SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

[Audio Gap] Michael Rollins with Citi Research, and we're pleased to welcome Marc Montagner, Executive Vice President, Chief Financial Officer for SBA Communications. Marc, thank you so much for joining us.

Michael, thank you so much for having me.

Before we begin, I just want to remind everyone in the room that QR codes around the room. And if you scan those, you can participate in our upcoming live audience survey. [Technical Difficulty] I will start over for the webcast. Sorry we'll do a take two. This session is for Citi clients only and disclosures are available at the room can go conveniently at the back of the room next to the AV desk. So welcome back to Citi's Global TMT Conference. I'm Mike Rollins with Citi Research, and we're pleased to welcome Marc Montagner, Executive Vice President and Chief Financial Officer of SBA Communications. Thank you so much for joining us.

Michael, thank you so much for having us.

And for everyone around the room, you can use the QR codes up on the screen for our live surveys. Your participation is -- your submission and participation is completely anonymous. We're not tracking it, and we'd welcome your participation to make this a more interactive forum.

So with all that out of the way for the second time. Marc, can you maybe just get us started and give us an update on SBA's strategy to expand financial performance and improve value for shareholders.

Okay. So our goal is really to create value in the long term for our shareholders. And the key driver for this is capital allocation. So if you go back to the big picture and all of these are public number, right, it's '23 and '24, the numbers we imagine in the same range. It's about $1.9 billion of EBITDA and about $350 million of cash interest expenses, $50 million of discretionary CapEx, another $300 million to $350 million of nondiscretionary CapEx, $40 million in cash taxes, mostly international cash taxes, and a dividend around $400 million. That leaves you with $700 million of cash to allocate in '23, '24, and we don't have guidance yet for '25. So last year, in a rising rate environment, we use $560 million to pay down debt, which makes sense, and it's about a $100 million share buyback. So far this year, we bought about $200 million of shares back at an average price of $215, mostly January through early April, and the rest has been used to pay down our revolver. So our revolver is almost fully paid out now. And then we want to be flexible because interest rates are coming down. I don't know -- I mean, in our outlook for the year, we have 2 ABS maturing one in October, next month, $620 million, another $1.2 billion in January. In our outlook, we saw we refinance those at around 6%. We launched a deal yesterday, $1.2 billion financing in the ABS market to refinance the security, initial price talk with them at around 5%. So we are very pleased with the way interest rates are going. So I think at this stage, it's all about being flexible if the right M&A opportunity were to come that would create value would be accretive to FFO and AFFO per share, maybe not in year 1, but year 2 or 3, I think we would do this. And if this dislocation in the market, our share comes down, share price, I think we'll be happy to buy back more shares. I think leverage is more an output than an input to where we want to be.

Appreciate the overview. And we'll queue up our -- want to drill down more on the strategy and capital allocation. But let's queue up our first survey question that we can get to in a few moments. So we're going to ask our group here today. So domestic organic leasing growth for SBA without Sprint churn, midpoint for 2024 is roughly 4%. What are the organic growth prospects for '25? And for our streamers, we're giving choices of basically 3% or less, over 3% to 4%, over 4% to 5%, over 5% to 6% and over 6%. So giving our group some choice here on how to choose this. So again, we'll invite everyone's participation. So while that's queuing itself up, you mentioned capital allocation and what you're doing with or how you're thinking about the use of free cash flow, how are you just thinking about the assets in general? At the beginning of this year, SBA talked about the idea of maybe optimizing a little bit more and just looking at all of the markets to make sure you have the right formula. So where is that today in terms of process and thoughts?

Well, I think we've done a lot of work and it's an ongoing process, like you do the work and now you put in a drawer and you're done. But I think if you look at our portfolio, we love the U.S. market. That's obviously the best market. We don't pay taxes, it's a very steady, very good zoning protection on the macro tower. We feel like we have exclusivity. And it's obviously the best market, but it's a mature market. And given competition from private equity firms, M&A opportunities are difficult to acquire the right valuation. But we always on the outlook year in, year out, we still buy 1 series, 2 series or portfolio of 5 to 10 towers and at the right valuation, we're going to keep doing this because it always those towers are going to be there for the next 30 years. And they have a capacity for 4 tenants we bought 2 tenants per towers. I think there's room to grow on that portfolio. And internationally, every market is different. So I'm sorry, I'm going to spend a little bit of your time, but let's start with the easy part, which is Africa. We have a very good operation in Tanzania and South Africa. These operations are growing at double digits. The carriers there are building coverage. And it's always good to see CapEx being deployed and delivering a return. In addition, those markets have power issues. So we also provide power-as-a-service with generators, batteries, solar panel and then make our sites very sticky and create demand for a site that is going to be there when power goes out. And in addition, I think we outsourced the delivery of diesel and the power cost will pass. So very pleased with Africa. I don't see us doing more deals in Africa, but we're very pleased with what we have. Then you take Latin America, Central America has gone through the carrier cancellation. You're basically down to 2 key areas, Claro and Millicom and most of the contracts there are U.S. denominated. It's going to probably grow at mid- to high single digit. So we like those markets. And I think to the extent that we could find attractive assets there to complement the footprint, I think would be looking at those. The near Brazil, where we have a significant position, about 12,000 towers. Brazil, long term is a fantastic market. 5G has not really been deployed there yet. The market is going through consolidation from 4 to 3 Oi wireless is being acquired by Claro, Vivo and TIM. And on the other hand, the Oi wireless wireless-wireline has just gone through reorg. So we have churn in Brazil that's going to be elevated for the next few years. And the government is running a deficit of 9% of GDP right now. That creates a lot of pressure on the currency. So about 20% devaluation in the last 12 months, 10% so far this year. But long term, we believe that this tremendous growth opportunity in Brazil. And in an environment where interest rates are high in the U.S., foreign currency always takes ahead. I think with U.S. interest rates coming down, I think it's -- this is going to be light at the end of the tunnel in long term, we're bullish in Brazil. And then we have 3 other markets, very small Ecuador, where the contracts are U.S.-denominated Chile and Peru, where if we find a way to fill in that and get more scale because scale gets you a better dialogue with the operator, covers your SG&A, but also allow you to support your customer faster and more efficiently. So for the right, I think, assets at the right valuation, we'll be happy to complement that footprint. I don't really see us expanding outside of those markets. And we saw Argentina. And I guess you've seen the rumor that there may be something on in the Philippines. We have a few 100 tower sites there. There are over 30 tower company in the Philippines today. So either your consolidator or your consolidating, so it's TBD.

Very helpful. Maybe...

No wait for the longer...

But it's a great update because I think just understanding where you are in each of these markets as I think we're all trying to understand your approach to the assets and then what you described as the optimization opportunity that is just very helpful. And maybe migrating over to the domestic business. So one of the questions that we keep getting from investors is whether or not SBA is seeing changes in what I'll call the preconditions for leasing, which I think people are defining as the conversations, the search rings, the applications or you're seeing improvement in the actual leasing activity for the business, domestic specifically in this?

So I think for this year, lease-up is about going to be around $42 million. We have not given guidance for next year. I think the exit -- the run rate in the fourth quarter is going to be $8 million or $9 million. So if nothing happens, you're going to probably in mid-30s lease-up next year. But that being said, the dialogue is much more active with the wireless operators now and it was a few months ago, 6 months ago. The level of application is up. But this is a misleading KPI because it takes time to go from an application to assign amendment, to assign lease-up, new colo. And it takes time to makes it way through the number to flow through. So right now, we are very pleased we could "see some green shoots." It's seen unclear how fast this is going to get converted into signs agreement and dollars and cents.

Let's see what our audience is expecting for you for next year. So 75%, over 3% to 4% growth, and this is [indiscernible] and 25% over to 4% to 5%. If you take that $8 million to $9 million, which annualizes to $32 million to $36 million, does that keep you in that 3% to 4% type of range?

I don't say -- I can't do the math that fast, but I'm sure someone can do the math. But I think if nothing happens, we -- it's like same runway that we have today on mid-30s with the green shoots converting to a real signed contract, I think we could be back at the 40 to 42 level. But we have not given guidance for 2025 yet, and it's just too early. But we like the momentum that we've seen. That's all.

So the takeaway then is you are seeing things start to improve going into next year?

That's right.

And so...

Not in terms of signed contract in terms of dialogue application and so on. There's a significant -- there's a material improvement in the dialogue.

When you're talking to the carrier customers of yours, is there any degree of price elasticity where if you're willing to give a little on certain conditions or price, you could actually stimulate activity? Or do you see this from your experience is generally inelastic and just when customers actually just need the stuff they need?

I'm new to the industry, but my feeling right now is like they talk to you when they need you, and they're not going to spend CapEx because remember, if they're going to sign a lease, it's CapEx associated, which they still not going to spend on CapEx and sign a lease unless that we needed. So I think it's really demand driven as opposed to price driven.

And it seems like from a carrier perspective, so you have 1 comprehensive deal that you signed with AT&T, is that summer of last year?

That's correct. It was in the third quarter of last year, as I recall third quarter.

And so how are you thinking about the opportunity to do more comprehensive deals with some of the other carrier customers as a way to potentially just enhance the visibility on where growth can get to you for SBA?

Well, I think what we like about the AT&T deal is that guarantee, I think, growth on our stand and from the AT&T standpoint, I think we make it easier for them to roll out 5G and catch up with T-Mobile. So I think it benefits both sides. And going forward, I think -- if you look at it, the industry is oligopoly on the carrier side and the #1 cost item in the P&L is historical so for them, trying to predict -- predictable cost going forward is important. And for us, I think predictable growth going forward is important, too. So I think the industry is probably going long term going towards more M&A. So I think that's a trend in the industry.

If you kind of take out the merger churn from Sprint in your performance, where are you seeing the annual revenue churn? And is there an opportunity to bring that down further as another way just to help the net growth that the company is achieving domestically?

I think that's why historically, churn -- [indiscernible] the churn was about 1% to 2% with oligopoly, 3 major carriers providing the bulk of our revenues. I think churn is probably going to trend towards the low end of that 1% to 2% range.

And can you just remind us your exposure with DISH today?

DISH today is about $45 million of revenue.

And as you look out going forward in terms of the conversations, you mentioned the things are starting to improve there. Is there anything else that we should be mindful of in terms of the way the domestic business is progressing?

But, I think if you really look at -- and I have -- I mean I joined NEXTEL over 20 years ago, I work in industry, every single business plan and NEXTEL, we're running CapEx in excess of 20% of revenue. Every single business plan show it going to 12% to 15%, and we never got there. We have a slide in our investor deck showing CapEx as a percentage of revenue for the Big Three for the last 12 years, and it's only for 15% to 22%. In '21, '22 and '23, it was running at around 20%, 21%. It was $35 billion, $40 billion, $35 billion. This year, it's about $14 billion. And when you roll out a new generation technology, you get probably a 10x pickup in capacity. So it's a step function. You buy spectrum, you roll out next gen, you get the capacity, you fill up the capacity that you need to basically bring more capacity to market and expand the footprint. So I think you had a massive lift in capacity from that massive spend $35 billion, $40 billion, $35 billion of CapEx. That's over $100 billion of CapEx in 3 years for the Big Three. And I think they repair their balance sheet index toward free cash flow. But it's only a question of time before they need to add more capacity and expand the network at the edge. So I feel very good about the future. And then look at fixed-wireless access, I think the industry keeps delivering more fixed-wireless access every quarter than the forecast. The fixed-wireless access customer probably generate 15x, 20x more tonnage on the networks and a handset, and a handset customers still growing the tonnage at 15% to 20% a year. So all of this means more equipment on the tower, and that's good for us.

Can you remind us -- you mentioned all the CapEx these carriers are spending. Can you remind us where they are roughly in terms of the mid-band upgrades on your sites today? .

I think it's about probably at the 50% level. T-Mobile mostly roll out 2.5 spectrum, better propagation characteristic. And then Verizon and AT&T on the C block. But it's probably overall at 150% level. So I think there's more room to grow there.

And the carriers are each talking about getting much further along with the mid-band coverage and over the next couple of years, trying to get close to kind of a mature level of that. And given where your sites -- your towers are typically located, should that give us a sense of optimism that if they do what they're saying that, that just naturally means that you could have a greater hit rate going forward because of the location and only 50% is kind of done today on average?

Well, I think that's right, Michael. Because if you really look at our macro towers, what we like about it, you have like some exclusivity associated with it because of the zoning. So if you carrier and you need coverage on a specific area, we don't really overlap with [indiscernible] or don't overlap with American Tower and they don't really overlap with us. So if you carrier, you're going to have to deal with the 3 of us or the other one. So our towers are mostly suburban and rural. We only have the small cell in urban area. And so there's a level of -- they have to come to us. And then you look at the economics, right? They have a generator. They have batteries, they have [indiscernible], they have a cabinet there with electronics. They have a space there and agreement with us. It's so much easier and faster and cheaper to just go with your existing footprint as opposed to negotiating a new lease with a new operator on a new tower.

And just in terms of the way that you construct your carrier contracts, are there any features that may be underappreciated by the market?

I think that it's -- to me, the #1 feature is we churn reduction and ease of use and ease of upgrading and adding more capacity. I think to me is the key feature.

Just sort of a different question because we're asking this of a number of the companies that are here with us this week. How can the Gen AI capabilities either help your revenue and/or your cost structure? And which of these is the greater opportunity for value creation in SBA?

I think it's both, first of all. I think on the cost side, we have 40,000 towers, multiple leases per tower. And I think just using AI to sort the lease, I think, is going to be helpful. Then we are flying drones more and more to basically see exactly what's on the tower, how much space is on the tower, it's much faster than sending somewhat up the tower. I think you get all that data and you could sort through the data. So down the road, that's going to help on the cost side, domestically and internationally. And on the revenue side, I think AI-enabled handsets are not in the marketplace yet, but just like any new technology when we're starting doing voice on wireless and then we did text and then we did data and then we did unlimited data and then we're doing video. And it just means that the tonnage on handsets keep going to keep growing at double digit, and AI is just going to be another app that's going to generate data just like social media or YouTube video or whatever.

Before we get to capital allocation. I'm going to throw a couple of surveys. And then we'll talk about some of these other topics and get back to this. So it'll be a little bit of a preview. So we're going to ask our audience, should SBA further simplify its asset mix. And 2 choices, no, the current asset mix and strategy should generate the best long-term value or yes, just become a domestic-only tower provider and monetize the international. So we'll see what our group here thinks of that in a few moments. But let's maybe talk a little bit more about international. So I think if we take a step back on international, the thesis on international has historically been -- there's just -- the density of sites is just less than the U.S. to serve customers, to serve traffic. So there's been this, I think, perspective that the organic growth in these markets should be significantly greater than the U.S. Is that still just like the high-level thesis. And I think LatAm, there's been, as you were describing earlier, some issues that are slowing down performance. Do we -- is that a market that we get back to this idea significantly better than domestic growth?

Yes. I think if you take a 30-year view or 10-year view or 20-year view, I think overall, I think you're going to probably going to see higher growth rate in emerging markets than in the U.S., which is a more mature market. It is going to be choppy. It's not going to be linear. It's going to go up and down. I think Central America went to the consolidation phase, we feel pretty good about the future. Brazil is still in the middle of it. Africa is still in a very good growth phase, growing at double digit. But I think if you take a long-term view, given population growth there, activity growth, the less mature market, you're going to see a higher growth rate on those markets. But today, I think I like our asset mix, I mean, 74% of our leasing revenue or domestic, about 79% of all our revenue are U.S.-denominated because look at Ecuador, Central America, most of the contracts are U.S. denominated. Same thing, some contract in Africa are U.S. denominated. 78% of our EBITDA are U.S. denominated. So I think it's a good mix at this stage. And I think emerging market, play it's roll in increasing long-term shareholder value for SBA.

We'll see what our audience thinks of the asset mix. So 75% said, no, in terms of whether you should simplify your asset mix further and that the strategy -- the current asset mix and strategy to generate the best long-term value. 25%, yes, just become a domestic-only tower provider. Was this a question that the Board has tested over the last year or 2 years just to try to create the best structure for shareholders? And were there any additional earnings that came out of that?

What I -- I'm not going to disclose what this discussion in the boardroom, but I could tell you that as a management team, those are the questions that we ask ourselves all the time.

And maybe introducing 1 other question, and this will give us a preview of where we're going. Should SBA pursue investment-grade credit ratings and just sustain a lower level of net debt leverage. So we'll come back to this in a couple of moments.

It's a good question.

And we look forward to your perspective on this, too. So with respect to M&A, it seems like that the conversation for the last earnings call is there's some -- the management team is putting some thought into the potential for additional deals and you may be actively evaluating in terms of what you're able to share? Is it across geographies, including the U.S.? Is it in only specific markets? Is there anything you could share this in terms of the flavors that SBA is thinking of in terms of what could be on the M&A landscape?

Well, on the M&A landscape, I think really, the goal is to create long-term value and a fine transaction that are accretive to FFO per share either in your 1 or in the short term, right? So as I mentioned earlier, internationally, I think it's mostly increasing the scale in existing markets at the right valuation. In the U.S., it's obviously the most attractive market that we have. I'll give you the example. I mean it's -- we look at Shentel. I was a deal that was announced earlier this year. It's a fantastic portfolio, the Sprint affiliate in Virginia, West Virginia, Ohio, Pennsylvania, it's an area where I travel a lot when I lived in Washington. It's fantastic portfolio, really difficult to overbuild there. So you look at the quality of the asset and you say I want to own this asset and then you say, okay, to run the DCF and this is okay. What model do you [indiscernible], is it a 3-carrier model or a 4-carrier model. Then you say is this is a region that where fixed wireless access is going to be a key component of the carrier offerings just because you probably don't have a lot of fiber going into the house or you're going to get it offside from fixed-wireless access. And then you look at -- you still have a number of old legacy Sprint leases. What is the churn, you have to take a bet. And then you look at -- you know that you're competing with PE firm are going to level this, 10x to 11x in the credit market. As a public company, you can do this, but it's okay. The interest rates are much higher like 6 months ago, where risk going long term. What -- why you're going to use because you're going to own this asset for the next 30 years. And you run the model and then you lose the bet and you say, you know what, I understand how they got there, and I hope they're right because it just means that our publicly traded company is probably grossing undervalue. And so we're going to keep looking at U.S. asset and -- but we're going to be disciplined. We want to create value for our shareholders long term, and we don't want to pay.

And within that context, how do you define value? Do you just think of it purely as AFFO per share accretion? Do you think about it as accretion at some point to the EBITDA multiple or the return on capital. What are the ways that SBA triangulates on how to define value accretion for the shareholder?

Well, I think it's multiple variable. I mean, you're running a DCF, you want to comfortable with evaluation, then if it's a high-growth asset, obviously, the multiple is going to be higher, and therefore, it's going to be dilutive in the shortened FFO per share. So how do you deal with that because you want to do what's right for the long term, but you don't penalize yourself for the short term. So you need to triangulate really and take a bet on where the long-term rate is going to be. So it's more math than the science. People who always ask the question, what's your hurdle rate and there's not like a black and white answer. And then there's always the strategic value of the asset. So there are many, many variables that go into that equation.

So speaking of rates, we'll see what our audience thinks of what you should do with your credit rating and your leverage. So 2/3 said yes, SBA should pursue IG credit rating sustain a lower level of net debt leverage. And 1/3 said, no. How do you look at this question?

Well, it's something we ask ourselves on a regular basis. I think right now, all of the $12 billion that we have $7 billion on the ABS market. ABS, issue security we launched yesterday is rated A and it's going to price at investment-grade pricing. So I think we're very happy with the yield we are paying on those $7 billion of debt. I think long term, the issue is investment grade, I give you the downside and I'll give you the upside later. The downside -- nothing is black and white. The down -- the upside -- the downside is that which I'm going to be investment grade, you have to maintain, you have to meet a commitment to see investment grade. And I think if there were a disruption in the marketplace, I think we'll be happy to buy back our shares. We'll be happy to do M&A. We have a $10 billion revolver that's end up today. And in a period of great dislocation that the best M&A opportunities may show up, and we may want to relever the balance sheet. On the other hand, I mean, growing investment-grade tool today in order to be investment grade, about 50% of our debt should probably be secure and half of it unsecured, so we'll have to reduce the ABS component, and that would increase probably the overall cost in the short term. Long term, as the industry matures, you have more long-term contract with your investors. It's a more steady state company and less variable. It may make sense [indiscernible] paper at a low rate, basically keep increasing the dividend, and the payout ratio and make it like more of a mature company with an investment-grade credit. So I'm not saying we're not going to get there. I think it's a right outcome eventually. But short term, I think we like where we are, and we like the flexibility. And we like the rates that we're getting on this -- in a secure market and even in the unsecured market.

And in terms of -- just going back to the -- just this broader topic of capital allocation. How do you think about just over time, whether or not you should go into adjacent opportunities versus just kind of keeping the current mix of what you have?

Well, today, we are really a pure-play tower company, both domestic and internationally. A lot of our company outside of the U.S. have a fiber component, 1 of the compare is a fiber component. At the end of the day, the macro tower is probably the best business we see out there. And it's going to be our #1 priority unless we really find a new business. I always say internally, Google Search business is the best business model out there. And I don't know if we're #2, but find someone -- another business that's as good as the tower business, the micro tower business, and I'd be looking at it. But right now, it's a very attractive market. We see the growth opportunity in that market. And I think as we want to put our capital.

And just circling back to just the leverage question. Does that ever matter for customer discussions? Do customers ever have a view of whether they want you as a supplier to have an IG rating?

No. And we have ample access to capital, we have a $2 billion rent-up revolver. I don't think we are at credit risk at all at this stage.

When you look at the kind of just the longer-term growth prospects, is there a simple long-term algorithm that investors should just keep in mind for SBA in terms of the growth potential of the business?

I would just look -- I think a good proxy is usage on wireless data network right between fixed-wireless access, handset growth. I think -- it's not a linear growth, it's not going to be steady growth. It's going to be a step function, [indiscernible] going to buy my spectrum. They're going to roll out CapEx in that spectrum band. They're going to add capacity at spectrum band. And you just look at a [indiscernible] of CapEx as a percentage of revenue for the Big Three, and you could just see the step function. 3G, 4G, 5G, and I think long term, this is still a fantastic business.

As you met with investors over the last few months, do you find that there's anything about the SBA story and opportunity that's underappreciated?

I think everybody is focused on 2025 now, what is the lease-up in 2025. I can't answer that question. All I could tell you is that if you take a 3-year view or a 5-year view, it's going to go up because the carriers are going to have to spend more CapEx. I'm bullish long term.

Marc, thank you very much for your time.

Thank you, Michael.

Thank you.