US-based SBA Communications is a leading independent owner and operator of wireless-communications infrastructure, including tower structures, rooftops and other structures that support antennas deployed by mobile network operators to enable the provision of voice, data and video services. The Florida-based company, which was founded in 1989 and operates more than 33,000 communication sites in 14 countries, offers investors a defensive investment exposure that is likely to benefit from the extraordinary growth in mobile data consumption driven by adoption of bandwidth-intensive applications, including video, social media, enhanced web browsing, and machine-to-machine communication.
SBA Communications’s defensive properties stem from its profound competitive advantages and an inherently resilient business model. With little overlap in the coverage footprint of existing towers and new construction limited by zoning regulations, the mobile-network operator tenants struggle to foster competitive tension among owners of infrastructure. This inequality of bargaining power yields contractual terms that overwhelmingly favour the infrastructure owner: site leases over SBA Communications towers are generally struck with an initial term of five to 10 years and contain fixed rent increases averaging 3% to 4% per annum in North America and Central America, while rents over the company’s South American and South African assets are tethered to local inflation. Moreover, the strategic positioning of the SBA Communications assets and the meaningful switching costs borne by mobile-network operators attempting to reconfigure their networks have historically supported low levels of tenant lease terminations. These favourable terms confer on SBA Communications predictable, recurring revenues, and support tower cash flow margins above 80%. (SBA Communications defined tower cash flow margins as tower cash flow divided by cash site leasing revenue less revenue from pass-through reimbursable expenses.)
Expectations of continued rapid growth in mobile devices and demand for data position SBA Communications to deliver meaningful growth in cash flows. Ericsson, the Swedish telecommunications company, projects that global mobile-data traffic will increase about 4.5 times over the period to 2026, supported by the rollout of 5G technology in mature markets and the increased penetration of smart devices in developing economies. Critically, this rapid growth in demand for data will require mobile-network operators to develop new spectrum and increase the capacity of their networks, necessitating the installation of antenna equipment at new sites and the addition of incremental equipment to existing sites. SBA Communications expect this activity to support long-term net organic lease revenue growth in excess of 5% per annum in the US and high‑single‑digit to low‑double‑digit revenue growth in its international markets. The relatively fixed nature of SBA Communications’s operating costs imply that this growth is likely to deliver highly attractive incremental returns on capital.