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.
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.
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.”
September 18, 2014 — Only a year after saying its towers would not be on the block anytime soon, Verizon is hinting that it is open to monetizing those coveted assets. Crown Castle International, known for acquiring ample carrier assets over the years, would be quite willing to take those towers off of Verizon’s hands, according to Jay Brown, CFO of the tower company.
“We have told them that we are interested in owning and operating their towers. We like carrier-owned assets and think they offer great, attractive growth opportunities,” Brown said at the 2014 Media, Communications and Entertainment Conference, Sept. 16, in Beverly Hills, California.
A potential tower asset purchase is analyzed based on the price relative to the growth rate. For example, Brown discussed Crown’s first carrier portfolio purchase in 1999 from Bell South and Bell Atlantic and the transaction a year later when it bought towers from GTE –– towers that had a 4 percent yield. Those assets are now yielding between 15 percent and 17 percent, which is a measure of run rate and annual cash flow versus the cash invested (initial purchase price and capex).
“We have done phenomenally well, adding 1 percent yield annually over a long period of time,” he said. “The more recent transactions with T-Mobile (two years ago) and AT&T (one year ago) we bought at a 5 percent yield.”
The T-Mobile and AT&T deals were underwritten with a similar yield growth expectation of 1 percent annually, which equates to adding one tenant per tower over a 10-year period. “The activity in terms of lease up and growth in cash flow has been right at what we underwrote,” Brown said.
If Verizon decides to sell its assets, Brown said Crown would go through a similar process of due diligence. “This is an analysis of the lease up opportunities of the assets against the price that has to be paid. If that results in the long-term dividend of the firm being enhanced by the transaction, we would be very interested in buying the towers,” he said.
Verizon owns 12,000 towers or 25 percent of its portfolio, according to estimates.
If CCI bought 12,000 towers from Verizon at $500,000 per tower (AT&T tower purchase valuation), the result would be a $6 billion deal. How could Crown fund such a deal only one year after purchasing AT&T’s towers? Financing the deal is not beyond Crown’s current means, Brown said.
“If we took leverage to the high end of our stated target range of 6 times, that would provide $2 billion in debt funding on the base,” Brown said. “Assuming a 20 multiple cash flow [of the towers to be purchased], if we financed six times that EBITDA, that would give us another $1.8 billion. We might take leverage above the target level for a short period of time and de-lever within a year [to make up the difference].”
With a little help from AT&T’s towers, Crown Castle International beat analysts’ estimates at Wells Fargo and Wall Street in the fourth quarter. Site rental revenue was $651 million, adjusted EBITDA was $468.4 million and adjusted funds from operations were $358.7 million, beating Wells Fargos estimates of $626.5 million, $442.6 million and $317.9 million.
In December, Crown Castle closed on the deal in which AT&T leased the rights to 9,000 of its wireless towers and sold 600 more to the tower company for $4.8 billion.
“We note the AT&T towers reportedly contributed $18 million in site rental revenue and $9 million in site rental gross margin in Q4, which were excluded from prior company guides as well as our Q4 estimates,” Jennifer Fritzsche, senior analyst, Wells Fargo, wrote in an Equity Research Flash Comment.
Site rental revenue was up 14 percent year over year, 3 percent of which could be attributed to AT&T towers, and was reduced 1 percent by churn and 1 percent by currency headwinds, according to Jay Brown, Crown CFO.
“We saw a significant increase in U.S. new leasing activity in the fourth quarter 2013, representing more than a two-fold increase compared with the same period in 2012,” Brown said during the earnings call.
The two-fold increase in new leasing activity includes both new licenses and amendment activity, with new licenses representing 65 percent of new leasing activity.
“We believe this activity reflects the carriers’ focus on deploying their equipment on additional sites to help ease capacity-related issues, commonly referred to as site densification,” Brown said.
Ben Moreland, Crown president and CEO, said carriers’ ability to make profitable network infrastructure investments is leading to unprecedented LTE rollout activity.
“The U.S. market is unique because network quality continues to be a differentiator between carriers,” he said. “The strong correlation between network investment and low consumer churn necessitates the carriers to continue investment in their networks to improve quality, increase capacity and add functionality to remain competitive and grow.”
Only 19 percent of installations were covered by pre-sold leasing agreements in the fourth quarter, compared with more than 70 percent of the installations in the prior year.
Crown Castle spent $182.3 million on capex in the fourth quarter, which exceeded estimates of $123 million. “The company spent $137.8 million on construction and improvements (vs. our $62.5 million estimate), though sustaining capex of $20.5 million was more in line with our $23 million estimate,” Fritzsche wrote.
By the end of the year, Crown Castle owned 41,322 sites, including 39,568 domestic and 1,754 in Australia, as well as 11,000 small cell nodes.
Jay Brown, Crown Castle’s chief financial officer, told an audience at the Bank of America Merrill Lynch 2013 Media, Communications & Entertainment Conference, Sept. 11, in Houston that the recent market volatility surrounding tower company stocks is the result of investor misconceptions about the nature of the wireless infrastructure market.
Brown warned against putting too much stock in beliefs that the carriers are going to dramatically increase money infused into infrastructure build out or that build out is going to grind to a halt.
“We take a much longer-term view of how the carriers are spending capital on their networks,” he said. “The reality is there is a balanced conversation that carriers have around allocation of funds from dividends, deploying sites and upgrading sites. Our experience has been that carriers tend to spend capital on a relatively steady basis.”
To divine the future of towers, Brown suggested that the audience should follow the movement of spectrum.
“Carriers have deployed about 300 megahertz of spectrum that is in the hands of the carriers and being used by consumers,” he said. “That has driven, across the industry, about three tenants per tower. That is the case with Crown Castle.”
Another 200 megahertz of spectrum is in the hands of carriers that have not deployed it yet, including spectrum owned by DISH, LightSquared and some of the 2.5 GHz spectrum. Additionally, the FCC is working on reallocating another 500 megahertz to mobile.
“People are saying there is a need for a lot more wireless service, and they want to get spectrum into the hands of the carriers. I think ultimately it will get deployed, and they are going to need towers,” Brown said. “I am not inclined to say that any one of the big four carriers is nearing the end of their build outs. There is a very long runway of steady growth. Trying to predict any decreases or increases is very hard to do.”
When asked about whether the growth of small cells is a threat to the growth of towers, Brown responded that small cells are complementary to tower development.
“We are incredibly excited about [small cells]. Both of our acquisitions of NextG and NewPath have done very well. It has allowed us to invest a lot of capital in an area that is growing with lease up demand from the wireless operators,” he said. “For the most part those small cells are being constructed where macrocells can’t reach. They are filling in the network and providing extra coverage and capacity that macro-towers simply cannot, but that doesn’t mean there is less of a need for the macro-towers.”