And infrastructure for Citi. Disclosures are available at the back of the room, and if you don't have access or would like another copy, please email me at michael.rollins@citi.com. We're pleased to welcome back Marc Montagner, Chief Financial Officer of SBA Communications. Mark, thanks so much for joining us.
Thanks for having me.
It's great to see you. It's a timely opportunity to catch up on SBA and towers. Maybe to get us started, just from a high level, provide us with an update on the strategy for SBA as you're trying to enhance financial performance and improve value for shareholders.
Okay, that's a good question. I think the number one driver of value creation is capital allocation. And if you really, and those numbers are public, I'm going to round them up a little bit, it's roughly $1.9 billion of EBITDA, about $425 million allocated to the dividend, about $435 million cash interest expenses, $35 million for cash taxes, and maintenance CapEx is about $50 million, and midpoint about $225 million of gross CapEx. So that leaves you about, call it midpoint, $675-$700 million of cash to allocate every year. And it's very critical to allocate this cash in order to create value. So if you go back to 2023, in a rising rate environment with about 6.5-7 turns of leverage, we basically used $100 million to do share buyback in 2023 and $500-$600 million to pay down debt. Last year, we spent $200 million.
It was balanced, really, $200 million on share buyback, $200 million of M&A, $200 million to pay down debt. This year, so far, we've done about $175 million of share buyback. I think at this stage, we think there's a lot of value in the stock, paying down debt, but also we did a $975 million M&A deal that was signed last year. We'll talk about the details next year. That's a deal in Central America that is going to create a lot of value long-term for SBA. Increase the leverage by 0.2 turns, but very accretive for the long-term. Going forward for next year, I think we're probably going to lean towards either buyback or paying down debt, given where valuations are very stretched in the U.S. domestic market, and I don't see us really expanding into new emerging markets at this stage.
It's rebalance, debt buyback, dividend, M&A, and dividend.
That's helpful. I just heard that our mic wasn't initially working. So just real quick, for those of you on the line that I haven't met, I'm Mike Rollins. I cover communication services and infrastructure for Citi. Disclosures were available at the back of this room. If you'd like another copy or need access, email me at michael.rollins@citi.com. Of course, we're here with Marc Montagner, Chief Financial Officer of SBA Communications. Okay, so back to the discussion. You said something very interesting. You talked about next year maybe having a different capital allocation. Historically, SBA has been aspiring to expand the portfolio. I believe it was like 5%-10% per year. Is that goal kind of now sunset? Capital allocation is going to be more focused on share repurchase in the future, where there's just maybe less opportunistic deals?
I think we're just going to be opportunistic. I think that's a message. I think we locked the leverage at around six and a half times today. S&P just upgraded us to investment grade at the corporate level. And I mean, valuations are very stretched in the U.S. market. We're competing with a lot of private equity money that could basically put 10, 12 turns of leverage on those assets. And it just didn't make any sense. And we bid, but we lost a lot of these domestic M&A opportunities outside of the U.S. Millicom, we thought, was a very creative transaction. We paid 11 times for an asset in Central America. That market is fully consolidated, five markets with two carriers that are very healthy, basically Claro and Millicom.
We have a 50-year contract in US dollars with escalator index to CPI and a BTS commitment from Millicom to build 2,500 BTS new sites over the next few years. That's going to lock in a mid- to high-single-digit rate of growth on the top line, and we like that deal a lot, so that's a deal that makes a lot of sense. To the extent we see deals that create value, we'll be opportunistic. Otherwise, buying back shares drives AFFO per share growth, and paying down debt does the same thing.
Before we get to the operations, just maybe one more on the portfolio. So as the leadership a couple of years ago changed at SBA, there was a discussion around portfolio optimization. And where are you today in terms of that optimization? Are you done? Is there more to do? How should investors think about what your portfolio may look like over the next few years?
That's a good question. Brendan Cavanagh, CEO at his first earnings call in February of 2024, announced basically a strategic portfolio review. I think when you look at the numbers, you realize where we are a leading tower company, number one, number two, number three. You get the call from the operators because they need your footprint to roll out a new technology, do colos, get more capacity. If you're at the fringe of their network, you're the last one to get involved, and your returns suffer. It's really difficult to cover the U.S. We looked at our 15, 14 markets around the world. Since we sold our portfolio in the Philippines, we were one of over 30 tower companies. We sold Colombia. We sold Argentina, where we are just like a very small footprint.
Recently, we announced the sale of our about 400 towers in Canada. Canada is a fantastic market, oligopoly, three great carriers there. The issue for us is that it's very difficult to expand in Canada in a sale-leaseback with one of the top three MNOs. The deal they are striking is mostly with financial buyers. They are mostly financial engineering as opposed to a strategic deal where they team up with a tower company on a long-term strategic relationship where we could really support them in the long term. We basically sold to a PE firm. We like the multiple. I think, I mean, Canada is not a REIT. We pay taxes in Canada. Adjusted for taxes, we receive about 28 times AFFO, 26 times, sorry. We thought it was an attractive number.
And we just couldn't see how to get scaled in Canada. So it's not a—we love Canada. It's just we didn't have the right position, so we decided to exit.
Maybe shifting over to the domestic operations, over the last few quarters, you've talked about leasing activity building on a quarter-over-quarter basis. So as we're sitting here today, are you still seeing leasing activity continue to build going into the end of this year? And what does that translate to in terms of organic growth for SBA as you're thinking about the second half of this year, but as well as 2026, where that book to bill might take you?
Right. So we have seen a number of applications to touch our site, do modification on site, increase for the last six quarters. Today, the majority of applications are for colos in terms of revenue opportunities. And we feel good about the momentum we have. And so if you will look at the CapEx cycle for the operators, right, they receive a new band of spectrum, roll out a new technology. In this case, it was 5G. CapEx as a percentage of revenue was running close to 25% for two years. And this year, it's a trough. It's about less than 15%. It's almost a historical low. We are rebuilding from there because traffic on our handset, the tonnage keeps increasing at double digit. Fixed wireless access is chewing a lot of capacity. The carriers have more demand for colos, densification, coverage.
T-Mobile is still working on their 95%, 50% down, 50 megs downlink on 95% of the POPs for middle of next year. So the momentum is there. It has not been reflected in the lease-up number in the second quarter because the book-to-bill cycle on the colo is six to nine months. Definitely, the new lease activity in the second half of the year will be greater than the first half. And that's a good sign for next year. We have not put together a budget yet for next year. We have not provided guidance, but we feel good about where this business is going forward.
In terms of the exit, I think the implied math was like a $11 million exit rate for 4Q. Is that still the expectation?
I think that's what the math will tell you right now.
For those less familiar, for the domestic leasing activity revenue contributions. So maybe getting into the news of last week. So as investors have been trying to think about where tower revenue growth is going, we get this announcement last week. EchoStar selling some spectrum to AT&T. And it's raised a number of questions about how this is going to impact the tower business model. How would you frame the different impacts that investors should be mindful of from that transaction and the possibility that more of that EchoStar spectrum could end up in the hands of the carriers?
That's a good question. I think everybody is probably scratching their head there. What does it mean? Obviously, I don't have a crystal ball. I just have about 30 years of experience in that industry. And my view is that long term, it's probably a positive. If you look at the wireless industry around the world, and it happens in the wireless industry, in the airline industry, in the railroad industry, in a lot of industries that have massive fixed costs and low variable costs, those industries get driven to an oligopoly with about three operators. And once you get to that stage, it's a very stable stage. The three operators are very healthy. They could basically forecast their business long term and spend a large amount of capital to keep growing and generate top-line growth. So I think it's good for the long term of the industry.
Short term, it means disruption. But it's a blip on the screen. This industry has been around for 35 years. Those towers are going to be there in 35 years. It's going to be almost impossible to overlap some of those towers in. You look on Long Island, you look at where we're headquartered in Florida, you look at Westchester County. How do you build a new site given the zoning constraints? So you see some of those sites every year you drive by and you see more equipment on those sites. So I think short term is disruption. Long term, I think it's good for the health of the industry.
And so maybe just to frame the disruption. So can you remind us your revenue exposure to EchoStar? And where is the risk that that revenue gets decommissioned away?
For us, it's about $55 million of revenue every year right now, run rate. And it's about 2% of our global revenues. The lease-up from this year, new leases, we're penciling $2 million. It's already called for. So there's no impact to 2025. If those leases are not renewed, and I don't think they'll be renewed at this stage, they'll probably be terminated. We'll see $25 million of churn in 2027 and $25 million of churn in 2028, a little bit on 2026, a little bit on 2029. So this is assuming the leases are being terminated and not renewed.
And you mentioned the momentum you've had with densification and with activity. Is there a risk that now, at least for AT&T, which could have more spectrum post this transaction and use that as a mechanism for capacity for some period of time, is that going to dilute growth for SBA because now your customer has an alternative for capacity?
They bought two bands of spectrum from DISH, the 3.45 gigahertz band. They could basically roll out 5G through software upgrades. We're not going to see anything there. That being said, on our network, AT&T has only rolled out 5G on 50% of the network. So they're still going to have to put more 5G equipment out there and roll out in a DISH band and their own band. So I think it doesn't really change that much. The 600 megahertz band, AT&T doesn't have any equipment there. It means new equipment. They have some rights and the MLA that we signed with them three years ago. It really depends what type of equipment and the timing of rolling out in that band. So at this stage, we have no idea what it means, to be honest with you. We have, I don't think we have engaged yet.
So because that's been a question like whether you could get amendments. And I think there's some question of whether that 600, depending on the equipment, could fit in that. So is it fair to kind of think about this being a possibility of getting amendments, the possibility of being included, or does it really lean one way or the other?
To be honest, I really don't know the answer today. It depends on what type of equipment and what timing. So we don't have, I don't have a crystal ball yet.
Sure. And when the tower businesses go through these episodic events of like a carrier changes their capacity plan, so now maybe they have more spectrum with the transaction, how long does that take to trickle down to the towers where you'll have better visibility of what it might mean for growth or densification or the things that could impact 2026, 2027 organic growth?
I don't know, to be honest with you. That would be pure speculation on my side.
Maybe just zooming out, right, where you think about the long-term comments that you made. We talked, I think, a little bit about this on the last earnings call, but how are you conceptualizing the annual long-term domestic growth? Where should that be? I think, is it almost 4% ex the merger churn this year?
Yeah, so I think the way we look at it in the US through escalator, I think it's about a 3% top-line growth rate. Then lease-up around 3%. And remember, the lease-up is a step function. It's not like one year, it's going to be three years forever. It could be 1% or 2% one year, six, seven, eight% another year. I'll give you an example. If you look at the upper C-block spectrum, that's probably NPRM and all these proposed rulemakings should be issued by the FCC this fall, probably in 12 months by the end of 2026. Auction rules will be drafted for the auction of the C-block, and then it's probably 12 to 18 months of clearing. So you could see the C-block coming to market late 2028, 2029. It's a brand new band of spectrum.
That is going to drive lease-up because it's 100 megahertz, maybe 120. It's going to need new equipment. Everything is going to be new right there. And that's the opportunity for the tower company. So the way we look at it is 3% escalator growth, 3% lease-up, and ex churn about the ex-Sprint churn about 1%. So top-line growth rate at the moment, mid-single digits.
Okay. Very helpful, and is there anything else just in terms of domestic growth that investors should be mindful of in terms of this current cycle that we're in and trying to think about the acceleration going into the end of the year and what it means for next year?
You know, I mean, as management, we really focus on creating value for shareholders over the long term. So it really means allocated capital in order to create growth and value over the long term. So we don't really think of those like quarter-over-quarter variation because we have a footprint. It's almost impossible to really overlap with some of our, most of our footprint given the zoning in urban, suburban area. And we know that the carriers like the service we provide, the quality, we're very responsive, really help them on the service side. So we have a very good dialogue with the carriers who are trying to support them. And I think it's a good relationship. So I feel that we are really working for the long term to create value for investors and our company.
You mean, oh please.
So those quarter-over-quarter variations, it's almost false precision because you got the application, but the equipment didn't get on the site, so you don't book it in this quarter. That's okay. It's going to show in the number next quarter.
You mentioned the services business, and the services business has been ramping this year. Investors tend to look at that, at least from the feedback that we get, as one of the leading indicators for leasing because you get the services sometimes before the leasing, but you also have a different angle this year, right, where you're also getting some revenue from third-party sites, which is boosting that figure. How should investors think about the strength of the organic services business, what that means for leasing versus the benefit you're getting from monetizing your business across a larger portfolio?
Yeah. So I wouldn't read too much into it. I think Nichole Thomas, who runs that business, is doing a fantastic job, absolutely fantastic job. The team is delivering first-rate quality of service to the customers. But it's indexed towards one carrier today, and you don't have long-term visibility. So we feel good about the ramp-up for the second half. It's a good sign for the first half of next year, but there's no long-term visibility in this business, and it's a non-recurring business.
Can you remind our audience in the domestic business what your exposure is to carrier consolidation? We've just talked about EchoStar, but are there other things, the T-Mobile integrations, like what's left that people should be mindful of just to think about that?
I think the only thing I could think of is UScellular being acquired by T-Mobile. We have about $20 million revenues from UScellular. There will be some churn. I'm pretty much sure that not all of it will go away over, and those consolidations usually take three to five years before it's all done, so $20 million, not all of it will go away, so I just don't know how much will survive, but I think between Sprint, DISH, and UScellular, that's pretty much it at this stage.
How much is left on Sprint?
We have $50 million this year, $50 million in 2026, and $20 million thereafter. So really, the last big year is 2026.
On the international side, where are you in terms of getting through some of these Latin American headwinds? How are you feeling about where that business sits?
Yeah. So basically, Latin America for us is really Brazil. And personally, I'm very bullish on Brazil. It's the largest economy in Latin America. The GDP per capita is four or five times GDP per capita in India. It's a large exporter of corn and soybeans, mineral oil. The central bank has done a phenomenal job getting inflation under control. The real has appreciated by over 20% this year. And we are the number two tower company, 12,000 towers behind American Tower. The industry is going from four to three, which is healthy for the long term. It's painful in the short term. So Oi has been parceled out to Claro, Vivo, and TIM. And Oi wireless went into reorg last year. We had another $20 million of annual revenue to Oi wireless. That eventually, we don't see Oi wireless surviving.
So over the next two or three years, we'll see that $20 million revenue going away. So those consolidations take three to five years. But long-term, 5G in Brazil is only less than 35% deployed. The country is going to need 5G. The fixed line, I think infrastructure is really not what it is in the U.S. So I think fixed wireless access has a huge potential there. And I'm bullish for Brazil long term. Listen, I was at Nextel with a large operation in Brazil, and it's either white-hot or no one wants to touch emerging market. It's totally driven by interest rates in the U.S. The minute interest rates go down in the U.S., everybody's chasing growth and higher return. And Brazil is the number place they go because of the size and the macroeconomics of the country. So it's the country of the future.
We feel good about Brazil. It's just we are being very patient there. So what we've done in the short term, I mean, cost of capital is very high. You get 15% in the checking account in Brazil now. So obviously, when we look at new site build, we're looking for a rate of return much greater than this. And our competitors, either the smaller companies, have much higher cost of capital than we do, so they can afford to build a lot of sites. And I think our number one competitor is we pull back in the region. So when we build site, we're going to build sites this year. We are teaming up with our carriers and making sure that we get a return commensurate with the cost of capital to operate in that country. But I feel good about Brazil long term.
And what about Africa? How's the business doing there? Are you happy with the investments that you've been making? And where does that go over time in terms of exposure for SBA?
Right, so we have two countries in Africa, Tanzania. Tanzania is a fast-growing market for us. A lot of new sites are being built, mostly for coverage. The government is really pushing the carriers to build more sites, and our operations are growing very well. Very pleased we see operations in Tanzania. South Africa has the highest return on invested capital of all of our international market because we got in early. We saw tremendous growth, and I think we are number four, number five carrier in South Africa. And once again, South Africa has its ups and downs, but in the long term, I think it's a good place to do business.
And then just thinking about the competitive landscape and over time, just like the positioning of towers for your wireless carrier customers, are you seeing any impact or a conversation about how these LEO constellations might affect their interest for rural towers, whether it's in the U.S. or some of your emerging markets?
Honestly, it's hard to say for us. LEO is probably complementary to the fixed wireless network, just because, I mean, first of all, the antennas are expensive. So it's never going to be as ubiquitous as it is big. It needs to be plugged to the grid. So it's never going to be as ubiquitous as the handset. I think it's a complement in very rural areas in the US. We don't see that as a disruptor. You don't get the capacity. You don't get the cost basis. The cost per bit to deliver a bit over satellite versus terrestrial wireless is probably 100-500X. It's more a complement than a threat to the wireless networks.
Maybe shifting over to capital allocation for a few more minutes. So you mentioned earlier the potential pivot next year into buybacks. Do you look at that as opportunistic, where there might be moments to really leverage the financial flexibility that you have? Or do you see kind of going back to maybe the way I perceived SBA used to manage the balance sheet, which was you had a certain leverage ratio you wanted to be at. And if you weren't there because you had flexibility, whether it was because of growth in the business or there wasn't M&A, you just bought back stock. So by the end of that quarter, you got to kind of in that range that you wanted to stay within. So it was a very prescriptive way of managing the balance sheet and capital returns.
Where are you in terms of that opportunistic discretionary approach versus more of a programmatic experience?
First of all, I just want to correct. So I don't think I say we'll pivot towards share buyback. I just say it's going to be a mix of share buyback, dividend, debt paydown, and M&A. It's going to depend on opportunity, the level of our stock. So it's a totally flexible approach on this $700 million of extra capital. And then to me or to us, the leverage is an output. It's not an input. The input is, what are your cash interest expenses every year? And what are the opportunities on the M&A side? If there's another Millicom deal at 11 times EBITDA, 15-year contract, USD, single-digit growth for 0.2 turns of leverage, I think you'll spend the money and increase the leverage. I think I like the kind of where we are at 6.5 times.
I mean, if interest rates were to go up and we don't see any opportunity, I think we probably pay down debt, right? I want to highlight it's like a flexible capital allocation approach, and we want to be flexible and be able to react quickly.
When you spoke earlier about your outlook for domestic leasing growth, when you combine that with international, what's the right expectation for organic AFFO per share growth on an annual basis?
Yeah, that's the billion-dollar question. I think if you relook at it, you say, okay, the top-line growth rate about mid-single digit, probably mid to high single digit at the EBITDA line. And then if you really exclude, I mean, rate impact, I think it's probably high single digit. But then the billion-dollar issue is where interest rates are going to go in the future. That's why we need to be nimble and flexible. If interest rates stay higher for longer, we need to index towards delivering. If interest rates were to go down, I mean, there's no reason not to relever the balance sheet and do M&A or buyback.
When you think of the opportunities in front of SBA, what do you think is the most underappreciated part of your future financial opportunities when you look at how the market values you?
I think, obviously, we are highly dependent on interest rates. You could see the volatility in our stock when interest rates fluctuate. I think you need to realize that, and I've been in this wireless industry for 35 years. People have underestimated the growth in that industry for the last 30 or 40 years, 35 years, and you started doing voice at $1 a minute. Then voice is basically free today. Then you do text, then you do data, then you do video, now you're going to do AI, you do fixed wireless access. We saw that the wireless network would basically cannibalize the fixed network eventually. No one uses a landline anymore. I think no one expected that when that industry started 25-30 years ago.
So if you take a long-term view and even 10, 15 years with AI, you don't even know where this is going because, I mean, look how much video traffic goes through wireless network with Mark Zuckerberg and his AI glasses. You're going to have even more video flying over those networks. You have no idea what it means on the capacity on these networks. I mean, 20 years ago, the carriers had 35-40 megahertz of spectrum. And now they have 300 or more. And you see like another 100 and 120 coming from the C-block. You're going to see government spectrum. You're going to see blocks of 100 megahertz of spectrum coming to market over the next 10 years. And that's just going to drive more traffic. The cost per bit on those wireless networks has dropped.
It's almost like Intel and their production of how many semiconductors you could put on a chip. Same thing has happened in the cost per bit in the wireless industry. It's probably gone by over 1,000X over the last 20 years. And it's going to keep doing the same as more spectrum comes to market. And the problem for the operators is that it's very difficult to build new towers in those neighborhoods. No one wants to see a new tower coming up. We have that infrastructure. It's there. There's capacity on it. And we are there to support them. So I think it's a symbiotic relationship. And if you take a long-term view, I think I feel really good about our business. I mean, I always say after the Google search business, just show me a better business. It's 85% gross margin, 70% EBITDA margins.
The fixed costs to get into that business are so high, it's going to be very, very difficult to come and compete with us.
Marc, thanks so much for your time.
Thank you.