Well, good afternoon, everyone. Thanks for joining us. I'm Nick Del Deo with MoffettNathanson, I'm thrilled to be joined by Brendan Cavanagh, the CFO of SBA Communications. Brendan, thanks for joining us.
Absolutely. Glad to be here, Nick. Thanks.
For anyone in the audience, if you have a question, you can use that QR code to submit one, and I'll see it on the iPad here, and I can try to incorporate some throughout the discussion. Brendan, I introduced you as CFO, but effective January first, you'll be CEO, so congratulations on that change.
Thank you.
You've been CFO for 15 years, I think, so obviously you've been instrumental in determining SBA's strategy and capital allocation priorities and whatnot. I think we all expect a lot of consistency there. You know, you don't operate in a static environment, and things change. As you look out over the, we'll call it next 5 years, 10 years, however you wanna define it, you know, what are the areas that you think, you know, you as CEO will have to spend more time on or look at it a bit differently versus what Jeff has looked at historically?
Yeah, I think. Well, first of all, thank you. It is a pleasure to be here. We, you know, I have been there for a long time, and we have a history of making decisions and looking at things, with a very specific financially oriented lens, and I don't think that will change at all. That I have been a part of that. I've kind of grown up in that, so, you know, it certainly is not my intention to shift away from that at all. You're right that the environment changes. Whether there was a change, with Jeff retiring, or not, we were gonna face similar challenges to what we'll face going forward, and so we'll have to adjust to those accordingly. I think, you know, fortunately, we're in a business that's very stable.
Mm-hmm.
It's very predictable. We've been at it for a long time. It doesn't change all that much, we're able to kind of operate with a very good foundation of consistency, and that will continue to be the case. We will, I think, be maybe a little more focused on some of the customer relationships, both domestically and internationally, and how we work together with our customers to ensure we secure that long-term relationship out into the future. You know, that might require some changes in terms of C-level interactions with customers. It might change little things that we do around the sites. At its core, the business, again, is very stable, so I wouldn't expect a lot of changes.
Okay. Just kind of close the loop on the managerial changes. Anything to update or share with us with respect to your CFO search?
Well, we are actively in that process and would expect to have somebody seated before the end of the year. I'm highly confident in that, and I think it'll be a great choice for the business. Right at this point, not much more I can say about it.
Okay, fair enough. All right. Let's dig into your business.
Mm-hmm.
We'll start with the U.S. You know, the topic that most people are focused on today, no surprises, is Dish. Obviously Dish has been a nice driver of growth for the industry in the last few years. You guys have highlighted that. There's certainly questions about the company's liquidity and their ability to complete the, you know, the program that they've laid out. I know that you're limited in terms of what you can share regarding any specific customer and what's going on there. You know, what can you tell us about the underlying activity you've seen from Dish, and whether you've seen any sort of changes in, you know, that make you sort of think about their ability to push through as expected?
Well, Dish has actually been one of our top leasing customers in terms of new business signed up over the last couple of years. They're a big contributor to our organic growth numbers this year, based largely on a lot of activity that happened last year.
Mm-hmm.
They have been still active at a slower pace in terms of signing up new business this year. It makes sense because basically they're very focused on this 2023 deadline that they have next month, actually. A lot of the activity with us was in the early stage, right? Given the book-to-bill cycle, we signed a lot of agreements with them. They're in the process now of building out a lot of those installations, actually doing the deployments, and that will be their primary focus for the time being. That relationship has been very strong. There's no indication of them slowing down at this point, and we're just trying to support them the best we can.
Now, I think, you know, the company's made some comments about, you know, potentially a CapEx pause or a change in terms of where they're allocating capital after they hit their targets next month. What's your interpretation of that?
Well, I think, the pause is probably already to some degree in effect as it relates to us. I mentioned that it slowed a little bit. We are still signing new leases up with them. It's just not at the same pace as it was before. Their next deadline is June of 2025.
Mm-hmm.
It is a bigger. You know, the percentage makes it seem like it's not that much of a change from 70% to 75%, but the fact that it's very specific to the individual markets, there's a lot of places that they're gonna have to go that they are not in today. I think there will be a decent amount of activity in the lead-up to that, but they have a couple of years until that deadline. I think what you'll see is, you know, a little bit slower pace as we move through this year. As we get into next year, it'll be important for them to start to line up their lease agreements similar to what they did on the last phase, signing up new leases and being ready to deploy that ahead of that eventual June 2025 deadline.
Okay. It sounds like the comments aren't necessarily inconsistent with what you had expected or observed internally?
Yeah, I don't think so. I mean, Like I said, we continue. There's activity every day with them, so it doesn't feel to us like it's gone to nothing. It's just a little bit slower than it was before. In all fairness, the activity level was extremely high.
Mm-hmm.
Actually much faster than we would have thought in terms of signing up new business. It feels like it's gonna be that way again. It's really more of kind of a wave of signing a lot of agreements. Then there's maybe a little bit of a slowdown while they're working on deploying t he equipment, as opposed to anything more than that. That's okay with us. We'd rather kinda get it all locked in in the early stages if possible.
Okay. Now, you know, based on your past experiences with players engaged in, you know, large-scale greenfield network deployments, you know, what sort of timeframes are typically involved with getting these things up and running in the field? You know, locking up your labor, your permitting, whatever. I'm trying to get a sense as to how long a pause like this might last given the timeframes involved to get the battleship moving the way that it needs to.
I mean, it's not... When we say a pause, a pause is... It's not a stop.
Mm-hmm.
It's a slowing. I think we were at our industry conference was last week in New Orleans, and Dave Mayo spoke there and talked about the fact that they need to continue on through this deadline and continue to be working on their network deployment because you can't just do nothing for a year and then expect to come back and suddenly be ready to hit that June 2025 deadline. I think that's what we'll see, but I do think that it will probably build over the course of the year and be at a stronger level a year from now than we'll see towards the back half of this year. Otherwise, I. You know, the typical, you know, it's been a while since we've had a brand-new network from the ground up built out. It's a multiyear process, so I don't see this as being any different than that.
Okay. Okay. I guess, you know, just thinking about your 2023 outlook, it's fair to say that at this point in the year, any contributions from Dish that you may be including are pretty much signed and locked in at this point.
Yeah. I would think the vast majority, if not all, is already signed up.
Okay. Now, obviously, I'm not gonna ask you to speculate on the different twists and turns, what might happen to Dish or what may not happen to Dish. Like you said, they're an important customer. You want them to be successful. Yeah, just kinda stepping back at a high level, you know, there are obviously all sorts of outcomes, you know, that we could think about, where some or all of the spectrum that Dish owns could end up in the hands of other players by different mechanisms. You know, maybe it's too open-ended a question to ask, you know, with any specificity, what might it mean for SBA if the ownership of some or all of Dish's spectrum were to change hands?
Well, generally speaking, it's still okay because ultimately that spectrum is gonna be deployed.
Mm-hmm.
It's gonna require equipment on infrastructure which we'll benefit from. Obviously, the magnitude of any impact will depend on whose hands it's in. If, you know, obviously with Dish it's a brand-new network being built from the ground up. That's probably the best scenario. If it's with another party who doesn't already have an existing network, I would imagine it'll be very similar. There may be some variance depending on what their intentions are, but for the most part it should be very similar for us. If it obviously ends up with one of the or multiple of the incumbents, their timeframe might be a little bit more elongated.
Mm-hmm.
In terms of deployment, but ultimately it will be deployed. I don't really worry too much about that. I think, the reality is all the spectrum's gonna be deployed. It's gonna require equipment, and infrastructure's critical to that. We certainly are hoping for Dish to be very successful.
Okay. That's great. Let's turn to a, to a topic other than Dish. You know, the incumbent carriers have all guided to kind of moderating or declining CapEx in the coming years. You know, some people are obviously focused on that. You've highlighted several specific opportunities that you think could help leasing in the next couple of years, one of the most notable being C-band.
Mm-hmm.
You know, I think you've commented that less than 50% of the sites on your towers have been upgraded, you know, to the extent they're operated by carriers that have C-band. Where do you think that percentage ultimately goes and over what sort of timeframe?
Yeah. It's hard to say exactly, but it's gonna be close to 100%, a little bit less than 100%. I mean, I'm sure there's some sites where it won't be necessary, but the vast majority of the sites will need to be upgraded. You know, the timeframe may vary, but I think it's over a couple of years at least.
Okay.
Yeah.
T-Mobile's currently in a little bit of a holding pattern with respect to its C-band and 3.45 GHz spectrum.
Mm-hmm.
You know, is it your sense from your conversations with the company, that they plan to move pretty quickly when that's freed up?
Yeah. T-Mobile has been by far our most active customer over the last couple of years. Obviously, most of that focus has been on the 2.5 overlays. They have a lot going on. Obviously, they're working through their synergies with the Sprint network as well. My answer is based on past experience with them in that they are pretty aggressive I n terms of how they move through and make their network decisions. They're excellent operators. I would expect that once it's available to them, that it will become a meaningful part of their network deployment activities. Otherwise, it's a little hard to say today because there's not a ton of preliminary activity that's taking place ahead of that clearance.
Okay. Okay. I think, you know, most of the C-band related revenue that you're generating today is coming from amendments rather than new sites.
Yeah.
You know, I thought when C-band was first auctioned, there were a lot of questions about how upper mid-band spectrum like that would propagate and if the buyers would ultimately need to deploy a lot of new sites to meet their license requirements, you know, particularly in somewhat more rural areas. H ave your discussions with the carriers given you any sense as to whether there may be a material new site opportunity for C-band over time?
Yeah, I think there will be more new sites than we've seen in a lot of years.
Mm-hmm.
I'm basing that on the fact that we've had more applications, for brand-new leases, and so our backlog is growing in that respect.
Mm-hmm.
I'm pretty confident that we will see more brand-new site installations. Much of our growth over the last really five or even more years has been heavily concentrated on amendments, overlay upgrade type of activities. That's still, I think, going to generally be the case, but the proportion that is associated with new leases I think will shift a little bit more in that direction than it has been in the past.
Okay. And you know, it's probably an oversimplification, but, you know, we generally think of your portfolio as being skewed a little more rural than perhaps your peers. You know, to the extent these carriers need to deploy C-band in rural areas to meet the requirements, do you feel like you're in a better position to pick up that business?
Perhaps. I think that that label is a little bit off base. I mean, I know that, you know, based on certain MTAs and however it's broken down, that's the conclusion. You know, even within what you might consider a rural location, there are a lot of cities and towns that I would classify more as suburban.
Mm-hmm.
Where you have population centers, that's where the carriers need to be. Yes, I suppose if there were locations where they needed to meet certain coverage objectives or requirements and our sites are there, we would have an advantage. I think as an average, I'm not sure that we stand out materially from our peers in that regard.
Okay. Okay. Well yeah, I think, you know, if we look at leasing in 2022, what you realized and what you're expecting in 2023, you know, it's shaping up to be a pretty unique period in terms of leasing activity, you know, as you've noted, because your biggest customers are all doing a lot of work simultaneously. If you think about, you know, the backlog of work, you know, that you envision from the items you've highlighted, like remaining C-band work or 3.5 GHz or 3.45 GHz and CBRS, how do you kinda think of that relative to the amount of work that's taken place in 2022 and 2023? Just to give us a sense of how you see the opportunity.
Well, based on, in fact, going back to one of the things you asked me before in terms of percentage of C-band, for instance, deployments t he fact that it's well below 50% with some of those carriers, you know, the runway for a lot of these things, and some of them haven't really started at all is pretty significant. In cumulative, I would say that it's certainly as big and probably bigger than what we've had. The question is really the time period over which it gets deployed.
If it's stretched out over a longer period of time, in an individual year it may not be as big as what we saw last year into this year. The magnitude of what has to be done is certainly larger. It's really just a question of the timeframe. Right now I think, you know, I would expect that it's probably spread out over several years based on the commentary from our customers. You know, that changes. I've seen it change in the past too, we'll see.
Okay. You know, let's talk about some potentials...
Yeah
... you know, 'cause that's sort of fun. The cable companies, big tech companies. I've had someone pitching on a satellite broadband provider wanting to build out a terrestrial component to augment their solution. You know, it seems unlikely that any of those potential customers would approach the big carriers in terms of what they might mean for your business, but every dollar is obviously nice to have. You know, would you say that any of these or other potential incremental opportunities are likely to contribute a measurable amount of revenue in the coming years?
I'm sure it can be measured. It would be very unlikely to be material. You know, even if I look at Dish, which has obviously been one of our largest leasing customers the last couple of years, as a percentage of our total leasing revenue, it's still very, very small.
Mm-hmm.
Any of these opportunities probably would fall into the same bucket, even if they were very active. That's not to say that that wouldn't be great for the business. As an incremental add, it would be tremendous. As you indicated, there's no real incremental cost to adding them, so of course, it would be a nice development. You know, practically, I don't expect it to be too material. Most of those examples, you're talking about folks who don't have spectrum. CBRS is its own animal. Basically you're talking about folks who don't own much spectrum, and so it's hard to imagine it becoming too material without something changing in that dynamic.
Okay. Okay. What about, you know, private networks? That's been, again, a topic of interest that ties into the CBRS comment you just made.
Mm-hmm.
Do you see anything there, or do you feel like that's gonna be the domain of the big carriers kind of selling pieces of their networks?
Yeah. I mean, it's been limited. It'll be interesting to see. I don't know for sure whether there will be others. I do think that the carriers are just the best positioned to take advantage if in fact there is a desire for that. I think it's gonna be more focused on industrial or manufacturing type of solutions in the early going. We are seeing a little bit of that, but you know, that's very specific and very targeted. We'll see where it goes, but I think long term, in terms of the big picture, the carriers are probably the best positioned.
Okay. You know, since you mentioned, you know, factories, I recall you guys mentioning at some point that you'd been working to build out some of your in-building portfolio. Working with customers on that front.
Mm-hmm.
And again, modest contributor, but incremental. Any updates you can share on that?
Yeah. Actually it's going pretty well. We have some good relationships with some, you know, top-notch real estate owners who are not in this business, but wireless connectivity is critical to them. We've had some pretty good successes lately. As you said, it's not the most material thing in the world, but it keeps us close to both our customers as well as certain folks who have access to real estate that I think our partnership can be benefited from for years to come. Other than that, there's probably not much to say.
Okay. Fair enough. How would you dimension your exposure to wireless ISPs? You know, I ask it in the context of, you know, there's a flood of money coming for terrestrial fiber builds in those markets. I wonder what that means for you guys.
Yeah. I feel like I keep answering the same way, that it's immaterial. It is immaterial. I mean, you know, at the end of the day, you can look at our, the makeup of our business and you can see where the concentration lies. All these things are fairly small around the edges. I mean, we have some, certainly have some WISP customers.
Mm-hmm.
You know, to the extent that they're impacted by these changes, I guess it would have some impact, but it's hard for me to imagine that it would be too noticeable, either to the positive or the negative.
Okay. Okay. You know, as we think out over the next few years, you know, for your leasing outlook particularly from the big carriers, there's probably a little more uncertainty than there is typically. At least, I think most of the people in the audience would describe it that way. You know, if we set, you know, your Sprint churn aside, which you've dimensioned, is it still your view that kinda mid-single digit or slightly better net organic growth is kinda what we should be looking for in the U.S.?
Yeah, I think that's probably right, mid-single digits. I mean, we have, you know, baked in escalators in the U.S. that are roughly about 3.2% or so on average. You know, a couple percent more of leasing growth is not unreasonable, 3% or so, and then a typical churn, excluding the, you know, the big consolidation-related churn, is somewhere in that 1%-2% range. I think, you know, mid-single digits is a reasonable expectation. We obviously have, as we go further and further and we get bigger and bigger, you know, the law of large numbers that we talk about sometimes does have an impact.
Mm-hmm.
You have moments in time where that may vary. You'll have periods where I think it'll be a little bit higher and periods where it'll be a little bit lower. You know, maybe the core message that I wanna impart is just that, you know, this is a big ship with a lot of recurring cash flow in its base. I think, most of these things which we spend a lot of time on because they are the variables that you report on that change slightly from quarter to quarter as a public company, but really they're not that material, honestly, to the overall picture.
It's at a moment in time, a little bit higher or a little bit lower. We have a very good business. There's a lot of need for wireless, and I think you'll continue to see investment there. If carriers are a little bit slower in one year and a little bit faster the next year, it doesn't change that much in the overall story.
Yeah. If we think about your churn outlook over the coming years, again, you set aside Sprint 'cause that's sort of a separate thing that you've dimensioned and everyone's going through.
I appreciate that you're setting aside Sprint so often. That's helpful.
How should we think about your underlying churn in the U.S.? I mean, you know, you talk about the 1%-2% it's typically been. Would you expect to be closer to 1%, closer to 2%, or is it hard to say?
Yeah. It's been a little bit higher, I would say, recently. There's not necessarily any one thing to spend a lot of time pointing to. I do think, as we get bigger and you lose some of these smaller ancillary tenants that we've accumulated over many, many years, you know, they become a smaller percentage of the total business. There's also, as they go away, they're not generally replaced as often. I would expect that we'd see our non-consolidation churn come down over time.
Okay. Yeah, I wanna work in a question from the audience that I think is interesting. It kinda ties into the general leasing topic. The question, how do you believe network quality will be defined in the long term? Is it gonna be more about physical assets like towers or having cloud architecture?
I think it's probably a mix of both, actually. I mean ultimately, at its simplest term, quality of the network will be defined on how well does whatever it is you're trying to accomplish work on that network. What gets you there easiest? To some degree, I can see certain scenarios, and it's been the case in the past where, you know, a concentration of towers or towers positioned in the right places with the right antennas and the right frequencies deployed on those structures gets you what you need in order to accomplish it.
I think as technology evolves and the needs for reduced latency and faster network speeds and things that we probably haven't even considered yet start to come into play, there will be other factors that matter too. I have no doubt that involving the cloud more in these dynamics will make a big difference. I mean, I guess I'm punting a little bit, but I think it's going to be a mix of all of those things to optimize whatever the end use is that you're trying to solve for.
Okay. Question on inflation. You know, obviously we all hope that it ticks back down to more, to more normal levels. If it doesn't, you know, if kinda mid-single digit type inflation comes entrenched as the new normal, you know, what would need to happen for your escalators to get re-struck to levels that are more commensurate with that or change to, you know, to CPI in the U.S.? Is that even feasible given the way that your contracts are structured?
Yeah. It would be unlikely to be able to happen today. I mean, we have most of our contracts, have been in place for a very long time. Over that long time, in many cases, we've had escalators that have exceeded inflation during that window of time. You gain from the good times and maybe you give up a little bit in the bad times. It would be hard for us to change that, and we're talking about the U.S. specifically.
Mm-hmm.
Because Internationally, most of our leases are actually tied to inflationary indexes in those markets. That's a different story. However, you know, from a risk standpoint, it's not a major risk, I don't believe, because on the expense side, we have mostly fixed expenses. The largest direct expense we have is our ground leases.
Mm-hmm.
Those also have fixed escalators in them on average at a lower rate than the tenant leases. In terms of a match, we're in a pretty good spot. We do have the opportunity to adjust pricing, obviously, on any new leasing that we do. New leases, new amendments. We're really just talking about escalators on the existing base.
Okay. With respect to new business, I believe you've articulated in the past that you typically have agreements, you know, called Master Lease Agreement, price lists or whatnot, standard terms with most of your customers. Would it basically, you know, that would kinda come up for expiration, and that would be the time that you could start to reset it for new business?
Yeah. In those particular cases where we have agreed to some sort of set pricing on a per equipment basis, obviously they only last for a period of time. That would be revisited, you know, at the end of that.
Okay. Let's talk a bit about your international business. You've got a lot going on there. Brazil is your biggest international market, and you've got some churn in the pipeline related to Oi that you've talked about, so it shouldn't surprise anyone. Now, I thought it was interesting that you proactively entered into a Master Lease Agreement with TIM to address that churn, you know, versus in the U.S. where at least the realized outcomes of any discussions have been that you kinda let things roll off as they were gonna roll off. I guess was there a reason to be more proactive on this front or where you wanted to address it up front?
Yeah. I mean, I don't know that we were necessarily more proactive. Perhaps they were more proactive in their desire.
This was customer driven?
Yeah. I mean, to some degree. We typically don't go track our customers down to see if we can let them churn out of leases early. Usually the initial requests would come from them.
Sure.
Then it's just a matter of what's the right balance. Obviously, we're giving something up by allowing them to get out earlier than they're contractually entitled to. You know, if we can secure a longer term relationship, a certain amount of business commitments, and other things around the edges that make sense, then that's, you know, then that's a good deal. We'd be comfortable doing that here. We haven't necessarily gone the route of saying we're not gonna do it in the U.S.
Mm-hmm.
That's not really been the approach. It's actually not really been a topic that's been raised with us by our customer. If they don't need it's not really something for us to push. It's really more a need that they have.
Okay. Then, I guess, by extension, to the extent you've suggested there may be additional deals in Brazil to cover the Oi churn, it's because those customers have reached out to you and are interested in doing something along those lines.
Yeah. Ultimately, there will either be a deal because both sides found it to be worthwhile, obviously.
Mm-hmm.
There may not be. Just because they ask doesn't mean that we necessarily end up in a transaction. It just means that we, you know, have those discussions and figure out if there's something we can settle on that actually gets them what they need and also is additive for our shareholders as well.
Okay. Now, you've said for many years, you know, with respect to Oi, that, you know, if the market went from four to three, it would be your view that it's probably a stronger market over time.
Mm-hmm.
Probably better for SBA. You know, having had Oi actually going through the acquisition process and sort of better understanding your customers' initial plans, are you more confident in that statement? Equally confident?
Yeah. I'm still confident in that statement. I think it's just a matter of time. We're in the period of time where their focus is on the consolidation of those networks and trying to gain synergies and figure out how to operate and put them together, right? This isn't the window of time where you necessarily would see the benefits of that. What we're really talking about is the longer term environment, because, you know, we had a situation there where there were four relatively equally spread in terms of market share carriers, which seems good on the surface, but one of them was in a much weaker financial position and just wasn't able to compete effectively. You just didn't have the dynamic that you really needed. What we're hoping for and expecting, frankly, is that the competition will now be much more driven by network quality.
Mm-hmm.
Anytime that's the case, we benefit from that because the best way to compete on network quality is to obviously invest in your network, and we're a beneficiary. I do think that that will be the case long term, and our conversations with the existing incumbents suggest that they have a lot to do. The recent, you know, 5G auctions in Brazil, we're starting to see some applications around that.
Mm-hmm.
I think the future will be very strong with those three carriers. We just need to get through this window right now that we're in.
Does three kinda strike you as the sweet spot for the number of carriers a typical market could support?
I think in most markets that's probably right. you know, it's interesting, in the U.S., you know, I don't know if that's necessarily the case, but Brazil has roughly two-thirds the population that the U.S. does. We were sort of at three carriers. 3.5 here, with a new one trying to come along. You know, how could Brazil be at four? That was part of the thinking and analysis on the previous comments we were talking about. I think, as we look at most markets, that's usually the right balance. In most places where we see more than three, there's usually somebody who's really struggling there, and inevitably, that probably doesn't last long term. That's a long way of saying yes.
Okay. Well, it was a good answer.
Thank you.
It's been a few years since you entered South Africa. You've had Tanzania under your umbrella for about a year and a half or so.
Mm-hmm.
You know, recognizing that these are two very different markets that happen to be on the same continent, you know, what have your experiences, you know, suggested in terms of the appeal of looking at other African markets, you know, into which you might expand?
Yeah. I think, you know, we look at each market kind of on its own merits and the opportunity that we're looking at. In the case of South Africa, it was really a new build, greenfield opportunity. The vast majority of sites we have there, we built.
Mm-hmm.
We saw an opportunity, a real need from the carriers there. We had some relationships where the locally, where there was some good opportunities for new builds, and it's worked out really, really well. Tanzania was a totally different animal in the sense that the vast majority of sites we bought from a carrier that was already in relationship with somebody else that we partnered with who had kind of a leg up there. It gave us an opportunity, I think, to do a deal that we might not otherwise have been able to secure without that.
Those were two different ways of getting in, and they are two different markets that have different issues. I guess if you see opportunities that make sense and are, we believe going to be very value-creating, we are comfortable going into other markets. However, if we don't see that, we're also comfortable staying in the markets that we're in and just leaving it at that. It's not really a target on Africa or a target on any place else. It's really identifying the specific opportunity and an environment in that market that we think is conducive to our business.
Okay. Okay. In, in South Africa, I think one of your peers has had some issues with Cell C as a customer. Did you do much business with them?
We have some Cell C leases. It's not nearly as much as they do. They bought their towers. They had a much bigger exposure there. We've actually had no issues to date. I don't foresee it being too material. It's a very small percentage of our overall international revenue, as it is, but at this point, you know, they're operating and paying their bills, so no issues.
Okay. Okay, good. You know, as you alluded to in South Africa, you do a lot of new construction outside of the U.S., usually a few hundreds towers a year. Are there opportunities to push harder there, or do you think what you're doing today is kind of effectively the maximum what you could do in your markets and, you know, with meeting your underwriting requirements?
Well, yeah, that's really the key. I mean, we can definitely do more. I mean, there's opportunities to build towers all over the place. It's really just being very specific and disciplined about, the opportunity, the quality of the sites that we're building. I think we can do more, in some markets. You know, we've been very successful in doing a lot of builds. Others, we've actually backed off because we've seen, certain developments in the market that maybe we haven't found appealing or attractive in terms of terms or the types of sites that carriers are willing to give out to the extent they're new builds. We definitely like to do strategic builds.
If we see a location that's a high-quality location where there's a need where we can get out ahead of it, we'll do that in some cases. The quantity of that is limited just by the nature of what it requires to do those. The easy way to do more is to get new build or, I'm sorry, build-to- suit, you know, awards from existing carriers. The devil's in the details on those deals and what are the specifics around the terms, and are we comfortable with that? As long as we can be comfortable with it, yeah, we can do more. I think we're very good at it. I think it's just a matter of being balanced and making sure that it's not just for tower count, it's for returns.
Right. Right. I wanna drill into a comment you made about, you know, perhaps the terms eroding in certain markets, so you backed off. You know, if I think about the U.S., you know, the new builds environment in the U.S. over time, yields got compressed dramatically.
Mm-hmm.
People realized it was a good business, carriers got smarter, and so on. In general, do you find that your risk-adjusted yields on new builds overseas are remaining relatively consistent, or has there been any compression there?
I guess they have to some degree. The issue is really probably more on the cost side. You know, the cost of building towers domestically as well, maybe even more so, has gone up in a lot of these places. You know, you can't necessarily look at the same leasing revenue arrangements. They don't provide the same return because the cost is just so much higher. Putting that aside, where we're able to do it, we're still targeting similar levels of return.
Mm-hmm
As a floating level relative to our cost of capital. Given today's environment, that generally speaking, is going higher. That's also a factor, I think, in why maybe you've seen a little bit less in terms of the number of builds we've done.
Okay, that's great. América Móvil has split off its towers outside of Mexico into a separate vehicle. I think they're taking that public at some point if they haven't already.
Yeah, they have.
I think Millicom is splitting off its towers in Central America into a separate business. Do you find that these kind of quasi-independent tower companies matter from a competitive perspective?
They do ultimately matter because it's our customers. You know, we talked about there's a limited number of customers in each market. Obviously, if your customer is in the tower business, that sort of changes the dynamic a little bit. I think, though, it's been interesting. We've found that in many cases, the actual carrier side of those operations sometimes prefers to go with companies like ours a s opposed to those companies. You have to assume over time that whatever those issues are, that they get worked out. It's important for us to make sure that, again, the towers that we're adding, whether through acquisition or new build, are focused in areas where we have, you know, hopefully the only game in town, so that that doesn't really matter too much. You know, for the most part, you're talking about sites that they're already on.
Mm-hmm
... the carriers, and a lot of times, the other carriers in the market aren't that inclined to go on their competitors' sites. I think that generally works to our advantage. But o bviously, if they're nearby sites, that's when, that's when it's a problem. You don't wanna have competitive sites in the same area. It's not good for us, and it's not good for them.
Yeah. Yeah. Okay. You know, edge data centers have been a topic of interest, and probably less so today than maybe a year or so ago. I think people have come to realize it's gonna be a while before that becomes a phenomenon, if it actually develops that way. Now, you've talked about having some success landing fiber regeneration points on your sites. Not a, not an edge use case as people may have imagined it, but still incremental revenue. Are these deployments being driven by, like, fiber to the home construction? Is it people building new enterprises? What's behind that?
I would say most of it is enterprise fiber and/or long-haul regeneration points. There may be some fiber to the home. I think there actually are a couple. There's actually some that was fiber in support of Dish, I believe.
Okay.
There's a variety of uses, but it's really a location-driven phenomenon. It's not really the same thing as an edge data center, obviously, but it is an alternative use. We set up the structure of the site, and we have different customer bases coming in, and it actually helps to some degree in making the site stickier sometimes.
Okay. Do you basically just put down a concrete pad and you're done, or is there more to it than that?
A little more than that. A lot of times they're shelters. The shelters sometimes are repurposed old shelters. Maybe from a legacy carrier, like a Sprint, shelter, that kind of thing. A lot of times there's a generator needed as well.
Mm-hmm.
That's usually the extent of it.
Okay.
There is a capital investment associated with it, but the returns match up very well with that capital investment.
Okay.
Because the biggest thing is we've already got the locations, we already have the land. It's already typically along the fiber run for the company that we're talking about, and so it's, you know, well suited for that. It's a natural fit.
As it relates to edge deployments that might fit, you know, the longer term hopes and aspirations, you know, tying together fiber with the actual edge of the wireless network, any sort of, you know, green shoots or expressions of interest from, you know, the carriers or cloud companies or CDNs or whoever might ultimately be the customer there that you've observed?
Very minimal.
Okay.
I mean, there's been some. We've actually had a little bit of success even internationally, where some of these C-RAN developments are benefited by having, like, an edge facility, but that's very early stages. The carriers have indicated an interest internationally. Domestically, not really. You know, our edge facilities that we have at tower sites today are primarily in service of local enterprise, you know, operators. It's not really about the wireless interconnection. That's really the key to whether this is actually gonna take off, is at some point, having the compute there at the tower site so that it can be directly interconnecting into the wireless network, how important is that, right?
If we reach a point where that is important, then we're obviously well-positioned because we have those edge locations. We already have it. Today, I don't think we have seen enough demonstrated to suggest that that's gonna be material, at least in the, in the short term. It may be long term. There's certainly promise, and there's people who absolutely believe it. It's gonna be a little while.
Okay. Let's, let's talk about the balance sheet a bit.
Mm-hmm.
You know, you typically target around 7x net debt to EBITDA. You've had that in place for some time now. You've got some known churn events coming up with Sprint and with Hawaii. You know, are you thinking of entering those years with leverage quite slightly below your target, such that post-churn you glide up a bit? Or do you think it's small enough that you don't need to make sort of an in-flight course correction like that?
I don't think the churn is going to drive our leverage higher by itself, because I believe there will be enough growth that at a minimum, it would equal t hat churn. You know, I don't expect us to go backwards. We're constantly generating cash, so we would naturally be, even through those periods, we'll naturally be de-levering.
Mm-hmm.
The pace might be a little bit slower than it is without the churn, but it's still on a delevering de-leveraging course in terms of our natural trajectory. I think as we lead into it's possible that our leverage will be lower. It wouldn't be because of that reason, necessarily.
Okay.
It would be more just the actual relationship between rates, which are obviously much higher, and the return opportunities of the incremental investments that we can make with that extra capital that's created through that carrying that higher leverage. We haven't necessarily seen the full adjustment in that, we would like to see and I expect to see ultimately. As a result, the better thing to do is frankly to de-lever.
That de-levering is not necessarily an objective to say, "Oh, I wanna be lower levered. I want to be lower levered if that's the best choice. If we are lower levered, that creates flexibility for us in terms of the ability, frankly, to lever back up if we see things turn we see an opportunity to invest in. That's not a promise that's what's gonna happen. That's just a flexible option that we retain, I think, by letting leverage drift down, so.
Okay. Well, I wanna return to that in a sec.
Okay.
Maybe another question on leverage.
Yeah.
You know, on the last earnings call, you guys talked about, you know, thinking about going to investment grade if rates stay elevated. Maybe it was just my interpretation, but it seemed like it was something you were giving more thought to than perhaps you had historically.
Well, I think, I don't know if we're giving more thought to it because it's a goal. It's not really a goal. I think we're giving more thought to it because, frankly, our ratings are being increased, by the rating agencies. If you look at S&P, we're only one notch below investment grade as it is, and that's without changing anything about how we operate our leverage targets, et cetera. At the same time, you have this dynamic that I was just describing a moment ago in terms of our leverage trending down naturally. If that continues to be the case, we're actually going to be very quickly at a level where under the rating agency's guidance, we would be eligible to be investment grade. I think the primary thing that we'd be lacking is our commitment to be there and stay there.
Stay there.
Right? The ability to actually do it is not that hard if we want to. It's one of those things that once you do it, you've kinda made that commitment, right?
Yeah.
You're not going back. I don't think we're quite ready to do that just yet. At some point, if things stay similar to, frankly, how they are now, which is a higher interest rate environment, you know, a more challenging, environment in terms of deploying capital at accretive levels, then yeah, I think we would. That's where we would go.
What sort of borrowing cost savings do you think you could get if you went that path?
Well, you know, historically, it hasn't been that much of a difference.
Mm-hmm.
The main reason or one of the primary reasons we've been levered higher and forgone being investment grade is that we could use secured financing, particularly in the securitization market, and have a very similar cost of debt.
Yeah.
To what our investment grade peers had, so why not have the additional leverage? It was very powerful in the equity value that it created. I think in today's environment it's a little bit... It's not quite as close as it was before. I think there is a little bit more of a benefit, although the absolute rates for that are still much higher than our existing, you know, debt instruments, so it's hard to swallow that to some degree. I do think the difference is a little bit greater. That's another factor in determining at what point is it right to move in that direction.
But you know, there's other elements that we have to consider, mix of secured debt and unsecured debt, and there's other things that would be expected, I think, over time, if we went that way. For now, we're just gonna let things happen naturally, and then we'll make a decision if it's the right thing to do at the time.
Okay. Well, let's go back to the capital allocation point. You know, you've mentioned that you see fewer assets for sale and what's out there is generally less attractively priced. What do you think is the most, you know, the driver that's gonna shake stuff loose?
I think the cost of capital, flowing through and affecting, other buyers, but also, a resetting of expectations by sellers.
Mm-hmm.
Yeah, I think we're in the first part of that. I think buyers are starting to say, "Wait a second." I think in part that's because they have already deployed a lot of the capital that's sitting on their balance sheet before. I think we didn't really see the immediate reaction because they were using somewhat yesterday's money-.
Mm-hmm.
Incentive to get it deployed. We're talking about, you know, pension funds and insurance, you know, funds and others, infrastructure funds, et cetera, private equity, all these folks who had maybe different motivations. Now that's starting to catch up, and I think there's a little bit of a, "Whoa, you know, the cost of this money is not coming down. It's going up for us, and therefore we need to pause a little bit." Sellers haven't necessarily adjusted to that. I've seen a lot of deals, particularly internationally, that have come to market and haven't necessarily gone for lower prices, but they maybe paused or not happened at all.
Mm-hmm.
I think there's been that breakdown. If we continue to see that trend move in that direction, then I think it brings more rationality to the process and gives us, you know, more of an opportunity than we've seen the last couple of years.
Okay. The deals that you have closed over the past couple of years, do you feel like you've gotten, you know, risk-adjusted returns or risk-adjusted expected returns or risk-adjusted quality of those assets equal to your going-in portfolio?
Yes. Generally speaking, yes. I mean, obviously, each dynamic is different. If you buy towers as we did in Tanzania, you know, there's a risk adjustment to that.
Mm-hmm.
To your point. Obviously, different people can have different views on what that should be. How does that compare to a U.S. portfolio of towers? Well, the U.S. portfolio of towers is much better because of the broader dynamics here in the U.S. If you pay, you know, a third of what they're valued at in the U.S. is that enough? I think yes, it is, because it's still towers. We know how to operate them. We're still doing it effectively. We have long-term lease agreements. We have good relationships with the carriers down there, and we've have no issues. In fact, we have good relationships with the government too. You know, I think it's a huge win, you know. If none of those risks come to be reality, it's gonna outperform by far...
Mm-hmm.
-the U.S. investment. I do think that the answer is yes, but obviously, some of that is in the eye of the beholder.
Okay. Well, listen, and I'll try to slip in one last question before we close on AFFO per share growth. You know, obviously the next several years are likely gonna be a bit choppier than normal. Given some of the Sprint churn, Oi churn, you know, refinancing as the interest rates get flow through. You know, again, if we set those items aside and try to think about your underlying AFFO per share growth outlook, you know, is 10% ± still kind of the bogey we should be thinking about? Or as the business matures, do you think that becomes more challenging to achieve?
I mean, I think naturally over time, it obviously has to come down because we're just bigger, more mature, all of those things. I mean, long term, I would say high single digits is more of an appropriate number. I do think there will be periods where we can achieve double digits. I mean, putting aside the interests in particular that, you know, who knows? I do think long term, though, we can sustain, you know, a high single digit growth rate in AFFO per share, you know, barring temporary movements up or down in interest rates in particular.
Okay. Well, great. Brendan, t hanks so much for joining us today.
Sure. Absolutely. Thank you for having me. Thanks.