SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us. I'm Nick Del Deo with MoffettNathanson. And I'm thrilled to be joined by Marc Montagner, the CFO of SBA Communications. Thanks for joining us, Marc.

Thank you for having me.

Yes. You're relatively new to SBA. So I think a lot of people in the audience probably don't know you well. But you've been involved in the telecommunications industry for many, many years in a host of different roles. You've been a senior executive, an investment banker, a director on a number of Boards, including one company we're hosting tomorrow. You've been involved with wireless carriers, spectrum owners, wireline operators, satellite companies and your -- most recently a SaaS provider. So I guess all things considered, what attracted you to the opportunity at SBA and talents and skills, you think you bring to bear that are most relevant for SBA at this point in its history?

So I think the first thing about SBA, I think it's digital infrastructure supporting the wireless industry. And I think, I was a banker here to the wireless industry in the '90s, worked at Nextel Communications, Sprint Nextel. And if you look at the growth in wireless in the last 30 years, it has been unbelievable, right? And I think the world is going wireless, it started with voice and text and data, and now it's video or if you have teenage girls in your family, you can only imagine how much tonnage is going on wireless network today, and I think the trend is going to keep going. I think the beauty of SBA is like selling pick and shovel to gold diggers. You have this long-term asset, 30-year-plus useful life where the carriers are not captive customers, but the switching cost are very high. You have -- you pay for fiber going to the site, you lease a cabinet at the bottom of the site, you put your routers there, you build your fiber going up the site, you put your equipment there. And the key to being successful is really to be in the dialogue providing a good service and being there to support them when they deploy a new band of spectrum, they need more coverage, they need more capacity. So I think it's a unique opportunity to participate at a very low risk in a growth of -- just the wireless industry.

Okay. And obviously, your experience is all tied into that. You've seen the cycles play out.

I've seen the cycle plan. Listen, from rolling out 2G, 3G, 4G, 5G, and it's going to keep growing 6G. I mean what I was at Nextel, I'll give you an example, we bought the 2.5 spectrum from WorldCom in bankruptcy. That spectrum was awarded by the [ Kennedy ] Administration for fixed wireless -- for fixed cable -- for wireless cable services, 24 channels. Eventually, they all went bankrupt when the cable operators put the coax into the ground. And that was -- WorldCom bought it, spent $4 billion trying to do fixed wireless Internet access, went bankrupt. We bought it for [indiscernible]. Went to FCC to change the use from basically one-way video to 2-way voice data and video and eventually sold the company to Sprint and Sprint was bought by T-Mobile, and now T-Mobile is deployed to that 5 and look at the cycle from the 60s to today. But any band of spectrum out there is going to be deployed because you don't make spectrum anymore, everyone will be scrambling for spectrum. And it's a step function. You're a carrier, you get a new band of spectrum. You build coverage, then you add capacity, then you do fill-ins and eventually, it's too expensive to do spectrum splitting or cell splitting, and you go after a new band. So it's really the step function. I think now we're in a maybe quiet period because if you really look, you go back -- when I started at SBA, going back 15 years, take the big 3 wireless operators, CapEx as a percentage of revenue. Where does it run historically? And on Nextel, we're always running above 20%. And that number has not changed. You look at the last 15 years, it's about 20% of revenue. 2022, 2023, we're running much higher, 23%, 24%. Because they rolled out 5G. And today, about, I think, 50% of our sites have been upgraded to 5G. So there's still a long way to go on 5G deployment, but they got 8 to 10x capacity increase by rolling out 5G. Now they have plenty of extra capacity that needs to be filled up. And -- but their industry is still growing. The big 3 added about 850,000 postpaid net add in the first quarter. The industry added almost 900,000 fixed wireless access customers. Each one of these fixed wireless access customers is using 15x to 20x more capacity than a handset. And if you add another 4 million fixed wireless customers this year eventually that free capacity, you got by rolling out 5G is going to be used and the carriers are going to have to finish the 5G deployment. So I think where we're sitting, we have a great relationship with our carriers. We're in the business of supporting our carriers, and we're going to be there to capitalize on the spending.

That's -- it's a great perspective. And I want to turn back to leasing in a bit. But capital allocation and the balance sheet seem to be top of mind for many investors today. And obviously, you play a key role in that front as CFO. So I'd imagine that the Board wouldn't have hired you, if your views were dramatically different than from what SBA had embraced in the decades prior. But that doesn't mean that you don't bring fresh perspectives. So maybe can you elaborate a little bit on your capital allocation and capital structure philosophies and where your views may be a bit different or additive to what the company has done historically.

Now obviously, during my internal process, capital allocation discussion were front and center. And what attracted me to the SBA management team is that, first of all, it's a very stable team. Everyone there has been there for about 25 plus year. And historically, this team has been extremely disciplined in terms of capital allocation. And created a lot of value by allocating capital wisely. And so looking at our company today and also public numbers, they were all in our guidance. It's about $1.9 billion of EBITDA for 2024. Cash interest expense is about $360 million, CapEx discretionary and non-discretionary CapEx, it's about $325 million (sic) [ $335 million ]. You have another about $40 million of cash taxes, all international cash taxes. And a dividend of [ $425 million. ] So you're left about $750 million, more or less, of capital to be allocated. Last year $100 million went to share buyback, about $600 million to paying back debt and another $100 million to M&A. This year, so far, we've done about $200 million of share buyback. We believe that this is going to be very accretive to FFO per share in the long term. Given the fact that interest rates may be higher for longer I think for the rest of the year, we are probably going to index towards paying down debt because our average cost of debt is about 3.1% today. And raising new debt or refinancing debt in the ABS market will probably be at [ around 5% ] in 3 quarters. So it is very accretive to AFFO per share to delever at this stage.

Okay. I guess can you expand on that a little bit? What's the process you use to make that sort of debt paydown versus share repurchase decision? Is it as simple as what will help your AFFO the most over the coming years? Or is it deeper than that?

I think it's more not [ at ] the science, but I think we're taking a long-term view and trying to obviously don't want too much risk but create value. And the #1 priority is to grow AFFO per share over the long term. So there's a balance, and there's always new input, but there's always 3 levers, where one is M&A, if the right M&A opportunities, they're at the right price and it's accretive to FFO and AFFO per share, we're not going to be shy about executing M&A. And if the M&A opportunity is not there -- M&A allow us to grow the company and be accretive to FFO and AFFO per share is always going to be the best outcome and help us extend our footprint, our company and create value for our shareholders, absent attractive M&A at the right price, it's going to be a combination of share buyback or paying down debt.

Okay. Okay. Now you've -- you're the only one of the big 3 public tower companies that is not rated investment grade. I think historically, the company's view has been that the flexibility that you have to go higher than what an IG rate would require is more beneficial than whatever interest savings you might get. But it seems like the team has been grappling with that a little bit more recently. I guess, how are you thinking about the benefits and the cost of committing to an IG rating versus maintaining the flexibility that you have without it?

Right. And to me, the key driver is not really the leverage, it's what are your cash interest expenses, right? Because right now, it's about, call it, $360 million, given our 6.5x of leverage. Cost of debt is about 3%. Now we're going to have to refinance some of that debt at a higher rate. So I think we'd like to keep interest rate -- cash interest payment as close as possible to that $360 million, $365 million. And so we're probably going to index towards paying down debt. But that being said, being investment grade, you need 2 things. You need a leverage that's slightly lower to where we are, but also commitment to stay investment grade. We are not willing to make that commitment because there may be attractive M&A opportunities that we see in the market, and we want to use our capital. The equity market may be disruptive, and we want to basically have extra flexibility to buy back our shares. And otherwise, we just pay down debt.

Okay. So that flexibility remains very...

The flexibility is #1 at this time.

Okay. And I guess a question I oftentimes get relates to your debt maturity profile relative to your peers as well. Your average maturity tends to be shorter than what you see at others. And sometimes people observe that it's perhaps a little -- given the long asset lives you have and the contracts you have, maybe -- it may make sense to extend that debt maturity profile. So how do you think about that issue?

To me, the real key driver is having access to capital, having liquidity and average -- having the lowest cost of debt possible. So we just refinanced our term loan, extended the maturity to 2031. Extending the -- increase the size of our revolver to $2 billion. It's going to be [ end up ] by the third quarter of this year. I think the drawn balance was $195 million at the end of the quarter. That's a $2 billion facility, maturity of January 2029. We have very few upcoming maturity, $620 million of an ABS in October, another $1.2 billion in January of ABS. And about $7 billion out of our $12 billion of debt is in the ABS market because it's secure and it allows us to really lower the cost of debt. So the average maturity is -- I mean due in ABS, it's a 5-year security. So given our exposure to the ABS market, that's the reason we probably have a 4-year maturity across basically our balance sheet. But to me, the maturity is not the key driver. I think it's having liquidity. We have a $2 billion revolver we could tap, access to capital. The ABS market is wide open. We could tap the ABS market. We could use our revolver to address any maturity coming up in case the rates that are being offered to us are not attractive. So having access to capital, having liquidity is the key driver.

Okay. Now I thought -- so obviously, Brendan Cavanagh became CFO -- CEO earlier this year, long time CFO. One of his initiatives has been to kind of double down on the idea of having a portfolio of high-quality assets and producing stable, growing results. On your earnings call a couple of weeks ago, Brendan emphasized that his strong preference would be to add to or otherwise enhance assets that may not currently fit that criteria rather than dispose them. Do you feel like that sort of path is available for most of the markets or assets that, that, again, kind of might fall into that bucket, that they're not performing at the standard you want?

Yes. So we operate in about 14 international market. Overall, our biggest one is Brazil, where very significant scale. And then we have some markets where we are subscale. All of these markets are free cash flow positive. And then the question -- I think the #1 priority would be to get scale in order to have more leverage and a better dialogue with some of the operators in the market we're subscale. If there's a way to get scale, that's the preferred strategy, if there's no way to get to being #1, #2, #3 or having a significant scale, obviously, we would rather monetize. But we would only monetize at a very attractive multiple. Those markets are free cash flow positive. So we don't have -- we don't feel like we need to exit those markets. We'll just be very optimistic.

Okay. Okay. Now I know -- if I remember correctly, the team used to talk about kind of a 30% portfolio limit on the share of assets from non-USD generating towers. Is that still the case? Or are you thinking of adjusting that ratio in light of the focus on stability?

Right now, I think about 70% of our leasing revenue or U.S. dollar denominated about 80% of our EBITDA are U.S. dollar denominated. All of our Central American market or U.S.-based contract. And we may tweak that up on the upside, but I think 25% to 35% -- I don't think there's a hard limit, but we are comfortable to where we are now. We may increase it a little bit. But I think this will be a preference to stay to a U.S. denominated market.

Okay. Okay. Now Marc, you just talked a little bit about the benefits of scale and the importance of scale. I think most investors probably understand that scale matters in tower leasing since you can leverage a lot of your overhead. There's a lot of operating leverage there. Most probably also understand the bigger tower co.'s are probably more likely to win build-to-suit deals from carriers if those arise. But I oftentimes get questions around the idea that if you have a handful of great locations that carriers need and for which they don't have alternatives. You should still be in a pretty strong negotiating position even if your portfolio is smaller than others. So maybe can you expand a bit more on why scale is so important and why the idea of having a smaller number of great locations may not be as -- as defined in an attribute as some folks may think.

I think we need both. And I think we're lucky and fortunate that we have both, but scale is important because if you really look at -- especially in the U.S., the 3 large operators, we have MLAs now in place. And I think if you're technical team working for a carrier and have been on the other side at NEXTEL, you always want to do it fast and do it cheaply. So if you have an MLA with an operator, you have been vetted by the legal team, you have been vetted by the finance team. There's a rate card. You have a job to do, build capacity, build coverage. You go through the preferred vendor, and we want to make sure we get the call. We have a fantastic reputation in terms of great job for the carrier, delivering fast, delivering good quality of work, having high-quality site in great location. So you want to be on that first-call list when they look at capacity and coverage. And I think to that extent, the industry has changed. I mean 10 years ago, you had MetroPCS, you had Leap, you had Nextel Partners, the Sprint affiliate, UScellular, you had a multitude of carriers. You're in an environment with 3 carriers now, 3 large tower companies. It's an oligopoly. And I think you want to have a seat at the table, being a preferred supplier was very massive. Look at the market cap, I mean, $150 billion of Verizon and AT&T, $200 billion for T-Mobile. Those are your customers, you want to support your customer, you want to make it easy for them to work with you, and I think that's where we're going.

Okay. Okay. That makes sense. So let's go back to the leasing outlook. And you talked about this a little bit in your opening remarks, but obviously, domestic leasing has slowed quite noticeably over the past year or so. The carriers kind of wrapped up their initial phases of their 5G deployments and are kind of moving towards what seems like a longer tail of infill and more rural sites. Do you think we're looking at a multiyear period of subdued leasing? Or is there a reasonable case to be made that leasing moves up to some higher level of activity in the next couple of years? And I guess if you believe that's plausible, what do you think the most likely kind of stimulant is to get us there?

I know it's going to come back. I just don't know when. We haven't seen an inflection point. I think the anecdote obviously, there's more dialogue, there's more application. But -- it's not an application, it's not really a good metric. It's very, I think, misleading metric because it could be an application to swap a piece of equipment, it could be an application to add a piece of equipment you don't know if it's going to generate 0 or $100 per site, or $1,000 per site. All we see is more dialogue, more activity, but we haven't seen an inflection point in terms of more leases being signed. It's going to come. I just -- I don't have a crystal ball, so I can't tell you when.

Okay. Do you think it's -- I mean, in terms of what might prompt it to happen it's just the passage of time and networks get more loaded? Or do you think there's something else that might...

I think it's a passage of time, right? Look, CapEx as a percentage of revenue for the big 3 were like historical high in 2022 and '23. So take a breather, fill up that capacity. But between fixed wireless access, adding like 850,000 net add on postpaid for the big 3, that's going to generate another 3.5 million subs. The broadband is going to generate -- the fixed wireless access is going to generate a ton of tonnage on those networks. So it's just a question of time. And if you take a long-term view, less than -- about 50% of mid-band spectrum must be upgraded to 5G, from what we can see T-Mobile has not deployed C-block yet. They've mostly done through that 5. Eventually, they're going to have to do that as well. So there will be more leasing activity, but we're still growing, we're free cash flow positive. We're paying down debt, buying back shares. So I think we will be there, and we'll be ready to support them when they're ready.

You noted that about half the sites that you host have been upgraded for mid-band 5G spectrum. Do you have a view as to how long it will take to do the next -- the remaining 50%? Or is that...

I don't. I don't. It's TBD.

Okay. DISH is sort of another swing factor in the leasing market. They were obviously a nice contributor to growth over the past couple of years but have slowed down considerably in light of everything that's going on there. Can you help us understand the degree to which DISH contributed to your growth before the slowdown and kind of the share of revenue that it represents today?

Sure. So DISH bookings were about $20 million in 2022. About $20 million in 2023. And today, it's about 45% (sic) [ $45 million ] of our revenue. And I think our goal -- customer, and we want to support them, we want them to be successful. So we'll be working with them and deploy wherever they want us to deploy.

Okay. And you said 4% to 5% of revenue. That -- that's of U.S. revenue?

It's $45 million in revenues.

$45 million. Okay.

Yes, it's $45 million in total revenue this...

Okay. Yes. It seems high. So I wanted to clarify that. I guess thinking about DISH prospectively, is there anything contractual that we should be aware of or has DISH basically fulfilled all the commitments they made to you?

They have fulfilled their commitment to us. I just don't know if they're going to meet the June 2025 minimum coverage requirement that they have. You will have to ask them the question.

Yes. Okay. Another topic that we think about is sort of the propagation attributes of the different bands that the carriers are using for 5G. 2.5 Gigahertz, C-band, the DoD spectrum, they all have propagation attributes that aren't as strong as what we've historically seen from more traditional mid-band spectrum. Obviously, very wide swaths of spectrum so it has -- they have more advantages, but propagation may not be their strength. I guess do you think that over time, this could create sort of a greater than normal opportunity for density-driven lease-up? Or new construction in more rural markets that may have historically been served with kind of lower-band spectrum?

Yes. So I mean it's clear that it's physics, right? And -- as a next step, we always say like with 450 spectrum, 850, 1.7, 2.5. We say that the 450 is going to go through the second basement, through 2 concrete slabs and 850 is going to go through 1 concrete slab and 1.7 is going to go to the inside conference room. And 2.5 is going to go through the office and a window, but probably not through the conference room and a mirror, and it's just physics. So if you want to use the C-block in rural area, your spectrum is going to -- the signal is not going to go 50 miles. It's going to be -- it's going to go a few miles. So you're probably going to need more towers. But I just don't know how much capacity they're going to need in rural areas.

Right, right.

But in urban area, I think, yes, they're going to use small cell on rooftops or whatever they need in order get that coverage.

Okay. Okay. I think, Marc, you also noted earlier that the carriers are pretty capacity-rich today with all the spectrum they deployed with a much more efficient technology. But thinking about how they augment capacity going forward, historically, they've relied on a mix of new sites, technology upgrades and new spectrum. 5G is still relatively new. There's no spectrum in the FCC's pipeline. Could you make the case that at some point we're going to see an uptick in the number of new cell sites that are being deployed and that could benefit you guys?

The carriers are not going to have any options. If there's no more spectrum coming to market, and I don't see any more spectrum coming to market this decade. The only way to add more capacity is we -- cell splitting, right. I think you're right.

Okay. That'd be good for SBA.

It would be good for us.