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Q3 Exceeds Expectations for Crown Castle

October 27, 2016 —

By J. Sharpe Smith

Senior Editor
AGL eDigest

J. Sharpe SmithExceeding its expectations, Crown Castle International (CCI) has reported $812 million in site rental revenues in the third quarter 2016, a 6 percent increase over last year.

“Crown completed another great quarter of financial results that exceeded our expectations,” said Jay Brown, Crown Castle’s CEO, during the earnings call. “The leasing environment continues at a healthy pace in both towers and small cells, allowing us to once again increase our full year outlook for 2016.”

The towerco also increased its dividend by 7 percent, reflecting that it expects continued growth into next year. Additionally, site rental revenue of $3.33 billion is projected for 2017, up 3.1 percent year over year.

“We believe the healthy leasing environment will continue into 2017, including $15 million in growth from small cells and similar growth in towers as compared with 2016,” Brown said.

While leasing revenue will see a drag from the amortization of prepaid leasing next year, Crown will continue to see steady progress from wireless carriers on its macro towers and outsized growth from its small cells segment, according to Wells Fargo Senior Analyst Jennifer Fritzsche.

“While we remain on the sidelines for now, we do believe we are approaching a point where headlines could go in CCI’s favor (note: if AT&T comes back it should be most positive for CCI of the three tower companies given its exposure to the AT&T portfolio),” Fritzsche wrote.

Brown highlighted the towerco’s small cell investments, noting that, to date, the company has invested $2.6 billion including $1 billion in NextG Networks and $1 billion in Sunesys.

“These investments have resulted in that business now generating more than $400 million per year of site rental revenues and a recurring yield of 6 percent to 7 percent,” said. According to Wells Fargo statistics, small cells represented 12.6 percent of Q3 rental revenue, or $102 million.

Brown also provided color on how small cells have expanded since 2013 in Chicago when they inhabited only the central business district (300 tenant nodes on 100 miles of fiber) to today where they have expanded to cover the surrounding suburbs (1,150 tenant nodes on 200 miles of fiber).

“Chicago is representative of what we are seeing throughout major U.S. metro markets, which is why we remain so bullish on the opportunities we see in small cells,” he said.

Leasing Revenue, Densification Highlight Crown First Quarter

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.