Good morning, everybody. I'm Simon Flannery. Welcome to day three of the TMT Conference. Hopefully, a lot of you got a chance to listen to Elon a few minutes ago. And now we've got a great follow-up here. We're delighted to welcome Marc Montagner, the EVP and CFO at SBA Communications. Thanks for joining us, Marc.
Thank you, Simon.
Great to have you here. We're colleagues many years ago, so nice to catch up again. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. So, Marc, you've been at SBA now a little bit over a year. You're a telecom industry veteran. You've seen the industry from a lot of different angles. I'd love to get just a little bit of a 30,000-foot perspective. So, in your time at the company, how has your perspective changed on the tower industry on SBA versus what you were expecting going in?
Right. So, first of all, I want to congratulate you for, like, 30 years. I remember you doing this conference in 1995, while I was at Morgan Stanley, and you've seen, just like me, the beginning of the wireless industry. There was basically no internet, no data center, and you've seen the downturn in 2002, 2003, and the explosion of wireless, and now we all carry a personal computer in our pocket, basically, and we have access now to AI and videos and everything, so it just speaks of the power of technology and how it has transformed our daily life. I mean, you have, like, daughters in their early 20s, and they can imagine a world where you can watch a video anytime, or where you have Google Maps and pictures in your phone, so our business has been around for 35 years.
I've been in the telecom industry since 1989, and it was a land grab initially, dozens of carriers at spectrum, and just needed to build coverage as soon as possible. 35 years later, the world has gone wireless. We all carry a personal computer in our pocket, and it's not going to go away, so 18 months, 16 months at SBA now, I think I can see that how this company is going to be around in another 35 years, just because our customers, the wireless operators, need our infrastructure, and so it's a little bit of a step function, right? Carriers buy spectrum. They roll out a new technology, 2G, 3G, 4G, 5G. They get a 10x capacity increase, and then they need to fill up that capacity, and when that capacity is used, they go back and fill in the colocation, extra coverage.
So I think if you really look, you go back 15 years, the big three, CapEx as a percentage of revenue, oscillate between 15% of revenue and 25% of revenue. So it was, like, 2021, 2022, it was above 20. And they got plenty of capacity. And last year, 2023, 2024, I think 2024 was probably below 15% of revenue was spent on CapEx. But as we mentioned earlier last year, we started to see green shoots in industry in our business in the first half of last year. And the momentum has been building, where we see more amendment, quarter over quarter, the number of applications from the carriers has kept increasing. And now we are seeing more demand for colocation as opposed to just amendment. So it's just building up. And I think we feel pretty good about 2025.
It's probably a good transition and a good momentum for 2026.
Great. So maybe just summarize some of your '25 guidance for it, if you would. We've got the Millicom deal coming in at the end. So how does that all tie together? You've got a little bit of churn still to deal with.
Right. So I think if we look at our business, you have the domestic business and international. Domestically, it's actually fairly easy to forecast. Our escalator is about 3% of revenue. And new leases, it should converge at around 3% growth. So in slower years, closer to 2%, where the carriers have to spend more capacity. It's probably going to be close to 4%. So you have 3% growth from the escalator, about 3% average for new leases. And the non-Sprint churn is about 1%. And you've seen our non-Sprint churn going from $30 million a year in 2023, $25 million a year in 2024, low $20 million for 2025. So you are kind of in a world of 3 plus 3 minus 1 in terms of top-line growth. And that's domestic business. 80% of our revenue of our leases, 80% of our EBITDA, roughly are U.S. denominated.
And then 15% of our business is in Brazil. So I think we're still bullish long-term on Brazil. We have a large exposure there. I think the country is going through consolidation from four carriers to three. So we faced churn in the last two years. And churn is going to remain elevated there for the next couple of years. And last year, unfortunately, the real was the worst performing foreign currency. It was down 23%. It stabilized this year. Interest rates in Brazil are at 13%, going to 16%. So I think we feel better about the real in the short term. But long-term, Brazil is a country that's going to keep growing. And we just need to go through the consolidation. So I think the U.S. market, I think we have very good visibility. And internationally, Latin America is going to go a growth engine at some point.
But currency and carrier consolidation is a little bit of a headwind in the short term.
Great. You talked a few minutes ago about the U.S. carriers still doing amendments, but looking at colocations. Could you just unpack that a little bit for us? And just where are we on the C-band or the mid-band deployment, at least? A lot of the 2.5 from Sprint is now out in the market. But there's a lot more to go for the other carriers. And then DISH is there well behind as well.
That's right. So if we look at our site, the SBA sites in the U.S., about 55% have been upgraded to 5G.
Mid-band, 5G.
T-Mobile is above 80%, all 2.5 spectrum. Verizon is about 70%, and AT&T below 50% on our side. I can't speak for their network overall. I think T-Mobile is still very busy. They have minimum coverage requirement for mid-2026. They're very active. Verizon is very, very steady. AT&T is playing catch-up. I think we see the momentum coming from 2024 into 2025. Now, the book-to-build cycle on an amendment is maybe three months. But on a colocation is six to nine months. We're going to see that mostly in the numbers, probably in the second half of 2025.
You'll be accelerating exiting out of 2025.
That's right.
Of these colocations, is this densification? Is this infill? What's the nature of that?
It's both. It's coverage and it's densification.
OK. And DISH is fairly quiet right now?
We didn't pencil much from DISH in 2026, because I think they're going to be focusing on handset purchases and marketing. But we are there to support them. We have very good dialogue with them. And I think they got 18 months' window on the regulatory front. So we expect them to be back in 2026.
We see the FCC making some moves on spectrum, the DoD auction, upper C-band proceeding. There's questions about the lower C-band. Is that something that you think can benefit you over the next couple of years or longer, I guess?
Definitely. I think if you look at the industry, right, when carriers receive a new band of spectrum, they usually spend a lot of money for it and need to put it to work. So that would be a catalyst at some point. But that being said, I was on the board at Intelsat. They cleared up 100 megahertz of C-band spectrum. It takes a long time to clear spectrum.
Because you launch traditional satellites.
Because you need to launch new satellites, repack your 200 megahertz into 100 megahertz, so I don't see C-band coming to market before probably the end of the decade, but it's doable. It's a question of time and money, but it will definitely happen, and I know that the FCC is very focused on getting more spectrum to market.
Yeah. It seems like particularly for spectrum that's not really being used effectively right now, giving it, because I think the chairman's been talking about how the U.S. is falling behind in terms of spectrum per carrier.
That's right. And if you look at the satellite industry, at least the GEO, I think they would love to see more proceeds going to their shareholders, because they could probably repack some of the spectrum. So everybody would benefit. But it takes time. You have to do NPRM at the FCC, solicit comments, find a way to compensate the satellite operators, order satellites from Boeing or other manufacturers. So it just takes time.
Since we're on satellites, we get the question a lot. I'm sure you do. Is how does that Starlink now at 5 million subscribers? How does that interplay with the tower business? Is there any competitive risk, or is it really for areas where there is no 5G, there's no fiber?
To me, satellite is a great complement to the wireless service. I think if you look at it, especially on a LEO or a GEO, it's a fantastic product if you're on a maritime container shipping or cruise ships, your airline industry, you want to have Wi-Fi over the ocean or anywhere, your driller in the tundra or in the Gulf of Mexico. I think it's a fantastic technology. I think in terrestrially, I think it's probably just applicable in very rural area. You're always going to have a tree. You're in a parking lot in an apartment. You're not going to have line of sight to a satellite, and the capacity is always going to be limited, so I don't see it as a threat, more as a complement.
And for the tower company, I think if you really want to reduce the latency from the satellite, you want to take it. I don't know, Starlink is probably 40-45 milliseconds. You want to take it 25 or 30 milliseconds. You're probably going to need more uplink and downlink from the towers pointing at the sky and terminate on a fiber network. So I think long-term, it's probably positive. But I think it's going to be a great complement to the wireless industry.
Yeah. Yeah. It's moving quickly. The domestic services business, so what are you seeing there right now? And it used to be that that was a pretty good precursor to leasing trends. Is that still a good relationship, do you think?
Yes. And it's a leading indicator of where our business is going. So we did about 150 in revenue last year. We guided at the midpoint 170 in revenue this year. So we see great momentum in that business. So it's heavily indexed toward T-Mobile. But it's a leading indicator of the future level of activity. So it's another good data point for us.
What are the big buckets you're seeing within that? Is it sort of RF planning for the construction? What are you?
It's planning. It's design. It's construction planning and all of this. So I think it's all of the above, really.
Great. Well, let's pull back to the big picture here. Brendan took over from Jeff, I guess, a year ago. You've got a strategic review. You've taken some actions already. Sounds like there's some more to go. So just help us understand the process and the objectives and where we are and where we're going.
That's a good question. I think Brendan became CEO in January of last year. He has been with the company for 27 years. He was there from the ground up, really. We operate in about 15 international markets. I think if you really look at the numbers, we had better businesses, better margin, better growth prospect in countries where we had scale. Obviously, with scale, your G&A is a smaller part of revenue. You also have a better dialogue with the leading wireless operator, because they need your tower, because you operate at scale. You have the coverage. The view was to do a strategic review and to the extent it's possible, exit the market where we didn't have scale, or find a way to reach scale in order to be a dominant tower company.
So in the last 12 months, we sold our operations in the Philippines. There are over 30 tower companies in the Philippines. We did not ever see a lease back with one of the leading wireless operators. We exited the Philippines. We exited Colombia and Argentina. And the numbers are really not material. It's a very small market. In Central America, we like Central America because there are two wireless operators. Those markets have been consolidated down to Millicom and Claro, which is part of Carlos Slim's portfolio of companies. The contracts are U.S . denominated. And we had operation there. And Millicom was selling 7,000 towers. So we have an agreement to buy 7,000 towers from Millicom. That's $975 million in a build-to-suit program, exclusive right to build 2,500 towers from Millicom over the next seven years.
As part of the agreement, we have a 15-year contract with Millicom in U.S. dollars with an escalator. And we extended the lease with Millicom on the towers that we operated in the market. So I think the beauty of it, we pay 11 times tower cash flow, 11.5 times EBITDA. It's an accretive deal. We locked in a mid- to high single-digit growth rate in U.S. dollars in markets where we have people, distribution, operation, support, et cetera. So those markets we're very comfortable with. And this deal is very accretive to us. And we're de facto the dominant operator in Central America now.
So to that point, you mentioned scale a couple of times. How do you define scale?
I don't think there's a formula.
But number one or two in the.
Number one or two, maybe number three. I think if you look at the other international market where we operate, or Africa, we are in Tanzania and South Africa. So Tanzania is a real growth market for us. If you really look at our BTS, a build-to-suit program, new site build for 2025, it's going to be one of the busiest years ever. We have forecasting to build 800 sites, about 500 for Millicom in Central America. And then the second largest market is Tanzania. The government is really pushing for the operators to extend coverage. We have a good relationship with Vodacom, Airtel. And it's really a growth market for us. Those are tough markets to operate in, because the roads are tough. Power is an issue. So we provide power as a service. Install solar panel. We outsource the truckload for diesel to a third party.
But we are not exposed to the cost of fuel. It's basically a cost-plus contract to the carriers. And South Africa, we have scale in South Africa. I think the country is still growing at a high single digit. Tanzania is definitely growing in a double digit. I think power, getting reliable power supply is a real issue. But we have a good relationship with the operators. And we're pleased with our operation in South Africa. So we don't have any processes right now. And there's not a formula for what does scale mean. But if we like a margin, we like a growth prospect, I think there's a market we're willing to invest.
Thank you. So I think on the strategic review, you suggested you'd be back to us with more information later this year. So is there some other transactions or other kind of productivity initiatives?
No. I think they don't know processes to market any portfolio right now. I think we're happy with what we have. But we always, I think, are obviously optimistic and either on the buy side or on the sell side.
You mentioned you're stepping up the build-to-suit. So how do you, as the CFO, think about the return on investment, the initial yields, the lease-up potential? Because certainly in the U.S., you haven't been doing much of that for a while. The industry hasn't. But it's a lot of capital upfront.
Yeah, so in the U.S., with inflation, cost to build have gone up, obviously, and it's a competitive industry. So we're still building towers in the U.S. And we're still buying towers in the U.S. But we are very, I think, disciplined in terms of return. Internationally, I think we have a formula with Millicom where we are comfortable with the return we're getting. And it's the same thing in Tanzania. But I think for every market, we obviously have cost of capital, our WACC that we use. And then you add a country risk, depending on which country you operate in. And then you have to factor in FX risk, the valuation on top of the country risk. So the cost of capital discount rate we use is really, I think, specific to each market where we look at either M&A opportunities or build-to-suit.
But I really think as senior management, as management team, capital allocation is really the way we are going to create value and distinguish ourselves.
You talked about FX a couple of times. And American Tower has been talking about reducing the proportion that's in emerging markets. How are you thinking about the right balance there? You obviously did the Millicom deal. But it's U.S. dollar-based in terms of having enough exposure to those high-growth markets. At the same time, the volatility can be.
Right. So today, about 80% of our leasing revenue, 80% of our EBITDA are denominated in U.S. dollars. We are, I think, have increased the hurdle rates that we are seeking in emerging markets, non-U.S. denominated markets. And you're going to see a reduction on build-to-suit that is being spent in Latin America.
Coming back to sort of demand drivers broadly, I think there's been some talk on the season's earnings calls around fixed wireless being an incremental driver. Because some of the companies have been pretty clear, we're not going to invest for fixed wireless. But it sounds like you are seeing it. And clearly, the long-term guidance we've heard from some of the carriers suggests they're going to double the usage. And we're seeing hundreds of gigabytes a month. So what are you seeing on the ground? What do you expect from fixed wireless, certainly in the U.S., but maybe internationally as well? We see it would be a good product there too.
I think fixed wireless, fixed wireless access to me is the first 5G application, really.
You talked about everybody getting wireless right at the open of the dialogue.
That's right.
It's the next step.
It's the next step, and either as a replacement to fiber. I think even as a complement or as a backup. And anecdotally, I think we had some markets where the hurricane hit our sites last year. And apparently, you just couldn't find fixed wireless equipment anywhere in the region affected by the hurricane. Everybody rushed to a store to get fixed wireless equipment. So I think, what, 10 million new adds last year, another 10 million new adds this year. Each fixed wireless access customer is probably a huge 15-20 times more tonnage than a handset. That's driving capacity. So we don't have visibility on the CapEx being deployed on our towers by the operators. Because a bit is a bit is a bit. So it's really hard to see if it was deployed for fixed wireless access or just handset consumption.
But it is going to drive demand. And then, I mean, Simon, you and I remember how the internet changed our life in the '90s. And everybody's life since improved productivity. And now you are going to have a device in your pocket with an AI app. And that is, I don't know, not smart enough to see what it's going to mean for productivity. But it is just going to drive more demand on the wireless network. And so if you take a 10-year view, 20-year view on this business, some of our towers have been there for 20 years, 25 years, 30 years. Recently, my wife and I drove down to Key West for a long weekend. And I saw a tower that is currently on the market or was on the market in Key West. And you look at this tower.
You see no one is ever going to build anything anywhere close to this. This site has probably been there for 25 years. It's going to be there for another 50 years. Because there's no place to build. We have this unique portfolio of towers that is going to be almost impossible to replicate for zoning laws from a cost standpoint. The wireless operators are going to have to squeeze more and more equipment on that infrastructure. When you drive around, you could just see those towers getting bigger and stronger and taller. That's the earning power of our business, really.
How do you think about then the edge opportunity? I think four or five years ago, there was this vision of a data center at every tower.
Right.
And we've obviously seen one of your peers buy a big data center business. And you've got some investments. But what's your latest thinking on what the right way to kind of invest against that opportunity, either partnerships or other?
We are ready to do something if we see demand. But it's probably still a way away. We don't see the demand right away. It may arrive at some point with AI. I just don't know.
Yeah. Yeah.
It's too early.
But indirectly, if it just drives wireless traffic, you benefit from that anyway.
I think that's right. I think that's right. And remember, in our business, you rent vertical space on the tower. But we also rent horizontal space for the generators, the battery, the routers. The wireless operators have to bring their own fiber. So they need physical space at the bottom of the tower. So to the extent that edge becomes a reality, we have the real estate where they could put that edge data center.
Another big debate in the industry has been, do you have holistic MLAs? Or do you have kind of pay-by-the-drink sort of thing? And SBA has typically been more the latter. But you've signed a deal recently. How do you think about that coming into the company and the industry? And what's the right way? Or are you still flexible to whatever works with the carriers?
I really think it has evolved more into a strategic relationship with the carriers. And they're growing in mid-single digit. We're growing in mid-single digit. They need to have visibility on their cost structure. We need to have visibility on our growth prospects. So I think there's a natural dialogue to have. So we have MLA now with AT&T. And I think we are flexible. Whatever works best on an ongoing basis.
So probably no big changes in how you operate.
I don't see big changes going forward.
You went through the Millicom deal. I think you put September 1st close in your guidance. Just can you help us through what approvals you need and where those stand today in terms of the kind of risks? I think you said it could close earlier. Or parts of it could.
It's really hard to predict. It's five markets. You have regulatory approval, antitrust approval. We don't expect any issues. It's a question of going through the process. So we assume it's probably going to close around September 1. I think guidance for the year is $42 million in revenue and $29 million of tower cash flow. So it's about a little bit over $7 million a month in tower cash flow, a little bit over $11 million in terms of revenue per month, $12 million. And it may close earlier. But we feel pretty good about September.
Are there any more Millicoms out there? How is the M&A environment?
I can't comment. I think you're probably going towards capital allocation discussion, right? So obviously, our preference, this is a business with 70% EBITDA margins, $1.9 billion of EBITDA. And then if you just run down the number, it's about $480 million for the dividend, $50 million for maintenance CapEx, $250 million for growth CapEx for this year, cash interest expense another $430 million, and cash taxes about $40 million. So you left about $650 million of capital, extra capital to allocate. So last year, we bought back shares, $200 million. We also did M&A mostly in the US, over $200 million, and then paid down debt. This year, that $650 million, we paid down our revolver completely last year. For this year, obviously, we need $975 million for Millicom. Part of it will be funded through the free cash flow, part of it through the revolver. We have a $2 billion undrawn facility.
Welcome to the conference center.
Do you think is this more of a new run rate for it, given the Millicom commitment? Or is this the peak year for build-to-suit, do you think?
I don't know. It's 2,500 towers for Millicom over the next seven years. I think in terms of revenue impact, it's minimum for 2025. Because it's all back-end loaded. We receive the search ring. Then you have to find the land, apply for zoning. So it's going to take a while. So all the construction is back-end loaded. So there's no real impact to the top line growth rate in 2025 from all this build-to-suit.
So you were talking about the funding options you have. Leverage is at historic low level, knocking on the investment grade door, if you want, I guess. But it sounds like you're still comfortable staying in this range. Millicom doesn't take you up very much. But just keeping your options open as you roll over debt and so forth.
Yeah. So you're right. Leverage at the end of the year was 6.1. The revolver was fully paid down. This is the lowest leverage in the history of the company. And average cost of debt is 3.2%. In a rising rate environment, we just need to be careful. We have $750 million of ABS maturing in January of 2026, another $1.2 billion maturing in November of 2026. So we have $2 billion refinancing in 2026. Those ABS have one handle in front of them. So obviously, we'll be refinancing at a higher cost of capital.
You still like the ABS market?
We like the ABS market. Of $12 billion of debt, $7 billion in ABS market. We refinance in late September, early October at 4.8%, so I think we price really through the investment grade market levels. We like the flexibility. I think it'd be nice to be investment grade, but investment grade means you made a commitment to stay investment grade. I think it would have been very difficult for us to spend $1 billion in Millicom after having made a commitment to being investment grade. We like the flexibility. If interest rates do were to come down again, I think we'll be happy to deploy more capital, do more share buyback, and take the leverage back up. We like that flexibility, and I don't think we are paying much more in terms of our cost of capital than an investment grade company.
Could you talk about your OpEx and your margins? We've obviously had a lot of talk about AI here and benefits in terms of running your organization more efficiently, maybe surveying your towers to see if everybody's got what they're paying for or what they're paying you for.
Yeah. So I think we are fairly centralized. And our G&A cost as a percentage of revenue are fairly low. There's just not a lot to extract on that front. But AI is going to help us. We have literally 40,000 towers, multiple leases with each operator per tenant. So you're talking over 100,000 leases. And AI is really helping us sorting through duration, terms, escalator, and all of this. So I think it's a great tool. And obviously, now we fly drones to get data on the towers, store the videos, see exactly. You don't have to send a person up there to really find out what's going on. So AI is a productivity tool at this stage. And we look to do more of it going forward.
Right. Well, we're just running out of time here, unfortunately. But maybe one last one on the dividend, another double-digit increase here. So it sounds like you've still got room to move the payout ratio up as your NOLs run off. We can get double-digit for the next few years.
That's right. We did 15% last year, 13% this year. Our payout ratio is about 35% of FFO, and we have room to keep growing the dividend at double-digit for the next couple of years, next few years. We still have NOL, so we have room on the dividend.
Sounds great. Marc, thanks so much for joining us today. Great conversation.
Congratulations.
Thank you.
30 years.
Appreciate it. Thank you.