All right. Good morning, everyone. I'm Ric Prentiss, Head of Telecom Services Research here at Raymond James. Welcome to the 44th, my 27th Institutional Investor Conference here at Raymond James. We've got a full lineup between Frank and myself, tower companies, satellite companies, telcos. We're gonna kick it off with SBAC today. Brendan Cavanagh, CFO, soon to be CEO, end of this year. Brendan will be moving on up as Jeff Stoops moves on to Chairman of the Board. Brendan's gonna spend a few minutes on SBAC, give you kind of the picture of who they are, then we'll do a fireside chat. We'll save some time at the end for some questions. Then, of course, we'll have the breakout session down below. Brendan, welcome. Thanks for coming again.
Great.
I'm glad it's not March of 2020. It's.
That's right. No, no Corona beers this year, Ric. Good morning. It's nice to see everybody. This is just a quick, couple minute overview on the company. I know Ric wants to get to some questions, we'll do it here pretty quick. Just the basic background on SBA is we were founded back in 1989, primarily as a wireless services company, transitioned into tower ownership around 1997. We're one of the three large public tower companies based here in the United States. We do have operations, although primarily in the United States, we have towers located in 16 different countries around the world, primarily in the Western Hemisphere, but we do have a couple of markets in Africa and have recently started building towers in the Philippines.
The company is organized as a real estate investment trust. We transitioned to that structure back in 2016. As you'll hear in a second, our business is largely a real estate type of business. We have today over 39,000 sites, and we are traded on the Nasdaq exchange. The basics of how the tower business work, and there's actually usually a picture there, but I guess we've cut it out. It's basically a landlord-tenant arrangement, just like any traditional real estate. In our case, we own the tower steel that's located at the location. The wireless carriers own the equipment that is put on the towers. They rent space from us on the tower and at the base of the tower in order to provide their network services.
Long-term contracts, typically five to 10 year terms, but with multiple renewal terms that extend out 25-30, sometimes 50+ years. Most of our leases here in the U.S. have fixed escalators, where the rents increase annually, typically on average between 3%-4% per year. One of the beauties of this business is that it's challenging to move sites. As a result, you have very low churn. Other than situations where you have a combination of carriers where they're merging and consolidating networks, there's very little turnover of tenant leases. Once they install at a site, they rarely leave. The expenses at the site are also very low. The margins, as a result, are very high. You can see here that this says we have approximately 81% tower cash flow margins.
Those are basically our cash gross profit margins at the tower. That's really because as you add incremental revenue through new leases and amendments, there's very little change to the expense base. It's almost 100% margin in each case. Our EBITDA margins are approximately 68%, and really they're only that low because of our services business, which has a lower margin that's blended in there. The tower business on a standalone basis would be in the high 70% range for EBITDA margins. Of course, our top customers are the wireless carriers. Oh, there's the picture I was thinking of. This just gives you an idea of what a typical tower compound looks like. All the green boxes are basically owned or the responsibility of the wireless carrier, the customer.
That includes the equipment that's on the tower, at the base of the towers, in the shelters, typically the generators. There's usually an easement provided for fiber or backhaul. The carriers, though, are responsible for getting that, securing that, and providing it. The only things that are actually the responsibility of the tower company are the tower itself, the actual tower steel, and the land, which we either lease or we own. This is my last slide. Just kind of an overview of the tower industry in general. The interesting thing about this slide is I always say this, but it's true. It's basically the same as it was 20+ years ago. The business has not really changed all that much. As I mentioned, it's a landlord-tenant type of relationship.
What makes the business so strong is the exclusivity of the assets that we have. Here in the U.S., in particular, certain factors make it very difficult for competing structures to be put next to existing structures. The primary reason for that is local zoning laws that limit the proliferation of wireless towers and typically force co-location. Once you get a tower in a specific location, you have kind of your own little operation there that's free from significant competition. In addition, it's a very capital-intensive business, and it's also well-defined by the network architecture of our customers. It's very challenging, once you design a network, you have an RF design that goes in a specific area, and the sites all work together to pull one out and to move it someplace else.
That's challenging to the network, you typically see very little of that. As a result, we have a very steady, stable cash flow stream that's generated and constantly growing as technology moves forward. There's a lot of companies pouring a lot of money into wireless these days, significant players, not only the carriers, but technology companies such as Google, Apple, Amazon and others, as well as the cable companies. It's a very attractive space for folks to get into to try and figure out how to use wireless to further support their business, and that all inures to our benefit. With the move in mobile data traffic continuing to climb, we feel very good about the future. Ric, with that, I'll maybe turn it over to you, and we can do some Q&A.
Great. Thanks, Brendan.
I'll leave that up.
Huddled in the dark corner here.
Yeah.
Kick it off. Obviously, got a long history of growth there. We wrote our first tower report January of 1999. I guess I can call that the last century or the last millennium. Towers have been around a long time. Let's talk a little bit about growth at the top level, on the growth spaces in the U.S. How do you see that playing out? You touched on a couple of them there, the unlimited plans, the expanding wireless ecosystem. How should investors think of it now that it's the law of large numbers is there too, but just how are you guys are feeling about organic leasing revenue growth over a long period?
Yeah. Well, we just gave our guidance, obviously for 2023, just a couple of weeks ago. That implies a certain amount of growth, both domestically and internationally. It's actually one of our stronger years domestically in terms of actually internationally as well in both cases. Domestically, it's one of our strongest years in the company's history in terms of new revenue added through new leases and amendments. We expect to have a strong year here, largely on the back of significant leasing activity that happened throughout last year. A lot of that flows through to the financials later, we're seeing a lot of that impact, not only in the second half of last year, but into this year. It'll be interesting to see how the carriers continue to invest in their networks.
There are other macro factors that impact their spending at times. There's so much spectrum in their hands that has to be deployed that we feel like you're gonna see that happen. It's really just a question of timing. This year will be strong. We'll see where we are as we move through the year and whether next year can be as strong as this year. It'll be largely dependent on what happens through the middle and back half of this year. In any case, whether it's, it pauses a little bit or slows a little bit into next year, there's so much that has to be done that we feel very good about growth over the next several years.
Okay. You guys have from gross to net, you've got some Sprint churn coming up as Sprint, T-Mobile consolidate those companies together. Remind us just kind of when that affects you guys to the greatest extent then.
Yeah. The biggest years of impact for us as we project it to be, would be in 2025 and 2026. Really, that's just based on overlapping sites or sites that are near each other that we see between T-Mobile and Sprint, where we think there are synergies to be gained by them. Combining that with the timing that we think that we'll be able to actually affect those changes, which includes things like the actual term end dates of the lease agreements that they have with us. Based on the timing of those term end dates and when we think they can get to that consolidation, we believe 25 and 26 will be the largest impact years for us in terms of the churn.
Okay. If we take it from top-line revenue, obviously pretty good conversion down to EBITDA. When we go to AFFO, Adjusted Funds From Operations, interest rates obviously are affecting-
Yes.
Tower companies, infrastructure companies in general. How should we think about, again, a very long-term kind of view of once rates stabilize, what AFFO per share growth rates could be for you guys as you look long term?
I mean, if you look back over the last several years, we've been growing AFFO per share at a very high clip in the mid-double digits, mid-teens, almost consistently each year. Some of that was organic growth, but some of that was also interest rate benefits as we refinanced debt at lower levels. Now that we have such an attractive structure, debt structure, the bad news is that as you refinance it's likely to cost you a little bit more. That will be a headwind for a period of time. If you get to a period, though, I think, where you see normalized interest impacts, you probably see something in the high single digits as your typical AFFO per share growth rate.
Your dividend payout ratio is fairly low right now.
Yeah. For this year, our dividend will be about 27% of our AFFO.
How should we think about dividend per share growth rate potential, knowing that has to be approved by the board, but just kind of combine the AFFO per share growth rate with dividend payout growth?
Yeah. Well, since we adopted our dividend, which was about three and a half years ago, we've been growing our dividend annually around 20% per year, which is also, we just announced our dividend for this year going forward, and it represents approximately a 20% increase again. We would expect that that's something that we can maintain at least for the next couple of years. That's not a promise, we have the capacity to do that. There are other factors that might affect that in terms of where else we might deploy that capital, that might create a better return in our view for shareholders. That might affect what those payouts look like. We have the capacity to grow at close to 20% a year for the next several years.
Okay. Thinking about external growth aspects, the M&A environment for buying new towers, you guys did a major deal. It seems like private valuations for financial buyers are staying higher than where strategic buyers are at. Opine for us why you think that is, how long can that occur, and what will drive you back into more M&A?
Well, we've seen a period now over the last several years where competition for new assets has not just come among strategic tower companies like it used to be in the olden days. You have a lot of infrastructure funds, even private wealth managers. You have pension funds. You have folks that are not typical owners of towers that are pouring money into this business. As a result, because of their having lower return thresholds, because of incentives that are based on fees and carry and things like that, it's driving the prices of these assets up well beyond where the public companies trade. Frankly, you've seen most of the deals that are getting done of size have not been done by the publics. They've been done by these other parties.
That's created this environment that now What we've seen is that for a period of time here, those folks are still using yesterday's balance sheet, where they borrowed money, that they have to put to work. The cost of capital is sort of on a lag in terms of its impact. That's starting to feed in now, and I think you're seeing less deals get done. Perhaps the reason that less deals are getting done is that seller expectations haven't moderated based on, what's actually happening out there. I think as we start to see that happening, then it will become perhaps, more competitive, for companies like us.
At the end of the day, we're gonna be disciplined about where we invest capital and make sure that it makes sense to us from a return standpoint, because the reality is we don't have to keep buying assets. We do it because we think they're a value add to our existing portfolio.
You've had a fairly active stock buyback program over the last couple years, taking somewhat of a pause now. Walk us through the algebra of interest rates, stock buyback, and kind of how you look at leverage coming down in the short term then.
Generally speaking, when we think about buybacks, we're looking, or really any investment of capital, buybacks are just one of those options. It's really about what creates the greatest long-term accretion to AFFO per share. We're looking at over time, and in that analysis, obviously, we have to think about things like interest rates and where we believe they may be going and how that might influence the decisions that we're making today. It also incorporates other things like the growth, the organic growth, what our carrier customers are gonna be doing, what type of options are out there to invest that capital. You'll see us adjust periodically, but one of the great things about our structure is that we have the opportunity to be flexible.
We've been very opportunistic in the past around both asset acquisitions as well as stock repurchases. I think that will continue into the future. For the time being, if interest rates are high and you don't see prices in the right range, then you may see us retire some debt and delever. It's really not a focus on delevering in and of itself. It's about creating flexibility so that we can be opportunistic if we see a shift in rates where it makes sense to now pour in and buy something, whether that be assets or even our own stock.
Great. You touched on some of the new names up there, Google, Apple, Meta, Amazon. begs the question that we get a lot, which is, what the heck is the edge? Where is the edge? When is the edge? How big is the edge? Why don't you help us understand.
Yeah.
You guys are, you know, got your toe in the water with some data centers.
We do, yeah. I think, to some degree, it's hard to completely answer that. For us, the edge is obviously at the tower site. It's the ultimate edge. It's all the way at the far edge of the wireless networks. That's where it matters to us. Not everybody necessarily would agree with that being the edge today. The reality is, there's not been a real significant need to be at that point of the networks yet in terms of where you place compute.
While I believe that there certainly is opportunity for that to occur, and we've done a lot of the groundwork to prepare ourselves to be ready for that, because it would be a very big advantage for us given that we already have all these locations, an opportunity for us, certainly. The reality is there has to be a need for it. I think to some degree, it's driven by applications that require compute to be that close to the edge of the network, and I'm not sure that those applications fully exist today. If they don't exist today, there aren't a lot of folks ready and willing to go out and spend money to move that compute power all the way to the very edge of the wireless network.
Ultimately, you need wireless network interconnectivity at the tower site for it to really have to be at that location, and I haven't seen that yet be needed on any large scale. There's isolated situations here and there, but generally speaking, it's not a large scale thing. For now, we continue to operate the small number of edge facilities and kind of mid-tier data centers that we own, continue to educate ourselves on that, make a go of those businesses, and we can be patient and see how things progress.
Great. The small cells is the other kind of ancillary question. You guys have done some indoor stuff.
Yeah.
Why don't you update us as far as you're thinking about when do small cells become important? Is it something you wanna deploy capital in U.S. versus international?
I mean, small cells have been around for a while, they are important, typically, most important in dense urban areas where proximity of wireless infrastructure is even that much more important. The issue that we've had with small cells isn't their necessity or viability in terms of the portion of the network that they serve and are critical to. It's really about exclusivity. I mentioned earlier in my comments that one of the big reasons that towers have been so valuable for so many years is because of the exclusive nature of the assets. When you get to the small cell situation, you can have a small cell on one corner of an intersection, and you could have another one on the opposite corner of the intersection.
Your ability, from a competitive standpoint, to drive price and return on that investment is much more limited. That's really the reason that we've done a lot less of it. It's also a very fiber-intensive business, typically, requires big investment there. We've chosen to stay away from that, but we do focus on other assets that provide some level of exclusivity, certain indoor DAS networks, for instance, where you provide coverage to a quality venue that otherwise can't be covered and is important to the carriers, those types of things. We'll continue to find those opportunities and seek them out.
Something that was very buzzy over the last couple of years, but seems longer cycle now, private networks, private 5G networks. DISH talks about it, Verizon talks about it, but it's been hard to kind of manifest itself. What are you seeing in that space? What do you think it'll take to unlock private networks, and what would your role be?
We do have a few of those ourselves that are done and in the works. Typically, what drives that is the type of location where wireless speeds, the most advanced wireless services need to be there from the venue owner's perspective. Perhaps the carriers aren't at a point where they're necessarily ready to jump in and fund something. The venue owner says, "Hey, this is a must-have in order to make my offering, whether it be retail, residential, whatever the case may be. To make it valuable to my end consumer, I must have this, and so I'm gonna go out and I'm gonna fund my own network," basically. We can partner with them to bring that technology and that option to them.
Typically, it's best at the time that they're actually developing the project, because it can be done most cost effectively at that time. For us, as long as we can actually have, again, some exclusivity in that relationship, then it can work for us to fund that build-out for them. We're doing some of those, and I think you will see more of that happen over time. Again, applications and the need for what service is ultimately being provided to the end consumer, I think is gonna be the biggest driver.
The question we asked Jeff on the call about 5G applications.
Yeah.
Wasn't sure if he was making a Florida State Florida joke, he said it was the seminal, not seminal, question. What are you seeing out there? 'Cause you guys stay involved. You have your technology group looking at this. Is it augmented reality, virtual reality, mixed reality? Is it Internet of Things, autonomous vehicles? What, what future alphabet soup of 5G gets you excited that says there's going to be money made by the carriers to afford to buy all this spectrum and deploy it and pay you guys rent? What, what's out there that you see gaining traction at some point?
That's a tough question.
Yeah.
As I mentioned earlier, we just own the dumb steel. Our actual proximity to that is somewhat limited, and our customers would certainly have a better view. It is a critical issue because it is what will. We do want our customers to obviously be successful to make money, and they need to monetize their investment into their network through some application that is a must-have that the end consumer says, "I'm willing to pay for that." I think those things are out there. I'm not the best one to answer what will be the thing that takes off. Some of the things you mentioned are certainly on that list, and I think starting to gain traction. That is something that has to occur because it's important for our customers and therefore indirectly important for us to see them continue to invest in their networks.
I mean, the history of wireless, 1G was voice, 2G was texting, 3G was data, 4G was kind of video, Netflix and Uber, Lyft, keeping track of where everything's at. 5G seems more complicated 'cause it's not just one word or phrase that kinda describes it. I guess just keep watching.
Yeah. I mean, it's definitely today it's all about latency and speeds. That's what it's providing. Things that require that much reduced latency or that greater speed to make them function optimally are where it's at. What is that tangible thing that you can point to and say, "Well, that's it. It's gotta have that"? I think that's seems to be missing right now, but I believe it's there and it's coming. I think we just have to wait and see, 'cause I don't have the answers to that.
One of the hot topics in in our space is space. A lot of stuff going on with satellites, a lot of discussion.
You're really moving into an area I don't know. Okay, go ahead.
Well, just from the standpoint of how do you guys see satellites coming into being, as far as wireless? You've got Apple working with Globalstar. You've got Iridium working with Qualcomm. It seems that there's a lot of places maybe where you go off the grid of the wireless network out there. We get the question of, one, is satellite gonna replace wireless? Is it just augment wireless, and is there a way to work together?
Yeah. I mean, satellites have been around, obviously, for a very long time, and people have had sat phones that they've used for 20+ years. I've actually had the satellite question for probably the last 25 years. It still comes up, perhaps with some of these partnerships that you've talked about, you know, it always moves a little bit closer. Even still, I think that it's still the same as it's always been in the sense that it is about filling in those spaces that it's harder to provide coverage in a cost-effective manner. There are just places where building out a traditional macro wireless network is not cost-effective given the sparse nature of the location or how rural it is, the number of people, et cetera.
It's important, though, that wireless be delivered in those areas, and this is probably a way to do that that's more cost effective. I think that's where you see the investment and that it is complementary as opposed to something that really is competitive or replaces traditional wireless. I can say that with pretty good confidence because our customers are pouring most of their money into their macro networks, not into this. This is sort of on the edges, and I think it's on the edges because it fills in those areas on the edges. You know, based on their investment patterns, I feel pretty good that macro network is still the primary source for providing wireless services.
Makes sense. Let's see if there's some questions from the audience. I'll take a moment and see if someone out there has one. If not, I've got plenty of pages of notes.
Got like, yeah, 50 questions in there.
Yeah. Yeah. Exactly. Well, since you are CFO with the current hat on before the new hat comes on all the way.
Yes.
What is your view on interest rates? You know, what are you guys kinda thinking about the trend, obviously reading the Fed is a full-time job for a lot of people. As you guys look at how you think of pacing over 2023, 2024 timeframes, what's kind of your feelings?
Yeah. Well, you know, we were. I think we did a good job over the last several years jumping ahead of refinancings, taking out some of our debt years in advance, to lock in lower rates while they were available. As things have shifted, obviously there will eventually be financings, and we just did one actually, where we'll have to refinance at rates that are higher than what we're taking out. I think that there's obviously gonna be a period of time here where rates continue to climb. That's the expectation. Perhaps the hope, if not the expectation, is that that begins to moderate, perhaps by the end of the year or into next year.
I think that that's a reasonable expectation, but it's, you know, listen, if I knew that, I probably wouldn't be sitting here if I knew exactly what was gonna happen there. That's our general view. We are fortunately able to wait it out a little bit. We don't have another maturity date until October of 2024, a year and a half or so, and there's no pressure to hurry. Capital is available to us. It's really just a matter of cost. I don't have any concerns about risks of not being able to refinance. It's really just, what's the price gonna be? Given that that's the case, and given what I just said about kind of the expectation of moves, we're gonna be patient and wait and see.
Hopefully we'll see that improve before we actually have to go to market again. The reality is we have a very low cost, balance sheet today, and it's gonna be hard to maintain that kind of cost level, in the near term, next refinancings.
Looking more like, I think American Tower did some in the mid fives. You did some mid six, 'cause you were earlier in the process i s kind of that five handle something that you think this industry-
Well, yeah, if it was today, yes. If it was today, definitely. Where that'll be, again, a year from now, I just don't know.
If we do get some stabilization, then eventually some reduction at some point, four handles are not out of the question.
No
given long term what we've seen this industry be able to borrow at.
Yeah. Yeah, not at all. I mean, we've been big users of secured financing, asset-backed financings, and those have typically on average been cheaper and our business is well suited to that given its stability and the types of assets that we have. You know, I think we'll be able to find avenues to get whatever the cheapest potential capital is for us. You know, predicting interest rates is a hard thing to do, so.
You'd own your own Caribbean island if you were really good at it.
If I were really good at it, yes.
as you look to make the change from CFO to CEO, what's the things you wanna work on in your skill set to say, "New hat coming"?
Yeah. Well, I've been thinking about that for a little while. I've been at the company for a very long time. Been there over 25 years, I kind of know SBA. I've sort of grown up there. I know the culture, I know the people, and I have a pretty good feel for how things operate. You know, the world changes, even whether Jeff was leaving or not, there are changes that happen with our customers and in the external environment. The countries that we operate in each have their own specific issues. There was gonna have to be some level of change that occurs anyway. For me, I get to be the one to sort of define what that is.
You know, I think what you'll see is greater focus on customer relationship and greater embracing of technology and automation and the things that we do, not just in the back office, but also out on the front lines. I think that through doing that, we'll be able to distinguish ourselves even more with our customers and continue to expand the long-term nature of the relationships that we have.
Last one from me, we'll call for any others from the audience. We've got 1 minute left. When we think of your shareholder base, where is it at right now? TMT, generalists, income funds, REIT investors? As you think of that other constituency you look at as a CEO.
It's been a little bit of a mix. I mean, we used to be all, you know, pretty much TMT growth type investors. Once we introduced the dividend, we started to see some shift there. Now we have kind of a mix. We still have some of those same guys that we had before because we still offer a lot of that. We're also starting to offer some cash yield there. There's a little more stability and maturity in the business. You start to see a little bit of a shift there. Some traditional real estate type of investors have started to be more and more attracted to what we do as they learn more about it. It's an education thing.
I think, you know, we're probably moving a little bit, transitioning a little bit more towards that type of investor. You know, there's enough growth and opportunity, I think, for the bigger tent for the time being.
Great. Well, we'll try and get you guys back to Nareit too as that process continues.
Yeah.
With that, we'll wrap it up here. We'll take it down to the breakout. Thanks for all your time today, everybody.
Great.
Have a good conference.
Thank you.