Crown Castle Inc.

Good day and welcome to the Crown Castle second quarter 2019 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ben Lowe, Vice President of Corporate Finance. Please go ahead, sir.

Great. Thank you, Todd, and good morning, everyone. Thank you for joining us today as we review our second quarter 2019 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 that we will 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 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 factors sections of the company's SEC filings. Our statements are made as of today, July 18th, 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 thank you, everyone, for joining us on the call this morning. We delivered another quarter of great financial results that exceeded our expectations and reflect the significant demand we are seeing from our shared infrastructure assets. I believe our strategy and unmatched portfolio of more than 40,000 towers and approximately 75,000 route miles of fiber concentrated in the top U.S. markets has positioned Crown Castle to generate growth in cash flows and dividends per share both in the near term and for years to come. Due in large part to the increasing demand we are seeing across our tower assets, we are increasing our full-year 2019 outlook and now expect to grow ASFO per share by approximately 8%, which is at the high end of our longer-term target of 7% to 8% annual growth. Dan will discuss the results for the quarter and the increased outlook in more detail, so I'll focus my comments this morning on two key points. First, current tower leasing activity is our highest in more than a decade, which we expect will carry into next year. And second, our small cell business is delivering compelling returns at scale. On the first point, we are seeing a more significant acceleration in tower leasing this year than we previously expected, with broad demand from each of our largest customers as they deploy additional cell sites and spectrum in response to the rapid growth in mobile data traffic. we now expect new leasing activity on towers to be approximately 30% higher when compared to the level of leasing last year, with activity in the back half of the year exceeding the growth generated year-to-date. And I believe the current level of activity will continue as our customers respond to data traffic growth on their 4G networks while also embarking on the deployment of 5G. According to a recent report from Ericsson, Data traffic per smartphone in North America is expected to increase from 7 gigabytes per month in 2018 to nearly 40 gigabytes per month by 2024, representing the highest rate of data consumption in the world and a compound annual growth rate of more than 30%. Additionally, as 5G becomes a reality, new use cases will develop that require wireless networks to connect not only people and their phones, but also billions of things. The expansion of the uses of wireless networks will require ubiquitous, low latency, high speed connectivity, which we believe will extend demand for our towers for many years to come. In addition to towers remaining a crucial element of the future, networks will need to be significantly more dense than current infrastructure can handle, which brings me to my second key point. As you see on the map on slide four, we invested early and at scale to build and acquire fiber in the most densely populated markets where small cells are being deployed and demand is expected to be the greatest. Said another way, all the gray space you see on the map where we don't have fiber is intentional. Turning to slide five, this strategy is delivering compelling results. The small-cell projects summarized on this slide are in the process of being completed. While the projects included in this dataset are not finished, some of the nodes within those projects are on-air, while other nodes are in various stages of construction. In total, this analysis represents approximately 75% of the 65,000 nodes we have on-air or under construction. and represent the most recent data points for measuring returns. When these projects are complete, we expect to have invested just over $2 billion of capital, both to build new systems for anchor tenants and to co-locate new small cells on existing fiber networks. These projects are expected to generate a recurring yield of approximately 8%. The blend of first tenant economics in the 6% to 7% range and colocation economics of approximately 20%, which is consistent with our discipline underwriting requirements. As the data shows, similar to the development of the tower business, we are seeing significant demand from multiple customers for the same asset, which results in colocation economics. The small cell colocation on existing fiber accounts for nearly 30% of the incremental cash flows we expect to generate from these projects, but only 10% of the incremental capital investment. This operating and capital leverage is very much like what the tower business has exhibited over time, and we believe our strategy of investing early in fiber for small cells will pay off in much the same way that our early investment in towers continues to. And whether we have built or acquired the fiber, we are seeing colocation economics as we add small cell customers to the existing fiber. To that end, approximately 75% of the colocation activity is coming from the markets where we acquired the fiber in recent years. While our levels of activity, initial yield, and lease-up economics are all very encouraging, the significant increase in the volume of small cells being constructed is straining the response time from municipalities and utilities who are not complying with the FCC orders, resulting in longer construction timelines than we previously experienced. As a result, we are seeing construction timelines averaging 18 to 36 months, which is longer than our prior average of 18 to 24 months. Due to the elongated construction timelines, we now expect to deploy approximately 10,000 small cells in 2019, which is at the low end of our prior expected range of 10,000 to 15,000 in this year. But it's approximately 30% more than what we delivered all of 2018. In the near term, we expect the delays to reduce our 2019 new leasing activity from small cells by approximately $5 million. Longer term, we do not expect the extended timelines to impact our overall growth or our returns. Taking a step back and reflecting on where we are with our fiber and small cell strategy, it is remarkable to me how much progress we have made in a relatively short timeframe. What began about 10 years ago with measured investments intended to explore the small cell opportunity has accelerated over the past five years at the scale of the opportunity and the business model have come into focus. As a result, we sit here today as the clear leader in the small cell industry with approximately 75,000 route miles of high capacity fiber concentrated in top markets, more than 65,000 small cells on air or under construction, more than 13 billion of invested capital generating a recurring yield of approximately 8% and a robust pipeline of small cell projects that will add to the returns on our current fiber asset base while increasing the longer term opportunity as we expand with new anchor builds. As we look ahead, we see tremendous opportunity to increase the returns on our fiber investments over time by adding small cell tenants to existing fiber networks as we're doing today. Along these lines, our experience is that the same fiber necessary to support small cell customers can serve large enterprises and government agencies who require high bandwidth connectivity. As such, we see a path to further improve our small-cell returns by sharing the fiber across these customers. This is similar to our approach with towers, where the vast majority of the economics are driven by the wireless carriers. But we also work hard to increase the returns on our towers by sharing the asset with others. As shown in our 2019 outlook, we now anticipate fiber solutions revenues to grow approximately 3% we're approximately $15 million lower than our previous expectation. As you would expect, we've prioritized activities related to our long-term strategy of adding small cells to our fiber, including integrating recent acquisitions into a single operating structure and platform. And consequently, we lost some sales momentum in this business. While we want to generate as much revenues from these sources as possible, we continue to believe that the growth from small cells will be the primary driver of future return on our fiber investments. So to wrap up and moving back to the collective outcome, 2019 is shaping up to be another great year for Crown Castle, with ASFO per share growth now expected to be at the high end of our longer-term 7% to 8% target. We see the growth in our business reflecting the positive underlying fundamentals driving demand for our infrastructure, including the continued growth in mobile data, on existing 4G networks and the early stages of our customers developing 5G networks. With our unmatched asset base and expertise, I believe Crown Castle is in a great position to capture these substantial long-term return opportunities and consistently return capital to shareholders through a high-quality dividend that we expect to grow 7% to 8% annually. And with that, I'll turn the call over to Dan.