CCI - Crown Castle Inc. (CCI) Presents at Nareit's REITweek 2023 Investor Conference (Transcript)
2023-06-06 18:38:06 ET
Crown Castle Inc. (CCI)
Nareit’s REITweek 2023 Investor Conference
June 6, 2023 4:30 PM ET
Company Participants
Daniel Schlanger - Chief Financial Officer
Conference Call Participants
Michael Rollins - Citigroup
Presentation
Michael Rollins
Well, good afternoon, and welcome to our discussion with Crown Castle. I'm Mike Rollins, and I cover the communications services and infrastructure stocks for Citi Research. We have disclosures available at the back of the room. They're over there, if you'd like to read them. I also have a copy up here. And for your convenience, they're also, if you're web-streaming, they should be available on the site. And if you're unable to access the link for any reason or you'd like an electronic copy, please e-mail me at michael.rollins@citi.com. So with those housekeeping details out of the way, I'd like to welcome Crown Castle's CFO, Dan Schlanger. Dan, thanks for the opportunity to host this discussion with you today.
Daniel Schlanger
Yes. Thanks for doing it, Mike, and it's good to see everybody.
Question-and-Answer Session
Q - Michael Rollins
Well, to get us started, how is the Crown team feeling about the company's assets and strategy to create shareholder value? And on each of these categories, should investors expect more of the same or some adjustments over the next 12 months?
Daniel Schlanger
We feel good. I hope those companies feel good about their ability and their strategy and ability to make money. But our goal over time is to grow our dividends per share by offering to our customers, who largely are the wireless carriers in the U.S., a lowest cost solution to building out a network. So our business, much like any shared infrastructure model, is to own a piece of infrastructure and lease it out to various customers who each pay less because we're sharing the economics among many customers, many tenants. And we start to make money as soon as we get sufficient tenancy to clear our cost of capital of development, just like most companies within the REIT space.
Ours is a little bit different because it is a kind of a single-use asset. It's a tower, which is a steel infrastructure, on which our customers place antennas that deliver data to us as consumers wirelessly. Our goal is to grow the revenue on the assets we own. We own about 40,000 towers in the U.S. We are focused only in the U.S., so we've maintained our focus purposefully because we believe the U.S. is the best market in the world for wireless communications infrastructure ownership. And we believe that the underlying growth in our business is tied to all of us continuing to use our phones more and driving wireless data demand in the U.S. And as that wireless data demand increases, the tenancy on our towers increase. We increase the revenue on the assets we own, which drives up our returns and generate substantial dividend per share growth over a long period of time.
Our goal is to grow our dividends around 7% to 8% per year. And we believe the -- like I said, the underlying data demand should allow us to do so. The underlying data demand is growing about 30% per year according to most industry analysts. So we believe we're well positioned given our focus on the U.S. and the tower market. And as we look out over the next five or 10 years, we think that all of those same dynamics are at play and feel good about our future.
Michael Rollins
And as we dig into some of your segments, let's focus maybe first on towers. So as the carriers are finishing the initial 5G mid-band deployments, what does that mean for Crown's leasing activity over the next few years?
Daniel Schlanger
Yes. So we have two major business groups at this point. We have the tower business, which is historically the business we've been in the longest, and it makes up about 70% of our business by revenue. And then what we would call the fiber side of our business, which is an extension of towers into what is called small cells. Same asset, same business model, just shorter, that's why they're called small.
So we have those two. So Mike, you're asking about the former, the larger of the two, the towers business. And as we see our customers continuing to spend on network because they know that they need to compete for their consumers on network quality. We all expect our phones to work when they -- when we want them to, we look at our phones a lot during the day. And one of the things that frustrates us or as consumers is you have five bars, and you get a little spinning wheel thing, meaning you can't get the data that you're looking for. That little spinning wheel thing means there's not enough capacity in the network. Even though you're getting a signal, there isn't enough demand -- or there's not enough capacity in that signal to bring the data you want to you. Our customers didn't have to respond by putting up more antennas. Those go on our towers. We make more money, like I was talking about in a second ago.
As we look out over the course of the next several years, we believe that our customers will continue to spend money on improving their networks as we continue to require more and more data. And we believe that will allow us to grow our tower business at about 5% to 6% per year at the revenue line. Based on the amount of growth coming and the spend that our customers, we believe, will provide towards meeting that new demand.
Generally speaking, our customers can either add more sites, so add antennas to more sites. Or put additional spectrum, which is a specific wavelength that carries data, put additional spectrum on existing sites, and that's generally how we grow our business, because both require more equipment and that equipment comes with more revenue to us.
Michael Rollins
And in terms of the tower business, you have the three national carriers as your customers. You have DISH. We get questions on DISH. Can you frame the revenue exposure that Crown has to DISH? And how should investors consider the range of outcomes for Crown depending on how DISH's deployment strategy and its financial and capital allocation evolve?
Daniel Schlanger
As you pointed out, the majority of our business comes from the three existing large wireless carriers: AT&T, T-Mobile and Verizon. DISH recently has been building out a new network to try to compete with those three carriers with what they believe will be a lower-cost offering because they are building a build-to-suit network for what is going on now as opposed to the legacy networks that the other three have.
Not speaking to whether that makes sense or not as an industry perspective, it certainly is something that is good for the towers and the people who own towers -- us, including our -- we have two large peers in the U.S. market, all of this should benefit from DISH building out a new nationwide network, which hasn't happened in decades in the U.S. And DISH has said that they need to spend $10 billion on that network and need to go on something in the neighborhood of 15,000 additional towers, or towers that are not in use for DISH right now. And we signed an agreement with DISH in late 2020 to give them an access to up to 20,000 towers that we own in exchange for a minimum fee per month that they owe us, and that minimum fee does grow over time. And we wanted to incentivize DISH to go on as many of Crown Castle's towers as possible.
So with a minimum fee over one tower, if you just amortize it over one tower, that's a very expensive one tower going on 20,000 towers lowers the cost for any one tower. And we believe we did incentivize DISH to go on a lot of Crown Castle towers, which has been very good for us. The overall exposure we have is still relatively small, though, because DISH is relatively new. So from our site rental billings or revenue standpoint, we had less than 3% of our tower revenue comes from DISH and less than 2% of our overall revenue comes from DISH.
Those numbers are not huge, but they have been important because it's a new customer with a new network and a new plan that has not yet been built. And we believe there is significant upside from here as DISH continues to build out their network and then offers a consumer product that competes head-to-head with the big three national carriers. And as I said before, we haven't seen that in the U.S. in a really long time, and we're excited about where that heads, and believe that DISH is well positioned. They are pushing hard to get a network built.
They have -- they've certainly made it interesting with us. They've pushed us hard to go as fast as possible to get on as many towers as possible. And that's a great place for us to be. Because like I said, we are ingrained in their network, they've utilized a lot of our towers, and we feel like we have a great relationship with them, and it's an exciting time for us.
Michael Rollins
So the tower business has been a similar size for a little while now. Are there opportunities to make the domestic tower business in terms of the size of the portfolio, substantially larger over the next few years? Or conversely, are there opportunities or thoughts to try to monetize part of the portfolio?
Daniel Schlanger
As I mentioned before, we own about 40,000 towers in the U.S. We and one of our peers, American Tower, are about the same size in that range. There are -- at this point, no significant tower portfolios that are for sale that we know of, most of them have been sold from our customers to us and American Tower, and then the third large one is a company called SBA Communications. The three of us own most of the towers in the U.S. They were bought mostly from our customers. Our customers no longer have large portfolios of towers to sell. So the portfolios that are potentially available, at some point, would be smaller, privately owned entities who own towers now that might want to sell them at some point.
We have not recently bought lots of towers in the U.S., not because we don't want more. We love towers. We would like to own as many as possible. But the pricing has been too high for what we see as the growth opportunity associated with those towers and therefore, the returns have been too low for us to be interested for the recent sales.
If that changes for whatever reason, whether the return expectations or the growth expectations increase or the values come down, we would be very interested in buying more towers. We just want to be very prudent about how we allocate our capital. We also have -- I mentioned before, have focused only on the U.S. We would be interested in owning towers in other markets as long as they are developed countries. So I think Western Europe is probably the biggest market.
Again, there have been towers that have been sold by the carriers in those countries over the past several years that we have not pursued in large part because, again, the growth that we see in those markets doesn't justify the value that's being paid for them. So the returns just aren't there for us to allocate our capital. But like I said, we love towers. We'd love to own more. And if any of those dynamics change, we would be interested.
Michael Rollins
Another way you could own more of your towers is on the land side. Can you talk about the journey that Crown has been on to own more of the land and the visibility you have on the expenses for those that you don't own?
Daniel Schlanger
So the -- what Mike's referring to is that our towers sit on parcels of land. We own about 40% of those parcels of land. The remainder we lease from landowners. It is our largest line item expense. We lease them with an average term of about 36 years. So there's no real concern about the ability to control that land for a long period of time.
Those leases generally come with escalators associated with them of about 3% per year. So our cost structure for the land generally increases about 3% per year. The good news on that point is it's a known increase. Very little of it is tied to any type of inflation, so that 3% is consistent. I think even good news for us is that we've also structured our contracts with our customers to include 3% escalators per year as well.
So we offset the increasing cost structure of the business with increasing revenues and therefore, I think we're in pretty good shape from an inflation standpoint, being the land as the majority of the cost structure of the business. But of that 60% we don't own, we could buy that land and then obviously take away that lease expense. We go through that analysis all the time to make sure that we are trying to allocate the right amount of cost -- the right amount of capital to buying land.
We spend in the neighborhood of $100 million a year, purchasing land under our towers, sorry. And we've settled on that point because if we try to accelerate that substantially, we generally drive the prices up because only certain amounts of land are available in a year. So we would generally just -- if we wanted to spend $200 million not get a lot more, we would just drive prices up, and we don't think that's a prudent use of capital either.
Over time, we have increased the amount of ownership of our land and the length of time that the leases are for the tenor of those leases, because we do want to make sure that we have access to that land over a long period of time, and that our towers are secure in their locations. So we feel good about that evolution that we've gone through and have been very focused on maintaining a very secure portfolio of land under our towers.
Michael Rollins
Taking it over to the fiber business. At the beginning of the year, management, I believe it was on the earnings call, made a comment that 2023 will represent the first year in a sustained acceleration of growth for the small cell business. And curious if you can unpack the opportunities for small cells for Crown and what you're seeing?
Daniel Schlanger
Yes. So again, small cells is just an extension of the tower model where we have a single assets that's shared among multiple tenants. The small cell tower, for the most part, is somewhere between 50 and 300 feet tall. Small cells are generally around 25 feet tall and many times are on existing street infrastructure. So utility poles, lampposts, traffic lights, things of that nature.
And we put an antenna on the top of that and then connect that to the network, that antenna to the network via fiber, fiber optic cable. The reason that we got into that business, which was about a decade ago, is because similar contract structure, similar customers and similar underlying dynamics of data demand driving the demand for those assets.
We believe that all of those things are coming true. And as you just alluded to, the way we measure the volume in that business is a node to think of a point of presence where an antenna is delivering some sort of signal to us as consumers. And in 2022, we installed 5,000 nodes in addition to the 55,000 at the beginning of last year that we had on air. Coming into this year of 2023, we believe we'll double that number of 5,000 to a deployment of 10,000 nodes in 2023 and drive, like you mentioned, what is the start of what we believe will be an acceleration and it's out in the small cell business for a period of time. We believe that going into '24 and '25, we'll continue that acceleration and continue to drive double-digit revenue growth.
The reason for that is with the demand that we see in the network, we all use our phones more, we all want our phones more. But like I said, that little spinny thing happens to us, particularly in parts of places in, say, Midtown Manhattan. The solution to that is to have more points of presence.
Towers can't get close together because they interfere with each other. The signals actually cancel each other out. And there's regulatory requirements that limit the building of towers in most locations. So the solution to not having enough capacity in the network is to densify the network through small cells, and we see that coming true currently, which is part of the reason that our total volume is doubling from 5,000 last year to 10,000 nodes this year, and we believe that will continue to increase into '24 and '25.
The same underlying drivers. Data demand drives data requirement and drives data density, which means more sites with more antennas and small cells is the extension of that argument. And we're seeing all that come through and really excited about the future, because what we see is no matter how our customers want to address their capacity needs, whether that's on towers or small cells, Crown Castle's set to benefit for years to come.
Michael Rollins
As you look at the totality of the fiber assets, the fiber solutions business, the small cell business, is this an operating unit that benefits from broader adoption of AI?
Daniel Schlanger
It's unclear, in my opinion, what AI will do to traffic patterns in the U.S. But as a overall -- overarching thought, I believe that AI will generate more data than what we've generated in the past, and that data will have to be moved from place to place just like data is today. So whether that data is moved wirelessly or over fiber optic cables, I believe we are positioned to benefit.
It's just hard to tell what all of that -- how that's all going to lay out within the network. So we know the network is going to have to get bigger in order to maintain the quality of service that we expect now with more data going through it, and I strongly believe that AI will generate more data.
I think that is one thing that is common about AI as it requires a tremendous amount of data. So with all of that, I feel really good about where we are, because we positioned the company to benefit from increasing movement of data. And that's, I think, one of the key points here is that no matter how that increasing movement of data plays out, we're in pretty good shape.
Michael Rollins
Just going back to the small cell side for a moment. In the past, you talked about a significant amount of demand being in the top 25 to 30 markets. As you mentioned you're seeing the interest in small cells and you have a bigger backlog than you've had in the past, are you seeing that interest extend beyond these top 25, 30 cities into more of that top 100 or broader? And does Crown have that presence to also address that emerging demand?
Daniel Schlanger
Yes. As you said, most of our investment has been in the top 30 markets in the U.S. because we believe that's where small cells would be necessary the fastest. Because as small cells are required where network densification has to happen, which means dense populations are better.
It is unlikely we're going to put small cells, I don't know, on long stretches of highway for instance. There's just not enough demand on those long stretches of highway to require the capacity a small cell brings. So we focus on the top 30 markets because that is where the densest population resides in the U.S.
But we are seeing our customers expanding beyond those top 30 markets into the top 50 or 100 markets because they are seeing enough density in demand, enough necessity among their consumer base for more capacity that small cells become attractive to them. We don't build any of our assets until we have a contract with our customers. So we don't go out and speculatively go build in a market just because we think it might be there.
And if one of our customers come to us and ask us to build in a market, we do a lot of analysis, to make sure that we believe that over time, we will get tenancy that is in addition to that initial tenant. So the other companies will come to the same market. We do a lot of analysis on data demand to make sure that's true.
So in markets, we don't see co-location, a second tenant coming in an approximate time frame, we likely won't build, because our business model is predicated on getting the second tenant. So we have built outside the top 30. It just hasn't been the majority of where we built because, like I said, density really matters. And the density is in the top markets in the U.S. So we have lots of small cells in shockingly, New York, in Los Angeles and Miami and Chicago, places like that because that's where the most -- majority of the people live.
Michael Rollins
What's the return profile of fiber look like relative to towers over time?
Daniel Schlanger
When we invest in a tower, when we were building or buying towers, which we haven't done for a while at any size, the initial purchase or per build was to a 2% to 4% yield. So the yield that we're talking about is -- the cash we generate, the gross margin we generate divided by the net capital, the capital that went in, less whatever reimbursements we get from our customers. And in that first year, we were getting 2% to 4%. When we add a second tenant to a tower, that number goes to high single digits, 8%, 9%. When we add a third tenant to a tower, that goes to mid- to high teens, 15% to 18%.
On small cells, it's a different demand -- a different return profile. We get a much higher initial return. That initial yield is somewhere in the 6% to 7% range. The second tenant gets us somewhere in the neighborhood of low double digits, 10% to 12%. And that third tenant gets us back to the same place I was talking about with towers in the mid- to high teens, 15% to 18% area. And as you can see, the towers start lower. And in the same place, small cells start higher into the same place, meaning the slope of the line of the tower return is higher. And the reason for that is there's no incremental cost really to add additional revenue to a tower.
We own the tower. We have to make sure the grass is mowed and the thing remains painted, so it doesn't fall over. We have to make sure that we pay the property taxes. But once we've done all of those things, adding additional revenue doesn't come with much cost. On small cells, to add another tenant, there is additional cost. We have right-of-way fees we pay. So we pay the city for the right to be in the right of way. And we have pole attachment fees we pay, where whoever owns the pole, if it's not us, the utility company we pay.
So there's less incremental in it-- so the revenues come with some incremental costs, which means the slope of the line is a little less steep on small cells as it is for towers. But at the end of the day, we believe that we can generate 15% to 18% returns when our cost of capital is in the high single digits. So almost doubling our cost of capital in a business that requires a lot of capital to operate, we believe that's exactly what we, as a management team, want to do, which is invest capital that over the long term will generate significant returns over and above the cost of capital and drive significant dividend growth.
So whether that's in towers or small cells, we're good with either. It's just that right now in the U.S., there are not very many towers being built. Most of them exist already. The only place that towers are being built for the most part are new subdivisions is the best way to think about it.
People are moving into new areas. There isn't a tower for that new area, build a tower there, that works. Where we are building more, adding more capital to the system as an industry, is in small cells. Which is why we're so excited about that opportunity, because it allows us to allocate capital in a way that we think will drive substantial dividend per share growth for years to come.
Michael Rollins
So speaking of dividend per share growth. So your annual, annual target 7% to 8%. Can you remind investors why the dividend growth may be less than that target range over the next couple of years, and the level of conviction that Crown has to get back to that targeted level of growth thereafter?
Daniel Schlanger
Yes. So over the next two years, what we've said is we expect minimal dividend per share growth, and that's a result of two distinct discrete items: One is interest rate environment went up. We do have floating rate debt. We have about 12% of our debt is floating rate debt. We have in the neighborhood of $20 billion debt total. So a few hundred basis points on that floating rate debt even has increased our interest expense in the neighborhood of about $150 million.
And then in 2025, we have an event with T-Mobile. T-Mobile purchased Sprint a few years ago. As part of that consolidation, they have gone and tried to find synergies in their network, some of which were on towers. We have negotiated with T-Mobile that we will lose $200 million of our revenue in 2025 associated with that deconsolidation and the synergies they're going to get.
That $200 million that I just said, plus the interest expense increase, that's just a result of the overall environment, gets to -- combination is about $350 million. We are about a little over $2.5 billion a year in total dividends. So 7% to 8% is in the neighborhood of $160 million, $175 million, which doubled would be about $350 million. So it's in the neighborhood of having minimal growth in the next two years because of those two events.
But because they are discrete events that we do not believe could carry into the future, T-Mobile can't buy Sprint again, they've already done that. And we believe the interest rates won't go up as fast as they have over the course of the last year or so. We think that we're in a position that in 2026 and beyond, we'll get back to our 7% to 8% target growth at the dividend per share line.
Michael Rollins
And are there any factors that could create positive or negative surprises to this current outlook?
Daniel Schlanger
Yes. It's going to sound like a glib answer, it's not meant to be. It's -- the activity levels of our customers. So if our customers begin to spend more on their network, we would anticipate that flowing through both our tower and small cell business. And we believe there's reason that could come true, but that's not what they've said publicly at this point.
They've said that they are going to maintain around these levels, what their capital is on spending on their network, which is why we believe the growth is about -- the underlying revenue growth and underlying cash flow growth of the business is about what we would have expected to save those two events, which is coming back to the full circle, is the activity levels remain about where they are now or where we think they will be, in the range of 2023 levels-ish.
And that will allow us to grow our business, but it's going to be masked by these other discrete items. If our customers do spend more money, we think that we will get more activity on our towers and small cells, which would drive more revenues. That's really our business model.
The two things that add value to our company over a long period of time, are: Getting more revenues on the assets we own; and the cost of capital coming down. And we believe we can drive both of those things with really good performance, and '24 and '25 would be no exception. It's just not our current expectation that the activity levels of our customers will increase.
Michael Rollins
And as you look at the business, do you see a synergy between offering the same customer, tower leasing, small cells and fiber access?
Daniel Schlanger
Yes, we do. It isn't -- I don't believe it would be a truthful statement to say that you must own small cells to be a tower company or you must own towers to be a small cell company. We believe, though, that going to our customers and having a suite of products and solutions for them to choose from, is a better relationship than going in and talking to our customers about which towers they may want to be on.
So our customers are not trying to figure out where to put towers, they're trying to figure out how to serve their consumer. They're trying to figure out how to give us all more data, more capacity. Sometimes that will take the form of a tower, sometimes it will take that form of a small cell, and sometimes we'll take the form of increased efficiency in their network. Whatever it is, they're trying to figure out capacity to us as consumers.
We believe going in and having a solution sale as opposed to a product sale is really beneficial. Because instead of saying to them, which tower do you want to try to solve the problem, we say, "How can we help you get the right data to your consumers where you want to get them?" And that came to fruition in our conversation with DISH, where they're coming to all the tower companies, trying to build out a nationwide network, and they chose to work with us first. And in many cases, they don't always tell why they choose everything they choose.
But in this case, they were very clear on wanting to include fiber as part of that agreement and announced as part of our announcement that fiber was included. Because they wanted one company to go to say we want to connect our towers via fiber to all the networks, or to our network, and we want one company to work with on that network build out.
And I think it was a huge benefit for us to be able to have that conversation we would have gotten some amount of business from DISH anyway because we own towers in good locations. And towers are a great business model. But having the ability to combine our solutions into one, I think, was really beneficial and will be going forward.
Michael Rollins
And just to wrap this up with your discussions with investors over the last number of months, are there elements of the Crown Castle story that you think are underappreciated?
Daniel Schlanger
I think the biggest one is the opportunity and the size of the opportunity in our small cell business. We believe that there's going to be a tremendous amount of small cells being built in the U.S. over the course of the next decade. And we don't believe we're getting credit for the potential option that, that provides to us as the builder of those small cells and the ultimate owner and then leasing those small cells up to more customers and making more money over time.
And the size of that potential opportunity, I think, is undercounted by the market because we're not getting a lot of value for that opportunity. And when we look out, it's one of the things that excites us the most. The tower business is a great business that we believe will continue to grow. But having that small cell business, we believe, is a differentiator and unique to our strategy and think that it should generate significant shareholder value over time.
Michael Rollins
Dan, thank you for your time.
Daniel Schlanger
Thanks, Mike. Appreciate it.
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Crown Castle Inc. (CCI) Presents at Nareit's REITweek 2023 Investor Conference (Transcript)