SBA Communications Corporation (NASDAQ:SBAC) Q1 2023 Earnings Call Transcript

SBA Communications Corporation (NASDAQ:SBAC) Q1 2023 Earnings Call Transcript May 1, 2023

SBA Communications Corporation misses on earnings expectations. Reported EPS is $0.93 EPS, expectations were $1.21.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SBA, First Quarter Results Conference Call. At this time all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mark DeRussy, Vice President of Finance. Please go ahead.

Mark DeRussy: Good evening and thank you for joining us for SBA’s first quarter 2023 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including but not limited to any guidance for 2023 and beyond. In today’s press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, May 1 and we have no obligation to update any forward-looking statements that we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics.

The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn the call over to Brendan to discuss our first quarter results.

Brendan Cavanagh: Thank you, Mark. Good evening. We started the year off with a solid first quarter. Our results were slightly ahead of our expectation and allowed us to increase our full-year 2023 outlook for most metrics. Total GAAP site leasing revenues for the first quarter were $617.3 million and cash site leasing revenues were $610.4 million. Foreign exchange rates represented a benefit of approximately $600,000 when compared with our previously forecasted FX rate estimates for the quarter and a headwind of $2.5 million when compared to the first quarter of 2022. Same tower recurring cash leasing revenue growth for the first quarter, which is calculated on a constant currency basis, was 4.7% net over the first quarter of 2022, including the impact of 4.2% of churn.

On a gross basis, same-tower recurring cash leasing revenue growth was 8.9%. Domestic same-tower recurring cash leasing revenue growth over the first quarter of last year was 8.5% on a gross basis and 5.1% on a net basis, including 3.4% of churn. Domestic operational leasing activity or bookings representing new revenue placed under contract during the first quarter remains steady and was similar through the fourth quarter. We again saw balanced contributions from each of our largest customers. During the first quarter, amendment activity represented 51% of our domestic bookings and new leases represented 49%. The big four carriers of AT&T, T-Mobile, Verizon and DISH represented approximately 95% of total incremental domestic leasing revenues signed up during the quarter.

Domestically, churn was in-line with our prior quarter projections, and our full-year churn expectations remain the same as we provided last quarter, including $25 million to $30 million of Sprint merger-related churn. Internationally, on a constant currency basis, same-tower cash leasing revenue growth was 2.5% net, including 7.8% of churn or 10.3% on a gross basis. International leasing activity was good again, with similar results to our solid fourth quarter. Inflation-based escalators also continue to make healthy contributions to our organic growth, although these inflationary rates have begun to decline from their ‘22 highs. In Brazil, our largest international market, we had another good quarter, although the impact of the previously discussed TIM agreement weighed on our first quarter, same-tower organic growth.

This growth rate in Brazil was 4.7% on a constant currency basis, including the impact of 5.9% of churn. International churn remains elevated, but in line with expectations and our previously provided outlook. Excluding Oi consolidation related churn, we believe 2023 will be the high watermark for international churn. As a reminder, our 2023 outlook does not include any churn assumptions related to the Oi consolidation, other than associated with the TIM agreement, but if during the year we were to enter into any further agreements with other carriers related to the Oi consolidation that have an impact on the current year, we would adjust our outlook accordingly at that time. During the first quarter, 78% of consolidated cash site leasing revenue was denominated in U.S. dollars.

The majority of non-U.S. dollar denominated revenue was from Brazil, with Brazil representing 15.5% of consolidated cash site leasing revenues during the quarter, and 12.4% of cash site leasing revenue excluding revenues from pass-through expenses. Tower cash flow for the first quarter was $491 million. Our tower cash flow margins remain very strong as well, with a first quarter domestic tower cash flow margin of 84.3% and an international tower cash flow margin of 69.9% or 91.8%, excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the first quarter was $459.3 million. The adjusted EBITDA margin was 68.7% in the quarter. Excluding the impact of revenues from pass-through expenses, adjusted EBITDA margin was 74%. Approximately 97% of our total adjusted EBITDA was attributable to our tower leasing business in the first quarter.

During the first quarter, our services business had another strong quarter, with $58.2 million in revenue and $14.1 million of segment operating profit. Our carrier customers remained busy deploying new 5G related equipment during the quarter, and our services backlogs also remained healthy at quarter end. Adjusted Funds From Operations or AFFO in the first quarter was $341.7 million. AFFO per share was $3.13, an increase of 5.7% over the first quarter of 2022. AFFO growth was hindered by increased interest rates, which are anticipated to impact growth rates throughout the year. During the first quarter, we continue to invest in our portfolio, acquiring 14 communication sites for total cash consideration of $8.6 million. During the quarter we also built 52 new sites.

Photo by Vadim Bozhko on Unsplash

Subsequent to quarter end we have purchased or are under agreement to purchase 66 sites, all in our existing markets for an aggregate price of $63.7 million. We anticipate closing on these sites under contract by the end of the year. In addition to new towers, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of $11.6 million to buy land and easements and to extend ground lease terms. At the end of the quarter we owned or controlled for more than 20 years the land underneath approximately 70% of our towers, and the average remaining life under our ground leases, including renewal options under our control, is approximately 36 years. With that, I’ll now turn things over to Mark who will provide an update on our balance sheet.

Mark DeRussy: Thanks, Brendan. We ended the quarter of $12.9 billion total debt and $12.7 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.9x, below the low end of our target range. Our first quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense remains at a strong 4.7x. During and subsequent to quarter end, we borrowed and repaid certain amounts under our revolving credit facility. And as of today, we have a $595 million outstanding balance under our $1.5 billion revolver. The current weighted average interest rate of our total outstanding debt is 3.1% with a weighted average maturity of approximately 3.8 years. The current rate on our outstanding revolver balance is 6.5%.

The interest rate on 93% of our current outstanding debt is fixed. During the quarter we did not repurchase any shares of our common stock and we currently have $505 million of repurchase authorization remaining under our $1 billion stock repurchase plan. The company shares outstanding at March 31, 2023 were $108.3 million. In addition, during the quarter, we declared and paid a cash dividend of $93.9 million or $0.85 per share. And today we announced that our Board of Directors declared a second quarter dividend of $0.85 per share, payable on June 21, 2023 to shareholders of record as of the close of business on May 26, 2023. This dividend represents an increase of approximately 20% over the dividend paid in the year ago period and only represents 27% of our projected full year AFFO.

With that, I will now turn the call over to Jeff.

Jeff Stoops: Thanks Mark and good evening everyone. The first quarter represented a very good start to 2023. Our team continued to execute at a very high level and we produced solid year-over-year growth in each of our key metrics. Each of our largest U.S. customers remain busy and they contributed relatively equally to our organic leasing activity during the quarter. The focus of their activity was a balanced mix of adding equipment to sites in support of 5G through the deployment of new spectrum bands and infill and coverage expansion through brand new colocations. While we believe domestic activity in 2023 will fall below the peak levels of activity in 2022, we expect our carrier customers to stay relatively busy with additional network deployment over the next several years for a number of reasons.

Some of AT&T’s and Verizon’s C-Band licenses will not be cleared until later this year. The C-Band and 3.45 gigahertz licenses won by T-Mobile have been delayed due to the lapse of the FCC spectrum authority. Dual band radios are our customers are planning to use in their deployment supporting 3.45 gigahertz and C-Band frequencies have just been approved by the FCC and dual band radios supporting C-Band and CBRS are still pending approval. And DISH will be moving forward with additional co-locations to meet their 2025 coverage requirements. We believe all of these developments will drive multi-year continued development activity. Also encouraging about the prospects for future network development activity is the letter sent last week from CTIA to the White House, imploring the President to free up 1,500 megahertz of additional mid-band spectrum currently held by the Department of Defense and other governmental agencies.

The request is for the spectrum to be made available on a full-power license basis, which obviously would have positive implications for additional macro-site activity. The request from CTIA demonstrates the industry believes that more network resources will be necessary to handle increasing demand for volume, quality and new applications and to stay competitive with the rest of the world. Just as the last 20 years has demonstrated the need for continuous network investment, we believe the future will be the same. We believe this will provide continued – a continued positive environment for SBA. Internationally we also add a solid quarter with continued steady organic leasing activity. During the first quarter, 42% of new international business signed up in the quarter came from amendments to existing leases and 58% came through new leases with particularly strong contributions from Tanzania and South Africa.

Brazil also had a strong quarter, ahead of our internal expectations with contributions from each of the big three carriers in that market, as well as good-sized contributions from CPI based escalators. The integration of the GTS assets has gone very smoothly and these assets are performing well thus far, and we have seen a stabilization in the currency exchange rate that has contributed to our increased full-year outlook. We remain excited about our opportunities in Brazil over the coming years as we build on our strong customer relationships and expect meaningful 5G related investments and continued expansion of wireless services throughout the country. Moving on now to our balance sheet, we remain in a very strong position. As we have stated before, we continue to be a preferred issuer in the debt markets we currently participate in with extremely good access to capital.

With respect to the current interest rate environment, fortunately we do not have any debt materials until October 2024. Thus we do not need to issue incremental debt today, unless we see a compelling use of capital that we expect to be additive to long-term shareholder value. We finished the quarter with 93% of our debt fixed and thus we are only modestly exposed to significant interest rate fluctuations. Our exposure to floating rate debt is also expected to decline further as we anticipate further paying down our outstanding revolver balance throughout the year absent other more compelling capital allocation. While our first choice for capital allocation continues to be portfolio growth, today the market is pretty slow globally and lacking attractive opportunities.

That of course can change quickly and we will be ready when it does. We ended the quarter with a net debt to annualized adjusted EBITDA leverage ratio of 6.9x below our target range and giving us flexibility if we see value enhancing investment opportunities. As a result of our strong financial position and our optimism about our future, today we announced our second quarter dividend, consistently our first quarter dividend which represents a nearly 20% year-over-year increase. This dividend represents only approximately 27% of our projected AFFO in our 2023 outlook, leaving us substantial capital for additional investment in portfolio growth, stocking purchases and revolver payments. Our financial condition remains very strong. Last quarter I mentioned the fourth quarter ratings upgrade we received from Standard & Poor’s to just below investment grade.

Since our last earnings release, we received another ratings increase, this time from Moody’s. These upgrades are indicative of the comfort the rating agencies have and the strength and stability of our underlying business. The future of our business remains bright. Our customers continue to have significant network needs and we are committed to supporting them and efficiently and effectively meeting those needs. I want to thank our customers and I want to thank our team members for the significant effort put in by all to the contribution to our shared success. We look forward to sharing with you our progress as we move throughout the balance of 2023. And with that Eric, we are now ready for questions.

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Q&A Session

Operator: . And first we will hear from Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo: Hi! Thanks for taking my question, guys. It looks like you did about $20 million or $21 million in leasing in the first quarter. The guidance implies may be 51 or so for the rest of the year. Should we think of the acceleration from here being fairly linear or is it going to have a bit of a different shape to it?

Jeff Stoops: It should be fairly linear Nick. The $21 million that you mentioned is about right for the first quarter and I would expect it to be kind of a gradual step down throughout the year.

Nick Del Deo: Okay, okay, good. And then with the strike to new builds overseas, looks like the pace stepped down quite a bit versus what you were doing in 2022. So I just want to know if that’s kind of normal noise or if there’s something more substantive that we should be cognizant of.

Jeff Stoops: Yeah, I think it’s just a little bit of a slow gig out of the gate for the year. I don’t think it’s any more than that and we’re not making any material adjustments to what we think we’re about to do this year.

Nick Del Deo: Okay. Which countries are you most focused on from a new build perspective?

Jeff Stoops: It really attracts our largest markets. So I would say outside the U.S., it would be Brazil, South Africa, Tanzania, but we will build towers I believe in every country in which we’re currently operating for this year.

Brendan Cavanagh: One thing Nick is that in Brazil a little bit of that slowdown is with the merger that took place among the carriers. There’s some focus on that. So, that’s put a little bit of a slowdown on the new builds temporarily, but we expect over time that will obviously come back and pick up.

Nick Del Deo: Okay, great. Well, thank you both.

Operator: And next we’ll hear from Jonathan Atkin with RBC.

Jonathan Atkin : Thank you. So given the comment that you made Jeff about – I think it was Jeff, you made a comment about lack of – relative lack of compelling portfolio growth opportunities. I wondered why stock buybacks didn’t kind of rank higher on the packing order in terms of capital allocation. And then secondly, as you think about U.S. leasing specifically, just wondering if you can maybe give us some of the puts and takes around any carriers that you might see even ramping on your portfolio, the activity level and then those that might be kind of tapering and what kind of rate of change do you expect. Thank you.

Jeff Stoops: Yeah, in terms of the stock repurchases, John, they are definitely high on our priority list as we demonstrated over the years and they will continue to be. We just feel like at this moment in time that we need to let the Fed do their thing and get to the point where we see that interest rates have stopped going up, because the rate that they are increasing has a direct impact on the cost of our revolving credit facility. So we think through this particular period of time, and given the rate that we’re paying on the revolver, that is absolutely the best use of our temporary capital allocations, but rest assured we will be buying material amounts of stock back over the coming years. In terms of the rate of changes of the carriers, and we don’t want to get into too much detail about who’s exactly doing what, and I think it’s been fairly well broadcast that who was spending the most money last year, and who was the most active.