SBA Communications Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; financial statements are unaudited. SBA owns and operates wireless communications sites, with site leasing as its primary business and a smaller U.S. site-development business.
Financial performance and position
Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenue | $678.5 | $652.0 | +4.1% |
| Site leasing revenue | $626.1 | $580.2 | +7.9% |
| Site development revenue | $52.4 | $71.8 | -27.1% |
| Operating income | $241.2 | $231.0 | +4.4% |
| Net income attributable to SBA | $203.6 | $69.5 | +193% |
| Diluted EPS | $1.87 | $0.64 | +$1.23 |
| Adjusted EBITDA (non-GAAP) | $471.7 | $437.8 | +7.8% |
Q2 operating margin was approximately 35.5%, compared with 35.4% a year earlier. The large year-over-year increase in net income reflects, among other items, a $29.2 million income-tax benefit and a $40.7 million net other-income item, including a $43.3 million gain on remeasurement of U.S.-dollar-denominated intercompany loans. Q2 2022 included a $66.1 million net other expense, including a remeasurement loss. These items make reported earnings comparisons less indicative of underlying operating trends.
- Six-month results: Revenue was $1,354.0 million, up 6.5%; operating income was $465.4 million, up 3.9%; net income attributable to SBA was $304.9 million, up 18.1%; diluted EPS was $2.79 versus $2.36. Adjusted EBITDA was $931.1 million, up 8.1%.
- Cash flow: Operating cash flow for the first half was $798.1 million, versus $664.6 million. Investing used $258.3 million and financing used $474.9 million. Cash, cash equivalents and restricted cash totaled $255.5 million at June 30, 2023.
- Debt and liquidity: Total debt principal was $12.67 billion ($12.60 billion carrying value); cash and cash equivalents were $179.2 million, with a further $72.1 million restricted. The $1.5 billion revolving facility had $450 million drawn at quarter-end and $360 million drawn as of the filing date, after a subsequent $90 million repayment. The company reported covenant compliance and estimated next-12-month debt service of $419.0 million.
- Balance sheet: Total assets were $10.60 billion and shareholders’ deficit was $5.09 billion at June 30. Current assets of $518.6 million were below current liabilities of $738.4 million.
- Shareholder returns: SBA paid $0.85 per share in each of two first-half dividends and declared another $0.85 dividend after quarter-end. No shares were repurchased in the first half; $504.7 million remained authorized under the repurchase plan.
Material changes versus prior comparable periods
- Site leasing drove growth: Q2 domestic leasing revenue rose 3.3%; international leasing revenue rose 25.7% on a reported basis and 25.7% on a constant-currency basis as presented by management. Growth reflected acquisitions, new builds, lease amendments, new leases, escalators and pass-through charges. Brazil accounted for 15.9% of Q2 site leasing revenue.
- Site development revenue fell 27.1% in Q2 and 16.3% for the first half, mainly on lower carrier activity from T-Mobile and DISH Wireless, partly offset by Verizon activity.
- Asset impairment and decommission costs increased to $32.9 million in Q2 from $8.5 million, and to $59.3 million for the first half from $17.0 million. Management cited increased churn, including Sprint-related churn, and higher decommission costs.
- Q2 interest expense rose $17.0 million to $101.3 million; first-half interest expense rose $35.9 million to $202.5 million, primarily due to higher average debt and rates. Management expects interest expense to increase in future periods in the prevailing rate environment.
- First-half acquisitions were $39.7 million, down from $353.6 million in 2022, which included the Airtel Tanzania site purchase. First-half cash dividends rose to $186.1 million from $153.4 million.
Outlook, risks and unusual items
- Management expects organic site leasing revenue in both domestic and international segments to exceed 2022 levels during the remainder of 2023, partly due to carriers deploying unused spectrum. The filing does not provide clear consolidated revenue or earnings guidance.
- For 2023, management expects non-discretionary cash capital expenditures of $52–$62 million and discretionary cash capital expenditures of $335–$355 million. It expects to fund these from cash on hand, operating cash flow and borrowings or new financing.
- After quarter-end, SBA purchased or was under contract to purchase 134 communication sites for $72.9 million, with expected completion by year-end. On July 30, it entered a new five-year AT&T master lease agreement intended to streamline AT&T’s 5G and next-generation deployment across SBA’s U.S. towers.
- LIBOR was replaced with Term SOFR in amendments to the interest-rate swap, 2018 Term Loan and revolving facility. The company said the transition had no material financial-statement impact. A $1.95 billion swap fixes the applicable 2018 Term Loan rate at 1.900% through maturity; most other debt is fixed-rate.
- Interest-rate exposure remains: a hypothetical 1% increase in variable rates was estimated to raise interest expense approximately 4.6% over the next 12 months. Foreign exchange exposure is also material; a 10% adverse Brazilian real movement was estimated to reduce six-month revenue by 1.3% and operating income by 1.0%. A 10% move in currencies affecting unsettled intercompany debt could produce approximately $133.5 million of gains or losses.
- Brazil tax authorities have asserted deficiencies relating to 2016–2019 purchase-accounting adjustments. SBA contests the assessment and recorded no liability, but estimated reasonably possible losses in excess of accruals of up to $97.7 million, excluding $94.2 million of penalties and interest. An adverse result could affect results or cash flows.
- The company released a $66.3 million valuation allowance on deferred tax assets of its U.S. taxable REIT subsidiary in the current period. Q2 SG&A also included a $3.1 million Oi reserve. SBA notes that inflation may pressure costs while much of its lease pricing is fixed or contractually set.
- Management identified carrier consolidation, Sprint and Oi churn, DISH’s network deployment, customer capital spending, acquisition execution, international economic and currency risks, refinancing costs, and REIT qualification as risks. Disclosure controls were reported effective as of June 30, 2023.
Important facts for investors to verify
- Whether leasing growth and carrier activity support management’s 2023 organic-growth outlook, particularly given Sprint-related churn and weaker site-development demand.
- How much of reported net income reflects recurring operations versus currency remeasurement gains and the tax valuation-allowance release.
- Debt refinancing and interest-cost exposure, upcoming maturities, covenant headroom and the availability of liquidity for planned capital spending.
- Progress and cash requirements for the 134-site acquisitions, planned capital expenditures and the new AT&T agreement.
- The resolution and potential financial impact of the Brazil tax assessment, and whether impairments or decommission costs remain elevated.