SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Thanks, everyone, for joining. I'm Batya Levi with the communications team at UBS. Our next presenter is Marc Montagner, EVP and CFO of SBA Communications. Very happy to have you here. Thank you so much.

Thanks for having me.

So every year, we -- given that timing of the year, we wanted to start off with maybe just a quick overview of your strategic focus as we head into '25?

Right. So I think I've been a CFO for about a year, Brendan Cavanagh, our CEO, step into the role from a CFO position in January. At the earnings call in February, he announced a portfolio review. As you know, we operate in over 15 different international market. And I think the objective is to either be #1 on #2 as a wireless tower provider in our international market. In order to have economies of scale, better margins and also a better dialogue with the mobile operators. So going through this review, for example, I think we sold our operation in Argentina. It was very small -- immaterial. We announced that we are going to sell our operations in the Philippines. There are over 30 tower operators in Philippine, most of them are backed by private equity firms. There's no way for us to achieve scale in the near future, so we'll exit the Philippine. In Central America, we -- like Central America, the contracts are U.S.-denominated, the markets have gone through consolidation already from -- down to 2 wireless operators, Claro, which is América Móvil and Millicom and we had the opportunity to -- we had 3,000 towers in the region. We just announced that we are buying another 7,000 towers from Millicom. We have a 15-year lease with Millicom, U.S. denominated. We extended the lease on the existing towers that we have. And also, we have exclusively on 2,500 BTS, build-to-suit new towers for Millicom in region. So we are basically locking in mid- to high single-digit growth rate in the region being the dominion operator in the region. So this is the type of, I think, directions we want to go in, either have scale, be the #1 or #2 operator or exit a market where we are just a marginal player.

More to come in '25?

More to come. It's ever going project, trying to keep optimizing your assets.

Okay. Let's start with the U.S., the majority of your business comes domestically. And top of mind is, I guess, what you see from a carrier activity perspective. If you could just level set what you're seeing there, how does that compare maybe to the beginning of the year would be helpful?

Well, I think our CEO spoke about green shoot earlier this year, and it's definitely a much more active dialogues with the 3 operators. So I think T-Mobile, I think, has a coverage requirement by the middle of 2026, as part of the Sprint transaction they did. So they need to build additional coverage. AT&T, I think, is probably playing catch up a little bit to Verizon, and Verizon is steady going forward. So we see a much better dialogue right now, but you need to realize there's always a lag between -- you get an amendment you receive more amendment, but is it a monitory amendment? Is it covered under the MLA. Is it an amendment for a colocation, for new coverage. You have to sort it through. And there's probably a 6 -- probably more like 9 months delay between bookings and billings. So we feel -- we haven't given guidance yet for 2025. We'll do that in the earnings call in February. So it's -- you'll see more, but I think we feel good about probably the second half of 2025.

Okay. In terms of our view, these are our estimates, maybe T-Mobile built 5G to about 80% of its towers in the U.S., Verizon maybe 60%, AT&T may be around 40%? Are those in the ballpark?

So if we can only see our own towers. And on our own towers, I think -- let's start with T-Mobile, they mostly -- the only roll out as far as we know, on 2.5 gigahertz spectrum, and they're probably 80%, 85% on SBA towers. Verizon is probably around the 60% mark and AT&T at around the 40% mark, on our towers. I can't talk about their network nationwide.

And when you talk about you feel good about second half of '25, is that a function of growth having 12-month trailing revenues, so kind of stable from here on and a pickup in the second half?

It's too early to say, we haven't given guidance, but we just have a much more active dialogue with our carriers. So hopefully, that will translate into dollars and cents, but I can't promise that yet.

Okay. And terms of the type of activity, still quite a bit of amendment to continue as they build out their 5G. Are you seeing any green shoots in terms of densification efforts?

We started to see some colors which is good. And eventually -- so it's a cycle where you start amendment, you build coverage and colo for capacity and then more for coverage. So definitely, we started to see some colos, which is a very good sign.

Is that across the board or 1 or 2 player moving ahead with it?

It's hard to say. It's hard to say.

Do you -- fixed wireless has been ramping up much faster than we had originally thought. Do you see the carriers putting capacity behind it right now?

Remember, we are a passive infrastructure provider. So we rent space on our vertical tower. So for us, it's just capacity. Capacity is capacity, it's impossible for to differentiate between what goes for fixed wireless access or access. But we know, I think we're hearing that a fixed wireless access customer uses probably 20x more capacity than handset and order growth right now, I think the industry is going to add about 10 million new fixed wireless access customers. So that's going to require more capacity and definitely more equipment on site. So we -- fixed wireless access is probably going to drive growth for us in the foreseeable future.

As you think about the need for more capacity down the road and potentially more densification effort, so where you stand, do you have a preference, if you would want to lock in some of this activity within a comprehensive deal, like you've signed with one of the players. Should we assume that, that will be your strategy -- preferred strategy?

It's really dependent on the existing agreement, what the carriers want. I think we want to be helpful to our carriers. We have one comprehensive MLA right now. we may or may not do more going down the road, whatever makes sense for us and the carriers. So it's case-by-case basis, right now.

And maybe just overall, U.S. growth has been roughly at mid-single digits if you take out consolidation churn. Your peers have been reporting at that level. When -- maybe you could remind us in terms of the remaining Sprint/T-Mobile churn that we should think about. But as you exit that, is there any reason why you wouldn't see similar growth like your peers?

No, I think that's right. I think we are all in the same industry, supporting the same 3, 4 wireless operators. If you look at it under the terms of our contract as an escalator of about 3% in the U.S., we lock in 3% growth rate. Lease-up should be on, I think, a sustained basis is along 3%. And then on Sprint churn given the long-term contract that we have should be around 1%, so 3 plus 3 minus 1, you had about 5%. And Sprint churn is going to be elevated in '25 and '26 and then it's going to taper off.

'27, where it will mostly be done?

That's right.

What do you see in terms of churn, excluding Sprint?

Less than -- at around 1%, I could see.

But it could drive to potentially less than 1%, given...

It may. You just don't know. I mean carriers are always going to optimize their network. So there's always going to be some churn, but it should be around the 1% level long term.

Okay. And maybe another carrier DISH, about 2% of your revenues...

It's 45% to 50% of revenue today.

Right. Million?

Million.

Right. How should we think about DISH activity? What do you see right now? What's your -- what are you sort of including in your projection period?

Well, I mean, first of all, we hope that they are successful and we want to support them in building their network. Right now, I think they receive regulatory relief another 18 months, 2 years. So long term, they are going to have to deploy more sites. There's no doubt in my mind. For 2025, we're going to see very low activity probably from DISH. All of this is -- I think it's going to get phased out, is moving to the right.

Okay. And maybe if you could touch upon cable. We haven't really seen them do much yet. Yesterday, Comcast mentioned that they do have the option to offload some traffic to CBRS, but they don't have to -- are you seeing any activity from them?

We don't -- really nothing material. I think given the attractive agreement that they have with Verizon, I just don't know the economics of building CBRS versus offloading on Verizon. I can't answer that question, but we don't see a lot of -- we don't really see anything material there.

Okay. And we always try to keep an eye on what the next tenant could be on the U.S. towers. We've heard some with potential edge compute opportunity that is coming closer to the towers, the edge of the network. What are you watching out from your end?

Listen, we spend a lot of time thinking about edge computing. We bought data center. We have [indiscernible] mini data center you could install at the turnkey solution at the bottom of the site. But -- we haven't seen it yet. So maybe with AI that may happen. But at this stage, we haven't seen any pickup in activity on that front.

Right. And what about -- a little bit of a small presence in the data center space. And how do you think about that strategically?

Data center, obviously, I think there's a huge demand for data centers. It's very capital intensive. And you have to do that at scale, right? Look at the scale operators are spending 30%, 40% of revenue on CapEx, I don't see us spending this type of capital to compete in that space. So -- we like the macro tower business, 85% gross margin, some 70% EBITDA margin. We like the deal that we just did with Millicom in LatAm that was done at 11x tower cash flow, 11.5x EBITDA. That deal is very accretive to us, you're locking an attractive growth rate is U.S. dollars. It's a 15-year contract. I think the macro tower business to us is still the most attractive business, and we're going to try to focus on our core business at this stage.

As you forecast potential growth coming down the path and think about AI and AI on the device, I guess we haven't really seen that much yet, but assuming that there could be another phone coming out next year. How do you think this will all benefit the tower business going forward?

Listen, I think the traffic growth benefits the tower company, right? So it started with voice and then it went to text and then data, video and now it's AI. So it's just more consumption to the handset -- consumption of data on the handset keep growing at double digit and AI may accelerate this. So I think it's good for the industry. It's very difficult for us to quantify it at this stage, but -- that's an industry that -- I mean that profit is going to grow at a higher growth rate than GDP, and that should just flow through to basically our business model at some point. So I think it's going to help us support this mid-single-digit growth rate in the U.S. going forward. And internationally, I mean, internationally, 5G is still behind us and it needs to catch up at some point. So we feel good about international as well.

Sounds good. And maybe just to touch on private operator, tower operators in the U.S. There's been a little bit more activity. Verizon signed a deal with Vertical Bridge. Maybe if you could touch on why did you pass on that deal? Or are you seeing a bit more competitive activity from the private guys?

Well, I think there's a scarcity of large portfolio of towers coming to market. And obviously, the private equity infrastructure fund have raised a lot of capital. The credit market are willing to lend them 10 to 12x on the buy side. So that makes it for a very competitive environment for us. There's one process where I think it was rumored that we're active, that was a Shentel towers that came to market earlier this year. And we looked at it, it's a very attractive portfolio, high-quality towers in a great part of the U.S., Virginia, West Virginia, Ohio, Pennsylvania, very -- probably clear that they're not going to get overbuilt given the landscape, the national park, the geography. And so you say, well, yes, I like to own this portfolio. And so you participate in the process and you say I need to build a model. So what do you underwrite? Do you underwrite a 3-carrier model, you underwrite a 4-carrier model, how active is DISH going to be in that part of the country. And then you see there's very little fiber to the home there. How big is fixed wireless access going to be in that territory. And then you say, well, there's still a lot of Sprint leases there because it was a Sprint affiliate. How much churn are you going to get? And what interest rate do you model going forward? You're probably going to operate those towers for the next 30 years. So do you use elevated interest rates like we had at the time, when you say long term, the tenure is going to come down and your WACC is going to be lower. So you have all these dials in the model and you bid for the assets and you lose and you say [indiscernible] lower bid. I could justify an even bigger number. So I think towers -- it just shows the earning power of the tower business. And the fact that the credit market are willing to put 10, 12x leverage on this makes it difficult for us to compete because as a publicly traded company, we're not going to lever our company to 12 turns. So you lose, but you say, "I see the value." And my conclusion is that it probably means that the public market are undervaluing the tower business versus the private market.

Yes. That's interesting. And do you see any change in the variance of public versus private multiples?

Well, as long as the credit market are willing to put 10, 12 turns of leverage on this asset and as long as you have so many PE infrastructure funds trying to deploy capital, right? Unless the public market revalue the public tower company. I think you still -- you're going to see a delta going forward because it's a scarcity of large private portfolio coming to market right now.

And what about new builds in the U.S.? Are you seeing any change?

New build with inflation, the cost of building towers has come up tremendously, the zoning -- so we still build tower for our carriers, but we are very disciplined in terms of the returns. So we compared to some of the private company, we are not a very large player in the U.S. market in terms of big deals. Just we don't -- it's very difficult to justify the economics on some of those deals for us at least.

And the network services business, it's interesting. It's choppy. You have less visibility. But once you get it, it's kind of like is a good precursor for more tower activity to come. This year was a good year. How do you think about maybe just the next 6 to 12 months? Can this continue?

Right. So I think this year, I think we guided towards about $150 million revenue in our service business. Run rate in the third quarter and fourth quarter is probably at around $40 million a quarter. And remember, we are very indexed towards T-Mobile, and we have a good dialogue, and we are being more active and it's a precursor of what should come down the pipe in terms of lease-up. So service is picking up a little bit.

Right. And are you picking up the other tenants also in terms of their services activity?

We are less active with the other. We mostly indexed towards T-Mobile today. We do some business with the other guys as well.

Got it. Maybe switching to Latin America. The recent acquisition that you announced with Millicom, can you just maybe touch on some of the differences that, that portfolio brings versus other Latin American towers do you have. The U.S. dollar denomination is quite attractive. But what was the other attractive piece of that?

First of all, we have operations in the region already. So we have salespeople, we have repair and maintenance capabilities. We have -- we deal with billing, account receivable, account payables. We have an infrastructure to support more towers. The contracts on U.S. dollars. It's a 15-year contract. So it locks in basically with a CPI-based escalators. So locks in a growth rate. We have an exclusivity to build 2,500 BTS. And we expanded the terms on our existing leases with Millicom. So it's really -- the downside is protected and we locked in some upside. So I think -- and we feel very good about Millicom. It's a good strategic partner to us and it's a great relationship. So this made total sense. Brazil today, we like Brazil for the long term. It's obviously the largest market in Latin America. They would be always big growth in Brazil. Right now, I think government or the government deficit is running at about 10% of GDP. So the real has lost 25% of its value so far this year and has been really tough on the FX side. So I think going -- and it's still churn coming. Oi is being consolidated into the other 3 operators. So we're going to see elevated churn going forward for the next 2 or 3 years. So I think we are going to really try to maximize free cash flow and not spend too much CapEx in Brazil for the foreseeable future until we see an uptick again and some stabilization on the currency.

Got it. In terms of the incumbents in Brazil, as they decommission some of the Oi sites, are they bringing up maybe new activity as well? Or are they still in that absorption period?

I think from what we can see, it's hard to say that's probably still in consolidation phase. 3G is still way beyond -- I don't know, I don't know, 25%, 30% rollout. I don't have exact numbers, but there will be a pickup on the growth side once the operator start rolling out 5G. So I think in the long term, it's going to be an attractive market. I think in the next, couple of years may be a little bit challenged.

Is it sort of similar 2% to 3% growth that we've seen? Is that...

It's probably going to be in low single digits.

And the extension of the Millicom contract, is that -- did you pick up a new piece of that contract? Or is the existing -- do you have more build-to-suit in other regions or sites?

No, it is only focused on Central America at this stage.

Got it. And how should we think about the closing of that deal? Will it be in tranches or...

It's still TBD. It's probably going to be probably in the second half of next year at some point.

Second half of '25. And maybe moving on to Africa. You have a small scale now. Would you like to get bigger?

Well, we are in 2 markets, Tanzania and South Africa. And we are very pleased with the results so far. We got in at the right time, at the right valuation. We have seen double-digit growth there for multiple years, and it's really building coverage. So Tanzania, the government and the carriers are very active expanding coverage. South Africa has been growing at double-digit rate for the past few years, coverage and capacity. I think we are adding Power-as-a-Service. So we do [ truck rolls ]. We outsource, obviously, the truck rolls the energy costs are the pass-through. So we protected it but it makes the site stickier. We have solar panel on a lot of the site. And it's -- it's nice to see the growth. It's nice to see a nice return on your investment. I think Tanzania is going to keep growing at double-digit rate. South Africa, economically, the country is -- has some challenges, unemployment rate is very high, so we need to monitor the situation. But we are very pleased with the results so far in Africa.

Is there a region that could continue to grow double digits?

[ Tanzania ], for sure, South Africa, probably high single digit, I don't know. We haven't done the plan yet, but it's demand -- there's definitely demand.

What are your thoughts of adding more scale in the continent?

I don't see us really expanding in emerging market at this stage. I mean Central America was very different, given the fact that it's U.S. denominated and we locked in an interesting growth rate. I think I should probably step back, right? If you look at -- because the way we look at it, we spend a lot of time discussing how to allocate capital, given the fact that we're massively free cash flow positive, capital allocation is going to be a key driver to create value for our company. So look at '23, '24 and '25. I'm going to use rough numbers, but it's basically $1.9 billion in EBITDA. And then you have maintenance CapEx, $50 million, gross CapEx, which is BTS mostly about $200 million. Then you have cash interest expenses to service that [ $350 million ]. This year, the dividend is about $425 million that leaves you -- and tax is about $45 million this year. So that leaves you with about $825 million of cash to basically allocate. And what have we done with this, 2023, it was -- interest rates were increasing with a $12 billion balance sheet. We thought it was prudent to pay down debt. So we used $600 million to pay down debt, $100 million for share buyback, $100 million for tuck-in M&A. 2024, we did about $150 million small M&A -- tuck-in M&A, $200 million share buyback in the beginning of the year where our stock dip and the rest was allocated to paying down debt. Going forward, I think I gave those numbers publicly at the earnings call in October, the revolver was fully paid down in October. At earning time and with about $350 million of cash on the balance sheet. We're going to keep building our cash position and we are going to pay $975 million, call it $1 billion to Millicom in the second half of next year. So the capital for next year is already allocated for. And we're not going to raise capital to pay for Millicom. We're going to use extra cash.

Right. But you've also said before, for the right deal, you might consider to take your leverage higher?

For the right deal. That's the reason we haven't made a commitment to being investment grade. Our leverage is about 6.4x today. I think we have a stated leverage of goal target of 7 to 7.5x. I think if you really look at we just did an ABS deal $2.1 billion in October, we priced this at, I think it was 4.8%. So we priced it [ single A ] way into investment-grade level. And we want to have the flexibility in case there's a disruption in the market to either buy back our share or do M&A. But we -- I think capital allocation is going to be a key driver to create value going forward, and we want to be disciplined in how we allocate capital.

And are you taking the view right now, maybe at least in the near term, that the rates might stay a little bit elevated for a bit longer?

Right now, we're in a watch and see mode, I think we have a term loan, $2.3 billion term loan, $2 billion of this is hedged. But I think we have 2 hedges on this. So the average price -- the average rate we're going to pay on the term loan is 5.4% on that $2 billion. The ABS, we just priced below 5%. So I think you're trying to keep our cost of debt as low as possible. We don't have any maturity until January of 2026 million, $750 million ABS. So at this stage, we just want to pay down debt, fund the Millicom acquisition out of free cash flow and see which way the interest rates evolve over the next 9 months.

And opportunistically, does that leave you a bit of room to do share buybacks [ pulsed ] in and out...

That's right. That's right. Remember, well, payout ratio on the stock is about 30%, between '23 and '24, we increased the dividend by 15%. And we have room to keep increasing the dividend at double digits for the next few years. Obviously, it's not a management decision. It's a board decision. But I think we have the flexibility, I think its intention to keep increasing the dividend at double-digit rate. For the next few years.

Right. And you've done a pretty good job in terms of controlling the cost side of it also. It's already a pretty low SG&A budget, but is there more room?

It's really -- it's really tight. It's very well run. And I don't see really any efficiency to begin on the SG&A front, to be honest with you.

Okay. I know you have a pretty big deal to close, but a lot of portfolios are coming up in Europe right now, more fits with your maybe strategy to increase the developed market exposure. So how would you describe what an attractive asset is. And you said like maybe increased leverage for the right deal. What does the right deal look like?

Well, it all depends on DCF and your IR, right? So I personally, I think I like Europe, we like Europe. We looked at a deal in Europe. It was rumored in the press earlier this year. I think Europe is behind the U.S. in terms of 5G rollout. So in the short to medium term, they probably see a higher growth rate than we are in the U.S. It's euro denominated. So that makes it attractive from an FX standpoint. And in the very stable countries. So -- and the operators there, it's very similar to what we did in Central America have long-term contracts. 10, 15, 20-year contract, all announcing renewable, which makes it very attractive because you protect your downside, you have escalators built in. Plus the growth coming from the 5G rollout. So it's -- those are very attractive markets. The issue really is going to be valuation. And the way we look at it, it's based on a DCF basis. It's all about valuation. The last deal we looked at, we couldn't get their own valuation. And we want to be disciplined. We going to be a good steward of our capital.

Right. And I guess not every country within Europe has the same dynamics also. So how much does that play into your thought process in terms of who the counter party is, what kind of consolidation that the market could go through. There is an asset available in France, for example, is that an attractive market?

Well, I obviously like the French market. Yes. No, listen, every market is definitely in Europe. It's just like a mosaic of different regulatory environment -- you regulate the telecom industry, but you have the local regulator, the markets with 5 operators, 4 operators, 3 operators, some allow RAN sharing, some don't allow RAN sharing, you can just take a global view on Europe and say like Europe. And taxes are very different. On market, we looked at was 15% tax rate, it makes it very attractive in Euros. In some markets have different...

France is not lot like that, right?

No, no. France is not like this. You have to look at every single market, dig in, do the work on the regulatory front, the tax side, and then you have labor laws, you have so many regulatory issues you have to look at. So you can just say, I like it. You have to do the -- we are a very bottom-up company. We like to roll up our sleeves. We have very strong operators. And when we dig in, we set our team and we do the work bottom up. So I cannot tell you -- and even if you say me, well, do you like the market, every tower company is going to have a different deal, a different escalator, different long-term contract, different arrangement on RAN sharing. So you can just take a blanket approach. You have to look at everything on a case-by-case basis.

And on the flip side, you always have the potential to invest in your company, I guess, through buybacks?

We could do buyback. We like the buyback. We did in the first quarter, and we saw that was a good allocation of capital. So we're going to be flexible and opportunistic.

Great. I think we can leave it at that. Thank you so much.

Thanks for your time.