Crown Castle Inc.

Good day and welcome to the Crown Castle Q4 2018 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ben Lowe. Please go ahead, sir.

Great. Thank you, Brian, and good morning, everyone. Thank you for joining us today as we discuss our fourth quarter 2018 results. With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer, and Dan Schlanger, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the investor section of our website at crowncastle.com, which we'll refer to throughout the call this morning. This conference call will contain forward-looking statements which are subject to certain risks, uncertainties, and assumptions, and any actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the risk factor sections of the company's SEC filings. Our statements are made as of today, January 24th, 2019, and we assume no obligations to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the investor section of the company's website at crowncastle.com. So with that, let me turn the call over to Jay.

Thanks, Ben, and good morning, everyone. Thanks for joining us on the call. As you saw from our results, we capped off another year of growth with solid fourth quarter results. As I look forward, I am optimistic the positive trends we see in the market will drive demand for our communications infrastructure assets. And I believe Crown Castle is well positioned to take advantage of those trends and deliver growth and returns for shareholders for years to come. Through disciplined capital allocation and execution, we have established an unmatched portfolio of more than 40,000 towers and 65,000 route miles of high-capacity fiber in the top US markets, where we see the greatest long-term growth and opportunity. On this call, there are three important themes I want to discuss. First, 2018 was a successful year for Crown Castle. Secondly, our strategy of offering towers, small cells, and fiber solutions is delivering the results we expected. And third, I'm excited about the long runway of growth as 4G investment remains robust and the deployment of 5G infrastructure is just getting started. On the first point, we delivered 10% growth in dividends per share in 2018, supported by cash flow growth across both our tower and fiber assets. Tower leasing increased in the back half of the year as all of our major customers were actively investing in their networks by deploying new cell sites and additional spectrums. Further, highlighting the strong demand for our infrastructure, we deployed a record number of small cells during 2018. In addition to the great operational performance in small cells, we added significantly more small cell nodes to our backlog than we installed in 2018, meaning we have a larger contracted pipeline of small cells to build today than we did at this time last year. Importantly, our team delivered these results while integrating our recent fiber acquisitions. With the integration work substantially complete, I'm excited as I look ahead and see the potential growth opportunity as we focus on adding both small cell and fiber solutions customers to our 65,000 route miles of dense, high-capacity fiber. This brings me to my second point. Our unique strategy of offering towers, small cells, and fiber solutions which are all critical components of communication networks that can be shared across multiple customers, is delivering the results we expected. With the volume of data delivered by both wireless and wired networks growing rapidly, our customers are leasing access to our tower and fiber assets to increase the capacity of their networks and keep pace with that growth. Because we have the ability to share our assets across multiple customers, we can provide our customers with cost-effective assets assets to the critical infrastructure they need while generating significant value for our shareholders over time as we lease our assets and drive cash flow growth. Steady performance and consistent execution over the last two decades has proven that providing shared infrastructure assets in the U.S. is a great business. Over that timeframe, we've invested approximately $23 billion in tower assets. and continue to create tremendous value for our shareholders as we grow the cash flows and returns on those investments by adding tenants. Since 2001, we've increased site rental revenues in our tower business at a compound annual growth rate of approximately 14%, scaling the business from approximately $350 million in annual revenue in 2001 to more than $3 billion in 2018. In recent years, we've expanded our infrastructure offering beyond towers by investing approximately $13 billion to establish fiber footprints in prime locations across the top U.S. markets where we see the greatest long-term demand. Our fiber investments are already yielding 8% and have significant available capacity to add new small cell and fiber solutions. As you can see in our 2019 outlook, we are seeing increasing levels of demand for our fiber assets. Following a record year in 2018 in terms of the number of small cells we deployed, we expect to nearly double our production this year by deploying 10 to 15,000 nodes. In addition, we have approximately 20,000 additional nodes in the pipeline that we expect to deploy in 2020 and beyond. Since it typically takes about 18 to 24 months for contracted nodes to be put on air and start generating revenue, we have a line of sight into meaningful small-cell revenue growth beyond 2019. With respect to towers, we expect the higher new leasing activity we saw in the back half of 2018 to continue, resulting in a meaningful acceleration in tower new leasing in 2019 as compared to 2018. With higher levels of new leasing activity across towers and small cells and steady growth from our fiber solutions business, I'm excited about our opportunity to continue to translate revenue growth into anticipated long-term growth in dividends per share of 7% to 8% per year. Which brings me to my third and final point. I see a long runway of growth in front of Crown Castle as our customers continue to invest heavily in their 4G networks to keep pace with data demand growth from existing technologies, while the deployment of 5G is just getting started. According to the latest estimates from Cisco, mobile data traffic in the U.S. is expected to grow five-fold from 2017 through 2022. To put that growth into perspective, that means mobile data traffic in 2022 is expected to be equal to 12 times the volume of all Internet traffic in the US in 2005. While the sheer scale of the expected growth is staggering and should drive significant demand for our infrastructure assets, I get even more excited when I consider how early we are in the digital transformation of the US economy and the critical role mobile infrastructure will play. I think we're just scratching the surface when you consider mobile traffic is expected to account for just 6% of total IP traffic in the U.S. in 2022, up from 3% a couple of years ago. While we continue to underwrite our investments based on existing applications and existing technologies, we believe the network infrastructure needed to support the next generation services will dramatically increase the demand for our tower and fiber assets. The journey from first-generation mobile technology through 4G has changed the way we as consumers live and work. What I find really intriguing about 5G and some of the emerging technologies is that they have the potential to fundamentally alter the role of wireless networks, going from connecting over 300 million people in the U.S. to potentially connecting billions of devices in the future. Some of those emerging technologies include autonomous cars, augmented or virtual reality, and industrial applications that require networks to provide availability anywhere, at any time, and on any device. To meet those requirements at the speeds and latency that will be necessary, industry estimates predict that carriers will need to achieve a tenfold increase in network performance as measured by latency, reliability, and speed. From an infrastructure perspective, That will require the deployment of additional spectrum across more cell sites, both on towers and on small cells, for decades to come. And we believe Crown Castle is in a great position at the center of these megatrends with our unmatched portfolio of towers and high-capacity metro fiber assets. Given these long-term opportunities, we are investing in assets we believe will attract and generate long-term returns for shareholders. while paying a high-quality dividend that we expect to be able to grow somewhere between 7% and 8% on an annual basis. And with that, I'll turn the call over to Dan.

Thanks, Jay, and good morning, everyone. As Jay mentioned, we closed 2018 with solid fourth quarter results, completing another very successful year for Crown Castle on several fronts. We increased dividends per share by 10%, consistent with our growth in AFFO per share and our commitment to return capital to shareholders. We substantially completed the integration of our recent fiber acquisitions and made significant investments in new fiber assets across the top markets where we see the greatest demand for small cells and fiber solutions. And we made those investments while improving our overall financial flexibility by proactively refinancing upcoming maturities and increasing the average maturity of our debt. Turning first to the fourth quarter 2018 results on slide four, I want to walk through a few items that should be considered when comparing the results to our prior outlook. First, site rental revenues exceeded the midpoint of the prior range by approximately $15 million, including $10 million of additional straight-line revenues primarily resulting from the term extensions associated with leasing activity. In addition, there were approximately $10 million of higher costs associated with the combination of additional incentive accruals for 2018 and expenses associated with certain natural disasters that occurred during the quarter. Results were also impacted by approximately $5 million of lower services contribution that is timing related. So we now expect that contribution in 2019. And finally, AFFO benefited by approximately $10 million from lower sustaining capital expenditures in the quarter, a portion of which are expected to now occur in 2019. Adjusting for the total impact of these items, results were within the ranges provided in our prior outlook for site rental revenues, adjusted EBITDA, and AFFL. For the full year 2018, site rental revenues increased approximately 29%, or $1.05 billion, including approximately 5.6% growth in organic contribution to site rental revenues. Moving on to investment activities during the year, we deployed approximately $1.7 billion in capital expenditures, including $1.6 billion of revenue-generating capital expenditures comprised of $1.2 billion in fiber and approximately $350 million for towers. For the full year 2019, we expect gross CapEx of approximately $2 billion, or approximately $1.5 billion net of prepaid rent. Based on our expected cash flow growth, and the incremental leverage capacity that growth will create, we believe we can finance this level of spending without issuing equity. Supporting this belief, we ended 2018 at just over five times debt to EBITDA, consistent with our intent to finance the business with approximately five turns of leverage as we remain committed to maintaining our investment grade credit profile. Additionally, with more than $3 billion of available capacity on our revolver and no maturities until 2021, we are comfortable with our debt balance sheet flexibility. Turning now to slide five of the presentation, at the midpoints, we increased our full-year 2019 outlook for site rental revenues and adjusted EBITDA by approximately $40 million due to higher straight-line revenues primarily resulting from the term extensions associated with leasing activity that I mentioned earlier. As you can see, AFFO guidance remains unchanged at approximately $5.85 per share as the higher straight-line revenue does not contribute to AFFO. Turning to slide six, we now expect between $223 million and $268 million of growth in site rental revenues in 2019. As you can see in the chart on the slide, when compared to the prior outlook, the only change relates to the impact of the higher straight-line revenues I just discussed. Our expectations for growth and organic contribution to site rental revenues remain unchanged at approximately 6%, up from 5.6% in 2018. We continue to expect higher 2019 new leasing activity for both towers and small cells, with consistent levels of growth from fiber solutions. To wrap up, 2018 was another very successful year for Crown Castle, and we are excited about the anticipated growth in our business in 2019. we are seeing the benefits from the investments our customers are making in wireless networks to keep pace with increasing data demand, which allows us to provide near-term returns through a high-quality dividend that we expect to grow 7% to 8% annually. At the same time, we are making significant investments in our small cell and fiber business that we believe will position Crown Castle to take advantage of the long-term growth trends Jay discussed earlier. Because we are so early in the growth cycle for small cells, we believe our investments will provide significant long-term upside as we add tenants to those new assets. It is this combination of near-term returns and expected long-term upside that I think makes Crown Castle such an attractive investment. And with that, Brian, I'd like to open the call to questions.

Thank you.

If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll now take our first question from Simon Flannery from Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you very much. Good morning. Coming back down to your... comments around the balance sheet. Could you just talk a little bit more about the use of leverage versus equity? So what are you comfortable with in terms of taking the leverage from where it is today? What's that upper end of that range? And then, you know, is this something that you might amend if, say, you were looking at some M&A? Maybe you could just comment more broadly on any M&A opportunities that you might be considering. Thanks.

Sure. Thanks, Simon. As we've discussed a lot in the past, what we look at is we want to maintain an investment-grade credit profile, which we believe means we need to stay at five times that EBITDA, which is our target leverage. And we've been right around there. We ended the year right around there, right at five times or just north of it. And so when we look out and see what our expected capital spend is over the course of 2019 and the incremental EBITDA that we believe we will generate and the leverage capacity it will create, We think that we're going to be able to use that leverage capacity and our internally generated cash flow to pay for the capital expenditures and maintain around five times that EBITDA. So that's why we think that we're in a position where we don't need equity. From what we can tell right now, we don't need equity through 2019 based on what we see the capital spend profile to be. To your point, though, if we do see some M&A activity out and think that something that's attractive for us, That would be external to what we just talked about. That would be funded in a way that would be consistent with maintaining our investment grade rating and five times leverage and would likely include equity because I think we're going to buy whatever company or assets we would buy, it would be for more than five times. So it includes some equity at that point. But when we're talking about our capital program for 19, we feel pretty good about our ability to finance it.

Simon, more broadly on the M&A front, we've talked about this, I think, the last several quarters on the call. We really don't see opportunities in the market of large scale that are going to fit our strategy, our focus around owning metro fiber that's dense with high capacity. And I believe the more likely approach for us is going to be to invest via building ourselves organic builds. There may be some tuck-in acquisitions in some markets where we find an opportunity where it makes sense to buy it versus build it. But we think the more likely outcome is that we're going to be building fiber to meet the demand that we see coming for small cells.

And limited interest internationally?

Yeah, we continue to believe the U.S. market is the best market in the world for the investment in communications infrastructure. We're always open to learning and communication. seeing what else is going on in the world. But based on everything we've had the opportunity to see thus far, we think the best opportunity for returns exists here in the U.S. It continues to be the largest and fastest growing market in the world. And to my comments that I made around 5G, we certainly believe the U.S. is going to lead the way on 5G and the amount of capital investment here and the potential opportunities we think are the greatest here in the U.S. Great.

Thank you.

We'll now take our next question. from David Barden from Bank of America. Please go ahead. Your line is open.

Hey, guys. Thanks a lot for taking the questions, I guess. One follow-up on that, Dan, just when you guys gave guidance last quarter, you know, with the interest expense that you built in, it was clear that the debt funding was going to be the lead vehicle for financing the business. Can you give us any more color now in terms of what you're thinking in whether it's revolver or debt on secured or secured and kind of the timing as we think about kind of the numbers flowing through in the year? And then the second one is, could you guys share any kind of incremental color on the tenant extension that you kind of announced was the source of kind of the guidance raised this quarter? When I look at the supplement on page 18, it's really hard to see that anything really changed there at all, so it wasn't clear kind of what the moving part there was. Be helpful, thank you.

Sure, I'll take the first one, Dave, and thanks for the question. When we put together the guidance, as you pointed out, we had assumptions around how we would finance the business through 2019, and nothing has significantly changed in the way we think about that. We clarified just now on the equity point, but nothing has significantly changed on how we think about financing our business. What we're trying to do is maintain our investment-grade credit profile and do it at the lowest cost we possibly can. And when we look out and see what the market looks like in terms of trying to term out debt or what our revolver capacity is. We feel good about the flexibility we have on our balance sheet, and we'll just be opportunistic as we look out and see when it makes sense to try to term things out to the extent that we want to between secured and unsecured and any other funding source we can possibly get our hands on because we want to be open to everything.

Dave, to your second question, we did not do a new, as people would often term it, a new deal during the quarter. So what we're speaking to and the adjustment that we made to the outlook doesn't have anything to do with something new that we crafted a new deal with customers. It was just related to the activity that we saw and then the term of the leases on that leasing activity. As you know, we're hesitant to get into specifics of how we transact with customers, but that's what's driving the reference in both the press release and in the numbers.

So this was something new, and it was not a term extension that got signed in the quarter?

It was not a new deal that we did, no. It would be a term related to the leasing activity that we saw during the quarter.

Okay, great. Thanks.

We will now take our next question from Rick Prentice from Raymond James. Please go ahead. Your line is open.

Thanks, guys. Appreciate taking the question. Two quick ones. Dan, you mentioned your prepared remarks, the CapEx, the $1.7 billion in 2018, and then in 2019, $2 billion gross, $1.5 billion net. The 2018 number, is that $1.7 billion? Is that a gross number or the net number?

That's a gross number, the $1.7 billion.

Okay, so 1.7 would compare to the 2.0 gross in 2019. Okay, and then following on David's question on the page 18 of the supplement, the one thing we noticed was, I know you don't like to talk specific, but the numbers are out there that I think T-Mobile 2022 annual rent cash payments at renewal went from 560 to 510 in 22. Is that part of what we're seeing then is some of that renewal timeframe got extended out beyond 22?

Rick, I don't want to tie components of what we've given together, but you're correctly reading the supplement to see that the term for components of revenues that were in earlier periods are getting pushed out to later dates. I would be careful about drawing too many connections between the numbers. As you read the supplement on the face of the supplement, you're accurate that that term has been extended.

Okay. And the average life, I think, did come down for Sprint from seven years to six years. All the other guys stayed at their previous number. Is that just that we've rolled off another year and if somebody stays at five years or six years that there's been some extension? I'm just trying to think of how should we read the supplement kind of year to year and what happens to the remaining life?

Yeah, I think... I think the way you described it is a good way to think about it is we've just crossed over the year. And so depending on what the terms of given contracts are absent activity on a site, then you're going to see that come closer to zero. And to the extent that there is activity or new leasing activity, it's going to move the book out towards the right.

The only thing I would mention, Rick, to maybe clarify the point you made is because they're whole numbers, there's rounding in there too. So the fact that one stays at five from one period to the next period doesn't mean we extend it. It just means that it hadn't crossed over from a rounding perspective.

Makes sense. And we haven't heard any comments from you guys on DISH, but it does feel like other people are starting to see DISH show up. Has that been helping the benefits? Have you seen some movement from DISH on putting their narrowband IoT network out there?

You know, as you know, we don't like to comment specifically on individual customers. I would tell you outside of the big four that there is spectrum that's being deployed for a number of different uses, and that is helping our revenue growth results, and we think there's opportunity for more of that in the future. The majority of the revenue growth that we see both on towers and small cells is really being driven by the big four operators. But beyond that, the infrastructure is useful for anyone who wants to deploy a wireless network, and we're seeing demand from a number of customers outside of the big four.

Great. That's helpful. Thanks, guys. Thanks, Greg.

We will now take our next question from Brett Feldman from Goldman Sachs. Please go ahead. Your line is open.

Thanks for taking the question. You were talking about the increasing pace of small cell node deployment going from 10 to 15,000 up to 20,000. And what we've seen in the past is that as you've ramped up your capacity to deploy small cells, there has been some increase in your operating expenses. I was hoping maybe you could just explain that dynamic to us. Are you at the point right now where there's some type of a linear relationship, meaning if you increase your deployment pace by a thousand nodes or so, there's going to be a certain amount of increase in your expense, or are you beginning to hit a point where there's an increasing degree of operating leverage within the business so that as you scale your growth, you maybe start to see more conversion of that revenue towards the bottom line?

Yeah, Brad, I would say based on what we have in the backlog currently that we're working on, both for 2019 and the work that we're already beginning on nodes that will go on air in 2020 and beyond, We think that our operating structure, as it's currently situated, is sufficient to manage that growth. To the extent that the pipeline grows even larger or we're trying to put on air more than, as I mentioned in my comments, trying to get on air somewhere between 10,000 and 15,000 nodes in 2019, if we were to meaningfully raise that number beyond that, then we'd have to come back and talk about what we think the cost structure is appropriate. If it were to get to that, things that would matter in that analysis is how many new markets are we having to go towards to the extent that the increase within markets that we already exist in, it might have less of an impact towards rising costs. If we see the opportunity expanding beyond existing markets, then that would have a different calculus in terms of thinking about operating expenses. I think the right way to look at it now is for the pipeline that we have currently contracted, we think the operating expenses are a stable level of activity to handle that level of demand.

Do you mind if I ask a quick follow-up? As we think about the bottleneck in your ability to deploy at any given pace, What would you say it is? Is it the absolute level of demand for small cell deployments? Is it your own capacity to meet that demand? Or is it external factors like the zoning process?

Well, in terms of timing, obviously if we talk about the timeline to deploy these of 18 to 24 months to get them deployed, if we were to see an increase in the amount of nodes that we're contracting today, we'd be two years away from actually benefiting from the revenue associated with that. So in terms of financial results, I think the biggest bottleneck I would point to is the amount of time it takes to get these deployed. The regulatory hurdles to get there are significant, and The FCC has obviously helped us through their recent order, and it gives some clarity around what the nature of the deployment should look like, and it gives us a path towards working with communities in order to get something in place. But nonetheless, the hurdles are there and the timeline is significant. So that's probably the biggest bottleneck. Obviously, we think, based on everything that we know and what we're seeing around 5G, we think the opportunities for small cells is is very likely to increase over time. And so to the extent that the overall demand for small cells increase, that is certainly a gating item currently in terms of what the cap on what our opportunity is. And over time, we think the opportunity is going to grow. But specific to financial results, it would be the timeline currently that it takes between when it's contracted and when we can get it on air.

And the only thing I would add to that, Brett, is I don't think it's our internal capabilities or capacity that it's a bottleneck at all. We've been able to scale, as Jay was talking about in the answer to the first question you asked, from 5,000 nodes or so a few years ago to 10,000 to 15,000 nodes now. We think we can continue to scale. It's really the combination of how big that demand will be ultimately in the time it takes to get there. Great. Thank you.

We will now take our next question. from John Atkin from RBC. Please go ahead. Your line is open.

Thanks. So I was interested, natural disaster reference, what specifically were you referring to and is there any sort of continued impact into 1Q?

John, we don't expect there to be any flow through to Q1. Specifically what we were referring to was Hurricane Michael in Puerto Rico and then the significant fire that happened in Southern California.

Okay. And then during the script, you mentioned the word latency, so that made me think about VaporIO, and I wondered if you could kind of provide any update operationally and potentially financially what we can kind of expect over the next year or so.

We're continuing to do some work on edge computing as the networks get designed and traffic increases to my comments around where traffic is increasing on mobile networks. we continue to believe that some of the traffic, in order to get to the latency required for Internet of Things, some portion of the network is going to have to be designed where information is kept at the very edge of the network, some for cost purposes, but also for reduction in latency. And we believe that it makes a lot of sense for a meaningful portion of that edge compute to be put in places where there are existing macro sites connected to small cells. So we're continuing to do a number of trials there, but it's still very early, and you shouldn't expect to see any impact to our financial results, certainly not in 2019 in the outlook that we've given from the work that we're doing there. But long-term, it could be an opportunity and may result in us having another use for leasing our sites, whether it's the ground or space on the towers related to Edge Compute.

Okay. And then finally, I was wondering if you could comment on the organic growth rate within fiber exclusive of small cells, so enterprise fiber essentially.

Sure. What we're looking at is about mid-single-digit growth rate on a revenue basis for the fiber solutions business exclusive of small cells. The small cell growth we think is going to be closer to the 20% range, so And that's comprised in the fiber solutions business. That's net of high single digits of churn. So the overall growth we think we'll get there is around 5%.

Great. Thank you very much.

We'll now take our next question. Colby Sincel from Cohen & Co. Please go ahead. Your line is open.

Great. You've historically talked about expanding the number of markets where you see the small cell opportunity. I was wondering if you can give us color on what that looks like today and how many of those markets do you have fiber in at this point versus you'll need to get there. And those markets that you don't have fiber in, I mean, is it about organically building or is it more likely that you would do those tuck-ins that you described? And then secondly, when would you expect to see massive MIMO-type equipment start to get put up on towers based on the conversations that you're having with your customers? Is that something that you see starting to happen in 2019 in a material way, or is that still out there? Thanks.

Yeah, Colby, to your first question, the vast majority of the spend by the wireless operators for small cells continues to be in the top 30 markets in the U.S., so basically like NFL cities. And we have fiber plant in many, if not all, of those markets now, or we're in the process of constructing it. to the extent that the expansion goes beyond those top 30 markets, which we're doing some of that, but it's not a meaningful amount of capital or, frankly, a meaningful number of small cells yet. So that's where the opportunity is currently, and that would stand for both the pipeline of notes that we're deploying and we'll put on air in 2019, as well as our contracted backlog at this point is mostly focused on those top 30 markets. As I mentioned earlier, my comments around the M&A, I intended those to be more broad than just the markets that we're currently working in. As we look at markets even beyond the top 30, we don't see acquisitions as a likely outcome for any meaningful amount of the fiber that we may one day own. We think it's more likely that we're going to end up having to build it. And that's a result of us assessing the type of fiber that exists in the markets. We just don't see the dense, high capacity urban fiber in markets, whether we're talking about top 30 or beyond the top 30, that are likely targets of any meaningful size to us. We think we're much more likely to be organically building that fiber. On your second question around MIMO antennas, we are seeing some of that. I don't know that that's, frankly, that relevant ultimately to our investment story. As carriers deploy equipment on both small cells and on towers in order to deploy network and manage both their spectrum position, capacity needs, they do a number of different things with antennas in order to meet that. And in order to design the network, there are a lot of demographic characteristics that are going to fall into that analysis. The relevance for us is much more around is there need for it and then how are they designing their networks We are seeing some of the massive MIMO antennas being deployed, but I don't know that that's really a meaningful component of our investment story. I would look much more at just the overall activity and the deployment of network, and the carriers will make differing choices around how they deploy that network depending on the demographics.

I think for the lower band spectrum, massive MIMO will require significant pieces of equipment. Some people will say like the size of a small dorm room type refrigerator. And as a result of that, just considering the size of that, there's a viewpoint that that could by itself be a material driver to growth for the tower operators when that happens. I guess your point is that we shouldn't isolate that as a material revenue opportunity. Is that what I'm hearing?

Exactly. Because they could solve the same thing by using more sites or differing types of equipment, depending on what spectrum bands they use and how they choose to do it. So just in isolation, I wouldn't necessarily assume that would be a large revenue driver for us. Okay. Thanks, Jay.

We will now take our next question from Matt Nicknam from Deutsche Bank. Please go ahead. Your line is open.

Hey guys, thank you for taking the question. It's on Lightower, so I guess it's been about a year now, over a year since you closed that deal. Can you just update us on some of the revenue synergies you had talked about for both CCI's existing enterprise and fiber assets to leverage the Lightower network and then obviously your ability to add new small cell revenue on that existing fiber? And then on the cost side, I know there wasn't much that you had outlined in the way of cost synergies, but is there anything to think about now that you've fully integrated the asset on a go-forward basis, having multiple fiber assets now under CCI's ownership? Thanks.

Sure. One year into the Light Tower acquisition, things have gone basically as we expected, so we've been pleased with how things have gone the first year into ownership. We, as a part of the acquisition, have the benefit of attracting about 900 employees that came with it. And they have been terrific, very seasoned, great skills, and have done a good job continuing to run that business and have been an integral part of the integration of the other fiber assets that we had acquired previously. And pleased today that we've effectively completed almost all of the integration activities and have everything on a common system. So excited about what that's going to mean for us with regards to revenue synergies. When we announced that transaction, and as we look today, yeah, there are a number of nodes that are going on existing fiber. And some of the fiber that we acquired, we were down the road on already contracting the nodes. And so we're using the fiber that we acquired to handle some of those nodes. and given the markets that we acquired, mostly in the Northeast with Light Tower and then the two Texas markets that we got with FiberNet, there is a significant amount of opportunity in those markets for small cells. So we're really early days in terms of the deployment of small cells against the fiber that we've owned, but the thesis is playing out as we would have expected 12 months into it.

And from the second part on the cost synergy standpoint, what we talked about is what we meant. We thought, as Jay said, we picked up 900 people and knew what they were doing, and we've kept the vast majority of those people. And we're not looking to try to wring out cost synergies to try to make sure we're operating that any differently than it has been operated in the past. What we're looking to do is trying to expand our market.

Got it. Thanks, guys.

We will now take our next question from Nick Neldeo from Moffitt Nathanson. Please go ahead. Your line is open.

Hey, thanks for taking my questions. Yeah, I realize that it might be a challenging question to answer just given the very nature of fiber, but can you try to give us a sense for what share of your purpose-built small cell systems are also generating some sort of revenue from a non-small cell source, like an enterprise customer, or perhaps what share do so a few years after they were constructed?

I don't know that I have the number off the top of my head, Nick, to be able to answer that question for you. As we look at individual markets, which we tend more to look at the business as we study how have we done in particular markets, and we've talked about some of these case studies in the past, we'll do a deep dive in a market like Chicago or New York and look at What was our initial investment? How much fiber did we own initially? What was the nature of that initial fiber relationship, whether it was K through 12 or enterprise or small cells? And then watch as it develops over time. And as we look at individual case studies, what we've seen is the thesis has played out as we expected. When you own fiber in areas where there's a dense population of people, Those are the places where the network, the wireless networks are challenged and they need to add capacity. And so we see those fiber networks, whether we start with small cells or we start with a fiber solutions application, we see over time it being an asset that's shared. And we find that in areas that are dense, urban areas. downtown business districts, and then we find it in more suburban applications. In both situations, the fiber ends up, where the people are, the fiber ends up being needed for business, enterprise, hospitals, universities, schools, and being necessary for wireless.

And one of the good things about the strategy we've deployed is, and why we're so interested in the fiber we're interested in, is having lots of strands, high-capacity fiber in lots of density, really plays into all of that. So having the ability to serve all of those markets at the same time with a level of service that isn't necessarily available in the market because the fiber is so unique, just that the capacity we have is unique through a lot of that, positions us really well to take advantage of all the markets we can serve. Okay, got it.

That's helpful. And then, Jay, in your prepared remarks, you talked about expected wireless traffic growth and how that drives your outlook for your wireless infrastructure. And, you know, historically with towers, the exclusive nature of the assets and the physics of wireless delivery has meant that there's been a pretty strong linkage between traffic growth and monetization rates. You know, when I think about fiber solutions, that relationship doesn't seem quite as clear given ongoing improvements in optronics and there being more competition. So, you know, with respect to fiber solutions specifically, how do you think about the long-term relationship between traffic growth and revenue growth?

Nick, appreciate that question because I think there is a sense in which that question drives towards the heart of our strategy of all the IP traffic that's out there or Internet traffic that's out there is not the target of our business. So there's a significant portion of that traffic that we don't serve today, a significant portion of it that we wouldn't ever aim to serve. The portion of the market that we're aiming for is large enterprises, universities, hospitals, in some cases government systems, that are large users, most of the time a few multi-location businesses. And that's really our only, that's our target for providing fiber solutions, where really all we're providing is the pipe. And the pipe happens to run along places where, because of the demographics of an area, there's going to be a lot of users of mobile technology there and constraints on the networks, and therefore that fiber is going to be needed for small cells. So I think overall traffic is indicative to some degree of the opportunity that's in front of us with those large enterprises, hospitals, universities, etc., But I would not try to take our fiber solutions business and draw a direct connection to overall growth in Internet or IP traffic over time as a direct correlation to what our revenue growth in our fiber solutions business is. I do think on the mobile side, which is why I made the comments that I made, I do think on the mobile side that that traffic is a good indication of the necessity of improvement in networks. particularly with regard to the uses of that network. As latency comes down, not only is latency a concern, but reliability has to go up pretty meaningfully from where the wireless networks are today in order for the devices that are likely to be used in a 5G environment to actually be effective and be able to be relied upon for industrial uses. And that increase in the reliability of the networks and the reduction in latency is going to mean a pretty significant increase, we believe, in the number of places where there's deployment of wireless spectrum, both on towers and small cells. So to wireless traffic, I think it's a pretty good indication. On the total traffic side or wired side, probably not the best indication for our business.

Okay. Got it. That's great color. Thanks, Jay.

We'll now take our next question from Michael Rollins from Citi. Please go ahead. Your line is open.

Hi. Thanks for taking the question. This is Adam Okowitz on for Mike. I was curious about the site leasing growth in the fourth quarter. It came in a little bit above what we were expecting. I was wondering if you can give a reason for what drove that and maybe why it didn't roll through to the 2019 guidance that wasn't updated for Organic. Thank you.

Sure. The driver of most of that incremental activity was actually our small cell business, where we saw the activity levels a little higher than what we expected going into the quarter. And the reason that it didn't roll through is because we've given ranges around what we think 2019 will be, and this is all within those ranges. So we... don't anticipate updating guidance every time something moves by a couple million dollars. We're trying to make it to where the ranges incorporate what we think is a reasonable expectation of the potential outcomes, and this falls within that range, so we're not going to update it for that.

Okay, thanks. And then just to follow on, the small sale business and the tower business, given that a lot of customers are overlapping, can you talk about what type of relationship those two businesses are having in the sales process? Are you signing joint contracts for both products, or Are your customers continuing to think about those products and the areas they're addressing separately? Thank you.

On the carrier side, the individuals who are deploying network would be handling both towers and small cells. So we don't see separate groups that we're having those conversations with. They are very different conversations, though, in terms of as we think about value. On the small cell side, we're deploying a significant amount of capital, generally speaking, about 75% of the activity that we have or thereabouts is going to be related to anchor activity, and the balance would be COLO. So in that 70%, 70%, 75% of the total activity being anchor activity, we're deploying a significant amount of capital in order to build those systems. So the conversation on that front is around the yield and return on that invested capital. As we talked about before, we would expect in order to deploy capital somewhere in the neighborhood of a 6% to 7% initial yield. And then ultimately, we get to a return to justify the investments and an acceptable return ultimately to the shareholder of adding multiple tenants beyond that. Our evaluation on the small sale side comes down to what's the investment required and what do we think the potential return is based on location and other things. On the tower side, it's a different conversation. It's around what assets exist in the market that will meet or solve the needs that they have. And there, because of the agreements that we would have with all of the customers, we're not really doing an analysis around what the return on a per dollar basis is for the investment of capital because the capital investment has already been made. So it's a conversation that happens with the same people, but it's a very different conversation depending on the type of product that they're trying to buy from us. Thank you very much.

We will now take our next question from Walter Peake from BTIG. Please go ahead. Your line is open.

Thanks. I just wanted to ask, obviously, again, about the prepaid, my favorite question. It looks like for the year you were guiding to 35 to 40. It was at a minimum at the high end, maybe a little over. If you can talk about what were the issues there. And then for next year, you had talked about doing 35 to 40. What's on top of this year, right, for the increase? Is the baseline for that the 327 that's reported, or is the baseline that the 292 or – maybe lower that excludes the acquired prepaid for the quarter? Thanks.

Sure, Walt. So first, yeah, the prepaid came a little bit above our 35 to 40 guidance. Small sale activity was a little higher, and so we got a little bit more prepaid activity or prepaid rent received in that case for 2018. Going forward, I think what we said is somewhere in the 30 to 40 range in 2019. That would be over and above the 327 you talked about, so total all in. That's the number I think you're looking for.

Got it. Thank you. That's helpful. And then just one other question as far as the churn makeup. When you look at the guided churn, assuming the tower churn is in this kind of whatever, 2% to 2.1% ballpark, right? And then so for the fiber business, right? What's left over is if you get 25% of your business is small sales and that's whatever, let's say a 1.5% churn, although that's probably high given its early stage. To get to the guided churn or disconnect stuff, that is implying like a 10% churn number for the enterprise business. Am I thinking about that properly in terms of kind of the breakdowns of the churn?

Yeah, I think you're close. I think on the tower side, both for 2019 and years beyond, we think the churn rates are around 1% to 2%. And as you mentioned, we're going to be at the high end of that for 2019. Our working assumption for long term is that small cells are going to have about the same level of churn. It's fair to say that maybe in the short term here, we don't see quite that level, but in that same 1% to 2% range. And then on the fiber side, we think it's high single digits, so we've talked about the fact that we think it's about 9% in 2019 in the outlook that we gave.

Right, so you're basically being pretty conservative then, because the numbers, if you put 9% in there, then that would kind of take you to the low end of the range, so I guess that the guidance on the churn sounds like it's fairly conservative then, because there's no exogenous churn events in macro towers, I don't think, expected in 2019, right?

Yeah, I think we're probably trying to give ranges, so depending on where you pick a point in the range, you squeeze out the other side, and we're just trying to give a range. But I think for modeling purposes, I think somewhere in the neighborhood, we think the fiber business is going to run in and around those high single digits, around 9%, and then 1 to 2 on towers and small cells.

Dan, well, just to clarify on the exogenous tower event, we do think that about half of the turn we're going to see in towers is because of the acquired network turn that's coming through. So I'm not sure you call that exogenous or not, but we did want to call it out as something that we see that we don't think repeats forever.

I may have to look that word up in the dictionary. I just use it. I'm not even sure I know what it means, but I appreciate the answers. Thank you.

We will now take our next question from Amy Young from Macquery. Please go ahead. Your line is open.

Thanks. I guess I'm just following up on our previous question, but I think your past view was that small solves return would be similar to macro sites at scale. I guess where do you think you are and how far along are you to reach scale? And has there been anything in the past year that's changed your view on that?

Thank you. Amy, we're really early days on small cells. So our initial yields on small cells, as I mentioned, are around 6% to 7%. If you look at our entire fiber segment with small cells and the fiber solutions, we're getting about an 8% yield on the invested capital around fiber. So we've taken both the acquisitions that we've done as well as the builds, and we've already grown the yield on the $13 billion that we've spent there. above kind of our initial entry point. On a tower basis, if we roll the clock back to a couple decades ago when we first started acquiring towers, we acquired a significant number of our towers at about a 3% yield and have grown that yield over the last two decades. If you look at it on a micro sense and look at what's the return on a tower versus the return on a small cell system, they're very comparable. As we add additional tenants to small cells, we see the returns and the margins expand at about the same pace, if not maybe slightly faster on the margin side than what we saw in the tower business. And at the end of the day, we see returns with pretty reasonable assumptions around what we think lease-up is, somewhere in the neighborhood of about the equivalent of a little over two tenants per tower on a tower basis, if we were to do that same math on the small cell side. we would get to returns that are well above a blended cost of debt and equity and provide substantial return as we think about growing the dividends per share over the long term. Last thing I'll mention about this is the key characteristic around what drives that return is what is the lease-up associated with the asset. So you enter the asset with an anchor tenant and have a going-in yield. On the tower side, historically, it's been about 3%. small sales, it's about double that at six to seven, but then what's the co-location model look like and at what rate do we see co-locations and that drives the return long term. Our experience has been thus far that the pace of leasing on existing investments, we've seen lease up that's about twice the pace of what co-locations on the towers happened over the last decade or so. So we've accelerated the path towards co-locating and sharing the asset as we've deployed these early systems of the small cells as a second and in some cases a third tenant has come along and used that same system. So our thesis in terms of the model is similar to Towers. It's playing out at the same time that we're scaling the business significantly. As I mentioned, I think I mentioned this last quarter, In 2019, we think we'll deploy roughly double the number of small cells or double the growth that we had in 2017. So that kind of growth is expanding the overall size of the pie. And as we look at it in a micro sense, the model is playing out. But it's playing out against a scale of assets that's much smaller than the entire size of the investment is today because it's grown so significantly in terms of our investment and opportunity that when you look at the yields on a total, yes, it's headed in the right direction going from initially six to seven to now eight, eight plus. But the overall book of that growth and the total return yield is going to take many years just like what it did in towers as we move the base and increase the opportunity.

Got it. Thank you. And I guess just following up on that, I think we've seen one or two carriers deploy small cells internally. And what do you think is driving behind, you know, what do you think is driving that decision and does that potentially shape your view on what you just said?

I think all of the carriers are deploying small cells in some form of a self-perform. We certainly don't anticipate that we'll win 100% of the market share, just like we've never done that on the tower side either. We think at the moment we're somewhere in the neighborhood of about half of what's getting deployed that we're winning. I think the fact that the carriers are self-performing should be a good indication of the fact that this is a good business and they need small cells. There are certain locations where we're going to choose not to build them because we don't see the lease-up opportunity there and therefore we don't see the shared economics. for great returns over the long term. So I think the carriers will continue to self-perform in places where we don't view those to be the best places to invest capital, just like we saw for a long time on the tower side where carriers built their own towers in places where tower companies or others were not willing to invest the capital in order to build the infrastructure.

Great. Thank you.

You bet.

We'll now take our next call from Spencer Kern from New Street Research. Please go ahead. Your line is open.

Hey, guys. Thanks for taking the question. I'm just wondering, you've guided to $120 to $130 million of new leasing revenue on towers in 2019. How does that compare to what you guys saw in the fourth quarter? I'm just trying to gauge whether your guidance assumes any acceleration in activity or if it's pretty much an annualization of this past quarter.

Thanks. Spencer, it's similar to what we saw in the fourth quarter, but as we're talking about and have talked about, what we're excited about is just the level of activity increasing over time and all of our customers being active across our Towers business. So we do think that that will continue through 2019.

Great. And I just have one other question on node density. I think in small cells, I think today you've got around two nodes per mile on average. And sorry, actually, it's lower than that. But my question is, you know, we've heard of some deals where carriers are signing deals for, you know, 10 to 20 nodes per mile. I'm just curious, could you talk about the sort of distribution of your small cell node density? Sort of how many markets do you have with node density above maybe 10 nodes per mile or 5 nodes per mile? I'm not sure how you break it out. And then also, are you seeing these types of deals becoming more prevalent in your conversations? Thank you.

Yes, Spencer, just to clarify a couple of points. So when we're deploying new fiber and building it for the purpose of small cells, our average is just over two nodes per mile currently as we're deploying. That's held pretty consistent. When you get to specific examples and we start to look at some case studies, we could show you many examples in dense urban markets where the node count is between 6 and 10 nodes per mile. And we don't think those are by any means isolated examples. We think that over time we're going to continue to see a density that's significantly beyond what we are currently in terms of small cells per mile. That's well beyond, if we start talking about 6 to 10 nodes per mile, That's well beyond what we're underwriting when we decide to make these investments. We're closer to underwriting in the neighborhood of about four or a little over four nodes per mile in terms of the density. So if ultimately networks get to kind of some of the numbers that you're talking about, and I believe there is a case where that could happen, That's not in our underwriting case, but we've both seen it in practice and believe, depending on the density that ultimately happens and is necessary for 5G, we could get well beyond what we're underwriting when we make these investments. And time will tell on that front, but as we look at individual case studies and look at some markets, some of the early deployments in both center business districts as well as some areas of suburbia, we do find examples as the carriers go out and initially deploy. They're deploying somewhere in the neighborhood of two per mile. A second carrier comes along and does a similar deployment. And then one of those two original carriers comes back and adds additional nodes to that existing deployment in order to increase the density. So we end up getting lease up, if you will, or co-location both from the existing deployment as well as a secondary deployment that comes back and adds additional nodes in order to increase the density. We think over time that's the way this is going to play out.

Great. Thanks so much.

We will now take our next question from Robert Gutman from Guggenheim Partners. Please go ahead. Your line is open.

Hi. Thanks for taking the question. it seems like almost 80% of CapEx is on the fiber and small cell side. It seems like small cell specifically would be a small portion of that at this point. Can you discuss broadly how it's being spent? Is this on the organic sort of dense fiber builds in markets and in the markets that you mentioned earlier that you're trying to get to organically? What is the timing of associated revenue generation on that? In other words, is it specifically linked to the backlog of small cells, or is it just building without specific contracts? That's basically what I'm trying to get at.

Sure. I think let's try to take a step back and tell you how we think about spending capital. What we're doing is we're spending capital to build fiber in markets where we see significant demand for small cells and continuing increases in that demand for small cells. So what we're trying to do is pick markets where we think it's going to ultimately be very conducive for small cells. And we will only start building in those markets when we have a contract in order to do so. So when we think about what that new capital expenditure, revenue generating capital expenditure looks like, the majority of it is in our fiber segment, but the vast majority of that is going in to build small cell systems. Having said that, those small cell systems include fiber that, as Jay was pointing out earlier, will put us in a position to go after some fiber solutions business that we're really interested in within those markets because it will likely be that the small cell deployment is close to where that fiber solutions business will come as well. But to your specific point on what the revenue timing is, since the vast majority of that is for fiber, I mean, is for small cells, the fiber to support small cells, It's an 18 to 24 month on average deployment cycle, which means that the capital will come in through the course of that 18 to 24 months before we see the revenue come in from it. But there's not going to be a case where we're spending capital and hope that someday we'll get revenue on it. Got it. Thanks.

And earlier in the call you mentioned, I think prior to this call you targeted 6,000 to 8,000 deployments in 2018 of small cell nodes. You had also prior mentioned a 35,000 node backlog. I think earlier today you said a 20,000 node backlog, but I would assume that's net of the 10 to 15 you expect to deploy this year. So then conclusion would be the backlog is unchanged.

Is that right? Yeah. So, yeah, the short answer is yes, but I just want to make sure we get to all the same points. Mm-hmm. We have about 65,000 nodes either on-air or under development. That number really hasn't changed, and so there hasn't been a significant move in that. We put around 7,000 nodes on-air in 2018, and as Jay mentioned, the ending 2018 backlog was higher than the beginning 2018 backlog, so that we more than replaced the nodes we put on-air with new bookings. Looking forward, we think 10,000 to 15,000 nodes we put on-air in 2019, And then we have 20,000 or so that will be put on air in near 2020 or beyond. So you're right. The short answer is no, the backlog really hasn't changed. We're just trying to give a little bit more color around the timing and how that looks going forward.

Thanks. Last small point. Could you break out the final leasing by segment as it compares to the guidance that was outstanding in terms of towers, small cells, and fiber?

Are you asking for 2018? Yeah, yeah. Okay. Yeah, so new leasing activity was around 110 for towers, around 60 for small cells, and around 45 for fiber solutions. Great. Thank you very much.

Sure. We will now take our last and final question from Philip Cusick from J.P. Morgan. Please go ahead. Your line is open.

Thanks for getting me in, Gus. I guess two, please, if I can. First, as we think about those term extensions that drove higher straight line revenue, it seems like that would be activity beyond regular way, but you've raised straight line guide nearly every quarter in the last couple of years. Can you give me examples of what this sort of unexpected activity might be and why it might not happen in a particular quarter?

Yeah, it's not unexpected activity. It's related to new leases that we think are we understand are coming. It's just the timing of that is sometimes difficult to predict, but it's also the length of the term extension that we get may be different than what we have in our forecast, and that can drive incremental straight line activity.

Is it fair to say that you come in guiding for sort of the worst case in what those extensions might look like, and then as they come in, you just stretch out the straight line?

I wouldn't call it worst case, but it's hard to predict. And so I think we're probably on the conservative side of that assumption specifically, yes.

That helps. Thanks. And then what do you see? Any change in the trends in enterprise fiber demand? Any change in bookings or churn pace there? Thanks.

So we really haven't seen any trends there as we've now had the business for about a year. I think it has played out roughly in line with what our expectations were going into the business. I think we're getting better at understanding how the business works and how to position ourselves in the market. But I wouldn't point to anything that's changing our long-term view of how that business will perform. Okay.

Thanks, Gus.

Well, thanks, everyone, for joining the call this morning. Obviously, we were thrilled with the outcome in 2018 and excited about the opportunity ahead. As we talked about on the call this morning, on a number of fronts, the increased level of leasing activity around towers and small cells is exciting, given what it means not only for calendar year 2019, but also what we think it will mean over the long term as the carriers look to deploy beyond 4G and into the 5G world. Thanks for joining us this morning. Look forward to catching up soon.