SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

We have seen across the Board a pullback in numbers. I don't think you will have this year, the same number of towers built in the United States that you had last year. And a number of these private, more build-to-suit focused companies have announced some layoffs. And if you look around the general wireless services industry, you'll see that things are a little bit slower on the new-build front. So whether it's cost of money or the cost of the actual construction, obviously, the combination of both that I think is impacting some things.

Are they starting to call and look for a lifeline from you?

There's -- the phone rings more. Yes. There's a little bit more conversation than there used to be.

Yes. And for your own cost of capital, in the past, you've raised secured debt and been within spitting distance of investment-grade rates. How should we think about that today? What are the banks telling you? And you've got this revolver that's pretty expensive. Anything about that over...

Yes. So within the last 12 months, the historic relationship between investment grade, say, BBB and A, ABS is flip-flopped. The ABS used to be cheaper. And today, it's not, it's maybe 50 basis points more expensive. So we're watching that carefully. I don't know, but we're watching as to whether that is a permanent change or whether things will, as rates peak and then begin to pull back down, whether that will reverse itself to its historic norm. But we're watching that carefully. And that's one of the reasons we could, if we decide that, that is more of a permanent change, we could decide to go more -- not more but in fact, investment grade. Paying down the revolver helps with that. It's kind of an easy position to be in today because it's accretive, obviously. It's a cost of debt that 6.5-ish percent is we may as well take that out. And by delevering and then building that capacity back up, we're very well positioned for what we do believe will happen. We just don't know when will be a peak in rates and then a decline. So for us, we think it's a smart no-risk way to build optionality and build flexibility for the future.

The only thing I don't understand about that is that if you believe that rates will roll over at some point, then your -- the cost of that revolver will come down as well. But your stock should go up. And so taking out effectively permanent capital -- by taking out equity today rather than taking out that revolver, this makes more sense to me at a certain price.

You're right, if you know that rates have peaked and are ready to begin to come down. I agree with what you're saying theoretically, but I don't know that today, rates have peaked and with the debt ceiling and all those things going on, it's a little bit, in my opinion, a little bit of a dicey time to increase leverage with a high-cost revolver that may be the cost is even going higher.

Right, not willing to take that bet?

Not today. But theoretically, I totally agree with you.

Okay. I'm going to switch to International, but I do want to -- we have a small enough room that if anybody wants to ask a question, if you raise your hand, I'd be happy to take it. So let's flip over and talk about some of the International markets, start with Brazil and the new government there, does that change at all the situation with the carriers? And it seems like they're going to do their thing regardless. But have you heard anything changing?

Have not. And we entered Brazil back in 2010 when Lula was president. So we have experience with him. Their situation today is a split government much like it is in the United States. There has been no discussions by either party down there of anything that would be materially adverse to the wireless carrier industry or the tower industry. So from our perspective, and obviously, we're watching it carefully, but I do feel like it's going to be business as usual. And business in Brazil is good. I mean they're working their way through the Oi consolidation. But in general, I think it has been the positive event that we had always long discussed that, that was a market that really was better rationalized to 3 carriers instead of 4. And things have stayed very busy down there, and I think we'll continue to be given the dynamics. They're even more of a wireless society than we are, if you can believe that. And they have less fiber and more and more people are relying on wireless as their source of broadband than in this country. So we like Brazil, and I don't think the Lula situation is going to be material.

And where is carrier activity, just compare where we are today versus say, 3 years ago?

In Brazil?

Yes.

Well, they had a big auction last year which is just getting off the ground. That was their 5G auction. So they're going to be behind the U.S. But that auction brought with it some coverage requirements that I don't know if it's every single part of Brazil, but certainly, the vast percentage of the population has to be fully covered with 5G service by 2029. So a lot of activity to go down there.

That's not that far away.

No.

And so they're just getting started in the 5G deployment, right?

Yes, just getting started.

And 4G was effectively fully rolled out?

No. Still not rolled out yet. And most of their development is not 5G stand-alone. So it requires the 4G base to build upon. So we look at Brazil as much like our history has been in this state, this country that while there are peaks and valleys of activity, there's always activity.

Yes. You own towers in a bunch of other Latin American markets as well. Anything getting better or worse than any of those is worth calling out?

They're not -- from a political or a country perspective, they're not any better or any worse. What they are most influenced by just like here in this country is how much money do the wireless carriers want to spend. That's really the driver for our industry across the world because, a, the demand is so great, the wireless consumption curves, traffic curves continue to climb at double-digit rates but it's all about how much investment do the carriers choose to make in any given year. So there are some countries where that's going -- in Latin America, where that's going greater than other countries, just as it always has been.

Okay. Shifting to Africa. You recently bought an asset in Tanzania. How has that going since you bought it and better or worse?

It's going a little bit better than expected because we've gotten in and have brought some operational expertise and some techniques that were not previously applied. So we really like where things are. It's a stable market. The government is very much pro-investment, very much pro-wireless because they believe that, that will be one of their main tools to help elevate the middle class. So the market and the conditions are good. We're learning the power business because it's a little bit different there than it has -- than it was in South Africa, which is mostly connected to the grid. But we're learning it well and coming up with some great solutions that the prior owner, which was the carrier, Airtel, who we have a great relationship with, they weren't using. So we're very happy with that investment and happy we made it.

So I ask you about power on the last conference call. And maybe talk about that, expand on what's going on in Tanzania versus what's happening in South Africa. And then you also mentioned that security is a requirement there as well. So talk about those opportunities for SBA.

Well, Tanzania is a market where a lower percentage of the towers are connected to the power grid. South Africa has the greatest percentage of connection to the power grid. Now having said that, South Africa is having some very well-publicized issues with its power grid and the blackouts and the rolling blackouts, and we can talk about that and how we're dealing with that. But in Tanzania, you're providing -- the strategy there is to extend the sites to the grid where you can. And then if not, you're provisioning diesel and generators. So it's a bit of a fuel and energy solution as much as it is the operation of the towers, which frankly is pretty much the same all the way around the world. So where security comes in, in Africa is a power solution is more than just connecting to the grid, it's batteries, it's rectifiers, it's equipment. And you have concerns about theft in some cases. So to really provide a power solution, you have to also provide a security solution. And that security solution typically involves hardening sites, hardening cabinets, making it more difficult for people to come in and take what they shouldn't be taking.

I think like a light housekeeper, you have higher guys to sit on the top and have his family.

And that's probably something we've looked at.

Yes. But companies like IHS are spending a lot of money on what they consider green power. What about batteries and solar and things like that in Tanzania rather than generators?

Yes, those are options as well. But when you collect the solar, you have to have a battery solution to make it all work and storage, and then you still have the transfer equipment. So those are the issues that really bring the security to bear. But sure, solar in Africa is going to be a great partial or in some cases, entire solution to the power issues.

And is that security and power -- is that best done by SBA? It's not really your core competence around the world. Is it better to sort of create a new company to do that? Or you want to do it yourself?

There are few companies that do it. And the -- I mean, much like we have done services on our own towers, if we can find a way to do that where we are the best ones doing it, in the most sensible manner with the best margins, and our customers want it. So we have to be creative and figure out what's best for them and what's best for us.

Okay. Are you open to more African expansion?

We are, under the right circumstances. I mean, the Tanzania and the South African experiences have been great for us. Don't know that we'll find another one like that. But if we do, we'd be very interested.

As you look around the world, we went through a period and probably because there was a lot of cheap capital going around where there was just a ton of carrier sales at high multiples. Haven't heard about many of those lately. What do you see in terms of carrier momentum in terms of getting those done?

I think you're seeing more of that in Asia. And I think you're seeing more of that in the Middle East. But you're not seeing a tremendous amount globally compared to what I would say we saw 3, 4 years ago. I do think the current financial conditions and cost of debt are weighing on that a little bit. But in general, the model of carriers selling their towers and the rest of their fixed infrastructure, that really has been universally adopted across the globe. And I think you'll continue to -- wherever you have carriers who don't or who haven't sold their assets, they're either considering it or they will consider it.

You have a small business in the Philippines. Are Asia or the Middle East, otherwise interesting?

We like the Philippines. What happened in the Philippines is that there were several large -- there's 2 main carriers there and there were several large sales that had some BTS components. We did not find the sale terms attractive. So we did not participate in those, and now we're strictly a build-to-suit company there but we think there may be some consolidation. There's a number of small tower companies in the Philippines, and it's a market that we like. We'll continue to stay and grow in, but it will be a different kind of growth probably than initially could have been. So the Middle East, I mean, we look at everything, but we've not seen anything there that we've found particularly attractive.

Okay. We've talked sort of about a long-term AFFO per share growth for the company of high single or I think Brendan mentioned last week, maybe low double digits in some years. Do you think that that's a sustainable growth rate given maybe the higher cost of capital world, a little slower, fewer carriers going forward. Is that a growth rate that can continue?

If you look at our last results and you equalize just the interest rate, the interest expense for the year ago quarter, Q1, we would have grown, I think, 11%, 12%. So we do have the ability to -- when rates are stable, obviously, when they're dropping, but when they're stable, to achieve those kinds of numbers, I think when it becomes very difficult is when we are in an increasing rate environment, which is what we've seen over the last year. But if you have a -- even at a higher level of interest rates once you get that base as long as it's not increasing, and in our case, ex the Sprint churn years of 2025 and 2026, there's no reason why given the operating leverage in the business model, that we shouldn't be able to grow at high single digit, low double-digit AFFO per share. It's just -- it's very hard to do that in an increasing interest rate environment.

Right. We're running out of time. So last question, I'll probably get the chance to ask you on stage. Just going back over your sort of 20-year career, as you look at SBA over the next generation of leadership, how do you think about the potential for the company from here? Should this be a sort of an independent public company continuing to grow? Does it need to be part of a bigger company? How do you think about this?

The beauty of the -- it harkens back to when we took SBA public, and we got a lot of questions about, well, why do we need you, because the people thought about the commodity-type of business model, which, of course, we've proven that the tower model is not. So we don't need to do anything to be larger in terms of joining with someone else. We certainly are interested in getting larger on our own because there are certain efficiencies that come along with that. But we're -- we've always run the business, Phil, as if we're going to be running it forever as an independent public company. That hasn't changed. I don't think it should change because I don't think that's the way to run a company to rely on something else that's going to be outside your control. But we'll see what happens. I think the tower industry has proven itself out to be long-standing, long-tenured. One of the things that I will look back on with great pride and great enjoyment is I got -- I had a ringside seat to the development of the independent tower business model. And I mean way back when, they didn't even know where to put us in the research ranks and the capital markets didn't quite know what to make of us and how to value us and evaluate us. And we've actually fully developed that and brought that along to where the business model now is global, and I'm sure the aggregate valuation is over $1 trillion. So I think the industry is going to be here for a long, long time, and I say the same thing about SBA.

Yes. Excellent. We end it. Jeff, thanks very much.

Great. Thank you.