Crown Castle Inc. (CCI) Earnings Call Transcript & Summary

Sure. We are yielding about 7%. We've invested, on a net basis, about $14 billion. The vast majority of that capital, we talked about kind of the average life of that capital on our second quarter call, is about 3 years. So we're roughly 3 years into investing $14 billion of capital, and we're already at 7% returns. The comparison of that to the legacy tower business, we would have been far less than 5% yield on invested capital less -- at the same period point in time historically. So really early days of the investment, and the returns thus far have been really encouraging. We talked about 2 of the markets that we've been in the longest on our earnings call in the case of Phoenix and Orlando. And those markets, having a little bit more time to mature, have shown really attractive returns on the fiber investments that we've made as we've added small cells and leased-up that fiber. So as we look at the opportunity in front of us, as you know, we're putting out capital for initial builds, when we're building a new anchor system, of about 6% to 7%, and that pricing has held over a long period of time. We'll build out the system. We'll have 1 tenant on the system day 1. And then as we lease-up the system, we move from -- with the second tenant, we move into the low double-digit range with that second tenant and then can get into the high teens with -- if we're able to add a third tenant. What we've underwritten, in terms of the investments and as we think about it, is we think about it just purely in a 4G environment. So we've not underwritten that the world is going to go to 5G. We've underwritten it assuming basically the networks get to kind of 4G density, and that would suggest that we add one tenant across the investments that we're making. And that drives us into yields on invested capital in the low double-digit range, with the opportunity -- and this is really key to the investment, with the opportunity to see really outsized returns. And we talked about that some on the earnings call, the asymmetric risk that we have in front of us. So we're certainly, at 6% to 7% initial yields, below the cost of our capital and the appropriate cost of capital for that business, at the same time, once we add one more tenant or above the cost of capital, starting to show really attractive returns to the equity holder. But the opportunity here over a long period of time, as the networks densify from 4G into 5G, I think we have the opportunity not only to see what we've seen in the tower business of returns exceeding the cost of capital but really outsized returns. And so the risk/reward here, the asymmetric outcome of significantly higher possible benefit versus relatively low downside risk, we think, has positioned the company really well and makes a lot of sense around the way we've invested capital thus far. I think we're going to see this play out really well over the next couple of decades. Early days of infrastructure investment. This is a steady growth business where we're looking to add revenues and grow the margins incrementally over a long period of time. And as we add incremental revenues and incremental margin consistently over a long period of time, that's how ultimately we drive great returns in this business. And that's what we're focused on, consistently delivering good execution, good performance, adding tenants to the towers, and that grows our margins and thereby grows our yield on the invested capital.

So on your second quarter call, you stated that the total number of small cell nodes in the U.S. could grow from about 200,000 today to over 1 million by 2024. That would be about a 30% CAGR. Well I got to turn my lights back on in this virtual world though right here. [indiscernible] You currently have 70,000 small cells on air under development. So that's about 1/3 of the -- of all the small cells that are in the U.S. right now once they're fully on the air. So if I just extrapolate all that and your outlook proves accurate, you could be operating over 350,000 cell sites within about -- small cell sites within about 5 years. And so the question that we've got is, what are some of the foundational assumptions that you have made to have such an optimistic outlook? And maybe a better way of asking is, what do you think might be a few of the points of inflection that we should be looking for to signal that we are going to start approaching that rate of growth?

Sure. Well we -- we're not assuming over time that we're going to hold the same market share that we have historically. In fact, we think the total addressable market is going to be so large that we will not be -- we would expect over time kind of our market share across the entire U.S. to decline. We're really focused around making sure the investments that we make are made in the markets that we think have the highest probability of returns to clear reasonable returns against the appropriate cost of capital. And that has meant that over time, we've focused our capital in kind of the top 30 markets in the U.S. We think those markets have the best probability and likelihood of investment. That's with the way it's followed from the tower business over the long period of time. And as we think about what's going to happen in 5G with data growth around the consumers and the density of that population in those top 30 markets, it's the most likely place where small cells are going to be needed. And so we focused our investment dollars around that. So what I think you'll see develop over the coming years is I think you'll see a significant number of additional small cells being deployed nationwide. I think each of the carriers have talked about what that's going to look like in their respective businesses. And the numbers are significant, as we talked about. We could be at a very significant number of small cells across the industry 5 years from now, and we think it even grows from there. And the component -- the part of that business that will be available for us is the portion of those small cells that are occurring in the top 30 markets. And we think there's more than enough demand for us to capture there to meet our underlying assumption of being able to add one additional tenant over the next decade. And if this plays out towards more of the upside in stretch cases, we very well may be well above adding 1 tenant over a 10-year period of time. The macro environment for that, as people have laid out the number of small cells coming, and therefore, the addressable market for us is plenty for us to be able to drive good returns for the shareholder.

You noted that based on this growth outlook, you would expect to see more solutions being made available. One of the sources of competition you already have is your customers. Some of them do this themselves. Can you help us get a little more of an update in terms of what that dynamic is like and give us a good example of when you win versus when one of your tenants decides they might just handle it in-house?

Sure. I think you'll see over time that carriers are going to continue to self-perform. There are going to be a number of markets that certainly we don't have an interest in building fiber in. And so they obviously are going to need small cells well beyond the top 30 markets, top 50 markets, top 100 markets, and those are likely not to be places where we're going to be interested in putting capital. So they will self-perform, build their own fiber or find another third party to build fiber for them. And so I think they will continue to self-perform. What we have seen historically in the business is that in the places where we have fiber and have an asset available for the carriers, we win a very, very high percentage of the RFPs in those markets and market areas. It's also true that just like the tower business, we have a significant fiber footprint. We're headquartered here in Houston. We have significant fiber footprint here in Houston. But we don't cover the entire market just like our towers don't cover the entire market. So there are places in Houston where the carriers will self-perform, where they'll find another third party. But in the places where we've actually built fiber and built small cell systems, I think our win rate is going to be very high for being able to capture the opportunity of small cells on that. And the reason for that is just like towers, this is the low-cost provision of the solution for the carriers. So if they're deploying network, we can deliver to them a solution that costs them less than half of what it would cost them to build it themselves. So to the extent that there is a provided solution for them and we can get them on air in a reasonable period of time, I think what you'll see is that they will -- just like they have done in the tower business, you'll see them choose that colocation model because it's a much lower cost. And that's really the heart of the business, whether we're talking about towers or small cells, it's being able to provide them a shared model that lowers their costs. And to the extent that we can do that well then I think it captures opportunity. But at the same time, we certainly don't have any desire to build every mile of fiber that's going to be needed to be built for small cells. So we'll pick our spots, be disciplined, making sure we're getting the right returns for the investment of the capital, and send those investments through the same rigorous process we send all of our investments through, and then we'll pick our spots where it makes sense to put our capital in because we think we'll drive good long-term returns.

I want to move on and talk about your fiber business. Your outlook is for about 3% organic growth this year, similar to last year. A question we've gotten is, how has COVID impacted that, if at all, because we keep hearing about an acceleration of enterprise IT architecture? Are you actually seeing any pull forward of demand? Or are there operational challenges that have actually caused things to slow down a little bit?

Yes. There are some pluses and minuses from COVID. As we've talked about on the earnings call, we've been pleased that the business has continued to perform as we expected going into the year. So it's been largely unaffected when we look at the financial results. Certainly, I think connectivity becomes really critical in the current environment and has caused companies to start to really think about redundancy and the quality of the connection that they have. So that's a plus for us. There've also been some cases where, as a result of COVID, access has been limited to some facilities where it's delayed the start of new revenues for us. But net-net, the combination of those 2 things got us right back to where we expected when we got into the -- into calendar year 2020. And our team has just been remarkable. To watch how our team has managed through COVID to continue to deliver for our customers a terrific result and couldn't be more proud of the work that they've done in a very challenging and difficult environment of implementing these safety protocols and making sure that we're continuing to deliver for the customer. We like the business. Obviously, it's done well. And we think there's opportunity to continue to grow that business. We think that the right level for folks to model is to assume that we're going to continue to grow at about 3% per annum. And we're working hard to see if we can do better than that. But I think that's the right assumption for now for that business.

I'm interested in hearing your thoughts about the degree of synergy between the fiber business and the small cell business. In other words, how frequently are you providing small cell infrastructure over fiber that was originally deployed for enterprises and vice versa? And when you're looking at a new enterprise opportunity or a new small cell opportunity, how much does your decision to pursue that factor into whether there's lease-up on the other side of the house?

Yes. We're in the small cell business and own fiber as a result of what we believe is going to happen from the wireless carriers and their need for small cells over a long period of time. So the driver of growth, the driver of returns, we think, is going to come from the wireless carriers as they invest in small cells. That's why we're in the business. So all of our evaluations for $1 of capital invested for enterprise fiber would be based on our view of what we think is going to happen around the wireless networks. Obviously, we've done a number of acquisitions over the years, most recently about 3 years ago in the form of Lightower. And we talked about one of those markets, Philadelphia, where we originally entered that market with enterprise fiber, and there were no small cells on that fiber. And we've been able to increase the returns in that market over time by the addition of small cells across that fiber. So in essence, what happens is that enterprise fiber solutions or customers become an opportunity for us to increase the yield on the asset. I think back to years ago, when I was on the development side of the house in our company and working on acquisitions, when we acquired some of our early towers back in the 1999/2000 time frame, there were tower portfolios that we bought where narrowband -- imagine this in this day, pagers were the preponderance of revenue on those assets. Well today, the vast majority of the revenue is coming from the wireless carriers. And we think about other applications, other drivers or needs for towers, those make up less than 10% of our total revenue, but they certainly add to and increase the yield on the asset. As we think about enterprise fiber solutions, the reason why we're in the business and what we think the driver is for long-term growth and value creation for shareholders, that's going to be driven by the wireless carriers and the need for small cells. At the same time, though, we think we can enhance the returns by the other category, if you will, and that is enterprise fiber as we provide fiber solutions using the same pipes that are running down dense metro urban areas. And those areas -- those kind of solutions can drive yield on the invested capital. So the combination of what the wireless carriers are going to need, that fiber pore with small cells as well as us being able to supplement that with enterprise revenue, we think, together, that makes the asset stronger and certainly makes the returns better to the shareholder.

You made an interesting point about growing tenancy. So when we think about and pivoting back to your tower business now, when we think about your tenant opportunity, you have 3 national facilities-based providers that drive the bulk of your revenue right now. And as you noted, DISH is positioned to emerge as potentially a fourth nationwide tenant, which is great for your business. You've also created a partnership with Vapor IO. So you're getting a little bit of early insight into edge computing. And I'm curious for your thoughts, if we were to look out maybe 10 years from now, well into the 5G cycle, do you think you're going to have even more tenants for your tower-based real estate, meaning that it's not just going to be 3 or 4 that have equipment strapped to the pole but maybe additional tenants who might be taking advantage of the lands and the connectivity at the bottom?

Here's what I think. I think if we go out 10 years, I think we're going to see a lot more demand and data traffic than what we see today. And I think the source of that will be twofold. One is I think we, as consumers, will use the devices often referred to Internet of Things. We'll have so many connected devices that are creating demands on the network that, that's going to increase the amount of demand on the network and data traffic. I think there will also be a significant increase in industrial applications as the speed of 5G delivers nearly instantaneous performance in the network and virtually no latency. So I think it's going to create a lot of industrial applications that are going to also increase data traffic. The combination of both consumer and industrial demands on the network, I think, are going to create a tailwind for our business for a very, very long period of time. So I think a decade from now, we're going to look back and see the combination of towers and small cells that the tenancy or the revenues on those assets are going to be significantly above where we are today. When you circle back to kind of the heart of your question of, okay, who are the logos that drive that demand, I think that's really hard to determine at this point. It could come in the form of the existing carriers with DISH, building out the networks. And then over time, they provide as a service to a number of different parties who are going to want access to wireless networks that are not today really kind of a part of wireless networks. So it could come in that form. It could also come in the form of the 4, the big 3 plus DISH, deploying nationwide networks. And then we do see new entrants who build out in select areas. They build out new networks. I think from a Crown standpoint, either one of those is great for us. And so I would tend to look more towards what is the ultimate data traffic going to look like, how much spectrum is out there to be deployed and then does the capital exist to really drive those business models. And I think what wireless has shown over the last 20-plus years is that connectivity is absolutely crucial, that mobility is critical to the way people think about using connectivity. And then the last element, which I think as we move into the industrial usage, wireless can reduce costs in businesses. And so the combination of those 3 things, I think, are going to drive significant amounts of data traffic in the years to come. And that cost reduction -- an opportunity of cost reduction in the industrial space, I think, adds a whole new element to 5G that frankly was not present in 1G through 4G.

I've got time to squeeze in one more question here. I'm going to go to the balance sheet. Your net debt-to-EBITDA as of the most recent quarter was about 5.6 turns. That's above your target of 5. But as you've noted, based on your outlook for improved leasing activity, you see a glide path to organically delever back to your target. And the whole point of that is it would seem like you wouldn't need to have to issue any equity right now in order to reach your desired leverage. So just looking ahead and thinking about the organic growth opportunity on your tower assets, the opportunity to continue deploying capital in your fiber and small cell businesses and just the low cost of capital environment we're in right now, how do you think about the funding mix for the company going forward?

Yes. Well a couple of things. One is we've been committed to maintaining our investment-grade credit rating. We think that's really important for maintaining a low cost of capital over a long period of time. And we think we can do that -- continue to do that, as we've mentioned. We don't think we have any need of equity in 2020. We think we can fund our deployment plans and our CapEx commitments without accessing the equity markets this year. I just said the same thing.

It could happen to you.

And so we can fund this year without any need of equity. And as we go forward, obviously, we're aiming to do everything we can do with the growth in EBITDA and in the leverage capacity that's created there to use that as our primary funding source. So we'll have to see as the years come ahead. But critical to kind of that evaluation of maintaining our investment-grade credit rating is evaluating -- properly evaluating the capital investments that we're making and ensuring that if we are at the point where we're deciding to issue another $1 of debt or, frankly, another $1 of equity, if it got to that point, we got to make sure that the returns are appropriate associated with any investment that we make in capital. And I think we have a long track record of making sure that we're thoughtful, rigorous in our evaluation of that and ensuring that every $1 of capital that we outlay is -- we believe, will deliver long-term returns to the shareholders. We talked about kind of the -- we talked about earlier in the conversation our desire to grow the dividend 7% to 8% per annum. And I think about our role as allocators of capital, we're trying to ensure that we're increasing and growing the dividend for decades to come and not just a few years to come. So our 7% to 8% is our target. And as we're running the business, we're thinking about ensuring that we're able to grow the dividend for decades to come. And so maintaining that investment-grade balance sheet is important to us. And then also I would combine that with the way we think about capital allocation and ensuring the investments that we're making are delivering appropriate returns.

All right, Jay, well listen, thanks so much for being here with us in this virtual format. And we certainly look forward to hopefully having you back in real-life at the Conrad next year for Communacopia in its 30th year. Thanks so much.

Great. Thanks, Brett. Thanks for having me. Talk soon.