SBA Communications Corp (SBAC) — Q4 2019 Earnings Call Transcript

Thank you, Julio. Good evening everyone and thank you for joining us for SBA's Fourth Quarter 2019 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 2020 and beyond. In today's press release and in our SEC filings, we detailed material risks that may cause our future results to differ from our expectations. Our statements are as of today, February 20th 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 results.

Thank you, Mark. Good evening. We had another solid quarter in the fourth quarter with strong operating and financial results in both our Leasing and Services businesses. Total GAAP site leasing revenues for the fourth quarter were $481.1 million, and cash site leasing revenues were $478.1 million. Foreign exchange rates were in line with our estimates for the fourth quarter, but were a headwind on year ago comparisons. Same tower recurring cash leasing revenue growth for the fourth quarter, which is calculated on a constant currency basis, was 6% over the fourth quarter of 2018, including the impact of 2.3% of churn. On a gross basis, same tower growth was 8.3%. Domestic same tower recurring cash leasing revenue growth over the fourth quarter of last year was 8.2% on a gross basis and 5.6% on a net basis, including 2.6% of churn, 0.8% of which continues to be related to Metro Leap and Clearwire terminations. The balance of domestic churn is from a variety of sources including a number of smaller customers that are modifying or shutting down older technologies, some sites that were never on air that are not being renewed and some legacy consolidation churn. Domestic operational leasing activity representing new revenue placed under contract during the quarter was down from the first half of the year and sequentially from the third quarter due to the industry-wide slowdown as our customers awaited resolution of the legal challenges to the Sprint, T-Mobile merger.

Thanks, Brendan. We ended the fourth quarter with $10.4 billion of total debt and $10.3 billion of net debt. Our net debt-to-annualized adjusted EBITDA leverage ratio was 7.1 times. Our fourth quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 3.8 times. On November 19, we repriced our $2.4 billion from a coupon of LIBOR plus 200 basis points to a new coupon of LIBOR plus 175 basis points. Subsequently, on December 3rd, we entered into a series of interest rate swaps on $1.95 billion of that term loan effectively replacing both of our existing interest rate swaps. The effect of these two new swaps was to reduce our swap interest rate by approximately 30 basis points to a fixed rate of 3.78% through the maturity date of the existing term loan. After year-end, on February 4th, we issued $1 billion of new seven year, unsecured senior notes at an interest rate of 3.875%. Our lowest cost unsecured senior note issuance ever. Net proceeds of this offering were used to redeem all of our outstanding 2022 4.875% senior notes through the associated call premium on those notes and repay a portion of the balance outstanding under our revolving credit facility. As of today, the outstanding balance under our revolver is $175 million. Pro forma for the senior note issuance, the weighted average coupon of our outstanding debt is 3.6% and a weighted average maturity is approximately 4 years.

Thanks, Brendan, and good evening, everyone. The fourth quarter was a strong finish to a very good year for SBA. We delivered solid financial results in both our Leasing and Services segments, finishing at the high-end of guidance for tower cash flow, AFFO and AFFO per share and exceeding the high-end of our guidance range for leasing revenue, total revenue and adjusted EBITDA. Our full year financial results also finished above the high-end of our initial 2019 guidance given in February of last year for leasing revenue, services revenue, tower cash flow, adjusted EBITDA, AFFO and AFFO per share. We produced over $2 billion in revenue for the first time in our history and we grew full year AFFO per share by 11.7% over 2018 and by 13.1% on a constant currency basis. We also grew our portfolio at the high-end of our 5% to 10% goal and we expanded into an attractive and exciting new market, South Africa. We completed several debt transactions, improving our cost of financing with each one. We bought back over 2 million shares of our stock at an average price of $231.87 and we began paying a quarterly dividend ahead of schedule. All of this was accomplished notwithstanding the domestic industry-wide slowdown for our customers during the second half of the year resulting from the uncertainties surrounding the outcome of the T-Mobile, Sprint transaction. As I said, 2019 was a very good year for SBA. Looking ahead now to 2020 and beyond, we are very excited about the prospects for SBA. We anticipate the resolution of the legal challenges to the T-Mobile, Sprint transaction will set us up for significant network investment by our U.S. customers involved in the transaction including DISH beginning in the second half of the year.

Hi, it’s Phil Cusick from JP Morgan. It sounds like as we model 2020, we should think about the first half activity slower to the fourth quarter activity. And then ramping in the back half. Can you give us any update on the Sprint, T-Mobile or DISH cadence of potential network planning? And when those two start to really impact numbers? Thanks.

Lot of discussions, Phil, but no real operational activity yet. Of course, given the fact that there is no closing, and while I believe that things will begin to move pretty quickly, particularly on the T-Mobile side, DISH had their own commentary yesterday as to the cadence of what they will be doing. But on the T-Mobile side, I think they will go quickly once the deal closes. But I think we are going to have to wait and see as to when that happens. They need to get through the California PSC and I think some other things. I think there are a lot of folks ready to go, but they are just waiting for the starting gun.

Okay. And then, a separate topic, can you give us any early read on the South Africa business, sort of how you think about that now that is under your belt and the attractiveness of other markets as you look out over the next year? Thanks.

Well, we like South Africa a lot. I mean, within our four years of investment there, we took close to 1,000 towers and they would actually be 1,000 today. I am not quite sure how to tell, but it’s getting off close to over two tenants per tower with a very good return on investment. A dynamic market with a lot of room for additional Greenfield builds. All the things we look for. So we are very excited about the ability to continue to grow in that market. We will continue to look for markets like that. We think there are some out there. They are not tens or twenties of those kinds of markets. But there are some out there. We are going to continue to pursue them and if you don’t mind, I am not going to name them.

Okay. And then, if I can just follow-up and be even more explicit since we are almost two months into the quarter, it looks like we should be assuming that activity in 1Q is probably even below 4Q. Is that a good starting point?

Well, I don’t know if you should assume it below. But I think you should take the comments about things came to a pretty abrupt slowdown, at least with respect to several customers in August. And the reasons for the change in that slowdown have not changed as of today.

Hey guys. Thanks for taking the question. Could you just remind us of your average remaining lease term with Sprint? And how are you thinking about approaching the decommissioning of Sprint’s network? Do you see value in signing in increments that would minimize churn? Or would you take a similar approach as you did with IDEN and coordinate a steady decommissioning schedule? Thanks.

Yes, Spencer, on the overlap, the average remaining terms for the Sprint leases on sites really overlap the T-Mobile is about 4.5 years.

Yes, I am confident given the complexities of what will need to be accomplished by the new T-Mobile, Spencer, that we will have an opportunity to address those issues and again we have no kind of religious opposition to MLAs and if it makes sense for both parties, as we have in the past, we would do one.

Great. Thanks. And one other question, could you just talk about the amendment pricing that you tend to see for mid-band spectrum like 2.5 or potentially CBRS and C-Band and how that relates to what you’ve been seeing for low-band spectrum over the last couple of years? Thank you.

We don’t want to get too specific. The incidence of CBRS amendments haven’t been that numerous yet and there has really only been one customer that has deployed mid-band and the massive MIMO architecture. And I would say the amendment pricing has been reasonably fair and consistent with all the other types of amendments that we’ve done over the years in terms of size and weight and all the things that have gone into the way we’ve conducted our business.

Hey, thank you. We had an expectation that churn domestically in the U.S. would have come down or improved in 2020 versus 2019. It doesn’t look like that’s happening. I was wondering if you can give some color around that. And then secondly, as it relates to the GTS acquisition, I appreciate you gave, I think some 15 times tower cash flow, but I was wondering if you could be just more explicit and tell us what the expectation is for revenue and EBITDA in 2020. Thank you.

Colby, first on the churn, it is down slightly in terms of same tower analysis due to the falling off of the IDEN churn that took place in the fourth quarter of last year, but as we look out to next year, some of that reduction due to the loss of IDEN is being offset by a slight elevation in Q4 churn notices that come from various miscellaneous items. I mentioned some of those items in the scripted comments; there is a number of smaller customers that are modifying or shutting down older technologies for one. An example of that is we had one regional carrier who had previously entered into some leases with us for 4G installations that we had reported in the past as leased out. But those were separate and apart from their pre-existing leases for their 3G installations which they are now decommissioning. And so, we’ve had a few slogs that were a little more than what we typically see and because it’s happening in the fourth quarter, that carries over into the 2020 numbers. So, on GTS, the numbers around tower cash flow contribution or EBITDA contribution is approximately $30 million for next year, a little over $30 million, $31 million. Now that can be affected of course by where the FX rate shakes out. But that was our expectation when we put the guidance together and from a revenue standpoint, it’s approximately a little more than 40, 42-ish.

The guidance. How are you thinking about AT&T and Verizon? We obviously heard Verizon last week talking a lot about diversification. But the FirstNet project is moving along. So is that fairly level year-to-year? Or any big changes you might call out? And then, you touched on CBRS there a minute ago. We got the auction coming up. How are the carriers you are talking to thinking of deploying that? Is it still very much in small cell indoor type environment? Or do you think there might be potential to use it more broadly on macro cells?

First question, Simon, is our guidance assumes essentially the same or certainly materially the same contributions from AT&T and Verizon. And in terms of the CBRS, primarily because of this hour and which of course affects the range, the CBRS will be more of a small cell indoor. But there will be some macro uses as well and we are actually – we have some applications for outdoor uses. So, it will be across the board. But we don’t think for at least for SBA, the CBRS spectrum will be nearly as impactful as the C-Band spectrum will be.

Thanks. Good afternoon guys.

Hey, Ric.

A couple questions. One, how should we think about the process flow as far as when applications start coming with the T-Mobile, Sprint merger with amendment activities that applications could turn into revenues. Is it a three month, six month process or possibly longer?

It depends on what they want to do. Amendments can go quicker, have a history of going quicker, certainly much quicker than brand-new leases. So, yes, I would use 3 to 6 as opposed to 6 plus on a colocation.

Makes sense. And like you said, you are not opposed to MLAs, particularly given the complexity of this thing. Is there the possibility of doing involving DISH in it as well? DISH on their call talked about how they are interested potentially in some of the Sprint decommission sites. So, what’s the process for them to take over those leases or weave it into an MLA?

Well, we got to know what leases you are talking about first. And we are not anywhere close to that. And then you have to match up heights and terms and things like that. My personal opinion is, while there will be a lot of business from DISH and the spring up of space and the inventory of what is available will be great for both DISH and the tower industry, the exact matching of existing Sprint or T-Mobile leases that are to be decommissioned, that’s going to be a tougher match.

Sure. Makes sense. And then, I think, we’ve heard from AT&T that their Firstnet project was maybe 75% done, but I am not – I am sure that’s probably not equal across the whole country. As you think about how much you’ve seen touches from AT&T. Can you give us an indicator of where you think they are in the project based on your sites?

I think their 75% includes a lot of advance work. From our perspective, we think it’s closer to 50%.

Sure. Okay. And last one for me, you mentioned CBRS could be some indoor systems or small cell systems, what’s your appetite given your balance sheet and your ability to put money to work on a shared infrastructure to get involved and maybe neutral host indoor systems and how big could that opportunity be? And what’s the timeline?

Well, our appetite for the right deal is quite large. The finding of the right opportunities are more difficult. They are asset-by-asset type of opportunities. And we are pursuing that area. We’ve actually added some resources there because we do think there will be some good opportunities. But it’s an asset-by-asset hunt.

Sure. And timeframe as far, is it kind of more like a 2021 event? Or it starts becoming noticeable then for the industry?

Well, I mean, there are things going on now and there are folks that are building out DAS systems and I think it will be converted to CBRS and folks that are interested in types of technologies today that will be converted to CBRS. So, it’s evolving our – just like we have always approached the tower business. We are very much focused on looking for the best assets.

Hey. Thanks for taking the questions. Two, if I could. You guys are obviously excited about the second half of 2020 relative to the second half of 2019. Can you maybe just help quantify thoughts on what you would expect to see from an increase in the backlog perspective from a year-over-year basis? Secondly, Jeff you talked a lot about massive MIMO antennas. Have you been able to sort of determine in your conversations with customers how deep into the network those types of antennas will need to go? And then, maybe further to be able to quantify for us what that would mean in terms of an amendment? Thanks.

I think they are going to go fairly deep to achieve true 5G outside of the dense urban markets. All of the work that I have seen indicates that that’s what you need in the macro world. And you really do need the mid-band spectrum to do it, which I think explains a lot of the different carrier spending patterns. I don’t want to get too much into detail as I think I commented enough on the amendment pricing earlier about how that gets priced. So if you look back at Spencer’s question, you’ll have your answer there. And in terms of the backlogs, yes, it all depends on when these deals get done. I mean, these backlogs I think will grow very, very quickly. It could grow – it could double or more in fairly short order. I do believe a lot of work has already been done in terms of what needs to be done to the network. Really a question of when is the deal going to be approved and I do think I said six months ago, I think you’ll see a lot of activity.

And I guess, just a follow-up, the only thing that you need to operationally to prepare for that and any limiting factors such as tower climbers that could make it so the growth doesn’t come in as fast as you expect? Thanks.

We tend to retain given our size as a company and our benefit plans. We are pretty good employers. And we will tend to use our tower climbers to make sure that the work will get done on our towers to ensure that the amendments and the colos at our towers get done. So we can prioritize there. So it will be okay. There will be some general shortages in the industry, but I don’t think it will be catastrophic. I mean, it will be an issue, but we always get through it as an industry.

Hey, thanks for taking my questions. I assume it's a very small number, but can you share the number of domestic towers you own that effectively can't accommodate another tenant? And sort of related to that, is there any reason a player like DISH wouldn’t be satisfied with the height of the RAD centers you tend to have available?

The second question answer is no. First, I am sure we have some, but 20, 30, or 40, very, very small.

Okay. So it’s a material number.

Yes. I mean, the towers – there are towers that require augmentations, but virtually every site we have can be augmented to accommodate additional tenants. So, it would be de minimis.

Okay. Got it. And then, when you are negotiating with an upstart network like DISH, are you inclined to try to get some sort of guarantee for the parent company on the lease or are you satisfied with the wireless operating entity being the sole signatory?

That’s probably more information than we’d like to talk about on the call.

Thank you. I guess, it came out during the trial that DISH has signed master service agreements that cover over 30,000 sites. I am not entirely sure what those are, but I am curious whether you are a party to any of them and if they’ve made any commitments to you? And then, second, you’ve not done a significant amount of domestic tower M&A recently, and there is a range of reasons you’ve stated for that in the past. But one of them was, there was a big mismatch between the valuations of private tower assets in the U.S. and where your stock was trading. Your stock has obviously performed a lot better. I am wondering if that’s changed the math such that there might be more opportunities to make domestic accretive acquisitions or if asset quality is really the gating factor as opposed to just the price. Thanks.

Yes, Brett, my belief on the first question is that, when DISH was building out their IoT network, they did sign up a number of master agreements including one with us. And in the course of that, a number of companies, including us, submitted all of their portfolios so that DISH was able to analyze those and figure out which of those towers would be suitable for that project and now they are able to do the same for the broadband network. So that is what that statement was all about. So that was under kind of the different – that was under the narrow band project. But the work that they did about how many towers they’ve analyzed that would be suitable for their uses was true. So your second question, in terms of the M&A, some of the stuff that we announced is actually more of what we have in the pipeline in the U.S. actually. And there are – there is still a lot of price competition. There is still some varying quality of folks who have done some things that to their terms and conditions that we don’t really like. But there are still some good assets out there that we will pursue. And clearly, as we look at where we traded things like that, we would take that into consideration. But we are very interested as we always have been in adding quality assets to the portfolio.

Are you finding that valuation, the valuation gap has started to close or are private multiples just expanding in conjunction with the public space?

Well, we took about a four-turn jump in, after the T-Mobile, Sprint deal got announced by – I can't say I’d see private multiples jump four turns in two weeks. But, who knows? So, let's just say hopefully the gap has closed a little bit.

Hey, guys. Thanks for taking the questions. Just on the dividend hike, obviously, the percentage is fairly eye-popping, Jeff, as you pointed out. Your dollars aren't necessarily all that large.

Right.

But I was wondering if you could kind of lay out where you think the – what kind of message you want to send? Is this what SBA can do with a dividend growth stock for some extended period of time? Is this more of a just a signaling about your conviction in the next cycle would be helpful on that? And then, the second question kind of related is, just given how strong the stock price move has been that we've seen in the last six to nine months, at what point do you start thinking about a split to try to make it easier for more money to kind of find its way into this, given that it’s an income growth leap story? Thanks.

Your kind of perception – your former way you kind of talked about the dividend is correct, David. When we kind of thought about this, it's more to give a longer, higher growth trajectory because as we model things out, the first dividend we would have to pay when we got to the exhaustion of the NOLs, frankly would be higher than the dividend we are paying now. So, you have to start out high and then, of course, grow it not by the same pace. So by doing this, we can grow it at a faster rate, which some people are going to like. We can control our remaining NOLs, and frankly, we can pay out less of our AFFO. So we think it's a win-win-win-win, which is why we chose to begin to pay it early. And even though we start small, we can grow it faster. And then, on the split, I am ashamed to say I really hadn't thought of that. Do you think that's something we should do?

I think people would love it.

All right. Well, we'll give it some thought. All you analysts weighing in. Send Mark. We could send Mark. Here you go. We'll take a short poll, we’d ask everybody in the next question.

I am for it too. And in terms of the – maybe given the faster growth outlook that you are expecting as we exit the year, can you also remind us where you would like to be in terms of your leverage target? I think as you started to grow the dividend, you potentially thought that you might come inside the second level, but any updated thoughts there? And then, a second question on, how you think you are positioned in terms of the rules which Sprint, T-Mo is expected to build over the next few years? And how you think about the leasing amendment mix change as we exit the year into next year?

So, if you looked at our guidance, Batya, if we don't spend some money on something, whether it's stock repurchases or portfolio growth, we are going to be in the mid-6s in leverage. So, that's not where we want to be. So, we would want to be high-6s to low-7s. So that's the – that's kind of the new area I think where we are targeting. And again, if we see something great to buy, we’d be very pleased to go above that for a temporary period of time. I mean, the cash flow generation power of the business is pretty amazing. So, on your second question, I think we are going to be very well positioned with T-Mobile. They are a very good customer of ours. We have a close relationship. We have a lot of work to do with them. And I think we will be a very active partner in terms of both amendments and colocations, just as we were in the first half of last year prior to the August central shutdown. Great. Well, we really appreciate everyone joining us on kind of our year-end wrap up. And we look forward to sharing our 2020 results with you as we go. Thank you very much.