SBA Communications Corporation ($SBAC)

Hi. My name is Richard Choe. I cover communications infrastructure for JPMorgan. I'd like to welcome Marc Montagner. I'd like to welcome Marc Montagner, EVP and CFO, SBA Communications. Thanks for being with us today.

I just wanted to start off for people that don't know, you have 46,000 tower sites, most of them in the U.S. but also internationally. When you look at your portfolio, how should we view kind of the growth opportunities for both the domestic and international assets?

Yes. So in the U.S., we always talk about 3 plus 3, minus 1% or 3 plus 2.5, minus 1. 3% growth from escalators that are in our long-term contract, then about 2.5%, 3% growth rate from new lease activity from the big 3 MNOs, minus 1% churn from non-DISH and non-Sprint. So you get to 4.5%, 5% growth rate. And international markets are all very different. In Central America, we just bought 7,000 towers from Millicom. They gave us a 2,500 new build commitment over multiple years. So between, I think, colocation, new BTS, we are looking at a high single-digit growth rate. The agreement is all U.S. dollars. It's indexed to CPI, all in U.S. dollars. Tanzania, that's a growth market. We're growing to be over 200 sites. The government is really pushing for additional coverage. That's growing in a double digit. And our largest international market is Brazil. Brazil is about 15% of revenue. So I think on the top line, I think it's really CPI-driven, but local CPI, which runs at about 5% to 6% in Brazil. New lease activity is probably around 4%. I think the issue in Brazil for the last few years has been consolidation. Oi, the #4 operators has been consolidated into the other 3, TIM, Vivo and Claro. So we have many years of churn, and I think we're going to see churn probably for the next 2 years. So we reached -- this year's peak churn in Brazil for us. But I think long term, if you read that CPI at 5% or 6%, lease-up at about 4%. It's high single-digit.

Yes. And I think that's something that we kind of lose sight of sometimes is that if we look at the U.S. business, you think long term, we should be growing at kind of that 5%, 4%, 5% level. But internationally, we should see that high single-digit level when things kind of normalize, which at some point, they will. Do you think those are the right way to think about the 2 parts of the business?

I think that's right. But even in the U.S., when we say 4.5%, 5% long-term growth rate, this is assuming a 3-carrier market. It doesn't take into account new use cases. So new use cases could be drone delivery services like they do in other market where I think GPS may be not precise enough, has too much latency. It could be self-driving car. It could be computing at the edge for inference data center. And I think the big question mark is what is Starlink going to do with the spectrum they just acquired. That spectrum eventually is going to make its way for the market. It's way too valuable not to be deployed. And I think if Starlink were to deploy in that band, I think that would probably mean a higher growth rate for us in the U.S.

Sticking with the 3 big carriers, it seems like a lot of them have kind of moved along with their 5G deployments, but they haven't really done as much of the densification as we might need. Do you still see a wave of colocation densification coming at some point? It seems like there could be different points in time when each does their own thing. But given what you see on your sites and how they're looking at their kind of networks, do you see that coming at some point?

Yes. They're all at different stage of development. I think T-Mobile was our most active carrier last year. They've stepped down this year. We signed a new 10-year master lease agreement with Verizon in November, and they've been very active. They are going to be our most active carrier customer this year. And AT&T signed an MLA with us in 2023. That's valid until mid-'28 and no business. So yes -- but densification is definitely ongoing. I think I don't know if it's fixed wireless access or other use cases, but the carriers have to add more capacity to the network, which is good for us.

And a lot of the, I guess, expansion of domestic tower portfolios has been done by private companies, but it seems like there might be more opportunities or conversations to have with carriers about build-to-suits domestically. Is that something that SBA might be more interested in? And I know it's probably not to a scale that will move the needle a lot, but every bit helps over time.

I think we still build towers in the U.S., and we have the muscle, we have the people. We know how to get, I think, the licensing done, the permitting done. It's just the rates that the big 3 carriers were offering for new BTS, new build-to-suits were not attractive. So I think we were not participating. But it looks like the dialogue is shifting a little bit and that -- those conversations are happening again. So I don't really know where it's going to lead, but I think we are more than willing to do our share and build for the right return.

And you kind of mentioned it earlier, like I think the way investors look at things now is on the traditional 3-carrier market in the U.S. But even with them, I think they're talking about both Verizon today and I assume AT&T tomorrow and that there might be other opportunities, not just their normal kind of wireless mobile service that you might see more deployments to the edge. Are your tower sites well positioned to kind of take on, I guess, new use cases, add more equipment and even maybe longer term kind of mini data centers are edge-deployed?

There's a lot of talk about edge data center. I think that's something the industry talked about a lot about 10 years ago and that didn't materialize. But I think in the age of AI, assuming you have an AI agent on your phone, on your tablet, I think latency is going to be critical because you want to make real-life decision and you're not going to get the data from a massive data center in Montana or Texas. You want that information to be right at the edge of the network as close as possible to the user. A question, I don't have the answer to this, are you going to see edge data center in a metro, the 50,000 to 100,000 square feet facility in a metro that's going to be a few miles away from the tower. Is that going to be good enough? Or does the data center has to be right at the bottom of the site? I just don't know, but we have the space, we have the power for us. We are a passive infrastructure provider. We rent a vertical space on our tower for radios, and we rent horizontal space at the base of the tower for generator, batteries, routers, a fiber cabinet. So we're more than happy to make that space available to the carriers.

Yes. No, I think people forget how much equipment is actually on your tower and then also at the base of the tower.

No, actually, when I visited my first tower when I joined the company, I was really impressed by how much equipment there between the generator, the tank for the fuel, the batteries and so on. There's a massive amount of equipment there plus multiple fiber conduits going there for the various operators. So it's not an easy infrastructure to replicate, to be honest with you.

Yes. No. And it's so distributed over the geographic area that it would be hard to replicate, especially if you need that low latency infrastructure. I guess we talked a little bit about international, but I think people don't understand or realize how much of the international markets are reliant on towers and there's not as much of a fixed line infrastructure. Can you talk about, I guess, your Brazil, Central America assets, how, longer term, you see them playing as part of technology infrastructure?

Personally, I'm very bullish on Brazil. I have like 30 years of experience in Brazil in the various companies I worked for in the past. And I think Brazil is a large country with a very high GDP per capita. It's 4, 5x the GDP per capita of India. It's the largest country in Latin America. It's 15% of our total revenue. 5G is less than 50% deployed. It's a healthy carrier market now with 3 operators. You probably have around 4 towers per 10,000 people there versus 16 towers per 10,000 people in the U.S. It's a very young population, and those markets have really pretty much bypassed the fixed line market. So I think the mobile market. And I think going -- having gone through the Oi consolidation, I think when we're going to come back at another year or 2 with 3 carriers, they need to -- they still have coverage requirement they need to meet, need to deploy 5G. I feel pretty good about Brazil long term. And the country is doing very well. Inflation is under control. Central Bank was very aggressive early 2025 in getting inflation under control. The country has a large positive balance of payment, exporting oil, commodities, mineral, agricultural products. So I feel pretty good about Brazil long term. And I think we're happy with our position there.

Yes. I guess one of your peers is kind of pulling back from the emerging markets, but it seems like you still see a significant amount of opportunity in your kind of emerging markets. Is that...

Well, it's -- we -- remember when Brendan Cavanagh became the CEO in January of 2024, he announced a portfolio review. And I think the screen that we use in any international market, we either want to be the dominant operator, one of the leading tower operator market in order to have a seat at the table when a carrier wants to deploy a new technology, expand coverage or in subscale market, either we try to be the leading carrier or tower operators or exit the market. So applying that screen, we exited Colombia, we exited Argentina, we exited the Philippines, and we exited Canada. Canada was a great market for us, but with just a few hundred towers, we never had a seat at the table with the operators. So we did very well on the exit. And then we look at Central America, we were already in the region, not being a leading operators. And when Millicom put their towers up for sale, I think we saw an opportunity to be the leading tower company in a market where that has been fully consolidated already with Millicom and basically Claro part of the Carlos Slim empire, the 2 main wireless operators and signing a 15-year lease in U.S. dollars with a CPI escalator and a commitment to -- for 7,000 BTS. For 2,500 BTs, I think, really made it a very attractive market for us. So I think it's really on a case-by-case basis. We have expertise in operating, building and leasing towers. And if we see an opportunity to bring that expertise to bear, we are going to use it.

It seems like you've approached it from kind of a risk-adjusted basis where you feel like you have a leading position, but also not a hopeful growth opportunity, a kind of defined...

Contracted. Contracted.

Yes, contracted growth opportunity. And it seems like without that, you probably wouldn't have done the deal.

I think that's right.

Yes. That's great. I guess as you look at these portfolios that you have, are there any remaining that you might need to exit or right now, the...

We're still a few markets where we have a small position, and it's -- if we see an opportunity to maybe become a leading tower operator, we may exercise it or otherwise, we are very happy with the yield and the free cash flow that those markets are generating today.

Given, I guess, some of the changes in the U.S. market with EchoStar, I guess, maybe the growth has kind of been interrupted a little, but it seems like your leverage is coming down kind of regardless of that and will continue. Do you see a need to go to lower leverage? Or do you feel like that's just kind of the natural way the business is going to grow so that your leverage is going to come down as your existing markets kind of continue to grow?

I think we have been an operator at about 6.5 turns of leverage for the past 3 or 4 years. And I think it's the right leverage for us. I think S&P changed the methodology that they use for tower companies last summer, given the long-term nature of the business, the long-term MLA that we have with our customers. The fact that our customers are all investment grade, they basically came up with a new methodology. And if your leverage is below 7x, they rate you investment grade. So now we are investment grade at the corporate level with Fitch and S&P. And I think our next step will be to issue an investment-grade bond at some point this year.

Got it. And it seems like you don't need as much kind of debt reduction per se as we move forward over the next few years. As you have your build-to-suit, but it seems like if there are not good, I guess, reinvestment opportunities for the operating business, how should we think about your capital return profile over the next few years?

Yes. I think in terms of creating value for shareholders, obviously, we need to operate in a very efficient way, serve our customers, do a great job for our customers. But then capital allocation is also a key factor in creating value for our shareholders. So last year, we spent about -- with excess free cash, we spent about $500 million buying our share at an average price of about $200. Those numbers are public. I think I've used them in the past. If you really look at our guidance using round numbers, it's about $1.9 billion of EBITDA minus about $530 million of dividend, another $250 million of maintenance and growth CapEx, about $70 million of cash taxes and then about $500 million of cash interest expenses. That leaves you with an extra $600 million to allocate to either M&A, debt paydown or share buyback. And last year, I think given the level where our stock was trading, we spent $500 million in buying back our shares. And I think this year, I think we're probably going to index towards buying back shares as well.

And I think something that gets lost is that how much you're growing your dividend by. How should people think about the long-term growth rate of the dividend because it's not -- it's a significant amount, but it's not static?

Right. So I mean, last year, we increased the dividend by 13%. Our payout ratio is about 41%. And we believe that we could keep growing the dividend in low teens for the next few years. So I think probably low teens for the next 3 years is probably a good way to think about it.

It's interesting because you're growing your dividend double digits and you're buying back shares. It seems like there's this perception that the domestic tower business is not a good business anymore, whereas I think history has shown that it has been a very good business and probably should continue. What do you think investors are missing in viewing that domestic tower business today that they don't see in the future because there seems to be this big disconnect.

Well, I think it's -- it goes -- I've been in the wireless industry for 30 years and the cycle repeats itself. Carriers buy spectrum. They roll out a new generation technology. They get a 10x increase in terms of capacity. The cost per bit that they deliver gets cut exponentially. When they roll out the new technology, their CapEx as a percentage of revenue goes to 23% to 25% of revenue, and then they go to harvest mode. So if you look at 2022, 2023, CapEx as a percentage of revenue was about 25% for the big 3 operators in the U.S. Last year, it was below 15%. It's going to be below 15% this year again. So even in this environment, I think the tower business is still a great business. You have auction of spectrum next year. The FCC by law has to auction off the upper C-band. That's going to happen in the first half of 2027. It's probably 18 months of clearing. And all the OEM have already 6G radios and equipment in the lab or in beta test. So I think 6G is coming to market. If you're a carrier, you need to keep delivering bits at a lower cost. I mean, remember, 20 years ago, you used to pay $0.25 for a minute of voice and $0.10 for SMS text. The carriers at 45% EBITDA margins. Now it's unlimited. You could watch YouTube all day and pay $55 per month, and they still have EBITDA margins at 45% just because they have been able to lower the cost per bit that they deliver, and that's because of more spectrum and more radios on the towers and better technology. And they're going to have to keep doing it. Fixed wireless access is chewing up a lot of capacity. I think we have 15 million fixed wireless access customers in the U.S., hundreds of millions of handset users, and those 15 million fixed wireless customers operate using 50% of the tonnage, 15% of the capacity on wireless networks today. The industry is going to add another 10 million fixed wireless access customers this year. So they are -- the carriers are going to have to build, I think, more colos, more densification, but also bring 6G to market. So I think if you take a long-term view, between 6G in late '28, '29, maybe Starlink is deploying in the spectrum that they have, new use case like edge computing, drone delivery services, drone detection technology, self-driving car and so on, you're going to see more use cases and the 3 plus 3 minus 1 could be something much greater than that.

It's funny. I was on a fiber call earlier last week and the person was saying how much fiber is actually going into drones and it's not -- we don't see a ton of drones here today, but I assume we're just going to see more and they're going to need connectivity.

That's right.

Is that right? It's one of those things that I feel like the carriers have spent a lot on spectrum and their network, and we're kind of in this period where they don't -- they're using up their capacity, but all the spectrum auctions coming down the line and technology use cases that at some point, they're going to have to reengage in spending on their network. Is that kind of the way you look at things right now that we're kind of in this pocket of maybe lower new activity, but you see the new activity coming at some point?

I think that's right. '22, '23 was, I think, a peak of 5G deployment. The carriers are all in harvest mode. They have repaired their balance sheet. They're buying back shares. But at some point, they are going to have to spend money on next gen, and that's going to drive, I think, lease-up for us, more colos, more densification, more coverage. And remember, this infrastructure has been built over the last 35 years. And it's almost impossible to replicate in a very -- I mean, you look at Florida, where we were headquartered, you look at Long Island, Connecticut, California, first of all, even if you could get the zoning to build a new site, the cost of the land is so high. If you're a carrier, it's always easier to just add another piece of equipment on a site where you have fiber going in, you have a generator, batteries, you have all your equipment. It's just very difficult and very expensive to build a new site in those highly populated area, which is where basically people need coverage and people need more capacity.

Yes. It seems like people keep thinking that the networks are built out enough, but they still have dead zones, they still have not great coverage everywhere. The SEC kind of -- they approved the order for EchoStar to transfer its licenses. But with that, there came an escrow fund and then also a build requirement for AT&T for 600. How does SBA view those two things -- and how does that impact you?

Yes. So 600, we are currently in an MLA with AT&T signed mid-2023 until mid-2028. I think 600 will need more new equipment for AT&T. So I think we'll be able to -- depending on the timing where they deploy in the 600 megahertz band, we'll be able to monetize it at some point in the future. As far as the escrow agreement with EchoStar is concerned, I think it's good that there's an escrow account and as a mechanism for resolving those claims, for us, it's not that material. I think we disclosed in the past that between unpaid leases and future lease commitment, we only have short-term leases with DISH and no lease-up planned for this year. So our exposure in terms of unpaid and future lease commitment is about $100 million. So we hope to recover as much as possible. But remember, I mean, any payment has to either be -- support of the settlement with DISH or approved by a judge. So we just don't know the mechanics of it very well yet, but we hope to recover as much as possible.

Yes, that makes sense. In terms of your services business, it's something that, I guess, was running at a high level has come down, but still is a decent amount. Can you tell us a little bit about the type of work you're doing and where you kind of see it going over the next few years? I know you don't have a ton of visibility all the time.

That's a business where there's not a lot of visibility beyond 1 quarter really. And it's really in the past was indexed towards one carrier. We're doing more work with a second carrier now, but that business is basically construction and engineering work. So I think it's a good business because it keeps us in a dialogue with our customers. We understand where they're going, and then we could basically do the work for them. It's a good margin business, but there's just not a lot of visibility in that business. But we think it's important for strategic reasons to be in the business. And it's a great business, about $200 million of revenue for us every year.

Got it. But it's not something you have to invest more in or...

No. It's no CapEx in that business.

Yes. It's one of those things where I see a lot of development, whether it is in housing or in kind of data centers, but a lot of growth areas of the economy are growing into new areas. Do you see more potential for tower activity as kind of we build out more communities, more areas of growth that aren't in the top 32 cities or...

Yes. I mean you could look in Florida, Arizona, where -- I mean, those exurbs keep going and growing. And we work with developers. We -- usually, they own the land, they have exclusive right to the land, but we work with them to build towers or even bring fiber to their development. So that's something we have a team that basically is directly involved with real estate developers trying to help out on that front. But it's a real fact of life. I mean developers are building tens of thousands of new houses to grow those communities, and we want to be part of it.

Yes. No, and I'm sure they want cell service.

They need cell service.

Yes. I guess the one thing we haven't thought about a little bit is the connectivity to your towers. A bunch of years ago, there was a big upgrade cycle where you had pull fiber to the towers and a lot of towers, if not most, you have some type of generator backup. Can you go through kind of what kind of connectivity level you have at your towers? What kind of backbone, I guess, of the network?

Yes. For us, I think we are a passive infrastructure provider. We lease vertical space on the tower and horizontal space. So the carriers are responsible for bringing the fiber to the site. So most sites are going to have 3 fiber connections. They lease space for a cabinet where they have basically the router for the fiber and space for the generator, batteries and so on. So we are providing the space. It's with all passive infrastructure provider.

Got it. And do you feel like they're kind of maximize that space at your towers at this point, but there's potential if we do see more edge capabilities that they could end up renting more space.

That's right. There's upside potential there. I just don't know when or how it's going to be materialized. But there's a lot of talk in the industry about edge computing.

Yes. But I guess of your tower portfolio, do you have a percentage or number that...

Yes, we've done the work. We're still doing the work. Not all of the sites have enough space or enough power for a small data center at the tower. So it's on a case-by-case basis.

But it's probably a significant amount.

I don't know the number, to be honest. We're still doing a lot of work there. It really depends how big a data center or a mini data center you need and how much power you probably need 3-phase power. Not all sites have 3-phase power. So it's -- there's a lot of bottom-up work that needs to be done there. And we need to understand the demand. It's still unclear what the demand is going to be.

Yes. I don't think people quite know yet, but I feel like it's an opportunity that would come down the line. Last thing I'd like to hit is that one easy way, buying back stock helps, but also buying ground leases kind of can help. What's the opportunity there? I know you do a certain amount each year, but is that something that you kind of push harder on? Or is it...

Yes. So I think we started this 10, 15 years ago, way before I joined the company. We have been very aggressive on protecting our, I think, our sites. And we probably have the best team in the industry, very aggressive, looking multi-years ahead. And I think any years, we spent between $40 million and $50 million buying ground leases to protect our site but also improve our margins. And that's something we're going to keep doing. We have a very, very strong team. The gentleman who run the team has been doing this for a very long time, and they look ahead and they create a lot of value for our company.

And you have a kind of a long pipeline of deals that you end up closing on.

Yes. Yes.

Okay. And with that, I'll leave it at that. Thank you for joining us today.

Thank you, Richard, for having me.