Regardless of the number of wireless carriers, tower companies will benefit from the release and development of RF spectrum and from vast increases in network traffic coming with 5G.
Wireless communications carriers are investing at least as much, if not more, in small cells than what they spend to deploy macro sites, according to Jay A. Brown, president and CEO of Crown Castle International. The company rents to carriers the wireless communications infrastructure that it owns, such as telecommunications towers, small cells, distributed antenna system (DAS) networks and routes of fiber-optic cable for connecting antenna sites with the carriers’ networks. All of the company’s assets are in the United States, although it has previously owned infrastructure in the United Kingdom and Australia.
Speaking at a plenary session at Connectivity Expo, conducted by the Wireless Infrastructure Association in Charlotte, North Carolina, Brown said he sees a diminishing opportunity to acquire macro sites while looking hard at the opportunity to acquire other kinds of infrastructure carriers need in the form of dark, dense, urban fiber. Dark fiber refers to installed fiber owned by one party and rented for use by another. He said Crown has dense fiber in 23 of the top 25 U.S. markets.
“We have invested $13 billion in fiber and small cells,” Brown said. “But our view is that there are no more assets of like kind of any substantial size to acquire.” He said increasing Crown’s inventory in fiber would involve building more dark, dense, urban fiber.
As for towers, Brown said the valuations of portfolios that remain with smaller, private owners — that may become what he called tuck-in acquisitions — have been steady for several years. For the past 20 years, he said, those valuations have almost always exceeded the valuations of towers owned by public companies.
“In most industries, the public players are afforded a higher multiple (valuation) because of diversification and other reasons,” Brown said. “In our industry, the private, smaller players have had valuation premiums. That probably argues that public companies are undervalued relative to the value of the assets.”
Referring to Dish Network’s plan to spend $500 million to $1 billion to construct a narrowband wireless network to serve internet of things (IoT) customers, Brown said that any time a company has radio-frequency (RF) spectrum to deploy, it works really well for the wireless infrastructure business. He said previous spectrum deployments had afforded the tower owners a large opportunity. With Crown owning 40,000 towers, Brown said, the company is excited about what the Dish Network IoT construction could mean.
Beyond Dish Network’s system, which initially will use 4G wireless technology, lies the prospect of 5G wireless network construction by Dish and possibly all of the existing wireless carriers. The first phase of 5G construction will overlay new equipment at existing macro sites, according to Brown.
“Macro sites are absolutely critical to 5G in the long term,” Brown said. “We don’t view small cells as a substitution for the macro sites. Carriers will design their next-generation networks around existing sites, which will, in time, become the hub sites as they design cloud-based radio access networks (C-RANs). As network traffic grows, it will exceed macro site capacity, and carriers will have to cell-split their networks and focus spectrum on specific areas. So, they’re using small cells to supplement existing macro networks.”
Crown has seen more bookings for small cells during the first quarter of 2018 than for the entire year of 2016, Brown said. Orders are market-wide and for thousands of small cells at a time, he said. For the next 20 years, he said, the opportunity for small cells and the infrastructure associated with them may be greater than that of towers over the last two decades. In Brown’s view, Crown has been able to obtain a return on the capital deployed for small cells and fiber that has been both attractive and encouraging at the early stages. Brown said that macro sites continue to be an important part of the network, and he expects amendments and new leases for them. Meanwhile, he said, he expects a significant portion of capital will be invested by the carriers for small cells and fiber.
“Crown wants to maximize the dividend per share that it pays, which is the best indication of the long term value of the company,” Brown said. “Our investments in fiber and small cells will have the highest effect for long-term value creation. The incremental lease-up is about twice that of towers. The winning play on fiber and small cells is delivering a solution to wireless carriers to share at a much lower cost than if they deployed them by themselves.”
Crown pays about 75 percent of its cash flow in the form of dividends and still invests more than $1.5 billion in capital expenditures and acquisitions, according to Brown. “We make better decisions when we have limited resources, and by paying out the majority of our cash flow to shareholders, that makes us really disciplined capital allocators,” he said. “Not only do we have the long-term cost of the capital, we have the short-term cost of dilution from paying dividends on shares as we issue them.”
The company makes sure investments it makes include a portion of equity, not only to cover the cost of capital but to be additive to the long-term accretion of the business, Brown said. He said Crown would continue to grow its dividend, which now is growing it at 7 to 8 percent per year. “I like coming back to the market and explaining the value of the investments that we’re making, and then raising the capital as necessary,” he said.
Sprint and T-Mobile US Merger
Two decades ago, Brown said, Crown had 1.2 tenants per tower, and there were eight wireless carriers. Currently, the company has more than 2.5 tenants per tower, and its cash flow has grown. That happened, he said, during a period when the market went from eight to four carriers. With the merger of Sprint and T-Mobile US that is pending, subject to government approval, the market will go from four to three carriers.
Carrier Number Irrelevant
“Two decades from now, we will look back, and it will seem almost irrelevant how many carriers there are, because, ultimately, what drives the need for our infrastructure is consumers, the devices they use and the amount of traffic that they put onto the network,” Brown said. “Our infrastructure model has been driven largely by consumer need. 5G wireless communications’ lower latency and higher speed will open industrial opportunities that will place an enormous amount of traffic on the network. That will result in carriers using more equipment on infrastructure, whether fiber, small cells or macro sites.”
The next Connectivity Expo is set for May 20–23, 2019, in Orlando, Florida.
Crown Castle International reported a strong third quarter with all major carriers contributing to its growth. The comm-infra company, which experienced growth across all of its segments: towers, small cells and fiber, also painted an upbeat picture of its 2019 expectations.
“We delivered another terrific quarter of results in the third quarter and increased our annualized common stock dividend by 7 percent to $4.50 per share based on accelerating leasing activity,”
CCI has portfolios of more than 40,000 towers, 35,000 small cells and 65,000 route miles of dense, high-capacity fiber in the top U.S. markets, in areas it foresees the greatest long-term demand from multiple customers. The triple play of towers, small cells and fiber are the key to the company’s growth now and in the future, said Jay Brown, Crown Castle’s CEO in a Seeking Alpha transcript of the third quarter earnings call. https://seekingalpha.com/article/4212546-crown-castle-international-corp-cci-ceo-jay-brown-q3-2018-results-earnings-call-transcript
“Our strategy to invest in towers and small cells and fiber has positioned us to capture accelerating leasing activity which is driving dividend growth,” Brown said “We believe our ability to offer towers, small cells and fiber solutions, which are all integral components of communications networks and are shared among multiple tenants, provides us the best opportunity to generate significant growth while delivering high returns for our shareholders.”
Small cells leasing growth will hockey stick up to $75 million in 2019, more than 35 percent higher than the $55 million expected in 2018. Small cell construction, which grew 40 percent from last year, is expected to continue during the next 18 to 24 months.
“This increased activity is a result of all four of our large customers investing in their networks through towers and small cells to both keep pace with the current 4G demand environment and position their networks for 5G,” Brown said.
Tower Rental Prospects
In 2019, new leasing activity is expected to be a $125 million for towers in 2019, up from a $110 million in 2018.
CCI can increase the yield on its fiber investment by serving both small cells and enterprise fiber customers with the same outside plant. “The current utilization of our fiber portfolio is similar to that of a single tenant tower. Our current 8-percent yield is more than double what we saw when our towers had only one tenant,” Brown said.
Site Rental Revenue
Organic site rental revenues grew $52 million or 5.8 percent year over year, comprising 8.4 percent growth from new leasing activity and contracted tenant escalations, minus 2.6 percent from tenant non-renewals.
In the second quarter, Crown Castle International saw site rental revenue growth of 35 percent, or $300 million, year over year, but only $49 million of that was organic. Site rental revenues were increased by acquisitions, which totaled $231 million and $20 million came from straight-lined revenues, according to press release distributed after the market closed on Wednesday.
The Organic site rental revenues represent 5.6 percent growth, comprised of 8 percent growth from new leasing activity and contracted tenant escalations, minus 2.5 percent churn.
“No business model is entirely predictable, but tower leasing comes as close to being ‘locked in’ as one could realistically hope. Tower investors wake up each morning, brush their teeth, shower, and collect 1/365th of (domestic) annual gross growth of 6 percent to 8 percent,” wrote Nick Del Deo, MoffettNathanson senior analyst. “There’s obviously more to it than that – churn, guidance changes, sister businesses like international towers or fiber, carrier consolidation risk, and so on – but that’s a fair way to describe the business.”
Matthew Niknam with Deutsche Bank Research noted that Crown Castles site rental revenue and adjusted EBITDA were 1 percent ahead of estimates by his firm and Wall Street, as well as Crown Castle’s guidance, possibly due to AT&T lease extensions.
“Relative to expectations, upside in both stemmed from $9 million in additional straight-line revenues, tied to “term extensions associated with leasing activity,” Niknam wrote. “While the drivers of this are unclear, we note that the weighted average current term remaining for leases with AT&T increased to 6 years, from 5 years last quarter.”
Capital expenditures during the quarter were $393 million, comprised of $10 million of land purchases, $26 million of sustaining capital expenditures, $356 million of revenue generating capital expenditures and $1 million of integration capital expenditures.
The Q2 earnings call will take place tomorrow, providing more details.
Tension between the carriers and the tower companies seems to be easing a bit. At least in the case of AT&T and Crown Castle International. The two have signed a new agreement simplifying and expanding their long-term leasing deal for wireless network infrastructure.
Under the new agreement, leasing management and operations are streamlined to improve the efficiency and flexibility under which AT&T can deploy new technologies and increase network capacity. These changes will enable AT&T to speed up the deployment of 5G technologies and the execution of our FirstNet build.
“This agreement marks a significant milestone in our relationship with Crown Castle,” said Susan Johnson, executive vice president – global connections and supply chain, AT&T. “It establishes a market-based framework and simplifies the lease management and administration process. This will allow us to streamline network projects to better serve our customers.”
The agreement aligns with AT&T’s commitment to provide customers with better speed, reliability and overall performance. In addition to macro sites, the new agreement covers small cell deployments. Small cells are necessary to improve wireless networks, keep up with increasing mobile data usage and lay the foundation for 5G.
“We are pleased to expand our longstanding strategic relationship with AT&T,” said Mike Kavanagh, chief commercial officer, Crown Castle. “We look forward to continuing to support AT&T’s growth by providing our infrastructure assets to meet their network needs for years to come.”
Panelists at the Wireless West Conference last week agreed that the wireless industry is shifting its small cell deployment into high gear, discussing both the reasons behind that growth and the issues that might hinder it.
Several factors are driving the deployment of hundreds of thousands of small cells annually, according to Jeff Lewis, president and founder, Verticom, who moderated “Small Cells, Big Market,” from general economic momentum to positive telecom industry trends. Specifically, he also cited the growing number of 5G use cases plus clarity surrounding timelines for 5G NR standards and deployment. Additionally, mobile edge computing is a key component of scalable 5G architecture.
“In addition to FirstNet, you have the TV repack and relocation initiative. You have incremental industry spend of $2 billion. Throw in regulatory and tax reform and you have another $2 billion of free cash flow,” Lewis said. “With the successful 5G trials going on nationwide, ROI models have begun to factor in less risk, which increases the project approval rate. Any time you have less risk and a more predictable deployment model, capex increases.”
One carrier, T-Mobile, has a “robust small cell program,” planning on deploying 25,000 small cells in the 18 to 24 months, according to Hollie Maldonado, site development manager, T-Mobile. She contrasted that number to the 20 years it took for the carrier to build out its current lineup of 60,000 macrosites.
Crown Castle, which as 50,000 small cell sites, is in the process of 5,000 more sites in the western market. “We are seeing enormous growth in small cells,” said Dan Schweizer, Crown Castle International government relations. “We are trying to build as many of them as we can.”
Kishore Raja, Boingo Wireless VP engineering, said there is an additional catalyst for small cell growth, noting they can now be deployed in two different ways on unlicensed spectrum as well as licensed, bringing with it new business models. “Now, there is a third avenue: the 150 megahertz at 3.5 GHz of spectrum in the Citizens Broadband Radio Service,” Raja said. “This opens up small cells to neutral host operators sharing spectrum with the incumbents.”
Opening up New Markets
The panelists discussed new markets that small cells bring to their companies. T-Mobile is currently deploying small cells to offload 4G LTE capacity from its macrosites, but the same sites will bring 5G services as close as possible to users. Crown Castle will use hyperdensification for offload of fiber data traffic and carrying mission critical Internet of Things data in an aesthetically pleasing manner. Small cells give Boingo Wireless an additional tool to solve issues in its current venues and also allow it to serve additional venues that before did not make economic sense. ExteNet uses small cells to densify the networks of carriers.
The challenge, according to Raja, is creating the user experience. “Whether the deployment is New Radio, millimeter wave, 4G, 4G advanced, Wi-Fi or any others, the goal is a clean, seamless user experience as they move from network to network,” he said. “Virtualization will be very key to managing these networks, both in terms of capex and opex.”
Opposition from Municipalities May Be a Drag on Small Cell Deployment
While the panelists agreed on the need for small cells to the future of the wireless industry, they also agreed that without streamlining of the municipal zoning processes the idea of deploying 100s of thousands of them seems impossible.
“We know one of the keys to achieving that goal is working with local governments. We have our work cut out for us,” Maldonado said. “We have launched a hefty site advocacy campaign in several markets to ensure that groundwork has been laid to execute quickly.”
Extenet is trying to drive down costs and streamline processes in the rights of way at a local level with the municipalities, according Greg Spraetz, SVP & GM enterprise solutions, ExteNet Systems.
Schweizer noted the work done by states and the FCC facilitating small cells. “Texas, Utah, Arizona, Colorado and New Mexico have all passed streamlining bills. Hawaii and California are pending,” he said. “I don’t believe we should have put small cells through zoning. There should be an agreed-upon form factor with the city, the industry has to do its part to build attractive sites that are compatible with existing residential areas and we should be able to pull a permit like any other right-of-way user.”
Recent rules adopted by the FCC, which exempted small cells from NEPA and SHPO regulations, will save the industry a lot of money and deployment time, according to Raja.
Schweizer cautioned streamlining regulations and legislation do not replace good relationships with municipalities. “There is no silver bullet,” he said. “Good state regulation does not obviate the need for government relations and being a trusted partner.”
J. Sharpe Smith
J. Sharpe Smith joined AGL in 2007 as contributing editor to the magazine and as editor of eDigest email newsletter. He has 27 years of experience writing about industrial communications, paging, cellular, small cells, DAS and towers. Previously, he worked for the Enterprise Wireless Alliance as editor of the Enterprise Wireless Magazine. Before that, he edited the Wireless Journal for CTIA and he began his wireless journalism career with Phillips Publishing, now Access Intelligence.