CCI - Crown Castle Inc. (CCI) Management Presents at Raymond James' 44th Annual Institutional Investors Conference (Transcript)
2023-03-07 14:12:02 ET
Crown Castle Inc. (CCI)
Raymond James 44th Annual Institutional Investors Conference Transcript
March 7, 2023, 11:00 AM ET
Executives
Dan Schlanger - Chief Financial Officer
Analysts
Ric Prentiss - Raymond James
Presentation
Ric Prentiss
No problem. All right. I think it’s still morning, right? It feels like a long day already. But excited. Day two, Raymond James 44th Annual Institutional Investors Conference. My 27th Raymond James Institutional Investor Conference. I’ve seen a lot of people in the room over a lot of those years as well. We wrote our first tower report January of 1999. So really excited to have Dan Schlanger here, CFO of Crown Castle to update us on what’s going on with Crown. I have Dan give just a few opening remarks and we’ll go into a fireside chat, take some Q&A from the audience and we’ll go from there. Dan, let’s give a little precursor, please.
Dan Schlanger
Great. Thanks, Ric, for having me. I have not been here for 27 years, but still like it. It’s a great conference. So thanks everybody for coming. As Ric said, Crown Castle is predominantly a tower company, where we own vertical structures where the four wireless carriers in the U.S. put antennas to allow cell phones to work.
The reason we’re in business is because we build those towers and then lease them up to new customers. And by doing so, we reduce the cost to any one customer. It’s the same reason that office buildings exist. If you can’t -- if you don’t have enough people to have the whole office building and you only want to rent a floor, that’s less expensive. If you rendered all the floors, it would take too much money. So the developer only makes money when they get a certain occupancy, but the tenant makes money as long as they don’t have to own the whole building.
We do the same thing, except we do it with vertical pieces of real estate that house antennas. Our customer base is predominantly, at this point, the three large customer wireless carriers in the U.S. Verizon, AT&T and T-Mobile, with DISH becoming a large customer right now as they’re building out their own network.
We have expanded our business into what we call small cells, which is basically the same business. Towers are 50 to 300 foot structures, so small cells are 25-foot structures. They are meant to go into places where towers can’t really reach.
If you get towers too close together or try to, they start to interfere with each other. So small cells fill in the gaps where towers are not capable of delivering all of the demand that we as wireless users take up.
That small cell business is in its infancy, towers we started investing in the mid-90s. In the small cell business, we started investing in basically in earnest kind of seven years ago. So we’re much earlier on in the small cell business, but very much the same drivers.
Just wireless data demand in the U.S. is going up about 30%, which means our customers need to add more antennas for us to be able to continue to have the level of service that we’ve come to expect. Small cells is the next extension of that. Those are our two major businesses.
And really the driver, like I said, of our business is as long as data demand continues to grow, we can keep costs lower for our customers by sharing the infrastructure and that’s how we make money.
Question-and-Answer Session
Q - Ric Prentiss
Great. Good precursor. A lot of focus on growth. You guys have been putting up some good organic growth. People are looking at this year trying to figure out, is 5G exciting, is it taking time? How do you look at kind of a mid- to long-term growth rate on the U.S. cell [ph] towers kind of organic leasing revenue growth rate, what the trends look like and your comfort and visibility?
Dan Schlanger
Sure. We think that the medium-term, our tower business will grow 5% to 6% revenue year-over-year. We believe that is a result of the increasing data demand that we’re talking about and the requirement for our customers to build more capacity into the network.
And we think it’s relatively consistent in that 5% to 6% range, because our customers typically don’t act in concert. It’s not like AT&T spends the same amount of money Verizon does in one year. They usually have some ups and downs, but they’re not usually in concert so they kind of cancel each other out, which gives us a pretty steady growth rate time year-over-year.
And when you add that growth rate for a long period of time, it generates substantial value creation, because the tower business is very good and that there’s very little incremental cost to that revenue growth. So the fall-through to the bottomline is almost 100%. There’s very little incremental capital that’s required.
And within that 5% to 6% growth, there is a 3% escalator that is contracted with our customers. So we have a lot of that growth that is just contractually already understood for the foreseeable future.
And within that growth of 5% to 6% is a net growth number, we have non-renewals or churn on our business that’s in the neighborhood of 1% to 2% of revenues per year. So our escalators are more than our churn, which means that in perpetuity we have a lot of visibility into our growth without having to spend money.
Ric Prentiss
Great. If we take it to small cells, you’re starting to see a little inflection up as far as gross node deployment. Help us understand your view of where small cell nodes could come. You’ve got some good backlog, right? You’ve got 35,000 node backlog T-Mobile, 15,000 backlog Verizon. What do you think unlocks those to like date specific, let’s get constructing it and how should it take to construct?
Dan Schlanger
Yeah. So in our small cell business, we are in the process of building out the network. So in towers, we’re not building additional towers that are there. We just lease them up at this point. And small cells, it’s so new into the whole market that we’re building a lot. Right now, we have about 60,000 small cells that we’ve built and we have about 60,000 small cells that we have under contract with our customers.
It takes somewhere between 18 months and 36 months from the time a contract is signed and the time that we can put the small cell into the network providing value. Most of that time is zoning and permitting with local municipalities, because it takes a long time for them to get comfortable with what it is going to be. We build these small cells in the right of way. So we have to negotiate with the municipality to have access to that right of way to build a small cell on a pole that either exists or that we build. That process takes a long time.
As you pointed out, we have about 60,000 small cell nodes in our backlog, meaning we’ve signed contracts that obligate our customers to provide us with 60,000 nodes to build, but that doesn’t mean that they are all signed and ready to be built today. So we believe it will take a number of years for us to put those 60,000 on air. Starting in 2023, which we believe will put 10,000 nodes on air, which is a doubling from 2022 and we believe that 2024 will be more than 10,000 as we continue to build into the backlog.
But it will take several years for us to make it through that 60,000 backlog. And we believe that within some period of time, we will get more orders that will then add to the backlog, because that’s the way our business we believe will work that our customers will need more and more of these points of presence to provide the data for all of us to consume over our wireless networks.
Ric Prentiss
And one area that I find the most confusing still is the Edge. What is it? Where is it? When is it? Who is it? Can you help us understand your view? You’ve obviously got some investments you’ve made and you’ve got some insight, but help us understand how you’re looking at?
Dan Schlanger
I will try to define that. The network in the U.S. right now for cellular use is built around, call it, about 150,000, 160,000 towers. That’s the vast majority of what we utilize when you take out your phone, the wireless signal goes to a tower for most of the time.
Like I said, we built about 60,000 small cells, which is, for us, only a pretty big number compared to the number of towers, but you can’t get as many connections to any one small cell doesn’t provide as wide of a radius.
So the question that Ric is asking is, where is the Edge is, there’s been talk in the industry about putting more of the computational power of the network, which essentially is now centralized in many locations. So when you go and ask the Internet for your Facebook page, it likely sends you to a data center in Northern Virginia.
The question is how much of that computation and storage of data will be pushed closer to where we sit as consumers to reduce the latency, reduce the time it takes for you to get it and to reduce the strain on the network, because pushing everything to Northern Virginia takes a whole bunch of bandwidth and it will ultimately take too much.
So how much do we need as an industry to push computation and storage of data more like what we’re seeing in towers going into small cells. So you go from towers being centralized to the small cells being distributed, will that also happen with data.
Our view is yes. Our view is that much like the requirement to serve us as consumers has moved from big towers that cover 5 miles to smaller -- lower down on the tower and covering a quarter mile and then small cells that cover 500 feet to 1,000 feet around them. We think that that’s the cellular network side of things.
We think the hard asset side of things of data also likely needs to expand from big data centers sitting in big places like Northern Virginia or New York or L.A. or even in smaller venues like Houston or someplace like that, where those data centers are still really big box data centers, do we need to push further into every market so that we have small places to store and compute data? I think the answer is yes. I think we need to as an industry.
But I can’t tell you what drives that. I don’t know who’s going to pay for it. I don’t know who’s going to utilize it. We are not yet certain of those issues, which is why you don’t see us investing too much yet into that outcome, because we can’t see yet where the return is going to come from.
We believe it will be there, which is why we continue to invest. We actually think that the investment we made, which is in a company called Vapor IO has a great opportunity ahead of it and is making significant inroads, but we still haven’t figured all of it out yet.
It’s a growth potential for our business. But in order for that business to really take off, we believe the wireless network needs to be built first, because that’s where -- if you think why you need some additional storage of data closer to customers is, because we’re moving around, trying to call the data. If you’re in one place, it’s actually pretty easy to site. So it’s the mobile part of the network that we think needs to be built out first, which is where our small cells come in..
Ric Prentiss
If we take it all the way to the bottomline, your very long-term maintained guidance has been kind of 7% to 8% dividend per share growth rate. We’re obviously facing some, I’ll call it, unprecedented interest headwinds right now. How do you think about, again, let’s look medium-, long-term about the ability to continue to produce that kind of growth rate on the dividend side and then how it’s supported on the AFFO side.
Dan Schlanger
Sure. So we pay out the cash flow generation of our business, almost all of it back into a dividend and then the incremental assets we’re building, we utilize incremental leverage capacity. So whatever our EBITDA growth is times 5 about, which is our leverage capacity. We utilized that amount of debt to pay for incremental investment. So the relation between dividend and cash flow is we pay out most of the cash flow of the business.
We believe we can grow 7% to 8% dividend, because the underlying core of the business, we believe, is growing in the tower side, 5% to 6%. We think small cells will grow faster than that, which means that our business will grow revenue relatively well and then fall down to 7% to 8%, because we do have operating leverage, because we don’t have on the tower side specifically, a lot more cap or operating costs when we add more revenue. We have a little bit more operating cost as we add more revenue in small cells. But really, the thing that drives down to the bottomline is the interest expense.
So what we’re seeing over the course of 2023 and 2024 is that interest expense is taking away our ability to grow as much as we would like. So our dividend per share growth, we believe, will be slower than the long-term 7% to 8% growth that we have versus target over 2024 and 2025, because in 2025, we have another kind of unique event with some T-Mobile and Sprint came together and we have some churn on our tower business that will reduce the amount we grow in 2025. But long-term, we do believe we can get to 7% to 8%.
Like I said, driven by the revenue generation of the business in a relatively consistent cost structure. It’s a very good business model. It’s something that we’re excited about that we can see -- and there’s a lot of visibility into that growth, because the way we contract with our customers is typically 10-year contracts and the vast majority of our revenue is already under contract.
So when we look out to the next year, we have a pretty good sense for where we were going to be. Even when we look out five years, we have a pretty good sense of where we’re going to be. So we believe that we will be able to grow our revenue sufficient that we can grow that dividend going forward.
Ric Prentiss
You guys aren’t as active in the M&A market. Haven’t done much there recently, having acquired quite a lot of small cell assets or fiber-ready small cell assets. But one of the phenomenons in the industry right now still is private multiples seem to be staying higher than public multiples vis-à-vis your stock price as well. Can you opine on why do you think that’s happening? Can the difference sustain? What would cause them to kind of converge?
Dan Schlanger
Yeah. I hope somebody could explain to me why it’s happening? That I can’t do. But I can tell you, it’s sustainable, because it’s been true for 20 years. For some reason, in the tower business, the private market multiples have exceeded public market.
I believe the reason for that is scarcity value. I believe that people generally see that towers is a very good business and they want to own towers and very few of them come for sale in any given period of time.
In the U.S., it’s been a really long time since we had big large assets or large collaborations of assets come to market. In Europe, that is happening currently where some of the carriers are selling off their tower assets. And I think what we’re seeing is investors believe there’s a scarcity value to those assets, and therefore, pay up for them.
That’s my best guess. It doesn’t really make sense to me because you can just do that and buy U.S. towers, which is a better business growing faster, has less risk for a lower multiple and you can buy as much as you want.
It’s not like we are small companies that have limited float. You want to buy $2 billion or $3 billion worth, have at it. I wish we could change that dynamic and get our stock price to where those multiples have been, but that’s just unfortunately not in the cards right now.
Ric Prentiss
And of course, if you want to do that, the Raymond James Trade Desk is available to help with that. The…
Dan Schlanger
Pretty good.
Ric Prentiss
A question we get is the left field technology question I always call it. Every year, every decade, there’s some new one out there, but the most recent one is a lot of buzz going on on direct-to-device, satellites coming in and working with smartphones. Help people understand how do you view what satellite means to the wireless world?
Dan Schlanger
What we’ve come to expect as consumers is that we can take our phone out, type something in and get a response almost instantaneously. And it has been proven that if it takes a second or two, you’re much more likely just to put your phone back in your pocket and do something else, then you are to stay looking at it. It’s actually a pretty small window at this point.
Therefore, what we’ve seen as an industry and that’s what I was talking about earlier going from towers to small cells is actually shortening the amount of time that you expect a response on your cellular phone or wireless information.
So you asked or something, you want that response faster. For instance, if you went back to the 10 years, 15 years ago and tried to move at that speed, you’d all be very frustrated with your phone, even though then it seemed really nice. We don’t go back rooms.
And the reason that we’re building small cells is to lower the response time, in essence, that getting closer and closer to consumers means that response time will be faster and faster. If you think about a low earth orbit satellite, what you’re doing is significantly increasing response time.
So you’re talking about a matter of seconds that the information will have to travel up to the satellite back down from the satellite and then get distributed. It doesn’t sound like much of a difference, but the difference between what we see now half or 50 milliseconds and 2 seconds will make you change your behavior.
So we don’t think there’s any real threat from a low earth orbit satellite. I believe where most of that value will come from is where networks like ours don’t already exist. So for instance, there’s been a lot of stories about how Starlink has helped in the Ukraine because the cellular network went down and so low earth orbit satellites were really useful and actually probably required for that country to continue to operate.
That’s a great use case for a low earth orbit satellite because whether it’s 2 seconds or 50 milliseconds, it doesn’t matter at all as long as it happened. That’s not the way the U.S. works. So we are a U.S.-only business. We think that there is no real threat from a low earth orbit satellite in the places where we do business.
If you want to go back country skiing in Montana, a low earth orbit satellite may help you. We’re not going to have towers there anyway because that’s not where the cellular network is. That’s the whole point. So where the fill-in works or is necessary, sure the low earth orbit salt work, we don’t see much competitive threat.
Ric Prentiss
I mean we always go back to the algebra, population density and GDP per capita, that math has to work for people to make returns?
Dan Schlanger
Yes. And so the way the low earth orbit satellites work is they go over the entire world population. So the population density becomes higher because you can circle the world. But in any one area, it doesn’t work very well. So the terrestrial network work is significantly more efficient from a cost perspective and a speed perspective and that’s why we just don’t see it happening.
Ric Prentiss
You touched on it briefly there, but let’s prove a little deeper. Crown Castle, Inc. is not Crown Castle International anymore. You took the word international out of the name. Help people understand -- you touched on it, but let’s go deeper into the why no European, Africa, India, et cetera, LatAm?
Dan Schlanger
Sure. The core of the reason that we’re U.S.-only is because we believe the U.S. is the best market in the world. And the reason that’s true is, because we have in the U.S. that the cellular carriers, the three-plus DISH are all healthy companies that are investing heavily in their network and investing heavily in technology.
That investment is driving significant incremental demand from us as consumers, which we then pay for and give them more money to spend to drive technology and investment. That virtuous cycle happens in the U.S., much more so than in any other market in the world.
And because of that, we believe not only is the market the best in the world, we also believe that it is the lowest risk market in the world for us as a U.S. company, because we have no foreign currency exposure and the rule of law in the U.S. is relatively well known and we are the last owner of our assets.
So we’re planning for 50 years, 70 years, for 100 years -- 75 years or 100 years of ownership. We kind of need to know what the rule of law is over those periods of time so that we can understand what risk there is to the future value of our business, and therefore, we can price in the returns.
When we look into international markets, we bifurcate them into two. In no place do we think that there are better markets than the one in the U.S. But there are some that we would steer clear of, no matter what, those are emerging markets.
Because if you take that argument I just made about the U.S. and put it on its head, you get to some place where you don’t know what the rule of law is going to be for 50 years, 75 years or 100 years.
And therefore, we can’t price the risk, and therefore, we can’t price an appropriate return. So emerging markets, you should not see Crown Castle participate in, because we just can’t figure out that risk return profile or make it work for our cost of capital.
On the developed countries, so say, Western Europe or places like that, we’d be more than happy to own towers there. We love towers. Tower is the best business. We want more of them. But the growth in the European market has been less than the growth in the U.S. market. The multiples have been higher.
So we can’t come to a return. And so there’s no principle around this. It’s just you don’t invest someplace, you don’t think you can make a return over and above your cost of capital. And with the markets most recently trading at 28 times cash flow with lower growth in our own business, we can’t justify the investment at this point. If we could either find more growth or a lower multiple, we would be interested. But right now, those have not been available.
Ric Prentiss
You guys have been a REIT a long time, been paying a dividend a long time. What’s the update as far as the shareholder base? Your shareholder base, if you think about TMT versus income versus REIT investors, any changes as far as that makeup?
Dan Schlanger
We actually don’t have a tremendous number of dedicated REIT investors. What we have, I think, settled into is more of a total return investor. So it’s a broader category than just REITs. It’s any investor who’s looking for a combination of a solid dividend with extreme visibility into the sanctity of that dividend and then that -- the growth in that dividend.
So our dividend yield is 4%-plus now. We set our long-term growth rate of 7% to 8%. We think that is a very attractive total return for the low-risk business that we’re in, that’s driven by data demand in the U.S. I think everybody would agree that data demand in the U.S. is growing and so it feels really like a good bet that we will continue to grow as an industry and we will continue to grow with Crown Castle.
And the combination of that growth with our dividend, we think, is very attractive. That’s where most of our investors lie right now is that total return, of which I would say, REITs are subsector. It used to be prior to our REIT conversion and our dividend pay that we probably had much -- we did have significantly more growth investors. We don’t see a lot of the growth investors anymore given that profile, which would make sense, because I think growth investors are looking for substantially more than 7% to 8%.
Ric Prentiss
And we don’t value on a multiple of revenue or value on cash...
Dan Schlanger
Cash flow…
Ric Prentiss
…dividend, et cetera.
Dan Schlanger
Absolutely.
Ric Prentiss
Let’s take a pause here to see if there’s some questions in the audience. Okay. No questions there. What do you think the market doesn’t get right now about your stock? You’ve mentioned a couple of times, private is higher, you’re low. I don’t quite understand it. But what do you think they’re missing?
Dan Schlanger
I think we are not getting credit for the ability for our business to grow as much as we think it will grow. The 5% to 6% on the tower side, over a long period of time drives a tremendous amount of value, because we’re not putting in more capital or significant capital or any more operating cost into it and that drives a significant amount of value creation.
And then you add to that the small cell business we have, that we think can grow substantially over time. And we don’t believe we are getting credit for the amount of capital we’ve already put in place that will allow that growth to happen with pretty substantial incremental returns, because even on the small cell business, our incremental returns when we add a customer to an existing system, we get 20% or 30% returns.
And therefore, we think there’s this huge amount of value creation that’s embedded in our stock right now that we are not getting credit for. And what we’ve seen is that our stock very much is correlated to the treasuries. And when we see that correlation, what we think is undervalued is our ability to grow, so our dividend yield expands a lot when the treasuries go up and our ability to grow, I think, is dismissed within that calculus.
So what we would like to see is just more understanding of what our investment profile is and how that investment profile will drive significant future value and get credit for that value that we just don’t think has happened yet.
Ric Prentiss
Since there is -- yeah, question.
Unidentified Analyst
[Inaudible]
Ric Prentiss
So the question is kind of broad thoughts on carrier CapEx level spending in the U.S. for wireless?
Dan Schlanger
Yeah. If our carriers continue to spend what they have spent, it’s just flat, we continue to grow, because what happens is, we have a base of business with them that is under contract and then they add more revenue to that base of business over time. So as long as they are flat, we grow, and that is within our 5% to 6%.
In addition, we are not really CapEx for our customers. We are actually OpEx, because we rent out the sites back to our customers. So there’s a correlation, but it is not exact. Their spending going up and down doesn’t really impact our business all that much, which is why that 5% to 6% that we give is future belief of what our growth will be is a relatively narrow band, whereas their CapEx can fluctuate a lot more.
What we see though is, the growth of our business being tied more to OpEx is that, in times where the interest rates go up, there could be an incentive for our customers to spend less capital and spend more OpEx, because that interest now that spend of the capital actually has become more expensive, and with us, the OpEx rate remains relatively constant or steady over time.
So what we’ve seen in the past is that as interest rates go up, they outsource more, they do more with us than they would have otherwise as opposed to build their own, particularly in the small cell business. So we actually think that the increasing interest expense provides even more value to a company like ours, which is saying we can provide, in essence, your capital and operating needs all at the same time because we’re spending capital on their behalf.
And because of the returns that we get clear our cost of capital, even in this higher interest rate environment, we see no reason not to continue to make those investments, because we will generate capital or returns over and above our cost of capital over time. We think that’s a great win-win for us and our customers and these periods of dislocation historically have been pretty good for us.
Ric Prentiss
Yeah. And we think that’s an important item to consider the outsourcing versus self-performing aspect as people look at carrier CapEx spending again?
Unidentified Analyst
[Inaudible]
Ric Prentiss
Question is on rollout small cell, any learnings or any ability to speed it up or is the zoning just?
Dan Schlanger
Yeah. The short answer is there’s not. The time that it takes for our business to get zoned and permitted is the time it takes, because the municipalities make it so. And where we’re -- our learnings are is that we help them through that process and we help them think through all the issues that could come up and having that good relationship increases the likelihood we will get the zoning and permitting that we want, but doesn’t really speed them up all that much.
We see 18 months to 36 months is a good estimate of what the timeframe will be going forward. A good example of that is in the tower business, it still takes six months to 12 months to get an antenna permitted for a tower that already exists and is sitting there and it’s been that way for 20 years. That doesn’t mean that the business is bad or anything bad is happening. It’s just -- that’s how long it takes.
The second part of your question was a little different, which is we reduced the number of small cells. We have -- we didn’t for 2023. In 2020, we expected 2021 to be 10,000, we brought that down to 5,000. That wasn’t because of zoning and permitting or anything that we did. That was demand for our customers.
So we believe the limiter of the number of small cells that go on air in a year is demand from our customers, not our ability to build more small cells or get them permanent. We believe that we can put the system in place to allow us to meet the demand of our customers. It’s just how much do they want to build and we’ll be there. We have never been the long pole in the tent on this.
We’ve always been able to keep up with our customer demand and we hope to be able to do that, because one of the value props that we have is we can build on your behalf at least as fast as you can, hopefully faster and charge you less than you would have to spend for yourself. That’s a core value proposition. We need to be at least as faster, faster and cheaper.
Ric Prentiss
Last one.
Unidentified Analyst
[Inaudible]
Dan Schlanger
Yeah. So that is why there is a correlation between the CapEx and our OpEx ultimately. So as they have to put more equipment on our towers, they have to buy the equipment. So there is some correlation. But what we’ve seen is as their CapEx goes up and down, so if it goes up 10% or down 10%, our growth does not fluctuate up and down 10%, because we have a significant amount of built-in growth through the escalator and we have a significant amount of visibility into what they want to do over a long period of time. So when they spend more on antennas, yes, we generally see more activity, which generally leads more growth, but it is not one for one.
Unidentified Analyst
[Inaudible]
Dan Schlanger
Yeah. I don’t know that.
Unidentified Analyst
[Inaudible]
Dan Schlanger
Yeah. I don’t know exactly. We have not found a correlation that really works to answer that, but it’s loosely correlated, not tightly correlated.
Ric Prentiss
Exactly. All right. Well, out of time. We’ll take it down to the breakout session. Thanks, everybody.
Dan Schlanger
Thank you.
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Crown Castle Inc. (CCI) Management Presents at Raymond James' 44th Annual Institutional Investors Conference (Transcript)