September 27, 2016 —
EDITORS’ NOTE — This is the third of three articles revealing the different approaches to small cells of the major tower companies. Crown Castle International, InSite Wireless Group and Digital Bridge Holdings share an appetite for small cells.
For Crown Castle, small cells represent assets placed on a collocatable asset, which is the fiber-optic network that delivers traffic from a mobile wireless network at a local point. “Whether that’s a distributed antenna system (DAS) node, a small cell, a femtocell or a picocell doesn’t necessarily matter to us, as long as there’s a fiber on which we can collocate,” said Dan Schlager, senior vice president of corporate finance at Crown Castle.
Schlager said Crown Castle wants to make the fiber-optic network profitable. To do so, the company seeks to participate in the densification of the radio-frequency (RF) spectrum the mobile networks deploy and, in doing so, become a partner to its wireless carrier customers. “We firmly believe that fiber is the asset that we’re going to collocate on, and what we really try to push on,” he said.
In a view expressed by Jay A. Brown, Crown Castle’s president and CEO, because small cells are deployed closer to the end user and in a denser array, such as on traffic lights or telephone poles, they represent the natural progression of network densification required to provide continuous consistent high-capacity and low-latency connectivity. With small cells, the company’s initial investment relates primarily to the build out of the fiber-optic cable network. “We believe our fiber footprint of 17,000 miles in top mature markets combined with the capabilities that we have acquired and developed over time give us time to market and economic advantages that should allow us to capture a significant share of this large opportunity,” Brown said.
For 2016, Crown Castle is expecting $170 million in organic revenue growth, with $115 million from towers and $55 million from small cells. Brown said the company sees its investment in small cells as representing an opportunity to grow the dividend it pays shareholders.
“Looking beyond 2016, we believe we are in a multiple-year cycle of network upgrades and enhancements, as carriers focused on meeting significantly increasing demand for wireless connectivity, which we believe will benefit both our tower and small cell businesses,” Brown said.
InSite Wireless started in the DAS business 16 years ago. The company built a system in the Moscone Center in San Francisco that has since undergone nearly six generations of upgrades for densification. InSite Wireless focuses on indoor DAS, always providing fiber access to the sites.
“The leasing on DAS is phenomenal,” said Lance Cawley, CFO of InSite Wireless. He said the company built a DAS that covers the Massachusetts Bay Transportation Authority (MBTA) subway in Boston that serves AT&T Mobility, Verizon Wireless, T-Mobile USA and Sprint. In addition, Comcast provides Wi-Fi service. InSite Wireless has started some underground wireless service for Verizon in the Los Angeles County Metropolitan Transportation Authority (Metro).
“DAS is a wonderful, yet difficult, business,” Cawley said. “Unlike towers, which are just a simple real estate leasing business involving many forms and a documented information flow handled by run of the mill staff, in DAS, it requires somebody at all levels of legal, engineering, RF and finance. These are $20 million, $30 million and $40 million build outs that take many years to complete. It involves a lobbyist and attorneys. It’s complicated, but we have phenomenal results in our DAS business. I think of the small cell business as an extension of the DAS business. A small cell has a base transceiver station (BTS) built in, whereas DAS has a centralized BTS pack.”
Cawley said InSite Wireless is indifferent to which solution it provides. “We provide whatever is cost-effective for the carrier to meet its capacity demands,” he said. “We love the macro tower business. It’s the majority of our business. We believe you should be in all these lines of business to meet the carriers’ growth and capacity requirements.”
At Digital Bridge Holdings, CEO Marc Ganzi said mature small cell networks experience lease amendment activity much like the tower business does. And business is good. “In the small cell business, we’re drinking through a fire hose,” Ganzi said. “We have 2,000 nodes in construction. We’ve got a leasing backlog that’s worth close to $60 million in annual recurring rent. There’s more than we know what to do with. It’s that size of an opportunity. That’s good, because as some of the macro tower business has slowed, we’ve seen the small cell business accelerate dramatically.”
Dan Schlager, Lance Cawley and Marc Ganzi spoke at the Wireless Investors Conference, part of the Wireless Infrastructure Show, in May. The next Wireless Infrastructure Show is scheduled for May 22–25, 2017, in Orlando, Florida. Jay A. Brown spoke during an earnings call in July.
August 30, 2016 — RBC Capital Markets remained overweight on the public tower companies, including American Tower and SBA Communications, with a “slightly greater weighting” toward Crown Castle International in the firm’s Mobile Infrastructure Recap for the second quarter.
“Towers are our only coverage sector with identifiable catalysts for (modest) revenue acceleration driven by various network activities at AT&T and T-Mobile, though slowing activity at Verizon could mute this trend somewhat,” wrote Jonathan Atkin, RBC analyst.
RBC’s preference for CCI is driven in part by the towerco’s involvement in U.S. outdoor small-cells and prospects for increasing tenancies from AT&T and T-Mobile. The firm also believes CCI’s dividend will increase the shareholder base.
Additionally, S&P, Dow Jones and the MSCI U.S. REIT Index have made rules changes concerning REITs, which will have a favorable impact both American Tower and CCI.
“We believe the REIT GICS creation later this week will act as a structural catalyst favoring the tower REITs,” Adelstein wrote. “AMT and CCI, each of which are top-five REITs by market capitalization, have up to now not been included in the two most heavily benchmarked REIT indices (FTSE/NAREIT and RMZ), yet will be included in the new REIT GICS category, which we believe could drive index-related buying.”
Site Leasing and Organic Growth
RBC predicted a small increase in tower leasing in 2016 compared with 2015. While macro-site deployment will be down, activity will increase in macro-overlays, small cells and carrier aggregation.
“Verizon and T-Mobile should remain active, with each contributing slightly fewer macro-site additions vs. 2014, offset by greater macro-overlay activity and increased small cell efforts,” Atkins wrote. “AT&T should remain inactive on macro-site deployments but noticeably more active on site overlays. Sprint remains mostly dormant on macro site additions, focusing on carrier aggregation and BTS small-cell deployments.”
RBC predicted increased overall activity at T-Mobile in 2017 and possibly AT&T, with Verizon posting less macro-site and more small-cell activity.
July 26, 2016 — Crown Castle International reported a strong second quarter, which reflected an “overall healthy leasing environment.” Site rental revenue grew 9 percent year over year to $805 million, with organic revenue growth of 7 percent. Those numbers included 6.2 percent from new leasing growth and 3.3 percent from escalators, minus 2.5 percent in churn.
“We’ve been able to grow through both organically and acquisitions, including integrating those acquisitions effectively,” said Jay Brown, president and CEO. “This solid execution has resulted in very good financial performance.”
The tower company met or exceeded the midpoint of its Q2 outlook in site rental gross margin, adjusted EBITDA, AFFO and AFFO per share. As a result, it increased its midpoints for the year.
CapEx Spend Favors Small Cells Over Towers
Brown said the current business environment for building towers is radically different from the turn of the 21st century, when Crown Castle built 1,000 to 2,000 towers annually.
“Today, we build less than 50 towers on an annual basis. And the reason for that is because we just don’t see the incremental returns as high enough,” he said.
Capex for small cells exceeded towers during the quarter. Year over year, small cell capex grew to $85.4 million from $53 million. Tower capex shrank to $75.9 million from $110.5 million. Investment in small cells represents a significant long-term growth opportunity, according to Brown.
“From a capital allocation standpoint, we are particularly excited about the small cell opportunities that we see ahead of us,” Brown said. “We’re choosing today to invest in and build immature assets because we believe there will be an environment over time that will fill those assets up and increase the yield.”
May 5, 2016 — Enjoying a solid start to 2016, SBA Communications reported that carrier activity was consistent with the last three quarters of 2015, featuring mostly amendments to existing macro sites, according to the towerco’s first quarter earnings call. Aside from normal churn and an iDEN de-commissioning hangover, which will last most of 2016, SBA achieved organic leasing revenue growth of 8.1 percent in the first quarter.
“By application and executed contract volume, the activity is substantially amendments,” said Jeffrey Stoops, president and CEO. “We expect the investments in macro sites by our U.S. customers will remain heavily weighted towards amendments for the remainder of this year.”
SBA projected increased growth in the long term (by 2020) through new sites and amendment activity, but conservative short-term estimates led Wells Fargo Securities to maintain its Market Perform rating for its stock.
“While this is a positive, SBAC continued to speak to a more muted domestic spending environment, which does not seem to be changing near term,” wrote Senior Analyst Jennifer Fritzsche.
During the quarter, carrier activity centered on the AWS-1 (Advanced Wireless Services at 1.7 GHz and 2.1 GHz) and 700 MHz deployments, as well as refarming of 2G and 3G spectrum to LTE,
“We are in the very early innings of AWS-3 (1.6 GHz, 1.75 GHz, 2.15 GHz), WCS (Wireless Communications Service at 2.3 GHz) and 2.5 GHz spectrum deployments all of which remain opportunities ahead of us,” Stoops said. “The amount of activity around an investment in our customers’ existing macro sites continues to be robust and underscores the importance of macro sites in our customers’ network plans.”
SBA lowered its services guidance to reflect reduced work from Sprint, while other carriers are expected to remain steady, compared with last year.
Carrier activity reported by American Tower in the first quarter took place in the AWS-3, WCS, and 2.5 GHz bands, as well as through refarming 2G and 3G spectrum into 4G in the 800 MHz and PCS bands. Refarming drove amendments as old antennas were swapped out for more advanced antennas, according to James Taiclet, American president and CEO.
“This shift drives further investment into cell sites through technologies such as carrier aggregation as well as adding new cell sites to reduce the transmission radius and, therefore, the quality improvement for each signal,” he said. “This increase in cell site density is expected to drive incremental collocation opportunities on macro towers, as customers like us demand higher and higher peak speeds to enhance our user experience.”
Organic growth of U.S. property revenue is projected to be 5.5 percent by American Tower, compared with 12 percent for international properties.
Crown Castle International
Crown Castle saw organic site rental revenue grow 7 percent plus 3 percent cash escalations minus 2 percent from churn in the first quarter.
Jay Brown, Crown Castle CFO, also said carrier activity won’t increase in 2016. Additionally, the execution of new leases and amendments will be backloaded, 40 percent in the first half and 60 percent in the second half.
“Our view is that leasing activity in the full year of 2016 is going to be very similar to what we saw in 2015. And we continue to hold that view,” he said.
April 26, 2016 — Crown Castle International exceeded its expectations in the first quarter 2016 and raised its outlook for the full year as organic site rental revenue grew $55 million or 8 percent year over year. The first quarter saw 7 percent growth from new leasing activity plus 3 percent from escalations, minus 2 percent tenant non-renewals, the company said during it quarterly earnings call.
While the tower business is good for CCI, the majority of its current capex is devoted to its small cell business, which comprises 16,500 miles of fiber. While small cells account for $385 million, or 12 percent, of annualized site rental revenues, it is obvious CCI sees a bright future in them.
“We are as excited as we have ever been by the opportunities in small cells,” Jay Brown, CCI CFO, said. “Our small cell conversations with the carriers have increasingly become more positive with the passage of time and we are seeing the business model of small cells play out very similarly to that of towers.”
Brown walked through two case studies that illustrated the collocation economics of small cells as the fiber infrastructure. The first one was located in Denver, which originally comprised 14 miles of fiber connecting 18 tenant nodes on 18 poles for the first carrier. Since then two carriers have been added to the system, which now numbers 17 miles of fiber connecting 65 tenant nodes on 26 poles in the public right-of-way.
“In aggregate, this system currently generates a yield of approximately 20 percent, based on the recurring cash flows and the capital we invested in the system. As you can see with this system, we have been able to leverage the initial investment by collocating additional tenant nodes on the fiber to drive our returns,” Brown said.
The system CCI has in Las Vegas consists of 36 miles of fiber supporting 77 tenant nodes on 77 poles. The yield of 13 percent is less than Denver, because it hosts only two carriers. A third one, however, is on the way.
“We are currently working with a third carrier to collocate nodes on this fiber network and anticipate adding that third carrier to this system in the next six months,” Brown said.
One of the questions surrounding small cells has concerned the number of carriers that would want small cell coverage in the same location. Unlike the Denver example, where the majority of the colocation of tenant nodes occurred on the same pole as the first carrier, the collocations in Las Vegas occurred at different pole locations along the existing fiber.
“Because the majority of the investment relates to deploying fiber, our yields increased by collocating additional nodes on our fiber, regardless of whether the colocation occurs on the same pole or on another pole along the fiber,” Brown said. “This is why we often describe the fiber as a tower laid on its side upon which we are aiming to collocate tenant nodes.”
Small cell deployment has driven improved yields on the fiber-optic systems, and CCI expects that trend to continue.
“Given the returns we are seeing from small cells, we believe our continued investments are consistent with our strategy of allocating capital to drive long-term growth in dividends per share,” Brown said.