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SBAC - SBA Corporation


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Guest fedcep

Hey everyone,

 

I haven't had time to put together a writeup on my website yet but I was wondering what you guys think of this idea. This idea has been written up at VIC as well.

 

SBAC is the smallest of three cellphone tower operators, the other two being AMT and CCI.

 

The overall idea is the following. It may take a while to play out because the sell side has been pushing this stock for a while now:

 

Management gets compensated on EBITDA without regards to cost of capital, so they have all the incentive to expand their balance sheet even if the transactions are dilutive, and that's exactly what they are doing. They were paying 10x cash flow for the towers in 2005, now they are paying close to 19x and getting really close to their cost of capital. And they keep issuing debt to an already stressed balance sheet (almost no cash, 3b assets of which half is goodwill, and 3b liabilities), meanwhile insiders are jumping out at $2m a clip per transaction. They are also understating capex -- the figures they are using now imply that each tower is good for at least 250 years, which is ridiculous (see the VIC writeup for more details on this). This is true for SBAC's competitors as well. Sell side has it as a buy across the board, yet they are getting pretty close of breaching covenants. All of this while trading at like 15x ev/ebitda. And to top it all, the puts have extremely low implied vol.

 

I'm long SBAC puts. They provide a better risk/reward given that they are trading at historic lows of IV. I've been meaning to publish a writeup but just haven't had the time yet. I appreciate any thoughts on this idea. Thanks for reading.

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Cellphones towers gets depreciated much faster then their usefull life. Which is like the government giving a tax break to this industry. It's probably the reason why they use EBITDA.

 

19 times EBITDA seems very rich valuations indeed tough. At what multiple did the other two been buying?

 

BeerBaron

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All the operators do the same things, I am VERY familiar with this industry, won't publish many thoughts but feel free to PM me for the full brain dump.

 

Consider this aspect as well, they operate somewhat similar to a bank but in reverse.  They borrow long term and lend short term, the lending being loaning out the space on the tower for lease payments.  The lease payments over interest costs minus operations is profit (or lack thereof). 

 

So you get the situation where if leasing demand drops at the renewal (most leases are 5 years renewable) revenue takes a hit yet interest costs remain on the outstanding debt.  To watch leasing demand watch antenna technology, tower space is rented as space not bandwidth.  So say a tower holds 10 antennas regardless of tech.  If a new tech comes along that can consolidate two antennas into one the wireless carrier has incentive to upgrade to save costs, but the tower company loses out.

 

Another point, the US market is saturated.  The top tower locations are already taken, right now the marginal additions are things like towers out in the middle of Colorado that are grossing $2k a month holding the local police and fire department antennas.

 

The multiples you have are a lot lower than what I am familiar with.

 

Compensation is off the charts for both management and employees, this is a very hot sector right now.  The easy money was already made.

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  • 10 months later...

Thanks for the post, good idea.  How did you get your LT debt figure for SBAC?  I see $5.3 B in debt at 9/30 but you show an additional $2 B.

 

I get SBAC - 16.5k towers, $14.5 billion Enterprise Value => $880,000 per tower.  That seems to be in line with the others.

 

AMT - 51k towers, $38.7 billion Enterprise Value => $760,000 per tower

CCI - 31.6k towers, $33 billion Enterprise Value => $1,000,000 per tower

 

What am I missing?

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Thanks for the reply, great catch. Can't get enough proofreaders. I updated the EV data and the revised metrics are as follows:

 

(in '000s)

Business value $10,066,725

Cash $1,441,045

Restricted cash $22,696

LT debt, current $529,595

LT debt $4,776,439

Value to common stockholders $6,179,040

Shares outstanding 126,418

+ Convert effect 7,097

Total shares out 133,515

Value per share $46.28

Current price $71.85

Upside 55%

Implied tower value $12,824,131

Implied value per tower $967

 

Leasing rates were increasing up until 2011 when they last reported tenants/tower. Here's the history of tenants/tower, leasing revenue per tenant, and growth for SBAC. It seems like in 2011 the leasing rate increase matched the value of the lease escalators of 3 to 4%:

 

1998 1.2 $20.6

1999 1.5 $14.7 -29%

2000 2.1 $10.6 -28%

2001 2.1 $13.4 26%

2002 2.2 $13.6 2%

2003 2.3 $18.7 37%

2004 2.4 $19.8 6%

2005 2.5 $19.5 -2%

2006 2.5 $18.5 -5%

2007 2.5 $20.7 12%

2008 2.5 $20.1 -3%

2009 2.5 $22.9 14%

2010 2.4 $24.5 7%

2011 2.3 $25.5 4%

 

 

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The way I see it, there's a few potential catalysts in place:

 

1) Lower capex from carriers as a result of the FCC rule that was upheld in December would mean lower EBITDA growth thus less room in covenants

2) More carriers following Sprint's lead in implementing lightRadio-based DAS. And the MIT solution, if executed as they promise, would definitely be a game-changer in terms of bandwidth needed. Right now package management for wireless is extremely inefficient, that's one reason why so many towers are needed.

3) Inflation/rate increase would increase cost of borrowing so there'd be less accretive acquisitions

4) Bond spread widening would also increase cost of borrowing

 

Right now you need about 2.9 average tenants per tower to justify the valuation, but only CCI has accomplished this in the past few years. Below is the historical tenants per tower figures for SBAC, AMT and CCI:

 

2011 2.3 2.1 3

2010 2.4 2.3 2.9

2009 2.5 2.4 2.9

2008 2.5 2.5 2.7

2007 2.5 N/A 2.6

2006 2.5 N/A 2.5

2005 2.5 N/A 2.25

 

What I find most attractive about this idea is that while inflation may be a low probability event, the payout would be large on the puts given that implied volatility is so low. And the increased insider sales combined with the new risk factors in the 10-K for 2011 may suggest that insiders are already seeing increased risk in the business model.

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I know it is a very, very crude comparison, but the per tower price does seem very high.  Look at this comparable:

 

Sale of T-Mobile's assets :

 

T-Mobile USA Inc. agreed to sell rights to 7,180 of its transmission towers to Crown Castle International Corp. CCI -1.12% for $2.4 billion in cash, giving the wireless carrier a capital infusion to upgrade its network.

 

In recent months, Crown Castle had emerged as the lead bidder for the towers, pulling ahead of American Tower Corp. AMT -0.33% and Global Tower Partners, a company owned by Australia's Macquarie Group MQG.AU +0.81% .

 

The deal gives Crown Castle, a Houston-based cell-tower company, exclusive rights to lease and operate the T-Mobile USA towers for about 28 years. After that, Crown will have the option to buy the towers for an additional $2.4 billion. The deal is expected to close in the fourth quarter.

 

http://online.wsj.com/article/SB10000872396390444712904578024122088858106.html

 

So crown-castle paid 2.4B up-front, with 2.4B due in 28 years to finalize the deal.  If you discount 2.4B at a very mild 3% in 28 years that's about $1B.  So they are paying 3.4B for 7,180 towers, or 474k per tower.  Meanwhile SBAC is going for over a million with debt included?  Perhaps SBAC has a higher quality mix but I am not sure about that.

 

SBAC also bought some towers this year:

 

SBA Communications Corporation (Nasdaq:SBAC) ("SBA") announced today it has entered into a definitive merger agreement with certain affiliates of TowerCo that own 3,252 tower sites in 47 states across the U.S. and Puerto Rico.

 

The consideration to be paid by SBA will be $1.2 billion in cash and 4.6 million shares of SBA Class A common stock, implying a total transaction value of $1.45 billion based on SBA's average three-day closing price of $54.48 as of June 22, 2012. The shares in the transaction will be subject to certain restrictions on transfer. The cash consideration shall be paid from a combination of cash on hand, existing credit facilities and up to $900 million in financing commitments from J.P. Morgan. The transaction, subject to customary closing conditions, is expected to close in the fourth quarter of 2012. Pro forma for the closing of the transaction, SBA expects that its net debt to annualized adjusted EBITDA ratio will be approximately 7.8x to 8.0x. SBA estimates the TowerCo assets will produce approximately $93 to $95 million in tower cash flow for the full calendar year 2013.

 

http://ir.sbasite.com/releasedetail.cfm?ReleaseID=686523

 

So, if you do the math they are paying about $450k per tower.  Is there more to the company than the value of the towers?

 

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  • 2 weeks later...

Sorry for the late reply. Somehow I don't get notifications when someone replies to the thread.

 

Here's a few more historical transactions: http://3.bp.blogspot.com/-GHXRDwi9xwA/UQKtHQVX7tI/AAAAAAAABJY/Gpv1qjhsMyI/s640/4.png

 

So they are paying around 400k/tower, and the quality of the assets is decreasing as measured by tower cash flow -- ie, price paid as a multiple of cash flow is increasing.

 

In addition to the towers, SBAC has a development consulting business line with fairly steady revenue hovering about $85m - $90m year, of which around 85-90% is COGS. SBAC doesn't disclose how much SG&A goes to the towers vs. the consulting business, so I valued it by plugging in a multiple of 11.5x gross profit/enterprise value, which is the average of a few public developers, and got a value for that business of $125m. I included this value in my estimation of implied value per tower for the stock: http://2.bp.blogspot.com/-Hm9eB2mlkuU/UQMda_vXtaI/AAAAAAAABK4/WhmXF2pFV-U/s1600/imptwr.png

 

There's definitely additional value to the zoning permits to build towers on a piece of land, since they are hard to obtain. But this value is included in the price that they are paying for the towers they've been buying at $400k. What's more, in many cases landlords are realizing this value and monetizing on it in the form of contingent rent that they receive from the tower operators (in addition to tower cos. paying 3 to 4% price escalators on the land to landowners). Interestingly, contingent rent has been growing faster than revenues for SBAC: http://2.bp.blogspot.com/-ORJs_8e_34s/UQKtHk9BwOI/AAAAAAAABJk/IjqgJMBW8nA/s1600/6.png

 

In fact, since we're looking at historical revenue growth, I think this graph shows what's happening pretty clearly: they've been growing revenues by growing the balance sheet even faster. Total debt alone has grown faster than revenues, and they also doubled the # of shares outstanding since 1997: http://2.bp.blogspot.com/-wMmy_WghB0g/UQKtIPELwxI/AAAAAAAABJ0/2uiLR9uO5bQ/s1600/8.png

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The valuation just seems extreme.  Even if you exclude depreciation, I have operation cash flow around $320M.  With an $8.6B market cap that puts it at 34x operating cash.  It seems that the numbers only work if land values continue to go up or their revenue can substantially increase.  If interest rates go up, they're in trouble.  If utilization goes down, they're in trouble.  You have technological innovation which should in time decrease their value.  Yeah I am short this one.

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I would even consider buying puts rather than shorting outright, because implied vol for the puts is at 7-year lows or so. That's on my writeup as well.

 

The most baffling thing is that they had converts expiring this February at $41 and they had lost their hedge on 7m shares in connection to those converts as a result of the Lehman bankruptcy, and they settled in cash (instead of issuing shares at 20x book)

 

By the way, my valuation assumes no tax or SG&A for the towers whatsoever.

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  • 2 weeks later...

Hi guys, just uploaded a quick update on today's earnings on Sumzero so I figured I'd post it on here as well. Looking forward to hearing your thoughts. Thanks

 

 

2/21/2013 - Update: Q412/FY12 earnings

 

At first glance it would seem 2012 was a good year, given high double-digit growth in revenues beating consensus by 2%. The rest of the facts aren't as encouraging, straight out of the press release:

 

Tower portfolio increased by over 60%

Leasing revenue growth? Lagged portfolio growth: 58%

Tower cash flow growth? Even worse: 47%

TCF margins: down 3.5%. 77.7% versus 80.5% in Q411

 

They also bought in 2013 seven additional towers at ~$700k/tower, and agreed to buy 95 more at ~$500k/tower. These figures top the high range of the previous purchases.

 

SBAC also announced an additional $600m in refinancings in 2013. They are refinancing 1.875% converts and they expect to pay 3.5%. Since the 2019s currently pay ~5%, this probably means they are thinking about issuing more converts, i.e., diluting shareholders further. Given that SBAC implied vol is at all-time lows, probably not the best time to issue converts.

 

Either way, their cost of financing is increasing, and the price they are paying for the towers is also increasing.

 

Stock traded flat after hours, hardly matching CEO Jeff Stoops' claim of a "very strong finish to a remarkable year for SBA".

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  • 2 months later...

Hi guys, just uploaded a quick update on today's earnings on Sumzero so I figured I'd post it on here as well. Looking forward to hearing your thoughts. Thanks

 

 

2/21/2013 - Update: Q412/FY12 earnings

 

At first glance it would seem 2012 was a good year, given high double-digit growth in revenues beating consensus by 2%. The rest of the facts aren't as encouraging, straight out of the press release:

 

Tower portfolio increased by over 60%

Leasing revenue growth? Lagged portfolio growth: 58%

Tower cash flow growth? Even worse: 47%

TCF margins: down 3.5%. 77.7% versus 80.5% in Q411

 

They also bought in 2013 seven additional towers at ~$700k/tower, and agreed to buy 95 more at ~$500k/tower. These figures top the high range of the previous purchases.

 

SBAC also announced an additional $600m in refinancings in 2013. They are refinancing 1.875% converts and they expect to pay 3.5%. Since the 2019s currently pay ~5%, this probably means they are thinking about issuing more converts, i.e., diluting shareholders further. Given that SBAC implied vol is at all-time lows, probably not the best time to issue converts.

 

Either way, their cost of financing is increasing, and the price they are paying for the towers is also increasing.

 

Stock traded flat after hours, hardly matching CEO Jeff Stoops' claim of a "very strong finish to a remarkable year for SBA".

 

Has anyone looked at AMT from the long side?  Or is this a crowded trade?

 

 

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I know SBAC fairly well (AMT better) but just to play devil's advocate against your short thesis:

 

- Be careful that the metrics you are pointing to aren't really indicating deteriorating economics.

- Revenue growth may lag tower growth as new towers are acquired in int'l markets where the tenants per tower, hence revenue, is lower.

- This doesn't mean the tower economics are worse - in fact, depending on the region, int'l towers are getting ~15-20% ROIC after a few years as they add more tenants per tower.

- Looking at trad'l metrics to value towers is, I think, a textbook example of why it is important to remember multiples are a result of the valuation, not the driver.  Tower P/E and P/FCF multiples are incredibly high, primarily due to all the capital that is reinvested to grow the tower base. If that reinvested capital is generating excess economic returns, then the shareholder should want to them to reinvest tons of the FCF.  This is the all powerful "compounding machine".  Simple metrics don't uncover this fact.  The reinvested capital is extending the durability and magnitude cash flows into the future.  Every $1 is increasing shareholder value by something >$1.

- One could run a scenario that shows ZERO new tower growth and run the resulting FCFs - so turn off the new tower spicket and run just the current portfolio.  With 3.5% annual pricing (all of which drops to the bottom line), zero tower growth and modest increases in tenants per tower, it isn't difficult to show FCF doubling in a 5yr period.  This isn't achieved by making heroic assumptions.  Simply getting their 3.5% contractual price increase and slowly increasing the amount of equipment on each tower.

- Combine this huge ROIC on incremental capital invested with copious opportunities to reinvest capital at very attractive returns = compounding machine.

- Agree that at some point they could go the way of radio towers but that is far far into the future - certainly something to monitor as technology evolves.

- Valuation per acquired tower needs to be looked at in the context of the region of purchase.  Towers in the US continue to get more expensive, and lower ROIC, but much of the opportunities lie in the int'l markets are, as a rule of thumb, half the price for 66% of the US economics.

- I'm not saying these stocks have a huge margin of safety here but just be aware some of your metrics may not be pointing to deteriorating economics as you suggest.

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  • 1 month later...
Guest fedcep

Thanks and sorry for the late reply. Always good to get the opposite view. My thoughts:

 

- Be careful that the metrics you are pointing to aren't really indicating deteriorating economics.

Answer: Which ones, specifically? In any case, the main point of the thesis is that you're selling a highly levered business at astronomical valuations. Not a lot has to go wrong in order for the common to get crushed. The cheap puts add to the convex appeal of the idea.

 

- Revenue growth may lag tower growth as new towers are acquired in int'l markets where the tenants per tower, hence revenue, is lower.

Answer: They are buying existing towers with existing tenants - would love to hear thoughts on why they should be able to add more. In fact their flagship acquisition in Brazil was from Vivo, a leading Brazilian cell phone carrier. Hardly uninformed players.

 

- This doesn't mean the tower economics are worse - in fact, depending on the region, int'l towers are getting ~15-20% ROIC after a few years as they add more tenants per tower.

Answer: Would love to see the math on this.

 

- Looking at trad'l metrics to value towers is, I think, a textbook example of why it is important to remember multiples are a result of the valuation, not the driver.  Tower P/E and P/FCF multiples are incredibly high, primarily due to all the capital that is reinvested to grow the tower base. If that reinvested capital is generating excess economic returns, then the shareholder should want to them to reinvest tons of the FCF.  This is the all powerful "compounding machine".  Simple metrics don't uncover this fact.  The reinvested capital is extending the durability and magnitude cash flows into the future.  Every $1 is increasing shareholder value by something >$1.

Answer: I agree. Now at what rate does SBAC have to increase shareholder value to justify trading at 25x EV/FCF?

 

- One could run a scenario that shows ZERO new tower growth and run the resulting FCFs - so turn off the new tower spicket and run just the current portfolio.  With 3.5% annual pricing (all of which drops to the bottom line), zero tower growth and modest increases in tenants per tower, it isn't difficult to show FCF doubling in a 5yr period.  This isn't achieved by making heroic assumptions.  Simply getting their 3.5% contractual price increase and slowly increasing the amount of equipment on each tower.

Answer: That scenario is overly optimistic because the price escalators don't flow to the bottom line even after assuming zero capex, which is unrealistic. The main competitive advantage is the zoning approval of the land, much of which SBAC doesn't own. In fact, the leases SBAC pays also have 3.5% price escalators. As for the 3.5% escalators that SBAC receives, they are contractual and therefore already priced in. At these valuations, stock would get crushed if they go to zero tower growth. Also can you clarify on the math? Cause if I start at 100 with 3.5% p.a. growth I end up with 119 after five years -- far from doubling.

 

- Combine this huge ROIC on incremental capital invested with copious opportunities to reinvest capital at very attractive returns = compounding machine.

Answer: Again, can you expand on your calculation of ROIC? This is a very capital-intensive business. SBAC generates 1b revenues on 6.6b of assets. That's 15% on revenues. Far from "huge" ROIC. By comparison, a true high ROIC business, such as KO, generates 48b revenues on 86b assets. And this of course doesn't take into account the absurd amount of leverage management has thrown on the balance sheet in order to expand Adjusted EBITDA and collect bonuses. Even at KO's ROIC levels -- markets break, and debt (currently at 5.3b and counting) can put a business on a squeeze very fast and force to liquidate assets at unfavorable prices. We're already seeing wider junk bond spreads as of the last month and a half and things continue to deteriorate since the last FOMC meeting: http://www.forbes.com/sites/spleverage/2013/06/19/high-yield-bond-prices-slump-yields-surge-after-fmoc-meeting/

 

- Agree that at some point they could go the way of radio towers but that is far far into the future - certainly something to monitor as technology evolves.

Answer: I agree. Again, the appeal to this idea is the payoff. Forecasting is a loser's game, but it's easy to determine a fragile ship and SBAC common is as fragile as it gets.

 

- Valuation per acquired tower needs to be looked at in the context of the region of purchase.  Towers in the US continue to get more expensive, and lower ROIC, but much of the opportunities lie in the int'l markets are, as a rule of thumb, half the price for 66% of the US economics.

Answer: They are already seeing issues with legislation in Latin America. That's SBAC's "international" market -- second-tier assets whose value hinders on "crony-capitalist" mostly corrupt government officials authorizing zoning for their towers in countries without rule of law.

 

- I'm not saying these stocks have a huge margin of safety here but just be aware some of your metrics may not be pointing to deteriorating economics as you suggest.

Answer: The common is already seeing signs of distress as the bond market reverts to more reasonable spreads and sell-side is growing increasingly skeptical about these guys, particularly as management continues to dump stock. $8.15m worth of insider sales in 2013 alone.

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Comcast is/has been rolling out a service where the routers in people's homes have an additional capability to provide public wifi.  This is a true threat to the cell-phone industries in metro areas.

 

This might have already been posted somewhere else on this site but it is relevant to SBAC, in a long-term way. 

 

http://www.businessweek.com/articles/2013-06-11/comcast-is-turning-homes-into-public-wi-fi-hotspots

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  • 2 years later...
  • 1 year later...
  • 3 years later...

Relative to other sectors, cell towers have underperformed this year and therefore are gaining some of my interest.  Akre has about 11% in AMT and 5% in SBAC and both are about midpoint between 12 month low and high (whatever you want to make of those data points)

 

I thought the following excerpt from the latest SBAC earnings call was interesting:

 

And while I am hesitant to bring up this only but boldly, we will end 2020 just short of an annualized fourth quarter AFFO per share of $10. If not for the significant negative FX movements experienced this year, which we believe were largely due to the relative strengthening of the U.S. dollar and Federal Reserve Bank policy in response to COVID, we actually would have made that $10 by ‘20 target we set out almost 5 years ago. If nothing else, I think this is really indicative of the strength and predictability of our business and our ability to manage it.

 

Is anyone out there following SBAC or other cell tower businesses?  Would you say that the predictability is still there in the business? Have they become more cemented and predictable (while maybe lower growth rates)?

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