SBA Communications Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2021

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 3rd quarter results for SBA. At this time, all lines are in a listen only mode. Later, we will have a question and answer session. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Vice President of Finance, Mark DeRussy.

Operator

Please go ahead.

Speaker 1

Good evening, and thank you for joining us for SBA's 3rd 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 cause our future results to differ Our statements are as of today, November 1, 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.

Speaker 1

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 Q3 results.

Speaker 2

Thank you, Mark. Good evening. SBA had another great quarter with Financial and operating results ahead of our expectations and continued strong momentum into the end of the year. Total GAAP site leasing revenues for the Q3 were $535,500,000 and cash site leasing revenues We're $525,100,000 Foreign exchange rates were generally in line with our previously forecasted FX rate estimates for the quarter. They were a tailwind though on comparisons to the Q3 of 2020, positively impacting revenues by $3,200,000 on a year over year basis.

Speaker 2

Same tower recurring cash leasing revenue growth for the Q3, which is calculated on a constant currency basis, was 3.6% over the Q3 of 2020, including the impact of 2.5% of churn. On a gross basis, same tower growth was 6.1%. Domestic same tower recurring cash leasing revenue growth over 3rd quarter of last year was 5.7% on a gross basis and 3.3% on a net basis, including 2.4 percent of churn. Domestic operational leasing activity or bookings representing new revenue Placed under contract during the Q3 was at a similar level to the Q2, which had represented the highest quarterly level since 2014. Even with this high level of execution, our domestic new lease and new amendment application backlog continued to grow during the quarter And finished the quarter higher and at a new multiyear high.

Speaker 2

These backlogs support our expectations for continued strong domestic operational leasing throughout the balance of this year and into 2022. During the Q3, amendment activity represented 45 percent of our domestic bookings with 55% coming from new leases. The big four carriers of AT and T, T Mobile, Verizon and DISH Represented 96% of total incremental domestic leasing revenue signed up during the quarter. Internationally, on a constant currency basis, same tower cash leasing revenue growth was 5.2% net, including 2.7% of churn or 7.9% on a gross basis. International leasing activity increased Again, quarter over quarter and was the highest in over a year.

Speaker 2

Churn grew some in the quarter as well and is anticipated increase further as we experienced the impacts of carrier consolidations and other network and contract modifications in Central America. In Brazil, our largest international market, we had another quarter of increased leasing activity. Gross same tower organic growth in Brazil 9.5% on a constant currency basis. During the Q3, 84.5% of consolidated cash site leasing revenue was denominated in U. S.

Speaker 2

Dollars. The majority of non U. S. Dollar denominated revenue was from Brazil, with Brazil representing 11.7% So consolidated cash site leasing revenues during the quarter and 8.4% of cash site leasing revenue excluding revenues from pass through expenses. Tower cash flow for the Q3 was $428,100,000 Our tower cash flow margins remain very strong With the 3rd quarter domestic tower cash flow margin of 84.6% and an international tower cash flow margin of 69.9% or 90.8 percent excluding the impact of pass through reimbursable expenses.

Speaker 2

Adjusted EBITDA in the 3rd quarter was $407,000,000 The adjusted EBITDA margin was 70.3% in the quarter. Excluding the impact of revenues from pass through expenses, adjusted EBITDA margin was 74.7%. Approximately 97% of our total adjusted EBITDA was attributable to our tower leasing business in the Q3. During the Q3, Our services business produced record results for the Q2 in a row with $53,800,000 in revenue And $12,500,000 of segment operating profit. Activity levels remained very high in the quarter And backlogs also continue to grow, finishing the quarter at another all time high level in our company's history.

Speaker 2

Based on our strong Q3 and the growing backlog, we have increased our full year 2021 outlook site development revenue for the Q3 in a row, now expecting $200,000,000 of site development revenue at the midpoint of our outlook range. AFFO in the 3rd quarter was $302,500,000 AFFO per share With $2.71 an increase of 13.9% over the Q3 of 2020. During the Q3, we continued to expand our portfolio, acquiring 144 communication sites For total cash consideration of $57,100,000 We also built 87 new sites in the quarter. Subsequent to quarter end, we have purchased or are under agreement to purchase approximately 1700 additional sites in our existing markets For an aggregate price of $231,000,000 including approximately 1400 sites and approximately $175,000,000 Related to the previously announced deal to acquire towers from Airtel Tanzania. We anticipate closing all these sites under contract by the end of the Q2 of next year, and we anticipate the Airtel Tanzania transaction to close in stages starting in the Q4 of this year.

Speaker 2

Consistent with our prior outlook, our updated 2021 outlook assumes that the Airtel acquisition closes at the end of the year, And thus, we have included the entire purchase price in our outlook for discretionary capital expenditures, but we have included no revenue or tower cash flow associated with these assets. In addition to new tower assets, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of 11 point $6,000,000 to buy land and easements and to extend ground lease terms.

Speaker 3

At the

Speaker 2

end of the quarter, we owned or controlled for more than 20 years The land underneath approximately 72% of our towers and the average remaining life under our ground leases, including renewal options under our control is approximately 37 years. In this afternoon's earnings press release, we included our updated outlook for full year 2021. Notwithstanding our assumption of weaker 4th quarter foreign exchange rates, our updated outlook includes increased expectations for site leasing revenue, Site development revenue, tower cash flow, adjusted EBITDA, AFFO and AFFO per share. These increases result from high services activity levels with our carrier customers, anticipated timing shifts and domestic consolidation churn, reduced cash interest expense as a result of recent refinancings And the impact of recent share repurchases. We anticipate that our strong domestic leasing bookings during the second and third quarters We'll be supportive of improved incremental organic domestic leasing revenue in 2022, which we will share on our Q4 earnings call.

Speaker 2

With that, I will now turn things over to Mark, who will provide an update on our liquidity position and balance sheet.

Speaker 1

Thanks, Brendan. We ended the quarter with $11,900,000,000 of total debt and $11,700,000,000 of net debt. Our net debt to Annualized adjusted EBITDA leverage ratio was 7.2 times. Our 3rd quarter net cash interest coverage ratio of adjusted EBITDA The net cash interest expense was 4.6 times,

Speaker 4

the highest in

Speaker 1

the company's history. On July 7, the company amended its revolving credit facility. Among other things, the amendment increased the total commitment under the facility from $1,250,000,000 to $1,500,000,000 Extend the maturity date of the facility to July 7, 2026, lower the applicable interest rate margins and commitment fees under the facility Incorporated sustainability linked targets into the facility, allowing for interest rate and commitment fee adjustments Based on how we perform against those targets, as of today, we have no amounts outstanding under our revolver. On October 14, The company repaid at par the entire aggregate principal amount of the 2013-2C Tower Securities, which had an anticipated repayment date of April 11, 2023. On October 27, The company through an existing trust issued $895,000,000 of 1.84 percent secured tower revenue securities Series 2021-2C, which have an anticipated repayment date of April 9, 2027 And a final maturity date of October 10, 2001 and $895,000,000 of 2.593 percent Secured Tower Revenue Securities Series 2021-3C, which have an anticipated repayment date of October 9, 2031 And a final maturity date of October 10, 2,056, the aggregate $1,790,000,000 of these power securities Have a blended interest rate of 2.217 percent and a weighted average life through the anticipated repayment date of 7.8 years.

Speaker 1

Net proceeds from this offering were used to repay amounts outstanding under the revolving credit facility and remaining proceeds will be used To redeem the entire aggregate $1,100,000,000 principal amount of the 2016 4.875 percent senior notes And to pay all premiums and costs associated with such redemption. Pro form a for these financing activities, the weighted average interest rate of our outstanding debt drops to 2.6% with a weighted average maturity of approximately 5 years and the interest rate on 97% of our outstanding debt is fixed. During the Q3, we repurchased approximately 440,000 shares of our common stock for $150,000,000 And an average price per share of $340.70 Subsequent to September 13, We repurchased an additional 601,000 shares for $200,000,000 at an average price per share of $332.72 Combined, the average purchase price

Speaker 5

for the

Speaker 1

$350,000,000 repurchases was $336.09 per share. All the shares repurchased were retired. After these repurchases, we had $125,000,000 of repurchase authorization remaining Under our subsequently replaced $1,000,000,000 stock repurchase plan, on October 28, the company's Board of Directors authorized a new $1,000,000,000 stock repurchase plan replacing the prior plan. The new plan has no time deadline and will continue until otherwise modified or terminated by the company's Board of Directors at any time in its sole discretion. As of today, the company has the full $1,000,000,000 of authorization remaining under the new plan.

Speaker 1

The company shares outstanding at September 30, 2021 were $109,500,000 compared to $111,400,000 at September 30, 2020, A reduction of 1.8%. In addition, during the quarter, we declared and paid a cash dividend of $63,600,000 or $0.58 per share. And today, we announced that our Board of Directors declared a 4th quarter dividend of $0.58 per share, Payable on December 16, 2021 to shareholders of record as of the close of business on November 18, 2021. Today's dividend announcement represents a payout ratio of 21% of 3rd quarter AFFO per share, which leaves us ample room for material future dividend growth. With that, I'll now turn the call over to Jeff.

Speaker 6

Thanks, Mark, and good evening, everyone. We had another very good quarter in the Q3 exceeding our own expectations. As you have heard, we continue to see very high carrier activity in our U. S. Business.

Speaker 6

Each of our major customers was busy in the quarter. Verizon beginning their C band deployments, T Mobile continuing their ubiquitous deployment of their 600 megahertz and 2.5 gigahertz spectrum, DISH continuing their toric pace from the Q2 signing up new agreements to facilitate the build out of their brand new nationwide 5 gs network And AT and T remaining steady. Notwithstanding the high levels of new leasing revenue that we signed up during the Q3, we still finish The quarter adding new multi year high backlog of pending leases and amendment applications. Based on this backlog and conversations with our customers, we expect to continue seeing elevated domestic leasing activities through the balance of this year and well into 2022. In addition to high domestic leasing activity levels, we produced record services revenue in the 3rd quarter, surpassing our 2nd quarter record.

Speaker 6

Our customers are all focused on building out their 5 gs networks, particularly targeting upgrades to their macro networks. Similar to our domestic leasing Our services backlogs continued to grow during the quarter and reached a new all time high for the company at quarter end. The strong Q3 performance and growing backlogs have allowed us to increase our full year outlook for all revenue related line items. Internationally, we began to see our markets starting to return to pre pandemic levels of activity. We again produced Quarter over quarter sequential increases in new lease and amendment executions and ended up with solid leasing results in the Q3 that were ahead of plan.

Speaker 6

During the quarter, we signed up 55% of new international revenue through new leases and 45% through amendments to existing leases. Our largest contributors to our leasing results came from Brazil and South Africa, our 2 largest international markets. As our international markets continue to recover from the pandemic and upcoming spectrum auctions across a number of our markets are planned, Including Brazil, which will put more spectrum into the hands of our customers, we expect to continue to see growth in the level of network investment made by our carrier customers over the next several years. We executed very well for our customers in the quarter and we are committed to continue to do so during these future expected periods of increased demand. In addition to our strong Q3 operating results, we continue to improve Our positioning with regard to our balance sheet and returning capital to our shareholders.

Speaker 6

During the Q3, we increased the size of our revolving credit So we extended the term and improved the pricing. Subsequent to quarter end, we completed a new $1,790,000,000 securitization financing, refinancing some existing securitization debt and using the remaining proceeds to shortly repay Our $1,100,000,000 of 4.7eight twenty 24 unsecured notes. The weighted average interest of these new securities is 2.2% and the weighted average term is 7.8 years. The net result of these financing activities will be annual cash interest savings of approximately $35,000,000 This financing was a particularly positive outcome for SBA We also achieved the highest debt capacity in our long history of ABS financing. As Mark mentioned earlier, our pro form a weighted average across all of our debt dropped to 2.6%, our lowest ever, and we ended the quarter at 7.2x net debt to annualized adjusted EBITDA well in the middle of our target range of 7 to 7.5 turns.

Speaker 6

Our ability to continue to drive our liquidity position higher, lower our cost of debt and extend out our maturity dates The combination of low cost debt and our expectations around future AFFO per share growth should make stock repurchases at the levels we have been buying very accretive to future AFFO per share. During the quarter, we continued to add to our through both building and acquiring new sites. We also signed up agreements to purchase additional sites and anticipate closing on the majority of our Tanzania transaction by year end. In addition to portfolio growth, we continue to opportunistically buy back stock, Repurchasing over 1,000,000 shares since our last earnings call and our announced 4th quarter dividend represents an increase of 25% over the dividend paid in the Q4 of last year. We feel very good about our current capital structure and ability to allocate capital to generate incremental value For our shareholders,

Speaker 3

we're

Speaker 6

in a very good time for the industry and for SBA specifically. Our customers are very busy, Our financial position is very strong and the future continues to hold many opportunities for us. We're excited about pursuing those opportunities. I want to thank our team members and our customers for their commitment and their contributions to our success. I look forward to sharing our year end results with you next quarter.

Speaker 6

And with that, Ryan, we are now ready for questions.

Operator

Okay. Our first question will come from the line of Ric Prentiss with Raymond James. Please go ahead. Your line is open.

Speaker 7

Thanks. Good evening, everyone.

Speaker 3

Hey, Rick.

Speaker 7

Hey. A couple of questions. Obviously, you guys are pretty excited with the backlog services business, leasing business. If I look specifically at the implied change to new lease amendment activity in the Q4 in the U. S, Looks like a pretty nice step up.

Speaker 7

How should we think about I know you're not giving guidance yet, but how should we think about how that plays into 2022 as far as it Does it build throughout 2022? Is it fairly level loaded? Now that we're sitting here in November, you probably have some pretty good visibility into what The pacing of 'twenty two looks like not the actual number.

Speaker 6

Well, I mean given the fact that we report those things on a Trailing 12 basis and knowing what we had in the Q4 a year ago and Q1 of this year, I think it's going to bill, Rick, as we at least as we move into the middle of next year, and then we'll see what happens with lease up Then we'll start to have some year over year comps that we're going to be working on some pretty good numbers for the back half of this year.

Speaker 7

Okay. And then on the escalator side, is there anything that varies the escalators Quarter to quarter, that causes any swings in the way you guys have your contracts set up. We've seen some bouncing around some of the other tower guys in the U. S. Specifically where you have more fixed.

Speaker 6

Not in the U. S.

Speaker 7

That's fairly consistent, obviously, 3.3%, 3.2%, something percent, very consistent.

Speaker 6

Yes. Again, in the U. S, I mean, a lot of our international stuff is CPI based.

Speaker 7

Thanks, Alex. Last one for me, I appreciate you taking the question. Can you update us on Sprint churn? What kind of magnitude you're looking at? Have you gotten any indication yet from T Mobile?

Speaker 7

Is it mostly going to just be the Colocated sites, is there the nearby sites, but just kind of maybe frame for us size and timing and kind of how you're having those discussions with T Mobile and Sprint?

Speaker 2

Yes. Hey, Rick, it's Brendan. So first of all, you may have noticed in our bridge that we made an adjustment to We reduced our domestic churn impact for 2021. That's basically all due to Sprint. It's a timing issue It's taking them perhaps a little bit longer than we were anticipating because we're making some estimates obviously around that heading into it.

Speaker 2

That doesn't change our view on the total potential exposure for churn, but it shifts the timing back just slightly. So I would Expect that to kind of move to next year. In terms of what we expect today, we've given some ranges in the past and I'll kind of reiterate that. They move a little bit, obviously, as we learn more about it. But this year in 2021, we would expect the total impact to end up being somewhere around $7,000,000 Next year is a higher year for us based on the timing of when leases hit the end of their terms.

Speaker 2

We expect it to be probably at the higher end of our previously Dated range of $30,000,000 to $35,000,000 I'd say it's closer to $35,000,000 mostly because of the shift in timing I just mentioned. And then, in 20 23 and 2024, we would estimate somewhere in the $10,000,000 to $20,000,000 range, for impact in each of those years. And our biggest years of exposure are 2025 2026 where the range would be somewhere in that 45,000,000 ish Range $40,000,000 to $50,000,000 say, to put brackets around it for each of those years. And then some de minimis amount after that. [SPEAKER J.

Speaker 2

PATRICK GALLAGHER, JR.:] Patrick Gallagher, Jr.:] In terms of where it's coming from, a lot of it is on overlap sites, but some of it is certainly on sites that are, proximity sites. [SPEAKER J. PATRICK O'SHAUGHNESSY:] Patrick Gallagher, Jr.:] And then in some cases, it's not always totally clear to us. I think they're still working through that. We don't have total Vision on what they're doing with other neighboring sites, but I would say it's a mix of the 2.

Speaker 2

But obviously, the greatest focus As it relates to our portfolio, it will be the sites where they have direct overlap.

Speaker 7

Great. That's very helpful. I hope you guys continue to stay well and your employees stay well.

Speaker 3

Thank you. Thanks, Rick.

Operator

Our next question will come from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 8

Thank you. Good afternoon. So you talked about the strong leasing and that DISH had this torrid pace. Can you help us understand how the bookings to billings will go? And are we seeing much of DISH in the 4th Quarter guide or the new revised full year guide or is that really going to flow through more in 2022?

Speaker 8

And then you talked about the The benefits of recent spectrum auctions or ongoing spectrum auctions, I guess, in here and in Brazil and elsewhere, maybe on the 3.45 Specifically in the U. S, do you think that's going to create much incremental leasing or do you think a lot of that can be encompassed by the carriers in their C band deployments? And any sense of when you might start to see that 3.45 get deployed? Is could it pull forward some of that second phase of C band builds

Speaker 6

Our understanding, Simon, on your last question is that the 3.45 will require new radios. So there will be some incremental activity there that the industry should benefit from. What was your first question? Yes, timing of revenue. Yes.

Speaker 6

So I think we've explained this before. But we have a Master deal with DISH and there's commitments and a lot of benefits going back and forth between each parties. I mean, one of the things, Simon, that was in there is DISH has a Payments schedule such that after signing, they have until a date certain for Installation of their equipment on that site before we begin to start collecting revenue. So the vast, vast, vast notwithstanding the tremendous amount of lease ups that we've had, the vast majority of all that recognition doesn't Start until 2022. So the answer as to is there much, if anything, addition to Q4, notwithstanding the activity, The answer is no.

Speaker 6

I think you had a third question. Did I miss

Speaker 8

Well, that was on the 3.45 and any sense on the timing of when that you might Start to see that deployment relative to the C band?

Speaker 6

Well, I mean, my understanding is Decisions get made, final auction results are known and decisions get made In the Q1 of next year, I do not believe there's the same clearing requirements that you have with the C band. So I don't see any reason why we wouldn't start to see some activity in the second half.

Speaker 3

Okay. Thanks a lot. Thank you. Thank you.

Operator

Our next question will come from the line of Jon Atkin with RBC. Please go ahead. Yes.

Speaker 4

So I had a question about international exposure and basically EMEA and maybe Tackle Europe and Africa separately, thoughts on how those regions might be appealing to you going forward? And then domestically, wanted to find out about the timing of revenue. You talked about DISH, but more generally, As you think about the availability of workforce and people to actually construct sites, what's your thinking with respect to any pressures that the We might see in 2022 that might affect leasing revenue recognition as opposed to just bookings. Thank you.

Speaker 6

Yes. In terms of the globe, Jonathan, I mean, We look all over and we look to find areas that fit our criteria. And We found a lot of that obviously in the Western Hemisphere, some of that in Africa. And I believe we will continue to find those Opportunities as we go forward on a country by country basis. Africa has a lot of growth, Certainly has some risk, but if you get in at the right price and you operate well as we believe we do, you will do well.

Speaker 6

Europe is a fine market. We just have not found opportunities that are at prices that we think Makes sense for us given our other opportunities to deploy capital. But we keep looking. I mean, we look at everything. That's what people expect us to do.

Speaker 6

In terms of the labor market, we watch that carefully because obviously a lot of other industries Are suffering right now? We are not. We have a large internal workforce of crews. We also use outsourced crews for some of the work. And right now, it's all working out okay.

Speaker 6

There's a number of training resources and opportunities that we think will increase The available workforce over the next several years. So I think generally we feel okay, but I mean That really is a quarter by quarter question that you ask. So the best I can tell you today is this quarter, next quarter we feel okay.

Speaker 4

Great. Thank you very much.

Operator

Our next question comes from the line of Walter Piecyk with LightShed. Please go ahead.

Speaker 9

Hey, Jeff. Can you, to the extent you can, provide us a little bit more color about the Sprint Like the churn delay, I guess. I mean, is there any indication that as it goes through the portfolio, they're recognizing that Maybe they're not going to turn off as many sites as originally. I know you talked about the next 2 years and they were generally all in the same ballpark. But Qualitatively, is there

Speaker 3

are they still,

Speaker 9

I think, targeting overall the same amount, maybe more, maybe less? Any thoughts on that?

Speaker 2

Yes. Hey, Walt, this is Brendan. Yes, it seems like thus far from what we've seen in our Communications with them that is generally still targeting the same thing that we thought originally more or less. I think the shift here is really Just the timing on moving off of some of the sites, you may have even seen they talked about some delay in shutting down the CDMA network. Yes, I think that probably is a factor in it.

Speaker 2

So, I don't think that the overall Focus is shifting at all, but the timing might be slightly different. That's all.

Speaker 9

Okay. And then on the inorganic stuff, this year was a pretty big year, although it seems like with the guidance Q4 is Whatever, you're still obviously up versus last year. But when you think about 22 in terms of new sites, M and A, that type of stuff, Any sense in kind of what that market will look like for you?

Speaker 6

I think it will continue to look Challenging from an acquisition perspective, really based on price, Walt. Prices continue to Remain high, and in our opinion, without much differentiation for quality, which is where we end up being very selective and picking our spots carefully. No, I do think there's enough out there for us to certainly hit the low end of our historical targeted range of 5% portfolio growth. I imagine with Tanzania and some increased activity that we expect in some of our existing markets So we will build more towers next year as well. So all in all, that will be the 5% to 10% portfolio growth will be the goal again next year.

Speaker 3

Got it. Thank you.

Operator

Our next question comes from the line of Batya Levi with UBS. Please go ahead.

Speaker 10

Great. Thank you. Just a couple of follow ups. First on the international side, you mentioned that churn should remain elevated for some time. Can you provide more color on that?

Speaker 10

And on capital allocation priorities, can you help us think about maybe discretionary CapEx, Excluding M and A, does that stay elevated as you ramp maybe augmentation CapEx to support higher growth? Yes. That's it.

Speaker 2

Okay. So on the international churn, We've been as you've probably seen and we talked about it, I think, on previous calls that we expected some elevated international churn this year. We haven't experienced most of that yet through the year, but in the Q4, we expect to see that John, largely due the primary reason is due to consolidation related churn, particularly with Claro and Telefonica combining in Guatemala. A lot of the impacts of that are starting to be felt here in the Q4, which is what's going to drive the full year number that we provided. And obviously, with it being so late in the year, it has an impact on what we would expect to report, not just in the Q4, but in the next into next year.

Speaker 2

In addition, there are we are dealing with a number of our customers in Central America. We have some that are working through network changes, due to various issues that they face

Speaker 4

And others where the terms

Speaker 2

of the agreements are starting to come to an end and we're working through what their future plans might look like. We expect there might be some incremental churn associated with that, but we also would expect longer term commitments and other business commitments as well as part of that. So It really was an indication mostly though about the consolidation churn that we're going to experience in Q4.

Speaker 6

So, Bahiyu, on your other question about Discretionary CapEx, the way you asked that question, you implied that our non M and A discretionary CapEx was going up. I don't really think it is. In terms of augmentations per tower,

Speaker 7

I mean,

Speaker 6

we don't really see anything material there. And keep in mind, there's Historical practice, which continues that our customers tend to pay most, if not all, of those augmentation dollars. Would there be something else besides the tower side, Brendan, in the discretionary CapEx?

Speaker 2

There's been some CapEx spent on the data centers that we acquired. So that might be the incremental piece that we obviously hadn't had in the past.

Speaker 6

Yes. And that just to be clear, that's In response to demand for increased megawattage and capacity at these data centers, so that is CapEx that we're extremely pleased to be able to invest.

Speaker 10

Got it. Thank you.

Operator

Next, we'll go to the line of Nick Del Deo, MoffettNathanson. Please go ahead.

Speaker 4

Hey, thanks for taking my questions. First, if my math is right, it looks like your implied site leasing revenue and tower cash flow guidance for Q4 are about equal to what you generated in Q3, at least at the midpoints. Was there anything that helped the Q3 results that won't carry through into Q4 like backbillings or anything similar?

Speaker 6

Well, FX.

Speaker 3

Okay. All right. Simple enough.

Speaker 4

And then I guess in terms of U. S. Activity, Are you seeing the incumbents deploy their mid band spectrum and DISH with its de novo build, kind of engaging with you evenly relatively evenly across Portfolio or is there a noticeable skew towards more urban or the denser suburban markets that you serve?

Speaker 6

I don't think it's noticeably skewed. I think we're seeing activity pretty much everywhere.

Speaker 3

Okay. Okay. That's good to hear.

Speaker 4

If I can squeeze in one last one. If I look at other revenue for international, that was up by about $6,000,000 versus your prior guidance. Is that mostly fuel, pass through fuel or something else going on there?

Speaker 2

No, it is mostly, pass through It's actually a lot of it is actually related to ground leases, in particular in Brazil, where we pass those through to the carriers. And that part of that is CPI that we didn't while we projected CPI increases across Tenant leases, we didn't necessarily include that on the ground leases because it's a pass through. But as that's starting to Come along with the increased inflation down there, it's pushing ground rents higher, which obviously pushes the pass through rents higher as well. Plus there is some power costs as you mentioned as well. That's the main driver.

Speaker 3

Okay. Okay. Got it. Well, thank you guys.

Speaker 2

Sure.

Operator

Next, we're going to the line of Phil Cusick with JPMorgan. Please go ahead.

Speaker 11

Hi. Thanks, guys. I wanted to follow-up. You said,

Speaker 12

I think, in the prepared remarks that you assumed that AT and T is steady from here.

Speaker 3

Do you think AT and T is at a full run rate? Or you're just Assuming they haven't ramped up by the Q4 guidance period.

Speaker 6

No. I think to be clear, Phil, we said that they were steady relative To kind of last quarter. I believe that they will ramp up in the times to come.

Speaker 3

Okay. And is that the conversation is building toward that already?

Speaker 6

Levi, I'll just leave it the way I said it. I believe that their activity levels will ramp as we move into next year.

Speaker 3

That's More than I expected. Thanks, Jeff.

Operator

Next, we'll go to the line of David Barden with Bank of America. Please go ahead.

Speaker 5

I don't know. I can follow-up on that belly laugh, Jeff,

Speaker 1

so I guess I have

Speaker 5

two questions. One was in the prepared remarks, Brandon, you called out the big 4, Which we haven't heard in a while. And it made me wonder if the magnitude to which DISH is spending Is roughly on par with what the actual big three are spending In terms of your business, and then the second question I had was, you also referenced some spectrum auctions that are happening in the coming months In not just domestically, but international markets, specifically, I'm interested in South Africa. That's been a problem Market from a spectrum perspective, a little messy over the last little while. I was wondering if you could kind of give us some pictures to what you thought The outlook would be for South Africa Spectrum Auctions in 2022?

Speaker 5

Thanks.

Speaker 6

Yes. I mean, when you really Harsh down our comments, David, and you look at the domestic split between leasing and amendments and you think about historically how Networks get upgraded mostly through amendments. So where are all those new leases coming from? Well, they're mostly coming from DISH. So Yes.

Speaker 6

For this quarter and last quarter, they're right up there in terms of quarterly contributions With the other big three, so that's why we said what we said. In terms of South Okay. Those spectrum auctions have been pushed back a little bit. There's a lot of interplay between the Wireless carriers and the government, the best that we can tell is that the auctions will be not This year, but in 2022, right now, they're scheduled for the first half. But they will be the full suite 5 gs spectrum.

Speaker 6

I think it's 600

Speaker 3

or

Speaker 6

700 rather, 2.5 and 3.5. So you're going to have all the tools necessary for the Carriers in that country to pick up what they need to move into 5 gs. So obviously, we're excited about that. It will mean Similar to what it means in the U. S.

Speaker 6

When customers move from 4 gs to 5 gs. Perfect.

Speaker 4

That was exactly what I thought you

Speaker 3

would say, Jeff. So just for reference.

Speaker 6

Thank you.

Operator

Our next question will come from the line of Michael Rollins with Citi. Please go ahead.

Speaker 3

Since you seem to be in such a generous mood to Share some new information. I'll take a crack at this. So you mentioned multiyear highs for services And leasing backlog. And I was thinking back to your 10 ks's where in 2019, you had a leasing backlog Of about $22,000,000 in 2018, you had about $16,000,000 And on the services side, it was about over those 2 years, dollars 55,000,000 $76,000,000 Can you share some context on how the current backlog compares to these couple of years? And then just secondly, curious if you could delve further into what you're learning from your data centers and how you're thinking about The edge and the role SBA is going to play in that in the future?

Speaker 6

Yes. The 10 ks disclosures, Mike, It's apples and oranges to what we were talking about in our earnings script and the press release. That disclosure is signed leases that have not yet commenced revenue. And when we talk about Backlog, it's applications. So those two things really are not correlating.

Speaker 6

But I'll give you a little more color on the backlogs. It's not multiyear high for services, it's all time high ever. For leasing, it is a multiyear high, going back probably to The heady 4 gs days, but it's good. And it took a big jump up in the quarter, Notwithstanding a very high degree of signings. So that's why we say what we said and why we feel good About next year.

Speaker 6

What was your second question? Edge. What you're learning from

Speaker 3

the data centers in the Edge?

Speaker 6

What we're learning is that it's generally a good business, Data centers in general, not that anybody needs me to tell them that. But one that we Like and we see synergies with the MicroEdge facilities where we have now We've got 4 or 5 of these things, more being built. And in many cases, the sale was made Because we were able to provide data center space in addition to the micro edge space. So there There's a big demand for redundancy, for disaster recovery, for backup. So the hub and spoke Model that we talked about earlier as to where we think this makes the most sense from our perspective is playing out, Albeit a little bit slowly because not sure the edge has really quite moved yet to the tower site, but it is headed in that direction.

Speaker 3

And so where does where do you think this goes over time? Are towers partners to data centers? Are towers Owners of a lot more data centers, where does this evolve into?

Speaker 6

It could evolve in either of those directions, But it does evolve into a more converged universe. And I think ultimately the degree of that convergence, Mike, will be how much computing power This is truly needed right at the sell side. And I don't think we know yet.

Speaker 3

Thanks.

Operator

Our next question will come from the line of Brett Feldman with Goldman Sachs. Please go ahead.

Speaker 3

Thanks. I guess I'll ask a follow-up on that one. I mean, we know your historical views on investing in fiber in the U. S. But if you were to start to see Real synergy between the connectivity between your data center assets and the edge facilities you can offer at sites, would you maybe reconsider Deploying the fiber between those locations.

Speaker 3

And then just a second question, I would imagine the big Uptick in the backlog is from what we're going to start calling the big four again. But I'm curious whether you're seeing anything in there from non traditional tenants, maybe enterprises looking to deploy CBRS based systems using your infrastructure, and if it's not in the backlog, is there anything going off from a conversation standpoint to suggest that could be percolating? Thank you.

Speaker 6

On your first question, it could make sense where we control Both ends of the destination to have fiber running between that we actually own. We do think over time, Brett, that a full suite of product offerings and solutions to The customer will be good. I mean, it's hard to sell someone. It's not as easy rather to sell someone micro edge Space when at the same time you say, well, you got to go find your own fiber. We'll see and never say never.

Speaker 6

But we I don't think the way fiber has been traditionally You know, bought, developed and deployed, that's a business I don't know that we would enter. It's going to be more when it joins two ends of things that we control.

Speaker 2

Okay. And then in terms of the nontraditional tenants in the backlog, there are some certainly, Brett, but As a percentage of the total backlog, it's pretty small. The carry partially because the big carriers are so active right now That we have huge backlogs with them. And so it's pretty immaterial in terms of its overall impact.

Speaker 6

Yes. But there are some in there. Yes, by accepting the lion's shares clearly from the big four.

Speaker 1

Great. Thank you.

Operator

Our next question comes from the line of Colby Synesael with Cowen. Please go ahead. Your line is open.

Speaker 11

Great. Thank you. One quick follow-up and then another one. As it relates to the international churn, you've highlighted you expected to be elevated in the Q4. Is that just a 1 quarter thing?

Speaker 11

Or would you anticipate churn being elevated in 2022 versus what we'll Ultimately seen in 2021. And then secondly, in the press release, you guys mentioned, I think this was quoted to Jeff, we expect elevated Domestic leasing activity is to continue through 2022 and perhaps beyond. I was wondering if you could just expand on that. Is that really just tied to some of the comments you've already made As it relates to DISH or is it really more than that? And maybe even how does AT and T in particular factor into that?

Speaker 11

Thank you.

Speaker 2

Yes. On the international churn side, I do expect it to be elevated not only in the Q4, but into next year, In part because, the Q4, especially when we report our same tower churn numbers, it's obviously on a trailing 12 months basis. So What happens in Q4 will be carried with us throughout the balance of the year. So Next year will certainly be higher, in terms of its full year impact than this year, because of the concentration late in the year.

Speaker 6

Yes. And along the length of the activity, Colby, comments really reflect just the historical norms of The lifecycle of a g upgrade going from 1 g to the next. I mean, when you think about where Verizon is and where AT and T is on C And where AT and T is on C band, the 3.45 stuff that's not even out yet and where DISH is, I mean, it's pretty easy to see that activity is going to move into 2023.

Speaker 11

Do you think then that we could actually be in a situation where we just continue to see that I think one

Speaker 3

of the big debates that investors are having now is do we start to flat line in 2022 or is there an opportunity for another step up?

Speaker 6

I mean, at some point, it has to flat line. I don't know specifically how to answer that question for next year until we see more about the 3.45 Shannon, understand some more of

Speaker 3

the timing, but I

Speaker 6

think flat line or not, I understand the importance of that from an investor perspective. But I mean, we see years of elevated activity.

Speaker 11

Great. Thank you.

Operator

Our next question will come from the line of Eric Luchow with Wells Fargo. Please go ahead.

Speaker 13

Great. Thanks for taking the question. Just curious on Brazil, if you could maybe provide us some color. You mentioned that same tower growth stepped up there in the quarter and there's a spectrum auction coming up later this week. You think that could drive another wave of amendment activity across the Brazilian market?

Speaker 6

Yes, I clearly do because the spectrum that they're being that's being put forth is what's really necessary The carriers to offer a 5 gs solution, which they have not yet really embarked on. So much like what's going on here in the U. S, When that spectrum is auctioned and put into use, you're going to have Similar activity levels. In terms of the you want to speak, Brendan, to the increase, Lisa? Yes.

Speaker 2

I mean, So the growth rate stepped up. It's really a combination of 2 things. 1 is the escalators are higher because of the CPI Based increases and as inflation has increased in Brazil, that's caused our escalators to be increasing. And then we have, In addition, seeing increased actual leasing activity over the last two quarters where it's sequentially increased over what it had been at the beginning of the year. I think really as we come out of some of the more serious COVID related periods in Brazil, we're starting to see the carriers moving back more towards Traditional spending levels, and so that's encouraging as well.

Speaker 13

Great. Thanks. And just one follow-up for me. You mentioned building more towers next year. Just Could you remind us which markets you're seeing build to suit opportunities in?

Speaker 13

And perhaps like what you're kind of underwriting today for return or yield requirements For building new sites in terms of NOI or development yield?

Speaker 6

We will build sites next year in every market in which we are currently Active. So and in most of those markets, more sites than we built Today. And we're looking at generally 10% -ish tower cash flow yield All day 1.

Speaker 13

Got it. So that includes the U. S. Where new builds have been fairly slow the last few years?

Speaker 6

Yes.

Speaker 13

Okay. Thank you.

Operator

Our next question will come from the line of David Guarino with Green Street. Please go ahead.

Speaker 14

Thanks. I was wondering if you could provide any updates on Oi. And specifically, I was wondering if you have any updates on the land Underlying, I think it was around 2,000 sites in Brazil that are up for renewal in 25. It feels like there's a lot of moving pieces. So Just trying to understand if there's any risk of lost revenues from those sites?

Speaker 2

Yes. There's now you're talking about the concession sites, I think, from the acquisition that we did. Yes. No, there's really not. And we expect that, we'll those will actually be continued on.

Speaker 2

And actually, Those leases extend out, I believe, longer than that with us as a commitment from Hawaii that goes out beyond those days.

Speaker 6

To 2,035, I believe. Yes. Right. Yes. That transaction is supposed now the latest thinking is that that It doesn't get consummated until sometime next year.

Speaker 6

And then with the network rationalization aspects that come out of that Not starting until sometime in 2023.

Speaker 14

Okay. Maybe switching gears then. Going back Okay. Earlier question about you guys talking about DISH as part of the big four carriers. Does that mean that you're going to update your customer concentration table To reflect DISH once the revenue starts commencing on the tower

Speaker 6

sites? Sure. Yes, Yes.

Speaker 2

I mean, once they reach a level, I mean, that we're giving the concentrations above 10% of revenue. Obviously, they'd have to achieve that. Their contributions to leasing activity are significant and on par with the other carriers now. But obviously, The total sum of revenue considering they started at 0 is at a much lower percentage. So we ultimately will do that if they achieve That level of contribution.

Speaker 14

Great. Thanks for taking the question.

Operator

And our final question in queue at this time is comes from the line of Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Great. Two questions. One, could you comment just on leasing PG and E assets? Any additional comments you could provide there? I don't think anybody asked.

Speaker 3

And then on the balance sheet, I think you guys called out blended interest costs of 2.25 percent or so and then some incremental run rate savings. Could you what else is to be done there Going forward, do you guys see interest expense coming down? Thanks.

Speaker 6

PG and E is ahead of plan, Benefiting from all of the U. S. Activity from all the contributors that we Earlier discussed in general, so we're extremely pleased with that. And on

Speaker 2

the balance sheet, the Just to correct what you said, the average interest rate is now on a pro form a basis 2.6%. There are Potentially some other possibilities, we obviously have maturity dates that come up over the next several years. Really, We'll have to see where interest rates are as we hit those dates. There's probably some opportunity to refinance And have some additional improvement, but I think we've done the vast majority of that now with the last deal that we just completed this past month.

Speaker 7

Great. Thank you.

Speaker 6

Brian, is that it or is there another question?

Operator

We have no further questions in queue.

Speaker 6

Great. Well, thank you everyone for joining us this evening and we look forward to reporting Our Q4 sometime in February.

Speaker 3

Have a

Speaker 6

great day.

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Earnings Conference Call
SBA Communications Q3 2021
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