Bank of America's Leveraged Finance Conference. I'm Ana Goshko, and I cover telecom towers and technology on the fixed income research side. We're thrilled to have SBA Communications with us and Marc Montagner, the company's Chief Financial Officer, and my old boss.
That's right.
Many years ago, Marc was actually my boss, and here I am questioning you.
That's right.
OK.
Switched sides.
Yeah. Great. OK, well, Marc, thank you so much for being with us. Maybe we just start with the big recent news. I almost feel like we should be conducting this in Spanish because you guys are becoming a very large operator in the Spanish-speaking world. But if you could just provide us a recap of the recently announced agreement to acquire Millicom's towers in five Central American countries and the related contracts. And things would be great for you to touch on is, why was this the right deal? What made it worth 11.5 times EBITDA? And what's the outlook, the growth potential?
Sure. OK, so it basically fits straight into the portfolio review that our CEO announced at the first earnings call in February, which was, let's just focus on looking at the region where we operate today and try to either be the number one or number two or exit that region because you want to have scale, and you want to have leverage in your negotiation with the wireless operators. So we already had assets, 3,000 towers in Central America, about 1,500 existing leases with Millicom. That's a region where consolidation has already happened. There are only two wireless operators in the region, Claro, which is América Móvil and Millicom, so there's no further consolidation. The contracts are in U.S. dollars, so there's no FX risk. We have assets in the region in terms of salespeople, operators, maintenance people, repair and maintenance.
This was a way to basically become the leading tower company in Central America in five markets. We signed a 15-year contract with Millicom with a CPI adjustment every year. We're extending the term to 15 years on the 1,500 leases we had with Millicom in the region. And we also received a commitment from Millicom for 2,500 built-to-suit new towers. So we're looking at basically a growth rate of mid- to high-single-digit for the foreseeable future. So it was a really, it fit right into our strategy of being number one, number two, or exiting, basically.
OK. And how do you plan to fund it?
I think we said that publicly on last earnings calls late October. We currently were sitting on $350 million of cash on a balance sheet. Our revolver was fully paid down. That transaction is probably not going to close until the summer of next year. We're going to generate probably another $800 million of cash between now and then. We'll have plenty of cash on the balance sheet to fund that acquisition.
OK, so really internally generated.
That's right.
OK. So you talked about markets that you like to enter are ones that have already gone through consolidation. Is that?
I think at this stage, we're not really looking to enter new markets. In a market where we had operations, I think we went through our own internal review. And when that opportunity came up, we said we have an existing presence in the region. This M&A opportunity gave us the opportunity to become the number one leading tower company in Central America. So we seized this. I think we said publicly, too, that we want to exit the Philippines. There are 30 tower companies in the Philippines. Most of them are PE backed.
That's crazy.
And we don't, we have a very small market share, so we'll be exiting that market. We exited Argentina as well. That was a very small footprint that we had. So that fit right in. But I don't see us at this stage going de novo into a new market in Latin America or Africa.
OK. What about Europe? What's the strategy in Europe?
Europe, I think, is a very attractive region for SBA lease. Euro-denominated, so you don't have FX risks or very little variation on the FX side. Europe is behind the US in terms of rolling out 5G. So I think they're probably going to see on the top side slightly more growth in the short to medium term. It's an attractive market. That being said , it was reported in the press that we looked at one opportunity in Europe, and we thought it was very attractive. We just couldn't get their own valuation. So the way we look at new opportunity, and I mean, we are paid to look at everything. So we do the work, but it's really DCF-based.
So the multiple is just one thing, and it really depends on the growth rate and how much CapEx you have to put in, what your discount rate, your country risk. We try to be very disciplined.
OK. So you've got Millicom on tap, close in about a year, right?
Probably.
Yeah. Central America focus for you is going to be number one and number two in those countries. And really, are most other countries at this point kind of off the table? Where might you, is there anything else that could fit your criteria?
In terms of new de novo M&A, I don't really see it in the emerging market now. Cost of capital in the emerging market is very high. We have a large operation in Brazil.
I was going to bring it up.
Yeah, 12,000 towers, I think, is going through consolidation now from four to three. So we've seen significant churn from Oi and Oi wireline. That's going to stay elevated probably 2025 and 2026, and maybe 2027. And in addition, the currency lost 20% of its value versus the US dollar last 12 months. The deficit is running at 9% of GDP. So it's really hard to justify going into a market where FX risks are so high right now. So I don't see us really expanding into new emerging markets at this stage.
OK. So then that leaves us the U.S., right?
Right.
The acquisition market has been, I think, much tougher, much more competitive in the U.S. So what is the domestic opportunity to expand your tower portfolio?
We like the U.S. market, like a lot of other people. I mean, 85% gross margins, 70% EBITDA margins, and it's probably the best. The macro tower business in the U.S. is probably the best because on top of it, it's a REIT business, so you don't pay taxes. That's why that has attracted so much capital. Right now, there's a scarcity of large tower portfolio coming for sale and a lot of PE infrastructure funds that have access to the trade market, raising 10, 12 times leverage, so it's very difficult for us to compete, but let me give you one example, right? Shentel was selling their tower in the spring, and this is like fantastic territory. Virginia, West Virginia, Ohio, Pennsylvania, a very good tower, very well built, probably never be overbuilt given the geography. So sign an NDA, and you build a model, right?
And what are the inputs into your model? Do you model a three carrier market or a four carrier market with DISH? And if you model a four carrier with DISH, when are they going to start building and really selling services in that region? And then you see the fiber to the home is probably still low. Unclear if the fiber is going to be built there. Is fixed wireless access going to be a huge factor in that region or not? Is bid money going to be used for fixed wireless access? And then the million-dollar question is, what discount rate do you use? You're in a market where the 10-year rate is 4%-4.25%. But this is a 30-year asset for us. We're not going to do what a PE guy would do, which is flip it in five or seven years.
We're going to own it forever. So what discount rate do you use? You assume that interest rates are going to be lower in 15, 20 years because you build a long-term model. And you bid and you lose. And you say, well, you know what? By tweaking that little dial a little bit, I could easily justify paying more. But you just don't know. So I opted right. And I think it just means that our publicly traded tower business is probably undervalued at this stage.
OK. And I'll come back to that. So given that beyond the Millicom pending deal, it looks like the acquisition field is pretty played out for the foreseeable future.
We still do deals. I mean, we buy 1 G and 2G , a portfolio of a dozen towers. I think we did a portfolio in a national park in Utah. There are still small deals coming. But the large portfolio, they are right size for the PE backed companies or going for multiple that are very difficult for us to justify given our trading level. It's just dilutive, and we're not going to do dilutive deals.
OK. So then we're going to be focusing on key organic growth drivers and what is increasingly a very mature market. So you recently mentioned a pickup in new lease colocations in the U.S. Can you just comment on that and talk about what's driving that, do you think?
Right. So if you really look at the market, I think, I mean, you and I have been in the wireless industry for 25, 30 years. I lived through 2G, 3G, 4G, 5G. The carriers buy spectrum. They roll out a new technology, and they could cram more bits per hertz in a new technology. Usually, they get a lift in 10x in terms of capacity. So in 2022, 2023, the carriers started spending about 22%-25% of revenue on CapEx. The big three spent $40 billion in 2022 and 2023 rolling out 5G. They got that much extra capacity that they need to fill. So sure enough, now CapEx all lower in 2024, closer to 15% of revenue for the big three, but it's a step function, and it's getting filled up by new postpaid. In 2023, the industry spent a lot of energy converting prepaid into postpaid.
2024, fixed wireless access is a factor, probably 10 million new subs. Those subs are probably showing 20 times more capacity than on a handset, and that capacity is getting filled, so I don't know if it's going to get filled late this year or middle of next year, but the carriers are going to have to put more capacity, and that means more colo. In addition, T-Mobile, when they bought Sprint, agreed that by mid-2026, they would provide 50 megs of downlink on 95% of the pop, and so T-Mobile is very busy now trying to get ready for that commitment. AT&T is playing catch-up, so I think AT&T is going to be busy for the next two years, and I think Verizon is probably busy, steady, very steady. It's probably going to be busy for another year.
So we have seen a high increase in terms of number of amendments at the beginning of the year. That doesn't mean that that's going to translate into hard dollars because it could be covered under the terms of the contract. It could be a non-monetary amendment. But it's a sign of increased activity and potentially increased demand down the road.
So it's a cyclical pickup.
It's a cyclical pickup. It's just going to take time because on an amendment booked to bill, if it's a monetary amendment, it's about three months. If it's a new lease booked to bill, it's probably nine months by the time you go through the whole thing. So it's not going to show into the numbers in the first half of next year. We're exiting. We're going to do $42 million of lease up in 2024. Our run rate coming out in the fourth quarter is probably eight or nine. So you annualize this, you're in the mid-30s. And probably the run rate in the first quarter was probably at around 11 or 12. So are we at the trough in terms of billings or new leases? We definitely are at the trough in terms of bookings. It's just going to take time to show in the numbers.
OK. So you touched upon fixed wireless being part of what you think's behind this kind of pickup in activity. We think we might be seeing a trend towards wireless wireline consolidation. So obviously, we've got Verizon Frontier as one data point, a couple data points, smaller ones on the T-Mobile side. Just your overall view of that, and does that have any implications for wireless network spend or for your business?
I think fixed wireless access is going to be a factor going forward. It's probably the first killer app of 5G. And if you really look at convergence, right, I think the cable operators have been very smart. They've been focusing on this for 20 years. And for them, it was really the power of the bundle. And if you could sell a bundle of four products or three products, your churn is going to be lower. You're going to get a bigger share of that consumer spend. And you're probably going to have better margins to scale. So I think the telcos, I think, definitely have seen the pain because the cable guys are posting great numbers on the postpaid wireless subs. And the way to compete is probably to have a bundle.
There's no way AT&T or Verizon or T-Mobile are going to get to 100% fixed line. They can't get there, so my view, and I don't know, I'm speculating here, but fixed wireless access is probably going to be a component of the bundle with the wireless product, and that's going to help our industry because fixed wireless access is showing up much more capacity than a handset, so eventually, I think it's going to help the industry, and in order to grow this, it's probably going to be mostly suburban and rural area, which is where we play. We are not really a small cell in urban area. We are more micro towers in urban and suburban areas, so that should help us long term.
OK. I was going to bring up small cells in a minute. But let me just bring it up now. So you're not really in small cells. Is there a potential to make investments in any new asset categories? So obviously, small cells come up, like data centers, fiber networks. I mean, obviously, we know that one of your key peers is trying to exit one of those businesses right now. But any potential to go outside sort of the core macro wireless tower business?
We spend a lot of time looking at other expansion opportunities. The problem is that when you have a business with 85% gross margin, 70% EBITDA margins, it's a REIT business. It's very tough to find anything that competes with this. When we look at this, what is important for us is exclusivity or semi-exclusivity, which we have on the micro tower business, either through zoning laws in suburban area or de facto in rural area because the economics don't make sense to build another tower next to an existing tower. That creates really great economics and great returns. We have not seen this in the fiber business. We have not seen this in the small cell business.
Data center, you need massive scale. I think unless you are talking about tens of billions of dollars of investment, and it's not something we could do. What we are doing in emerging markets is power as a service. For example, in Africa, where the grid is not reliable, so we have solar panels, we have generators, we sell security, and we sell power. What we do too is lease basically cabinets at the bottom of our sites in some emerging markets. So it's an ancillary service. It makes the site, I think, more secure, but also stickier and minimize churn. But really, outside of the micro tower business, I don't really see us doing anything in scale or material, frankly.
OK. So you've been in the CFO role for about a year now, right?
Right.
OK. And Brendan Cavanagh, who was a longtime CFO, moved to the CEO role. So you, coming into the CFO role, have you brought in any new ideas, approaches to operations, and kind of profitability enhancement opportunities that you've identified?
This is a very lean company. I mean, SG&A is running at about 6.5%. There's very little opportunity to cut costs. I think what we started really was the portfolio review earlier this year. Because at the end of the day, when you generate $800 million of extra cash post-dividend, capital allocation is probably the best way to create value. And I think the Millicom deal is a good example of where I think we're going to create value, exiting a market where we don't have the scale. I think frees up capital that could be reallocated either to share buyback or dividend, paying down debt. So I think portfolio review, capital allocation is really where I think we could create value going forward.
OK. So you guys have been. I think SBA management has recently been pretty clear that you're not chasing an investment grade rating, that you like the flexibility of not having to commit to maintain. I've had other high-yield companies, like high BB companies, say that they didn't want the burden of having to maintain that investment grade rating. They wanted the flexibility if there was an M&A opportunity, if there was a shareholder return opportunity. They wanted to have that flexibility. Is that really where you guys are coming from?
I think that's exactly where we are. I think right now, leverage about 6.4 turns. We just refinanced $2.1 billion of ABS debt at 4.8%, single-A. Out of the $12 billion of debt, $7 billion of ABS, $3 billion is high yield, another $2.3 is a term loan. On the Term Loan B, $2.3 billion, $2 billion is currently hedged at SOFR plus 0.05%. So we're paying basically 1.8% on $2 billion of our Term Loan B. This is a new hedge kicking in in April of 2025 at SOFR plus 3.4%. So the cost on that $2 billion is going to be 5.1%. And that's our most expensive debt. So being investment grade doesn't give us a huge advantage in terms of pricing.
And we want to maintain the flexibility to share buyback in case there's basically a disruption in the equity market. Creative M&A, for example, I think Millicom deal increased our leverage by 0.2%. I just don't know how the rating agency would have reacted if we had made the commitment to go investment grade and then spent $1 billion doing an M&A deal. I think we want to maintain that flexibility. And I don't think we are being really penalized in terms of pricing by being non-investment grade at this stage.
How do you think about the mix of ABS? What's the right mix of ABS on the debt stack? And how high can you take that?
Right now, we are about $7 billion. I think we like to have, I think, the flexibility of tapping different markets. $3 billion of high yield, $2.3 billion term loan. We have a $2 billion revolver that's untapped. I don't see us increasing the portion of ABS just because the ABS market is not open all the time. It's not as deep as the high yield market or the Term Loan B market. So I think it's important to have a mix and be able to have the flexibility to tap different markets and get the best pricing.
OK. So we touched on this a bit already. But there's frequent discussion in the market about the disconnect between the private and public market tower valuations. And obviously, one of the reasons that makes the U.S. M&A market tough for you guys. I mean, I think you talked about some of the math. But it might sound a little radical coming from a credit analyst. But I mean, do you guys ever think you're too conservative on the leverage side?
You know the average cost of debt now is 3.1%. You're sitting on a $12 billion balance sheet. I'll give you an example of an ABS coming up in January with a one handle on it, $750 million. So in a decreasing interest rates environment, it may make sense to increase the leverage again. But if you refinance a $12 billion balance sheet at 3%, at 5%, that has a huge impact on FFO and FFO per share. So I think right now, we're probably indexing towards paying down debt until we see which way interest rates are going to go.
OK, and that's also the rationale for paying for the Millicom deal out of internally generated free cash flow.
I think that's right.
Yeah. Just in case if there are any questions from the audience, please feel free to raise your hand, I think. OK. What can you say about the business outlook for 2025? I know you're not ready to guide, but you feel like you've got momentum.
There's definitely momentum. The level of dialogue with the carrier is better. It's more active. And there's a lag, I think, between starting the dialogue, getting the amendment, and the bookings. So I'm very hopeful for the second half of next year in terms of seeing it in the numbers. But meanwhile, I think our teams are very busy, very engaged with the carriers. And I feel good about the second half of next year. So we'll give guidance in February at earnings. And I think we want to see where the fourth quarter ends up and finalize our budget for next year.
OK. And then you touched upon potential divestitures. So you specifically mentioned on the earnings call earlier in our conversation the Philippines. What is the potential impact of that? And how would.[crosstalk]
It's totally immaterial.
Play out?
Totally immaterial. It's a very small footprint. And then we have other markets with less than 1% of revenue. We are not seeking to sell those markets now. I think it's very difficult to sell emerging markets right now just because cost of capital is very high. The lenders are not willing to really lend money or put significant leverage on those assets. And there are many portfolios for sale in emerging markets now. So you have more sellers than buyers.
Is that right?
It's just the opposite of what you're seeing in the domestic market in the U.S. I think. And so I think we're very happy with the operations we have in emerging markets. Africa is doing very well, going at double digit, very good relationship with the operators. And I think we're very pleased with the way it's been operating. And we have three smaller markets in Latin America: Peru, Chile, and Ecuador that are doing well. They are free cash flow positive. And we are very happy the way they are being operated and the way they're delivering now.
OK. So we have about a minute or so left. Anything important that we didn't mention about SBA or opportunities that we haven't touched on?
Listen, this business has been around for 30 years. These towers are going to be around in 30 years from now. It's a critical infrastructure for wireless operators. The world is going wireless. So I think you're no longer in an environment with 30 wireless operators in the U.S. all trying to get coverage as fast as possible. But it's an oligopoly. It's probably a mid-single digit growth rate with fantastic margins. So I think behind the Google search engine business is probably one of the best businesses I can think of.
That's awesome. That's great. Well, Marc, thanks very much for joining us. I would say it's a Boca Raton-based company.
Long commute this morning.
I appreciate you riding your bicycle over here.
Thank you, Ana.
OK. Thank you.