SBA Communications Corporation (SBAC) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the SBA second quarter earnings call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions; instructions will be given at that time. (Operator instructions) As a reminder, today's call is being recorded. With that being said, I will turn the conference now over to the Director of Finance, Mr. Mark DeRussy. Please go ahead.

Good morning and thank you for joining us for SBA second quarter 2012 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 in this call is forward-looking including but not limited to any guidance for 2012 and beyond. These forward-looking statements maybe affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in last night’s press release and our SEC filings which documents are publicly available. These factors and others have affected historical results, may affect future results and may cause future results to differ materially from those expressed in any forward-looking statement we may make. Our statements are as of today, August 3, 2012 and we have no obligation to update any forward-looking statement we may make. Our comments will include non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and other information required by Regulation G has been posted on our website, www.sbasite.com. With that, I will it over to Brendan to comment on our second quarter results.

Thank you, Mark. Good morning everyone. As you saw from our press release last night, our second financial and operational results were excellent. We exceeded the high end of our guidance across all of our most important financial metrics including leasing revenue Tower cash flow, adjusted EBITDA and AFFO. Total revenues were $229.1 million, up 34% of the year earlier period. Site leasing revenues for the second quarter were $203.6 million or a 35.6% increase over the second quarter of 2011. Our leasing revenue growth was driven by organic growth and portfolio growth, including the impact of the Mobilitie acquisition which closed on April 2nd. The vast majority of our site leasing revenue comes from the US and its territories, with approximately 5.7% of total leasing revenue coming from international operations. Site leasing segment operating profit was a $158.8 million or an increase of 34.5% over the second quarter of 2011. Site leasing contributed 97.5% of our total segment operating profit. Tower cash flow for the second quarter of 2012 was $152.3 million or a 28.4% increase over the year earlier period. Tower cash flow margin was 79.3% compared to 80.1% in the year earlier period. Margins were slightly impacted by the addition of the less mature Mobilitie portfolio and are expected to be similarly impacted by the TowerCo acquisition and then resume their growth thereafter. We continue to experience strong leasing demand both domestically and internationally. Amendments which were predominantly from AT&T, Verizon and Sprint continue to be numerous and contributed approximately 80% of US leasing revenue added in the quarter. The big four US carriers contributed approximately 0.75 of our consolidated incremental leasing activity in the quarter. We have a solid leasing backlog and expect that the third quarter will be another strong one in terms of customer…

Thanks Brendan. SBA entered the second quarter with $4.1 billion of total debt. We have cash and cash equivalents, short-term restricted cash and short-term investments of $109 million resulting in net debt of $4.0 billion. Our net debt to annualized adjusted EBITDA leverage ratio was seven times. Our second quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 3.3 times. We were very active in the capital markets during and subsequent to the second quarter. Several of these second quarter events we've already reported and discussed. In April, we issued 5.25 million shares of comment stock to fund the equity portion of the Mobilitie transaction. The cash portion of the purchase price was funded with the $400 million bridge loan and the balance from a draw on our revolver. Also in April, we redeemed a $131 million of principal at each of our 8% and 8.25% senior notes with proceeds from an equity offer and equity offering in the first quarter. In May, we obtained a new five year $200 million term loan which was issued at par and bears interest at LIBOR plus a margin that ranges from 2% to 2.5%. The proceeds from this loan we used to pay down announced outstanding under our revolver. Simultaneous with the term loan A we amended our credit facility to increase the committed availability under our revolver to $700 million and to extend the maturity date out until May of 2017. In July, we issued $800 million of senior notes due 2020. The notes were issued at par and bear interest at a rate of 5.75%. Proceeds from these offering were used in part to repay the full Mobilitie bridge loan and to repay all amounts barred under our revolver. Also in July we priced…

Thanks Mark and good morning everyone. Thank you for joining us. As you have heard we had an excellent second quarter, one of the best that I can remember. All of the factors that materially contribute to our financial results came together positively in the second quarter and ahead of our expectations. Probably more exciting is our belief that these factors will continue to combine positively for the rest of 2012 and into 2013. We have had a number of moving parts this year that may make it a challenge to fully appreciate what is going on at SBA, but it really boils down to four key factors that have combined to drive our success. Strong customer activity both domestically and internationally, excellent operational performance across all lines of our business, material portfolio growth with quality assets at attractive prices and successful opportunistic financings executed on every attractive terms. These four areas which have always been the keys to our success came together in the second quarter in such a way as to permit SBA to post superior growth in Tower cash flow, adjusted EBITDA and particularly AFFO per share. We expect these four areas will continue to combine together in a positive way for us in the remainder of 2012 and as we move into 2013. I am going to focus the rest of my comments on several SBA specific points within these four areas which I believe will provide you not only with better understanding of the drivers to our second quarter success but also why we are so excited about prospects for the rest of the year. Organic growth was and continuous very strong, driven in the second quarter by AT&T, Verizon, Sprint and our international assets. Much commentary about strong wireless CapEx and network upgrades in…

(Operator Instructions) And a little one from Jonathan Atkin with RBC Capital Markets.

A couple of questions, first on the DAS assets that you are continuing to operate would you look to may be expand that or may be find another purchaser for those assets and then regard to just the traditional macro business ending the quarter I am interested in what kind of link order of lease up pace you are seeing amongst AT&T Verizon and Sprint.

On the DAS assets Jon we are probably going to keep them and work to improve their efficiencies, so we got to work with ExteNet on that and at some point I would expect this to sell those assets to ExteNet as well. In terms of the rank order, I think AT&T was number one, but not by a whole lot over Verizon right and then Sprint was third, but all in very material amounts of activity And I think that’s going to continue to roll through the rest of the year with the possible exception that Sprint may rise in the rankings as the Network Vision amendments really start to accelerate.

And then with regard to the mobility integration that also respectively to TowerCo, can you just remind us what are the main operational and back office challenges involved in holding in those assets?

Well a lot of it is IT related and movements of data files and making sure that data that comes over is organized the way that we run our company and that process is well under way. There will be some additional field operations, people added. We tend to run that side of our business based on a certain tower count in the geography. Obviously our tower counts are going up quite a bit and we will probably add a few more sales people around those assets. But those positions are already in the process of being filled and things have gone smoothly so far and we expect that to continue.

Our next question is from the line of Phil Cusick with JPMorgan. Please go ahead.

Can I just follow up on the (inaudible) Chicago why in extent of its home market, are you holding on to these. Is there an efficiency problem that you can better improve than they can?

No, we just can’t agree at this point on pricing terms for those assets?

Okay, so as they develop it and everybody will know what's going on?

Yes.

Okay, and then, can you, I want to make sure I heard this right, less than 25% of your tier Verizon sites has been amended so far. Is that right?

No. Combined all of our AT&T, Verizon and Sprint sites, less than 25% of those and in rank order who has amended the most is Verizon, followed by AT&T and then Sprint in third place.

Got it and then as you talked to T-Mobile, so far you sort of avoided some of the MLAs people have done. Are you more inclined to do this MLA with T-Mobile or is not high on your priority list?

All those are high on our priority list for the right terms and again we don’t have a religious opposition to MLAs, it's all about what's best for SBA, both today, looking out the future financially. So we're open and in dialog and you know, will take some resolution, you know, happens here in the not too distant future.

We will go to Ric Prentiss with Raymond James. Please go ahead.

[Joe Cusick] there. First, a couple of things, on the T-Mobile MLA possibly in the not so distant future, we've seen some people starting to look at MLAs and try and protect from wireless industry consolidation by getting long-term lease extension. How would you kind of frame your thoughts about revenue upside versus churns expectation and wireless consolidation?

Yeah, I think it’s a balance Rick. I mean we would find more and longer-term, both attractive.

Okay, and Jeff to Phil’s question on the AT&T plus Verizon plus Sprint under 25% amount. I assume Sprint excludes the item stuff, so its truly T plus Verizon plus just the CDMA side of Sprint, that's in that number.

Correct.

And then on the financing, you've done a really good job. Mark’s been really busy as you all have in getting the financings done here in the last few months. When you bring in the TowerCo towers, is there a possibility that you could securitize some of those at pretty attractive rates and what would be kind of the trigger to look at doing that.

Yeah, I mean we do intend to continue to access the securitization market. I mean one of the things that we did is we kind of got our unsecured higher costing debt refinancing out of the way with the 5.75% senior notes although on an absolute basis that was a wonderful rate. So the future financings post TowerCo, we positioned to be to fit within the secured buckets that we look to fill and you can assume that some of that will be in the CMBS market. Well, I don't know if you can assume it or not but that's certainly our intent. The TowerCo assets are in great shape. We are actually taking steps today, working with TowerCo to begin securitization readiness stake from those assets and we feel pretty good about our ability to tap that market again post transaction.

Great, and the promissory note for the DAS business sale to ExteNet, what kind of form is that going to take and how should we think about how that affects your balance sheet numbers?

Well, it's not that big, just $25 million and it accrues interest to 10% and it’s got some healthy terms for us which are designed to give ExteNet the incentive to not leave it out there a whole long time.

The next question is from David Barden with Bank of America. Please go ahead.

Just two, if I could. The first maybe Brendan, could you just tie out the change in the midpoint guidance for us in the revenue and EBITDA; I think that the retention of the DAS business is going to be probably about a little more than half of the revenue change, a little less than half of the EBITDA change from last quarter to this quarter and then the rest of it I guess would be some combination of organic growth and new tower build etcetera. So if you could give us some better breakdown that will be helpful? And then Jeff I think you said during your remarks that said because you are going to end the year at around 7.7 times leverage roughly in line with you debt targets that you are going to be ready to reinvest the capital again into the market. Could you elaborate a little bit, did you mean, starting to go look again at more aggressive portfolio build or did you mean coming back to buyback more stock or both, it would be great? Thanks.

On the guidance change, what you said is basically right. We are adding to our full year guidance about $5.4 million to revenue in Tower cash flow and EBITDA from the inclusion of the DAS assets that we are keeping, that’s about $1.8 million per quarter for the three quarters; obviously we already got that benefit in Q2 and then the remaining $3.6 million for the second half of the year. The balance of the increase is primarily from organic growth, so if you look at site leasing revenue we have increased the midpoint there $9 million less the $5.4 million from the DAS, the balance of that, the $3.6 million is all organic growth, because we’ve signed a very little in terms of new acquisitions. And the same would apply if we got out of Tower cash flow and EBITDA obviously, we did a little bit better on the EBITDA line in Q2, in part because we have a better than expected services quarter as well. But all that baked into increase, so you have got $12.5 million on EBITDA, only about $5.5 million of that is from DAS, the rest is all organic growth.

And on the future investment question David, once we get back to the high end and working our way down on the labyrinth, the high end of our target range of 7.5 times and below, we will once again turn our thinking back to capital investment which has always been a choice for us between portfolio growth, which is our bias and then stock repurchases if those look to be better the old spin or portfolio growth opportunities. So no change in how we will think about things; just really a question of when we get back to that level and I think it’s now going to be sooner than we thought given how well we performed in the second quarter and what our expectations are for the second half of the year.

And we will go to Jonathan Schildkraut with Evercore Partners. Please go ahead.

First on the ExteNet sale, the sale of DAS assets rather to ExteNet; it looks like you sold it at about 14.5 times Tower cash flow. This might be a good opportunity for you guys to give us a sense as to some of that unrecognized value in terms of your DAS investment, now 14.5 times Tower cash flow seems like a good number? Secondly, in terms of your investment there is there a reason that you chose to take cash plus note as opposed to an increase percentage of ownership? And then I would like to return with a different line of questions. Thanks.

Well, the formal consideration was heavily negotiated in terms of their desire for additional equity issues, our desire for good financial return, where the senior lenders of ExteNet would want to be, so all those things; now even though we’re been already investor there, you can assume it was a robust conversation. And in terms of the value, we’ve never really disclosed how ExteNet is doing on how to start that now, although I will say that based on those multiples, our value of our ExteNet investment is above what we’re carrying in on [that approach].

One question around the conversations with T-Mobile, you know, in the past the company has talked about a desire to potentially address the anchor tenant arrangement on the Mobilitie assets; is it fair to assume that that has entered part of the conversation?

Yeah, it is; although it may or may not be addressed as part of a holistic agreement with T-Mobile, it’s still on the table; but there is a lot of built up, first of all we’ve been a little busy this quarter, T-Mobile has been a little busy, so you know, we have all those opportunities still ahead.

And we’ll go to James Ratcliffe with Barclays. Please go ahead.

Any comment on AT&T’s specially a next wave in the assets from Comcast and Verizon and particularly in long-term, but if they want to deploy those WCS frequencies, what sort of amendment activity would be necessary or would those be covered under typically existing amendments? Thanks.

It would all come down to the issue of whether or not new equipment was necessary to transmit that 2.3 GHz level and I don't know the answer yet on that change. That’s pretty new news for us and we're just starting to understand that but it becomes a fairly simple answer to your question. If new equipment is required than it would be necessary for AT&T to come back and talk with us. If not, they would not have to.

And we will go to Jason Armstrong with Goldman Sachs. Please go ahead

Maybe first question just on amendment, obviously very strong activity. You talked about being sort of [80%] incremental activity here and then still lots of room to run given the 25% debt. How are you feeling about the outlook for cell-splitting and kind of where we are and the LTE amendment versus eventual cell-splitting cycle? And then maybe just second question on T-Mobile assets Tower sale, I know Jeff you talked in the past about you’ve done two relatively large deals this year that seemingly put you out of the market for the T-Mobile Towers but with your comments about the leverage profile and being well into consider stuff sort of beginning of next year when you had to 7.5 churns, you know, that’s portfolio and a deal that would obviously take sometime to close. Are you signaling here that you may be willing to look at those assets at this point going forward? Thanks.

I will take the last one first. You should not expect any material big new deals for us announced this year while we continue to work back to our target leverage rate. And in terms of the amendments, you had me so focused on the second one Jason what was the amendment question?

The question was really more of a cell-splitting question, obviously we are sort of big amendment cycle at this point, where do you think on the cell-splitting side?

We are seeing from AT&T and Verizon some new tendencies which gives us reason to continue to believe in our base belief which is the driver behind Mobilitie and TowerCo that once the LTE initial roll out is completed there will be capacity infill in cell-splitting. It will be, we will take a variety of forms both macro sites and small cells. There will be plenty of macro sites and we are already seeing some examples where capacity needs are emerging now and are being addressed with new tendencies.

The next question is from Simon Flannery with Morgan Stanley.

If you can come back to the future expansion in 2013 I think Jeff in the past you have talked about 5% to 10% portfolio growth annually. Obviously, you have done a lot more than that this year. Is that the sort of thing that you know all other things being equal you should think about for ’13 and ’14 as your sort of your base line target and maybe you can just talk about international versus domestic in terms of areas of focus? Thanks.

We will provide some more color on that when we give our full year guidance in our next call Simon. I mean we are getting larger. We will continue to invest. What will be the governing factor and this is how we come up with the statements that we have in about 5% to 10% portfolio growth. We will be where we want to continue to leverage the business. And if it continues to be in the 7 to 7.5 times range which I feel is appropriate today when most of that investment can go towards portfolio growth with good growth assets. From that we will fall out a number of towers. And that's kind of how we will talk about it in, so I can't really speak to the five to 10 today but this exactly how we will calculate and speak to that issue. And in terms of international versus domestic, we are going to continue look in all those areas, we are having great success both domestically and internationally with lease up and customer activity. So we will take a wide view of where our additional investments will go.

And next from the line of Colby Synesael with Cowen. Please go ahead.

On the TowerCo deal you guys had noted that when that closes it should be immediately AFFO accretive and obviously there's some debt financing that you've not done to make so you guys could get that done. Just curious on the interest rates that you've received on that debt, is that in line with what you are expecting and what are the implications then for the accretion analysis you may have given us initially and what you are expecting now. And then the second question has to do with the 25% of existing sites that you noted who have now been upgraded to LTE for I guess what AT&T, Sprint and Verizon. Is there a direct correlation and in other words implying then that between going to a higher number and actually what the revenue growth could be because the MLA is out of I think that case of the MLA that you signed with those guys that as you actually start to expand to more LTE on those towers, it might not necessarily be a direct correlation towards the revenue growth could be?

On the TowerCo debt accretion we have done better in our two recent financings than we thought. We actually thought we would do a blend of around 5% between high yields and secured in actuality it was 4.1%. So we did a lot better and actually of course that should have a benefit to the TowerCo accretion, that you mentioned something about having a lined up some more debt, we really don’t have anymore debts lined up. We have a committed bridge facility in place that bears interested LIBOR plus 350. So when roll it all together our matched debt against that transaction will be well below 5%. And in terms of the revenue growth, we only have MLA with Sprint and as we sign up amendments, we've straight lined the revenue so it is all in there and that was the reason why we had a GAAP revenue pick up, but we only recognized the AFFO impact when we actually begin to cash revenue recognition. So we actually do have a lot of additional runway based on where we think that 25 or its actually, its below 25% where we think that number is added, as you look at the impact on cash AFFO.

Our next question is from Chris Larson with Piper Jaffray. Please go ahead.

I wanted to come back to a couple of questions. One was the amendments and I wonder if you could just comment, as you sign these amendments, are you extending out the total lease of those, and then if you could give us a sense for the weighted average lease length for the big four carriers. And then just on that question you just answered on Sprint MLA, is that to imply that -- the question is there additional upside on a GAAP basis for Sprint on the MLA basis or are they already in that 25% or are they greater than that now?

Okay, yes Chris there is with regard to the straight line, there is an upside to the GAAP revenue for Sprint based on timing of when they actually commence those amendments because while it’s in our numbers today, it’s in there at the latest possible date if they are allowed to commence on such that to the extent that they commence some earlier, you would have a pick up. Although albeit a smaller pick up then obviously if it weren’t there at all. And then secondarily to the extent that they are to sign amendments at greater rates than the minimum that they are obligated to that obviously also has a positive impact and we are seeing some of that in the early going at this point.

And on the MLA versus lease extension question Chris, we have again only signed an MLA with Sprint and in connection with that, we did extend leases and I think our average with Sprint CDMA sites is around nine years now. The other three guys average three to four years and they run -- their leases run in the traditional five years with five five-year renewal option cycle.

And we will go to Kevin Smithen with Macquarie. Please go ahead.

In the outlook section of your press release, it identifies a company intent to spend additional capital in 2012 on acquiring revenue producing assets not yet identified or under contract, the impact of which is not reflecting the 2012 guidance. Basically what you said on the call, there seems to be no major deals, but are there tuck-in deals that you are expecting that could be material in terms of revenue developments this year into next year?

Yeah, there will be additional deals, Kevin. I don't know that, that will be material. I suspect they won't, but we will continue to stay active in the mom and pop market and continue. You know we have some additional capital that were interested and prepared to spend, but nothing material while we close TowerCo and work leverage back down to our target range.

Also, your international site revenue is 5.7% and that’s pre-TowerCo, you know, given the strong dollar rate now and the cheap borrowing costs, should we expect to see, you guys more aggressive on in Lat Am and internationally in 2013?

You know, we like market a lot and what we've done so far in Central America is all dollar denominated. So we like that too. So I think the answer is yes. I mean we like those markets. There are other markets that I think we could like as well, but that’s certainly an area in which we are interested in finding good additional investment.

And 10% is still your long-term goal for international revenue mix?

It is and again that was really more of a goal to ourselves, you know, something to shoot for. You know, our international business is growing a lot actually on an organic basis, faster than our US business but with both mobility and TowerCo, it's kind of – it's been pushed back a little bit on a pro forma basis. But, yeah that’s still a number that we’re interested in getting to.

Our next question is from Imari Love with Morningstar.

The augmentation CapEx trend, just wanted to get a feel for how you see those lining up in the second half versus the first. They have been running low relative to 2011. Other question was of the 19 acquired towers since the end of the quarter, and you said you have three more that you agreed to purchase. Where are the locations on those?

On the 19, I'm embarrassed to say I don't know exactly where they are. They are US towers spread around the country.

That's what I was asking US versus international.

Yes, they are US towers. And on location CapEx trends I think, Brendan correct me if you see it differently, but I think the trends are good. We don't see any material increase there and particularly keep in mind that we report gross numbers but actually have over the last couple of years had more than 50% of that cost reimbursed to us by the tenants whose activity requires the augmentation.

Yeah, I will agree with that. I mean we are seeing more of our sites being touched because of the greater amount of amendments and as a result in some cases we are seeing a little bit of an uptick generally in augmentation CapEx to accommodate the additional equipment. But we are having greater success in terms of recovering those funds from the carriers that are actually causing those augmentation. So on a net basis we are actually doing better.

And to the presenters, there are no further questions in queue.

Great, I want to thank everyone for joining us today and we look forward to speaking with you next time. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.