Crown Castle Inc. ($CCI)

Good morning, everyone. My name is Brendan Lynch. I cover REITs at Barclays. I'm very pleased to be here today with Chris Hillabrant, CEO of Crown Castle. Chris has been with Crown Castle for about 9 months now. I think this is his first Nareit and probably the first time a lot of you are getting to put a face with the name.

So maybe just to start, Chris, you've got experience at T-Mobile and Ericsson, Samsung, Tillman, Vantage Towers. You have many different perspectives on the communications industry. What drew you to the tower business and to Crown Castle specifically?

Thanks, Brendan. Great to be here today. Nice to see everyone this morning. Yes, I've had a long 30-year-plus career in telecom, working across operators, Verizon, T-Mobile, OEMs, Samsung, Ericsson and then been in towers now and most recently with now leading Crown. When I look at the business overall, I think the tower space is the best place to be. Specifically with Crown, I'd share a story with you. When I started out, I was building towers in the Texas markets for T-Mobile at the time. And when it came time to find some extra capital, I reached out to the various tower companies, which at that time were very small. And Crown was actually the first company that I did a tower deal with, selling them about 100 towers in the Austin, San Antonio market and then later, several hundred up in Dallas and then many hundred later in Houston. So Crown has been a great partner. As far as tower companies go, it's been a customer-focused tower company and one that I always looked at as a strategic partner versus just another vendor. And so for me to then step in and lead this company, it's been the lifetime opportunity to be able to help turn this company around and execute the strategic plan that had been put in place prior to my arrival.

Great. So you've been with Crown Castle for about 9 months now. You closed on the fiber sale. What does Crown do best? And where do you still see opportunities for improvement?

So Crown now as the sole U.S.-only focused tower company no longer has the fiber and small cells businesses that had been taking a huge use of our capital investment. We're now in a space where we can compete and focus in on becoming a best-in-class tower company. This means finding ways to partner with our customers. It is about delivering the services that they expect in order to get them on our sites as fast as possible and then finding ways to creatively work with them in new business lines as they come up. And an example of that is recently, we've started to do trials around edge compute and finding new ways to drive the revenue per tower higher. And although this is at very early stages, we look at this as kind of an inflection point and our ability within the tower industry to perhaps start to scale and take a piece of the AI fueled growth in the marketplace.

Great. Yes, that's a very interesting opportunity, and we'll come back to that in just a -- maybe just to touch on the organic growth outlook kind of in the near term, and then we can move to the longer term as well. On the first quarter call, you mentioned that the 3.5% organic growth would likely mark the low point. Has there been any acceleration in carrier applications or activity that could lead to an acceleration in the back half for organic growth?

Yes. So to reiterate, we do think this is the low watermark in terms of growth. This has been a year where everybody is taking a deep breath as an industry, I'd say, overall. But over -- if I look across the MLAs that we have in place with our customers, and that gives us visibility into the build that they will have into the future, we see it as a low watermark and with additional upside opportunity. We're always looking for ways to drive additional revenue. And so we're currently exploring, as I said before, not only edge compute, but also individual service packages that our customers are asking for. One of the things that I think is a hallmark of a successful company is when you go to meet with your customers, which I do on a very regular basis, and what you hear from the customers, we want to do more business with this is something that's somewhat unique. It's not uniform across all tower companies and something where we think we can execute as a result of that.

Can you just elaborate on what you mean by individual service packages? That's a term I've heard?

Yes. So as an example, today, Crown has a good services business. We typically will start off at the beginning of the process where perhaps we need to change the ground lease to take additional space for a customer or we might need to go through a zoning process in order to help get the customer onto the tower. We'll do all of those preconstruction services, which have very good margins and something that I think we've been able to offer at a good compelling price for our customers. And so that's been very successful. What we're hearing from customers now is more of a turnkey approach that some of our competitors have adopted. And so now we're exploring whether it makes sense for us to partner with somebody to provide those services to make it more seamless for our customers or perhaps to do a portion of those services ourselves. So that would be one specific example.

Great. In terms of the organic growth over the next 12 to 18 months or so, what are some of the leading indicators that we as analysts could be monitoring for progress on that front?

Yes. I'm probably going to disappoint some of you here in that I would tell you the single biggest analog within the industry is when you look at the growth of data and specifically data that's being fueled by new applications in AI, where people are just using it from a tax perspective, but now are uploading photos or even video streams to utilize. It's about fixed wireless, which has exploded and driven beyond just taking up the capacity within the networks, but actually driving capacity built into the networks. That data growth is the single largest indicator of where the industry is headed, and this has been at a growth rate of 30% plus over the last 3 years. In fact, if you look at the CTIA study, I think it was something like the largest individual data growth year-over-year on record was last year. So it's very encouraging. In addition, you see the spectrum sale, which DISH has recently concluded with both Starlink and AT&T, you'll have the 600 megahertz, which AT&T will deploy, which will require larger antennas to be deployed out there. And then the commitment of the administration to have 800 megahertz of spectrum that will be auctioned starting off in 2027. This all bodes very well for the industry as a whole. And so we see 6G, even though all the use cases haven't been fully defined yet, as a huge driver for data growth into the future.

Great. In terms of the 800 megahertz of new spectrum that's going to be auctioned off starting in 2027, what is the order of magnitude of new leasing growth that, that would create for the industry?

I think it really depends on each of the carriers, what they have in place today. So what I say by that, a couple of things. One is what type of antennas do they have in place, what type of radios do they have in place. In some cases, people have been able to use software upgrades to unlock a portion of that capacity. In other cases, they actually need to go up on to the towers and increase the number of antennas and radios to take advantage of that spectrum. There's been some talk about C-band delays. There was an issue out previously. The industry has always found a way to work around these solutions. I remember the same thing happening with AT&T and Verizon, and they found a way to deploy it in such a way that they were able to avoid having to worry about having the Altimeters technology being swapped out. So we would expect that to fuel the next several years of growth. I think the first 100 megahertz is due in 2027. With the full 800 megahertz, the commitment that's there, it will have to be cleared. It will have to be deployed, it will have to be put to use. But this could fuel the next 5 to 10 years easily of growth as they look towards 6G. What I found really impressive was I was at a meeting at the White House several months ago, meeting with one of the domestic policy staff, and they made it very clear to us that the administration is fully behind 6G. This is something that they see an opportunity for America to lead in terms of having global technology out there in the form of 6G leadership for the U.S., which again is something that's very good for our industry as a whole.

You mentioned before about AI applications. This is certainly a source of a lot of excitement, but there isn't much tangible at present. Can you just give us any examples that you see coming in the next couple of years where we might see those applications really start to scale?

I mean this is -- I'm going to tell you a story because I think it kind of brings to light how AI is and even somebody like myself would use it in a daily thing. There was a charity golf tournament that we were invited to recently for one of our customers. And I was curious on whether I've been to this as a COO in one of my former lives in the tower -- smaller tower company. And I was like, did the CEOs show up? And of course, there's no invite list, but I went to this customer's website. I found out that they had a picture real on their website of all the people that had attended. And so with using one of the AI platforms, I was able to say, "Hey, is any of the wireless company CEOs show up and the AI chatbot basically said, well, I can't do that for privacy. But what I can do is I can individually load those up against the publicly available databases and LinkedIn and try to compare them for you. And so I said, yes, please do that, and it did that and I ended up loading in several of the pictures and able to be able to do that. The fact that I could use an AI client to basically determine if somebody had attended a golf tournament, which is a small and name thing, involved me uploading, I don't know, how many hundreds of megabytes of photos in there. But the way that people are using AI today is not necessarily representative of how people will use AI in the future. And that ability to upload large photographs of video streams is going to fundamentally change the way that AI is used. And so that bandwidth that's now required for uploads is diametrically going to grow as a result of that. So again, as we look towards the technology evolution, we see this as one of the key drivers of data growth traffic into the future.

Great. Let's talk about some of the challenges that the industry could face. You mentioned software upgrades. That's something that we've seen more recently where maybe you wouldn't be able to generate as much revenue from carrier activity as you would have in the past. How should we think about that type of change or even the versatility of network infrastructure increasing with dual-band radios or RAN sharing, those types of considerations?

We were at Mobile World Congress in Barcelona this year, a small group of us to look at the evolution of antennas and radios across the major OEMs that do business here in North America. And while we do see that there is a continued densification of capacity in the antennas and in the radios, there's a portion of this which is driven by physics. So if you think back to my earlier example there of 600 meg is these are very large massive MIMO antennas are taller than I am, 7 feet tall plus. You got to put these out there. You can't suddenly change the laws of physics that a low-band spectrum is going to go into a smaller antenna. Now back to the software deployment in radios, it is -- while it is true where if you already have a set of radios out that are tuned to the band to deploy that you can initially go ahead and just add those spectrum through a software upgrade. But over time, as the data grows and the capacity increases, you need to add additional radios. So irrespective of the bands that are included there, as traffic grows, you're required to put out additional radios. And any time you're adding radios to the network, anytime you're adding antennas to the network, it is good for Crown and for the industry as a whole.

Makes sense. Maybe just one on fiber-to-the-home rollouts. We see a lot of the carriers being very active on that front. That could be liberating some spectrum for cellular use, which is currently being used for fixed wireless access. How should we think about that dynamic?

Look, most of the operators have been using WiFi calling for over a decade now. And most people, myself included, typically have their WiFi turned on, whether they're at home or in the business. So that's capacity that's currently being carried by those wireless networks, the WiFi-based networks already. This isn't something that suddenly is going to pull off all the mobile traffic. And again, when I'm out there using the types of applications that are driving that growth, I'm consuming it. It's not just when I'm sitting at home, it's when I'm traveling in my car, it's when I'm out and about -- this is really still the arms race within the industry of providing coverage wherever a person wants to use their mobile device.

Maybe just a couple more on the industry. I'd say 5G hasn't lived up quite to the expectations that some of the industry has had over the past couple of years. How do you think 6G might be different?

Maybe start with 5G. I think there's one piece that nobody really talks about, but which has been a major benefit for the industry as a whole, which is the price to deliver per bit to the customer has dramatically decreased in that time period. And while maybe some of the more science fiction applications, people talk about remote operating theaters where a doctor in India could operate on somebody in Sweden didn't come to -- when I walk out in my neighborhood in Houston, I see Waymo cars everywhere. Today, that technology is embedded on the car, on the vehicle itself, but it's not too great of a leap to think about in time where that will migrate out to the network. And what it excites us about is it starts to give real relevance to edge compute and the need to put out GPUs at the edge in order to have the low latency type applications of things like autonomous driving. So while not everything came through, the fact that they were able to reduce their cost significantly to keep up with the data demand is something that was really a benefit of 5G. Looking towards 6G, and I think I said this a second ago, is those applications, which will fuel 6G include there'll be different types of applications. I would expect that still one of the primary drivers of 6G will be a new way to drive additional cost out of delivering that per bit. But as 6G becomes a more focus over the next 4 to 5 years, we expect that it will drive a cycle of investment that the operators will have and that the applications that are going to emerge over time. This is no different than maybe if you turn back the clocks to a couple of decades ago there was a huge lot of fiber that had been put into the marketplace and people are like, what are we going to do here? This is never going to be consumed only to find that new applications came out of that and the consumption accelerated. It drove that fiber-to-the-home revolution that you're talking about. I think we're poised for a similar type of innovation to be released as the technology is deployed.

Speaking of new technologies, direct-to-device has gotten a lot a lot of attention. I think the industry -- the tower industry and you and your peers have done a pretty good job explaining how it's a complementary technology to terrestrial networks. Do you see an opportunity for direct-to-device to even be an incremental growth driver for the tower industry as well?

While not going into specific talks that we're having with potential customers. I would say that if you look at the recent announcement by the MNOs here in the U.S. to not provide a virtual mobile network operator to the operators, it presents a challenge. You can add value at the very extreme edge where there's no coverage today, but it has to be out in the open air. If you're in a vehicle, if you're in your home, if you're in a place of business, the satellite signal can't get into you as a mobile user. And so ultimately, if there was a desire to build another network, there would have to be a terrestrial component. You cannot replicate the capacity of the terrestrial networks that exist today just through satellite alone, even with the additional coming in, and it doesn't solve the in building challenge that they would face in the kind of urban, suburban areas for in-home and in-vehicle use. So it's an opportunity. Where it goes, we'll see, but we're open for business and eager to serve all customers.

Great. Let's come back to the edge data center opportunity. You mentioned that you have some trials that you're currently involved with. Can you give us any additional detail about what that entails?

Yes. I'd start by saying, just to be clear, this is something that is at a very early stage. And it needs to be borne through a series of trials that we're conducting that this is something that makes sense, that it's scalable and that it's a good solid, profitable business for us to -- so I don't want to overexcite people in terms of what the opportunity is. That said, what we've seen at least initially here across a number of new entrants in this place is that there is some demand. And therefore, we're excited to be a part of the, let's call it, the tip of the spear that's out there looking to find this. I think I was reading the other day, there's something like a 15-year backlog in data center capacity needs. And so anybody that has space or shelters, people that have power and people that have connectivity in the form of fiber or some form of backhaul instantly becomes very attractive potentially for edge data center use. So this is what we're looking at. We've got several trials in place. It looks promising so far, but we will need to thoroughly make sure that this is a good, viable and scalable business before we go in head-first.

Is this something that you're dedicating capital to? Or should we think about it more as just leasing space at your tower sites and just collecting a revenue stream? .

Yes. I mean, fundamentally, we are a real estate company which is why we're here today, right. We do have shelters on a number of sites that were some of the tower portfolios that were purchased. In many cases, these shelters are in good shape be able to be co-located in. In other cases, they may need to be either upgraded or replaced. Again, and I think we're going into this as a very limited use of our capital. We have a very high bar that we have set putting capital to use versus saying share buybacks or are staying within our investment grade 6 to 6.5x debt. So if this is a business that we can, with not a whole lot of effort, scale, we're happy to take that money.

Another business that you suggested you might try to scale more relative to the past is building new towers. There's not a lot of towers that are being built in the U.S. at present, how do you think you can take share?

So every year, there's roughly 2,000 towers that are being built across the U.S. And today, it has been very much spread across much smaller tower companies, some big ones, too. But in general, the big 3 public companies have not gotten a lot of shares of towers from their customers. I think a couple of things. One is, back to my earlier comments, in some cases, customers are asking us to do more and asking us if we would consider building towers for them as anchor tenants. . Where we think the sweet spot is, is that through some of our analytics of understanding customers' towers of where they are and they are we're using data available of network performance, where we can find a tower that has a minimum of 2, sometimes even all 3 customers that are interested in. These are the types of opportunities that we'll a very high hurdle in terms of the use of that capital. So it's not a huge opportunity today, but it's something that fundamentally as a tower company, along with leasing new sites and amendments, along with buying out your ground leases, building new to is something that we're proud to do.

I think 1 of your past employers, Tillman, is very active on that front. Is that a network that you can still tap into to kind of accelerate this opportunity? .

Look, there was a point in time where capital was very cheap that some of these smaller tower companies were able to gain a toehold in the industry and build a high number of towers. I think it's become far more challenging cost to build the tower has almost doubled since the pandemic with the run-up of inflationary cost of labor of raw materials to build the tower, steel, concrete, et cetera. I think that more than likely the towers that get built will be increasingly built for multiple carriers where it makes sense and very few that are back in what Tillman was of build to relocate for a fewer of those just because the economics simply don't work.

Great. Maybe to just touch on the cost savings initiatives. This has been something that's been focused for quite a while now with the fiber sale. What work streams remain to be executed on going forward?

So first of all, we're incredibly proud of the fact we were able to quickly move to execute the fiber and small cell sale, along with our litigation with DISH and fighting to preserve our rights under that contract and pleased that FCC Chairman ultimately put a set aside for DISH there. These were the major things on our plate along with relaunching Crown 2.0 as a stand-alone tower company for the first 7, 8 months of my tenure here at Crown. As we look forward, we're focused on organic growth but more importantly, what can we do to help drive scale and efficiency. And so you've heard terms thrown around like best-in-class, best-in-class in terms of the systems and tools that we have, measuring the cycle times by the time we receive an interest to go on 1 of our towers to the time that we help our customers deploy that. These are all things that we can do that will both increase customer satisfaction, while at the same time continuing to drive cost out of business. So we're fairly relentless. We have a good plan in place, and we're excited with the progress so far. I don't have anything to guide you to yet in terms of expectations of where they're going to lead. But as we put these systems in place as these tools are launched, I think long term, we're excited at the potential cost savings that would be associated with the deployment of this.

Great. You mentioned DISH there. What is the range of outcomes that we should be preparing for?

Yes, I'd like to think that the recent FCC action is now somewhat of a floor that's been established, and there's work to be done there. You still need to have a judgment against DISH in order to tap into that. There's still some work being done on finalizing how that fund will be ultimately dispersed among the claimants. And depending on how many people ultimately show up, we'll determine on how much is left there. We still continue to aggressively pursue DISH in court and are actually feel very good about our suit and that ultimately, we should be able to prevail there. But at least now there has been a floor established and we're very appreciative of the FCC recognizing the impact on our industry and having to set aside.

Great. Maybe a few more on capital allocations. You have indicated that you're interested in purchasing more of the ground leases underneath your towers. Can you just elaborate on that opportunity? And what you evaluate in terms of location, renewal risk, strategic value, et cetera?

Yes. So let's start by saying that we are behind our key competitors. They've got now somewhere 10%, 11% ahead of we are and are already realizing the benefits of that cost reduction. We believe that through ground purchases, and we prioritize those based on those of greatest value in terms of savings for us long term that we can go out there and lower our costs significantly over time. Again, we apply the same types of metrics in terms of what is the multiple that we need to pay there. I think we're judicious in how we apply this. The benefit is and what I saw in Vantage where we were able to basically quadruple or when double the rate of land purchases over time is -- this is something that with focus, with the right internal team and vendor pool that you can go out and execute on smartly. And because we are behind our competitors, we see this as a real opportunity for us at Crown to start to close the gap.

In terms of kind of controlling your own destiny, AT&T has some very long-dated purchase options on a large amount of towers. How should we think about the opportunity for Crown Castle to buy them out of that opportunity?

Yes. I think we always look at great opportunities that are in the interest of our shareholders. So without commenting specifically on that or other types of opportunities like that, we always look to see how we can best deploy that capital the highest return, and it may be in that case that we do. .

Great. Maybe just 1 last one. Kris Hinson, who was formerly IR has been named Chief Commercial Officer; and Mark Lendon as Chief Information Officer. What are the objectives that led you to create these new positions?

Yes. I think as we launched Crown 2.0, 1 of the things we looked at was trying to flatten the organization took out several layers of management in an effort to be more responsive, to be more nimble in the marketplace and to be able to execute smartly. And then what we've been able to do, I think, in the case of Chris, who's 1 of our leaders is kind of pull him up and give him some additional operational experience. And because organic growth is 1 of the key focuses of our company over the next several years, putting somebody in place can execute smartly and having the focus on that was in the best interest. And then on the CIO front, we realized we really needed somebody that was AI conversant that could bring in a fresh set of eyes to help us in driving the tools into the marketplace. We have a great opportunity ahead of us with the types of platforms that we're now implementing. These are the same platforms that we had used advantage, and I saw formative effect. So by bringing Mark in, we've got somebody to help lead that team and accelerate our progress of rolling out these new systems.

Great. A lot to be excited about. Chris, thank you very much. We'll leave it there.

Yes. Thank you so much.