Crown Castle International Corp. (NYSE:CCI) Morgan Stanley Technology, Media and Telecom Conference 2022 March 8, 2022 6:35 PM ET
Company Participants
Dan Schlanger – EVP and CFO
Conference Call Participants
Simon Flannery – Morgan Stanley
Simon Flannery
Okay. All right. Good afternoon, everybody. Welcome back. We’re delighted to have Dan Schlanger here from Crown Castle. Welcome back Dan. Appreciate your time today.
Dan Schlanger
Thanks. Great to be with you. Nice to see you again in person.
Simon Flannery
Likewise. For important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep.
Dan Schlanger
You don’t have that memorized yet?
Question-and-Answer Session
Q – Simon Flannery
I should. So, it’s been a long time since October of 2021 when you put out your guidance, but you you’ve signed the T-Mobile master lease agreements, you’ve had some updated news here. So, help us understand the kind of the key drivers for Crown Castle in 2022 and beyond?
Dan Schlanger
Sure. Like typical, our drivers revolve around a couple things. One is to increase the utilization of assets that we already own, which means on our tower business to continue to add new equipment, new antennas, new lines in order to allow our customers, the wireless carriers to improve their network quality. And we get paid more as that happens. So, we want to continue to add additional revenue to the existing assets we have.
And then we want to add new assets, primarily through our fiber and small cell business that will allow us to build a business like that in the future. And we believe that given the overall dynamics at play in the U.S. with demand growing for — data demand growing for somewhere between 30% to 40% per year, that the future of wireless networks will require density that is well beyond that — which is available through towers only, which is what drove us into this small cell and fiber business.
So, we want to build assets like that, that give us access to the same dynamics of the business model, which are upfront capital that we spend to share that capital among multiple customers to lower their total cost of implementation and operation, which is in essence, why we’re in business. So, we want to do that on our existing assets, add more assets, and do all of that profitably while trying to control the costs. And that’s generally what we look at every year that we come in.
What is really great about the year of 2022 is that we’ve started it with very favorable agreements that we signed. As we’ve talked about, we’ve added 50,000 new small cells in the last year or so. And we’ve signed — our backlog, sorry — thank you for the clarification.
And we’ve signed master lease agreements with most of our customers, our large customers on the wireless side, tower side of the business, which sets us up really well to have good growth and good visibility for — going into the future.
And when we look from kind of a longer term perspective of what 2022 looks like, especially on the tower side, the growth that we’ve seen, over the course of the last couple years has actually been really good. The tower business is a great business because it just grows over and over again. So, the next year, next year, next year, and you add a bunch of good years of growth together, and it’s a great business. But over the course the last couple years, we’ve seen a pretty significant increase in the new leasing activity that we see going on our towers, because of all the activity our customers are going through.
And that has led us to increase the — leasing — the core leasing that we have on our towers kind of 30% from 2020 to 2021, another 20% from 2021 to 2022, which puts 2022 at about 50% higher than the five-year running average. And that’s a substantial difference in a business like ours. So, like I said, I think 2022 was set up extremely well for us.
And not only that we are setting ourselves well — ourselves up well for well beyond that in addition through our the investments we’re making in fiber and small cells.
Simon Flannery
Great. And — I mean you’ve reiterate a number of times your long-term AFFO per share growth model and dividend growth model in the 7% to 8% range. But I think we had Verizon last week talked about 2022 being the peak CapEx here. So, we certainly got some questions about what does that mean for the towers if their CapEx is coming off? I think we’ll hear from AT&T on Friday that they’re accelerating their CapEx, DISH is clearly in the middle of their build out program. But what inning do you think we’re in on that sort of macro tower 5G build out, do you think we’re still in the early to middle innings for you and for the industry?
Dan Schlanger
I think from a 5G buildout, overall, we’re very early. There are lots of additional used cases that will require a new network like 5G and what 5G will bring to all of us consumers in the industry is a ubiquitous, very high speed, very low latency network. And that will drive used cases in the future that we’re not quite sure what they are yet. But it’s worth the early stages, these cycles typically last a decade or so that’s how long about how the 4G cycle had lasted even when we look back to — started in about 2014 and our customers are still spending on 4G.
So, these are things that take a long time to play out and 5G being kind of a new network that will allow a new way of working, we believe it could even be a longer cycle. And — so I think we’re very early on. But that’s not to say that in the cycle, that every year is better than the year before. That’s not the way our business works. It doesn’t grow up into the right all the time of incremental growth, we’re consistently growing, but we’re not consistently growing faster every year.
But we do see that over that period of time of an upgrade of a generation of the wireless network, that there is a tremendous amount of growth. And like I said, I think we’re in the early stages of it right now. And what we’ve seen from our customers is it’s very rare that all of our customers are very active all at the same time. So, I think of it kind of is kind of sine wave, some of them go up at the same time others go down and it kind of evens itself out for us, which is why we’re so comfortable in saying over a long period of time, we can grow 7% to 8% per year.
That’s not to say that we’re going to grow 20% one year and then 0% next year and average out, we think we can grow in that 7% to 8%, or like we’ve done in the past couple years above that, because there’s really steady growth in this business.
And what is — what’s great about being the owner and operator of those assets is that steady growth allows us to have a long-term view of our investments, which is why we’ve been so excited about all the investments we’re making on the small cell business that we’ve been making over the last decade or so is it — it’s now coming to where we can see the fruition of that and that the benefits that we can generate for our shareholders are coming more into site with the agreements we’ve signed recently.
But all that just points to like I said earlier, it’s a great business model and we think that the underlying reason for it is to lower the overall costs of the network, so that we all don’t have to pay more. And I think that’s good for us. It’s good for our customers, it’s good for consumers.
Simon Flannery
And presumably the bills you’re seeing today are mostly on the existing towers that the carriers have. But even before they go to small cells over time, one would expect that they would continue to build out their add on — go into new towers that they haven’t been on before you seeing any evidence of that yet? T-Mobile’s total at about 10,000 new sites over time.
Dan Schlanger
Yes, I just want to — I want to be clear on new sites. There are existing sites, but we’re not building any to speak of,
Simon Flannery
New for them.
Dan Schlanger
New for them, but existing for us. What we would call it is a co-location, or an amendment. Co-location would be a new site for the customer, even though we already have, and an amendment would be where they already have equipment and they’re adding more.
And we’re a little bit skewed to co-location right now more than we had been historically, typically, it’s about 50-50, the total activity, the revenue we generate is about 50-50 from co-location and amendment and new revenue. And we’re seeing a little bit more than that right now, primarily, because we have a new network being built by DISH.
But we are seeing those. So, the way that our customers work, is when they go out and want to augment their network, they start with what they already know, which is the towers they are already on, it’s less expensive and faster just to amend the current tower, add additional equipment to that tower, and then utilize that tower more efficiently.
And that takes less time, like I said, and it also they understand the network engineering a lot better because the tower exists. They know where the traffic is, they know how it all works out. They don’t have to do a lot of work to make that happen.
Once they run out of those opportunities, they then start co-locating on towers they haven’t yet been on and densifying their network because they can’t just be on the towers that are already on because there’s too much demand. And that shift from amendment activity to co-location activity happens over a period of time.
And what’s interesting is we’re seeing that in a bigger picture way with the move from towers into small cells. So, in that analogy towers is more like the amendment where they already know where the towers are they are, they have a network understanding, they don’t have to engineer a lot, they just are going to utilize towers to the extent they can. Towers remain the most cost effective way to deploy spectrum.
So, they’re going to use as many towers as they can. But once they kind of run out of that ability or to the extent that they can run that ability effectively, there are still going to be more demand that needs to be served and that’s where small cells come in. And what we’re seeing with the last year or so with 50,000 nodes being booked is that even in the midst of Verizon saying this is the peak year for CapEx, they find 15,000 small cell nodes, saying they know that after they’re done with that tower, they have to be on small cells. And what that gives us a lot of confidence that the strategic choice we’ve made to add a fiber and small cell business to our overall portfolio is a very good one, because that — the next leg of spending will come through that small cell.
So, if you go back to not only the customers, one customer spend, well, another one may not spend as much in that year and that evens out for us, they also have to make decisions between towers and small cells. And maybe one customer is really focused on towers, while another focused on small cells or vice versa. And again, for us, because we have both avenues of growth available to us, we think that that adds to more stability of that — of the growth rate for us over a longer period of time. And we can grow that 7% to 8% for the medium to long-term.
Simon Flannery
One of the things you did in the T-Mobile deal was to push out the churn. So, can you just talk about how that all came together and what was the — how should we think about churn out between now and was it 2025, once you’ll have the next big churn event for them?
Dan Schlanger
Yes. What happened was when T-Mobile and Sprint merged, they had announced that they were going to consolidate the network, which we knew was coming and we had shown in some of the disclosures we had, where T-Mobile and Sprint were co-located on a similar — on one asset, the revenue coming from Sprint, we laid that out. We had a big turn event that could have happened in 2023. And then we had disclosed, there was another one in 2028.
So, what we wanted to do was try, obviously from our perspective, we want to maintain as much of the revenue as possible, so minimize the churn. And to the extent that churn were to happen, we want to push it out as far as possible. That’s what we want to do.
Obviously, we are negotiating with another party who wants the opposite. They want as little revenue coming to us, which is cost to them. And they want to make it as fast as possible. So, the negotiation had a lot to do with that. When does that churn going to happen? How much is it going to be? And what we ultimately agreed to was coming to an agreement that 2025 was going to be a year where most of the churn was going to happen, which pushed out from 2023 and then pulled in a little from 2028, which seems like a reasonable compromise.
But we’re also able to minimize that amount of churn overall by allowing that to happen, because the timing, fortunately, for us is less important than the overall quantum because this is a very long-term business. So, if it’s one year versus the next year, that doesn’t really impact the present value, what impacts it is how much revenue do you have going on for a long period of time.
So, we wanted to maximize that net present value and what we came up with was concentrating the turn in 2025 and getting rid of those big events in 2023 and 2028. We think that was a really good trade for us. And it allows us to continue to grow our business with T-Mobile. And you can still see that we are growing the overall tower business in 2022 at the high end of what the industry — our tower peers are showing and we’re going to be leading the pack again in tower growth.
So, it hasn’t impacted us anything but positively at this point, we think we’ve made a good deal with T-Mobile, we think that they got something out of it as well or they wouldn’t have agreed. And we think the relationships in a really good spot because we were able to come up with what to us felt like a very good compromise and something that allows us to keep the majority of our revenue in the growth that we expect.
Simon Flannery
Great. And one of the consequences of signing these long-term deals is you’re locking in a fixed price escalator over that time period. How do you assess inflation risk? You’re obviously hedged with your ground rent in terms of your cost structure, but how do you think of inflation and how that goes into how you sign those deals and the overall impact on value creation?
Dan Schlanger
Generally speaking, we think of stability and predictability as a highly valued asset for us, and we believe our investors as well. And therefore we have not pushed hard into inflation based escalators nor has the industry overall in the U.S. So, we’re completely in market with this to target about a 3% escalator within the contract terms without having a lot of inflationary adjustments up or down.
And that’s something that we think is core to the value creation of the business because of two reasons. One, the churn profile, the business is usually between 1% to 2% of revenue per year. So, with the escalator and Churn, there’s growth, more escalator than churn means there’s growth, very little capital, which means that we can grow for a long time without having to spend money, which is unusual in most businesses. So, we want that escalator to be there to be certain so that we don’t have the potential that might turn upside down and you have less growth and escalator.
The second reason is what you alluded to is that from an inflationary perspective, we don’t see a lot of risk, because our cost structure is also subject to basically a 3% escalator. So, that’s the biggest line item cost in our income statement and on the tower side is ground rent. We leased the land underneath our towers, that ground rent comes with 3% escalator. That is very similarly not tied to inflation. So, we do not have a lot of cost pressure. So, we believe we can grow the gross margin of our business without inflationary escalators. But maintaining that 3% escalator is important to us for the long-term value creation in the business. And we think that within the MLS we’ve signed, we’ve kept that very consistent.
Simon Flannery
Great. And presumably on the services side, sort of a cost plus type pricing model, is it so that if you’ve got labor cost inflation there, you can have some pricing power on those deals.
Dan Schlanger
It’s either cost plus or even when it’s a fixed revenue side of the business, it’s a pretty short cycle. So, even if we were to price a business today, get it done in a few months, we could then reprice it, the next one would assuming the higher labor costs. So, we’re not subject to that inflationary labor pressure for very long. But most of it is cost plus, so we have both those things going on at the same time. So, we don’t have a lot of margin pressure due to inflation.
Simon Flannery
Fixed wireless has been a hot topic at the conference so far. And certainly in the last six months, it seems to have gone from sort of dead on arrival to being having a moment and be interesting to just you talked about the densification. But it seems like the amount of traffic that the fixed wireless customers consume should be pretty good for the tower and small cell business. So, did you have a sense of how if they really do hit Verizon $4 million, $5 million; T-Mobile $7 million, $8 million, what that means for their networks and for your business? Or is that already reflecting some of your backlog?
Dan Schlanger
I think it would be very positive for our business, whether it’s in our backlog or not, it would consume capacity on a tower at a much higher rate to your point than we do as individual consumers through our cell phones. And we think that two things will happen one, it will consume a lot at first of a tower capacity. But over time, it is more likely in our opinion that fixed wireless access will be served by a small cells and towers, because it will be hyperlocal. There where that where the spike in demand will be houses and neighborhoods. And if that were allowed to be served by the tower, a lot of the towers capacity would be eaten up by that one house or that neighborhood that it would be available and people took it up.
And in order to relieve that pressure on the towers, a lot of what happens with small cells and you build a small cell, put it really close to where all that demand is and that tower can go back to serving its entire radius. And the small cell can go serve what is that fixed wireless demand. And we believe that over time that our small cell business will very much benefit from fixed wireless access. And we would love for them to meet and exceed all of their totals for that. Because what’s happening is we’re seeing competition both ways. We’re seeing competition from the wireless companies in the cable, we’re seeing competition from cable into wireless.
And all that means more customers for our business. And when you’re talking about these businesses that are competitive and competing on network quality, that the way to make your network the best is to utilize the lowest cost, implementation and operation of that network, which is outsourcing it to us because we can share. And we just think that it just this entire, the dynamic that’s going on in the market now is very positive for us.
Because we play a really good part, we can build out that network. We can do it for less money than they can do it for themselves. We can do it with less disruption to the communities in which we’re going to provide the network because we dig up streets or put trucks in the middle of road to build things. You don’t have to do that once instead of each company doing it themselves.
And ultimately, we think we can do it faster because once we had it built, it doesn’t take nearly as long — once we have the network or system built doesn’t take nearly as long to add another customer to it. When you add all those things together, we think we provide a significant value in the industry. And more customers wanting it, more used cases needing network is just — it’s nothing but good for us.
Simon Flannery
Do you have any good visibility into the infrastructure bill or the act, the opportunity there, but as it seems like to go to unserved areas, fiber may not be feasible. So, again, fixed wireless may be appropriate, I’m not sure if you’re talking to people who are potentially looking at business cases around there. But could that be something important over the medium term?
Dan Schlanger
I don’t think we will directly access any of the money from the infrastructure bill. What I do think, though, is that we will secondarily access it. Our customers will get access to that money to allow them to build an area that they otherwise would not build, and then they will use us to make that built the most efficient as they possibly can.
That’s what I believe will that’s the way we will have access to the infrastructure.
Simon Flannery
And maybe some new customers.
Dan Schlanger
Yes. And then on top of it, which is a good point, there are already new customers that have come to us saying, hey, we want access to that money. This is the type of network we want to build to provide access for broadband to these underserved communities, can you help us because they have no capacity to build for themselves.
And especially when you’re talking about fiber and small cells, we are clearly the market leader. And therefore we get that call more than any other company will — would. And we’re seeing more of that recently than we had historically. It’s a good potential next step for us is to have additional customers in that area.
Simon Flannery
Great. So, we talked about the small cell backlog a couple of times as we move forward into 2023 and 2024, you said that you expect that to reaccelerate. I think there’s been concern in the past about the permitting, the zoning, how do we get comfortable that you can kind of accelerate the buildout to I don’t know, ultimately double your — triple your current pacing?
Dan Schlanger
Yes, to add numbers to that in 2021, we build about 5,000 nodes, our expectation is to build another 5,000 nodes in 2022. In 2023, we are our expectation is to build 10,000 plus, which is the doubling you spoke of.
The confidence we have is that a lot of those nodes are already in process. They weren’t necessarily the ones that we signed recently, the 50,000 between Verizon and T-Mobile that we signed recently, there’s ones that have been in process for a long time. There are others that are co-location that don’t take as long as new builds do. And we have a pretty good sense from project management of when nodes will go on air. So, we feel pretty good about it, about meeting those targets. But that doesn’t say that we figured out some way to short circuit, the zoning and permitting, it still takes 18 to 36 months to build a small cell from scratch. Most of that time is to get a municipality to tell us yes, you can do that, that’s the majority of the time.
We have not found a silver bullet to work through that in three months and everything’s fine. So, that 10,000 plus is partly just rolling through backlog we already had in process and co-locations that we may sign because those take much shorter. So, where are we can add — like I was talking about the very beginning where we can add more revenue and more equipment to the assets we already own, it takes less time and we can we can make that happen by 2023. And we’re very confident. What I think is good, though, is that even though the 18 to 36 months is way too long, it’s a long time to get something built, it’s a long time for it to force our customers to plan. It does force our customers to plan and it was part of what we were talking about earlier is that even in the midst of the most tower activity that brides and say they’ll see or we’ve seen in a long time, I was talking about the new leasing activity increasing thing 50% more than the last five years.
During that period, we had two customers Verizon and T-Mobile come to us and say, hey, we really need small cells. And they were looking out because I knew they needed to look out somewhere between 18 and 36 months because it takes that long to build a small cell.
So, they knew that at some point, if they were going to move from towers to small cells, they needed to get it done. And that gives a little bit more impetus than if it were a month process. And because we are good at this and because we have experience and track record that we can point to give confidence to our customers that we can get things done. We believe we are the first call when they’re looking out 18 to 36 months saying hey, we would like to figure out what we can do going forward. And we believe that we’ve performed well enough to continue to be their preferred provider of small cells when they outsource and that’s we again, we believe that The outsourcing will continue to accelerate over time. So, even though 18 to 36 months is too long, and it’s hard. On some level, it’s a competitive advantage for us.
Simon Flannery
Just harder for others. And are you still winning, the lion share 50% of the RFPs out there?
Dan Schlanger
Yes. I mean, we don’t see anybody else announcing any small cells. So they’ve wanted over the last 13 or 14 months. So, I would say our outsourced market share is higher than that right now. But that’s not to say it will be up forever. This is a good business, that people will figure out how to compete very well. And we’re just we’re competing very well right now. And we’re doing everything we can to convince our customers that using us, is the best alternative that they have. And as long as we can keep convincing them that’s the case, that means we’re less expensive. And we’re faster than any other alternative, we think we can continue to win. So what is on our mind all the time is how do we get faster and cheaper.
Simon Flannery
You talked at the start about leasing up the existing infrastructure, and you’ve got this backlog. I think from time-to-time you give us a sort of a snapshot of where the markets are, where they were, where they are, if we sort of fast forward a little bit, is a lot of this going to be existing customers putting more nodes on a given mile? Or is it a second customer coming in on that same fiber? Is there a lot of new fiber going to be built? And how do we characterize the backlog in terms of what that means for the lease up?
Dan Schlanger
It’s a combination of the two. But the majority of the 35,000 nodes that we signed with T-Mobile will be co-located on existing assets, which is a big number.
Simon Flannery
So that gets your ROI?
Dan Schlanger
Yes, that should get our ROI up. But at the same time we do that we’re also building new assets as well. So, it’s
Simon Flannery
It’s still in the major top 20 or so. Yes, for the most part in the top 30 markets in the U.S. Although we have expanded that to where some of our customers want to go and other markets, we are willing to build there as long as we see Lisa upcoming. But we’re I said this before, if you think about how I started, our goal in any year is to lease up existing assets and build new assets. We want to do both at the same time. As long as we think the opportunity once we built the asset — the new asset is that we can lease it up in the future.
So, that’s exactly what’s happening right now is we’re building new and leasing up, both — leasing up in towers, but more importantly for the stage of the business that we’re in leasing up the small cell systems. And that gives us a tremendous amount of confidence that the future of this business is going to be great because all the assets that we’re building now will then become leased up assets in the future, which drives the ROI up.
Simon Flannery
Okay. The fiber business seems to be kind of steady doing its thing. I mean in the past that have grown a little bit faster, it seems to have leveled at about 3% or so. And the updates there on the demand side are seems like, again, demand for fiber is pretty strong.
Dan Schlanger
Demand for fiber is strong. There was some disruption because of COVID on just how the market worked. But we didn’t see a huge impact one way or the other. We believe we’ll grow in that 3% range, which is a — is net have about high single-digits churn. So, gross revenue growth in the low, low teens area and 9% churn or so. Take it as a 3% ne.
What is different about our business is we have pride, less gross growth, growth and less churn than most fiber businesses because we’re targeting a very specific niche in the market, targeting large, highly specialized customers who want their own network or a piece of a very robust network.
So, we’re going after financial services and healthcare and government agencies more than we are trying to go to small and medium businesses or homes, because that’s more our strength. And because we have the asset base that we’re building for small cells, we have the asset base that we can allow for that business, which is a little different.
Instead of running one strand of fiber and you put as much on as possible, we can actually give people dark fiber or significant portions of the width fiber. And that allows them to run their own networks. And that’s just a different business. And it’s stickier business that we think demands a little bit higher customer service a little bit higher engineering capabilities. And that’s really the market we’re going after, which why it’s been more stable than most.
Simon Flannery
Great. So, you’ve obviously got a lot of investment opportunities there. From time-to-time Crown Castle comes up in newspaper articles about this M&A deal or that M&A deal. Just to update us on your priorities. He did a lot of fiber deals a few years ago and have been fairly quiet since then, and stayed within a U.S.-centric focus. What’s the latest?
Dan Schlanger
Yes, I think you wrapped it up pretty well there. We’re going to be U.S.-focused, because we think that is — the U.S. is the best market for wireless infrastructure ownership in the world. The most growth with the lowest risk given for a U.S.-based cost company. We don’t see a tremendous amount of M&A.
We would look at developed market towers, we do look at developed market towers. But given the returns that we see and the prices being paid, we don’t think they compete well for our capital. And we don’t see a lot of M&A in the U.S. because we look for very specific fiber characteristics, very — mostly in metro areas, top 30 markets, like you mentioned, density of that fiber under a lot of the streets already existing. And then the high capacity fiber with lots of strands that we can use for small cells.
We just don’t see a lot of that out there. So, we think we’re going to build more than we’re going to buy. And we think that’s great because it gives us an opportunity to generate a great return over time. So, our capital allocation priorities are invest in the business we have, build new assets in the small cell business that we think are the right assets to build, and then continue to return money to shareholders through dividends that is funded by the operating cash flow of the business.
Simon Flannery
Great. Dan, thank you so much for your time today. Appreciate it.
Dan Schlanger
Thanks Simon. Good seeing you.
Simon Flannery
Likewise.
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