All right. Good morning, everybody. Welcome to day two of the KeyBanc Technology Leadership Forum. My name is Brandon Nisbell. I cover towers and comms services for KeyBanc. Thanks for everybody for being here this morning. This is a 25-minute fireside chat. With us today, we have Crown Castle, Sunit Patel, CFO. Sunit, thanks for being here.
Thank you. Thanks for having me.
Sunit, you've been in the industry for a long time. I think, new to Crown Castle, but been in the sort of industry a long time. Maybe for people that don't know you, why don't you share your background and overall what different experiences you bring to the table for Crown?
Yeah, thank you. I've been in the industry a long time, mostly in the wireline side, companies like MFS, which stood for Metropolitan Fiber Systems, MCI, Level 3 for many years, where I was CFO, took the company from $1 billion to $8 billion in revenues, a lot of acquisitions along the way, divestitures. We merged with CenturyLink, which is now called Lumen. I was the Chief Financial Officer there, and then I was at T-Mobile. I was in charge of putting T-Mobile and Sprint together. I was there a couple of years, through the closure of the transaction with Sprint. I spent a lot, you know, there was plenty of exposure to the wireless side. With respect to Crown, I joined the Board of Crown Castle January of last year and then stepped off the Board in March of this year to take on the CFO responsibility.
Lots of operating experience, lots of M&A experience, you know, wireline, wireless, and happy to be here at Crown, the tower side.
Great. You've been with Crown Castle for six months. What are your initial impressions? What are the opportunities? What are the challenges that you faced? Yeah, go into that for us.
Yeah, so I'll start with, you know, for those of you who don't know us too well, we're Crown Castle, 40,000 towers across the U.S. We are a REIT, great business. We're the second largest tower operator in the U.S. We've announced we are selling our fiber and small cell business for $8.5 billion. That is expected to close in the first half of next year. We'll essentially be a U.S. pure tower play, if you like, which makes us unique from that perspective. I've been here coming up to six months next month. I would say, one, I really like the tower business, like the Crown Castle tower business, a lot of attractive features to it from a financial perspective. It's a great culture, very resilient. All the teammates I met, it's a very resilient culture, very positive culture. I'm really excited about it.
In terms of first impressions, I think I'm really excited about us moving from running three businesses, small cell, enterprise, fiber, and tower to just a tower business. I think that brings a lot of advantages, whether it's focus, efficiency, agility, you know, being able to make investments in technology and systems. I do feel that that is an area that the company, Crown Castle, we can benefit a lot from, a lot of systems and platform investments that should really help us improve our experience for our teammates, also for our clients. That I think is definitely something that's a big opportunity for us.
You bring a lot of industry experience to the table. What characteristics or skill sets do you bring that you think are particularly unique? How do you think about your key priorities over the next year or a couple of years into the role?
Yeah, so I think we've said we want to be best in class in our segment and just having the unique focus on being a U.S. tower-only business. My experience, a lot of operating experience, a lot of driving automation, productivity improvements, efficiency improvements. I think that should be helpful here. I have worked in very large environments. As you know, the amount of things in the carrier side, the sizes are large in terms of people and systems and complexity. I think that could be helpful here. We're undergoing a big divestiture right now, and I've done lots of M&A deals. I think that's helpful. These are some of the things, as I look at us as a U.S. tower-only business, both the finance and the IT responsibility for the company.
There are a lot of things we can do, whether it's corporate systems, our contract lifecycle management systems, our systems where we interface with our customers, our workflow systems internally in the tower operations side. Just across the board, I think there's a fair bit we can do to make life easier.
While you're new to Crown Castle, you actually have a new executive coming in, new CEO, Christian Hildenbrand, just announced a week or two ago, expected to join in September. Could you tell us more about Christian? What attracted you guys to him or vice versa? What experiences he brings to the table?
Yeah, we're quite excited to have Christian Hildenbrand join us as CEO. He has great operating experience. Most recently, he's CEO of Vantage Towers in Europe. It's a substantial business. They manage about 45,000 macro sites, 85,000 in total, including other small cell and rooftop sites. Great operating experience. That company is backed by several large private equity and institutional investors, so he understands that aspect of it. He has what I would describe as great wireless ecosystem experience. He was at T-Mobile for many years as an operating executive, rose through the ranks there, worked at Samsung, at Ericsson on the technology side serving wireless clients, and now at Vantage. I think he brings a good breadth of experience and will be valuable for us. He's also aligned with our strategy of being a U.S. tower-only company. We're excited to welcome him.
Okay, relative to the strategic priorities you guys outlined before, no real change that you see coming.
Yeah, the focus now is just on execution, getting through this divestiture, which we expect to complete in the first half of 2025. As I said, being best-in-class operators, really focus on that aspect, whether it's clients or internal.
Talk to us about the divestiture. You guys have sort of six to nine months till you expect that transaction to close. What needs to happen between now and then to get the transaction closed? Maybe internally, what are you really focused on from an efficiency perspective?
Yeah, there are several things. Obviously, the key thing is regulatory approvals, which are both federal and state approvals. On the federal side, you have the FCC, you have the DOJ, you have CFIUS, Team Telecom. It's just a whole slew of approvals.
Remind us where in the timing around those types of approvals.
I think they're generally going as planned. As we mentioned in last quarter's earnings call, we have a second request from the DOJ, pretty standard. I think all of that is going as we expected. We continue to be very comfortable with the timeline we've filed for all our approvals. On the state side, it's on a state-by-state basis with PUCs. I think we're now starting to get a bunch of state approvals, but that also has to be managed separately. I think on the regulatory side, it's going about as well as we expected.
Any long poles in the tent in terms of state approvals and utility commission approvals? I know California usually is challenging for a lot of M&A.
Yeah. No, I mean, I think you summed it up correctly. Nothing of note other than what you mentioned. California can be a little longer, but no surprise.
Okay. Carve-out financials, those need to be filed, I think, at some point in time. When would you expect those?
Yeah, I think those are going as we talked. They should be ready to go soon, later this year. That's going a long way.
You expect to generate about $8.5 billion from the transaction. I don't think there's any tax payment involved with the transaction. Remind us what you expect to do with the proceeds.
Yeah, I think, as we said, consistent upon the announcement of the transaction, we expect to use about $6 billion to pay down debt. The balance we expect to use for share buybacks.
Okay. Let's shift to the business a little bit. Sort of the core tower business. You guys reported earnings a couple of weeks ago. You raised guidance for tower leasing from $110 million at the midpoint to $115 million. What are you seeing right now in terms of activity from the carriers that you didn't necessarily expect to start the year?
I think we've seen activity levels go up broadly, whether it's by geography or by client, which has been good. That combined with us driving some improvement in our cycle times internally have driven the reason for changing the guidance, and we feel good about the guidance.
How do you feel about cycle times overall, and looking forward, is that part of the sort of the efficiency work that you think you can do that could be beneficial?
Yes, I think that is something that there's a fair bit of improvement to go over the next couple of years as we've started to focus in on that. I'm excited about what we can do there.
Okay. As we take a step back and look at changes that came from the one big beautiful bill, bonus depreciation should certainly help your customers from a tax standpoint. There's also spectrum that is expected to be auctioned. How do you think of that as potential drivers for your business over the next couple of years?
Yeah, so it is a big benefit for our clients, as you point out, with the bonus depreciation. We generally see that as a good thing, even though some of them run both wireline and wireless businesses. As you pointed out, the government has put aside a fair bit of new spectrum for which you will see auctions taking place and then ultimately deployed. It is good for the industry. It is good for us. Having said that, it will take a couple of years for some of the going through the auctions, knowing who buys what sort of spectrum where, and then what their deployment plans are. Generally, for the long term, that's good for the tower sector.
How do you see it sort of playing out from a customer activity perspective between now and sort of the new spectrum? I think, absent spectrum, customers can sort of densify or they can add equipment from a spectral efficiency standpoint. How do you see that playing out over the next couple of years?
Yeah, look, I think that continues to be a good news story generally because there are different axes that our clients compete with each other. When you think about it from a network perspective, there are really several key things. There's network coverage. Then there is capacity, meaning you might have coverage, but what is the capacity? How much bandwidth can you handle going through there? Then there's network speed. When you and I do a speed test on our phone, what's the upload-download speed? I think that when you look at those three things, what is clear is that wireless data demand has grown 20% - 30% a year consistently over the last 10 + years. Even if you look at projections out for the next 10 years, it's still roughly on the order of 20% a year.
I think that data demand growth, and now we do have some new drivers that are not obvious in the near term how it impacts things, but it's clear that over the longer term, it should continue to be, it'll continue to drive mobile data demand growth with what's happening with AI. You're seeing some massive investment in data center infrastructure, and ultimately, it's to support our day-to-day lives. It should benefit, over the longer term, should benefit mobile data demand in general.
Got it. One of the interesting aspects and differences between the sort of big three towers has been their interest or lack thereof in master lease agreements with their customers, right? I think American Tower has been on one side really trying to pursue holistic agreements with their customer. SBA generally on the other side pursues more à la carte leasing structure. I think you guys would, I'd characterize you more in the middle. What's your philosophy in terms of transacting with customers under those types of long-term agreements?
Yeah, I think once I can't comment on their agreements, I don't know about as much as you do. In general, no, we like having long-term agreements with our clients. I think we've been operating in that way. You might go through phases where activity with your client or your interaction might be on a specific, let's say, tower by tower basis. In general, we do have longstanding agreements with our clients and we do like it that way.
If we look at sort of your financials, straight line revenue, I think is expected to go negative, which means sort of a lot of those deals are longer term in nature, right? They're sort of towards the end of their term. How do you think about renewals on those and overall timing there?
Yeah, straight line revenues are non-cash in nature, so not really a key economic driver. To your point, I think that the reality is that the infrastructure we provide as tower operators in general is fairly stable with our clients on a long-term basis. I think that generally we work it out with our clients. There's nothing much to read there per se. Our arrangements with our clients are generally fairly long-term and work out that way.
Okay. Obviously, a big headwind for the industry this year and over the last several years has been consolidation-related churn, specifically Sprint churn for you guys in this year's numbers. As we take a step back and sort of work our way through the Sprint churn this year, how do you think of the long-term sustainable churn rate? Talk about US Cellular, any sort of exposure there as T-Mobile has now closed that transaction too.
Yeah, so with Sprint, I mean, we are through a big chunk of it this year. Going forward, we've said publicly it's about $20 million a year for a number of years. If you look at our churn, excluding Sprint, it's in that 50 basis points- 150 basis points. We think we're more at the low end of that, and we feel good about that. That's why I was making the point our business is fairly stable, which is one of the attractive features of our business from an investor perspective. With respect to US Cellular, we see minimal impact from that with T-Mobile, plus or minus. Do not see much of an impact.
Okay. You know, as we look at sort of your organic growth rate, again, excluding Sprint churn, how do you think about sort of that long-term sustainable growth algorithm? I think Crown Castle has talked about it in the past, getting to like a 5% growth rate plus on the net side, American Tower is there. How do you think about getting back to that level of organic growth?
Yeah, I think we typically more recently have provided guidance on an annual basis. If you look at our 2025 guidance, we're sort of in the zip code, you know, if you look at our organic growth rate, excluding the Sprint churn. We feel comfortable with that. We haven't really provided long-term guidance. Things change enough every year. At this point, we feel good about providing annual guidance. We'll provide guidance for 2026 with year-end.
In February, it's interesting that you mentioned how stable the business is. I think you come from a couple of companies which might not be as stable. What is your philosophy around maybe issuing some sort of longer-term guidance? Is that something you guys are looking to do? Is that something that's not interesting to you? What's your overall philosophy on a long-term outlook?
Yeah, I mean, I think that we'll see. You know, we typically do rediscuss it or discuss it every year. With Kris joining on board, I'm sure we'll talk about that.
Okay. Gotcha. As part of the transaction, the fiber divestiture, small cell divestiture, a lot of investors are really focused on the operating efficiency, sort of sunk corporate costs that you might have, and anything that you can do on the tower side to become more operating efficient. There are numbers that you have put out, and we can't quite put our finger on exactly what that cost structure looks like. Can you help us understand what you're going to do to implement some of those cost savings? Any way to quantify it would be super helpful.
Yeah, I mean, to your point, we did put out an AFFO guide post-closure of the transaction under the assumption that if we close on June 30, 2025, then our AFFO from July 1, 2025 to June 2027 is about $2.3 billion+ at the midpoint. I think that some chunk of it is from debt pay down that we talked about. Some chunk of it every quarter as we add revenue, as we grow revenue, most of that revenue drops to the AFFO line. There's some of it. The other is, as you point out, cost efficiencies. I think that journey has already begun if you look at our numbers and our raise to our EBITDA guide in relationship to the revenue guide being taken up. It really, I think the cost efficiencies fall in three buckets, if you like.
One is that the benefits are running one business versus three businesses. You will see that as we close the transaction and move across next year, you'll start seeing that. Some of this is automation in systems and platforms, some more tactical that you're beginning to see some benefits in in terms of reduction in cycle time. Some platform investments will take a little longer to pay off, both corporate systems and operating systems. I think that benefit will start showing up more late next year in the following couple of years. Those are the three different buckets. We continue to be quite confident, which is why we repeated the last earnings call in that AFFO guide. As you've seen in our raise of our guidance, we are progressing well towards hitting that AFFO guide.
Is it sort of an even split between running one business, systems and platforms, and the other item that you mentioned, sort of split evenly between the cost you think you can take out of the business?
It's tough to be too precise, but I would say that's a good way to think about it for now. I think we'll see, in terms of quantum, you'll see a little bigger benefit post the close of the transaction just because you're running one business and then the rest. I would say that the two larger buckets would be what you would see right after we close the transaction for the time period after that. The second would be benefits we'd gain over a couple of years. The third, which would be a smaller one that we're already beginning to drive, is some of the more shorter-term tactical things we are driving with cycle times that you're seeing us show improvements in our cost.
Got it. One of the things that I tell investors as I think about sort of Crown Castle's long-term AFFO per share growth algorithm is, I think the company can get back to a 5% AFFO per share growth rate or organic revenue growth rate. I think the cost efficiencies could be like a point or two on top of that for EBITDA growth of 6% or 7%. You got to buy back, right? You got to buy back. That could be, depends on the level of the stock, a couple of points of AFFO per share growth. Overall, it seems like the business can produce a high single, low double-digit AFFO per share growth pretty sustainably. What are your thoughts around that framework for a long-term growth algorithm?
Yeah, I think all the key points you mentioned from a framework perspective, absolutely, that's our plan. In terms of specific guideposts with respect to revenue growth or cost efficiency and what those numbers will be, we'll have more to talk about that every year as we go along that journey. I think, as we've said, as you think about what you said with the stock buyback and the fact that we want to pay dividends at 75% - 80% of our AFFO, that should do several things. One, it should, as we grow our AFFO, that means you'll see the dividend growing.
At 75% - 80%, that still leaves a fair bit of discretionary cash flow, whether it's for the share buybacks to benefit our owners, making sure we remain investment-grade, and the varying rate of interest rate scenarios gives us plenty of degrees of freedom to drive that total shareholder return.
Speaking of interest rates, I think post-transaction, you expect to be at a 6x-6.5x net debt leverage ratio. Why is that the right sort of range? How did you guys come to that? You know, how do you expect to run the business, you know, and from a leverage perspective?
Yeah, so I mean, we're running at the lower end of that, and I think 6 x- 6.5x. Many people look at that to EBITDA. The tower business is different in that our CapEx as a % of revenue is substantially lower than the carrier. Universally, your level of discretionary cash flow is a lot higher. Our key guidepost is, you know, we are focused on remaining investment-grade and what it takes to be investment-grade. We think that 6x - 6.5x is fine. You know, we've been talking to the rating agencies you've seen more recently. Standard & Poor's reaffirmed our triple B rating, and you know, we've been dialogued with Moody's and the other ratings. We feel that at that range, it keeps us at investment-grade. If things change for any reason, the main takeaway for our investors is we're focused on being investment-grade.
Got it. I think with that, we're just about out of time. Sunit, thank you very much for being here. Appreciate your time.
Yeah, thank you. Thank you, everyone.