SBA Communications, Inc. (SBAC - $107) 13.6BN Eq Cap, 21.9BN TEV

Recommendation: Buy SBAC

SBA Communications is the third largest owner-operator of wireless towers in the United States. Over

the last several years, management has aggressively grown its portfolio of US based tower assets while

expanding into international markets (predominantly Brazil). As of September 30, SBAC owned 15,509

towers in the US and 9,602 internationally. While tower assets have been embraced by investors over

the past decade due to their attractive financial characteristics and secular growth profile, recent events

have provided investors the opportunity to own a best of class asset coupled with high quality

management at an attractive price. Management, who have a proven track record of capital allocation,

has recently changed their capital allocation policy and begun a stock buyback program. In fact, the

company started buying back stock in the second quarter of 2015 ($150mm) and accelerated that pace

in 3Q ($250mm). This is a significant change in posture, as this is the first time the company has bought

back stock since they spent $225mm in 2011 and $107mm in 2010. Decelerating revenue growth in

2015, coupled with a below consensus 2016 guide (largely due to FX issues and final iDen based roll off

from Sprint) has rebased expectations, as well as the share price. At current levels investors are

purchasing a high quality asset whose operating momentum is near a cyclical trough. Wireless network

buildouts / CAPEX releases should drive a reacceleration in revenue growth in 2H16, with a powerful

2017 tailwind. I believe shares in SBAC could allow investors to compound money at or above a mid-

teens rate over the next five years. Time arbitrage really pays off for long term investors as sell side

analysts do not properly account for capital allocation/portfolio growth.

Business Overview

SBA Communications owns and operates tower infrastructure in the US, Brazil and Central American

countries like El Salvador. The company derives its revenues from the leasing of antenna space on their

towers to wireless service providers such as AT&T, Sprint, T-Mobile and Verizon Wireless. In the US,

which is over 85% of their revenue base, service providers enter into long term leases (typically 5-10

years with additional 5 year options) with rent escalators of 3-4% per year. Internationally, leases tend

to have a longer initial term (10 years) with rent escalators built into the structure. While there are

short term hiccups in growth rates due to the wireless operator’s network spending plans (and currently

currency issues…BRL), this business is a growing annuity stream with extremely strong cash flow

characteristics. In 2014, SBAC generated domestic tower cash flow margins of 78.6% (+450bps YOY) and

international margins of 63.6%, while maintenance capital expenditures run at 2-3% of revenues. Over

the next five years, SBAC has the opportunity to further grow its portfolio (management has publicly

articulated a target of 5-10% a year) and expand margins, while returning copious amounts of cash to

shareholders in the form of buybacks.

Economics of a Tower

Towers are vertical structures built on a parcel of land, designed to accommodate multiple tenants

(wireless operators, government agencies, etc.). The tower company typically owns or has a long term

lease on the tower structure and the land below it, while the tenant operates their equipment on the

structure. At the end of 2014, SBAC had an average of 1.8 tenants/tower and 73% of their structures

were on land that is owned or controlled for over 20 years. Their average life of the lease is 33 years

with only 5% of leases maturing in the next 10 years. To better illustrate I have taken the following two

slides from American Tower’s (AMT) slide deck “Introduction to the Tower Industry and American

Tower”.

Like other real estate businesses, there is powerful operating leverage inherent in tower assets. SBAC

has the highest tower cash flow margins in the United States (about 80%), and is in fact well above Class

A office properties owned by the likes of Boston Properties or SL Green which are in the 60% range.

Once a structure is constructed with a tenant, additional tenants generate incremental margins

approaching 100%. These dynamics make it such that incremental returns on invested capital continue

to improve on a unit level as well as on a consolidated corporate level.

Driving Revenue Growth

Portfolio growth

SBA, like other tower operators, drives revenue growth by increasing the size of their real estate

portfolio, increasing the number of tenants / tower and driving rate increases over time. In order to

drive portfolio growth tower companies can grow slowly through a build strategy (~$275k/tower) or a

buy strategy. While there has been a significant consolidation of the wireless tower ownership over the

past 15 years, there remains runway for further concentration. According to wirelessestimator.com, as

of November 19, 2015, there are 117,022 towers located in the United States owned by a total of 114

companies. Per the most recent public filings, AMT owned 40,066, CCI owned 39,692 and SBAC had

15,509 as of September 30th. US Cellular still owns a few thousand towers (after divesting nearly 600 of

them to Vertical Bridge Holdings in December of 2014) while there are a number of PE backed portfolios

that could be on the market. Private market multiples are currently quite high, as they have expanded

from the 15.5x SBAC paid for their last sizable US transaction, Mobilitie, in the spring of 2012. More

recently AMT paid over 21.5x for Verizon’s portfolio. According to management teams some assets are

being shopped with multiples in the low to mid 20’s on Tower Cash Flow (TCF).

In addition to driving US portfolio growth, operators have expanded outside of their core market.

American Tower (AMT) has been the most aggressive with their international expansion as they now

derive nearly 40% of revenues from markets such as Brazil, India, and African infrastructure. SBAC has

been more focused on Brazilian expansion over the past few years. In fact, they have systematically

acquired tower assets in the country over the past three years. SBA has committed nearly $1.5 billion of

capital over a series of purchases from both Vivo and Oi with multiples in the mid-teens on a TCF basis.

Contract quality remains high, and given inflation issues (partially driven by FX and structural

imbalances) rent escalators are CPI based as opposed to the “more traditional” 3-4% in the US and El

Salvador. Given recent currency volatility, management has reduced guidance for fiscal 2016 below

prior consensus estimates and also committed to only using local currency cash flows for further

portfolio expansion.

Demand Growth

As wireless networks have improved and customers have migrated from feature phones to

smartphones, there has been a significant increase in data demands on the networks. Beyond unit

growth, tower operators work to increase the number of tenants they have in order to increase per

tower revenue density. Over the past twenty years, there has been a significant wave of demand from

the wireless operators. In fact, wireless carriers have systematically increased their CAPEX as they have

migrated networks from 2G standards to the current 4G. At the end of 2014 it was estimated that

within the US 41% of wireless subs were 4G while another 44% where 3G. Over the next five years, 4G

penetration will continue to increase in the US while there will be further penetration in international

markets.

As wireless data demands continue to increase exponentially, operators must create additional network

capacity. Wireless data capacity can be added by layering in additional cell sites (such as macros/towers

or by deploying small cells and Distributed Antenna Systems) or by deploying additional spectrum to

existing sites. Below is a chart from RBC showing new site demand from the US operators.

2015 has been a cyclically slow year for new leasing activity due to a number of factors. Firstly, AT&T

slowed its network buildout pace as they have been focused on DTV integration, their large purchases in

the AWS-3 auction, as well as Mexico. Secondly, Sprint’s funding issues have impeded its ability to

spend the required capital to move their network strategy forward. On the flip side, Verizon has been

spending at similar levels while T-Mobile continues to invest heavily to improve user experience and

drive postpaid subscriber growth. As shown below, SBAC has outsized exposure to both T and S relative

to peers.

Given SBAC’s exposure to AT&T, its decrease in wireless spending led to a rather significant deceleration

in SBA’s organic domestic cash site leasing revenue. In 3Q organic growth was 5% down from 6.5% in

2Q and 7.3% in 1Q. While this has disappointed investors, management telegraphed the slowdown in

AT&T spend throughout the year. Here is an exchange on the 4Q14 earnings call.

Philip A. Cusick - JPMorgan Securities LLC Hey, guys. Thanks. Can you talk about the guidance a little bit and what's going on in the U.S.? Lot of strength in the fourth quarter, and it doesn't seem like there was a lot of sort of one-time stuff. So where's that coming from? And there has been a little bit of, I would say, not consistent between some of your compatriots about what AT&T's doing. Are they sort of on, off year-over-year? Can you give us a little bit more visibility into what you're seeing there? Thanks.

Jeffrey A. Stoops - President, Chief Executive Officer & Director Yeah. The strong fourth quarter print, Phil, really was driven by the operational activity that preceded it in the second quarter and third quarters. You sign things up; takes a little bit of time before revenue begins to be recognized. So what you saw there was the result of tremendous activity in the year prior to that. AT&T has slowed now, and they slowed down beginning in the fourth quarter. That is the primary reason why we saw the shift in amendments, from amendments to leasing. At least from our perspective, I would agree, with the comments from one of our peers that echoed that, they continue to be off. They're doing things, for sure, but they're off the pace that they were in the first half of last year. And we'll see how that goes the rest of the year. But that slowdown was well known to us at the time we gave our prior guidance, and there's not much that has changed on that front.

Here is Jeff Stoops on their 2Q call flagging how low AT&T spending actually was. His comments on

AFFO/share are also instructive and consistent with his message for years.

When pressed a little more on carrier spend and the change in capital allocation (the newly initiated

buyback), Stoops once again refers to “intrinsic value” and a five year forward model.

That was the rearview mirror. Let’s look through the windshield. On forward looking basis,

management has made more positive commentary in regards to AT&T as well as broader industry

spending. Here are comments from their 3Q call.

Sprint has been diligently working to improve its funding and liquidity profile. In fact Sprint announced

on November 20, 2015 the creation of Mobile Leasing Solutions, LLC which will enable Sprint to do a sale

and lease-back of certain leased devices. In the announcement the companies talked about $1.1bn of

cash going to parent at deal close. While one transaction / deal structure alone does not fix the

situation at Sprint, it is a clear move in the right direction. Management at Sprint, as well as their

controlling shareholder, SoftBank Group Corp, have been vociferous about the needs to further build

out the network.

Financial Model

As discussed above, SBAC and their tower peers have extremely strong financial models driven by strong

secular demand (from investment grade/near IG customers), high cash flow margins with increasing

incremental margins. While there can and have been short term ‘air pockets’ of incremental demand

from specific wireless carriers, the long term trend is clear. Time and time again, investors have been

rewarded to step into tower operators when they disappoint due to lack of growth (most of this

disappointment is due to FX and a light CAPEX year from T). The buildout of the AWS-3 spectrum, a

tailwind to network CAPEX in 2017 and beyond, followed by the 600MHz band that will likely come up in

the Broadcast Incentive Auction (Spring 2016) provide visible demand drivers for tower owners. In fact,

these buildouts will likely lead to a reacceleration in transponder/revenue growth for the sector.

I doubt there are many that would disagree with the core tenants of the top line thesis for towers.

While some operators like CCI are more focused on driving growth through small cells, demand for

macros (i.e. Towers) will be strong as small cells work best in densely populated urban areas (I know this

is hard for Wall Street to believe, but NYC is not the rest of America). In fact, AMT’s head of

International Operations made some interesting comments on a wireless operators views on small cells

vs macros at the Morgan Stanley European TMT Conference in mid-November. Yes…I am calling out the

big Crown Castle (CCI) bulls on small cells.

I must take a minute to address the recent “bombshell” guidance for 2016 (well at least for hair trigger

hedge funds). Management guided EBITDA of $1.113-1.133bn which compares to a prior consensus of

$1.19bn. As some of you may have noticed, I have used presentations from SBA’s competitors. That is

because SBA doesn’t put them out. In my humble opinion, management could do a little better job

communicating with the street broadly speaking. For instance at the Goldman Sachs Communacopia

conference in mid-September Jeff Stoops sounded pretty darn confident. With that said, I will try to

explain the “major” differences between prior estimates and the company’s guidance. Of the

approximately $70mm shortfall I would ascribe $20mm to remaining iDen roll off, $14mm from currency

and $14mm from amortization of tower augmentations. In addition, there was another $20ish million

impact from weaker core organic site leasing. It is extremely encouraging that even with a cloudy

outlook for 2016 (due to the weak AT&T and Sprint spend throughout 2015…I estimate a 6-9 month lag

between permitting and revenue generation) management has guided to site leasing revenue exiting

the year at a 7.5% growth rate.

The biggest difference between how I think about SBAC and the street, is through the lens of capital

allocation and a longer term horizon (i.e. Time Arbitrage). When one takes a sampling of the published

sell-side models there is a large disconnect between how analysts use Excel to spit out their estimates

for one year forward and how the owner/operator management team runs its business. Over time, this

disconnect leads to a substantial difference in the cash flow per share power of the firm.

Significant differences:

1. Portfolio Growth: Jeff Stoops, CEO since 2002, has espoused a view for years that SBAC will

target to grow its portfolio at a 5-10% annual clip though both organic and inorganic means. If

we look at history he has done just that. While the US is more difficult to roll up than before,

there remain opportunities to build and buy in the country. Additionally, there are further

international expansion opportunities. It is important to note that CEO Stoops and Steve

Bernstein, the founder and Chairman of the Board, have been tremendous stewards of capital.

a. The sell side, for the large part does not include portfolio growth in their estimates

beyond acquisitions that are yet to close. I have assumed that the company builds 500

towers are year (at a cost of 275k/tower) and acquires 500 at a cost of 750k/tower (at a

multiple of 20x would mean that acquired towers have ~2 tenants) from 2017 going

forward. Stated a different way, this would lead to portfolio growth of 3.8% in 2017

with decreases of 10bps per year (still below management targets). This rate of

investment would consume approximately 600mm of capital per year.

2. Capital Structure: SBAC exited 3Q with net debt of $8.36Bn or net leverage of 7.6x.

Management has publicly stated that they are extremely comfortable running with this amount

of leverage given the cash flow characteristics of their business. SBAC’s peers run with balance

sheets closer to 4-5x. While this seems aggressive, for a long term owner it is cash flow (and the

stability thereof) and cash interest coverage that matter. It is important to note that the large

majority of SBA’s leverage is fixed rate and well termed. Keeping leverage at these levels allows

the company to pursue portfolio growth, or more recently in a significant shift return capital to

shareholders by shrinking the equity cap. Sounds very reminiscent of the Cable Cowboy and

how he compounded wealth at TCI, Liberty Global, SiriusXM, etc.

Secured Debt Rate Maturity Amount

2010-2 Tower Securities 5.101% 4/17/17 550 2012-1 Tower Securities 2.933% 12/15/17 610 2013-1C Tower Securities 2.240% 4/17/18 425 2013-2C Tower Securities 3.722% 4/17/23 575 2013-1D Tower Securities 3.498% 4/17/18 330 2014-1C Tower Securities 2.898% Oct. '19 920 2014-2C Tower Securities 3.869% Oct. '24 620 2015-1 Tower Securities (Priced 500mm on 10/6) 3.156% Oct '20 - Revolving Credit Facility 2.425% 5/9/17 280 2012-1 Term Loan A 2.550% 5/9/17 160 2014 Term Loan B (Carry Value) 3.250% 3/24/21 1,478 2015 Term Loan B 3.250% 6/10/22 494

Unsecured Debt

5.625% Senior Notes 5.625% 10/1/19 500 5.75% 2020 Senior Notes 5.750% 6/15/20 800 4.875% Senior Notes due 2022 4.875% 7/15/22 745

Total Debt at end of 3Q 8,487

a. Most sell side analysts use FCF to pay down debt over time. By doing this they refuse to

listen to management’s capital allocation policy, a big mistake in my opinion.

b. While 7.5x of net leverage seems high when viewed in isolation, one could make the

argument that SBAC has significantly more debt capacity. The company had run with

materially higher leverage in the past. Another gut check is to compare SBAC to other

real estate companies. Since I’m not a REIT dedicated investor I chose to look at the two

Class A office owners I referenced earlier in the report, SLG and BXP. In 2015 SBAC will

have an interest expense of $340mm compared to EBITDA of $1.09BN, or 3.2x coverage

(if we strip out SG&A, then coverage is 3.45x). SLG has 2.87x and BXP has 3.5x.

i. In fact, I would make the argument that tower cash flows are far less cyclical

than office properties and therefore could support significantly more debt

capacity. If we were to take SLG’s coverage ratio (which has been lower in the

past), it would imply that SBAC could support an additional 40mm of interest

expense with its current profitability levels. Using SBAC’s most recent Tower

Security with an interest rate of 3.156%, it implies that SBAC has additional debt

capacity of $1.27Bn….TODAY.

c. While I clearly took too long to write up this opportunity, I took the view that SBAC

would get aggressive on share repurchases in 4Q, to the tune of $500mm, given the

dislocation after their earnings release. I have worked to assume that SBAC keeps its

net leverage in the 7.5x range until 2018 and then slightly tapers it down towards 7x. All

“excess” cash flow is then used to purchase stock at 20x forward FCF/share. While one

can take issue with the leverage, it does highlight the FCF/share dynamics and the

compounding power of the model.

i. Another benefit of keeping leverage towards the high end of management

targets, or above, is that it works to lower pretax income. By doing that,

management would effectively increase the value of their Net Operating Loss

(NOL) asset per share. Currently SBAC has a federal NOL position of $1.3bn.

Based upon how the model is run, the NOL position would not burn down until

2020. Note: In prior communications with the street, management had

highlighted 2018.

1. Acquisitions could also help the NOL position, as I wouldn’t be shocked

if some of the private equity sponsored portfolios also have tax assets.

2. One question is the interplay between the NOL and the corporate

structure. As I’m sure many of you are aware the other tower

companies are REITS. I take the view that SBAC can compound money

faster as a C-Corp. If and when SBAC changes its structure, the AFFO

multiple should expand beyond where Class A offices trade, as the

towers have faster growth, higher quality tenants and better interest

coverage.

The time arbitrage opportunity that presents itself in SBAC is quite compelling. Investors have the

ability to purchase a secular growth asset operating at a cyclical trough at a time when sentiment has

shifted negatively. Couple this with a management team that has proven they are singularly focused on

driving long-term shareholder value. SBA is adept at managing the balance sheet to lower their cost of

capital, while using it to drive value through smart portfolio growth and buybacks below ‘intrinsic value’.

A reading of the company’s annual letters is instructive on how management thinks about their business

and shareholder’s capital. While one can take issue with the pace of acquisitions, buybacks, leverage, or

any number of things, I ran the models this way to show the compounding power of this business. I

believe when management talks about ‘intrinsic value’ they are thinking 5-10 years out. It would not

shock me if the numbers discussed in this write-up, including the additional net leverage, are well

known and analyzed by the Chairman, CEO and CFO as they act like owners not employees. As a point

of reference, the latest proxy shows that Stoops has control of 1.33mm shares or $150mm.

Risks

1. Wireless carriers continue to delay capital projects leading to further reductions in near term

expectations

2. Further deterioration in Brazil. This could be driven by additional FX pressures or carriers trying

to adjust down their rate escalators.

3. Small cell adoption takes off, leading to lower demand for macro sites.

4. Significant tightening of credit conditions could lead to funding pressures.

5. A backup in interest rates could dampen investor enthusiasm for SBAC. Even though they are

not a REIT structure, they do get comped vs peers AMT and CCI.

6. Multiple compression drives outsized pressure to SBAC due to balance sheet leverage.