April 26, 2016 — Crown Castle International exceeded its expectations in the first quarter 2016 and raised its outlook for the full year as organic site rental revenue grew $55 million or 8 percent year over year. The first quarter saw 7 percent growth from new leasing activity plus 3 percent from escalations, minus 2 percent tenant non-renewals, the company said during it quarterly earnings call.
While the tower business is good for CCI, the majority of its current capex is devoted to its small cell business, which comprises 16,500 miles of fiber. While small cells account for $385 million, or 12 percent, of annualized site rental revenues, it is obvious CCI sees a bright future in them.
“We are as excited as we have ever been by the opportunities in small cells,” Jay Brown, CCI CFO, said. “Our small cell conversations with the carriers have increasingly become more positive with the passage of time and we are seeing the business model of small cells play out very similarly to that of towers.”
Brown walked through two case studies that illustrated the collocation economics of small cells as the fiber infrastructure. The first one was located in Denver, which originally comprised 14 miles of fiber connecting 18 tenant nodes on 18 poles for the first carrier. Since then two carriers have been added to the system, which now numbers 17 miles of fiber connecting 65 tenant nodes on 26 poles in the public right-of-way.
“In aggregate, this system currently generates a yield of approximately 20 percent, based on the recurring cash flows and the capital we invested in the system. As you can see with this system, we have been able to leverage the initial investment by collocating additional tenant nodes on the fiber to drive our returns,” Brown said.
The system CCI has in Las Vegas consists of 36 miles of fiber supporting 77 tenant nodes on 77 poles. The yield of 13 percent is less than Denver, because it hosts only two carriers. A third one, however, is on the way.
“We are currently working with a third carrier to collocate nodes on this fiber network and anticipate adding that third carrier to this system in the next six months,” Brown said.
One of the questions surrounding small cells has concerned the number of carriers that would want small cell coverage in the same location. Unlike the Denver example, where the majority of the colocation of tenant nodes occurred on the same pole as the first carrier, the collocations in Las Vegas occurred at different pole locations along the existing fiber.
“Because the majority of the investment relates to deploying fiber, our yields increased by collocating additional nodes on our fiber, regardless of whether the colocation occurs on the same pole or on another pole along the fiber,” Brown said. “This is why we often describe the fiber as a tower laid on its side upon which we are aiming to collocate tenant nodes.”
Small cell deployment has driven improved yields on the fiber-optic systems, and CCI expects that trend to continue.
“Given the returns we are seeing from small cells, we believe our continued investments are consistent with our strategy of allocating capital to drive long-term growth in dividends per share,” Brown said.