Crown Castle Inc.

Good day and welcome to the Crown Castle Q3 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ben Lowe. Please go ahead.

Great. Thank you, Mary, and good morning, everyone. Thank you for joining us today as we review our third 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 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 22nd, 2020, 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. Thanks, Ben, and good morning, everyone. As you saw in our earnings test release from last night, we delivered another quarter of positive results. We remain on track to generate growth in ASFO per share this year that is consistent with our 7% to 8% target, and we expect growth to accelerate to 10% in 2021. I would highlight three key financial points in our earnings press release, the 11% increase in our dividend, the reduction in capital intensity and fiber while delivering consistent growth, and the ability to fund our 2021 capital plan without the need for equity issuance. Dan will discuss the results and our expectations for the balance of 2020 and the full year 2021 outlook 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 near-term returns. 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. Steady execution against this strategy is resulting in consistent dividend growth. as we increased our annualized common stock dividend by 11% to $5.32 per share, in line with the high end of our outlook for ASFO per share growth in 2021. Despite some timing challenges this year, we continue to build on our long history of consistently delivering compelling growth through various market cycles, highlighting both the strength of our business model and the significant value creation opportunity our strategy provides to shareholders. Over the last six years, and inclusive of the increase we announced yesterday, we have grown the dividend at a compounded annual growth rate of more than 8% per share. Additionally, since the acquisition of Light Tower in 2017, when we increased our annual growth target by 100 basis points to 7 to 8%, we have grown the dividend on average by 9% per year. Importantly, as you can see on slide four, While we have returned a total of $10 billion to shareholders through dividends, we have also invested in assets we believe will generate great returns for our shareholders over the long term, as our portfolio of assets positions us to benefit from what we expect will be a decade-long investment cycle as our customers deploy 5G. One of the core principles of our long-term strategy is to focus on the U.S. markets. because we believe it represents the fastest-growing market for wireless network investment with the least amount of risk, leading to superior long-term returns. According to TTIA, as shown on slide 5, our carrier customers have invested nearly $300 billion of capital to upgrade their wireless network since the beginning of 2010, significantly increasing the density of their network with tens of thousands of new cell sites while deploying additional spectrum. The U.S. wireless market attracts a disproportionate amount of capital investment because the market fundamentals are so attractive. In 2019, as an example, carriers in the U.S. invested approximately $30 billion, representing nearly 20% of all mobile CapEx globally to serve demand from less than 5% of the world's population. To go after this sizable and growing opportunity, we have invested nearly $40 billion over the last couple of decades in shared infrastructure assets that we believe are mission critical for both today's wireless networks and the next generation of wireless networks our customers are just beginning to develop with 5G. Our talent 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 that they now generate a yield on invested capital approaching 11% with ample capacity to support additional tenants and generate future growth in cash flows. More recently, we began investing in small cells as wireless network architecture evolves with 4G, requiring a network of cell sites that is much denser and closer to the end users in order to serve the rapid growth and mobile data demand. The impact on wireless networks from the persistent 30% plus annual growth in mobile data demand is staggering. The amount of wireless data used in 2019 was 96 times greater than the data demanded in 2010. Further to the point, the incremental growth from 2018 to 2019 alone exceeded the total data usage from 2010 through 2013 on a combined basis. To respond to this insatiable demand, our carrier customers have deployed more wireless spectrum from more locations. Since 2010, the total number of locations where wireless carriers are broadcasting their spectrum has increased by approximately 150,000 to nearly 400,000 at the end of 2019, with most new sites deployed on existing macro towers as well as new small cells. The increasing site densification has always been a key tool the carriers have used to add network capacity, enabling our customers to get the most out of their spectrum assets by reusing the spectrum over shorter and shorter distances. The law of physics dictates that the cell site densification will continue, particularly given the higher spectrum bands coming to market in recent and upcoming auctions. We expect the densification trends to drive additional leasing on our tower assets for years to come. But with the radius of cell sites continuing to shrink, we expect small cells to play a greater role in network densification going forward. During our earnings call in July, I talked about our assessment that our small cell business has significant potential upside and limited downside. This is in part because we have assumed a relatively low density of small cells compared to industry estimates and carrier commentary. The wireless ecosystem is beginning to show signs that would lead towards our potential upside cases. Last week, we saw an important milestone in the march towards greater network densification when Apple announced that all iPhone 12 models sold in the U.S. support millimeter wave spectrum bands, while models offered in other regions of the world are limited to sub-6 gigahertz bands. This announcement reminds me a lot of 2007. At the time, the wireless carriers in the U.S. had accumulated a vast supply of 3G-capable spectrums. but there were no use cases identified requiring that much capacity. At the time, phones were used for talking and, in limited cases, texting. Ringtones were the exciting feature you could download to personalize your device. Then Apple launched the original iPhone and the world changed. People could use their phones to surf the web, listen to music, share pictures, and communicate with each other without speaking. And more importantly, the introduction of the iPhone kicked off a new era of wireless innovation that spurred unprecedented investment in wireless communication networks in the U.S., and no one really saw it coming. Fast forward to now, and much of the same dynamics are at play. The new iPhone was launched for spectrum bands that are not yet deployed at scale. As was the case with the original iPhone, the use of millimeter wave opens up a whole new set of opportunities and use cases. And although no one can be certain about which use cases will take hold, it is exciting that the company that started it all with the original iPhone is again at the front end of a wireless communication revolution with the iPhone 12. This is so important to our business because the carriers now have nearly 20 times more spectrum capacity than they did in 2007, with a significant portion yet to be deployed and more spectrums scheduled to be auctioned in the next few months. In aggregate, carriers and other market participants have already purchased approximately $15 billion at auctions, plus made acquisitions to gain access to higher spectrum bands needed to deploy 5G. And that investment is likely to increase considerably with the upcoming C-band auctions. Millimeter wave spectrum currently accounts for more than 80% of the total spectrum that's available for use in the U.S., and we believe the iPhone 12 will speed up its deployment. Because of its RF characteristics, millimeter wave spectrum provides significantly more capacity, but over a fraction of the geographic coverage area. As a result, we believe the majority of millimeter wave spectrum will ultimately be deployed using small cells rather than towers. With that in mind, we are excited about the industry-leading small cell business in the U.S. that complements our tower business and provides substantial potential upside to our 5G growth strategy. The 10% ASFO per share growth that we expect in 2021 is without the benefit of all the 5G investment I just described. Because small cells develop during the 4G investment cycle, we are much earlier on when it comes to our small cell and fiber investments. with a three-year weighted average life across the approximately $14 billion of invested capital. Given the immaturity of these investments, it's encouraging that the business is already generating a current yield on invested capital that is approaching 8%. Similar to Towers, the investments we are making in small cells and fiber have a high initial cost that will ultimately be shared across multiple customers. lowering the capital and ongoing operating costs to each customer while generating returns for our shareholders as we lease up those assets. We expect the yield on our investments to increase gradually over time as we benefit from the lease up of our existing assets, offset by the pursuit of organic investment opportunities to construct less mature small sale assets for anchor tenants at an initial yield of 6% to 7%. In recent years, Anchor builds have accounted for 70 to 80% of our small cell leasing, with co-location making up the remaining 20 to 30% of activity. Based on our current pipeline of nodes we plan to construct in 2021, we expect the contribution from co-location to increase to approximately 40% of the activity, contributing to a $400 million projected decrease in our discretionary fiber capital expenditures in 2021 when compared to levels of 2019. In addition to the benefit from an increase in small cell co-location activity, there are several large multi-year fiber expansion projects that we inherited through acquisitions that are scheduled to be completed this year, contributing to the forecasted decrease in capital expenditures in 21. We believe the expected reduction in capital intensity of growth within our small cell and fiber business is yet another encouraging sign that our strategy is generating the returns that we expected. So to wrap up, our strategy to deliver the highest risk adjusted returns for our shareholders by balancing the growing dividend and investing in assets that will drive future growth. To that end, We are deliberately investing all of our capital in the largest and what we believe is the best market in the world for owning communications infrastructure assets. We offer a comprehensive solution to our customers of towers and small cells to enable and benefit from the wave of investment our wireless 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 this future while increasing our dividend by 11%. which is meaningfully above our long-term target of 7% to 8% per year. As we focus on closing out another successful year, I want to take a moment and thank our team for how well they have navigated through a pandemic and a significant carrier consolidation in our state to help deliver ASFO for share growth in 2020 that is consistent with our long-term growth target. Before turning the call over to Dan, I'd also like to briefly mention our other announcement yesterday. Our board of directors appointed Tammy Jones and Matthew Thornton as directors effective in November of this year. With the addition of these two highly qualified and experienced directors, our board has made significant progress with the first phase of the board transition process we announced last quarter. On behalf of all of the board, I'm excited to welcome Tammy and Matthew to Crown Castle, and I personally look forward to working with them both. With that, I'll turn the call over to Dan. Thanks, Jay. Good morning, everyone. As Jay mentioned, we delivered another quarter of solid results. We remain on track to generate at least 7% growth in ASFO per share in 2020, and we expect ASFO per share growth to accelerate to 10% in 2021, allowing us to increase our dividend by 11% to $5.32. Turning to slide six of the presentation, site rental revenues and adjusted EBITDA grew 4%, while ASFO increased 8% in the third quarter 2020 when compared to the same period last year. During the quarter, we experienced an increase in activity on towers that resulted in a meaningful increase in the contribution from services when compared to recent quarters. We expect a further increase in industry activity as our carrier customers invest to improve their existing networks and as 5G investments ramp, which we believe will start in earnest in 2021. However, The full rebound in activity on Towers is continuing to occur a bit slower and later than we previously expected, with a portion of the activity we expected to occur in late 2020 shifting into early 2021. As a result, on slide 7, you will see that at the midpoint, we have decreased our 2020 outlook for site rental revenue by $43 million, adjusted EBITDA by $83 million, and ASFO by $8 million. These changes are primarily the result of the expected shift in timing I mentioned, partially offset by lower-than-expected interest expense and sustaining capital expenditures. Specifically, the change in timing of Towers activity negatively impacts the expected 2020 organic contribution to site rental revenues by approximately $20 million and services contribution from Towers by approximately $50 million. Additionally, the combination of this shift in timing as well as fewer lease extensions than previously forecasted, negatively impacts our 2020 straight-line revenues by approximately $20 million. These changes are offset by approximately $10 million in lower expenses, $30 million in lower interest expense, and $25 million in lower sustaining capital expenditures. As a result, for full year 2020, we now expect approximately 6% growth in organic contribution to site-owned revenues consisting of approximately 5% growth from towers, more than 15% from small cells, and approximately 3% from fiber solutions. We also expect adjusted EBITDA to grow about 4%, and ASFO per share to grow around 7% in 2020. Shifting over to our full-year 2021 outlook on slide 8, we expect organic contribution to site rental revenues of $295 million to $335 million, or approximately 6% growth, of approximately 6% growth from towers, 15% from small cells, and 3% growth from fiber solutions. It's worth pointing out that our outlook does not include a material contribution from DISH Network's wireless network build out as we expect activity on that front to begin in late 2021 consistent with their public commentary. As Jay discussed earlier, We expect discretionary capital expenditures in 2021 to be approximately $400 million lower when compared to 2019, totaling approximately $1.5 billion as we apply a rigorous analytical approach to each capital investment decision. We anticipate the combination of lower capital expenditures and higher cash flow growth will allow us to fund our discretionary capital budget next year with free cash flow and incremental debt capacity consistent with our investment-grade credit book profile. As it relates to the balance sheet, we finished the quarter with 5.4 times debt to EBITDA, a weighted average maturity of nine years, no maturities until 2022, and approximately $4.5 billion of undrawn capacity on our revolving credit facility. Our debt maturity profile is the result of a deliberate approach to minimize financing risk and more closely match our debt maturities to the long-term nature of our asset base. while focusing on driving down our overall cost of capital. Turning to slide nine, we expect 2021 growth in AFSO of $300 million to $345 million for approximately 12% growth. In addition to the approximately 6% expected growth from organic contributions to site rental revenues, the outlook includes expense increases that primarily reflect the combination of typical escalations in cost of living increases as well as incremental direct costs associated with fiber revenue growth, an increase in services contribution tied to the expected increase in tower activity in 2021, and an expected contribution to growth of $60 to $90 million from other items, primarily related to the conversion of preferred stock that occurred during the third quarter that will reduce annual preferred stock dividends paid next year by approximately $85 million. But before we open the call-ups questions, there are three key things we want to make sure you take away from our discussion. We increased our dividend by 11%. The capital intensity in our fiber business is declining while delivering consistent growth. And we expect to fund our 2021 capital plan without the need for additional equity. Looking further out, we believe our ability to offer towers, small cells, and fiber solutions, which are all integral components of communications networks, provides us the best opportunity to deliver superior risk-adjusted returns for our shareholders. And with that, Mary, I'd like to open the call to questions.

Thank you. If you wish to ask a question at this time, please signal by pressing star 1 on your telephone plug-out. Please ensure the function on your telephone is switched off to allow your signal to reach your equipment. Again, please press star 1 to ask a question. And we can take our first question now from Michael Rowland of Citi. Please go ahead.