Crown Castle Inc. (NYSE:CCI) Morgan Stanley European Technology, Media & Telecom Conference 2022 Call November 17, 2022 2:55 AM ET
Company Participants
Ben Lowe – Senior Vice President, Corporate Finance
Unidentified Analyst
Great. Good morning, everybody. Welcome to Day 2 of the conference. Hope you are having a good conference. It’s my great pleasure to welcome Ben Lowe from Crown Castle. Welcome to Barcelona, Ben.
Ben Lowe
It’s great to be back.
Question-and-Answer Session
Q – Unidentified Analyst
So before we get started, please note that for important disclosures, see morganstanley.com/researchdisclosures. So, let’s start with the outlook you gave with Q3 earnings you provided, initial 2023 outlook and talked about still healthy organic growth continuing, but some puts and takes, maybe just go through the details for us?
Ben Lowe
Yes, it’s a good place to start. So, again, great to be back, always a great conference, appreciate the opportunity. ‘23 really reflects – it’s an exciting period in the industry right now. We are very early on with the build-out of 5G in the U.S. If you think about historically, these upgrade cycles have been the better part of a decade long. And we are probably less than 2 years in to kind of the first phase of that build-out, which has been driving a significant amount of growth across our business, primarily on the tower side over the last couple of years. And as you pointed out, looking into ‘23, we expect another really good year of activity and growth to continue with very solid growth on the tower side that we are expecting about 5% organic growth on the tower side. And then the first phase of an acceleration on the small cell side of the business, which I am sure we will get into in a few minutes.
But the overall demand environment is very healthy, very robust. And our expectation is for that to continue for quite some time. And we are seeing the benefit of that, again, across our infrastructure of assets, the 40,000 towers that we have really concentrated in the top markets in the U.S. and then starting to see the benefits as our customers plan for the next phase beyond the initial upgrade cycle where they are deploying a lot of new spectrum that they have gotten control over the last couple of years and really start to plan for the next leg of the investment that will come around densification, which will be critically important for them to add significant capacity to the network. And it ultimately starts with what’s happening with consumer demand and mobile data growth. We continue to see that compound at about a 30% clip each year and that’s a significant strain on their networks and their only way to really respond to that is deploy more spectrum and then deploy more cell sites. And we are in a great position across our tower and small cell business to be able to benefit and help support that level of investment. So, we are pretty optimistic about the growth going forward.
Unidentified Analyst
Great. You did say that you thought the dividend growth over the next couple of years will be a little bit below the 7% to 8% long-term guidance, can you just talk us through that?
Ben Lowe
Sure. So we established a target of 7% to 8% growth in the dividend back in 2017 and since that time, have been able to grow it at about 9% CAGR over that period of time. So we’ve seen significant growth over the last 5 years and remain very optimistic about the long-term growth opportunity to be able to continue to target that 7% to 8%. As you point out and as we talked about on the Q3 call, we wanted to be clear that there are some near-term headwinds in terms of the Sprint consolidation churn that we see impacting growth between now and 2025. It’s about $225 million remaining churn beyond the guide for ‘23, primarily $200 million of that impacting tower growth in 2025 and then some remaining churn on the small cell side as they rationalize and bring those two networks together. So that’s one discrete near-term headwind that we think will impact growth between now and 2025.
And then the second one is obviously the significant move in interest rates that we have seen this year. That will impact our run-rate interest expense, we think, in the neighborhood of $140 million step up going forward. The balance sheet is positioned really well to be able to navigate that long-term with about 85% of our debt fixed rate. And so the component that’s most susceptible in the near-term to the move in rates is the 15% floating. And so when we look at the magnitude of those two near-term isolated growth headwinds, that’s why I wanted to be clear that for ‘24 and ‘25, we would expect that to take us below growth trend of 7% to 8%. But importantly, as we look out and think about the long-term demand trends in the business and how well we’re positioned, we don’t see those near-term headwinds in any way impairing that long-term growth opportunity and would expect the business to return to 7% to 8% growth at the dividend per share line beyond ‘25.
Unidentified Analyst
Okay, great. Can you unpack that 5% for us, escalators and amendments and new colocations churn, how do we get to the net number?
Ben Lowe
Sure. So on the tower side, the 5% growth that you are referring to, we have most of our escalators, contracted annual increases in the rent on the leases we have with our customers is a 3% fixed escalator for the most part. And then when you build up from the 3% to the 5%, you are going to have another 300 basis points or so of growth from new activity and then offset by about 1% from non-renewals. So when you think about the long-term growth opportunity for our tower business, again, we’ve had back-to-back years of 6% growth in the very early stages of the upgrade cycle for 5G. Expect that to moderate to 5% but still a very healthy level of organic growth in the business. What we’ve seen for the last several decades on the tower side is over a long period of time, say, at every 10 years, we typically can add about 1 tenant equivalent at a portfolio level every 10 years. There can be ebbs and flows in any given year. So it’s not the same exact rate of leasing year in and year out depending on what our customers are prioritizing in any given year. But over a long period of time, we have seen that ability to add about 1 tenant equivalent every 10 years.
So when you work through the opportunity on a go-forward basis, we continue to see that today we are sitting at about 2.5 tenants per tower, just under, with significant investment from three established operators and then obviously a new entrant in DISH. So we think from a market structure perspective, we’re probably in the healthiest position we’ve been in, in a long time on the tower side. And that gives us optimism that we will be able to continue to sustain that level of leasing going forward. And that should be able to produce mid-single-digit growth on the tower side when you think about that – adding that new activity on top of the 3% fixed escalators that we have in the majority of our contracts. And then long-term, outside of carrier consolidation discrete events, like I was just speaking to on the Sprint side, non-renewals or churn on the tower side is typically 1% to 2% per year. So we see an opportunity to sustain and see a long duration of growth in that mid single-digit range on the tower side. And then as the shift goes from upgrade activity to more of densification, which will benefit both towers, but then increasingly we think small cells will be a critical part of the network solution for our customers as they add cell sites to really add depth and capacity to their networks going forward, that we see that mid single-digit growth on the tower side augmented by accelerating levels of activity and ultimately growth on the small cell side, which supports that long-term 7% to 8% growth target.
Unidentified Analyst
Great. And do you see any big changes in the amendment proportion in ‘23 versus ‘22?
Ben Lowe
No material shifts that we would point to in ‘23. So where we started the conversation, as we have seen in prior cycles, the first area of focus for our customers when they get new spectrum, as they have talked about publicly is to try to upgrade as many of their sites as quickly as possible. We have seen benefit from that over the last 18 months or so.
Unidentified Analyst
And any idea of how many of those sites they have hit already?
Ben Lowe
As they have talked about publicly, they made a lot of progress, but there is still a lot of work to be done even in that initial phase. So there is more runway of just growth from upgrading and amending existing sites before we start to see a more significant increase in activity from a densification perspective, which goes back to why we have so much visibility and conviction in terms of the durability and duration of the growth opportunity going forward.
Unidentified Analyst
How much of that ‘23 guide is actually already contracted?
Ben Lowe
That’s the beautiful part of the business. Every year, when we start the new year on January 1, we have a significant amount of visibility into the amount of growth that we expect in the year to come when you think about just the recurring nature of our revenue base. When we talk about the growth, so as we’re just deconstructing the 5% growth on the tower side and how much of that is coming from new activity, whether it be amendment activity or colocations as they densify their network, about half of that growth in any given year comes from leases that commenced in the prior year that we didn’t get the full run-rate benefit in that calendar period. And then the other half is going to be from leases that commence in the current calendar year. And most of that we have visibility obviously into what commenced last year, we already know that, that’s in the run-rate coming into the year. And then there is typically a 6 to 9-month lag from the time we receive an application on the tower side to when we get through all the permitting and construction work to get that on air and generating revenue. And so that 6 to 9-month backlog provides a meaningful amount of visibility and certainty around the other half of the growth equation from leases that are going to commence in the current year. And then the smallest component, the third component would be what we are forecasting for applications we don’t yet have in-house, but we have visibility into based on the conversations we are having with customers at a local level that fills in that final piece of the growth equation, but a significant amount of visibility into that growth in any given year.
Unidentified Analyst
Great. Which not many industries have at this stage heading into the macro climate, you mentioned the 3% escalator for a lot of the last couple of decades, that’s been a pretty good spread over inflation, not so much today. We do get asked might the U.S. tower industry move like some of the global peers to a CPI? Is there ability to do that? Is there interest to do that? Do the carriers want to embrace that? Any updated thoughts there?
Ben Lowe
Yes. I would expect us to continue to operate consistent with how we have been for a long time, where the majority of those contracts are likely to be fixed in nature. And the thought process behind that really goes back to the early days of when the tower business was being established. The single largest cost item in our cost structure relates to the land under our towers that we don’t own, that we have long-term control through long-term leases with the underlying ground owners. Today, about 60% of the cash flow from our tower assets are coming from sites where we have leases under those towers and about 40% of the cash flows from sites where we own the land outright. The vast majority of those land leases for the 60% have fixed escalators of about 3%. So, it’s been important…
Unidentified Analyst
Into 20 years, 30 years.
Ben Lowe
Yes, north of 35 years of average term remaining on those leases. So lot of certainty and control and visibility into what the cost structure is going to be on that side. And it’s important to us to have symmetry between the revenue line and the cost line so that we don’t add variability and volatility in terms of the profit margin that’s flowing through the bottom line. So would not expect us to look to shift course in terms of away from fixed escalators. And we think that certainty of growth and predictability of growth is valued by our shareholders in terms of the lack of variability that, that produces in terms of bottom line and ultimately, dividend growth.
Unidentified Analyst
I think the carriers appreciate the visibility as well into their cost structure.
Ben Lowe
I think that’s right, yes.
Unidentified Analyst
Maybe not at 3%, but it shows the importance of the towers and traffic, as you say, is growing 30%. We had T-Mobile yesterday saying 40-gig usage on Magenta MAX plan.
Ben Lowe
That’s great.
Unidentified Analyst
Yes. So one of the things we hear from the carriers, we heard it yesterday, is some of them are cutting CapEx next year as the peak of the 5G spend from their C-band deployment and 2.5 deployment has kind of passed. So there is always this kind of question how much relationship is there between carrier CapEx and tower leasing. You have obviously pointed to a pretty healthy continuation. So, how do you square that big drop, $3 billion, $4 billion, from each of them versus continuing to be a good year for the towers?
Ben Lowe
You have covered this space for a long time, so I am sure you have done a lot of work trying to draw that correlation between carrier wireless CapEx and what that ultimately means for leasing on the tower side. I think directionally it’s instructive in periods where we have seen consistently increasing levels of capital investment that tends to lead to more activity over time. And we’ve seen this going from 1G to 2G to 3G to 4G and then obviously early days 5G. Each one of those generational upgrade cycles has required a higher level of industry CapEx to be able to support it and in turn, that’s sustained and oftentimes driven even higher levels of leasing activity. When you try to parse it more narrowly than that and look at any specific period of time year-to-year, there is not going to be a direct one-to-one correlation. Again, directionally, it’s helpful to look at that, but there is a lot of spend within those CapEx budgets that don’t necessarily directly tie to leasing activity on our sites. So there are going to be some ebbs and flows.
What gives us confidence looking forward in terms of the durability of the growth opportunity for us, again, starts with that underlying mobile data demand growth and the reality that to be able to support and supply that growth, it’s coming down to deploying more spectrum which is a finite resource; and then ultimately cell site densification to be able to add depth and capacity. And we don’t see any signs of any slowing to what you’re just alluding to in terms of data trends. If anything, there is probably an upward bias to data growth as opposed to any risk of any material slowdown. And as long as that underlying demand growth is there, we think that leads to very sustained healthy levels of leasing activity over a long period of time. And we don’t see that leading to a sustained period of lower investment by our customers.
Unidentified Analyst
Great. You mentioned DISH earlier. They just got some new financing. You were one of the early ones to sign a contract with them. So do you think you can get more than your fair share of the DISH activity?
Ben Lowe
We do. And we think based on what they have talked about publicly in terms of the number of sites that they have deployed and what their plan is and what we’ve seen in terms of contribution, internally we do think that we are getting more than our fair share and we think that, that’s sustainable going forward, given that agreement that we got in place, as you mentioned. We’re the first tower company at scale to get a long-term agreement in place with DISH. And we think that put us in a position to be really the anchor infrastructure partner as they designed a network from scratch. It’s exciting to see a new entrant come in and build a nationwide wireless network from the ground up. It’s been a long time since we’ve seen that. And when you add that to the established operators and the level of activity that we see, we think that sets us up for a long runway of growth.
And in terms of our position with DISH, what was interesting is we worked through that agreement initially, which just to level set for maybe those in the room that aren’t as familiar with the details, we have a long-term agreement that provides DISH access to up to half of our portfolio, so up to 20,000 sites over that 15-year period. And for that, there is a significant minimum contracted payment that will grow over time that provides a lot of visibility and certainty into future growth, minimizing some of the potential variability there in terms of how that activity translates into financial results for us and ultimately dividend growth over time. And within that, there is also a component of providing access to a meaningful amount of our fiber over time. So as you think about building wireless networks, what’s often forgotten is a key component of wireless networks is having high-capacity fiber connectivity that’s helping to transport a lot of that data traffic between sites and back to the core network and being able to come to the table with a more holistic infrastructure solution, not only the tower side, but also the capabilities we have with our 85,000 route miles of fiber that are concentrated in the top markets; and then ultimately, the capabilities we have on the small cell side that we think any wireless operator over time as network traffic continues to grow will ultimately need small cells over time, we think that set us apart and put us in a position, too, as you mentioned, we think, capture more than our fair share of the market opportunity going forward. So we feel good about where we’re positioned. It’s impressive what they have done over a pretty short period of time, standing up an organization and deploying network at scale. And we’re obviously very focused on supporting them and rooting for their success.
Unidentified Analyst
Great. And there is a wrinkle when a new customer comes on in terms of revenue recognition. Is that right, that sort – it’s not when you sign the leases when they start to activate the tower. Can you explain the…
Ben Lowe
Specifically, to the DISH agreement?
Unidentified Analyst
Yes, yes.
Ben Lowe
I think what you’re referencing when we announced that long-term agreement, we got a lot of questions from investors that were surprised. I think people have become accustomed over time any time you see a long-term agreement announced with a tower company, there is typically a meaningful upfront step-up in straight-line revenue. Not to get into some of the accounting vagaries of the business, but what GAAP accounting requires is that over a long-term lease with contracted growth that you recognize that revenue for GAAP purposes on a straight-line basis or ratably at the same rate over time, which means with a typical lease contract on the tower side where you have annual escalations, the initial starting cash rent would be lower than the GAAP rent and then over time it flips and cash exceeds GAAP.
What’s different, I think, more nuanced that you’re talking about in this situation, for lease accounting, which is where straight line comes from, for that to be triggered, there has to be a lease that’s identified. And so when you think about the nature of the agreement that we have with DISH where we provide them access to up to 20,000 sites until specific sites are identified and you get past certain milestones, it doesn’t actually trigger lease accounting. So there is not straight line until those leases actually commence from a GAAP perspective. But again, that minimum significant contracted cash payment is ultimately the rental stream that we’re getting paid to provide that access to those 20,000 sites over time. And that’s ultimately what flows through all the key operating metrics when you think about the organic billings growth and ultimately cash flow at the bottom line that’s supporting the dividend.
Unidentified Analyst
So when do you hit that minimum run rate? Is that in ‘23 or…
Ben Lowe
Which minimum run-rate?
Unidentified Analyst
You said they have made a minimum contractual commitment to your – is that over the 15 years of – it’s not year by year, okay.
Ben Lowe
Yes. That will continue to scale over time. And so that provides a lot of certainty around future payments and ultimately future growth in cash flows. Like any agreement that we enter into that’s more holistic in nature, it contemplates a very specific set of facts and circumstances in terms of how much activity, what the rights are at any given site. So there is always headroom for additional growth. And over time, we’ve seen historically that when we have these more holistic agreements in place that over time there tends to be more activity than what was contractually committed to, so there is always additional opportunity to drive growth beyond that significant baseline.
Unidentified Analyst
Great. Great. Can you talk about what you’re seeing from other kind of non-big carrier tenant cable companies, WISPs, others now and over the modeling period?
Ben Lowe
Yes. For a long history in the tower business, rightfully so, a lot of the focus is on the big national carriers and the activity we’re seeing there. So again, today, we have three established operators and a new entrant. So there is a lot of activity from those big four. There is always been another group that consists of somewhere in the neighborhood of 10% of the activity in any given year with local regional operators. Cable is interesting. They have obviously been very public around their wireless aspirations. And as we see kind of the competitive dynamics and the convergence between broadband in the home and fixed wireless and then in the mobility space, we think that’s a positive for the industry long term. It brings more customers to the table that ultimately will likely need access to wireless infrastructure at scale, and we think about the value proposition that we provide as a shared infrastructure solution.
At the core of it is our ability to provide a cheaper infrastructure solution relative to the alternative of self-performing. That’s been the history on the tower side for a long time and what’s made the industry so successful for a long period of time. And we’d expect that to continue. And as new entrants, whether it’s cable or others, come in and look for access to infrastructure at scale, we think we’re in a great position across our portfolio of assets to be able to provide that value and see the benefit from that over time. So we’re optimistic as we look at that other set beyond the big four in terms of what that could mean for additional activity and growth over time.
Unidentified Analyst
Great. So let’s pivot to small cells. You’re unique amongst the big three tower companies in terms of your focus on the U.S. small cell market. Maybe just start by telling us what attracts you to the market. And perhaps compare the economics of small cells to the economics of macro towers.
Ben Lowe
It probably makes sense to start with a little bit of a history in terms of how we’ve legged into the opportunity and gotten to the position we are today with the scale as the leading provider in the U.S. More than 10 years ago, we started to look out over a long period of time and through various demand modeling, understanding how much spectrum would be available over a long period of time; and with the continued persistent growth in mobile data, how much of that would be supplied from additional spectrum versus additional macro cell sites versus something else. And as we put those pieces together, we took a pretty early view looking out over the next decade plus that we saw a real big gap in that equation on the supply side. We thought that there is going to be demand at scale for something beyond towers. Towers are phenomenal. They are the most efficient, cost-effective way to deploy spectrum and provide wireless coverage at scale, but there are limitations to how dense the network can get, the network grid on the wireless side with macro sites alone. And so our view early on was there would have to be another solution, another infrastructure solution, to be able to help support that additional need for network densification. And so we started to make some early investments in late 2000s, just after 2010, to build out some small cell networks to try to test the idea that maybe this is the infrastructure solution that can help fill in that gap.
And there were a couple of things we were looking for as we started to make some of those early investments. One, did it work and was there demand from the customer side that this was a viable solution? Because we wanted to understand over time is this going to be a sizable enough opportunity where it makes sense to dedicate and allocate a lot of resources, both capital and human capital, to be able to develop this new opportunity. Could it really move the needle from a growth perspective long-term? We also wanted to better understand the underlying business economics. So when you go back to the – what’s made towers so successful for so long, we put the capital in upfront and then we can leverage and share the cost of that infrastructure across multiple customers over time. And as long as we deploy that infrastructure in areas where there is going to be high demand for multiple customers, we can then generate what starts at a very low initial return, below our cost of capital for the first tenant. As we lease up those assets and drive the returns higher, we can generate significant growth and returns that support a growing dividend stream over time. And that’s exactly what we’ve seen play out on the tower side.
And from the customer side, again, it’s a cheaper solution versus owning that infrastructure themselves and paying the entire cost of that infrastructure where we can share it across multiple customers. So we wanted to test is that same dynamic at play with small cells. The infrastructure itself is a little bit different. So there are some nuanced differences. When you think about the key shared infrastructure that supports small cells, on the tower side, it’s the vertical steel. That’s where most of the capital goes.
On the small cell side, it comes down to the high-capacity fiber that’s connecting each one of those antenna locations back to the core network. And that’s the solution that we provide is that dedicated high-capacity fiber connection to each one of those small cell locations. That’s where most of the capital, 70%, 80% of the capital, goes into building a small cell system, goes into actually constructing that fiber connection. And so we need to make sure that there is enough capacity to be able to support multiple customers over time so we don’t have to redeploy that same capital cost to further support that fiber asset. And as we tested that out at a small scale, we saw, one, it was a very useful, helpful solution for our customers. And as we continued to see how the demand side of the equation developed, it became more clear to us that this was going to be a critical part of wireless networks going forward at scale. So there is going to be a large revenue opportunity. And that same core value proposition of that shared infrastructure being a cheaper solution for our customers was present with small cells as well: put the capital in upfront for the first tenant and then we can leverage that investment over time to add multiple customers as we plug them into that same infrastructure and the return scale.
So specifically to your question about maybe a little bit of a compare and contrast in terms of the economics on the tower side to what we’re seeing on the small cell side. We’re not really building new towers at this point in the U.S. It’s largely a built-out market. But if you went back to when we were building and buying towers at scale, the initial returns for that first tenant were typically around 3% cash-on-cash yield. So as I mentioned, well below our cost of capital, which makes sense because we are banking on the ability to share and lease up that asset to generate returns above our cost of capital as we get the second and third tenant over time.
When you compare that to how we price the small cell solution to our customers, we started a 6% to 7% initial cash-on-cash yield. We don’t build on a speculative basis. So, we don’t put a shovel in the ground or put any capital to work until we have a firm contract in hand. And we started a 6% to 7% initial yield, which is still below our cost of capital, but about double where we started with that first tenant on the tower side. And then as we plug in more small cells with the second and third tenant, we see those returns scale from 6% to 7% to the low-double digits when we get the second tenant on air. So, at that point, we have meaningfully cleared our long-term cost of capital and we have significant headroom in terms of capacity for additional growth and tenancy as we add more customers over time. What’s interesting and a little bit different on the small cell side, when you think about the dimensions of lease-up and the ability to add multiple customers, it really comes down to how many small cells can we plug into a fixed run of fiber. So, if you want to think mental model, think about a mile-long stretch of fiber in the top market that we have deployed, the first customer typically requires somewhere in the neighborhood of two to three nodes per mile of fiber. If you want to think about that as a rule of thumb for a tenant equivalent for small cells, towers is easier. You look at a vertical tower, and you can count the platforms and that gives you a pretty good idea of how many customers are deployed. But again, the shared infrastructure on small cells is that horizontal fiber that’s running under the streets. So, if you think about two to three nodes per mile being the tenant equivalent, we started two to three nodes generating a 6% to 7% initial yield. When we get another two to three nodes deployed on that same fiber asset, that’s when the returns scale in the low-double digits. We have already seen demand from existing customers come back wanting to further densify networks that they have already deployed. And I think it speaks again and points to that continued growth in wireless data that you deploy a small cell system, all of a sudden, there is a lot of network capacity in that area, but that pretty quickly gets absorbed because we, as consumers, once there is more capacity we find a way to use it and to pull it down. So, we see the ability to add tenancy, add densification not only by adding new logos, but also seeing further investment over time from existing tenants. And that gives us a lot of confidence that we are going to be able to take what today we have about $16 billion of capital invested on the fiber and small cell side, already generating north of a 7% yield on cost. And we have 55,000 – just over 55,000 small cells deployed across those 85,000 route miles of fiber. So, what’s exciting about that, we have less than a tenant equivalent from a small cell perspective because a lot of the fiber that we own and operate today we acquired from fiber companies that didn’t have any small cells. So, we retain all the economic upside of adding small cell customers to that fiber that already comes with really good cash flow that’s generating and helping to contribute to that 7% – north of a 7% initial yield today. And as we add a tenant equivalent, we think, similar to the rate of lease-up that we have seen over a long period of time on towers, and what we have seen over the last 10 years on small cells, as we add that tenant over the next 10 years, we think that pulls the returns overall on all that invested capital into that low-double digit area above our cost of capital.
Unidentified Analyst
Great. So, that’s a very helpful overview. You have got a strong backlog, but the growth has been pretty moderate as the carriers are focused on their macro 5G builds, 5,000 this year. You are guiding to 10,000 for next year. Just help us understand what the process is that you can kind of flip a switch and double that, both from a carrier perspective, you know how, okay, we are ready, let’s do this and then from a supply chain side as well because we certainly hear municipalities, that’s permitting processes, and other labor supply are all challenging in this environment.
Ben Lowe
It is a tight labor market, there is no doubt. To your point, if you look back a couple of years ago when we were deploying 10,000 nodes per year, in the early stages kind of following the C-band auction, we saw our customers shift their focus much more to deploying that spectrum that they just acquired. And that’s where there is a pretty meaningful shift in focus and prioritization to upgrading tower sites. And so we saw the rate of small cell deployments step down to 5,000 where we were last year and again this year. But given that inflection in demand that we have seen from a bookings perspective, where we have upwards of 60,000 nodes contracted and committed in our backlog today, a lot of that coming from the 15,000 nodes that we were awarded from Verizon last year and then 35,000 from T-Mobile this year, it speaks to that long-term network planning that we see our customers doing as they look out beyond this initial upgrade phase into network densification, it’s a clear indication of how critical small cells are going to be for that next wave of investment. And given the long lead times of upwards of 3 years from the time we identify and lock down a site, get through all the permissioning and permitting and construction to getting those small cells on air, that requires a lot of long-term planning, which is exactly what we are seeing. As we look into next year, we expect ‘23 to be the first year of seeing the benefit of that acceleration on the small cell side where we, as you pointed out, expect to go from 5,000 nodes that we are deploying this year to double that to 10,000 next year. We have a lot of visibility in terms of pulling that from our existing contracted backlog. So, I have a lot of confidence in reaccelerating and getting back to 10,000. And you will see the initial benefit on the P&L growth accelerating as well, but obviously those aren’t getting deployed January 1st. So, it will be in the run rate as we exit ‘23 and set us up for ‘24 and beyond. And we are optimistic that we will see an opportunity to scale well beyond 10,000 over time as well, again, given what we already have contracted in the backlog, but based on all the conversations that we are having with our customers of what’s going to be required longer term. In terms of our ability to scale, organizationally, we feel like we are in a great place today to be able to support that level of production at 10,000 to the extent that we are successful in being able to scale beyond that. There may be some additional discrete investments in future periods to be able to enable and support that, but that would be an easy decision to make financially. In terms of securing the crews, so when you think about what we are ultimately doing, we are the general contractor that’s managing that construction activity and subbing it out. So, we have a dedicated team on the supply chain side that’s making sure that we have crews available to do the work. And given how much visibility we have in our backlog, I think we are in a unique position to be able to come to the market and be able to provide multiple years of visibility into demand. And given our scale, I think that puts us in a position to be able to have a lot of confidence that we are going to be able to secure those crews to be able to get that work done. In terms of what are the long poles in the tent in terms of getting well beyond 10,000 over time, we don’t really think it’s on our side in terms of any challenges with scaling even beyond where we are. We think as the opportunity grows, we will be able to scale the organization and it will ultimately come down to prioritization decisions on our customer side. Again, as we have seen over the last couple of years, that can ebb and flow from period of time, but there is always more network needs than can be satisfied in any given year. It would be great if everything our customers needed to be get done on their network could get done in any given year. The flip side is it actually provides visibility in terms of a growing backlog of network investment needs by our customers, which just adds to that visibility that we have into future growth. So, we feel like we are in a great position heading into ‘23 to be able to support the doubling in production from 5,000 to 10,000. The other really positive development within that beyond just the overall volume increasing, it goes back to the economics we were talking about a few minutes ago. Historically, over the last 3 years or 4 years, the mix of activity within our small cell leasing between that anchor build at 6% to 7% initial yield versus the co-location, which is where the returns scale because we are leveraging fiber we have already deployed, that mix has been much more weighted to anchor builds the last several years. Only about 20% to 30% of the activity has been co-location. As we look at the population of nodes that we expect to deploy and turn on air next year, the 10,000, we expect more than half of that to be co-location, which is why you are seeing such a modest increase in terms of the expected discretionary capital investment that comes with that. This year, we are on track to invest about $900 million in total on a net capital basis. Next year, we guided to $1 billion. So, a modest $100 million increase and yet doubling the amount of small cells we are deploying. And so you are seeing the scale benefits of that co-location come through in terms of a much lower required amount of capital to support that growth.
Unidentified Analyst
Great. Well, one of the interesting things coming back here after 3 years is the growth of the European tower industry. And your peers have been active in the international sphere, I remember when you were in Australia. But you have done almost nothing. I am sure you have looked at a lot of stuff. But just what’s the philosophy here to have you focused on the domestic market on the small cell fiber business for growth rather than emerging markets or developed markets internationally?
Ben Lowe
You are right. We are in a unique position today. We are 100% levered to the build-out of 5G in the U.S. And what we have seen over a long period of time is the U.S. market has been consistently the highest-growth, lowest-risk market to own this type of infrastructure. So, we benefited from that exposure for a long period of time. You are also right that we always do look at opportunities and test and retest views. When I think about international, I would break it into two buckets. Emerging market, I would take off the table for us. We just – we don’t see an appropriate amount of growth opportunity to more than offset the structurally higher risk that comes with owning and operating infrastructure for a long period of time in those markets. So, I would take emerging markets off the table. Developed markets in terms of tower infrastructure, we do look at those opportunities and we do come to a different conclusion and I think others in the industry in terms of not pursuing those. And it ultimately comes down to our assessment of the return opportunity. And when you are allocating capital, it’s trying to identify the best highest use of that next dollar of capital. And the returns that we see in the U.S., primarily today investing in small cells and fiber, we think long-term will far exceed the returns that we think are on offer in other parts of the world. When you look at Europe as an example where there has been a lot of activity, these are really good businesses. But when we look at the forward growth opportunity, we think that it’s meaningfully less than what we see long-term in the U.S. And where assets have been valued, it doesn’t reflect that growth differential. So, we have stuck to our knitting in the U.S. But it’s not a set-it-and-forget-it, we will constantly be thoughtful about testing and retesting that view to see if anything has changed in the market that would lead to a different answer.
Unidentified Analyst
Alright. Well, Ben, unfortunately, we are out of time. That’s a great overview. Thank you so much.
Ben Lowe
Appreciate the opportunity.
Unidentified Analyst
Great. Thanks.
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