October 16, 2014 – The timing, really, could not be worse. Unless you are a stockholder, of course. In the middle of performing due diligence and possibly raising debt and equity for a bid on Verizon’s towers, Crown Castle is facing tension among its investors.
Activist investor Corvex Management, which owns a $1 billion stake in the tower company, has told the tower company it must “correct its capital allocation plan” and reduce its cost of capital before it bids on the 12,000 tower portfolio.
In a letter to shareholders, the investment advisor said Crown Castle would be the best positioned bidder from a strategic standpoint but not from financial point of view, because its stock price is depressed.
“We believe Crown Castle’s current capital structure and capital allocation plans taken together are sub-optimal, and that the combination of de-levering the balance sheet while maintaining an artificially low payout ratio has pressured the company’s valuation and led to Crown Castle trading at a discount to its peers,” Corvex wrote.
To improve its valuation, the tower owner should either begin paying more than $4 a share in quarterly dividends or pay $1.60 per share in dividends combined with ongoing buybacks, according to Corvex. These capital allocation changes would drive a 27 percent re-rating of equity in the short term and possibly a 60 percent improve in the long term, the investor asserts.
“Once the company’s equity currency has strengthened, Crown Castle can aggressively pursue a Verizon towers transaction, creating even greater long-term value for shareholders. However, if the company does not have the right cost of capital, it should not be pursuing acquisitions or issuing equity, whether for Verizon’s towers or any other transaction,” Corvex wrote.
Corvex believes “excessive equity funding” was used by Crown Castle last year in its purchase of AT&T’s Towers for the “relatively high price” of $4.85 billion for 9,700 sites.
“It is critical that the company avoid a similar stumble in any potential Verizon transaction,” Corvex wrote.
Corvex noted that a higher payout ratio would increase Crown Castle’s appeal to REIT investors, while also attracting yield-oriented investors.
Jennifer Fritzsche, senior analyst, Wells Fargo Securities, expects Corvex’s letter and the two options to be well received by shareholders.
“We believe the shift toward increasing its payout ratio, coupled with the recurring nature of its dividend secured by the Big 4 wireless carriers, would be viewed positively by yield investors,” she wrote.
Crown Castle acknowledged that it had received the Corvex letter and said the tower company plans to address capital allocation policy, including dividends, on its 2014 third quarter earnings call scheduled for October 31, 2014.
“We receive input from many of our shareholders on a regular basis, and we welcome the dialogue and perspective,” Ben Moreland, Crown Castle president and CEO, said in a prepared statement. “Over the last decade, we have returned more than $3 billion in capital to shareholders through share purchases and dividends. We continually review our capital allocation strategy and consider all input from our shareholders as we aim to create long-term shareholder value.”
September 23, 2014 — Crown Castle’s purchase of 24/7 Mid-Atlantic Network, which owns 900 route miles of fiber in the Baltimore/Washington corridor, may have caught some by surprise, but it’s really just a reminder of the importance of the infrastructure that makes small cells possible: fiber optics.
The transaction is interesting because it is the first time a tower company has directly acquired fiber assets, according to Jennifer Fritzsche, Wells Fargo analyst.
“Given the company’s focus on DAS/small cell infrastructure, we feel like owning the fiber may help alleviate part of the small cell economic issue by providing the necessary backhaul,” Fritzsche wrote.
Is Crown Castle getting into the fiber business? Developing an end-to-end turnkey signal solution? Not that much forward thinking went into the fiber buy, according to Jay Brown, Crown Castle CFO.
“We recently won an RFP from Verizon to cover the Baltimore market with small cells for them,” Brown said. “24/7’s fiber happened to be a perfect overlay. This was a buy-it versus lease-it or build-it proposition.”
Crown Castle needed to be fast to market and the acquisition helped with that. Plus, it was cheaper than building its own fiber network or leasing the existing fiber. In fact, it was just plain cheap. “We spent last week’s cash flow for the fiber, small transaction,” Brown said.
In the future, you may see more tower companies acquire existing fiber if they have a small cell opportunity and find fiber that is a good fit, but don’t expect them to build out speculative fiber networks.
“We will follow the carriers to where they want to go and build it as they desire it to be built. We are focused on being the infrastructure provider to the operators,” Brown said.
Another takeaway from the 24/7 Mid-Atlantic acquisition is that small cells have taken off, moving beyond small-scale deployments. Crown currently has more than 6,000 nodes under contract that it is in the process of building. Brown estimates that during the next five years Crown will spend $2 billion on small cell infrastructure.
“The rate of activity around what the operators are indicating they want from us has risen dramatically over the last 12 to 18 months,” Brown said. “The builds have gone from a very small geography in a part of the city to, for example, covering the whole city of Baltimore. Activity is increasing significantly on a broad scale, and we expect that to be on an elevated level for a long time.”
September 18, 2014 — Only a year after saying its towers would not be on the block anytime soon, Verizon is hinting that it is open to monetizing those coveted assets. Crown Castle International, known for acquiring ample carrier assets over the years, would be quite willing to take those towers off of Verizon’s hands, according to Jay Brown, CFO of the tower company.
“We have told them that we are interested in owning and operating their towers. We like carrier-owned assets and think they offer great, attractive growth opportunities,” Brown said at the 2014 Media, Communications and Entertainment Conference, Sept. 16, in Beverly Hills, California.
A potential tower asset purchase is analyzed based on the price relative to the growth rate. For example, Brown discussed Crown’s first carrier portfolio purchase in 1999 from Bell South and Bell Atlantic and the transaction a year later when it bought towers from GTE –– towers that had a 4 percent yield. Those assets are now yielding between 15 percent and 17 percent, which is a measure of run rate and annual cash flow versus the cash invested (initial purchase price and capex).
“We have done phenomenally well, adding 1 percent yield annually over a long period of time,” he said. “The more recent transactions with T-Mobile (two years ago) and AT&T (one year ago) we bought at a 5 percent yield.”
The T-Mobile and AT&T deals were underwritten with a similar yield growth expectation of 1 percent annually, which equates to adding one tenant per tower over a 10-year period. “The activity in terms of lease up and growth in cash flow has been right at what we underwrote,” Brown said.
If Verizon decides to sell its assets, Brown said Crown would go through a similar process of due diligence. “This is an analysis of the lease up opportunities of the assets against the price that has to be paid. If that results in the long-term dividend of the firm being enhanced by the transaction, we would be very interested in buying the towers,” he said.
Verizon owns 12,000 towers or 25 percent of its portfolio, according to estimates.
If CCI bought 12,000 towers from Verizon at $500,000 per tower (AT&T tower purchase valuation), the result would be a $6 billion deal. How could Crown fund such a deal only one year after purchasing AT&T’s towers? Financing the deal is not beyond Crown’s current means, Brown said.
“If we took leverage to the high end of our stated target range of 6 times, that would provide $2 billion in debt funding on the base,” Brown said. “Assuming a 20 multiple cash flow [of the towers to be purchased], if we financed six times that EBITDA, that would give us another $1.8 billion. We might take leverage above the target level for a short period of time and de-lever within a year [to make up the difference].”
More Growth to Come as Sprint and T-Mobile USA Join the 4G Roll Out
By Don Bishop
Growth, both organic and through acquisitions, was the dominant topic as executives from the big three tower companies spoke at the Wireless Infrastructure Show on Tuesday in Orlando, Florida. Ben Moreland, president and CEO of Crown Castle International; Brendan Cavanagh, senior vice president and chief financial officer of SBA Communications; and Rod Smith, senior vice president and chief financial officer of American Tower’s U.S. tower division, spoke with PCIA President and CEO Jonathan Adelstein during “The View from the Top: An Executive Roundtable,” a plenary session.
“We’re up to our ears in integration,” Moreland said, speaking of Crown Castle’s acquisition of a portfolio of towers from AT&T. “We’re integrating 9,700 sites we acquired from AT&T at the end of last year.” He said with an acquisition of this size, it normally takes six to nine months before a tower company is able to accept applications for antenna space rental on the acquired sites at the same speed as other sites.
Smith spoke about American Tower’s acquisition of towers from Global Tower Partners, saying, “At this point we’re ahead in terms of capturing our selling, general and administrative expense synergies that we originally had in our investment case. That provides a tailwind for future margin expansion. We also posted strong growth in those assets in the first quarter of 2014. The core organic growth for the GTP assets was 9.9 percent for the first quarter. That outpaces the core organic growth for the quarter for the legacy American Tower sites, which was 9.2 percent.” He said both numbers are well ahead of the 6 to 8 percent core organic growth rate that American Tower targets for the long term.
Cavanagh addressed the issue of 4G network build outs and their effect on the tower business. “Although we’ve seen record growth during the past couple of years from our Big Four carrier customers in the United States, the backlog remains at a record level,” he said. “The growth trajectory for continued deployment is significant for the next few years. Many amendments have been for 4G upgrades, and it is still going on. And the carriers are engaging in a lot of coverage builds, too. We expect to see growth during the next few years comparable with what we’ve seen during the past few years.”
Moreland said Crown Castle expects a record application volume this year. “We’ve never seen it as busy as it is now,” he said. “A lot of amendments are carrying out 4G deployments, depending on which carrier. We’re seeing significant collocation activity return to the market.” Leading the way are Verizon and AT&T, he said, adding that he expects it to continue with Sprint and T-Mobile USA later on. He said the carriers and Wall Street recognize that the use of towers for network build outs represents an efficient use of capital.
Smith said that during the past several years, American Tower has invested $7 billion in U.S. infrastructure. He said the company also has assets in 12 countries in four continents. He said 64 percent of the company’s acquisition capital has been spent in the United States in the past several years. “We absolutely are bullish on the U.S. market,” he said.
Smith said Verizon has completed its initial roll out of LTE. “We describe its network as a mile wide and an inch deep,” he said. “They’re going to have to come back in and densify the network.” He said AT&T is moving rapidly through its initial LTE upgrade. Sprint and T-Mobile also are working on LTE upgrades. “It’s been a long time since we saw all four wireless carriers as active as they are,” he said. “We believe that will continue.”
The executives spoke about progress with loosening restrictions on wireless infrastructure. “There definitely seems to be a shift at the FCC to appreciating what wireless infrastructure does and to try to speed the process for deployment,” Moreland said. “Even so, you have things that fly in the face of that, whether it’s rules about public notices for towers’ effects on migratory birds that seem to be the opposite of the overall theme. But there’s a positive shift.”
Cavanagh said there has been a recognition of the value that wireless infrastructure brings to the consumer and the economy that is significant. Smith added that the U.S. government seems to recognize the value of bringing broadband services to people across the country.
Moreland tied innovation at the consumer wireless device level with growth for the wireless infrastructure business. He also noted spectrum owned by the First Responder Network Authority and Dish Network look like future opportunities for antenna space rental. “Over time, that spectrum will be deployed in some shape or form that will result in further sharing of our infrastructure,” he said.
Cavanagh said the clearer growth opportunity lies with the four large U.S. commercial wireless carriers. “It’s nice to know that there are other guys out there with additional swaths of spectrum that will ultimately be deployed,” he said. “Whether it’s in partnership with an existing carrier or independently, that will help to sustain the growth rate for years to come.”
In past years, the “View from the Top” roundtable has featured as many as five executives from large tower companies, but with consolidation reducing the number of large tower companies and concentrating tower holdings among Crown Castle, American Tower and SBA Communications, this year’s roundtable had fewer figures on the stage.
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.