We're pleased to welcome Marc Montagner, Executive Vice President, Chief Financial Officer for SBA Communications. Marc, thank you so much for joining us.
Michael, thank you so much for having me.
Before we begin, I just wanna remind everyone in the room that we've got the QR codes around the room, and if you scan those, you can participate in our upcoming live audience survey. I'll start over for the webcast. Sorry, we'll do a take two.
The session is for Citi clients only, and disclosures are available in the room, conveniently at the back of the room next to the AV desk, so welcome back to Citi's Global TMT conference. I'm Mike Rollins with Citi Research, and we're pleased to welcome Marc Montagner, Executive Vice President and Chief Financial Officer of SBA Communications. Thank you so much for joining us.
Michael, thank you so much for having us.
For everyone around the room, you can use the QR codes up on the screen for our live surveys. Your participation is your submission and participation is completely anonymous. We're not tracking it, and we'd welcome your participation to make this a more interactive forum. With all that out of the way for the second time, Marc, can you maybe just get us started and give us an update on SBA's strategy to expand financial performance and improve value for shareholders?
Okay, so our goal is really to create value in the long term for our shareholders.
Yes.
And the key driver for this is capital allocation. So if you go back to the big picture, and all of these are public number, right? It's 2023 and 2024, the numbers are pretty much in the same range. It's about $1.9 billion of EBITDA and about $350 million of cash interest expenses, $50 million of discretionary CapEx, another $300 million-$350 million of non-discretionary CapEx, $40 million in cash taxes, mostly international cash taxes, and a dividend around $400 million.
That leaves you with $700 million of cash to allocate in 2023, 2024, and, we don't have guidance yet for 2025. So last year, in a rising rate environment, we used, $560 million to pay down debt, which made sense, and used about $100 million for share buyback.
So far this year, we've bought about $200 million of shares back at an average price of $215, mostly January through early April, and the rest has been used to pay down our revolver. So our revolver is almost fully paid down now. And then we wanna be flexible because interest rates are coming down.
I don't know if... I mean, in our outlook for the year, we have two ABS maturing, one in October, next month, $620 million, another $1.2 billion in January. In our outlook, we thought we'd refinance those at around 6%. We launched a deal yesterday, a $2 billion financing in the ABS market to refinance those securities. Initial price talk put them at around 5%.
So we are very pleased with the way interest rates are going. I think at this stage, it's all about being flexible. If the right M&A opportunity were to come, that would create value, would be accretive to FFO per share, maybe not in year one, but year two or three, I think we would do this. And if there's dislocation in the market, our share price comes down, I think we'll be happy to buy back more shares. I think leverage is more an output than an input to where we wanna be.
So appreciate the overview, and we'll queue up our. Want to drill down more on the strategy and capital allocation, but let's queue up our first survey question that we can get to in a few moments. So we're gonna ask our group here today, so domestic organic leasing growth for SBA without Sprint churn, midpoint for 2024 is roughly 4%.
What are the organic growth prospects for 2025? And for our streamers, we'll give, we're giving choices of basically 3% or less, over 3% to 4%, over 4% to 5%, over 5% to 6%, and over 6%. So giving our group some choice here on how to choose this. So again, we'll invite everyone's participation.
So while that's queuing itself up, you know, you mentioned capital allocation and what you're doing with, or how you're thinking about the use of free cash flow. How are you just thinking about the assets in general? You know, at the beginning of this year, SBA talked about the idea of maybe optimizing a little bit more and just looking at all of the markets to make sure you have the right formula. So where is that today in terms of process and thoughts?
I think we've done a lot of work, and it's an ongoing process. Not like you do the work, and then you put it in a drawer, and you're done. But I think if you look at our portfolio, we love the US market. That's obviously the best market.
You don't pay taxes. It's a very steady, very good zoning protection on the macro tower. We feel like we have exclusivity, and it's obviously the best market, but it's a mature market, and given competitions from private equity firms, M&A opportunities are difficult to acquire the right valuation. But we're always on the outlook. Year in, year out, we still buy...
onesies, twosies , or a portfolio of five to 10 towers, and at the right valuation, we're gonna keep doing this because it always, those towers are gonna be there for the next 30 years. And, they have a capacity for four tenants. We are about, two tenants per tower, so I think there's room to grow on that, on that portfolio.
And internationally, every market is different, so I'm sorry I'm gonna spend a little bit of time, but let's start with the easy part, which is Africa. We have a very good operation in Tanzania and South Africa. These operations are growing at double digits. The carriers there are building coverage, and, it's always good to see, CapEx being deployed and delivering good return.
In addition, those markets have pow er issues, so we also provide power as a service with generators, batteries, solar panel, and that makes our sites very sticky and creates demand for a site that is gonna be there when power goes out. And in addition, I think we outsource the delivery of diesel, and the power costs are passed through.
So very pleased with Africa. I don't see us doing more deals in Africa, but we're very pleased with what we have. Then you take Latin America. Central America has gone through the carrier consolidation. You're basically down to two key areas, Claro and Tigo. And most of the contract there are US denominated. It's gonna probably grow at mid- to high-single-digit.
So we like those markets, and I think to the extent that we could find attractive assets there to complement the footprint, I think we'd be looking at those. Then you have Brazil, where we have a significant position, about 12,000 towers. Brazil long term is a fantastic market. 5G has not really been deployed there yet. The market is going through consolidation from four to three. Oi Wireless is being acquired by Claro, Vivo, and TIM. And on the other hand, the Oi wireline has just gone through a reorg.
So we have churn in Brazil that's gonna be elevated for the next few years, and the government is running a deficit of 9% of GDP right now, and that creates a lot of pressure on the currency. So about 20% devaluation in the last 12 months, 10% so far this year.
But long term, we believe that there's tremendous growth opportunity in Brazil, and in an environment where interest rates are high in the US, foreign currency always takes a hit. I think with US interest rates coming down, I think there's gonna be light at the end of the tunnel, and long term, we're bullish on Brazil.
And then we have three other markets, very small, Ecuador, where the contracts are US denominated, Chile and Peru, where if we find a way to fill in that. And get more scale, because scale gets you a better dialogue with the operator, covers your SG&A, but also allow you to support your customer faster and more efficiently. So for the right, I think assets or at the right valuation, we'll be happy to complement that footprint.
I don't really see us expanding outside of those markets. And we saw Argentina, and I guess you've seen the rumor that there may be something going on in the Philippines. We have a few hundred tower sites there. There are over 30 tower companies in the Philippines today. Either you're a consolidator or you're a consolidatee, and so it's TBD.
Very helpful. Maybe-
Sorry for the long response, but-
No, it's a, it's a great... Well, it's a great update 'cause I, I think, just understanding where you are in each of these markets is, I think we're all trying to understand your approach to the assets, and then, you know, what you described as the optimization opportunity, that's just very helpful.
And, maybe migrating over to the domestic business, so one of the questions that we keep getting from investors is whether or not SBA is seeing changes in what I'll call the preconditions for leasing, which I think people are defining as the conversations, the search rings, the applications, or you're seeing improvement in the actual leasing activity for the business, domestic specifically in this case.
I think for this year, lease-up is about gonna be around $42 million. We have not given guidance for next year. I think the exit, the run rate in the Q4 is gonna be $8 or $9 million.
Mm-hmm.
So if nothing happen, you're gonna have probably in mid-30s lease-up next year. But that being said, the dialogue is much more active with the wireless operators now than it was a few months ago, six months ago.
The level of application is up, but this is a misleading KPI because it takes time to go from an application to a signed amendment, a signed lease-up, a new colo, and it takes time to make its way through the numbers to flow through. So right now, we are very pleased. We could, quote, unquote, see some green shoots. It's to be seen and clear how fast this is going to get converted into signed agreement and dollars and cents.
Let's see what our audience is expecting for you for next year. 75% over 3% to 4% growth, and this is ex-Sprint. And 25% over 4% to 5%. If you take that 8 to 9 million, which annualizes to 32 to 36, does that keep you in that 3 to 4 type of range?
Eight and six. I can't do the math that fast, but I'm sure someone could do the math. But I think if nothing happens, if it's like the same run rate that we have today, you're in mid-30s. With the green shoots converting to a real signed contract, I think we could be back at the 40 to 42 level. But we have not given guidance for 2025 yet, and-
Yeah
... it's just still early. It's just still early.
Is, you know-
But we like the momentum that we feel. That's all.
So, the takeaway then is you are seeing things start to improve going into next year?
That's right.
And so-
Not in terms of signed contract, in terms of dialogue, application, and so on. There's material improvement in the dialogue.
When you're talking to the carrier customers of yours, is there any degree of price elasticity, where if you're willing to give a little on, you know, certain conditions or price, you could actually stimulate activity? Or do you, do you see this, you know, from your experience, as generally inelastic, and it's just when customers actually just need the stuff they need?
I'm new to the industry, but my feeling right now is, like, they talk to you when they need you, and they're not gonna spend CapEx. Because remember, if they're gonna sign a lease, there's CapEx associated with this. They're not gonna spend on CapEx and sign a lease unless that we need it. So I think it's really demand-driven as opposed to price-driven.
It seems like from a carrier perspective, so you have one comprehensive deal that you signed with AT&T. Was that summer of last year?
That's correct. It was in the Q3 of last year, if I recall, Q3 .
And so, how are you thinking about the opportunity to do more comprehensive deals with some of the other carrier customers as a way to, potentially just enhance the visibility on where growth, can get to for SBA?
I think what we like about the AT&T deal is that there's guaranteed growth on our end. From the AT&T standpoint, I think we make it easier for them to roll out 5G and catch up with T-Mobile. I think it benefits both sides.
Going forward, I think if you look at it, the industry is an oligopoly on the carrier side, and the number one cost item in their P&L is tower cost. For them, trying to have predictable costs going forward is important, and for us, having predictable growth going forward is important, too. I think the industry is probably going long-term towards more MLAs. I think that's a trend in the industry.
If you kind of take out the merger churn from Sprint in your performance, where are you seeing the annual revenue churn? And is there an opportunity to bring that down further as another way just to help the net growth that the company's achieving domestically?
I think that's where historically, with churn, with Sprint, the churn was about 1% to 2%, with a oligopoly, three major carriers providing me the bulk of our revenues. I think churn is probably gonna trend towards the low end of that 1% to 2% range.
Can you just remind us your exposure with DISH today?
DISH today is about $45 million of revenues.
And as you look out going forward, in terms of the conversations, you know, you mentioned, you know, the things are starting to improve there. Is there anything else that we should be mindful of in terms of the way the domestic business is progressing?
I think if you really look at... And I have—I mean, I've joined Nextel over 20 years ago. I work in industry. Every single business plan in Nextel that we're running CapEx were in excess of 20% of revenue. Every single business plan showed going to 12% to 15%, and we never got there.
We have a slide in our investor deck showing CapEx as a percentage of revenue for the Big Three for the last 12 years, and it's anywhere from 15% to 22%. In 2021, 2022, and 2023, it was running at around 20% to 21%. It was $35 billion, $40 billion, $35 billion. This year it's about $14 billion, and when you roll out a new generation technology, you get probably a 10x pickup in capacity. So it's a step function.
You buy spectrum, you roll out next gen, you get the capacity, you fill up the capacity. Then you need to basically bring more capacity to market and expand the footprint. So I think you had a massive lift in capacity from that massive spend, $35 to 40 billion of CapEx. That's over $100 billion of CapEx in three years for the Big Three, and I think they repair their balance sheet, index toward free cash flow.
But it's only a question of time before they need to add more capacity and expand the network at the edge. So I feel very good about the future. And then look at fixed wireless access . I think the industry keeps delivering more fixed wireless access every quarter than the forecast. A fixed wireless access customer probably generates, what, 15, 20 times more tonnage on the networks than a handset, and a handset customer is still growing the tonnage at 15% to 20% a year. So all of this means more equipment on the tower, and that's good for us.
Can you remind us, you mentioned all the CapEx these carriers are spending. Can you remind us where they are, roughly, in terms of the mid-band upgrades on your sites today?
I think it's about probably at the 50% level. T-Mobile mostly rolled out 2.5 spectrum, a better propagation characteristic, and then Verizon and AT&T are in the C-band. But it's probably overall at around the 50% level, so I think there's more room to grow there.
And the carriers are each talking about getting much further along with the mid-band coverage and, you know, over the next couple of years, trying to get close to kind of a mature level of that. And given where your sites or your towers are typically located, should that give us a sense of optimism that, you know, if they do what they're saying, that just naturally means that you could have a greater hit rate going forward because of the location, and only 50% is kind of done today on average?
I think that's right, Michael, because if you really look at a macro tower, tower is what we like about it. You have, like, some exclusivity associated with it because of the zoning. So if you're carrier, and you need coverage on a specific area, we don't really overlap with Crown, or we don't really overlap with American Tower, and they don't really overlap with us.
So if you're carrier, you're gonna have to deal with the three of us or the other one. So our towers are mostly suburban and rural. We don't really have the small cell in urban area, and so there's a level of they have to come to us. And then you look at the economics, right? They have a generator. They have batteries. They have coax.
They have a cabinet there with the electronics. They have a space there, an agreement with us. It's so much easier and faster and cheaper to just go with your existing footprint as opposed to negotiating a new lease with a new operator on a new tower.
Just in terms of the way that you construct your carrier contracts, are there any features that may be underappreciated by the market?
I think to me, the number one feature is return reduction and ease of use and ease of upgrading and adding more capacity, I think, to me, is the key feature.
Just sort of a different question, 'cause we're asking this of a number of the companies that are here with us this week. How can the GenAI capabilities either help your revenue and/or your cost structure, and which of these is the greater opportunity for value creation at SBA?
I think it's both, first of all. I think on the cost side, we have thousands. We have 40,000 towers, multiple leases per tower, and I think just using AI to sort the lease is gonna be helpful. Then, we are flying drones more and more to basically see exactly what's on the tower, how much space is on the tower.
It's much faster than sending someone up the tower. I think you get all that data, and you could sort through the data. So down the road, that's gonna help on the cost side, domestically and internationally. And on the revenue side, I think AI-enabled handsets are not in the marketplace yet, but just like any new technology, right?
We're starting doing voice on wireless, and then we did text, and then we did data, and then we did unlimited data, and now we're doing video, and it just means that the tonnage on handsets are gonna keep growing at double digit, and AI is just gonna be another, another app that's gonna generate data, just like social media or YouTube video or whatever.
Before we get to capital allocation, I'm gonna throw out a couple of surveys, and then we'll talk about some of these other topics and get back to this. This will be a little bit of a preview. We're gonna ask our audience: should SBA further simplify its asset mix? And two choices: No, the current asset mix and strategy should generate the best long-term value, or yes, just become a domestic-only tower provider and monetize the international.
We'll see what our group here thinks of that in a few moments. But let's maybe talk a little bit more about international. I think if we take a step back on international, the thesis on international has historically been there's just the density of sites is just less than the US to serve customers, to serve traffic.
So there's been this, I think, perspective that the organic growth in these markets should be significantly greater than the US Is that still just, like, the high-level thesis? And, you know, I think LatAm, there's been, as you were describing earlier, some issues that are slowing down performance. You know, is that a market that we get back to this idea of significantly better than domestic growth?
Yeah, I think if you take a 30-year view or a 10-year view or 20-year view, I think overall, I think you're gonna probably see higher growth rate in emerging market than in the US, which is a more mature market. It is going to be choppy. It's not gonna be linear. It's gonna go up and down. I think Central America went through the consolidation phase, so we feel pretty good about the future.
Brazil is still in the middle of it. Africa is still in a very good growth phase, growing at double digit. But I think if you take a long-term view, given population growth there, activity growth, the less mature market, you're gonna see a higher growth rate on those markets. But at today, I think I like our asset mix.
I mean, 74% of our leasing revenue are domestic. About 79% of all our revenue are US denominated because, look at Ecuador or Central America, most of the contracts are US denominated. Same thing, some contract in Africa are US denominated. 78% of our EBITDA are US denominated. So I think it's a, it's a good mix at this stage, and I think emerging market play its role in, increasing long-term shareholder value for, for SBA.
We'll see what our audience thinks of the asset mix. So, 75% said no, in terms of whether you should simplify your asset mix further, and that the strategy, the current asset mix and strategy should generate the best long-term value. 25%, yes, just become a domestic-only tower provider. Was this a question that the board has tested over the last year or two years, just to try to create the best structure for shareholders? And were there any additional learnings that came out of that?
I'm not gonna disclose what is discussed in a board room, but I could tell you that as management team, those are the question that we ask ourself all the time.
Maybe introducing one other question, and this will give us a preview of where we're going. Should SBA pursue investment-grade credit ratings and just sustain a lower level of net debt leverage? We'll come back to this in a couple of moments.
That's a good question.
We'll look forward to your perspective on this, too. So, you know, with respect to M&A, you know, it seems like the conversation from the last earnings call was there's some. You know, the management team's putting some thought into the potential for additional deals, and you may be actively evaluating. In terms of what you're able to share, is it across geographies, including the US? Is it in only specific markets? Is there anything you could share with us in terms of the flavors that SBA is thinking of in terms of what could be on the M&A landscape?
On the M&A landscape, I think really it's the goal is to create long-term value and a transaction that is accretive to AFFO per share, either in year one or in the short term, right? So, as I mentioned earlier, internationally, I think it's mostly increasing the scale in existing market at the right valuation.
In the US, it's obviously the most attractive market that we have. I'll give you the example. I mean, it's we look at Shentel. That was a deal that was announced earlier this year. It's a fantastic portfolio ex the Sprint affiliate in Virginia, West Virginia, Ohio, Pennsylvania. It's an area where I traveled a lot when I lived in Washington. It's a fantastic portfolio, really difficult to overbuild there.
You look at the quality of the asset, and you say, "I wanna own this asset." Then you say, "Okay, run a DCF on this." You say: Okay, what model do you underwrite? Is it a 3-carrier model or a 4-carrier model?
Then you say, "Is this a region that, where fixed-wire access as, is gonna be a key component of the carrier offering just because you probably don't have a lot of fiber going into the house, or you're gonna get a lot of sites from fixed-wire access?" Then you look at, you still have a number of old legacy Sprint leases. What is the churn? You have to take a bet. Then you look at, you know that you're competing with PE firm who are going to lever this 10 to 11 times in the current market.
As a public company, you can do this, but you say, "Okay, the interest rates are, were much higher, like, six months ago. Where interest rates are going, long term? What WACC are you gonna use? Because you're gonna own this asset for the next three years." And you run the model and then you lose the bid, and you say, "You know what? I understand how they got there, and I hope they're right because it just mean that our publicly traded company is probably grossly undervalued." And so we're gonna keep looking at US asset, but we're gonna be disciplined. We wanna create value for shareholder long term, and we don't wanna overpay.
Within that context, how do you define value? Do you just think of it purely as AFFO per share accretion? Do you think about it like, accretion at some point to the EBITDA multiple or the return on capital. What are the ways that SBA triangulates on how to define value accretion for the shareholder?
I think it's multiple variables. I mean, you run a DCF, you want to come from what the valuation, then if it's a high growth asset, obviously the multiple is gonna be higher, and therefore it's gonna be dilutive in the short term to FFO, FFO per share. So how do you deal with that? Because you wanna do what's right for the long term, but you don't wanna penalize yourself for the short term.
So you need to triangulate really and take a bet on where all the long-term growth is going to be. So it's more an art than a science. People always ask the question, "What's your hurdle rate?" And there's no like a black-and-white answer. And then there's always this big value of that asset. So there are many, many variables that go into that equation.
So speaking of rates, we'll see what our audience thinks of what you should do with your credit rating and your leverage. So two-thirds said, yes, SBA should pursue IG credit rating, sustain a lower level of net debt leverage, and a third said, no. How do you look at this question?
It's something we ask ourself on a regular basis. I think right now, out of the $12 billion of debt, we have $7 billion on the ABS market. ABS issue security we launched yesterday is rated single A, and it's gonna price at investment grade pricing. So I think we're very happy with the yield we are paying on those $7 billion of debt.
I think long term, the issue with investment grade, I give you the downside, and I give you the upside later. The downside, and nothing is black and white. The downside is that we say I'm gonna be investment grade, you have to maintain, you have to make a commitment to stay investment grade.
And I think if there were a disruption in the marketplace, I think we'd be happy to buy back our shares. We'd be happy to do M&A. We have a $10 billion revolver that's untapped today, and it's in a period of great dislocation that the best M&A opportunities may show up, and we may wanna relever the balance sheet.
On the other hand, I mean, going to Investment Grade today, in order to be Investment Grade, about 50% of our debt should probably be secured and half of it unsecured. So we'd have to reduce the ABS component, and that would increase probably the overall cost in the short term. Long term, as the industry matures, you have more long-term contracts with your investors. It's a more steady state company and less variable.
It may make sense to issue a 20-year paper, 30-year paper at a low rate, basically keep increasing the dividend and the payout ratio and, make it, like, more of a mature company with an Investment Grade credit. So I'm not saying we're not gonna get there. I think it's a right outcome eventually. But short term, I think we like where we are, and we like the flexibility, and we like the rates that we're getting on this, in a secured market and even in the unsecured market.
In terms of just going back to the just this broader topic of capital allocation, you know, how do you think about just over time, you know, whether or not you should go into adjacent opportunities, you know, versus just kind of keeping the current mix of what you have?
Today we are really a pure play tower company, both domestic and internationally. A lot of tower companies outside of the US have a fiber component. One of our competitors has a fiber component. At the end of the day, the macro tower is probably the best business we see out there, and it's gonna be our number one priority.
Unless we really find a new business... I always say internally, Google search business is the best business model out there, and I don't know if we're number two, but find someone, another business that as good as the tower business or the micro tower business, and I'd be looking at it. But right now, it's a very attractive market. We see the growth opportunity in that market, and I think that's where we wanna put our capital.
Just circling back to just the leverage question, does that ever matter for customer discussions? Do customers ever, you know, have a view of whether they want you as a supplier to have an IG rating?
No, and we have ample access to capital. We have a $2 billion untapped revolver. I don't think we are at credit risk at all at this stage.
When you look at the kind of just the longer term growth prospects, is there a simple long-term algorithm that investors should just keep in mind for SBA in terms of the growth potential of the business?
I would just look at. I think a good proxy is usage on a wired data network, right? Between fixed wireless access, handset growth. I think it's not a linear growth is not gonna be steady growth. It's gonna be a step function. Okay, carriers are gonna buy my spectrum. They're gonna roll out CapEx in that spectrum band. They're gonna add capacity in that spectrum band. And you just look at a chart of CapEx as a percentage of revenue for the big three, and you could just see the step function.
Mm.
... 3G, 4G, 5G. I think long term, this is still a fantastic business.
As you met with investors over the last few months, do you find that there's anything about the SBA story and opportunity that's underappreciated?
I think everybody's focused on 2025 now, and what is the lease-up in 2025? I can't answer that question. All I could tell you is that if you take a three-year view or five-year view, it's gonna go up because the carriers are gonna have to spend more CapEx, so I'm bullish long term.
Right. Mark, thank you very much for your time.
Thank you, Michael.
Thank you.