Sba Communications Corp (SBAC) Q1 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for your patience in holding and welcome to the SBA first quarter results call. At this time, all participant phone lines are in listen-only mode. Later, there will be an opportunity for questions. Just a brief reminder, this conference is being recorded.

Good evening and thank you for joining us for SBA's first quarter 2021 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 2021 and beyond. In today's press release and in our SEC filings, we detail material risks that may affect our future results or may cause our future results to differ from our expectations. Our statements are as of today, April 26, 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 turn the call over to Brendan to discuss our first quarter results.

Thank you Mark. Good evening. SBA had a solid start to the year with first quarter results ahead of internal expectations for most of our key financial metrics. Total GAAP site leasing revenues for the first quarter were $505.1 million and cash site leasing revenues were $504.5 million. Foreign exchange rates were generally in line with our previously forecasted FX rate estimates for the first quarter. They were, however, a significant headwind on comparisons to the first quarter of 2020, negatively impacting revenues by $12.6 million on a year-over-year basis. Same-tower recurring cash leasing revenue growth for the first quarter, which is calculated on a constant currency basis, was 3.6% over the first quarter of 2020, including the impact of 2.4% of churn. On a gross basis, same-tower growth was 6%. Domestic same-tower recurring cash leasing revenue growth over the first quarter of last year was 5.6% on a gross basis and 3.1% on a net basis, including 2.5% churn. Domestic operational leasing activity, or bookings representing new revenue placed under contract during the first quarter, was modestly lower sequentially than the prior quarter. But on the heels of our newly signed agreements with Verizon Wireless and Dish, we have seen substantial increases in our domestic new lease and amendment application backlogs. These backlog increases are supportive of significant increases in domestic operational leasing activity throughout the balance of this year. During the first quarter, amendment activity represented 77% of our domestic bookings with 23% coming from new leases. The Big Three carriers represented 86% of total incremental domestic leasing revenue signed up during the quarter. With that, I will turn the call over to Jeff.

Thanks Brendan. We ended the quarter with $12.1 billion of total debt and $11.9 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 7.6 times. This leverage ratio is elevated slightly above our target range of 7.0 to 7.5 times due to the PG&E acquisition during the first quarter. Our first quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 4.4 times. On January 29, the company issued $1.5 billion of unsecured senior notes due February 1, 2029. These notes accrue interest at a rate of 3.125% per year and interest is due semiannually on February 1 and August 1 of each year, beginning on August 1, 2021. The net proceeds from this offering were used to fully redeem all the outstanding 4% senior notes, to pay all premiums and costs associated with such redemption and to repay the amounts outstanding at the time under the revolving credit facility and for general corporate purposes. As of today, we have $530 million outstanding under our revolver and the weighted average interest rate of our outstanding debt is 3% with a weighted average maturity of approximately 4.3 years. During the first quarter, we repurchased 654,000 shares of our common stock for $160.9 million for an average price of $250.33 per share. All shares repurchased were retired. As of today, we have $475.1 million of repurchase authorization remaining under our $1 billion stock repurchase plan. The company's shares outstanding at March 30, 2021 were 109.3 million compared to 111.6 million at March 31, 2020, a reduction of 2%. In addition, during the quarter, we declared and paid a cash dividend of $63.4 million or $0.58 per share. And today, we announced that our Board of Directors declared a second quarter dividend of $0.58 per share, payable on June 15, 2021, to shareholders of record as of the close of business on May 20, 2021. With that, I will now turn the call over to Jeff.

Thanks Mark and good evening everyone. As you heard, we had a strong start to the year with solid financial and operating results. Activities in the first quarter provide a foundation for the rest of 2021 and for the next couple of years. During the quarter, each of our largest domestic customers provided public disclosures expanding upon their 5G deployment plans, making it clear upgrades to their existing macro network should be a key component of their network investment strategies over the next several years. We have begun to see direct evidence of this with significant growth in our leasing application backlogs and increasing volumes in our services business.

First, we go to the line of John Atkin, RBC. Your line is open.

Thanks very much. So I was interested in whether you have seen any actual equipment installed on your U.S. towers? What kind is it, C-Band or L-Band variety? And then I had a kind of a bigger picture question about escalators which historically have been fixed and we get a lot of questions sometimes about why that could eventually become more CPI-based over time in the core U.S. business? Thanks.

So on C-Band type things, I'll just speak generically, Jon. Signed leases and amendments, yes; actual installs, no. And you shouldn't read anything more into that other than the typical time it takes to go from execution to installation. On fixed escalators versus variable, that's an age-old question. It depends on which side of historical inflation you fall on as to what you prefer. It's been discussed and in every case that I know of in the U.S., people have landed on a fixed escalator concept. So I don't know what really to tell you beyond it's a regular topic of discussion and fixed is the way folks have gone. Regarding Brazil, Brazil is still strong on progress. There is no question the economy is feeling the effects—labor and employment—and the unemployment rate in Brazil is now currently around 15%. Our folks are optimistic that better times are shortly ahead, but we will need to see all that play out. Notwithstanding the overall bleaker environment there, certainly compared to the U.S., our business and our operations continue to do just fine, and communications continues to be a key need there. Carriers continue to answer that need. But in general, everyone reads the same thing that I do and the folks I talk to still have some room to go in terms of improving their COVID position. Lastly on PG&E assets, obviously all the ones we talked about are in use. We have interest in some of the other 28,000 that are currently not in use. The demand has been both for amendments by existing customers and new leases. So we are pretty pleased with how things have gone the first couple of months. Justin, I think we are ready for our next question.

Next up, we have Michael Rollins of Citi. Your line is open.

Hi. Thanks and good afternoon. Just first, following up on your comments regarding the activity levels, with the Verizon on the book and you have had a couple more months of discussions and activity, is 1Q the trough for domestic organic growth by leasing growth that was reported at 5.6%? And how do you think about what the peak range could be for this metric again, now that you have a couple more months of conversations and agreement? And then just secondly, are there any updates on the possible timing for merger-related churn relating to the T-Mobile and Sprint deal? Thanks.

Yes. Hi Mike. On the same-tower growth rates, Q1 is certainly right around the trough. It's possible that Q2 also could be at a similar level based on what we have in mind today. As a reminder, that metric is a calculation based on the trailing 12 months, so it's really backward-looking. A lot of the significant increases we have seen in organic leasing activity have just started to happen recently. I expect it will start to increase in the second half of the year and we will exit the year at a higher rate and continue to increase as we move into next year. As far as how high it could be, on our previous call we talked about on a net basis getting to mid single digits. I think that is certainly achievable. A big question mark is the timing of the churn related to Sprint and T-Mobile. The numbers we gave on our previous call are still pretty much the same. We haven't seen anything that would make us change our expectations. As a refresher, this year we have about $8 million or so of impact to 2021 that we are anticipating. We have already incurred a decent portion of that, so that's probably about the right number for this year. Next year is expected to be a little bit bigger, closer to $30 million of impact next year before it steps down the following couple of years to somewhere around $10 million to $15 million per year. We see the biggest impact potentially in 2025 and 2026. Having said all that, that's an estimate based on the timing of when those overlapping leases come up for their maturity date. It's possible that T-Mobile's plans will change in terms of what sites they need to keep. We will have to keep an eye on that and we will inform you if anything changes.

Next up, we are going to Phil Cusick with JPMorgan. Your line is open.

Hi guys. Thanks. Can you help us think about activity ramping from this year to next year as we go from the guided activity and talking about an exit run rate accelerating from here? I just want to pull the churn discussion out and really think about what activity could be doing?

Well, it's clearly going to accelerate, Phil, as the C-Band spectrum is cleared. Verizon themselves stated that one of the reasons their team was able to get ahead of the actual clearing was having the equipment already in place and ready to go. As a practical matter, there will be a fair amount of just-in-time delivery of new C-Band equipment as it relates to when they get the spectrum cleared. AT&T commented that much of their C-Band spending is not even going to occur until the beginning of 2022. So if you take our customers' statements at face value, we should move through this year and continue to grow as we move into 2022.

And if I were to assume 2019 as a good example of what happens when two carriers are really spending, do you think 2022 activity could be better than that $63 million or something that was in 2019?

It could. We don't want to get too far ahead of ourselves, but if you take your premise of multiple carriers being very busy, I think 2022 could be that year.

Yes. Okay. Last thing, the services this quarter were really strong. Anything that we should think of as sort of a one-time or not repeatable in the second quarter? Or is that a good new run rate?

I don't see anything today that would make Q2 materially different.

Next, we have the line of Spencer Kurn with New Street Research. Your line is open.

Hi guys. Thanks for taking the question. I was wondering if you could elaborate on the deal you struck with Verizon. One of your peers signed a more holistic deal where a certain amount of revenue was contracted annually and you guys didn't. So I was curious, why didn't you take that approach?

We historically have thought it's best for all parties to operate on a more a la carte basis, Spencer. You are correct: our straight-line only includes the results of the term extensions. It does not include any type of use rights, because that's a different deal, and that's just the way we historically have run the business and like to do things. I don't know if it's any more complicated than chocolate versus vanilla.

Got it. And in your prepared remarks, I think you said that you didn't include any benefit from the increase in your backlog that you saw this quarter because of the uncertainty around the commencement timing. Is it the case that you had already baked in some impact of the C-Band into the guidance and the applications that you saw this quarter basically met your expectation? Or is it the case that if these sites do commence, it could be incremental to your expectations that you laid out last quarter?

Yes. Hi Spencer. We did expect and included in our original guidance an increasing amount of leasing activity throughout the year. The backlogs are supportive of that. The big question mark, which we mentioned in our prepared remarks, is the timing of those applications turning into signed agreements and then the next step of the signed agreement getting dates at which the rents would kick in. We have certain assumptions around how that's going to play out. It certainly will be increasing as we move through the rest of the year, but that was already assumed. So to the extent that we are off and it is a little faster, it could be higher. But I think as we get later in the year, the potential for that to be a material impact is very limited.

Next, we have the line of Rick Prentiss with Raymond James. Your line is open.

Great. Thanks. Good afternoon guys. We were all surprised with the cash taxes mentioned. How did you get there?

You broke up a little bit. I think you are asking about the change in our cash taxes. The cash taxes for the balance of the year are, in part, due to expected benefits from the PG&E acquisition in terms of amortization of that asset. That was not fully modeled when we gave the original guidance because that deal actually closed right before we gave the last guidance. So that's something we are going to benefit from. Any other things that affected it are fairly minor differences in some of our international markets, but PG&E was really the biggest difference.

Because when we think longer term, how should we think about cash taxes will move around? I mean, they are going to go up.

Yes. They are certainly going to go up. As a REIT, we obviously have limited federal cash taxes at any point, but there are currently state cash taxes that we do pay because we are not paying our full AFFO out as a dividend. So there is some opportunity to improve on that front. On the other side, the more impactful thing will be our international taxes, which as we continue to grow in those markets and some of the depreciation shields run off, you will see the cash taxes in the international market decline.

Makes sense. And how should we think about the CBRS opportunity? What's the timing and size available to put capital to work?

The timing is now. The primary interest right now will come from municipalities and private networks. We are actually building some school systems to help bridge the digital divide that are focused on CBRS. While some of our cable customers are also active, in terms of the national wireless carriers they are going to focus really on the mid-band and use CBRS more as a niche solution for them. So the biggest opportunity for CBRS today is really outside of the national wireless carriers.

Makes sense. And then have you thought about giving us a table showing Sprint churn as far as colo versus other sites as more of your peers are doing the same?

We haven't thought about it, but we will think about it.

That would be great. All right. Thanks guys. Stay well.

Next, we have the line of Batya Levi with UBS. Your line is open.

Great. Thank you. I think my first question — How do you think this next big change will be around maybe into next year or as C-Band becomes more of the mix down the road? And how does the amendment revenue compare to higher earnings? Thank you.

Batya, you broke up on a lot of that and I don't think any of us heard everything you said. Could you try that again?

Sure. I was asking about the amendment revenue mix. I think it was 77% this quarter. How do you think about that trending towards year-end and maybe with the C-Band deployments becoming a bigger part of the mix? And in terms of averages, how do these amendment revenues compare on a monthly basis now versus prior upgrades?

The 77% figure is likely to go down as we approach year-end, mostly because a lot of Dish's business will be new leases. So to the extent it changes, it will be for that reason, because most of the other activity from the other three carriers will be amendments. In terms of pricing, we typically don't get into specifics, but based on load and usage basis, the pricing is consistent with our history.

Okay. Got it. Maybe one quick follow-up. The new tower purchases, 413—can you tell us where they were and how is the M&A activity in those markets?

Those are actually under contract, most of them, Batya, and they are mostly located internationally in existing markets of ours.

Got it. Okay. Thank you.

Next, we have the line of David Barden with Bank of America. Your line is open.

Hi guys. Thanks so much. A few questions. On the services activity, in the past we have had one or two carriers being the driver of that. How democratically distributed would you describe services activity running ahead of expectations at this stage? Second question, on the commencement question, Mark and some of the comments that John Stankey made about 'skittishness' with respect to supply chain—any observations from your perch as to how you see the probability or confidence interval around accelerating activity given those supply chain questions? Thanks.

On services, it's still not broadly distributed; our services revenues are disproportionately coming from a few customers, which is good because we have the opportunity to expand that base as we move through the year. Regarding supply chain, we haven't really seen any supply issues yet. That's not to say there aren't constraints in the market, but we haven't experienced them. As we've explained before, once a lease or amendment is executed, revenue begins to accrue at the earlier of the date certain or when we actually install the equipment. We're all rooting for fast equipment availability and installs earlier than the specified end date in the contract. If that happens, we begin to accrue revenue earlier. Right now, as we think about this year and next year, we are not planning around equipment delays.

Okay. Great. And one more follow-up: in light of the PG&E deal, now that that's closed, has there been any elevated inbound interest from other corners of the world looking to do what you have done? Or was that more a forced situation that was unique?

PG&E had unique needs, but we have had many inquiries from other utilities around the country.

Next, we have the line of Nick Del Deo, MoffettNathanson. Your line is open.

Hi. Thanks for taking my questions. First, returning to the PG&E sites—if you think back to other assets you have acquired that may not have been adequately marketed, how long does it take them to hit their stride and start seeing the benefits of being plugged into your sales engine? Is it basically right away or does it take a little time?

It always takes time—typically six months to a year to really get to the point where it's like a home-grown asset.

Okay. That's helpful. And on the M&A front, with talk of higher capital gains taxes this year, would you expect that to potentially increase the pool of towers for sale in the U.S.? Or are you not hearing much on that front?

It has historically increased deal flow, so I would expect it to do so again, but I don't know the magnitude. I wouldn't expect it to be a tsunami of deals, but there will be tax sensitivity if capital gains rates increase.

Okay. So maybe you pick up a few more, but not enough to really change the trajectory?

I wouldn't say we are going to get to 20% portfolio growth from tax law changes.

Next, we have Tim Long of Barclays. Your line is open.

Thank you. Two questions. First, you mentioned CBRS and digital divide benefits—could you talk more broadly about government push for rural broadband and what that might mean for your business? Second, any updates on edge compute/data center initiatives where you are currently evaluating opportunities?

Government efforts to bring broadband to rural areas are ongoing. Initial bills have been mostly focused on fiber to establish minimum uplink and downlink speeds, which fixed wireless doesn't always meet today. There is lobbying to free funds for wireless as well as fiber, and that remains to be seen. Another aspect of proposed legislation is focused on CapEx. We've tried to make the case that if relief could be structured to guarantee rental payments and OpEx for periods of time, that would be impactful for our industry. The work we've done so far hasn't relied much on federal programs; there is an E-rate program for education, but mostly we've been working with county school districts and private funding interested in economic development. We're excited about the potential. On edge compute, it continues to be a focus and I think it's going to bear fruit. We have two new customers and two new facilities under construction since our last call. But for edge to be meaningful, you need use cases that require computing power right at the cell site, and we are not broadly there yet. We believe we will get there, and when we do, the edge computing opportunity will be significant.

Next, we have Walter Piecyk with LightShed. Your line is open.

Thanks. Jeff, I wanted to go back to Phil's question. He was drilling on 2022—do you think 2022 is the peak year for colo and amendments?

I don't know. We'll see. It depends on how quickly our customers want to spend. AT&T said they are not really going to start C-Band work until 2022, so it could be, but it also may not be.

Got it. And then Brendan, you mentioned the Sprint/T-Mobile churn numbers and reiterated the roughly $8 million this year. You mentioned a lot of that has already been loaded in Q1—was it a couple of million in Q1 of that $8 million that has already hit your numbers?

It was a little less than $2 million—probably about $1.8 million or so. We saw a bunch of releases that ended right at the end of last year and the beginning of this year. There are some other pieces we are assuming happen that may or may not, but they are relatively small.

So when you talk about mid single-digit growth long-term, should we think about that including the Sprint number?

Yes. Long term, that mid single-digit growth is a net number, which includes churn like Sprint's. In any given year it could be higher or lower because Sprint churn is lumpy. Some years will be below that, and conceivably it could be higher than that if you had really low churn and high lease-up.

I was just hoping it's a long-term steady number. Last question: on Dish, are they using massive MIMO antennas in their new lease activity or a more traditional approach?

More traditional.

Next, we have Brett Feldman from Goldman Sachs. Your line is open.

Yes. Thank you. Two questions. First, regarding C-Band and historical thinking that higher frequencies are more useful in dense areas, your portfolio skews less dense. Now that you have insight from conversations with carriers about how they are thinking about using C-Band, what level of visibility do you have that they will go to all the towers they currently use with you in markets where they hold C-Band licenses and upgrade to support C-Band? Or are there towers that won't fit? On the optimistic side, to what extent might they increase density? Second, earlier you mentioned you haven't changed your approach to leases—fixed escalators and a la carte. There are emerging operators who have signaled they are getting into spaces where you may not be winning because you haven't been as flexible. How are you comfortable with that trade-off?

I would point to our historical results and our recent performance as the reason we're comfortable. On density, we've seen enough to know it's going to be fairly broad. I wouldn't tell you to count on 100%, but it's going to be closer to 100% than 50%. We won't really know until we get into it, particularly with existing carriers, regarding how much new leasing will come because they are pursuing colocations first—it's faster and cheaper. If demand is good enough and there's money to be made, they are going to collocate.

Next, we have Eric Luebchow of Wells Fargo. Your line is open.

Yes. Thanks for taking the question. You mentioned in the Verizon deal there were some parameters around new site builds. Recently, the big three carriers haven't done as much with public towercos on new builds. Do you see an opportunity beyond the initial amendment activity for new sites, either with Verizon or any of the other carriers? Or is it too early to tell?

We definitely see an opportunity and this agreement will facilitate that.

Okay. Great. One more—have you seen any amendment opportunity beyond the C-Band radios, perhaps looking at lower-frequency spectrum upgrades to support uplink to allow better propagation out of mid-band spectrum?

Yes. There is a variety of equipment content in these requests—not just strictly C-Band radios. Massive MIMO antennas are a big part of this, and we are seeing a variety of different things. The unleashing of the C-Band has given everyone a reason to return to macro networks that they knew were coming.

Next, we have the line of Colby Synesael with Cowen. Your line is open.

Hi. Thanks. With the Verizon MLA, I am curious if you put in place any incentives for them to go on to X amount of sites faster, such that if they meet a timeline they get more favorable pricing? And secondly, Brendan, any updates on refinancing opportunities given the rate environment and what drove the AFFO beat this quarter? If I annualize Q1, it gets me to midpoint of your 2021 guidance—anything one-time in there?

Yes. We do have incentives—X amount, X price, X date equals X discount. This is the first global master agreement we've done for Verizon.

Hi Colby. On refi opportunities, there are definitely opportunities. We have debt approaching points where it can be refinanced and based on the current market we expect to be able to refinance at better rates on several instruments. Stay tuned; we constantly look at that and expect to take advantage. On the AFFO beat, one main contributor was services, where we had a very strong quarter and high margin contribution. You could call that non-recurring in some sense, but we expect continued similar activity throughout the year based on backlog. We also had better cash taxes due to PG&E and lower non-discretionary CapEx than expected, and we lowered our guidance for full-year non-discretionary CapEx slightly. The share buyback also helped reduce share count. It's a mix of these factors. Some of it is timing—Q1 did well in certain areas and some costs like SG&A and CapEx we expect to be a bit higher as we move through the year, so timing plays a role. Overall we were able to improve our full-year guidance in part because of Q1 performance.

Got it. Thanks.

Next we have the line of Brandon Nispel of KeyBanc Capital Markets. Your line is open.

Great. Two questions. Jeff, can you quantify the year-over-year change in the backlog of signed but not commenced new leases? When was the last time backlogs were this high? Second, on the minimum commitment with Dish—how do minimum commitments trend throughout the life of the contract?

Dish has certain time periods that we won't disclose in detail, but there are discrete periods with incentives and commitments to move things along during the life of the lease. For dollar volume on backlogs, we internally talk about the number of amendments and leases. Where we are today versus a year ago, backlogs are more than twice the size, but it's a different time. By historical standards we are at a high level, although perhaps not the absolute peak. In recent times the LTE upgrade backlog was higher, but our current backlog is definitely high and continues to build.

Got it. Thank you for taking the questions.

Next will come from David Guarino, Green Street. Your line is open.

Hi. Thanks guys. A question on data centers—since the start of the year we've seen a pickup in transactions. Have you evaluated any other acquisitions since Jacksonville and what's the company's appetite to grow the data center footprint?

We have greater appetite provided acquisitions come along with edge deployments at our cell sites. As edge deployments grow and we continue to demonstrate synergies between regional data centers and MEC centers at our tower sites—as we're beginning to experience in Jacksonville—we would continue to look. We remain a wireless infrastructure company first, and any regional data centers would be pursued because of perceived success around the cell sites.

Is that appetite U.S.-only or international as well?

The concept applies everywhere.

And the final question comes from Matthew Niknam of Deutsche. Your line is open.

Hi guys. Thanks for squeezing me in. Can you give any more color on the latest you are seeing from Dish and when we should anticipate them to become a more meaningful driver for cash site leasing revenue growth in upcoming quarters? And one housekeeping item for Brendan: can you give contribution from a revenue and tower cash flow perspective for PG&E in Q1? And should we effectively double that into Q2 given the full quarter? Thanks.

On the PG&E contribution, I believe the contribution was somewhere between $4 million and $5 million of tower cash flow and only slightly higher on the revenue side, because costs are very limited there. You should pretty much double that because it closed pretty close to the middle of the quarter.

On Dish, there are a lot of signed leases and a much larger number of applications—tremendous activity. Whether we see revenue from that this year will depend solely on how quickly Dish goes through site acquisition, permitting and construction. I can't give more than that because it would be a guess; revenue recognition this year will be driven by the pace of installs for Dish. But everything is moving in the right direction.

Understood. Thank you.

Thank you and thanks everyone for joining us. We think it's going to be a great year and we look forward to sharing our progress with you next quarter.

Ladies and gentlemen, this does conclude the presentation for this afternoon. We thank you for your participation. You may now disconnect.