Hi, my name is Richard Choe. I cover communications infrastructure for JP Morgan. I'm pleased to welcome Brendan Cavanagh, President and CEO of SBA Communications. Thank you for being here today.
Thanks, Richard. It's nice to be here.
Brendan, you took over as President and CEO at the beginning of this year. What are your top priorities for this year as you, you start?
Yeah, so, you know, our priorities remain the same as they've actually been for the last 25 years, which is to continue to focus on shareholder value. And I think the main way that we do that in the current environment that we're in is by a focus on stability, but I like to say stability with agility. And the stability part is to ensure that we have locked in as long a term, strong relationships with our customers as possible, finding ways to make ourselves invaluable to them, to ensure that we have those long-term relationships. And the agility part is really just to continue to make sure that we're opportunistic, as we've always been, to find ways to either meet certain customer needs as they pop up, where sometimes you don't expect them to, or asset opportunities for investment.
I think there's been some view that the tower industry right now is kind of going through a little bit of a lull, but do you feel like the next three to five years, that there's going to be the same level of opportunity and growth that you've seen in the past, call it five, 10, 15 years?
Yeah, well, I definitely do because of the base underlying business that we serve. If you look at mobile data consumption, it continues to grow at a very rapid pace. I don't think you could find one person out there who would suggest that that's gonna slow down. And as that continues to climb, there's very few ways to meet that demand. One is new spectrum, and another is new infrastructure, but the great thing about new spectrum is that it also requires upgrades to the infrastructure as well. So in either case, we share in that growth as we have for decades, and so that gives me confidence in the long term. I think in the short- term, there's some bumps. Those bumps are driven by, as much as anything, in my view, cost of capital.
It affects us directly, but it also affects our customers and their spending patterns. Right now, there's not that sort of competitive, network-related, competitive driver that's pushing carriers to spend even through that higher cost of capital, and so spending is a little bit lower. But they can't pause for very long because the weight on the network is too great if they sit back for too long. So I'm very confident over the longer term, we'll see continued steady growth as we've seen over the years.
Yeah, no, I feel like we only use our phone more and more- and as you use the phone more and more, it requires more data. You have talked about, though, a little bit of optimization of the business, and I think that can take many forms, but can you kind of go through a little bit on what you're focused on in terms of, I guess, the U.S. business and maybe some of the other assets that you own and what you're focusing on?
Yeah. So we're basically just trying to take kind of a refreshed view of all of our operations, whether that be different markets or different business lines, and even our core business line of U.S. towers, to make sure that, one, we're optimizing our performance, that we're doing everything we can to make sure we're as efficient as possible. But two, more than that, that we are finding ways to put ourselves in a position where we have the best opportunity to grow long term. So for example, when you look at international operations, in some markets, we've done very well, in other markets, it's been so-so.
And when we kind of analyze what the different drivers are of that, in places where we have a stronger position in terms of relative market share, and more importantly, have stronger relationships or are aligned more closely with the leading carriers in those markets, we tend to do better. We're more relevant to our customers. We're with customers who are less likely to have financial challenges that affect their relationship with us or even the survival of their business. And so if we can do things to shift in that direction in places where we don't have it, that will help us stabilize and strengthen our position for the long term. That's just one example. There are some others, but we're looking at every element of what we do to identify what we believe are the key drivers to long-term success.
This doesn't change things overnight, but it does allow us to move directionally in a certain way and have a certain frame that we look through everything at, when we're making decisions.
So is it fair to say it's not just market share, it's your relationship with who you think is a strong partner in each market, and that is the lens you're viewing for longer- term growth?
Yes. I mean, that's, that's one element. I think it's an important one. It's not the only thing, but it definitely is an element of it. You can look, for example, we had great success in the market of Panama, an early international expansion that we did, and actually, our returns were tremendous there. Still, to this day, we're tremendous there. Of course, as a public company, it's a little bit of a different lens because you have to think about it from this date forward. But if you look back at the actual investment, we had a very nice return on it. As a private company, we would have said, "Well, you know, this is, this has worked out well." But as a public company, we have to think about it going forward.
And as we look at what has been the recent challenge there, a large percentage of our revenue base was tied to Digicel, who was the weaker carrier in the market, and they're now basically leaving that market. And so you have a more significant portion of your revenue tied up there, and it ends up elevating churn. And in our business, every quarter, everybody wants to know what's the growth going forward. So if you have one of these situations, it's a wait. So we just have to balance the overall return with the messages and where we sit as an ongoing public entity.
Got it. And I apologize for jumping around a little bit, but One of my later questions, I figure it's a good time to ask now.
That's fine.
Do you see the market for these potential assets, the private market for potential sales, are they healthy, or are you seeing maybe the private market's not as strong as they were, you know, a few years ago, just because of rates?
Yeah, you know, it's actually a tale of. There's two different stories here. When you look at it in the U.S., one of the biggest challenges that we actually face right now is this disconnect between the cost of capital and private valuations. Private valuations have not really adjusted for the rising cost of capital the way that they logically should. So sometimes we talk about cost of capital being a big headwind to us, and it is, sort of, but really, the biggest problem with it is that disconnect in that relationship more than it is the absolute rates. If everything adjusted accordingly, you would be able to still deploy capital at a reasonable return that provided roughly the same spread to what you were doing before.
Well, with the influx of all the money that's chasing our asset class, and not just strategics, in fact, in most cases, not strategics, it has driven this kind of disconnect in valuations, people using yesterday's balance sheet to go after assets today. That has made it harder for us to deploy capital on U.S. towers, as it has for our peers, by the way. So there, I don't think we've seen that shift, but internationally, I'm starting to see more of a shift in that direction. We haven't necessarily seen, deals trading at materially lower prices, but we have seen a lot of deals not getting done, and so I think that's a sign that buyers are not meeting sellers' expectations, and eventually, you're gonna see some shift there. So I do think that's starting to change a bit.
Got it. And going back to the U.S. business, at the end of last year, things were starting to tail off, but the year started on a lower base. But recently, you mentioned that you're starting to see some signs of activity. Can you tell us what you're seeing more recently from your carrier partners?
Yeah. We're talking about the U.S. specifically?
U.S., yes.
It has been a little bit slower. It goes back to what I mentioned a few minutes ago, which I think is the main driver in my view, which is that cost of capital difference, plus the lack of that competitive driver. Because when you look at 5G, people say there's no killer app. I think that's probably a bit of a stretch.
I think there are many applications that are developing that are important, but as an end subscriber, there's not that thing that captures the imagination just yet, that causes you to say, "Oh, I've got to be on this network because the 5G coverage is better than this one." And if that doesn't exist, and the cost of capital is much higher, the carriers say, "Well, I can be a little bit slower and more measured in my spending," and that's basically what we're seeing. However, having said that, we did see an increase in applications in the first quarter over the fourth quarter. I don't want to overstate that because the fourth quarter was rather low, by historical standards, so the fact that it's higher is directionally good.
It's not at the levels that it was before, but I think over time, you will see that continue to improve because of what I mentioned at the very beginning, which is just that, that constant, increase in mobile data consumption that will drive pressure on these networks that will require, frankly, additional spending. Plus, there's a lot of spectrum that hasn't been deployed yet.
I guess with that, you know, people constantly ask, like, where are the carriers in their deployment? I mean, obviously, for advertising reasons, you'll have the carrier say, you know, "Everything's 5G now, and everything's great," but the actual underlying networks are still being upgraded at different paces.
Kind of, where do you see your carrier customers in terms of how far they've either upgraded to 5G or deployed that mid-band spectrum? that they have?
Right. Yeah, in terms of upgrades to existing installations at our sites for upgrades for that mid-band spectrum, which varies obviously between carriers, on average, if you blended them together, they're a little bit over halfway there, but it's not the same for each carrier. One is quite a bit further ahead than the others, and that's because they had access to that mid-band spectrum that they're using much earlier, so naturally, they're ahead. So it's not exactly balanced, but on average, they're a little over halfway, which means there's still a pretty good runway to go. And that's just on the initial overlay. That doesn't really account for densification, and other infill, that frankly, will be more required as you deal with mid-band spectrum versus the lower-band spectrum that was used in previous generations.
So in terms of putting, I guess, that overlay and densification, I expect the next few years you'll continue to see that upgrade from that, call it 50% level, up to 70%, 80%. When do you expect to start seeing some of that densification work? Is that further down the line, or?
Yeah. We've started to see a little bit of that. Actually, we've seen a little bit of a shift towards the percentage of our new leasing activity being made up of new co-locations versus amendments. It used to be almost entirely amendments. Now we're seeing much more of a balance there, and I think that's a sign of some densification that's taking place. It's, there's coverage in there, too, but densification is a part of it. So it's in the initial stages of that, but pretty early. So there's still gonna be a lot of opportunity to see that next kind of wave of initial 5G rollout. So to your earlier point, when the carriers say, "Oh, we've, we're covering, you know, 90% of the country or something."
That, that may be true, but it is very thin coverage, and as consumption increases, their ability to actually meet those demands requires infill and densification.
So I think that's interesting in that you are starting to see some of this densification, which I think people thought would be coming later in the cycle. Or they think that there's amendments, you're done with amendments, and then all you do is densification. But it seems like you're starting to see this kind of trade-off of not only are they continuing to build out, but also densify at the same time as they see the usage on their networks.
Yeah, that's generally true. I think, I base most of my answers on historical cycles that we've seen, so we kind of have a sense of how this works, and I don't really think this is very different than what we've seen in the past, which is generally that initial layer of coverage, and then you come back and you infill or you upgrade where you need additional capacity in many cases. And so we're still... I expect this to follow the same kind of pattern, but at any given point in time, with a specific carrier, you have a mix of those things going on because they're hitting certain markets initially, particularly the denser, more urban markets, and so they may be at a certain stage, whereas maybe a more suburban or even rural market is at a later stage.
And so you might be doing infill or densification over here, and over here, you may still be doing kind of your initial coverage build, where you're upgrading your existing network. So it's really kind of a mix, but generally speaking, we have most of that densification work ahead of us.
I think in the past, you've talked about the 3G, 4G, and now 5G cycle. I think people think this 5G cycle was a little bit different because of the amount of spectrum with C-band that came to market and, but it seems like you're saying that this is following the same pattern that you've seen in the past. Kind of, do you feel like we're still in the early stages of this 5G cycle, or are we in the middle? Just kind of where do you get a sense of where we are in this cycle?
Yeah, I would say we're approaching the middle. Most of these cycles take roughly, t hey're usually about 10 years, each G, in terms of its build-out, and we're a few years into this, so we're probably not quite at the halfway point based on that. I would say to the first part of what you were saying there, it is similar. I expect it to generally be similar, but what varies, and I think is varying here, is a little bit of timing. And so it actually started off, perhaps in some ways, a little bit quicker, where you had this kind of big jump in. And I think part of that was driven by one carrier having access to mid-band spectrum, which is critical to this, before the others, and therefore trying to get ahead of the game and be more aggressive.
And that's, in fact, what we saw, and that's why you saw kind of accelerated leasing, organic leasing activity, a year or two ago. Now, what's happened since then is you've seen perhaps a bigger slowdown than what you saw in previous cycles, and it's for the reasons that I mentioned before. And again, that overarching kind of cost of capital issue, it, it's very meaningful when you're spending the kind of CapEx that our customers are, and so you saw it slow down perhaps a bit faster. But all of this stuff is timing, and it goes, it kind of goes back to what I was saying about being a public company versus a private company. As a private company who wasn't having to worry about each quarter, how things look.
You wouldn't have any concerns at all because the need is there, and the timing of when you get it might vary a little bit, but it's ultimately, it has to come. There isn't another solution, and so we have great confidence in that. However, every quarter, when you report, if you're in a period like we are now, where cost of capital is higher, and they don't feel that competitive pressure, it's a little bit slower than it's been before. But they're still sitting on the spectrum. They paid a ton of money for it, and they're not gonna not deploy it. They certainly are gonna deploy it.
So as you look out a little bit further, and to your point, like, unfortunately, we're very quarter to quarter in near- term.
I don't blame you, Richard. Not, not entirely.
But as you look out a little bit further, it doesn't seem like you're worried that eventually there'll be a level of new business that comes in. It just seems almost inevitable that the next few years, investors who might be worried that we're kind of in a prolonged down cycle, call it, of tower activity, are probably fretting a little bit too much or thinking just too much about the current situation.
Yes, I suppose. I mean, I think everybody has their own objectives that they're trying to achieve, and I think one of the great things about our business, about our industry, is the stability of it, the long-term nature of it, the fact that it's so reliable and cash flow just continues to grow at one pace or another over time, and it always has, and I think it will for a very long period of time. But the downside, I suppose, is that when you're in an environment where risk-free yields are much higher, we don't change quickly, right? There's no magic lever to pull that all of a sudden triples our growth in that environment.
And so, you know, on a relative basis, I think what you've seen is just: Oh, okay, now it's not as much of a gap as it was before, and therefore, as an investor who has to make decisions from year to year, you see people kind of changing course for a period of time. That will change over time and work itself out, and as the leader of this company, I have to stay focused on the things that I can control, and that's executing at the highest level, making sure that we have the right assets and that we allocate capital properly.
... Got it. With rates kind of staying higher for longer, in the past, I think the company is focused on reinvesting in the business, growing internationally to build scale. After that, there's dividend and buyback. But can you kind of walk through with rates where they are today, kind of how you're thinking about the capital structure, your investments, both domestically or internationally, and where the ranking is these days?
Yeah. So we have, in many ways, a similar approach that we've to what we've always had in terms of capital allocation, and it starts with a certain view on the appropriate level of debt with which to capitalize the business. And so we've had kind of a the same target leverage range for many, many years, for decades, 7x-7.5x t of net debt to EBITDA. And that remains our target, although, as those of you who follow us know, we've seen our leverage actually decline pretty far below that level, right? And that goes back to what I was talking about earlier, that sort of disconnect between private valuations and the cost of capital, where it's been harder to allocate capital into assets.
So when we look at our different possible paths that we could go, I think you should expect that you'll see a mix of all these things. We'll still add assets because we will find ways to find quality adds at appropriate price points, but it's harder to do that with our full stack of capital that's available to us. Our number one priority, though, is the dividend. We continue to be the leading grower of dividend in the industry. We're growing it this year, 15% over the last year, and that's actually the lowest level we've grown it at since we introduced it, versus our peers who aren't growing their dividend at all. And I think we will continue to lead in that sense, so that making sure that we meet our dividend.
But after you pay the dividend, we still have a significant amount of free cash flow that we're generating. And I think you'll see a mix of opportunistic asset additions, both new builds and acquisitions, and share buybacks, and we've done some of those recently. So it'll be a mix of those, but also, we've been actually paying down debt recently, which is not something that we focused on in the past. But in the current environment, given some of the anomalies that exist out there and the fact that we have a lot of maturities coming up that will certainly refinance higher than they are today, it's one way to secure a certainty of return is reducing that debt a little bit further.
Got it. Is it fair to say that if the private market doesn't change and you don't see good opportunities, you're comfortable with just being able to generate more free cash flow? You're paying your dividend and growing it at a high level, but you're comfortable with seeing your overall leverage come down for a while if, as rates stay higher, and then maybe later on, you'll reevaluate things. But in the current environment, we could see leverage continue just to kind of fall down.
Yeah, you could. The goal in and of itself isn't necessarily to delever. In fact, right now, I would say that we feel it's more important to retain flexibility, which having the lower leverage with a higher target actually provides us flexibility if we see an opportunity to kind of jump in and take advantage of that. And so that's where we're at today. If we don't see those opportunities and we're delevering and leverage continues to fall, at some point, we obviously have to revisit what we're doing. But I don't want to jump to that too quickly because we're in a certain moment in time, and things can change, and I think being positioned to go in whichever direction produces the best financial return is really what I wanna maintain.
Got it. Something that I'm more curious about, and I'm sure you're kind of limited in what you can say, but as we look out in the tower space right now, it just doesn't seem like there's a whole lot of opportunities. Like, in the U.S. space, it seems pretty limited. Internationally, I think people are pulling back. So when you say you're.
Opportunities for assets, you mean?
For assets, yeah. So when you say that you're kind of making sure that you have the lower leverage for potential opportunities, there doesn't seem to be a lot out there. Am I wrong in thinking that?
Yeah, I don't think. I wouldn't say that. I think in the U.S., there's some level of scarcity. It's been heavily built out and consolidated up. There are some portfolios that could potentially come to market of some size. But for the most part, the U.S., it's kind of smaller, what we call mom-and-pop type of investments that are out there. But there's always something that seems to be popping up. Internationally, though, I don't think that's the case at all. There, there's tons of assets that are available today. The question is whether they meet our objectives on all fronts, and certainly, price is one of those fronts, but the quality and where are they located, all that kind of stuff matters. But there's a ton of assets available.
In fact, I think there's more assets available than there are buyers for those assets right now.
So despite.
There may be opportunity as a result of that, possibly.
So despite wanting to reevaluate your assets and focus on key areas, you are seeing if the bid-ask spread is appropriate, good potential.
Oh, sure.
Internationally.
Yeah. I mean, our evaluation of our current operations has no bearing on our willingness to invest capital into the right opportunities and to new assets. I mean, we have. You know, I kind of look at M&A as basically a separate business line of ours. We have a group inside of our company that is there. Frankly, some of them have been there as long as I have or longer, and that this is all they've ever done. And so we have a very kind of routine, almost, assembly line-like process that we follow in evaluating everything that's out there, and that hasn't changed. We haven't been quite as active in the number of deals that we've done because I feel like we're disciplined.
That's, you know, that's the goal, and I think we actually live up to that pretty well. But we evaluate everything. I mean, even stuff in markets that you might think, well, you're not in that market, you wouldn't look at that. We look at everything because you never know when you're going to see something that actually fits the bill that we can we believe that with our expertise of operations, that we can drive additional value out of it that others haven't seen, and so we feel it's important to be aware of everything. So I'm hopeful, actually, because I think we're very good at it, that we will find the right opportunities, but we'll remain disciplined either way.
In the past, you've done a decent amount of builds internationally, and, but I think that's pulled back a little bit, given the higher rates and maybe more uncertainty. Can you remind us kind of what hurdle rates you're looking for in an international business? Then, what level of business mix would you feel comfortable with in terms of U.S. versus international, kind of, as a longer-term framework?
Yeah. I mean, I'd rather not answer too explicitly the hurdle rates, but they are a relative spread to what we would consider a risk-adjusted WACC in the markets that we're in. And that varies depending on where you are. Although we do finance today, at least everything off of our U.S. balance sheet, and so we do kind of balance it with that a little bit because, ultimately, our cost of capital stays set. But you have to consider, you know, currency and other factors in there. So, it has adjusted certainly as cost of capital has increased it in terms of our returns, which is part of the reason you've seen less assets being added, right? In terms of the mix of U.S. versus international, you know, there's not, like, a specific target.
We certainly do, acknowledge and kind of lean into being predominantly U.S. tower company, and I expect that that, generally speaking, will stay. It's not our intention to shift that balance where you would say, "Oh, they're only half domestic." So for the most part, I think the relative mix we have today will stay, but as opportunities arise, we'll have to reconsider that. And one of the key things that we focus on, more than international versus domestic, is U.S. dollar versus foreign currency denominated, because we've found that that's been one of the biggest items that is hard to control for. In an otherwise very stable business, you introduce an element of instability when you introduce foreign currencies, and you've seen it. We've experienced it in the past in Brazil.
You've seen some of our peers have major impacts from that. And so we kinda target not letting our non-U.S. dollar-denominated revenue base be more than 25%-30%.
Got it. You're generating a significant amount of free cash flow, but you do have some near-term maturities coming up, and they were done at very low rates, and you've done a great job in terms of hedging in lower rates. But with rates staying kinda higher for longer, what near-term, I guess, maturities do you have to refinance and deal with, and what are you seeing in terms of your ability to borrow at good rates? Whatever that means these days.
Yeah. I was gonna say, what's a good rate?
Yeah.
Well, we do have two, two instruments, two securities that are maturing, in the relatively near term. We have about $620 million-$640 million, I always mess it up, in October, of securitization debt, and another roughly $1.1 billion in January, also in the securitization market. So between the two, almost $1.8 billion that matures, and they are, as you said, at very attractive rates. The good news is that we took full advantage of the very low interest rate environment over the years that we had it and, and have been able to keep our interest costs low. The bad news is that maturities eventually come up, and it's a lot higher today than it was then.
In terms of concern, I have no concern at all in terms of access to capital. I mean, there, there are many different markets available to us. Our asset class is always considered kind of a, relatively higher quality to the folks at similar ratings levels that we're competing with, and so we always do very well and have plenty of, access to capital. It's just purely a, a cost thing, and so we're trying to figure out how to best manage that. But to some degree, we are where we are, and the interest rates will be what they'll be. We are focused more, on the secured markets. We can generally use the securitization market, which is where these maturities are.
We will likely refinance in the same market, to get a rate that is more similar to an investment-grade rate, because it is actually an A-rated piece of paper, than we would, you know, get as an unsecured issuer in the high-yield market. But even that market, you know, we tend to lead that market, too. We're very preferred issuer in the high-yield market. So we have flexibility, and we'll just manage it on the timing front. But, I mean, the one thing I'm sure of is that the rate will be much higher than it is on what we're paying off.
We seem to ask this pretty often, is you're not investment grade, but you seem to borrow at investment grade. Has that changed, and has that thinking changed, that do you feel like there's an advantage to becoming investment grade, or?
I actually, I really don't at the moment. That will, I'm sure, change at some point down the road, but today I don't. And what we're talking about in terms of the cost of the money, that's really all that matters. I mean, that. If it was going to improve meaningfully our cost of capital, our cost of debt, specifically by being investment grade, we would certainly be very open to that.
If it's gonna be basically the same, as you rightfully pointed out, we've been able to essentially borrow at investment grade rates by using the secured markets, and we're comfortable doing that. There's not a big reason to rush into it, especially in the current environment, you know, because as you look at it, you've got even if you could get a slightly better rate, typically an IG piece of paper is not gonna be callable the way that a lot of our instruments are. And so in this higher rate environment, where everybody hopes, believes, that rates are going to come down over time, locking in something that's not callable for the longer term at a historically fairly high rate, just doesn't . I don't see the value in doing that today.
Plus, we preserve flexibility if we see one of those opportunities we talked about earlier to lever back up in the current way that we're managing it, but eventually it's gonna happen.
Yeah, no, it'll be interesting to see what those opportunities are. One of the, I guess, biggest headwinds for your U.S. business is the Sprint T-Mobile churn. Can you remind us kind of what you're seeing, or what you will see, and how that's trending relative to your expectations? And then on the other side, the non-Sprint, T-Mobile churn, are you seeing that come down, in this period also?
Yeah. So we, we've given very specific numbers on each of our earnings calls as to the Sprint T-Mo, the timing of what we expect our, our Sprint impact to be, and it's generally in line with that. We haven't seen anything that would change those numbers. It's gonna be roughly $30 million of churn, which is already in our outlook for this year, for 2024. And basically, through the next couple of years, our biggest years will be the next two years, we believe, in terms of the, the churn impact, and then it'll start to, to kinda wind down after that. On the other churn, it's it's been a little bit elevated over the last couple of years, but I, I believe, actually, that we will see it start to step down.
That's my expectation, that we will see less and less of that, in part because some of the things that were out there as potential low-hanging fruit, meaning smaller carriers that weren't gonna make it. All those things start to diminish over time, and so the opportunity for that churn becomes less and less, and I think we're starting to see that be the case. So I would expect us to be towards the lower end of our historical 1%-2% range, as we get out another year or so.
Got it. Just to kind of finish up, with the little bit of elevated churn, activity still being low, but could increase later on, and then the, the higher refinancings, I think investors are somewhat worried about your ability to grow.
This isn't a good way to end, Richard.
Sorry. But, in the end, I'm obviously painting the worst-case scenario, like, as investors look at your AFFO growth, how should they think about it, maybe not just next year, but kind of longer term?
Well, yes. I mean, the next couple of years have some of the headwinds that you mentioned, that will certainly weigh on AFFO per share growth. I mean, historically, we've grown our AFFO per share in the mid-teens on an annual basis every year. Yeah, we're not gonna do that the next couple of years, in all likelihood. But I do think once you get these couple things behind us, because they're all, they are all distinct, timing-related things, right? Interest rates, eventually, you will refinance out of them, or interest rates will come down. Sprint churn will end and be behind us, and carriers have to spend on their network. So all of those things are, unfortunately, kind of lining up at around the same time.
But longer- term, that's not gonna be the case, and so I'm, I'm pretty confident that we'll get back to at least a kind of high, mid to high single digits, high single digits, AFFO per share growth rate annually.
No, that's great. I think you'll get back there soon enough, so-
Absolutely.
Thank you.
Great. Thank you, Richard. Appreciate it.