Coming back after the coffee break. We'll give people a couple more minutes, but what I want to do is welcome Marc Montagner, like, I think I can still call him the new Chief Financial Officer of SBA Communications for joining us. Thank you, Marc, for coming here. This is our first time kind of chatting on stage. I'm a softball guy, so you got to know that, so I guess, like, look, the big question, right, for the tower companies, has been the moderation in carrier spend and the relatively rapid moderation in carrier spend, and it kind of grew pretty much through the middle of 2023 and then really tapered off, and it's tapered off further in 2024.
Before we talk about the upside, and if we think about your guidance for the year, and what it might imply for an exit revenue rate, new leasing revenue rate, out of 4Q into 2025, where is the bottom? When do we reach bottom?
Let's just talk about the big picture, and then we'll take it down, right? I've been in that industry in and out for 30 years now, and the CapEx cycle, 1G, 2G, 3G, 4G, 5G, carriers have been saying for years, I'm going to take CapEx to about 15% of revenue, and then there's demand on the network, a new generation coming, and it runs to 20, 21, 25%. So if you look at CapEx in 2021, 2022, and 2023, it was for the big three, $35 billion, $40 billion dollars, $35 billion dollars. And it was running at over 20% of revenue. This year, it's going to be about, like, low 30, about 14% of revenue.
And when you introduce a new generation, you get a capacity lift of about 10X, and it's a step function. You spend $100 billion buying spectrum, and you spend tens of billions of dollars putting the network in place, and then you have extra capacity, you fill that extra capacity, and, it just... It's unclear how long it takes to fill up that all capacity, but if you will look at handset usage, that grows at double digit every year in terms of tonnage. Now, you have fixed wireless access, where every single user is using 15-25X the tonnage that you get on a handset. So you have a carrier, you have extra capacity, you might as well sell it for $35-$50 a month because it's there.
And the big advantage of 5G is people keep asking, what is the killer app? It's not the killer app. It's the cost per bit for the carriers is so much lower each time you introduce a new capacity. So it gives you an unbelievable cost advantage, where you could basically do a fixed wireless access customer using 20 times more tonnage and still make money on this. Eventually, that capacity is gonna be used. I don't have a crystal ball. All I could tell you is that some of our competitors have said that the level of application has gone up by a tremendous amount in first quarter, second quarter. We are not disclosing those numbers because it's a misleading metrics. You don't know what an application is gonna lead to. It's gonna lead to an abandonment, a new lease up, a new lease.
All we know is that we see the same level of increased dialogue, and we feel very good about 2025, and if you will look at it, at the big picture, right, T-Mobile is the most advanced, having rolled out 5G on 2.5, but when they did the Sprint deal, they promised 50 megs of downlink on 95% of the pop by the middle of 2026, so that's two years from now or less. I think I hope that's gonna generate more demand in 2025. AT&T is playing catch up.
Verizon is steady Eddie, so at the big picture, maybe 50% of that 5G spectrum has been deployed, and I think I feel good about 2025, so our lease-up last year was 77, about 42 this year. Exit run rate is probably gonna be about eight or nine on the fourth quarter, but I feel good about twenty-five. I just can't tell you if it's gonna increase in the first quarter, second quarter, or third quarter. But we could all feel that something good is coming.
So is the message, multiply eight or nine by four, and that's your starting point, and then add a little growth to that, gradually over the course of 2025 , and then hopefully, we see that extend into twenty twenty-six and beyond?
Yes. But I think 2025 should be at the same level, at that mid-case, at where we own in 2024, on $42 million dollar lease-up.
Okay. So that's pretty, pretty aggressive. So if we start at eight or nine in 4Q, and we want to get up to forty-two, so there should be-
We see pick up in next year. I just can't tell you when it's gonna happen.
So I guess that aha moment is the kind of quote-unquote, "green shoots" that-
Oh.
all the tower investors are looking for. I mean, you know, what we're-- we are expecting, right, a couple of announcements. So Verizon has said that sometime in the coming quarter, they're gonna have an announcement about their expanded fixed wireless access that likely has something to do with them getting to, kind of the completion of their, you know, 1.0 , C-band deployment by the end of 2025.
There's an announcement coming there. And then at the end of September, actually, more like mid-September, T-Mobile is gonna have their Analyst Day. And they're gonna have, you know, things to say about their investments in the network and applications, development, and things like that. So for these companies to make these announcements, my guess is they'd have to already be in conversations with you, and we should have some concrete outcomes, you know, by the end of this year, which then inform, you know, the guidance that you're gonna kind of officially give in January, February 2025 .
That's right. That's right. But we, the teams are having very constructive, positive, active dialogues now. It's much better than it was in the beginning of the year, in the first quarter and second quarter.
So speaking of applications, you know, we had Sampath from Verizon here talking about how, you know, he kind of foresaw that maybe AI could be the base of a raft of as-yet-unknown kind of consumer-centric applications that, you know, require 5G capacity, but a lot of that communication happening at the edge. So, you know, we kind of have this conversation. Crown Castle is considering throwing in the towel on their small cell build, but maybe is now the time to start thinking about small cells as incrementally important to, you know, delivering on these applications that could be the future?
Listen, carriers are going to need capacity in metro, suburban, rural areas. I think we are not that focused on the urban areas. I think our macro tower business , we like the exclusivity, factor of it. If you are in a small cell environment, you need to bring fiber to that small cell, and you don't have a lot of exclusivity because you have multiple buildings, multiple lampposts or whatever, where you could really build coverage. So we stayed away from it because our model is you build a carrier tower with capacity for up to four tenants on that carrier's. We own an average of 1.9 now, and I think the zoning protection, exclusivity is important to us in order to maximize return on this. But I'm not saying that small cell is a bad business.
It's not something we focused on in the past because exclusivity was very important to our criteria in terms of deploying capital.
Can you speak to, if there is any, domestic opportunity to expand your tower portfolio, either build to suit or acquisitions?
I mean, we continue to build towers and acquire towers in the U.S., but those are very mostly the small portfolio, one to half a dozen towers. I think on a large portfolio, it is very competitive. It's very difficult for us to justify the valuation, but let's just take a specific example, right? Shentel recently sold their wireless towers, and that was a very excellent portfolio. Virginia, West Virginia, Pennsylvania, Ohio, high-quality towers very difficult to build there in mountains or state parks, so get the data tape, you look at the numbers, and then what case do you underwrite? Do you underwrite a four carrier market or three carrier market, and you saw those towers are gonna be there for the next thirty years. Interest rates are high today.
Why should I use a discount rate and assume high interest rate for 30 years? What is the right discount rate? And then you say, is this territory right for fixed wireless access? Because there's probably not a lot of fiber to the home. And then, a lot of Sprint leases, because it's an old Sprint affiliate. What is the churn? And you run a model, and, as a publicly traded company, we have 6.5 turns of leverage. You know, that a private equity firm could put 10, 11 to turns of leverage on, on-
On that M&A deal. And then you lose, and then you say, "Well, you know what? I'm not saying that they were wrong." They could see the value, they could justify the value, and I hope they are right, because it just show how undervalue the publicly traded companies are, and I think it's also showed the earning power of the tower business. But it's very difficult for us, as a publicly traded company, to really justify those valuation, given our trading level today. It would be dilutive to FFO and EPS per share, and we want to be very disciplined on capital allocation.
One of the interesting things that is going to happen, likely next year, is the separation of the U.S. Cellular wireless business from the underlying infrastructure. That company, it would imply today, is probably not trading at a multiple that's near where SBA is trading. Is that something that's floated on your radar screen? Obviously, dealing with the Carlson family might be a challenge. But how do you think about that? Is that an opportunity? Is that something you're licking your chops about?
It's still too early. I think we obviously try to look at everything.
But we want to be very disciplined in capital allocation. If you look at the big picture, right, the way we want to create value is by being disciplined in allocating capital and creating and growing AFFO and FFO per share in the long term. So if you look at last year and this year, rough numbers, and all these numbers are public, it's about $1.9 billion of EBITDA, about $350-$360 of cash interest expense, about $50 million of discretionary CapEx, about $300-$325 non-discretionary CapEx. Then your cash tax is about $40 million, and dividend over $400 million. So you're left about $700 million of capital to allocate after everything has been called for.
Last year, we used $560 million to pay down debt, because in a high interest rate environment, delevering was accretive to FFO and FFO per share, and we spent about $100 million buying back our share. So far this year, in the first quarter and early April, we spent $200 million buying back our shares, because we thought that at $250 million dollar level, that's an average where we bought our shares back, this was accretive to FFO per share, and we thought the stock was undervalued at that level, and the rest was used to pay down debt.
Right now, we want to be very, I mean, if the right opportunity shows up at the right multiple, we will deploy that capital to do M&A, obviously, but it needs to be accretive, maybe not year one, but year two or year three.
Just to kind of come back to the growth outlook, just to be clear, is the kind of growth potential you see kind of unfolding in 2025, is that net of kind of Dish basically slowing down to zero, which is what I think is a reasonable assumption in terms of investment from their network?
I can talk about Dish. It's about $45 million revenue for us today. Our goal is really to support them in meeting their coverage requirement of mid-2025. I think if you look at their spectrum, it's beachfront property. That spectrum has fantastic propagation characteristic. The portfolio is worth tens of billions of dollars. So either Dish is going to find a way to fund their expansion, or someone is going to help them. That spectrum is not going to go away. It's going to be put to use at some point. If you look at just the U.S. market between escalator and lease-up, we should see a pre-churn on Sprint. We should see mid-single digit growth. Now, the non-Sprint churn is coming down. It was $30 billion last year.
It's going to be about 25% this year, and long term, with, I mean, the wireless industry is already up, really, and we see churn going down to probably around 1%, long term. It's likely above 1%. Sprint was 27% last year, about 30% this year. It's going to be 40-45% next year, 45-55% in 2026, and then about 10-15% in 2027. So you exclude the Sprint churn, you're going to grow in the U.S. at, probably mid-single digit, and that's going to flow through to EBITDA. And then, the big question is: Where do interest rates go, going forward?
So I think this year, I mean, our plan, we assume that we would refinance our ABS that mature in October of this year and January next year at 6%. We launched the ABS transaction this morning. I think the price talk is around 5%, so I think that that's public now, and I-
How big do you think that's going to be?
We launched $1.2 billion, and we'd love to upsize this. It's to refinance the $620 million that mature in October, and we have $1.2 billion maturing in January, so I think that should be well-received. I think clearly, the interest rates have come down faster than we anticipated initially, so it's not going to be directly impactful to 2024, because I can assume that we just refinance the October maturity. We are pre-funding the January maturity as well, but it's going to be positive for 2025.
For the balance of the term loan?
The term loan is LIBOR plus two hundred. That's $2.3 billion. There's a hedge on this, so it's basically until April of 2025, the cost is about 2.05%. There's a hedge on another billion-dollar, about 5%. And to the extent we find a way to hedge a larger portion of that term loan at the right interest rate cap, we'll do that.
Kind of be patient, see where we wind up on rates?
That's right. That's right. But I really think that 2023, 2024, you had a double whammy, right? The carriers were inching towards free cash flow and coming down CapEx because they need to. Interest rates were elevated, and we see better days ahead. The carriers are going to have to spend CapEx, interest rates are coming down, and this is all positive for our industry.
I want to get back to the balance sheet and capital allocation, but, you know, you made some comments about maybe the differences in private versus public market valuations for towers domestically. What do you see in the international market right now?
Internationally, we're mostly indexed toward Latin America, and every market is very different right now, right? Central America has gone through consolidation, is basically down to Claro and Millicom now. Most of our contracts there are U.S. denominated, and going forward, we see decent growth rate at low risk because there's no more consolidation and no, virtually no currency risk. So we're very happy with Central America . Brazil is going through a tough phase, where you are going from four carriers to three, or is being consolidated into Vivo, Claro, and TIM. So we've seen about 16 million of churn in Brazil this year, fall to Oi Wireless, fall to Oi Wireline, another 8 to other carriers like Nextel and Sky, and we see elevated churn in Brazil for the next probably few years.
The other issue with Brazil is devaluation. The country is running budget deficit at 9% of GDP. The currency is devalued by about 20% in the last twelve months, at least 10% this year. So that was versus the plan we put forward in January, that's about above $30 million negative top line, just due to the devaluation. Long term, we are bullish on Brazil. Brazil is going to be a three-carrier market, very well-capitalized company, TIM, Telefónica, and Claro, which is América Móvil, it's called Slim's company . Long term, it's a growth engine in Latin America, and we are very happy with Brazil, so I think we feel good about Brazil going forward. Then we have three other countries, Ecuador, Chile, and Peru.
So Chile has great zoning protection, and, we like our position there. Ecuador is U.S. denominated, small position. It's doing well, and same thing in Peru. So I think the rest of Latin America, if we see an opportunity to increase our scale in the countries where we have operations, I think, at the right valuation, we do this because scale is important in business. It allows you to have a better dialogue with the wireless operators. You could support them faster, more efficiently when they need more capacity, more coverage, roll out a new generation, rolling out 5G, which is way behind Latin versus, where we are. I don't see ourselves expanding in new, de novo market in Latin America or Africa. If you look at Africa, we have a very good position, a good scale in Tanzania and South Africa.
Those markets are growing at double-digit rates. We are providing power as a service. Power is a real issue in those markets. We provide generator, we install solar panel for our customers. Our sites are very sticky. Energy costs are passed through, so we are hedge on a rise in energy costs, and also good market. But I don't see us expanding into new geography in Africa, but those two markets are performing very well.
So I want to circle back to the Brazil situation. But, you know, for the longest time, your peer, American Tower , was kind of the flag bearer for investing in emerging markets. And, they seem to be kind of tilting away from emerging and more towards developed markets. You haven't invested in any developed markets. Europe seems to be the one most in vogue. So no de novo markets in Africa or Latin America . Is going after maybe more developed markets, something that's on the table for you?
At this, well, we—I mean, it was rumored and it's public knowledge that we looked at Cellnex in Ireland. This is an attractive market. Three operators. It was a dominant wireless tower company in the country, low tax rate, 15%, a long-term contract with the wireless operator, and we took a look. I think it's very unlikely that we'll do a M&A deal in Europe. Europe is ex-growth . The operators, I mean, either Europe go through a consolidation phase or they go through network sharing.
I've been looking at the European wireless operators for the past thirty years, and I don't see ourself going into Europe now until there's more visibility as to what are the regulators gonna push down, or they're gonna allow more consolidation, or they're gonna allow network sharing. There are too many question marks on Europe, so I don't see us going into Europe right now.
So, I mean, for a long time, I think SBA has been, you know, one of the more aggressive, counterparties for the carriers in terms of kind of being patient and waiting for them to come to you, so that you can charge exactly what you want to charge, what the market will bear, so to speak. But, you know, you've signed deals, more recently that are more holistic in nature.
Uh, yes.
We don't know the exact nature of these deals. Dish was one of them. I think AT&T, we have one now. Talk about your thinking around that, and is this, you know, a change in attitude towards, you know, relationships with the carriers?
I think the industry is changing, right? It's the wireless industry. It's no longer like you don't have twenty operators trying to compete on coverage and prices and high-growth energy where speed to market is key. This is more oligopoly growing in a single digit. The carrier is, if you look at their cost structure, tower cost are the largest single item in their P&L, and I think they'd like to see predictable costs going forward. On our end, we have mostly three large customers in the U.S., and having predictable growth rate going forward is important. All this, I think, is probably saying that long term it makes sense, both for our customer and for us, to enter into long-term strategic relationship.
So if we kind of then take that, does that make sense to maybe look at that from a Brazil standpoint, with those three operators, now that we've kind of gotten to some measure of stability and recognizing that you're gonna have this churn event, you might be able to smooth that out a little bit? Is that something that's under consideration?
It's still too early to say. I can't comment on this, but I think Brazil is gonna go through, has gone through consolidation, now we have to go through the churn period. But long term, it's gonna be a very stable market with meaningful growth. 5G is gonna be a driver of that growth. So it may be challenged for the next few years, but long term, we feel very good about Brazil.
So you mentioned that in a high interest rate environment, it made sense to pay down debt. We're in a less high, but not low interest rate environment. Nevertheless, you seem willing to transact at 5% rate today. Is kind of 5%, you know, we're gonna kind of maintain leverage where it is today and refinance at 5%, and we're okay with that? Or do we have to keep deleveraging?
It really depends. The leverage is an output. The input is really what are your cash interest expenses? And what do you do with this extra $700 million every year? Do you pay down debt in order to grow FFO and FFO per share? Do you do share buyback? Do you find accretive M&A transaction to do? So we want to be disciplined. I think at this stage, our target leverage is 7-7.5, we're at 6.5, and we're going investment-grade in order to be investment grade, we will need to make a commitment to keep our leverage at that level or lower, and I think we want to be opportunistic for the right dislocation in the market, buying back share, right M&A opportunity, or if interest rates stay high, just pay down debt.
I think capital allocation, being a disciplined allocator of capital is the way to create value long term, and we want to maintain optionality at this stage.
So I want to revisit that. So every year we have a big high yield conference that we host in Boca. And we come with a group of equity and debt investors to visit your headquarters.
That's correct.
We did that this past December, and it was interesting for me to hear the debt perspective on this, which was that, you know, we, as high yield investors, really like SBA's relatively unique position as a high yield buyer. Being one of the highest quality, high yield borrowers in the marketplace makes you pretty unique and special, and your paper probably trades tight as a function of that. Investment grade, though, you'd be kind of the least interesting investment grade issuer out there, or among the least interesting, because you're not as high as, you know, in the stack. So I want to hear what you're saying correctly. Are you saying investment grade is a target, investment grade is an option, or investment grade is we, we're not interested?
At this stage, we're not interested-
Okay.
in the short term. It may change in the long term, really depending on the environment. But right now, I mean, out of $12 billion of debt, $7 billion is in the ABS market. That's rated single A on the issue we launched this morning, very attractive rate. And I think it's important to maintain flexibility at this stage.
The other issue with. I lived in non-investment grade my whole life. If you do an investment grade bond, it's non-callable for the life of that security. You go into the high-yield market, those bonds are callable, so you have the opportunity to refinance them in a declining interest rates environment. So that's another feature that I think is very attractive in high-yield market.
So it sounds like, okay, we've got an expectation of modestly improving at least domestic growth.
And we're leaning towards maybe longer-term contract structures that maybe lock that in, maybe trade-off. There's some trade-offs, but we're prepared to make some maybe more compromises looking longer term than we were today.
If it makes sense to us, and if you could secure a long-term growth rate.
And so we're comfortable with our kind of lower leverage, but we don't need to do a lot more necessarily right now, especially if interest rates are moving in the right direction. We're generating a lot of free cash flow. And there doesn't seem to be a lot of M&A opportunity in towers domestically. And even though you've said you see opportunities internationally, it doesn't sound like you're interested in those either.
I'm not saying this. I'm saying that, if it gives us an opportunity to increase scale in market where we are at the right valuation, and if it's increased to FFO, we would look at those.
Okay, so that's not happening, and then, so then you're gonna have, really, there's two ways to kind of deploy capital, right? There's, buying back stock or, maybe making investments in new asset categories. That could be a small cells we talked a little bit about, but it could be data centers, it could be, fiber, it could be any other thing. It sounds like those, any other things, are not really central to your wheelhouse, right?
I think at this stage, if you look at both our international portfolio, domestic portfolio, we're a pure tower company. Even internationally, we don't have fiber business. We have three small data center, but it's totally non-material. And so long term, going back to your question, investment grade, if you don't see opportunities to deploy capital in M&A, and you are in a slow growth environment on top line, and you have long-term relationship with the carriers with predictable growth, probably makes sense to eventually become investment grade, increase the dividend, and right now, our payout ratio is about 30%. I mean, obviously, dividend policy is a board decision. It's not a management decision, but we increase our dividend by 15% from 2023 to 2024.
I think until for the next few years, you're probably gonna see a double-digit increase in the dividend. Long-term, FFO per share growth and dividend growth rate will probably converge, but at a 30% payout ratio, we still have room to increase the dividend at a higher rate than the FFO per share growth.
I guess that was my next question, which was, you know, there are some green shoots, there's some positive things happening, but there's also, Dish is gonna slow down to zero, Sprint churn is gonna persist through 2027, Brazil churn is gonna persist for a couple of years. And so that relatively modest improvement in domestic towers, growth is gonna get lost, between the top line and the bottom line. One of the things that you could do to, restart growth at the bottom line on a per share basis would be to more aggressively buy back shares.
Would that be philosophically what you'd want to do, or I would argue that growth would probably get valued more on a per share basis than a dividend per share, but I might be wrong.
I think I would agree with that. And what you saw us doing $200 million of share buyback earlier this year, and buying back shares is definitely on the radar screen.
So what's the break-even price? What should we-
I, I'm not gonna answer that question. But if you tell me what interest rates are gonna be in the next three years, I may be able to to get there. But, you saw us buying back shares at at around $215, if I recall, earlier this year. I think, it was funny because on the earnings calls, by the time we announced it, the share was at $195, and a lot of questions say, "Why did you buy shares $215?" And today, the stock is over $230, and people say, "Why don't you, why didn't you buy more?" So-
It doesn't matter what you do, people always are gonna have a view on this. I think what's important is to say this is an asset, those towers have another thirty-year life in them or more. Interest rates are probably gonna come down. And if you look at what the private equity market is willing to pay for tower business versus the public equity, there's probably a huge delta between the two.
I'm not an investor. I'll leave that to you guys, but my personal view is that the public market is probably undervaluing the publicly traded tower companies.
So we got a few minutes. I just wanna maybe touch on another aspect or a theme that seems to be or has emerged in towers, which is that there's been a lot of new blood that's come in, a fresh set of eyes. So Steve, over at American Tower , the new CEO, yourself and, you know, Brendan, new CEO, yourself being new to the space, as CFO, new CEO of Crown. And one of the common themes, I think, from at least what I've heard from Crown and AMT, is that there's a notion that we can reimagine the cost structure of the business and do things in new ways, more efficiently, that maybe we haven't done in the past. What is Marc Montagner's idea for how to make SBA a more lean, mean organization?
And in addition to share buybacks and falling rates and kind of working through the churn issues, how can we, you know, organically make that growth occur?
On the cost side, I think G&A is only 6-6.5% of revenue. So we're not gonna see huge improvement on the G&A side, frankly. I think AI is gonna help. We have thousands and thousands of leases, 40,000 towers. So I think flying drones to capture images of those towers, putting this in a database, sorting through the terms of the leases. So I think AI is gonna improve efficiency.
For those that are listening, just FYI, we did a site visit with Dycom, who's one of the biggest servicers out there, just bought Black & Veatch, which is one of the bigger wireless-
Right.
-servicers out there. And, he said, like, the drone thing's real. Like, people really are flying drones up and doing kind of initial measurement and site work and stuff like that, so-
We're doing this.
Yeah.
We're doing this, absolutely.
Yeah.
And that, that's gonna help a lot. And then, I think internationally, we're gonna do the same thing. So AI, to us, is gonna drive down cost. On the top line, are we... I mean, when the new handsets, smartphones are going to be out there with AR app. I assume that's going to drive more demand again.
I mean, I don't know if we have two teenage daughters, just amazing, unmatched video they consume on their iPhone, right?
You're the second person today that said that their kids are using so much video that they can't-
It's all 99% of the usage is video, when less than 1% is text, and there's no voice.
And if you told me that ten years ago, people, we never thought you'd be watching videos on an iPhone-
If you're not on Wi-Fi, and now, with unlimited plan and 5G, it's a given.
I've been, I mean, I remember when I was at Morgan Stanley. I took NetCom GSM public in Norway in 1995. We had 25% wireless penetration. We're forecasting 50% penetration in three years. The market didn't believe it. We hit the 50% within twelve months, right? And suddenly, Scandinavia was above 100% penetration within three years. If you look at the history of wireless, the mobility function is such a feature that it's a killer app, is the mobility.
You could take your life with you anywhere. The iPhone has more processing power than the first computer that put man on the moon.
This wireless thing is going to take off.
It's going to take off.
Yeah.
So and it's going to be more and more and more data. So the carriers, it's still competitive, three or four carriers, it doesn't matter, and if they disappear, someone is going to roll out that spectrum. That spectrum is going to be put to use. All of this means more CapEx, and it's always a step function. So I feel really good about the next 30 years. So at 2:30, I think, take a 30-year view and look at what our stock has done since the IPO in the last 25 years.
Yeah, I had a-
Up 1800%.
Okay, I had a bunch of questions on services, revenue, and other things-
Yeah.
But we ran out of time. Honestly, it was a good way to end it.
Okay.
Marc, thank you so much for joining us. I really appreciate it.
Okay, good to see you again.
Thank you guys for coming out.