SBA sees T-Mobile uptick in Q3 as C-band and Dish timing remain question mark

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How early Dish and C-band work starts will ultimately drive financial results, SBA said. (Getty Images)

As SBA Communications reported third quarter earnings on Monday, the sentiment “bodes well” appeared to be the main theme for the tower company going forward.  

While the boon from the T-Mobile and Sprint deal that had been expected for towers in 2020 hasn’t quite materialized yet, SBA said it saw more activity from T-Mobile in Q3 that drove a bump in leasing compared to the second and first quarters.

Speaking on Monday’s third quarter earnings call, SBA finance chief Brendan Cavanagh said they expect this to continue increasing next quarter and into 2021, according to a transcript from SeekingAlpha.

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With better than expected results, SBA increased the mid-point of its 2020 guidance slightly, upping site rental revenue by $5 million, Adjusted EBITDA by $9 million and AFFO by $26 million, according to Wells Fargo.

SBA won’t provide 2021 guidance until Q4, but analysts at both MoffettNathanson and Wells Fargo believe the results and setup going forward “bodes well” for SBA’s growth.

However, SBA said leasing activity was still below levels seen in the third quarter of 2019, and Crown Castle and American Tower, which recently reported earnings, reiterated the slower (but now expected) T-Mobile ramp up.  During the second quarter, tower companies had said T-Mobile’s movement on towers wasn’t at the levels they expected it to be at that point, elongating timelines.

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“2020 was supposed to be the year that amendment revenue hit, but the delayed closing of the deal punted any bump into 2021,” wrote MoffettNathanson analyst Nick Del Deo in a Monday note to investors.

Del Deo indicated American Tower’s recently signed MLA with T-Mobile may not be as positive as initially expected and wrote that Crown Castle’s “dispiriting” initial 2021 outlook “incorporated virtually no leasing bump whatsoever,” although the latter attributed it to a function of timing.  

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“That leaves SBA as the last best hope for this part of the thesis to play out without any asterisks,” according to Del Deo.

With better than expected Q3 results and outlook, Wells Fargo analysts reiterated SBA as the Wall Street firm’s top tower company pick. Since activity was slow in the first half of the year, Wells Fargo noted that the beginning of 2021 should look good for SBA comparatively year over year.

Revenue in the third quarter totaled $523 million, Adjusted EBITDA was up 5% to $373.3 million, and AFFO was up 9.2% to $270.1 million and AFFO per share increased 10.7% was $2.38.

The tower company saw 3.5% organic leasing growth year over year in the U.S. in Q3, with 2.2% churn.  

SBA recorded $391 million in site leasing revenue for its U.S. towers, contributing to a 3.9% increase in total site leasing revenue of $486.8 million, including international. 

Most of SBA’s Q3 bookings came from amendments (80%), while the remaining 20% was from new leases.  Of that 83% was from AT&T, Verizon and T-Mobile.

Cavanagh noted that the time from when SBA actually signs up (or “books”) leasings to when they’re billed is usually six to 12 months, which he said a little longer than has been in the past. That impacts financial results in later quarters, because of the cycle or lag time until revenues are recognized and counted toward profits.

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T-Mobile has sent termination notices to SBA for about 100 Sprint leases, according to Cavanagh, who indicated that won’t have much impact in 2021.  

“That is relatively small, probably in the $4 million to $5 million range in terms of its impact for next year,” on annual rent, he said.  

Executives also said that churn from Sprint leases is expected to be “heavily weighted toward the back end” or several years out, with most having about four years left, while T-Mobile has between 5-6 years.

According to MoffettNathanson, that also should give SBA more protection in 2021.

C-band, Dish remain wildcards

While 2020 didn’t see the boost from T-Mobile that was expected, SBA is looking further out to realize benefits from T-Mobile’s merger and other factors that still have questions around timing. 

Those include the upcoming C-band auction, set to start December 8, and Dish’s network build. SBA CEO Jeff Stoops said that C-band is expected to drive more activity from both Verizon and AT&T on macro sites starting sometime next year.

T-Mobile has been deploying 2.5 GHz spectrum at hundreds of locations, and the carrier said it will have thousands of 2.5 GHz sites live this year.

And SBA doesn’t expect AT&T or Verizon to slow down next year as T-Mobile ramps up. AT&T has upgraded 50-55% of SBA sites for FirstNet, “so still a ways to go,” Stoops said.

Still, he acknowledged it will be a while in 2021 before SBA sees the highest levels of activity it expects, specifically around C-band, noting deployment of the new frequencies will take time. Incumbent satellite operators have committed to a clearing schedule, with the first tranche of C-band spectrum expected to be ready by December of 2021.

Stoops, however, said he thinks the spectrum will be cleared faster than people expect.

“There is every incentive for the folks who win that spectrum…because they are purchasing it, in some cases, arguably to stay competitive with a rapidly deploying T-Mobile to get things done very quickly,” Stoops said, according to a transcript. “And I think that it’s going to bode well for us and our industry.”

Exactly what C-band deployments look like won’t be known until the auction wraps up and it’s clear who won what. Stoops expects most carriers are going to deliver 5G with mid-band spectrum where they have existing 3G and 4G sites and coverage, outside anything other than the absolute oldest towers.

Alongside “constructive discussions with Dish” for what’s expected to be a multi-year 5G network greenfield build and T-Mobile site upgrades with 600 MHz or 2.5 GHz, Stoops said that the factors together “bode well for domestic organic growth for the following several years,” after teeing up an increased leasing environment in 2021.

“T-Mobile is going to be busy, we believe, and the real issue as to what will ultimately drive the financial results, as opposed to the activity levels, but the financial results, will be how early in the year Dish and the C-band work really starts to get going,” Stoops said.