The upside of Crown Castle International’s investments in fiber and small cells dwarfs the possible downside, Daniel Schlanger, executive vice president & chief financial officer of Crown Castle International, said in an interview with Dave Barden, managing director, Bank of America Securities yesterday during the BofA Merrill Lynch 2020 Media, Communications & Entertainment Conference.
Schlanger was responding to a question about whether Crown Castle could have invested money in ways that would have given a higher return and if he regretted investing in fiber and small cells.
“It’s clear that the investments that we made over the last five years are not the highest return investments,” Schlanger said. “We could have bought stock in Tesla and made seven times our money, but our business is not to speculate in stocks. When you factor in the probability of an upside, the upside way outweighs the downside.
“Do I think we made a mistake? Absolutely not. We are trying to create a model that worked so well with towers. We have shared infrastructure that lowers our customers’ costs and generates a return over and above our costs of capital for our investors,” he added.
The question was tied to arguments made by Elliott Management, which has a $1 billion interest in Crown Castle, that the company’s stock has underperformed compared with other public towers because of its fiber strategy, which has yielded “disappointing returns despite the $16 billion of investment.”
Crown’s interest in fiber and therefore small cells stretches back to 2014 when it purchased 24/7 Mid-Atlantic Network, which owned 900 route miles of fiber in the Baltimore/Washington corridor. At the time, Crown had more than 6,000 nodes under contract that it was in the process of building, and it needed fiber to build out small cells for Verizon in the Baltimore market. Since then, it has purchased numerous other fiber companies, including Quanta Fiber Networks (Sunesys) in 2015, FPL FiberNet Holdings in 2016 and Wilcon Holdings in 2017. Today, it is the long-term owner of more than 80,000 route miles of fiber.
Crown has been installing small cells for indoor, outdoor and mixed-use areas since 2003, and today it has 70,000 small cells on air or under contract.
Schlanger said it is too soon to judge whether the investment into fiber and small cells will pay off, and he said he is confident that the data needs spurred by 5G technology will bring exponential demand for more small cells. On Crown’s web site, it projects that 800,000 new small cells will be needed by 2026.
“We are not to the point where these investments (under any underwriting scenario) would have generated returns over and above our cost of capital,” he said. “It is not a sufficient time to determine whether they were the right decisions or not. As we look out into the future, we feel very strongly that small cells will be an important part of the network architecture going forward.”
Schlanger said the economics of collocation on small cells are good enough push up the initial anchor tenant yield, which is 6 percent to 7 percent, up to 10 percent to 12 percent.
“The assumption is we are adding a single additional tenant per small cell or an additional two to three nodes per mile of our fiber that we already own,” Schlanger said. “That is a relatively low bar to make a return. The potential is there that we could add significantly more small cells if we see the potential upside of millions of small cells in the United States and we have fiber in the top 30 U.S. cities, which is where the majority of those small cells will go. We could see seven or eight nodes per mile. The upside in that is huge.”
Crown Castle International’s results in the second quarter exceeded its expectations, reflecting strong demand for towers, small cells and fiber and generating AFFO per share growth of 8 percent for 2019, up from its prior outlook of 7 percent growth and at the high end of its long-term growth target, stated Jay Brown, Crown Castle’s CEO, said on the company’s Q2 earnings call today.
“We believe our ability to offer towers, small cells and fiber solutions, which are all integral components of communications networks and are shared among multiple tenants, provides us the best opportunity to generate significant growth while delivering high returns for our shareholders,” Brown said.
Crown Castle’s current tower leasing activity is its highest in more than a decade, causing it to increase its full year 2019 Outlook.
“Crown Castle entered 2019 with momentum on the tower side of the business, and I am excited that we are experiencing even higher levels of tower activity than we expected. We believe this level of activity will carry into next year,” Brown said.
Crown Castle is constructing 30 percent more small cells than last year as carriers invest in their current networks while beginning 5G deployments. However, it now expects to deploy 10,000 small cells in 2019, which is at the low end of its expected range of 10,000 to 15,000.
“The significant increase in small cell deployments is straining the response time of municipalities and utilities, resulting in longer construction timelines than we previously experienced,” Brown said. “These pressures are most acute in several top markets where we are seeing the highest volume of activity.”
Site rental revenues grew approximately 6 percent, or $69 million, year over year, including $66 million in organic contribution to site rental revenues and a $3 million increase in straight-lined revenues. The organic contribution to site rental revenues represents 5.7 percent growth, comprised of 9.5 percent growth from new leasing activity and contracted tenant escalations, net of 3.8 percent from tenant non-renewals.
Vapor IO and Crown Castle International have jointly developed a service that seamlessly interconnects Vapor IO’s Kinetic Edge with Amazon Web Services (AWS) via Crown Castle’s high-speed Cloud Connect. This product enables a new class of mobile and wireless edge applications that span the continuum from edge to core. Starting today, customers at Vapor IO’s Kinetic Edge can build edge applications that interconnect with AWS over an operator-grade fiber optic network. Built atop AWS Direct Connect, this collaborative offering unlocks a powerful class of edge applications that split workloads and data between the mobile edge and centralized locations, delivering a seamless end-to-end experience.
“By directly connecting AWS services to applications at the Kinetic Edge, we’re bringing the full power of the cloud to the last mile wireless network, delivering the foundation of a true edge-to-core architecture for developers,” said Cole Crawford, founder and CEO of Vapor IO. “We are aggressively rolling out the Kinetic Edge across a national footprint that will reach over 20 markets by the end of 2020 with a planned deployment of over 80 additional markets. By incorporating AWS Direct Connect into our last mile network, we enable seamless cloud integration for edge applications.”
Customers of Vapor IO’s Kinetic Edge can build applications on AWS that directly interact with Vapor IO’s tower-connected data centers at the edge of the cellular wireless network, via Crown Castle’s dedicated high-speed fiber link. This will allow developers to build wireless and mobile edge applications that can reduce network costs, increase bandwidth throughput, and rely on a more consistent network experience than Internet-based connections.
Taxes were not the only thing due April 15. The FCC’s Small Cell Streamlining Order, which ruled that overly stringent aesthetic requirements for small cells could be judged an unlawful prohibition of services, mandated compliant aesthetic ordinances be developed by local governments by mid-April.
Speakers and attendees at the Wireless West Conference last week in Phoenix said the aesthetic requirements produced by the cities have spanned the gamut from simple model ordinances to highly complex regulations meant to prohibit small cells.
Aesthetic codes have to reasonable, cannot be more burdensome than requirements of other infrastructure and have to be published in advance, according to the FCC. Aesthetics requirements must also be technically feasible and directed at mitigating public harm or deployments that are out-of-character with the cityscape.
The aesthetic code deadline came not long after the California State Supreme Court upheld an ordinance that established various standards of aesthetic compatibility for wireless equipment by the City and County of San Francisco in 2011.
“The California State Supreme Court ruling is not inconsistent with the FCC order,” said Bob Jystad, government relations manager, Crown Castle International, told eDigest before he moderated the panel, FCC & Me: Effects of the New FCC Order, on the second day of the show. “The FCC order goes into more detail, which is critical. What does it mean for the cities to act reasonably in terms of aesthetic review? The FCC order attempted to answer that.
Most of the jurisdictions have adopted reasonable design guidelines, working with the wireless industry, according to Jystad. “We have been pretty happy with what we have seen,” he said. “If you can identify a design that will go with our technology, we will go with it. We don’t want to be delayed or overcharged.”
Scott Longhurst, government relations manager, Crown Castle International, said the FCC order provides needed certainty for carriers and municipalities, creating a process for rapid small cell deployment. He is already seeing, at least for the short term, a thawing of the municipal/carrier relationship.
“If a carrier submits a design that meets those standards, they will get a permit. And, vice versa, for the jurisdictions. The carriers are going to build the types of facilities the cities want to see,” Longhurst said. “We see a lot of mutual agreements between the carriers and the municipalities. We are seeing the applicants be really flexible, extending time for the jurisdictions to figure out their processes.”
But, municipalities should not take advantage of that flexibility, according to Longhurst, or the wireless industry will come back enforce the FCC’s shot clock. “I am seeing a lot of patience, which preserves relationships. We are in a hand-holding stage, but if the order is upheld, we will need to see a more solid-fisted approach,” he said.
Jystad, on the other hand, said he likes how shot clocks can get a conversation started about what processes are really needed, such as whether a public hearing is needed for every single small cell using an approved design.
Mediator May Minimize Municipal/Carrier Conflict
In light of the conflict between municipalities and carriers, WSB engineering consultants saw a need in the marketplace to serve as a mediator between the parties.
Carly Kehoe, WSB senior planner, said a lot of cities merely want the carriers to provide model ordinances, while others are more contentious and write the most critical ordinance that they can. They try to get small cells denied through ordinances dense with details.
“There is disconnect. The cities are not listening,” Kehoe said. “It is a wide array that we are seeing in [aesthetic ordinances], Some of them are simple and some are complex and make compliance difficult. And a lot of cities don’t seem to care about meeting the aesthetic ordinance deadline.”
WSB uses its credibility gained from providing engineering services to jurisdictions and its contacts on the carrier side to act as a mediator.
“The industry is ready to deploy and it gets jammed. There is a clog in the pipeline at the local level,” Kehoe said. “We work with the local jurisdiction to determine the hold up and what the [September] FCC order means. Local jurisdictions don’t understand and they fear that the federal government is forcing them to do something with their land and they have lost their rights.”
One city that definitely is not in a listening mood is Austin, Texas, one of the cities that is suing the FCC over the Small Cell Streamlining order. Ironically, as the home of South By Southwest, the city brings in world-renown experts that speak on the latest and greatest technology annually, yet it does not want to work with any of the carriers to deploy small cells.
“They hate small cells, which is funny because this city wants to be on the cutting edge of technology,” Kehoe said.
Crown Castle International’s first quarter results were in line with its expectations for the year, with a 6 percent increase in site rental revenues, an 84 percent increase in net income, 8 percent increase in Adjusted EBITDA and 9 percent increase in AFFO.
“In the first quarter, we delivered solid results that were in line with our expectations, positioning us well to generate attractive growth in cash flows and dividends per share for the full year 2019,” stated Jay Brown, Crown Castle’s CEO. “This continued growth reflects the strong fundamentals we see across our business, including our major customers spending to improve their current networks while beginning to invest in 5G.”
Analysts, many of whom believe the tower stock prices will not go much higher, were not overly impressed.
Deutsche Bank Research
We continue to like Tower fundamentals and view CCI as our preferred idea (and top 5G beneficiary) among the group. However, our recent downgrade to Hold reflects lack of upside to our 2019YE price target ($121) and broader concerns around valuation. For context, CCI trades at 21x 2019E P/AFFO; this is at the high end of its historical range (17x-21x), despite a business mix incrementally skewing towards Fiber (relative to Towers) in recent years.
Nick Del Deo
Q1 2019 numbers were generally consistent with expectations, as is typically the case, though towers were a bit stronger than we expected and fiber / small cells softer, with network services contributing more than expected. Instead, we’d note that growth remains below that of its peers when considered on an apples-to-apples basis, the company has a meaningful contribution from non-tower assets, and its reported results require the greatest adjustments to derive its underlying economic results.
Wells Fargo Securities
CCI reported solid Q1 2019 results. Organic revenue growth was a tad light of our expectations, but considering the company reiterated its 2019 guide, we suspect activity was in-line with CCI’s expectations and look for an increased benefit in the balance of 2019. As presented in our 4/15 downgrade of the towers sector, we suspected the towers were pricing in a “beat and raise” story throughout 2019.
New Street Research
Site leasing revenue and EBITDA were in-line. AFFO beat on lower sustaining capex, but this will be offset by higher capex in subsequent quarters. Guidance was unchanged, which is modestly disappointing since CCI has tended to raise guidance at this point in the year. No material changes to estimates or thesis. We continue to see the greatest relative value in SBAC within the towers.
Site rental revenues grew $66 million, from first quarter 2018 to first quarter 2019, inclusive of approximately $65 million in Organic Contribution to Site Rental Revenues and a $1 million increase in straight-lined revenues. The $65 million in Organic Contribution to Site Rental Revenues represents approximately 5.7 percent growth, comprised of approximately 9.5 percent growth from new leasing activity and contracted tenant escalations, net of approximately 3.8 percent from tenant non-renewals.