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.
Mosesso: What will the role of wireless be in the future?
Brown: The way we use our devices today, pulling down information either for work or entertainment, is going to change. With reductions in latency, what we will see over the next couple of decades is a meaningful amount of traffic moving to machine-to-machine communications in industrial settings in every vertical market. It will be used to reduce costs and increase savings. I am not aware of a single industry that is not working on wireless applications.
Mosesso: What are the opportunities for infrastructure providers like Crown Castle?
Brown: Towers are going to continue to play a role in the next generation of wireless deployments. They are the most cost-effective, efficient way for any company to deploy wireless spectrum. Even nontraditional owners of spectrum and deployers of wireless networks are likely to first use towers as the backbone of their network. Fiber-connected small cells will increasingly be used to improve coverage as well as the density of the network.
Mosesso: What are your thoughts on the effect of recent and upcoming auctions?
Brown: What is encouraging is that the cost of the spectrum bought at auction in the higher bands has come down dramatically, which means there will be more capital available to go toward the deployment of those technologies. The additional spectrum that is being provided by the FCC, both licensed and unlicensed, is really good for our industry and incredibly encouraging.
Mosesso: Most of the spectrum that is coming to market is in the higher frequency ranges. What does that mean for leasing across towers and small cells?
Brown: Even in the higher spectrum bands, towers are going to be used. Maybe less, however, than they were used, historically, nationwide. But in targeted areas, higher spectrum bands will be used on towers as a portion of the carrier’s network. It is more likely that those higher bands will be used on small cells in urban settings and dense suburban areas. Over time, small cells will have a greater diversity of spectrum bands than you see on macro sites, if you consider the whole portfolio of assets.
Mosesso: How do you respond when people outside of our industry will say that the coming of 5G will lead to a massive spike in capital spending?
Brown: I am quick to discourage people from thinking that way about our industry. In reality, the operators are likely to manage their cash flows and balance sheets appropriately and think about capital investment as a long runway of investment in their networks. They have done that for a number of years. A lot of the volatility of spending by wireless carriers has largely evaporated over the last five years. The level of spending has become relatively steady.
I believe over the next couple of decades we will see consistent investment in infrastructure as we deploy 5G.
Mosesso: You have said that Crown Castle will deploy 10,000 to 15,000 small cells in 2019. What is driving this significant acceleration?
Brown: Five years ago, we had almost no small cells — 1,000 to 2,000. Today, we have almost 30,000 of them that we have deployed in the top 30 U.S. markets. Another 35,000 small cells will be under construction in the next 18 to 24 months.
The deployment of small cells will require a massive increase in the amount of spending. That ramp is going to continue to accelerate. With the pipeline that carriers today say they are going to need in the coming years, that ramp is going to continue to accelerate. What is this going to look like in 20 years? Every industry estimate I have read says that each wireless carrier is going to have at least 1 million small cells.
Mosesso: What is one way in which the deployment of small cells differs from macrotowers?
Brown: While there are companies that are willing to build one to two to ten towers for a carrier, small cell deployments are a very different business. When we are building small cells in Southern California for example, we may get 4,000 to 6,000 small cells in one order, because they have to be deployed in scale using fiber-optic cable. There is less opportunity for smaller companies to come in and do a few small cells, because the carriers are looking to cover a much larger geography at one time.
The long awaited 5G deployments may disrupt other areas of the wireless infrastructure buildout, Earl Lum, president, EJL Research, told an audience at IWCE, this week in Las Vegas.
“Since we are at the cusp of rolling out 5G, small cells and anything on the periphery with get put on the back burner. Whenever a new network gets rolled out, you see priorities change,” Lum said. “You are going to see a big shift back to sub-6 Gig, particularly the CBRS band at 3.5 GHz.”
Indications from the carriers during the MWC19 in Barcelona last week are that purchases of small cell equipment and siting are beginning to slow down in the United States, which coincides with the increased concentration on a 5G macrocell deployment.
“I learned at the Mobile World Congress that all the countries that are planning to deploy 5G are deploying it on macrocells, collocating it with 4G and 3G equipment,” Lum said. “You are going to see the deployment of Massive MIMO antennas, which are not going to fit on a small cell.”
MIMO antennas operating in the 3.5 GHz band attached to macrocells can provide 5G coverage and put off the need for small cells.
“With Massive MIMO, you have multiple beams, each one is the equivalent of a small cell,” Lum said. “If you can put off building eight small cells, how much money do you save? At $100,000 per small cell, that’s $800,000 you have saved with a single MIMO that costs $35,000. That is a pretty good return on investment.”
Regulatory Uncertainty May be Affecting Small Cells
Their may be other factors affecting small cell rollout, such as regulatory uncertainty. The FCC’s small cell streamlining order is currently being scrutinized by the U.S. Court of Appeals Ninth Circuit. Congress is looking into whether the FCC colluded with the carriers, in an attempt to steer the judicial review of the FCC’s small cell order away from the Ninth Circuit, which is known for pro-municipal judgements. And 21 states have passed laws forcing localities to be in compliance rules streamlining small cell deployments.
“We are in a strange 90-day window,” Scott Longhurst, government relations manager, Crown Castle International. “Even though the small cell order was adopted Jan. 15, local jurisdictions have until April 15 to adopt their own aesthetics standards.”
Regulatory uncertainty is affecting carriers in mostly the secondary and tertiary markets, while major markets, such as New York, Los Angeles, Chicago, Boston, Miami – they are “building out pretty vigorously,” according to Longhurst. Crown Castle is currently building out 5,000 small cell nodes in Los Angeles, alone, for T-Mobile.
“In the largest markets, small cells are a coverage play, filling in around the macro antennas,” Longhurst said. “As chipsets are placed in the new handsets, the pressure will build for the carriers to deploy small cells.”
Even though the FCC adopted rules that limited fees, tower companies are still seeing municipal fees that are all over the map.
Questions about what fees are acceptable “might be a part of why you are seeing a bit of a slowdown right now is both sides, cities and carriers and tower companies are trying to figure this out,” Longhurst said.
Wireless has been the only use of the right of way that is regulated by planning departments of the local jurisdictions. Longhurst is confident that the courts will uphold the FCC’s effort to change that.
“The intent of the FCC in its small cell streamlining order was to force the local jurisdictions out of the discretionary permit process in the right of way. So wireless will be treated like any other utility in the right of way,” Longhurst said. “So, from that standpoint, the FCC order has a good chance of being upheld.”
Longhurst is beginning to see a change in heart at the associations representing the cities, because of the importance of 5G to the growth of cities in the future. “I think they are going to come around. They are not going to want their constituents coming back at them someday asking why their city got bypassed by the 5G revolution.”
The industry is still learning basic issues surrounding the physical deployment of small cells, according to Longhurst. For example, they have found that the integrated millimeter antennas cannot be placed behind a shroud. Because of the RF propagation characteristics of high-band, the waves reflect off of the shroud.
“We have been working with the cities for a year and a half on designs to conceal this equipment,” Longhurst said. Now we have to go back to them and tell them a square must be cut out of the shroud so the 5G radio and transmit and receive signals.”
Six weeks ago, few people knew there even was a Mobile Infrastructure Hall of Fame. But as WIA President and CEO Jonathan Adelstein took the stage for the first induction ceremony in a crowded room of 500 of the industry’s leaders, it felt like there has always been one. Or at least there was a pent-up demand for one.
“Today, these five honorees come from companies with a combined market cap of around $200 billion. They employ nearly 100,000 people and growing. And they’re driving the innovation economy with wireless broadband few dreamed possible in the flip phone era,” Adelstein said. “These five leaders are inducted tonight because of their foresight, their vision, and their tenacity. Each faced down challenges — and overcame them all.”
Gathering the top wireless CEOs and others at a ballroom in Washington D.C. on a Wednesday night in mid-November to honor its best had another altruistic goal. It raised $500 thousand for the WIA Foundation in support of training, education and apprenticeships.
“Tonight, the [inductees] lend us their presence because each believes — with us — that another challenge lies ahead for the wireless industry. To build world-class 5G networks — we need a world-class 5G workforce. Together, we’re taking steps to meet that challenge — building a workforce that’s worthy of this great industry,” Adelstein said.
The evening was attended by such notables as FCC Chairman Ajit Pai, Commissioners Michael O’Rielly and Brendan Carr, U.S. Sen. Steve Daines, and other guests from the FCC, Congress and the Administration.
The inaugural class of Hall of Fame inductees included: Neville Ray, CTO, T-Mobile; Steven Bernstein, founder, former CEO and current board member of SBA Communications; Steven Dodge, founder, former CEO, American Tower; John Kelly, former CEO, Crown Castle; and Jose Mas, CEO, MasTec Network Solutions.
John Legere, president and CEO of T-Mobile, lent his star power and sense of humor in a heartfelt tribute to Ray, who has 25 years of wireless experience and has led the carrier through the LTE roll out, from the zero POPs in 2012 to 324 million POPs today. The first 200 million POPs were built in six months. He also pushed new technology into the field, including Wi-Fi calling, VoLTE, License Assisted Access and 4X4 MIMO and 256 QAM.
“Neville Ray is truly a genius,” Legere said. “This is a guy that gets things done. You give him the goal and the resources, and you just know that it will be done. You get out of the way.” He joked that Ray’s budget of $50 billion also played a key role in the success. “Give the guy some cash and he makes it happen.” Ray later clarified that he only got $40 billion.
Jeffrey Stoops, president and CEO, SBA Communications, praised Bernstein’s decision-making ability and leadership qualities.
“He can quickly and incisively distill complex issues down to straightforward decisions has been a critical part of our success,” Stoops said. “More importantly, it’s his entrepreneurial spirit and his values, including honestly, integrity, fair play, quality, customer service and hard work, that Steve instilled in SBA that remains a driver of our continued growth and success.”
Jim Taiclet, chairman, president and CEO, American Tower, said Dodge has been a “true trailblazer” for the tower industry, and has served as innovator throughout his 40-year career, which included banking, media and telecom.
“He founded and took public three pioneering companies. The first was American Cable Systems, which he grew into an industry leading position and sold to Continental Cable. Then he went on to American Radio Systems, which was sold to CBS, and then American Tower Corporation. The only flaw in Steve’s plan was an apparent lack of creativity with company names.”
Ben Moreland, former CEO of Crown Castle, introduced Kelly as the “most wonderful person” he has ever known. Kelly served as a mentor to Moreland and “set a high bar as a humble leader and a really nice guy,” Moreland said. Kelly was CEO of Crown from 2001 to 2008 and remained on the board for a number of years afterward.
“He inspires people to be the best they can be,” Moreland said. “He instilled a very customer-centric focus that required us to always think about a win-win situation with the carriers.”
After Mas became CEO of MasTec, the company grew to 22,000 professionals nationwide, quadrupled its revenues, increased earnings six-fold, and reached a ranking of 428 in the Fortune 500, O’Rielly said in his introduction.
Additionally, Mas diversified MasTec beyond telecom construction into renewable energy, oil & gas and electric transmission, among others.
“Mr. Mas is not just as successful businessman. He is a long-time leader in the Miami-Dade United Way’s Toqueville Society, which donated $15 million to improve lives last year. Most recently Mas and his brother Jorge joined a consortium with David Beckham to raise $25 million to bring a new Major League Soccer team to Miami,” O’Reilly said.
Regardless of the number of wireless carriers, tower companies will benefit from the release and development of RF spectrum and from vast increases in network traffic coming with 5G.
Wireless communications carriers are investing at least as much, if not more, in small cells than what they spend to deploy macro sites, according to Jay A. Brown, president and CEO of Crown Castle International. The company rents to carriers the wireless communications infrastructure that it owns, such as telecommunications towers, small cells, distributed antenna system (DAS) networks and routes of fiber-optic cable for connecting antenna sites with the carriers’ networks. All of the company’s assets are in the United States, although it has previously owned infrastructure in the United Kingdom and Australia.
Speaking at a plenary session at Connectivity Expo, conducted by the Wireless Infrastructure Association in Charlotte, North Carolina, Brown said he sees a diminishing opportunity to acquire macro sites while looking hard at the opportunity to acquire other kinds of infrastructure carriers need in the form of dark, dense, urban fiber. Dark fiber refers to installed fiber owned by one party and rented for use by another. He said Crown has dense fiber in 23 of the top 25 U.S. markets.
“We have invested $13 billion in fiber and small cells,” Brown said. “But our view is that there are no more assets of like kind of any substantial size to acquire.” He said increasing Crown’s inventory in fiber would involve building more dark, dense, urban fiber.
As for towers, Brown said the valuations of portfolios that remain with smaller, private owners — that may become what he called tuck-in acquisitions — have been steady for several years. For the past 20 years, he said, those valuations have almost always exceeded the valuations of towers owned by public companies.
“In most industries, the public players are afforded a higher multiple (valuation) because of diversification and other reasons,” Brown said. “In our industry, the private, smaller players have had valuation premiums. That probably argues that public companies are undervalued relative to the value of the assets.”
Referring to Dish Network’s plan to spend $500 million to $1 billion to construct a narrowband wireless network to serve internet of things (IoT) customers, Brown said that any time a company has radio-frequency (RF) spectrum to deploy, it works really well for the wireless infrastructure business. He said previous spectrum deployments had afforded the tower owners a large opportunity. With Crown owning 40,000 towers, Brown said, the company is excited about what the Dish Network IoT construction could mean.
Beyond Dish Network’s system, which initially will use 4G wireless technology, lies the prospect of 5G wireless network construction by Dish and possibly all of the existing wireless carriers. The first phase of 5G construction will overlay new equipment at existing macro sites, according to Brown.
“Macro sites are absolutely critical to 5G in the long term,” Brown said. “We don’t view small cells as a substitution for the macro sites. Carriers will design their next-generation networks around existing sites, which will, in time, become the hub sites as they design cloud-based radio access networks (C-RANs). As network traffic grows, it will exceed macro site capacity, and carriers will have to cell-split their networks and focus spectrum on specific areas. So, they’re using small cells to supplement existing macro networks.”
Crown has seen more bookings for small cells during the first quarter of 2018 than for the entire year of 2016, Brown said. Orders are market-wide and for thousands of small cells at a time, he said. For the next 20 years, he said, the opportunity for small cells and the infrastructure associated with them may be greater than that of towers over the last two decades. In Brown’s view, Crown has been able to obtain a return on the capital deployed for small cells and fiber that has been both attractive and encouraging at the early stages. Brown said that macro sites continue to be an important part of the network, and he expects amendments and new leases for them. Meanwhile, he said, he expects a significant portion of capital will be invested by the carriers for small cells and fiber.
“Crown wants to maximize the dividend per share that it pays, which is the best indication of the long term value of the company,” Brown said. “Our investments in fiber and small cells will have the highest effect for long-term value creation. The incremental lease-up is about twice that of towers. The winning play on fiber and small cells is delivering a solution to wireless carriers to share at a much lower cost than if they deployed them by themselves.”
Crown pays about 75 percent of its cash flow in the form of dividends and still invests more than $1.5 billion in capital expenditures and acquisitions, according to Brown. “We make better decisions when we have limited resources, and by paying out the majority of our cash flow to shareholders, that makes us really disciplined capital allocators,” he said. “Not only do we have the long-term cost of the capital, we have the short-term cost of dilution from paying dividends on shares as we issue them.”
The company makes sure investments it makes include a portion of equity, not only to cover the cost of capital but to be additive to the long-term accretion of the business, Brown said. He said Crown would continue to grow its dividend, which now is growing it at 7 to 8 percent per year. “I like coming back to the market and explaining the value of the investments that we’re making, and then raising the capital as necessary,” he said.
Sprint and T-Mobile US Merger
Two decades ago, Brown said, Crown had 1.2 tenants per tower, and there were eight wireless carriers. Currently, the company has more than 2.5 tenants per tower, and its cash flow has grown. That happened, he said, during a period when the market went from eight to four carriers. With the merger of Sprint and T-Mobile US that is pending, subject to government approval, the market will go from four to three carriers.
Carrier Number Irrelevant
“Two decades from now, we will look back, and it will seem almost irrelevant how many carriers there are, because, ultimately, what drives the need for our infrastructure is consumers, the devices they use and the amount of traffic that they put onto the network,” Brown said. “Our infrastructure model has been driven largely by consumer need. 5G wireless communications’ lower latency and higher speed will open industrial opportunities that will place an enormous amount of traffic on the network. That will result in carriers using more equipment on infrastructure, whether fiber, small cells or macro sites.”
The next Connectivity Expo is set for May 20–23, 2019, in Orlando, Florida.