SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia + Technology Conference. My name is Jim Schneider. I'm the telecom analyst here at Goldman Sachs. It's my pleasure to have SBA Communications and CEO, Brendan Cavanagh with us today. Welcome, Brendan.

Thanks, Jim. Nice to be here.

Thanks for being here. Maybe Brendan, just very high level. You've been with the company for a long time now. You've been CEO for just about 9 months, I believe. The company has transformed, I think, a lot during your tenure. We expanded into many different countries over time. What's the impact to the highest level you want to make on the company during your tenure? And what's the most important change you want to catalyze?

Well, first of all, I've been very fortunate to be a part of SBA for over 26 years now. So I've seen a lot of that transformation take place over time, and it's been great to be a part of such a successful company and a successful industry. And some of the things that have made SBA great over the years, the high commitment to integrity, the high quality in terms of the service that we provide, the financial discipline that we bring to what we do, those are all things that I want to make sure that we keep and we maintain and the core of -- the makeup of SBA. So we're definitely focus on retaining all of that and having been a part of it for so long, I feel like I'm already sort of involved there. So there's no real big wholesale changes. But what does change is the environment changes. Obviously, we become more mature, the industry becomes more mature. And when we think about the growth and the expansion that we've had I think while we continue to want to grow, we want to make sure that the focus is on areas that enhance the stability of our company because we're at a stage now in our life cycle where one of the most important things is ensuring stability of cash flow, constant, steady growth, sort of that safe haven in terms of an investment opportunity for our equity investors. And so the focus on the growth areas are how do we improve our positioning and the strength of our positioning in the markets that we go to as opposed to perhaps just trying to grow for the sake of getting bigger.

And to that point, I mean you've expanded your presence in many different countries. Some of the countries, you have quite small scale in today. As you think about the strategic review you've undertaken, how should investors think about sort of your desire to continue operating from these smaller regions is worth continuing to operate there? Or is it more value accretive perhaps to sell some of these smaller positions and get bigger scale in some of the places where you've got a little bit more bulk?

Yes. So first of all, strategic review that we talked about, the main premise of that was to look at as it relates to our international markets specifically was to look at those markets each individually and say, where can this market can reasonably be 5 to 10 years from now? Where do we think we can get this to? And then is that even good enough for us? Is that something that we find to be satisfactory. And then to get there, what are the steps that we need to take. Can we actually accomplish these things to get to that point? And at the end of that analysis as we go through it, you make certain decisions around, okay, if I can't actually achieve something that I think puts us in a position as value additive, then I need to figure out the best way to back away from that market, perhaps exit it. But in other cases, let me find ways to improve our positioning. And we're looking at a number of different things. We have a lot of things in the works, some around expansion in terms of additional assets that we add to the mix that improve our positioning, strengthen either the size and scale of our operations, but maybe more importantly, indexing us to the stronger carriers in those particular markets. So that's a big focus area. Obviously, operating efficiencies are things that we can bring to it as well. So we're kind of in the midst of this. Even though I discussed this on our call at the beginning of the year, it's a little hard for me to get into the specifics of what we're doing. We actually have some tangible things to talk about. But there are a number of things in the works today that I think will actually put us in a much stronger position in many of the markets that we operate in, and I'm looking forward to sharing more about that down the road.

Yes. And then maybe just help us with your logic train here. And what are some of the core features of a market that make it an attractive place for you to be in? And are enough of those new markets out there that you consider investing in a good number of -- or entering into a good number of new ones?

Yes. So the primary reason -- first of all, the U.S. is the best tower market in the world. It always has been. It's where we obviously have the largest proportion of our operations. But the reason to add international markets is largely because they are much less developed in terms of their wireless ecosystems than we are here in the U.S. And so the opportunity to see outsized growth is much greater in many of these places. And so what we're trying to do is to find locations that provide us an opportunity to enhance our growth profile by going into those markets and make them very additive to what we have here in the U.S. In order to do that though, you need to have, as I mentioned a moment ago, you need to have a very strong position in terms of your scale in that market. You need to be very relevant to the key carriers and you need to be indexed to those market-leading carriers. Sometimes and we found -- we've made this mistake in the past, we've been over-indexed to a weaker carrier in the market. And very often, they don't survive, either they're consolidated out or they just go under, go bankrupt. And so you want to make sure that who you're tied to is who's going to drive growth in that market for the long term. So that's a big focus area. And then beyond that, it's just the general stuff, right? Do you have good stability of currency, good stability of regulatory rules, tax regimes, are the land-use laws something that you're comfortable with in terms of operations? And then the last thing, obviously is valuation. I mean once you put all those other things into the mix, into the bowl, you say, okay, this is what I think it's worth when I consider the risks and what I'm signing up for, that's worth a certain amount. And if I can achieve that price point in terms of entry. That's what I want to go for. So that's generally how we think about it when we're looking at these markets.

Yes. A couple of more high-level questions for you, if I could. There's been some rumors of potential U.S. tower portfolio is up for sale in the market. Maybe give us a sense of how you think about the ways in which you intend to expand the U.S. portfolio? And how do you see the private versus public multiple discrepancy today? And are there any factors besides price that will kind of like sway you one way or the other in terms of how you expand that footprint?

Yes. I mean we would love to continue to expand our footprint here in the U.S. That's obviously become more and more challenged because there are less and less sites, just the supply of sites is less. There are a couple of big portfolios like you mentioned that carriers are rumored to be potentially selling. It's certainly something that we would take a look at if given the opportunity and would be potentially interested in. But for the most part, what's available out there are very small portfolios. And we look at every one of those and we are, I think, one of the best in the business in terms of the M&A practice that we have. But at the end of the day, it comes down to what are those specific assets worth? And can we acquire them at a valuation we think makes sense. And the challenge has been what you mentioned, which is this discrepancy, all the public companies have had their valuations compressed over the last couple of years, basically because of interest rates. The interest rate environment has impacted where our companies have been valued. But private tower companies have not responded to that. And I think it's largely because there's the supply-demand imbalance. There's not enough supply of assets, and there's a lot of demand from a lot of folks to add those assets to their portfolios or to create a platform. And so you see this dynamic where price points for private assets have now adjusted with where the public valuations have gone. And so that's put us in a situation where we basically have done less acquisitions. And as a result, we've delevered some over the last year or so. But ideally, we would love to continue to add assets to the mix. And I think we will see those valuation differentials start to compress a little bit, primarily because the public tower company valuation should go up. But I do think as we start to see that shift take place and the cost of capital come down a little bit, it will improve our ability to be more competitive.

Great. Maybe a little bit of a left field question for you. Brendan, I mean, AI has been a consistent maybe, I would say, unrelenting theme at this conference. Today, a lot of large corporates are just kind of trying to figure out their AI strategy, how they might implement it. When do we eventually get to the inferencing phase of AI, I think there's a case to be made, there's compute at the edge and network is part of that. How do you envision that your tower business to benefit from that, if at all, do you think there's more network gear at the base of towers? Or is it simply the wireless carriers need more capacity that makes for better leasing results, et cetera?

Yes. I think -- I actually think there is some opportunity to benefit, and it's really both of those fronts. The inferencing phase of AI, I think, will be very memory intensive, and so you'll have this. For a long time, we've talked about compute power and storage being pushed further out to the edge. And I think this will help kind of facilitate that move of greater storage at the edge. And some of that edge will be tower sites like ours, particularly sites that are sort of fiber aggregation hubs where you see of multiple towers kind of feeding into that would be ideal locations. So that will be an opportunity for us to monetize some of our investment as a result, I think, of some of that AI-oriented activity. And then the other side of it is what you mentioned in terms of just the end user now as all of a sudden got features on their devices that are driving more traffic to the wireless networks, and that puts strain on the networks. And obviously, that's all through enhanced investment in the networks through new equipment at towers and expanding maybe even through infill sites. So I think it's a positive dynamic. I don't think there's any overnight obvious thing that you can point to and say, oh, this is a direct correlation to towers. But I think the broader sentiment around it is positive for our industry.

I want to pivot to the sort of domestic business for a second, but before I do that, I just want to maybe level set kind of how you're thinking about the overall growth algorithm for the company because I think a lot of investors due to the Sprint T-Mobile merger and the different ways that churn is recognized across your various peers have trouble comparing various peers, just the overall growth rate. So when we get clear of this churn event of Sprint T-Mobile, how should people be thinking about sort of the core algorithm for growth, revenue, EBITDA, FFO per share growth, et cetera?

Yes. So I think we're talking about the U.S. specifically, I think in your question. So yes, it is -- the expectation should be that you will see organic growth that's somewhere in the mid-single digits. And basically, there's 3 primary components, right? You have the fixed escalators that are embedded in our existing leases. Those are around 3%, slightly more than 3% on average. So you've got 3% growth kind of locked in to your existing base. Then of course, you have new leases and new amendments that are additive. Those probably add 2.5% to 3%, but in some years, very busy years. It's 3.5% to 4%. In fact, 2 years ago, it was actually greater than that for us. So we have those windows of time. So you've got those 2 pieces. And then the negative side is you have churn. And I think longer term, putting aside the Sprint consolidation churn, I think we'll see that normalize out about 1% a year as a negative. So that puts you somewhere in that mid-single-digit percentage growth range. And I believe that's an appropriate range over time. That obviously translates to faster growth when you get down to the EBITDA and AFFO lines because they're starting at a lower base. It's almost 100% flow through. So that's how we look at it. I think from a comparison standpoint, I would expect that most of the tower companies will be in a very similar area the carriers are, for the most part, rolling out their deployments on a network-driven broad-based basis. They're not making it specific to individual tower sites. So we just got to get some of that Sprint churn behind us. But in the meantime, we continue to collect rents on those sites. So it's actually not necessarily a bad thing. It's just a delay in terms of recognizing that churn.

Sure. And you have good confidence in that sort of 5% growth rate even with sort of like maybe at a little bit over of 50% of the cell sites in the U.S. upgraded to 5G and with carrier CapEx sort of just run around flattish.

Yes, for sure, I do. Individual year-to-year, some years, it will be slightly higher and some years it will be slightly lower, but I feel very confident because you've got the spectrum bands that you're alluding to that haven't been fully deployed yet in terms of the mid-band spectrum for 5G. That will definitely be a driver of incremental growth. You have things like fixed wireless access that have been very successful for some of our customers, but they're huge bandwidth hogs, 20x what the average mobile user is using the average fixed wireless user is. So that puts a strain on the network that will drive incremental investment. And then you even have regulatory directed requirements, some of our customers have minimum coverage and downlink speeds they need to provide to rural areas. Over the next couple of years, that will be a driver of incremental leasing. So the next few years, I think there's a lot of opportunities to see an increase in the leasing environment, and we're starting to see that pick up today in terms of the applications that are coming in.

DISH, I think they have some network build-out requirements that are coming up next year. What kind of network activity are you seeing from them right now? And then how should we think about this impacting your services business as you head through the end of this year and then to '25?

Yes. So DISH is I would say it's a modest level of activity, but almost in sort of a business as usual type of way. I mean our interactions with them are no different than they were before, although the volumes are not what they were before. But we continue to sign leases with DISH every single quarter, and I expect that will continue. In terms of their upcoming coverage deadline, which is in June, I believe, of next year, they probably need to do more. They would need to be accelerating beyond what they're doing in order to actually achieve that. I don't know what the end outcome there is. I'm speculating that perhaps there would be an extension to that deadline, but I don't really know and if there is, that might give them a longer runway, which I think would be good for them. But if, in fact, that's not the case in order to get there, we would have to see a material pickup in activity with them.

Makes sense. I think clearly, your meetings today must have suggested that I think everybody is trying to figure out in the investment community how to sort of think about your growth rates into 2025 and what's going to be at the end of this year. It appears that AT&T is set to do some more upgrades. I think you've just signed a new comprehensive MLA with them. We know, at least we think, that Verizon is going to be kind of steady in their deployments and maybe T-Mobile does more on the rural side and we just talked about DISH. So as we put all together, how should we think about the sort of the new domestic leasing levels being in '25, same, greater, smaller than they were in '24?

Yes. So I mean the breakdown in terms of the makeup is what I mentioned before in terms of the elements that contribute to it in terms of just the shorter term, what happens next year. '24, the second half of the year is lower in terms of its contribution to our financials than the first half of the year. That's already in our guidance that we've given. It's implied there. And so if you took the fourth quarter run rate number for this year, that we've already guided to and you annualize that for next year, it obviously would produce a lower result in '25 and '24. So if there was no change from that, that's what you'd be seeing. However, we are seeing an increase in actual activity levels with customers, both conversations, an anecdotal type of inputs, but also just the sheer number of applications that are coming in. And some of these items that we talked about a moment ago are driving some of that increased activity. So I think there's opportunity for sure to see next year show as opposed to this year, which had a declining impact to see an increasing impact as we get into next year where it grows during the year. The question about whether it will be the same or higher or lower than '24. It's a little premature for me to say. We'll obviously give our guidance in February of next year. But so much of that answer will be dependent upon what happens in terms of new executions, the balance of this year and into the first quarter of next year because there's a time lag from when they sign stuff to when it actually starts to hit your financials. So if that doesn't start happening very soon, even if it starts happening throughout next year, its impact to next year's numbers will be muted. So it needs to happen in the near term. And when we actually give the guidance, we'll already know that answer. So we'll tell you that.

Very good. We'll just have to wait or guess. The U.S. government doesn't seem to have any spectrum like options lined up as far as I know. So based on your conversations with your carrier customers, how do you think that impacts their plan to spend today?

Well, that's right that there is nothing planned. And I think even if something gets on the docket, it's going to be a couple of years out. And then the time for it to clear, you're looking at many years, 4, 5 years probably before they really have additional spectrum in their hands to deploy. However, they're currently sitting on fallow spectrum that they have not deployed yet today that they previously acquired. So that will continue to be a driver of activity for them. And the network demands don't slow down either. So what we found is while it is probably better to have new spectrum out there that tends to be better for our industry as a whole because it drives these new initiatives and new technologies. Even without it, the consumption doesn't slow down. And so the only way to solve that problem if you're a carrier, if you don't have new spectrum is to start cell splitting and creating additional capacity within the existing network. And that typically ends up resulting in new additional equipment on our tower sites or new sites being added into the mix. So we tend to do well in both environments, and I expect that, that will be the case here as well.

Yes. So I mean do you think it's as simple as they just kind of go and run through and upgrade all their existing sites and then they start looking to cell site splitting in densification. Is it as simple as that? Or is there some kind of like different sequencing to that you think might take place?

Yes. I don't think right now that they're changing their profile of spending based on this lack of spectrum. So I think it's more driven on the immediate needs and the needs they see over the next 2 years for their network and as well as other things, frankly, financial reasons are a factor as well that affect where are they deploying their capital and what's the cost of capital. So those things have been relevant, I think, in fact, to the slowdown that we've seen a little bit over the last year is that the cost of money has been higher. So there are a number of factors that affect it, but I think what you'll see is them target the places where they have the most challenges that give them the biggest bang for their buck. And that's not really any different than it's been at any point in the past.

As you just kind of think about like the overall densification requirements in general, Physics 101 kind of tells you that carrier needs more C-band sites than they did on 2.5 gigahertz, for example, just because of shorter propagation characteristics. Is that something that you're already starting to see? How different is C-band deployment than 2.5 gigawatts?

Yes. I think it's a little too early to say whether it actually requires more sites because they are at different stages of deployment. So the 2.5 that T-Mobile is deploying is further along than the C-band deployments. And so what is the end state of that? I don't know yet. But my personal view is that it won't be that different. While it's true that C-band at 3.7 does not propagate as far as the 2.5 spectrum, the carriers are able to compensate for that in part through the super high-power massive MIMO antennas that they're using that certainly helps compensate for it a little bit. But they also have done this carrier aggregation where they start to combine FDD and TDD spectrum. And then when you have a situation where an end user is a good distance from a tower and so there's a weaker signal on that device to the tower movement of data, it is compensated for by using the FDD spectrum. So I think there are ways for them to work around it. So my view is that it will be fairly similar at the end of the day in terms of the number of sites that are needed between the two. But time will tell. And if they need more, that's all right, too. We're here for that.

Very good. And maybe last one on the domestic business. I mean I think fixed wireless access as you mentioned, it requires a lot of bandwidth, but it's also been a bit of a controversial point in the industry, especially in the investment community around what's the efficacy? And is it simply a fallow capacity strategy when you've got excess spectrum to burn? Or is it a strategy unto itself where you would invest specifically to address that part of the market? What's your sense?

Well, that's a better question for the carriers as they're the one making those decisions ultimately. But my sense is that -- and this is just from the outside looking in that it's such a huge part of their subscriber growth. In fact, I think without fixed wireless subscribers, they wouldn't necessarily have had any growth over the last several quarters. And so it's a meaningful part of their growth story and their ability to add customers to their mix. And so I don't foresee them slowing down on that at all. I do think they benefited from the ability to do it cost effectively through the fallow spectrum capacity that they had from their early 5G rollouts. But the amount of consumption, network consumption that's taking place from the average fixed wireless user versus the average mobile user, I mean it's like 15 to 25x more. And so with that situation, it's starting to build in terms of its impact on the network, and I think it will require the carriers to invest to do that, I think they will make that decision to invest because it's such a significant driver of their subscriber growth, but we'll see. But all signs from our perspective are that, that will be what happens.

And based on what you can see, I know just given your insights in the operations, do you think they're seeing kind of hotspots that are cropping up purely due to the fixed wireless traffic?

Sure. Yes. No. I think there definitely are some of those locations. Even in what is considered to be a slow-leasing environment, there's constantly activity across their network and across our sites. And so a lot of that is driven by specific needs. A specific site has challenges and they need to find ways to become more spectrally efficient or whatever the case may be. And so they'll attack that. And that's really not different than the past. It may be a different reason that it's happening. It might be fixed wireless that's causing it. But whatever the reason, there will be definitely that focus from the carriers.

Great. Maybe switching to the international business for a second. In Brazil, the Oi situation seems to be kind of getting to a conclusion where each of the carriers seems to know what the end state of that market is going to look like, give us an update on kind of what -- where you stand in terms of your conversations with carriers there?

Yes. So we have had -- we have very good conversations with each of the 3 incumbent MNOs. You're right that they are focused heavily on the integration of the Oi assets that they all acquired a portion of. And so that's definitely been a big focus area for them. But we have pretty good activity happening actually in terms of lease-up. I think it's going to remain relatively modest for a period of time while they work through this integration because they can only do so many things at once. But once we get beyond that, I think the strength -- or 3 strong carriers that have a fairly balanced market share is a much better place to be than where we've been in the past. And I think it will drive incremental growth because there's still a ton of needs in terms of network development down there. So we have agreements with -- master agreements that are in place with Vivo and with TIM, and interestingly enough, our most active customer is actually Claro. So I think there's a lot of opportunity in that market.

Yes. Yes. And I guess -- to that point, I think América Móvil just kind of announced earlier this year, they're going to be investing. I think it's $8 billion in Claro through 2029...

In Brazil, I think.

Yes, Claro Brazil, sorry, sorry. Can you maybe give us any kind of incremental color if you're seeing anything from those kind of deployments yet? And when do you think we would see actually an impact from those specific program?

Yes. I mean it's very early stages. So I would say it's probably too early to say. Although, as I just mentioned, they actually are our busiest customer down in Brazil. So I'm sure that's partially the beginnings of some of that effort. But they're actually our busiest customer across all of Latin America as a matter of fact. So they seem to be taking a more aggressive approach in terms of their network development. I do think that, that is certainly a great sign in terms of the capital that's being poured into it, the importance that América Móvil is placing on the Brazilian market. And I think as one of the largest tower companies there, we're in a very good position to share in that. And as I said, we're starting to see it. We're just at the beginning stages there. So I think there's a nice long runway for that.

Yes. And structurally, you feel pretty good about the go-forward from Brazil market and the growth you can drive there longer term?

Yes, I do. I mean, like I said, we've got to get through some of this integration with Oi. We have some overhang from Oi's wireline business that will have to get cleaned up as they've gone through a restructuring there, judicial restructuring. But yes, I mean, the dynamics for the remaining 3 carriers as you get some of that stuff cleaned out, I think, is a much stronger position than we had before where there was sort of this weaker one in there and there was frankly, too many carriers for the market. I think we're at more of an ideal kind of point in terms of number of customers. So I do think, structurally, it's got a lot of opportunity. We just got to get through the consolidation stuff. Unfortunately, there will be a little bit of that noise for the next 2 years, probably.

Yes. you've been relatively explicit in your public commentary about considering assets in Europe where you don't have a presence today. Are there any other countries or regions where you don't currently operate that could be of interest? And maybe you say something about Europe, if you would?

Yes. Well, yes, I don't know if I've been explicit about Europe specifically. The way our philosophy is, and this isn't really a change, but it is very clearly the case now. We are focused on looking at all opportunities for asset expansion. So we don't target a specific market. We're not saying, hey, we need to be in this particular market. We are open to all opportunities as they come along. That might include something in Europe. It might include something in another part of the world. That doesn't mean we're going to end up in those places. It means that we're going to evaluate them on a stand-alone basis, if they provide some of the elements that we talked about earlier that were important to us in terms of international markets, then I think you'll see us if we can get the right valuation, you'll see us go into that. Our top focus though, our top priority in terms of international growth or expansion is really around the existing markets that we're in. If we can do things that enhance our position, particularly in those markets where we're a little subscale, then that's what I would prioritize over going into a new market. But at the end of the day, we're looking at all opportunities that are available and I wouldn't be surprised to see us go into a new market. But at the same time, I wouldn't be surprised if we didn't. It really is not something that we target in and of itself. It's based on the individual option that's in front of us.

Yes. But it does sound like maximizing bulk and relevance in the markets where you are today, is probably job one.

Yes, I think that's more important. I mean, really, what's job one is we have what we have, right? And we've got a lot of great assets, and we have some that are probably a little less than great. And so trying to figure out how to optimize the portfolio we have. In some ways, the best way to do that is to add complementary assets that strengthen the whole. By putting them together, it actually improves the overall position. So that is definitely our primary focus is how to strengthen and stabilize as best we can in all of our existing markets and our existing investments. But if we add new markets along the way that are additive to the overall company, that's great, too.

A couple of minutes left. I just want to maybe ask one last thing on capital allocation because, obviously, we've seen -- brought leverage down quite a bit. You've looked at kind of doing some debt restructuring. How should we think about sort of your desire as we see here today and your outlook for rates environment which who knows?

I only knew that, yes.

Exactly. You see here today, assuming nothing changed from where we are today. What we'd rather do in terms of prioritizing debt further repayment versus potentially be opportunities with buybacks, et cetera?

Yes. So our leverage today is at basically the lowest point that it's been at in our history. And it is not our goal today to become an investment-grade company. And the reason for -- now -- eventually, we will be an investment-grade company. That will happen ultimately as we continue to mature over time. It will naturally happen. But we are not targeting that today because I think that the benefit of that, which is really all about what is the cost to borrowing, what is the cost of debt, can it be done at a level that is actually more attractive? And I think given our access to secured markets and what we can raise at there, there's really very little difference. And so it's much more important to me to hang on to the incremental leverage capacity that we retain in our current position so that we can be opportunistic as asset investment opportunities come along or even perhaps a dislocation in our stock price where we would go and buy in more of our own shares. That flexibility and that extra capacity to use that level -- the extra ability to use that leverage capacity is much more important to me than having a lower leverage or investment grade rating today. So we think about it in terms of continue to be opportunistic. I think if things don't change, your question was if they don't change from today, I think you'll see what we've done before, which is a continued mix of all these things. And this will probably be the case anyway because it's our goal is to continue to add assets, buyback shares, and where appropriate, pay down debt. But at this stage, where our leverage is, I don't think it's necessary to focus too much on the paying down debt. I think the other 2 things will capture more of our spending on investment.

Great. That's a pretty great tour to force for the business and a good place to end with just on time. So thank you very much, Brendan. Appreciate it...

Thank you, Jim. I appreciate it. Thank you all for being here.