Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph, joined by Mike Rollins with Citi Research, and we're pleased to have with us SBA's CEO, Brendan Cavanagh. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC 2024 to submit any questions. Brendan, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
All right. Well, good morning. Is this on? Yep. Good. Good morning. I am here, first of all. I'm here today with our new CFO, who joined us just a few months ago, Marc Montagner, who's sitting next to me, and also Louis Friend, who's our new vice president of finance, sitting over in the corner there. So thank you for having us today. For those of you that are not familiar with SBA Communications, we're a wireless tower company. We own wireless towers in 15 different countries, but predominantly based here in the United States. Have been in business for 35 years. We're a real estate investment trust since 2016. Why you should buy our stock?
Well, I think there's a lot of reasons, but just to kind of give you the high-level view on that, we are first of all trading at a value today that is near some of our all-time low valuations, at least in the last decade or so. A lot of that has been driven by the interest rate environment. But I think something that's missed sometimes is that the interest rate environment not only affects what our cost of debt is, and that seems to be what's weighing on our stock a little bit, but it also affects our customers and their ability to spend on their networks, their willingness to spend on their networks.
And so I think as you start to see interest rates abate a little bit, there's actually a multipronged move up as a result of our cost of capital and our, and our customers starting to invest more in their network. So, I think there's a lot of opportunity to see real growth in our stock.
Thanks. You know, Brendan, maybe to kick us off, as you're now CEO of the company, how do you want to shape the priorities for SBA this year?
Yeah. Thanks, Mike. First of all, I've been at the company for over 26 years, so nobody should expect a material strategic shift. I've been a part of the decision-making for the last couple of decades, and, I'm very comfortable with the way that we've operated the company. In fact, the business itself, for those of you that aren't familiar with it, is very steady and stable. If I give you a presentation kind of summarizing the basics of the tower business, it's the same presentation I could have given you 20 years ago because the business stays very steady.
So what we're really doing is reacting to the environment that we're in, and at this point, we are in a more maturing company, a more maturing industry, and so it's important for us to focus on how we draw out that extra little bit of value from around the edges. And so we're doing a full, thorough review of all of our operations, the markets that we're in, the different business lines that we're in, to make sure that everything aligns with the core of what we present, which is really stability and quality. And I think, as we do that, there will be some refinement to some of those operations. In some cases, we may invest a little bit more in order to improve our scale in a particular market, for instance, or we may actually decide to divest certain assets as well.
That's something we did actually in the fourth quarter. We had operations in Argentina. They were really subscale, and there were also other factors in that market that created some level of instability that we felt did not align with the core of what we present to you as an investment thesis. So, we decided it was best to exit and focus our energies elsewhere. So that's really the key focus for this year, is to kind of look at each of these things closely and figure out what aligns and what doesn't, and make refinements where we think appropriate.
As you've embarked on this review, have there been any surprises so far, whether, you know, good or challenging in terms of, you know, assets, product, market?
Yeah, I don't know if there have been surprises necessarily, but I think there are things that we're learning as we go through this, and we're kind of in the midst of this. And what I mean by that is, as we kind of evaluate the different places where we operate, we've seen great success in a number of them, and we've seen some that haven't been as successful. And so a big part of the evaluation is to kind of look at it and say, "Well, why were we successful here? Why were we not there?" And I think what we're finding is that our relative position as a tower company in the market, but also our position in terms of our relationship with the key customers in that market, those that are the market leaders, is actually more beneficial to us over time.
If you align yourself with a weaker player, particularly in some of the international markets, the emerging markets where we operate, you find that there's more consolidation that takes place. You end up on the wrong side of that, and that, those are the things that we're gonna look to avoid and improve our positioning on. And in the places where we've been a leader and our customers have had greater success, that obviously benefits us as well. And so positioning ourselves properly in the markets that we operate in is a key focus.
You referenced earlier that the U.S. is still the largest portfolio by far. Does the review also focus on the U.S. assets? And are there certain things that you're learning from managing the U.S. portfolio that can improve returns, you know, regardless of the mechanism, you know, investing, finding efficiencies, monetizing?
Yeah, we're, we're looking at everything. The US certainly fits that. We have a lot more experience and time in the US. It's a little bit more stabilized, if you will, because we've been at it for 25, 30 years now. So there's a little less to, to learn there. We're a little more embedded, and our position in the market is, is pretty strong as it is, and our relationships with our key customers are also, I think, at a point where there's very little to, to materially change those. But having said that, the way that we operate, the types of contractual arrangements that we enter into, we, for instance, did a master lease agreement last summer with AT&T, the first of its kind, really, in our history.
And so we think about ways that we can tweak our relationships with our key customers in order to strengthen and, and really preserve that cash flow stream for the long term, because really what we are is a long-term, significant cash flow generator, and we want to make sure that that stability is retained. Sometimes we need to make tweaks to the way that we operate or enter into agreements with our customers.
If you think about the opportunity maybe to do that with more of the customers, you know, comprehensive MLA, is it just a matter of the willingness of two parties, or is it usually around an event where a carrier customer has a more significant investment cycle, and so they design this type of agreement around that process?
Yeah, I'd say it's probably more the former, but in some cases, the impetus for one of our customers to feel inspired to kind of enter into a more comprehensive agreement is because they have a particular initiative that's underway or about to be underway. So sometimes that will be what drives parties to the table, but ultimately, it's. There's an ongoing relationship that we already have, that we will have into the future, and we both recognize that. And so it's a matter of kind of coming to terms as to what works best for both parties. At the end of the day, this isn't. Sometimes you'll hear people talk about it in our industry as though they got the better of a carrier, and that's not really the way that it works. You're dealing with very smart people on the other side. There's a balanced discussion.
We have things that we're trying to get out of it. There are things they're trying to get out of it, and if we can find a place to meet in the middle, we do. And we've done that at various times in our history. The AT&T deal was just a little bit different in its structure, but we've done master agreements with our customers, with all of our key customers over the years, several times.
Should investors expect during 2024, at least another agreement with one of the big national carriers?
Well, we have existing agreements in place, with all but one carrier right now, and that carrier we had an agreement with that just expired. That's T-Mobile. So, it's possible that we would enter into a new agreement with T-Mobile that's more of a master agreement. But even if we don't do that, there's sort of a way of doing business that's normal, and we will sign individual agreements on a case-by-case basis throughout the year. So it's possible that there'll be a master agreement with them. I wouldn't think with anybody else, because we've already got agreements in place that are-- we're in the middle of.
Drilling further down on the domestic business, can you share with what you're seeing in terms of leasing activity as you've exited 2023 and what you're seeing in early 2024 so far?
Yeah. So if you go back, let's say two years ago, we were seeing an extremely high amount of activity. The carriers were very busy, in particular, one carrier in particular, who had a significant amount of mid-band spectrum that they were deploying in their efforts to roll out a 5G network. So that was driving leasing at a very high level. Since about this time last year, we started to see carrier activity slow. As I mentioned in my earlier comments, I think the cost of money, the current interest rate environment, is playing a role in that.
But you also have what I would describe as probably a lack of an obvious killer app for the 5G, and as a result, the impetus to have to compete on network is not as strong right now as it's been in past cycles, perhaps. And as a result, given the financial situation, the carriers are going a little bit slower in their rollout. So the leasing activity, while still there and always constant, is at a lower level than it's been in the previous couple of years. And that remains the same today. However, we are having conversations with our customers that indicate that they have initiatives that they're starting to ramp up towards, and I think that could be a driver of increased activity levels. AT&T's got their announced movement of their network from Nokia to Ericsson, which is a driver.
They also have work going on with FirstNet. DISH, who has its own potential issues from a financial standpoint, but from a network standpoint, has a regulatory deadline next year that will drive incremental activity, and we're starting to see that activity pick up with them in our conversations. Verizon has been relatively steady, but also is continuing to roll out their C-band spectrum, and T-Mobile has C-band and 3.45 spectrum that they have not deployed at all yet. That was just finally cleared by the government for them to go ahead and start moving with. So I think all of those things will be drivers of activity over the next couple of years.
So there's been some questions, a number of questions that we've been getting since, you know, the three tower companies have presented their earnings about maybe different tower companies seeing maybe, you know, different preconditions to future activity or leasing getting better. So is it fair to say, just based on your comments, you are seeing the preconditions conversations? Maybe applications starting to get better to support better leasing activity in the future?
Yeah, we are seeing that, but I think it's premature to jump to what that means something specific for the second half of the year. The timing is still, I think, in question a little bit, but again, our business is a long-term business at its core, and I can't necessarily say from quarter to quarter what's going to happen, but I can say that over time, there are significant network needs, and we know that our customers are reliant on our sites as part of that network rollout. So I'm confident that we'll see it, and I think those increased conversations that you're referring to, yes, those are happening, and those would be good signs. And just as it relates to the other tower companies, carriers aren't making their decision based on one tower company or another.
They have network decisions that they're making that they will... If they're busy on their network, everybody sees that same level of activity increase, and if they're slow, everybody sees that as well. There could be slight nuances and differences due to contractual arrangements that might affect the way that it rolls in for one company or another, but the overall activity levels will be fairly consistent, I would think, across all the tower companies.
When you just think about the history of this business, if there's an expectation for leasing or an opportunity for leasing to be better in the second half of the year, based on the historical visibility that you have, when would be the point at which you would kind of know or feel good, like, yeah, like you now have a clear path to better leasing, you know, in that second half of the year?
Well, I mean, it really comes down to, obviously, what we're talking about is signing up. Once we know that we're signing up incremental revenues at a higher pace, obviously, we know that in the future periods, we will see that start to roll through our financials. So there's, there's a lag anyway. So even if activity is, is faster and, and bigger in the second half of the year, it's not really going to affect this year, it's going to affect next year. So we, we kind of get a lead time as it relates to the financials anyway. In terms of knowing when they're going to sign more, as applications increase, we start to have a sense that there's more coming, but it's never an absolute. Sometimes we see applications increase, and then there's a little bit of a pause.
Other times, we see more come in than we would have expected based on the application pace. So applications are probably the best guide. Our services business also gives us an insight into what our carrier customers are doing because we're working with them to roll out their networks and do network planning, and even site acquisition and development. So that process sometimes gives us an insight into whether we're gonna see an uptick in activity at the tower sites.
Internally, when you run the algorithms of what carriers need to do over time, maybe the quantum of upgrades even still for this 5G cycle, what's the right range that investors should keep in mind in terms of the annual organic growth opportunity, for the domestic towers? Recognizing, you know, I would say from that, there's this elevated Sprint churn at the moment.
Mm-hmm.
If you kind of just push that aside and just think about it from a pure-
I'd like to push it aside.
-organic, yeah.
Yeah. I would say that kind of a normal level of... And normal is really more of an average over time, it's not necessarily normal. Every year seems to be a little bit different, one direction or the other. But a normal level is sort of that mid-single digits same-tower growth rate that you would see due to organic lease-up on our towers in the U.S. It is a little bit depressed because of the churn that you mentioned, but that churn will move its way through over the next couple of years, and I think once that's through, I would actually expect our churn levels to probably be towards the low end of historical levels after that.
You said, sorry, low end of the historical levels?
Yeah, I think churn. Once you get through the Sprint churn, in a couple of years, I would say, at least based on what I see today, there's, there's a lot less opportunity for churn to happen. There's just not as many leases. There's not as many, much overlap. Now, that puts aside somebody having a financial situation that they can't make it through, but for the most part, our customer concentration will be pretty, pretty dense at that point, and I would expect very little churn.
What's that broader historical range that investors should be thinking about?
Historically, we've seen 1%-2% as our normalized churn in the US, 1%-2% of leasing revenue. And I think when we get a couple of years from now, you will see that probably towards the low end of that range going forward.
And then, when you think about the, the Sprint churn, is there any shift in that in terms of timing? Is it getting pushed out? Is it running on track? And, and can you just remind us of just how much you have to kind of burn through over the next few years?
Yeah. So it's, I would say it's generally in line. It's hard to know exactly what the timing is, and I think you've seen, if you've watched over the last couple of years, we've given an outlook, and it's tended to be $1 million too high or $1 million too low because of timing with their ability to actually move off of certain sites. It's probably, to date, been a little bit behind, but I would say going forward, it will be a little bit more probably than what we originally thought, but within a very small range. In terms of what's left, we have somewhere between $125 million-$150 million of total revenue that would churn off over the next 3 to 4 years.
... Geographically, is there anything differentiated about where your towers are located, where you feel like there's an extra level of growth, maybe relative to your peers? Or maybe it could be on the underwhelming side, depending on, you know, where the activity levels, you know, may be?
There's very small differences. I mean, our portfolio is probably slightly more suburban and rural than some of our... than one of our peers. Our other peer is probably not really any different than us in terms of the makeup. And what we found is that ultimately, the carriers kind of go through a process where they start basically in the NFL cities, that type of thing, and they move out from there. But ultimately, they're looking to cover all of these areas, all of these cities and towns, highway corridors, all that kind of stuff. It's important that they have true nationwide coverage. Our towers are not located in spots that have no population. They're located in places where people are there and living and working and using transportation routes.
We've never found that the geographic differences in the portfolios have made much of a difference at all.
Are there any other features of your carrier contracts that might be underappreciated by the market?
Well, I think, perhaps the detail of the equipment specificity that exists in our agreements would be something that people might be surprised at how specific it is. It's not simply a lease of space. It's not just you get this much room on the tower. It's right down to the model numbers and serial numbers of every piece of equipment that's there, the weighting, the weight, the size and dimensions, all of those components of it. That includes the cabling, the radios, the antennas, anything that's going on the tower, and frankly, anything that's going on the ground as well. And so that specificity allows us the opportunity to really know what's going on at our sites, for one thing, and to make informed decisions about additional investments that we make.
It also allows us the opportunity to monetize the change that takes place there on a regular basis. In many cases, we've been able to, even with fairly neutral loading changes, actually monetize that change over time.
And one of the questions that we get, and it's it could be kind of looked at in a couple of different ways, is how technology affects leasing over time. You know, whether it's certain pieces of equipment might get smaller, whereas certain antenna technologies might actually have a greater load or, you know, have a greater amount of space that they kind of absorb on the tower. And then at the same time, you have technology like satellites, like, you know, LEOs starting to populate, where they might provide coverage in more rural areas. And people are wondering how this affects the tower model over time. You know, do you generally look at this as net positive, net neutral, net negative? Can you sort of frame the subject of technology for our audience?
Yeah, well, historically, technology change has been really, really good for our business because each one of these new cycles of technologies in the wireless space have driven the need for incremental spectrum to be deployed, and therefore, incremental equipment to be deployed. And for the most part, it's required densification of these networks, where they've gotten deeper and closer together, closer to the end user, and all of that activity has required more and more equipment at the tower sites. And frankly, the constant change in the technology, even when it's not necessarily been bigger equipment, although sometimes it is bigger equipment, it's the constant change has allowed us to monetize that upgrade cycle that's taken place.
So I've found technology to actually be very, very good for our business, and if you look at what our customers are focused on right now, they first of all just spent a ton of money on spectrum over the last couple of years. They're deploying that. They're still only partway through those deployments, so that will drive activity, as we talked about a moment ago. But they're lobbying the government to ensure that there's more spectrum made available and that the FCC retains its auction authority. All of those things are because they recognize that they have to continue to invest, because the amount of broadband consumption is increasing at a rapid pace.
And one, just one example of this that has been very popular to talk about these days is fixed wireless access, which has been the main driver of growth for a couple of our wireless carrier customers. What's interesting about it is that that usage of spectrum is putting a tremendous strain on the network or has the potential to put a tremendous strain on the network, because the amount of average consumption, broadband consumption by the average fixed wireless user, is 20 times what it is for the average mobile user. Think about what you use it for. So that huge usage of that capacity means that there will be network strain, and that will require, again, additional investment into the network. So for the most part, I see technology shift as a positive.
To the extent equipment gets miniaturized, we've seen that over the years, and really what it's meant, instead of our growth being like this, it's been maybe slightly like this.
Just a reminder, if you have a question, just push the button, and the light will show up. We have a question over to the right.
Yeah, just a quick follow-up on that, then I want to ask a question about DISH.
Sure.
At 20 times the usage and you start to strain the network, does that require additional density, more towers in the same area, or are they gonna put more equipment on the same towers? How does that flush out in the network?
I would say all of those things, actually. Yeah, it does require more density, for sure, because you have to have places to offload that incremental traffic, and that can be done through, in some cases, additional equipment at the same sites, but in other cases, it would require other locations.
...And then on DISH, I'm just wondering how you guys think about DISH. They have obviously their 25 requirements. Are you having conversations with them today, or do you expect, when do you expect to have those, and what's your thought about when they actually start to get, you know, start the rollout? I'm just wondering if they can finish the rollout between, you know, January 1 of, you know, and July. Is that, is it, or does it have to pull into this year?
Right. Yeah, well, first of all, we are having conversations with them today. Those conversations have started to accelerate over the last couple of months, and if you think about how we interact with them, we're interacting with them on an operational level, about their operational network needs, what they need the tower sites for. And from that perspective, they're definitely ramping up, and they recognize that they have this deadline. We don't talk to them about their finances or their balance sheet, and that ultimately may have some impact on what they do and what they're able to do it. And I don't know if they're looking for extensions to their regulatory deadlines today. It wouldn't surprise me if they were. I really don't know, but that's a possibility that would change the trajectory of it.
But right now, the behavior is such that they recognize they have the deadline, and we're seeing an increase in those conversations about how they roll that out. Can they even do it? Yeah, I think so. It's a big project. The deadline is June of 2025, so they have about a year and a half, a little less than a year and a half. They do have to get going, for sure, though, to accomplish it, because this is a more focused deadline in terms of it's not measured on a national basis. It's measured on a market-by-market basis, so that's a bigger lift for them.
And if they sought sort of deadline relief, on what basis could that be? I mean, I'm just wondering, because the point was, there's a deadline for a reason, right?
There is. Well, I couldn't—I wouldn't hazard a guess as to their basis that they would argue for it, but I think, you know, the situation is perhaps a little different. The market is different, the cost of money is different, and I think while those things may not necessarily typically be something the regulator would be sympathetic to, I do think that the whole premise of approving the T-Mobile-Sprint merger was based on establishing this fourth nationwide carrier, and I believe the regulator would be inclined to try to make sure that that's successful.
One just follow-up on that. In 2024, what's your exposure to DISH revenue as a percent of the total domestic revenue?
I believe DISH represents approximately $40 million or so of our annualized revenue.
Thanks.
Mm-hmm.
Just read a question that came in related to thoughts on deleveraging in 2024, and maybe I'll combine that with just capital allocation broadly and how you prioritize share repurchases versus development or acquisition.
Yeah. So, you know, we have a long history of being a leveraged capital allocator, mostly buying towers, but also buying back our stock. You know, that I would desire to still be that, although it's a little bit harder to be that in the current environment in terms of cost of debt. And so, and also the market's more mature. The opportunities for assets is a little bit different. There's not as many available, and frankly, they're very, very highly sought after, so the price points that we see for some of the assets that are trading in many cases are beyond what we think is reasonable. So having said all that, our first choice, if all things were equal, would be to continue to grow our portfolio and invest in new assets through building and buying.
But buying back our stock, particularly given what I said at the very beginning of this conversation about its relative valuation, is not a bad option. And if you look back last year, we actually dedicated most of our excess capital to delevering. Given the current environment, we saw that as the best use of capital. So some mix of all of those things I think will continue to be a part of the story, and people should expect to see all of them over time.
How does that play into kind of target leverage and any decisions around or ambitions for an investment-grade credit rating?
Yeah. So at this stage, first of all, our leverage at the end of the year was 6.3 turns, Net Debt to Adjusted EBITDA, and that is the lowest it's been in decades, perhaps our entire history, other than maybe the very beginning. So, we have had a historical target for the last 12 years or so of 7-7.5 turns. We're obviously well below that today. We haven't changed that target, even though we're below it, because I believe at this point in time, retaining the flexibility and the optionality that that presents is of more value to us than being an investment-grade company.
The value of being investment-grade is, for us, sheerly based on the cost of debt that we could raise, and right now, I see that differential as relatively small versus the flexibility of retaining the additional leverage capacity. Now, we'll see how it goes. If we can use that leverage capacity efficiently to add assets and to grow our business, and create shareholder value through that, that's what we're gonna do. If we don't see those opportunities, then we will naturally see our leverage continue to decline, because we continue to produce more EBITDA every single year, and we continue to produce a lot of free cash flow. And if that's where we end up, we will naturally move to investment grade. That's gonna happen at some point anyway, so...
Maybe switching gears to-
It's like dinner time for a second.
That was the five-minute warning, though.
Yes. Okay, good.
Switching gears to the international markets in Latin America specifically, you know, you've mentioned on the earnings call that you're dealing with, you know, maybe a greater level of industry rationalization in some of those markets that's, you know, weighing on the growth. Can you talk about, and just remind us, you know, how this kind of will play through the financials over the next few years, and where do you get to at the other side of this? What's the right expectation for growth in these markets?
Yeah, I think so. We are, we're actually taking somewhat of a proactive approach around this, and there's a little bit of short-term pain associated with that. But it-- this goes back to the earlier discussion of strategy overall and the goal to focus on stability and quality. And I think in order to produce stability, when you have certain markets where you have weaker carrier customers or you have consolidation that's happening or may be happening, those customers are looking for ways to gain synergies and rationalize those networks in an efficient way.
And while we could stand back and say, "Well, we're not gonna help you with that," that in the short term, would allow us to push off some churn and to retain a little bit higher cash flow for a period of time, but long term, would probably put us in a weaker position. And so we've made the decision to work with our customers where we can, to help them gain some of those synergies a little bit earlier, which effectively pulls forward some of the churn a little bit. I don't think it increases it in total. In fact, I think it reduces it, but it pulls it forward a little bit, and what I would expect that you will see over the long term is a much more stable long-term commit... First of all, they're increasing their commitments to us in terms of time.
They're increasing their commitments in terms of incremental business, and we're now dealing with the surviving stronger entities. And so I actually think that our positioning will be much better over the long term. But we do have a couple of years of elevated churn internationally. So we have to work through that, and we will. I mean, all in all, it's not, it's not that much in terms of absolute dollars, but it's something that's a little different for the tower business.
In terms of just where you are with respect to the 2024 guidance for that, is there still some room where you may take additional actions to kind of, you know, execute this strategy of bringing churn in, such that there might be an additional step backwards in the international, you know, expectation, but to eventually take two steps forward, as you were describing?
Yeah. It's possible. You know, we put forth guidance based on our best estimate of what's going to happen. Most of it is kind of known, so it's not a lot of guesswork, but there's a little bit in there about things that we're working on. But we don't. Well, the biggest thing really that's out there, Mike, that would fit into the category of what you just described, is in Brazil. Claro is one of the three incumbents who took a portion of the Oi network. Oi was absorbed by the other three incumbents, and we've entered into agreements with both TIM and Telefónica that have done what we just described, pulled forward some of the churn, but created a much stronger long-term relationship. We haven't done that with Claro.
We may or we may not, depends on whether we, they want to, and whether we've come to any agreement around that. If we do that, that would probably be an incremental impact to this year's churn, if in fact, it happened early, early enough in the year. Outside of that, I think it would be, if there's anything, it'd be relatively immaterial.
We'll go to our speed round, and ahead of the official rapid fire, just on the subject of data centers, where you have some investments, do you see them getting significantly larger, staying the same, or do you see that as a place of divestment in the future for SBA?
That's to be determined. I can't say. I don't know.
Okay. So from a rapid-fire perspective, question number one: is same-store NOI growth for your sector, not SBA specifically, in 2025? You can look at it as same-store revenue or gross profit, whichever metric you prefer.
What, what is it? Is that-
For 2025, the sector expectation for-
Oh, well, it's a little bit depressed because of the Sprint churn, so, and I think that applies to the others, although it may not be totally balanced, so low to mid-single digits in the U.S.
Okay. Will your property sector have more, fewer, or the same number of public companies a year from now?
This session will give you five minutes.
I would think the same. There's only three public U.S. tower companies, so it's hard to imagine that would change.
Great. And what's the best decision today? Buy, sell, build, redevelop, or repurchase your stock?
A little bit of, of all of that, actually.
Thank you so much.
Thank you.