SBA Communications Corporation (NASDAQ:SBAC) Q4 2022 Earnings Call Transcript

SBA Communications Corporation (NASDAQ:SBAC) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the SBA Fourth Quarter Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark DeRussy, Vice President of Finance. Please go ahead.

Mark DeRussy: Good evening and thank you for joining us for SBA’s fourth quarter 2022 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, February 21 and we have no obligation to update any forward-looking statements we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics.

The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn the call over to Brendan.

Brendan Cavanagh: Thank you, Mark. Good evening. We finished up an outstanding 2022 with another very strong quarter. Our fourth quarter results were ahead of our expectations and allowed us to finish at or near the high end of our full year 2022 outlook for most metrics. Total GAAP site leasing revenues for the fourth quarter were $609.6 million and cash site leasing revenues were $600.5 million. Foreign exchange rates represented a benefit of approximately $800,000 when compared with our previously forecasted FX rate estimates for the quarter and a benefit of $2.2 million when compared to the fourth quarter of 2021. Same tower recurring cash leasing revenue growth for the fourth quarter, which is calculated on a constant currency basis, was 5.1% net over the fourth quarter of 2021, including the impact of 4.2% of churn.

On a gross basis, same-tower recurring cash leasing revenue growth was 9.3%. Domestic same-tower recurring cash leasing revenue growth over the fourth quarter of last year was 8.5% on a gross basis and 5% on a net basis, including 3.5% of churn. Domestic operational leasing activity or bookings representing new revenue placed under contract during the fourth quarter was not as strong as the third quarter, but still solid. We saw meaningful and balanced contributions from each of our largest customers. Full year organic leasing contributions to domestic site leasing revenue ended up in line with our outlook provided on our prior earnings call. During the fourth quarter, amendment activity and new leases each represented 50% of our domestic bookings.

The big four carriers of AT&T, T-Mobile, Verizon and DISH represented approximately 95% of total incremental domestic leasing revenue signed up during the quarter. Domestically, we again experienced less churn than we had projected due to timing of merger-related decommissionings being later than we had previously estimated. We still expect to incur this churn and have incorporated our reduced 2022 domestic churn amount into our outlook for 2023. Internationally, on a constant currency basis, same-tower cash leasing revenue growth was 5.4% net, including 7.6% of churn or 13% on a gross basis. International leasing activity was very good again with similar results to our strong third quarter. 2022 was one of the strongest years in the company’s history for international gross leasing activity or bookings.

In addition to strong customer activity levels across many of our markets, we continue to see healthy contribution from inflation-based escalators. In Brazil, our largest international market, we had another very strong quarter. Same-tower organic growth in Brazil was 13.2% on a constant currency basis. Similar to the third quarter and as anticipated, international churn remained elevated in the fourth quarter due primarily carrier consolidations and Digicel’s previously announced exit from Panama. During the fourth quarter, 78.5% 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 15.1% of consolidated cash site leasing revenues during the quarter and 12.1% of cash site leasing revenue, excluding revenues from pass-through expenses.

Tower cash flow for the fourth quarter was $485.9 million. Our tower cash flow margins remain very strong as well with a fourth quarter domestic tower cash flow margin of 85% and an international tower cash flow margin of 69.4% or 90.9%, excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the fourth quarter was $460.7 million. The adjusted EBITDA margin was 68.1% in the quarter, again, impacted slightly by outsized services revenue. Excluding the impact of revenues and pass-through expenses, adjusted EBITDA margin was 73.1%. Approximately 96% of our total adjusted EBITDA was attributable to our tower leasing business in the fourth quarter. During the fourth quarter, our services business had another very strong quarter, with $76.5 million in revenue and $19.3 million of segment operating profit.

We finished 2022 with our most successful services year in company history as measured by both revenue and profit by a very wide margin. Services backlogs remain very healthy at year end, although off the record high hit earlier in 2022. Our fourth quarter services results were again primarily driven by T-Mobile and Verizon. Adjusted funds from operations or AFFO in the fourth quarter, was $340.7 million. AFFO per share was $3.12, an increase of 11% over the fourth quarter of 2021. AFFO results finished ahead of our prior outlook, but were still negatively impacted relative to our outlook assumptions by our early refinancing of $640 million of secured tower revenue securities in November at a higher interest rate than the retired debt. During the fourth quarter, we meaningfully expanded our portfolio acquiring 2,642 communication sites for total cash consideration of $736.7 million, which included 2,632 sites acquired from Grupo TorreSur in Brazil for approximately $725 million.

During the quarter, we also built 162 new sites. Subsequent to quarter end, we have purchased or are under agreement to purchase 31 sites all in our existing markets for an aggregate price of $23.2 million. We anticipate closing on these sites under contract by the end of the second quarter. In addition to new towers, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of $15.9 million to buy land and easements and to extend ground lease terms. At the end of the year, 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. Looking ahead now, this afternoon’s earnings press release includes our initial outlook for full year 2023.

Our outlook reflects continued year-over-year growth across our leasing business, including an increase in organic leasing revenue contributions from new leases and amendments largely due to the strong new leasing activity we experienced during 2022. We also forecast significant revenue growth contributions from non-organic additions, primarily as a result of having the assets acquired from GTS in Brazil in our results for a full year in 2023. In addition, our leasing revenue outlook contemplates increased impacts from customer churn in 2023. Domestically, the increase is mainly in connection with the anticipated Sprint-related decommissioning, some of which we had previously expected in 2022. Due to the timing shifts of some of these decommissionings, including during the fourth quarter, we are now including an estimate of $25 million to $30 million of Sprint-related churn in our full year outlook.

Our previously provided estimates of aggregate Sprint-related churn over the next several years remain unchanged. Internationally, our outlook includes increased churn as well, including carryover impacts from Digicel in Panama and carrier consolidations in Central America. In addition, our international churn includes approximately $10 million associated with an agreement we have entered into TIM Brazil, to address their consolidation of a portion of Oi Wireless. This agreement has accelerated certain turn impacts with us in exchange for longer-term business commitments from TIM, and we believe positions us well for a long, mutually beneficial relationship with TIM. Our 2023 outlook does not include any other churn assumptions related to the Oi consolidation.

But if during the year, we were to enter into any further agreements with other carriers related to this that have an impact on the current year, we would adjust our outlook accordingly at that time. With regard to our Services business, our full year 2023 outlook reflects the year-over-year decline in revenues and adjusted EBITDA contribution but starts ahead of where our 2022 outlook started. If not for the phenomenal 2022 services results, our outlook for 2023 would represent the best year for services in our company’s history. As I mentioned a moment ago, we continue to have very healthy services backlog. And as a result, we expect another very strong year for this business. The outlook does not assume any further acquisitions beyond those under contract today and also does not assume any share repurchases.

However, we are likely to invest in additional assets or share repurchases or both during the year. Our outlook for net cash interest expense and for AFFO does not contemplate any further financing activity in 2023, but it does assume we deploy excess cash into repayments of our outstanding revolver balance. Under this assumption, we would end the year with leverage in the mid 6x area, but we project that we would still incur approximately $36 million of increased net cash interest expense compared to 2022. Finally, our outlook for AFFO per share is based on an assumed weighted average number of diluted common shares of $109.6 million, which assumption is influenced in part by estimated future share prices. We are excited about 2023. Our customers remain active, and we expect to produce very strong results as we help them to achieve their network build-out goals.

Before turning the call over to Mark, I would like to take just a moment to discuss the succession plan announced this afternoon. I’m truly honored to have been entrusted with the leadership of this tremendous company. I’ve had the privilege of spending the last 25 years at SBA and spending all of those years working closely with Jeff as the company has grown significantly under his leadership. Jeff has been a great friend and mentor to me and I look forward to continuing to have his counsel as Chairman of the Board. I’m very excited about the future of SBA. We have an amazing business that is part of a great and still growing industry. Our financial strength and very talented leadership team position us well to be a critical support to our customers and to capitalize on many future opportunities.

I greatly look forward to working with the rest of the SBA team to continue rewarding shareholders and building upon the company’s great legacy. With that, I’ll turn things over to Mark, who will provide an update on the balance sheet.

Mark DeRussy: Thanks, Brendan. We ended the quarter with $13 billion of total debt and $12.8 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.9x, which is below the low end of our target range, notwithstanding our significant Brazilian GTS acquisition during the fourth quarter. Our fourth quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was a very strong 4.7x. During the fourth quarter, the company through an existing trust issued $850 million of secured tower revenue securities, which have an anticipated repayment date of January 11, 2028 and a final maturity date of November 9, 2052. The fixed interest rate on these securities is 6.599%. The net proceeds of this offering were used to repay the entire $640 million principal amount of our 2018 1C tower securities, which had an anticipated repayment date of March 2023 as well as to pay certain amounts outstanding under the company’s revolving credit facility and for general corporate purposes.

Subsequent to quarter end, we continue to use cash on hand to repay amounts outstanding under the revolver. And as of today, we have $585 million outstanding under our $1.5 billion revolver. The current weighted average interest of our total outstanding debt is 3.1% with a weighted average maturity of approximately 4 years. The current rate on our outstanding revolver balance is 6.0%. The interest rate on 93% of our current outstanding debt is fixed. During the quarter, we did not repurchase any shares of our common stock as we allocated capital to repay amounts outstanding under revolver as a result of the GTS acquisition. We currently have $504 million of repurchase authorization remaining under our $1 billion stock repurchase plan. The company’s shares outstanding at December 31, 2022, were 108 million compared to 109 million at December 31, 2021, a reduction of 0.9%.

In addition, during the fourth quarter, we declared and paid a cash dividend of $76.7 million or $0.71 per share. And today, we announced that our Board of Directors declared a first quarter dividend of $0.85 per share payable on March 24, 2023, to shareholders of record as of the close of business on March 10, 2023. This dividend represents an increase of approximately 20% over the dividend paid in the fourth quarter. And with that, I will now turn the call over to Jeff.

Jeff Stoops: Thanks, Mark and good evening, everyone. The fourth quarter was a strong end to one of the best operational years in our history. For the full year 2022, we beat the midpoint of our original full year guidance for revenue by almost 8% for AFFO per share by 5%. We grew our tower portfolio by over 15%, including entering into a new market in Tanzania, which has gone very well. We had a very strong year for lease-up, including one of the best ever internationally. Our Services business had its best year ever, beating the midpoint of our original outlook for services revenue by 46%, and we grew and expanded our relationships with our largest customers worldwide, setting us up for a bright future. During the fourth quarter, our domestic same tower leasing revenue growth was the highest of the year.

All of our largest U.S. customers remain busy during the quarter with relatively balanced contributions from each of them as they continued adding equipment to sites in support of the deployment of new spectrum bands. As evidenced by our full year 2023 outlook, we expect the contribution to revenue growth from domestic leases and amendments to be good again this year, and we expect all of our largest customers to stay relatively busy with additional network deployment during 2023, although perhaps at levels slightly below the peak periods of activity we experienced in 2022. Each of the largest U.S. carriers still have significant remaining network needs. So we are confident we will see solid activity on our domestic power portfolio for years to come.

Internationally, we ended the year with another very strong organic leasing quarter. During the fourth quarter, 60% of new business signed up in the quarter came from amendments to existing leases and 40% gain through new leases. International leasing activity was ahead of our internal expectations and led by strong contributions from Brazil, South Africa and Tanzania, our largest markets. In 2022, Brazil had, in particular, a very strong year. Lease-up in Brazil for the year was well ahead of internal expectations, and we also had a larger-than-anticipated contribution from CPI-based escalators. We realized material portfolio growth in Brazil, primarily as a result of the GTS acquisition for which the integration is going very smoothly. The foreign exchange rate fluctuations have stabilized over the last year and were actually a slight tailwind to our 2022 results.

As Brendan mentioned, we recently entered into an agreement with 1 of the 3 major carriers in Brazil to address Oi consolidation issues in our broader long-term relationship, and we may do something similar with our other major customers in that market. We believe there are great opportunities for future growth in Brazil, particularly with recent 5G spectrum options as the driver. One item we are watching in Brazil is always recent filing for injunctive relief from some of their debt payments. We currently expect that Oi must and will continue to pay their operational vendors, including rents to tower providers. And to date, we have had no collection issues. Our financial exposure to Oi is much reduced given the recent sale of most of their wireless operations to the other 3 mobile carriers in Brazil, with Oi representing approximately 3.5% of our total international revenue.

Our sites are critical to the operation of Oi’s network, and we have very long-term leases. As a result, we will likely see a little impact from this latest filing. However, we will, of course, continue to monitor the situation closely. Moving on now to our balance sheet, we remain in a very strong position. During the fourth quarter, in order to address the nearing maturity date, we completed a new 5-year ABS offering. And while the interest rate was higher than we would have liked, we were very pleased with the significant level of demand for our offering. We continue to be a preferred issuer with extremely good access to capital. While we have good access to additional debt capital, we will be very thoughtful this year when considering issuing incremental debt in the current rate environment, which would only be done for a compelling use of capital, similar to our Tanzanian GTS acquisitions in 2022.

With completion of this refinancing, we now do not have any debt maturities until October of 2024. We finished the year with 93% of our debt fixed, keeping us largely insulated for the time being from significant interest rate fluctuations. Even with the GTS acquisition, we ended the year with a net debt to annualized adjusted EBITDA leverage ratio of 6.9x, below our target range. The strength of our operations and balance sheet and the steady growth in our cash flow allowed us to once again announce an increase of nearly 20% in our quarterly dividend. This increased dividend still represents only approximately 27% of our projected AFFO and our 2023 outlook, leaving us substantial capital for additional investment in portfolio growth, stock repurchases and revolver payments.

The strength of our business and capital structure was recently recognized by the rating agency Standard & Poor’s. Since our third quarter earnings release, S&P increased our corporate rating to BB+, only one notch below investment grade. While a good development, we do not, however, have a specific goal of being an investment-grade company. Should we continue to use AFFO to pay down our revolver and reduce leverage, that would be a tactical choice to generate a guaranteed return to the higher interest rate environment compared to other uses of capital and not a change in our long-term views on the use of leverage. We would be building capacity and biding our time for the next opportunity to issue incremental debt at more attractive rates. We believe the stability and financial strength we offer provides shareholders strong opportunities for additional value creation.

I want to end on our succession news. The Board and I have been working on succession planning for several years. We appropriately considered the pros and cons of an external search versus the appointment of an internal candidate as our next CEO. Brendan has, for many years, been growing as the leading internal candidate to be our next CEO with increasing internal and external responsibilities. We are confident we have made the right call. Brendan is an extremely talented executive, equally adept with internal and our external matters, strategy and shareholder value creation. His knowledge of SBA and our industry are without equal. He’s well known and respected in the investment community. SBA has an extremely bright future in his hands, and I get to remain very involved and invested in that as the future Chairman of the Board.

So a little bit about my decision. It’s been very difficult, as you can imagine, given my love for involvement with SBA for more than 25 years. But the reasons are very simple. I turned 65 this year. And I’ve reached a point in life where I want to do some things while I still can, but I can’t do while running SBA full time. Things like spending more time with family, a growing number of grandchildren, travel, spending more time at our home in South Carolina and charity work, very basic reasons that I believe we all consider at various times in our life. With these things vying for my time and attention, it became clear that now is the right time to turn over leadership to Brendan and the next generation of our exceptional leaders. As you can see from our fourth quarter results and full year 2023 outlook, I am retiring at a time when SBA’s financial help and prospects are extremely strong.

I want to thank all of you on this call or otherwise that have played a role in SBA’s success over the years. We have accomplished a lot, and it certainly has taken the work of many. I consider myself extremely fortunate have had the opportunity to lead such a talented group of individuals as we have at SBA, and to have been able to interact and build relationships with a much larger group of customers, constituents, friends, business partners and others who have all contributed to our success. And with that, Eric, we are now ready for questions.

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Q&A Session

Operator: And our first question comes from the line of Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks, Jess. First, Jeff, congrats. Grandbabies are fine. I know you’re going to have fun with them as I am and Brendan, looking forward to working with you in your new role.

Brendan Cavanagh: Thank you, Rick.

Jeff Stoops: Thanks, Rick.

Ric Prentiss: You bet. Two questions, if I could. First, as you think about carrier spending for wireless, obviously, they need to make sure there is revenue and demand out there, what do you all think are the most exciting 5G applications that are coming? And when do customers actually start to get what 5G means? So that’s the first question.

Jeff Stoops: Yes, I think that is the seminal question, Rick. And I think, to be honest with you, I can’t name a 5G application that exists today that is kind of in the got to have category. And I think that’s what the whole ecosystem of wireless is waiting on. And when that happens, and I believe it’s a question of when, not if, you’re going to see a heightened sense of needing to invest and make sure that the competition doesn’t get too far ahead. But until that comes along, I think it’s sensible for our customers, particularly ones that have some promises to the Street on free cash flow and things like that, I think, to moderate. And based on all the commentary and what we heard from Ericsson yesterday, I mean that’s what’s going on.

Ric Prentiss: And then more boring question for the second one. How should we think about the site leasing revenue growth pacing into the years in kind of the front-end loaded versus rear-end loaded. And it looked like that have a couple of major revenue items for other, $12 million in the U.S. and $8 million for international. So maybe unpack that a little bit about what those are.

Brendan Cavanagh: Yes, Ric. So the pacing this year, we would expect will be higher growth in the first half of the year with a slight step down in the second half of the year. That obviously is dependent somewhat on how leasing activity goes in terms of signing up new business here in the first half of the year. But the first half is pretty much locked in for the most part based on the success of the leasing activity we saw at the end of last year. I mean your second part you were breaking up just a little bit. I think you were asking about the other on international. Is that…

Ric Prentiss: And U.S., it was like $12 million U.S., $8 million international. What should we think those are?

Brendan Cavanagh: Yes. So it’s a variety of things. In the case of international, there are some increases to pass-through expenses, which is the main driver. And then in the U.S., it’s a mixed bag. There is some other, what we kind of call, cash basis revenue that we’ve assumed will come in the first half. So it’s things like that. That’s really just our estimate of the year-over-year change as opposed to an absolute change as the business gets a little bit bigger, those things tend to grow.

Ric Prentiss: Again, congrats, Jeff, and enjoy the time of the grandbabies.

Jeff Stoops: Thanks, Ric.

Operator: And our next question comes from the line of Phil Cusick with JPMorgan. Please go ahead.

Phil Cusick: Hey, congratulations to both of you, Jeff and Brendan. Well deserved.

Jeff Stoops: Thanks, Phil.

Brendan Cavanagh: Thank you, Phil.

Phil Cusick: I wonder if we could just talk about the sort of pace that you assume of either acceleration or deceleration among your carrier customers this year. It seems like through last year, you were sort of looking for somebody to pick up. And maybe they haven’t yet, while others sort of expectation will be slowing down this year. What kind of visibility do you have today?

Brendan Cavanagh: Well, we’ve got decent visibility. As I just mentioned to Ric, generally, we expect things to be declining in terms of the growth rate from the first half of the year into the second half of the year. The mix varies by carriers. We had a couple of carriers that were extremely busy last year. We expect them to still be busy this year, but perhaps not at the same pace. So I think that’s probably the main driver, those that are picking up and will really just be dependent on the timing of when we see that accelerate. So I think if you look at last year and you look at the pace at which it increased throughout the year, it’s probably a little bit more of a modest decline this year than it was an increase last year.

Jeff Stoops: We still see several or more than one, let’s say, picking up. And really, it’s just the delta between what decelerates versus what accelerates. But they are not all moving, I think. As you know, they are not all equal in terms of their build-outs and what they have accomplished. So the ones that are furthest ahead are likely to have more on the deceleration side, and the ones that still have a long way to go will be accelerating.