Crown Castle Inc. (NYSE:CCI) 2022 Bank of America Media, Communications & Entertainment Conference September 8, 2022 12:40 PM ET
Company Participants
Dan Schlanger – CFO
Conference Call Participants
David Barden – Bank of America
David Barden
Thanks for coming. Appreciate it. We’re kind of kicking off the comm, infrastructure side of the conference here with the Chief Financial Officer of Crown Castle, Dan Schlanger. Dan, thanks for coming again, this year. Sorry, we didn’t get the golf sorted out in 2022, but we’re working on that.
Dan Schlanger
Okay. I’m not a golfer.
David Barden
Did you miss the tequila tasting last night?
Dan Schlanger
I did. I am at tequila guy, but I’m not a golfer.
David Barden
All right. Well, we’ve got some extra in the research room, so I’ll meet you thereafter.
Dan Schlanger
Should have done it before this.
David Barden
Maybe I did. I’m not saying I didn’t. So all right. So I guess, look, you’re pretty famously loose with information, and you like to share company-specific stuff. So I think we should be right into it.
Question-and-Answer Session
Q – David Barden
We’ve got kind of we’re 50 — more than 50% away through the year. I guess at a high level, how is — do you think the year is kind of going as you expected it to go from a deployment perspective from the macro side and domestically?
Dan Schlanger
Yes. We are experiencing now the highest level of activity we’ve seen. So you look at the services business we have, which is generally a good proxy for what level of activity there is because that’s when we either prepare the site or for additional equipment or put additional equipment on the site. And that activity level is really high, and you can see that in the gross margin in our services business. And then as we think about it, an application is when a customer comes to us and ask to put more equipment on the towers, those application levels are very high. So we think that, from an operational standpoint, the year has gone as well as we would have expected, and the deployment is as robust as we would have expected.
The things that cut against us really were or have been interest expense and interest rates moved much faster than we had expected or could have expected. I believe that’s true of everybody anywhere. I don’t think anybody could have anticipated where interest rates would be by now at the beginning of the year, much less October of last year when we gave guidance. So our interest expense is $65 million higher now for 2022 than when we gave guidance. And we’ve kept our AFFO guidance the same because we had operational outperformance. So to answer your question, yes, we think the operations have gone as well as we would have expected or better, and the financing side has gone worse.
I don’t think that’s different for most companies on the financing side. I think it was a very difficult period to have anticipated. I think we’ve done a good job anticipating in a rising interest environment generally in our business but not this quickly and this dramatically.
David Barden
So I want to get back to the interest side, but staying on the operational side. So I think that you had a slide in your 2Q deck. You kind of talked about the fourth generation of mobile CapEx spend being like, I don’t know, what was it? I have written down here $325 billion, and right now $225 billion kind of 5G to date. And I think a lot of that’s been pretty compressed. Are we to take away from that kind of a statement that we’re kind of 2/3 of the way through the 5G deployment, and we’re kind of getting towards the end? Or are you making the statement that we’ve spent so much so quickly, we’re probably on the beginning end of a much larger kind of large-scale build in 5G?
Dan Schlanger
If you — that chart, which we put together and didn’t know what I was going to say when we started putting it together, and it came together is basically, if you look at the 2G to 3G cost about $200 billion, 3G to 4G, it was about $400 billion and now — or $300 billion. And now we’ve already spent $200 billion going from 4G to 5G, we would anticipate it is harder and more expensive to make the shift from 4G to 5G than it was from 3G to 4G. So it’s not that we’re 2/3 in. We believe that because our customers, the carriers spent so much on spectrum, whether that was through M&A or through the licensee of spectrum through the auctions with the government, that there’s an impetus for them to then put that spectrum on air and get it generating value because sitting on their balance sheet is not a good use of anything, like any companies.
So I would say that we are not 2/3 of the way into 5G. We’re very early on into 5G. And because there’s all that capital that has already been deployed, there’s a reason to push even harder for our carrier customers. And what we’re seeing right now is the results of that dynamic where data demand is increasing on a year-to-year basis. It’s straining the network every year more than it did the year before because if it — data domain was 30% every year, it doubles every 2.5, 3 years, that means over the next 2.5, 3 years, we have to put as much on air as is on air today. That’s a huge amount of growth that needs to happen.
And right now, they’re focused — the carriers are focused on meeting that growth with the mid-band spectrum they’ve acquired or merged into depending on who they are, and they’re doing all of that on towers because that’s the most efficient way to cover most of the population in the U.S. The tower business, utilizing a tower is more efficient than any other way of propagating spectrum. But we don’t believe that towers are sufficient for the amount of demand that’s coming because you can’t put them close enough together because they start to interfere with each other. And we can’t build a whole bunch of more towers in most urban markets. And that’s part of the reason we’re in our small cell business is because we believe that continuation of data demand growth will drive more densification of the network in the small cells and beyond towers.
So even while this push is currently focused on towers, Verizon and T-Mobile came to us and gave us huge small cell commitments because they knew 18 to 36 months from now, they’re going to have to be building small cells to meet the demand that’s coming. We believe 5G will push more and more that way because the use cases of 5G will push more and more towards being closer to the customer, which is part of the reason that we think the 5G — totality of the 5G spend will be higher than what has been spent on 3G to 4G because moving that — into that more dense network will require more spending than just adding more to towers.
So we’re going to have to add more to towers in the industry and densify as an industry, which is why we think we’re in the very early stage of the 5G evolution.
David Barden
So I don’t want to dig in that a little bit, but I want to kind of go back and just to have you kind of address something that’s kind of been in the news lately. The T-Mobile SpaceX deal intended to kind of fill in white spaces in their network, also AST Space Mobile is supposed to be launching BlueWaker 3 in the near future and that’s supposed to be a much higher bandwidth mobile solution. Obviously, it’s a test satellite so it’s only going to be Texas and Hawaii or something like that. But, directionally, one of the things that’s interesting is that American Tower actually has an investment in AST, space mobile, because they see it as complementary to their portfolio. How do you see the kind of emerging momentum in satellite as being complementary or substitute for the macro market?
Dan Schlanger
I think you said it well. Even in American Tower’s investment, it’s complementary. It is not a substitute because utilizing a satellite-based network goes against the general principles that’s been going on in the industry for the last 25 years. We’ve been moving from high to lower and from higher latency to lower latency. As you move to satellites, you get a way high and the latency goes way up. And you can see that even in the announcement from SpaceX and T-Mobile, they talk about the first deployment being text only because they don’t even have enough synchronicity in the network to be able to make a phone call because the latency will be too much for that phone call to make any sense. So that’s not substitutive for us.
We’re trying to get to sub-10 millisecond latencies, and they’re talking about phone calls being so far off they can’t make them. And so I don’t think it has anything to do with whether it substitutes for us. I think it’s a great solution for where there isn’t yet a terrestrial network or will never be a terrestrial network. So I don’t know if you are, but if you’re a backcountry skier, maybe it’s a really good thing if something happens and you fall and you can text somebody, “Hey, I have fallen.” But — and if that text takes 30 seconds to get out, who cares, that’s great, at least you got out as opposed to not having any connectivity. But you put that in the middle of Los Angeles and you have a 30-second delay or a 10-second delay or a 3-second delay and nobody is going to want that service because you can get 50 millisecond delays on the current network.
And all the use cases that we see coming in 5G push that latency down, which is going to take more density of the network, not putting it up in the sky. And I think that, that T-Mobile and SpaceX announcement is really good overall because it will make white space, as you put it, dead spots in the country be able to have coverage or around the world ultimately to be able to have coverage if you’re SpaceX. I think that’s really useful. It just has very little to do with our business.
David Barden
Just out of curiosity, how much demand do you think there is in those white spaces that would support people throwing satellites up in the space?
Dan Schlanger
I can’t answer that. I don’t know. So it’s probably better for SpaceX to try to address.
David Barden
I’ll ask you one —
Dan Schlanger
You should be —
David Barden
I will. Okay. So is it still the game plan at third quarter results to give 2023 guidance?
Dan Schlanger
Yes. Okay. What is that going to be?
David Barden
So as I think about 2022, I mean, I think we’ve been trying to get some pieces part. So we’ve got DISH, which kind of was in a bit of a rush to kind of meet their June 20% coverage deployment. Now they’ve got to get to 70%. So it doesn’t sound like they’re going to like slow down. You’ve got Verizon who’s purchased incremental rights to C-band spectrum. So it sounds like they’ve got incremental work that they want to do.
AT&T finally got access to their DoD spectrum, and they’re going to do the joint DoD Auction 110 C-band build, that’s starting now. And T-Mobile still has quite a bit of, I think, white space in their kind of small and rural network, which they highlight as 1 of their big growth opportunities. So to the extent that what’s changing from ’22 to ’23 feels like we’re adding AT&T to a pretty already active mix, and no one who’s active seems to have an incentive to slow down. Is it rational then to believe that from an operational standpoint, we should see positive momentum as opposed to just the same as we saw in 2022?
Dan Schlanger
Yes. So it was an elegant way to ask for guidance next year.
David Barden
No —
Dan Schlanger
Still Yes. What I would what I would say is going back to what we were talking about earlier is the operational side of our business is going really well. And we don’t see any reason that it wouldn’t continue to go well, which is why we maintain our guidance and increase our guidance for ’22. We’ll give guidance for ’23 in a month or so, and we’ll get into much more of the detail around it. But everything you said makes sense. There’s a lot of spectrum that needs to be deployed by everybody in the market, in the industry to meet the demand that’s coming. And that’s why we say, over the long term, we feel really great about our tower business. It’s a wonderfully positioned business to take advantage of the long-term growth trends in data demand in the industry.
And looking into ’23 just generally, I think that operationally, we feel really good about it. And we’ll give guidance and talk through it in a month. And I think it will be, like it always is, 4, 5 months before our peers do the same thing. So the reason that we do that is we believe that our business is sustainable enough and predictable enough that we can look out 18 months and give a really good estimation of what we think those 18 months will bring.
David Barden
On the services business, is there a reason to — if looking at where we are right now, has there been any kind of movement relative to the strength we saw in 2Q?
Dan Schlanger
Like I said before, the activity levels we see across the board are really good. So if you look at the guidance that we put out, there’s no substantial drop off in the back half of the year. So the activity levels remain good.
David Barden
Any kind of labor issues or cost issues affecting margins in that now that we get to — there’s the planning side and the permitting side, which is the higher margin piece, which happens earlier. And then there’s the kind of bolt tightening, tower climbing part, that’s a little lower margin. And that’s the part that really requires the bodies that are in tight supply. Is there any issues on that side of the business right now?
Dan Schlanger
We have not seen any that would impact either the margin of the business or the pace at which we can put new equipment on towers. So we’ve had access to contractors maintain and be sufficient to meet all of our demand. I’m not sure that’s true across the entire industry. But for us, we feel good about it. And we haven’t seen a rise in costs that would really impact the margin. In fact, as we talked about in our second quarter discussion, we’ve been really good about going after higher-margin work even in the construction side of our services business. And that’s part of the reason that it grows in the second half compared to the first half.
David Barden
Got it. So obviously, you had a lot of success in the past year with the Verizon and T-Mobile small cell deployments or at least contracts. Can we talk about now given where are we now in that kind of mix of we’re trying to get coverage, but then we’re addressing density? Are we — is Crown deploying on these contracts today yet and decide this kind of 5,000 to 6,000 small cell node envelope that you’ve talked about for this year? Or is it really going to be all next year when you’ve talked about returning to kind of a more normal 10,000 to 11,000 small cell node deployment?
Dan Schlanger
There’s very little in the 5,000 that came from those specific contracts. It just takes too long to get through the process for us to put on air anything that would be associated with the T-Mobile and Verizon contracts. That will begin in earnest in ’23 and beyond. Part of the increase, like you were just talking about from 5,000 notes that we expect to put on this year to 10,000 we expect to put on next year is because we have those Verizon and T-Mobile nodes that we’re going to put on air. And we think that, that trajectory of 10,000 is a good 1 going forward or could be increased depending on how quickly we can get those nodes on air. Because they’re committed, and now we just have to work with our customers to figure out exactly where they’re going to be and when we’re going to build them, how we’re going to build them and get them built, which takes time, but we feel really good about the relationships we have with them. It’s all working out well.
And just we have to work through the process. So very few this year, more next year and then it will continue for a period of time.
David Barden
Can you comment on — because obviously, you’ve talked about — originally, you were hoping it would be kind of a 12- to 18-month type of build, than it kind of shifted out. Now it’s more like 18 to 36 months in terms of the permitting, getting the power guys to the utilities to cooperate. But arguably, on this kind of idea that we’re colocating multiple systems on top of each other, it would be faster if we can colocate slower, if we have to build new nodes. What is the mix within this contract — these contracts that are going to tell us whether we’re going to be a little earlier on the 18 side or longer on the 36-month side?
Dan Schlanger
Most of the T-Mobile nodes that we signed are colocation and should come on faster. And what we’ll see with that is that we’ll get more specific guidance when we come in to October around the 10,000 nodes. But as we’re working through the process of where those notes are going to be and exactly where to cite them, we will know more about what that mix will look like going into 2023, but it should be higher than it has been historically because a lot of those nodes from T-Mobile are going to be colocated on existing systems. And, to us, the — we need a mix of both of those, the anchor build and the colocation build for our business to be working the best. The anchor build because we’re so early on in building out small cells throughout the U.S., we need anchor builds to fill in where we don’t have anything as an industry and us as Crown Castle.
And without those anchor builds, we wouldn’t have anything to colocate on in the future. So one of the things that my boss, Jay, likes to say is you can’t amend a tower you don’t own. Well, same thing with small cells. You can’t co-locate on small cell, you haven’t built. So we need to build anchor to set up that asset base for future growth. We also need colocation to show that the business model is working really well because we, as a company, make money when we get more than 1 tenant on a single asset. That’s how shared infrastructure works. And so we need both of those things happening all at the same time. And what we’re seeing now is we are — that’s coming true. We’re seeing anchor builds and colocations happening to exactly where we would want to be.
David Barden
The — okay. So one of the things that kind of comes along with the small cell build is typically an upfront capital contribution. And that’s been a big part of the kind of business that you guys have been doing for several years. And relatively recently, you started giving new disclosures about the contribution that amortization of prepaid rent has been making to your kind of recurring tower service revenue. And we’ve been getting a lot of questions about that, as you know, about whether the evolution of the small cell business and the prepaid rent contributions and the timetable over which you amortize them, you’ve given some disclosures which suggest that the prepaid rent will go down, but that’s based on the prepaid rents that you’ve received.
And then presumably, there will be new, maybe, upfront capital contributions, which would be — and again, this is all on cash. You’ve been — give us your spiel in a second after I talk — is talking. And then there’s going to be new CapEx that comes in and you amortize that. And so we have to add whatever that looks like to whatever you’ve disclosed about the past cash CapEx. But I guess, I would like to kind of hear your updated thoughts now that you’ve had a lot of chance to talk to investors about this new disclosure and how they think about it and its relevance and importance and how — what you’ve disclosed might not actually be what happens in the future.
Dan Schlanger
Yes. So what you’re talking about is we have a supplemental materials to our earnings every quarter. And in those supplemental materials, we have lots of tables, all of which are not forecasts. They’re just what is on the books today just accounted for over time. And prepaid rent amortization that we’re talking about is no different. The reduction from 2022 amortization to 2023 amortization in those tables is about $100 million. Because, to your point, we are spending money this year and then receiving some fee paid rent from our customers this year, it won’t be all that $100 million. We will offset that with the incremental prepaid we’re getting now amortized over the life of the contract. And the life of the contracts are similar than they have been. They’re about 10 years. So you can do math to figure out how much will be added to prepaid rent amortization going into 2023, but it will be lower — prepaid rent amortization will likely be lower in 2023 than it was 2022. And the reason that we want investors to understand that dynamic is because it’s good for our business to get the prepaid rent, but optically, that reduction in prepaid rent amortization looks bad because it impacts our AFFO metrics and the growth in that AFFO.
We just want investors to understand that, that is a dynamic that is happening and to look into the future and bake that into whatever modeling they’re doing to make sure that the FFO metric itself is appropriately adjusted for that prepaid rent amortization. As we think about our business, though, — the — like I said, prepaid rent is really good. What that means is we spend CapEx and our customers pay for part of it by giving us a contribution to that CapEx. And instead of allowing the accounting rules allowing us to, in essence, offset CapEx with their capital contribution, we have to disclose it in our statements as 100% of the CapEx, and then we put a deferred revenue balance on our balance sheet of that capital contribution, and we amortize that through the income statement over the life of 10 years.
I don’t like that that’s the accounting. I think it is confusing. But it’s true. Those are the accounting rules. So we can’t do anything, but that. Which means that there’s real value contribution there. It’s not made up at that point. We are getting capital from our customers. And there’s no other way to account for it so we keep it in our metrics, but we want to be very transparent about how those metrics are derived. And then however an investor wants to think about that prepaid rent amortization, whether they want to include it and how they believe our cash flow generation of the business is or not, that’s really up to them. We just want to be very clear about it.
One of the questions we often get is, well, why do you put it in AFFO if it’s not cash generation in that period? And the answer to that is because that’s the way our peers do it, too. It is an industry for the 3 of us standard AFFO definition. And we want to make sure that we don’t bear from that because it will make it harder, in our opinion, for investors than to compare the headline numbers to each other. But we also want to be very transparent that here’s what the numbers are. Here’s how it gets built up. So the reason for all that disclosure is to try to get people focused on it enough to make those decisions.
David Barden
So it’s interesting because there was a time when you didn’t amortize it because the AFFO was not a GAAP measure you can kind of choose how you want to calculate it. And you guys did actually disclose in the AFFO the full cash contribution and everyone lost their minds because you weren’t comparable. And so then, for a period, you actually did both, and then you kind of gave up on the old version. And the reality is, I went to my REIT analysts, and I said to them, look, these guys are getting these cash contributions to these builds. He’s like, “Oh, like a capital contribution to renovating a building?” Yes, all REITs would, of course, include that cash day 1 because that’s just — it’s a cash metric.
But I guess the tower industry has decided to kind of alter it a little bit. And so I mean that’s one side of it. So I think that you guys tried —
Dan Schlanger
We did. Before my time, but we tried.
David Barden
The flip side of this would be that — it’s interesting that this disclosure, which breaks out, amortize rent amortization comes at a time when amortization is slowing down, not when it was accelerating. And why was now the right time to make this disclosure?
Dan Schlanger
So we actually started the disclosure about a year ago when amortization was accelerating.
David Barden
I new it was going to be.
Dan Schlanger
So we thought that it made sense to disclose it. We’ve gotten enough questions about it over a long enough period of time that we thought it made sense to disclose it. We’re always in a period — position of getting feedback from our investors saying, this is what we would like to see and trying to address that feedback. We’ve done that in many cases. We’ve done that in the small cell business. We’ve done a cohort analysis. The same thing to be said there is, “Hey, you just chose that period of time because it looked good.” That’s not exactly why we do things. We don’t do it because they look good or look bad, we do it because we think it is a reasonable request that’s been made to us, and we try to address that request.
And that’s what happened here. And we have talked about the impact of prepaid rent amortization for a long time in our business, we just didn’t disclose it. We always talked about it. I always said it in our calls. So now we just made it more official, more formalized so that people can do that analysis whenever they want to as opposed to wait for the call and say, “Okay, what are they going to say this time and how precise is that?” So we’ve just evolved our disclosure more than completely changed it.
David Barden
Right. Thanks for that. So all right, I want to go back then to the guidance change. We talked about all the good things happening in kind of the macro side, the things were kind of idling on the small cell side. I guess I did want to ask 1 more question. What’s your confidence level given all the unknowns in the permitting and muni process and all these that you can double small cell node deployment next year?
Dan Schlanger
We’re confident we can do it?
David Barden
You got it. So it’s all like the permits you got it all backed out?
Dan Schlanger
I wouldn’t say we have it all like every permit we need and it’s all done, that would be hard to say right now, but we feel comfortable that we can make that happen.
David Barden
And based on that, your ability to double 5,000 to 10,000 round numbers, is there any part of the marketplace that’s evolved to the point where 10 could become 15%? Or is it still that’s redlining the business’ ability to grow?
Dan Schlanger
It really has very little to do with our ability to grow and more to do with the time it takes to get all of the things in place, mostly permitting, zoning and utilities in order to build that small cell. So we haven’t been the bottleneck. It’s more in demand and then the time it takes based off those really long lead time items. So the question is, can we get those long lead time items shortened enough in order to make 10,000, greater than 10,000 in 2023? Maybe, we’ll talk more about that in October, maybe, but we think 10,000 is a pretty good estimation.
David Barden
Okay. We’re still hovering around that number. Good. Okay. All right. So going down to just the guidance change in interest. Obviously, you’re right. I mean no 1 really could have predicted this. You have — I think it’s 15% of the debt is floating. Is that correct?
Dan Schlanger
That’s right.
David Barden
Is there anything about now where we sit today that makes you want to rethink that? You don’t necessarily want to lock it in, but locking it in has been — there have been times when we did some fixed floating swaps in history, didn’t work exactly the way it was intended. But I’m interested to hear you like your thought process now on swaps, terming out debt, what you — how you, if any way, manage what’s happened?
Dan Schlanger
Yes. You have a lot of history there because those swaps get talked about a lot in our shop.
David Barden
Well that was Jay. It’s all Jay’s fault.
Dan Schlanger
It’s all Jay’s fault, and he’s my boss [indiscernible] bad things about him.
David Barden
You used to say about me.
Dan Schlanger
I can say plenty of bad things about you.
David Barden
Thanks.
Dan Schlanger
So there’s nothing in the current environment that would make us change substantially from the fixed floating ratio. We’ve hovered in the 10% to 15% range basically since I’ve been there. What we have done over the last 5 or 6 years since I’ve been there is reduce the amount of floating rate debt from before because it was much higher because we didn’t want to get caught too much in a rising interest rate environment. And then we’ve also extended the term, extended maturities of our debt. and we significantly reduced the secured portion of our debt, all of which was preparation for an increasing interest rate environment. Whether 10% or 15% or 20% is exactly the right number, it’s hard to say that is more art than science, but we want to hover in that 10% to 15% range of floating rate debt. It may fluctuate here and there depending on debt markets. So if they’re really difficult debt markets, and we don’t want to term out in that period, then we’re going to use more of our revolver for a longer period of time, which will push more of our debt towards the floating rate side, and then we’ll clear that out with some sort of longer term at some point when the markets get better.
The part of the reason that we increased the size of our revolver was to give us more flexibility on that point. And because we have more CapEx coming in, because we have more debt overall that is maturing, we want a higher level of flexibility on our revolver to be able to withstand 12 to 18 months of capital call, whether that’s CapEx or repayment of debt, so that we aren’t caught in a really bad debt environment where we have to go issue in the public markets. That is how we think about this. Maintain our debt around 5x debt to EBITDA because that’s what the agencies have told us is required to maintain our investment-grade rating. And then within that, make sure that we are managing both the near-term impact of increasing interest expense with long-term impact of getting too much floating and putting too much pressure on any near-term cash flow.
So I think we’ve done a really good job of all of that. I think that the stance we’ve taken is extend your maturities so you lower any near-term cash calls. So if you have 5 years of weighted average debt, than, for us, we have about $20 billion. That doesn’t mean $4 billion a year, you’d have to refinance. We make it 10 years, and now it’s only $2 billion we have to refinance. That’s good for us. We’ve done that. And then make sure that we have the wherewithal to go access the markets quickly if windows open up, we’re going to — we’ve done that. And then make sure we have access to all forms of capital we possibly can, which is why we have the secured debt as low as we do now, so that if the unsecured markets are bad, we can go to the secured markets.
I think, with the 15% floating rate that we have right now, that’s about $3 billion of debt that is floating rate and interest rates have moved a lot. And so that’s what caused the $65 million increase. As we had $3 billion, interest rates have moved 200, 250 basis points, and the math just works out that way. That doesn’t bother me as a — from a theory standpoint, strategy standpoint because we want some floating rate debt because it’s lower cost. So we want that management between risk and reward, and what we try to do is generate the highest risk-adjusted return we possibly can. Part of that’s how you manage your balance sheet, and right now, we feel really good about how we’ve managed our balance sheet because I think we balance those things pretty well.
David Barden
Okay. Before we kind of shift to the business side, the services side, I just wanted to kind of ask a question real quick. So there’s a company here, Radius Global, and their business model is they want to buy up land underneath towers and data centers and cable landing stations, just clip coupons, but then, eventually, these leases mature and there may be an opportunity to renegotiate. And Crown Castle knows this very well. I think a lot of your — a lot of people affiliated with Crown were affiliated with a company called TriStar way back in the day.
Dan Schlanger
That’s true.
David Barden
And there was a little bit of an arms race buying land buying land and everyone swapped all the land and it all just went away. But this guy is now — he’s kind of out there cowboying it. And I’m interested to see if you even care? And if you do, if it affects your capital allocation decisions about buying back land at some sort of accelerated rate?
Dan Schlanger
We always care. So whenever somebody tries to enter the market in a way that’s different, we want to make sure that we’re not being [indiscernible] and just say, well, that’s not going to work, and it does bother us. But the position that we’re in now is significantly different than the position we were in when you’re talking about the arms race you spoke of with TriStar and then every other tower company buying land under each other’s towers and kind of being on [indiscernible] then we kind of flipped them all and it all cleaned up. When that was happening, we had a huge wave of leases that were expiring within the next 5 to 10 years at that point. The reason for that was we had bought a lot of assets from our customers, and they hadn’t pushed out those leases as far as we would have and that wave hit us. And instead of allowing it to hit us, we wanted to either renegotiate the contracts, the leases, or buy them out so we didn’t have that near-term risk. Because, as you said, if you reach the end of the lease, which is the ground underneath our tower, if we don’t own it, we lease it. At the end of that lease, the owner of the land under the tower has some leverage. I’m going to increase this rent because if you don’t pay it, then you lose this place for a tower.
What we’ve learned over time is we renegotiate those leases well before, so 10 years out. So the owner doesn’t have this idea, okay, I can make a whole bunch of money tomorrow. And we can extend them for a really long period of time. And so, right now, we own about 40% of the towers — the land under our towers. And the rest, the 60% has an average term of 36 years. So it’s hard to impact us in the near term, which makes it hard for somebody like Radius to think this is a good place to go to try to exact that leverage because if you put capital in now, 36 years from now, maybe I’ll be able to have that leverage. That’s a long time for a public company to think. So maybe they’re doing that really well, but we haven’t seen it really impact our business yet. So it has not impacted the way we would allocate capital towards buying land or not. We spend about $100 million a year buying land. And we think that’s a pretty good place. Because if we were to try to increase that substantially, our belief is, instead of getting more sellers into the market, we would just drive up the price for the people who are willing to sell anyway. $100 million a year is about what we think is reasonable.
David Barden
Interesting. Okay. So as we kind of —
Dan Schlanger
And that could change if the market changes. If we see a huge opportunity, and everybody wants to sell, then maybe we’ll take advantage of that.
David Barden
And you don’t because of all the activity you’ve done over the last few years, you don’t have waves of lease expiry. Got it. So the last, I think, kind of a couple of minutes. We’ve heard a couple of different stories on enterprise services, business services, fiber services, which is a bigger part of your business than the small cell business, which we talk a lot about. One story was from T-Mobile and from AT&T saying, this enterprise services business is in a secular decline. There’s nothing we can do about it.
Then you kind of got Lumin in the middle, which is like, yes, we got a lot of things that we need to harvest, but we still see some green shoots and stuff we can grow. And then you’ve got Unity and Cogent, who are saying, I don’t know what you’re talking about, like we’re growing. We’ve got growth because we’re in only the growth parts of this business. So we’re kind of in this weird spot where we got inflation, but we’re staring down the barrel of recession, and people look at Crown and wonder, with this business services side, how resilient can that really be in — if the economy kind of really goes south?
Dan Schlanger
We think the way we’ve positioned it allows us to be more resilient than most in the industry because where we’ve positioned our fiber business, the enterprise side of it, is directly in line with where we think small cells are going to be because we wouldn’t be in that fiber business if not for small cells. So we bought fiber in metro markets across the U.S. in order to support small cell growth in the future. And with that, we then, as we pass a building or a hospital or something like that, we can build into that building or hospital and generate incremental revenue on an asset that we already have. What that leads us towards, though, has been focused on larger, more sophisticated enterprises, not really small and medium businesses. And we believe those larger enterprises have a much longer planning horizon that is not as impacted by a recession because they’re looking out over a period of time saying, even though there may be a recession in the near term, over the long term, we’re going to have increasing data demands.
So we don’t want to optimize for the next 6 months, we want to optimize over a longer period and make sure we don’t get exactly what we’re talking about in leases. We don’t want our provider to come to us and try to leverage the position to get a significantly higher price in the future, let’s lock it in for a little while. So we believe all of those dynamics lead us with this focus on larger enterprises think companies, financial services companies or large hospital systems or government agencies or school systems, things like that, that focus allows us to have more confidence that we can be more resilient over a longer period of time, which is why we’re comfortable but a 3% revenue growth rate per year is reasonable over a long period of time.
Now that’s not to say that our revenue will grow 3% every year forever. Sometimes it may be lower, sometimes it may be higher, but we think that on average, 3% is a good way to think about that business. I do think that it’s a little more difficult right now to predict what’s happening in the world based on coming out of COVID and all of the things you talked about from a macro perspective. We’re coming out of COVID, rising interest rates, maybe there’s a recession, but employment is really good. What does all that mean? It’s really hard to predict what all that means, and you’re seeing that across the economy. But we believe we’re well positioned to maintain that 3% growth rate over a period of time.
David Barden
Good. All right. I think we touched everything. Thank you so much for being here, Dan, and thank you guys for coming and I appreciate it. And enjoy the rest of the meeting. Thanks for coming.
Dan Schlanger
Thanks for having me.
Be the first to comment