportunity than we've seen in the last couple of years.

The deals that you have closed over the past couple of years, do you feel like you've gotten risk-adjusted returns, risk-adjusted expected returns, risk-adjusted quality of those assets equal to your going in portfolio?

Yes. Generally speaking, yes. Obviously, each dynamic is different. So if you buy towers as we did in Tanzania, there's a risk adjustment to that, to your point. And obviously, different people can have different views on what that should be. So how does that compare to a U.S. portfolio of towers. Well, the U.S. portfolio of towers is much better because of the broader dynamics here in the U.S. But if you pay 1/3 of what they're valued in the U.S., is that enough? And I think yes, it is because it's still towers. We know how to operate them. We're still doing it effectively. We have long-term lease agreements. We have good relationships with the carriers down there. And we have no issues. In fact, we have good relationships with the government, too. So I think it's a huge win. And if none of those risks come to the reality, it's going to outperform by far the U.S. investment. So I do think that the answer is yes. But obviously, some of that is in the eye of the beholder.

One last question before we close on AFFO per share growth. So obviously, the next several years are likely to be a bit choppier than normal given some of the Sprint churn, a churn, refinancing as the interest rates get flow through. Again, if we set those items aside and try to think about your underlying AFFO per share growth outlook, is 10% plus or minus, still kind of the bogey we should be thinking about or as the business matures, do you think that becomes more challenging to achieve?

Yes. I think naturally, over time, it obviously has to come down because we're just bigger, more mature, all of those things. So I would -- I mean long term, I would say high single digits is more of an appropriate number. I do think there will be periods where we can achieve double digits, putting aside the interests in particular, that who knows. But I do think long term, though, we can sustain a high single-digit growth rate in AFFO per share, barring temporary movements up or down in interest rates in particular.

Okay. Well, great. Brendan, thanks so much for joining us.

Absolutely. Thank you for having me. Thanks.