We hope that you can join us on Thursday, August 25th @ 12:30pm ET for our Black Book presentation on new Active Short SBA Communications Corp. (SBAC), which we added to our position monitor last week. SBAC is the third largest of the three "TowerCo" REITs with just over ~36k multi-tenant communication sites located in North, South and Central America as well as Africa. Its primary business is the leasing of antenna space on its communication sites (~90% of annual revenue), for which it collects rent payments under long-term lease contracts from a variety of wireless service operators (Verizon, AT&T, T-Mobile, etc.). For this reason, SBAC is in its essence just a real estate business - you either own or rent the ground/roof, then build a steel erector set on top of the ground, attach arrays to the erector set, and lease space on the erector set to tenants looking to deploy their equipment. The rental cash flow is then used to pay site opex/capex, service debt, acquire and/or develop new sites, and to support dividend payments to your own shareholders. Irrespective of the evolution of communication tech, the TowerCo model really is that simple.
In recent years SBAC, along with peers AMT and CCI, have all become Top-10 components of the XLRE following their REIT conversions in the early-to-mid 2010s. It is an interesting space straddling both the Communications and REITs sectors, which in our view has left them somewhat "orphaned" from a real estate coverage perspective. We are going to come at the sector, and SBAC specifically, from a real estate angle.
And when we do that, several aspects of the SBAC story immediately become concerning and/or make no sense: (1) SBAC is a "consensus long" and you couldn't find a bearish view on either the buy- or sell-sides if you tried, (2) we believe the space is very "narrative driven," and that reality in large part does not jive with the narrative, (3) the domestic U.S. tower site leasing business has likely down-shifted to secularly lower growth rates and become a "cash cow," (4) the international tower business offers inferior economics to the TowerCos and growing it is a relatively poor use of capital, and (5) the stocks are valued in the market like "story" or tech stocks which makes no sense to us. At the same time, we see a specific negative catalyst for SBAC that could cause a downward re-rating in the stock.
We will review each of these on Thursday, but in general investors should be asking themselves the following: "What happens when a growth stock goes ex-growth?" Answer: the downside is significant.
EVENT LINK: CLICK HERE (video, dial-in, materials links)
Please e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
