Morning, everybody. I'm Ric Prentiss, head of telecom services research here at Raymond James, and as I should say, TMT research, because we did pick up media recently with Warner Bros., Disney, and Paramount, but in one of the longest-standing relationships we have, the tower industry, which we wrote that report 25 years ago that we still give out. Really excited that SBAC can join us this morning, and their new CEO, joining us as CEO versus CFO in other years, is Brendan Cavanagh. The format we like to use here is the modified fireside chat format. So Brendan will have a few slides, then we'll get into the fireside chat portion and save some time at the end for your questions, and then, of course, the breakout session. Brendan, welcome as the new CEO of SBAC.
Great. Thanks, Ric.
Good morning. Good morning. It's nice to see you all here. It's funny because Ric was saying how they still give out the same report that they wrote 25+ years ago, right? And these slides are pretty much the same slides from 25 years ago too, because the tower business doesn't change all that much, and that's really, frankly, one of the beauties of it. So I will go through these quickly because I know Ric wants to get to the Q&A. This is really just a quick high-level summary, kind of of SBA and the industry. For those of you that are less familiar with us, we've been around now for 35 years, founded in 1989. We are based, actually, here in Florida, and we are a real estate investment trust, converted to that back in 2016.
We own and operate wireless infrastructure, primarily towers, throughout 15 different countries, but mostly concentrated here in the U.S. and in Central and South America, and then, of course, publicly traded on the NASDAQ. So just to kind of this is a slide that basically is the same as what you would have seen 20 years ago had you walked in here. It kind of goes over what the industry looks like. We are basically just landlords. It's a true real estate business landlord-tenant relationship. The tenants, in our case, are the wireless carriers. So here in the U.S., our customers are folks like AT&T, T-Mobile, and Verizon primarily. What's made our business so valuable is the exclusive nature of the assets that we operate.
And here in the U.S., that exclusivity is driven by a number of things, but one of the key things is the zoning restrictions that typically make it very hard to put up new towers in a given location. So if you're a carrier and you want to cover a particular spot, and we have a tower there, very often it's the only choice that you have. And so that dynamic is what has created tremendous stickiness to the cash flow stream and the long-term nature of the relationships that we have with our customers there. It is also a capital-intensive business model. It does require a lot in order to actually deploy new towers if you can even get the zoning approval. And we found throughout the years, through many different economic cycles, that it is recession-resistant, that we see it continue to grow.
EBITDA has grown basically every year through difficult cycles, through very positive cycles. It's a very steady, stable business, and that's the primary thing I think you should take away when thinking about the tower business. We also are supporting a great underlying business of our customers in the sense that wireless has obviously exploded throughout our history. If you think back to 1989 when we started, it's very different today than it was then, and we could have never imagined where wireless would go. In the early days, we thought we were building towers simply to have phone service everywhere, which we were. Nobody could have envisioned at that time smartphones and wireless broadband and the way that it's gone now.
But it's been a tremendous boon to our industry because it's required so much additional equipment, the deployment of additional spectrum on our sites, and all of that has allowed us to continue to grow our revenue stream over the years. Let me move forward here. The basics of the tower business. As I mentioned, we rent space on the tower to wireless carriers. The equipment that is on the tower, the antennas, the radios, that belongs to our customers. We just own the actual tower structure and either own or lease the land that's underneath it. The rest of it is the carrier's responsibility. So as technology changes happen and they need to upgrade it, those changes are really the responsibility of our customers and often actually allow us the opportunity to monetize that change in equipment at the tower sites. The lease terms are very long.
They typically include fixed escalators, so you have annual increases in the rents every year. We have very limited churn because of the stickiness and the attributes I mentioned to you a moment ago, and very high margins. Our tower cash flow margins are 81%, and that is actually much higher even in the U.S. where we're more mature. It's in the mid-80s% here in the U.S., and our EBITDA margins are north of 70%. So this is just a quick picture of what it looks like, and really the point of this slide is just to say the blue boxes, number 7 and 8, are what we own, just the tower and the land. If we own the land, in some cases we lease it. That's our responsibility. Everything else in the picture is basically the responsibility of our customers.
We are free from a lot of kind of the noise that comes along sometimes when there has to be changes due to technology or, frankly, even weather events that knock antennas off of the tower. All that responsibility lays with our customers. It's a very good place to be in the cycle. With that, that's it.
All right. Enough. Have a seat.
I'm going to jump over here. Yep.
Yep. I think one of the first questions is you had your first call as CEO for the fourth quarter earnings call. You laid it out, but I think for the conference, let's hit it again. What's going to change with you having the CEO instead of the CFO role as you look at what you want to create, the vision for SBAC?
Right. Yeah. Well, I've obviously been with SBA for a very long time, and I've been a part of most of the material decisions that we've made over the last several decades, and so you shouldn't expect that there would be a massive material change as I've had a voice in that. I think most of the change that is occurring is really more a function of a change in the broader industry, in the broader environment. The reality is we're maturing. We're a more mature company in a more mature industry, and that requires certain shifts in what we do. And I think that's more because of that than it is because of the change in leadership. Jeff and I, we're always very much aligned. But what we're seeing today is that you've got dynamics where you need to focus on executing at a higher level.
In the past, we could always say, "Hey, we're a levered capital allocation story where we could take our low cost of capital, go out there and buy assets and integrate them into our fold and create value that way." We still look to do that, and we still do do that. The opportunity to do that, though, is not as great as it once was. The assets are not as available as they used to be. The competition for those assets, frankly, from companies that aren't tower companies, other financial players, is much greater than it used to be.
And so for us, ensuring that we position ourselves in every market as the strongest position we can be in, the longest-term relationship with the key customers, the leading customers in those markets, that's going to be the main focus for us in order to ensure stability over the long term. As a public company, we talk about things from quarter to quarter because we have to, but our - excuse me - our underlying business is very much a long-term, long-contract business. And so for me, the real focus is on ensuring that long-term stability of that cash flow, and that's where we will prize our decision-making.
Yep. You touched on it there. We have seen prices in the private sector go for much higher multiples than where the public sector is trading. Why do you think that disparity is there? It seems this cycle, the disparity has been higher for a longer period of time.
Yeah. I don't have the absolute answer for that because sometimes I scratch my head when I see some of the deals that get done and the price points that are paid. I wonder what exactly they're ultimately underwriting because, really, we should be able to do better. In many cases, we should have a lower cost of capital. We should have synergies to the extent that there are synergies more than some of these other folks. So we should actually be able to be more competitive, and yet, in many cases, we are not. I think you have a different element of investor. You have more financially oriented folks. You have infrastructure funds. You have insurance funds. You have pension funds. You have sovereign wealth funds that are coming into the mix.
All of these folks are coming with perhaps lower return expectations, with a desire to get into a business that is, frankly, very attractive and has been for many years, and trying to build scale up in that business. And so they're willing to spend a little bit more. And sometimes I'm not sure that they necessarily always know the proper underwriting in terms of what the growth looks like either. We have the blessing and the curse to some degree. Our M&A team might consider it a curse of being very experienced in what we believe the future will look like in terms of our customers' activities. And I think we're very precise in the assumptions that we make in our modeling, and I'm not sure that everyone else is.
Yeah. You mentioned stability. On the earnings call, you talked about developed markets a bit too. Help us understand your current mix, large percent, highest percent U.S. towers of the three public tower stocks. You've got some Brazil and some other markets out there as you showed. Think about what does stability mean, and what did your comments about developed markets really imply on the call?
Yeah. I'd say it's less about developed markets versus emerging markets, I guess. It's more about the positioning within the markets that we're in to ensure stability. I think what, on the surface, is attractive about developed markets is just simply a greater regulatory regime, perhaps, perhaps a more stable currency, some of the things that give you a little more confidence that you're going to have stronger customers that can be there for the longer period of time. But you can create that environment in less developed markets as well. We have in some cases. One of the things we're doing right now is we're looking at each of our existing markets, and we're evaluating, "Why do we do so well in certain markets, and why do we not do well in other markets?
And what are the primary differences, the primary drivers?" Finding, in a number of cases, it comes down to our position in the market, how substantial we are, how much of a level footing we're on with our key customers when it comes to key negotiations. It also has to do with who are the key customers that we're most closely aligned with, how financially stable and successful are they, what does their long-term prognosis look like? We're kind of looking through all those things, and we're trying to determine in the markets where we're a little bit subscale, can we move ourselves into a position where we will be of greater scale and greater positioning relative to the strongest customers in the market? If we can do that, I think there's still plenty of opportunities to create value there.
If we determine we cannot do that, perhaps we shouldn't be in some of those markets. We recently exited one market, Argentina, in the fourth quarter after we determined that that wasn't possible. Those are the kind of things that we're looking at internationally to best position ourselves going forward.
It feels like you've got the sharp pencil out, the magnifying glass to look at the whole portfolio and say, "What's achieved what we thought it would achieve? Where haven't we achieved it?" And there are buyers out there, it feels like.
Yes. That's also a factor too. What we talked about earlier, there's a lot of folks who are interested in adding assets, and not everything will work for us, but it might work for somebody else, and that's a consideration too.
Okay. Clearly, having been a levered capital appreciation story, very good allocators of capital, interest rate environment has changed. How should we probably the top question we get on SBAC is maturity schedule you have coming forward. How do you address that, and how does AFFO per share then manage through that?
Yeah. So we did do a refinancing here, actually, in the first quarter. It's actually not the next maturity that we have. It was a maturity that's coming up with a $2.3 billion term loan that was maturing in April of 2025 that we just refinanced. We also extended and expanded the size of our revolving credit facility as well. And so we're kind of chipping away doing each of these things along the way. In the case of the upcoming maturities, we have some ABS debt that's maturing in October and some in January of next year, and there are plenty of opportunities to refinance it. It's really not a question of any concern about being able to refinance, so we know 100% that we can do that.
It's really more a question of trying to optimize the timing and the type of instrument that we use to do it because the general belief is, and I think most of the people probably in this room would agree, that interest rates will come down. The timing is a little less certain. Perhaps it's kind of ebbed and flowed over the last few months in terms of views on that. That being the case, how long we lock things in for is a question that we consider. How quickly do we jump to it? We did really, really well in setting up our balance sheet over the last so many years, but that means that everything that comes up now is almost definitely going to price higher when it's refinanced.
We want to be cautious in jumping into something that's too long-dated or too high too early. We're going to continue to evaluate it, and obviously, you'll see us do something later this year to deal with the upcoming maturity.
You guys have had some success with hedging in the past. What have you already done with hedging, and how should we think about that as a strategy going forward also?
Yeah. So we hedged most of our Term Loan B, the one that we just refinanced, and the hedge continues on because we did refinance it with another floating-rate term loan. We have just under $2 billion of interest rate swaps in place where we actually have locked in one month so far at five basis points. It is today at 5.3%. So it is materially accretive to us and is keeping our interest costs way, way down. Unfortunately, it eventually does mature. So when it's up, which will be in April of 2025, at that point, there would likely be a step up in interest rates.
One of the things that we did, though, is we did enter into a new forward-starting interest rate hedge that will start for roughly half that value, about $1 billion in notional value, in April of 2025 when this one expires, and it locks that same SOFR rate in at 3.8%, obviously much higher than where it is but well below where SOFR is today. And so what that does is it kind of gives us some balance. If interest rates come way down, yes, we will have a slightly higher payment on that portion of it, but I think the broader environment will be very, very positive for us. And to the extent that it doesn't come down to that level, we will have stabilized a portion of that interest cost. So that's the way we've used that, mostly around our floating-rate debt.
The rest of our debt, by and large, is fixed rate.
Right. One of the other differences between the public tower stocks has been fiber small cell or not. You guys have pretty much been the not camp. You did have an investment in Extenet a while back that you exited. Walk us through how do you view tower business versus small cell business versus fiber business, just so investors get a sense of your view on that?
Yeah. Our view has always been that those things, clearly fiber and even small cells, are necessary parts of the wireless ecosystem to deliver quality wireless service. You need to have clearly access to fiber, but you also, in the case of small cells, will need that in spots where tower solutions are not appropriate or not possible, particularly dense urban areas. So it's never been an issue with believing in the need for those solutions. The question for us has been whether that business model is the same as the business model we have with the macro towers. We just kind of, as I went through those slides, a lot of the focus was on sort of the exclusive nature of the tower assets that we have. These businesses really don't have that same exclusivity.
So what you have is something that is more commodity-like in our view. If you have more commodity-like asset, it's going to price as a commodity. What are we bringing to the table that differentiates ourselves as an economic investment in that situation? We found it to be limited at best. For that reason, we've chosen not to go into those businesses.
Okay. Capital allocation leverage then. So your leverage range had been typically with a 7 handle on is kind of where you would be. Now you're in the lower 6s. How should we think about do you want to go investment grade? What are the other opportunities? And then let's sort of stock buy back into that.
Okay. Yeah. So we have not changed what we state our target leverage range to be, although we are well below it at this point. We ended the year at 6.3 turns, which is actually the lowest level we've been at in maybe forever, certainly 20+ years. So that's been more due to the fact that we haven't seen great places to put capital to work that were better than, frankly, delevering, paying down what we had outstanding on our revolver, which was some of our higher-cost floating-rate debt. So that's what's driven the delevering because it was the best use of capital, in our view, at that time. But what I like about our position is that we now have retained significant flexibility in terms of our ability to use that leverage capacity.
If we see a place or an opportunity that we think will drive value, we have no issue with levering back up to do that. Now, that's not to say we're going to do that. It just means we have the flexibility and the optionality to do it. And I think, for the time being, being in that position is a good place to be. Now, if we don't see those opportunities and we continue to see our leverage decline over time, naturally, we're moving much closer to being an investment grade potential company, and we're probably pretty close right now.
You're saying you're probably there.
Yeah. So that is something that we are considering, and it will eventually happen at some point. I don't think it has to happen right now. And I think, actually, right now, I'm not sure that the cost differential benefit to being an investment grade company is really all that worth it in this current moment. That may be different down the road. And again, naturally, it's going to happen. So for now, we're content to not be investment grade and to continue to focus on being opportunistic with the leverage capacity that we have.
And then as far as stock buybacks, flexing in and out, and then dividend growth.
Yeah. So stock buybacks have been a huge part of the SBA story throughout our history. We haven't done too many over the last couple of years here, but it's always been a part of our capital allocation, and I would expect that it would continue to be going forward. The relative amount of that sometimes varies, and sometimes it's hard to see as an investor looking at it from the outside because there are a lot of things that we're looking at that may be a call on capital. And for the time being, we may have to hold off in terms of spending on buybacks. And eventually, we may or may not do those other things. And then you say, "Well, why didn't you buy?" Well, we were considering other uses of capital.
Ultimately, I definitely believe that stock buybacks will be a component of our capital allocation going forward, and its relative size will depend on other options that are also available. Then the dividend, we're currently and have been the fastest-growing dividend in our industry and really among most REITs. I would expect that that probably will continue at least for a number of years. The best part about that is that even with that fast-growing dividend, it only represents about 30% of this year's AFFO that we projected for 2024. There's still a lot of remaining free cash flow available to us to deploy elsewhere.
Okay. The left field technology question. Over our 20-25 years, Superconductor Technologies, it's LightS quared, it's light Radio, it's you name it, we've had them all. It's solar flares. The current one is satellite communications, direct-to-device. How do you view that, and what other?
It's not that new, by the way. I've been hearing that for 20 years, about satellites. Okay. Go ahead.
It seems more closer to reality because I did have a salesperson the other day go, "My iPhone just says all I have in the subway is SOS satellite connectivity." I'm like, "You're not going to have a satellite connectivity in the subway because.
So it's because the whole network went down, but that's.
SOL.
Yeah.
But that seems to be one of the current ones that investors are trying to figure out. Are satellites going to take over wireless?
Well, no, I don't believe that they are. I believe what you're seeing and there definitely are advancements being made. There's obviously a lot of smart people with a lot of money spending time and energy around trying to deploy satellites for the purposes of wireless connectivity. And what we're seeing in that is that it's highly, I would say, complementary to what we offer. It is not cannibalizing the tower business because what they're able to do is so limited for many different reasons, but it is really targeted at places that it's just not economically feasible to provide wireless coverage today, very remote areas, even, frankly, to ships out on the sea, whatever the case may be. And actually, I do think it's great because it provides public safety, an emergency type of solution to places that otherwise would not have that solution.
But the power needed to do real, actual what most people do on their mobile phones today could not be done through satellite communication, plus the cost and the technology shifts that will take place over time. I think it's going to be a real challenge for that to be anything more than kind of a supplemental add-on. And that's the way that most of our customers are treating it. I can tell you they're certainly not backing off on investing in their core macro networks because they think they're going to move to satellites. That seems to be way, way off in the distance if it's ever even a possibility.
Take a couple over here, and then we'll look to the audience if there's some in a bit. The capital spending by the carriers in the U.S. is a little bit lower as we look into this year, 2024. Help us understand where do you think the capital trends are headed and what it means for leasing for you and weave in there the Sprint churn and what other churn might be in the U.S.
In the U.S.? Well, yeah, the spending levels are lower than they've been by historical standards with our customers. And I personally believe that one of the main drivers of that there's two main things, I think, but one of the main drivers when we talk about high interest rate environment, high cost of capital, we always talk about it as an item that affects us and our balance sheet, but it also affects our customers and I think how much they want to spend on their network capex. And so in some ways, it's a little bit of a double whammy. But that means that when interest rates improve, you actually have two things that I think will ultimately improve for us, not only our own cost of debt, but you'll see, I think, increased spending from our customers.
The other factor that's affecting our customers is simply this question of how important is network advantage today? In the past, it's been the primary driver of this competitive tension that's existed between our customers where they've said, "Hey, I need to go and spend. I can't fall behind the other guy who's spending.
Can you hear me now?
Yeah. Can you hear me now? That's what it was all about. I think in this environment, because there's not that clear 5G killer application that is making a consumer go, "Oh, I've got to be on T-Mobile's network because they have better 5G coverage in this area," that's not really happening because nobody's felt compelled in that way. That will change over time, and perhaps AI or fixed wireless and different things that are occurring will drive that. But for the time being, they haven't felt like they needed to spend that money. Given the current economic environment, finance took priority over network. I think that's basically what we've seen. But that will all change and work its way out over time.
Having had the benefit of being in this for a long time, almost as long as you, we've seen that kind of ebb and flow, and it will continue to do that. And so I feel confident that this is all about timing as opposed to anything else.
See if we have any questions from the audience.
We answered them all.
No, we got a few more. We got a few more. But it is an interesting question, though. Your stock has obviously been under pressure. How much do you correlate that to interest rates, or is there something else you think investors are missing?
Well, interest rates is clearly a huge part of it. And it's funny, if you look back at the fourth quarter, just as an example, our stock was pretty low at the end of the third quarter as interest rates were really high. And then all of a sudden, there was this sense that interest rates were going to come down pretty quickly, and our stock shot way up. And then all of a sudden, that sentiment changed a bit as to the timing, and there were some signs that maybe it's not going to happen as fast as people thought, and our stock went back down. It's very closely correlated to interest rates. Really too much, to be honest with you. But it is correlated in terms of short-term movements to interest rates. So I do think that's a huge part of it.
But I think it does present a very good buying opportunity, I believe. I'm not here to pump my own stock by any means, but just looking at it.
You can or.
Well, maybe. But just looking at it historically, where we are in terms of the trading valuation, it is at a low point for the last couple of decades. And so there's definitely this is a point in terms of value where it is lower than it's been at any time in the past or at least in a long time. And so if you believe that interest rates will moderate, then clearly, there's some upside from that. But even putting that aside, the fundamentals of the core business haven't really changed, right? We still have carrier spending on networks. They still have a ton of spectrums to deploy. We continue to see steady cash flow that we have available to deploy. Even if it's just in the stock buybacks, we are able to create value, particularly at this low valuation level.
The fundamentals of what we offer and the stability that we offer, that hasn't changed at all. I think sometimes people miss that because they get caught up in the current environment and maybe looking at other companies that are a little more short-term in the types of things they produce as compared to us. We're a big ship. The type of business we're in, it can't change that much from quarter to quarter, but it does provide a safe harbor in an otherwise rough storm.
When we look at the charts, the 5- and 10-year AFFO, and I prefer FAD, funds available for distribution, to get at real cash, you guys are getting into that teens level, forward, maybe even mid-teens level, which has historically been a pretty big buy clarion to say, "This is silly for such a stable business." So I would encourage investors to reach out and get those 5- and 10-year charts and look at this moment in time and go, "It feels like maybe the U.S. leasing should be trending up from here as we look out to 2025 and 2026." Is that maybe a fair again, I'm not putting you into guidance, but it feels like, given the carrier's activity level, interest rates, CapEx spending, that this might be a lower point in the long range?
Well, yeah, I think it is definitely a low point by historical standards in terms of their spending, and they still have a lot to do. So yes, in concept, I totally agree with you. The only thing that I hesitate on is just to try and pinpoint timing because whether that happens late this year or it happens a year after that, it matters to somebody who's looking for short-term changes. But if you're looking at this as a long-term investment, it doesn't really make that much difference. And the fundamentals that you're describing definitely exist.
For large, long-only type funds, they look for the opportunities to come in, and this could be one.
Sure is.
Anything else you want to let the audience know that you don't think we've hit so far then as far as your business, your new role as CEO?
Yeah. I mean, you hit on almost all the important things, so I don't think there's anything major there. I think you should look at it based on the history of what not only the industry has produced, but what SBA has specifically produced over the years and understand that the quality of the assets that we've accumulated over time and the discipline that we've taken to accumulate those assets are going to be still there and still make a difference over the long haul. So feel very good about the future.
Great. Thanks, everybody.
Thank you.