With strong leasing activity from the big four carriers, Crown Castle International saw site rental revenue increase $132 million, or 21 percent, to $747 million for the first quarter 2014 from $615 million, year over year, tower company executives said during last week’s earnings call.
“CCI reported strong 1Q14 results (excluding $5 million of one-time benefits) with site leasing revenue, site cash flow, EBITDA and AFFO above expectations,” wrote Jonathan Atkin, RBC Capital Markets analyst.
During the quarter, Crown Castle spent $111 million on revenue-generating capital expenditures, including $75 million on existing sites and $36 million on the construction of new sites, primarily small cell construction activity. About 85 percent of new leasing activity is coming from new installations.
“Our current application pipeline leads us to expect new leasing activity per quarter for the remainder of the year to be approximately 15 percent higher compared to the level we experienced in the first quarter 2014,” said Ben Moreland, Crown Castle president and CEO.
Jay Brown, company CFO, added, “Most of that is new tenant installation on sites rather than amendments as we’ve seen over the last several years. So it’s site densification and them adding additional sites.”
Crown Castle’s first quarter results were the first since it closed on the deal in which AT&T leased the rights to 9,000 of its wireless towers and sold 600 more to the tower company for $4.8 billion.
“Adjusted EBITDA increased 20 percent, driven by the inclusion of the AT&T towers, an increase in site rental gross margin and strong performance of our network services business, and offset to a small degree by increased G&A, which was up about 8 percent year-over-year,” Brown said. “This increase in G&A includes the effect of increased staffing to manage our T-Mobile and AT&T tower transactions, which increased our tower portfolio by nearly 75 percent, and the significant growth of our small cell networks.”
Verizon Wireless and AT&T are currently focused on network densification, while T-Mobile and Sprint work to complete their LTE coverage deployments so they can begin their densification efforts, according to Moreland. Based on the 3G build out, which ran from 2002 to 2009, LTE is still in the early stages of deployment, he added.
“Given the revolutionary nature of 4G, we have reasons to believe that the 4G LTE deployment cycle will be even longer than the 3G cycle,” Moreland said. “And in order to meet Cisco’s projected 8-times increase in mobile data demand, we believe carriers will continue to invest over a multiyear period. This multiyear deployment cycle gives us confidence in the long runway of sustained organic revenue growth.”
Sprint and T-Mobile are expected to begin densification of their LTE networks in 2015 once coverage build outs have been completed.
“We expect increasing contributions to sector demand starting in the late second half of 2014 from T-Mobile’s 700-MHz build out and Sprint’s deployment of 8T8R LTE technology, though we believe CCI’s ability to monetize 700-MHz amendments from TMUS could be slightly impaired versus peers,” Atkin wrote.
Crown Castle expects 3 percent of its run-rate site rental revenues to be negatively affected by the iDEN network decommissioning, which is spread evenly throughout 2014 and 2015.
With a little help from AT&T’s towers, Crown Castle International beat analysts’ estimates at Wells Fargo and Wall Street in the fourth quarter. Site rental revenue was $651 million, adjusted EBITDA was $468.4 million and adjusted funds from operations were $358.7 million, beating Wells Fargos estimates of $626.5 million, $442.6 million and $317.9 million.
In December, Crown Castle closed on the deal in which AT&T leased the rights to 9,000 of its wireless towers and sold 600 more to the tower company for $4.8 billion.
“We note the AT&T towers reportedly contributed $18 million in site rental revenue and $9 million in site rental gross margin in Q4, which were excluded from prior company guides as well as our Q4 estimates,” Jennifer Fritzsche, senior analyst, Wells Fargo, wrote in an Equity Research Flash Comment.
Site rental revenue was up 14 percent year over year, 3 percent of which could be attributed to AT&T towers, and was reduced 1 percent by churn and 1 percent by currency headwinds, according to Jay Brown, Crown CFO.
“We saw a significant increase in U.S. new leasing activity in the fourth quarter 2013, representing more than a two-fold increase compared with the same period in 2012,” Brown said during the earnings call.
The two-fold increase in new leasing activity includes both new licenses and amendment activity, with new licenses representing 65 percent of new leasing activity.
“We believe this activity reflects the carriers’ focus on deploying their equipment on additional sites to help ease capacity-related issues, commonly referred to as site densification,” Brown said.
Ben Moreland, Crown president and CEO, said carriers’ ability to make profitable network infrastructure investments is leading to unprecedented LTE rollout activity.
“The U.S. market is unique because network quality continues to be a differentiator between carriers,” he said. “The strong correlation between network investment and low consumer churn necessitates the carriers to continue investment in their networks to improve quality, increase capacity and add functionality to remain competitive and grow.”
Only 19 percent of installations were covered by pre-sold leasing agreements in the fourth quarter, compared with more than 70 percent of the installations in the prior year.
Crown Castle spent $182.3 million on capex in the fourth quarter, which exceeded estimates of $123 million. “The company spent $137.8 million on construction and improvements (vs. our $62.5 million estimate), though sustaining capex of $20.5 million was more in line with our $23 million estimate,” Fritzsche wrote.
By the end of the year, Crown Castle owned 41,322 sites, including 39,568 domestic and 1,754 in Australia, as well as 11,000 small cell nodes.
The U.S. tower market is the place to be for growth, Ben Moreland, CEO, Crown Castle International, emphasized in the company’s third quarter earnings call, which was called in the wake of its AT&T Tower purchase.
“With networks already supply-constrained in the face of broadband data growth estimates of 6x to 8x over the next four years, it’s very clear to us that the U.S. market is one where we will see significant growth in the years to come,” he said. “We believe that the U.S. market represents the most compelling risk-adjusted returns for capital investment in wireless infrastructure.” Only 4 percent of Crown’s total sites will be located outside of the United States.
As a matter of course, Crown Castle chose to invest $4.85 billion to acquire 9,700 sites from AT&T, which will bring its U.S. tower count up to 40,000. As well as underpinning its commitment to the U. S. market, the purchase feeds Crown Castle’s urban presence, with half of AT&T towers residing in the top 50 markets. After the sale, 71 percent of Crown Castle’s towers will be in the top 100 markets.
“These AT&T towers represent a unique opportunity to acquire a large, urban-centric portfolio and further our strategy,” Moreland said.
With the completion of the initial phase of LTE deployment, macro site collocation is now driving in the market, Moreland said. AT&T’s towers have an average of 1.7 tenants, which Crown Castle will try to increase by at least one tenant per tower.
“These towers are well positioned to accommodate the demand we’re seeing in the carriers’ network densification,” he said.
Jennifer Fritzsche, Wells Fargo senior analyst wrote in an equity research note that she senses a “major shift in focus toward densification.” One sign of that swing is the drop in amendments as a percent of leasing activity from 70 percent to 20 percent in the third quarter, year over year at Crown Castle.
“Consistent with our recent channel check findings, Crown Castle indicated it saw much new business from new cell sites as carriers (namely AT&T and Verizon Wireless) continue to densify their respective LTE footprints,” Fritzsche wrote.
Crown Castle has six tower acquisitions from domestic carriers and historically they have performed well. Tower purchases from Bell Atlantic/GTE Wireless, Powertel and Bell South have produced yields of 15 percent, 16 percent and 18 percent, respectively – well above their 4 to 5 percent initial yields. Moreland said he prefers carrier portfolios because of the consistent quality of the locations.
“We believe, like the value we have created from the five other carrier tower transactions we’ve done, we will continue to drive shareholder value through our operation of these [AT&T] towers,” he said.
Crown to Sublease Tower Space to AT&T
AT&T committed to an initial lease term of 10 years across all sites with multiple renewal options and monthly rent of $1,900 per site with an annual escalator of 2 percent. Subject to certain limitations, AT&T’s rent includes rights to limited pre-defined space on the transaction sites, similar to certain existing customer agreements.
Crown acquired the exclusive right to lease and operate the AT&T tower portfolio sites for an average term of 28 years with expirations ranging from 2032 to 2048. At the end of the term, Crown has options to purchase the sites outright for a total of $4.2 billion
With carriers making progress by leaps and bounds in LTE deployment, are the good times are about to come to an end? That was one of the questions Jonathan Adelstein, president and CEO, PCIA-The Wireless Infrastructure Association, posed to the tower executive panel at the association’s annual conference, Oct. 9 in Hollywood, Fla.
“We have seen the coverage maps … and you see them getting filled out and people are kind of wondering where are we in the 4G build out?” Adelstein asked The View From the Top – A Tower CEO Roundtable panel.
SBA Communications is busy and expects to be for some time, according to Jeff Stoops, president and CEO, because it is early in the LTE deployment.
“We’re still getting to full coverage. We’re not there yet. And we’re just beginning to crack the capacity stage and the ultimate full build out and tweaking of the networks,” Stoops said. “So, I’m very optimistic that the strong trends that we’re currently involved with will continue for some period of time.”
Ben Moreland, president and CEO, Crown Castle International, said his company is seeing a return to collocations this year as Verizon Wireless and AT&T get further along into their LTE builds.
Amendments peaked in the fourth quarter of 2012 at historically high levels at SBA Communications and now the trend is moving toward collocations, according to Stoops.
“When you think about how carriers deploy their networks, it is all about speed and efficiency, which is the amendment process,” he said. “And then what has followed in past cycles and I don’t see this one as any different is the in-fill stage where they test the holes and the demand. And that’s really satisfied by brand new tenancies.”
Steven Marshall, executive vice president, American Tower, said the company is seeing somewhat of a swing back to collocations but is still experiencing a great deal of amendment activity.
The tower CEOs discussed what might be the next carrier to enter the wireless industry and which spectrum it might use. Dish Network was held by to be the most likely to get into the ring by Moreland and Stoops
“Dish Network is very public about their need and desire to have a wireless product. They’ve been obviously very aggressive in acquiring spectrum and have made no bones about their interest in either acquiring or partnering with a wireless carrier to get out and build a wireless product,” Moreland said.
DISH controls enough spectrum and has a plan to deploy on a network-sharing basis, according to Stoops.
While Marshall had no prediction on the next carrier entrant, he said that the Dish spectrum will ultimately get deployed and drive additional demand for infrastructure.
“Maybe other people, maybe Charlie Ergen [Dish chairman of the board], will ultimately land on a particular strategy that drives a lot more infrastructure investment for us. But one thing’s for sure, this is a fantastic industry that’s got fantastic runway and great growth potential. Other carriers will continue to invest in their platforms and other people will come in to provide that need.”