SBA Communications - Q2 2023
July 31, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to the SBA Second Quarter Earnings 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. If you should require assistance during the call, please press star then zero. I would now like to turn the conference over to our host, Vice President of Finance, Mark DeRussy. Please go ahead.
Mark DeRussy (VP of Finance)
Good evening, and thank you for joining us for SBA's Second Quarter 2023 Earnings Conference Call. Here with me today are Jeff Stoops, our President and Chief Executive Officer, and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2023 and beyond. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, July 31st. 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 second quarter results.
Brendan Cavanagh (CFO)
Thank you, Mark. Good evening. We had another steady quarter in Q2 with solid financial results that were slightly ahead of our expectations. Based on these results and our updated expectations for the balance of the year, we have increased our full year 2023 outlook for site leasing revenue, tower cash flow, adjusted EBITDA, AFFO, and AFFO per share. Total GAAP site leasing revenues for the second quarter were $626.1 million, and cash site leasing revenues were $618.7 million. Foreign exchange rates represented a benefit of approximately $1.9 million when compared with our previously forecasted FX rate estimates for the quarter, and a headwind of $4.2 million when compared to the second quarter of 2022.
Same tower recurring cash leasing revenue growth for the second quarter, which is calculated on a constant currency basis, was 4.3% net over the second quarter of 2022, including the impact of 3.9% of churn. On a gross basis, same tower recurring cash leasing revenue growth was 8.2%. Domestic same tower recurring cash leasing revenue growth over the second quarter of last year was 7.8% on a gross basis and 4.2% on a net basis, including 3.6% of churn. Domestic operational leasing activity, or bookings, representing new revenue placed under contract during the second quarter, declined from the first quarter. While all major carriers remained active with their networks, agreement execution levels in the second quarter from several of our customers were below our prior expectations.
Longer term, we continue to see significant runway for new 5G-related leasing activity based on the number of our sites that remain to be upgraded with mid-band spectrum deployments by the major mobile network operators. Today we announced that we have entered into a new long-term master lease agreement with AT&T. This comprehensive agreement will streamline AT&T's deployment of 5G solutions across our tower portfolio, while providing us with committed future leasing growth from AT&T for years to come. Based on this MOA, we have increased our projected contribution to 2023 leasing revenue from domestic organic new leases and amendments by $6 million from the full year projections we provided last quarter. During the second quarter, amendment activity represented 42% of our domestic bookings, and new leases represented 58%.
The Big 4 carriers of AT&T, T-Mobile, Verizon, and DISH represented approximately 89% of total incremental domestic leasing revenue that was signed up during the quarter. Domestically, churn was slightly elevated during the quarter, primarily due to faster decommissioning of legacy Sprint leases than we had projected, which is the opposite of our experience last year. Based on our current analysis, we expect Sprint-related churn for 2023 to be at the high end of our previously stated range for this year of $25 million-$30 million, resulting in a change to our full-year domestic churn outlook of $4 million. Our views around the ultimate multi-year cumulative impact of Sprint merger-related churn have not changed, although we continue to update our outlook around timing as more information becomes available.
We now project 2024 Sprint-related churn to be in a range of $20 million-$30 million, 2025 to be between $35 million and $45 million, 2026 to be $45 million-$55 million, and 2027 to be $10 million-$20 million. Just as last year ended up being well below our initial churn expectations, and 2023 will likely be a little above our initial expectations, we anticipate that the exact timing will continue to be somewhat, somewhat fluid, but in line with our provided projections. Non-Sprint related domestic churn was in line with our prior projections. Moving now to international results. On a constant currency basis, same tower cash leasing revenue growth was 4.8% net, including 4.9% of churn, or 9.7% on a gross basis.
International leasing activity was strong in the second quarter and ahead of our internal expectations. These positive results and our solid backlogs have allowed us to increase our projected contribution to 2023 leasing revenue from international organic new leases and amendments by $1 million. Inflation-based escalators continued to make steady contributions to our organic growth. Decreases in actual and projected Brazilian CPI rates have caused us to moderate our outlook for international escalation contributions for the full year by approximately $1 million. Overall, Brazil, our largest international market, had another very good quarter. The same tower organic growth rate in Brazil was 5.7% on a constant currency basis, including the impact of 5.6% of churn, which amount was significantly impacted by our previously discussed TIM agreement.
While international churn remains elevated, it continues to be in line with expectations and our previously provided outlook. 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, if during the year, we were to enter into any further agreements with other carriers related to the Oi consolidation, that would be expected to have an impact on our current year, we would adjust our outlook accordingly at that time. During the second quarter, 77.5% 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 16.2% of consolidated cash site leasing revenues during the quarter, and 13.1% of cash site leasing revenue, excluding revenues from pass-through expenses. Tower cash flow for the second quarter was $503.5 million. Tower cash flow in the quarter benefited by approximately $7.3 million in accounting-driven cost reclassifications. Our tower cash flow margins remain very strong, with a second quarter domestic tower cash flow margin of 85.5% and an international tower cash flow margin of 70.3% or 92.3%, excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the second quarter was $471.7 million. The adjusted EBITDA margin was 70.3% in the quarter.
Excluding the impact of revenues from pass-through expenses, adjusted EBITDA margin was 75.9%. Approximately 98% of our total adjusted EBITDA was attributable to our tower leasing business in the second quarter. During the second quarter, our services business had another strong quarter, with $52.4 million in revenue and $13.1 million of segment operating profit. While off year-ago activity levels, our carrier customers remained busy deploying new 5G-related equipment during the quarter. We have retained our full-year outlook for our site development business, due in part to the strength of our first half results. Adjusted funds from operations, or AFFO, in the second quarter was $352.7 million.
AFFO per share was $3.24, an increase of 6.2% over the second quarter of 2022 on a constant currency basis. During the second quarter, we continued to invest in additions to our portfolio, acquiring nine communication sites for total cash consideration of $7.2 million and building 64 new sites. Subsequent to quarter-end, we have purchased or are under agreement to purchase 134 sites, all in our existing markets, for an aggregate price of $72.9 million. We anticipate closing on these sites under contract by the end of the year. In addition to new towers, we also continue to invest in the land under our sites, and during the quarter, we spent an aggregate of $10.1 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. With that, I will now turn things over to Mark, who will provide an update on our balance sheet.
Mark DeRussy (VP of Finance)
Thanks, Brendan. We ended the quarter with $12.7 billion of total debt and $12.4 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.6x, below the low end of our target range and the lowest level in decades. Our second quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was a strong 4.9x. During and subsequent to quarter end, we repaid amounts under our revolving credit facility, and as of today, we have $360 million outstanding 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 3.5 years. The current rate on our outstanding revolver balance is 6.3%.
The interest rate on 95% of our current outstanding debt is fixed. During the quarter, we did not purchase any shares of our common stock, choosing instead to reduce revolver balances. We currently have $505 million of repurchased authorization remaining under our $1 billion stock repurchase plan. The company shares outstanding at June 30th, 2023, for 108.4 million. In addition, during the quarter, we declared and paid a cash dividend of $92.1 million or $0.85 per share. Today, we announced that our Board of Directors declared a third quarter dividend of $0.85 per share, payable on September 20th, 2023, to shareholders of record as of the close of business on August 24, 2023.
This dividend represents an increase of approximately 20% over the dividend we paid in the year ago period, and only 26% of our projected full year AFFO. With that, I'll now turn the call over to Jeff.
Jeff Stoops (President and CEO)
Thanks, Mark. Good evening, everyone. The second quarter was another very solid one for SBA. We produced good financial results across all areas of our business. We continued to deliver high-quality service and operating results for our customers. Each of our largest U.S. customers remained active with their networks. Our 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 co-locations. We did, however, see the same slowdown in activity that many others have discussed. While we had always anticipated domestic leasing growth to moderate as we move through 2023, organic leasing activity levels were lower than we anticipated in Q2 from some of our customers. Some of this was due, we believe, to slower activity from AT&T in anticipation of our new MLA, as would be expected.
We believe that these variations in activity are part of the normal cycle of carrier network investment that we have seen over time. A large initial burst of coverage activity as the next generation of technology starts to be deployed, followed by many years of coverage completion and capacity building. We are confident that there will be additional material network investment over the next several years. We believe this for a number of reasons. Most importantly, wireless demand continues to grow at a fast clip, consuming more and more of current network capacity. We have a large remaining number of sites that have not been upgraded yet to accommodate the mid-band spectrum holdings acquired by our customers over the last couple of years, some of which spectrum is not even available for deployment yet.
DISH has their next phase of regulatory coverage requirements to meet in 2025. We have our newly signed MLA with AT&T. We believe all of these items and others are supportive of multi-year continued development activity. While there will always be ebbs and flows in leasing activity levels based on a variety of factors, we believe that there will remain a need for continuous network investment, just as we have seen throughout our history in this business. With regard to our announced master lease agreement with AT&T, we're very excited about this next chapter in our long-standing, successful relationship. This new agreement highlights the long-term importance of SBA sites to AT&T's future network deployment plans. The agreement will improve operating efficiencies between our organizations and enhance stability with regard to future leasing growth.
We look forward to working closely with AT&T for years to come under this mutually beneficial framework. In the second quarter, our services business remained busy, helping our carrier customers meet deployment objectives in an efficient and effective manner. While our services business is down on a year-over-year basis, 2023 will still represent the second biggest services year in our company's history, behind only 2022. We believe our legacy and reputation in the services business keeps us well-positioned to be a go-to provider for our customers to meet their network rollout goals. Internationally, we also had another solid quarter with greater organic leasing activity than we had anticipated.
During the quarter, 62% of new international business signed up in the quarter came from amendments to existing leases, and 38% came through new leases with 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 ahead of our internal expectations with contributions from each of the big three carriers in that market. I continue to be pleased with our operational performance, cost management, and customer relationships in Brazil, which has made us a leader in the market. We have recently seen positive movements in the currency exchange rate, providing some financial benefit and increased U.S. dollars for repatriation, as well as contributing to our increased full-year outlook. We remain excited about our opportunities in Brazil. During the quarter, we again generated solid AFFO, providing significant cash for discretionary allocation.
While our strong financial position allows us to retain flexibility for future further opportunistic investment in portfolio growth and stock repurchases, we dedicated the majority of our available cash in the quarter to paying down the outstanding balance on our revolver. We immediately benefit from this by reducing our floating rate cash interest obligations, which today represent among the highest cost debt in our capital structure. With the continuing high cost and limited availability of private market tower acquisition opportunities, we believe this is currently our best use of discretionary spending. Our quarter-ending net debt to adjusted EBITDA leverage ratio was 6.6%, which I believe to be the lowest in our history, at least as a public company.
As always, we will continue to be opportunistic around investments, but for the near term, likely direct future cash flows into the repayment of debt as the most accretive short term and certainly a long-term beneficial use of capital. Our balance sheet is in great shape with no debt maturities until October 2024, and since that maturity could easily be refinanced under our revolver, we are comfortable now to remain opportunistic around timing of future financings. We are a preferred issuer in the debt markets we routinely use and retain very good access to capital. We finished the quarter with 95% of our debt fixed, and thus, we are only modestly exposed for now to significant interest rate fluctuations. Our exposure to floating rate debt is also expected to decline further as we continue paying down our outstanding revolver balance throughout the year.
We feel very good about our current capital position. We feel fortunate to be in a sound, stable business with tremendous fundamentals and significant long-term opportunity ahead. Our customers continue to have significant network needs. We will be there to support them in meeting those needs. I want to thank our team members and our customers for their contributions to our shared success. With that, Eric, we are now ready for questions.
Operator (participant)
If you wish to ask a question, you can do so by pressing one, then zero. You may remove yourself from queue at any time by pressing one, then zero again. If you are on a speakerphone, please pick up the handset before pressing the numbers. Once again, to ask a question, please press one, zero. First, we will hear from Ric Prentiss with Raymond James. Please go ahead.
Ric Prentiss (Managing Director)
Thanks. Good afternoon, everybody.
Jeff Stoops (President and CEO)
Hi, Ric.
Ric Prentiss (Managing Director)
Hey, obviously, I have some questions on the AT&T MLA. Big news item there. Appreciate, I think, when you said $6 million of the increase in lease activity was really driven by AT&T MLA.
Jeff Stoops (President and CEO)
Hey, hey, Ric. Ric, can you?
Ric Prentiss (Managing Director)
Yep.
Jeff Stoops (President and CEO)
Can you speak up, we're having trouble hearing you? Ric?
Ric Prentiss (Managing Director)
How about now? Can you hear me better now?
Jeff Stoops (President and CEO)
That's much better. Thank you.
Ric Prentiss (Managing Director)
You bet. Yeah, I'm sorry about that. I had another phone call come in. It's like, nope, doing something busy. Yeah, appreciate some of the color on the MLA with AT&T. Couple of questions around it. Why now? Any others that you're working on? Also, suggesting that $6 million increase in guidance came from that, it looks like we should be thinking maybe of kind of flattish new lease activity over the next couple of quarters and as we exit 2023. Is that the way we should be thinking about it?
Brendan Cavanagh (CFO)
Yeah. On the MLA, first of all, on the numbers, the $6 million increase is basically due to the MLA. Obviously, that was our, the $72 million is what we reported last time. We increased it to $78 million, and activity was a little bit slower in the second quarter. We expect that the MLA will kick in right away based on the terms of it, and will be a contributor going forward. In terms of the cadence, it would be fairly flat. I would expect actually that we'll see an uptick in terms of the contribution to the third quarter as a result of the MLA, and then you'll see it be a little bit lower into the fourth quarter. That lower trajectory has nothing to do with the MLA.
That's really based on slowing activity from other carriers. If you'll recall correctly, we had kind of a trajectory expected that was downward leaning throughout the year, and I would expect that will continue as it relates to other contributors.
Jeff Stoops (President and CEO)
In terms of why, Ric, this agreement with AT&T has been in the works for well over a year, and it's a, it's a deal that we believe is beneficial to both organizations. We've been working on it for that period of time and, and trying to signal and be transparent to our openness, for this type of agreement, knowing that, we were likely to enter into this agreement, which, which we have.
Ric Prentiss (Managing Director)
Mm-hmm.
Jeff Stoops (President and CEO)
We really don't want to comment too much on what's going on with other, other customers. Just as we have always said, we are not hung up so much on structure as we are on finding, mutually beneficial agreements with our customers.
Ric Prentiss (Managing Director)
Okay. One other one for me on the paying down the revolver. When does the calculus move back towards stock buyback? Because it sounds like there's still not a lot of M&A out there, which would be probably your first choice. How do we think about when the lever moves, since you're down to 6.6 leverage, to more stock buyback? Is that like a next year item? Is that further out?
Jeff Stoops (President and CEO)
Yeah, I think, if rates stay the same and stock prices stay the same, it will continue to be more accretive and obviously good for the overall capital position to continue to pay down the revolver to zero. When we get to that point, Ric, you should ask that question again.
Ric Prentiss (Managing Director)
I'll be here to ask it. Great.
Jeff Stoops (President and CEO)
Okay.
Ric Prentiss (Managing Director)
Thanks, everyone. Stay well.
Jeff Stoops (President and CEO)
Yeah.
Operator (participant)
Next, we'll hear from Michael Rollins with Citi.
Michael Rollins (Managing Director)
Thanks, and good afternoon. Just curious, just to follow up on the comprehensive deal with AT&T, can you share some of the multiyear components of this deal? Is there gonna be a straight-line element that sometimes comes up with these types of, multiyear or comprehensive opportunities? Does it change the way investors should think about leasing overall for SBA in 2024 in the domestic side?
Brendan Cavanagh (CFO)
Yeah, Mike, it will certainly smooth the way that we operate with AT&T. I think from that perspective, perhaps it impacts our reported growth numbers in terms of ebbs and flows. There may be a little bit less of that, at least as it relates to this particular agreement. From a straight line impact, we would expect that over the course of the agreement, that we will have some straight line impacts, but there are no straight line or very minimal straight line impacts in the short term.
Michael Rollins (Managing Director)
Just on the commentary on leasing, the site development revenues are unchanged from the prior guidance. You did note that there was some slower activity levels. Was this just something that you were maybe more prepared for earlier in the year? Is there anything different about your site development business that maybe gave your expectation a little more durability in spite of some of the changes that you observed?
Jeff Stoops (President and CEO)
Yeah, I think we know our site development business very well. You know, it primarily centers around work, almost entirely work on our, on our towers. We have a very good feel for it. You know, there's, there's just enough work out there, Mike, that was already, you know, booked earlier in the year and actually, you know, some of it probably spilling over from last year, that's now working itself through our services backlog, that gives us the comfort to continue with the guidance that we have. So, a lot of it is more a reflection of activity levels that occurred Q1, Q4 of last year.
Michael Rollins (Managing Director)
Thanks very much.
Operator (participant)
Next, we'll hear from Simon Flannery with Morgan Stanley.
Simon Flannery (Managing Director)
Great. Thank you very much. I was just wondering on the, the leverage point, have you had any more consideration of targeting investment grade status? Or is that, is this gonna be just a temporary, change in your overall leverage targets? And then, perhaps you could just talk.
Jeff Stoops (President and CEO)
Well.
Simon Flannery (Managing Director)
Go on. Yep.
Jeff Stoops (President and CEO)
Yeah. Right now, I think you should assume it's temporary, so that we can continue to watch interest rates, and see where they go. If interest rates stay high, it, it may not be temporary. We haven't made that decision yet. Actually, we're paying down the revolver because it's the most economic and best use of our cash today. It just so happens that as we continue to do that, we, you know, further decrease leverage, which makes the path of going to investment grade, if we were to so choose that path, easier to obtain. I really don't think you should look at it, Simon, as a conscious effort to get to investment grade, as much as it is just the best financial use of our discretionary cash.
Simon Flannery (Managing Director)
Great. Yeah, and, and just one follow-up, you mentioned earlier that you've still got a lot of sites that have not been upgraded to 5G. Do you think as, you know, given some of the rural portfolio of your portfolio, do you think that would advantage your portfolio, in the next several years versus to that initial build-out?
Jeff Stoops (President and CEO)
Yeah, I think, if history is any guide, yes, that's, that's exactly how, how it works. It starts out in the NFL cities and goes from there.
Simon Flannery (Managing Director)
Great, thank you.
Operator (participant)
Next, we'll hear from Phil Cusick with JPMorgan.
Phil Cusick (Managing Director)
Hi, guys. Thank you. Two, if I can: How should we think about the exit run rate in activity this year versus going into next year? AT&T, it sounds like it's steady in 3Q and 4Q, and then from there, and others are decelerating through this year. Should we think of the fourth quarter as a decent run rate for next year or maybe a little bit lower than that? Second, Jeff, I didn't understand your comment just a second ago on the service revenue now for activity earlier in the year. It sounds like services are still running well ahead of historical levels. Do you expect them to come in, sounds like you expect them, you're gonna make the guide this year, but next year, it sounds like things are gonna be probably well below.
Does that make sense? Thank you.
Jeff Stoops (President and CEO)
Go ahead, Brendan.
Brendan Cavanagh (CFO)
Right. Yeah, on the first question, We expect that the fourth quarter run rate, you're talking specifically, just to be clear, about domestic, organic.
Phil Cusick (Managing Director)
Yes. Thank you.
Brendan Cavanagh (CFO)
Leasing contributions. Yeah, to be around approximately $17 million-$17.5 million. I would definitely caution you as to using that as an indicator of next year. As I mentioned earlier, the trajectory based on activity levels is declining, and as a result, we would expect those numbers to step down as we move into next year. We're obviously not ready to give 2024 guidance yet at this point, but just kind of broadly, when you think about it, the way we've always explained it, and just the way that it actually happens, is that you get a lot of growth. For instance, the 2023 growth is based heavily on the leasing activity that took place at the end of last year, 2022, and next year's numbers will be based heavily on the leasing activity that's taking place this year.
The number is a little bit higher than we said before because of the impact of the MLA for the fourth quarter, but I don't believe will be indicative of the numbers for next year.
Jeff Stoops (President and CEO)
Yeah, as far as the services revenue, Phil, it, the first half of what we report in 2024 will be largely dictated by what we do now operationally with leasing. You know, we have two different components of that. We have the site acquisition component, which is the planning stuff, and then we have the construction, which is where, you know, a lot of the current activity is taking place because that's the last part of the cycle. We'll see. We'll see where we come out with the 2024 guidance on services, but it will, you know, be obviously heavily impacted by how we finish out the rest of the year.
Phil Cusick (Managing Director)
Thanks very much, guys.
Operator (participant)
Next, we'll hear from Jonathan Atkin with RBC.
Jonathan Atkin (Managing Director)
Thanks very much. I was interested in doing, just to contextualize the AT&T MLA, how much of your revenue for kind of this year, next year, the following year, can we be considered to be fairly locked in as opposed to usage-based? Thanks. Segmental revenue.
Brendan Cavanagh (CFO)
Just, yeah, just, you mean just the percentage of the AT&T revenue or overall revenue?
Jonathan Atkin (Managing Director)
Overall revenue. For the whole company, how do we kind of think about how much is kind of a lock versus more.
Brendan Cavanagh (CFO)
We can't.
Jonathan Atkin (Managing Director)
Revenue source.
Brendan Cavanagh (CFO)
Right, Jon, we can't give specific numbers out, and obviously, a number of our agreements with other customers are fluid, and where those amounts end up are, is obviously unknown. As a percentage, it's hard to say as well. We can't be very specific about it, but we do have some portion of our revenue base that is locked in now under this agreement that wasn't before.
Jeff Stoops (President and CEO)
A greater portion of the AT&T than probably exists under other agreements, although we still, we still have some of that. I mean, I don't think that's, that's not a number that we have, we have focused on.
Brendan Cavanagh (CFO)
Yeah.
Jeff Stoops (President and CEO)
So, the best we can answer, Jonathan, is it's a, it's a much greater extent under the AT&T revenue.
Jonathan Atkin (Managing Director)
You're comparing that to your agreements with other carriers, as opposed to other tower co's agreements with AT&T, I'm assuming?
Jeff Stoops (President and CEO)
Correct.
Brendan Cavanagh (CFO)
Yeah, correct.
Jeff Stoops (President and CEO)
Just.
Jonathan Atkin (Managing Director)
Got it. Yeah, understood. Maybe just give us some, some directional guidance around the trajectory around building new towers and ground lease and easement activity.
Jeff Stoops (President and CEO)
Yeah, I mean, we continue to look for good, financially smart, new build opportunities. We're doing those mostly outside the United States. Primarily, Brazil and South Africa are our two largest markets outside the United States. You know, we've have a steady focus on, you know, ground lease purchases and extensions, which hasn't changed, you know, at all. It's moved a little bit more international, in terms of the mix, just because we've been at it so long in the United States. Nothing's really changed there. We would, we would put more capital into particularly the land purchases and extensions if the opportunities arose.
Jonathan Atkin (Managing Director)
In terms of purchasing other portfolios, you know, maybe thinking about Africa and, and your operating history there and, and maybe some, some, you know, tuck-in opportunities, either in that geography or, or elsewhere. You know, what are your thoughts on increasing their scale in, in, in existing markets versus expanding the footprint?
Jeff Stoops (President and CEO)
Yeah, I mean, the answer to that question is pretty much the same as it has been for years. For the right deal, we will do it. We have no strategic hole that we feel needs to be filled. In market growth, because of the existing base, is going to be preferred over new market growth. We would still go into a new market if we found the right deal. You know, I would point back to the Tanzania investment as a good example of that.
Jonathan Atkin (Managing Director)
Go ahead.
Jeff Stoops (President and CEO)
Because it's all financially driven, it makes, you know, our decision to use discretionary cash to pay down the revolver, you know, that much more straightforward.
Jonathan Atkin (Managing Director)
Lastly, I, I might have missed this, but the duration of, of the AT&T MLA?
Brendan Cavanagh (CFO)
It's 5 years, Jonathan.
Jonathan Atkin (Managing Director)
Thanks very much.
Operator (participant)
Next, we'll hear from David Barden with Bank of America.
David Barden (Managing Director)
Hey, guys. Thanks so much for taking the questions. I guess, maybe two. The first one, Jeff, just with respect to some of the actions that your competitors are taking, pros and cons for being in the construction business, you know, for towers at all. You know, is there maybe an opportunity to, to redirect resources in, in more optimal ways, or, or is there an opportunity, if, if people are willing to give up business, for you guys to lean in at the margin as we think about the go-ahead business? Second, maybe for Mark, as we think about the 25 term loan and, you know, its maturity, what should the street be doing in terms of expectations, you know, in the model with respect to how we address that cost, fixed, long-term, roll it?
What is the plan? Thank you.
Jeff Stoops (President and CEO)
David, I'm gonna defer that to our expert here, Brendan.
Brendan Cavanagh (CFO)
On the services question, David, you know, we've had a lot of history. Actually, you recall, that's how SBA started. We have a very flexible cost structure that allows us to ramp up, ramp down. We use a lot of subcontracted tower crews. We have our own, but we also use subcontracted tower crews.
One of the things that has really served us well, and our customers give us high praise for this, is by using our services people for work on our towers for them, they are greatly benefited in terms of speed to market and efficiencies. I, I don't think that changes. I, I guess if I had to choose one of your two options, you know, lean out or lean in, we'll look to lean in and not be afraid to do that because of our confidence in how we manage that business.
Mark DeRussy (VP of Finance)
Dave, on the term loan, you know, your question of modeling, if I could only see into the future, you know? Yeah, I mean, the best thing I think for people to do when looking at it, is probably to assume a similar like-for-like refinancing. I would expect that spreads will be similar to up slightly from where they are today, but we'll have to see how that plays out. It's just a matter of using the forward curve in terms of the benchmark SOFR rate. That doesn't mean that that's necessarily how it will play out. We will probably be evaluating multiple different options. There may be a mix of different instruments that we use. Some may be fixed and some may be floating. All things are on the table for us right now, and we look at that, frankly, every day.
If you're just simply modeling out long term, I think the best thing to do is, is to assume a like-for-like instrument.
David Barden (Managing Director)
All right, great. Thank you, guys.
Operator (participant)
Next, we'll hear from Walter Piecyk with LightShed. Please go ahead.
Walter Piecyk (Partner and TMT Analyst)
Thanks. Can you hear me?
Brendan Cavanagh (CFO)
Yes.
Jeff Stoops (President and CEO)
Yes.
Walter Piecyk (Partner and TMT Analyst)
All right, perfect. Sorry. If you didn't have the AT&T MLA, would the $72 million still stick, or would that fall off, accelerating faster than you thought in terms of the second half of the year?
Brendan Cavanagh (CFO)
I can't really answer that question, Walt, because there's so many elements that go into it. You know, what would the activity be with AT&T, otherwise, those types of things. I, I can't really say for sure what it would be, given that we were working on this for quite a while. Of course, we don't like to discuss the individual customers, but obviously, DISH has just gotten through a major deadline that they had. There's a little bit of a, a slowdown or pause, if you will, related to that. We would expect that will eventually pick up. Given the delay between signings and, and revenue recognition, I would expect that will weigh year-over-year on next year. And T-Mobile was frankly, very, very busy as well, and you have somewhat of a similar dynamic there.
It's, you know, that's, that's the, what we're going into for next year, but longer term, there's still a lot to do there. You know.
Walter Piecyk (Partner and TMT Analyst)
If there, so if there was something incremental, like qualitatively, what, what do you think those issues are?
Brendan Cavanagh (CFO)
If there was something incremental, in what sense? I mean.
Walter Piecyk (Partner and TMT Analyst)
Well, just you were, you were just in your in the response you just gave, meaning in Q2 is a little bit less, and you're saying you're expecting that to continue into the third and fourth quarter. Again, I think you guys did a good job historically at already talking about a slowdown in the second half of the year, and also maybe how that would carry into 2024. I'm just trying to get a sense of, is there something new or worse?
Brendan Cavanagh (CFO)
Yeah, I don't think there's something particularly new. I think it's been a little bit slower than what we had anticipated before, but directionally, it's still the same. What does that mean for next year? Does that mean $5 million difference or $10 million? I can't tell you yet. We're not ready to get there.
Walter Piecyk (Partner and TMT Analyst)
Okay.
Brendan Cavanagh (CFO)
And we still have half the year to go. It's, it's marginally worse than what we thought in terms of the balance of the other carriers.
Walter Piecyk (Partner and TMT Analyst)
Okay, just one, one.
Jeff Stoops (President and CEO)
The qualitative.
Walter Piecyk (Partner and TMT Analyst)
Yeah, go ahead.
Jeff Stoops (President and CEO)
The qualitative benefits or the positives to look forward to, Walt, is, I mean, DISH has to get started, you know, whether it's late Q4 or early Q1 on their 2025 bill, which is gonna be large, you know, T-Mobile hasn't even got the C-band and the 3.45 spectrum yet. You've got the, you got some folks waiting on availability of dual-band equipment. There's, there's all kinds of things to look forward to as we move through the year and into next.
Walter Piecyk (Partner and TMT Analyst)
Are you seeing anything from cable, Jeff?
Jeff Stoops (President and CEO)
A little bit, but not, not enough to, you know, give anyone the impression it's gonna move the needle.
Walter Piecyk (Partner and TMT Analyst)
Got it. Thank you.
Operator (participant)
Then next, we'll hear from Batya Levi with UBS.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
Great, thank you. Just a quick follow-up on the AT&T MLA. Does it cover all the towers that AT&T has equipment on your sites? Should we assume that the escalator in there is similar to the 3%-3.5% that you have? Another one, I believe you said 42/58 mix for amendments and new leases. Can you give us a sense to how that will look like if we just exclude DISH? Thank you.
Brendan Cavanagh (CFO)
Yeah. I'm sorry, what was the first part of the question, the MLA?
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
AT&T, AT&T MLA, if it includes all the all the sites they have with you.
Brendan Cavanagh (CFO)
Yeah.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
And the escalator.
Brendan Cavanagh (CFO)
Right. It does. There may be a few exceptions because of specific issues around individual sites, but the vast majority of our sites are covered by the MLA.
Jeff Stoops (President and CEO)
That have AT&T on them.
Brendan Cavanagh (CFO)
Yeah, that have AT&T on them, of course. Then, on the escalator piece, you know, I can't really get into the specifics around, around what the escalator is, but our historical escalator with AT&T has been north of 3%, and we would expect that to continue.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
Great. The amendments without DISH, is that much higher than the 42%?
Brendan Cavanagh (CFO)
It would be. It would be. If you took DISH out of the mix, you would have a much higher percentage of amendments of, of the total.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
Okay, maybe just a quick one. Can you give us a sense on what the guidance assumes for DISH as we exit the year?
Brendan Cavanagh (CFO)
No, we can't give you that kind of specificity, no.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
Okay, thanks.
Brendan Cavanagh (CFO)
It's much less than it was. It's much less than it was exiting last year.
Batya Levi (Managing Director and Communications, Media, and Infrastructure Analyst)
Got it. Thank you.
Operator (participant)
Next we'll hear from Nick Del Deo with MoffettNathanson.
Nick Del Deo (Managing Director)
Hey, thanks for taking my questions. You know, first, regarding the AT&T deal, should we think of that as pulling forward some revenue that you otherwise would have expected in the latter years into, you know, into the near future? Do you feel that the totality of the revenue that you'll get from AT&T over the course of the contract is similar to what it otherwise would have been?
Jeff Stoops (President and CEO)
The answer to the last part of your question is yes, Nick. The answer to the first part, I don't think it's a pull forward.
Brendan Cavanagh (CFO)
Yeah. I mean, it's, it's hard to say, because obviously, previously it would be very specific to the timing of when they were signing things. We don't know exactly what that timing would be. So, could, could be pulling forward, could be pushing it.
Jeff Stoops (President and CEO)
Yeah, the answer to your question will be only known in hindsight by the levels of AT&T's activity.
Brendan Cavanagh (CFO)
Yeah.
Nick Del Deo (Managing Director)
Okay, okay. We should think of it as more, you know, call it smoothing a bit, but not necessarily sort of a mass reallocation of, of what the revenue would have been. Is that fair?
Jeff Stoops (President and CEO)
Yes.
Nick Del Deo (Managing Director)
Yeah. Okay, great. Kind of two clarifications, you know, for Brendan. One, it looks like your forecast for other international revenue went up by about $9 million versus last quarter's guidance. What was that? Was it in this quarter's results? Second, can you elaborate a bit on the $7 million in cost reclassifications that you noted in your prepared remarks? You know, what was it reclassified to and from? What was behind it? Which segment?
Brendan Cavanagh (CFO)
Yeah. Yeah, the other international was roughly half of that was in the second quarter. There's some that is in the balance of the year, and it's frankly, a mix of things. It's not one thing in particular. There was some increased cash basis revenue recoveries that we did not necessarily forecast, and some that we've actually even seen subsequent to quarter end. Also some termination fees and just other, frankly, cats and dogs, Nick, but they, they did add up, and we actually have higher expectations for the balance of the year. That's, that's that piece of it.
On the accounting reclassification, it basically has to do with the decommissioning of some carrier-related equipment, basically Sprint-oriented equipment at some of our tower sites that we previously had expected or had been recording as a cost of revenue, a direct cost of revenue. After discussion with our accountants, it was determined that the best classification for that was impairment and decommissioning costs. Basically, it's just a move of those costs out of cost of revenue and into impairment and decommission costs.
Nick Del Deo (Managing Director)
Okay, sort of a, sort of a one-time true-up?
Brendan Cavanagh (CFO)
There was some one-time true-up in there, but that's the way it'll also be going forward, and that's assumed within the guidance that we've given around tower cash flow.
Nick Del Deo (Managing Director)
Okay. Can you share anything about how much of the change was attributable to that beyond the $7 million recognized in the quarter, what it would be for the full year?
Brendan Cavanagh (CFO)
Yeah, it's, it's another roughly $4 million.
Nick Del Deo (Managing Director)
Okay, terrific. All right. Thank you both.
Operator (participant)
Next, we'll hear from Brett Feldman with Goldman Sachs.
Brett Feldman (Managing Director)
Thanks. Two questions, if you don't mind. You know, when some of your peers announce their own versions of MLAs or holistic agreements or whatever they call it, it's not uncommon when they announce it, for them to come out and say, "Oh, by the way, we're raising our guidance for straight-line revenue." I know you got a question about this earlier, it's typically because there's some incremental commitment that was made in that agreement, maybe with escalators or some other amount of leasing, and you didn't do that with this agreement. I can imagine a question we're gonna get is, you know, ultimately, what do you feel like you accomplished through the MLA? Because you've been very selective in entering into these, these larger agreements.
I know there's been some questions on it, but I, I'm trying to think about the right way of framing that. Then the second question is, you know, portfolio growth has been a focus for SBA for, for a very long time. I remember the Analyst Meeting, I don't know, 15+ years ago, where you first started talking about those long-term targets. It's, it's understandable why, paying down your revolver right now is, is probably the economically, most accretive thing to do.
You know, whenever we get past this moment, do you think portfolio growth is gonna be the same priority and same opportunity, or are you starting to suspect that maybe the tower portfolios that you don't own in the markets you're in or might wanna be in, are not nearly as attractive as the types of portfolios you could just develop on your own, particularly outside the U.S.? Thanks.
Jeff Stoops (President and CEO)
Yeah. I will take the last one, first. I believe portfolio growth will always be our most desirable and highest potential allocation of capital. Where it falls today, I mean, and keep in mind, we grew the portfolio 15% last year. Where it falls today is purely a function of cost of debt and availability and pricing of assets. As long as all that works out, Brett, to achieve a investment result that we want, I don't see the preference and prioritization of portfolio growth changing.
Brendan Cavanagh (CFO)
Yeah, Brett, on the question around the straight line for the MLA, there actually was, you couldn't see it, but there is actually some small impact to straight line, that was actually offset by a decrease in straight line associated with some of the accelerated Sprint churn that we mentioned earlier. There is a small impact. In terms of what it looks like going forward, obviously, what our peers have done and what we've done, they're probably not exactly the same agreements. I'm sure there are terms that are different. I can't speak to theirs specifically. Really, it's a function of timing in terms of when certain commitments take place. In the future, I would expect that there will be some straight-line impact as a result of this deal, it's, it's a little more activity-driven than it is upfront.
Jeff Stoops (President and CEO)
Yeah. You will see straight-line benefits, over time, over the course of the five years, Brett, based on various triggers and activity levels, as opposed to upon signing.
Brett Feldman (Managing Director)
All right. Thank you.
Operator (participant)
Next, we'll hear from Jonathan Chaplin with New Street.
Jonathan Chaplin (Managing Partner)
Thanks. One, just very basic question. How do you assess that paying down the revolver is the most accretive use of free cash flow? How do you sort of put that up against the accretion you get from share repurchases? Is it as simple as what the yield of the debt is relative to your AFFO yield? Are you taking the direction of rates into consideration when you make that determination, or is it just sort of a, you know, moment-by-moment decision that drives whether you're in the market buying back stock or paying down the revolver? Just a follow-up question on DISH. Is there anything assumed in new leasing activity for the second half of this year from DISH in your guidance? Thank you.
Brendan Cavanagh (CFO)
The accretion analysis takes into account a number of things. There's certainly the basic straightforward piece that you mentioned, which is, you know, what's, what's the yield of buying back our stock today versus what can we save by paying down the revolver or any debt? Right now, that actually is more accretive to pay down the revolver today. We also look at it long term, and we look at our expectations for growth for growth and cash flow, as well as what we think our future financing or refinancing costs will be. That positioning relative to our balance sheet as a whole is also relevant to it, so.
Jeff Stoops (President and CEO)
Yeah, that, and that bodes towards stock repurchases, Jonathan, with one major exception today, which is we don't know that interest rates have stopped going up. When interest rates go up, it immediately affects the cost on the revolver. We can always buy our stock back. We take comfort in that. When you have a increasing interest rate environment where we don't know when it's over, we just think both from a business perspective and certainly a balance sheet perspective and from an accretion perspective, the pay down the revolver balance, while we have one, is the way to go.
Brendan Cavanagh (CFO)
DISH, in terms of the impact for the second half of the year, as we mentioned, it's obviously been slower in terms of new business being signed up with them. They're still a significant contributor to the second half numbers because of all the business that they did with us over the last year. We expect that we'll continue to see, at least for this year, less executions with them. Ultimately, they have a ton to do, as we talked about, to meet their 2025 goal, and we would expect that that will turn around sometime at the end of the year or into next year.
Jonathan Chaplin (Managing Partner)
Got it. Thanks, guys.
Operator (participant)
Next, we'll hear from Eric Luebchow with Wells Fargo.
Eric Luebchow (Director and Senior Equity Analyst)
Great. Thanks for taking the question. Just going back to the question on investment grade, I know that's clearly not part of the plan right now, but, you know, theoretically, you know, if you did make that decision, what type of leverage do you think you'd have to target to get there? How, how quickly do you think you could get there based on where your leverage is at today?
Brendan Cavanagh (CFO)
Well, based, based on the thresholds that are there by the agencies, or at least by one of the agencies right now, we're getting very close to being there, certainly within a half a turn of leverage of being there. It, it'd be more about the commitment to staying there than it would be about hitting the leverage trigger.
Eric Luebchow (Director and Senior Equity Analyst)
Yeah, understood. Then just, another question on the comprehensive MLA. I mean, does this at all indicate that you guys would still be open to entering into similar arrangements with some of the other carriers to maybe smooth out some of the leasing volatility? Or is it really just a case-by-case basis, what you think would be, you know, NPV positive for your business?
Jeff Stoops (President and CEO)
Yeah, I mean, it's, it's, it's really the latter, but, I mean, we've always said we would be open to, to a variety of structures. I mean, this, I think, evidences that openness. For the right deal, Eric, we would, we would do any number of structures with our, our customers.
Eric Luebchow (Director and Senior Equity Analyst)
Understood. Thank you both.
Operator (participant)
Next, we'll hear from Brendan Lynch with Barclays.
Brendan Lynch (Director)
Great, thanks for taking my questions. At the risk of belaboring the point, I, I have a few on the MLA. Maybe just high level, given the MLA with TIM and now with AT&T, has the market changed, have customers changed, or has your perspective changed? Maybe if you could give us any specifics along the number of sites, minimum payment schedule. You mentioned it was there five years, but I'd imagine the leases are for much longer. Any details around that would be helpful.
Brendan Cavanagh (CFO)
Yeah, I think, in terms of the details, we need to keep, stay away from most of those. There's a lot of specific things that you asked about there that obviously are, are somewhat important for us to keep, confidential for both us and our customer. It is a five-year agreement. There'll be a lot of ramifications that I would expect would extend beyond the five years. In terms of the MLA in general, I think Jeff kind of mentioned, answered this earlier. You know, we've always been open to different structures. Obviously, at different points in time in our history, we haven't necessarily found terms that we found to be beneficial to us, or they didn't work for our customers, wherever the case may be. We've done less of those.
We've done MLAs over the years in various structures. We have an MLA today with Verizon. We've had MLAs with T-Mobile and with DISH. We've, we've done these agreements before, but each one is dependent upon the specifics around that carrier and their needs at the time and, and what works for both parties. I don't know that anything has holistically changed out in the, the market broadly.
Jeff Stoops (President and CEO)
Yeah, I mean, we are trying to be responsive to our customers, while at the same time being responsible to, you know, ourselves and our shareholders. That will continue to be kind of the, the big picture as to how we approach these things, and it could lead to more or this could be the only one.
Brendan Lynch (Director)
Maybe just to, to clarify a point, I, I think you've described some of your past MLAs as being pricing menus. Is that how you would characterize this arrangement with AT&T, or is there a better way to think about it?
Jeff Stoops (President and CEO)
Yeah, this would be a little different than that. This would be payments in exchange for AT&T having certain rights to use our towers.
Brendan Lynch (Director)
Okay, very good. Thank you.
Operator (participant)
Now we'll hear from Greg Williams with TD Cowen.
Greg Williams (Director and Senior Equity Research Analyst)
Great, thanks. Just first question on any further developments with Oi, beyond TIM, with the other carriers, any ongoing discussions, are you having them? Are you hopeful you can get anything done by year-end? Just second on, on the site development, sounds like it'll hang out in the low 50s the next few quarters. Anything to think about in terms of service margins from here? Thanks.
Brendan Cavanagh (CFO)
Yeah. On the Oi question, you're talking specifically about deals with the other carriers that took over Oi mobile, I believe.
Greg Williams (Director and Senior Equity Research Analyst)
That's right.
Brendan Cavanagh (CFO)
Yeah, we, we are having conversations with those other carriers, it's possible that there would be some other arrangement struck with them, it's, it's premature for us to, to say, obviously, if we do reach one, we'll, we'll let you know at that time. Then on the site development question, I would expect that the margins will stay pretty similar on a percentage basis to what you've seen during the first half of this year. The volume may be a hair lower, pretty, pretty flat. Your estimate of around 50 or so quarters is probably about right.
Greg Williams (Director and Senior Equity Research Analyst)
Got it. Thank you.
Brendan Cavanagh (CFO)
Yep.
Operator (participant)
We have no further questions at this time.
Jeff Stoops (President and CEO)
Great. Well, I wanna thank everyone for joining us this evening. We look forward to getting back together in late October for our third quarter report. Thank you.
Operator (participant)
That does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.