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

All right. Welcome back. Thanks, everyone, for being here. I'm Brett Feldman, Goldman's U.S. Telecom Infrastructure Analyst. It is my pleasure to welcome back to the 30th Communacopia, Jay Brown, the CEO of Crown Castle. Jay, thanks so much for being here with us today.

You bet. Glad to be here. Thanks for the invite, Brett.

All right. So Crown Castle is one of the largest telecom infrastructure providers in the U.S. You have about 40,000 towers, 80,000 small cells and about 80,000 route miles of fiber. Why have you put together this collection of assets? Or put another way, what is your future -- your vision for the future of wireless networks?

We're really excited about where the company is positioned here in the U.S. The U.S. has long been the fastest-growing wireless market in the world. And so we've concentrated our investments in the U.S. between towers, fiber and small cells because we think that's really, frankly, where the future is going. In the first 4 generations of wireless in the U.S. the investment by the wireless carriers was heavily on the tower side. It's how they deployed the networks around using macro sites. And as we see the future developing and we're right here in the beginning of the launch of 5G, what's going to be critically important in 5G is the density of wireless networks. So we continue to believe that the macro towers are going to have a big important role in the deployment of 5G, and we're obviously benefiting from that today. But what is also going to be critically important is that the carriers densify their network well beyond what you could do on macro sites. And in order to do that, they're going to need to use small cells as they've talked about publicly connected by fiber. So we've tried to position the company ahead of the demand and believe that we've got assets that are going to really benefit well as we go to 5G and beyond, as the wireless networks continue to densify.

Well, let's start off by talking about your tower business. And we've had some of your public peers, some private telecom infrastructure operators at the conference, and at least among some of them, the questions have been they're finally getting the visibility into an acceleration in their domestic tower leasing. You've already seen something of an acceleration. You're actually growing in some cases, at twice the rate of your peers. What's driving the growth in your tower business? And how durable do you think it is?

Yes. You're right. We are growing about double that of our peers. And we're doing that through a combination of top line growth as well as seeing less churn than what they're experiencing in their portfolios. And the biggest driver of that outperformance, relative to our peers, has been the way that we've structured the contracts and the engagements that we've had with our customers. So we were proactive in terms of going out and extending the Sprint leases over a long period of time, several years ago, which has reduced the amount of churn that we're seeing in the near term. And then I think we've also done some really thoughtful things around the way we structure contracts, engage with customers, and provided holistic solutions to the deployment of networks. So for instance, DISH and the agreement that we signed with them, we were the first company to sign a large master agreement with them. And one of the things that they indicated as a part of that agreement was that they were going to anchor their network on the Crown sites. So we benefited not only from the incumbent wireless carriers and the deployment of 5G, but we've also benefited, I think, in the early stages here of the deployment of DISH. So it's 5G driven as is the big uplift in terms of overall activity. And I think we've benefited disproportionately as a result of some of the location of the assets, some of the quality of the assets and the holistic provision that we're able to go to with customers. I would say the tower business is a great business, and it has been for a long period of time. And so there have been points of time in the past where maybe people have looked at growth rates relative to tower companies. And I think you can probably over-index a little bit too much in terms of one company is doing a little better than another company. So I wouldn't over index in terms of what that means. I think the provision of what we offer to customers is compelling, and I think that the margin has helped us. I don't know that the performance 2x is indicative of what's happening. And frankly, I think over time, it will revert closer. But I think over a long period of time, the strategy that we've undertaken with multiple assets and being really a full-scale provider to the carriers. As 5G deploys over time, I think that's going to really help us. And as I think about the growth rates the diversity of the assets, I think, will also help us because I think we're going to go through periods of time where the capital is allocated among towers, among small cells depending on the need. And last year was a good example of that. We saw great growth during 2020 across the whole company, but towers did not have a good year last year. And the uplift that we saw from small cells and fiber, frankly, really helped our overall performance. And then this year, we've seen a bit of a reversal of that where towers just carried a disproportionate load for the overall enterprise. And I think you'll see the carriers continue to make those kind of capital decisions where they toggle between densification, which will ensure the benefit of small cells and infill where they already are, which will benefit towers.

It's just interesting, though, you're talking about how this year has seen an uplift in your tower leasing. When we talk to investors about some of the big demand drivers that we think are ultimately going to be good for the tower sector, one of them is C-band, one of them is DISH. Technically, I don't think either of those 2 dynamics have made a material contribution to tower leasing revenues this year. I mean they've been commencing leases, but it's been very back-end loaded. And so I guess, first, my question is that fair, which is to say that a lot of the leasing benefit you would expect out of the DISH contract and then out of just the C-band deployments is really predominantly in front of you and not meaningful to the run rate yet?

Yes, that's true. The C-band as well as what DISH is deploying, yes, that's the extension of the long runway of growth that we see ahead of us. And today, we're in the very early stages of the deployment of 5G and they really haven't gotten to the point where they're deploying C-band to the point where it's meaningfully impacting our revenue stream. From a work standpoint, obviously, the amount of network that DISH is building is certainly the focus of a lot of our team. But in terms of in the run rate of revenues, that's still in front of us.

And I will just stick with the C-band for a moment because it's being cleared in tranches, right? So 100 megahertz of the 280 is supposed to be cleared by December 5, which is not too far from now in 46 of the 50 largest markets in the country. I believe that 71% of your towers are in the top 100 markets. And operators like Verizon have made it clear that it's their intent to get those C-band licenses turned up and in use in those initial markets pretty quickly. So it would certainly feel like, at least with regards to that band and that operator, as we move into '22, that should be a fairly meaningful source of leasing. I'm asking because you're at a high run rate of growth, but it does look like there are reasons why it can sustain for some period of time.

Yes. First, high level. One of our premises for a very long period of time has been we want to invest in the U.S. market, the broad brush. But more intentionally, we focused on investing in the top markets in the U.S. So as you correctly say, about 71% of our towers are in the top 100 markets in the U.S., there is a similar, if not greater concentration, frankly, even greater concentration. If you look at where we've invested capital, on fiber and small cells, which is almost entirely focused on the top 10 markets. Certainly in the top 30 markets in the U.S. And that is results of what we've observed over a long period of time that as carriers deploy new technologies and aim to densify their networks, they really aim for those dense urban markets, the top 30 markets, NFL cities, if you will, markets see the early effects of it. And oftentimes there's a proportionate amount of capital spent there. So we think that's going to continue. We've seen that historically with macro towers. We think that will continue into C-band as you rightly point out, both in front of us and the comments that have been made by the carriers about their intention to build that out. I think that obviously, will provide a great return for them and benefits our business as there's additional leasing. I think the same thing is true as you think about what will happen in where do the dollars of capital get allocated for things like densification. So as we move past sort of the initial overlay of 5G and start to densify, I think we're well positioned on the small cell and fiber side there.

I was asking about the C-band. There was actually an auction that completed just before that. It was the CBRS auction. I'm curious if you've seen any CBRS in your funnel, whether for your macro towers or on the small cell side.

Not that it's impactful right now to the run rate revenues, but it's interesting, when you put those 2 questions back to back, I think it makes the point -- and this is one of the great times to be in the business. If you look historically, there's almost no time in the company's history where we've seen 3 incumbent carriers investing heavily in their network. There's always been periods of time where 1 was on, 2 were off, or 2 were on, 1 was off. We've now got 3 incumbent carriers who are all spending heavily on their network. They've all increased the amount of capital that they're investing in wireless network deployment. And we have a new entrant building a new network. And that characteristics of -- as you raised, the CBRS spectrum, the C-band spectrum, the other bands of spectrum that are laying fallow in the hands of the carriers, they've got a lot of spectrum that needs to be deployed and they have the capital to be able to deploy that spectrum. So in periods of time in the company's history where carriers have had spectrum and had capital, those have been the best periods of growth for the company. And as I think about not only are we at a stage where we've got fallow spectrum in the hands of the carriers and the capital and an ability to deploy it. But you've also got 4 very willing and hungry carriers that are pushing to get network deployed. So that's a landscape that we feel great about for -- frankly, for a long period of time. And in your last question, you kind of referenced we may be at a peak and how do we think about it. Well, we talked about that a little bit on our second quarter earnings, and we'll give guidance here in a few weeks for 2022. But I don't see any reason why we don't go into '22 with tower growth that looks like what we saw in 2021 or what we're seeing in 2021, which we talked about on our last earnings call. So certainly, it's elevated from what it's been over past years. but we think it has legs at least into 2022. And we feel really good about the activity that we're seeing across all the assets that we have and where the network spend is going to be.

So you made a fair point earlier that one of the differences in the organic growth rate that you're enjoying now versus your peers, is there are different time frames under which you're all going to experience some churn off of Sprint. I think you had framed out about 5% to 6% of your revenues come from Sprint leases that are overlapping with T-Mobile on the same sites. So theoretically, those would be the obvious synergies. First, can you just remind us the time frame over which you're anticipating that you would see that come up? And then I have a follow-up question.

Yes. So the majority of those leases come up in 2023 and 2028. We've obviously put a lot of that detail in our filings. And so you can look at the supplemental reports to see by year where those leases are. So you're right, there's about 5% to 6% of our consolidated revenues, and those land mostly in 2023 and then the largest chunk in 2028.

So the reason I started with that is you still, I believe, have separate lease agreements with T-Mobile and Sprint. And I'm sure T-Mobile would have some motivation to want to consolidate them as they have with some of their other providers. You have certainly consolidated leases in the past, carrier consolidation is not new. How do you think about the elements of a win-win when you work with the carrier, particularly a situation where you know site decommissioning is going to be a key element of what that customer is going to be doing over the next couple of years?

Well, first and foremost, we want to work in a way that helps our carriers do what they need to do in terms of their network. So our entire business is around providing the infrastructure at a lower cost than owning it themselves. And we want to be able to deploy that network faster than they could do without us. So focused on making sure that it's a cost attractive proposition to them, and we can do it with speed. The balance that we have to strike is we've got to make sure that we're thoughtful about the economics on the site. So while we want to deliver for them the network that they need in order to build out 5G. The reality is we've also got to make sure we appropriately guard the economics of the contracts that we have in place. And I think over time, we found ways to be creative and thoughtful to balance the -- protecting the economic value of the assets that we own and maximizing the return on those assets. And at the same time, making sure that we deliver for our customers so that they can in turn deliver for consumers a network that's reliable and ubiquitous.

Do you have a time frame where you feel you should be consolidating those leases? Or are you comfortable operating on them for as long as it takes to come up with something that may be better?

And we like our current arrangements with them. So there's not a need to have to do something. There may be something that comes along that's interesting that we would say that makes sense for us to do something but we're happy to continue to operate with our current agreements with T-Mobile.

Generally speaking, as you're approaching leases with all of the major carriers, is it increasingly important to you that your range of infrastructure is captured in those agreements? Or I guess the flip side of it is, are you increasingly finding that they are asking that your range of infrastructure be embedded in the agreement?

Well, In terms of -- I think there's a couple of different ways to think through and maybe shed some light on how we would think about it. We would start with thinking about the returns on the assets and what's the appropriate return for an asset given its geography, the cost of the asset. And so we would start with just sort of a fundamental view of the value of the assets and the space that was needed on those assets, and so what's the appropriate rent charge for that. It is a very different setup of the carriers than it was 10 years ago, 5 years ago even. 5 years ago, the idea of small cells and towers was a very separate group inside of the wireless carriers. Today, all of that is condensed in their network planning group. So the same folks who are considering tower deployments are also considering small cell deployment. So there's no way to have a conversation about 5G networks without having a conversation about the densification that will be needed from small cells and the macro sites. So those 2 conversations oftentimes happen simultaneously. The way we think about the economics and the terms of those agreements, though, are separate in terms of thinking about what's the appropriate return on the asset, and how do we appropriately price the space. The most recent, I think, good example there would be the agreement that we did with DISH, where they committed to go on 20,000 sites. I think we were the first company to sign one of those. And what was really integral to that agreement, as they've said publicly, was actually not just the delivery of small cell and not just the delivery of towers, but also the ability to deliver fiber for them as a part of that deployment. And I think everybody is going to benefit from the deployment of the DISH network. But I think we will benefit disproportionately because as they've indicated, they're going to anchor their network around our sites. So it's not an incumbent carrier where they're on a lot of assets and then they're looking to infill or build out more coverage. This is designed from scratch, and they're designing from scratch their network around our existing assets, and they saw our fiber as an integral part of that. So when we went through that price process, we've had to appropriately price both components of the asset, and that's how we would do it for any carrier today. At times they're connected, at other times they're not. The Verizon agreement that we signed earlier this year where they committed to 15,000 small cells, there wasn't a component in that discussion about towers. So I think you'll continue to see us at times, do them simultaneously. At other times, they may be separated by days, weeks, months, years. It will just depend on where the need of the carrier is.

The -- a point you made earlier about how it's been very rare to see 3 incumbent carriers active at the same time. And what we're actually looking at is 3 incumbent carriers plus a new entrant being very active. And that new entrant is obviously concentrated on full new site deployments versus amendment activity. So the question here is: this is happening in a world where we increasingly hear about disruptions to supply chains and a tighter labor market. Can you give us any insights as to whether those issues have been affecting your ability to either get supplies or labor or have any of your customers come and say that they're struggling with it and maybe can't meet some of the deployment time frames they had hoped for?

Now obviously, the disruptions in the supply chain have been widely reported. And I think some of the labor shortage in telecom is a direct result of the amount of investment and activity that's going on in sectors, including our own business. We talked about in the first 6 months of this year -- first 7 months of this year, we had more leases, more applications for leases on towers than we had in any given year in the company's history. So activity is up significantly, and that has certainly put a strain on the labor market. As I look at the guidance and the outlook that we've given, I don't see any disruptions there that are going to impact our ability to deliver the guidance that we've provided. And feel good about where we are going into next year. I think the more specifics around equipment, I'd probably beg off of those questions and let our customers speak for that themselves. But we haven't seen it disrupt our own outlook or expectation for the year.

Okay. I'd like to spend some time talking about the small cell business now. You've invested about $15 billion total in fiber infrastructure. And I think you've disclosed the yield on that investment right now is around 7%. For context, I believe you've invested about $23 billion in your tower assets, where the yield is around 11%. And so a question we get quite a bit is what gives you confidence that you'll ultimately match or exceed the yield on your fiber investments that you've gotten on a tower model that has been pretty proven?

Yes. One of the things that I think we look at carefully is you look at the places where we've invested capital and then watch how that capital gets a return and drives a return over time. So we go back and look at the markets that we've been in for a long period of time, do they exhibit tower-like characteristics? And you're correct in terms of -- you referenced our tower yields. We're today at about 11% across the whole portfolio of towers. We started those assets at about a 3% yield going all the way back to 1999. And it took us a long time to get to where we are today at about 11% yield. Interestingly, and I think worth pointing out is if you look at the towers that we've acquired since 2007, those assets are yielding 8%. So if you take the -- and we've been in fiber since -- really the largest acquisition that we did, it was in 2017. So we're about 4 years in to meaningful fiber investment, a little less than that on a weighted average, and we're at about 7%. So we feel good about where we are as a launching point. And the characteristics that we're seeing from the wireless carriers and where the activity is going for this first generation or second generation of small cells, a lot of those are ending up on existing fiber. So I think this year, we're in the neighborhood of about 40% colocation, 60% anchor builds. And that's down from kind of the 70-30 where we were previously, where we were 70% anchors and only 30% colocation. So I think there are going to be periods of time where we see colocation opportunities really on existing assets. And that really drives the view that we have that over time, these fiber assets that we have in small cells they're going to get to great returns. So we think we're somewhere in the neighborhood of 7% to 8% initially as we build out small cells. As we add a second tenant, that initial yield of 7% to 8% moves into the low double digits. And as we get to a third, we're into the high teens, low 20s on a yield on invested capital. And similar to the path of towers, we think that will take time. But the right assets and the right location, we think over time, we'll see real benefit from that existing -- those existing assets seeing additional colocation over time, just like the tower story.

I believe it was last year, you had sketched out sort of a longer-term vision for the small cell opportunity in the U.S. I think you had estimated that we were going to go not your business, but in aggregate, from something like 200,000 small cell nodes last year to potentially 1 million a couple of years out. This year, you actually moderated your outlook for the small cell nodes you expected to put on air in your own business. And I was hoping you can maybe just revisit why you decided to modify your outlook. What's behind it? And does any of that reshape what you think the aggregate addressable market and opportunity for small cells is going to be for your business?

Yes. So this year, you're right. We did modify the number of small cells that we thought we'd put on the air. We originally thought we'd do about 10,000 this year, we lowered that to 5,000, and gave indication we thought we'd do about 5,000 this year and next year. And that was based on the activity that we saw the carriers do where they reallocated their capital towards macro sites, and pushed out the time that they actually wanted to put equipment on small cells. So it doesn't have any impact on our contracted small cell pipeline. The small cells that we thought we would put on air this year, those are still under contract. We'll still put those on air. We're just going to put them on air in periods beyond 2022. And -- or some portion of them, as I referenced. And then we saw an uplift in the activity around macro. So I think it's nothing more than kind of the push-pull on capital resources and then prioritizing the macro sites over the small cells. But what's interesting is as they think about the deployment of network in the middle of kind of going down this path of reallocating some funds away from small cells towards macro sites. At the same time, you have Verizon signing up for 15,000 small cells for us. So I don't think it's indicative in any way of kind of the long-term need for small cells. Again, I'd go back to kind of the January of this year, Verizon is committing to 15,000 small cells to us. And then over the course of this year, maybe allocating a few more dollars towards the macro sites. So I just think it's timing more than anything else. And as I referenced in my earlier comments, you could go back to last year and almost make the reverse comment last year where small cells benefited disproportionately and towers just saw very, very little activity last year, it was way down from what we had expected when we went into 2020. And then we saw that come back this year. So I think it's just a matter of where they're allocating the dollars in network. And I think the colocation macro sites will do well this year, think that holds into next year, as I said, and certainly see long-term demand really attractive on the small cell side.

So you alluded to this earlier, but you had pointed out that the activity, the nodes you would be deploying this year were a little less weighted towards anchor and a little more weighted towards colocation, meaning a little more weighted towards taking advantage of fiber you had already deployed. So obviously, there's a very high return on that. Do you think that that's the beginning of a more balanced shift? Or is it maybe just in this environment where they're looking to finish up some projects that were already in the funnel, so it just kind of naturally went towards existing fiber?

Yes, let's answer -- the easy part of the question is, I think long term, most of the activity will turn out to be colocation. I think it will follow the tower model where if we were having this conversation back in 1999, up until to about 2003, 2004, leasing on towers was almost split evenly between build new towers and colocate on existing assets. And so there was a lot of build activity that was going on. We're at the stage now where there's a lot of build activity needed for small cells to build the fiber because it just -- fiber doesn't exist -- the high-capacity fiber for small cells does not exist in the world. So it's got to be built in order to be there. But as you roll the model forward, I think we'll get to the place where the vast majority of the activity will be small cells added onto that fiber that's being built now. So what we're doing today is basically building for the future. And I think one day, that fiber will turn into a colocatable asset just like towers has been, and that will be the vast majority of the activity will be that colocation. I don't think it's going to be a straight line. So it's -- I don't think you can just go kind of 70-30, 60-40 and then go all the way to 90-10 or whatever it turns out to be long term. I think there will be periods of time where we go through infill in top markets and then spread out beyond the top 30 markets in the U.S. and maybe we'll build some more fiber and continue to build out the business. But it's just going to have to -- we'll have to evaluate as we go along, Brett, and send any opportunities to invest and further the growth beyond what we have today. We'll have to go through a rigorous capital allocation process and evaluate what we think the growth on the assets is. And we may decide that the assets that we're building today and the next couple of years here is a good enough base, and that's what we're comfortable with, and we'll just go straight colocation or we may find opportunities to continue to invest capital that we think will extend the run rate of growth and choose to put capital to work.

I was going to ask a follow-up question here on CapEx because your outlook for discretionary CapEx this year is about $1.3 billion. That's a downtick from $1.6 billion that you had spent previously. And of course, if you're going to be deploying fewer small cells and the mix is a little more colo-heavy, then obviously, that would speak to that. If you are operating on the assumption that the carriers are going to continue to favor macro site deployments into next year and maybe a little beyond that as they look to take advantage of the C-band spectrum as it's cleared, it would seem like maybe your CapEx might remain at a lower level for a while. Is that fair? And if that is the case, what's the next highest use of that capital?

Yes, I think that's probably fair. I mean we'll give specific guidance here in the -- I think we're just a few weeks away from giving 2022 outlook as we get into the back half of October. So we'll give you a view on not only how we think the business will operate but also a view on the use of capital. I think the process that we go through with every dollar of capital, whether it's somewhere in the neighborhood of $1.3 billion where we'll be this year on an investment of capital or if it's the first dollar, is we go through the process of really analyzing what do we think will maximize the long-term dividend in the firm. And that's our view, is maximizing the long-term dividend. And we'll invest capital if we think that capital can be put to work to drive the dividend higher over the long term. And if we don't see opportunities to do that in more traditional ways like building small cells, building fiber for those small cells, building or buying towers. If we don't see opportunities that at least beat the return that we would get if we just bought back our own shares, we're more than happy to just use the leverage capacity that we have along with the excess cash flow and buy back the assets we already own. We think there's lots of organic growth in the assets that we already own. They're really attractive. And so that's a pretty high bar against which to consider every dollar of capital that gets invested. And that's the process we go through every day to see the capital projects that we have on offer in front of us, are they attractive or not. And there have been periods of time in the company's history where we -- our view was based on the opportunities that made more sense just to buy back the assets we already own via stock purchases.

I want to spend a little more time on that actually because if we think about it, you set out a few years ago a target of growing the dividend 7% to 8% annually. And that was generally based on the rate at which you expected to grow AFFO per share growth. And for the most part, you have outperformed. And you've also raised the dividend faster. So not only have you grown AFFO per share faster, you've generally raised the dividend faster as a result of all of that. If you are at the point where it looks like the capital requirements of the company maybe won't be as high as you anticipated when you set out those targets, am I correct to assume that maybe the 7% to 8% is something you think you can be a little tighter to on the dividend end and any excess AFFO and liquidity available to you is more buyback-driven? Because like I said, it just seems like so far, to the extent you were outperforming, you were just giving us -- to your shareholders any the dividend.

Yes. I think the way we think about the payout ratio is probably important as a part of this conversation. So we think about paying out about 75% of the ongoing cash flow in the business in the form of a dividend. As we've looked at this lots of different ways, we think that's about the right level of payout, payout about 75% of AFFO. So when we talk about dividend growth and how the business is performing, that's sort of fixed in our mind of a steady payout ratio. Beyond that, obviously, the rest of that can be used for capital to make investment in assets or it could be used, as I was referencing before, it could be used to buy back shares. And I think -- I want to just pick up on the point you made because you're absolutely right, when we made the big investment in 2017 in fiber, our view at the time was the tower business was going to grow somewhere in the neighborhood of 6% to 7% per year, we grow the dividend at 6% to 7%. We made an investment in fiber, where we raised based on the expected growth rate of the business, we raised the growth rate 7% to 8% as our target, which is still our target today. And over the last 4 years, we've outperformed that target by growing the dividend 9% per annum. And so that bogey is a reflection. That achievement on the dividend side has been a reflection of great operating growth in the business. And I think you'll forever see kind of that tie in the way that we think of as we grow the business, we'll pay out that cash flow to shareholders and then we will turn around and think about, okay, the next use of capital, whether that's the increased leverage from -- created from additional EBITDA or the little bit of excess cash flow that's left over after the payment of the dividend, that 25% of the ongoing cash flow in the business, I think then we'll be thoughtful about how to allocate that in ways that further extends the runway of runway of growth. Because -- whenever this conversation comes up about 7% to 8%, and we've exceeded to 9%, I think sometimes people can look at that and say, okay, well, what would maximize the dividend for next year? And honestly, we don't think about it just purely as how can we maximize next year's dividend? We want to be able to grow the dividend 7% to 8% for the next 20 years. And I would hope that 5 years from now, 10 years from now, when we're having this conversation, we're just talking about continuing to be able to grow the dividend 7% to 8%. So as I think about the mix of assets and where we're allocating capital, we're thinking about how, over the long term, do we position ourselves relative to where the world is going, where 5G networks and beyond are going, and how do we position ourselves in a way that have -- to have to have capital that has been put to work in assets that are critically important to those networks. I think that's our best chance to extend the runway of growth well beyond kind of the -- well beyond kind of the near term.

All right, Jay. Well, listen, that is a great place to end. A wonderful overview. We always enjoy these conversations. And I certainly hope we'll be doing this in person next year.

I hope so as well. It's great to be with you. Thanks for the time.

Thanks for being here.