Welcome to the Goldman Sachs Community Opinion Technology Conference. My name is Jim Schneider. I'm the Towers Analyst here at Goldman Sachs. We're very happy to have SBA Communications and CEO Brendan Cavanagh with us today. Thanks, Brendan.
Yeah, it's great to be here, Jim. Thank you for having us.
Excellent. Brendan, maybe the company has transformed a little bit since you were last here. You sold some assets in some regions, bought some assets in LATAM , and domestic market activity has improved. As you sit here right now, in which part of the business do you think you have the greatest change at this point next year, and what do you think is going to catalyze that, and how are you investing behind the opportunity?
Yeah, it's funny. The things that you characterize as change, which were change, are really in the interest of stabilizing the business. That's why we took some of the steps that we did in exiting markets that we were subscaling and improving our position in markets where we otherwise saw an opportunity to stabilize things. I would expect that as we look forward to next year, we'll continue to do more of the same thing. It will vary in terms of what we do in each particular location, but the ultimate goal is to stabilize things. I think, you know, I'm sure we'll get to it a little bit later, but the biggest thing that's changed really is the makeup of the customer base and what's happening there. It's not just in the U.S., it's globally as well. We've seen consolidation and shifting of our customers.
For us to be in the best position in terms of stabilizing our position, it really is dependent upon having those strong customer relationships. A lot of our focus and investment, it's not just about investing dollars, it's also about investing time and energy. It's built around the types of arrangements that we have with our customers, the types of relationships, and aligning ourselves basically with the strongest customers in each of our markets.
How do you think of expanding your U.S. portfolio? What is the sort of private versus public multiple discrepancy from a valuation perspective right now? Are there any factors besides valuation that would sort of change your view on expanding that U.S. footprint?
Yeah, there continues to be a disparity between public and private asset valuations in the U.S. in particular. The public companies are obviously trading at valuations that are much lower than where private assets are trading. That has caused us to not do as many of those acquisitions as we have in our history because they just aren't at valuations that we see as important. Valuation remains a very critical component. It's not just about valuation, it's about quality for sure. Quality means the quality of the assets that we're buying, the types of contracts that we're inheriting from the seller, whether those have good protections in terms of future growth opportunities, those sorts of things.
I think what you'll see is us continue to be acquisitive where we can, but it will be very selective in order to match up that valuation with the highest quality assets we possibly can.
Okay. If you think more broadly about capital allocation framework, you've got a lot of options: dividend growth, annual gains, tower builds, as we just talked about, M&A, buybacks. Give us some insight as to how you think about the different return hurdles for each of those, including international, domestic M&A, ground lease purchases, deal to suit, and so on and so forth.
Yeah, so we have risk-adjusted return hurdles that we apply to every decision we make in terms of capital allocation. I would expect over time you will see a mix of all of those things as you have in the past because at a given point in time, some options are perhaps better than others. The dividend, we are the fastest growing dividend payer in the industry. I would expect that to continue, and so that always is the first priority. What it comes down to is this decision between buying ourselves and buying or building other assets. All things being equal from a return standpoint, I would prefer to add assets because I think we're the best, frankly, in the industry at integrating those assets, growing the opportunity set, adding value through that. I would like to do that as my priority.
However, the valuation, the competitive nature of the market today for assets has not allowed us the same number of opportunities that we would like. As a result, you see us doing things like paying down debt and buying back stock. I'll just be bluntly honest, today at the valuation that we're at right now, our stock is at a very attractive valuation. I know there are some drivers of it, but they're a little bit off in terms of their relative impact compared to what's actually happening. We have to be opportunistic around those opportunities when they present themselves.
Switching to domestic business for a moment, you said on your Q2 call that application volume and activity levels were strong. Site development is typically a leading indicator for your activity levels, also strong. Maybe start with activity. Is that continuation of the rural build that one of your top customers is doing and the customers kind of finishing up on their mid-band 5G deployments, or is there anything else going on in there?
It's a mix of both of those things. It's really specific for each customer what their focus is on today. Not all of them are doing the exact same thing, but they're all broadly focused on network quality improvement. Some, it's through expansion into areas that they previously have not had strong coverage. Part of the rural build that you're referring to has been a big driver of new leasing activity, and we're seeing that continue. Others that were a little bit further behind in terms of the mid-band spectrum upgrades, depending on the timing of when they got that spectrum in their hands, has affected obviously the timing of when they've deployed it and rolled it out. We're seeing others that are certainly upgrading for C-Band. We're also seeing just general densification.
I think the shift towards fixed wireless access in terms of our customers' subscriber growth has put strain on their networks in a good way, but that strain has required them to dig in and find ways to improve the network capacity that they have available. That is a driver, I think, indirectly of some of this activity that we're seeing.
Yeah. You also raised your straight line guidance, which is not part of your organic growth, but it's a pretty good indicator of work that's getting done. We believe that's related to AT&T, which you now have under an MLA. As we think about the work that's remaining for that customer, how far along do you think they're up? Are they on their upgrades of their tower sites?
Yeah, it is basically related to AT&T. I mean, we do have straight line changes that happen associated with all of our customers, but the biggest move in terms of the last quarter when we reported that was around AT&T. Basically, the deal is that under the master lease agreement that we have, whenever they touch a site to do an upgrade, one of the things that comes to us through that is an extension of the lease agreement. That extension creates an increase in straight line revenue or projected straight line revenue. We're seeing them pretty active on their C-Band upgrades primarily, and those upgrades are driving touches at our towers, and that's leading to those extensions. I would expect to continue to see that activity. They're about 50% of the way through it as it relates to SBA's towers.
I can't speak broadly to their network, but 50% of our sites that we have with them in terms of upgrades for C-Band deployments. There's still a ways to go there.
Okay. The U.S. carriers, I'd say, have upgraded certainly more than 50% of their sites with 5G at this point. Verizon has pointed to 80%- 90% of C-Band deployments finished by the end of this year. Given the size of your domestic business, carrier CapEx potentially flat to down in the next two years, what level of comfort should investors have in your ability to drive about 5% organic growth sustainably from here?
First of all, I'm not sure that the CapEx will necessarily be down. I know there are statements made at different times and to different audiences about that, but what we see on the ground is a lot of network needs. I think some of this concentration that's happening where you now are getting down to really having the three core MNOs in the market will drive that network competition even further. I actually expect that you will see the three MNOs here in the U.S. all remain very active over the next several years. I don't really worry about that too much. In terms of the growth rate, you know, 5% is a growth rate that is made up of three components, right? You have the escalator within our existing contracts that's roughly about 3%. That's 3% of that growth.
Then you have lease up through new leases and amendments that's contributing somewhere in that 2.5%- 3% range typically. Then you have churn. The churn is elevated today because you've got the overhang of some of the Sprint T-Mobile overlap that'll go away. We obviously have some exposures related to the embedded base of DISH revenue that we have today too. Once we get beyond those items, I would expect churn to be very, very low, probably sub 1%. That's what gets you back to that kind of 5%-ish range in terms of domestic organic growth. I do expect that to be the case, but I think it's a couple of years out because we have to get through this churn wall.
You may want to ask a couple of things related to DISH/EchoStar. Maybe in sequence, I think your EchoStar exposure is about $55 million annualized, if I'm not mistaken. Can you help us understand the contracts you have in place with them regarding their ability to churn? When do they renew, and how do you think about the overall churn over the next five years plus? It sounds like you think it may be slightly a near-term event given some of the things we'll talk about.
Yes, I mean, obviously there's been no specific conversation at this point, but they do represent, first of all, $55 million of annualized revenue for us. That's the total amount of revenue that we generate from them today. We are assuming that those leases will go away as they get to the end of their term dates. Our agreements were set up where every time they signed a new lease, it started a new term, and that new term was generally five years. They're all ending at different times. The biggest concentration of that churn we would expect to be felt by us in 2027 and 2028, where we would experience approximately $25 million in each of those two years. That's $50 million of the $55 million. There'll be a little bit, I think, that would be felt next year and a little bit that would follow on after that.
Assuming they just go away at the end of those terms, that's what we would see coming.
Very good. In terms of the spectrum sales that we see in the market in the last couple of weeks, can you remind us, for example, if AT&T has a 700 MHz antenna on your tower and they want to deploy a new 600 MHz antenna, would that be considered a colocation or an amendment? What do you typically charge for that kind of antenna configuration? Lastly, tied to that, are there dual band antennas that can accommodate both?
Yeah, so first of all, AT&T bought two primary bands of spectrum, right? 3.45 GHz and then the 600 MHz. On the 3.45 GHz, which is an existing band that they own, most of their equipment deployments already account for that. Obviously, if they have no 3.45 GHz on a site, they would have to spend the money to upgrade the site for that. Assuming they already have that, and they've said this too, and we believe this to be the case, they will not have to necessarily make a change. It will be a software type of upgrade. They will not have to add equipment. With regards to that band, we would not expect to see any change or activity. On the 600 MHz, which is a brand new band for them, they obviously have no deployments that reflect that.
Whether they put brand new antennas and radios at the site, or they swap out the 700 MHz for a dual band type of structure, either way, whether they're adding or swapping out and changing, there will have to be some equipment change at the site in order to account for that. The issue for us will be just what they're specifically doing at what specific sites, because we have a master agreement in place with AT&T that is somewhat holistic in nature. It's dependent. They pay us a fixed amount every year that they've grown into, and that provides them certain rights, capacity rights based on surface area and weight and those types of things.
Depending on what they need to do, what they already have at a site, how much does that impact, you know, what that site's going to look like after they make that change will affect whether there's an incremental monetization available on that or not. We'll just have to see where that goes. It would be an amendment. It wouldn't be a brand new lease.
Okay, very good. Separately, there was another transaction announced where EchoStar is selling AWS- 4 and H-b lock to SpaceX. I think there's been questions about whether any of that could be used for an increased use of sort of satellite direct to handset kind of connectivity and whether there's any kind of desire that SpaceX may have to become sort of an alternative carrier or in some kind of way. Curious how you would kind of handle the chances of that happening and the impact on your business, if any.
I don't really see that happening specifically. What I do see them offering is a solution for locations that today do not have viable economic solutions available to them. Sort of the deep rural areas, maritime, other places where it's very hard to reach through a traditional macro terrestrial network. It's either hard to reach or it's just way too expensive relative to the benefit of what you're covering as a traditional provider. They definitely provide a solution that is complimentary. I'm sure you've heard the word complimentary said many times by others in my industry and our customers' industry.
Yeah, sure. I think, you know, it's because it's not just a buzzword. It's actually the case. I mean, as we've evaluated ourselves, we've seen that it does provide a solution for something that doesn't fit well with what exists today. There's a reason that those places aren't covered today, right? If there was an economic value in doing it, you can be assured that people would have already started to approach that. I think it is complementary in that it provides that solution. I don't see it as displacing what we do because when you get to a more urban area where you're providing traditional coverage, there are many limitations, physics-oriented limitations that will prevent the ability to provide the kind of service that we're accustomed to today as end users.
I don't need to list everything, but the basics are, you know, line of sight that is necessary for a satellite service. That's affected by not only obstructions such as buildings, homes, trees. It's also affected by the speed at which the satellites are moving and the changing direction of the signal between the phone and the satellite is constantly moving. That shifts the quality of what can be provided. That's one issue. Plus, the spectrum that SpaceX now has, although significantly more obviously than they had access to before, is not nearly as much as the MNOs have. They're not competing with the same level of capacity available to them. Simply things like massive MIMO antennas and the ability to create spectral efficiency, that's degraded significantly in an environment where you're providing coverage from space. Their efficiency will be significantly limited.
All of that means that they can't provide the same level of service. Can you get the ability to call someone, to make a text, to do the basic things you need to do, especially if you're in an area where you're fairly remote? Absolutely. I think that's great. I expect it to be something that our MNO customers work on how to incorporate into their offerings.
Great. Final topic on this line of questioning, which is just UScellular's getting acquired by T-Mobile. Maybe remind us of the size of that business for you today, UScellular. How much of the revenue is coming from overlapping sites with T-Mobile, and sort of like what's the best way to kind of conceptualize that annualized churn?
Yeah, USc ellular only represents about $20 million of annual revenue for us. The overlap on T-Mobile sites is roughly $14 million of that $20 million. I would expect that those, similar to the DISH leases we talked about earlier, have various ending dates. Over the next five years, I would expect probably we'd lose $3 or $4 million a year. On average, they're pretty well evenly spread out if they're going away at the end of their terms. We'll have to see in the spots where T-Mobile doesn't have great coverage whether there's an incremental add from them to kind of replace that. For the most part, you should expect that it all kind of goes away. It feels like we keep talking about these different, all these customers that are going away and what they represent to us.
The good news is, from my perspective, everything that could possibly happen around these things has kind of happened at this point. We're kind of clearing the decks, if you will, with these guys that were sort of the extra add-ons around the edge. Of course, we monetized those while they were there. Going forward, the important thing will be the strength of our position and relationship with the three remaining incumbents. I think it's very, very good and the future looks good with those guys.
Maybe one good guy we could talk about is spectrum auctions. It seems like the SEC is a little bit more sort of inclined in this and the space is more inclined to kind of push that forward. If that comes towards the second half of the decade and sometime in the next few years, based on what you know about potential spectrum available for auction, do you see those bands as a basis for new tower deployments?
Yeah, I do. I do generally. I think the first band will be a fairly small one. That's the AWS- 3 stuff. I'm not sure that that will necessarily be a driver of incremental growth opportunity for us. I do think that the follow-on bands, even if it's CBRS, but certainly the upper C-Band ranges that they're talking about deploying, should all drive additional equipment needs at the sites. I do think it will be a driver of incremental growth for us. This is, you know, an end-of-the-decade type of thing because not only do you have to get through the auctions, you have to get the spectrum cleared and go through the process of getting it actually deployed. You're really looking at many years out.
One thing about this shift in the DISH spectrum sale is that it perhaps changes a little bit of the timing of when the carriers need to make those deployments because they were under the gun a little bit running out of spectrum. At least in AT&T's case, they're not now. We'll see what happens with the other guys.
Let's touch on the international front. The weak situation in Brazil seems to be kind of nearing a conclusion. Each of the carriers knows, I think, what the end state looks like. Maybe give us an update on what your carrier conversations are like in Brazil right now.
Yeah, actually Brazil, we feel really good about Brazil long term. You know, we have this shorter-term noise because of the Oi consolidation. Oi was the fourth carrier there. They essentially were broken up into and split up among the other three existing incumbents in the market, which long term, I think, will be good. We'll have three strong customers. The long-term prospects are very good for Brazil. First of all, as a market as a whole, there's a lot going for it. You know, there's a lot of potential. It's a 200 million population. The three carriers now are starting to shift customers from 2G, 3G networks to 4G and even 5G networks. That's actually driving ARPUs even higher. That dynamic is making the carriers healthier.
It's actually causing them, I think, to compete more on what we think is the most important thing, the best thing for us, which is network quality. As we start to see that happening, we see the government taking, you know, more of an active role, the regulator there, by pushing for faster auctions, more 5G spectrum, faster deployments of that spectrum as it gets auctioned, more restrictions around it that cause it to be pushed out faster. I think that's going to be a very good dynamic for us. It sounds like a little bit of a broken record, but we got to get through this churn stuff that we have from this consolidation. Once we're kind of through that period, the baseline of what exists in Brazil and the potential for it, and frankly, it's well behind the U.S.
in terms of the type of network deployments that we've seen. The opportunity set is even greater, I think, in many ways in Brazil than it is here longer term.
Yeah. Brendan, you closed the Millicom or you announced the Millicom acquisition last fall. Part of it has already closed. Can you remind us of the rationale behind that deal, and how has the performance been in the part that's closed so far?
Yeah, so the Millicom, for those that don't know, we bought towers. We haven't closed on all of them, but it's about 7,000+ towers from Millicom, who is the leading wireless MNO in Central America across the region. It added to our roughly 3,000 or so towers that we had in the region already. We did it for a variety of reasons. I mentioned earlier that our goal, and I think the first question you asked was around some of the bigger picture things that we're focused on. Stabilizing our results and stabilizing our operations is a huge part of what we've been focused on. This deal helped us do that across that market. It put us in position as the leading tower company in the entire region, and I think we'll forever be that. We are aligned with the number one carrier in that region.
We have a very good relationship with the number two guy, which is Claro, and we're starting to see a lot of activity from them. It's U.S. dollar denominated, so there's no foreign currency exposure. The long-term lease agreements, 15-year lease backs with other terms that we found very favorable, including CPI escalators. The opportunity set there is very, very good. Plus, we did all of that at a price that was attractive, accretive. That's great, right? I mean, we're able to immediately create a positive financial impact day one and then have this opportunity to continue to see it grow and stabilize and strengthen our position. If we could do more deals like that, we would like to do that. Unfortunately, they're not growing on trees, but we are trying to find those opportunities, and I think it will be something we're pleased with for a long time.
Great. Maybe give us a sense about how large you like to be in the LATAM market overall. Is there a point where you sort of say, "Hey, that's my target threshold. I don't want to exceed that," either for LATAM or international more broadly?
Yeah, I mean, there's not a specific target because it depends on the individual opportunities. We're predominantly a U.S. tower company, and I think that will not change at any point in time. There's a general governor in there. We have historically talked about limiting our non-U.S. dollar leasing revenues to a maximum of 25%- 30%. We're well below that today, so there's plenty of room there. I think that's still probably a pretty good level. Each market is its own special situation, and I think it would be not appropriate to just say, "Hey, there's just an absolute threshold." Overall, the U.S. is where we are most focused, and it's where I would expect that we will continue to have the majority of our business located.
Okay. Maybe a couple of financial questions. You know, this Sprint and other churn events we just talked about is kind of dragging the next couple of years, but how should we think about, or how should investors think about the growth algorithm for the company over the medium and long term in terms of X amount of top line growth driving X amount of EBITDA and AFFO per share growth in terms of drop-through?
Yeah, so I mean, long term in a steady state environment, we talked about the leasing revenue in the U.S., that 5% that we discussed how you get there before. That should drop down to a higher growth percentage, obviously, for EBITDA, and then even more so when you get down to AFFO. However, AFFO is, of course, impacted in the nearer term, the next several years, by refinancings that we need to do. We have a high interest rate, high relative to our historical levels. In fact, our next three maturities, all three of those instruments have a one handle starting the coupon. They're all sub 2% debt. That's great that the prior CFO did a good job on that, I guess. The issue now is, though, in the current environment, they're all going to be refinanced at obviously much higher rates.
We know we have this refinancing headwind that will affect what the AFFO growth looks like. In a normalized environment for interest expense, which eventually there will be, you know, when you deal with these two things that are kind of our biggest negative right now, the churn and the interest rate refinancings, outside of that, I think we're going to be in that mid to high single digits growth in AFFO per share. We should be able to do that long term. There will be windows of time where interest rates will again be a tailwind too. It may not be in the next couple of years, but down the road, these things kind of ebb and flow. I think you have to kind of take that out and say, operationally, what are you able to do?
I think we're able to do easily a mid-single digits growth in terms of the cash flow we're generating per share.
If you were to refinance that debt today, what kind of, if it was any kind of rough drag, about how much the interest expense step up would be the next couple of years?
Yeah, I mean, we're ballparking based on the timing of the maturities and where we think rates will be on the refinancings that we're probably going to see somewhere between $40 million- $60 million each year increase for the next four years in interest expense. That's about a 4% or 5% jump roughly each year in the cash interest expense. That's what we're facing. Obviously, it could change a little bit depending on what happens with the rate environment, but it's definitely going to step up from where it is.
From a new market perspective, as you think about potentially investing in a new market, either M&A or organically, what characteristics do you kind of scope forward to make it attractive to you? Is there an ideal number of carriers in a market? Obviously, there's a perfect number at some point, but maybe when you consider ever entering a market which has got a large number of carriers, even though it may be fast growing, given the potential risk of consolidation and bankruptcy, etc., that we've seen in the past?
Yeah, I think we would, it depends on how we entered it. What position are we taking in the market upon the entry? What's the makeup of the portfolio that we're adding? What carriers is it aligned with? Certainly, one thing we would not do, and this is learned over time, is we would not align ourselves very heavily with the weaker of the MNOs in the market because they're most likely going to be the one that's not there when the consolidation comes. That is the place we don't want to be. We had a little bit of that happen to us in Brazil with Oi, and we have to manage through that. As we look forward, we learn lessons from that.
I think if you can align yourself with the strongest carriers in the market and you can ensure that you're relevant to them by having a strong position in terms of where you sit in terms of relative positioning of tower companies, then there's still opportunities and we certainly would consider that.
Yeah. Maybe to close, you know, we talked about some of the sort of one-time churn events we've got in front of us still. If you sort of step back, you know, your core carrier activity levels are improving. The overall business is on a better trajectory and better footing, exposed items. If you think about the go-forward trajectory, what are the items that you think investors are overlooking today about the SBA story? What's most underappreciated and what should people be thinking about in terms of their investment in SBA?
Yeah, I think, first of all, we end up, understandably, of course, being caught up in this public company bias. We're a public company, and so things tend to get focused on a quarter to quarter or even year to year basis. That's natural, of course, but the nature of our business is such that we have very long-term agreements. We're entering into 30-year, 40-year agreements, very long-term steady cash flows. That's the prism through which we look at how we manage the business because we're not just here for the next quarter, we're here for the long term. I think people don't really appreciate, they may appreciate the stability to a certain extent, but I don't think they appreciate how much the carriers actually have to do still. How much is still needed in terms of wireless network deployments.
All the advent of technologies, all the changes that take place, it all drives the need for more capacity on these networks. Our ability to kind of sustain that growth, it's been, I think, clouded by some of this churn stuff with carriers that frankly probably weren't going to be around anyway. I mean, anybody that looked at it, you know, kind of with cold hard facts would say, odds are they're not going to be there long term. That's what's happened. It's sort of cleaning itself up. The guys that are there providing the core service, they have a lot to do. They're going to have a lot to do for a long period of time. There's a reason that they've been so desperately pushing the government to auction more spectrum to make it available.
It's because they know that they have capacity needs that they have to figure out how to meet. It's not because they just want it to keep on the shelf. It's because they know they're going to need it. That need will drive the need for incremental capacity in the infrastructure that we provide. I think we feel very good about the long-term stability and steadiness of what we offer and our ability to continue to grow our cash flows over an extended period of time. I don't just mean two or three years. I mean 10 years, 20 years. This is a very long-term business that's got tremendous power. Ultimately, shareholder remuneration will become a greater and greater part of that through both buybacks and the dividend growing. As we continue to do that, it's just going to be kind of a quality component of anybody's portfolio.
I think with that, we're out of time. Brendan, thanks for being here.
Absolutely. Thank you, Jim. Appreciate it. Thank you all.