Jeff Stoops on SBA’s leveraged capital appreciation strategy

SBA Communications CEO Jeffrey Stoops reflects on his tenure with the company from the inception of the independent towerco business model in the late nineties, through tough lessons learned when the bubble burst in 2002, to international expansion and a potential future REIT conversion. In this exclusive interview, Jeff shared with TowerXchange insights into the rationale behind SBA’s international expansion in Canada, Central and South America, and what it takes to be the CEO of one of the top towercos in the world.

TowerXchange: Thanks for speaking to us Jeff. How did you get into the tower business?

I graduated in law back in 1984 and I accepted a job at a Florida-based law firm, Gunster Yoakley & Stewart (now Gunster) in Palm Beach County. I climbed the ladder from starting Associate all the way to full Partner. I never disliked the practice of law but I often wondered, while advising corporate clients, whether it would be more interesting on the decision-making side of the business rather than as an advisor. I thought that having all those responsibilities would be more rewarding and, in a way, even fun.

In 1996, I got a call from a colleague whose brother in law worked at SBA. He asked me whether we could help with M&A and corporate advisory and that is how I met Steve Bernstein (the company was formed as Steve Bernstein and Associates). Steve was presented with an offer to take control of the company, which seemed good on the surface but did not actually recognise the right value of the free cash flow generated, so I talked him out of the deal.

As Steve’s lawyer, we strategised a lot and imagined how the business could shift from an asset-light to an asset-intensive model. You see, SBA had been established in 1989 and back then was a service company, finding sites for carriers, negotiating leases, pulling permits and managing construction but ultimately turning over the assets to the carriers. The company would look similar post-transition, with the same employees, the same skill-sets and the same customers. The only difference was capital intensity.

So we built a legal framework and started raising money through private investors. This turned out to be the first and only time we financed SBA privately, and by early 1997 we had raised US$30mn.

At this point, Steve gave me the offer to join SBA, which was too good to refuse. I became the company’s General Counsel but my real job was developing the asset ownership side of the business. There was no tower industry at that time. Customers had not been ready to outsource the ownership of towers, which were still perceived as highly strategic. Thinking backward, there was absolutely nothing at the time, no framework, no benchmarks, no rulebook to follow. We shaped the industry from scratch. SBA Communications and American Tower received the industry’s first build-to-suit contracts from Bell South DCS (now part of AT&T).

Although from different starting points, we all arrived at a similar business model innovation around the same time; American Tower was being spun off from American Radio, while Castle Towers (which became Crown Castle) was started by real estate developers. SBA was the only company who came from a site development background. Back in the late nineties, there were probably a dozen to twenty tower entrepreneurs who were all responsible for creating the tower industry as we know it today – some are not in the business anymore as a result of consolidations, sales et cetera. SBA Communications, American Tower and Crown Castle happen to be the last ones standing.

TowerXchange: So how does the initial vision of a towerco in the early days compare with today’s reality?

In hindsight, the idea was obviously pretty good from day one. We still use some presentation slides that were conceptualised back then in 1997. We thought the industry would be mission critical, exclusive, with low churn, and we were right.

On the other hand, we thought we were going to have more customers than just the four that exist today in the U.S., but we underestimated the amount of equipment we would see on towers and the rental fees. Therefore, from a revenue perspective, we are actually ahead but we are reaching those targets with fewer customers.

TowerXchange: During the tower industry’s dark days when bubbles burst and valuations tumbled, what enabled SBA to survive where others did not? What lessons were learned which should be conveyed to towercos formed since those challenging times? 

In June 1999, we went public at US$9 per share. Eighteen months later, our shares were valued at US$57 each and I felt really smart. And in 2002, they hit US$0.19. Yes, that’s correct, nineteen cents.

We went public at the end of the U.S. dotcom bubble and valuations were not based on monetary criteria. Back then, our value was based on how many towers we owned rather than on how much money we were generating. And we took too much debt on, leveraging at 15x in those days.

Once the U.S. telecom market busted in 2002, we experienced a dramatic change in the lending community.  Less friendly faces; lots of restructuring specialists instead. Two of the then five public companies in the sector did not make it and SBA got quite close to filing for bankruptcy. We had some creditors who were looking to take SBA over; they had amassed large positions in bonds and were looking to own the equity as they knew the real value of the business. They proposed a bankruptcy reorganisation and offered management the opportunity to stay on with a lucrative compensation package. Where I was raised, however, bankruptcy was a dirty word and something to be avoided at all costs. So we fought against reorganisation in bankruptcy as hard as we possibly could.

We knew that because each tower is a business in its own right, we could hive off towers as necessary to raise enough money to pay off enough of our debt and avoid bankruptcy. We had two interested potential buyers. We sold off 800 towers west of the Mississippi and used the proceedings to pay off our bank debt, which was the most troubled portion of our capital structure. Then we began a long and steady climb to reposition ourselves. We traded debt for equity, saw the market slowly improving, refinanced our business and grew our cash flow day after day.

And we learned a valuable lesson! One of the reasons why this business is so attractive is that it’s very leverageable but too much debt is simply not sustainable, no matter which industry you are in. We run at less than half those levels of leverage today.

Oh, and three years later to the day we bought back all of those 800 towers!

TowerXchange: So at which point did SBA start looking outside of the U.S. and decided to overlay an international component to its growth narrative?

Around 2008 it became apparent that at some point, we would run out of opportunities to invest in the U.S. as a result of the ever-increasing level of consolidation and our increasing amounts of investable capital.

At SBA, we run a leveraged capital appreciation strategy so every day we think of ways to maximise the use of our balance sheet and how we can re-invest the capital we produce. And that is why we started looking outside of the U.S. – to keep our balance sheet optimised.

Canada was the first market we got into which was not much of a leap although there are some differences from the U.S. model, then we entered Central America. At first, we got interested in Costa Rica because it was the last country in the Western hemisphere that had not privatised its wireless business yet and only had one player (State-owned ICE). So we entered Costa Rica anticipating the auction which was considerably delayed. In the meantime, we happened to buy sites in Panama, which technically was the first country we entered in Central America, before expanding into Costa Rica, El Salvador, Nicaragua and Guatemala.

Operationally, the Central American model is not significantly different from the U.S. model, and the carriers all develop and operate networks in the same way. The biggest differences were cultural; standards, customs and traditions. There is slightly more need for secure compounds in Central America, but we do not operate in any frontier country where a level of manned security is needed. And because we were the first to enter in the region, we were able to shape contracts the same way we did in the U.S., which obviously was a benefit. Additionally, in Central America our expenses and revenue are almost entirely denominated in U.S. dollars.

Then we moved to Brazil, which is a huge market with plenty of potential but where we had to adapt to an existing model, since we were not the first ones entering the country.

Brazil presents some differences in the way contracts are designed. Ground rent is pass-through, which is a positive aspect but does not allow towercos to have the same degree of control over the relationship with the landowner. Generally speaking, we always prefer to have a direct relationship with landlords and this is why, over time, we are taking over that aspect in spite of the pass-through. Customers were not in favour of this change at first, but now do appreciate the fact that they do not deal with that hassle any more. This ensures we maintain healthy relationships with landowners, which for us is a priority.

In Brazil, we also have a pre-agreed pricing structure for certain types of installation and equipment so there is no negotiation needed, which is different from the U.S. and Central America where we have site specific pricing. Lastly, because of exposure to the Brazilian Real, we use CPI escalators, whereas in countries where contracts are denominated in U.S. dollars, the escalator is fixed.

TowerXchange: Have you actually run out of opportunities to invest in the United States?

There are still a large number of small players that will continue to provide interesting opportunities in the United States but our desire, and our investors’ desire, is to grow.  To do that, every year we have a larger asset base from which to move the needle, so we need to seek sizeable portfolios that simply are not available in the domestic market.

That said, we are still looking at probably buying and building around 1,000 sites in the U.S. in 2016 but that is not 5% of our portfolio. To find that 5% or greater growth rate we are targeting, we do need to look internationally.

TowerXchange: I know you have been asked this question during the recent Q1 earnings call but I cannot help but notice that Brazil is very quiet in terms of organic growth for all towercos… I understand SBA can still leverage and lease up its 7,000+ tower portfolio but what is the outlook for the country? And are we likely to see some degree of towerco consolidation anytime soon?

To be frank, considering everything that is going on in Brazil, economically and politically, we are pleased with where we stand. We are actually ahead of our plans and if you normalise currencies, we have done well financially and bought down multiples on our assets dramatically on a constant currency basis.

Right now, we are not able to know when things are going to improve but once they do – and I believe they will – our customers should start to invest more. Brazil has so much going for it and we would really like to see our customers making more money in terms of ARPU and free cash flow, which would result in higher investment in their networks.

With regards to possible consolidation, I do not think we will see any other towercos in addition to SBA, American Tower and Grupo TorreSur driving to a scale of over 6,000 towers in Brazil and making a long-term business. Most private equity investors have a three, five or seven year time horizon, and the market is perhaps tougher for them than it was two or three years ago, so we are very active in terms of seeking to acquire new assets since we are generating a lot of cash in Reais that we’d like to reinvest in Brazil. But I think at the moment the problem is to find the right price and agree with the seller because there are some expectations that simply cannot be justified in terms of multiples given current market conditions in Brazil.

TowerXchange: Argentina and Cuba: what is your take on these virgin tower markets? 

I would include Argentina in the list of countries that present very attractive opportunities for us alongside Peru, Chile and Colombia. Therefore, we would definitely consider entering Argentina if we could find the right deal.

Cuba is a different story and notwithstanding the efforts of the U.S. government to reinstate diplomatic relations, I do not think that the Cuban government is open yet to the idea of a U.S. based company owning part of the country’s telecommunications infrastructure. One of Cuba’s key problems is the certainty in terms of use and ownership of the land. We do not know whether this could happen or not but once the dictatorship ends, previous landowners who were once expropriated could claim those lands back. While most commentators seem to expect remuneration to be in money rather than real estate, land ownership is a critical element of the towerco business model, and this still seems to be a challenge in Cuba.

That said, once these aspects are solved, Cuba could become an interesting target for towercos!

TowerXchange: Are U.S. towercos currently undervalued?

I think towercos are very much undervalued on a DCF basis, hence we are devoting investment capital into repurchasing our own stock.

TowerXchange: What impact do you feel the carve out of Telcel and Telefónica’s towers into Telesites and Telxius might have on the CALA region? What’s your view on the relative merits of carve-out and IPO versus sale and leaseback?

This situation will take some time to settle but these companies have already outsourced the new-build skill set and that might be hard to bring back in-house. Additionally, Telefónica already sold most of their towers in the region and do not have huge site inventory anywhere. So I am not sure how rational it would be to start operating Telxius with so few tower assets remaining on their balance sheets in Central America. They have a few more towers in Brazil, but have still sold the vast majority. I also think that if an independent towerco has a tower in an attractive location with good zoning, Telefónica will still decide to co-locate if they do not have an existing tower available, rather than building a new one.

That said, the short-term impact of this situation might be that we will not see many new towers being outsourced. And we will have to compete with Telxius for new build and co-location services. Also, if some towercos were expecting Telefónica to sell their sites in certain countries, this probably will not be the case anymore. But there were not many expectations with regards to América Móvil ever selling towers.

With regards to the relative merits of carve out and IPO versus sale and leaseback, you would need to ask the carriers to know for sure, but my view is that with an IPO they can raise money while retaining a certain degree of operational control. Since they were getting good multiples in sale and leaseback too, I do not think they can expect higher valuations via an IPO.

TowerXchange: As the CEO of one of the world’s largest telecom infrastructure businesses, what keeps you up at night?

The times when being over-leveraged threatened our survival are long behind us. We run a solid, sensibly leveraged capital appreciation strategy today. Nowadays my thoughts are focused on increasing returns for our shareholders. I do not have any operational concerns and I would like to continue our history of very strong growth and value creation for our shareholders.

TowerXchange: Where would you like SBA to be in let’s say ten years? And how do you envision the tower industry as a whole in ten years from now?

I can see SBA being larger, with a greater reach, higher share value and with increased cash flow.

SBA is likely to be converted into a real estate investment trust (REIT) by then, and we intend to begin paying a dividend within that ten year timeframe. From day one, SBA was never focused on being the largest towerco, but on being the most rewarding for our shareholders. Since we are not yet a REIT, we have no obligation to pay out substantial dividends and are allowed to keep compounding capital in the company. We do have room for more investments within and beyond the United States.

Even though we source capital in U.S. dollars, we will seek investments that pay in currencies other than U.S. dollars. We have to set a nominal maximum of 25% non-U.S. dollars revenue, which means we have plenty of spare capacity for international investments. While our near term focus remains on the Americas, I believe at some point in the next ten years we will invest beyond the Western hemisphere.

Allow me to go back to the beginning of this interview and reiterate that towers are separable business units so we can continuously add them with a great degree of operating leverage and that is what we will continue to do. I do not see SBA shifting its business focus, which will remain on macro sites since towers will always be the backbone of our customers’ networks.

So in the future, we will keep an eye on domestic and international opportunities that can offer the best ROI for our shareholders.