Q2 2017 SBA Communications Corp Earnings Call
Jul 31, 2017 AM EDT
SBAC.OQ - SBA Communications Corp
Q2 2017 SBA Communications Corp Earnings Call
Jul 31, 2017 / 09:00PM GMT
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Corporate Participants
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* Brendan T. Cavanagh
SBA Communications Corporation - CFO and EVP
* Jeffrey A. Stoops
SBA Communications Corporation - CEO, President and Director
* Mark DeRussy
SBA Communications Corporation - VP of Finance
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Conference Call Participants
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* Amir Rozwadowski
Barclays PLC, Research Division - Director and Senior Research Analyst
* Brandon Lee Nispel
KeyBanc Capital Markets Inc., Research Division - Research Analyst
* Brett Feldman
Goldman Sachs Group Inc., Research Division - Equity Analyst
* Colby Alexander Synesael
Cowen and Company, LLC, Research Division - MD and Senior Research Analyst
* Jonathan Atkin
RBC Capital Markets, LLC, Research Division - MD and Senior Analyst
* Joshua Matthew Frantz
BofA Merrill Lynch, Research Division - Associate
* Matthew Niknam
Deutsche Bank AG, Research Division - Director
* Michael L. McCormack
Jefferies LLC, Research Division - Equity Analyst
* Nicholas Ralph Del Deo
MoffettNathanson LLC - Senior Research Associate
* Philip A. Cusick
JP Morgan Chase & Co, Research Division - MD and Senior Analyst
* Richard Hamilton Prentiss
Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research
* Robert Ari Gutman
Guggenheim Securities, LLC, Research Division - Senior Analyst
* Simon William Flannery
Morgan Stanley, Research Division - MD
* Spencer Kurn
New Street Research LLP - Research Analyst
* Walter Paul Piecyk
BTIG, LLC, Research Division - Co-Head of Research and MD
* Whitney Fletcher
Deutsche Bank AG, Research Division - Research Associate
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Presentation
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Operator [1]
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Ladies and gentlemen, thank you for standing by, and welcome to the SBA 2017 Second Quarter Results Call. (Operator Instructions) And as a reminder, this conference is being recorded.
I'll now turn the conference over to Mark DeRussy, Vice President of Finance. Please go ahead, sir.
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Mark DeRussy, SBA Communications Corporation - VP of Finance [2]
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Good evening, and thank you for joining us for SBA's Second Quarter 2017 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 on this call is forward looking, including, but not limited to, any guidance for 2017 and beyond. In today's press release and in our SEC filings, we detailed material risks that may cause our future results to differ from our expectations.
Our statements are as of today, July 31, and we have no obligation to update any forward-looking statement we may make.
In addition, our comments will include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website.
With that, I will now turn the call over to Brendan to comment on our second quarter results.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [3]
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Thank you, Mark. Good evening.
The company had another steady financial performance in the second quarter. Our performance was once again primarily driven by solid operational performance on the leasing side of our business. Total GAAP site leasing revenues for the second quarter were $403.0 million, and cash site leasing revenues were $398.9 million. Better-than-expected foreign exchange rates positively impacted leasing revenue by less than $0.7 million, relative to the company's prior expectations for the second quarter.
Same tower recurring cash leasing revenue growth for the second quarter was 4.6% over the second quarter of 2016. On a gross basis, same tower growth was 7.5%. The net same tower growth calculation was negatively impacted by approximately 2.9% of churn.
Domestic same tower recurring cash leasing revenue growth over the second quarter of last year was 7% on a gross basis and 3.8% on a net basis, excluding 3.2% of churn, over 70% of which was related to Metro/Leap and Clearwire terminations.
Internationally, on a constant currency basis, gross same tower cash leasing revenue growth was 10.7%, exclusive of 60 basis points of churn.
Gross organic growth in Brazil was 10.8%.
Domestic operational leasing activity, representing new revenue signed up during the quarter, was ahead of 2016 levels. Although based on the revenue commencement timing, we do not expect this increase in lease-up to have a material impact on our 2017 results. Just over half of incremental domestic leasing revenue added came from amendments, and the big 4 carriers represented 86% of total incremental domestic leasing revenue added during the quarter.
International leasing activity remain consistent with 2016 average levels with solid -- with continued solid contributions from all of our markets. During the second quarter, 86.4% of cash site leasing revenue was denominated in U.S. dollars. The majority of non-U. S. dollar-denominated revenue was from Brazil, with Brazil representing 12.8% of all cash site leasing revenues during the quarter; and 9.1% of cash site leasing revenue, excluding revenues from pass-through expenses.
With regard to second quarter churn, we continued to see churn from leases with Metro/Leap and Clearwire, consistent with our expectations. As of June 30th, we have approximately $31 million of annual recurring run rate revenue or less than 2% of annual leasing revenue from leases with Metro/Leap and Clearwire that we ultimately expect to churn off over the next 2 to 3 years. That's down from $38 million at year end and $50 million at September 30, 2016.
Domestic churn in the second quarter from all other tenants on an annual same-tower basis remained less than 1%. We continue to expect domestic same-tower churn rate to be in the mid-2% range by the end of the year. The total amount of churn continues to be as expected and is not anticipated to impact our long-term goal of producing $10 or more of AFFO per share in 2020.
Tower cash flow for the second quarter was $317.2 million. Better-than-expected foreign exchange rates positively impacted tower cash flow by approximately $0.4 million relative to prior expectations.
We continue to have success controlling the direct costs associated with our towers, allowing us to continue to have the strongest operating margins in the industry.
Domestic tower cash flow margin was 82% in the quarter, and international tower cash flow margin was 68.7%.
Adjusted EBITDA in the second quarter was $298.8 million. Foreign exchange rates positively impacted adjusted EBITDA by approximately $0.4 million relative to our expectation. Our adjusted EBITDA result in the quarter were due to solid results from both our leasing and services business.
SG&A for the quarter was generally in line with expectations but up year-over-year, excluding the oil reserve, due primarily to increased personnel-related costs.
Adjusted EBITDA margin was 70.6% in the quarter compared to 70.1% in the year-earlier period, excluding the oil reserve. Approximately 99% of our total adjusted EBITDA was attributable to our tower-leasing business in the second quarter.
AFFO in the second quarter was $211.2 million, which amount was positively impacted by approximately $0.4 million relative to prior expectations due to stronger foreign exchange rates. Our industry-leading AFFO per share increased 16.9% to $1.73, excluding the impact of the $16.5 million oil reserve that was recorded in the second quarter of 2016.
Excluding both the oil reserve and the positive year-over-year impact to changes in foreign currency exchange rates, AFFO per share increased 14.7% over the year-earlier period.
We continue to selectively deploy capital towards portfolio growth. In the second quarter, we acquired 228 communication sites, including 143 sites in Peru and the rights to manage 37 additional communication sites for $124.2 million, comprised of $60.9 million in cash and the issuance of approximately 488,000 shares of our Class A common stock.
We also built 96 sites during the second quarter.
Subsequent to quarter end, we have acquired 68 additional communication sites, including 35 sites in Argentina at an aggregate purchase price of $16.5 million. The sites purchased and built in the second quarter as well as these additional sites are located in both domestic and international markets.
Jeff will touch briefly on our 2 new markets of Peru and Argentina in a moment.
We continue to invest in the land under our sites as this is both strategically beneficial and almost always immediately accretive. During the quarter, we spent an aggregate of $16.4 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled more than 20 years of the land underneath, approximately 71% of our towers. And the average remaining life under our ground leases, including renewal options under our control, is approximately 33 years.
Looking forward, our earnings press release includes our updated outlook for full-year 2017. We have increased the midpoint of our guidance ranges for site leasing revenue, tower cash flow and adjusted EBITDA by $5.5 million each. These increases were due to a variety of factors, including actual second quarter results, revised expectations around forward FX rates and the impact of acquisitions put under contract since our first quarter earnings release.
Our assumptions for operational leasing activity during the remainder of 2017 remain exactly the same as the assumptions we made when providing our initial 2017 guidance in February and the updated guidance we provided in May. We have not assumed any permanent pickup in operational leasing activity for the second half of the year.
We have also increased our outlook for AFFO by $7 million at the midpoint and AFFO per share by $0.075 at the midpoint. The increase in AFFO guidance is due to our higher expected adjusted EBITDA and lower expected non-discretionary cash capital expenditures, offset by slightly higher expected net cash interest expense.
The decrease in non-discretionary CapEx is due to lower experienced maintenance and general corporate CapEx during the first half of the year than we had previously expected. The increase in anticipated net cash interest expense is primarily a result of increased LIBOR rates on our floating rate debt as well as higher estimated average outstanding balances on our revolver due to share repurchases.
The updated outlook does not assume any impact from potential acquisitions not under contract as of today and it does not assume any impact from new financings or repurchases of the company's stock other than those that have been completed as of today.
With that, I will turn things over to Mark, who will provide an update on our liquidity position and balance sheet.
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Mark DeRussy, SBA Communications Corporation - VP of Finance [4]
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Thanks, Brendan.
SBA ended the quarter with $8.6 billion of net debt, and our net debt to annualized adjusted EBITDA leverage ratio was 7.2x, within our target range of 7 to 7.5x. Our second quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 4.0x.
We ended the quarter with $150 million outstanding under our $1 billion revolver, and we have $215 million outstanding as of today. At quarter end, the weighted average coupon on our outstanding debt was 3.6%, and our weighted average maturity was approximately 4.4 years.
On April 17, we issued through our existing tower trust, $760 million of secured tower revenue securities, which have an anticipated repayment date of April 11, 2022, and a final maturity date of April 9, 2047. Fixed interest rate on these securities is 3.168%. Net proceeds from the offering were used to prepay our $610 million of 2012-1C Tower Securities, which carry an interest rate of 2.933% as well as accrued and unpaid interest and also for general corporate purposes.
Year to date, as of today, we have repurchased 1.9 million shares of common stock for $250 million at an average price per share of $134.98. We currently have $750 million of authorization remaining under our stock repurchase program.
Current shares outstanding are 120.2 million, down from 124.6 million shares a year ago.
We are very pleased with our capital structure. SBA continues to be the preferred issuer in the debt markets and, as a result, we believe our structure maximizes our ability to drive growth in AFFO per share.
With that, I'll now turn the call over to Jeff.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [5]
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Thanks, Mark, and good evening everyone. As you heard from Brendan earlier, we had another solid quarter. We continued to execute well, growing our portfolio, increasing our operating margins, efficiently meeting the increasing demands of our customers, growing AFFO and shrinking our share count. Our positive results in the quarter, combined with adjusted expectations for improved foreign exchange rates, have allowed us to again increase our full year 2017 guidance.
In the U.S., operational customer activity, measured as the amount of newly contracted cash revenue per tower was up sequentially from the prior quarter for the second quarter in a row. This increase was primarily due to an increase in the number of new leases signed, although the majority of new business is still coming in the form of amendments. Organic leasing activity in the quarter remained primarily from the re-farming of 2G and 3G spectrum to LTE as well as some AWS-1 and 700-megahertz deployments. We have also begun to see 600-megahertz applications.
Internationally, we had another quarter of operational leasing activity. This activity was approximately 60% from new leases and 40% from amendments in the second quarter. We again had strong contributions from all of our markets, including Brazil, where we continue to see steady results.
In general, international growth on a same tower basis should remain superior to the U.S. for years, given the lesser maturity and density of the networks in international markets and the lower revenue per tower of which the growth rates are calculated.
On the portfolio side, we entered 2 new markets that we have been evaluating over the last couple of years, Peru and Argentina. We now operate and own towers in 13 countries in the Western hemisphere. During the second quarter, we acquired 143 sites in Peru; and in July, we acquired 35 sites in Argentina, the first sites we own in each of these countries. Each of these markets has characteristics we like and we believe we can increase the towers we own materially in coming years.
In Peru, there are 4 competitive active wireless carriers and rapid growth occurring in the percentage of the population accessing wireless mobile Internet services. The deployment of 700 megahertz 4G LTE spectrum that was auctioned off by the government in 2016 will be a big driver of continued investment in the wireless networks of Telefonica, Claro and Anatel, in particular. The government has also recently called for significant increases in the number of cell sites in Peru to meet the quickly growing demands and needs of the population.
Argentina is one of the largest markets in South America and we believe will be a source of meaningful growth opportunities over the coming years. The investment in wireless infrastructure has been significantly lacking in Argentina for many years, but with the recent change in government in Argentina, we have seen significant strides in the country's efforts to attract external investment.
There are 3 main wireless carriers in the market with a relatively equal market share. We expect competition and lagging wireless network performance to be drivers of meaningful investment by all 3 of these carriers.
We are excited about the opportunities that both of these new markets present. Our strategy in these new markets will be the same as throughout the rest of Latin America: establish SBA as a long-term player with superior financial and operational resources; and cultivate deep relationships with our customers based on trust and performance. It's a recipe that has led us to a leadership position in Latin America.
Looking ahead, we continue to feel very good about the environment in which we're operating. As we discussed last quarter, our customers have many things to accomplish over the coming years. In the U.S., deployments of AWS-3, WCS, 2.5 gigahertz and 600 megahertz spectrum will all be drivers of future organic leasing activity for a number of years. And of course, significant opportunity exists around AT&T's deployment of the FirstNet network.
While the FirstNet deployment efforts have not yet officially begun, all indications are that we are getting closer to the commencement of a large wave of infrastructure investment associated with this project. As of today, 7 states have now announced their intention to opt into the nationwide FirstNet network and many others are expected to follow. Specific implications to SBA of this rollout are still being defined and we do not anticipate any material impact to our 2017 financial results, but we continue to expect this important nationwide buildout to be a positive contributor to our growth for the next several years.
On the expense side, we continue to execute well, driving increased efficiency and cost reductions throughout our organization as well as continuing to reduce land costs through our active ground lease buyout program. Our solid performance in cost control as well as our steady success in organic leasing growth have allowed us to again lead the industry in tower cash flow and adjusted EBITDA margins. Our domestic tower cash flow margin is now an impressive 82%; and internationally, we have grown our tower cash flow margin to 68.7% even as we continue to add many new immature towers to our portfolio.
With regard to capital allocation and balance sheet optimization, we ended the quarter with 7.2x net debt to annualized adjusted EBITDA, within our target range of 7.0 to 7.5x. During the quarter, we allocated capital-to-portfolio growth and share purchases. It remains our goal and expectation that this year, we will grow our portfolio by 5% to 10%. Within that range of portfolio growth, we believe we can continue to be very selective with regard to the tower assets we choose to buy and build.
We expect to remain a predominantly U.S. macro tower company, a very strong position to be in for the next several years given expected deployments and a reason we feel confident in the value being created through our share purchases. Our significant liquidity and access to attractively priced additional financing allows us to continue to use our balance sheet to drive increased returns for our shareholders.
In closing, we are well positioned to achieve our goal of $10 or more of AFFO per share by 2020. A steady demand environment with our customers and strong operational execution not only drove good second quarter results but also give us increased confidence for a solid 2017 and achieving our long-term goals. SBA continues to be a strong performer in a tremendous industry. We have the highest-quality assets and tremendous employees whose efforts continue to drive SBA on to greater success. We look forward to a successful remainder of 2017.
Kathy, with that, we are now ready for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question will come from Amir Rozwadowski with Barclays.
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Amir Rozwadowski, Barclays PLC, Research Division - Director and Senior Research Analyst [2]
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Jeff, I was wondering if we could touch base a bit on FirstNet. If we think about -- the commentary that you suggested is that you don't expect a near-term impact at least through 2017. How do you think that this sorts of unfolds? I mean, are you guys -- would you have visibility in terms of what type of benefits you could perceive from this? When do you expect to get that visibility? Would love any color that you can provide there.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [3]
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Yes, I'll give you some high-level color, and obviously, I want to stay away from pricing and things like that. We have started to see specs and examples and how this might actually look. At this point, we believe that AT&T will choose to roll this out through their turf vendors, which is much of how they have done their deployments in the past. And that's the first level of agreements and contracts that have to be worked through. And then as the turf vendors would begin to execute on the plan, then obviously, that really won't yet and can't, I believe, occur until after a particular state opts in, then we will actually start to receive applications and then be in a position to move forward. So I believe we're getting much closer. Will I be able to say next quarter, as we have just said with respect to the 600 megahertz, that we are seeing and receiving applications? I don't know, but I do feel that we're becoming obviously increasingly closer to that point.
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Amir Rozwadowski, Barclays PLC, Research Division - Director and Senior Research Analyst [4]
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Great. And then just one housekeeping question if I may. The discretionary CapEx went up in the guidance, what is that specifically related to?
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [5]
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It's primarily related to additional acquisitions that have been put under contract.
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Operator [6]
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Our next question will come from David Barden with Bank of America.
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Joshua Matthew Frantz, BofA Merrill Lynch, Research Division - Associate [7]
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It's Josh Frantz in for Dave. A question on the deployment for the different antennas. Can you talk about the relative revenue for an amendment for 600 megahertz, for 700 versus AWS? And then also, same for 2.5?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [8]
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We're not going to get into the exact differences between the types of amendments. I will tell you, though, that generally as you go lower in the frequency of the spectrum, the antennas get larger. And as you would have larger antennas, you're going to typically attract larger amendment dollars.
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Joshua Matthew Frantz, BofA Merrill Lynch, Research Division - Associate [9]
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Is there any sort of size on revenue that you can -- typical bases that you can give us?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [10]
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No, we're not going to get into pricing.
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Operator [11]
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Our next question is from Phil Cusick with JPMorgan.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [12]
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A couple if I can. Brendan, can you repeat what you said about acquired churn for the second half of '17 and into '18? Did you say 2.5% for total churn exiting '17?
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [13]
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I'm not sure if I said that, but it is our expectation that when we -- from a domestic standpoint when we exit the year, that we will be at about 2.5%.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [14]
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And how should we think about the remaining churn for 2018 from that acquired network customers?
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [15]
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So we have -- I think what I gave in the scripted comments was the total amount of dollars that we have that we believe will churn off from the 3 primary guys, Metro/Leap and Clearwire. And that's $31 million of annual revenue at the end of the second quarter. I would expect that we'll come out of the year somewhere in the mid- to low $20 million range probably is what will be left when we exit this year. And that would go way over the subsequent 2 years. So we're really not talking about much of a large impact. The exact timing of that 2 years obviously remains to be seen, but hopefully, that ballpark fits for you in terms of magnitude.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [16]
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Okay. And Jeff, you said that it looks like AT&T will be using its regular turf vendors. You have relationships with those guys and I think you do services for them sometimes. Should we think about an impact from your services business this year?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [17]
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Too early to tell this year, and I think there's some opportunity in the future but time will tell.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [18]
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And how does AT&T not owning that FirstNet spectrum change their rights on towers if they didn't have some bigger agreement?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [19]
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Well, that's -- it's an amendment. I mean, it puts them in a position of having to come -- it would be basically the standard amendment process, Phil.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [20]
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Okay. And a standard amendment process like there's a like a sort of a scorecard and -- I don't know an X, Y and Z or it's a negotiation?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [21]
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Yes, and it's not -- I mean, it's not much. I'm not sure that's a distinction that really bears a difference because they'd have to do that anyway because the equipment's going to be different.
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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [22]
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I see. Okay, and if I can, one more. You were aggressive on the buyback in the quarter and as well as the start of the third quarter. What's driving that? And what does that tell us about the sort of opportunity set of other deals out there?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [23]
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Well, it's telling you that we're delevering pretty quickly. We actually invested more capital in portfolio growth in Q2 than Q1, and we have hopes and aspirations and opportunities to continue to invest in portfolio growth. But as I mentioned, we do feel good about hitting at least the low end of the 5% for the year, and we want to stay in that 7 to 7.5x. And no one should read the 7.2 as any type of change there. And actually, as we were moving through the quarter, we saw that we're going to actually have lower leverage than we might have otherwise anticipated going into the quarter so we stepped up on the stock repurchase. And if the same thing happens again, we would most likely do the same thing.
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Operator [24]
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We'll go next to Simon Flannery with Morgan Stanley.
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Simon William Flannery, Morgan Stanley, Research Division - MD [25]
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First, a clarification. I think you said on the lease-up, some of them wouldn't commence such that they benefit '17. Is there anything unusual about what you're seeing now in terms of stuff that's being signed now that doesn't commence until next year? Or is this still pretty much as in prior years? And then perhaps you could just comment on any nontraditional tenant's interest that you're getting from folks. There's certainly been a lot of discussion about other players coming into the industry looking at potential network deployments. It will be great just to get a general sense of what your expectations are around moving beyond the big 4 in the U.S. and elsewhere.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [26]
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We're definitely seeing more leases colos in absolute numbers relative to past years. As part of the process in the give-and-take with various customers in various regions, it is not at all uncommon, Simon, where you would negotiate a rent commencement date of the earlier installation or January 1. Until it's installed, we would count that as January 1 and obviously not include that in any type of guidance until we know. So that's a fairly typical customer SBA type of negotiation that's going on, and I think that's fairly representative throughout the industry. But I think the good thing that comes out of all that is the number of colos is up, which is good. In terms of other tenants, there's a lot of discussion and conversation and interest, but I can't point to anything material, Simon. And when we think about the business and plan, and we are primarily, if not exclusively, looking at the existing tenant base of which to build our future.
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Operator [27]
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Our next question is from Robert Goodman with Guggenheim.
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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [28]
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So we've heard a lot of talk over the past quarter about 5G and how the first sort of wave of 5G will be fixed wireless. And I was wondering how -- if you could just comment on your views of how that will play out in rural locations within your footprint over the next several years.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [29]
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Well, if true 5G as -- and it's not being defined yet by the technical authorities. But if it is true 5G, it will require different equipment that exists today to deploy it. So you're looking at new equipment or different equipment or swapped equipment on the towers, so that, of course, is going to be an opportunity for us. And if it's using higher-frequency spectrum, you'll need more dense networks, and that, of course, will be an opportunity for us. So I do think we will participate in that, Robert, when that time comes because I don't think what is out there today will satisfy 5G requirements.
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Operator [30]
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Then we'll go next to Jonathan Atkin with RBC Capital Markets.
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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [31]
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So a couple of questions. As you look at the kind of the lower bands activities around 600 megahertz and FirstNet, and you mentioned that you have seen some of the technical designs, what portion of time are we potentially looking at a new RAD center as opposed to a traditional amendment to adding existing RAD center?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [32]
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We haven't seen enough data, Jonathan, to speak even remotely intelligently to that question.
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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [33]
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And then just moving on. Build-to-suit activity in the U.S., not so much speaking for your company, but do you think the industry itself is going to be seeing more kind of requirements for that by the carriers over the next couple of quarters or years? Any movement that you're seeing on that front?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [34]
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Well, I think the last couple of years have been historic lows for new-builds industry wide. And I do think, based on my understanding of some of the requirements of FirstNet and some of the other deployments that some of the other folks want to make, that there will be more new-builds necessary. I don't know if they ever get back to, obviously, the days when people were building for coverage, but they should be greater than what they were over the last couple of years on an annual basis.
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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [35]
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Okay. And then I was curious about Brazil and any color that you could provide around the mix between colos and amendments as well as how you would think about the growth rates that you saw this quarter prior to escalator impacts.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [36]
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Well, Brazil, I think, is tracking logically. It is a less-mature market. You would expect the ratio of new deployments to favor colos over amendments, and that's exactly what we've seen ever since we've been there. We expect that to continue. In terms of the growth rates ex escalator, I think they've been fairly stable.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [37]
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Yes, they're about -- it's roughly 4% or so, John. You've seen our overall growth rate come down a little bit, and that's really the escalator dropping.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [38]
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And actually, we continue to be pleased with what's going on in Brazil given the economy, and we're actually seeing some signs of green shoots down there. The GDP, I think most people -- not that it's taking a tremendous leg-up, but most people feel it's bottomed and it's starting to climb back in the right direction. So we're -- we continue to feel very good about the long-term prospects of the Brazilian market.
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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [39]
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And then, lastly, in the U.S. how much of your land is owned outright? You gave kind of the owned and controlled stat. Is the outright ownership that's somewhere in this 30%, 35% range? Or how would you kind of ballpark that?
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [40]
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Yes, that's about right. That's about right. That includes some professional easements that we have, too, in that 35% range.
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Operator [41]
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We now have a question from Brett Feldman with Goldman Sachs.
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Brett Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]
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Two questions. One's really just a follow-up to the one that you just answered, which is a few years ago we had an issue with some land aggregators. I'm just curious, do you have anyone who owns a sizable amount of your land under your towers right now?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [43]
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No. That issue seems to have passed the spies in the industry.
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Brett Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [44]
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That's what I figured. So I'll ask my second question, which is as we hear the carriers talk more and more about how they're moving to the centralized RAD architecture, can you talk about how they may be using -- or maybe they're already using some of their macro locations as the hubbing point for all of these equipment, so kind of the host location for nearby small cells. I'm just curious if you've actually seen that play out, where when they come to your sites, they're actually increasingly interested in what you can offer them from a grounds-base level. And if not, do you think you're going to have to go see some investment phase, where there's something you need to do at your towers to actually support that type of architecture?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [45]
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The carriers -- well, the -- as you know, Brett, AT&T and Verizon have traditionally used 12 by 20 shelters at all of their outdoor sites. And within that shelter, they're allowed to do whatever they want. So there are many instances where this is occurring at our sites and we would not know it. What they're looking for is the right site with the right fiber proximity and the right connections to where they want to make those connections. But the actual ground lease, additional -- selling of additional ground space is not going to be that great of an opportunity at least with those customers because historically they have always contracted for fairly good-sized shelters that are going to be able to house most all that equipment.
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Operator [46]
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Our next question is from Rick Prentiss with Raymond James.
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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [47]
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A couple of questions around portfolio growth. I think in the second quarter, Brendan, you mentioned that some of the acquisitions were paid for in stock, almost 0.5 million shares. Can you update us a little bit about was that the buyer asking for that? Was that you? And I think it's been a while since you've done some kind of a stock compensation for M&A.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [48]
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Yes, Ric. That was a specific transaction where the buyer specifically wanted stock. That was the only option really available to us. But we are obviously actively repurchasing stock as well, so in effect, you can consider it cash eventually.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [49]
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Yes. It was all tax driven by the buyer.
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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [50]
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Tax-driven? Okay. And then Argentina, Jeff, you mentioned, obviously, went in there post the quarter and you mentioned that it could be a meaningful growth opportunity. Can you help us kind of size what you think Argentina might be? And then how do you mitigate kind of the FX risk?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [51]
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Well, the 35 towers we bought have all the carriers on them and they're predominantly denominated today in U.S. dollars. So there is a history in Argentina of negotiating and contracting in U.S. dollars. That will be our first choice going forward. I don't know that we will do that 100% of the time. And where we can't do it, we will do it -- we will manage that risk as we do. And our other non-U. S. dollar-denominated jurisdictions, primarily Brazil, where we match off expenses, we will look to local debt funding, although that has not been an attractive opportunity to date, although it is one that we are constantly evaluating. And ultimately, we will watch the size of the non-U. S. dollar-denominated revenues that come out of a particular spot.
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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [52]
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As you think about the market size of the portfolio in Argentina, is it more buying? Is it -- now that you've got a portfolio, things are building, a mixture of both? Just trying to think (inaudible).
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [53]
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There is -- one of the reasons we're excited is it's going to be primarily a longer-term build market that I think a company like ours that has excellent execution capabilities, great financial resources, long-term staying potential will be good at and the customers will recognize. There are 3 -- it's almost uncanny as to the mix of carriers down there. It's almost an equal split between Claro, Movistar and Personal/Nextel. You got 43 million people. The number of sites is low, and I think it's somewhere around 16,000 cell sites, which seems ungodly low. That sounds too low. I got to re-look it. I'm looking at some notes here. But it is a -- it's a country that has tremendously underdeveloped wireless. And it's a great country with great resources and a growing population, and we look at it much the same way that we looked at Brazil. But unlike Brazil, I don't think you're going to have an opportunity to get big quick there because of the way the currency has depreciated down there over time and the way the tax laws work. My understanding is most of the carriers down there, their tower portfolios have been depreciated to almost 0 and the tax hits on the sales or transactions would be unpalatable. And these -- and obviously, these are things that I'm mentioning because these have all been well thought and people have talked about them. And you can imagine that there have been a lot of bankers pitching these 3 carriers in Argentina to sell their towers, but there's some structural impediments down there that I think are going to make that unlikely. And we'll see. Maybe somebody will figure something out down there, but we're going into Argentina to build towers over a long period of time.
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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [54]
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Great. The last question for me is on U.S. fiber. Obviously, lot of transactions, all cash deals kind of going on. Can you update us on your thought on small cells, enterprise fiber, indoor DAS systems, and American Tower mentioned maybe some international opportunity for this, but kind of what your thoughts on fiber and how it might play into the space.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [55]
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Well, it's clearly a part of telecommunications infrastructure, but it's an entirely different business. And the fact that it may share some tenants or customers with macro sites doesn't mean it's the same business because it's not. And I think people have demonstrated that and people are starting to see that, both from an investment perspective and an overhead perspective. And we'll see, over time, a return perspective. It is not a business that we believe is necessary for us to maximize the assets that we have and maximize the returns for our shareholders, and we continue to look for exclusive opportunities that may involve fiber. Those would likely come in indoor opportunities, where you have some protectable rights to the real estate, things like that. But we really haven't changed -- notwithstanding the amount of activity that has occurred in that space between now and the last time we spoke, our views haven't changed.
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Operator [56]
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Our next question is from Nick Del Deo with MoffettNathanson.
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Nicholas Ralph Del Deo, MoffettNathanson LLC - Senior Research Associate [57]
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It's been a little over a year since you first laid out your goal of $10 or more in AFFO per share by 2020. As you look over the next few years, what would you say are the biggest sources of potential upside there? And what do you view as the biggest -- or the most relevant risks?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [58]
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I think organic lease-up could provide the most upside. I think the biggest risk could be FX.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [59]
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A significant increase in interest rates.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [60]
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Yes. FX and interest rates are the 2 big risks to the negative and organic -- I mean, if -- and if are slower, I guess if you...
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [61]
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Well, yes, but I -- that's more of an upside opportunity.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [62]
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Yes, because we've based it really on the last couple of years, I don't -- I see that as much more levered to the upside than I do as a risk to the downside. I do think the greater downside risks are the FX and the interest rates.
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Nicholas Ralph Del Deo, MoffettNathanson LLC - Senior Research Associate [63]
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Okay, so macro stuff that's outside of your control?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [64]
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Yes.
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Operator [65]
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We'll go next to Spencer Kurn with New Street Research.
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Spencer Kurn, New Street Research LLP - Research Analyst [66]
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So the last couple of days, there have been a lot of press reports about cable companies partnering or merging with wireless companies. I just wanted to get your thoughts on how you think about the impact of cable and wireless convergence on your business? And specifically, to what extent would that added capacity from cable alleviate the need for capacity on your towers?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [67]
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I don't think it does anything because ultimately what we sell is the radios and the antennas. We sell the thing that turns the signal into the wireless signal that connects with the phone. So notwithstanding all the fiber that might come with a transaction like that, you still have to have a radio and an antenna on the end of it that turns the signal into what connects with the mobile device. And that's ultimately where our business comes into play.
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Spencer Kurn, New Street Research LLP - Research Analyst [68]
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Got it. And does your mix of -- does your skew towards rural and suburban towers play a role in your thought process at all?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [69]
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Yes, I think it's extremely well positioned for the future because those markets are, I think, best suited to macro site architecture, whereas in the more urban markets, you have a lot of different options and where I think a lot of the fiber folk is and the cable folk has been.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [70]
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Our next question is from Colby Synesael with Cowen.
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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [71]
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Two, if I may. The first one having to do with unlimited. I'm just curious, since all the carriers have come out guns blazing with their unlimited offerings this year, have you seen any explicit impact with your business? Are they coming to you and explicitly noting maybe anecdotally or even more specifically in terms of the plan that it's because of the unlimited that they're having to perhaps do more activity than they had otherwise anticipated at this point in the year? And then secondly, I think all of a sudden, the cell sites -- or I was getting asked the differences between the various public tower operators, and American, in particular, in this most recent quarter, their growth is up I think about 60 basis points on a year-over-year basis. You're holding steady yourself at least in the U.S. I'm just curious, do you have any thoughts for why they might be seeing an acceleration in their business relative to yourself at this point?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [72]
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Yes, on the first question, Colby, I've got to believe the unlimited plays a part in the steadiness of our business and what we believe will be an uptick here as we move into '18 with the deployments of the additional spectrum. But in terms of coming right out and saying, "Yes, we're doing this because of the unlimited plan," no, that's -- the conversations were never quite that explicit or specific.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [73]
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Yes, Colby, on the second question, I can't really speak to how others are calculating their numbers or maybe more impactfully, what the potential influences of the accounting for MLAs, so it's hard for me to draw any real clear comparisons. But we can confidently say that we're not seeing any material variance and activity levels with our key customers that would be -- we'll be surprised if it was any different from what our peers are seeing. There may be occasional timing differences, but generally speaking, I would expect we'll all see our fair share of future organic growth opportunities.
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Operator [74]
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We now have a question from Mike McCormack with Jefferies.
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Michael L. McCormack, Jefferies LLC, Research Division - Equity Analyst [75]
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I guess, there's been some talk about alternative providers of wireless tower services, maybe just comment on that particularly and then also where you see sort of where you stand from a pricing power perspective. And then thinking about the 600 deployments that you said you're getting some applications now, but just trying to get a sense for when you think the real pace of that will pick up in a meaningful way.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [76]
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Yes, I think we're just starting to see the beginnings of that, Mike, and obviously, it will pick up from here. I can't really pick the quarter where it peaks, but it's well ahead of us, I think. In terms of the alternate providers, I think towers has always been a very entrepreneurial business. And people can build towers here and there and the local person who has the unique knowledge of the real estate where the zoning might lend itself to that can get a tower built, but it's not an easy process, in general. And in many cases, zoning and is going to make it extremely slow and cost prohibitive at best and just outright prohibitive at worse. I mean, if you look at the towers that are out there today, it's taken 30 years to build those towers. And it's not because folks didn't want to try and go faster, because they did. So yes, there will be some other -- there always have been folks out there besides the -- I'm assuming when you say alternative tower providers you mean people other than the publics as opposed to like hot air balloons?
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Michael L. McCormack, Jefferies LLC, Research Division - Equity Analyst [77]
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Correct.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [78]
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Yes, so let's -- and you'll always have that dynamic, and there will be some towers built. And I think you'll definitely see and hear some of that because I think, as I mentioned or answered one of the questions earlier, I think you'll have a greater need, particularly with FirstNet, where you'll have some extremely remote and rural needs, where I think you will have to have some new builds, and there will be some people interested in those.
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Operator [79]
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Our next question is from Walter Piecyk with BTIG.
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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [80]
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I'm just trying to get some specific timing on the sequence of FirstNet. So AT&T already said they're going to put it in their CapEx for this year, so we know what's happening in Q4. Do you get the call before or after they order the antenna as far as planning for the site?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [81]
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We would typically get the call from the turf vendor.
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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [82]
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That's fine, but is the turf vendor calling you to get the site or they're calling the guy to buy the antenna first? The vendor, as in like a CommScope.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [83]
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I don't know the answer to that. I mean, they're going to know -- they're going to have a pretty good idea of the sites because I mean the sites are well known and the inventory of what's on the site is well known and what its capability is. I don't know, Walter. (inaudible) I don't know what the timing is on the equipment side.
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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [84]
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But chances are, if they know your portfolio the antenna guy gets the call first and then they dial you up and say, "Okay, we're going to put an antenna or change the antenna on the site."
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [85]
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I mean, the applications that would be submitted would be very equipment specific and, therefore, antenna specific. So whether they've been ordered or not, we wouldn't necessarily know, but we would know what they're exactly planning to use so (inaudible).
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Whitney Fletcher, Deutsche Bank AG, Research Division - Research Associate [86]
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Well, they haven't been ordered yet, but if we're going to hit CapEx, presumably they're going to get ordered in the fourth quarter.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [87]
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Yes. And let me answer the question this way. We can move very, very quickly.
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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [88]
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Okay, can I move on to Brazil? Telesites today talked about how América Móvil, who's got about 18,000 sites in Mexico, is building like 1,000 a year. That's just new sites, like new-builds as opposed to whatever colos are doing. And the answer was that they're doing these not for coverage in remote areas of Mexico but dropping them for capacity reasons. So I'm curious if you're seeing any of that type of activity, meaning an accelerated tower build by América Móvil, Claro in Brazil. And also, I know you don't do a lot of builds there, but would you think about changing that since that -- it seems like that might be a strategy for América Móvil going forward?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [89]
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You mean smaller-type installations that are more surgical?
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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [90]
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No, I mean, building a new macro tower because there's 3 other carriers or maybe 2, with 1 -- became 1 that would want to add to those sites as they also need to add sites for capacity reasons. Basically, what Telesites said is América Móvil is not going back supporting towers for capacity because of all this LTE growth they're having. So I'm curious if you're seeing that in Brazil and whether you would be willing to build sites for them in Brazil, let alone just adding tenants to your existing portfolio.
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [91]
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Well, we know América Móvil is active in Brazil, they have been, and we know that they're building towers, and we do build towers for them. So I think the answer to all that is yes.
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Operator [92]
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Our next question is from Matthew Niknam with Deutsche Bank.
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Matthew Niknam, Deutsche Bank AG, Research Division - Director [93]
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Just 2, if I could. One on Peru and Argentina, just wondering if there's any incremental SG&A you expect to flow through. Or do you actually expect to leverage the existing LatAm base of SG&A across these newer markets? And then secondly on U.S. leasing activity. I think in the past, you said it was -- new business was about 60/40, with more of a skew -- I guess, 60% towards amendments. Has that changed at all into 2Q?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [94]
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We will leverage a lot of what we have, Matt, but we will probably be adding initially 10 people or so. I don't know whether it's 8 or I don't know whether it's 12, but say 10 between the new countries that will be brand-new additions. That should -- that will all be covered by the revenue and the cash flow we've picked up, so these markets will be EBITDA-positive from day 1, and a lot of the back office stuff that will be shared based on the strength that we have in the region.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [95]
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I'm sorry, Matt, your second question was on...
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [96]
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The split.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [97]
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The split, domestically or internationally?
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Matthew Niknam, Deutsche Bank AG, Research Division - Director [98]
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Domestically.
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Brendan T. Cavanagh, SBA Communications Corporation - CFO and EVP [99]
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Yes, domestically. So we moved closer to 60 -- I'm sorry, to just over half this quarter is I what I believe we said. So it's roughly 55% coming from amendments and 45% coming from leases. That is obviously much less from amendments than we've had for the last 2 years, but I'm not sure that, that's necessarily indicative of a longer-term trend. I think it's more specific to this particular point in time. So we would still expect amendments to most heavily be what we see it coming over the next couple of years.
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Operator [100]
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That will come from Brandon Nispel with KeyBanc Capital Markets.
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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [101]
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So you guys mentioned the absolute level of new leasing activity has increased sequentially for the past few quarters. Should we expect that to continue throughout the rest of 2018? And then Jeff, maybe on a comment that you had on the new spectrum deployments coming online, really focusing more on 2018. You said growth -- that organic leasing activity should pick up. I mean, is that assuming that Metro, Clearwire and Leap lessen in terms of impact on your results? Or was that assumption more on the gross organic side?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [102]
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Yes, it's really all about the true commencement of the 600 megahertz, the 2.5G and the FirstNet business. That's what all those comments are based on, and we do think it's just a question of time. None of that is in our 2017 remaining guidance. We do think it's coming. We have talked about and have seen 600 megahertz applications. We've talked about how we approach guidance, which we're going to only include things once we've actually booked them and recorded the revenue which has not happened yet. So it's all coming, and we will be reporting it and it will be showing up in our numbers when we receive it, but it's coming.
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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [103]
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The $42 million in new leasing activity in 2017, are we looking at a number closer to $50 million in 2018?
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Jeffrey A. Stoops, SBA Communications Corporation - CEO, President and Director [104]
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We don't get into next year's guidance until the end of the fourth quarter.
Thanks everyone for joining us on this call, and we look forward to reporting our third quarter results in October.
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Operator [105]
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Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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