SBA Communications Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 15 speakers on the call.

Operator

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. Then 0.

Operator

And I would now like to turn the conference over to our host, Vice President of Finance, Mark DeRussi. Please go ahead.

Speaker 1

Good evening, and thank you for joining us for SBA's Q2 2023 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer and Brendan Cavanaugh, 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 31.

Speaker 1

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 2nd quarter results.

Speaker 2

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 2nd quarter were $626,100,000 and cash site leasing revenues were $618,700,000 Foreign exchange rates represented a benefit of approximately $1,900,000 when compared with our previously forecasted FX rate estimates for the quarter and a headwind of $4,200,000 when compared to the Q2 of 2022.

Speaker 2

Same tower recurring cash leasing revenue growth for the 2nd quarter, which is calculated on a constant currency basis, was 4.3% net over the Q2 of 2022, including the impact of 3.9 percent 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 Q2 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 Q2 declined from the Q1. While all major carriers remained active with their networks, Agreement execution levels in the 2nd quarter from several of our customers were below our prior expectations.

Speaker 2

Longer term, we continue to see significant runway for new 5 gs 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. In addition, today we announced that we have entered into a new long Master Lease Agreement with AT and T. This comprehensive agreement will streamline AT and T's deployment of 5 gs solutions across our tower portfolio, while providing us with committed future leasing growth from AT and T for years to come. Based on this MOA, We have increased our projected contribution to 20 23 leasing revenue from domestic organic new leases and amendments by $6,000,000 from the full year projections we provided last quarter. During the Q2, amendment activity represented 42% of our domestic bookings and new leases represented 58%.

Speaker 2

The big four carriers of AT and 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 decommissionings 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 We will be at the high end of our previously stated range for this year of $25,000,000 to $30,000,000 resulting in a change to our full year domestic churn outlook of $4,000,000 Our views around the ultimate multiyear 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 $30,000,000 2025 to be between $35,000,000 $45,000,000 20.26 to be $45,000,000 to 55,000,000 And 2027 to be $10,000,000 to $20,000,000 Just as last year ended up being well below our initial churn expectations And 2023 will likely be a little above our initial expectations.

Speaker 2

We anticipate that the exact timing will continue to be 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 percent of churn or 9.7% on a growth basis. International leasing activity was Inflation based escalators also continued to make steady contributions to our organic growth.

Speaker 2

However, 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 $1,000,000 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 TAM 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.

Speaker 2

During the Q2, 77.5 percent of consolidated cash Site leasing revenue was denominated in U. S. Dollars. The majority of non U. S.

Speaker 2

Dollar denominated revenue was from Brazil, with Brazil representing 16.2 percent 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 2nd quarter was $503,500,000 Tower cash flow in the quarter benefited by approximately $7,300,000 in accounting driven Cost Reclassifications. Our tower cash flow margins remain very strong with a 2nd quarter domestic tower cash flow margin of 85.5 percent and an international tower cash flow margin of 70.3% or 92.3 percent excluding the impact of pass through reimbursable expenses. Adjusted EBITDA in the 2nd quarter was $471,700,000 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%.

Speaker 2

Approximately 98% of our total adjusted EBITDA was attributable to our tower leasing business in the 2nd quarter. During the Q2, our services business had another strong quarter with $52,400,000 in revenue and $13,100,000 of segment operating profit. While off year ago activity levels, our Carrier customers remained busy deploying new 5 gs related equipment during the quarter, and 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 300 $52,700,000 AFFO per share was $3.24 an increase of 6 0.2% over the Q2 of 2022 on a constant currency basis. During the Q2, we continued to invest in additions to our portfolio acquiring 9 communication sites for total cash consideration of $7,200,000 and building 64 new sites.

Speaker 2

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 $72,900,000 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 $10,100,000 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.

Speaker 1

Thanks, Brendan. We ended the quarter with $12,700,000,000 of total debt $12,400,000,000 of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.6 times, Below the low end of our target range and the lowest level in decades, our 2nd quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was a strong 4.9 times. During and subsequent to quarter end, we repaid amounts under our revolving credit facility. And as of today, We have $360,000,000 outstanding under our $1,500,000,000 revolver.

Speaker 1

The current weighted average interest rate of our total outstanding debt 3.1 percent 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 $505,000,000 of repurchase authorization The company shares outstanding at June 30, 2023 for $108,400,000 In addition, during the quarter, we declared and paid a cash dividend of $92,100,000 were $0.85 per share. And today, we announced that our Board of Directors declared a 3rd quarter dividend of $0.85 per share payable on September 20, 2023 to shareholders of record as of the close of business on August 24, 2023.

Speaker 1

This dividend represents an increase of approximately 20% over the dividend we paid in the year ago period and only 20 6% of our projected full year AFFO. With that, I'll now turn the call over to Jeff.

Speaker 2

Thanks, Mark, and good evening, everyone. The Q2 was another very solid one for SBA. We produced good financial results across all areas of our business And we continue to deliver high quality service and operating results for our customers. Each of our largest U. S.

Speaker 2

Customers remained active with their networks. Our customers continue to add equipment to sites in support of 5 gs 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 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 and T in anticipation of our new MLA as would be expected.

Speaker 2

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.

Speaker 2

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 And we have our newly signed MLA with AT and 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 and T, We're very excited about this next chapter in our long standing successful relationship.

Speaker 2

This new agreement highlights the long term importance of SBA sites to AT and T's future network deployment plans. The agreement will improve operating efficiencies between our organizations and enhanced stability with regard to future leasing growth. We look forward to working closely with AT and T for years to come under this mutually beneficial framework. In the Q2, 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 2nd biggest services year in our company's history behind only 2022.

Speaker 2

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, 2% 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, It was ahead of our internal expectations with contributions from each of the big three carriers in that market.

Speaker 2

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. And 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.

Speaker 2

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.

Speaker 2

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.

Speaker 2

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 and 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. And with that, Eric, we are now ready for questions.

Operator

Then 0. You may remove yourself from queue at any time by pressing 1 then 0 again.

Speaker 2

If you

Operator

are on a speakerphone, Please pick up the handset before pressing the numbers. And first, we will hear from Ric Prentiss with Raymond James. Please go ahead.

Speaker 3

Thanks. Good afternoon, everybody.

Speaker 4

Hi, Ric.

Speaker 3

Obviously, I have some questions on the AT and T MLA, big news item there. I appreciate, I think, Brendan, you said $6,000,000 of the increase in lease activity was really driven by AT and T in LA.

Speaker 2

Hey, Rick, can you speak up? We're having trouble hearing you. Rick?

Speaker 3

How about now? Can you hear me better now?

Speaker 2

That's much better. Thank you.

Speaker 3

You bet. Yes, I'm sorry about that. I had another phone call come in. It's like, nope, doing something busy. Yes, I appreciate Some of the color on the MLA with AT and T.

Speaker 3

Couple of questions around it. Why now and any others that you're working on? And then also, suggesting that $6,000,000 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?

Speaker 2

Yes. So on the MLA, first of all, on the numbers, the $6,000,000 increase is Basically due to the MLA, obviously, that was our the 72 is what we reported last time, we increased 78, and activity was a little bit slower in the Q2. So, we expect that the NOI will kick in right away based on In 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 Q3 as a result of the MLA, and then you'll see it be a little bit lower into the 4th quarter.

Speaker 2

And 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. In terms of why, Rick, this agreement with AT and T has been in the works for well over a year. And it's a deal that we believe is beneficial to both organizations.

Speaker 2

We've been working on it for that period of time 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 we have. Really don't want to comment too much on what's going on with Other customers, but 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.

Speaker 3

Okay. And 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 and A out there, which will be probably your first choice. But how do we think about when the lever moves since you're down to 6.6 leverage To more stock buybacks, is that like a next year item? Is that further out?

Speaker 2

Yes. 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 0. So when we get to that point, Rick, We should you should ask that question again. I'll be here to ask it.

Speaker 3

Great. Thanks everyone. Stay well.

Speaker 2

Yes.

Operator

And next we'll hear from Michael Rollins with Citi.

Speaker 5

Thanks and good afternoon. Just curious, just to follow-up on the comprehensive deal with AT and T. Can you share some of the multiyear Components of this deal, is there going to be a straight line element that sometimes comes up with these types of Multi year or comprehensive opportunities and does it change the way Investors should think about leasing overall for SBA in 2024 in the domestic side.

Speaker 2

Yes, Mike. So it will certainly smooth the way that we operate with AT and T. So I think from that 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.

Speaker 5

And just on the commentary on leasing, so the site development revenues are unchanged from the prior guidance. But you did note that there were some slower activity levels. Was this just something that you were maybe more prepared for earlier in the year? Or 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?

Speaker 2

Yes. I think we know our site development business very well. It primarily centers around work Almost entirely work on our towers. So we have a very good feel for it. And there There's just enough work out there, Mike, that was already booked earlier in the year and actually Some of it probably spilling over from last year.

Speaker 2

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.

Speaker 5

Thanks very much.

Operator

And next we'll hear from Simon Flannery with Morgan Stanley.

Speaker 4

Great. Thank you very much. I was just wondering on the leverage point, have you had any more consideration of targeting investment grade status? Or is that is this going to be just a temporary change in your overall leverage targets? And then perhaps you could just talk go on.

Speaker 2

Yes. 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 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.

Speaker 2

It just so happens that as we continue to do that, we Further decrease leverage, which makes the path of going to investment grade, if we were to so choose that path Easier to obtain. But 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.

Speaker 4

Great. Yes. And just one follow-up. You mentioned earlier that you still got a lot of sites that have not been upgraded to 5 gs. Do you think as given some of the rural SKU of your portfolio, do you think that would Advantage your portfolio in the next several years versus to that initial build out?

Speaker 2

Yes. I think, If history is any guide, yes, that's exactly how it works. It starts out in the NFL cities, it goes from there.

Speaker 4

Great. Thank you.

Operator

And next we'll hear from Phil Cusick with JPMorgan.

Speaker 6

Hi, guys. Thank you. 2 if I can. How should we think about the exit run rate in activity this year versus going into next year? AT and T, it sounds like it's steady in 3Q and 4Q and then from there and others are decelerating through this year.

Speaker 6

Should we think of the 4th quarter as a decent run rate for next year or maybe a little bit lower than that? And then second, Jeff, I didn't understand Your comment just a second ago on the service revenue now for activity earlier in the year. And 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 going to make the guide this year, but next year it sounds like things are going to be probably well below. Does that make sense?

Speaker 6

Thank you.

Speaker 2

Go ahead, Brendan. Yes. So on the first question, we do we expect that the 4th quarter Run rate, you're talking specifically just to be clear about domestic, organic leasing contributions, yes, to be around approximately $17,000,000 to $17,500,000 But 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.

Speaker 2

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. So, the number It's a little bit higher than we said before because of the impacts of the MLA for the Q4, but I don't believe it will be indicative of The numbers for next year. Yes. And as far as the services revenue, Phil, The first half of what we report in 2024 will be largely dictated by what we do now operationally with leasing. We have 2 different components of that.

Speaker 2

We have the site acquisition component, which is the planning stuff and then we have the construction, which is where a lot of the current activity is taking place because that's the last part of the cycle. So we'll see. We'll see where we come out with the 2024 guidance on services, But it will be obviously heavily impacted by how we finish out the rest of the year.

Speaker 6

Thanks very much, guys.

Operator

And next we'll hear from Jonathan Atkin with RBC.

Speaker 7

Thanks very much. So I was interested in doing just to contextualize the AT and 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.

Speaker 8

Sipential revenue.

Speaker 2

Yes. You mean just the percentage of the AT and T revenue or overall revenue?

Speaker 7

Overall revenue. For the whole company, How do we kind of think about how much is kind

Speaker 1

of a lock versus

Speaker 7

more DFT?

Speaker 2

Right. John, 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 is It's obviously unknown. So as a percentage, it's hard to say as well. So 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.

Speaker 2

And a greater portion of the AT and T than Probably exists under other agreements, although we still have some of that. And I mean, I don't think that's not a number that We have focused on, yes. So the best we can answer, Jonathan, is that it's a much greater That under the AT and T revenue.

Speaker 7

And you're comparing that to your agreements with other carriers as opposed to other Calico's agreements with AT and T, I'm assuming.

Speaker 2

Correct. Yes.

Speaker 7

Got it. Understood. And then maybe just give us some Directional guidance around the trajectory around building new towers and ground lease and easement activity.

Speaker 2

Yes. 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, our 2 largest markets Outside the United States. And we have a steady focus on ground lease purchases and extensions, which Hasn't changed 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 has really changed there.

Speaker 2

We would put more capital into particularly the land purchases and extensions if the opportunities arose.

Speaker 1

And then

Speaker 7

in terms of purchasing other portfolios, Maybe thinking about Africa and your operating history there and maybe some tuck in opportunities, either That geography or elsewhere, what are your thoughts on increases or scale in existing markets versus expanded the footprint?

Speaker 2

Yes. 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 that we feel needs to be filled. In market growth because of the existing base is Going to be preferred over new market growth, but we would still go into a new market if we found the right deal.

Speaker 2

And I would point back The Tanzania investment as a good example of that. But because it's all financially Driven, it makes our decision to use discretionary cash to pay down the revolver that much more straightforward.

Speaker 7

Lastly, I might have missed this, but the duration of the AT and T MLA?

Speaker 2

It's 5 years, Jonathan.

Speaker 1

Thanks very much.

Operator

And next we'll hear from David Barden with Bank of America.

Speaker 9

Hi guys. Thanks so much for taking the questions. So I guess,

Speaker 1

maybe

Speaker 9

2. 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 for towers at all, is there maybe an opportunity To redirect resources in more optimal ways? Or is there an opportunity, 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. And then second, maybe for Mark, As we think about the 25 term loan and its maturity, what should The Street be doing In terms of expectations in the model with respect to how we address that cost Fixed, long term, roll it, what is the plan? Thank you.

Speaker 2

Dave, I'm going to defer

Speaker 1

that to our expert here, Brendan.

Speaker 2

On the services question, David, we've had a lot of history. Actually, you recall that's how SBA started. So 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. And 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.

Speaker 2

So I don't think that changes. So I guess if I had to choose one of your two options, 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. And Dave, on the term loan, your question of modeling, if I could only see into the future, but we Yes. 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.

Speaker 2

And I would expect that spreads will be similar to up slightly from where they are today, but we'll have See how that plays out. And then it's just a matter of using the forward curve in terms of the benchmark SOFR rate. But that doesn't mean that that's necessarily how it will play out. We will probably have we will be evaluating multiple different options. There may be a mix So different instruments that we use, some may be fixed and some may be floating.

Speaker 2

But all things are on the table for us right now and we Look at that frankly every day, but if you're just simply modeling out long term, I think the best thing to do is to assume a like for like instrument.

Speaker 9

All right, great. Thank you, guys.

Operator

And next we'll hear from Walter Piecyk with LightJet. Please go ahead.

Speaker 2

Thanks. Can you hear me? Yes. Yes. All right, perfect.

Speaker 2

Sorry.

Speaker 10

The if you didn't have the AT and T MLA, would the 72 still stick? Or was that fall off accelerating faster than you thought in terms of the second half of the year?

Speaker 2

I can't really answer that question, Walt, because there's so many elements that go into it. What would the activity be with AT and T otherwise, those types So I can't really say for sure what it would be given that we were working on this for quite a while. First, 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 slowdown or pause, if you will, related to that, and we would expect that will eventually pick up. But given the delay between Signings and revenue recognition, I would expect that will weigh year over year on next year.

Speaker 2

And T Mobile was frankly very, very busy as well. And You have somewhat of a similar dynamic there, but that's what we're going into For next year, but longer term, there's still a lot to do there. So we tend to decline.

Speaker 10

So if there was something incremental like Qualitatively, what do you think those issues are?

Speaker 2

If there was something incremental, In what sense? I mean what?

Speaker 10

Well, 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 Because 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? And I'm just trying to get a sense of is there something new or worse?

Speaker 2

Yes. I don't think there's something particularly new. I think it's been a little bit slower than what we had I paid it before, but directionally, it's still the same. So what does that mean for next year? Does that mean $5,000,000 difference $10,000,000 I can't tell you yet.

Speaker 2

We're not ready to get there and we still have half the year to go. But it's marginally worse than what we In terms of the balance of the other carriers? Yes. The qualitative Benefits or the positives to look forward to, Walt, is I mean DISH has to get started, whether it's late Q4 or early Q1 on their 2025 bill, which is going to be large. T Mobile hasn't even got the C band and the 3.

Speaker 2

4, 5 spectrum yet. You got the you got some folks waiting on availability of dual band equipment. So there's all kinds of things to look forward to as we move through the year and into next. Are you seeing anything from cable, Jeff? Little bit, but not enough You know, give anyone the impression it's going to move the needle.

Speaker 2

Got it. Thank you.

Operator

And then next we'll hear from Batya Levi with UBS.

Speaker 11

Great. Thank you. Just a quick follow-up on the AT and T MLA. Does it cover all the towers that AT and T has equipment on your sites? And should we assume that the escalator in there is similar to the 3%, 3.5% that You have.

Speaker 11

And another one, I believe you said $4,258,000,000 mix for amendments and new leases. Can

Speaker 2

I'm sorry, what was the first part of the question?

Speaker 11

AT and T MLA, if it includes all the sites they have with you and the escalator.

Speaker 2

Right. So 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. That have AT and T on it. Yes, that have AT and T on it,

Speaker 6

of course.

Speaker 2

And then, on the escalator piece, I can't really get into the specifics around what the escalator is, but our historical escalator with AT and He has been north of 3%, and we would expect that to continue.

Speaker 11

Great. And the amendments without DISH, is that much higher than the 42%?

Speaker 2

It would be. It would be. If you took DISH out of the mix, you would have a Much higher percentage of amendments of the total.

Speaker 11

Okay. Maybe just a quick one. As you can you give us a sense on what the guidance assumes For DISH as we exit the year?

Speaker 2

No. We can't give you that kind of specificity, no. Okay. But it's much less than it was. But it's much less than it was Exim last year.

Speaker 11

Got it. Thank you.

Operator

And next, we'll hear from Nick Del Deo with MoffettNathanson.

Speaker 12

Hey, thanks for taking my questions. First regarding the AT and T deal, should we think of that as pulling forward some revenue that you otherwise would have expected in the latter years into the near future? And do you feel that the totality of the revenue that you'll get from AT and T over the course of the contract is similar

Speaker 2

to what it otherwise would have been? 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. Yes. I mean, it's hard to say because obviously, previously, it would be very specific to the timing of when they were signing Thanks.

Speaker 2

We don't know exactly what that timing would be. So, could be pulling forward, could be pushing it down. Yes. The answer to your question will be Only known in hindsight by the levels of AT and T's activity. Yes.

Speaker 2

Okay. Okay. So we should think of

Speaker 12

it more, call it, Smooth and a bit, but not necessarily sort of a mass reallocation of what

Speaker 2

the revenue would have been. Is that fair? Yes. Yes. Okay, great.

Speaker 12

And then, kind of two clarifications, for Brendan. 1, it looks Your forecast for other international revenue went up by about $9,000,000 versus last quarter's guidance. What was that? And was it in this quarter's results? And then second, can you elaborate a bit on the $7,000,000 in cost reclassifications that you noted in your prepared remarks?

Speaker 12

What was it reclassified to and from? What was behind it? Which segment?

Speaker 2

Yes. So 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. That's not one thing in particular.

Speaker 2

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. And then also some termination fees and just other, Frankly, cats and dogs, Nick, but they did add up and we actually have higher expectations for the balance of the year. So 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, but after Discussion with our accountants, it was determined that the best classification for that was impairment and decommissioning costs. So Basically, it's just a move of those costs out of cost of revenue and into impairment and decommission costs.

Speaker 12

Okay. So sort of a one time true up?

Speaker 2

There was some one time true up in there, but that's the way it will also be going forward and that's Assumed within the guidance that we've given around total cash flow.

Speaker 12

Okay. Can you share anything about how much of the change was attributable To that be on the $7,000,000 recognized in the

Speaker 2

quarter, what it would be for the full year? Yes. It's another roughly $4,000,000 Okay. Sure thing. All right.

Speaker 2

Thank you both.

Operator

And next we'll hear from Brad Feldman with Goldman Sachs.

Speaker 5

Thanks. Two questions, if you don't mind. When some of your peers announced 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, but it's typically because there's some incremental commitment That was made in that agreement, maybe it was escalators or some other amount of leasing. And you didn't do that with this agreement.

Speaker 5

So I can imagine a question we're going to get is, ultimately, what do you feel like you through the MLA because you've been very selective in entering into these larger agreements. And I know there's been some questions on it, but I'm trying to think about the right way of framing And then the second question is, portfolio growth has been a focus for SBA for a very long time. I remember the analyst meeting, 15 plus years ago when you first started talking about those long term targets. And it's understandable why paying down your revolver right now is Probably the economically most accretive thing to do. But whenever we get past this moment, do you think portfolio growth is going to be The same priority and same opportunity?

Speaker 5

Or are you starting to suspect that maybe the power portfolios that you don't own And the markets you're in or might want to 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.

Speaker 2

Yes. 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, 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.

Speaker 2

But as long as all that works out, Brett, to achieve an investment result that we want, I don't see the Preference and prioritization of portfolio growth changing. Yes. And Brent, 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 Set by a decrease in straight line associated with some of the accelerated Sprint churn that we mentioned earlier. So there is a small impact. But 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.

Speaker 2

Sure, there are terms that are different. I can't speak to theirs specifically. But really it's a function of timing in terms of when certain commitments take place. And In the future, I would expect that there will be some straight line impact as a result of this deal, but it's a little more activity driven than it is Upfront. Yes.

Speaker 2

It will you will see straight line benefits over time over the course of the 5 years, Brett, Based on various triggers and activity levels as opposed to upon signing.

Speaker 1

All right. Thank you.

Operator

And next we'll hear from Jonathan Chaplin with New Street.

Speaker 13

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,

Speaker 3

is it as simple as

Speaker 13

what the yield of the debt is relative to your AFFO yield? And are you taking the direction of rates into consideration when you make that determination? Or is it just sort of a moment by moment decision that drives whether you're in the market buying back stock or paying down the revolver? And then just a follow-up question on DISH. Is there anything assumed in new leasing activity for the second half of this year

Speaker 2

So the accretion analysis Takes into account a number of things. There's certainly the basic straightforward piece that you mentioned, which is what's the yield of buying back our stock today versus What can we save by paying down the revolver or any debt? And right now, that actually is more accretive to pay down The revolver today, but we also look at it long term and we look at our expectations for growth, For growth in cash flow as well as what we think our future financing or refinancing costs will be And that positioning relative to our balance sheet as a whole is also relevant to it. So yes, 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. And when interest rates go up, it immediately affects the cost on the revolver.

Speaker 2

We can always buy our stock back. And that we take comfort in that. But when you have an 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 1 is the way to go. And 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.

Speaker 2

But we expect that we'll continue to see, at least for this year, less executions with them. But 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.

Speaker 13

Got it. Thanks guys.

Operator

And next we'll hear from Eric Liu Chao with Wells Fargo.

Speaker 8

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 theoretically, If you did make that decision, what type of leverage do you think you'd have to target to get there? And how quickly do you think you could get there based on where your leverage is at today?

Speaker 2

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. But it'd be more about the commitment to staying there than it would be about Hitting leverage, sir.

Speaker 8

Yes, understood. And then just another question on the comprehensive NOA. I mean, does this That 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 NPV positive for your business?

Speaker 2

Yes. I mean, it's really the latter, but I mean, we've always said we would be open to a variety of structures. I mean, this, I think, evidences that Open this though, for the right deal, Eric, we would do any number of structures with our customers.

Speaker 8

Understood. Thank you both.

Operator

And next we'll hear from Brendan Lynch with Barclays.

Speaker 14

Great. Thanks for taking my questions. At the risk of belaboring the point, I have a few on the MLA. Maybe just high level, given the MLA with Tim and now with AT and T, has the market changed? Have customers changed?

Speaker 14

Or has your perspective changed? And then maybe if you could give us any specifics along the number of sites, minimum payment schedule, You mentioned it was 5 years, but I'd imagine the leases are for much longer. Any details around that would be helpful.

Speaker 2

Yes. 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 somewhat important for us to keep confidential for both us and our customer. But It is a 5 year agreement and there will be a lot of ramifications that I would expect would extend beyond the 5 years. In terms of the MLA in general, I think Jeff kind of mentioned answered this earlier.

Speaker 2

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 Sure. They didn't work for our customers, whatever the case may be. So we've done less of those. But we've done MLAs over the years in various structures.

Speaker 2

We have an MLA today with Verizon. We've had MLAs with T Mobile and with DISH. So we've done these agreements before, but each one is dependent upon the specifics around that carrier and their needs At the time and what works for both parties. So I don't know that anything has holistically changed out in the market broadly. Yes.

Speaker 2

I mean, we are trying to be responsive to our customers, while at the same time being responsible to ourselves and our shareholders. And that will continue to be kind of the big picture as to how we approach these things. And it could lead to more Or this could be the only one.

Speaker 14

Maybe just to clarify a point, I think you've described some of your past MLAs as being Pricing menus, is that how you would characterize this arrangement with AT and T? Or is there a better way to think about it?

Speaker 2

Yes. This would be a little different than that. This would be payments in exchange for AT and T having certain rights to Use our

Speaker 1

towers. Okay, very good. Thank you.

Operator

And now we'll hear from Greg Williams with TD Cowen.

Speaker 5

Great, thanks. Just first question on any further developments With Oi, beyond Tim, with the other carriers, any ongoing discussions are you having them? And are you hopeful you can get anything done by year end? And then just second, On the site development, it sounds like it'll hang out in the low 50s for the next few quarters. Anything to think about in terms of service margins from here?

Speaker 5

Thanks.

Speaker 2

Yes. On the Oi question, you're talking specifically about deals with the other carriers that took over Oi Wireless, I believe. That's right. Yes. We are having conversations with those other carriers, and It's possible that there would be some other arrangement struck with them, but it's premature for us to say.

Speaker 2

And obviously, if we do reach 1, We'll let you know at that time. And 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, but pretty flat. Your estimate of around 50 or so quarters It's probably about right. Got it. Thank you.

Speaker 2

And

Operator

we have no further questions at this time.

Speaker 2

Great. Well, I want to thank everyone for joining us this evening, and we look forward to getting back together in late October for our Q3 report. Thank you.

Operator

And that does conclude our conference for today. Thank you for your participation and for using AT and T event conferencing. You may now

Powered by Quartr
Earnings Conference Call
SBA Communications Q2 2023
00:00 / 00:00