Well, good morning. For those of you online, welcome back to Citi's 2023 Communication, Media, and Entertainment Conference. For those of you I haven't met, I'm Michael Rollins. I cover the communication services and infrastructure categories for Citi. Before we get started, I'd like to mention that we do have disclosures available at the registration desk and on the Citi Velocity page from which you are streaming the audio. We're also gonna incorporate your questions in today's discussion. If you're in the room, we've got the microphones, and you can turn on the microphone light, and we'll try to get to you as soon as we can. If you're streaming, there's a question box. You could enter your questions in that way. Finally, we're continuing the tradition of using live audience surveys that are completely anonymous.
We're just aggregating the results, and that can be accessed in the room. There's placards around that should have the ability to access the surveys as well as online. A box will come up with the questions that we're polling on, and you can use your connected devices for that. With all those details out of the way, I'd like to welcome back to the conference Brendan Cavanagh, Chief Financial Officer of SBA, as well as Mark DeRussy, Vice President of Finance. Brendan, Mark, thank you both for joining us today.
Yeah, absolutely. Happy to be here, Mike. Thanks.
Great. Well, you know, maybe to kick us off, you know, maybe you could share with us how you're thinking about the strategic and the operating priorities for 2023 and how they may be different than, you know, what you're looking to accomplish in 2022.
I think, well, first of all, they generally are very similar to what they've been the last few years. I think you usually ask me this question first every year, and it's usually about the same answer, and that's probably still the case in the sense that, you know, our primary focus is on our existing assets and trying to maximize growth on those assets with our customers being as supportive a partner as we can with the carriers and helping them to achieve their network goals. Then really just using the strength of our balance sheet, our capital position, and allocating capital in a way that provides the best return for shareholders. That obviously generally has been our approach in the past, continues to be.
In terms of differences, of course, we're in a more challenging macro environment, cost of capital is a little bit higher. Probably has some impact on where return thresholds need to be for allocations of capital, so may influence decisions that we make, may influence where we lever the business a little bit. Generally speaking, the priorities are the same. It's really just a matter of reacting and incorporating some of the current macro environment factors.
Great. Well, I think we'll come back to that to delve in further. Before we get there, I wanna throw out the first survey question to our audience and also, maybe wanna drill down on some of the demand environment, and then we'll come back to maybe the capital allocation. The first question we're gonna ask our audience today is, what will domestic organic tower leasing revenue growth be in 2023? We're gonna exclude merger churns. Take T-Mobile...
Mm-hmm.
...out of this picture and just think about what that organic level of growth looks like. Our choices for our audience today is less than or equal to 4%, 4%-5%, 5%-6%, 6%-7%, or over 7%. While that result kind of brew up to the surface, you know, one other, you know, question, just at a high level is, you know, how you're thinking about the portfolio growth. I think in the past, you've had this annual portfolio growth of 5%-10%. Is that still the target for SBA? Do you see any shift in the focus for that?
Yeah. I mean, it's still a goal. I don't think it's an absolute have to have, it never really has been. It's been a target that we've set kind of internally. For instance, in 2022, we're going to actually be way beyond that number given a couple of the large deals that we did this year. It, it will really come down to what are the financial returns associated with those investment opportunities, and if we can find opportunities. I think there's enough opportunities out there that it's certainly possible to do. It's just a question of where price points end up, and we'll see how that shakes out. We'll certainly build a number of sites that will add to it.
In order to get there probably has to be some meaningful contribution from acquisitions, and that's really kind of the wild card.
Mm-hmm.
Yeah, it's an internal objective that we have. It's still our intention to hopefully grow the portfolio 5%-10% this year. If we don't, it's really because we just didn't see something that met the right financial hurdles.
Moving to the domestic business, you know, can you remind us, you know, based on where the guidance is, what that organic growth level is in 2022 in terms of, that organic leasing growth without T-Mobile churn? What led to you raised the guidance a little bit, for the year, which implied a greater fourth quarter. What led to some of the strength exiting, you know, 2022 in terms of domestic leasing?
Well, you know, the carriers have been very active, in particular T-Mobile in deploying their 2.5 spectrum, signing a lot of new agreements, a lot of amendments with us throughout the course of the year. We also had contributions from DISH, who was very active late 2021 and into 2022 in signing up new lease agreements. Those new agreements that have been signed have started to hit the financials and start to impact our financial statements much more at a greater pace in the second half of this past year. I would expect will continue into the first part of 2023. That increased throughout the year in terms of the reported growth contributions throughout 2022 has been driven by activity that started to happen in late 2021. There's sort of a delay.
We always talk about it, but there's kind of this delay between signing new agreements and when they actually start to impact the financial statements. What's been happening here in the second half of the year is driven off of activity that largely took place in the first half of 2022. Hopefully I don't know if I answered your question or not, but we've seen a lot of growth based on the basic things that you look at our customers doing all network, 5G-related deployments, DISH brand new network, T-Mobile 2.5 rollout, AT&T and Verizon starting to kick in with C-band deployments.
In 2022, just remind us, the organic site leasing growth for the business?
Yeah. I believe, for domestic...
Yeah.
...we're talking about, I believe was 7 on a gross basis, was in the high 7s, I believe. You'll have to check me on that, but it's in that range.
Mm-hmm.
Obviously some churn impact, about half of that churn impact coming from the T-Mobile, Sprint merger. The net rate was around 4-ish%. But if you take out the Sprint T-Mobile, it's probably north of 5.
Yeah. We're using that as a springboard. Let's see what our survey responses came back with. We have 15% at less than or equal to 4. This is for 2023 organic growth, excluding the merger churn. 31% at 4-5, 38% at 5-6, and 15% at 6-7. You know, you mentioned that you expect the strength in the first half to continue. Curious, you know, if you have any thoughts on, you know, what our audience thinks in terms of organic growth. Why would the first half of 2023 be significantly different than the second half of 2023 in terms of the growth?
Yeah, I don't... I mean, it's interesting the way that the results came in sort of a bell curve spread out there. I think it wasn't really concentrated in any one area. I think that the uncertainty, to the extent there is uncertainty, really is related to the second half of the year. To your second question there, we have greater visibility into the first half of 2023 'cause obviously it's heavily driven off of what we've done here in the latter part of 2022. Less visibility into the later part of the year, although we have backlogs that look very healthy. I guess really the answer is dependent upon timing with our customers and their focus, their continued focus on deploying their 5G, C-band deployments, in particular from AT&T and Verizon.
I don't really look at it as, you know, is this something that's gonna happen? We're confident it's gonna happen because the network needs are there. It's really just a question of timing. I don't have a clear answer for you. I obviously haven't given our outlook yet, which we will do next month. At that time, I think we'll be able to comment on it a little bit more specifically. You know, there's potential for the second half of the year to be at the same level as the first half. There's also the possibility that it's less. It really is just gonna be a function of timing, of activity with the major carriers.
It really is, just to summarize and ask, it's a question of just your comfort in the visibility when you gave those comments on the third quarter earnings call but the indicators.
Yeah, the indicators are there. Things are good. I mean, look, maybe what I can say is that, I would expect that 2023, in terms of gross dollars added from new leases and amendments, which is a number that we give...
Mm-hmm.
...which was, we put 67 was our projection for 2022 last quarter, $67 million. That I would expect that we will be able to be at least at that level for 2023. If we're at that level, let's say it's the same number for next year. Purely hypothetical. If it were the same number next year, while in 2022, it built up during the year. In 2023, it would probably be trending down throughout the year if it were the same. If it's to be, if the growth is to be maintained at a higher level throughout the year, obviously we'd be able to produce a better result next year, I think.
As carriers are getting through the mid-band cycle, are you starting to see any incremental interest in densification or co-location to kind of follow these, this augmentation of equipment on existing sites?
We've seen some uptick in the number of brand new lease agreements, new co-locations that have been signed, particularly with T-Mobile, who I think frankly is a little bit ahead in their 5G deployments, it's probably natural that you'd see that from them first. Densification, I think it's a little too early to say that we're seeing that. I think there's still a lot to do in terms of the overall upgrade across the existing sites. We'll see how that plays out over the coming year.
In terms of new entrants, you know, what are you seeing in terms of DISH and cable or, you know, other parties that might be interested in deploying their own capacity? You know, what are you seeing on that front?
Certainly DISH was a very meaningful contributor last year. I expect they'll be a meaningful contributor to the revenue added this year as well, just based on what they signed up last year. Even if they didn't sign anything else up, they would be a meaningful contributor this year to the growth. They have obviously significant regulatory deadlines that they're working towards. I expect them to continue to be a meaningful contributor to our business in terms of new leasing growth. In terms of other parties, you know, the thing that DISH has that maybe the others don't have is material spectrum holdings, that really is the primary driver in terms of new leasing activity opportunities. That's why so much of our growth obviously comes from the existing carriers plus DISH.
You know, when you talk about cable or others, I think there's some opportunity there. We have regular conversations with those folks, but the lack of their own material spectrum holdings makes that difficult, I think for it to be too material, unless, of course, they partnered with somebody else or there's a change in the approach.
You know, one of the reasons we were thinking earlier just about organic growth ex T-Mobile churn is because as it has in other cycles like this, it kinda moves around, you know. Curious, you know, how you're looking at the predictability of T-Mobile churn going forward now that the Sprint network is shut down, does that mean that the delays in the decommissioning kinda go away and should be more predictable, or is this something that continues to move around?
Yeah, I think it generally should be predictable. We actually felt pretty good about our predictions, which were predictions based on our own market intelligence, communications with the customer, but really our own view on when are the leases up, what progress are they making in terms of work that they're doing. It's turned out to be a little bit more delayed. This obviously we've lowered the impact to 2022 as we've moved through the year, which is really just a timing thing. I think now as we get into this year, 2023, and particularly in the next year, it'll start to firm up a little bit more, and they'll probably be able to to move off of sites more efficiently at the time that those leases are actually up. I don't know for sure.
Things happen, and that, frankly, is not completely within our control and, in fact, it's very little in our control. It's all in their control as to what they need from a network standpoint. We'll have to see as we get a little bit closer. The overall view on Sprint T-Mobile-related churn is still pretty much the same. It's just a question of when does it happen.
Can you remind us the base case cadence that investors should now expect...
Yeah.
...for the next few years?
In 2022, we expect the full year impact to be about $20 million of churn from that. That's what's embedded in our guidance numbers that we've given. For next year, it's probably now closer to $25 million-$30 million. That used to be a little bit lower. It's shifted higher really because 2022 has ended up lower than we thought. In 2024, we would expect the impact to be somewhere in the $10 million-$15 million range. The big years for us are really 2025 and 2026, and each of those years are probably $45 million-$50 million of churn impact. That's. There'll be some residual that's left after that, but the majority will be done at that point.
The residual kinda gets rolled into the annual usage.
Yeah. I mean, there might be, I think, if I remember correctly, 2027 is something like 10-15, and I'm not sure we would probably even talk about it after that, so.
You know, when you think about your business model and the way that you structured agreements more at the location-specific level versus the holistic level, should investors expect maybe a little bit more friction churn but better returns over time? Are there other pluses and minuses that investors should think about in, you know, the way that you're managing the portfolio maybe versus some of your other competitors?
I think well, first of all, we do have some master agreements in place. Actually, we have a master agreement in place with Verizon, with DISH, and even with T-Mobile. AT&T is really the only one that we don't have an agreement with. Those agreements, I think the main difference is not so much having a master agreement as it is maybe the structure. For the most part, our agreements have been structured where they're still tied to activity levels for the carriers. As equipment is deployed, there is, you know, an associated increase in leasing revenue growth for us, and if it's slower, it would be lower. It does create some level of certainty in what's gonna happen and some minimum commitment, those sorts of things.
That, that's probably the primary difference from what you see with some of our peers, at least in the past, where they've had sort of a it's the same no matter what the activity level is. What that means is that, in periods of time where the carriers are more active, I think we tend to see maybe a little bit more relative to others. In periods where they're less active, we see a little bit less, perhaps. Overall, you know, hopefully we've done better. That's the goal. We're trying to approach it like, any landlord with, an exclusive asset that, is in need, that when there's demand for that asset, that you monetize it at that time. That's the approach that we take. I don't know that there'll be massive changes, in terms of its impact.
In the case of churn, you mentioned churn at the beginning of it. That's not been a big factor for us. I think others have done some things where they've kinda staggered out churn. For us, we've kind of just let it go as it comes. I mean, at the end of the day, the carriers, if they don't need a site, they don't need a site. It's really you're just playing a little bit of a game in terms of timing and how you report it. Ultimately, if they don't need the site, the lease is gonna go away. We haven't spent a lot of time trying to change that.
Okay. For our audience here, if you wanna ask questions, just push the button in the microphone, it'll light up, and we'll get to you. I'll throw out the second survey question, but before we get to this topic, we'll probably discuss international first. The second question is, what is the best priority for capital allocation after internal development in the build-to-suits over the next 12 to 24 months? The choice is repurchase shares, accretive acquisitions measured by AFFO, accretive acquisitions measured by tower gross profit multiples, capital recycling and net debt leverage reductions. We'll see what our audience comes back to. While we're doing that, maybe just moving international. What's happening, you know, in terms of international markets, Latam, Africa, what you're seeing in terms of the growth profile heading into 2023.
Well, we had a very good 2022 in terms of organic leasing activity in our largest market, Brazil, our second largest market, which is South Africa. We obviously added assets in a couple of new markets, either in the year or right at the end of last year, in Tanzania as well as the Philippines. We started a build-to-suit program there. There's been a lot of activity. It's all been generally pretty positive. We've had certain older markets of ours where we've seen some amount of elevated churn, largely due to either consolidation of carriers or, you know, in the case of Digicel in Panama, for instance, where they're leaving the market. Things like that.
I would say, you know, the actual activity levels have been pretty strong, as we've gone through 2022. As we head into 2023, you know, we have pretty good relationships across the board with the carriers in the various markets that we operate. A number of the markets have very solid opportunity in terms of network need. I think we'll continue to see significant investment in a number of those markets that will continue to drive organic growth. You know, we feel pretty good about our positioning. Every market's a little bit different. Some are better than others. We're in 15 different international markets. You know, there's a different story for each one.
The largest, being Brazil, you know, outside of which you may wanna ask me about the Oi merger, you know, that's a major, event down there. Outside of that, we've seen the carriers actually be pretty active, at least up until this point.
Yeah. So speaking of which, how should investors think about consolidation churn, particularly in Latam and Brazil in 2023? Is this something that also has multi-year ramifications that people should be mindful of?
In the case of Brazil, which is probably the largest, because it's our largest market, you obviously have four carriers combining into three, with Oi now being absorbed partially by each of the other three legacy customers. Under the existing agreements as they are, in terms of churn exposure, you know, we have a number of years left before we would start to see that. You know, we're trying to work with the customers. We're in conversations with some of the other carriers there about if there are arrangements that could work, you know, equally well for both of us, help them achieve some of their synergies earlier, but maybe give us some other benefits that we would not otherwise perhaps get.
That is really all I can say about that at the moment, 'cause those conversations are ongoing. To the extent that there was something worked out with them, you know, it's possible to see churn, some churn pulled earlier, as a result. We kind of expect that, we're looking at somewhere in the $25 million-$30 million exposure range from the Oi merger over time. How much of that could happen this year versus later years really is dependent upon conversations we're having with the carrier. It's, it's too early for me to say, but...
Does that 25 to 30 include the recent acquisition you did in the market, or is that separate from that?
Yeah. The total impact from Oi churn on that acquisition is probably about $3 million. That's probably additive, but would get rolled into any conversations we would have with the carriers, obviously.
You know, when you think about managing through merger churn, whether it's in the United States or whether it's in a market like Brazil, does the higher rate environment we're in increase your interest to get the cash in sooner and come up with a deal where they could pay you more upfront and wash this thing away, that that cash is more valuable to you today? Or does it lessen the interest and you'd just rather get it, you know, over time on the prescribed contract?
Depends on the situation. If they're not gonna be deployed at the site, and you're gonna get the same amount upfront, perhaps you just take the money upfront, right? If there's the opportunity, though, through them staying at the site that long-term things change and they actually need to stay there, obviously it's better to continue to have them pay you out. Unless you have an alternative use for that space at the time, obviously you wanna have it free and available to lease up to somebody else. Assuming that's not the case, I think we tend to prefer to have the ongoing relationship last longer, all things being equal, because it tends to lead to, I think, better long-term results.
They tend to need stuff that they thought maybe they didn't need later, and you're more apt to hang on to it if it's there.
Is there anything else about the international markets at this point that you feel are underappreciated by investors for SBA?
That are underappreciated. Well, you know, I think the need for wireless investment may be sometimes a little bit underappreciated, and the fact that in many of these markets, the wireline options and solutions are so limited that wireless is actually more critical to some degree in some of these markets than it is even here. That criticality means that the underlying infrastructure is that much more important to the entire functioning of that society. I think if you thought towers were an important bedrock in the U.S., I think they're even more so perhaps in a number of these international markets.
It gives us great comfort in the long-term stability of the businesses that we're investing in in these markets and the sites that we're building, because it really is critical to everything else that goes on in many of these places.
Are you using inflation-based escalators in these markets? Should investors think about that as like zero-calorie revenue, so it just gets offset by the change in costs with inflation? Or is there a potential net benefit to the bottom line from inflation-based escalators?
In all the markets that are not U.S. dollar denominated, I believe in every one we have CPI-based escalators. That's generally the way that it's done. That's market practice across most of the international markets. There's definitely a benefit as inflation has been high. We benefited from it this past year because the margins on the business, the operating margins are so high. While there is some impact certainly to expenses, our expense base is fairly small as a percentage of the revenue base, there's definitely a benefit. In places like Brazil, which is our largest international market, the ground leases are passed through to the carriers. Even though the ground rents may increase with inflation, it's being passed through to our customers. Actually there's no cost impact there.
Really the main cost impacts to us are outside of ground leases, are overhead costs, personnel, that sort of thing.
Mm-hmm.
There's not many other expenses.
Moving to some of the questions about capital allocation, let's go to the survey results and see how our audience feels about the best priority for capital allocation after what we talked, what we mentioned as internal development build-to-suits. 9% repurchase shares, 36% accretive acquisitions for AFFO, 0% for deals measured on Tower Gross Profit, 0% for Capital Recycling, and 55% net debt reduction. And you kinda teased this out in the beginning that, you know, you're thinking about leverage. Can you share with us how you're thinking about leverage for the business maybe differently over the past few years?
Yeah. I actually don't think that we're thinking about it differently. I think that the environment is a little bit different. Our approach has been for those of you that have been around SBA for really for as long as we've been around, it's really not changed that much. We've had the same leverage target probably for the last 15 years of 7 to 7.5 turns, net debt to adjusted EBITDA. We felt that's been the right place. It's been higher leverage level than our peers, but we felt that the opportunity to invest that incremental capital was the best thing for shareholders, and that's why we've done it. That remains the same today.
The real key in all of that is the relationship between that cost of debt and the return potential from the assets that you're if it's assets or stock or whatever it is, the investment that you're making with that incremental capital. What we haven't seen totally adjust to this point is you've got certainly the cost of borrowing going way up, but the return thresholds have not adjusted. Because of the competitive environment, some of the other parties that have brought a lot of cash maybe are using yesterday's balance sheet to fund investments that they're making. We haven't necessarily seen an appropriate recalibration, I think, of price points. Maybe it's just sellers not being able to yet come to grips with lowering the price where they're selling assets.
If that relationship doesn't shift, as long as that relationship stays consistent, we can absorb the higher rates. Frankly, we were levered at these levels at higher levels with higher interest rates in our history, and it worked very well. Of course, the price points for the investments we were making were much lower at the time. If you don't see that adjustment, then the appropriate thing is to obviously let leverage come down. We do de-lever organically very quickly. That will naturally happen over time if we don't see places where we can invest and actually make a nice return given the cost of the capital.
If we de-lever, I would say it's not necessarily a shift in strategy, but what it does do is it creates capacity and flexibility for us to be more opportunistic if the opportunities present themselves down the road, if you see a shift in the macro environment where either pricing comes down or the cost of borrowing comes in, and we can adjust accordingly and go back to something similar to what we've had before. The approach is very much the same. The environment has shifted. If we need to de-lever as a result of that shifting environment, then we're more than comfortable doing that, because at the end of the day, our focus is on shareholder return. It's a financial analysis more than it is anything else.
With that analysis, is there a trough that you wouldn't wanna go below? You know, maybe you could share with us or remind us at the end of the third quarter where the net debt leverage was and maybe where it could trough out if this environment persists.
It's a little hard to call an exact bottom. It'd be hard for me to imagine it being more than a turn lower than it is today. We finished the third quarter at, I believe, 6.9 turns. We expect that we'll be slightly higher than that probably at the end of the year because we did the GTS deal in October, so that was after the end of the third quarter. We'll probably be somewhere around 7 x. I would think at year-end. You know, given how much cash we produce, given the growth in the EBITDA, you know, if we're not actively investing in any material way, you know, we can easily drop a turn off of that in the course of a year.
Do I expect that that's what we'll do? Not necessarily. I mean, it's frankly not our desire. We would rather be active and be investing in things that we think are value-added over the long term. I think, frankly, we're very good operators and can add value there. You know, that may not be the opportunity that presents itself, and if it's not, then you'll see leverage come down. It's hard to imagine it dropping much more than a turn, but we'll see where the environment takes us.
As you think about the decision set and the discussion, you know, for the executive team and the board, you know, how do buybacks come into the equation? Is this something where you'd rather be patient and watch first what happens in the private markets? Are you watching the public markets and your own stock price? How should investors think about the framework to decide whether SBA should be buying stock back?
Well, I can't tell you exactly how we make the decision. We do certainly play all those things against each other that you're mentioning and try to choose what we think is best. You've seen us be very active stock repurchasers over the last five years or so, it's been done largely in opportunistic moments. I would expect we'll probably buy back some stock this coming year. It'll probably be at points where we see it as an opportunistic purchase. At the moment, you know, we have a fairly large balance outstanding on our revolving credit facility. We have a place to put incremental cash immediately that's easy for us to get some immediate benefit from in paying off that debt. You know, we don't feel rushed to do that.
We'll see, you know, whether opportunities present themselves or not.
Then just making, maybe taking a step back, you know, back to the domestic business. We talked a lot about 2022, 2023. How would you rate your longer term visibility? Maybe we'll ask both for domestic and international. As you look at the growth prospects for your business, how do you rate that visibility?
I would say it's relatively strong in the first part of the year, this coming year. As you get later on, I think long term, the visibility is decent. It's what I mentioned earlier, the timing of it is, I think, what's a little bit hazy, because what you can look at is you can see the carriers are holding a certain amount of spectrum that they spend a lot of money on. They need to deploy that spectrum. They have certain windows of time in which to do it. The deployment of that spectrum drives a need for incremental equipment on the tower sites, which is a value add to us, helps us to grow revenue. When you see that overall picture, you know that it's there over a multi-year period. It's just how much do they do this year? How much do they defer?
Each carrier, I think, is in a little bit different spot. I mean, some of our success last year was because one carrier in particular was very aggressive and moving very quickly, in T-Mobile, and so that helped elevate that. Because of the design of our structure of our agreements, it again follows the activity levels of the carrier. If you have all the carriers starting to be active at the same time, that's when you see us have our best years. If it's only one or two carriers, that doesn't necessarily play out that way. It's a long-winded answer, but really what I'm saying is I feel very good about our visibility longer term. The individual components and how it breaks up into individual time periods is where the uncertainty, I think, lies.
Our last question on AFFO per share growth. As you think about the opportunity to grow the per share AFFO, what are some of the pluses and minuses that investors should be considering, you know, that are maybe, you know, unique to the environment or, you know, you got the macro, you have some of the consolidation churn that you were describing? What are some of the pluses and minuses as people are thinking about the growth for this year that, you know, they should be considering?
Well, the pluses are obviously the organic growth opportunity. The carriers have done a lot leading up to it, which will help this year's results. Obviously, the more they continue to be active will continue to help it. Churn is of course a negative. The question, it could be relatively a positive, I guess, if it's less this year than expected, but over time, it's obviously the big overhang. You know, the other factor is cost of debt. Now, as you look forward to 2023, we have no financings. We just completed a refinancing that has a bit of a negative impact because it was at a higher cost than the debt that we paid off late last year. That's all known now and disclosed, so you can figure that in.
We have no maturity dates until October of 2024, there's no immediate need to be in the financing markets this year, you should kinda know where the interest shakes out. Those are probably the main inputs. There are other factors that are probably smaller. Services was very, very big this year. You know, our services margin contribution, you know, probably won't be quite as high this year, but still healthy, I think. Those things are around the margins, but it's the main issues that we seem to talk about every time we're together. You know, leasing activity, interest rates, churn. It's always the same things.
Well, Brendan, thank you so much for sharing your time with us today.
Sure. Absolutely. Thank you for having me, Mike.
Thank you.
All right. Appreciate it.