Q & A: SBA’s Top Exec on the Industry, Mergers and Growth
SBA Communications has been in the news a lot lately, and for good reason: a pair of recent acquisitions netted the company more than 5,500 tower sites in domestic and international markets.
The expanding infrastructure provider is banking on the trickle-down effect of rising demand for mobile data to propel it into its next stage of growth. After all, rising wireless traffic means operators will have to invest in infrastructure, and that’s good news for companies like SBA Communications.
Jeff Stoops, president and CEO of SBA Communications, recently sat down with Wireless Week to talk strategy, the state of the industry and whether recent legislation is actually helping towers get built faster.
As he sees it, there are plenty of growth opportunities in the industry, but dealing with state and local jurisdictions can still be problematic.
Continue reading for more of the discussion from their interview, brought to you by PCIA’s 2012 Wireless Infrastructure Show. This is an edited transcript.
Wireless Week: SBA Communications is paying $1.45 billion to buy 3,252 tower sites in the United States and Puerto Rico from TowerCo, and has also purchased 2,300 domestic and international sites from Mobilitie. Aside from the revenue generated by the addition of the assets themselves, how will the transactions help SBA leverage growth opportunities stemming from rising data demands and LTE deployments?
Jeff Stoops: Both the Mobilitie and the TowerCo assets are mainly located in the more populated areas. While not urban - that’s primarily a rooftop market – the towers are located in more populated quasi-urban and suburban areas. We think those areas will be a predominant beneficiary of 4G capacity infill that we expect will occur once the basic 4G rollout has been completed. This is really a capacity play, and our belief in increasing capacity needs that will emanate from 4G acceptance at a consumer level.
WW: Some of the sites SBA acquired through the TowerCo deal are for Sprint's iDEN network, which is in the process of being decommissioned. Can you characterize the impact of the iDEN shutdown on the TowerCo assets?
Stoops: We have quantified it as a maximum potential of $20 million to $25 million per year, but not starting until 2015. The potential revenue loss will be incurred in the 2015 to 2018 period. While you never like to lose revenue, if you know it’s potentially coming, you can quantify and analyze it. This is why we felt comfortable in moving forward with the transaction.
WW: And when you say an impact of $20 million to $25 million, you mean a decline in revenue, not a loss?
Stoops: Correct. It will be offset by other tenants coming on, Sprint Network Vision CDMA upgrades and rent escalations in the other leases. I do not expect you will see a decline in SBA’s revenue. You will see numbers that perhaps would have been higher had we not had this, but we expect to continue to grow our top line all through this period.
WW: There’s been a lot of talk about T-Mobile USA selling off its towers. Does SBA plan to bid on T-Mobile’s towers, or is that a purchase you're not interested in?
Stoops: With our Mobilitie and the TowerCo transactions, our plate is pretty full this year. I do not believe you’ll see us pursuing another materially large transaction, at least for the remainder of this year.
WW: You hold a position on PCIA’s board of directors. From your discussions with the other executives on the board and the association’s members, what would you say are the biggest challenges and opportunities for infrastructure providers like yourself?
Stoops: The challenge is really keeping up with the myriad of state and local regulations. There’s less rhyme or reason at the state and local levels because you’re dealing with thousands of different jurisdictions. At the federal level, things are fairly stable for the infrastructure industry at this time. Our primary focus is making sure that our customers are getting what they need to allow them to continue to grow their wireless businesses and reinvest in their networks.
In many respects, the infrastructure industry will rise or fall based on the profitability of our customers because, while there is a pretty clear connection between wireless demand and infrastructure needs, there also needs to be an investment for our customers.
WW: Part of what’s going on in the industry are mergers and acquisitions like those you’ve conducted recently, and I’d like to get your take on the state of consolidation in the tower industry. Do you think there’s more to come?
Stoops: I do. It’s a business tailor-made for consolidation, because in many respects it’s a real estate business. If you look at other types of real estate businesses, there are the small developers who sell out to the middle market, who in turn sell out to the huge real estate investment trusts. Towers aren’t really any different.
Smaller developers are every bit as good as SBA, in some cases maybe better, at getting towers built in their local markets. But they are often in financial positions where they probably don’t want to own those assets for a long period of time, so they may look to sell. If they are good assets, we’re happy to buy them.
I think that kind of cycle will continue for a long period of time. As time has progressed through the wireless industry, the usable distance between antennas has shrunk. Five years ago, you may have gone five miles before you needed a second tower. Now, you might only be able to go just a mile or two. Over time, the need for more towers has been created through increasing wireless demands. Companies large and small have stepped in to fill that void: carriers that build their own towers, public companies and the small guys who may only build a tower or two. The fact that new towers are constantly being built will allow consolidation to continue to occur.
It’s also a business that’s good for consolidation because the overhead and back offices we have developed are really capable of handling so much more. For instance, we’re increasing the size of our company about 50 percent through the Mobilitie and the TowerCo transactions, but we’ll probably only have to increase our headcount by 5 to 10 percent. When you have that kind of efficiency, it makes sense to keep getting larger.
WW: More and more carriers are implementing data caps in an attempt to manage capacity. Does this have an impact on SBA’s revenue? If so, how?
Stoops: I think it’ll be a positive for us, because I believe it will match our customer’s profits with their infrastructure needs. Consumer demand for data will continue to grow, and we expect that our customers will set data caps at levels where not only the minutes of use will grow, but their revenues will also grow. That gets back to my earlier point about the connection between increasing wireless use and infrastructure. As one grows the other must grow, but somebody has to pay for it and make a return on investment. If these plans improve the financial health of our customers, which obviously is the intent, we’re all for it.
WW: There's been a lot of talk about small cell deployments as the solution to the capacity crunch. Do you view small cells as a significant new market for infrastructure providers, or is it too early to tell?
Stoops: I think it’s an opportunity. What I’m not sure of at this point is how it will look economically to the infrastructure provider: whether it will look like the traditional tower model or something different. I do think there’s an operational need, but whether it’s something that is financially interesting for us and our shareholders remains to be seen.
WW: On the topic of small cell solutions, distributed antenna systems can play a key role in providing coverage inside buildings. How do you see demand for improved in-building coverage playing out with ExteNet Systems, a company in which SBA holds a considerable stake?
Stoops: It is a big opportunity and it’s increasing as we speak. The number of projects that ExteNet is working on and the number of inquiries it’s received about in-building has grown dramatically. It is a direct result of the customers’ desire to offload traffic from their macro sites. In urban markets, that’s going to continue.
WW: SBA is a major sponsor of this fall’s Wireless Infrastructure Show in Orlando. What are you looking forward to? What do you expect to see?
Stoops: We look forward to the show every year because it is a great time and place for the industry to come together. You see a number of folks in our industry only at the show each year, so it’s a great place to catch up, network and meet. I’m not sure that there will be any industry-changing announcements at the event; that’s not really why we do it. We do it as a means to get the entire industry together, catch each other up on what’s going on and then make some plans for the upcoming year.
I expect an optimistic tone and a good turnout. It’s been a good year for our industry since the last show. It will be great to catch up with everyone.
WW: The infrastructure tie-up between Telefonica and Vodafone in the UK is allowing the companies to decommission duplicate cell sites. Do you think we'll ever see any interest in a similar arrangement between U.S. operators, or is collocation as far as it goes?
Stoops: There have been a couple attempts in the United States to share infrastructure, but they never worked from the carriers’ perspective because providers here continue to hold out network quality as a prime differentiator. Plus, a lot of carriers use different technologies and frequencies here, so it’s more difficult in the United States than it is in Europe. It seems that we have a more robust economy and financial prospects here, so there aren’t the same financial pressures that are driving what’s going on in Europe.
I think if you asked any operator, their first choice would be to own, operate and maintain their own network. If you were to ask the folks in Europe who are sharing infrastructure whether it was being driven by operations or economics, I think the answer would be economics. I’ll never say never, but Europe seems to have a very different business climate than we have here in the United States.
WW: Access to financing is important to the infrastructure industry, as you know. How is the uncertain state of the economy affecting companies’ ability to procure loans from banks? Is it still pretty difficult?
Stoops: It seems to be a world of the haves and the have nots. Fortunately, I believe SBA is in the world of the haves. You might have seen we recently raised $800 million of eight-year 5.75% notes, which we were told is one of the lowest rates ever paid by a company of our ratings classification. I think that shows how much investors value the tower business model.
Our company and our peers have always enjoyed some of the best access to capital markets of any business out there. But I think it may be a different picture as you move to smaller projects. I suspect it’s not that easy for someone who wants to build a couple towers to go out and find local financing. While we have no trouble raising financing, it’s because we’ve done it now for 15 years and there’s a certain group of people that understand our business model and provide us with financing. If you were trying to build a tower or two and your local bank was the only source of financing, I’m not sure how receptive they would be. And based on what I’ve observed, this applies across all industries. The larger companies seem to be having an easier time raising financing than the smaller companies.
WW: Related to the state of the economy and regulations, this summer's jobs bill included provisions that made it easier to add new equipment to cell towers and base stations. How important was that legislation for the industry?
Stoops: It was very important, especially in certain geographies. Many areas had already allowed collocation by right because it was logical. If you already had a tower, why would you require additional permitting for the next tenant to go on it? But there were certain places in the country that did not do that, like southern California and some places in the Northeast. In those areas, this legislation was extremely important.
WW: Is there more that you would like to see on the legislative and regulatory front?
Stoops: The new federal legislation will need to be clarified, and rules will need to be promulgated to make sure the intent of the law actually does get carried out. I’m optimistic that will get done, and done well because it’s a fairly straightforward concept.
On the federal side we don’t see a tremendous number of issues at this time. Our industry really has more issues on the state and local regulatory and permitting side. That’s a challenge we have to keep working through every single day. There’s no doubt that, if we had uniform citing rules promulgated by the federal government, infrastructure could be rolled out faster, but that falls squarely within the political difficulty and reality of federal versus state rights.
Going back to the theme that tower infrastructure is primarily real estate, towers are one of the most traditional types of local businesses. It’s politically difficult to impose a federally driven siting scheme that would override state and local permitting and permissions that historically are required for real estate to be developed.
WW: What do you see as the major impediments to the construction of new cell sites? Does it all go back to these small state and local issues.
Stoops: Yes, but we as an industry have worked through it. The reason our industry has done well with permitting is people have not built towers unless they’re absolutely necessary. That helps towers get approved. Carriers will always prefer to collocate on an existing site, since it’s more of a sure thing, it’s quicker, and it allows them to do what they need to do in a much more abbreviated period of time. The industry has been very responsible about not over-building so there aren’t too many towers out there. In fact, there aren’t enough.
The impediments continue to be state and local. We’re based here in Boca Raton, Florida, which I think needs a lot more towers. But it would be difficult to get them permitted because of “not in my backyard” attitudes and the local political climate. You’re always going to have that. Over time, we accomplish what needs to get done, but it could be better if you had greater local acceptance. I wouldn’t call it a major impediment, however I would call it an impediment we’ve learned to live with for the past 15 years.