Companies can change a lot in a few short years. That has certainly been the case with SBA Communications (NASDAQ: SBAC), which has only been a real estate investment trust (REIT) since 2017. The company has evolved quite a bit since then and will likely continue doing so in the years ahead. With that future in mind, here's a look at where this infrastructure REIT might be in three years.
Where SBA Communications is today
SBA Communications currently owns more than 32,000 communications sites across 14 markets in North and South America as well as South Africa. That's up from 26,000 locations at the time of its REIT conversion.
SBA is one of the top 20 REITs by market capitalization. However, it's much smaller than its communications-focused infrastructure REIT peers, American Tower (NYSE: AMT) and Crown Castle International (NYSE: CCI). American Tower currently operates more than 180,000 communications sites around the world and is in the process of buying a portfolio that will add roughly 31,000 additional locations to its tally. Meanwhile, Crown Castle operates more than 40,000 cell towers in the U.S. to go along with an extensive fiber optic cable and small site network to support 5G.
Where SBA Communications seems headed over the next three years
Given its relatively smaller size, SBA Communications has significant growth potential over the next few years. The company can continue acquiring tower assets from mobile carriers, which are increasingly looking to sell their infrastructure to reinvest into expanding their networks. In addition to acquisitions, the company can build additional tower sites for its current customers to support their growth while also putting more tenants on its existing towers. Given its focus on high-growth markets like the U.S. and Brazil, it should have plenty of opportunities to continue expanding.
Another potential growth driver for the company is data centers. SBA bought its first data center in the U.S. in 2019 and purchased a second one last year. The company sees appealing growth potential to leverage its existing tower assets to provide customers with access to secure space, power, and fiber optic cables to help support fast-growing data usage.
However, while SBA Communications has lots of expansion potential, it doesn't have quite its peers' financial flexibility to capture this growth. That's because it currently has a somewhat elevated leverage ratio of 7.0 times its debt-to-EBITDA. For comparison's sake, American Tower's leverage ratio will rise above 5.0 times after it completes its latest acquisition, which, while higher than its 3.0 to 5.0 times target, is comfortable enough to maintain its investment-grade credit rating. SBA Communications has been working to reduce its leverage -- it's down from 7.6 times in 2016 -- by allocating some of its free cash flow toward debt reduction, which it will likely continue doing over the next few years.
As leverage comes down, SBA Communications will have an even greater financial flexibility to pay dividends. The REIT currently has the lowest yield in its peer group (0.7% versus 2.1% for American Tower and 3.3% for Crown Castle) due to a low payout ratio. The company has been growing its payout at a fast pace -- it boosted it 25.7% in 2020 -- and will likely continue doing so as it expands its portfolio and reduces leverage.
The future looks bright for this infrastructure REIT
SBA Communications has only been a REIT for a few years. However, it's been an excellent one as it has generated a more than 150% total return. Powering those market-crushing returns has been its ability to continue expanding its infrastructure portfolio and dividend while also reducing leverage.
The REIT seems likely to continue delivering on those same objectives in the coming years. Leverage has been steadily coming down, which has improved its access to low-cost capital. Because of that, it has increased funding flexibility to continue expanding, which should power fast-paced dividend growth. Thus, it seems reasonable to believe that this REIT can continue generating market-beating total returns.