How SBA continues to find double digit growth in International markets

SBA Communications is a company that needs no introduction. TowerXchange constantly reports on their international acquisitions and speculates on potential future deals but today, we had the pleasure of talking once more with Kurt Bagwell, President of SBA’s International business. Kurt shared with us some in-depth insights into the rationale behind the company’s initial move South of the border, the company’s financial model as well as some hints on their possible next steps in Latin America.

TowerXchange: Kurt, you joined SBA back in 2001… Please could you share a history of how the company, and the tower industry, developed from humble origins and a period in 2002-3 when SBAC, AMT and CCI shares were valued at around a hundredth of their value today – it must have been a helluva ride for management teams and shareholders!

I can definitely say it’s been quite a journey! SBA is now in its twenty-sixth year of operation and a lot has changed since 1989, when it started as a site acquisition company. In the nineties, the company entered the tower ownership business and went public. At that time, the towerco model came of age and the industry began to blossom.

I joined SBA in 2001 after eleven years with Sprint and immediately we hit the 2001-2003 timeframe which represented a time of reset for the global economy as a whole. The tower industry was affected as well and a realignment of the market proved necessary. SBA made necessary changes, but we stayed very focused on our core assets and business model.

As the economy recovered, our business model proved to be a successful choice and since then, we’ve seen tremendous growth and have been able to provide great returns to our shareholders.

TowerXchange: What motivated SBA to diversify from North America to the CALA region?

About five years ago, we were still experiencing a good level of growth in the U.S., but we realized that we needed to look around and open new markets if we wanted to achieve even greater results and extend our high growth rates

In 2009, we launched in Central America with the goal to achieve both organic revenue as well as portfolio growth. And now, we can say we are right on track with over two thousand sites in five Central American countries and a successful business model.

Our drivers were to grow methodically and at a fast pace, and the following move to Brazil has further contributed to our expansion.

TowerXchange: What is left to buy in terms of towers in Brazil in terms of carriers’ portfolios and how is SBA planning to keep growing in the market? 

Over the past two years, we’ve been extremely busy putting together a very strong portfolio of nearly seven thousand Brazilian sites which provided the critical mass we needed to be relevant among Brazil’s MNOs as well as to achieve economy of scale.

To date, we are looking at reinvesting local cashflow into greenfield projects via build-to-suit activities and we will look at complementing that with some small acquisitions.

I would say there is still plenty of space for long term growth in Brazil. In fact, the ratio of users per tower is still extremely high at approximately four times the level of the U.S. – there are still plenty of opportunities for geographic expansion and enhanced network density in both urban and rural areas, especially since the volume of usage keeps expanding.

SBA Communications is a long term player in Brazil and we’re constantly exploring opportunities to build and buy sites. We really don’t see Brazil as a market near saturation as there are various open channels to us both in terms of organic and M&A growth.

A few years ago, everyone was referring to the U.S. tower market as a slowing industry but we haven’t experienced any major slowdown and, if anything, the market keeps offering new opportunities. Brazil, with its roughly  two hundred million inhabitants, is definitely not close to a standstill. The country is currently experiencing change and tougher economic times than it has in the recent past, but there is still a lot happening. Now is the time companies like SBA can really add value to the local industry.

TowerXchange: Beyond Brazil, where is the company considering adding to its footprint over the next 12-18 months? 

At the moment, we are very focused on the Western hemisphere and we are looking at launching in a few other countries which will allow us to leverage our knowledge of the local market and culture as well as our long standing relationship with carriers.

Primarily, we are looking at Western Latin America, a move which is made possible thanks to our Spanish and Portuguese-speaking team based in our LatAm offices, and our South Florida headquarters. Our local teams will allow us to penetrate new regional markets very  effectively.

We aren’t ready yet to divulge the details of our next moves but we will do so in due course. I can say there are a few options in the pipeline.

TowerXchange: What is your view of Chile? Have the regulatory changes around permitting affected the growth of the country’s telecom tower sector?

We aren’t experts on Chile but we’ve been following the regulatory changes that have affected the tower business over the past couple of years. I would say that it’s definitely been a tumultuous start and the new zoning rules resulted in some sites being decommissioned.

However, I believe things will rationalise themselves over time. For tower owners, the presence of strict zoning rules is actually a positive thing long term as having a good site in such a country provides a strong competitive edge! This is a transitional phase but I can see things playing out positively for towercos.

TowerXchange: How do the tower market dynamics in Central America compare to those in South America? Is tower cash flow comparable? 

Central America presents a similar business model to the U.S. but with a faster growth in demand for mobile data, which has been driving these investments.

From our perspective, the experience in Central America has been very positive. The cost of doing business in the region has been very low and we’ve been able to maintain most expenses in U.S. dollars, hence reducing if not eliminating foreign exchange risk. The growth profile is excellent and Central America is definitely an area where we will remain deeply involved.

Although the scale of the geography and population aren’t as great as those of South America, Central American countries present very vibrant economies which for us is a very important factor to consider.

There isn’t much difference between the tower cash flow in Brazil and Central America. In fact, the spread between the ground rent and the tenant rent is the biggest driver and pretty similar in both areas. Opex isn’t significantly different either. But Brazil definitely presents higher labour costs in light of a stringent legal framework, so scale is important to balance out the higher SG&A expense.

The main difference between Central America and Brazil is represented by the ground rent which in Brazil is passed through to our tenants pro-rata. In theory, we always prefer for the ground rent to be included in the total tenant rental rate but in this specific case, the market operates under a pro-rata cost sharing method. In fact, it was a critical factor which allowed us to comfortably buy large carrier portfolios that had pre-existing terms on the underlying ground leases. Additionally, while the carriers share in the success of multi-tenancy due to this, SBA also gains from the lack of inflation-related increases in this part of the expense base, historically the largest for a towerco.

TowerXchange: In a recent editorial, TowerXchange noted how SBA’s international leasing revenue has more than doubled since 2013 (6.3% vs 13.5%), but that you have self-imposed a nominal limit of 25-30% non USD denominated revenue – what was the thinking behind that limit?

To be honest, this is quite a straight-forward business decision. SBA doesn’t grow for the simple sake of growing. We develop a careful, long term growth plan as required by our shareholders and in line with our business thinking.

Because of the strength of the U.S. dollar at the moment, our nominal limit has been at the centre of an exaggerated discussion. In reality, we see it as very simple math hence we’ve spoken about it publicly.

The limit was put in place as we keep financing non U.S. dollar revenues in the U.S. debt market, where the current cost of capital is considerably lower. This isn’t anything special but simple risk management. By balancing this we know we can support our debt and are very comfortable with it, since we don’t have to worry as much about forex volatility.

TowerXchange: And do you see SBA remaining a Western hemisphere-only player for the foreseeable future?

As previously mentioned, this is the strategy for the foreseeable future. That said, we have been researching internationally and will continue to do so. If and when the right occasion presents itself, we will consider opportunities on a global scale.

TowerXchange: What’s your opinion to be found on the relative merits of acquiring tower portfolios built by carriers compared to those build by independent developers? Are independent developer towers typically more valuable because they are more frequently built in unique locations with demand for at least a second tenant, because they are typically built with structural capacity for multiple tenants, or does the fact that they have typically been more effectively marketed mean there is less growth potential?

SBA has been involved in over eight-hundred M&A transactions and the vast majority of them has been with third party developers rather than carriers. This is particularly true within the U.S. In LatAm most of our deals to date have been with carriers, simply because of the fact that most independent developers are not yet ready to sell in LatAm, and there are fewer of them to start with.

In our experience, we favour deals with developers. A “developer” is a third party tower operator that creates sites, just like us. They usually pick locations with multi-tenancy in mind and consider ground lease conditions very carefully, with a long term mindset and trying to push for preferable rights for the tower business. Most developers are able to sign good long term contracts with carriers and perform extensive due diligence when they develop sites - hence the quality of their documentation and compliance with regulations tends to be great. Generally speaking, developer portfolios achieve higher standards and are built with infrastructure sharing in mind, which is obviously what we are after.

Carrier portfolios can be as good but usually present different characteristics. Towers tend to be lighter as they aren’t built with multiple tenants in mind, and ground leases aren’t always set up with a long term approach. Carriers tend to deal with shorter term leases which aren’t favourable for us.

Another important factor is that when buying a carrier portfolio, the towerco acquires the bulk of it, inevitably including a small proportion of sites that aren’t fit for our purposes. We prefer sites without many other towers around them and built with a “sharing mindset”. When buying from a carrier, you acquire a variety of assets.

That said, we simply have to take all these factors into consideration when we model the growth profile of a given portfolio and that results in the price we are able to offer being higher or lower.