SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

So let's start with the 1 closest to home Central America. We bought 7,000 sites from Medicom about a year ago. We like Central America. It is a consolidated market, 2 wires operators, Claro and Medicare. There's no more further consolidation risk. -- the contracts are in U.S. dollars with a CPI escalator a 15-year contract. And we have a BTS commitment from Medicon to build 2,500 sites over the next few years. We're probably going to build 400 BTS in Central America this year, approximately. And we probably lock in a mid- to high single-digit growth rate, the governments are pushing hard for expanded coverage. Medicom is very aggressive in terms of growing the top line and capturing market share and any tower we built could potentially accommodate colocations from Claro. So we feel really good about Central and it. The largest market is Brazil. It's probably 15% of revenue, 15% of EBITDA Brazil is being consolidated from 4 into 3. So all the fourth wise operators we carve out to Claron we have been facing elevated churn in Brazil for the last few years or your wireline is going out of business. So it's EUR 14 million this year. And we are going to have elevated churn in Brazil last year. I think we have about midpoint of our guidance is $38 million of international churn, 3/4 of it will be positive this year. We are probably going to see elevated churn again in Brazil in 2027 and then it should be a much more stable market once the oil churn is behind us. But we like Brazil as a country. The population is on the number of base station population is -- density is still very low, about 25% of what it is in the U.S. 5G is less than 50% deployed. The operators have coverage requirement is more 5G auction spectrum coming to market. The country is doing very well. balance of payment is positive, $4 billion to $5 billion a month, large explore of mineral, agricultural product, energy. So we feel pretty good about Brazil in the long term. And once it is console with 3 operators and other is behind us. So that should be probably a mid- to high single-digit market long term. It's kind of flattish today because of the churn. Then Tanzania, it's still small, but growing at doubmid-teens for us. probably going to be close to 200 sites in terms of the this year. The government is pushing the operators to expand coverage. It's probably the only telecom infrastructure in most of the country is wireless. People use ORS and wires are for payment and board solar application. So we feel very good about Tanzania. And then we have 3 very small markets in Latin America, Chile, Peru, Argentina to Imation. We don't have scale in those markets, we're harvesting those market running them for cash basically and not growing.

Okay. Makes sense. So I want to turn to the important component of growth in the next couple of years, and that's just the balance sheet and debt refine. I know investment grade with a priority of ours for a long time, work so congratulations once again, I'm get to investment grade. But you as other tower operators have debt maturing in the next year or 2, that carries relatively low coupons, right? Can you just walk us through what is maturing remainder '26, 2027 and your thoughts about potential for refi rates versus the expiry.

Yes, that's a good question. I think we had a number of low-cost debt that is being rebuying 2026, 2027 that's creating a higher cash interest expenses for us in '26, '27 and is putting pressure on FFO and FFO per share. So -- we just did a $3.5 billion investment-grade transaction on July 14 of this year, very attractive pricing. I think we hit the market perfectly. We've got lucky in terms of timing. We paid down $1.1 billion drawdown on the revolver. We fully paid on the revolver. We pay down of term on B $2.3 billion, and we still have about $0.5 billion of cash on the balance sheet following that transaction. Coming up is $1.2 billion ABS in November of this year that was on 1 hand on it. There's a 1.5% high yield maturing mid-February with 3% and 5%, 8% coupon. And there's another $900 million ABS in April and with a 1 header on it. We intend to refinance these securities in the investment grade market, assuming low 5% comm. So this is going to create pressure on FF1 FFO per share in 2027. Past this last wall of refi, I think by 2028, we will not see increased cash interest expenses, will be in a more stable environment. We'll have in place basically a long-term investment grade that is in place and full access to capital, a $2.5 billion revolver and as we have plenty of liquidity.

Okay. we've talked throughout 2026, despite your guidance for the year and the number of pressure points in the Latin American churn, refi is a bit of a pressure in '26 and then just the care active being slower domestically as well, as I'm thinking about '27 of the conversation we've had so far, right, about bridging to the growth further out, feels that if care activity is probably relatively stable, maybe even down, right? We don't know. More pressure from refi. You're working through most of the LatAm churn, I guess, but still some residual Brazil churn in '27. So it feels to me, thinking about the growth outlook that '27 could look a lot like 2026. And then '28 is when we start ramping into, well, less headwind from refi and then potentially more carrier activity. Am I framing that all correctly just back of the envelope, I'm thinking about growth?

I would agree with you, Michael. I really think that '27 is a transition year let churn internationally, at least $5 million change from a 6 million spring from DISH will be out of the way bring us in international churn should be elevated but start to come down. Lisa, it's unclear what 2027 is going to be. I don't think the network teams at the have received a budget for 2027 yet. I'm just on that work is being done in the fall. So we'll probably get more visibility by December or January or what the CapEx spend is going to be for the MNOs in 2027. Last -- so the pressure in '27 is going to be just like '26 international churn, higher cash interest expenses, but we'll set up the company very well for a pickup in growth in 2028 going forward . But meanwhile, I mean, we have dividend yield is 2.5%. We -- last year, we intend to keep increasing the dividend at low double digit for the foreseeable future. Our payout ratio is low 40%, about 41%, and we have room to increase the dividend for the next few years. In last year, we bought $0.5 $1 billion share at an average price of $2 million. I think we believe that share buyback at the current valuation is accretive to FFO per share and creates value for shareholders in the long term. So we're not shying in terms of buying back shares in last year. We didn't do it in the first half of the year because we had a $1 billion draw down on with over, we had to do our refinancing first. So the revolvers paid down, we have a new $2.5 billion revolver that end up access to investment-grade market, and we have plenty of liquidity. And we think that buying back share at this level is accretive to create the best use of capital at this moment.

So I wanted to talk about 1 potential positive, I guess, driver remainder of '26 and '27. I'd love to hear love to hear your feedback. This past quarter, we heard from tower companies and then also some of the builders like dot-com and MasTec that 1 or more of the carriers maybe had slowed or paused through activity in 2Q, some attributed to some headcount reductions at 1 or more of the carriers might have impacted that with the thought being that the aggregate spending wouldn't change just maybe the activity got pushed out later in the '26, early '27, do you agree with that hypothesis that we could see maybe some ramp in carrier activity from 1 or more in the back half of the year? Or are you not seeing that?

We think that -- I mean, the lease-up has been steady. The breakdown of the spend among carriers has shifted a little bit. We have a new MLA with Verizon. Verizon is very busy with us right now. But we think that all carriers are still active, and it's still early to --

Very clear. And how you -- you mentioned a bit ago about some of the smaller Latin American territories that really are not contributing to growth is de minimis, it's not material. So how are you thinking about M&A, right, either potential acquisition, to add scale to markets where maybe they're not material or even divesting markets where you've decided maybe that it did not play out the way that you and management had expected and now it's the time to monetize those assets.

So I'll just go back to when Brandon Calvin, became our CEO -- having been CFO before for 15 years. The first earnings call in February and 2024, you announced a portfolio review. And we basically look at our market and realize that in order to grow and extract value, create value and general high margins, it was important to operate in a market that is -- that was consolidated because churn, 1 of the carriers is being called out to the other operators. It's a 3- to 5-year period of churn because the new 1 wait for the lease to expire it doesn't nonrenew it. So you basically see churn going on for 3 to 5 years. This is what we've seen in the U.S. with DISH Brazil employees. So we want to be in market. We are 2 or 3 operators that are stable. We also think it's important to have scale because if you have scale, if you're 1 of the leading tower company in the market, you are the first 1 to get the call from the operators because they want to roll out a new technology or expand coverage or capacity rapidly. So you are part of the dialogue. If you've won a 30 tower company, it's very difficult to create value. And so we went through -- or if we don't have scale that you divest or you find an opportunity to grow through M&A. And for the last 3 years, we sold Colombia and Argentina, we sold -- we had a very small operation there. We sold the Philippines. We only had a few hundred towers. We're 1 of 30 tower company in the Philippines and we exited that market. Canada is a fantastic market, but we only had to 200 towers. We didn't see a path to create a portfolio with a few thousand towers. So we saw a very attractive multiple to PE firm. And we have 3 markets in Latin America, Chile, Peru and Ecuador. Those markets are being run for -- or in a harvest mode I think we're very pleased with the margins and the free cash flow is extracting from those markets. If someone were to pay us a number that is above our DCF value I think we'll be happy to sell. Otherwise, we are staying power. They are generating free cash flow. And -- but I don't see us at this stage going into a new market, and I don't see any massive new international M&A at the current moment in emerging markets.

Okay. So it seems like a priority for use of capital is going to remain consistent for at least intermediate term.

Disciplined and consistent Discipline is important. Okay. And we would strongly believe that, I mean, in order to create value, yes, you have to support your customer be fully behind the customer, make sure you respond to all their needs. But capital allocation is really a key driver of value creation. So either accretive M&A, the medications actually in Latin America, high single-digit growth rate in U.S. to rest for 11x multiple, share buyback. In 2023, in a rising rate environment, we paid down, I believe, $700 million of debt. So I think we have all these levers. And if you just just step back a little bit, right? Where is that cash coming from for either buyback or paying out debt or M&A, guidance is about 1 point -- I'm rounding the numbers, I've used those numbers before we were public. It's about $1.5 billion about $250 million of gross CapEx and maintenance CapEx, minus about $500 million of cash interest expenses, about $7 million of cash taxes, about $530 million in dividend and you left with $700 million of extra cash every year. So you could easily do buyback without changing the leverage. You could pay down debt, you could do small M&A. We have a target leverage of 6x to 7x. We currently levered at about $65 million and we have pro flexibility within that range to either keep buying back shares or doing small M&A, talking M&A or paying down debt, if interest rates increase too much.

So I want to go back a higher level for the final question, Marc. So Look, I agree with, I guess, your statement about buying back stock being the best use of capital and SBA stock price. I think the tower stocks in general are trading incredibly cheap, right? On a historic basis, also relative to the broader REIT universe based on what I think is longer-term projected growth. Is the best way to recognize that value in the public markets working through the next couple of years of some of the growth headwinds? Or is it better to be private and work with that owner partner maybe that has a longer-term horizon than the public equity markets. And if not why, maybe recognize greater value going private rather than being public and troconvinced public investors that sick out to 2029 growth.

Listen, me, we are very shareholder friendly. Our Board has fiduciary do this to all stakeholders. And I think if someone way to approach this with an attractive offer, I'm sure Board will engage, but that's all I'm going to say. I think it's true that if you look at private valuation today in the transaction that are taking place in the U.S. dollar business, the multiple of being paid or greatly above the publicly traded value of our stock or our public multiple. And it just speaks of the value of our company, and we think it's undervalued at this level. And we are patient. We are going to work every day trying to allocate capital to create value for the long term. And our team, I think, from the service business to people operating in the U.S. in regions. Internationally, our sales team probably is aggressive out there trying to cover our customers to the best we can grab market share and create value for the long term. I think we are operators. And if someone is when it come to our Board, I think our Board will engage. But that's all we're saying. We have -- we are operators, and we care greatly about shareholders. We want to create long-term value for our shareholders.

And the other reason I think that tower stocks are trading at a discount and SBA in particular, is we have a transition of growth, right? Because the things you laid out earlier kind of the churn rate moving it into 5G build, waiting for 6G, DISH EchoStar. I think the markets at a difficult time recently evaluation to an appropriate level. So -- can you walk us through what the right long-term growth rate is for SBAC, are we back to a mid-single-digit type FFO growth longer term, thinking about escalators, new tower build contribution other factors. What is the right level of growth?

I think the way we look at it is on the top line, escalator is about 3%. Lisa normalized lease up is going to be 2.5% to 3% of revenue and churn is is stabilized at a 1%. So you're looking at probably 4.5% to 5% top line growth rate. So -- and remember, any new equipment you put on the tower is almost like a 100% free cash flow conversion because of high fixed cost, low variable cost business. So full operating leverage we think we could probably grow EBITDA at mid- to high single-digit FFO excluding refinancing risk post 2027 at mid- to high single digit. You basically have a mid- to high single-digit FFO, FFO per share growth. And you correct the dividend at 2.5%. That is basically growing at double digit, low double digit. And on top of it, you get accretion from share buybacks. So I think you could get to high single-digit total return.

And just to put that all in context for the investors not familiar with the broader REIT reverse, I think you're trading at 4 or 5 turn discount to the average REIT, maybe growth low to mid-single digits on FFO per share. So you're talking about higher durable long-term growth once you get past some of these short-term headwinds with the stock trading at a 4 or 5 turn discount versus the average REIT out in the tower business. Does that frame it all pretty well.

We like the economics. It's 85% gross margins, TCF margins. It's single-digit top line growth rate with an infrastructure that is almost impossible to replicate. I just don't see how you could build both towers in some suburban or highly populated area as the driver on around Connecticut, Triona California, Arizona and you see those massive macro towers and you just zoning.

You couldn't you could replicate today. They have the pushback and you talk about Nebis for data centers we imagine trying to build on to new macro cell sites. Maybe in the last minute, and why isn't there a threat for less or slower rural semi-suburban densification additions from carriers if there is a SpaceX direct-to-device direct-to-consumer threat, because that's probably the market where they can best serve people or population density. So why isn't there a risk of maybe less build less activity in rural semi suburban areas?

Well, if you're a carrier, right, if you have a sell side today, and first of all, at sell-side cost muchness to build. We could probably do backup by satellite in starting or microwave is cheaper back up than fiber. And that side is built, it's probably we did low cost to keep it going. I think we are probably going to be low in urban area, that suburban and urban, 1 is less constrained. And you're going to capture the traffic going through that area. Why give up that traffic to starting they are just going to cannibalize your customers. I think if I'm a carrier, I may just decide to keep that site and capture whatever traffic I can as opposed to offloading this to starting.

Perfect. Marc, about out of time. Thank you so much. I really appreciate it.

Thank you.

It's good to see you, Marc. Thanks.