Crown Castle Inc.

Good day, everyone, and welcome to the Crown Castle Q2 2020 earnings call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Ben Lowe. Please go ahead.

Thank you, Vicki. And good morning, everyone. Thank you for joining us today as we review our second quarter 2020 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 will refer to throughout the call this morning. This conference call will contain forward-looking statements and discussions of hypothetical scenarios which are subject to certain risks, uncertainties, and assumptions, and actual results may vary materially from those projected or presented during this call. 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, July 30, 2020, 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. As you saw from our results, we delivered another quarter of positive results that were in line with our expectations, and we maintained our guidance for 2020 growth in ASFO per share of 7% to 8%, consistent with our long-term growth expectations. I believe our strategy and unmatched portfolio of more than 40,000 towers and approximately 80,000 route miles of fiber concentrated in the top U.S. markets have positioned Crown Castle to generate growth in cash flows and dividends per share, both in the near term and for years to come. Following an industry slowdown in tower activity late last year, we are seeing activity on towers begin to increase, and we continue to anticipate a significant step up in industry activity in the second half of this year as our carrier customers invest to improve their existing networks and as 5G starts to ramp. While the full rebound in activity on towers is occurring a little bit slower than we previously expected, we remain on track to generate at least 7% growth in ASFO per share and see potential for our ASFO per share growth to be above our expected 7% to 8% target going into next year. Dan will discuss the results and our expectations for the balance of 2020 in a bit more detail. So I want to focus my comments this morning on our strategy to maximize long-term shareholder value while delivering attractive short-term returns. As many of you know, shareholder engagement has always been a priority as we continue to execute on our strategy. Over the last several weeks, we have engaged in productive conversations with many of our shareholders. And I very much appreciate the feedback we received and the thoughtful exchange of ideas during those discussions. Through those interactions, we heard broad support for our overall strategy, including our continued investment in towers, small cells, and fiber, and our overall approach to capital allocation and our dividend policy. We also heard that you as owners of the business are looking for more visibility into how our strategy is performing. And with that in mind, we've taken steps this quarter to increase the disclosure around our small cells and fiber strategy. We look forward to hearing your feedback about the additional information provided and welcome ideas for other disclosure we should consider going forward. Turning to our strategy to maximize long-term shareholder value, we believe we have positioned the company with the right assets in the right markets with leading capabilities to deliver value to our customers, and generate shareholder returns for years to come. Focusing on slide three, we have invested nearly $40 billion in shared infrastructure assets that we believe are mission critical for today's wireless network and sit in front of what is expected to be a massive decade-long investment by our customers to create the next generation of wireless networks. As you can see, our tower and fiber investments are at two different stages of development and maturity. Our tower investment began more than 20 years ago when we built and acquired assets that we could share across multiple customers, providing a lower cost to each customer while generating compelling returns for our shareholders over time as we leased up those assets. As we have proven out the value proposition for our customers over time, we have leased up our tower assets so they now generate a yield on invested capital of approximately 10%. More recently, we realized that wireless network architecture would need to evolve with 4G, requiring a network of cell sites that would be much denser and closer to the end users. With that in mind, we expanded our shared infrastructure offering beyond towers by building the industry-leading small cell business in the U.S. Because small cells really develop during the 4G investment cycle, we are much earlier on when it comes to our small cell and fiber investments. with approximately 90% of the approximately $14 billion of invested capital having been deployed in the last five years. Given the immaturity of these investments, it's encouraging that the business is already generating a current yield on invested capital of more than 7%. As you can see on slide four, the extension of our strategy into small cells was based on how similar the two business models are. Both small cells and towers have the same underlying demand driver of wireless data growth and the same core customers. They both have a high initial cost that is ultimately shared across multiple customers that lowers the capital and ongoing operating costs to those customers while generating returns for shareholders through the long-term lease-up of those assets. They both have 10-year initial contract terms with escalators that meet or exceed annual churn rate. and they have similar barriers to entry. On the tower side, the strategy has created significant value for shareholders and still has a long runway of growth as we believe towers remain the most cost-effective way to deploy spectrum, making them critical to next-generation wireless networks. As you can see on slide 5, the returns and ultimate value realization for towers has taken decades to play out. We started with initial returns and towers of approximately 3% and grew those yields to nearly 9% over six years as we increased the tenancy and cash flows on a largely static asset base. We then had the opportunity to double down on our investment strategy, which diluted the overall yields to approximately 7% as we added less mature assets to the portfolio, and it took us another five years to get back to the more than 9% yield. As the business model and strategy continued to prove out, we decided to double down again with the T-Mobile and AT&T tower acquisitions, once again diluting the consolidated yield as we nearly doubled our tower asset base by adding less mature assets that came with a lower initial return. Once again, it took us about six years to return to 9% yields on the overall portfolio. In all, it has taken us 20 years to move our returns from 3% to the 10% levels we see today. As I reflect on my 20 plus years here at Crown Castle, having lived through this journey with our shareholders, there are several important observations when I look at this slide. First, what is largely taken for granted today by most investors that the US power business is one of the best business models ever was not a widely held view in the earlier years of development. Even as we were proving out the business by adding several hundred basis points of yield to the early investment, I can remember answering questions about the long-term return potential of the business, the negative free cash flow profile and when or if that would inflect, and the potential negative impact of carrier consolidation, just to name a few. Second, the increase in yields occurred over a long period of time and only when we maintained a static asset base. However, if at any point we had stopped investing in new assets to focus on driving the yields up, we would have missed out on significant value creation. Although similar to our tower investment profile, we expect small cells will have a different yield progression since we are making organic investments to construct less mature small cell assets as opposed to purchasing tower assets, which should result in a more gradual increase in returns as opposed to the large ups and downs you see on this page related to towers. And third, a significant portion of the ultimate value realization from towers came much later, once there was little to no remaining debate in the market about how good the U.S. power business actually is. The significant multiple expansion seen on this slide is a good indication of how that debate was ultimately decided over a long period of time. Turning to our small cell and fiber strategy, we are generating a 7% yield on approximately $14 billion of invested capital today. We have legged into our small cell and fiber investment over the last decade, concentrated, as I mentioned before, in the last five years, as our conviction in the value creation opportunity increased, including seeing returns on early investments increase as we co-locate new small cell customers on existing fiber assets. As I mentioned earlier, we expect the yield on invested capital in fiber to have a more gradual increase over time relative to what we've experienced with towers as we make additional organic investments in new small cell and fiber assets. To give additional visibility into how our organic investments are progressing, on slide six, we've identified five markets that we will discuss today in greater detail and will update on an annual basis during our second quarter polls. These five markets should provide a helpful representation of how our overall strategy is performing over time, given how different these markets are when it comes to the scale of the investment, the revenue mix between small cells and fiber solutions, the node density, and the contribution from acquisitions. Let me make a few observations within these markets I would like to draw to your attention. Los Angeles provides an important proof point that increases our confidence that our strategy is working. More than 70% of the invested capital is associated with several acquisitions, including NextG, Synesis, and Wilcon, at an initial return of less than 6%. Since that time, we have added more than 200 basis points of yield to the overall invested capital base by adding customers and cash flow to the nearly 7,000 route miles of fiber, with most of the growth coming from adding small cell customers. The returns in Philadelphia are also encouraging, with a current yield of approximately 10% as a result of combining fiber solutions and small cells on the same assets, which gives us a great opportunity to meaningfully increase returns as we continue to add small cells to the fiber over time. Although the nodes per mile is the highest in Denver, the majority of the investment and activity to date has been for Anchor small cell customers. the 5.5% yield is lower than we would typically expect from small cell anchor builds due to some higher costs that we incurred during construction, which were beyond what we had initially estimated. Looking at Phoenix, the nearly 12% return is higher than we would typically expect with a node density of just two nodes per mile, which is primarily driven by a combination of some co-location that has occurred in the market as well as the contribution from small cell venues. And to the last market on the page, we believe Orlando is a key market to review. The very first investment we made around our small cell strategy was in Orlando more than a decade ago. We built this initial system for one carrier and were able to subsequently lease it up to other carriers over time. This initial system has also benefited from both amendments and increased density for evolving technologies. We think Orlando provides a clear example of what a fully leased up or stabilized market can look like. The capital we invested now yields nearly 20%, which is where we believe all markets can get with the level of lease up we think is possible in the future. Again, we think it will be helpful for you to see how these markets develop over time, so we plan to revisit these same markets each year to give you visibility into how the returns and operating performance evolve. Some of these markets will likely show yields increasing over time as we co-locate additional nodes on existing fiber, while others may show decreasing yields for a period of time as we expand our fiber footprint, mainly growing outside of the urban cores to cover the entire market where small cells may be. Zooming back out, we believe our small cell and fiber strategy provides a compelling risk-reward opportunity for our shareholders. As you can see on slide seven, With 30 to 40% anticipated annual growth in data demand from current 4G applications and the additional demand that we expect to be generated by the deployment of 5G networks, we believe the long-term addressable market for small cells will be very significant. Based on industry estimates, the total number of small cells on air in the U.S. could be over a million by 2024, and we don't think it stops there. As a reminder, our base case underwriting has always assumed we add one additional tenant equivalent at 4G densities of approximately two to three nodes per mile over a 10-year period. And we believe 5G has the potential to drive network densities well beyond our underwriting assumptions. Considering the combination of 5G network requirements and the higher spectrum bands that will be available to meet future mobile demands, We believe node densities approaching 20 nodes per mile could represent an achievable upside scenario longer term. Slide 8 helps to illustrate just how compelling the risk-reward opportunity could be for our small-cell strategy, all other factors being held constant. The purple line on this graph is an illustrative representation of possible total shareholder value in 10 years. with the only major change in the assumptions being node densities increasing as you move from left to right on the chart. The light green shaded area on the chart illustrates where we could be on that curve if we sustained the current growth profile of the business, which we believe we can achieve based on 4G densities. We believe the value for shareholders could potentially be two times higher based on these assumptions. As small cell densities increase moving left to right, you can see our the potential our small cell strategy could result in the value for shareholders being four times higher in 10 years, even with only seven nodes per mile on average. As we just went over, we believe ultimate 5G densities could be significantly higher than that, potentially approaching upwards of 20 nodes per mile over the long term. Going the other direction, if the current volume and mix of small cell co-location activity do not increase from current levels, and fiber solutions growth were to decelerate, we believe the potential downside is fairly muted, as shown on the graph when compared to the potential upside. Similar to when we made our first investments in power assets, nobody can predict exactly how these things are going to play out over the next two decades. In any case, though, we believe that having the right shared communication infrastructure assets in the midst of significant wireless data growth that is driving network investment can lead to tremendous yields on invested capital. With small cells being that kind of infrastructure asset, we are excited when we assess the potential upside in proportion to the potential downside. We see limited risk and huge potential reward, which increases our conviction that this is the right strategy to pursue. So to wrap up, we believe that our strategy to maximize long-term shareholder value is compelling and straightforward. We are 100% leveraged to the largest and best market in the world for owning communications infrastructure assets. We are positioned to enable and benefit from the wave of investment our customers are expected to make over the next decade to build out 5G and meet the growing demand for wireless data. We are investing for the future while delivering a compelling near to medium-term total return with a high-quality dividend we expect to grow 7% to 8% per year. We believe our strategy offers shareholders significantly potential more upside than downside. And with that, I'll turn the call over to Dan.