Crown Castle Inc.

Q3 2019 Earnings Conference Call
10/17/2019

Samantha

Operator

Good day and welcome to the Crown-Castle Q3 2019 earnings goal. Today's conference is being recorded. At this time I would like to turn the conference over to Ben Lowe. Please go ahead, sir.

Ben Lowe

Vice President, Investor Relations

Great. Thank you, Samantha, and good morning, everyone. Thank you for joining us today as we review our third quarter 2019 results. With me on the call this morning are Jay Brown, Crown-Castle's Chief Executive Officer, and Ben 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'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 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, October 17, 2019, and we assume no obligation 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.

Jay Brown

Chief Executive Officer

Thanks Ben, and good morning, everyone. We delivered another quarter of strong financial results that reflect the significant demand we are seeing for our shared infrastructure assets. I believe our strategy, an unmatched portfolio of 40,000 towers and 75,000 route miles of fiber concentrated in the top U.S. markets, has positioned Crowncastle to generate growth in cash flows and dividends both in the near term and for years to come. Steady execution against this strategy is resulting in consistent dividend growth as we increased our annualized common stock dividend by 7% to $4.80 per share in line with what we believe our ASFO per share growth will be in 2020. Over the last five years, and inclusive of the increase we announced yesterday, we have grown the dividend at a compounded annual growth rate of approximately 8% while investing heavily in assets that we believe will generate significant growth over the long term. Dan will discuss the results for the quarter in the full year 2020 outlook in a bit more detail so I want to focus my comments this morning on two key points. First, new leasing activity across our business is expected to be higher in 2020 than in 2019. Including activity in our tower business remaining at the highest level in more than a decade. And second, I'm excited about the long runway of growth for Crowncastle as 4G investment remains robust and the deployment of 5G is just getting started. On the first point, in 2019 we are seeing a significant acceleration in tower leasing as our customers add capacity to their wireless networks in response to the rapid growth in mobile data traffic. The current demand environment is largely tied to our customers investing heavily in their 4G networks to keep pace with 30 to 40% annual data demand growth. As you can see in our outlook for 2020, we expect the elevated level of tower leasing to continue into next year. As 5G becomes a reality and wireless networks expand from connecting everyone to connecting everything, we believe new use cases will develop that will generate significant long-term demand for our infrastructure with towers remaining at the core of the wireless networks. As I think back on my time at Crowncastle over the last 20 plus years, there have been significant advances in the broader wireless industry. Like the rapid deployment of technology that has taken us from tracking mobile penetration rates and voice minutes with 1G to the current 4G unlimited data plans that feed a seemingly insatiable demand for data from consumers. And now the industry is in the beginning stages of what is likely to be the next decade long investment cycle with the deployment of 5G, which brings with it the promise of a step function change in the role that wireless networks will play in supporting the digital economy going forward. While technologies have changed, there has been one constant, the significant and sustained demand for tower assets in the US. This steady growth has been driven by increased data traffic and investment to maintain and improve the wireless user experience. With continued strong data growth, we believe the carriers will respond to pressure on their networks as they have over the last couple of decades by leasing access to our infrastructure. In addition, future networks will need to be significantly more dense than current infrastructure can handle, which brings me to my second 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. We are at the very beginning of what the World Economic Forum has deemed the fourth industrial revolution. The first used water and steam power to mechanize production. The second used electric power to create mass production. The third used electronics and information technology to automate production. And the fourth will be the digital revolution that leads to long-term gains in efficiencies and productivity and impacts almost every person and every industry. The fourth industrial revolution is closely tied to the deployment of 5G, which will allow for billions of devices to be connected and communicating in real time. This level of connectivity is unprecedented and will require a network that is denser and closer to end users than has ever been the case. We saw this change in network architecture begin with 4G, driving us to expand our shared infrastructure beyond towers and build the leading industry small cell business in the U.S. We believe creating this unique portfolio has increased our opportunity to deliver long-term growth and dividends per share by tapping into the same underlying demand trends that make U.S. towers so valuable. The extension of our strategy utilizes the same playbook we used with towers by sharing the asset across multiple customers. In the case of small cells, fiber is the critical shared asset. We have rapidly scaled our small cell business to where we are today with 70,000 small cells on air or under construction, and we believe we are still in the very early innings. According to CTIA, the number of small cells deployed in the U.S. is expected to increase nearly tenfold from 85,000 at the end of last year to 800,000 by 2026. Against that backdrop, we see tremendous opportunity to increase the returns on our fiber investments over time by adding new small cell tenants to existing fiber networks, as we are doing today. We also see a path to further improve our small cell returns by sharing the fiber assets across a larger addressable market of customers that require high bandwidth connectivity, including large enterprises, health care institutions, and government agencies. When I look at the entire opportunity in front of us, I see we are generating a 9% recurring yield on the $37 billion of capital that is invested across our 40,000 towers and 75,000 route miles of fiber. With the lease up we have driven over the past two decades, we are now just over two tenants on average per tower. In a similar vein, with an average investment age of just three years, we have less than a small cell, one small cell tenant equivalent across our fiber networks, giving us a long way of growth as we have significant capacity to add more tenants to our assets over time. So to wrap up, the growth we are seeing in our business reflects 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 operating in the best market in the world for communications infrastructure ownership, I believe Crown Castle is in a great position to capture these substantial long-term 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. Thanks Jay. Good morning everyone.

Ben Schlanger

Chief Financial Officer

As Jay mentioned, we delivered another great quarter of results that sets us up to finish 2019 on a strong note and provides a solid foundation for 2020. Our third quarter results were positively impacted by higher services contribution and lower sustaining capital expenditures than we had expected, though this is just timing related so our full year expectations for both remain unchanged. During the third quarter, we also continued to improve our financial flexibility by taking advantage of favorable market conditions to proactively lock in attractive long-term interest rates and extend the weighted average maturity of our outstanding debt to nearly seven years. We finished the quarter with leverage of five times debt to EBITDA, which is consistent with our investment grade credit profile. Turning to our full year 2019 and 2020 outlook on slide five of the presentation, there are a few items I would like to highlight. First, the 2019 outlook remains unchanged from our prior outlook. Second, the 2020 outlook assumes the proposed merger between T-Mobile and Sprint closes prior to the end of the first quarter of 2020. And lastly, in 2020, relative to 2019, we expect a similar contribution to growth from towers, a consistent number of small cell deployments with approximately 10,000 nodes constructed, and consistent contribution to growth from fiber solutions. Also, please note the 2020 outlook reflects the impact of the mandatory conversion of preferred stock that we anticipate occurring in August 2020. The conversion will increase the diluted weighted average common shares outstanding for 2020 by approximately six million shares and reduce preferred stock dividends paid by approximately $28 million when compared to 2019. In addition, we increased our annualized common stock dividends per share by 7% from $4.50 per share to $4.80, tracking the expected growth in AFFO per share. Moving to slide six, we expect approximately $245 million of growth in site rental revenues from 2019 to 2020 at the midpoints, consisting of $285 million of organic contribution to site rental revenues offset by a change in straight-line revenues for approximately $40 million. With these expectations, we anticipate consolidated organic contribution to site rental revenues of approximately 6% in 2020, consisting of 5% organic growth from towers, inclusive of 3% contribution from escalators offset by 2% churn, 15% organic growth in our small cell business, inclusive of .5% contribution from escalators offset by 1% churn, and 3% organic growth from our fiber solutions, inclusive of 9% churns and no contribution from escalators. As it relates to the expected tower churn in 2020, the 2% remains at the high end of our long-term -2% range as the last of the acquired network churn is expected to occur in late 2019, having an impact on 2020 financial results. Turning to slide seven, I would like to briefly walk through the expected AFFO growth from 2019 to 2020 of approximately $210 million at the midpoints of outlook. The growth is primarily driven by the organic contribution to site rental revenues growth of approximately $285 million at the midpoints, which is partially offset by an approximately $90 million increase in expenses is a combination of the typical cost escalations in our business, including lease escalations and cost of living adjustments, and the direct expenses associated with new leasing activity. The balance of the changes relates to the expected contribution from network services and other items that are primarily related to changes in financing costs. To support this growth, we expect our $1.3 billion net of capital contributions from our customers. Based on our expected cash flow growth and the incremental leverage capacity that growth will generate, we believe we can finance this level of spending without issuing equity. In closing, we are excited about the positive growth trends driving demand for our tower and fiber assets. Looking forward, we believe we're in a great position to continue delivering on our annual dividend growth target of 7 to 8%, while at the same time making significant investments in our business that we believe will generate attractive long-term returns and support future growth. Before taking questions, I want to address one other item. As you saw in our 8K file yesterday, we received a subpoena from the SEC in September requesting certain documents from 2015 through the 2016 census. The subpoena is present, primarily related to our capitalization and expense policies for tenant upgrades and installations in our services business. Additionally, we have previously provided information to the SEC relating to certain of our service-related vendor transactions, which are not material in amount. The subpoena requires us to produce certain documents, but is not a finding that any violation of law has occurred. We believe our long-standing capitalization and expense policies are appropriate, and we will of course cooperate fully with the SEC, including in connection with their review of those policies. With that, Samantha, I'd like to open the call to questions.

Samantha

Operator

Thank you. At this time, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from Simon Flannery with Morgan Stanley.

Simon Flannery

Analyst, Morgan Stanley

Great. Thank you very much. Appreciate it. So, just following up on the SEC, do you have any sense on timing of when you've got to get back to them and when you might hear some more clarity around what exactly they're looking for here? And then on the outlook for next year, you talked about the small cell business being similar to this year. Any more clarity around your ability maybe to revisit and acceleration, clear up some of the zoning and other issues to get, if it's not next year, at least in the better years to get back to that sort of 15,000 type number over time. Thank you.

Jay Brown

Chief Executive Officer

Sure. Good morning, Simon. On your first question, we don't have any indication of timing. So, as Dan mentioned, we'll fully cooperate with the requests that have been made of us and we'll work through the process as appropriate. On the second question around small cells, we do think, as we talked about extensively on the last quarter call, we're seeing a meaningful amount of delays from both municipalities and utilities in certain jurisdictions around the country where we're trying to deploy small cells, which has caused the timeline, expected timeline to extend from what we had previously seen around 18 to 24 months to now a range of about 18 to 36 months. And we're working that on a number of different fronts in terms of trying to come up with a solve on how do we do that more quickly and work through the process more quickly with municipalities and utilities. But I don't have at this point any update or more positive perspective. I think we still believe, as we sit here today, that the timeline is going to be 18 to 36 months. And the activity that we're giving for 2020 on the call this morning reflects that timeline of 18 to 36 months. And to the extent that we do have some breakthroughs on that front, we'll certainly update you.

Simon Flannery

Analyst, Morgan Stanley

Great. And any change to your backlog?

Jay Brown

Chief Executive Officer

Well, on the backlog, we did, as we talked about, that's up to 70,000 small cells in the backlog. So we put about 2,500 on roughly during the third quarter. And then we took on some new orders. So the total pipeline and constructed small cell nodes went from 65,000 to 75,000 from second to third quarter of this year.

Simon Flannery

Analyst, Morgan Stanley

Thank you.

Ben Schlanger

Chief Financial Officer

Yeah, just to be clear, that number is 70,000 of the ones that are on-air and under development, which is around 40,000 on-air and 30,000 under development, which, as Jay mentioned, you can see that we added to both of those numbers in the quarter. So we had some bookings in the quarter that I think are indicative of what Jay was talking about earlier, which, looking at the big picture of all of this, it does feel like, and we're a little frustrated about it, too, that it's taking longer to put these on-air than we would have anticipated at this point. But we're really in the early innings of this whole rollout of small cells and really haven't gotten into 5G. So what we're looking at is how can we make this business sustainable and scale it, because we believe the activity levels are there and will continue to grow. And we think we're making progress on that front, but as Jay mentioned, there are going to be some hurdles we need to get over, and we're working really hard to get over

Simon Flannery

Analyst, Morgan Stanley

them. Thanks, Mark.

Samantha

Operator

Thank you. Our next question will come from Philip Cusick with JPMorgan.

Richard

Analyst, JPMorgan

Hi, this is Richard for Phil. I wanted to get an update on your current thoughts around incremental opportunities around data centers at towers or nodes, and along with that, alternative connectivity solutions, such as directly connecting Crown at One Wilshire to other networks and bypassing MeetMe rooms. Thank you.

Jay Brown

Chief Executive Officer

Yeah, I think at this point, the strategy that we've undertaken is the core of our focus. So we're focused on the components of the network related to towers and fiber, particularly around small cells. We think that the vast majority of the opportunity is going to lie in those two areas, as the world goes through what I talked about in terms of the fourth industrial revolution. We have, as you know, we've made some investments around edge data centers in vapor, and we're continuing to watch that space. We think there's opportunity not only to create potentially a lease-up business by utilizing the space at the very edge of the network, which we would have as a result of our investments in small cells and towers, but it also gives us a perspective on kind of where the world is going. So at this point, I really don't see data centers playing a significant role in our long-term strategy. We think the opportunity for us really relies around towers and then the use of fiber for small cells, and then utilizing that same asset, as I mentioned in my comments, for other customers, like hospitals and universities and other users that need high bandwidth fiber.

Richard

Analyst, JPMorgan

Great, thank you.

Samantha

Operator

Thank you. Our next question will come from David Bardon with Bank of America.

David Bardon

Analyst, Bank of America

Hey guys, thanks a lot for taking the questions. I've got a few, but I guess the first one would be on the Sprint T-Mobile merger assumption. Could you kind of talk us through how you landed on choosing to assume it closed in the first quarter, and kind of what does it contribute to the guide incrementally if it didn't happen at that quarter or happen at all?

Jay Brown

Chief Executive Officer

Thanks. Sure. You know, I think we needed to make an assumption, obviously, as we went through the guidance portion, and based on the approvals of the DOJ and the FCC of the transaction, we believe the industry is operating under the assumption that the deal is going to close in the first quarter of next year. I think as we think about the business and as we sit down to do the outlook each year in October for the following year, I think it's important to keep in context how our business operates and how it works. We oftentimes talk about how few inflection points we have in the business, and the reason for that is because of the amount of visibility that we gain into the business. If we think about the 2020 outlook and talk specifically about kind of the leasing component of that, it's a combination of three components as we sit down and try to figure out what we're going to do for the year. One would be the leases that have commenced during 2019 that are contributing to our results in calendar year 2019 but didn't contribute to the full year of 2019. So as we go over into 2020, we get a full 12-month contribution from all of those leases that were signed and commenced during calendar year 2019. That adds to growth. The second component would be leases that we signed during 2019, but they won't actually turn on until 2020. So those leases are committed, they're signed. We know when they're going on air roughly, and that would be the second component of how we lay out the outlook. And then the third component and the smallest component of the contribution to growth in any given year is the leases that we'll sign in the next calendar year, in the year that we're giving guide to. And some component of those leases that are signed next year, those will commence in the second half, in all likelihood, towards the second half of next year. That's a relatively small component of the guidance. So one of the things that we used to say, and we haven't talked about it in a long time, but still true, in any given year when we get to this point of thinking about the next year of our guide around site rental revenue growth, a very significant percentage of the 6% growth that Dan was speaking about in his comments, we already have visibility to, and in many cases, more than half of that is probably already signed by customers or is already producing revenue in our statements today, and we'll get the benefit of a full year of it next year. So that's on the site rental side. And then on the services side, as we start to think about it, there's two components of the services business. There's the installation component where we're project managing the work for carriers, and that benefits from all of the leases that have been signed in this year that will get installed next year, and then some component of what gets done in 2020 that we don't have visibility to yet, but leases that we think will sign. And then the last component would be around pre-construction work that we do or what we often call site development services, and that is pre-work that's done. So we would be doing the site development services today for leases that are going to go on in 2020, and then we'll do some work in 2020 for pre-construction work. The construction work won't even be done until 2021. So when we look at all of those elements, it gives us a tremendous amount of visibility into the business, which is why we guide in October of every year for the next calendar year, because significant portions of it are known today. And I know you asked specifically about how we think about Sprint, T-Mobile. Dave, you've followed us for a long time, so you know we don't like to talk about specific customers and don't want to do that on the call. But that's how we've built up our outlook in any given year, and we did that consistently for 2020 as to what we've done in prior years. And then to put a finer point on it, we thought for sure someone would ask us, what did we do with the Sprint, T-Mobile merger? And so the assumption that we made was that it goes on in the first quarter. But I think the explanation more broadly of how we think about the outlook and what drives that outlook should help folks understand kind of the visibility that we have towards that outlook. And then to the extent that there's a development broader in the space that changes, forces us to need to change the assumption that we've made here, we're happy to come back and give you that update to our outlook when it occurs or when certain development necessitates us revisiting our assumption.

Ben Schlanger

Chief Financial Officer

Just to add one point of clarity to that, David, is that as Jay mentioned, the three components that can add to new leasing activity in the subsequent year that we're giving guidance for, and that last one he talked about, leases that we would sign in the year and put on in the year that would impact the financial statements in 2020, that's the smallest piece, and that's what we would be talking about if there were a significant change in either the timing or outcome of the T-Mobile and Sprint merger. It's what we would be signing next year and would go on air next year. So that's the, like you said, it's a smaller portion of what could impact new leasing activity from the tower side.

David Bardon

Analyst, Bank of America

Awesome. And thanks for that, guys. And I guess maybe a second question would be just on the small cell lease up side. So you've been talking about kind of 2019 and 2020 kind of looking roughly similar in terms of no deployments presumably, and then the lease up in revenue terms is also pretty similar. I was wondering why the leasing incremental revenue on the small cell business wouldn't be higher because if you're going to deploy the same amount this year as you did last year, but you've got the opportunity to lease up last year's systems for incremental tenants, we should be seeing kind of a revenue acceleration in dollar terms rather than flat. Is there something missing in that equation?

Ben Schlanger

Chief Financial Officer

I don't think you're missing anything in the equation, David. I think what is happening is the timing of the new nodes going on air in 2020 is back in loaded, which results in not having as much contribution to the new leasing activity in the year. But we believe that that will over time come into play.

David Bardon

Analyst, Bank of America

OK, got it. All right. Thanks, guys.

Samantha

Operator

Thank you. Our next question will come from Jonathan Ken with RBC Capital Markets.

Jonathan Ken

Analyst, RBC Capital Markets

Thanks. A couple of questions. So as you laid out the components of guidance for 2020 in these different buckets, where do MLAs play a role? Is that strictly in the escalator or is there a part portion of that in leasing? And then related to guidance and David Barton's question, I guess, just to kind of put a finer point on it, it sounds like you do assume some modest amount of integration related capex in 2020. Is that correct?

Jay Brown

Chief Executive Officer

On the MLAs component, and I know you know this, Jonathan, but just for the broader audience, oftentimes the term MLAs is used to describe agreements that we strike with the customers where they make committed levels of activity to us. Oftentimes those are over multi-year periods of time. We generally do not assume and have not assumed anything with regards to this outlook, with regards to new customer agreements in our outlook for 2020. So it's business as usual, if you will, in terms of how we're contracting with customers and the activity that we've baked into that outlook. I'm not sure I understand your question on the second one. Could you rephrase it or ask it a different way?

Jonathan Ken

Analyst, RBC Capital Markets

Yes. If two carriers were to merge before March of 2020, presumably they would embark on some integration related capex that might lead to elevated amendment revenues, let's say, as one carrier deploys 2.5 and the other deploys lower. So a different spectrum is going to get cross-pollinated onto the different sets of assets. So that could lead to maybe a little bit of a higher pace of amendment revenues next year. So the question is, is that, it sounds like that's contemplated in your guidance, but to Dan's comment, it's the smallest part of your guidance. Is that a fair characterization?

Jay Brown

Chief Executive Officer

Yeah. I think obviously, as we noted, we are assuming that the T-Mobile Sprint merger happens in the first quarter. And I think broadly the industry is working and thinking under that assumption. The pause that I would have, and I think consideration of this that's important, is in the activity cycle of the deployment of what's coming. And obviously, when you listen to Sprint and T-Mobile talk about the rationale for the merger and you listen more broadly to all of the players in the space, the capital spending is going to start to transition here in the next 18 to 24 months from largely being focused on 4G to 5G. And those activities, while they will start in the next 18 to 24 months, really in earnest, this is going to be a decade-long, we believe, investment cycle that we'll go through with the carriers. And trying to put a really fine point on which quarter that activity actually starts in and what the scale of that activity is, we have proven, I think, to ourselves over 20 years of trying to do this that it's nearly impossible for us to be that precise. And so we generally talk about the business, think about the business, manage the business over kind of year-plus cycles. And I think as we get into 5G, I think what you will hear us talk significantly about is that the wireless carriers will go out and touch the sites that they're on already and upgrade that technology towards 5G. And commensurate with that, some of the comments that I made, I think you'll also see them increase the density, particularly in the top 30 markets in the U.S. where there's greater density of users in order to provide 5G. And 5G is going to require a greater density of the network. We think that will really benefit small cells. And then the last phase of it will be a densification around the macro sites where you see carriers come back and try to find opportunities to put in additional antennas and lines and macro sites that they're not on existing. So I do think to your point, I do think you're right that we'll see in the early stages kind of amendment activity to existing leases. But I think that's going to happen over a very, very long period of time, I think decade, rather than trying to put a finer point on a quarterly outcome.

Jonathan Ken

Analyst, RBC Capital Markets

And then lastly, related to new business, there may be auctions that take place perhaps in the C band at some point in the first part of next year. And then unrelated to that, there would be this sort of mandated fourth network that gets built out as part of DOJ's approval of the deal. So I wondered how much or what are the timelines to sort of contemplate? And do we see any of that in 2020 around C band deployment and then maybe a mandated fourth network deployment? Or was that not part of what you were thinking when you gave your initial outlook?

Jay Brown

Chief Executive Officer

I think as we think long term about the network, certainly we would expect that the FCC will continue to go down the path of trying to make additional spectrum bands available. I think they have been really clear and all of the research has shown that despite the significant amount of investment that's going to happen around densifying the networks, there's not enough capacity in the existing spectrum bands to meet the demand that's going to come both from consumers and industry around the deployment of 5G. So I think we will see the C band as an example of that. I think there are multiple other examples that are being talked about in terms of coming to auction. But I think even beyond what's contemplated today, I think we're going to see over the next decade additional spectrum bands freed up and come to market. And as those bands get freed up, the absolute best place to be as an infrastructure provider is when there's a combination of new spectrum being deployed or a spectrum that has previously been fallow and that ends up in the hands of a provider, whether that logo is known to us today or otherwise, and that that provider then has either an incentive as mandated by the FCC to get it deployed or has a business interest and economic desire to get that spectrum deployed. And when those two things come together, an opportunity and capital to invest in the network along with new spectrum bands, that goes really well for our industry and has for a long period of time. As we contemplate the guidance that we're giving this morning, we're not assuming that there are additional spectrum bands that are given in the next 12 months, as we think about 2020 back to my earlier point around what contributes to that. That would really have to be known today and we would already have leases to the extent that it was any of those things that I'm talking about now. That would be very small and frankly pretty much inconsequential to our guide. But I wouldn't dismiss that in terms of the long-term benefit that those things are going to bring to our business. We think those are significant. And as we think about the upside from the investment that we've made around fiber and our longstanding assets that we have on towers, both of those assets are going to benefit significantly as additional spectrum bands are deployed over the long term.

Jonathan Ken

Analyst, RBC Capital Markets

Thank you very much.

Samantha

Operator

Thank you. Our next question will come from Michael Rollins with Citigroup.

Michael Rollins

Analyst, Citigroup

Hi. Good morning. Just going back to the SEC inquiry, is the accounting that you use for tenant upgrades and installations similar or the same as your competitors? And do you know if they've also received a similar request? And then maybe just moving over to the network services business more broadly, how would you look at the potential for the gross profit that you're generating from that business to be similar or greater over time to the current level? And is there a framework that you use to sort of measure what that might look like relative to the underlying activity for leasing within the financials that you report? Thanks.

Jay Brown

Chief Executive Officer

Sure. On your first question, I can't speak to the accounting of our peers or whether or not they've received a letter. On the second question around services gross profit over time, historically this is basically tracked leasing activity in the tower business. The amount of services that we perform are really small outside of the tower business. So virtually all of the gross profit that we have comes from the tower business. And as I mentioned in my earlier comments, there are two primary things that we do for the wireless carriers and the services business. And I'll do this sequentially, not in order of scale. The first thing that we do for carriers would be what we would call site development services. Those would be things that are pre-construction. There are things like site acquisition, application fees, and other things that we do prior to actually beginning the construction process for a new tenant. And whether that new tenant is an amendment to an existing lease or a brand new installation on the tower, we will do some of that work for them pre-construction. That represents, I think in 2018, that represented about 40% roughly of the total services activity that we had. The 60%, which would be the second component of it, is the project management of actually installing their equipment on our sites. And in that regard, we're providing project management services to tenants as they're wanting to install the equipment, whether it's, again, amendments or brand new leases. There have been occasions over time where the growth and our gross profit has been a function of us capturing greater percentages of the activity. In periods where activity in towers was relatively light, if you go back historically, lighter than levels today, at times people will come into that business and they will bid the price and the margins really tightly and will walk away from some of that business because we just don't see margins in it. In periods of time where activity is more robust, there are times when we capture a higher percentage of it. So it generally tracks activity, but not perfectly. So if you look at the increase in services gross profit over the last several years, you can basically track that to our continued increase in activity around tower leasing activity. And as we've mentioned a couple of times this morning, we're in 2019 and we think we'll be again in 2020. In terms of tower leasing activity, we're at the highest level we've seen in more than a decade. And so our services business is obviously tracking with that.

Michael Rollins

Analyst, Citigroup

And it just seems like in 2019 you may have gotten a little bit of a multiplier on that gross profit growth relative to the gross profit growth of network services, relative to the movement if we measure activity by just the internal leasing dollars. Is that fair or is there more to unpack to try to get at the change in activity relative to the change in gross profit?

Jay Brown

Chief Executive Officer

Yeah, there is a bit of a – that's why I made my comments about it's not single dimension. And we did benefit from 2018 into 2019. We've captured a higher percentage of both pre-construction work as well as installation work. So we've grabbed some market share there during 2019 relative to 2018. So it's a combination of the activity and a little bit higher market share.

Yvette

Representative

Thanks.

Jay Brown

Chief Executive Officer

Yvette?

Samantha

Operator

Thank you. Our next question will come from Colby Sinisul with Cohen & Company.

John

Analyst on behalf of Colby Sinisul, Cohen & Company

Great. This is John on for Colby. Thanks for taking the questions. Within the fiber business, can you talk about the bookings trends you witnessed in the third quarter versus maybe the second quarter? And do you believe there is some potential that the 3% growth for 2020 could ultimately prove conservative? Thank you.

Jay Brown

Chief Executive Officer

Yeah, we saw the business continue to perform well in the third quarter. The third quarter period obviously came in line with our expectations. You saw from the numbers that we gave on an incremental basis in 2020 our midpoint of growth is 165 million compared to 150 million in 2019. Off that larger asset, off the larger revenue base, the growth is still 3%, which is where we guided. I think our outlook for that and guidance around it, as we've said a couple of times this morning, is at 3%. We feel good about that. We believe we can sustain that over a long period of time. And we're doing everything we can to increase it. As I look at the quality of the fiber and where it's located and the opportunity there, that fiber is running right past a significant addressable market that I believe our fiber could provide services to. And I think as we get better at the business, I'm hopeful that we will be able to increase it and see an opportunity. Our 2020 outlook is a balanced view of what we think the best thing that could happen to us, the worst things that could happen to us, and trying to weigh a number of different assumptions around it. And as we get into 2020, if we figure out a way to do a little better in the business, we'll certainly update you. Thank you.

Samantha

Operator

Thank you. Our next question will come from Rick Prentice with Raymond James.

Rick Prentice

Analyst, Raymond James

Thanks. Good morning, guys.

Yvette

Representative

Morning.

Rick Prentice

Analyst, Raymond James

Hey, a couple of questions if I could. Jay, I think you mentioned that the change in the straight line adjustment for 2020 looks like about maybe 40 million improvement there. We have been expecting maybe more like 100 million change there. Looks like T-Mobile now is more like six years versus five years. But how should we think about that change then also as we look into maybe 21? Are we expecting a bigger change from straight line adjustment as we go from 20 to 21 and get that to be a positive adjustment since cash is so important to look at?

Ben Schlanger

Chief Financial Officer

So, Rick, let me take that one. Sure. What adds to that straight line, as you know, is extension of current leases and signing new leases. And we believe that the combination of those two activities will lead to an additional $40 million straight line revenue. Can't really speak to your expectation of $100 million compared to that number, but we believe that what we've captured in there is a new leasing activity that we expect in our guidance and our outlook. And then included in that, like I said, is the extension of current leases to the extent that that happens. And looking into 2021, we're just giving guidance for 2020 now. So we can get into that when we start talking about 2021 and how it all may look out. But right now what we're talking about, as we mentioned, at the midpoint, we're around $40 million for 2020.

Rick Prentice

Analyst, Raymond James

Sure. In the supplement, you do give a little extra detail, but obviously it's a static picture as far as what the adjustment between book and straight line is. So that's kind of where we had gotten the early indication on 2020 and thinking on 21. So that's what I'm just trying to get. I know you don't give guidance on 21, but you do provide that supplement some extra kind of color.

Ben Schlanger

Chief Financial Officer

That supplement, as you pointed out, is a snapshot in time as of our business that relates to our business as of September 30, 2019. And it will move depending on what happens with the business as we sign new leases and extend new leases. So that's why we give it, because we want to get as much detail as we can. But looking into the future, we want to give that as part of our outlook, not as a static picture.

Rick Prentice

Analyst, Raymond James

Sure. Okay. Second question is amortization of prepaid rent. It looks like that amortization of prepaid rent went up maybe about $25 million from 2018 to 2019. As we look at your 2020 guidance, should we assume a similar increase of maybe $25 million, more or less, just trying to take a look at what the amortization of prepaid rent contribution is in 2020?

Ben Schlanger

Chief Financial Officer

Yeah. First, that's about right. It's in that neighborhood from 2018 to 2019. And we believe that going into 2020, it will be a little higher, but not anything that would be material.

Rick Prentice

Analyst, Raymond James

Okay. And then the last one, Dan, you mentioned on churn on the tower side, being up at that 2% level in 2020 because of kind of wrapping up the acquired network churn late 2019. How much dollars are left in there? So we just kind of get a sense of what that is as we get to the finishing up 2019 and into 2020 on a dollar basis.

Ben Schlanger

Chief Financial Officer

Well, what we've seen now is that we think we've taken almost all of it at this point, and it'll just be the flow through from the activity that we've already seen going into the remainder of this year and then into 2020. And it's most of the difference between what will be normalized at 1% and where we are now at about 2%. And therefore, as we get into the back end of 2020, we think that that number of incremental churn will come down and we'll get closer to the lower end of our 1% to 2% long-term guidance.

Rick Prentice

Analyst, Raymond James

Makes sense. So long-term, more like 1% what you're seeing in the historical, absent any other acquired networks, et cetera.

Ben Schlanger

Chief Financial Officer

I think that's fair. It's within that range, and we'll be on the lower end of that range as opposed to the higher end of that

Rick Prentice

Analyst, Raymond James

range.

Ben Schlanger

Chief Financial Officer

Great. That helps. Thank you.

Samantha

Operator

Thank you. Our next question will come from Nick Doduo with Moffitt-Mathison.

Yvette

Representative

Hey, thanks for taking my question. Dan, can you walk us through the mechanics of what gets expensed and what gets capitalized in the services business?

Ben Schlanger

Chief Financial Officer

Sure, Nick. I want to take a step back and just talk about that generally as how we think about capitalization. And what we do, and I think this is what any company does, but it's basically looking at what are the expenditures that add to the long-term value of an asset, can generate future revenues on an asset. Anything that does that, we will capitalize. To the extent that we are making expenditures that, for instance, are more maintenance in nature, but do not add to the long-term revenue-generating potential of that asset, we will expense

Yvette

Representative

it. Okay. Are you capitalizing costs? So does that mean you're capitalizing costs incurred for the services business to PP&E? Like talent improvements? Yes.

Ben Schlanger

Chief Financial Officer

So Nick, like I said, we capitalize the costs that add to the long-term nature of the asset, and I think you can appreciate that given where we are with our discussions right now, we don't want to get into a lot more detail here.

Yvette

Representative

Okay. Understood. Maybe switching gears then, one on the small-cell front. As we think about the lengthening install-in frame, are there any exit clauses in customer contracts if you're not able to deliver the small cells in a given time frame? I recognize that they may not choose to exercise them because waiting might be a better option than exiting, but I'm kind of curious if they're there.

Jay Brown

Chief Executive Officer

I'm sure they have an exit should we not perform appropriately under the contract, but these are committed contracts. So to the extent that we're performing appropriately, we're not on the hook based on certain barriers like municipalities and utilities that would make the timeline very long. So I think as we talk about the contracted base of small cells that we have, we don't view those at risk as long as we can get them on air at some point.

Yvette

Representative

Okay. Got it. Thanks, guys.

Samantha

Operator

Thank you. Our next question will come from Betsy Levi with UBS.

Betsy Levi

Analyst, UBS

Thank you. A couple of questions. Just going back on the guidance, given that you're expecting a similar organic growth in macro next year, and this includes a small amount from new leases that could be signed when the deal closes, can you provide more color on what type of activity you think actually could slow down to make for that difference? And maybe any thoughts on commercial availability of CBRS if you're seeing any increased activity from the carriers as they deploy that. And a final question on the discretionary capex. It looks like it's a little bit lower versus 19. Can you talk about what's driving that reduction?

Jay Brown

Chief Executive Officer

Sure. On the first point, I really don't want to get into a specific customer guidance around what we expect in calendar year 2020. We've tried to frame this in a way that's helpful and shows the relatively minimal amount of activity that would happen in 2020 and how that would flow through to the guide that we've given. So I'm not sure I can add much color to that. We're certainly assumed that during 2020 we'll see new macro leases across the portfolio and across the industry, and those will have some contribution in 2020, but those leases will frankly have more meaningful contribution to our 2021 results. On CBRS, we are watching that activity. There is some of it, but it's not material to the results today. We don't expect that it will be material to our results in 2020 in the outlook that we're providing. Initially, I think most of the CBRS activity appears to be focused in building, so we're seeing some of that in the venue opportunities that we have, and that may contribute there, but it's really small at this point and not a material driver of the business. On

Ben Schlanger

Chief Financial Officer

the discretionary capital, Batia, the reduction really is related to what we believe it will take to put on air all of the assets that we believe will generate the new leasing activity that we have coming into 2020, and we believe that's just lower in 2020 than it is in 2019. As you know, there was a step up in activity going into 2019, and we're leveling out a bit in 2020, and the result of that is a slightly lower capital expenditure profile than what we're seeing in 2019.

Betsy Levi

Analyst, UBS

Okay, one just follow-up. Can you give us a rough split of the fiber and small cell revenue base as we exit the year? Is it more like 80% fiber, 20% small cell?

Ben Schlanger

Chief Financial Officer

Yeah, it's closer to 70% fiber, 30% small cell going into 2020, so it is 80-20.

Samantha

Operator

Okay. Got it. Thank you. Thank you. Our next question will come from Robert Gutman with Guggenheim Securities.

Robert Gutman

Analyst, Guggenheim Securities

Thanks for taking the question. You know, the site leasing, fourth quarter site leasing revenue implied, given -to-date progress and even at the high end of full-year guidance, it seems like the fourth quarter implication is pretty flat versus third quarter, just a hair higher. As you know, we think about fourth quarter usually being seemingly stronger, so can you talk a little bit about the timing through the year there and maybe pull into that a little bit about how you see order activity in the second half of the year versus the first half of this year?

Jay Brown

Chief Executive Officer

Yeah, happy to answer that question. We had maybe a seasonally strong third quarter as we think about historically the activity in Q3 was stronger, so I would chalk that up to timing. Obviously, we're not changing our full-year outlook for 2019. We did expect Q3 to be really strong relative to the full year, and so to the extent you're noticing a little bit of movement between Q3 and Q4, we believe that to be just timing.

Robert Gutman

Analyst, Guggenheim Securities

Thanks. Ed, what about the pace of new order activity in the second half of the year versus the first half of the year?

Jay Brown

Chief Executive Officer

Well, the second half of the year leads right into our 2020 outlook, so the leasing and the bookings that we're doing in the second half of this calendar year, those flow into leases that are turning on in 2020 to the extent we don't get them on air at the end of 2019. So I think a good read-through for particularly second half activity of 2019, that is you can get a good proxy for that by looking at the outlook for 2020. So when we make comments in 2020 to say that the leasing activity in 2020 looks substantially similar to that of 2019 in terms of change in our reported revenue growth, that's really a proxy for what's happened for the second half of 2019. So say all that to say second half of 2019 activity is at the highest levels we've seen in a decade, except for the periods in the second half of 2018 through the beginning of 2019. So it's been incredibly, incredibly strong and really hopeful as we go into 2020. And as you remember, Robert,

Ben Schlanger

Chief Financial Officer

we increased our new leasing activity expectations earlier this year on increasing level of activity through 2019. So we believe that this higher level activity we're seeing now will

Robert Gutman

Analyst, Guggenheim Securities

continue. Great. Thank you. And on the incremental small-filler orders, how much of that is new builds versus second tenants, the breakout proportionally?

Jay Brown

Chief Executive Officer

Similar to what we've seen over the last several quarters, so we're still seeing the predominant amount of the activity is coming from new locations where we're going to extend fiber off the plant. But we're seeing co-locations in that mix as well to the tune of about 30 to 40% of the activity is coming in and co-locations and about 60% to 70% would be new extension of the fiber networks that we have in place. The activity continues to be focused in the top 30 markets of the US, so there is some marginal activity outside of that. But certainly this increase that we're talking about this morning, that's coming in almost entirely the top 30 markets.

Robert Gutman

Analyst, Guggenheim Securities

Great. Thank you.

Samantha

Operator

Thank you. Our next question will come from Tim Horan with Oppenheimer.

Tim Horan

Analyst, Oppenheimer

Thanks, Jay. Maybe just asking, sorry guys, thanks Jay, maybe just asking the question a little differently on Sprint T-Mobile Dish. Do you think that merger ends up changing the trajectory of revenue at all over the next five years? Does it improve it? Does it keep things relatively the same? Does it hurt? I mean I know there's a million moving parts. And then secondly, are you seeing much interest from the cable companies yet or do you think they're engineering wireless networks at this point? And then lastly, are the municipalities and utilities, are they improving on their ability to kind of process all the orders here for small cells or when do you think that improvement comes where we can get to a good run rate again?

Jay Brown

Chief Executive Officer

Sure. I think to your question around longer term, the driver of our business is really data traffic growth, which I referenced a couple of times in my comments. And I think regardless of the logos, the number of logos, who owns what spectrum, I think what drives our business and the investment in the infrastructure goes to what is the data traffic opportunity. And if our assumption is right around the coming of 5G and the amount of infrastructure that's going to be required for that, I think our business is going to perform really well regardless of the outcome there. There may be some short-term changes that we're talking about on a quarter to quarter basis depending on what the ultimate outcome of the industry structure is. But the long-term trajectory of revenue growth, we believe that that is a very favorable environment. And it's why we, you know, when Dan and I are having these kind of conversations, it's why we spend so much time trying to focus around the dividend and our dividend growth of 7 to 8 percent. Inside of that range of 7 to 8 percent, we're taking into consideration a number of different outcomes, whether it's movements and activity around leasing as well as changes in interest rate environment and other things. We're trying to look out over a really long period of time and say, how do we think the business will perform over a long period of time? And that drives us to talk about kind of the dividend growth of 7 to 8 percent. And to your question, looking at the longer term of kind of what does it look like over the next five years or so, you know, I would say I think our view around dividend growth of 7 to 8 percent encapsulates the number of different industry structures, deployments of new technologies, different spectrum bands, and we believe it will be really favorable for us. On your second question around cable companies, again, I'm going to beg off on that because I really don't like to talk about specific customers. I think more generally, as we move towards 5G, there's a mix of a lot of customers that are starting to look at the need for infrastructure and how they could own wireless networks in ways that go beyond what we've historically seen. And we've seen leasing from players outside of the four big operators in the U.S. this year. And that activity has been up compared to prior years. So we've benefited from some leasing outside of the big four operators. I think as we move towards 5G, you're likely to see that continue. Then your last question around municipalities and utilities, we're certainly working really hard to try to get there. There have been a number of governmental entities that have been helpful on that front. Obviously, the FCC has worked really hard to try to put out some guidance and some rules that are intended to give clarity to the timeline and to the amount. Those rules have been helpful in a lot of cases, but we also run into utilities and municipalities that just fail to comply with the orders and the rules of the FCC. A number of states have undertaken activities and tried to help this activity. And so we're up to mid-20s in terms of number of states that have passed legislation that enables our ability to deploy this with committed timelines and committed cost structures. And there are a number of other states that we're working on at the state level. In general, though, I would say, as we talked about kind of the operating components, how long is it going to take us to deploy these? All of those changes and opportunities there really haven't changed our trajectory of how quickly we think we can deploy these. Ultimately, though, I mean, just going all the way back to kind of where we started in the conversation and my prepared remarks, this business at its most basic level is a significant investment of capital upfront to own an asset that can be shared. And that sharing occurs over a very long period of time. And the timing, while we certainly are working on it and we want to deliver for our customers a small-cell node as absolutely quickly as we can, ultimately, as we think about looking at the business and whether or not it makes sense for us to own the shared asset and what the returns are, we're less focused on the exact timing of when we can get these small-cell nodes on and much more focused around what's the addressable market and what's the opportunity there. And we have found by running the tower business over a long period of time that the patient steady execution of adding tenants to that shared asset over a long period of time is how you can effectively drive great returns on the investments that we've made. And we're really focused on how do we do that cost effectively and thoughtfully and then position ourselves really well with our customers to be the go-to provider because we can provide them with a low-cost solution that they can count on. And that's what we're focused on day in and day out to run the business well.

Samantha

Operator

Thank you. Thank you. Our next question will come from Spencer Kern with New Street Research.

Spencer Kern

Analyst, New Street Research

Hey, guys. I have a couple of questions, but on small cells you talked about your new leasing revenue being back-end weighted. I was wondering if you could provide a little bit of context on the cadence of new leasing activity that you expect in the guide for towers and fiber.

Ben Schlanger

Chief Financial Officer

Those are generally flat across the 2020 outlook, Spencer. There's no significant change from first half to second half.

Spencer Kern

Analyst, New Street Research

Okay. Got it. Thank you. And then on capex, I was just wondering if you could put a finer point on where you expect the lower capex to come from, whether it's towers, small cells, or fiber in 2020? It's in the

Ben Schlanger

Chief Financial Officer

fiber, small cells arena, Spencer. Towers is going to be relatively similar. And then building the asset out for the fiber and small cell business is what we're spending a little less money on in 2020 than we did in 2019.

Spencer Kern

Analyst, New Street Research

Got it. And then just lastly on small cells, have you – you know, you've historically talked to a win rate of around 50% of the market. And in the meantime, it feels like we've seen more growth from carriers building small cells themselves or cable companies talking about adding, you know, CBRS or Wi-Fi to their own infrastructure. So I was just wondering if you could, you know, update us on your perspective of the competitive landscape. Has anything changed? Are you seeing better win rates or are they remaining stable? Thanks.

Jay Brown

Chief Executive Officer

Yeah. You're correct in that our historical experience has been we've won what we believe to be about 50% of the opportunity that's been available in the market. And the small cells that have been deployed, we believe we've won about 50% of that activity. We're certainly not underwriting, as we think about the long-term returns in the business, we're not underwriting that as what we believe will be a significant growth in the amount of activity. I quoted the CTIA stat in terms of a tenfold increase in the number of small cell nodes between now and 2026. We don't assume that we're going to continue to win 50% of the activity. We believe we will win a very high percentage of the activity that happens in the areas where we have existing fiber. And to the extent that there is activity outside of where we have fiber today, then it will just be an investment decision around whether or not we would like to continue to expand the business. And that goes back to kind of my comments and a couple of questions go around, you know, how are we thinking about running the business? We're focused on how do we grow the dividend per share over a long period of time. And to the extent that we continue to expand the base and follow the carriers into markets beyond what we have today, that will really be an investment decision around what do we believe the returns are, the initial returns, plus the opportunity for future growth there. And to the extent that the return structure stays similar to what it is today, I think we'll continue to do that. If it changes, then we'll evaluate that capital at that point. But we're not underwriting an assumption there. To your question around self-perform, we believe it is the most likely, if Crown Castle is not building the small cells, the most likely scenario is that the work is being self-performed by the carriers. Again, similar to kind of the tower industry in the earlier days where there were a few providers who were building a bunch of towers, but the carriers were also self-performing. There are locations that we choose not to build small cells and build fiber, and in those cases oftentimes the carrier is going to do it themselves. There are other cases where we would potentially be interested in doing it, but the carriers decide that they want to self-perform. I think the scale of what's going to be needed around small cells over the coming decade is you're going to have some of all of that and more. And so I think we'll continue to see the carriers self-perform and build a significant number of small cells themselves. And I think we'll do really well in the places where we've chosen to build fiber and capture lease-up opportunities against that fiber to drive our returns.

Spencer Kern

Analyst, New Street Research

Great. Thank you.

Jay Brown

Chief Executive Officer

You bet. Maybe we'll take, given the time, maybe we'll take one more question.

Samantha

Operator

Thank you. Our last question for today's presentation will come from Brandon Nispel with KeyBank Capital Markets.

Brandon Nispel