SBA Communications Corporation (NASDAQ:SBAC) Q3 2023 Earnings Call Transcript

SBA Communications Corporation (NASDAQ:SBAC) Q3 2023 Earnings Call Transcript November 2, 2023

SBA Communications Corporation misses on earnings expectations. Reported EPS is $0.8 EPS, expectations were $3.23.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SBA Third 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. [Operator Instructions] 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 third 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 expectations. Our statements are as of today, November 2, and we have no obligation to update any forward-looking statement 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 it over to Brendan to discuss our third quarter results.

Brendan Cavanagh: Thank you, Mark. Good evening. We had another very solid quarter in Q3, with financial results that were ahead of our expectations. Based on these results and our updated expectations for the fourth quarter, we have increased our full year 2023 outlook for site leasing revenue, tower cash flow, adjusted EBITDA, AFFO and AFFO per share, notwithstanding weaker forecasted foreign currency exchange rates than we had previously expected. Total GAAP site leasing revenues for the third quarter were $637.5 million and cash site leasing revenues were $630.4 million. Foreign exchange rates represented a headwind of approximately $1.4 million when compared with our previously forecasted FX rate estimates for the quarter, and a benefit of $4.8 million when compared to the third quarter of 2022.

Same tower recurring cash leasing revenue growth for the third quarter, which is calculated on a constant currency basis, was 4.7% net over the third quarter of 2022, including the impact of 4.1% of churn. On a gross basis, same-tower recurring cash leasing revenue growth was 8.8%. Domestic same-tower recurring cash leasing revenue growth over the third quarter of last year was 8.6% on a gross basis, and 4.7% on a net basis, including 3.9% of churn. Domestic operational leasing activity or bookings representing new revenue placed under contract during the third quarter was up materially from the second quarter, primarily as a result of the AT&T master lease agreement signed in July. Excluding the impact of the AT&T MLA, third quarter activity levels were similar to the second quarter.

All major carriers remain active with their networks. However, agreement execution levels continue to be slower than a year ago. The higher cost of capital naturally has caused a focus on cash management and expense control by our customers. This dynamic extends the timing over which 5G-related network investments are being made. There is still a long way to go for 5G network investments based on the number of our sites that remain to be upgraded with mid-band spectrum deployments by the major mobile network operators. Wireless data use continues to grow materially, and that fact, combined with the limited spectrum availability will require additional infrastructure over time to maintain and certainly to enhance service quality. This gives us great confidence in continued domestic organic leasing growth for many years to come.

During the third quarter, domestic churn was slightly below our prior projections due to a slower pace of decommissioning of legacy Sprint leases than we had projected. Our overall expectations for Sprint related churn remain the same, but there will likely continue to be small variations in timing of realizing this churn over the next several years. We currently expect Sprint related churn for 2023 to be $28 million. 2024 Sprint related churn is currently estimated to be approximately $30 million. Non-Sprint related domestic churn was in line with our prior projections and continues to range between 1% and 2% of our domestic leasing revenue. Internationally, on a constant currency basis, third quarter same-tower cash leasing revenue growth was 4.5% net, including 4.9% of churn or 9.4% on a gross basis.

International leasing activity remained strong in the third quarter and was again ahead of our internal expectations. While global macroeconomic conditions present challenges to our carrier customers, we have continued to see pockets of dedicated network investment across a number of our markets. The desire and need for enhanced wireless coverage and quality of service continues to be elevated internationally, and we expect will continue to drive leasing opportunities across our portfolio. Wireless data growth in our international markets is even greater than the U.S. We also continue to see steady contributions from inflation-based escalators in many of our markets. In Brazil, our largest international market, the same-tower organic growth rate was 2.6% on a constant currency basis, including the impact of 6.3% of churn, which growth rate reflects a decline in the Brazilian inflationary index.

The net growth rate was also again significantly impacted by our previously discussed TIM agreement. As a reminder, our 2023 outlook does not include any churn assumptions related to the Oi consolidation other than that associated with the TIM agreement. However, we continue to discuss potential arrangements with other carriers related to the Oi consolidation that could have an impact on our current year international churn. During the third quarter, 77.8% 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 16% of consolidated cash site leasing revenues during the quarter, and 12.9% of cash site leasing revenue, excluding revenues from pass-through expenses.

Tower cash flow for the third quarter was $511.7 million. Our tower cash flow margins remain very strong, with a third quarter domestic tower cash flow margin of 85.3%, and an international tower cash flow margin of 70%, or 91.5% excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the third quarter was $482.1 million. The adjusted EBITDA margin was 71.4% in the quarter. Excluding the impact of revenues from pass-through expenses, adjusted EBITDA margin was 76.9%. Approximately 98% of our total adjusted EBITDA was attributable to our tower leasing business in the third quarter. During the third quarter, our services business had another solid quarter, with $45.1 million in revenue, and $13.6 million of segment operating profit.

While off last year’s all-time high activity levels, we continued to execute on our backlog of high quality, high margin work and deliver for our carrier customers. However, given the slower pace of carrier network related activity across the industry, we have lowered our full year outlook for our site development business by $15 million at the midpoint. Notwithstanding this adjustment, we continue to manage our costs and focus on high-margin work. And thus, we have not lowered our expected margin contributions to 2023 adjusted EBITDA and AFFO from our services business. We still expect 2023 to be the second largest services revenue year in our history, trailing only 2022. Adjusted funds from operations or AFFO in the third quarter was $364.1 million.

AFFO per share was $3.34, an increase of 7.7% over the third quarter of 2022. During the third quarter, we continued to invest in additions to our portfolio, acquiring 45 communication sites for total cash consideration of $40.8 million, and building 86 new sites. Subsequent to quarter-end, we have purchased or are under agreement to purchase 215 sites, all of which are in our existing markets for an aggregate price of $74 million. We anticipate closing on these sites under contract by the end of the second quarter of 2024. In addition to new towers, we also continued to invest in the land under our sites. During the quarter, we spent an aggregate of $15.1 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.

Before I turn things over to Mark, I’d like to take a quick moment to welcome Marc Montagner, who joined our team in mid-October, and will be taking over as our new CFO on January 1. Marc brings with him an extensive background in telecommunications and finance, and we are very excited to have him as part of the team. I also would be remiss if I did not take a moment to recognize that this call is Jeff’s final earnings call as CEO of SBA. I have big shoes to fill, and I am grateful for the professional guidance and the friendship he has extended to me over the last 25 years. And with that, I will now turn things over to Mark, who will provide an update on our balance sheet.

Mark DeRussy: Thank you, Brendan. We ended the quarter with $12.6 billion of total debt, and $12.4 billion of net debt. Our net debt-to-annualized adjusted EBITDA leverage ratio was 6.4x, 0.2 turns lower than last quarter, and the lowest level of decades. Our third quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense increased to 5.1x. During and subsequent to quarter-end, we repaid amounts under our revolving credit facility. And as of today, we have a $285 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 3.2 years. The current rate on our outstanding revolver balance is 6.5%.

Including our interest rate hedging position, the interest rate on 95% of our current outstanding debt is fixed. During and subsequent to the quarter, we repurchased 0.5 million shares of our common stock for $100 million at an average price per share of $197.89. We currently have $404.7 million of repurchase authorization remaining under our $1 billion stock repurchase plan. The company’s shares outstanding at September 30, 2023 were $108.1 million. In addition, during the quarter we declared and paid a cash dividend of $92.1 million, or $0.85 per share. And today we announced that our Board of Directors declared a fourth quarter dividend of $0.85 per share that’s payable on December 14, 2023 to our shareholders of record as of the close of business on November 16, 2023.

This dividend represents an increase of approximately 20% over the dividend paid in the year ago period and only represents 26% 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. We continue to execute well in the third quarter. We produced financial results ahead of external and internal expectations. And we continue to be a valued partner to our carrier customers in helping them to meet their network objectives. Each of our largest U.S. customers continued to add equipment to sites in support of 5G through the deployment of new spectrum bands as well as to expand coverage through brand new colocations. Although current activity levels are below the pace of the last couple of years, we have continued to steadily organically grow our revenues and tower cash flow. Even in a slower than typical demand environment wireless carriers still have a constant need to invest in expanding and enhancing their networks.

By leveraging our high quality assets and providing them quality services support, we have been able to continue growing our business relationship with each of our major customers. In addition, we are confident there will be additional material network investment over the next several years as wireless data usage continues to grow materially. The growth in wireless demand is not slowing down and networks will continue to be strained and our customers still have significant mid-band spectrum holdings that need to be deployed with little additional spectrum plan for release anytime soon. Macro tower sites are still the most efficient and effective way to deliver wireless connectivity, and our focus on high quality portfolio will make us a key participant in network growth for many years to come.

Internationally, we also had another solid quarter with greater organic leasing activity than we had anticipated. We again experienced strong contributions broadly from many of our markets, including Central America, Brazil and South Africa. Brazil, our largest market outside of the U.S. was again ahead of our internal expectations, and each of the big three carriers in that market remained busy with coverage expansion, densification and integration of the legacy Oi wireless network. Lease up across many of our Central American markets was also ahead of expectations and evidences the need of our customers to meet the constantly growing demand of wireless customers for wireless data in those markets. I am pleased with our operational execution internationally, and I am optimistic for the future based on significant network needs across many of our markets.

During the third quarter, we again generated very healthy AFFO, providing strong dividend coverage and significant cash for discretionary allocation. During the quarter, we allocated capital to the dividend and new site additions through both acquisitions and new tower builds, selectively adding high quality sites that we believe will be additive to our organic growth in future years. We also spent $100 million on share repurchases at prices we believe represent a very good value and will produce a nice return over time. We also continue paying down the outstanding balance on our revolver. We immediately benefited from this by reducing some of our highest rate cash interest obligations. The reduction in our outstanding debt, along with our continued solid growth in adjusted EBITDA produced a quarter ending net debt to adjusted EBITDA leverage ratio of 6.4x, which I believe is the lowest level ever in our public company history.

Even with continued portfolio growth, stock repurchases and growing dividends, we have reduced our leverage by almost one full turn in the last 18 months, demonstrating the deleveraging power of our business. At this leverage level, we believe we have the near-term optionality to achieve an investment grade rating. However, for the time being, we are maintaining flexibility in order to comfortably assess all capital allocation options. Going forward, we expect to continue growing our dividend at a rate higher than the rate of growth of our AFFO over the next several years, while maintaining a low AFFO payout ratio. For the time being, excess future cash flows will likely be directed into the repayment of debt, as it is the most accretive short-term and is also beneficial long-term, but we will of course, also stay opportunistic around portfolio opportunities and additional stock buybacks.

Our balance sheet remains in great shape with no debt maturities until October 2024, and we have the capacity to satisfy that repayment entirely with cash flow from operations or availability under our revolver. We continue to have very good access to capital, and thus are comfortable to be opportunistic around the timing of future financings. Overall, we feel very good about our current capital position. As Brendan mentioned earlier, this represents my final earnings call as CEO of SBA. I have participated in approximately 100 of these calls over the years. I have been honored to be the leader of this organization for the past 22 years and appreciative of the time I have spent with many of you on this call. Thank you for your support and goodwill throughout this very enjoyable ride.

I will retire with the comfort and satisfaction of knowing SBA is a great company, in great shape, and with a management team that I know will lead it to new heights. I want to conclude by thanking our team members and our customers for their contributions to our shared success. And with that, Eric, we’re ready for questions.

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Q&A Session

Operator: [Operator Instructions] And one moment please for our first question. And our first question goes to Jon Atkin with RBC Capital Markets. Please go ahead.

Jon Atkin: Thanks very much. And Jeff, I want to wish you all the best. And maybe a question for you given your tenure in the industry. Your company and many of your peers have seen kind of a lot of changes. I think your company at one point was doing shared wireless backhaul. You’ve gone into data centers, you’ve evaluated things like outdoor DAS. But anything about the sector as you see it on your way out of the company as an active observer, I imagine. But any kind of broad brush structural changes that you see affecting the tower model or anything ancillary to that that we should be looking for as investors? Thanks.

Jeff Stoops: I would say over my 25, 26 years, Jon, there’s been a steady connection between growth in wireless demand and necessary infrastructure. And I think that really has its roots in the laws of physics and the way radio spectrum works. We’ve seen cycles that have repeated themselves over time. The current cycle feels like it’s going to be a bit more elongated than perhaps some of the prior cycles, as I think our customers are demonstrating. Not that they didn’t demonstrate fiscal prudence over the years, but it seems to be a particularly higher priority than racing to deploy spectrum, which they will own, and deploy it when they need it. But the basics haven’t really changed that much. We haven’t seen any technology that really will obsolete the basic tower business model.

We watch satellites and things like that, and we watch small cells. And the macro site really continues to be the backbone of wireless communications. And the conversations we have with our customers tell us that they expect macro sites to continue to be the backbone. So I think there’s always ups and downs and twists and turns, but directionally it remains pretty much the way it was many years ago.

Jon Atkin: Great. That’s great perspective. And thinking forward over the next year or so, Brendan, I guess would be directed towards you. But kind of the operating trends and the demand drivers, any sense as to kind of the cadence that one might see as this spectrum gets further deployed and the kind of the 5G journey continues on behalf of the M&Os?

Brendan Cavanagh: Yes. I think, Jon, we’ll see in the early part of heading into next year that things will probably be lower than they’ve been. But I would expect to see that increase over time. And it really base that answer mostly on the needs that our customers have. There’s still quite a bit of spectrum that has to be deployed on our sites. There are some deadlines out there for certain of our customers that they need to meet. And just based on conversations that we have with them, suggest that there’s still a ton of work to be done. But I think, as Jeff kind of alluded to, in the current moment in time, there’s a little bit more of a focus on financial constraints and cost control. But I think that naturally will start to give way to network needs as mobile and wireless data consumption increases. So, I would expect that we’ll see it start to move up as we get into the middle of next year.

Jon Atkin: Thanks very much and all the best, Jeff.

Operator: Our next question goes to Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks, good afternoon everybody. Jeff, I think I’ve been on 96 of those 100 earnings calls with you. So I’ll echo Jonathan’s comments. And have fun with the grandkids and your charity work I know you’re so active with.

Jeff Stoops: Well, thank you, Ric. We had a good run together.

Ric Prentiss: Yes. I want to come to a couple of items. The dividend policy. I appreciate the comments on that, dividend rate over the growth rate of AFFO. Some of the others in the space are looking at the dividend policy, should it be tied more towards the qualified REIT subsidiary, kind of minimum that you have to do versus total AFFO. How should we think about you all looking at kind of the dividend versus qualified REIT subsidiary versus total AFFO, and as you think about the payout ratio over time?

Brendan Cavanagh: Yes. We’re fortunate to be in the position that we’re in, where we actually still have fairly sizable NOLs, which gives us some flexibility there, Ric. But as – you kind of look at it as, you produce a certain amount of taxable income, and we satisfy it through a mix of using NOLs and paying out dividends and in order to maintain our REIT compliance. And so by starting when we did, it has allowed us to continue to grow our dividend at a pace that I think is fairly high across most REITs, and will allow us to continue to do that to some degree, it’s certainly at a pace greater than the AFFO per share growth. Until we reach a point at which we will have exhausted those NOLs, and at that point, I would expect we’ll pay a dividend that is – whatever is necessary to comply with our REIT requirements.

So that’s kind of the way we look at it. What that means, based on our projections is that we’ll continue to have nice growth in our dividend over the coming years. And we’ll be able to keep our payout ratio as a percentage of AFFO fairly low, which gives us a lot of flexibility on other discretionary uses for that capital.

Jeff Stoops: Yes. I think, Rick, the reason we haven’t broken out total AFFO versus just AFFO from requalifying income that dividend is calculated, is we’re not close to any of those levels. I mean, I think our philosophy will never change, which is we’re only going to pay out what we have to on that calculation. And it also kind of confuses people if we introduced another metric. It’s just, I think, easier for people to understand and think about when we’re using AFFO. But we have a long way to go before we get to the point where we’ve exhausted our NOLs. And that gives us the ability to increase dividends faster than perhaps others. But at the same time, we’re watching the total payout as a percentage of AFFO. And we’re going to be able to do both, keep a lower relative payout ratio and increase the dividend at a faster pace for the next several years.

Ric Prentiss: Makes sense. You mentioned that you think, possibly, the levels you’re at lowest, decades, if not, ever publicly in the mid-6% range. How should we think about what investment grade means to you, if you were to pursue it? What kind of level – you’ve always been kind of a levered capital appreciation story. But obviously, the interest rate environment we’re in has caused people to always look through things. But how should we think about your view on leverage and interest rates? And then that calculus that allowed you to do stock buyback this quarter?