Why SBA Communications Stands Out as My Top Investment Choice

Summary

• Revenue Growth through Site Leasing: SBA Communications Corporation (SBAC) generates significant revenue by leasing space on its cell towers to mobile carriers, focusing on North and South America, and Africa, with a strong presence in the U.S. and Brazil. The company averages 1.9 tenants per tower and has experienced steady organic growth rates between 4-5% year over year.
• Diversification and International Expansion: SBAC has increased its international exposure over the last three years, contributing to its diversified revenue sources .
• Long-term Tenant Leases: Tenant leases usually range from five to fifteen years with multiple renewal options, providing a stable revenue stream.
• Increasing Demand for Wireless Data: With mobile usage and the demand for wireless data continually rising, there is a growing need for more infrastructure, such as cell towers, which SBAC provides. This demand is expected to increase with the adoption of 5G technologies, further benefiting SBAC.
• 5G Adoption and Network Densification: The rollout of 5G technology and the shift towards network densification, including the use of small cells, is expected to drive more leasing opportunities for SBAC, enhancing cellular network capacity and quality .
• Investment Opportunity: Despite challenges such as rising interest rates affecting investor sentiment and valuation, SBAC’s consistent growth and strategic positioning offer a compelling investment opportunity with a significant upside potential from its current price.
• Risk Factors: High inflation and the concentrated nature of the communication sector, with a significant portion of SBAC’s revenue coming from a few major tenants, represent potential risks. Any financial difficulties faced by these tenants could impact SBAC’s leasing terms unfavorably.

Investment Thesis

#1: Tower REITs has sticky customers with predictable and stable growth

• SBA Communications Corporation (SBAC) primarily generates its revenue through site leasing. Site leasing revenue encompasses leasing space on its towers to mobile carriers, where the company owns or operates a substantial number of cell towers across North America, South America, and Africa, with a significant presence in the U.S. and Brazil.
• Revenue growth in this segment is achieved by increasing the number of tenants leasing space on each tower (2023: average of 1.9 tenant per tower), escalating rental rates over time through contractually defined terms, and expanding the company’s portfolio of sites through acquisitions and the construction of new towers. Organic growth has been consistently stable over the last 8 quarters, averaging between 4-5% year over year.

• Tenant leases are generally for an initial term of five years to fifteen years with multiple renewal periods, which are at the option of the tenant.
• SBAC is increasingly diversified by growing it’s International exposure in the last 3 years as seen below:

#2: Wireless data is becoming an essential service for both business and consumers and the demand continues to grow

• Although mobile penetration is starting to plateau in the US (97% – now own a cellphone of some kind. 90% own a smartphone), mobile usage continues to increase year over year

• 4 main categories dominate the mobile app usage: Social media (39%), Gaming (10%, Messaging (10%) and Retail (7%). Social apps such as TikTok, Instagram, Snapchat are the top most downloaded apps worldwide followed by communication apps such as Whatsapp and Telegram
• The younger demographic (Ages 18-29) is beginning to cut the cord on internet and is starting to become mobile dependent. One of the core reason is that Mobile-enabled internet access is increasingly perceived to be just as good as wired home internet.
• While only 10% of US mobile users currently have a 5G phone and plan, adoption of 5G wireless technologies is already changing consumer behavior: A recent study found that one in five users decreased their Wi-Fi usage after upgrading to 5G, while 10% stopped using Wi-Fi on their smartphone altogether.

• As mobile operators expand their networks to accommodate rising data demands, they require more infrastructure, including cell towers, to support their services. This expansion leads to more leasing opportunities for tower REITs, as operators seek to rent space on these towers for their antennas and equipment. Consequently, the growing demand for wireless data directly translates into higher occupancy rates and potentially higher lease rates for the towers
• Telecoms have also shifted capital investment into small-cells which is pivotal to the roll out of 5G (shift towards densifying networks to accommodate the surging data capacity demands). Small cells allow for the re-use of frequencies, thereby increasing cellular network capacity, quality, and resilience.

#3: Rising interest rates provided an entry point into SBAC at an attractive valuation

• We’ve set our 12-month price target at $310, implying an upside of 46% from the current price (March 19th) of $213
• The price declines has been primarily driven by the sentiment of the investors, primary around the risks of rising interest rates and the level of long-term debt
• The fundamentals remain the same where SBAC continues to grow at a steady rate so the recovery narrative remains, it’s just a matter of when

Risk Assessment

• High Risk: Inflation continues to stay above 3% prompting the Feds to delay rate-cuts until mid to late 2025. In this scenario, the gains will be delayed for a year with increased price volatility in the real estate sector.
• Med Risk: The communication sector is highly concentrated. In Q4 2023, 40% of SBAC domestic site revenue comes from T-Mobile, 29% from AT&T and 20% from Verizon. If these tenants experience financial difficulties, there is a possibility for negotiating less favorable terms.