SBA Communications Corporation (NASDAQ:SBAC) Q4 2023 Earnings Call Transcript

SBA Communications Corporation (NASDAQ:SBAC) Q4 2023 Earnings Call Transcript February 26, 2024

SBA Communications Corporation misses on earnings expectations. Reported EPS is $1.01 EPS, expectations were $3.32. SBA Communications Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SBA Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. 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 morning, everyone — I’m sorry — good evening, everyone, and thank you for joining us for SBA’s Fourth Quarter 2023 Earnings Conference Call. Here with me today are Brendan Cavanagh, our President and Chief Executive Officer, and Marc Montagner, 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 2024 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, February 26, and we have no obligation to update any forward-looking statements 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 Marc to discuss our fourth quarter results and 2024 outlook.

Marc Montagner: Thank you, Mark. We ended 2023 with another strong quarter. Our fourth quarter results were ahead of our expectations and allow us to finish at or near the high end of our full year 2023 outlook for site leasing revenue, tower cash flow, adjusted EBITDA, AFFO and AFFO per share. Consolidated same tower recurring cash leasing revenue growth for the fourth quarter, which is calculated on a constant currency basis was 3.6% net year-over-year including impact of 3.9% of churn. On a gross basis, same-tower recurring cash leasing revenue growth was 7.5%. Domestic same tower recurring cash leasing revenue growth over the fourth quarter of last year was 6.9% on a gross basis and 3.5% on a net basis, including 3.4% of churn.

Of that 3.4%, 1.6% was related to Sprint consolidation churn. As expected, domestic operational leasing activity or bookings representing new revenue placed under contract during the fourth quarter was consistent with the lower levels of activity we saw during the second and third quarter of 2023. Full year organic leasing contribution to domestic site leasing revenue ended up in line with our previously provided outlook. Non-Sprint related domestic annual churn was also in line with our prior expectations and continues to be between 1% and 2% of our domestic site leasing revenue. International same tower recurring cash leasing revenue growth for the fourth quarter, which is calculated on a constant currency basis was 4.2% net, including 5.9% of churn or 10.1% on a gross basis.

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Q&A Session

In Brazil, our largest international market, same-tower gross organic growth was 8% on a constant currency basis. Total international churn remained elevated in the fourth quarter due mostly to [carrier] (ph) consolidation. During the fourth quarter, 77.5% of consolidated cash site leasing revenue was denominated in US dollars. The majority of non-US dollar-denominated revenue was from Brazil, with Brazil representing 16.1% of consolidated cash site leasing revenues during the quarter. During the fourth quarter, we expanded our tower portfolio, acquiring 23 communication sites for a total cash consideration of $21.3 million. We also built 138 new sites. Subsequent to the quarter end, we have purchased under agreement to acquire 281 sites in all of our existing markets for an aggregate price of $87.8 million.

We anticipate closing on this site under contract by the end of the third quarter. Looking ahead, this afternoon, earnings press release includes our initial outlook for the full year 2024. Our outlook reflects a continuation of the reduced level of carrier CapEx that began early last year. Despite this, our leasing business will continue to grow organically through contribution from new leases amendment and contracted escalators. Domestically, our outlook assumes $55 million of customer churn in 2024, of which approximately $30 million related to Sprint related decommissioning. Our previously provided estimate of aggregate Sprint related churn over the next several years remain largely unchanged. We anticipate a range of $40 million to $45 million in 2025, $45 million to $55 million in 2026 and $10 million to $20 million in 2027.

Internationally, our outlook includes approximately $22 million churn in 2024. During the fourth quarter of ’23, we signed a multiyear agreement with Vivo in Brazil. Under this agreement, we expect to incur $4 million wireless consolidation churn in 2024 and an additional $2 million over the next several years. Total anticipated wireless consolidated churn remains at approximately $30 million. Additionally, our full year 2024 outlook reflects a year-over-year decline in service revenue and gross profit due to the lower overall carrier activity in the US. However, our outlook is in line with the historical performance, excluding our very strong result in 2022 and ’23 due to the initial rollout of 5G network by some of our wireless customers during these years.

This outlook does not assume any further acquisitions beyond those under contract and does not assume any share repurchase. However, we are likely to invest in additional assets and/or share repurchase during the year. Our outlook for net cash interest expense and core FFO and FFO per share include the recent refinancing of our term loan B debt, the upsize of our credit facility and the future [refinancing up with rerating rate] (ph) in the future of our $620 million ABS tower securities maturing in October 2024. Our balance sheet remains very strong, and we have ample liquidity. In January of 2024, we refinanced our $2.3 billion credit facility, pushing out the maturity to 2031. We also increased our revolver capacity by $500 million. Our $2 billion revolver is almost fully paid down.

Our leverage remains at historical lows and well below our steady target of 7 to 7.5 turns, giving us plenty of dry powder for opportunistic acquisition and/or share repurchase. Lastly, we purchased a forward-starting interest rate swap in the fourth quarter. This will give us great certainty around great uncertainty on future interest costs. With that, let me turn the call over to Mark, who will provide additional detail.

Mark DeRussy: Thank you, Marc. We ended the quarter with $12.4 billion of total debt and $12.1 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.3 times, which is below the low end of our target range and near the lowest level we have seen in decades. Our fourth quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was very strong at 5.2 times. During the fourth quarter 2023, the company entered into a $1 billion forward starting interest rate swap, which will swap one-month SOFR for a fixed rate of 3.83%. The swap has an effective start date of March 31, 2025, which coincides with the expiration of our existing $1.95 billion notional interest rate swap. This forward starting interest rate swap agreement will expire April 11, 2028.

Subsequent to the fourth quarter and on January 25th of 2024, the company issued a new $2.3 billion secured term loan B under its amended and restated senior credit agreement. This matures in January of 2031. The new term loan accrues interest at SOFR plus 200 basis points. The existing $1.95 billion interest rate swap will remain in effect until expiration on March 31, 2025. The term loan was issued at 99.75% of par value. The proceeds were used to retire the company’s 2018 term loan and to pay related fees and expenses. Also subsequent to the quarter, on February 23, 2024, the company further increased the total commitments under the revolving credit facility from $1.75 billion to $2 billion. We continue to use cash on hand to repay amounts under the revolver.

And as of today, we have a $70 million outstanding balance under our $2 billion revolver. The current weighted average interest rate of our total outstanding debt is 3% with a weighted average maturity of approximately 4.1 years. The current rate on our outstanding revolver balance is 6.4%. The interest rate on 97% of our current outstanding debt is fixed. During the fourth quarter, as we previously discussed on our third quarter earnings call, we repurchased 235 — I’m sorry, 234,000 shares of our common stock, $46 million at an average price of $198.27 per share. We currently have $405 million of repurchase authorization remaining under our $1 billion stock repurchase plan. The company shares outstanding at December 31, 2023, were 108.1 million.

In addition, during the fourth quarter, we declared and paid a cash dividend of $91.8 million or $0.85 a share. And today, we announced that our Board of Directors declared a first quarter dividend of $0.98 per share payable on March 28, 2024, to shareholders of record as of the close of business on March 14, 2024. This dividend represents an increase of approximately 15% over the dividend we paid in the fourth quarter. With that, I’ll now turn the call over to Brendan.

Brendan Cavanagh: Thank you, Mark. Good afternoon. I am pleased for the opportunity to reflect on our 2023 performance and to share our thoughts about 2024 and beyond. 2023 was a year marked by some significant macro headwinds, in particular, the consistently high interest rate environment that not only directly affected SBA’s floating rate debt costs and the views around our cost of future refinancing, but also impacted our customers and their network spending levels. In spite of these macro headwinds, SBA executed extremely well and produced solid financial results. When compared against the initial outlook for 2023, given in February of last year, our actual results for the year finished materially above the high end of the ranges given for site leasing revenue, tower cash flow, adjusted EBITDA, AFFO and AFFO per share.

Most of the outperformance was organic as we spent very little incremental discretionary CapEx in comparison to our initial outlook. Our excess free cash flow was instead largely spent on paying down our floating rate revolver debt, and we finished the year at a multi-decade low leverage level of 6.3 times and today have a current revolver balance of only $70 million. Internally, it was a year of leadership transition for the company. Jeff Stoops retirement, the addition of Marc Montagner to the team and new leaders in our international, legal and IT functions. Everyone has stepped up extremely well into their roles, and I am very happy with how the team is collaborating and performing. The disciplined succession planning and highly capable team members assembled throughout the organization have positioned us well for the future.

As we look forward to 2024, we recognize that we are coming off of a period of reduced network investment by our largest domestic customers. However, future network needs for each of these customers remain significant, and we anticipate being a critical partner for our customers in meeting their operational goals and objectives. A significant percentage of our sites still require 5G-related upgrades, which we are confident will take place over the next couple of years. In addition, the success and growth of fixed wireless access as a product offering for our customers will add greater demand for increased network capacity as the average user of this product uses 20 times or more broadband data than the typical mobile customer. And the evolution of AI-infused 5G offerings will continue to fuel the demand for improved speeds and lower latency.

All of these factors as well as good old-fashioned service-based competition are supportive of steady organic leasing activity on our US assets for years to come. Internationally, we also see a dynamic of significant network needs, providing a backdrop for continued solid organic leasing activity throughout many of our markets. Financial pressures have impacted many of our international customers as well but the demand for advanced wireless products and services is significant, and in a number of cases, even greater than that seen in the US. We expect this will in turn drive continued demand for incremental space at our tower sites. Nonetheless, there have been customer consolidations in several of our markets. As a result, we have worked closely with our customers to help them achieve necessary efficiencies in their operations, but while preserving the breadth of our business relationships, and solidifying our contractual commitments for the long term.

While this temporarily leads to elevated churn, we believe the long-term strength and stability of our cash flow streams produced as a result of these efforts meaningfully improves our go-forward value proposition. This is a good segue into my views around our forward strategy. Internally, we are highlighting a desire to analyze everything we do or consider doing through the lens of stabilizing our results, growing our core business and shifting our mix more and more to high-quality assets and operations. While this is not materially different than the approach SBA has taken throughout its history, we recognize that not all of our assets or business lines fit well within this goal. As a result, we are doing the work to evaluate our full portfolio and develop action plans around how we improve our position in each business line and in each market.

For instance, in our international operations, we have found it to be valuable to be a market leader in the markets we operate in. In places where we hold a more significant position, we have tended to do better than those places where we do not. This ultimately means that we need to find a path to increase scale in certain markets or possibly exit a market. An example of this was our fourth quarter exit from Argentina. Not only was our market position subscale, but the economic instability in that country created operational challenges that were dilutive to the otherwise typically very attractive attributes of the tower business. We will pursue incremental investments to drive continued growth as we always have. But we will prioritize either an overall favorable shift in the quality and stability of our asset mix or an opportunistic investment that improves our standing and existing markets.

Financial results always matter. We will be disciplined toward producing the best possible financial results over the long term. We believe high-quality assets ultimately produce that result. We also believe that when opportunities for incremental asset investments are not available, stock repurchases and debt reductions are worthwhile uses of capital. We intend to continually evaluate our optimal capital structure, and we’ll look to balance the lowest cost of capital with retaining appropriate investment flexibility. Our attention to optimize capitalization of the company has placed us in what I believe is the best position in the industry. We are the fastest dividend grower, but yet have the greatest retained AFFO post dividend to invest in the business.

We have maintained an average cost of debt very close to our larger peers, but have retained access to up to two turns more leverage. We have recently extended and expanded our revolver capacity by $500 million, creating increased liquidity. This structure provides us with significant optionality to move in whichever direction we believe will provide the best return for our shareholders. The strength and stability of our core tower business remains and it provides a tremendous foundation for all future endeavors. As a result, I have great confidence in our ability to create future value for our shareholders. I want to thank our customers for their support and their confidence in SBA. I also want to thank our team members for their contributions to our success.

And with that, Eric, we are ready to take questions.

Operator: [Operator Instructions] First, we will hear from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks. Good afternoon, everyone and Brendan, congrats on the new seat. Mark with the K, welcome to the calls.

Mark DeRussy: Thank you.

Ric Prentiss: First, leverage obviously has been a key focus. You guys have been paying down floating rate debt. You’ve got your net leverage down to 6.3 turns. Almost all the floating is paid off as of today then. How should we think about 6.3, where it heads in the future versus stock buyback? And then on the M&A side, update us as far as what you’re seeing out there, you mentioned that you like to be the leader in your markets. Are there any deals out there that would give you an industry-leading position? And what would kind of make that an interesting market if there were new markets out there?

Brendan Cavanagh: Yeah. So Rick, on the leverage side, we’re at 6.3 times mostly because we believe that throughout the last year, the best use of our capital was into paying down that floating rate debt that we had with some of the highest cost debt in our structure. And we didn’t necessarily see opportunities that we thought were a better use of capital. but we’re comfortable at a higher level of leverage if we see the right place to use that capital. That may include some amount of stock buybacks, but it also obviously would include quality acquisitions if we see that opportunity. So really, what we’re doing is, we’re retaining flexibility as it relates to our balance sheet to go in whichever direction we think produces the best result.

We don’t feel that we have to stay at this level, but if we do, that’s fine too. On the M&A front, yeah, it’s one of the aspects of what we look for when we’re looking at a new market or even at opportunities within some of our existing markets where we’re perhaps not a market leader in terms of our position is to be a leader, if we can in terms of our size and importance to our customers. We used to just assume that we look at all opportunities that are available throughout the globe, frankly, as they come available, and we consider that among a number of other factors where we’re looking at that. I can’t really speak to anything specific that we’re looking at, but there definitely are opportunities out there.

Ric Prentiss: Obviously, we’re sitting here at the end of February. Can you help us understand the pacing of what you think new lease activity in the United States will kind of play out through the year? And is it still kind of three months, maybe closer to six months as far as when you get an application in to where it actually turns into revenue?

Brendan Cavanagh: Yeah. The time frame from signing something to when it actually gets into revenue is still pretty consistent with what it’s been in the past. Obviously, it’s a little bit longer for a brand-new lease when we sign that. That’s usually a good six months or more on the amendments, it’s typically shorter, closer to three months, but it depends on the specific circumstances. So that’s pretty consistent with what it’s been in the past. In terms of the pacing throughout the year, our projections, if you look at our bridge in terms of what we’ve put forth as contributions, and I assume you’re asking about domestic specifically. But domestically, that number should be a little bit more front-end loaded today because it’s based on activity that we’ve seen throughout last year and that’s kind of rolling over.

And at this point, we’re not necessarily forecasting a material pickup in activity. But to the extent there is that pickup in activity, it’s mostly going to impact next year.

Ric Prentiss: Great. Thanks a lot.

Operator: And next we will hear from Jonathan Atkin with RBC Capital Markets. Please go ahead.

Jonathan Atkin: Thanks. Two questions. One, you talked about the willingness to examine an exit from markets where you lack scale, does that apply to product areas such as data centers? And then my second question is, you called out the Vivo relationship in Brazil. Anything with TIM or Claro along similar lines where you might be renegotiating some of your commercial terms or looking to kind of react to market conditions in Brazil? Thanks.

Brendan Cavanagh: Yeah. On your first question, there’s no specific plans to exit anything — to exit the data centers or anything else in particular. But I will tell you that we are applying the same lens to everything that we do as we kind of evaluate these various things, whether it’s international markets or its other product lines. And we look at that through a financial lens and what the future can be, opportunities to grow it, what are the synergies with our base core business. I mean, ultimately, we’re a tower company, how do things fit in with that. As we go through that analysis, we may come to the conclusion with something that we should exit it, but we may also come to the conclusion that we should grow it too. So at this stage, it’s premature to say that we would make a decision one way or the other, but you should assume that we’re looking at each of our holdings through that lens.

With regard to Brazil, we did actually — I don’t know if you recall, Jon, but last year, we announced about a year ago at this time that we had entered into an agreement with TIM related to the Oi consolidation and it actually pulled forward some of the churn into 2023 associated with that consolidation, but it dealt with a number of other issues and extended agreements out. So we already have something largely in place with Tim. In the case of Claro, there’s currently nothing in place, but we’re constantly in discussions with them and it may or may not lead to something, but we’re talking with them about what would be best for them and for us.

Operator: Thank you. Next, we’ll hear form Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo: Hey, thanks for taking my question and congratulations both Brendan and Mark on your newish positions. Brendan, I guess to start, you noted that you tend to do better in markets where you have meaningful scale or a leadership position. How do you define a leadership position? Is that share of total assets owned both on threshold? Or is it some other measure? And does this general framework that you’re embracing mean it’s less likely that you’re going to enter into a new market? Or is that sort of a separate consideration if you think you’re on a path to a leadership position in it?