SBA Communications Corp at Raymond James Institutional Investors Conference

Mar 06, 2017 AM EST
SBAC.OQ - SBA Communications Corp
SBA Communications Corp at Raymond James Institutional Investors Conference
Mar 06, 2017 / 06:40PM GMT 

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Corporate Participants
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   *  Brendan Cavanagh
      SBA Communications Corporation - EVP and CFO

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Conference Call Participants
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   *  Ric Prentiss
      Raymond James & Associates - Analyst

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Presentation
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 Ric Prentiss,  Raymond James & Associates - Analyst   [1]
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 Good afternoon, everybody. I'm a Ric Prentiss, the head of telecom services research here at Raymond James. And I welcome you to the afternoon sessions.

 So we are going to kick off this afternoon's session with the first of the public tower guys, SBAC. Brendan Cavanagh is here to join us. We are really excited to get an update. A couple slides, fireside chat, Q&A; and then we will go downstairs for the breakout.

 Brendan, thanks for coming.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [2]
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 Great, thank you, Ric. Nice to be here. Like Ric says, this is just a quick, five-minute overview so we can get to the Q&A. Just to give you -- for those of you that aren't familiar with SBA or the tower industry, we are the third largest of the three public tower companies here in the US. The business is basically a landlord/tenant type of business. It's almost a traditional real estate business. But rather than owning buildings and land, we own tower structures and we rent space on those structures to the wireless carriers, primarily, as our tenants, who pay us on a regular monthly, typically, basis.

 One of the things that makes the business so valuable is the exclusivity around the towers. A lot of that exclusive nature is driven by zoning, in particular. Because there are zoning restrictions where local municipalities do not want to have towers popping up all over the place, we end up with a situation where we have exclusive assets that, very often, are the only solution available for our customers to provide wireless coverage in a particular location. And that's where much of the value comes from within this industry.

 We do have very high visibility and stability of cash flows. We have long-term lease contracts with our customers, very low churn over the years. And I'm sure we'll talk a little bit more about that with Ric in a minute.

 We are also in a services business where we primarily provide site acquisition and development and construction services to the wireless carriers, but that's a very small component of our business. Roughly 99% of our EBITDA comes from the tower leasing business.

 Our portfolio consists of over 26,000 towers around the world, entirely in the Western Hemisphere. We have roughly 16,000 of those sites that are located in the United States as well as US territories, Puerto Rico and the Virgin Islands. The rest of the sites, the other 10,000 are located internationally. But the biggest concentration of the international towers is in Brazil, where we have roughly 7,000 sites.

 Notwithstanding the mix of site count, the majority of our leasing business from a financial standpoint still exists in the United States. You can see on this slide here that 83% of our revenue in the fourth quarter was generated in the US. And frankly, if you remove some of the pass-through revenues that exist in Brazil, where expenses down there are passed through to the customers so it's really a wash, it's an even higher percentage -- is based in the US.

 So the big driver for our business going forward, what has been the big driver and what is the big driver going forward, is the fact that mobile data growth continues to expand. This particular slide here is a projection that's put out by Cisco that shows their projections for mobile data traffic in both Latin America and North America over the next five years or so. And you can see that even if they are only half right, and we grow at half these rates, there's a tremendous amount of increase in the amount of data traffic that's going to be going over these networks.

 And with that traffic comes congestion and strain on the existing networks. And as a result, our customers have to continually invest in those networks to deploy new spectrum bands, as well as new equipment to open up and ease the network pain that they are feeling. And through that we are able to monetize those investments through primarily amendment activity, but also new leases.

 So this is my last slide. Just to give you the overview on the SBA strategy, the way we look at things, our primary goal has been, and continues to be, to maximize returns for our shareholders. That is our number-one objective. And we think the best way to do that is through maximizing growth in our AFFO per share.

 AFFO per share is similar to a proxy for the amount of cash flow that's being generated by the business that is essentially available to be returned to you, the shareholders, in one form or another. That form may be incremental investment in additional assets. It may be stock buybacks. Or it may, one day, be dividends. But the goal is to grow that amount of AFFO that's being generated on a per-share basis.

 We do that three primary ways: one, organic growth. Our embedded base of business continues to grow through the addition of new tenant leases to our existing sites, through amendments to existing tenant leases that we have in place.

 We also have contracted escalators that exist within our existing lease agreements. So you constantly have this ongoing growth that takes place as a result of the fixed escalators that are in the lease agreements, even without doing anything.

 And then, of course, controlling the operating expenses at our sites. We actually, despite being the smallest of the three public tower companies, have the largest operating margins. Today our tower cash flow margins in the US are about 82%. It's about 80% on a consolidated basis, for our entire business. And our EBITDA margins are about 70%. So you can see that there's a lot of operating leverage within this business. And those are the highest in the industry.

 The other thing we focus on is certainly optimizing our capital structure; the way that we lever our Company, we are the highest levered of the three public tower companies. We focus on maintaining leverage in a target range of 7 to 7.5 turns of net debt to EBITDA. We think that, because of the stability of the underlying business, you can use secured debt to drive lower cost of financing; and through that, we're comfortable taking on the additional leverage and investing it back into the business. We make sure that we are covered.

 From a maturity standpoint, we do ladder out our maturities and use multiple different debt markets in order to make sure that we don't have any real risks around the balance sheet. But we think this is a primary differentiator between us and our peers.

 And then, finally, it's about how we allocate capital. We look, first and foremost, at trying to build and by towers at attractive prices. We think that's the best way for us to continue to grow our business is to find the right investment opportunities in new assets and buy those at the right prices.

 However, sometimes those prices, especially lately, have been very, very high. And as that happens, we look for other ways to invest that capital to meet the kind of returns that our shareholders expect. And the primary way we've done that over the last couple of years is through share repurchases.

 And as an example, in the fourth quarter of 2016, we spent almost $350 million buying in 3.4 million shares of stock. And we think, through that, we will see meaningful growth in AFFO per share as a result of that. We take advantage of basically opportunities, when we see our stock trade off in terms of valuation relative to what we see in the private market.

 So all that is done to help us focus on what we've put out as our long-term goal of $10 of AFFO per share by 2020, and we feel comfortable that that's a very achievable goal.

 Ric, do you once you start the questions? Okay, great.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [3]
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 So for those that are new to the tower story, you've been there quite a while.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [4]
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 I've been at SBA now over 19 years.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [5]
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 We, of course, wrote our first tower report in January of 1999 and marked aggressive in this area (technical difficulty) and now at the Company. So we've known you guys a little bit of time, obviously. Is it fair to say towers are a real estate portfolio of business, but if you really don't compete head to head with the other power companies that individual property model.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [6]
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 Yes. I think that that's right. From a certain (technical difficulty) we don't compete with each other at that level. And once you have a site in place, you basically have, like I said earlier, an exclusive asset. So that exclusive asset allows you not to have much competition at that location.

 What we do compete for is new asset savings. That's really where we compete with each other. It's perhaps for an acquisition opportunity or a new build opportunity to spread a few properties at six locations, double-site. That's where the competition takes place, but otherwise --.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [7]
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 And as you think about your Company and your leverage to capital appreciation story I think is probably the way you would position yourself; if we think about that, your net organic cash, and you mentioned that as one of the three pillars of growth for you guys. Let's talk first in the US about gross leasing revenue. So if you look at what that growth rate was last year versus this year, what is your guidance assuming?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [8]
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 So when we say growth, you mean excluding China?

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 Ric Prentiss,  Raymond James & Associates - Analyst   [9]
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 Exactly.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [10]
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 So last year, if you look at what -- in the fourth quarter we just reported in the US specifically gross organic growth of 7%. And that is 7% for our fourth-quarter results versus the fourth quarter of the prior year. So that's basically representative of what happened during the course of the year.

 As we look forward into 2017, we [have] given guidance for 2017. It contemplates basically a flat amount of dollars being added per site. Now, that does result in slightly over growth rate. It's about 6.8%. That difference is purely based on the fact that the base that the percentage of capital is on is bigger than the law of larger numbers. So other than that, we are essentially assuming that it's basically flat year-over-year.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [11]
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 Right. Which is one thing, for people new to the story also, it's like not that revenues are flat but the growth rate of revenues is basically flat. One of your peers did suggest that they were starting to see a pickup in the US that might cause growth in the US to be stronger, and larger growth in 2017 than 2016. Are you seeing that? Or is there any systemic reason to think you wouldn't see it?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [12]
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 Well, what we guided to is what we've seen. So we are expecting, as I said in our guidance, for things to be flat. Are there opportunities for it to be better? Yes; and there is some anecdotal evidence to that effect. I can't speak to what our peers are specifically looking at and targeting. As we've talked about earlier, the way that the business operates, they are not going to see activity with carriers that we are not going to see. There can be slight timing differences, perhaps.

 But generally speaking, our customers are going to roll out these sorts of changes that are driving most of the business, which is amendments for the [large facilites] on a market or even nationwide basis. And so that's not going to be specific to one tower company or another.

 Now, if they get into (technical difficulty) one site that belongs to one of our peers (technical difficulty). But we are going to both see -- or all three of us are going to see the same amount of activity. So I don't expect there to be any real material differences at the end of the day in terms of (technical difficulty).

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 Ric Prentiss,  Raymond James & Associates - Analyst   [13]
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 One of the things that investors should be mindful of is, as you see carriers buy spectrum, then they will put it to work. So as you think about spectrum bands, AWS-3 -- a lot of acronyms here -- WCS, 2.5 gigahertz, FirstNet, Dish, broadcast. Any of that baked into the guidance? And what are your thoughts about when those different bands might actually start getting put to work in the US by the different carriers?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [14]
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 I would say, generally not baked into the guidance for this year. I think that -- there's a lot of items there, so they may all come little bit differently. But there is -- if you take FirstNet, for example; if FirstNet were to get announced in the near term and to start happening, let's say, this summer, we might start to see some impact of that. But if it doesn't happen within the next few months, you are probably looking at it not really affecting the financial statements other than perhaps the fourth quarter of 2017. But it would certainly be a positive contributor as you got into 2018 and beyond.

 It may also come along based on who the winner is likely to be, with other deployments at the same time that they may be doing for WCS, AWS-3. So we may see a number of those things are starting to get rolled out, I think, as we get into the latter part of the year.

 We've seen a limited amount of activity around AWS-3 from one of the carriers. And I think with 2.5, we've seen a little bit as well. But the opportunity to see that really pick up, I think, will start to take off here over the next year or so. And then as you get into 600 spectrum, that's probably a little further down the road. But there is at least one carrier talking about that being maybe sooner rather than later.

 So the bottom line of this whole point is that there's a lot of spectrum that's sitting out there that is in the hands of our customers that has not yet been deployed and will be a driver of incremental growth for our industry, I think, for the next several years to come.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [15]
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 And for those new to the story, because this is a 1,000-investor conference, so a lot of people here -- what you are implying is the lead time. So like when a carrier comes to you and makes a lease application, how long does that take in the process, to go from lease application to checking the lease and then actually becoming a revenue paying event?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [16]
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 Typically, from the time you get an application you are looking at somewhere in the three- to six-month range. But then you also have the time from execution, when it is actually signed and booked, which is really what we are focused on. Stuff gets signed. We know it's a reality now. But there is usually a delay before that starts to hit your financials. And that can also be a three- to six-month delay. So as things are getting signed up, when you see that start to accelerate, the impact of our financials will be (technical difficulty).

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 Ric Prentiss,  Raymond James & Associates - Analyst   [17]
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 It's certainly a really nice business model to have such good visibility and then comfort that the growth is there. So you are almost already starting to see, 2018, early indications not so far away from now.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [18]
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 To some degree, you start to see that. If you start to see your backlogs building, it gives you a good idea of how things might look a year out. But that varies, too, with each individual rollout. Some go faster than others.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [19]
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 And you mentioned FirstNet there. So FirstNet is the public safety network, 911, emergency responders that got funded from an auction of spectrum a couple years ago. What are you hearing about that? Obviously, the process is moving forward. It's in a court case right now, as far as who was shortlisted by the government, and somebody else complaining. But as you look at FirstNet, what are your thoughts about what it means as it starts to play out? What kind of activity could it be? How should we think about framing it as -- it's zero today.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [20]
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 Yes. It's certainly a positive from the standpoint that it's all incremental. As you said, we obviously aren't doing anything today. It is certainly dependent on who the winner is, and the specifications are not known for sure yet. So in terms of the exact impact, I really can't answer that yet today. But it is expected that it will likely be AT&T as the winner.

 If that is, in fact, the case, part of the reason that this would be done and that they would be chosen is because of their existing network that they have today, the leverage -- the benefit of that. That's part of what they bring to the table as a bidder in that process.

 And so in that case, we would expect that we would see a large number of amendments to existing AT&T leases. They are a large customer, and they are on more front sites than anybody else. So we think that there's a very good possibility to see some amendment activity at those sites associated with FirstNet specifically.

 Could there also be a mix of new tenant leases? Yes. I think that would largely be focused on locations where there really isn't adequate coverage today; but in order to meet the ubiquitous coverage plans of the FirstNet group, you are going to start to see expansion into areas that perhaps don't have coverage today. And so through that there probably will be new sites added. How much of that benefits SBA remains to be seen. But it's probably not as much as we make (technical difficulty).

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 Ric Prentiss,  Raymond James & Associates - Analyst   [21]
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 That makes sense. You mentioned AT&T, largest tenant. Ever since the presidential election- the constant rumor -- and because nothing can actually be talked about while the auction is in a quiet period; but a lot of people are focused on what would the potential impact to you be of a Sprint/T-Mobile merger? Can you help us just frame what your thoughts are, in case such a merger were to come to fruition?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [22]
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 Yes. We clearly saw speculation. There is no actual reserve that has been announced, perhaps won't ever be announced. But to the extent that there were such an event, from an exposure standpoint, SBA currently has, in terms of overlapping sites -- sites where we have both T-Mobile and a Sprint lease at the same location -- we would be exposed to lose a little bit less than 5% of our leasing revenue if they were to eliminate one of those leases from each of those sites where they overlap.

 Now, keep in mind that if that did take place, first of all, that would take place over quite an extensive period of time (technical difficulty) lease terms that don't expire at the same time, and they are spread out on average over the next few years, 3 to 4 years, so you see this taking place over a number of years.

 It also doesn't take into account the extra incremental investments that would be required in the network of the remaining entity in order to handle coverage of the larger remaining subscriber base they now have, as well as to deal with issues around the disparate technologies that they both operate in, putting in place the use of spectrum bands that one or the other of them currently have access to, so the equipment is useful for.

 So those are the kind of things that I think will be somewhat mitigant to potential losses as well. So while it would be bad headlong risk for us if that were announced, I don't think that the actual impact of the launch would be quite as extensive as people think.

 Can you hear me now?

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 Ric Prentiss,  Raymond James & Associates - Analyst   [23]
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 So Verizon, thanks for that.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [24]
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 Yes. We are only almost done. But now you will hear all the important stuff again.

 Sorry, Ric. Do you want to start over?

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 Ric Prentiss,  Raymond James & Associates - Analyst   [25]
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 As we look at the churn potential, I would assume -- have Sprint and T-Mobile have any -- have had any leases in the last three, six, nine months that have come up for renewal, and has there been any like non-renewals?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [26]
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 There are leases that come up all the time for renewal. There have been no non-renewals that would have had anything to do with this, the type of stuff where we have exposures like Clearwire or Metro leases, which is really a vestige of those consolidations and would have nothing to do with the two companies.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [27]
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 And so when a lease comes up for renewal, five-, seven-, 10-year period of renewal?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [28]
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 Typically we have five-year terms. So usually when a lease rolls over into a new term, it's usually locked in for another five years.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [29]
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 So if they thought something was coming, they are certainly not changing their behavior --

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [30]
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 Yes, and it would make no sense for them to be doing that, based on the speculative nature of such a transaction.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [31]
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 And trying to get approval and --

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [32]
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 Right, right. Yes.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [33]
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 You mentioned Clearwire. Let's talk a little bit about that churn that you are seeing, a little bit elevated. I want you to tell people what your typical thoughts on what churn, year in, year out, would usually be; and that you are a little bit elevated right now because of Clearwire, which was acquired by Sprint; Leap, with AT&T; and Metro with T-Mobile.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [34]
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 Right, yes. On a normal basis, we are typically in the 1% to 1.5% range. And actually --

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 Ric Prentiss,  Raymond James & Associates - Analyst   [35]
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 Per year?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [36]
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 Per year of leasing revenue. And we have actually been, frankly, lower than that. And even that includes some other consolidation -- Verizon/Alltel or AT&T/Centennial -- those kinds of things are in there. When you get down to really what's non-consolidation-related, it's frankly very, very small.

 We've seen elevated churn recently. Over the last couple of years we've had some iDEN churn from the old Nextel network that has rolled off. We've pretty much got that behind us now. And then we've also got, as you mentioned, Metro, Leap and Clearwire-related churn. We've seen an uptick in the US.

 If you look at it just from a domestic standpoint, our reported same-tower churn rate was approximately 3% in the fourth quarter. That's 3% year-over-year. About 2%, actually slightly more than 2%, was from Metro, Leap, and Clearwire. So it's the vast majority of it.

 As of the end of the year, we've got about $38 million of run rate annual revenue with those three guys that we expect will churn off sometime over the next three years. But we'll see the majority of that, I think, happening during 2017, and particularly in the first half of it.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [37]
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 And I think in third quarter, that number was like $50 million was left on run rate.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [38]
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 Yes.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [39]
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 What would $50 million have been as like a percent of revenues? Put it in a frame of reference similar to Sprint and T-Mobile, 5% overlap, kind of means.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [40]
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 Yes. So our total revenue is $1.5 billion, approximately, of leasing revenues, so about 3%.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [41]
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 Let's take a moment and see if there's some questions from the audience.

 Sure, Pete?

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Unidentified Audience Member   [42]
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 Is there any antenna technologies that can be disruptive technologies? Are there other things you worry about that would make the need for a cell tower diminish?

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 Ric Prentiss,  Raymond James & Associates - Analyst   [43]
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 So the question is, any left-field technologies, any changing in technologies that would make towers not as required?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [44]
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 Not that we've seen, no. In fact, there's more and more being invested by our customers at the existing macro sites to harden them up, to put new -- we are somewhat technology agnostic because we are really just the dumb infrastructure, if you will. And so even though there have been technology changes that may be making antennas more efficient or allow them to deploy different kinds of spectrum that they weren't able to before, those sorts of things happen.

 But that is something that actually allows for amendment activity at the tower sites. They still need the locations in order to most efficiently deliver that. So I think the answer is really basically no, to keep it simple.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [45]
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 Robert?

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Unidentified Audience Member   [46]
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 (inaudible - microphone inaccessible)

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 Ric Prentiss,  Raymond James & Associates - Analyst   [47]
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 So the question is, what is the impact of 5G on your customers and your business on the towers?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [48]
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 Yes. It's very early to really say absolutely, this is the impact; because the standards haven't even been officially set around 5G yet. But when you look at what is expected, if you look at the standard-setting body and how they are talking about 5G, they are talking about two phases of it, really.

 The first phase is that fixed wireless type of solution that would perhaps used millimeter wave band spectrum and would be more focused, by nature, on those dense urban markets where you might see small cells and other types of solutions be the better solution from an infrastructure standpoint. But that's because you are talking about a spectrum that doesn't propagate very far. And frankly, it's in markets that are not really tower markets today. They are places that we don't really operate, because towers are not well-suited to a dense city setting.

 When you talk about the second phase, though, where it's now more about mobile wireless deployment of 5G, you are talking about a situation where they are going to have to go to spectrum bands that are different. What those are, I don't know. It could be 600 megahertz. It could be a reforming of 3G spectrum.

 But whatever it is, it's going to be more in line with traditional wireless deployment. And so that will, by its nature, also be focused on macro sites. There's not going to be a redesign of the networks that allows for the number of sites that would be required if you use that higher-band spectrum, that millimeter wave band spectrum.

 So I think that actually ultimately is a very positive thing for the tower business, because we will see another wave of technology coming out that will require new equipment and changes at existing macro sites. I think we will benefit from that, but I think it's a number of years away.

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Unidentified Audience Member   [49]
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 (inaudible - microphone inaccessible)

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 Ric Prentiss,  Raymond James & Associates - Analyst   [50]
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 The question is, would they need new fiber backhaul coming into the cell sites to support 5G?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [51]
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 Yes. I think in some cases, the answer is no; and, in some cases, yes. Every site has got its own particular situation today. But I think in most cases where there's fiber deployed today, that's probably adequate. Now, maybe they need new strands that come in, depending on the amount of traffic that's coming through there. But I can't really fully answer that question because there are so many unknowns, still.

 It's getting a lot of talk about it. There's certainly a lot of buzz, and it has been -- it's a keyword that is thrown around a lot, 5G. But what it really is and what it's defined as, it still remains to be nailed down, to a large extent.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [52]
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 And maybe the last question, to piggyback on that, is small cells. Some tower companies are getting into small cells. Any interest in moving beyond the macro tower business model into owning fiber, into owning small cells, into any other type of asset class that's out there?

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [53]
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 Yes. Not specifically; we are open to small cell type of investment, to the extent that it is something that gives us exclusive access to the asset. So if you had in-building networks, for instance, that were exclusive locations that you controlled, now you have something that's akin to the tower model, and so we would be perhaps interested in something like that. But otherwise, it's primarily a fiber-based business. That's really what it is.

 And fiber, frankly, is not an exclusive asset. And so, while it can be a good business, we certainly don't think that it's a bad business, by any means; we just don't think it's nearly as good as the business that we are in. And as a result, our focus is on continuing to invest further in the tower, the macro business.

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 Ric Prentiss,  Raymond James & Associates - Analyst   [54]
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 We'll end it there. We'll take the rest of the questions down in the breakout session. Thanks very much for coming.

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 Brendan Cavanagh,  SBA Communications Corporation - EVP and CFO   [55]
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 Thank you.




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