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SBA Communications [SBAC] Conference call transcript for 2022 q3

2022-10-31 23:03:04

Fiscal: 2022 q3

Operator: Ladies and gentlemen, thank you for standing by and welcome to the SBA Third Quarter Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mark DeRussy, Vice President of Finance. Please go ahead.

Mark DeRussy: Good evening and thank you for joining us for SBA’s third quarter 2022 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2022 and beyond. In today’s press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, October 31 and we have no obligation to update any forward-looking statements we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn it over to Brendan to discuss our third quarter results.

Brendan Cavanagh: Thank you, Mark. Good evening. We continued our very strong 2022 with another outstanding quarter. Our third quarter results were well ahead of our internal expectations and have allowed us to again increase our outlook for our full year results. Total GAAP site leasing revenues for the third quarter were $587.3 million and cash site leasing revenues were $575.6 million. Foreign exchange rates represented a benefit of approximately $600,000 when compared with our previously forecasted FX rate estimates for the quarter, but they were a headwind on comparisons to the third quarter of 2021, negatively impacting revenues by $3.3 million on a year-over-year basis. Same-tower recurring cash leasing revenue growth for the third quarter, which is calculated on a constant currency basis, was 4.9% over the third quarter of 2021, including the impact of 4.2% of churn. On a gross basis, same-tower growth was 9.1%. Domestic same-tower recurring cash leasing revenue growth over the third quarter of last year was 8% on a gross basis and 4.8% on a net basis, including 3.2% of churn. Domestic operational leasing activity, or bookings, representing new revenue placed under contract during the third quarter, was very solid again with meaningful contributions from each of our largest customers. The combination of our strong third quarter leasing activity level and faster-than-anticipated commencements of new amendments have allowed us to increase for the second consecutive quarter our outlook for new 2022 domestic site leasing revenue from organic lease-up. During the third quarter, amendment activity represented 58% of our domestic bookings, with 42% coming from new leases. The big four carriers of AT&T, T-Mobile, Verizon and DISH represented over 94% of total incremental domestic leasing revenue signed up during the quarter. Domestically, we also experienced less churn than we had projected due to timing of merger-related decommissionings being later than we had previously estimated. Our reduced 2022 domestic churn amounts are expected to shift to 2023. Internationally, on a constant currency basis, same-tower cash leasing revenue growth was 5.4% net, including 8.4% of churn or 13.8% on a gross basis. International leasing activity was very good again as we had our best quarter of the year in terms of new revenue signed up. In addition to strong customer activity levels across many of our markets, we continue to see healthy contributions from inflation-based escalators. In Brazil, our largest international market, we had another very strong quarter. Same-tower organic growth in Brazil was 13.6% on a constant currency basis. As anticipated, international churn remained elevated in the quarter due primarily to carrier consolidations and Digicel’s previously announced exit from Panama. During the third quarter, 81.1% of consolidated cash site leasing revenue was denominated in U.S. dollars. The majority of non-U.S. dollar-denominated revenue was from Brazil, with Brazil representing 12.5% of consolidated cash site leasing revenues during the quarter and 9.2% of cash site leasing revenue, excluding revenues from pass-through expenses. Tower cash flow for the third quarter was $464.1 million. Our tower cash flow margins remain very strong as well, with a third quarter domestic tower cash flow margin of 84.8% and an international tower cash flow margin of 67.3% or 91.3% excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the third quarter was $446.8 million. The adjusted EBITDA margin was 67.3% in the quarter, impacted slightly by outsized services revenue. Excluding the impact of revenues from pass-through expenses, adjusted EBITDA margin was 72.2%. Approximately, 95% of our total adjusted EBITDA was attributable to our tower leasing business in the third quarter. During the third quarter, our services business again produced new record level results, with $88.3 million in revenue and $22.8 million of segment operating profit. We also continue to replenish and build even higher our services backlogs, finishing the quarter once again at a higher level than the prior quarter, notwithstanding our record third quarter results. Based on this backlog, our strong third quarter and the continuing high activity levels by our customers, we have raised our outlook for full year site development revenue by $26 million. Adjusted funds from operations, or AFFO in the third quarter, was $339.4 million. AFFO per share was $3.10, an increase of 15.1% on a constant currency basis over the third quarter of 2021. During the third quarter, we continued to expand our portfolio, acquiring 131 communication sites for total cash consideration of $54.9 million. We also built 113 new sites in the quarter. Subsequent to quarter end, on October 11, we closed on the previously announced acquisition from Grupo TorreSur, adding 2,632 sites in Brazil for cash consideration of $725 million. In addition, subsequent to quarter end, we have purchased or are under agreement to purchase 34 sites in our existing markets for an aggregate price of $28.5 million. We anticipate closing on these sites under contract by the first – excuse me, by the end of the first quarter of next year. In addition to new tower and other assets, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of $9.1 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 72% of our towers and the average remaining life under our ground leases, including renewal options under our control, is approximately 36 years. Based on results and activities during and subsequent to the third quarter, we have updated our outlook for full year 2022. We have increased our outlook across all of our key metrics due to outperformance in the third quarter, lower churn expectations as a result of timing and the earlier closing of the GTS acquisition. These items were partially offset by higher interest costs and higher estimated cash taxes from the outlook previously provided with our prior quarter earnings release. We are very pleased with our third quarter and year-to-date performance and excited for a strong finish to 2022. With that, I will now turn things over to Mark who will provide an update on our balance sheet.

Mark DeRussy: Thanks, Brendan. We ended the quarter with $12.4 billion of total debt and $12.1 billion of net debt. Our net debt to annualized adjusted EBITDA leverage ratio was 6.8x below the low end of our target range. Our third quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 5.3x, equaling the last two quarter’s all-time high. Subsequent to quarter end, we used cash on hand and borrowings under our revolving credit facility to fund the GTS acquisition closing. As a result, as of today, we have $995 million outstanding under our $1.5 billion revolver. The current weighted average interest rate of our total outstanding debt is 2.9%, with a weighted average maturity of approximately 4 years. The interest rate on 90% of our current outstanding debt is fixed. During the third quarter, we did not purchase any shares of our common stock as we allocated capital for the closing of the Brazilian acquisition. We currently have $504.7 million of repurchased authorization remaining under our $1.0 billion stock repurchase plan. The company’s shares outstanding at September 30, 2022 were 108 million compared to 109.5 million at September 30, 2021, a reduction of 1.4%. In addition, during the quarter, we declared and paid a cash dividend of $76.7 million or $0.71 per share. And today, we announced that our Board of Directors declared a fourth quarter dividend of $0.71 a share, payable on December 15, 2022 to our shareholders of record as of the close of business on November 17, 2022. With that, I will turn the call over to Jeff.

Jeff Stoops: Thanks, Mark and good evening everyone. As is appropriate on Halloween, we are pleased to present a treat of an earnings report. The third quarter exceeded almost all expectations and benefited from the significant level of wireless deployment activity by our carrier customers. Notwithstanding the broader challenging macroeconomic environment, our business was extremely busy and we were able to again increase our full year outlook across all key metrics. We raised our full year outlook for total revenue by $49 million after raising it by $64 million last quarter. Domestic organic contributions to leasing revenue growth in the third quarter were the highest for the year and our outlook implies an even higher contribution in the fourth quarter. Our services business produced the highest quarterly contribution of revenue and gross profit in our history and we again grew our services backlog. Our rate of return on invested capital was 10.6% for the quarter, the highest in at least 10 years. It really was a remarkable quarter. In the U.S., each of our carrier customers remained busy during the quarter as they have throughout the year, building out their networks through the deployment of new spectrum bands. T-Mobile was our most active customer during the quarter, continuing their nationwide deployment of 2.5 gigahertz and 600 megahertz spectrum. Verizon, AT&T and DISH were again very active in the quarter, with 5G-related new lease and amendment signings. Site leasing revenue growth from domestic new leases and amendments has been strong this year, growing throughout the course of the year. We expect the contribution to revenue growth from domestic leases and amendments to be good again next year as well based on the strength of the organic leasing activity during 2022. Internationally, we had our best organic leasing quarter of the year. During the third quarter, we saw more of a shift toward upgrades at existing sites, with 63% of new business signed up in the quarter coming from amendments to existing leases and 37% coming through new leases. International leasing activity was again led by strong contributions from Brazil and South Africa, our two largest markets. Brazil has performed very well this year. Not only has lease-up been above our internal expectations for the year, we have also had larger contributions from CPI-based escalators, while maintaining a relatively stable foreign exchange rate. In addition, we closed on the previously disclosed GTS acquisition of over 2,600 sites earlier in October. The integration of these sites has only recently begun, but is proceeding smoothly and ahead of plan. As a reminder, these sites have 2.1 tenants per tower and we believe there are opportunities for growth, particularly with recent 5G spectrum auctions in Brazil as a driver. These sites do contain some legacy oil leases, but a smaller percentage than the rest of our portfolio. With regard to Oi, we have begun conversations with some of the carriers that are absorbing the Oi wireless business to discuss potential mutually beneficial and efficient arrangements around the integration of these networks. We still anticipate total churn of approximately $20 million to $30 million associated with the Oi merger on our legacy sites plus an additional estimate of approximately $3 million associated with the GTS or Grupo TorreSur sites. These numbers do not include any potential impact to pass-through reimbursements as those items will be neutral to tower cash flow. We also continue to produce revenue from tenancies associated with Oi’s wireline business, which is unaffected by these mergers. We have a strong relationship with our Brazilian customers and look forward to working with them through this process. With respect to our balance sheet due to early refinancings completed over the last few years and some well placed interest rate swaps, we have positioned ourselves well to address more challenging debt markets. We ended the third quarter with a net debt to annualized adjusted EBITDA leverage ratio of 6.8x, below our target range at our lowest level in years. And even with our large fourth quarter Brazilian tower acquisition, we expect to be at or below 7.0x at year end. We have only one $640 million debt instrument maturing between now and October of 2024, representing approximately 5% of our debt outstanding. That instrument matures in March of 2023. And while interest rates are certainly higher today, we still have great access to incremental and refinancing debt capital given the strength of our cash flows. We expect to refinance our pending first quarter maturity during the next several months. During periods with an elevated cost of capital and increased interest rates, it is even more imperative to continue our disciplined and opportunistic approach to investing capital. We are fortunate to be in a strong industry, benefiting from the continued growth in wireless, but also having the strength of significant free cash flow generation, largely fixed cost and scaled operations. It is during times like these that we really appreciate the strength of our underlying business. We are very pleased with the third quarter performance. As indicated by our updated outlook, we are also well positioned to finish out 2022 on a high note. We will be providing our initial 2023 outlook on our next quarterly earnings call. But based on this year’s organic leasing activity and the significant network projects ahead of our customers, we anticipate our leasing results to continue to be strong into next year. We will continue to be disciplined in our approach to capital allocation, focused on maximizing returns for our shareholders. I want to thank our customers and team members for their support and contributions to our success and we look forward to a strong finish to the year. And with that, Caroline, we are now ready for questions.

Operator: Thank you. Our first question comes from the line of Jon Atkin from RBC Capital Markets. Your line is open. Please go ahead.

Jon Atkin: Good afternoon. So I was interested in two topics. One is what you might be seeing in terms of seller expectations or just general observations about domestic M&A and what’s going on with TCF multiples? And then secondly, in your conversations with your U.S. customers interested in – or to what degree infill or densification or cell splitting starting to come up as opposed to overlays, which I think has been driving the majority of the growth ex-DISH so far? Thanks.

Jeff Stoops: Yes, I will take the last one first, Jon. We are still at least with respect to SBA and its assets in the capacity stage and the overlay and the initial deployment of mid-band spectrum. While we fully expect densification to come, capacity for us continues to be the current driver. Now, we take that as a good thing, because that really just lengthens out the extent of the activity timeline for us. In terms of seller expectations, they are changing some. They have not fully reset to the degree that the public company multiples have compressed. What that means for SBA is there will be a lot of things that we take a pass on unless the price is right. We loved what we did in Tanzania. We loved what we did in GTS. There is a lot of things that we passed on because those expect – there is still a gap in those seller expectations. But they have started to move actually down.

Jon Atkin: And then lastly, just on international M&A and tuck-in opportunities, build-to-suits, what’s your appetite for that at the moment?

Jeff Stoops: We like build-to-suits provided they are the right terms. Tuck-in acquisitions and, for that matter, new markets would all fall into kind of the same comment I made about finding things that are right for us. And we’re only going to do things if we believe that it’s right for us from a price and a growth perspective. And as – if we do things great, if we don’t, you’ll see what happened in the third quarter, which is that we de-lever pretty quickly until we do see those right capital allocation opportunities.

Jon Atkin: Excellent. Thanks very much.

Operator: Our next question comes from the line of Michael Rollins from Citi. Please go ahead.

Michael Rollins: Thanks, and good afternoon. Curious if you could just share a little bit more details of the backlog. And are you still seeing an extended book-to-bill where it’s just taking longer for that backlog to get into the actual revenue numbers? And then separately, on just data centers and Edge opportunities, any updates on how you’re looking at the opportunities? How some of your tests are coming along? Thank you.

Jeff Stoops: Yes. I don’t know. Brendan, correct me if I’m wrong, but I don’t know that we’ve had any changes in the book-to-bill.

Brendan Cavanagh: Nothing material. I will say that actually, if you noticed on our bridge for domestic contributions from new leases and amendments that we did up that contribution for 2022, it was 66 last quarter and 67 now. And that change is really largely due to a slight acceleration in timing, and that’s mostly around amendments that just kicked in a little bit quicker than we had projected. But it’s a pretty small change relative to the big picture. I don’t think there is been any material move in that you would point out.

Jeff Stoops: And on the Edge business, Mike, we’ve actually seen some great progress, but it’s still – it’s great from where we started, which was, of course, at zero. But it’s not really material. I would say we probably have either in operation or under construction 30 to 40 of these facilities. And the primary demand for them has been Edge computing and fiber and cable regeneration. But what we found to be the key to success in this area is really the state of and the location of the tower site because where it’s ready to go and it’s close to or on top of existing fiber makes all that much more attractive. So on an absolute basis, yes, we’ve seen a lot of growth. On a financial basis, it’s still, of course, very small. But we’re encouraged by what we’ve seen.

Michael Rollins: And within that context, is there a base expectation of the value enhancement? So if you look at what these 30 to 40 sites could do from a incremental cash flow, incremental value perspective? Is there a number that we all should be keeping in mind as the opportunity set?

Jeff Stoops: No, because it’s still small. What I will tell you, though, is that we’re really happy with the incremental return on invested capital for these projects. And at its core, that’s what I think you have hired us to do. So we’re very happy with that. And as long as we can make that return on invested capital, albeit small, perhaps for a little while, we’re going to keep doing it.

Michael Rollins: Thank you.

Operator: Our next question comes from the line of Ric Prentiss from Raymond James. Your line is open.

Ric Prentiss: Good afternoon, everybody.

Jeff Stoops: Hey, Ric.

Ric Prentiss: It certainly is not get treats versus tricks tonight. Thanks, Jeff. First question I’d like to get into is, there is been a lot of debate out there. When you look at the U.S. business, it sounds like you have good visibility, so the leading indicator of services business sounds strong with record backlog. But we get the questions of aren’t the carriers trimming CapEx budget if you look at ‘23 versus ‘22? Not a perfect indicator CapEx. Potential for a recession in the U.S., interest rates are high. Does anybody need to go borrow to pay their CapEx? Help us understand how you’re feeling, it sounds quite positive, Jeff, as far as looking exiting ‘22 strong and then looking into ‘23 strong?

Jeff Stoops: Well, keep in mind, because of the nature of the business, where you sign things up today, but you don’t begin to recognize revenue until later that we’re today already shaping next year’s financial results. So that’s a point of confidence. The other thing I would say is that we track to the tower which of our customers have upgraded their mid-band spectrum on our sites. And the number is actually fairly low across the board for us at this point. And our customers will do what they will do. But knowing what this means for them in terms of the amount of the money, frankly, for first of all, that they spend on the spectrum the – at least as reported, competitive differences between some of them from a spectrum perspective and others, where they are on our towers and the fact that the CapEx numbers that you get from them are extremely broad. We feel next year is going to be pretty good.

Ric Prentiss: Okay. Other question. Obviously, you closed Grupo TorreSur. How should we think about the funding for that business in this environment? And as we look into ‘23, how much more interest expense should we be kind of already starting to think about from our side, even though you haven’t given guidance yet, but think about what that headwind might be? And do stock buybacks come back on the radar as we get into this year or early next year?

Jeff Stoops: Well, Grupo TorreSur is funded. I mean, that you say, think about the funding, that’s already funded. That got funded from cash on hand and our revolver. So the next thing we’re looking at is the refinancing of the $640 million ABS instrument in March where we’ve got that teed up, ready to go. I don’t want to speculate too much on the interest increase. There will be, of course, an interest increase. I mean, Brendan, what’s that instrument bearing today?

Brendan Cavanagh: The one that’s getting paid off is just below 3.5%. So you should expect that, that will be significantly higher.

Jeff Stoops: Well, let’s put a little parameters around that. I mean, we’re thinking it’s going to have a 6 handle on it, right?

Ric Prentiss: Okay. Okay.

Jeff Stoops: But then – but keep in mind, we’re going to be producing over $1 billion of AFFO. We don’t have another debt instrument due until October of 2024. So we’re going to be in great shape. We’re going to have capital to invest and it’s either going to get – we’re either going to see value in portfolio acquisitions based on my earlier comments. We may or may not. We are going to be – continue to be opportunistic around stock repurchases or third and I would say this is somewhat unlikely given the first two, you are going to see a big decline in our leverage ratio.

Ric Prentiss: Okay, that helps a lot. Everybody, stay well.

Operator: Our next question comes from the line of Simon Flannery from Morgan Stanley. Your line is open.

Landon Park: This is Landon on for Simon. Thanks for taking the question. I was wondering if you could expand on any specifics domestically from what you’re seeing from Dish or any of the other carriers in terms of where you think they are at in their deployments.

Jeff Stoops: Yes, I don’t want to get too granular. All of the – well, let’s say, T-Mobile, Verizon and AT&T all still have work to do with us based on our analysis of where they are with their mid-band spectrum. Some of those are further ahead than others. And I think the answer to that question has been well reported. And then Dish has really got a lot of business signed up, and their focus right now is getting all that on air to meet the June 2023 requirements, which based on everything we can tell, they are in a very good position to do. And then we expect them to come back and begin to work on the 2025 requirements. So while it’s varied landed in terms of which of those are busiest, and I don’t think they want me actually commenting on that. I will tell you that there is a high level of business from all of them. And they all, at least based on our analysis, still have a lot to work, a lot of work left to do on our portfolio.

Landon Park: Thanks for that color, Jeff. And then just one follow-up on the Edge deployment commentary, can you maybe describe what these sites look like, the 30 to 40 that are in operation under construction and build costs, size of the facilities? And maybe what percent of your sites do you think are potentially eligible over time to have such deployments?

Jeff Stoops: Yes. I think they are mostly 6x12 or 10x20-foot shelters that look like the traditional wireless shelter that certain carriers have used historically. They have got air conditioning. They have got a lot of logistics to check temperatures and alarms and things like that. They basically are for racks of equipment, and they start out with two or three rack capacity and can be expanded beyond that. And Brendan, what are we – what’s our average cost on those?

Brendan Cavanagh: Well, it depends on the size and the scale, obviously. Deployment there for something along the lines of what Jeff described, you’re looking at somewhere in the $100,000 range. But if we do a bigger, more fulsome Edge, it compute through data center where it’s a bigger operation, it can be as much as $400,000 or $500,000.

Landon Park: And how much power do you have – would you have going to those facilities?

Jeff Stoops: Yes, they are not – at that size, they are not being sold on a traditional data center power basis. A lot of the uses today are for regeneration of signal for cable and fiber companies. And that’s not really how that’s priced and sold.

Landon Park: Okay, thanks very much for the color.

Operator: Our next question comes from the line of Walter Piecyk from LightShed. Please go ahead.

Walter Piecyk: Thanks. Jeff, just going back to Rick’s question, can you give us or define what low means in terms of the number of cell sites that mid-band? Are you talking like sub-10%, sub-20% something in the ballpark?

Jeff Stoops: The most populated of the carriers would be in their satisfaction rate on our towers would be in the 50%ish range and others are below that.

Walter Piecyk: Got it. And then Comcast has this radio from Samsung, it does 2.5 and it has low been in there. I guess, first part of the question is, have you had any type of meaningful dialogue with Comcast and Charter about helping them with their offload strategy? But then more importantly, I guess, when that inevitability does happen, if you look at like three scenarios, one where they just said, hey, we have a radio that just does CBRS and the antenna that goes along with that. Scenario two is we’re doing low band and CBRS, so that’s probably a different type of antenna, maybe larger. And then the third alternative is the low band that they have is deeper, meaning like rather than 5 megahertz in Comcast case, they go out, they lease some additional low band and they are using 10 megahertz of spectrum. Would the leases differ between those three scenarios? Because I’ve seen that you recall over the past many years that you would argue that like, hey, when someone put on the spectrum, we get more money. So for a new leaser or a new tenant, would it be the same way where if they came to you with one of those three alternatives that there would be different pricing?

Jeff Stoops: Just based on the nature of the spectrum is being transmitted?

Walter Piecyk: Yes, and nature.

Jeff Stoops: Probably. Probably not. Probably it’s all going to be based on the way the equipment looks. And based on your description of the third alternative lower band, deeper lower band, I mean, as you’re describing it, I’m envisioning that’s going to be the most intensive on the equipment side. So they would be based on that, Walt, as opposed to the fact that they are transmitting their own. I mean, even though CBRS is shared and not necessarily owned, we wouldn’t differentiate somebody’s use of CBRS versus their use of their own spectrum, I don’t believe. I don’t think we ever have put it that way.

Walter Piecyk: And has there been any meaningful discussions up to this point?

Jeff Stoops: We are always in discussions with Charter and Comcast. But I would say that those scenarios that you lay out, for my personal opinion, I think they are still somewhat in the future.

Walter Piecyk: Got it. Thank you.

Jeff Stoops: Yes.

Walter Piecyk: Yes, understood. Very well.

Operator: Our next question comes from the line of Batya Levi from UBS. Your line is open.

Batya Levi: Thank you. Can you remind us the overall financial impact of the GPS side, if there are any changes to the original expectation? And how much revenue was pulled forward? And Network Services, you mentioned the strength and you added more to the backlog. Could we expect a similar performance next year on that segment? Thank you.

Brendan Cavanagh: Yes. GTS, the numbers aren’t any different than what we gave last quarter. So, the total revenue on an annualized basis is expected to be approximately $72 million. The impact from the pull forward of closing a little bit early was about $3 million.

Jeff Stoops: Yes. And in terms of services, I mean we have a backlog that supports a fourth quarter performance similar to what we enjoyed in the third quarter. That’s not what we have guided to because we exceeded our expectations so greatly in, Q3 and Q4 has some holidays and all that. And in terms of next year, we really wouldn’t hazard a guess until we have the benefit over the next four months or five months prior to when we give out full year 2023 guidance.

Batya Levi: Great. Thank you.

Operator: Our next question comes from the line of Nick Del Deo from MoffettNathanson. Your line is open.

Nick Del Deo: Hey, good evening guys. Thanks for taking my questions. First, just looking at the change in guidance, what’s the jump in other revenue in the U.S. coming from? Is that decommissioning fees or something similar and how much of that was in Q3 versus what you expect in Q4?

Brendan Cavanagh: Yes. It was – almost all of the jump is related to Q3, I would say. And it is related largely – it’s a variety of things. But cash basis revenues, a portion of that, a big chunk of that is related to what we might call holdover fees, extra fees that are paid for somebody staying on the tower that’s coming off, but they stay longer than they should. It also includes internationally payments from Digicel. We mentioned Digicel is a big contributor to the churn number internationally, which they are, but they have actually continued to make a number of payments. And so those payments are showing up basically in other now.

Nick Del Deo: Okay. That’s great. And I guess I also wanted to ask about expense trends that you are observing in the U.S. Obviously, the majority of your OpEx is ground rent escalators and that are fixed. So, that takes a lot of risk off the table. But what are you seeing and expecting as it relates to the rest of your expense base, like corporate, field operations and so on?

Jeff Stoops: We are seeing definitely some inflationary pressure there, Nick. And we are going to be giving out average compensation increases next year at a higher rate than we have given in the last couple of years. But when you look at – I think we are – our SG&A is only like 6% cash, cash SG&A, 6% of revenue. I mean it’s just – it just really doesn’t matter on the overall financial numbers. But we would be lying to you if we said that we were immune to that kind of stuff. But for us, it’s just so much smaller of a percentage than it is for a lot of other companies.

Nick Del Deo: Okay. That’s great. And if I can squeeze in one last quick one. Obviously, as we look at the growth overseas, the value of the CPI-linked escalators are really showing their value in the current environment. Are there any caps on major contracts that we should be cognizant of, or are you guys uncapped on that front, and hence, essentially totally protected?

Brendan Cavanagh: We are largely uncapped. I am trying to think if there are any, there may be one or two somewhere out there. But for the most part, it’s not capped.

Nick Del Deo: Okay. Terrific. Thank you.

Operator: Our next question comes from the line of Greg Williams from Cowen. Your line is open.

Greg Williams: Great. Thanks for taking my questions. Just two, if I may. Can we talk about your Latin American churn? If I look at your guidance, it should be still up here in these 8% levels? I am just trying to figure out how much of that spills over into 2023? Do we remain at these 8% levels over the next few quarters given the Oi cadence and the consolidation churn in digital, etcetera? Second question is just on the service revenue, actually, the service margin profile. How do you expect that to pan out? Are we shifting from maybe permitting to more construction? And I think you hit a margin close to 26%, and wanted to see where that shakes out over the next few quarters. Thanks.

Jeff Stoops: Yes. I mean I will take the latter question first. And Brendan, you can do the American churn. We are executing very well, Greg, on both the traditional permitting and zoning side of the business, as well as the construction side. So, the margin differential that you saw years ago between those two lines of our services business, they are not exactly the same, but the gap has closed tremendously. So, we still get a better margin on the zoning and the permitting side of things than we do on the construction. So, the mix of that will impact the margins. But I mean I don’t think it’s going to be a hugely different margin next year. I think based on the way the work will flow and how we expect things to come in for business that has – I mean the first business that we typically see for any kind of new interest is going to be on the zoning and permitting side. So, I think it’s not going to change a whole lot.

Brendan Cavanagh: Yes. And then Greg, on the international churn piece, I would expect that the next couple of quarters, few quarters probably, will be in a similar range in terms of that percentage that you are looking at because of the timing of when some of the stuff started. The one thing I would also caveat about next year is just, this obviously only takes into account what’s happened now, and there is – the one big thing that’s out there that we are in the midst of conversations about is related to the Oi consolidation in Brazil. And as of today, there is nothing to report on that. But as we continue to have conversations, depending on where those end up, that may influence what next year’s numbers look like.

Greg Williams: Got it. Thank you.

Operator: Our next question comes from the line of Dave Barden from Bank of America. Your line is open.

Dave Barden: Hey guys. Thanks very much for taking the questions. I got a bunch, Jeff, for you. I think the first most important is, what are you going as for trick or treating tonight with your kids? The second…

Jeff Stoops: I am going as a grandfather.

Dave Barden: Yes. I am still interested in the costume. So, the second question is, you kind of highlighted the leverage being below the target. There was a time when you guys implemented your dividend that you thought maybe a lower leverage target would be the right target. I wondered if you would want to have a little bit of a conversation about how you are thinking about target leverage. And given that there is not a ton to do on acquisitions and you didn’t do stock buybacks, even though stock has been pulling back, whether there has been some sort of change there. And if…

Jeff Stoops: There really hasn’t been a change there. I mean clearly, we have maintained our target but have operated almost entirely at the low end now for some time. And I think that’s going to continue to be the case, if not dropping below. But the dropping below, if that happens, is going to be more a function of our dissatisfaction with poor capital allocation opportunities and some financial theoretical belief that this is the optimum leverage level given our access to capital. And one of the thing, and you may be driving at this, Dave, we are not going to turn into a high dividend relative to AFFO company. We just don’t think that’s the right thing to do. We will grow our dividend probably as faster, faster than well, certainly our peers and maybe anybody else in the REIT industry as we have the last couple of years. But it’s still going to be lower as a percentage of AFFO because we like the flexibility that it provides.

Dave Barden: Okay. Great. And then the second question I had was one of the things that distinguished you guys from peers has been a pivot to fixed rate debt. Obviously, that changed a little bit with GTS. I think someone asked earlier about the plan for the GTS that you guys talked about the refinancing of the ABS, but I don’t – what is the plan for the variable rate debt in the portfolio? I guess this is one for Mark. Are you going to go – are you going to lock in higher fixed rates, or are you going to try to rated out in the meantime?

Mark DeRussy: It will be a mix of both. We have, as you probably have noticed from our prior ABS financings where we have the opportunity to raise more than the amount to be refinanced, we have been rated for issuance well above 640. We are trying to figure out exactly how far above that that we go. So, there will be some reduction in the revolver from that, and then the rest of it is going to occur pretty quickly from cash flow.

Dave Barden: Perfect. Okay, good. Thank you. And then my last question, if I could, please, Jeff is, I have always kind of considered you a little bit of a Brazilian policy wonk. Now that the election is over, how – what do you think is next in terms of implications for the telecom industry, currency, etcetera? Thank you.

Jeff Stoops: Well, we all know that Lula is left of Bolsonaro, but he has gotten elected by a coalition of not only the more left us, but also some more centrist populations as well. At the same time, if Lula got elected President, the Congress down there got actually more to the right. So, you are going to have a classic draw between the President and between Congress, and Congress has a lot of power in Brazil. So, I think for us, it’s going to continue to be kind of a good business environment without a lot of policy changes. That’s – I mean I think the whatever – and I don’t know that he would have proposed anything. But assuming, for hypothetical purposes, that Lula proposed some things that would be very much to the left and detrimental to business, I don’t think that’s going to happen because of the Congress.

Dave Barden: Okay. Thank you, guys. I really appreciate.

Jeff Stoops: Sure.

Operator: Our next question comes from the line of David Guarino from Green Street. Your line is open.

David Guarino: Thanks. Hey Jeff, I wanted to make sure I am understanding your enthusiasm for domestic new leasing activity next year, especially compared to one of your peers that gave ‘23 guidance that implies a step down from macro tower new leasing activity. So, I guess the question is really your ‘22 guide this year for $67 million in new leasing activity. Do you think we are going to look back on that as a high watermark, or do you think that there is actually room for that to grow going forward?

Jeff Stoops: I am glad you asked that question because when we are conveying good feelings about next year, it’s exactly around that number for 2022. That same calculation and that same thing that we will be posting when we start our bridge for next year – next earnings release, that’s really what we are speaking to. So, I think I just answered your question.

David Guarino: Alright. I can read through that. And second one then switching gears on it. Given the volatility and the pretty rapid change we have seen this year in a lot of foreign currencies, maybe not the experience in Brazil, but certainly a lot of other markets. Have you reconsidered how you underwrite the risk for international investments relative to what you might have been doing at the start of the year?

Jeff Stoops: Not really because the rate of currency movement has largely been matched off by the CPIs in those countries.

Brendan Cavanagh: And all of our revenues in those countries are escalated based on CPI. There will be some minor exceptions to that plus or minus. But in general, that relationship has helped.

Operator: Our next question comes from the line of Brendan Lynch from Barclays. Your line is open.

Brendan Lynch: Great. Thanks for taking my question. Maybe on the debt, again, given the macro environment, has your ability to tap into the secured debt market changed recently? And do you think that will continue to remain a primary source of funding going forward?

Brendan Cavanagh: Yes. Brendan, we do think that it will remain a primary source of funding for us. Our ability to tap into it has not really been impacted. It’s really just a question of cost. That’s the only question mark. But the access to capital and having plenty of capital available to us in those markets still remains very strong.

Brendan Lynch: Okay. Great. And then just one other question. It looks like your discretionary CapEx guidance came down by about $35 million for the year. Is that related to labor availability or supply chain constraints or other rising costs that might be leading to a slowdown in development projects?

Brendan Cavanagh: No. It’s mostly just timing of some smaller acquisitions and when we think they are going to close.

Brendan Lynch: Okay. Very good. Thank you.

Operator: Our next question comes from the line of Brandon Nispel from KeyBanc. Your line is open.

Brandon Nispel: Great. Thanks for taking the questions. Two, if I could. Jeff, you guys talked about commencements coming in a little bit quicker than expected. But could you update us on the backlog of unsigned lease applications? Where do you stand today relative to a year ago and last quarter? Then for Brendan, obviously, international CPIs have been high, but have come down a little bit, at least in Brazil. I guess if we put estimates aside today, inflation stayed where it’s at, what should we be looking for, for that escalator next year? Thanks.

Jeff Stoops: Yes. In terms of our backlog for leases, new leases and amendments, we are just a tad off of where we were at the end of second quarter, which was one of the highest that we have had in many, many, many years. So, we are still looking at a very, very strong backlog, which just underlies a lot of our optimism going forward. And Brendan, I am going to let you handle the second question.

Brendan Cavanagh: Yes. I mean you are asking me to predict the CPI for next year in Brazil, which it’s hard to do with certainty, especially given the recent elections and all that, we have to kind of see how that all settles out. But I think high-single digits is a reasonable assumption today, and perhaps it could be higher than that. But I would target somewhere in that 8% to 10% range.

Jeff Stoops: Well, I mean there is going to be a forward curve out there. I mean we do planning around those things because nobody has an accurate crystal ball on that. We rely on the published consensus forward curve .

Brendan Cavanagh: Yes. I mean, the big thing though, Brandon, for us is some of it comes down to timing. Obviously, we have concentrated periods at which our leases escalate. So, depending on where things are during those windows of time, it has either a greater or lesser impact on our specific numbers.

Brandon Nispel: Great. Thank you.

Operator: And there are no further questions in the queue at this time.

End of Q&A:

Jeff Stoops: Great. Thanks Carolyn and thank you all for joining us. We look forward to our next release in February, where we will talk about 2023 and happy Halloween.

Operator: And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing services. You may now disconnect.