SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Yes, I suppose. I mean I think everybody has their own objectives that they're trying to achieve. And I think one of the great things about our business, about our industry is the stability of it, the long-term nature of it, the fact that it's so reliable and cash flow just continues to grow at one pace or another over time and it always has, and I think it will for a very long period of time. However, when there are much -- the downside, I suppose, is that when you're in an environment where risk-free yields are much higher, we don't change quickly, right? There's no magic lever to pull that all of a sudden triples our growth in that environment. And so on a relative basis, I think what you've seen is just, oh, okay, now it's not as much of a gap as it was before. And therefore, as an investor who has to make decisions from year to year, you see people kind of changing course for a period of time. That will change over time and work itself out. And as the leader of this company, I have to stay focused on the things that I can control, and that's executing at the highest level, making sure that we have the right assets and that we allocate capital properly.

Got it. With rates kind of staying higher for longer in the past, I think the company is focused on reinvesting in the business, growing internationally, build suits. After that, there's dividend and buyback. But can you kind of walk through with rates where they are today, kind of how you're thinking about the capital structure, your investments, both domestically or internationally, and where the ranking is these days?

Yes. So we have, in many ways, a similar approach to what we've always had in terms of capital allocation, and it starts with a certain view on the appropriate level of debt with which to capitalize the business. And so we've had kind of the same target leverage range for many, many years, for decades, 7 to 7.5 turns of net debt-to-EBITDA. And that remains our target, although as those of you who follow us know, we've seen our leverage actually decline pretty far below that level, right? And that goes back to what I was talking about earlier, that sort of disconnect between private valuations and the cost of capital where it's been harder to allocate capital into assets. So when we look at our different possible paths that we could go, I think you should expect that you'll see a mix of all these things. We'll still add assets because we will find ways to find quality adds at appropriate price points. But it's harder to do that with our full stack of capital that's available to us. Our #1 priority, though, is the dividend. We continue to be the leading grower of dividend in the industry. We're growing it, this year, 15% over the last year, and that's actually the lowest level we've grown it at since we introduced it, versus our peers who aren't growing their dividend at all. And I think we will continue to lead in that sense. So that -- making sure that we meet our dividend. But after you pay the dividend, we still have a significant amount of free cash flow that we're generating. And I think you'll see a mix of opportunistic asset additions, both new builds and acquisitions and share buybacks, and we've done some of those recently. So it will be a mix of those, but also we've been actually paying down debt recently, which is not something that we focused on in the past, but in the current environment, given some of the anomalies that exist out there and the fact that we have a lot of maturities coming up that will certainly refinance higher than they are today, it's one way to secure a certainty of return is reducing that debt a little bit further.

Got it. Is it fair to say that if the private market doesn't change and you don't see good opportunities, you're comfortable with just being able to generate more free cash flow? You're paying your dividend and growing it at a high level, but you're comfortable with seeing your overall leverage come down for a while as rates stay higher, and then maybe later on, you'll reevaluate things? But in the current environment, we could see leverage continue just to kind of fall down?

Yes, you could. The goal in and of itself isn't necessarily to delever. In fact, right now, I would say that we feel it's more important to retain flexibility, which having the lower leverage with a higher target actually provides us flexibility if we see an opportunity to kind of jump in and take advantage of that. And so that's where we're at today. If we don't see those opportunities and we're delevering and leverage continues to fall, at some point, we obviously have to revisit what we're doing. But I don't want to jump to that too quickly because we're in a certain moment in time and things can change. And I think being positioned to go in whichever direction produces the best financial return is really what I want to maintain.

Got it. It's something that I'm more curious about, and I'm sure you're kind of limited in what you can say. But as we look out in the tower space right now, it just doesn't seem like there's a whole lot of opportunities. Like in the U.S. space, it seems pretty limited internationally. I think people are pulling back. So when you say you're...

Opportunities for assets, you mean?

For assets, yes. So when you say that you're kind of making sure that you have the lower leverage for potential opportunities, there doesn't seem to be a lot out there. Am I wrong in thinking that?

Yes. I don't think -- I wouldn't say that. I think in the U.S., there's some level of scarcity. It's been heavily built out and consolidated up. There are some portfolios that could potentially come to market of some size. But for the most part, the U.S., it's kind of smaller, what we call mom-and-pop type of investments that are out there. But there's always something that seems to be popping up. Internationally, though, I don't think that's the case at all. There's tons of assets that are available today. The question is just whether they meet our objectives on all fronts, and certainly, price is one of those fronts, but the quality and where are they located, all that kind of stuff matters. But there's a ton of assets available. And in fact, I think there's more assets available than there are buyers for those assets right now. So there may be opportunity as a result of that, possibly.

So despite wanting to reevaluate your assets and focus on key areas, you are seeing if the bid-ask spread is appropriate, good potential internationally?

Yes. I mean our evaluation of our current operations is -- has no bearing on our willingness to invest capital into the right opportunities and into new assets. I mean we have a -- I kind of look at M&A as basically a separate business line of ours. We have a group inside of our company that is there. Frankly, some of them have been there as long as I have or longer, and that -- this is all they've ever done. And so we have a very kind of routine almost assembly line-like process that we follow in evaluating everything that's out there. And that hasn't changed. We haven't been quite as active in the number of deals that we've done because I feel like we're disciplined. That's the goal. And I think we actually live up to that pretty well. But we don't not -- we evaluate everything, I mean even stuff in markets that you might think, well, you're not in that market, you wouldn't look at that. We look at everything because you never know when you're going to see something that actually fits the bill that we believe that with our expertise of operations, that we can drive additional value out of it that others haven't seen. And so we feel it's important to be aware of everything. So I'm hopeful, actually, because I think we're very good at it, that we will find the right opportunities, but we'll remain disciplined either way.

And in the past, you've done a decent amount of builds internationally, but I think that's pulled back a little bit given the higher rates and maybe more uncertainty. Can you remind us kind of what hurdle rates you're looking for in an international business? And then what level of business mix would you feel comfortable with in terms of U.S. versus international as a longer-term framework?

Yes. I'd rather not answer too explicitly the hurdle rates, but they are a relative spread to what we would consider a risk-adjusted WACC in the markets that we're in. And that varies depending on where you are, although we do finance today at least everything off of our U.S. balance sheet. And so we do balance it with that a little bit because ultimately, our cost of capital stays set. But you have to consider currency and other factors in there. So it has adjusted certainly as cost of capital has increased it in terms of our returns, which is part of the reason you've seen less assets being added, right? In terms of the mix of U.S. versus international, there's not like a specific target. We certainly do acknowledge and kind of lean into being predominantly a U.S. tower company. And I expect that, that generally speaking, will stay. It's not our intention to shift that balance where you would say, "Oh, they're only half domestic." So for the most part, I think the relative mix we have today will stay. But as opportunities arise, we'll have to reconsider that. And one of the key things that we focus on more than international versus domestic is U.S. dollar versus foreign currency denominated because we've found that that's been one of the biggest items that it's hard to control for. And in otherwise a very stable business, you introduce an element of instability when you introduce foreign currencies, and you've seen it. We've experienced it in the past in Brazil. You've seen some of our peers have major impacts from that. And so we kind of target not letting our non-U.S. dollar-denominated revenue base be more than 25% to 30%.

Got it. You're generating a significant amount of free cash flow, but you do have some near-term maturities coming up, and they were done at very low rates, and you've done a great job in terms of hedging in lower rates. But with rates staying higher for longer, what near-term, I guess, maturities do you have to refinance and deal with? And what are you seeing in terms of your ability to borrow at good rates, whatever that means these days?

I was going to say, what's a good rate. Well, we do have 2 instruments, 2 securities that are maturing in the relatively near term. We have about $620 million or $640 million, I always mess it up, in October of securitization debt and another roughly $1.1 billion in January, also in the securitization market. So between the 2, almost $1.8 billion that matures. And they are, as you said, at very attractive rates. The good news is that we took full advantage of the very low interest rate environment over the years that we had it and have been able to keep our interest costs low. The bad news is that maturities eventually come up, and it's a lot higher today than it was then. In terms of concern, I have no concern at all in terms of access to capital. I mean there are many different markets available to us. Our asset class is always considered kind of a relatively higher quality to the folks at similar ratings levels that we're competing with. And so we always do very well and have plenty of access to capital. It's just purely a cost thing. And so we're trying to figure out how to best manage that. But to some degree, we are where we are and the interest rates will be what they'll be. We are focused more on the secured markets. We can generally use the securitization market, which is where these maturities are. We will likely refinance in the same market to get a rate that is more similar to an investment-grade rate because it is actually an A-rated piece of paper, than we would get as an unsecured issuer in the high-yield market. But even that market, we tend to lead that market, too. We're a very preferred issuer in the high-yield market. So we have flexibility, and we'll just manage it on the timing front. But I mean the one thing I'm sure of is that the rate will be much higher than it is on what we're paying off.

And we seem to ask is pretty often is you're not investment grade, but you seem to borrow at investment grade. Has that changed? And has that thinking changed that do you feel like there's an advantage to becoming investment grade, or?

I actually -- I really don't at the moment. That will, I'm sure, change at some point down the road. But today, I don't. And what we're talking about in terms of the cost of the money, that's really all that matters. I mean if it was going to improve meaningfully our cost of capital, our cost of debt specifically by being investment grade, we would certainly be very open to that. If it's going to be basically the same, and as you rightfully pointed out, we've been able to essentially borrow at investment-grade rates by using the secured markets, and we're comfortable doing that, there's not a big reason to rush into it. Especially in the current environment, because as you look at it, you've got -- even if you could get a slightly better rate, typically an IG piece of paper is not going to be callable the way that a lot of our instruments are. And so in this higher rate environment where everybody hopes, believes that rates are going to come down over time, locking in something that's not callable for the longer term at a historically fairly high rate just doesn't -- I don't see the value in doing that today. Plus we preserve flexibility if we see one of those opportunities we talked about earlier to lever back up in the current way that we're managing it. But eventually, it's going to happen.

Yes. No, it will be interesting to see what those opportunities are. One of the, I guess, biggest headwinds for your U.S. business is the Sprint/T-Mobile churn. Can you remind us kind of what you're seeing or what you will see and how that's trending relative to your expectations? And then on the other side, the non-Sprint/T-Mobile churn, are you seeing that come down in this period also?

Yes. So we've given very specific numbers on each of our earnings calls as to the Sprint/T-Mo, the timing of what we expect our Sprint impact to be. And it's generally in line with that. We haven't seen anything that would change those numbers. It's going to be roughly $30 million of churn, which is already in our outlook for this year for 2024. And basically, through the next couple of years, our biggest years will be the next 2 years, we believe, in terms of the churn impact, and then it will start to kind of wind down after that. On the other churn, it's been a little bit elevated over the last couple of years, but I believe actually that we will see it start to step down. That's my expectation, that we will see less and less of that in part because some of the things that were out there is potential low-hanging fruit, meaning smaller carriers that weren't going to make it. All those things start to diminish over time. And so the opportunity for that churn becomes less and less. And I think we're starting to see that be the case. So I would expect us to be towards the lower end of our historical 1% to 2% range as we get out another year or so.

Got it. Just to kind of finish up. With a little bit of elevated churn, activity still being low, but could increase later on, and then the higher refinancings, I think investors are somewhat worried about your ability to grow.

This isn't a good way to end, Richard.

But in the end, I'm obviously pitting the worst-case scenario. Like as investors look at your AFFO growth, how should we think about it maybe not just next year but kind of longer term?

Well, I -- yes, I mean the next couple of years have some of the headwinds that you mentioned that will certainly weigh on AFFO per share growth. I mean historically, we've grown our AFFO per share in the mid-teens on an annual basis every year. We're not going to do that in the next couple of years in all likelihood. But I do think once you get these couple of things behind us, because they are all distinct timing-related things, right, interest rates, eventually, you will refinance out of them where interest rates will come down. Sprint churn will end and be behind us and carriers have to spend on their network. So all of those things are unfortunately kind of lining up at around the same time. But longer term, that's not going to be the case. And so I'm pretty confident that we'll get back to at least a kind of mid- to high single digits, high single digits AFFO per share growth rate annually.

No, that's great. I think you'll get back there soon enough, though. Absolutely.

Great. Thank you, Richard. Appreciate it.