CCI - Crown Castle Inc. (CCI) Management Presents at Morgan Stanley 2023 Technology Media & Telecom Conference (Transcript)
2023-03-09 15:41:05 ET
Crown Castle Inc. (CCI)
Morgan Stanley 2023 Technology, Media & Telecom Conference Transcript
March 9, 2023, 11:00 AM ET
Executives
Dan Schlanger - Chief Financial Officer
Analysts
Simon Flannery - Morgan Stanley
Presentation
Simon Flannery
All right. Good morning, everybody. Welcome to day four of the TMT Conference and welcome to Dan from CCI. Thanks so much for joining us today, Dan.
Dan Schlanger
Thanks very much for having me.
Question-and-Answer Session
Q - Simon Flannery
For coming back here. And we thank you all for coming out to San Francisco, making the conference such a success and we wish you all the best of luck getting home as the storm comes in. So good luck.
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So maybe we can start with 2023 priorities, the strategy going forward. It sounds like you are going to continue to see momentum in your key businesses. So help us with the highlights as we -- what we should expect for this year?
Dan Schlanger
We are excited about this year as we typically are, because what we see is our main customers, the three existing wireless carriers and they are spending money on building networks and the quality of their networks to withstand the increasing demand that we as consumers place on the network.
And our business generally is we want to lease up the assets we own and then build new assets that we believe over time will be leased up, so that we can generate returns over and above our cost of capital to generate value for our shareholders.
And so when we see periods of time like we are in now where we are coming off growing our tower business, 6.5% on a revenue line in 2022 moving into 2023 growing around 5%. Those periods of time are really solid for us. We believe 5% to 6% growth is kind of the general range that our tower business will grow over time.
And as our customers, the big wireless carriers continue to compete on network quality, so they want to make sure that their network doesn’t suffer in quality compared to their competitors, because then we as consumers will change carriers. If they continue to do so, we believe they will continue to make significant investments in their network year-over-year and that’s exactly where we are now.
And our growth being 6% to 6.5% over the past couple of years going to 5%, that type of natural oscillation happens in our business. But we are excited because as we look forward all of those dynamics continue to work in our favor and we believe it will drive significant value over time.
Simon Flannery
Great. And help us with the puts and takes around the dividend growth, the long-term model and where we are over the next couple of years?
Dan Schlanger
Yeah. We have a goal of growing our dividend at 7% to 8% per year. Over 2024 and 2025, we believe that we will be lower than those numbers and have limited dividend per share growth, because in essence, interest rates for one year and then we have Sprint churn for another year in 2025.
That Sprint churn is the outcome or result of T-Mobile and Sprint merging and when that happens, the carriers, when they have consolidated like that in the past, what they do is they make sure that the towers that they are on, where both Sprint and T-Mobile were resident, they want to take down the Sprint sites so they don’t have too much coverage. It doesn’t make sense to have both networks running at the same time.
And they are doing so and we were able to negotiate with T-Mobile to push that churn into one year and that year is 2025 and so we will see about $200 million of revenue that falls off in 2025 as a result of their work.
But we think that’s all there is going to be and then before and after that, our churn in our tower business will remain in what our historical range has been, which is 1% to 2% of revenues per year.
And because of that Sprint churn and because of the rapid rise in interest rates, we believe 2024 and 2025 will have limited dividend per share growth. But then afterwards we will continue to grow as we would expect in that 7% to 8% range. And as we look back, we set that 7% to 8% goal in 2017, and since then, we have grown our dividend at 9% per year.
Simon Flannery
About…
Dan Schlanger
So it’s above what we expected, above what we had targeted and that’s a significant creation of value in our opinion. We did not -- although we expected a rise in interest rates as we look at our long-term model, we did not expect that rise in interest rates to be as quick as it was, and therefore, it’s going to impact the short-term a little bit. And we did not anticipate at the time a merger and therefore, a consolidation event.
So those are the two events I have spoken of in 2024 and 2025. But going from a 9% growth and then continuing in the future of that 7% to 8%, we think is doing exactly what we said we are going to do and actually better than that what we said we were going to do and sets us up for long-term value creation.
Simon Flannery
You said limited dividend per share growth. So you do expect some modest positive growth in both years or what’s your latest thinking?
Dan Schlanger
Yeah. We can’t give guidance right now for what it’s going to be. So we need to see how 2023 plays out and then what 2024 and 2025 will actually look like and then we can give guidance in 2024.
Simon Flannery
But the intention is to do something.
Dan Schlanger
The intention is always to grow our dividend.
Simon Flannery
Okay.
Dan Schlanger
That’s our goal all the time and our entire company is focused on doing so. It depends on timing of how things play out. So we will update that guidance and give it.
Simon Flannery
One of the things that’s great about the tower model is your visibility into your business and you always have given guidance in October speaking to that. So help us understand, because this is a very uncertain environment, we have talked -- a lot of people are hoping that things pick up in the second half, but there’s a concern that things may deteriorate in the second half. But talk about your confidence in your guidance both near-term and long-term?
Dan Schlanger
Well, the near-term confidence we have is very high. As you mentioned, the tower business is very predictable. We have long-term agreements with all of our major customers that give us significant visibility into the underlying cash flow but also the growth in that cash flow. So we have a base of business and then that base business grows some based on the agreements we have with our customers.
When we give guidance in October, especially I will talk specifically about the tower business, we know most of what even the incremental cash flow will be for the subsequent year, because tower growth comes from an escalator, which is generally around 3% a year. We know what that number is going into the year.
And then additional activity on our towers, part of which is activity that happened in this case 2022, but later in the year and so there’s a lop-over effect, where we get some growth because of -- if it was three months of an addition in 2022, there will be an additional nine months to get to the full 12 months in 2023. So that’s one bucket of growth.
The second is contracts we have already or amendments we have already signed, additional equipment that’s going on our towers that we had signed in 2022 by the time we gave guidance but wouldn’t go on air until 2023, so there wouldn’t be any incremental revenue until 2023.
And we know most of that, but the only piece that we don’t know is the new activity that is going to happen in the year -- that we get in the year. So something that we signed in 2023 that goes on air in 2023 and that’s the smallest bucket. So by the time we give guidance in October, we feel really good about what the next year will look like.
The same is generally true for our small cell business. Actually, the cycle times of our small cell businesses are longer. So it actually gives us more visibility into what we think is going to happen and then our enterprise fiber business has less of a cycle time, so there’s more variability in that business.
But we still have a fair amount of visibility because there is still a very long average duration of contract in that business. So it’s not like there’s a tremendous amount coming off and we have to figure out what to do.
We have a pretty good sense of what’s going on in all of our businesses by the time October rolls around, which is why we have always been very comfortable guiding to the next year in October and why we have gotten pretty close. So we are usually within our guidance range when we give that guidance in October and our goal is to give our investors our best estimate of what the next year is going to be.
Simon Flannery
Yeah.
Dan Schlanger
Of course, there are going to be things that would go differently than what we expect, but some things go better, some things go worse and we end up within the range.
Simon Flannery
You mentioned the fixed escalators. We are obviously not at 3% inflation right now and may not be for a while. Is there any -- I understand your ground leases have fixed escalators as well, but is there any thought that you might need to look at Plan B here over the medium-term to move to some sort of an inflation adjustment if inflation doesn’t normalize over the next year or two?
Dan Schlanger
I don’t think so. We have had fixed escalators around 3% for a couple of decades.
Simon Flannery
Sure.
Dan Schlanger
There have been times where we have benefited as the owner of the asset from the fixed escalator being 3% when inflation was very low and there have been times where inflation has been higher.
But like you said, our cost structure doesn’t have a lot of inflationary pressure to it. So the vast majority of our cost is in the land lease under our towers. So we own the tower. We have to lease the land under the tower. That land lease escalated 3%, which actually gave rise to why we chose 3% to escalate our revenue to keep track with that underlying cost structure. So where we see variability in our cost structure really is in our SG&A with people and that’s a very small percentage of our overall business.
Simon Flannery
Sure.
Dan Schlanger
And therefore, we don’t see a lot of reason to or we don’t see a lot of margin pressure when inflation is high. And we believe there is a lot of value to us and to our investors for knowing there’s a fixed escalator and understanding what that means over a very long period of time and we believe that predictability and ultimately lower risk is exactly what we want to give for our investors. It’s part of our overall thought process of lowering the risk of our business.
And one of the good things about the tower model is that, the escalator of 3% is higher than the churn we spoke of earlier of 1% to 2%, which means if you take that out and believe that it will all happen forever.
Simon Flannery
Yes.
Dan Schlanger
You can get to growth in perpetuity without spending money and that’s a unique quality of a business. That’s very rare. And I think that’s a lot of the reason that our businesses -- all the tower businesses are so valuable.
So we don’t want to upend that predictability and sanctity of the growth of the cash flows, because we feel -- we don’t feel the pressure now, but we don’t want to upend it, because there’s other companies raise prices. That doesn’t have any impact on us. What we want to do is maximize the long-term value of our business and we believe that predictability helps. On the flip side, I believe our customers also like that predictability.
Simon Flannery
Sure.
Dan Schlanger
Because they don’t want to look out and say, oh, now our tower leases are going to grow at 6% this year, where their revenue is likely not going to grow 6% in that year. So what are they going to do to make up for such a large increase. We don’t want to put them in that position either. So we think both we and our customers both benefit from a stable escalator over time and that 3%, I think, is very appropriate for the type of asset that we own.
Simon Flannery
Great. Coming back to the leasing, help us understand the pivot from this mass kind of coverage rollout of 5G mid-band and then you are moving into that sort of second phase of densification, which is sort of where we are starting to see now. So what does that look like? I think you said on your call, less than half of your towers have been upgraded with mid-band right now. So it sounds like from what you are saying, it’s a modest deceleration, but you are still going to see a lot of activity from the big three.
Dan Schlanger
You said it pretty well. But what I would add is that, in any generational upgrade that we have seen in the wireless market, the network, our customers start with what they know best, which is towers they already have equipment on. In our parlance, we call that amendments. So they are mending a tower they are already on to add different or more equipment to it.
They start there because it is the easiest for them to plan for. They know the propagation characteristics, they know the usage characteristics, they know how their network fits together, so they just go where they already know.
After they have done that, then they start pushing into densification, which for us is putting more equipment on towers they are not yet on. We call those either first-time installs or colocations. So we have always seen this shift from amendments to colocation as the generations get upgraded.
What’s different about the generation we are in now is we believe that shift will continue one step further from tower amendment, tower colocation into small cells, because there’s going to be so much demand from us as consumers that we can’t just have towers.
So if you think about it, you go on what you know amendments, so you go on what you know second best colocations and then you go on you know the least, which are small cells because we just aren’t that far into the maturity of that business yet and then we think they will go on what they know and then amend small cells. So we believe that cycle will continue.
And we are just at the very beginning of that cycle because with the amendments that we were talking about, we did mention on our call that about 50% of those amendments have happened. So when you look at the number of towers, our customers are on about 50% of those have been touched with mid-band spectrum.
So even in the amendment side, we are just about halfway through and we are yet to get into the densification of towers, yet to get into the densification in small cells and yet to get into the densification of small cell collocation or amendments at that point.
So as we look forward, we are really -- that’s why we are so excited about the business. We have access to all of that cycle. And part of what we have done over the last 10 years or so with our investments in fiber and small cells is to ensure the opportunity for us to continue to grow as the network densifies.
And I think that, that’s a unique position. There’s no other company in the U.S. that does that and it positions us really well and it’s part of what we think, as I mentioned before, adds together to what we are trying to do is provide the lowest risk, highest return we possibly can.
And we believe that focusing on the U.S., which is the best market in the world for wireless infrastructure, allows us to lower the risk and increase the upside, because the U.S. spends more on its wireless network than any other country and we have significantly limited our rule of law or foreign currency risk by staying in the U.S.
We believe that having both towers and small cells both as a lower risk position, because no matter how our customers grow, they will need one of the two to densify the network over time. So we have lowered the risk there.
And we have increased the return because we are going to grow one way or the other and we believe that thought process puts us in a different category than most companies, including our peers. And it bleeds all the way into how we run our balance sheet where we have extended maturities on our balance sheet and reduced the amount of floating rate debt and reduced the amount of secured debt and increased our liquidity.
All so that we could maintain that risk profile as low as possible, give ourselves the best opportunity to take advantage of what’s coming for to us and ultimately marry that risk return in the best way possible.
Simon Flannery
Great. And you were one of the early partners of DISH in terms of their build-out and it seems like you have been able to take more than your fair share of that activity. Can you just talk us a little bit through what that means for you?
Dan Schlanger
When we signed our initial deal with DISH, which was the first tower deal they signed. We had an idea that what we wanted to do was work with them as much as possible in our initial build-out so that we got as much of their initial towers as possible, because as my boss Jay likes to say, you can’t amend a tower that you don’t have.
So we know that amendments drive lots of value for our business. So if we can get that first installation, we know that over time, it will grow, the amount of equipment on that tower will grow because data demand continues to grow and you can’t just -- you can’t supply that demand only with that first array of towers -- of antennas.
So what we did with DISH was try to incentivize them to utilize our towers, and we did so by constructing the contracts such that we have a very significant minimum payment that they owe us over time each year.
And in return, we gave them the right to go on up to 20,000 of our towers. So if they went on one tower, that minimum payment per tower would be huge. If they go on 20,000 towers, the minimum payment gets defrayed over 20,000.
Simon Flannery
That payment escalates over time?
Dan Schlanger
The payment goes up over time. It does indeed. And by incentivizing them financially to go on more of our towers, we believe that they are going on more of our towers. But we don’t know whether it’s more than our fair share.
We can’t tell what they are doing with our customer or competitors exactly. But we know we have set it up in a way that we believe allows them to focus on our towers is one of the search criteria of what’s important to them, while they build out a network from scratch.
Simon Flannery
And how are you able to recognize that revenue, do they need to go on the towers or are you able to because in a lot of these lease extensions, you can recognize the revenue upfront that.
Dan Schlanger
We -- because this is a new lease and not an extension, we actually can’t recognize the revenue until they picked out a tower.
Simon Flannery
Okay.
Dan Schlanger
And the way the accounting works is these are leases and you can’t start a lease until you have an asset that is being leased. So they have to go on a tower and then we can recognize the revenue and everything that goes with it.
Simon Flannery
Okay. So there’s more to come there.
Dan Schlanger
We believe there is more to come, yes.
Simon Flannery
Fixed wireless has been a big theme at the conference and a lot of bulls and some bears as well. But how do you think about it from your business if it’s going to really drive traffic growth on the network?
Dan Schlanger
Well, whether you are a bull or a bear on fixed wireless from a business model, I think, it is indisputable that fixed wireless drives traffic on the network, because homes are generating demand that is being serviced with wireless capacity.
So whether you think long-term fixed wireless is going to be a great business or not, right now, it is driving incremental demand on the network. Our customers have talked about that being demand that is otherwise going latent right now. So it’s excess capacity in the network.
But as we know, the demand -- the data demand in the U.S. is growing. So excess capacity becomes utilized capacity very quickly and they have now put with fixed wireless, another demand that is soaking up that excess capacity even faster than it otherwise would have been.
So although we are not yet seeing direct for us fixed wireless deployments, we know that those fixed wireless homes are taking up excess capacity that will allow us in the future to have more demand on our assets both towers and small cells.
And we know that for just because of the physics of it, also T-Mobile has said they limit the number of homes within a sector of their wireless network that are allowed to use fixed wireless, because they know that if they have too many, it will overwhelm those towers or those points of presence such that their mobile customers would be -- would suffer and they know that they can’t have that happen. So we are seeing the impacts of incremental demand from fixed wireless. It just hasn’t yet been incremental to our business. We believe it will be over time.
Simon Flannery
Yeah. It may encourage them to use to densify faster than they might have otherwise have done because they will see…
Dan Schlanger
Exactly.
Simon Flannery
…fixed wireless revenue initially.
Dan Schlanger
Yeah. And I think what’s really good about it is I think one of the biggest issues that investors have had with the 5G rollout is, what are our customers, the carrier is going to do to make money off of that investment and fixed wireless is giving them a revenue stream that they otherwise wouldn’t have had and that’s a great place for us. Because if our customers…
Simon Flannery
Yeah.
Dan Schlanger
…the carriers can get a return on the investments they are making, they will make more investors to make more of a return, and that’s a virtuous cycle that helps us tremendously.
Simon Flannery
Yeah.
Dan Schlanger
And we believe fixed wireless is doing so right now. And then I think the question is, what are the other use cases that could do so, because it can’t just be fixed wireless. And although those have been hard to come by, another theme I have heard is relatively popular here at the conference is generative AI or some sort of natural language interface, where people are engaging more with their devices, because the interface is more conducive.
It’s easier. It’s more intuitive. It’s better. I think it’s better. I was not a Bing user before and I am now because I use it because I type something in and it gives me a response that I can make sense of.
Simon Flannery
Yeah.
Dan Schlanger
And what we have found as an industry is the more engagement people have with their mobile devices, the more traffic goes over the network, the better off we will be. And those types of changes of how we as consumers act are what drives significant increases to the demand on the network.
And whether natural language interface is that sort of driver or not is yet to be determined, but it’s a pretty exciting one right now. And I think that there’s a lot of that generative AI that will drive more traffic on the network just because people will get better and better results than what they have done in the past.
Simon Flannery
And the rate of adoption is stunning?
Dan Schlanger
It is stunning.
Simon Flannery
Yeah.
Dan Schlanger
It is stunning. And it’s something that, I mean, I know ChatGPT got to 100 million user faster than any app in history and that’s hard to imagine.
Simon Flannery
Yeah.
Dan Schlanger
Because they didn’t advertise. It just happened. So…
Simon Flannery
We look forward…
Dan Schlanger
… I am excited about it.
Simon Flannery
We look forward to hearing from them later today.
Dan Schlanger
You guys got a good conference going.
Simon Flannery
Small cells, this is the year to take it back up as the macro tower builds are kind of reaching their kind of steady state if you like. Help us with the 10,000 deployments this year, how is it going so far?
Dan Schlanger
Yeah. So to give context to it, in 2022, we put 5,000 small cell nodes on air. Based on customer contracts that we have signed over the last 18 months with Verizon and T-Mobile, we added 50,000 additional nodes to our backlog, and we are working through those nodes.
We have 60,000 nodes in backlog in total. And in 2023, we believe that, that acceleration to start building into those booked nodes that have been built will go -- will allow us to build 10,000 in 2023. We are doubling the amount of small cells we are building.
And in doing so, we are also adding a significant amount of colocated nodes, which are nodes that go on existing fiber, so we spend much less capital. And you can see the result of that in our capital that we are doubling the number of nodes and our capital -- net capital associated with our fiber segment is up 10% to 15% is our estimate. So doubling the nodes only increasing capital 10% to 15%. You can see the operating leverage in that business.
Simon Flannery
ROIC goes up.
Dan Schlanger
Yeah. And that’s exactly the business we are in as the business towers is. As you build it, you have that asset in the ground or in the air and then you add more revenue and get better returns and we are seeing that come through. We are still early in the year of how many nodes we are building, but we are still on track and feel comfortable with our 10,000 nodes.
Simon Flannery
And talk about your competitive position in this. This is a scale game. You can’t -- unlike towers, you can’t just put up half a dozen and sell them to one of the big tower companies.
Dan Schlanger
Yeah. It’s a good point. What we have seen is that building small cells is significantly more difficult than it was to build towers. As you pointed out, there really wasn’t much scale to towers. If you own this tower and I own that tower, okay, we both make money. If we own both of them, we make more money. But owning both of them didn’t really do anything to change the dynamic.
With small cells, it’s very different. It is a difficult business to work. It’s a difficult business to do at scale. And we believe the combination of our assets, which are very high capacity, meaning lots of strand fiber in most of the dense metro markets in the U.S., top 30 markets.
And our capabilities, which is working with our customers to site these small cell nodes with RF engineering appropriate characteristics and working with municipalities to get the zoning and permitting and working with the utilities to get the power and getting all the permissions from all of the different associated parties.
We believe that, that combination of asset and capabilities across the nation provides us a competitive advantage that is very difficult to overcome for somebody else, which is why we have seen 50,000 nodes of bookings in the last 18 months and we haven’t seen a third-party other than us announce another booking.
Simon Flannery
Yeah.
Dan Schlanger
So we believe that scale is really a competitive advantage. And one of the things we are trying to do is press that competitive advantage. So get more scale, build more assets, have more capabilities, talk to our customers more, get more nodes so that they give us more and more, because what their buying pattern has been is focused on markets at a time, and therefore, big systems at a time.
So it’s not 10 nodes or 15 nodes, it’s 500 or 1,000 nodes or something like that and it’s hard for somebody who’s never really built one to come in and say, oh, we can build 1,000 for you, like that’s a really tough place. It’s like the old adage of you never get fired for choosing IBM.
We are the ones who are -- who have proven that we can provide these nodes on time and for our customers and it’s really important to our customers because small cells are required to make their network operate efficiently.
Simon Flannery
And do you have the fiber assets that you need, you have mostly grown organically in that business recently, but you had done a number of acquisitions and that was a perennial question. But prices have come down some I guess and certainly funding is harder for some of these companies, so any interest?
Dan Schlanger
We don’t have all the fiber assets that we need, but we believe strongly that the majority, the vast majority of those new fiber assets for us will be built by us as opposed to bought by us. We just don’t see the combination of characteristics that make fiber attractive to us in the market. So like I said, we want big markets because that’s where our customer, we believe the carriers will spend for us on…
Simon Flannery
Top 30.
Dan Schlanger
Top 30. Density of the fiber, meaning it’s already in a lot of the market and high capacity, which means lots of strands. And the reason lots of strands is important is because each small cell node takes two strands of dark fiber, one going from the network to the node, one going from the node back to the network.
And therefore, if you have six strands of fiber, you can build three with small cell nodes and like we talked about, you need a lot more than three in a system or down a run of fiber. So we typically build 288 strands. In our acquisitions, we are in the 120-strand range when we were doing acquisitions.
We don’t see that type of fiber asset available in the market. They just was -- the markets weren’t built that way. So we feel really good about building our own because we think it will, again, just extend the lead we have already put in place.
Simon Flannery
Great. Well, maybe just one last one on capital allocation balance sheet. You talked about the steps you have taken to shore up your balance sheet and prepare for a tougher rate environment. How are you thinking about leverage in this sort of rate environment, are you happy with where you are?
Dan Schlanger
We are. Like I said, we have purposefully managed the balance sheet over the last five years for periods of time like this, where we believe that we have the right liquidity and right term profile to our balance sheet. The amount of debt that we have, we are very comfortable with, 5 times debt-to-EBITDA, we think is appropriate for our business and we believe that we will maintain that.
Because the -- we -- it circles back to the question you asked earlier, the predictability and security of our cash flows is really high. So we do not believe that there’s anything even in a higher interest rate environment that would lead us to lower that.
Simon Flannery
Great. Well, Dan, great conversation, as always. Thank you so much for your time.
Dan Schlanger
Thanks. Great seeing you. Thanks, Simon.
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Crown Castle Inc. (CCI) Management Presents at Morgan Stanley 2023 Technology, Media & Telecom Conference (Transcript)