Description

Generally speaking, most market pundits believe that interest rates “take the stairs up and the elevator down.” Against that backdrop, I have been looking for investments where I can get paid to wait for the Fed elevator to ding, and believe I have found one: SBA Communications (“SBAC”).

SBAC is a global developer, acquiror, and operator of wireless communications infrastructure. Founded in 1989 in Boca Raton, FL, SBAC produced a 15% IRR for shareholders from its IPO in 1999 to its share-price peak in December of 2021, handily outperforming its peers (CCI and AMT).

SBAC is what happens when you take a generational market opportunity and combine it with an incredible business model and a best-in-class group of operators:

The generational market opportunity:

·         When SBAC was getting its start in 1990, there were 11 million global mobile cellular subscribers (ITU October 1999). Today, there are 8.9 billion, for a 34-year CAGR of 22%. Data consumption over that period grew even faster, and is expected to continue growing at a 25% clip through 2029.

·         Ultimately, the best businesses are always a levered reflection of their end market dynamics. Whether it’s Transdigm or TSMC (or SBAC), being in the right market matters the most, and SBAC is in one of those markets.

The incredible business model:

·         To provide the adequate coverage (does my phone connect?) and capacity (does my phone send and receive at adequate speeds?) required to compete, wireless carriers spent inordinate amounts of capital to ensure their networks could attract as many subscribers as possible.

·         As the demands for coverage and capacity from the subscriber increased, the capital required increased as well. In the late 90’s (after the telecommunications act of 1996), wireless carriers threw in the towel and started selling their tower portfolios to aggregators and leased back the requisite space, freeing up capital for increased network coverage and capacity growth (and occasionally, transformational, destructive M&A…)

·         This change in network capital allocation created the following economic opportunity for tower companies:

·         The average tower in the US costs $250,000 to construct, and is almost always built with at least a single committed tenant. The first tenant’s revenue gets eaten up by the tower’s fixed costs: land rental expense (as most sites are leased), insurance and site monitoring, leaving the operator with a 5% pre-tax, unlevered yield.

·         The marginal cost to add a tenant is essentially electricity, as the equipment additions are paid for by the new tenant. Unlevered yields climb quickly to mid-to-high teens with a second tenant and grow from there. Market terms call for 5 to 10-year leases with annual escalators (~4%) and automatic renewals.

·         Churn is almost entirely driven by carrier M&A (creates duplicative equipment when both carriers are on a tower pre-merger). Once a tower is up and operating, it generally doesn’t come down.

·         Once scale is achieved, there is almost no marginal SG&A to add towers to the portfolio, driving incredible contribution margins.

·         In sum: creditworthy, long-term tenants with minimal churn + strong unlevered (and very leverage-able) unit economics + meaningful economies of scale

The best-in-class operators

Jeff Stoops, SBA’s CEO from 2002 to 2023, joined the Company as General Counsel in 1997 just as it was transitioning from a network services provider to an owner and operator of wireless communication sites. He was the longest serving CEO in the wireless communications space and delivered a 16% TSR during his tenure (23x MOIC), capitalizing beyond his peers on the generational market opportunity and incredible business model available at SBA. In Jeff’s own words, SBAC is “a financial engine that needs to execute well… we’re not finding the cure to COVID.” That execution focus is deeply embedded in SBAC’s culture, and shareholders today get the benefit of Stoops’ longtime number 2, CFO Brendan Cavanagh, as CEO going forward as of 2023.

This is also a team that is ruthlessly focused on ROIC. “We are much more narrowly focused than some… we are focused on return on invested capital. You can move a lot of the different levers that people look at by growing in certain ways, but if it’s not long term and a good return on invested capital… it’s been something we’ve shied away from.” SBAC’s ROTIC has been 25%+ the last 5 years.

As John Thorndike, author of “The Outsiders” has been quoted, the best CEO’s do two things well: manage the business well to optimize the profits and after that deploy the profits effectively. And that’s what you get with the SBAC team.

What matters?

If you believe that this is a great business in a great market with a great team (as I do), this is really a bet on interest rate declines with limited opportunity for permanent position impairment. The Company is highly levered (6.3x net) and has $5.9B of maturities coming due between now and November 2026. It is also a REIT, and its valuation is very sensitive to changes in interest rates. It is currently trading at 17x EV/EBITDA, roughly its lowest valuation in the last 20 years (average over that time period was 22x). If rates decline:

1.       The maturity wall is refinanced at attractive terms

2.       Wireless carriers turn the capex spigot back on, driving tower portfolio growth

3.       The market cheers and rerates the stock to its historic multiple

If we are higher for longer, management’s financial discipline likely generates a piddling, inflation-like return and no harm, no foul (I do not believe we will touch new valuation lows given the business’ quality and historically low leverage).

I believe rates will decline, even if marginally, in the next two years, triggering this refinancing/rerating and generating a mid-20%’s IRR with limited downside.

Catalyst