SBA Communications Corp at Morgan Stanley Technology, Media & Telecom Conference

Mar 02, 2016 AM EST
SBAC.OQ - SBA Communications Corp
SBA Communications Corp at Morgan Stanley Technology, Media & Telecom Conference
Mar 02, 2016 / 08:45PM GMT 

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Corporate Participants
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   *  Jeff Stoops
      SBA Communications Corporation - President & CEO

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Conference Call Participants
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   *  Simon Flannery
      Morgan Stanley - Analyst

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Presentation
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 Simon Flannery,  Morgan Stanley - Analyst   [1]
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 Good afternoon, everybody. At this conference so far we're hearing a lot about 5G. We're hearing a lot about small cells. We're hearing a lot about video over mobile. And it's a great segue into SBA Communications. And welcome Jeff Stoops, CEO.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [2]
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 Thanks, Simon. Happy to be here.

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 Simon Flannery,  Morgan Stanley - Analyst   [3]
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 Let me just start by saying please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/research disclosures, or at the registration desk.

 So, welcome, Jeff. Perhaps we could kick off just -- you recently had your earnings. You put out some guidance, updated your guidance, for 2016. So, can you talk about the priorities and what we should be looking for?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [4]
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 Yes. The priorities for us are continued strong execution, execute well on customer demand, which continues to be good and we believe will grow as we move through the year.

 As it always is, capital allocation is a priority. We believe a key component of our value creation over the years has been the way we capitalize and leverage the business. We continue to believe that a 7 to 7.5 times is the appropriate range in today's market interest rate environment, given our organic growth and other factors.

 So that will continuously create investment capacity for us. And we will look, as we always do first, to portfolio growth when we can buy assets at the right price with the right growth characteristics. And when we can't fully deploy all of our capital there, which was the case in 2015, we'll look to do stock repurchases. And today, with our stock trading at what I believe are very depressed levels, it's a very attractive alternative for us compared to other investments.

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 Simon Flannery,  Morgan Stanley - Analyst   [5]
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 Okay, great. It feels like it's sort of been a perfect storm for the tower companies in a way. There was a fear last year of rising interest rates. We had currency headwinds. We've had IDen churn, decommissioning. We're at kind of quieter period for a couple of the carriers. And the growth rate's decelerated.

 And I guess what investors are really trying to get their arms around is, when do we start to see that acceleration, both in terms of reported numbers, but also in terms of organic numbers. Do you think we're at this trough and we'll start to see -- you talked about customer demand through the year. Do you have some good visibility into the numbers (multiple speakers)?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [6]
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 We have fair visibility, as we always have, for about three to six months. And things are looking up and picking up. And this is really ahead of AWS-3 and some other deployments which we know are coming later this year, or certainly 2017/2018.

 I think last year we reported US same-tower revenue growth on a gross basis as we exited Q4 of 7.5%. That feels very low for us. So what I've characterized last year's and starting out this year's activity levels, if you think about an eight-cylinder engine, we're running on about five of eight.

 And there's been many periods of time where that has been the case. But it's cyclical in terms of the spend. And we believe, for all the reasons that things have always picked up from those levels, that things will continue to pick up as we move through this year and into next.

 So we are looking forward to increased, and expecting increased, US activity. I certainly won't promise and actually don't expect that it will be back to the levels of 2013 and 2014, where we saw activity levels well beyond our highest expectations. But last year was a below-average year, fairly well below average. And looking back on history and averaging things out and looking at wireless demand and the need for infrastructure to support that demand, we feel very good about the future.

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 Simon Flannery,  Morgan Stanley - Analyst   [7]
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 And can you go back to prior periods where you were on, say, four or five cylinders? How long does that period last where one, two carriers are kind of taking a breather and just sort of reloading, or maybe running -- grooming their network, running it a little bit harder?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [8]
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 Somewhere between a year or two would be -- that would be the most that I can -- now, there are changes. And sometimes one carrier will pick up, another will drop off. So you may have the same result, but from entirely different drivers.

 It was very unusual to have the period of 2013 and 2014 where we were truly running on eight, and sometimes it felt like nine, but eight cylinders.

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 Simon Flannery,  Morgan Stanley - Analyst   [9]
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 So as we think about the AWS-3, the WCS 2.5, how does that impact your business? There's a lot of kind of concerns that some of it might just involve a swap-out of equipment. But how does SBA see the revenue opportunity from some of those deployments?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [10]
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 Yes, we're seeing a lot of re-farming today where there's swap-outs and changes. And the way we price our product and the relationship we have with our customers is very straightforward. If they want to do something at the tower site which uses up additional capacity, we have the right in every case, and would expect, to get paid something for that. And that's very logical. They understand that. We understand that. It's been a very smooth way of doing business together.

 So, in those cases where they swap out one radio head and one antenna and there's no additional size increase or no additional [lend] load, it's most likely that we would allow that to happen for no additional charge -- happy to do it, happy to see them improve their networks.

 That's not really been the case, though, over history. The size of the antennas, moving the radios up on the tower from the ground, all that has taken more and more tower load. And that's really what we sell and that's what our customers expect.

 On our earnings call we talked about the number of amendments that we did last year in the US. And that number was about 5,500 on a base of about 15,000 towers. Less than 10% of those involved zero increases. So, 90%-plus had some type of equipment change that resulted in a higher load, that resulted in a higher rent.

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 Simon Flannery,  Morgan Stanley - Analyst   [11]
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 There's a lot of noise in the marketplace about the carriers trying to push back on escalators and on pricing generally. And I think this came up on some of the calls. But how would you characterize the pricing environment and those discussions?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [12]
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 I think they're not much different than they have been historically. Our customers do a great job of negotiating for their interests, and we do the same for our interests and our shareholders.

 I mean, it would be a mistake to think that our customers just woke up and decided that they'd rather get things for less. That's been that way ever since we got into this business. And we find the happy medium where -- I mean, the beauty of our business in that, and why we have such a good relationship, is this is a demand-driven product. They come to us and it's not a forced sale or anything like that. They're of course free to take a site or not take a site.

 So when they come to us, they need it. They know that they need it. And we find the right accommodation. It's worked for 20 years and I think it's going to continue to work.

 I think maybe some of what you're hearing is the realization that the future will continue to be equipment intensive and that, to keep moving down the track just as we've seen for the last 20 years, that equipment intensities continue to grow.

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 Simon Flannery,  Morgan Stanley - Analyst   [13]
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 But it seems like AT&T reintroduced unlimited. Now they're bringing out an over-the-top video product. T-Mobile has BingeOn. It seems like a lot of these developments are just going to drive more traffic on the network for the next few years.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [14]
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 You know, it certainly seems that way to us. We look at things like the Cisco report and we look at the video offerings which, of course, take up more spectrum. And networks have limited capacity. And the spectrum that's available today and is yet to be made available is not enough to satisfy the demand without a degradation of service quality unless there's more infrastructure invested.

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 Simon Flannery,  Morgan Stanley - Analyst   [15]
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 And when we look at the individual tower companies I think it's tough for the investor to sort of compare MLAs across -- obviously we don't get the same disclosure (inaudible). But can you just again talk about your philosophy, where you'd rather get paid by activity perhaps than sort of locking somebody in to kind of a big bucket of usage, so that should enable you to get significant leverage as that activity returns? What's the (multiple speakers)?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [16]
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 Well, we don't have any MLAs that would give us revenue unless there was directly -- we don't have any MLAs, basically, but none that would, as some of our peers have, would create revenue where there's no activity and then somehow cap revenue where there's a lot of activity.

 So we like that approach. It's consistent with the philosophy I just laid out that if you're adding equipment that increases the load on our towers, we should be compensated for that. And if you're not, fine, and we're happy to accommodate that.

 We think, because of what I just said about our belief that wireless will continue to grow and more infrastructure will continue to be needed, we think the pay-as-you-go and pay-for-only-what-you-use model is the right way. And we think it's served us very well.

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 Simon Flannery,  Morgan Stanley - Analyst   [17]
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 I could just imagine those 600 megahertz antennas are going to be pretty big.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [18]
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 I think they'll be very big. And I think that particular spectrum, given the more suburban and highway corridor nature of our portfolio, I think that's going to work out very well for us. We're looking forward to that.

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 Simon Flannery,  Morgan Stanley - Analyst   [19]
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 Well, I think there's a 39-month re-banding, but I've certainly heard some of the carriers saying -- as we found with AWS spectrum, there are ways to -- and 700 -- we can get this to market faster, perhaps, than --

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [20]
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 We've got some aggressive customers who are ready to go, and we hope they're right.

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 Simon Flannery,  Morgan Stanley - Analyst   [21]
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 You talk about the suburban footprint, the highways. If I'm a carrier and I want to cover a particular -- how much of your portfolio is in an area where there's really no alternative? You know, there was that ReCode article about Sprint. But where there's really no choice in terms of another facility within, I don't know, a quarter mile, or half mile.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [22]
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 Oh, well over 90%.

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 Simon Flannery,  Morgan Stanley - Analyst   [23]
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 Yes.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [24]
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 And then in the area -- I mean, we are in areas where the only real technological architecture that works is macro sites.

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 Simon Flannery,  Morgan Stanley - Analyst   [25]
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 Yes. And you're fiber-fed already, so.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [26]
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 For the most part. Not entirely, but our customers and others continue to run fiber to the towers, so every year we get a little more fiber-connected there.

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 Simon Flannery,  Morgan Stanley - Analyst   [27]
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 So it's just really hard to put up an alternative structure, even if you could get the zoning for it.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [28]
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 Well, if you could get the zoning -- the carriers, our customers, have really spent a lot of money on -- I think last year's results, even in what was a down year, the fact that over 33% of our macro site were amended in some way really demonstrates the importance. It's really the only way for them to have a true network backbone.

 I mean, particularly when you think about things like power, generators, E-911 reliability, FCC requirements. I mean, carriers think about -- how are we going to make sure we're on the air? It's really the macro network, because that's the only thing that they can really bolster and support and strengthen.

 So, we like where we are and we think the next 20 years are going to be as good as the last 20, in terms of the growth and our ability to participate in the growth of wireless.

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 Simon Flannery,  Morgan Stanley - Analyst   [29]
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 T-Mobile is talking about their progress on VoLTE, 50% of calls now on VoLTE, but how the others are far behind. I don't know how much visibility you have into this, but do you get the sense that there's still a lot of work to do to densify in certain areas to get the performance of VoLTE to where it can be deployed more broadly across the carrier networks and there's an opportunity there for more amendments?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [30]
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 Yes. My sense is yes, because a lot of the amendments that we are doing now and did last year were re-farming of 2G and 3G spectrum to LTE, which is what they're all doing to move to VoLTE. We don't really have any way of gauging and reporting who's furthest ahead. But it's clearly an activity driver for us.

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 Simon Flannery,  Morgan Stanley - Analyst   [31]
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 Yes. So, as you look out, it feels like the medium to long-term drivers are becoming a little bit more visible than they have been for awhile. 5G is in every presentation today. We have FirstNet RFPs under way. The 600 we were just talking about. Dish has some build deadlines as well around their spectrum. So how do you think about all those? What are the ones where you sort of see hitting first?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [32]
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 Well, I think AWS-3 will hit first. I think FirstNet, assuming it continues to move at its current path and direction, should probably provide some revenue for our industry before the 600 megahertz. I'm not quite sure where the Dish spectrum is going to fall in terms of its deployment. Obviously, at some point it needs to be deployed.

 And that all really supports our very long-term positive view about the industry. I mean, the billions of dollars that have gone in, and will go in, to spectrum that doesn't really earn any return until it's deployed. In my mind, and perhaps we're oversimplifying things, but it really means that we're going to have steady growth for many, many years to come.

 We obviously believe that because we're active repurchasers of our stock.

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 Simon Flannery,  Morgan Stanley - Analyst   [33]
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 Of course. So, we spent some time on US. Maybe we'll just touch on international. You've invested quite a bit in international over the last few years. Where are you and the Board in terms of what percentage of your business you want international to be three, five years down the road?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [34]
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 We have publicly talked about a self-imposed limit of 25% to 30% of our site leasing revenue being denominated in other than US dollars. Today that's about 10%, with the vast majority of that being in Brazil. So we have a lot of room left to go. I don't know that we'll ever necessarily get to that goal. We're going to look for the right opportunities, the right risk profiles.

 And the real driver for that is we believe that our value creation approach, which is to be a leveraged capital appreciation story for our investors, really is best served by relying on the US debt markets, so funding in US dollars, maintaining and taking advantage of the low interest rates.

 But to run that strategy and minimize risk, you have to make sure that really all of your repayment refinancing is there in US dollars. So essentially we don't rely on any non-US-dollar denominated revenue or EBITDA to service our debt, refinance our debt, or anything like that.

 So if you were to expand that you would start to create some tension with that dynamic. You'd either have to bring leverage down or you'd have to fund in local currencies, which could work if the rates were good enough. And in a lot of the emerging markets where we think the growth is going to be the highest, the ability to cheaply source in local currency is not really there.

 So we watch all that carefully. There's an algorithm that we kind of have that says this is where we are willing to go or not willing to go.

 So I would say we have some more room for international investment, but it will not be more than what I just stated may never get to actually those levels.

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 Simon Flannery,  Morgan Stanley - Analyst   [35]
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 I think you mentioned on your call you're starting to see some US opportunities as well in terms of M&A.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [36]
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 Yes. There are always plenty of US opportunities. It was really just a question of price. So we stepped back from a lot of acquisitions in the US that we could have done. We'd still prefer portfolio growth to stock repurchases. We would perhaps even pay a turn or two higher to get a good growth asset that grows our EBITDA line and grows our financeable base.

 But we won't pay eight times more, which is some of the -- I mean the bid/ask got as high as that in terms of looking at our own stock. And these are for assets that in some cases weren't as good as our own portfolio. So that's where we kind of make the capital allocation decisions.

 So, if we could spend all of our money on great growth assets at the right price, that's what we'd do.

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 Simon Flannery,  Morgan Stanley - Analyst   [37]
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 So obviously there's a lot of turmoil economically in Brazil right now. But how's the operational performance of those assets?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [38]
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 It's been good. It's been well ahead of plan, and we're very pleased with all that. Unfortunately, the gains that we had made operationally on a translation basis have been wiped out by the declines in the real.

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 Simon Flannery,  Morgan Stanley - Analyst   [39]
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 But you see some good long-term potential there?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [40]
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 The business is cranking along pretty well in a economy that is clearly not running on all cylinders. And we're losing some percentage of growth there. I don't know whether it's 1%, 2%, 3% that I believe we would get in a healthier Brazilian economy. We're still pleased with what we have. And I think we're positioning ourselves so that when the currency stabilizes and turns, which we believe it will, of course, one day -- it always does -- that we're going to have a very good result from that.

 We are generating a lot of cash in Brazil, which we're keeping in the country and building new towers and buying towers and not -- we haven't put any new money from the US, or added to our debt kind of calculation in US-dollar-denominated debt and we're generating a lot of funds there now that should satisfy all of our growth. And it'll be pretty good growth for years to come.

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 Simon Flannery,  Morgan Stanley - Analyst   [41]
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 And a word on Central America?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [42]
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 Central America has been great. Central America, all of our businesses are denominated in US dollars. So we don't have any of the FX issues that are detracting from the Brazilian story. And growth has been higher than expected and costs have been lower.

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 Simon Flannery,  Morgan Stanley - Analyst   [43]
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 Great. So you mentioned the balance sheet a couple of times. I think your leverage ticked up, something like 7.7, so you have been buying back stock. Is your goal to get that down into the 7, 7.5 by the end of the year? Is that the philosophy there?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [44]
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 Yes. That would be our goal. I mean, we may stay where we are a couple quarters to take advantage of a very depressed stock, which is why we're above the 7.5 [currents]. We have plenty of additional capacity. We have additional ratings capacity. But I don't think that we would take it up much higher, just even if we could use that to buy more stock -- which we could.

 But we take a very long-term view of this and we want to basically keep the spirit of the relationship that we have with our bondholders, which is a very, very good relationship.

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 Simon Flannery,  Morgan Stanley - Analyst   [45]
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 And any updated thoughts on timing of a REIT conversion on your NOLs?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [46]
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 Yes, we're still a couple years away. And our main focus now, from running out of NOLs that would otherwise trigger our desire to make that tax election -- so our focus now is the elections and what happens, if anything, with tax policy. We wouldn't want to get caught on the wrong side of a legal change or regulation change that might limit us in the future.

 We are ready to go today. We actually take the steps that a REIT takes to certify its assets and we go through all the steps. So we could elect status at any time. But we actually don't want to do that until we get closer to running out of our NOLs.

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 Simon Flannery,  Morgan Stanley - Analyst   [47]
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 And I think you said a little while ago you might be starting to get to a position where there might be [approaching] dividend required in a couple years. Is that right?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [48]
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 Yes. That's going to be before we run out of NOLs, but probably still a couple years away.

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 Simon Flannery,  Morgan Stanley - Analyst   [49]
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 Okay. Well, we do have time for a couple of questions from the audience. We've got a mic wandering around if people have questions.

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Questions and Answers
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Unidentified Audience Member   [1]
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 As you think about your business, thinking long term, and you look at some of the technology changes that are coming, especially like move to the higher frequency spectrum, there's nothing much available in the lower frequencies, say over -- after five years and move to maybe a more a SON type architecture where [dopplers] want to do less changes on the towers, how confident are you about [amendment] revenue and the fact that [dopplers] will continue to put heavier and heavier equipment on the towers?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [2]
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 Well, I think the answer to that question depends on the type of geography that you're looking to serve. I think in the urban markets you're going to see a lot of continued small cell deployments because the macro sites don't work on the tops of buildings.

 But as you move away from the urban areas, we continue to believe that the macro sites will benefit and will continue to be really the only viable source of delivering that kind of capacity and coverage. I mean, particularly when you start thinking about highway corridors and if we ever truly get to driverless cars and the connections that are required there, it really actually does bode very well for the longevity and growth of the macro sites.

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Unidentified Audience Member   [3]
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 Are you seeing any movement of the [spend] purchasing capacity away from the base of the tower --

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [4]
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 Yes.

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Unidentified Audience Member   [5]
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 -- [to] centralized locations?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [6]
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 Yes. We're actually benefiting from that in some respects because our towers are serving as that base station when they can feed out to other areas and some small cell installations where they are [C branding] back to our tower. So I think it's a benefit in that regard.

 Where we might lose the base station at the bottom of the tower, you wouldn't lose -- and the whole architecture is moving to remote radio heads on the top of the tower and the antennas, so we don't see that changing. Actually that's part and parcel of the whole [C brand] thinking, is that one base station may be over there, but the radio heads and antenna's over there.

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 Simon Flannery,  Morgan Stanley - Analyst   [7]
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 So how much of your revenue comes from the ground installations versus what's on the tower and the cabling?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [8]
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 We never break it out that way. I mean there's no -- I can't think of a single contract, really, where we have separated out the ground from --

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 Simon Flannery,  Morgan Stanley - Analyst   [9]
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 From the [cell]?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [10]
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 Yes. And our customers are there for the permitting, the height, and the location.

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 Simon Flannery,  Morgan Stanley - Analyst   [11]
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 Okay.

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Unidentified Audience Member   [12]
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 Can you just talk about the mix of your towers across urban, suburban, and highway corridor, and any traffic data you have on the relative growth rates in those different areas of the traffic?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [13]
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 Yes. We have -- Mark, jump in and help me here, if I get the numbers wrong. But we're about 51% in the top --

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Unidentified Company Representative   [14]
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 58% in the top 100 BTAs.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [15]
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 Okay. Go ahead.

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Unidentified Company Representative   [16]
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 58% in the top 100 BTAs. And the growth rate has been fairly evenly distributed across the country over a long period of time, reflecting the fact of carriers --

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [17]
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 Last year our highest growth rate was in BTAs 200 to 400.

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Unidentified Company Representative   [18]
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 Yes.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [19]
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 Now, in the top 50, or top 25, the true urban cities, we don't have a lot of assets. I mean, there's just not a lot of towers in there.

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 Simon Flannery,  Morgan Stanley - Analyst   [20]
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 So on small cells, you've obviously sold your [six share] in ExteNet. So would you be open to doing indoor DAS systems on a one-off or other deployments like that? How are you thinking about the opportunity for (multiple speakers) --

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [21]
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 We are. We've built a team, small team but growing team, that's focused on indoor DAS and other types of installations where we have either a managing relationship or some kind of exclusivity where we have some competitive advantage.

 We definitely see attractions in the indoor market. And let me just say, because there's a lot of -- obviously it's a big topic of discussion in every meeting we're ion. And people try and paint it as a right answer or a wrong answer. I tend to view it more as chocolate and vanilla. I mean, there's going to be plenty of outdoor DAS, outdoor small cell business. But it's a fiber business, and that's not what we're -- that doesn't fit the return profile of what we're seeking as a leveraged capital appreciation play.

 Doesn't mean it's bad. Doesn't mean it's not going to make money for the right expectations. I think all that's going to happen. But it's just not -- it doesn't fit the same return-on-investment criteria that we're seeking for our capital allocations compared to other uses.

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 Simon Flannery,  Morgan Stanley - Analyst   [22]
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 And you're not seeing the small cell growth detracting from the macro. It's not a case of either/or for the carriers?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [23]
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 Well, I think to some degree their budgets are not infinite. So at some point a dollar spent one place takes it away from somewhere else. But we're awfully busy -- I mean, 5,500 amendments last year we think is very healthy.

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Unidentified Audience Member   [24]
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 Just wanted to ask about I think in Q3 you talked a little bit about how you saw a big acceleration in applications that gave you a good deal of enthusiasm about what Q4 in [2016] was going to look like. But then when -- as that quarter progressed, a lot of those applications stalled out, I guess. Do you have any updated commentary on that? Are those same applications starting to result in leases and things like that?

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [25]
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 Yes, that was in an August/September timeframe. And we saw some increased levels of activity that we felt were going to continue to trend up. And they kind of did not, through the end of the year.

 But in terms of delays, that's pretty much passed. We're back to the typical cycle and times which for us are three months on an amendment and up to six months on a colocation. So really the key indicator for me, when I tell you and talk to you about the things that are picking up or not, it's based on the application backlog.

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 Simon Flannery,  Morgan Stanley - Analyst   [26]
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 Great. Well, unfortunately we're out of time, Jeff. Thanks so much.

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 Jeff Stoops,  SBA Communications Corporation - President & CEO   [27]
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 Great. Thanks, everyone.




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