There are many great companies out there with strong growth trajectories, and while that alone may be attractive enough for some investors, that wouldn’t cut it for value investors. There are plenty of those names in the REIT sector, and this brings me to SBA Communications (NASDAQ:SBAC). I examine the stock in this article, and present potentially better and higher yielding alternatives.
SBA Communications is a leading owner and operator of wireless communications infrastructure in North, Central, and South America and South Africa. Its primary focus is on the leasing of antenna space on its multi-tenant communications sites to a variety of wireless service providers, including Verizon (VZ), AT&T (T), and T-Mobile (TMUS) under long-term contracts, and this segment comprises over 90% of its revenues.
One of the key reasons for investing in SBAC is its recession-resistant revenue stream and the overall attractiveness of the cell tower business. That’s because once a tower is built and established, it doesn’t take much incremental Capex to put additional hardware equipment on that tower and lease that space out. This attribute is highlighted by Morningstar in its recent analyst report:
The tower business is very attractive. Wireless carriers enter long-term leases that include rent escalators (annual increases of about 3% in the US and generally tied to inflation internationally), which gives the firm a highly visible and stable revenue stream, and towers have significant operating leverage.
Adding tenants to existing towers and equipment upgrades by tenants both provide sharp revenue increases while adding little incremental cost. As data use grows and networks get more stretched, locating equipment on more towers and upgrading equipment are primary solutions for carriers. Consumers’ ever-increasing need for mobile data results and little geographic overlap with competitors results in normalized churn of under 2%.
Like peer American Tower (AMT), SBAC also has an international presence. Half of SBAC’s towers and nearly three-quarters of its revenue is from the US, with much of the rest coming from South America and Canada. In recent years, SBAC has been expanding in South Africa, the Philippines, and Tanzania. With the US being an established market for mobile usage, SBAC’s exposure to emerging markets gives it more growth runway.
Speaking of which, SBAC saw strong growth during the third quarter, with AFFO per share growing by 15% over the prior year period on a constant currency basis. This was driven mostly by 5G deployment in the US and 4G deployment in international markets, with wireless carrier activity remaining robust in all markets.
Going forward, management expects activity to remain strong into next year and beyond, given the size and scope of the wireless carriers’ ambitious 5G deployment plans. Moreover, SBAC recently closed on its acquisition of 2,632 additional towers in Brazil in early October. With this acquisition, SBAC is on track to grow its Brazilian portfolio of owned towers by 15% this year. This positions SBAC well in this attractive market.
Perhaps unknownst to some, SBAC also invests heavily in the underlying land under its towers, giving it a very long line of sight on the associated revenue, which can span over 3 decades. This was highlighted by management during the recent conference call:
In addition to new tower and other assets, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of $9.1 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 72% of our towers and the average remaining life under our ground leases, including renewal options under our control, is approximately 36 years.
One area of concern is that SBAC carries more leverage than its peers American Tower and Crown Castle Inc. (CCI), with a net debt to EBITDA ratio of 6.8x and a BB credit rating from S&P. However, it does maintain strong interest coverage ratio of 5.3x, and the leverage is not surprising for a growth company.
Moreover, while SBAC maintains low AFFO payout ratio of just 23%, the 1% dividend yield is simply too low for income investors, and sits well below the near 3% yield of American Tower, and near 5% yield of Crown Castle Inc. AMT and CCI have 5-year dividend CAGRs of 18% and 9%, respectively.
Also SBAC is more expensive compared to peers, with a forward P/FFO of 24.9, compared to 16x for AMT, and 16.9x for CCI. As such, it appears that the market has already baked a high level of growth into the stock.
Overall, SBAC is a high-quality growth stock in the tower business that is positioned well for the 5G buildout. It also has a healthy and growing amount of international exposure, which should give it a growth kicker as those emerging markets mature.
While SBAC may be an attractive investment in a “normal” market. I simply find peers AMT and CCI to be much cheaper on a relative basis, all while sporting much higher dividend yields. As such, dividend investors who seek to replicate SBAC’s international exposure may want to consider AMT, while those who want a domestic pure-play may favor CCI at present.