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Crown Castle Goes Back to the Future with Tower Development Corp. Buy

By J. Sharpe Smith

AGL-ArticleImg1April 11, 2016 – Some tower portfolios simply go to the highest bidder, others seem to the be the result of long term relationships in the industry. Crown Castle International’s purchase of Tower Development Corporation (TDC) late last week for $461 million could be placed in the latter category. TDC, which owns and operates 336 towers in the United States and Puerto Rico, is the portfolio company of Berkshire Partners, which has a long history of working closely with CCI.

The purchase of the towers, which average two tenants each, is expected to contribute $25 million to $27 million to CCI’s site rental gross margin in the first full year and to be immediately accretive.

The acquisition of TDC brings the giant public tower company full circle with the roots of its long-term relationship with Berkshire Partners, which was one of the original investors in Crown Castle. Along with investing multiple times in CCI, Berkshire worked with its management to build the financial tools needed to participate in the tower industry consolidation, eventually helping it go public in 1998 and with subsequent sales of equity securities.

Additionally, TDC, which was formed in 2009, has developed wireless infrastructure in partnership with CCI.

Berkshire also played a role supplying capital and advice in CCI’s acquisition of the British Broadcasting Corporation’s tower and broadcast assets in 1997, which were divested in 2004.

“There was a true partnership between [Berkshire] management and investors through the key early domestic acquisitions made by CCI, and especially during the ground breaking effort to prove to the BBC that CCI was a worthy outsourcing partner with the operating skills and capital necessary to ensure continued smooth operation of their critical transmission assets,” the firm writes on its website.

At the end of 2015, CCI had operations in 100 U.S. markets, with more than 40,000 towers, 17,000 small cells and 16,000 miles of fiber-optic backhaul.

Crown Castle Reports Strong 3Q Leasing Activity

By J. Sharpe Smith —

October 29, 2015 — Crown Castle International reported strong leasing activity in the third quarter with 10 percent growth year over year from new leasing activity and cash escalations. Organic site rental revenue growth was $43 million, or six percent, less 4 percent attributed to tenant non-renewals. The tower company expects the growth to continue in the four quarter and throughout 2016.

“Based on our increased 2015 outlook, we expect to finish 2015 on a strong note and we look to continue this momentum moving into 2016,” said Ben Moreland, Crown Castle president and CEO.

In 2016, Crown anticipates new leasing activity of $170 million, which is similar to 2015 levels. That number is shared by tower leasing ($115 million) and small cell leasing ($55 million). Organic site rental revenue growth next year is expected to be 5.5 percent or $160 million, which consists of 9 percent new leasing activity and escalations on tenant leases, less 4 percent from non-renewals.

The $115 million new leasing figure is consistent with Crown Castle’s long-term expectation of adding one tenant-equivalent per tower over 10 years across its portfolio of 40,000 towers. During the last six years, the tower company’s annual leasing activity has ranged between 0.09 and 0.13 tenants per tower.

“Our organic growth is also supported by annual contracted tenant escalators on our towers and small cell leases of 3 percent, which we expect will contribute $95 million in growth during 2016,” said Jay Brown, Crown Castle CFO.

Small Cells Adding to Bottom Line

During the third quarter, Crown Castle closed on the acquisition of Sunesys, which owns or has the rights to nearly 10,000 miles of fiber in major metro markets across the United States where Crown Castle has a small cell presence.

The contribution of the Sunesys acquisition, in addition to the strong leasing and improved operating leverage, will drive Crown Castle’s projection of 8 percent in AFFO (adjusted funds from operations) per share growth in 2016.

Small cells are already making a difference. Excluding Sunesys, small cell leasing revenue has grown 30 percent so far this year.
“While towers will continue to be the most efficient and cost-effective way for carriers to deploy their networks, we expect carriers to make investments in small cells to enhance their macro networks by bringing cell sites closer to mobile subscribers,” Brown said. “We believe small cells represent the natural progression of network densification and cell splitting by the carriers as they contend with consumer demand for mobile data.”

(Quotes for this article courtesy seeingalpha.com)

Headwinds Buffet Strong Growth at CCI

By J. Sharpe Smith —

November 4, 2014 — Crown Castle International’s President and CEO Ben Moreland had good news about the health of tower leasing, saying the long-term industry fundamentals are sound during the company’s third quarter earnings call.

“Looking ahead to 2015, we expect leasing activity from new tenant installations and amendments to existing leases to remain robust and similar to our expectations for 2014, as all four major wireless carriers continue to upgrade their networks to meet consumer demand,” he said.

But the news was not all good. CCI’s growth for 2015 will be slowed by $65 million of non-renewals from the final year of the Sprint iDEN decommissioning, as well as $40 million from network rationalization of Metro PCS, Leap and Clearwire legacy networks.

Although Moreland said continued strong gross leasing activity would drive double-digit organic growth in the next year, the effects of the rationalization are now expected to last beyond next year, resulting in organic growth of 6 percent to 7 percent.

Wall Street reacted badly to the news about the decommissioning headwinds sending the stock down several points. Analysts were all over the place; some upgraded CCI and others downgraded it. RBC Capital Markets trimmed its price target from $90 to $83 for CCI based on lower site rental revenue and AFFO growth forecasts, according to Analyst Jonathan Atkin. On the other hand, Goldman’s Brett Feldman upgraded CCI, lauding its “attractive combination of dividend yield and dividend growth.”

Wells Fargo Senior Analyst Jennifer Fritzsche was on the fence. “We remain on the sidelines given the more muted 2015 outlook, and reiterate our Market Perform rating on CCI shares,” she wrote.

Crown Castle chose the earnings call to announce an increase in its dividend from $1.40 per share to $3.20 per share, a 134-percent increase. The move was seen as a response to activist investor Corvex Management’s call for the tower company to “correct its capital allocation plan” if it wants to bid on the Verizon towers. Moreland said the timing was right to give back more to shareholders.

“We acknowledge that our organic growth rate in the future is likely to be lower than in the past, partly because of the law of large numbers and the headwinds associated with the carrier consolidation on non-renewals we expect over the next three to four years,” Moreland said. “Thus, we believe a larger component of our shareholders’ total return appropriately should come from the current distribution of our very high-quality contracted revenues, primarily serving the four national U.S. carriers.”

The dividend will be paid with 75 percent of CCI’s AFFO, leaving 25 percent to fund organic growth, according to the company. Moreland said future organic growth opportunities will not require a lot of capital to pursue.

“Opinions among shareholders and the investment banks were split between support for distributing a high percentage of our AFFO in the form of dividends and desire for us to maintain a lower payout and continue to retain more flexibility to purchase shares opportunistically,” Moreland said. “We have sized the dividend to retain 25 percent of AFFO, which we believe is necessary to pursue all of our organic growth plans and sustain the business appropriately.”

Moreland did not make any announcements on a possible Verizon tower bid, but said additional acquisitions are on the table. “We will continue to seek external growth through further acquisition opportunities when such acquisitions cover the cost of the new capital and allow us to increase the dividend over time,” he said.

Investor Assails Crown Castle’s Capital Allocation Policies

By J. Sharpe Smith —

October 16, 2014 – The timing, really, could not be worse. Unless you are a stockholder, of course. In the middle of performing due diligence and possibly raising debt and equity for a bid on Verizon’s towers, Crown Castle is facing tension among its investors.

Activist investor Corvex Management, which owns a $1 billion stake in the tower company, has told the tower company it must “correct its capital allocation plan” and reduce its cost of capital before it bids on the 12,000 tower portfolio.

In a letter to shareholders, the investment advisor said Crown Castle would be the best positioned bidder from a strategic standpoint but not from financial point of view, because its stock price is depressed.

“We believe Crown Castle’s current capital structure and capital allocation plans taken together are sub-optimal, and that the combination of de-levering the balance sheet while maintaining an artificially low payout ratio has pressured the company’s valuation and led to Crown Castle trading at a discount to its peers,” Corvex wrote.

To improve its valuation, the tower owner should either begin paying more than $4 a share in quarterly dividends or pay $1.60 per share in dividends combined with ongoing buybacks, according to Corvex. These capital allocation changes would drive a 27 percent re-rating of equity in the short term and possibly a 60 percent improve in the long term, the investor asserts.

“Once the company’s equity currency has strengthened, Crown Castle can aggressively pursue a Verizon towers transaction, creating even greater long-term value for shareholders. However, if the company does not have the right cost of capital, it should not be pursuing acquisitions or issuing equity, whether for Verizon’s towers or any other transaction,” Corvex wrote.

Corvex believes “excessive equity funding” was used by Crown Castle last year in its purchase of AT&T’s Towers for the “relatively high price” of $4.85 billion for 9,700 sites.

“It is critical that the company avoid a similar stumble in any potential Verizon transaction,” Corvex wrote.

Corvex noted that a higher payout ratio would increase Crown Castle’s appeal to REIT investors, while also attracting yield-oriented investors.
Jennifer Fritzsche, senior analyst, Wells Fargo Securities, expects Corvex’s letter and the two options to be well received by shareholders.

“We believe the shift toward increasing its payout ratio, coupled with the recurring nature of its dividend secured by the Big 4 wireless carriers, would be viewed positively by yield investors,” she wrote.

Crown Castle acknowledged that it had received the Corvex letter and said the tower company plans to address capital allocation policy, including dividends, on its 2014 third quarter earnings call scheduled for October 31, 2014.

“We receive input from many of our shareholders on a regular basis, and we welcome the dialogue and perspective,” Ben Moreland, Crown Castle president and CEO, said in a prepared statement. “Over the last decade, we have returned more than $3 billion in capital to shareholders through share purchases and dividends. We continually review our capital allocation strategy and consider all input from our shareholders as we aim to create long-term shareholder value.”

Crown’s Purchase of FiberCo Key to Mid-Atlantic Small Cell Rollout

By J. Sharpe Smith —

September 23, 2014 — Crown Castle’s purchase of 24/7 Mid-Atlantic Network, which owns 900 route miles of fiber in the Baltimore/Washington corridor, may have caught some by surprise, but it’s really just a reminder of the importance of the infrastructure that makes small cells possible: fiber optics.

Jay A. Brown


The transaction is interesting because it is the first time a tower company has directly acquired fiber assets, according to Jennifer Fritzsche, Wells Fargo analyst.

“Given the company’s focus on DAS/small cell infrastructure, we feel like owning the fiber may help alleviate part of the small cell economic issue by providing the necessary backhaul,” Fritzsche wrote.

Is Crown Castle getting into the fiber business? Developing an end-to-end turnkey signal solution? Not that much forward thinking went into the fiber buy, according to Jay Brown, Crown Castle CFO.

“We recently won an RFP from Verizon to cover the Baltimore market with small cells for them,” Brown said. “24/7’s fiber happened to be a perfect overlay. This was a buy-it versus lease-it or build-it proposition.”

Crown Castle needed to be fast to market and the acquisition helped with that. Plus, it was cheaper than building its own fiber network or leasing the existing fiber. In fact, it was just plain cheap. “We spent last week’s cash flow for the fiber, small transaction,” Brown said.

In the future, you may see more tower companies acquire existing fiber if they have a small cell opportunity and find fiber that is a good fit, but don’t expect them to build out speculative fiber networks.
“We will follow the carriers to where they want to go and build it as they desire it to be built. We are focused on being the infrastructure provider to the operators,” Brown said.

Another takeaway from the 24/7 Mid-Atlantic acquisition is that small cells have taken off, moving beyond small-scale deployments. Crown currently has more than 6,000 nodes under contract that it is in the process of building. Brown estimates that during the next five years Crown will spend $2 billion on small cell infrastructure.

“The rate of activity around what the operators are indicating they want from us has risen dramatically over the last 12 to 18 months,” Brown said. “The builds have gone from a very small geography in a part of the city to, for example, covering the whole city of Baltimore. Activity is increasing significantly on a broad scale, and we expect that to be on an elevated level for a long time.”