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

This is the Global TMT Conference. I'm Batya Levi with the communications infrastructure team at UBS. Our next presenter is Dan Schlanger, Chief Financial Officer of Crown Castle. Dan, thank you so much for being with us.

Yes. Thanks for having me, Batya. It's great to be here.

Thank you. I thought that maybe we could start off with a quick overview of the strategic focus for the company as we head into '21.

Yes. Our strategic focus doesn't really change from year-to-year. So whether it's '21 or '20 or '22 or whatever it is, what we're trying to do is to get more customers on our existing assets and then build more assets that we can co-locate in the future. Our strategy is to focus on the best wireless communications infrastructure market in the world, which is the U.S., and own the right assets in the right markets that will allow us to provide value to our customers and generate returns for our shareholders. And the way we do that is we invest in really long-term assets, towers and small cells and fiber to be specific, that, over time, we can get more customers to lease up. And the value that we provide in order to get that to happen is we lower the overall cost of implementation in operation for any 1 customer by sharing the costs over multiple customers. So we provide a significant value to our customers, and we provide significant returns to our shareholders because as that lease-up happens, we can generate returns that exceed our cost of capital. And our goal, as we look into 2021, is to continue to provide that value in that return generation profile to the extent that we can. And what's exciting about our business and why we think it's so well positioned for both 2021 and then longer term is that we have an underlying demand driver that we think is very beneficial to the business, that being that wireless data demand in the U.S. is growing at 30% to 40% per year. And as long as that continues to grow, our customers, the Big Three, and soon to be Big 4, carriers in the U.S., need to spend money on infrastructure to deploy more spectrum to meet that demand. So we have an underlying secular growth trend that is really positive and allows us to do exactly what I said, is add more customers, add more equipment to our existing assets would drive significant value for our shareholders.

Okay. Great. And maybe let's start with the outlook you already provided for '21. You -- looking at -- specifically for your tower business, you expect a similar level of activity to continue. Can you maybe dig in a little bit more and talk about the drivers of that growth for next year?

Sure. As you mentioned, we're excited about next year. The tower business, which is the majority of our business, both in terms of revenue and value, is going from what we expect will be in the neighborhood of 5% revenue growth in 2020, growing to 6% revenue growth in 2021. That's pretty significant for our business. We have a pretty sizable tower business, and it's really stable. And to increase growth by 100 basis points year-over-year means that several things are happening. And the first is that we're seeing activity levels increase as we go into 2021. So the new leasing activity that is on our towers is increasing going into '21 over 2020. And the second thing that's happening is we think that the churn associated with our business, in the tower business, is going down. And that's because several years ago, in the early 2010s, there was consolidation in the wireless industry, and we saw the last of that consolidation, what we would call a higher network churn, hit our towers late in 2019. So it had a spillover effect into 2020, and that spillover effect is gone going into 2021. So the churn will come down. So the increment of adding both incremental or additional new leasing activity and reducing the churn gets to that 100 basis points of incremental growth on our tower business. And we're excited about that not only on the face of it just being good, is that we believe we're on the precipice of more activity and significant spending to meet the 5G demand that we and our carrier customers see coming. And as they invest in 5G to make it a reality for consumers, that will mean more equipment on our already existing assets, and more assets will build on the small cell side to meet that demand. And we don't think that there -- that we've really met or we've been faced yet with the true activity increase that 5G will create, which means that our 6% growth going into 2021 is even more positive because it may not reflect all of the activity that could come should 5G investments happen in significant greater levels than what we would expect in 2021. And that may be in 2022 or even beyond, but we think that it sets us up for what we think is a potentially a decade-long growth profile for our business that we have access to both in our tower and small cell business, which is unique in the industry.

Yes. And in terms of that pickup in the activity. I know you don't talk generally -- specifically about your carrier activity, but more in a general sense. T-Mobile, what we hear is that they're spending, accelerating the build-out of the 2.5. Have you already started to see a pickup from the T-Mobile activity? And what is your expectation in terms of that pacing of activity into next year?

Yes. Not going to specifically talk about T-Mobile, they've asked us not to and recently talked publicly about us not -- them not wanting us to. So broadened out a little bit, we would say that we anticipated the second half of 2020 to be better than the first half of 2020, and that was because of the T-Mobile merger. We -- and when we gave guidance at the end of '19 for 2020, we had an assumption that the T-Mobile and mergers -- Sprint merger would occur at the end of the first quarter, which it did, but then we had an underlying assumption that activity levels would ramp very quickly thereafter. And that didn't happen as fast as we expected, and I'm not speaking at all to how T-Mobile expected it to happen. And therefore, the ramp through 2020 was less exaggerated than what we had expected. And we believe that some of that activity will be pushed back into 2021, which is why we see some growth in new leasing activity in 2021 over 2020. And that also includes not only T-Mobile, but across the board, we see good activity levels and feel good about that increasing level of growth going into 2021 across our business. The other 1 area we will be a little bit more specific on -- as I said, we don't like to talk about customers. It's more up to them to talk about their plans. But DISH has also been very open about things, about not receiving equipment for their build-out of their 5G network until late into next year or at least the second half. So in our outlook, we've assumed a limited amount of incremental activity from DISH going into 2021, but not that much, just given the timing of whatever and how everything is playing out.

Okay. That's helpful. And maybe just going back to T-Mobile. Because the decommissioning activity is such a big part of the overall network deployment. I believe this -- your exposure to those overlapping sites are still under contracts that will not come up for another 2 to 3 years. But there is some small renewal potential coming from Sprint, within that $30 million to $35 million range over the next few years. Any indication if that will start to maybe -- churn off starting in '21?

Yes. We have some spread churn associated with -- in our '21 outlook. We think that -- T-Mobile has been a very good operator, a very good integrator of assets, and they will look to provide synergies to the extent possible, and we think they will get some from towers, although maybe not the predominance of their -- preponderance of their other synergies may not come from towers, but they will have some. Like you mentioned, we have, on average, 5 years left of the term for the historical Sprint sites. That was done purposefully. We renegotiated both our T-Mobile and Sprint agreements a few years ago because we thought that if they were to come together, we would want more time in between that merger and when the agreements would term or come to a term because we thought that giving that time would release some of the pressure that we would feel to renegotiate a transaction when there was a churn event that was really close to us. The first charter that we have is we have some Sprint of any significance. We have some Sprint sites that will churn in 2023, but that's still 3 years from now, which is a long time in our business. There's a tremendous amount of wireless demand growth that will happen over 3 years, and we think that we'll have lots of demand from T-Mobile and the rest of our carrier customers to put more antennas on more towers to meet their end-user demand. And as long as that's happening, it's just the core value of the tower business, like I was talking about at the beginning and the answer to your first question, that we provide value by lowering their cost and allowing them to get on to towers that already exist to meet demand that's happening. We think that we'll still continue to provide that value, and that will be really beneficial for us. And then the question is, how much does that -- how does that compare to what the potential churn would be and whether T-Mobile can meet all of its goals for its network and the quality of its network within net of those 2 things. And we think there's a lot of reason to believe that the new growth will more than offset the churn, and it will be positive for us over time. So we'll continue to have good conversation with T-Mobile and see how it all plays out.

Okay. Yes, that's great. In terms of the churn, is it -- is there a thinking that it's mostly going to be the rationalization of overlapping sites where they have equipment both from Sprint and T-Mobile angle? Or is there any indication that they will also take a look at the sort of the proximity churn where they no longer need to have 2 different sites that close to each other?

Yes. I would leave it up to them to talk about how they're going to tackle their synergies as opposed to us. So we think that, like I said, we think we have good towers in the right markets. And for any of our customers to be able to meet their end users, they need to go over a lot of our towers, and we think that we're well positioned to have all of the conversations around what you're talking about with T-Mobile and every other customer of where they need sites, where are there holes in their network, how do they compete effectively for subscribers. And we think we're an integral part of any network architecture going forward.

Okay. Maybe sort of looking at it from a new activity perspective. As the carriers are deploying more mid-band spectrum, which still very good propagation, but not as good as lower frequency, are you also seeing maybe more demand for densification and more of a -- more cell splitting than before? Generally speaking, from -- not specifically to T-Mobile, but just generally from the U.S. carriers?

The answer to that is yes. That has been a trend in the wireless market for a very long time now. Back when the wireless market started, it was most beneficial to be on a very tall tower, 300-foot tower, put low frequency on that and put as much power behind it as possible to send the signal as far as possible. That doesn't work anymore because there's so much demand that even though the waves can reach out a couple of miles or more, there are too many people with too much demand within there that you'll have coverage, but you won't have any capacity. So you could see that as a user of that service, if you look at your phone, you would see 4 or 5 bars because you see a cell site, but then you try to go connect to some sort of data, and you'd get a spinning wheel because you wouldn't have any actual capacity to meet your data demand. And therefore, that cell splitting began 15 years ago, and it's just accelerated over time. And it is not just the waves and the frequencies that made that acceleration occur, it's the profile of the demand. As we have more urban areas and more people in those urban areas demanding more and more data, growing at 30% to 40% a year means you double every 2.5 years or so. That means that over the next 2.5 years, we will have more incremental data usage than we have total data usage today. And if you think about how that has to evolve in the network architecture, density is required regardless of the frequency bands. The frequency bands just add to the issue because as you pointed out, as we get into higher frequency bands, they travel less far, which means you just have to have sites that are closer together. So you have both a demand and a physical property characteristics adding to the requirements desktop. And this is -- as we think about our business, this is the core of why we got into the small cell business. We looked at towers and know that they are going to be necessary for network architecture going forward. But we also understood that they weren't sufficient for all network architecture. Because of this requirement to densify, you need to get closer and closer to the customer, and the logical extension of that is to do so with small cells. And that is why we are so bullish on small cells, is that we think it is required to deliver the type of performance that consumers have come to expect and even more required when you start thinking about the benefits that will come with 5G. And we -- the reason that we're so excited about the future and the long-term growth trends for our business is that we think that towers will continue to be utilized and small cells will grow substantially in order to meet that densification requirement, in order to meet the expectations consumer has had. And it's exactly why we think the small cell business is as good as it is and why we continue to invest as heavily as we do again.

As you look at your overall capabilities holistically, the tower business and the small cell business, and it -- in many cases, it's the same customer that requesting both of those services. Is there a point where it does make sense to bring all of that under 1 holistic agreement? And how would you approach a decision-making like that?

We follow our customers basically. If they want an agreement to cover everything, then we would be interested in having that agreement cover everything. Even though they are the same customers and even though they're many times the same buying individuals and their customers, I still think that small cells and towers are a bit different in how they are negotiated. We typically talk about towers as a nationwide-type of deployment and small cells much more localized, so I'm not sure that we will get to the point where they become 1 agreement. But if our customers want them to, we're happy to. We're not going to trade value between the 2, whether it's 1 agreement or 2 agreements or 3 agreements. We're going to make sure each 1 stands on its own merit. But as you saw in the agreement that we had with DISH, that agreement actually included some fiber transportation services we are going to provide to DISH, which we think was a differentiator in that negotiation and why we were the first and still only tower company to reach an agreement with DISH, is partly because we were able to incorporate fiber transportation into that transaction because it meant that we had the type of capabilities they need to develop a 5G network. And the ability to go to 1 counterparty, I think, was attractive to them. So it really depends on the state of our customers, how they want that -- those agreements to look and how they want to negotiate more than what we want because what we have found is that even if it doesn't result in the same agreement, having a conversation with our customers around what solutions we can provide to their network concerns is a lot better than just going and saying, "Hey, we have a tower here if you want." And that, I think, is just beneficial regardless of how the agreements actually get papered.

Right. And maybe going to that agreement. If you could talk a little bit about how that deal came through. And very little information is available right now, but is that because it will evolve as DISH solidifies its plans to full network deployment? Or is it you already have a good sense, it's just not being made public? And as the deal has more components to it, just the tower business, just generally speaking, how should we think about the revenue opportunity versus -- as it compares to your traditional carriers? I think we have a little bit of a connection problem. I think we lost Dan's connection, so let's just give it a little bit of time. [Technical Difficulty]

Sorry, Batya.

No problem. Is it the DISH question that made you run away?

Yes. Exactly. I hung up on DISH. No, I'm really sorry, Batya. It's unfortunate that it happened on such a good question.

Yes. Okay. Glad to have you back.

I'm sorry.

So wanted to get everything you can say about DISH.

Okay. I can do that. Again, I apologize.

No problem.

So on DISH, it's something that we're excited about. Like I mentioned a second ago -- or no, longer because of the kind of outbreak, but we are the first and still only tower company to announce the agreement with DISH, and we think that's important. One, they've talked about us being an anchor infrastructure provider for their 5G network nationwide; two, we believe that we have positioned ourselves as well as possible to try to get more than our fair share. But because they see us as an anchor portion of their infrastructure build, but also just given the size and scope of our tower business being 40,000 towers, we have a lot to offer. And the fact that those towers are predominantly in the top markets in the U.S. So 70% of our towers are in the top 100 markets in the U.S. And given all of that, we think we've positioned ourselves really well to take a good share of the initial build from DISH. And also, as we pointed out in an 8-K that we filed after we announced the agreement, DISH's -- the agreement has some minimum contracted payments that DISH is required to pay regardless of how many tower sites they ultimately go on. And that means if they go on 20 sites or 20,000 sites, there's a minimum contracted payment they owe us. And that means that it is more efficient for them to go on as many sites as possible than it is to go on as few because they're going to amortize that payment over more sites and make it more economical. So we think that with all of those characteristics, we are well positioned to take a good share of what DISH will build out in their first nationwide -- or the first portion of their nationwide build and why that, ultimately, that agreement was for up to 20,000, which is higher than what DISH had talked about historically of needing 15,000 sites to meet their 2023 requirements, is it -- we think that we actually are in a really good position to take a lot of this.

Okay. So you -- I guess if we look at their requirements, their '23 or '25 requirements, in order to meet that kind of presence in major metro areas, would your tower portfolio satisfy a significant portion of that? Or would there -- some business be going over to the other tower companies as well, in your view?

Again, it's better for DISH to talk about that, but I don't think that we would assume we get 100% market share from DISH. I think towers are really good assets in part because they have a very specific and valuable use in the world. So when you talk about a network that is already existing, like the ones that Verizon, T-Mobile or AT&T are operating, when that happens, what they look at for in a tower is they have a hole in their network, they have a place where their network isn't meeting the requirements of their users and they want to fill that hole with new spectrum or additional antennas to drive the same spectrum, kind of the cell splitting we were talking about earlier. And when the tower there is owned by Crown Castle, they'll use the 1 owned by Crown Castle. If that tower that fills that hole is owned by American Tower, then they'll use the 1 owned by American Tower. That's part of why the business is so good, it's because there's limited overlap in those cases, and we each have very good assets.

Right.

What's different about DISH, though, is they don't have that. They're starting from scratch. They're starting from -- they look at a market and they say, "In this market, we want to cover this many people. How do we do that?" And they can filter what they want based on any criteria they choose. And I have no idea how they're going to do that. That's really up to them to decide. But it gives them more flexibility to utilize whatever it is they're filtering criteria is. So if they want only 50-foot towers, they'll filter on 50-foot towers. They want only monopoles, they'll build on monopoles, predominantly or at least first. Or if they want only Crown Castle sites, they'll be on only Crown Castle sites. And they have more of that flexibility. So what we are trying to do is recognize that differential, understand the scope of what they're trying to build and give them the most flexibility that they could have while incentivizing them to use Crown Castle towers over and above anybody else's, and we think we've done that.

Okay. And similar to what you mentioned that was in the 8-K in terms of the minimum revenue. Does the deal also have specific terms in terms of escalator? Or what were -- sort of like we used to track for traditional carriers. In that sense, is it a similar deal?

Yes. The short answer there is yes. And if you look at that 8-K that we said -- that we actually said, the terms of the deal are similar and consistent with other tower deals. So escalators terms and the minimum payment that we went on and we have negotiated has something to do with -- there's a limited amount of rights they get on those assets as well. So it's not an unlimited amount that they can access on the towers, it's a limited amount of macro rights for a payment going forward. How all that works, I can't get into because it's the specifics of the financial side of a deal, but we understand what the value is of our asset given our 25-year operating history. And we believe we've priced the rights they get appropriately. They obviously believe that, too, or they wouldn't have entered into a deal.

That's for sure.

You know how long to coordinate a deal that -- if the other party doesn't agree to. So we both think we got something out of this. I think what they got was certainty and speed and flexibility for how they want to deploy the -- at least the first phase of their 5G network nationwide, that included the fiber that we offered. And what we got was almost the opposite. We got certainty on the other side, that we think that we have incentivized them to go on Crown Castle towers, and we understand what rights we've given them and what price we're going to get for them. So we feel really good about it.

Okay. Great. Maybe moving on to CBRS. The auction concluded in the summer. As you gave your '21 outlook, does that include some incremental activity that will be coming from CBRS deployment? Any indication if -- and if it's going more sort of like indoor or outdoor solutions? Or is it being deployed on macro towers as well?

Yes. We think that CBRS is a very good band. It's still in that mid-band spectrum range, and it has an unlicensed and licensed portion. So companies that don't necessarily license will be able to have access to spectrum. And we think that there will be very good indoor and outdoor use cases. And we've seen those outdoor use cases already. We have customers who have been talking to us about using CBRS outdoors. I think a lot of that will happen on small cells because it will be very targeted. So not necessarily looking for big coverage areas, but looking for where can they augment capacity in very specific areas. But we also think there will be very good indoor use cases as well for exactly the same reason. There could be a campus that wants a private network, and they can use utilize CBRS to provide that, which will be better and more secure coverage than WiFi can provide. And that's -- those are the types of things that we do see on CBRS. We think that it will be both on towers and small cells. Although like I said, it probably will skew a bit towards small cells because it's looking more for capacity than coverage out of that CBRS layer.

Right. And then the next big deployment could be C-Band auction starting today. What is your best guess in terms of when we'll start to see deployment of that spectrum?

We don't have a great guess on that. That depends on who buys it and -- or who wins the licenses and then ultimately, what their plans are for those. And what we can say is we think we have very good assets for whenever -- whoever buys it wants to deploy the C-Band spectrum. As we were talking earlier, it's in that mid-band spectrum range, which means the propagation characteristics are good. They're not as good as the low band. And so we think that towers is a very viable alternative, and small cells are very viable alternatives for C-Band deployments. And we think it will skew in the near term to more urban areas because that's where the congestion is happening on a lot of the networks because that's where the people are. So we -- again, we feel like we've positioned ourselves very well for this next phase of investment because we have towers and small cells that focus on the top markets in the U.S.

Okay. Let's move to the small cell business, small cell and fiber business. Can you talk a little bit about the strategy and how your view of the business has changed since you first entered a few years ago?

The strategy really hasn't changed at all. We want to own high capacity, meaning, lots of strands of fiber in the top markets in the U.S. because we think that's where small cells will be deployed the fastest. And the reason we want to own the fiber is because that's the co-locatable asset, that every small cell node is connected back to the network with 2 strands of dark fiber, and owning that fiber is what allows us to provide a lower cost of implementation and operation because that's where the majority of the capital goes, is in the varying of the fiber. So our strategy has been go where we believe that the customers will be, and we've done that 2 ways, either acquire in those areas or wait until we get an initial build. So we don't build speculatively, just hoping that customers will come. We'll build only when we have a contract, and those have been mostly in the top 25 markets in the U.S. And our strategy has been to put those assets in the right places where we believe co-location will happen the fastest. And then as we do that, the initial return we get is 6% to 7%, which is below our cost of capital. But when we get to a second tenant, the overall returns for that entire system now get into the low double-digits, which is higher than our cost of capital. And we believe that, that happens, we add a tenant over every 10 years, and none of that's really changed. Even though historically, we've been able to add tenants a little faster than that, our anticipation and assumption going forward as we continue to add a tenant over 10 years, which means that over that period, we get overall cost of capital and have a lot of upside from there. Because if 5G is coming, which we believe it is, and millimeter wave will be utilized to deliver the 5G experience, which we believe it will, then the type of demand we see as well in excess of what we would call 2 tenants. An equivalency would be 2 to 3 nodes per mile of fiber as a tenant, so somewhere in the 5 to 6 nodes is 2 tenants. We can see 5 or 6 nodes just on 1 tenant from a millimeter wave deployment because those waves propagate only about 1,000 feet of usability, which means you need about 5 or 6 nodes per mile just to cover. And you add that to the already existing 4G nodes, and we could see 8, 10, 12 nodes per mile in the future, which we think would be, as we know, be significantly above what we've underwritten in terms of the assumptions we use to justify our investments. So our strategy is going to be to continue to invest in those markets, continue to stay close to our customers and continue to develop the capabilities required to build small cells because they're really hard to get done. And if we can do all that, we think we can -- we'll be in a really good spot.

Great. Maybe just thinking about the small -- how the business has ramped over the last few quarters, I would say. About 70,000 nodes, it's either on air or under construction, and that number has been pretty stable for some time. And the question we always get is why isn't that increasing? So can you talk a little bit about that? Is it more competition? Is it more maybe carriers doing it themselves or maybe just sort of like a wait-and-see period and they haven't really come to the stage of densification with small cells yet? What are you seeing it is? And maybe a longer-term target in terms of what your aspiration is in terms of how many small cells you have in your network?

Yes. The amount that we have either under construction or on air is really dictated by the demand from our customers. We have not seen a tremendous change in competition. We still are, by far, the largest third-party provider of small cells in the U.S. We haven't seen our returns change or our winning percentage change very much. We haven't seen a change in the competition. We have seen that some of our customers do want to self-perform, and that does take a fair amount of the -- or has taken a fair amount of the demand over the last several years. But that was always part of our understanding, is that our customers do want to self-perform. Where we add value, like we said, is where we think colocation is going to happen in the near term because then, we can offer a lower price to every 1 of those customers, and they can provide to themselves because we get to share it across multiple end users. And so the question becomes, when are we going to see a significant increase in the investment that our customers are making in the densification in the markets that we're already at? And that's always hard to pinpoint of exactly when our customers are going to prioritize a certain spend in a certain market. That's always been hard for us to predict, but we know it will happen. Because the density needs to happen, the densification needs to happen and because 5G is coming, we know that small cells are going to be important. And so if you ask me 10 years from now, do I think we'll still be at 10,000 -- deploying 10,000 nodes a year, no, I think it's going to be significantly higher than that. A different way to say it is, I think we're going to have a lot more than 100,000 more nodes 10 years from now than we do now on our system. Determining exactly when that inflection point might happen or how big it is, is very difficult for us. We're just really confident it's going to happen, which leads us to why we're so comfortable with the investments we've made because we're looking for, like I said earlier, 2 tenants to make our returns over our cost of capital. We think we can do that and then some with what we've seen coming with 5G.

Okay. Great. We don't have a lot of time left, maybe 1 final one. As you look through your '21 guidance, what do you think the risk could be for that? Last year, maybe T-Mobile activity starting a little later was why things moved slightly. And as you think about the moving parts for this year, is it DISH maybe not getting the equipment or not deploying anything in '21? Is it the small cell or fiber piece? What are your thoughts there?

Yes. One of the beautiful parts about our business is there's not a tremendous amount of volatility. Even in the year where you just said that, "Hey, T-Mobile came slower-than-expected and things didn't work out from an activity perspective like we thought they were going to," we still were within our 7% to 8% AFFO per share growth target and within the -- which is our longer-term target. So even when things don't go well, we still meet kind of the goalpost we've set out there. As we look going into 2021, we believe we will far exceed those -- that 7% to 8% target and get closer to 10% AFFO per share growth. The risk of that are the same risk that we would always have, is the major risk to -- or major drivers of our business are the volume we get, so how much new leasing we get, and the financing costs, so whether interest rates move. So if we get less activity than we expect, obviously, that will be bad. And if the interest rates increase significantly, that will also hurt -- could also hurt our AFFO, although not that much more fixed debt and floating. So there's not a tremendous amount of risk there. I think that always what happens is we're predicting on some level where our customers are going to prioritize their spend, both in terms of are they spending on a network or something else? And within the network, are they spending on towers versus small cells versus fiber versus -- or in what markets, and that's always some sort of -- we have an educated guess on that, but not direct knowledge. And that's where the risk would be, is if they prioritize something over and above that over the course of next year.

Got it. Okay. Awesome. Thank you so much for your time, Dan.

Thanks. And sorry again, Batya.

No, no worries.

[indiscernible]

No problem. Hopefully, we'll have you in person next year.

That will be much easier. I won't cut off then. But thanks. Good luck with the rest of your conference. Thanks for having us.

Thanks so much.