SBA Communications Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the SBA Third Quarter Results Conference. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Finance, Mark DeRussie. Please go ahead. Thank you, Rich. Good evening, and thank you for joining us for SBA's third quarter 2020 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 2020 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, November 2nd, 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. 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 third quarter results. Thanks, Mark. Good evening. SBA once again had very strong results in the third quarter, exceeding our expectations in all key financial metrics. Total GAAP site leasing revenues for the third quarter were $486.8 million, and cash site leasing revenues were $486.1 million. Foreign exchange rates were a $1 million tailwind to revenues when compared with our previously forecasted FX rate estimates for the third quarter. They were again, however, a significant headwind on comparison to the third quarter of 2019, negatively impacting revenues by $20.1 million on a year-over-year basis. Same tower recurring cash leasing revenue growth for the third quarter, which is calculated on a constant currency basis, was 4.1% over the third quarter of 2019, including the impact of 1.9% of churn. On a gross basis, same tower growth was 6.0%. Domestic same tower recurring cash leasing revenue growth over the third quarter of last year was 5.7% on a gross basis, and 3.5% on a net basis, including 2.2% of churn. Domestic operational leasing activity, or bookings, representing new revenue placed under contract during the third quarter, increased over the first half of 2020 levels, but remains below levels we were seeing in the year-ago period. The sequential increase in domestic new bookings was driven primarily by increased activity with T-Mobiles. Based on conversations with our customers and continued growth in our domestic application backlog, we anticipate seeing this activity continue to increase in the fourth quarter and into 2021. During the third quarter, amendment activity remained the large majority of our domestic bookings, with newly signed up domestic leasing revenue coming 80% from amendments and 20% from new leases. The big three carriers represented 83% of total incremental domestic leasing revenue signed up during the quarter. Internationally, on a constant currency basis, same-tower cash leasing revenue growth was 7.1%, including 0.4% of churn, or 7.5% on a gross basis. Our international leasing activity was up modestly over first half 2020 levels, but still remains impacted by continued COVID-related spending reductions by our customers in a number of our markets. This quarter, Brazil was again the largest contributor to international lease-up. Gross same-tower organic growth in Brazil was 9.0% on a constant currency basis. During the third quarter, 86% of consolidated cash site leasing revenue was denominated in U.S. dollars. The majority of non-US dollar denominated revenue was from Brazil, with Brazil representing 10.8% of all cash site leasing revenues during the quarter and 8% of cash site leasing revenue excluding revenues from pass-through expenses. Tower cash flow for the third quarter was $396.8 million. Our tower cash flow margins continue to lead the industry. with a third quarter domestic tower cash flow margin of 84.3%, and an international tower cash flow margin of 71.0%, or 90.1%, excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the third quarter was $373.3 million. Our industry-leading adjusted EBITDA margin was 71.5% in the quarter, up 90 basis points from the prior year period. Excluding the impact of revenues from pass-through expenses, adjusted EBITDA margin was 75.8%. Approximately 98% of our total adjusted EBITDA was attributable to our tower leasing business in the third quarter. AFFO in the third quarter was $270.1 million. AFFO per share was $2.38. an increase of 10.7 percent over the third quarter of 2019, and a 15.3 percent increase on a constant currency basis. Our outperformance in ASFO was partially attributable to reduced net cash interest expense, resulting from the termination of the company's $1.95 billion notional value interest rate hedge on a portion of our 2018 term loan in exchange for a one-time cash payment of $176.2 million. This termination in combination with a new interest rate swap entered into by the company on the same day, fixing the interest rate at 1.87% on $1.95 billion of our 2018 term loan, will result in annualized cash interest expense savings of $37.2 million. The impact to 2020 net cash interest expense is a reduction of $16.3 million. During the third quarter, we also continued to expand our portfolio, acquiring 44 communication sites and one data center for total cash consideration of $73.5 million and building a total of 75 sites in the quarter. Subsequent to quarter end, we have purchased 54 communication sites for an aggregate price of $14.6 million. and we have agreed to purchase 132 additional sites for an aggregate price of $85 million. We anticipate closing on the majority of these sites by the end of the first quarter of 2021. We also continue to invest in the land under our sites, which provides both strategic and financial benefits. During the quarter, we spent an aggregate of $7.2 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 71% of our towers, and the average remaining life under our ground leases, including renewal options under our control, is approximately 35 years. In our earnings press release this afternoon, we included an update to our outlook for full year 2020, providing increases in all key metrics. Strong leasing revenue and services results in the third quarter were drivers of these increases in our outlook, in addition to lower SG&A projections, lower non-discretionary capital expenditures, and lower net cash interest expense. These results and adjusted forecasts, along with the impact of our recent share buybacks, which Mark will discuss in a moment, have allowed us to increase our full-year 2020 outlook for ASFO per share by 25 cents. I will now turn things over to Mark, who will provide an update on our liquidity position and balance sheet. Thanks, Brendan. We ended the quarter with $10.8 billion of total debt and $10.5 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 7.0 times at the low end of our target range. Our third quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 4.2 times. On July 14, through a trust, we issued $750 million of 1.884% secured power revenue securities, which have an anticipated repayment date of January 29, 2026, as well as $600 million of 2.328% secured power revenue securities, which have an anticipated repayment date of January 11, 2028. The aggregate $1.35 billion of tower securities have a blended interest rate of 2.081% and a weighted average life through the anticipated repayment dates of 6.4 years. Net proceeds from this offering were used to repay the entire $1.2 billion aggregate principal amount of the 2015-1C and 2016-1C tower securities. with the remaining net proceeds being used for general corporate purposes. As a result of this financing, our next debt maturity is not until April 2022. As of today, we have no outstanding balance under our revolver, and the weighted average interest rate of our outstanding debt is 3.1%, with a weighted average maturity of approximately 4.2 years. During the third quarter, we repurchased 580,000 shares of our common stock for $175.6 million, or an average price of $302.63 per share. Subsequent to quarter end, we have repurchased 415,000 shares for $124.4 million, or an average price per share of $299.54. Today, our Board of Directors approved a new $1 billion stock repurchase plan, effective immediately, replacing the previous $1 billion plan, which had $124 million of repurchase authorization remaining. The company shares outstanding as of September 30, 2020, are $111.4 million, compared to $112.6 million at September 30, 2019, a reduction of 1.1%. In addition, during the third quarter, we declared and paid a cash dividend of $52 million, or 46.5 cents per share. And today, we announced that our board of directors declared an equivalent fourth quarter dividend of 46.5 cents per share, payable on December 17, 2020, to shareholders of record as of the close of business on November 19, 2020. And with that, I will now turn the call over to Jeff. Thanks, Mark, and good evening, everyone. We had another strong financial performance in the third quarter. We produced leasing revenue, tower cash flow, adjusted EBITDA, AFFO, and AFFO per share that were all ahead of both our expectations and consensus expectations. The year has developed almost exactly as we predicted it would on our last earnings call. U.S. customer activity has increased due to T-Mobile activity increasing post-merger. International business remains stable to improving, but still challenged due to the continued impact of COVID-19 in those markets. And the capital markets remain very friendly to our company. Because we see further increased U.S. leasing activity in the future over 2020 levels at a time where our international markets recover from today's COVID-19 challenges, we continue to invest capital in both portfolio growth and by repurchasing our stock. which investments we believe will help fuel future growth in AFFO per share and dividends per share. We're very pleased with our results, particularly against the backdrop of continuing COVID-19 conditions in all of our markets. The majority of our employees and our customers' employees are still working remotely, but yet continue to work efficiently and effectively to produce these positive results. We also have a number of essential field personnel working every day out at tower sites to meet our customers' needs. We greatly appreciate the efforts of all of these frontline folks who have not only had to adjust to working in the new COVID world, but also have been there to get hurricane and fire-impacted sites back up and running for our customers and ultimately for their customers. They've done a great job. I thank them for all they have done and will continue to do. From a leasing activity standpoint, in the U.S., we saw an increase in new bookings during the third quarter to a higher level than we saw throughout the first two quarters of the year. This increase relates directly to T-Mobile activity post-merger. This increased activity, as well as our strong services results and our growing application backlog, are positive signs for continued increases in the pace of domestic organic leasing activity for the fourth quarter and into 2021. These third quarter levels, while trending up, are still below the levels of activity we saw in the year earlier period. We believe that there are opportunities to see growing levels of new bookings on a quarter-to-quarter basis for the next several quarters. There are several drivers behind this anticipated trend. First, we expect T-Mobile to continue to accelerate their focus toward meeting their stated 5G coverage goals including upgrading the majority of their sites with either 2.5 gigahertz or 600 megahertz spectrum or both. Second, the upcoming C-band auction should see significant participation, and we expect we'll be a driver of increased activity starting sometime next year with both Verizon and AT&T, as the deployment of this spectrum will require new equipment at many of their existing macro sites. And third, we continue our constructive discussions with DISH and we anticipate that they will be actively engaged in building out a nationwide 5G network over a multi-year period. All of these factors should create an increasing domestic leasing environment as we move through next year, which will bode well for domestic organic growth for the following several years. Internationally, we saw slightly higher leasing activity levels than we saw in the first half of the year, signing up 47% of international revenue under new leases and 53% under amendments. Notwithstanding the slight increase in activity levels, we continue to see impacts in our Latin American and South African markets from the COVID-19 crisis. On the positive side, most of our international wireless customers have reported improved third quarter financial results sequentially, compared to the second quarter as lockdowns in their markets have started to lift. However, they've also reported material year-over-year CapEx reductions in the order of 10% to 25% as lockdowns have made network deployment difficult and they have prioritized cash. As a result, we expect international bookings may remain pressured in the fourth quarter and into early next year. On the bright side, some of our customers, such as America Movia, have discussed in their third quarter calls their future plans for increased, more normalized capital spending, which we believe will be a positive for us. Wireless continues to be critical to the access to the Internet in all of our international markets, and significant network investment is still needed throughout all of these markets. None, with the possible exception of certain parts of Canada, have as yet embarked on the type of 5G upgrade that we are starting to see here in the U.S., As COVID-19 conditions improve, we expect wireless capital spending in our international markets will improve considerably. Consistent with the uptick in our U.S. leasing activity, our services business has a strong quarter, seeing a material pickup in construction activity, particularly with T-Mobile. We also continue to control our cash SG&A costs very well. As a result, we again reported the highest tower cash flow and adjusted EBITDA margins in the industry, including an 84.3% domestic tower cash flow margin. We also were able to control our non-discretionary capital expenditures for the quarter, allowing us to again reduce our full-year outlook for this capex. And we were able to use available cash on hand to pay off and reset an out-of-the-money interest rate hedge. significantly reducing our future cash interest expense obligations for nearly the next five years. Our solid performance up and down the lines of the P&L allowed us to produce our highest quarterly AFFO per share ever. And while I'm hesitant to bring up this oldie but goldie, we will end 2020 just short of an annualized fourth quarter AFFO per share of ten dollars. If not for the significant negative FX movements experienced this year, which we believe were largely due to the relative strengthening of the U.S. dollar and Federal Reserve Bank policy in response to COVID, we actually would have made that 10 by 20 target we set out almost five years ago. If nothing else, I think this is really indicative of the strength and predictability of our business and our ability to manage it. In addition to our operating and financial results, we also had a solid border allocated capital. We purchased or put under contract a number of very high-quality tower assets. We built a number of towers across our international markets. We invested in the JackSnap data center, as we discussed on our last earnings call, a step in our long-term edge data center strategy focused on being ready to monetize and capitalize on eventual data center demand at our tower sites. We spent $300 million in the third and fourth quarters opportunistically repurchasing our stock, which will positively contribute to AFFO per share growth going forward, including this quarter. And we announced today our dividend at an amount which represents less than 20% of our third quarter and the midpoint of our projected fourth quarter AFFO per share. We anticipate that our expected increased AFFO generation will give us ample ability for material future increases in dividends while maintaining plenty of capital for continued portfolio growth and stock repurchases. Next quarter, in conjunction with the preparation of our 2021 outlook, we anticipate that our Board of Directors will be declaring a materially increased quarterly dividend, which, as is becoming our practice, will remain the same on a quarterly basis through the course of the year. From a balance sheet perspective, we've been able to continue to manage our leverage effectively, ending the third quarter at 7.0 times the level I'm very comfortable with. As I mentioned earlier, the debt capital markets have been very accommodative, and we've taken advantage of these opportunities several times this year. In the third quarter, we were able to refinance $1.2 billion of securitization notes, reducing our overall cost of debt, which today averages 3.1%. We have achieved an investment-grade cost of debt on a levered balance sheet, which, of course, when properly managed, greatly benefits our shareholders. We currently have no debt maturities until 2022, and we continue to have very high liquidity, including our fully available undrawn $1.25 billion revolver. The strength of our balance sheet continues to provide us with the flexibility and confidence to be opportunistic around investment opportunities and share repurchases while still being able to comfortably support and materially grow our dividend. We had another solid quarter in the third quarter. I want to again thank our team members and our customers for their contributions to our success, particularly during these challenging times. We look forward to a strong end to the year and sharing our results with you next quarter. And with that, Rich, we are now ready for questions. Certainly. Ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1 and 0 command. If you are using a speakerphone, we ask that you please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1 and 0 at this time. We will begin with the line of Phil Cusick with JP Morgan. Please go ahead.

Hey, guys.

Thanks a lot. So, Jeff, you discussed T-Mobile ramping and probably ramps further from the fourth quarter. Do you see signs that other carriers could be slowing down in the next year that would sort of net some of that growth out? I don't think materially. I think we will see a period of time, though, in 2021 where before we will see the highest levels of activity we expect, particularly with respect to the C-band, because that's going to take a little bit of time. But I don't know. I mean, of course, anything can happen. But I don't see signs today that T-Mobile is going one way and the other two are going in the opposite direction. That's great. And then what momentum do you see in the deployment of MIMO antennas? This is something we've been talking about for a couple of years. Does that wait for CBAN to be deployed as well, or are you seeing that happen today? Well, we're seeing it happen today because we're seeing 2.5 gigahertz spectrum being deployed today. And, I mean, that is the – preferred way, my understanding. That is the preferred way and the most efficient way to get the most out of the mid-band spectrum for 5G. That makes sense. And one more, if I can. What do you see in activity levels in Brazil, and how does that compare to what you expected when you bought more sites in December? Thank you. Well, we didn't see COVID. And we did not see the level of the FX adjustment, which I think is in large part due. But what we have seen is a steady currency, constant currency adjusted, very good demand fill for those assets. And we think over time and with some improvement in those COVID conditions, we're going to see tremendous improvement in the numbers coming out of Brazil. But I would certainly be telling you, Fib, if we foresaw everything that has gone on in Brazil this year back in December. I don't think anybody could say that, but... but it does sound like there's still good demand in that market despite COVID. Yeah, there is. I mean, if you were to strip back, I mean, if you look at the demand and the growth rates that Brendan talked about and you see in our numbers on a cost of currency basis, we're very pleased with where things are. And that's still on a on a year in an environment where these customers have pulled back materially in their capex in response to COVID. And they basically said that, look, this is temporary. We're going to need to spend more money coming out of this thing. So we're very – we continue to be very, very happy with our Brazilian operations. Great. All right, we'll now go to the line of Simon Flannery with Morgan Stanley. Please go ahead.