Q4 2023 Earnings Summary
- SBA Communications anticipates continued growth in Adjusted Funds from Operations (AFFO) per share over the long term, focusing on maximizing this key metric despite challenges such as higher interest rates and Sprint churn. The company's long-term contracts and relationships position it well for sustained AFFO per share growth.
- The ongoing 5G upgrades present significant leasing opportunities, as only a bit over half of SBA's tower sites have been upgraded to 5G. The company expects the remaining upgrades to occur over the next 2 to 3 years, indicating a runway for organic growth through amendments and new leases.
- SBA is open to leveraging its strong balance sheet for value-accretive investments, including potential M&A opportunities and stock buybacks. With net leverage at 6.3x, below its target range, the company is positioned to capitalize on growth opportunities to enhance shareholder value.
- Higher interest expenses due to rising interest rates are expected to negatively impact AFFO per share. Brendan Cavanagh stated that "the next few years, there are some challenges to our AFFO per share metric, largely because of two things that are not new. Interest rates, we've done an excellent job over the last many years locking in very low-cost debt. But the market is what it is. And at some point, you have to refinance at least some of that debt. And so you're going to see higher interest costs that weighs on that a little bit."
- Anticipated churn from Sprint decommissioning and international customer consolidations could reduce revenue growth. Cavanagh mentioned that "the Sprint churn, in particular, that is kind of out there that we know we have ahead of us, and we've scoped for you as to what that looks like." He also noted elevated churn internationally due to customer consolidation, which could "temporarily lead to elevated churn" impacting cash flow.
- Potential shift towards alternative infrastructures like small cells and rooftops may reduce demand for traditional tower leasing. When asked about operators satisfying capacity needs with rooftops and small cells, Cavanagh acknowledged that "those dense urban centers really were never tower markets to begin with... Anything that's getting resolved with rooftops, that's a very limited tower market." This could imply limited growth opportunities in certain markets.
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Leverage and Capital Allocation
Q: How should we think about leverage and capital allocation between debt paydown, stock buybacks, and M&A?
A: Management has reduced net leverage to 6.3x by paying down floating rate debt but is comfortable with higher leverage if better uses of capital arise. This could include stock buybacks or quality acquisitions. They are retaining flexibility to deploy capital in the best way to produce optimal results. -
Domestic Leasing Activity Outlook
Q: Can you help us understand the pacing of new lease activity in the U.S. and whether the run rate could go below $40 million?
A: The timeframe from signing to revenue remains consistent, with new leases taking about 6 months and amendments around 3 months. Projections show domestic leasing slightly front-end loaded, based on last year's activity. If activity doesn't pick up, the run rate could be slightly below $40 million by year-end, but management believes there's opportunity for numbers to go higher in future years, depending on carrier activity. -
Strategic Review and Market Position
Q: Are you considering exiting markets where you lack scale or leadership positions?
A: Management is evaluating all holdings through a financial lens, focusing on maximizing positions in markets where they have meaningful scale and relevance to customers. This doesn't necessarily mean they will exit any markets or product areas like data centers, but they are open to refining their portfolio to improve long-term cash flow stability and growth. -
AFFO per Share Focus and Growth
Q: What are your key performance metrics and expectations for AFFO per share growth over the next 3 years?
A: The primary metric is AFFO per share, representing the free cash flow available to shareholders. The goal is to grow this over the long term, despite near-term challenges like higher interest rates and Sprint churn. Management is focused on maximizing this number over a 5 to 10-year period, ensuring stable, growing cash flows. -
International Churn and M&A Multiples
Q: How are M&A multiples evolving, and what are your expectations for international churn?
A: The M&A market remains competitive with high price points, especially in the U.S. Internationally, there's some moderation due to higher cost of capital, but often deals are not getting done due to disconnects in price expectations. Regarding international churn, consolidations—particularly in Brazil—are expected to continue driving churn over the next few years as carriers adjust their networks post-merger. -
DISH Network Leasing Expectations
Q: What are your expectations for DISH within your leasing assumptions?
A: DISH is a component of leasing growth projections for this year. They have obligations to meet FCC and DOJ targets by mid-2025, and management believes DISH will address these aggressively. However, DISH represents a relatively small percentage of the total expected growth. -
Interest Rate Hedging Strategy
Q: Can you elaborate on your recent interest rate hedging actions and any plans to hedge further?
A: The company entered into a $1 billion hedge as a forward starting swap to manage interest rate exposure on debt maturing in March 2025. This hedge represents about 50% of the outstanding debt. They may consider additional hedging but will monitor the market and act appropriately, aiming to lock in lower rates and ensure stability. -
5G Upgrades and Future Leasing
Q: What percentage of your towers have been upgraded to 5G, and when do you expect to reach 100%?
A: Currently, a little over 50% of sites have been upgraded to 5G, varying among different carriers. Management expects the upgrades to continue over the next 2 to 3 years, providing a good runway for future growth as carriers complete their 5G deployments. -
FirstNet Impact on Leasing
Q: How will AT&T's new FirstNet contract affect your leasing activity?
A: The impact is expected to be limited in terms of amendments or upgrades. The opportunity lies more in new site leases or tower builds where AT&T may need to densify their network, rather than modifying existing agreements. -
Capital Expenditure Guidance
Q: What drove the increase in discretionary CapEx spend for 2024 compared to 2023?
A: Discretionary CapEx for 2024 is guided to be similar to last year's, at around $330 million, with a slight increase from $310 million in 2023. This reflects spending on deals under contract and new builds, consistent with their growth strategy.