SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Good morning, everybody. I'm Simon Flannery, welcome to day 3 of the TMT Conference. Hopefully, a lot of you got a chance to listen to Elon a few minutes ago. And now we've got a great follow-up here. We're delighted to welcome Marc Montagner, the EVP and CFO at SBA Communications. Thanks for joining us, Marc.

Thank you, Simon.

Great to have you here. We were colleagues many years ago, so nice to catch up again. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. So Marc, you've been at SBA now a little bit over a year. You're a telecom industry veteran, and you've seen it -- the industry from a lot of different angles. I'd love to get just a little bit of a 30,000-foot perspective. So in your time at the company, how has your perspective changed on the tower industry on SBA versus what you were expecting going in?

Right. So first of all, I want to congratulate you for like 30 years. I remember you doing this conference in 1995, when I was at Morgan Stanley and you've seen just like me the beginning of the wireless industry. It was basically no Internet, no data center. And this -- you've seen the downturn in 2002, 2003 and the explosion of wireless. And now we all carry a personal computer in our pocket basically, and we have access now to AI and videos and everything. So just speaks of the power of technology and how it has transformed our daily life. I mean, they have like dollars in their early 20s. And they can't imagine a world where you can watch your video anytime or where you have Google Map and pictures in your phone. So our business has been around for 35 years. I've been in the telecom industry since 1989. And it was a land grab initially, dozens of carriers at spectrum and just need to build coverage as soon as possible. 35 years later, the world has gone wireless. We all carry a personal computer in our pocket and it's not going to go away. So 18 months -- 16 months at SBA now, I think I can see that how this company is going to be around in another 35 years just because our customers, the wireless operators need our infrastructure. And so it's a little bit of a step function, like carriers buy spectrum, they roll out a new technology, 2G, 3G, 4G, 5G, they get a 10x capacity increase and then need to fill up that capacity. And when that capacity is used, they go back and fit in, do colocation, extra coverage. So I think if you really look, you go back 15 years, the big 3 CapEx as a percentage of revenue oscillate between 15% of revenue and 25% of revenue. So it was like 2021, '22, it was above 20%. And last -- and they got plenty of capacity in last year 2023, '24, I think '24 was probably below 15% of revenue was spent on CapEx. But as we mentioned earlier last year, we see -- we started to see green shoots in industry in our business in the first half of last year. And the momentum has been building where we see more amendment quarter-over-quarter, the number of applications from the carriers has keep increasing. And now we are seeing more demand for colocation as opposed to just amendment. So it's just building up, and I think we feel pretty good about 2025, and it's probably a good transition and a good momentum for 2026.

Right. So maybe just to summarize some of your '25 guidance for it, if you would. We've got the Millicom deal coming in at the end. So how does that all tied together, you've got a little bit of churn to still to deal with.

Right. So I think if we look at our business, you have the domestic business and international. Domestically, it's actually fairly easy to forecast. It's -- our escalator is about 3% of revenue and new leases, it should converge at around 3% growth. So in a slow year, it's closer to 2%, where the carriers have to spend more capacity. It's probably going to be close to 4%. So you have 3% growth from the escalator, about 3% average from new leases and the non-sprint churn is about 1%. And you've seen our non-sprint churn going from $30 million a year in 2023, $25 million a year in 2024, low $20 million for 2025. So you are kind of in a world of 3 plus 3 minus 1 in terms of top line growth. And that's domestic business, 80% of our revenue of our leases, 80% of our EBITDA roughly are U.S. denominated. And then 15% of our business is in Brazil. So I think we're still bullish in long term on Brazil. We have a large exposure there. I think the country is going through consolidation from 4 carriers to 3. So we faced churn in the last 2 years and churn is going to remain elevated there for the next couple of years. And last year, unfortunately, the real was the worst performing foreign currency, was down 23%. It stabilized this year. Interest rates in Brazil at 13%, going to 16%. So I think we feel better about the real in the short term. But long term, Brazil is a country that's going to keep growing and we just need to go through the consolidation. So I think -- the U.S. market, I think we have very good visibility and internationally, Latin America is going to go a growth engine at some point, but currency and carrier consolidation is a little bit of a headwind in the short term.

Great. You talked a few minutes ago about the U.S. carriers still doing amendments, but looking at colocations. Could you just unpack that a little bit for us? And just where are we on the C-band or the mid-band deployment, at least back a lot of the 2.5 from Sprint is now out in the market. But there's a lot more to go for the other carriers and then DISH is there, well behind as well.

That's right. So if we look at our site, the SBA sites in the U.S., about 55% have been upgraded to 5G, 55%. T-Mobile is above 80%, all 2.5 spectrum. Verizon is about 70% and AT&T below 50% on our side. I can't speak for their network overall. And I think Verizon -- T-Mobile is still very busy. They have minimum coverage requirements for mid-'26 very active. Verizon is very, very steady and AT&T is playing catch-up. So I think we see the momentum coming from '24 into '25. Now the book-to-bill cycle on an amendment is maybe 3 months, but on the colocation is 6 to 9 months. So we're going to see that mostly in the numbers probably in the second half of 2025.

So you'll be accelerating actually coming out of '25?

That's right.

And of these colocations, is this a densification? Is this infill? What's the nature of that?

It's both. It's coverage, and it's densification.

Okay. And DISH fairly quiet right now?

Well, we don't -- didn't pencil much from DISH in 2026 because I think they're going to be focusing on handset, purchases and marketing. But we're there to support them. We have a very good dialogue with them. And I think they got 18 months we leave on the regulatory front. So we expect them to be back in 2026.

And we see the FCC making some moves on spectrum, DE auction, upper C-band proceeding. There's questions about the lower C-band. Is that something that you think can benefit you over the next couple of years or longer, I guess?

Definitely, I think if you look at the industry, right, when carriers receive a new band of spectrum, they usually spend a lot of money for it and need to put it to work. So that would be a catalyst at some point. But that being said, I was on the board at Intelsat, they cleared up 100 megahertz of C-band spectrum. It takes a long time to clear spectrum.

Need to launch traditional satellite...

Because you need to launch new satellite, repack, your 200 megahertz into 100 megahertz. So I don't see C blocks coming to market before the -- probably the end of the decade. But it's doable. It's a question of time and money but it will definitely happen. And I know that the FCC is very focused on getting more spectrum to market. So...

Yes. It seems like, particularly for spectrum that's not really being used effectively right now, giving it because I think the Chairman has been talking about how the U.S. is falling behind in terms of spectrum per carrier.

That's right. And if you look at the satellite in at least the GO, I think they would love to see more proceeds going to their shareholders because they could probably have repacked some of the spectrum. So everybody would benefit, but it takes time. You have to do NPRM at FCC. So is it common, find a way to compensate the satellite operators, order satellites from Boeing or other manufacturers. So it just takes time.

And since we're on satellites, we get the question a lot, I'm sure you do, is how does that -- Starlink is now at 5 million subscribers, how does that interplay with the tower business? Is that -- is there any competitive risk? Or is it really for areas where there is no 5G, there's no fiber?

To me, satellite is a great complement to the wireless service. I think if you look at it, it's -- especially on the LEO or GEO, it's a fantastic product, if you're on a maritime, container shipping or cruise ships, airline industry, you want to have WiFi over the ocean or anywhere, you are an all driller in the Tundra or in the Gulf of Mexico, I think it's a fantastic technology. I think in -- terrestrially, I think it's pretty just applicable in a very rural area. You're always going to have a tree, you're in a parking lot in apartment, you're not going to have line of sight to a satellite. And the capacity is always going to be limited. So I don't see it as a threat, more as a complement. And for the wireless -- for the tower company, I think if you really want to reduce the latency from the satellite, you want to take, I don't know, Starlink is probably 40, 45 millisecond, you want to take it 25 or 30 millisecond, you're probably going to need more uplink and downlink from the towers pointing on the sky and terminate on a fiber network. So I think long term, it's probably positive. But I think it's going to be a great complement to the wireless industry. Yes.

Yes, it's moving quickly. The domestic services business. So what are you seeing there right now? And it used to be that, that was a pretty good precursor to leasing trends. Is that still a good relationship, you think?

Yes. And it's a leading indicator of where our business is going. So we did about $150 million in revenue last year. We guided at the midpoint $170 million in revenue this year. So we see great momentum in that business. But it's heavily indexed towards T-Mobile, but it's a leading indicator of the future level of activity. So it's another good data point for us.

And what are the big buckets you're seeing within that? Is it sort of RF planning for the construction? What are you...

Its planning, its design, it's construction planning and all of this. So I think it's all of the above, really.

Well, let's pull back out to the big picture here. Brendan took over from Jeff, I guess, a year ago, you've got a strategic review. You've done -- taken some actions already. It sounds like there's some more to go. So just help us understand the process and the objectives and what -- where we are and where we're going?

That's a good question. So I think Brendan became CEO in January of last year. He's been with the company for 27 years. So he was there from the ground up really. And we operate in about 15 international markets. And I think if you really look at the numbers, we had better businesses, better margin, better growth prospects in countries where we had scale because obviously, with scale, your G&A is a small part of revenue, but also you have a better dialogue with the leading wireless operator because they need your tower because you operate at scale, you have the coverage. And so I think the view was to do a strategic review and to the extent it's possible, exit the market where we did not have scale or find a way to reach scale in order to be a dominant tower company. So in the last 12 months, we sold our operations in the Philippines, over 30 tower companies in the Philippines. We did not have a sale leaseback with one of the leading wireless operators. We exited the Philippines. We exited Colombia and Argentina. And the numbers are really not material. It's a very small market. In Central America, we like Central America because there are 2 wireless operators. Those markets have been consolidated out to Millicom and Claro, which is part of [indiscernible] portfolio of companies. The contracts are U.S. denominated. And we are operation there. And Millicom was selling 7,000 towers. So we have an agreement to buy 7,000 towers from Millicom. That's $975 million and build-to-suit program, exclusive right to build 2,500 towers from Millicom over the next 7 years. As part of the agreement, we have a 15-year contract with Millicom in U.S. dollars with an escalator. And we extended the lease with Millicom in -- on the towers where -- that we operated in the market. So I think the beauty of it, we pay 11x to cash flow, 11.5x EBITDA. It's an accretive deal. We locked in a mid- to high single-digit growth rate in U.S. dollars in markets where we have people, distribution, operation, support, et cetera. So it's those markets we're very comfortable with, and this deal is very accretive to us and with de facto the dominant operator in Central America.

So to that point, you mentioned scale a couple of times. How do you define scale?

I don't think there's a formula. I think...

Number 1 or 2 and...

Number 1 or 2, maybe number 3. I think if you look at the other international market where we operate or Africa, we are in Tanzania and South Africa. So Tanzania is really a growth market for us. If you really look at our BTS, build-to-suit program, new site build for 2025, it's going to be one of the busiest year ever. We have forecasting to build 800 sites, about 500 from Millicom in Central America. And then the second largest market is Tanzania. The government is re-pushing for the operators to expand it's coverage. We have good relationship with Vodacom, Airtel. And it's really a growth market for us. It's a tough market to operate in because the roads are tough. Power is an issue. So we provide power as a service, install solar panel. We outsource the truck roll for diesel to a third party, but we are not exposed to the cost of fuel. It's basically a cost plus contract to the carriers. And South Africa is -- we have scale in South Africa. I think the countries are still growing at high single digit. Tanzania is definitely growing in the double digit. I think power, getting reliable power supply is a real issue, but we have a good relationship with the operators, and we're pleased with our operation in South Africa. So I don't -- we don't have any processes right now, and there's not a formula for what that scale mean. But if we like a margin, we like a growth prospect, I think this is a market we're willing to invest.

Thank you. So I think on the strategic review, you suggested you'd be back to us with more information later this year. So is there -- is that -- are there some other transactions or other kind of productivity initiatives?

No, I think it's -- there are no processes to market any portfolio right now. I think we are happy with what we have. But we always, I think, are obviously optimistic -- opportunistic and either on the buy side or on the sell side.

You mentioned you're stepping up the build-to-suit. So how do you, as the CFO, think about the return on investment, the initial yields, the lease-up potential? Because certainly in the U.S., you haven't been doing much of that for a while, the industry hasn't but there's a lot of capital upfront.

Yes. So in the U.S., with inflation cost to bill have gone up, obviously, and it's a competitive industry. So we -- we're still building towers in the U.S., and we're still buying towers in the U.S. But we are very, I think, disciplined in terms of return. Internationally, I think we have a formula with Millicom where we are comfortable with the return we're getting. And it's the same thing in Tanzania. But I think for every market, we obviously have cost of capital, a WACC that we use and then you add a counter risk, depending on which country you operate in. And you have to factor in FX risk devaluation on top of the country risk. So the cost of capital discount rate we use is really -- I think it's specific to each market when we look at either M&A opportunities or build-to-suit. But I really think as senior management as management team, capital allocation is really the way we are going to create value and distinguish ourselves.

You talked about FX a couple of times and American Tower has been talking about reducing the proportion that's in emerging markets. How are you thinking about the right balance there? You obviously did the Millicom deal, but it's U.S. dollar-based in terms of having enough exposure to those high-growth markets at the same time, the volatility can be.

Right. So today, about 80% of our leasing revenue, 80% of our EBITDA are denominated in U.S. dollars. We are, I think, have increased the hurdle rate that we are seeking in emerging markets, in non-US denominated market. And you're going to see a reduction on build-to-suit that is being spent in Latin America.

Okay. Yes. coming back to sort of demand drivers broadly. I think there's been some talk on the season's earnings calls around fixed wireless being an incremental driver because some of the companies have been pretty clear, we're not going to invest for fixed wireless, but it sounds like you are seeing it. And clearly, the long-term guidance we've heard from some of the carriers suggest they're going to double the usage, and we're seeing hundreds of gigabytes a month. So what are you seeing on the ground? What do you expect from fixed wireless certainly in the U.S., but maybe internationally as well, would seem it would be good product there, too.

I think fixed wireless access to me is the first 5G application right? And...

You talked about everybody getting wireless right at the open of a dialogue, it's the next step...

That's right. It's the next step and either as a replacement to fiber, I think even as a complement or the backup anecdotally, I think we had some markets where the hurricane hit our sites last year. And apparently, you just couldn't find a fixed wireless equipment anywhere in a region that got hit by the hurricane, there will be a rush to a store to get a fixed wireless equipment. So I think what, 10 million new adds last year, now the 10 million new adds this year, each fixed wireless access customers, probably huge 15 to 20x more tonnage than a handset. That's driving capacity. So we don't have visibility on the CapEx and we deploy on our towers by the operators because a bit is a bit is a bit. So it's really hard to see if it was deployed for fixed wireless access or just handset consumptions, but it is going to drive demand. And then I mean, Simon, you and I remember how the Internet changed our lives in the '90s and everybody's life since and improved productivity. And now you are going to have a device in your pocket with AI app, and that is I don't -- not small enough to see what it's going to mean for productivity, but it is just going to drive more demand on the wireless network. And so if you take a 10-year view, 20-year view on this business, some of our towers have been there for 20 years, 25 years, 30 years. Recently, I was -- my wife and I drove down to Key West for a long weekend, and I saw a tower that is currently on the market or was on the market in Key West and you look at this tower and you say no one is ever going to build anything anywhere close to this. This site has probably been there for 25 years and is going to be there for another 50 years because there's no place to build. So we have this unique portfolio of towers that is going to be almost impossible to replicate for zoning it all from a cost standpoint. And the wireless operators are going to have to squeeze more and more equipment on the infrastructure. And when you drive around, you could just see those towers getting bigger and stronger and taller, and that's the power of -- the earning power of our business.

How do you think about then the edge opportunity? I think 4, 5 years ago, there was this vision of data center at every tower. And we've obviously seen one of your peers buy a big data center business, and you've got some investments. But what's your latest thinking on what the right way to kind of invest against that opportunity, either partnerships or other?

We are ready to do something if we see demand, but it's probably still a long way away. We don't see the demand right away. It may arrive at some point with AI, I just don't know. It's too early.

Yes. Yes. But you indirectly -- if it just drives wireless traffic, you benefit from that anyway.

I think that's right. I think that's right. And remember, we have -- in our business, you rent vertical space on the tower, but we also rent horizontal space for the generators, the battery, the routers, the wireless operators have to bring their own fiber. So they need physical space at the bottom of the tower. So to the extent that hedge becomes a reality, that's we have the real estate where they could put that edge data center.

Another big debate in the industry has been, do you have holistic MLAs or do you have kind of pay by the drink sort of thing? And SBA has typically been more the latter, but you've signed a recent -- deal recently. How do you think about that coming into the company and the industry? And what's the right way? Or are you still flexible to whatever works with the carriers?

I really think it has evolved more into a strategic relationship with the carriers. And they're growing in mid-single digits. We're growing in mid-single digit. They need to have visibility on their cost structure. We need to have visibility on our growth prospects. So I think there's a natural dialogue to us. So we have MLA now with AT&T. And we -- I think -- we are flexible with whatever works the best on an ongoing basis.

Okay. So probably no big changes in how you operate there?

I don't see big changes going forward.

You went through the Millicom deal, I think you put September 1 close in your guidance. Just can you help us through what approvals you need and where those stand today in terms of the kind of risks to -- it could -- I think you said it could close earlier or parts of it could.

It's really hard to predict. It's 5 markets, you have a regulatory approval, antitrust approval. We don't expect any issue. It's just a question of going through the process. So it's -- we assume it's probably going to close around September 1. I think guidance for the year, it's $42 million in revenue and $29 million of tower cash flow. So it's about a little bit over $7 million a month in total cash flow, a little bit over $11 million in terms of revenue per month. And it may close earlier, but we feel pretty good about September.

Are there any more Millicoms out there? Or how's the M&A environment?

I can't comment. We -- I think you're probably going towards capital allocation discussion, right? So obviously, our preference -- this is a business with a 70% EBITDA margins, $1.9 billion of EBITDA. And then if you just run down the number, it's about $480 million for the dividend, $50 million maintenance CapEx, $250 million for growth CapEx for this year. Cash interest expense, another $430 million and cash tax is about $40 million. So you left about $650 million of capital, extra capital to allocate. So last year, we bought back shares, $200 million. We also did M&A mostly in the U.S., over $200 million and then pay down debt. This year, that $650 million, we paid down our revolver completely last year. For this year, obviously, we need $975 million from Millicom. Part of it will be funded through the free cash flow part of it through the revolver. We have a $2 billion untapped facility. But we are always opportunistic and we have really 3 ways to allocate capital, share buyback, m&A to grow the business or paying down debt. And I think those 3 buckets, we're just opportunistic. Our preference is to deploy capital to grow the business for the long term. But sometimes either the opportunities are not there or they exist, but they are too expensive. And then share buyback last year was a better way than to grow than spending 30-plus times on M&A in the U.S.

The growth CapEx, is that mostly build-to-suit? So you're buying in more ground leases or...

It's mostly some ground leases, but also 800 sites, 500 for Millicom in Central America. And then out of the remaining 300, over 50% will go to Tanzania.

Do you think -- is this more of a new run rate for it given the Millicom commitment? Or is this the peak year for build-to-suit, do you think?

I don't know. It's 2,500 towers for Millicom over the next 7 years. I think -- in terms of revenue impact, it's minimum for 2025 because it's all back-end loaded or you receive the search ring, then you have to find the land, apply for zoning. So it's going to take a while. So all the construction is back end loaded, so there's no real impact to the top line growth rate in '25 from this. All is build-to-suit.

So you were talking about the funding options you have. Leverage is at historic low levels, knocking on the investment grade door, if you want, I guess. But it sounds like you're still comfortable staying in this range. Millicom doesn't take you up very much. But just keeping your options open as you roll over debt and so forth.

So you're right. Leverage at the end of the year was 6.1%. The revolver was fully paid down. This is the lowest leverage in the history of the company. And average cost of debt is 3.2%. In a rising rate environment, we just need to be careful, we have $750 million of ABS maturing in January of '26, another $1.2 billion maturing in November of '26. So we have $2 billion of financing in 2026. Those ABS have a one handle in front of them. So obviously, we'll be refinancing at a higher cost of capital.

And do you still like the ABS market?

We like the ABS market of $12 billion of debt, $7 billion in ABS market. We financed in late September, early October at 4.8%. So I think we price really through the investment-grade market levels. We don't -- we like the flexibility. I think it'd be nice to be investment grade. The investment grade means you need a commitment to stay investment grade. I think it would have been very difficult for us to spend $1 billion in Millicom after having made a commitment to be investment grade. We like the flexibility. If interest rates too were to come down again, I think we'll be happy to deploying more capital, do more share buyback and take the leverage back up. We like that flexibility. And I don't think we are paying much more in terms of our cost of capital and an investment-grade company.

Could you talk about your OpEx and your margins, and we've obviously had a lot of talk about AI here and benefits in terms of running your organization more efficiently, maybe surveying your towers to see if everybody is, call it what they're paying for or what if they're paying you for.

Yes. No. So I think we are fairly centralized in our G&A cost as a percentage of revenue are fairly low. There's just not a lot to extract on that front. And -- but AI is going to help us. We have literally 40,000 towers, multiple leases with each operator per tenant. So you're talking over 100,000 leases. And AI is really helping us sorting through duration terms, escalator and all of this. So I think it's a great tool. And obviously, now we fly drones to get data on the towers for all the videos, see exactly, you don't have to send a person up there to really find out what's going on. So AI is a productivity tool at this stage, and we look to do more of it going forward.

Right. Well, we're just running out of time here, unfortunately. But maybe one last one on the dividend, another double-digit increase here. So it sounds like you've still got room to move the payout ratio up as your NOLs run off, we can get double digit for the next few years.

That's right. We did 15% last year, 13% this year. Our payout ratio is about 35% of FFO, and we have room to keep growing the dividend at double digit for the next couple of years -- next few years. We still have NOLs. So we have room on the dividend.

Sounds great. Marc, thanks so much for joining us today. Great conversation.

Congratulations for 30 years.

Appreciate it. Thank you.