All right, welcome. We're gonna go ahead and get started here with our next session. And it's a pleasure to welcome back to the Communicopia + Technology Conference, Brendan Cavanagh, the current CFO, but incoming CEO, of SBA Communications. Brendan, thanks so much for being here with us.
Yeah, happy to be here. Thanks, Brett.
All right. So, you're set to become CEO after being at the company and serving in the CFO role for about 15 years, and the reason you're gonna be stepping into this role is because Jeff Stoops is gonna be retiring, after a very long career at SBA. I believe he's been there, as CEO for over 20 years.
And so before we do get into this, I just wanted to say it's really been an honor having SBA at this conference for so many years, and I've really enjoyed my dialogue with Jeff going back really over 20 years, since I started as a very junior person on the sales side. It's wonderful to see that he's gonna enjoy a well-deserved retirement.
Yeah.
It's really exciting that you're gonna be stepping into this role, and that we'll get to keep doing this for a number of years.
Absolutely. I look forward to it, and I know Jeff looks forward to the retirement himself, so.
I would, too. All right. Well, listen, I'd like to start at a little bit of a high level here. What's the outlook that you have for SBA as you prepare to step into the CEO role? Why do you think that this is an exciting opportunity? And, I mean, the next 15 years, I'm sure, are not gonna be exactly like the last 15. How do you see the opportunities evolving for SBA?
Yeah. Well, first of all, I've been fortunate to be at SBA for over 25 years. I've kind of grown up there in a lot of ways, and so it's an honor to be able to have the opportunity to lead the company going forward. But having been there all that time and spent all that time with Jeff, I've obviously been a part of a lot of the significant decisions that have been made throughout the years, and so I wouldn't expect any major shift or change. What I've been talking about internally at the company has been kind of this idea of stability with agility.
I would expect from the stability side that we'll continue to focus on maintaining the core culture that we have, which has made us very successful, and bringing a financial discipline to all the decisions that we make, whether those are investment decisions or anything else about operations, the way that we deal with our customers, et cetera. So that is what we want to hold on to. But as you said, things are different. We're a more mature company today. It's a more mature industry. It's gonna be important for us to adapt to the changes that are kind of happening around us, and some of that will require, I think, a different sort of relationship with our customers-
Mm-hmm.
A different sort of view on the decisions that we make. You know, it's a very long-term business, and so the decisions that we make going forward will be focused, I think, even more on the long term and on how we operate. Just being more efficient, embracing technology, and embracing it internally for operations, but also externally in terms of what we can provide to our customers that make it so that if, if they have a choice, they're gonna choose us in those situations.
Maybe we can elaborate on that. What do you mean by sort of the evolving relationship that you have with your customers? And just for context, you obviously recently signed a new master lease agreement with AT&T.
Yeah.
You've historically been pretty selective in deciding when you want to enter into those more holistic deals and when you want to stick with your standard process. You know, what ultimately made this a win-win, and is there anything in here that's maybe part of an evolution in how you're engaging with customers?
Yeah, I would say that, first of all, it was not a sudden agreement that we entered into with AT&T. We'd been in discussions with them for well over a year about what an agreement might look like that would suit both of us. And just generally speaking, in the past, we've always been open to a master agreement. I think it seemed at times that we weren't, but it really came down to that financial discipline that I referred to before, and kind of comparison of what we thought would happen if we didn't have such an agreement and what it would look like with an agreement. And we've tried to be disciplined about choosing the path that we thought was ultimately best for SBA and our shareholders, and that remains the same today.
I think in this particular situation, where AT&T is in the cycle of build-out, our relationship with them, there were a lot of benefits to a little bit more of a master, kind of holistic structure that gave us a certain amount of certainty for the long term, gave them a little bit more efficiency, and we think will economically be very positive for us. So, it's not a wholesale shift, but, it's a structure that both parties, I think, are very happy with. And I'll tell you, even in the limited time since we've actually signed it, you know, the relationship, I think, is as good as it's ever been. We're in pretty regular dialogue.
I think there's opportunities for us to find ancillary ways to help them out with their network needs, and through doing that, they'll benefit, and we'll benefit as well.
Where do you stand in terms of the nature of your contractual relationships with your other big customers in the U.S.? Is there any movement towards embracing a similar construct?
Well, we have master agreements today with each of the other customers. A couple of years ago, I guess maybe it's been 3 years ago, we signed an agreement with Verizon. We've signed one with DISH, and we actually have an agreement with T-Mobile as well. The T-Mobile one is getting closer to the end. They're a little bit different in the way that they're structured, but they are still holistic agreements that address overarching needs that they have. Just the way that they work in terms of the details is a little bit different. But, you know, we can work within any construct that's beneficial for the carrier, as long as the terms of it make sense for both parties.
I don't know that there'll necessarily be any change in the future when those agreements are up, but we're open to those kind of conversations.
... All right, with your most recent results—actually, is this microphone working okay? It's kind of hard for me to—You're good? Okay, great. With your most recent results, you actually increased your outlook for domestic leasing this year, although you acknowledged that you were beginning to see some actual slowdown in carrier leasing activity. And so first question here is, just how would you characterize what the leasing environment looks like right now? And then maybe just from a historical perspective, how would you think about where we are now, being at the tail end of the front end of 5G, relative to the same point in time in the 4G cycle?
Yeah. So we had, We have seen a little bit slower level of activity among the carriers. We expected activity to be slower. Our guidance that we gave at the beginning of the year assumed a decrease as we moved throughout the year based on what we were seeing. I'd say it's a little bit behind even that expectation that we had. We were able to raise our guidance because of the agreement that we signed with AT&T, which will be additive as they start, I think, picking up activity around our sites. But outside of that, the broader activity levels among the others have been down a little bit. Where that shakes out throughout the balance of the year, we'll have to see.
Not ready yet to say where next year will shake out, but I think we're going to see them continue to focus on rolling out the additional spectrum, rolling out 5G. It's really just a question of timing. In the case of comparing it to 4G, I'd say it's similar in some regard. You saw a big upswell of activity at the beginning. Last year was a very busy year for us, and then you saw it slow down a little bit as they started to focus more on densification and kind of filling out areas that they hadn't touched before. I think this is similar.
I think the difference here is that perhaps there hasn't quite been, that kind of killer application that's come out yet, that's really driven the need to be ahead of each other in terms of network quality at this generation. And so, the period that it takes to this rollout take place may be a little bit more elongated than what we saw with 4G.
I, I know you're not prepared to give forward year guidance yet, but I'll, I'll do my best here.
Okay.
I do believe in the past that you have said that over the course of the 4G cycle, domestic leasing activity could fall within a fairly wide range in any given year, just depending on what activity levels are. I think something like $40 million-$80 million, you've talked about. Just based on the questions I've been getting from investors, I think what people are trying to establish: Is it fair to assume that maybe as you were to roll into next year, you might be run rating closer to the low end of that range, and then as you gain visibility, you'd have an ability to figure out where you're really gonna come out for the full year?
Yeah. I mean, I'm not ready to give-
Okay
... 2024 guidance, but the way that it typically works is, you know, there's a lead time. By the time that we're giving guidance next February, we'll have a pretty good sense of what the numbers are gonna look like, because so much of it is based on activity that happens in the second half of this year. And so we'll see how things play out through the rest of this year. But I will say that if activity levels are similar during the second half of the year to what we saw during the second quarter, in terms of new business being signed up domestically, that we would be likely at the low end of that range for next year.
Now, that doesn't mean that next year we won't see increasing activity levels, but the impact of that will be felt more towards the end of next year and into 2025. That's just the way that it works.
What are the things you would hope to gain insight into that might lead to a higher level of activity as you were exiting 2024 and heading into 2025?
Well, each of the carriers have their own individual needs. And so depending on how quickly they get to those, 'cause they're going to do them anyway, it's really a timing question, which will drive when you will see that uptick in contribution from leasing revenue. So in the case of DISH, for example, they obviously just finished hitting their initial regulatory threshold that they needed to by June 2023, but they have another one that's coming in June 2025. You know, they will have to start picking up activity around that. Depending on the timing of that, which we would expect will start sometime next year. That will start to benefit perhaps the second half of next year and into 2025. In the case of T-Mobile, extremely busy last year.
Still, still active, but have slowed down from where they were. I think as they start to move to the deployment of actually C-band and 3.45 spectrum, you know, that's a whole new wave of activity level. So it's really a question of when does that start? And of course, the other carriers are focused on C-band rollouts primarily. It's really just timing related.
If you weren't in my session with Mike Sievert, which was quite literally just before this, I asked him at the very end, when he expected they would start deploying their, their C-band and their 3.45, and his answer was: "We're not sure," because what they're focused on right now is gaining access to the 2.5 gigahertz licenses that they had won at auction, but have not been awarded. He pointed they'd already hung those radios, so it was a priority for them to be able to use it. So I guess he sort of punted on the timeline.
Right.
We still don't know-
Right
... is the takeaway.
Yeah, and I think that's fair, and we don't know either. We'll start to get a sense through our services group and others. We're one of their bigger services providers, but, you know, they were by far our biggest leasing customer a year ago. So, it's understandable that you would see that drop a little bit for the time being. But again, they're still holding that spectrum, and they need to get it deployed. So I think, for us, we're a long-term business. It'll eventually come.
The leasing activity is the gross in the equation. Churn gets you to the net, which is ultimately what the growth in the business is. You've given us a lot of visibility into the churn you're expecting out of the Sprint sites, as a result of the consolidation of Sprint and T-Mobile. What's going on with non-consolidation churn? Historically, that's always kind of been in the 1%-2% range. Is that still the right framework, or are we starting to see that tick down?
Yeah, I think it's still the right framework. It's been probably a little bit more towards the high end of that over the last couple years. But I would expect that it'll start to tick down because there's just less to churn off, to be honest with you. We have most of our revenue, obviously, coming from the big four carriers, so the component of that that is made up of non-big four customers is shrinking, and I expect that we'll see less of that. And our relationships with the big four customers, to the extent that they were a part of that, which occasionally they are, I think will be reduced as well, based on some of these agreements that we have in place. So, you know, we'll see for next year.
I'm not sure whether that's the case, but as you get out into the years that follow on, I would expect us to be closer to the low end of that historic range.
Well, and what causes non-consolidation churn at this point?
It's a variety of things. Sometimes it's older businesses. Believe it or not, we still have paging customers and other narrowband-type solutions that eventually run their cycle and, and go away. In terms of the bigger carriers, sometimes they'll sign leases for sites that they'll actually never install on. They've maybe signed up for an agreement and then never went on air, you know, or some other ancillary issue that's come along that said, "Hey, this site actually doesn't work from an engineering standpoint. We're better off somewhere else." So you get those kind of things that take place, but it's, it's a wide variety.
We've seen a lot of consolidation in the U.S. UScellular said they're looking at, you know, options. How meaningful would it be to your business if they ultimately did go through with some transaction where they were acquired?
Well, they're a fairly small percentage of our revenue base, so in terms of being acquired and having overlap churn, you know, I think they're maybe 1% of our total leasing revenue or something. So I wouldn't expect it to be overly material, but there'd be some small impact, I suppose.
Earlier, you were talking about, you know, some of the things that could create upside to, to the run rate of leasing. I, I think the statistic you've shared in the past is that about half of your cell sites, or the towers that you operate, have been upgraded by your, your tenants to for 5G. So it would imply that there is a significant amount of additional leasing that needs to happen. In terms of the business you're getting now, are they just chewing into that, but maybe just not at the intensity that they'd been doing before?
Yeah, I think that's right. It is around half of the sites that we have with the big carriers who've been upgraded for C-band, in the case of AT&T and Verizon, and, 2.5 for T-Mobile. Blended, it's about that. Some carriers are further along than others. It's really, it's really just a pacing issue. I mean, ultimately, we expect them to hit 90%-100% of those sites with the upgrade, so, there's definitely a lot of opportunity out there. It's just a question of whether they do it in a short window. It's funny, if they accelerated it and they did it all now, people would say, "Wow, leasing's really taking off," and then it would drop off more materially afterwards. Or it can be at a steadier level, you know, for several years.
But ultimately, they're gonna get to the same place down the road.
You talked about DISH and its 2025 build-out requirements. Maybe just at a higher level, how meaningful is it to your long-term business plan that there is a fourth facilities-based operator? Because, you know, DISH is the one we talk about now, but cable companies could potentially be-
Right
... getting into that area over time as well.
Yeah. I think... Well, it is important. You know, it's certainly better than having just the three, because if the spectrum that Dish holds today were to end up in somebody else's hands, it's still going to be deployed, there's still gonna be equipment needed at tower sites to support that. And so, generally speaking, we're still going to have that opportunity and benefit from it. However, if that somebody else is one of the existing three incumbents, their ability to be more efficient, to take longer to deploy it, to be able to do it through equipment installations that they already have, is greater. And so the opportunity set for us would be less than if it was a true standalone entity, like it is with Dish.
So, you know, obviously, it would be better for us to have that fourth carrier, and we believe that's, that's what the government has wanted. We believe that's what is likely to be the outcome, but we'll just have to see. Right now, we're supporting DISH just like we are the others.
All right. Let's talk a little bit about Brazil. So you've about 12,000 sites in Brazil, and I believe that market generates about 16% of your cash site leasing revenue. We've seen some consolidation happen in that market. What's your outlook for the Brazil leasing environment from here? What's ultimately gonna drive demand, and how do you think about getting past some of the consolidation churn you have to absorb?
Yeah. So you've got, for those of you that aren't familiar, the four carriers have consolidated down into three. That consolidation, though, has taken place by Oi, the carrier that's now going away, being absorbed somewhat evenly among the other three carriers. So they're all kind of dealing with some, swallowing of a piece of Oi into them, and right now, that is the primary focus for the carriers. So in the short term, we do have some churn to deal with. We do have some focus by the existing carriers on gaining those synergies and, and synergizing those networks. But longer term, we think it's actually gonna be very, very positive, because you're gonna have three very healthy carriers.
There were recent mid-band spectrum auctions in Brazil, that came along with, requirements in terms of build-out, coverage, objectives, a certain portion by the end of 2027, and I believe 100% 5G availability to 100% of the population by the end of 2029. So as we look at those periods of time, we look at the spectrum that has to get deployed and we look at where the carriers will be as they get through this initial kind of wave of the consolidation impact, I think the future for Brazil is gonna be very strong. Now, having said all of that, we actually thought this year was gonna be very, very slow in Brazil from a lease-up standpoint because of this dynamic.
But we're actually outpacing our expectations that we came into the year with, as the carriers seem to still have many network needs, and we're benefiting from that.
When do you think you will be full through the consolidation churn?
Well, so we expect that the churn will be about $25 million-$35 million of total lost revenue. $10 million of that is in this year's numbers because of a deal that we signed with TIM, who was one of the three carriers, that brought forward some of that churn in exchange for other things, other long-term commitments from them, other new business commitments, et cetera. If we have no agreement in place with the other two carriers, if we were to sign something with them, it could do something similar and accelerate the timing in exchange for other benefits. But if we don't, then the lease exposure would take place as those term end dates come up, and that will be over, you know, probably five, six years on average.
How do you think about the new build opportunity in Brazil for SBA?
Well, we've built a lot of sites down there. We continue to build sites down there, probably not quite as many today as we were in the past. Some of that is due to this focus that they have right now around the consolidation of Oi. And I think we'll continue to see opportunities because we've got strong relationships with the carriers down there. But it's not just what they're willing to hand out, it's what we're willing to take, too. We're pretty focused on making sure that the sites that we're building are gonna have the opportunity to meet the financial returns that we've set forth, internally. And in some cases, frankly, they don't. And in those cases, we have to pass on those.
So I would say there's plenty of opportunity for new sites, but we focus on the ones that we want.
What does competition for site development look like in Brazil? The context that I have in mind is, you know, we saw this period in the U.S. where a sort of cohort of privately backed tower operators emerged, in some cases, technically backed by the carriers, where they were essentially willing to build and accept terms that the big public companies would not.
Right.
For quite a long time, we actually have not seen robust site development by the big public tower companies, specifically because of that. Are you finding that Brazil or some of the other international markets you're in, as they mature, are experiencing similar dynamics?
There are some cases where there are people willing to do things that we would not be willing to do, and I would imagine some of the other bigger companies would not be as well. And so, to combat that, we have to make sure that we're offering something beyond what those folks can offer, and we do that through meeting other needs that our customers have, or providing them solutions that it's easier for us to provide around security, for instance, power solutions, other nuances. You know, the interesting thing is, internationally, the carriers are a little bit more open to us being more involved in the dialogue around their network and their needs than you would typically have had here in the U.S.
The good thing about that is it allows us to evaluate areas where we can benefit them and ultimately benefits us because it establishes a long-term relationship and partnership. We're gonna continue to focus on those relationships and providing those solutions to them, and also trying to lock up agreements for a long period of time as well, which we've had pretty good success with.
Right. Broadly speaking, for a long number of years, you've had this objective of growing your portfolio by about 5%-10% a year, although you really haven't announced any scaled acquisitions this year. What does the M&A environment for towers look like globally? Are you seeing things or are you just not seeing things that are interesting?
Yeah, we are seeing some things. Although I'd say it's not quite as much as it was before. You know, we do have internally, we kind of set this objective, and we talked about it all the time, of 5%-10% portfolio growth. And if you go back a year ago, we actually grew our portfolio by 15%. So some years it's gonna be over, and some years it's gonna be under. This is likely to be a year where it's under, because the opportunities that are out there, not all the sellers have, I think, adjusted to the cost of capital that exists in the market and its impact on pricing. I do think buyers are adjusting more, which is why you've seen less deals broadly. It's not just SBA.
I think you've seen less acquisitions happening in the tower space, across the industry, and that's because of this sort of misalignment, perhaps, in terms of expectations versus what people are willing to pay. But I think that's a good sign. I think there's some rationality that's being brought to it. And in our case, you know, we'll continue to be opportunistic. Where we've been successful is finding opportunities that are a little different, maybe, kind of under the radar, so to speak, where we think we can bring our expertise and history to extract some value that others might not have seen.
Are you mostly looking for those opportunities in places where you already operate, or do you anticipate that you'll likely expand your geographic footprint through additional M&A?
Well, we definitely look within the markets that we're in. We're already there. We've already got a base of operations, so certainly try to look to add scale to the existing markets. In terms of new markets, we are open to new markets. We do look at them. There's nothing that we really close down, but we also don't have an objective where we have to expand into a new market. It's really gonna be dependent upon the opportunity that we see in front of us. But, we think there are possibilities for that, and it's not unlikely that we'll see those opportunities and expand into one or two new markets over the coming years.
...How are you thinking about what you want your overall asset portfolio to look like? And so I'll sort of ask it two ways. One, just in terms of being outside the U.S. as a tower operator, particularly in developing markets, is there a comfort zone in terms of how big you would wanna be, but maybe not wanna be bigger? And then the second part of the question is just ancillary infrastructure. You've done a lot less of that. You've done some of it, but you've done a lot less of it. Are you evolving your thinking there at all as you just see how networks are being built, and financed, and used?
Yeah. So we are open to ancillary businesses to some degree, to the extent that they benefit the offering that we're making around our tower business. At our core, just to be clear, we are a tower company. That's what we are, that's what we will remain. The other things that we do are done because they provide some benefit, we believe, to our tower business, or our tower business provides some benefit to that other business. And ultimately, it's still a financial analysis, where we're not gonna do other things just to be in them because we think that it sounds good, or it suggests that we're offering something to our customers. If they don't work on a standalone basis from a financial return standpoint, we're not kind of going there.
So, the incremental investments we make will be to add ultimately return to the shareholder. In terms of the international mix, you know, we've said publicly before, and this is still the case, that we want to limit our exposure to non-U.S. dollar-denominated revenues to somewhere in the 25%-30% range. We are below that today. And a lot of that is based on the fact that we finance most of our business, or basically all of it, out of the U.S. markets and U.S. dollar-denominated debt. And so, as long as that's the case, I think there needs to be some synergy there that we're comfortable with. And hey, we're primarily a U.S. tower company.
From a tower standpoint, we have more towers internationally than we do US, but obviously, our revenue and EBITDA standpoint, it's much more heavily US-focused, and I think it will remain that way into the future. The last thing I'll say about it is that most of the growth opportunity, though, is international, so, you know, we have to balance that as we look at opportunities that are out there. Unfortunately, the ability to continue to grow the portfolio in the US is somewhat limited.
All right. Let's talk a little bit about the balance sheet. So you ended the second quarter with a little over $12 billion in net debt, so your net debt to EBITDA was at 6.6 times. It's actually the lowest in your history as a public company.
Right.
You know, for how long does it make sense for SBA to delever? Is there a point that you just don't think it would make sense to go below, or is it really contingent on the macro environment?
It is contingent to some degree on the macro environment. It's really a comparative analysis. Where is the incremental capital gonna go? You know, we've always been the highest levered of the public tower companies by design. We always found that we could take that incremental capacity that was created to that incremental leverage, and invest it into assets that were going to create a higher return to our equity holders. And as long as that's the case, we're still comfortable with that. We haven't lowered our leverage targets, even though our leverage is, in fact, below those targets today. But we're making individual decisions today to pay down our debt, primarily our revolving line of credit, which still allows us to keep that capacity and that flexibility.
There is no magic threshold that we say, "Oh, we can't go below that number." And I don't think that we'll continue to drop indefinitely, but I do think, for the time being, it's creating the best, long-term return, and that's why we're doing it. But we'll be able to be flexible and see how the rate environment changes. And that's really the bottom line issue, is we don't know for sure where rates are gonna settle out, and given the amount of debt that we have, we have to wait and see how that plays out before we make any big commitment.
Other than rates, what else is a primary factor that influences where you're comfortable with leverage?
Well, rates is probably the primary one, but, what's the use of that capital? What's the potential to use it? Over time, the dividend will become a bigger percentage of AFFO that will eventually affect it as well. So, there's several factors that will play into it.
One of the things you have done with discretionary capital over time is repurchase shares, although you haven't repurchased any shares for the past couple of quarters, instead allocating that capital towards paying down the revolver, which I think is your most expensive debt. At some point, you will have that fully paid down.
Right.
How are you thinking about what would be the next most logical way to allocate excess capital after that point? Do buybacks start coming back up on the list?
Yeah. I mean, the preference has always been, and still is, to actually add incremental assets, to invest in new towers through builds and buys. But, it's a comparison of how that looks against the other options, which include buybacks, which include delevering as well. So I would expect, at some point, buybacks will certainly be in the mix of a way that we add value. For right now, we think that the debt paydown is a better way to go, but eventually, I would expect there'll be a mix of each of these things.
You know, historically, you've driven shareholder value primarily through growth in AFFO per share. That has slowed a bit right now for reasons that you've talked about. You obviously now have a dividend. You have a rapidly growing dividend. As you think about the next many years and the ways you're looking to drive value for shareholders, how are you thinking about the balance between AFFO per share growth that you think you can deliver versus the dividend and the dividend growth that you think you can deliver?
Yeah. I mean, our primary focus is still on medium to long-term AFFO per share growth or accretion. That's all the decisions that we make about allocation of capital, that's the primary focus that we have. That'll continue to be the case. The dividend, we have been the fastest growing dividend payer, in the industry, and pretty high, if not the highest, among REITs broadly. I expect that we'll continue to lead the industry in terms of the pace of growth of the dividend. And so it will become a more meaningful part of the value proposition for shareholders. But today, it's still a relatively small component of it, and our focus, ideally, will be on growing the AFFO first, if we can do that. But eventually, over time, the NOLs are gonna burn off, we're gonna pay a higher dividend.
That dividend is growing faster than the AFFO per share is growing, so it will start to eat up more and more of that AFFO, and it'll become a bigger part of the story. But that's probably a number of years down the road.
All right, Brendan, thanks so much for being here.
Yeah.
Really appreciate it.
Absolutely. Thank you for having me, Brett.
Great.
Thank you.
Thank you. No, I appreciate it.