SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Coming back after the coffee break. We'll give people a couple more minutes. But what I want to do is welcome Marc Montagner. I think I can still call him the new Chief Financial Officer of SBA Communications to -- for joining us. Thank you, Marc, for coming here. This is our first time kind of chatting on stage. I'm a softball guy, so you got to know that.

So I guess, like, look, the big question, right, for the tower companies has been the moderation in carrier spend and the relatively rapid moderation in carrier spend. And it kind of grew pretty much through the middle of 2023 and then really tapered off and has tapered off further in 2024. So before we talk about the upside, if we think about your guidance for the year, and what it might imply for an exit revenue rate, new leasing revenue rate out of 4Q into 2025, where is the bottom? When do we reach bottom?

Well, let's just talk about the big picture and then we'll take it down that, right? I've been in the industry in and out for 30 years now. And the CapEx cycle or 1G, 2G, 3G, 4G, 5G carriers, I've been saying for years, I'm going to take CapEx to about 15% of revenue. And then this demand on the network, new generation coming and it runs to 20%, 21%, 25%. So if you look at CapEx in '21, '22 and '23, was for the big 3, $35 billion, $40 billion, $35 billion. And it was running at over 20% of revenue. This year it's going to be like low 13%, about 14% of revenue. And when you introduce a new generation, you get a capacity lift of about 10x. And it's a step function. You spend $100 billion buying spectrum, then you spend tens of billions of dollars putting the network in place. And then you have extra capacity, you fill that extra capacity and it just -- it's unclear how long it takes to fill up that old capacity. But if you look at handset usage that grows at double digit every year in terms of tonnage, now you have fixed wire access where every single user is using 15 to 25x the tonnage that you get on a handset. So you have a carrier, you have extra capacity, you as well sell it was $35, $50 amount because it's there. And the big advantage of 5G is people keep asking what is the killer app. It's not the killer app. It's the cost bid for the carriers is so much lower each time introducing capacity. So it gives you an unbelievable cost advantage where you could basically do a fixed wireless access customer using 20x more tonnage and still make money on this. Eventually, that capacity is going to be used. I don't have a crystal ball. All I could tell you is that some of our competitors have said that the level of application has gone up by a tremendous amount in first quarter, second quarter. We are not disclosing those numbers because it's a misleading metrics. You don't know what an application is going to lead. It's going to lead to an abandon, a new lease up, a new lease. All we know is that we see the same level of increased dialogue and we feel very good about 2025. And if you look at it at the big picture, right? So TMo is the most advanced having rolled out 5G to that -- but when they did the Sprint deal, they promised 50 Mbps of downlink on 95% of the pop by the middle of 2026. So that's 2 years from now or less. I think I hope that's going to generate more demand in 2025. AT&T is being catch up. Verizon is steady at least. So that's a big picture, maybe 50% of that 5G spectrum has been deployed and I think I feel good about 2025. So our lease up last year was $77 million about $42 million this year. Exit run rate is probably going to be about $8 million or $9 million in the fourth quarter. But I feel good about 25. I just can't tell you if it's going to increase in the first quarter, second quarter or third quarter. But we could all feel that something is good is coming.

So is the message, multiply 8 or 9 by 4, and that's your starting point and then add a little growth to that gradually over the course of 2025. And then hopefully, we see that extend into 2026 and beyond?

Yes. But I think '25 should be at the same level, but at mid case where we own in '24 or $42 million lease up.

Okay. So that's pretty aggressive. So if we started at $8 million or $9 million in 4Q and want to get up to $42 million, so this should be..

We see pickup in next year. I just can't tell you when it's going to happen.

So I guess that aha moment is the kind of "green shoots" that all the tower investors are looking for. I mean is there -- what we're -- we are expecting, right, a couple of announcements. So Verizon has said that sometime in the coming quarter, they're going to have an announcement about their expanded fixed wireless access that likely has something to do with them getting to kind of the completion of their 1.0 C-band deployment by the end of 2025, there's an announcement coming there. And then at the end of September, actually more like mid-September, T-Mobile is going to have their Analyst Day and they're going to have things to say about their investments in the network and applications development and things like that. So for these companies to make these announcements, my guess is they'd have to already be in conversations with you, and we should have some concrete outcomes by the end of this year, which then inform the guidance that you're going to kind of officially give in January, February 2025.

That's -- that's what -- but we -- the teams are having very constructive, positive active dialogues. It's much better than it was in the beginning of the year in the first quarter, in second quarter.

So speaking of applications, we had Sampath from Verizon here talking about how he kind of foresaw that maybe AI could be the base of a raft of as yet unknown kind of consumer-centric applications that require 5G capacity, but a lot of that communication happening at the edge. So we kind of have this conversation. Crown Castle is considering throwing in the towel on their small cell build, but maybe it's now the time to start thinking about small cells is incrementally important to delivering on these applications that could be the future.

Listen, curious I am going to need capacity in metro suburban world areas. I think we -- all of that focus on urban area as I think our microtower business, we like the exclusively factor of it. If you are in a small cell environment, you need to bring fiber to that small cell. And you don't have a lot of exclusivity because you have multiple building, multiple land post or whatever you could really build coverage. So we stayed away from it because our model is in you be the carrier, a tower with capacity for up to few tenants on the carriers. We are on average of 1.9% now and I think the zoning protection exclusivity is important to us in order to maximize return on this. But I'm not saying that small cell needs to buy a business is not something we focused on in the past because exclusivity was very important to our criteria in terms of deploying capital.

Can you speak to if there is any domestic opportunity to expand your tower portfolio, either build-to-suit or acquisitions?

We -- I mean we continue to build towers and acquire towers in the U.S., but those are very mostly small portfolio one to half a dozen towers. I think on a large portfolio, it is very competitive. It's very difficult for us to justify the valuation and just take a specific example. Shentel recently sold their wireless towers and that was a very excellent portfolio in Virginia, West Virginia, Pennsylvania, Ohio. High-quality towers very difficult to build there in mountains or state parks. So [indiscernible], you look at the numbers and then what case do you underwrite. You underwrite a 4-tier market or a 3-tier market. And you saw those towers are going to be there for the next 30 years, interest rates are high today, why should I use a discount we assume high interest rate for 30 years? What is the right discount rate and then you see, is this territory right for fixed wireless access because there's really not a lot of fiber to the form and then a lot of Sprint leases because it's an old Sprint failure. What is the churn, and you run a model and as a publicly traded company, we have 6.5 turns of leverage. You know that the private equity firm could put 10, 11 turns of leverage on M&A deal. And then you lose and then you say, well, you know what, I'm not saying that they are wrong, they could see the value, they could justify the value, and I hope they're right because it just shows how the value the publicly traded companies are, and I think it's also show the earning power of the tower business. So it's very difficult for us as a publicly traded company to really justify those valuations given our trading levels today. You would be dilutive to FFO and AFFO per share and we want to be very disciplined on capital allocation.

One of the interesting things that is going to happen likely next year is the separation of the U.S. cellular wireless business from the underlying infrastructure. And that company it would imply today is probably not trading at a multiple that's near where SBA is trading. Is that something that's floated on your radar screen? Obviously, dealing with the Carlson family might be a challenge. But -- how do you think about that? Is that an opportunity? Is that something you're looking at your chops about?

It's too early. I think we obviously try to look at everything but we want to be very disciplined in capital allocation. If you look at the big picture, right, the way we want to create value is being by being disciplined in allocating capital and creating and growing FFO and AFFO per share in the long term. So if you look at last year and this year, rough numbers and all these numbers are public, it's about $1.9 billion of EBITDA, about $350 million, $360 million of cash interest expense, about $50 million of discretionary CapEx, about $300 million, $325 million non-discretionary CapEx then you have cash taxes about $40 million and dividend over $400 million. So you were left about $700 million of capital to allocate after everything has been called for. Last year, we used $560 million to pay down debt because in a high interest rate environment, delevering was accretive to FFO and AFFO per share and we spent about $100 million buying back our share. So far this year, in the first quarter in early April, we spent $200 million buying back our shares because we saw that at $250 million level now which where we bought our shares back this was accretive to FFO per share and we thought the stock was undervalued and the rest was used to pay down debt. And right now, we want to be very -- I mean, if the right opportunity shows the path of right multiple, we will deploy that capital to do M&A, obviously, but it needs to be accretive, maybe not you want but [indiscernible].

And so just to kind of come back to the growth outlook. Just to be clear, is the kind of growth potential you see kind of unfolding in 2025? Is that net of kind of DISH basically slowing down to 0, which is what I think is a reasonable assumption in terms of investment from their network?

So I can't talk about DISH. It's about $45 million of revenue for us today. And we -- our goal is really to support them in meeting their coverage requirement of mid-'25. I think if you look at their spectrum. It's a beach form property. That spectrum has a fantastic propagation characteristic. Portfolio is worth tens of billions of dollars. So either DISH is going to find a way to fund their expansion or someone is going to help them. But that spectrum is not going to go away. It's going to be put to use at some point. And if you look at just the U.S. market between escalator and lease up, we should see pre-churn on Sprint. We should see mid-single-digit growth. Now the non-Sprint churn is coming down. It was $30 million last year. It's going to be about $25 million this year in long term with -- I mean the wireless industry is early. And we see churn going down to probably around 1% long term, slightly above 1%. Sprint was $27 million last year, about $30 million this year, it's going to be $40 million to $45 million next year, $45 million to $55 million in '26 and then about $10 million, $15 million in '27. So you exclude the Sprint churn, you going to grow in the U.S. at probably mid-single digit, and that's going to flow through to EBITDA and the big question is where do we trust rates going forward? So I think this year, we -- I mean, our plan, we assume that we would refinance our ABS that mature in October of this year, in general, next year at 6%. We launched the ABS transaction this morning. I think the price talk is around 5%. So I think that's perfect now.

And how big do you think that's going to be?

We launched $1.2 billion to and we'd love to upsize this is to refinance the $620 million maturing in October and we have $1.2 billion maturing in January. So I think there should be, I think, well received. I think clearly, the interest rates have come down faster than we anticipated initially. So it's not going to be directly impactful to 2024 because our plan assumes that we just the October and January, we are pre-funding in January maturing as well, but it's going to be positive for 2025.

And for the balance of the term loan?

The term loan is LIBOR plus $200 million that's $2.3 billion hedge on this. So it's basically until April of '25. The cost is about 2.05%. There's a hedge on another $1 billion above 5%. And to the extent we find a way to hedge a larger portion of that turn on at the right interest rate cut, we'll do that.

Kind be patient, see where we wind up on rates.

That's right. That's right. But I always think that '23, '24, you had a double whammy, right? The carriers were indexing towards free cash flow and coming down CapEx because they need to, interest rates were elevated. And we see better use out of it. The carriers are going to have to spend CapEx into asset coming down, and this is all positive for our industry.

I want to get back to the balance sheet and capital allocation, but you made some comments about maybe the differences in private versus public market valuations for towers. Domestically, what do you see in the international market right now?

Internationally, we're mostly indexed toward Latin America. And every market is very different right now, right? So Central America, has gone through consolidation is basically down to Claro and Millicom now. Most of our contracts there are U.S. denominated. And going forward, we see decent growth rates at low risk because there's no more consolidation and no -- virtually no currency risk. So we're very happy with Central America. Brazil is going through a tough phase where you had going from 4 carriers to 3 or is being consolidated into Vivo, Claro and TIM. So we've seen about $16 million this year or to wireless will deploy wireline another 8 to other carriers like NEXTEL and Sky. And we see elevated churn in Brazil for the next probably few years. The other issue is Brazil is devaluation. The country is running budget deficit and 9% of GDP. The currency has devalued by about 20% in the last 12 months, at least 10% this year. I don't know it was versus the plan we put forward in January. That's about $30 million of negative top line just due to the devaluation, but long term, we are bullish on Brazil. Brazil is going to be a 3 carrier market, very well-capitalized company, TIM, Telefonica and Claro which is American Mobile is called Sling Company. And long term, it's a growth engine in Latin America. And we are very happy with Brazil. So I think we feel good about Brazil going forward. And then we have 3 other countries, Ecuador and Chile and Peru. So Chile has quick zoning protection, and we like our position there. Ecuador is U.S. denominated a small position is doing well, and same thing in Peru. So I think the rest of Latin America, if we see an opportunity to increase our scale in the countries where we have operation, I think at the right valuation. We do this because scale is important in business. It allows you to have a better dialogue with the wireless operators. You could support them faster, more efficiently when they need more capacity, more coverage, roll out a new generation rolling out 5G, which is way behind in LatAm versus where we are. I don't see ourselves expanding in new de novo market in Latin America or Africa. Look at Africa, we have a very good position, a good scale in Tanzania and South Africa. Those markets are growing at double-digit rates. We are providing power as a service. Power is a real issue in those markets. We provide generator. We install solar panel for our customers. Our sites are very sticky energy cost all pass-through. So we are hedging on a rise in energy costs and also a good market. But I don't see us expanding into new geography in Africa, but those 2 markets are performing very well.

So I want to circle back to the Brazil situation. But for the longest time, your peer American Tower was kind of the flag bearer for investing in emerging markets. And they seem to be kind of tilting away from emerging in more towards developed markets? You haven't invested in any developed markets. Europe seems to be the one most in vogue. So no de novo markets in Africa or Latin America is going after maybe more developed markets, something that's on the table for you?

This -- I mean, it was [indiscernible] public knowledge that we looked at Cellnex -- this is an attractive market. We operators. It was a dominant wireless tower company in the country, low tax rate of 15%, long-term contract with the wireless operator, and we took a look. I think it's very unlikely that we'll do M&A deal in Europe. Europe is through growth, the operators, I mean, either Europe goes for consolidation phase or they go through network sharing and I mean looking at European wireless operators for the past 30 years, and I don't see ourselves going into Europe now until there's more visibility as to what are the regulators going to push down or they're going to allow more consolidation. Or are they going to allow network sharing. There are too many question marks on Europe. So I don't see us going into Europe right now.

I mean for a long time, I think SBA has been one of the more aggressive counterparties for the carriers in terms of kind of being patient and waiting for them to come to you so that you can charge exactly what you want to charge what the market will bear, so to speak. But you've signed deals more recently that are more holistic in nature. We don't know the exact nature of these deals. DISH was one of them. I think AT&T, we have one now. Talk about your thinking around that? And is this a change in attitude towards relationships with the carriers?

Well, I think the industry is changing, right? Wireless industry is no longer like no longer a 20 operators trying to compete on coverage and prices and high growth synergy -- high growth industry where speed to market is key. This is more early [indiscernible] growing in a single digit. The carriers, if you look at their cost structure, tower cost, all the largest single item in the P&L and I think they'd like to see predictable costs going forward. On our end, we have mostly 3 large customers in the U.S. and having predictable growth rate going forward is important. So all yes, I think is probably saying that long term, it makes sense both for our customers and for us to enter into long-term strategic relationship.

So if we kind of then take that, does that make sense to maybe look at that from a Brazil standpoint, with those 3 operators now that we've kind of gotten to some measure stability and recognizing that you're going to have this churn event, you might be able to smooth that out a little bit. Is that something that's under consideration?

It's still too early to say, I can't comment on this. But I think Brazil is going to go through -- has gone through consolidation and we have to go through the churn period. But long term, it's going to be a very stable market with meaningful growth. 5G is going to be a driver of that growth. So it may be challenged for the next few years, but long term, we feel very good about Brazil.

So you mentioned that in a high interest rate environment, it made sense to pay down debt. We're in a less high but not low interest rate environment. Nevertheless, you seem willing to transact a 5% rate today. Is kind of 5%, we're going to kind of maintain leverage where it is today and refinance at 5%, and we're okay with that? Or do we have to keep deleveraging?

It really depends. The leverage is an output. The input is really what are your cash interest expenses. And what do you do with this extra $700 million you pay on debt in order to grow FFO and AFFO per share due to share buyback? Do you find accretive M&A transaction to do. So we want to be disciplined. I think at this stage, our target leverage is 7% to 7.5%, about 6.5% and we're growing investment -- in order to be investment grade, we will need to make a commitment to keep our leverage at that level of law. I think we want to be opportunistic for the right dislocation in the market buying back share, right M&A opportunity or if interest will stay or just be on that. I think capital allocation being a disciplined allocator of capital is the way to create value long term, and we want to maintain optionality at this stage.

So I want to revisit that. So -- every year, we have a big high-yield conference that we host in BOCA. And we come with a group of equity and debt investors to visit your headquarters. We did that this past December. And it was interesting for me to hear the debt perspective on this, which was that we, as high-yield investors really like SBA's relatively unique position as a high-yield buyer being one of the highest quality, high-yield borrowers in the marketplace makes you pretty unique and special. And your paper probably trades tight as a function of that. Investment grade, though, you'd be kind of the least interesting investment-grade issuer out there or among the least interesting because you're not as high as in the stack. So I want to hear what you're saying correctly. Are you saying investment grade is a target, investment grade is an option or investment grade is we're not interested.

At this stage, we're not interested in the short term. It may change in the long term, really depending on the environment. But right now, I mean, out of $12 billion of debt, $7 billion is in the ABS market that's rated single A or only issue we launched this morning, a very attractive rate. And I think it's important to maintain flexibility at this stage. The other issue with -- I lived in non-investment grade my whole life, if you do an investment-grade bond, it's noncallable for life of that security. You go into the high-yield market. Those bonds are callable. So we are giving opportunity to refinance them in a declining interest rate environment. So that's another feature that I think is very attractive in high-yield market.

So it sounds like, okay, we've got an expectation of modestly improving at least domestic growth and we're leaning towards maybe longer-term contract structures that maybe lock that in, maybe trade -- there's some trade-offs. But we're prepared to make some maybe more compromises looking longer term than we were today.

If it makes sense to us and if you could secure a long-term growth rate.

And so we're comfortable with our kind of lower leverage, but we don't need to do a lot more necessarily right now, especially if interest rates are moving in the right direction. We're generating a lot of free cash flow. And there doesn't seem to be a lot of M&A opportunity in towers domestically. And even though you've said you see opportunities internationally, it doesn't sound like you're interested in those either.

I'm not saying this. I'm saying that if it gives us an opportunity to increase scale in markets where we are at the right valuation. And if it's increased to FFO, we would look at those.

Okay. So that's not happening. So then you're going to have really, there's 2 ways to kind of deploy capital, right? There's buying back stock or maybe making investments in new asset categories. That could be small cells we talked a little bit about, but it could be data centers, it could be fiber, it could be any other thing. It sounds like those any other things are not really central to your wheelhouse, right? .

I think at this stage, if you look at both our international portfolio, domestic portfolio, we are pure tower company. Even internationally, we don't have fiber business. We have 3 small data centers, but it's towering material. And so long term, going back to your question on investment grade, if you don't see opportunities to deploy capital in M&A and you are in a slow growth environment on top line, and you have long-term relationship with the carriers with predictable growth, probably makes sense to eventually become investment grade, increase the dividend, and right now, our payout ratio is about 30%. And I mean obviously dividend policy is a Board decision. It's not a management decision, but we increased our dividend by 15% from '23 to '24 and I think until -- for the next few years, you're probably going to see a double-digit increase in the dividend. Long term FFO per share growth and dividend growth rate will probably converge, but at a 30% payout ratio where we still have room to increase the dividend at a higher rate than the FFO per share growth.

I guess that was my next question, which was there are some green shoots. There's some positive things happening, but there's also DISH is going to slow down to 0, Sprint churn is going to persist through '27. Brazil churn is going to persist for a couple of years. And so that relatively modest improvement in domestic tower growth is going to get lost between the top line and the bottom line. One of the things that you could do to restart growth at the bottom line on a per share basis would be to more aggressively buy back shares. Is that -- would that be philosophically what you want to do? Or is -- I would argue that growth would probably get valued more on a per share basis than the dividend per share, but I might be wrong.

I think I would agree with that -- and you saw us doing $200 million of share buyback earlier this year and buying back shares definitely on the [indiscernible].

So what's the breakeven price? What's your..

I'm not going to answer that question. Can you tell me what interest rates are going to be in the next 2 years, I may be able to get there. But you saw us buying back shares at around $250 and if I recall earlier this year, I think -- it was funny because on the earning calls, by the time we announced it, the share was at $195 and a lot of questions, say, why did you buy shares $215 and today, the stock is over $230 and people say, why don't you buy more. So it doesn't matter what you do. People always are going to have a view on this. I think what's important is to say this is an asset both towers have now 30-year life in them more. Interest rates are probably going to come down and if you look at what the private equity market is going to pay for tower business versus the public equity, there's probably -- there's huge data between the two. And my personal ground on investor, I'll leave that to you guys. But my personal view is that the public market is probably and valuing the publicly to tower companies.

So we've got a few minutes. I just want to maybe touch on another aspect or a theme that seems to be -- or has emerged in towers, which is that there's been a lot of new blood that's come in a fresh set of eyes. So Steve, over American Tower, the new CEO, yourself and Brandon, new CEO, yourself being new to the space as CFO -- a new CEO Crown. And one of the common themes, I think, for at least what I've heard from Crown and AMT is that there's a notion that we can reimagine the cost structure of the business and do things in a new way efficiently that maybe we haven't done in the past. What is Marc Montagner's idea for how to make SBA more a lean mean organization in addition to share buybacks and falling rates and kind of working through the churn issues, how can we organically make that growth occur?

Well, on the cost side, I think G&A is only 6%, 6.5% of revenue. So not going to see a huge improvement on the G&A side,frankly. I think AI is going to help. We have thousands and thousands of leases, 40,000 towers. So I think flying drones to capture images of those towers, putting this in a database flowing through the terms of the leases. So I think AI is going to do efficiency.

And for those that are listening, just FYI, we did a site visit with DICOM who is one of the biggest servicers out there just bought Black & Beach, which is one of the bigger wireless servicers out there. And he said, like the drone thing is real, right? People really are flying drones up and doing kind of initial measurement and site work and stuff like that so and..

We're doing this . Absolutely. And that's going to help a lot. And then I think internationally, we're going to do the same thing. So AI to us is going to drive down cost. On the top line, really -- I mean when the new handset smartphones are going to be out there with AI, I assume that's going to drive more demand again. I mean I don't know if we have 2 teenage daughters just meaning unmatched video they consume on their iPhone, right?

You're the second person today that said that their kids are using so much video.

It's all 99% of the usage is video and less than 1% is text, and there's no voice. And if you told me that 10 years ago people never thought you'd be watching videos on an iPhone, if you're not on Wi-Fi. And now with unlimited plan in 5G, it's a given. So I really -- I've been -- remember when I was at Morgan Stanley, I took Netcom GSM public in Norway in '95. We had 25% wireless penetration. We are forecasting 50% penetration in 3 years. The market didn't believe it. We hit the 50% within 12 months, right? In summary, [indiscernible] was above 100% penetration within 3 years. So if you look at the history of wireless, the mobility function is such a feature that it's a killer app. It is the mobility. You could take your life with you anywhere. The iPhone has more processing power than the first computer that puts men in the moon.

This wireless thing is going to take off.

It's going to take off. So it's going to be more and more and more data for the carriers in order -- okay, it's still competitive, 3 or 4 carriers, it doesn't matter. And if DISH disappears someone is going to roll out that spectrum. That spectrum is going to be put to use. All of this means more CapEx, and it's always a step function. So I feel really good about the next 30 years. So 2, 30 years, take a third year view when look at what our stock has done since the IPO in the last 25 years. [indiscernible]

Okay. I had a bunch of questions on services revenue and other things but we ran out of time. That was a good way to end it. Marc, thank you so much for joining us. I really appreciate it.

Okay, good to see you again.

Thank you guys for coming out.