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

Good morning, and welcome to Morgan Stanley's TMT 2021 Day 4. It's my great pleasure to welcome Dan Schlanger from Crown Castle. Welcome, Dan. Thanks for joining us.

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

Right. So before we get started, please note that important disclosures are available on the Morgan Stanley public research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Dan, you gave us guidance way back in the fall for 2021, but it'd be great to just refresh the priorities for Crown Castle for this year?

Sure Simon. Like we said, we give guidance every year in October for the following year. And part of the reason we do that is because our business is relatively predictable over a period of time. And I think that we think that it gives investors a good sense for how the business is going to turn out and what to expect. And in doing so in October, really sets the stage for us to do exactly what you say is prioritize well for what we want to do internally and what we're going to promise to do externally. And like always, our goal is to add more customers to our existing infrastructure. That's kind of the goal every year. We know that the value we bring to our customers, the carriers, mostly is to lower their cost of implementation and operation of wireless infrastructure assets and potentially lower the time to market for them. And we can do that well enough and add enough customers to a single asset, and we're able to generate returns that ultimately go well above our cost of capital. And that's what we're trying to do all the time. But in order to do that, we need to have the right assets in the right places, and we need to have the right customer relationships with the right customers and we think we're doing that by our other goal, which is to continue to invest very well into what is now the highest attractor of our discretionary capital investment, the small cell and fiber business that we've entered into over the last 5 to 10 years. And as we continue to spend capital in order to build assets in the top 30 markets predominantly, we believe we're positioning ourselves for long-term growth in the market and in the U.S. And we're focused very much, almost only on the U.S. because we think it's the best market for wireless infrastructure ownership and it's growing the most over time. So as we add that incremental discretionary capital investment, we think that it's much better for us in the long-term because we have an opportunity and avenue for growth where we think the market is heading, which is to densify the supply of the network, just like the density of demand is growing. So as I said, the real focus for us is to maintain the value we provide to our customers by lowering their cost and lowering their time to market, while generating good returns, which means we just need to have the right assets right places in each of those assets over time.

Great. And I think one feature of the Crown Castle story is you've put out this long-term guidance of 7% to 8% AFFO growth and dividends alongside that. So perhaps give us some of the elements that give you the confidence to have that out there? What are the component parts of that guide?

Yes. It is one of the parts of our story that we think is really attractive. We can look out and say that we have a goal of delivering 7% to 8% dividend per share growth year-over-year. And we put that goal out in 2017. And since 2017, we've met that goal every year and on average, beat it. And as we look going into 2021, our guidance has us growing AFFO per share, which is what we base our dividend off of by 10%. So it's above the high end of that range, and we want to maintain our ability to meet that 7% to 8% goal through multiple market cycles. And the way we've done that is try to deliver the highest risk-adjusted returns we possibly need. One of those ways that we've made that into an operational reality is exactly what I was talking about a second ago, is to focus on the U.S. We believe that the U.S. market is the best market, the U.S. has about 5% of the world's population and 20% of the world's investment in wireless infrastructure and wireless networks. In addition to that, we don't take foreign currency or country or sovereign risk when we are focused on the U.S. as a U.S.-based company, which puts us, we believe, in the position to generate the most growth at the lower amount of risk through anywhere else in the world. The second thing we've done is -- to generate that 7% to 8% growth is to, like I said earlier, put the discretionary capital in places that we believe will, for a long period of time, generate growth. So investing in thin fiber that supports small cells and investing in small cells that we think will be leased up over time, we think we've positioned ourselves uniquely in the U.S. to take advantage of where the market is headed, which is to densify the network even further through the utilization of small cells. And we think that we will get a big portion of that because we are the largest provider -- outsourced provider of small cells in the country. But really underlying what -- how we get very comfortable with our business is the core of our business is our tower business. And that allows us to see very much into the future because it is such a stable growing business. The growth in the tower model is predicated on the wireless demand growth for data in the U.S., which industry estimates predict will be somewhere in the neighborhood of 30% to 40%, which means every 2.5 years or so, we're going to generate more data because we're going to double that demand growth. We're going to generate the same amount of data that is in place today, which means by the time we're done with 2023, we will increase the amount of data by the amount of data that we're showing -- that we're moving across the network today. That's going to take a tremendous amount more investment in the network, which will very much have hit towers, the core of our business. And because of the contract structure with built-in escalators, very low churn we see on the tower business, we have a lot of confidence of what that's going to look like. And as we see in 2021, our initial portion of that, we're just the first year if it, we believe our tower business is going to grow somewhere in the neighborhood of 6% at the revenue line. And that's an acceleration from what we saw in 2020, which was around 5%. And as we look out at what our peers have done, it is a significant premium over what our peers are performing in 2021. And we don't see any reason why we wouldn't be able to continue to perform really well from a tower perspective into the future. So we believe we are short-term and medium-term, very well positioned because how we've made our tower business model including how we've contracted with our customers. Some of that is the mitigation of churn risk through the T-Mobile and Sprint merger. But some of it is just where we have our assets and where we position ourselves with all of our customers, including the recent agreement that we have entered into with DISH, we think gives us significant visibility into the future. It gives us confidence in that 7% to 8% growth. And then like I said, you have that kind of short and medium-term confidence in our ability to perform with the long-term that we've set up that we are uniquely positioned through our small cell business to take advantage of where the market is headed. We think we're just in the best position across the entirety of our business. And it's manifesting itself in that 7% to 8% growth rate that we think we can meet through a variety of market cycles.

Great. And as you mentioned, the tower business continues to perform well. But I get the sense from earnings season others that there's a real hope that there'll be an acceleration as DISH gets delivery of their equipment as the C-Band starts to become a reality. So is that your sense that leasing for the towers accelerates through the year and that we set up for an even better 2022?

Yes. I think without getting in '22 guidance, I think what we see is that for all the reasons you said, there's good momentum in the tower business. And what makes us so excited that we're performing it right now at 6% growth in '21, according to our outlook, is that we really haven't seen a tremendous uptick in investment in 5G spending or in the 5G infrastructure. And we believe we are at the very early stages of a potentially decade-long investment cycle by our customers to improve the network and ultimately deliver a 5G experience. And that includes what you're talking about as DISH has been very public with, building a 5G nationwide network from scratch, and we think our agreement with DISH positions us to get more than our fair share of that build-out in the near term. And they've been very open about not -- DISH has been very open about not getting some equipment they need until later into 2021, the back half of '21, which means it really won't impact leasing for us until back half of '21 and into '22. And the agreement that we have with them will -- although it has a minimum payment that is guaranteed, there's a -- the amount of revenue that we generate will be dictated by how much activity they put on to our towers. So we do think that, that will accelerate over time. And we do think that C-Band along with all the rest of the spectrum that our carriers own, will be deployed and that's what gives us so much confidence in that long-term 7% to 8% growth rate is that there's a lot of activity that's coming, and it's going to end up on towers and small cells, which is exactly what we wanted to do.

And on the C-band, there is some thought that the carriers may engage with Intelsat and SES to see if there's a path to accelerate beyond the FCC clearing deadlines. Do you have any color on that? And perhaps on C-Band densification given that if you put it on the existing carrier grids, you're not really going to have ubiquitous coverage? Is there a sense that there's an additional opportunity either for more cell sites for each carrier and/or small cell activity?

Yes. I'll let the carrier speak to how they're going to clear that spectrum. But what we see is, as you are pointing out, C-Band overall is really good for us and good for the industry and our business specifically. Any time that our customers have access to large amounts of spectrum and are competing on network quality with each other, and have a consumer base that has access to handsets that allow them to utilize that spectrum. That mix of characteristics in the environment is very good for towers and very good for wireless infrastructure. What's even -- what's a little different about C-Band is because it is a higher bandwidth than has traditionally been deployed, it goes a shorter distance. The propagation characteristics are shorter, which means, as we pointed out, we either need more -- I guess, the ultimate answer is we need more site to cover the same area. And that's going to -- we believe we'll start with going on to towers because towers are still the most efficient way to deploy new spectrum or any type of spectrum because they can cover a larger area. But ultimately, we do believe that the deployment of C-Band will end up on small cells and towers together. And because of our unique exposure to small cells, we're somewhat agnostic between those 2. And I can't tell you when the flip will happen between starting with towers because it's most efficient and ending up with some small cells because it's required to get to the coverage and capacity that we need for the network and for 5G in specific. I'm not sure when that happens, but any case of that is really positive for us because we're a tower and small cell provider, and we believe that we have the right assets in the right markets to provide that to our customers while giving them, like I said before, lower cost, faster speed to market and be able to compete better with their competition for the ultimate end user, the consumer. And yes, we see all of that as positive momentum for us. But it's not just C-Band. It's beyond that. For us, we're less focused on the band specifically. And we're more focused on how are we going to help our customers meet the overall growth and demand that they're trying to withstand and to supply. And that's why we're so excited is that the underlying growth drivers for our business are very constant.

Great. You touched on the Sprint churn a moment ago. You had extended your contracts with Sprint a number of years ago. So you don't really have any size maturities for 2023. How do you think about managing that? Is that something you're going to explore a master lease agreement? Or is that something that you'll deal with as it comes due?

It really depends on the conversations that we're going to have with T-Mobile. And as you pointed out, one of the things we did proactively was to extend some of the contracts we had with Sprint and T-Mobile before the merger happened so that we could give ourselves and T-Mobile time between the closing of the merger and when we had some churn to figure out where they were going to go, what type of network they want to build, how fast they want to go, what bands they want to deploy, how much they want to use towers, how much they want to small cells. And have those conversations with T-Mobile so that we can help be a partner to them to give them the best network possible. And whether those conversations happen and results in a master lease agreement that changes the timing of the churn or not is really the 2 of us sitting down and coming up with what is important for each of us and whether a new agreement would meet those goals. But we are both very sophisticated companies who have done this a lot before. So we would have -- both have to have some benefit for entering into a new master lease agreement. And we have been able to do that many times in the past with T-Mobile. I have no reason to believe that we wouldn't be able to get to something like that. But if we were, then we would let it run as business as usual under the current agreements we have. And we would be okay with that too because ultimately we believe that the combination of Sprint and T-Mobile was positive for the industry. That Sprint having a lot of spectrum that could be deployed and T-Mobile coming together and having a bigger network on which to deploy it, we think over time, as they have pointed out, they're going to spend more as a combined company than they would have as separate entities, which means, ultimately, we're going to see more activity on our towers and small cells than we would have otherwise. And yes, that churn has some offset to it, but it's not going to offset the -- all of that growth. That growth is going to happen, like we were talking about earlier, take -- get -- make up for the 30% to 40% demand growth and any 5G use case that's coming, and we just see that as such a huge opportunity that we're excited about where we sit. And like I said, that -- how that churn plays out will be a conversation that we have with T-Mobile, and it may stay exactly as it is or we may change the timing or smooth it out or bring it forward, or however, we all come together to figure out what a win-win solution is for us because without a win-win solution, we're just not going to come to the agreement.

That makes sense. So maybe we can pivot to the small cell business. You've provided us some additional disclosure. I think a topic that we get a lot is still investors trying to understand the lease-up potential and the longer-term growth and your ability to really scale with second tenants to densify and get those double-digit returns. So help us understand where we are today? And what you're seeing? You've obviously, as you referenced earlier, just got another big order boosting your backlog. So that's nice to see.

Yes. As you pointed out, what we've seen is each of our customers are interested in utilizing small cells because they, like we, understand that the amount of data that is going to be demanded in the U.S. is going to require more cell sites than just towers can provide. Towers can't get too close together, both because of canceling each other out because they interfere with each other, but also because there's municipal regulations that dictate how close together they can be and how many more towers we can build in market. And that just won't be enough for the amount of demand that we all see coming as an industry, which means small cells will be required. And what we've seen is as long as a company sees some sort of value in a small cell in a specific part of the market, then they have improved their network in that part of the market, which attracts the other carriers to come in and look to see if they want to also improve their network there. And that leads to some co-location. And we believe once we've built out through most of the top markets in the U.S. -- we're focused in the top 30 markets in the U.S. for our small cell business. And once we've built out a lot of those markets with a lot of fiber, then almost everything becomes co-location. And at some point, the logical conclusion of that is if we have fiber in every market and every -- under every street, and everything is co-location, the question is when do we get there? And what we're seeing is an increase in activity around co-location because even a number of co-located nodes being in the neighborhood of 30% for 2021 out of our about 10,000, the 3,000 co-located nodes, that's a fair number of just quantum of co-located nodes. It's just that we're also getting a quantum of total nodes that's increasing over time. So the percentage may not change, but the number of co-locations will, and we'll either see that or the percentage of co-locations change at the same time, depending on where our customers want to go. And what we have a hard time trying to predict is whether our customers want to be where we already have fiber and small cells or whether they want to be in a more greenfield area of the market. And we're going to have a hard time figuring that out exactly. But what we do know is that whenever we build, we focus very much on ensuring that there is going to be co-location opportunity very quickly in that market where we have built. And that is -- that's what dictates where we're willing to spend money or not. And what we've seen is that our underwriting assumption of adding about one tenant every 10 years to a small cell system, we've done better than that over time. We just anticipate that's because we're kind of early on in a nascent market, and then it will mature and go into kind of that one tenant every 10 year cadence. And we think that's a very good cadence for the amount of returns that we think we can generate for our shareholders.

Great. And do you think there is a little bit of a change in the carrier self-perform around small cells that has been focus on the part of some of them to do it themselves where possible? We've obviously seen C-Band bring a lot of additional leverage here. So do you sense some change in being more open to working with you and others?

I think the agreement that we signed with Verizon is important for 2 reasons. One, just the sheer magnitude of it, 15,000 small cell commitment is the biggest commitment we've ever received in our history. And the second is, it is a show that even Verizon, who has very much been focused and vocal about a one fiber business where they wanted to build a lot of their fiber and small cells, even they see a significant advantage to outsourcing certain small cells where we can give them a lower cost of implementation and operation and a faster speed demand. And that's basically what we're trying to do overall with our shared infrastructure model is lower cost and increased speed. And if we can do that, we think we will attract more and more small cells and tower business over time. And the question becomes, where are we going to see that type of bottle take hold versus self perform? Because we do believe self-perform will continue as a portion of the small cell build in the U.S. We never anticipated 100% market share. We actually never anticipated outsourcing to be 100% market share, just like that's the case with towers. But what we do see is that where we see lots of co-location, we can increase our investment in those markets and position ourselves to get the co-location when they don't self perform. And that deal with Verizon gave us a lot of confidence, and I think gave the market confidence that all of our customers ultimately see value in an outsourced provider coming in and lowering their costs and speed -- increase their speed. And what we've seen and what you pointed out is, in addition to those 2 benefits, the last benefit that we bring as an outsourced provider is a separate access to capital. So we can put it on our balance sheet and then charge them on a monthly basis as opposed to them putting it on their balance sheet. And like you said, they just spent a lot of money on the spectrum, we believe they're going to spend a lot of money on deploying that spectrum, and we think we can really help by providing a separate source of capital that is focused on wireless infrastructure as opposed to the wireless carriers themselves. And all of that, we think, is a -- adds up to us providing something that's very valuable to our carrier customers.

And can you just comment on the competitive environment in small cells? There's been a ton of private equity money coming into infrastructure more broadly. I think in the past, you'd said you'd get -- win about 50% of the RFPs out there. How does that look today?

That really hasn't changed for us. The competitive market is very dynamic and the market is very similar to what we've seen. There isn't a tremendous increase in the number of participants in the small cell market specifically. And that's because it takes a tremendous amount of time, capital, expertise, relationships, experience. It's a very difficult market to break into. And the competitive advantages are very well established. And having, like we do, an extensive fiber footprint through the top 30 markets through the U.S., I think even further expands our competitive advantage because in those markets, it's going to be very difficult for somebody to justify investing to try to unseat us. So we have not seen a tremendous increase in competitive intensity. In fact, it's remained very similar. And our pricing and win shares have been consistent over a long period of time. And to your point though we have seen a difference in, for instance, the competitive intensity for fiber only place where the multiples paid for those have gone up over time or even for private tower businesses where the multiples for those have gone up over time, we haven't seen the same type of thing in small cell.

Maybe we'll pivot to the fiber business. I think you're guiding again to another 3% or so topline for this year. So what sort of trends are you seeing in that business? Is there sustaining the demand we saw last year from COVID related bandwidth growth?

We actually have been talking through 2020 that we didn't see a huge uptick in bandwidth growth. We just saw a continuation of the relationships we have with our customers and the continuation of our sales with those customers. The thing we did see was a bit of an elongation of the sales cycle because not being in front of people on a face-to-face basis has made it more difficult to close transactions. So the time between getting an opportunity and getting it on air has lengthened a little, but not enough to really impact our revenue growth. And we just see the continuation of solid opportunity sets and solid revenue growth in our fiber business because we're focused on mostly large enterprises and type of financial services, healthcare, governments, school systems, companies and entities that need very highly engineered, very bespoke types of systems because we have the expertise and the asset base to be able to do so. That's not as impacted by short-term moves as most -- or some of the small and medium business markets can be. So we see the opportunity to maintain that 3% growth rate in the future.

Right. And perhaps just a word on CapEx. Your capital intensity has come down a little bit here. How -- what are the key priorities for your CapEx program? And is this sort of a good run rate?

Yes. The priorities for our CapEx, we're continuing to do what we talked about earlier, which we have the right assets to ultimately be in the position to provide small cells in the right markets in the future. And we're building out the vast majority of the growth in our small cell and fiber business. We do not see M&A as being an important part of our growth going forward. So most of what we're going doing is discretionary capital was spent on incremental assets in the markets that we think are most attractive for small cell deployments. And given the level of demand that we see today from our customers, we believe we'll be in the neighborhood of 10,000 small cells added per year, which leaves us in the neighborhood of the discretionary capital that we're seeing this year of around $1 billion on a net basis. And as long as that demand doesn't change substantially one way or the other, we think that is a relatively good run rate. However, we do think that over time, the number of small cells that our customers want will increase and we -- I don't know exactly when that will happen, but what we were talking about earlier just needing more small cells to reach -- to have the spectrum bands reach the people they need to reach and needing more small cells to enable a 5G type of world, we think that we will have an acceleration at some point at what point -- at which point, we likely will have more capital to spend. But then we'll start getting co-location and that capital intensity will come back down. And how all that plays out is hard to judge from right now. But we're really excited that we're in the position to see that play out because we think it will add significant value over time. If it plays out the right way, we'll be able to grow faster than our 7% to 8% growth AFFO per share growth target. If we see our customers spending more money on their networks to reach 5G use cases that allow for more returns to them, we think that, that could add to our 7% to 8% growth. If however, we see 5G being a portion of the money they spend on our network and that total amount stays relatively similar, we think that 7% to 8% growth rate will just elongate for a longer period of time into the future.

Great. And maybe just in the last couple of minutes here, Dan, there's a lot of concern about rising rates, we've seen a big move here in the last few weeks. How do you think about the balance sheet and leverage and capital allocation and managing that dynamic?

Sure. First of all, I would say that rising rates and inflation don't impact our business very much at the core of it. The vast majority of our costs are either fixed or they're fixed at an escalator. So 70% of our tower costs about are ground lease. And those aren't tied to inflation, they're mostly just fixed 3% escalators, much like the revenue side of our business is fixed at around 3%. So we don't see -- and then the second biggest cost that we have in our cost structure is interest rates. And we don't see a tremendous amount of difference in the cost structure inflating as interest rates increase, inflation increase. So the business itself, we feel really good about. From a balance sheet perspective, we have purposefully lengthened the tenor of our balance sheet over the last 3 years from about 6-year average center to about a little over 9 years, that we didn't have a lot of refinancing risk. And we've increased the amount of fixed rate debt to over 90% fixed rate. So we don't have a lot of exposure to that interest rate and don't believe that it will impact much of how we think about balance sheet because as we underwrite new long-term assets like we have, we utilize a more average cost of debt over a period of time as opposed to what we've seen over the last year or 2. So we think we are well positioned from a balance sheet, well positioned from a customer -- I mean, from a business standpoint, and well positioned from an underwriting standpoint to withstand any type of inflationary pressure.

Great. Well, Dan, that's a great overview. We really appreciate your time. Thanks so much.

Thank you, Simon. It was great being here. Thank you.