Crown Castle International reported a strong third quarter with all major carriers contributing to its growth. The comm-infra company, which experienced growth across all of its segments: towers, small cells and fiber, also painted an upbeat picture of its 2019 expectations.
“We delivered another terrific quarter of results in the third quarter and increased our annualized common stock dividend by 7 percent to $4.50 per share based on accelerating leasing activity,”
CCI has portfolios of more than 40,000 towers, 35,000 small cells and 65,000 route miles of dense, high-capacity fiber in the top U.S. markets, in areas it foresees the greatest long-term demand from multiple customers. The triple play of towers, small cells and fiber are the key to the company’s growth now and in the future, said Jay Brown, Crown Castle’s CEO in a Seeking Alpha transcript of the third quarter earnings call. https://seekingalpha.com/article/4212546-crown-castle-international-corp-cci-ceo-jay-brown-q3-2018-results-earnings-call-transcript
“Our strategy to invest in towers and small cells and fiber has positioned us to capture accelerating leasing activity which is driving dividend growth,” Brown said “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.”
Small cells leasing growth will hockey stick up to $75 million in 2019, more than 35 percent higher than the $55 million expected in 2018. Small cell construction, which grew 40 percent from last year, is expected to continue during the next 18 to 24 months.
“This increased activity is a result of all four of our large customers investing in their networks through towers and small cells to both keep pace with the current 4G demand environment and position their networks for 5G,” Brown said.
Tower Rental Prospects
In 2019, new leasing activity is expected to be a $125 million for towers in 2019, up from a $110 million in 2018.
CCI can increase the yield on its fiber investment by serving both small cells and enterprise fiber customers with the same outside plant. “The current utilization of our fiber portfolio is similar to that of a single tenant tower. Our current 8-percent yield is more than double what we saw when our towers had only one tenant,” Brown said.
Site Rental Revenue
Organic site rental revenues grew $52 million or 5.8 percent year over year, comprising 8.4 percent growth from new leasing activity and contracted tenant escalations, minus 2.6 percent from tenant non-renewals.
In the second quarter, Crown Castle International saw site rental revenue growth of 35 percent, or $300 million, year over year, but only $49 million of that was organic. Site rental revenues were increased by acquisitions, which totaled $231 million and $20 million came from straight-lined revenues, according to press release distributed after the market closed on Wednesday.
The Organic site rental revenues represent 5.6 percent growth, comprised of 8 percent growth from new leasing activity and contracted tenant escalations, minus 2.5 percent churn.
“No business model is entirely predictable, but tower leasing comes as close to being ‘locked in’ as one could realistically hope. Tower investors wake up each morning, brush their teeth, shower, and collect 1/365th of (domestic) annual gross growth of 6 percent to 8 percent,” wrote Nick Del Deo, MoffettNathanson senior analyst. “There’s obviously more to it than that – churn, guidance changes, sister businesses like international towers or fiber, carrier consolidation risk, and so on – but that’s a fair way to describe the business.”
Matthew Niknam with Deutsche Bank Research noted that Crown Castles site rental revenue and adjusted EBITDA were 1 percent ahead of estimates by his firm and Wall Street, as well as Crown Castle’s guidance, possibly due to AT&T lease extensions.
“Relative to expectations, upside in both stemmed from $9 million in additional straight-line revenues, tied to “term extensions associated with leasing activity,” Niknam wrote. “While the drivers of this are unclear, we note that the weighted average current term remaining for leases with AT&T increased to 6 years, from 5 years last quarter.”
Capital expenditures during the quarter were $393 million, comprised of $10 million of land purchases, $26 million of sustaining capital expenditures, $356 million of revenue generating capital expenditures and $1 million of integration capital expenditures.
The Q2 earnings call will take place tomorrow, providing more details.
Tension between the carriers and the tower companies seems to be easing a bit. At least in the case of AT&T and Crown Castle International. The two have signed a new agreement simplifying and expanding their long-term leasing deal for wireless network infrastructure.
Under the new agreement, leasing management and operations are streamlined to improve the efficiency and flexibility under which AT&T can deploy new technologies and increase network capacity. These changes will enable AT&T to speed up the deployment of 5G technologies and the execution of our FirstNet build.
“This agreement marks a significant milestone in our relationship with Crown Castle,” said Susan Johnson, executive vice president – global connections and supply chain, AT&T. “It establishes a market-based framework and simplifies the lease management and administration process. This will allow us to streamline network projects to better serve our customers.”
The agreement aligns with AT&T’s commitment to provide customers with better speed, reliability and overall performance. In addition to macro sites, the new agreement covers small cell deployments. Small cells are necessary to improve wireless networks, keep up with increasing mobile data usage and lay the foundation for 5G.
“We are pleased to expand our longstanding strategic relationship with AT&T,” said Mike Kavanagh, chief commercial officer, Crown Castle. “We look forward to continuing to support AT&T’s growth by providing our infrastructure assets to meet their network needs for years to come.”
Panelists at the Wireless West Conference last week agreed that the wireless industry is shifting its small cell deployment into high gear, discussing both the reasons behind that growth and the issues that might hinder it.
Several factors are driving the deployment of hundreds of thousands of small cells annually, according to Jeff Lewis, president and founder, Verticom, who moderated “Small Cells, Big Market,” from general economic momentum to positive telecom industry trends. Specifically, he also cited the growing number of 5G use cases plus clarity surrounding timelines for 5G NR standards and deployment. Additionally, mobile edge computing is a key component of scalable 5G architecture.
“In addition to FirstNet, you have the TV repack and relocation initiative. You have incremental industry spend of $2 billion. Throw in regulatory and tax reform and you have another $2 billion of free cash flow,” Lewis said. “With the successful 5G trials going on nationwide, ROI models have begun to factor in less risk, which increases the project approval rate. Any time you have less risk and a more predictable deployment model, capex increases.”
One carrier, T-Mobile, has a “robust small cell program,” planning on deploying 25,000 small cells in the 18 to 24 months, according to Hollie Maldonado, site development manager, T-Mobile. She contrasted that number to the 20 years it took for the carrier to build out its current lineup of 60,000 macrosites.
Crown Castle, which as 50,000 small cell sites, is in the process of 5,000 more sites in the western market. “We are seeing enormous growth in small cells,” said Dan Schweizer, Crown Castle International government relations. “We are trying to build as many of them as we can.”
Kishore Raja, Boingo Wireless VP engineering, said there is an additional catalyst for small cell growth, noting they can now be deployed in two different ways on unlicensed spectrum as well as licensed, bringing with it new business models. “Now, there is a third avenue: the 150 megahertz at 3.5 GHz of spectrum in the Citizens Broadband Radio Service,” Raja said. “This opens up small cells to neutral host operators sharing spectrum with the incumbents.”
Opening up New Markets
The panelists discussed new markets that small cells bring to their companies. T-Mobile is currently deploying small cells to offload 4G LTE capacity from its macrosites, but the same sites will bring 5G services as close as possible to users. Crown Castle will use hyperdensification for offload of fiber data traffic and carrying mission critical Internet of Things data in an aesthetically pleasing manner. Small cells give Boingo Wireless an additional tool to solve issues in its current venues and also allow it to serve additional venues that before did not make economic sense. ExteNet uses small cells to densify the networks of carriers.
The challenge, according to Raja, is creating the user experience. “Whether the deployment is New Radio, millimeter wave, 4G, 4G advanced, Wi-Fi or any others, the goal is a clean, seamless user experience as they move from network to network,” he said. “Virtualization will be very key to managing these networks, both in terms of capex and opex.”
Opposition from Municipalities May Be a Drag on Small Cell Deployment
While the panelists agreed on the need for small cells to the future of the wireless industry, they also agreed that without streamlining of the municipal zoning processes the idea of deploying 100s of thousands of them seems impossible.
“We know one of the keys to achieving that goal is working with local governments. We have our work cut out for us,” Maldonado said. “We have launched a hefty site advocacy campaign in several markets to ensure that groundwork has been laid to execute quickly.”
Extenet is trying to drive down costs and streamline processes in the rights of way at a local level with the municipalities, according Greg Spraetz, SVP & GM enterprise solutions, ExteNet Systems.
Schweizer noted the work done by states and the FCC facilitating small cells. “Texas, Utah, Arizona, Colorado and New Mexico have all passed streamlining bills. Hawaii and California are pending,” he said. “I don’t believe we should have put small cells through zoning. There should be an agreed-upon form factor with the city, the industry has to do its part to build attractive sites that are compatible with existing residential areas and we should be able to pull a permit like any other right-of-way user.”
Recent rules adopted by the FCC, which exempted small cells from NEPA and SHPO regulations, will save the industry a lot of money and deployment time, according to Raja.
Schweizer cautioned streamlining regulations and legislation do not replace good relationships with municipalities. “There is no silver bullet,” he said. “Good state regulation does not obviate the need for government relations and being a trusted partner.”
J. Sharpe Smith
J. Sharpe Smith joined AGL in 2007 as contributing editor to the magazine and as editor of eDigest email newsletter. He has 27 years of experience writing about industrial communications, paging, cellular, small cells, DAS and towers. Previously, he worked for the Enterprise Wireless Alliance as editor of the Enterprise Wireless Magazine. Before that, he edited the Wireless Journal for CTIA and he began his wireless journalism career with Phillips Publishing, now Access Intelligence.
Activity this year in surrounding towers, small cells and fiber will be greater than 2017, Crown Castle International officials said during last Thursday’s fourth quarter earnings call.
Guidance on new leasing activity for 2018 was $110 million at towers, $55 million at small cells and $45 million at fiber solutions. The company also expects churn of about 1 percent to 2 percent at both towers and small cells, according to Daniel Schlanger, Crown Castle chief financial officer.
“So, we still see really good activity across the board, and I think that it’s going to continue to translate into new leasing activity, as we did in our prior outlook,” he said.
Crown Castle is the best positioned tower company to benefit from the accelerating carrier spending on infrastructure, according to Matthew Niknam, analyst, Deutsche Bank Research.
“Crown Castle’s ‘asset trifecta’ … makes it a key thematic idea benefiting from multiple network investment catalysts in 2018 and beyond,” Niknam wrote. “Put another way, we think CCI’s unique asset mix could serve as a ‘swiss army knife’ of sorts for carrier infrastructure needs; these include LTE coverage enhancements, densification, and early 5G builds.”
Additionally, Crown Castle increased its outlook for site rental revenues and adjusted EBITDA, partially because of the two long-term customer agreements it signed during the quarter.
“These agreements included contracted new leasing activity and term extensions on existing leases,” Jay Brown, Crown Castle president, said. “We continue to see increasing levels of investment activity from our major customers that is resulting in an expected increase in 2018 new leasing activity across towers, small cells and fiber solutions as compared to the new leasing activity we saw in 2017.”
Quotes courtesy www.seekingalpha.com
J. Sharpe Smith
J. Sharpe Smith joined AGL in 2007 as contributing editor to the magazine and as editor of eDigest email newsletter. He has 27 years of experience writing about industrial communications, paging, cellular, small cells, DAS and towers. Previously, he worked for the Enterprise Wireless Alliance as editor of the Enterprise Wireless Magazine. Before that, he edited the Wireless Journal for CTIA and he began his wireless journalism career with Phillips Publishing, now Access Intelligence. Sharpe Smith may be contacted at: [email protected].