All right. Good morning, everybody. Welcome to day four of the TMT conference, and welcome to Dan from CCI. Thanks so much for joining us today, Dan.
Thanks very much for having me.
Coming back here. We thank you all for coming out to San Francisco and making the conference such a success. We wish you all the best of luck getting home as the storm comes in. Good luck. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Maybe we could start with 2023 priorities, the strategy going forward. It sounds like you're gonna continue to see momentum in your key businesses. Help us with the highlights what we should expect for this year.
We're excited about this year, as we typically are, because what we see is our main customers, the three existing wireless carriers and DISH, spending money on building networks and the quality of their networks to withstand the increasing demand that we, as consumers, place on the network. Our business generally is we want to lease up the assets we own and then build new assets that we believe over time will be leased up, so that we can generate returns over and above our cost of capital to generate value for our shareholders.
When we see periods of time like we are in now, where we're coming off growing, say, our tower business 6.5% on a revenue line in 2022, moving into 2023, growing around 5%, those periods of time are really solid for us. We believe 5%-6% growth is kind of general range that our tower business will grow over time. As our customers, the big wireless carriers, continue to compete on network quality, so they wanna make sure that their network doesn't suffer in quality compared to their competitors, 'cause then we, as co-consumers, will change carriers. If they continue to do so, we believe they will continue to make significant investments in their network year-over-year. That's exactly where we are now.
Our growth being, you know, 6% to 6.5% over the past couple of years, going to 5%, that type of natural oscillation happens in our business. We're excited because as we look forward, all of those dynamics continue to work in our favor, and we believe it will drive significant value over time.
Great. Help us with the puts and takes around the dividend growth, the long-term model and where we are over the next couple of years.
Yeah. We have a goal of growing our dividend at 7% to 8% per year. Over 2024 and 2025, we believe that we will be lower than those numbers and have limited dividend per share growth because, in essence, interest rates for 1 year, and then we have Sprint churn for another year in 2025. That Sprint churn is the outcome or result of T-Mobile and Sprint merging. When that happens, the carriers, when they have consolidated like that in the past, what they do is they make sure that the towers that they are on, where both Sprint and T-Mobile were resident, they wanna take down the Sprint site, so they don't have too much coverage. It doesn't make sense to have both networks running at the same time.
They're doing so, we were able to negotiate with T-Mobile to push that churn into 1 year, and that year is 2025. We will see about $200 million of revenue that falls off in 2025 as a result of their work. But we think that's all there's going to be. Before and after that, our churn and our tower business will remain in what our historical range has been, which is 1%-2% of revenues per year. Because of that Sprint churn and because of the rapid rise in interest rates, we believe 2024 and 2025 will have limited dividend per share growth. Afterwards, we will continue to grow as we would expect in that 7%-8% range.
As we look back, we set that 7% to 8% goal in 2017. Since then, we've grown our dividend at 9% per year.
Above, yeah.
It's above what we expected, above what we had targeted. That's a significant creation of value in our opinion. We did not although we expected a rise in interest rates as we look at our long-term model, we did not expect that rise in interest rates to be as quick as it was, and therefore, it's going to impact the short term a little bit. We did not anticipate at the time a merger and therefore a consolidation event. Those are the two events I've spoken of in 2024 and 2025.
Going from a 9% growth and then continuing in the future of that 7%-8%, we think is doing exactly what we said we're gonna do and actually better than that, what we said we were going to do. Sets us up for long-term value creation.
You said limited dividend per share growth. You do expect some modest positive growth in both years or what's the latest thinking?
Yeah, we can't give guidance right now for what it's going to be. We need to see how 2023 plays out and then what 2024 and 2025 will actually look like, and then we can give guidance in 2024.
The intention is to do something.
The intention is always to grow our dividend.
Good.
That's our goal all the time, and our entire company is focused on doing so. It depends on timing of how things play out. We'll update that guidance and get it.
One of the things that's great about the tower model is your visibility into your business, and you always have given guidance in October, you know, speaking to that. Help us understand, because this is a very uncertain environment. We've talked, a lot of people are hoping that things pick up in the second half, but, you know, there's concern that things may deteriorate in the second half. Talk about your confidence in your guidance, both near term and long term.
Well, the near term confidence we have is very high. As you mentioned, the tower business is very predictable. We have long-term agreements with all of our major customers that give us significant visibility into the underlying cash flow, but also the growth in that cash flow. We have a base of business, and then that base of business grows some based on the agreements we have with our customers. When we give guidance in October, especially, talk specifically about the tower business, we know most of what even the incremental cash flow will be for the subsequent year, because tower growth comes from an escalator, which is generally around 3% a year. We know what that number is going into the year.
Additional activity on our towers, part of which is activity that happened in this case, 2022, but later in the year, so there's a lap over effect where we get some growth because of, you know, if it was 3 months of an addition in 2022, there'll be an additional 9 months to get to its full 12 months in 2023. That's 1 bucket of growth. The second is contracts we've already or amendments we've already signed, additional equipment that's going on our towers that we had signed in 2022 by the time we gave guidance, but wouldn't go on air until 2023, so there wouldn't be any incremental revenue until 2023. We know most of that.
The only piece that we don't know is the new activity that is going to happen in the year that we get in the year. Something that we sign in 2023 that goes on air in 2023, and that's the smallest bucket. By the time we give guidance in October, we feel really good about what the next year will look like. The same is generally true for our small cell business. actually, the cycle times of our small cell businesses are longer, so it actually gives us more visibility into what we think is going to happen. Our enterprise fiber business has less of a cycle time, so there's more variability in that business.
We still have a fair amount of visibility because there is still a very long average duration of contract in that business. It's not like there's a tremendous amount coming off, and we have to figure out what to do. We have a pretty good sense of what's going on in all of our businesses by the time October rolls around, which is why we've always been very comfortable guiding to the next year in October and why we've gotten pretty close. We're usually within our guidance range when we give that guidance in October, and our goal is to give our investors our best estimate of what the next year is going to be.
Yeah.
Of course, there are gonna be things that go differently than what we expect, but, you know, some things go better, some things go worse, and we end up within the range.
You mentioned the fixed escalators. We're obviously not at 3% inflation right now and may not be for a while. I understand your ground leases have fixed escalators as well, but is there any thought that you might need to look at plan B here over the medium term to move to some sort of an inflation adjustment if inflation doesn't normalize over the next year or two?
I don't think so. We have had fixed escalators around 3% for a couple decades now.
Sure.
There have been times where we have benefited, as the owner of the asset, from the fixed escalator being 3% when inflation was very low. There have been times where inflation has been higher. Like you said, our cost structure doesn't have a lot of inflationary pressure to it. The vast majority of our cost is in the land lease under our tower. We own the tower, we have to lease the land under the tower. That land lease escalates at 3%, which actually gave rise to why we chose 3% to escalate our revenue, was to keep track with that underlying cost structure. Where we see variability in our cost structure really is in our SG&A with people, and that's a very small percentage of our overall business.
Sure.
Therefore, we don't see a lot of reason or we don't see a lot of margin pressure when inflation is high. We believe there is a lot of value to us and to our investors for knowing there's a fixed escalator and understanding what that means over a very long period of time. We believe that predictability and ultimately lower risk is exactly what we want to give for our investors. It's part of our overall thought process of lowering the risk of our business. One of the good things about the tower model is that the escalator of 3% is higher than the churn we spoke of earlier of 1%-2%, which means if you take that out and believe that it will all happen forever, you can get to growth in perpetuity without spending money.
That's a unique quality of a business. That's very rare, and I think that's a lot of the reason that our businesses, all the tower businesses are so valuable. We don't wanna, we don't wanna upend that predictability and sanctity of the growth of the cash flows because we don't feel the pressure now, but we don't wanna upend it because there's other companies raise prices. That doesn't have any impact on us. What we wanna do is maximize the long-term value of our business, and we believe that predictability helps. On the flip side, I believe our customers also like that predictability.
Sure.
They don't wanna look out and say, "Oh, now our tower leases are gonna grow at 6% this year." Where their revenue is likely not gonna grow 6% in that year, so what are they going to do to make up for such an large increase? We don't wanna put them in that position either.
Yeah.
We think both we and our customers both benefit from a stable escalator over time. That 3%, I think is very appropriate for the type of asset that we own.
Great. Coming back to the leasing, help us understand the pivot from this mass kind of coverage rollout of 5G mid-band, and then you moving into that sort of second phase of densification, which is sort of where we're starting to see now. What does that look like? I think you said on your call, less than half of your towers have been upgraded with mid-band right now. It sounds like from what you're saying, it's a modest deceleration, but you're still gonna see a lot of activity from the Big Three.
You said it pretty well. What I would add is that in any generational upgrade that we've seen in the wireless market and network, our customers start with what they know best, which is towers they already have equipment on. In our parlance, we call that amendments. They're amending a tower they're already on to add different or more equipment to it. They start there because it is the easiest for them to plan for. They know the propagation characteristics, they know the usage characteristics, they know how their network fits together, so they just go where they already know. After they have done that, they start pushing into densification, which for us is putting more equipment on towers they are not yet on. We call those either first-time installs or co-locations.
We've always seen this shift from amendments to co-location as the generations get upgraded. What's different about the generation we're in now is we believe that shift will continue one step further from tower amendment, tower co-location into small cells, because there is going to be so much demand from us as consumers that we can't just have towers. If you think about it, you go on what you know, amendments, you go on what you know is second-best co-locations, and then you go on what you know the least, which is small cells, because we just aren't that far into the maturity of that business yet. We think they'll go on what they know and then amend small cells.
We believe that cycle will continue, and we are just at the very beginning of that cycle because with the amendments that we were talking about, we did mention on our call that about 50% of those amendments have happened. When you look at the number of towers our customers are on, about 50% of those have been touched with mid-band spectrum. Even in the amendment side, we're just about halfway through, and we are yet to get into the densification and towers, yet to get into the densification of small cells, and yet to get into the densification with small cell or amendments at that point. As we look forward, That's why we're so excited about the business.
We have access to all of that cycle, part of what we've done over the last 10 years or so with our investments in fiber and small cells is to ensure the opportunity for us to continue to grow as the network densifies. I think that that's a unique position. There's no other company in the US that does that. It positions us really well, and it's part of what we think, as I mentioned before, adds together to what we're trying to do, is provide the lowest risk, highest return we possibly can.
We believe that focusing on the U.S., which is the best market in the world for wireless infrastructure, allows us to lower the risk and increase the upside because the U.S. spends more on its wireless network than any other country, and we have significantly limited our rule of law or foreign currency risk by staying in the U.S. We believe that having both towers and small cells both is a lower risk position, because no matter how our customers grow, they will need one of the two to densify the network over time. We've lowered the risk there, and we've increased the return because we're gonna grow one way or the other. We believe that thought process puts us in a different category than most companies, including our peers.
It bleeds all the way into how we've run our balance sheet, where we've extended maturities on our balance sheet and reduced the amount of floating rate debt and reduced the amount of secured debt and increased our liquidity, all so that we could maintain that risk profile as low as possible, give ourselves the best opportunity to take advantage of what's coming to us, and ultimately marry that risk return in the best way possible.
Great. You were one of the early partners of DISH in terms of their build-out. It seems like you've been able to take, you know, more than your fair share of that activity. Can you just talk us a little bit through what that means for you?
When we signed our initial deal with DISH, which was the first tower deal they signed, we had a idea that what we wanted to do was work with them as much as possible in our initial build-out, so that we got as much of their initial towers as possible. As my boss, Jay, likes to say, "You can't amend a tower that you don't have." We know that amendments drive lots of value for our business. If we can get that first installation, we know that over time it will grow. The amount of equipment on that tower will grow because data demand continues to grow, and you can't supply that demand only with that first array of towers. Of antennas.
What we did with DISH was try to incentivize them to utilize our towers, and we did so by constructing the contract such that we have a very significant minimum payment that they owe us over time each year. In return, we gave them the right to go on up to 20,000 of our towers. If they went on one tower, that minimum payment per tower would be huge. If they go on 20,000 towers, the minimum payment gets defrayed over 20,000.
That payment escalates over time?
The payment goes up over time. It does indeed. By incentivizing them financially to go on more of our towers, we believe that they are going on more of our towers. We don't know whether it's more than our fair share.
Yeah.
We can't tell what they're doing with our customer or competitors exactly. We know we've set it up in a way that we believe allows them to focus on our towers as one of the search criteria of what's important to them while they build out a network from scratch.
How are you able to recognize that revenue? Do they need to go on the towers or are you able to? Because in a lot of these, you know, lease extensions, you can recognize the revenue up front.
Because this is a new lease and not an extension, we actually can't recognize the revenue until they've picked out a tower.
Okay.
The way the accounting works is these are leases, and you can't start a lease until you have an asset that is being leased. They have to go on a tower, and then we can recognize the revenue and everything that goes with it.
Okay. There's more to come there.
We believe there is more to come, yes.
Fixed wireless has been a big theme at the conference and a lot of bulls and some bears as well. How do you think about it from your business if it's gonna really drive traffic growth on the network?
Well, Whether you're a bull or a bear on fixed wireless from a business model, I think it is indisputable that fixed wireless drives traffic on the network because homes are generating demand that is being serviced with wireless capacity. Whether you think long-term fixed wireless is gonna be a great business or not, right now it is driving incremental demand on the network. Our customers have talked about that being demand that is otherwise going latent right now, so it's excess capacity in the network. As we know, the demand, the data demand in the U.S. is growing. Excess capacity becomes utilized capacity very quickly, and they have now put with fixed wireless another demand that is soaking up that excess capacity even faster than it otherwise would have been.
Although we are not yet seeing direct for us fixed wireless deployments, we know that those fixed wireless homes are taking up excess capacity that will allow us in the future to have more demand on our assets, both towers and small cells. We know that for just because of the physics of it. Also, T-Mobile has said they limit the number of homes within a sector of their wireless network that are allowed to use fixed wireless because they know that if they have too many, it will overwhelm those towers or those points of presence such that their mobile customers would suffer, and they know that they can't have that happen. We are seeing the impacts of incremental demand from fixed wireless. It just hasn't yet been incremental to our business. We believe it will be over time.
Yeah. It may encourage them to use to densify faster than they might otherwise have done because they'll see-
Exactly
... at least some fixed wireless revenue initially.
Yeah. I think what's really good about it is, I think one of the biggest issues that investors have had with the 5G rollout is what are our customers, the carriers, going to do to make money off of that investment? Fixed wireless is giving them a revenue stream that they otherwise wouldn't have had. That's a great place for us because if our customers...
Yeah
... the carriers, can get a return on the investments they're making, they will make more investments to make more of a return. That's a virtuous cycle that helps us tremendously.
Yeah.
We believe fixed wireless is doing so right now. Then I think the question is: What are the other use cases that could do so? Because it can't just be fixed wireless. Although those have been hard to come by, another theme I've heard is relatively popular here at the conference is generative AI or some sort of natural language interface, where people are engaging more with their devices because the interface is more conducive. It's easier. It's more intuitive. It's better. I know I think it's better. I was not a Bing user before, and I am now.
Sure
because I use it because I type something in and it gives me a response that I can make sense of.
Yeah.
What we have found as an industry is the more engagement people have with their mobile devices, the more traffic goes over the network, the better off we will be. Those types of changes of how we as consumers act are what drives significant increases to the demand on the network. Whether natural language interface is that sort of driver or not is yet to be determined, but it's a pretty exciting one right now. I think that there's a lot of that generative AI that will drive more traffic on the network just because people will get better and better results than what they've done in the past.
The rate of adoption is stunning.
It is stunning.
Yeah.
It is stunning. It's something that, I mean, I know ChatGPT got to 100 million users faster than any app in history, and that's hard to imagine.
Yeah.
They didn't advertise. It just happened.
Well, we.
We're excited about it.
We look forward to hearing from them later today at the conference.
You guys got a good conference going.
Small cells, this is the year to take it back up as the macro tower builds, you know, they are kind of reaching their kind of steady state, if you like. Help us with the 10,000 deployments this year. How is it going so far?
Yeah. To give context to it, in 2022, we've put 5,000 small cell nodes on air. Based on customer contracts that we've signed over the last 18 months with Verizon and T-Mobile, we added 50,000 additional nodes to our backlog. We are working through those nodes. We have 60,000 of nodes in backlog in total. In 2023, we believe that that acceleration to start building into those booked nodes that have yet been built will allow us to build 10,000 in 2023. We're doubling the amount of small cells we're building. In doing so, we are also adding a significant amount of co-located nodes, which are nodes that go on existing fiber, so we spend much less capital.
You can see the result of that in our capital, that we're doubling the number of nodes and our capital, net capital associated with our fiber segment is up 10%-15% is our estimate. Doubling the nodes, only increasing capital 10%-15%, you can see the operating leverage in that business coming through.
ROIC goes up.
Yep, that's exactly the business we're in. That's the business towers is. As you build it, you have that asset in the ground or in the air, and then you add more revenue and get better returns. We are seeing that come true. We are still early in the year of how many nodes we're building, but we are still on track and feel comfortable with our 10,000 nodes.
Talk about your competitive position in this. This is a scale game. You can't unlike towers, you can't just put up half a dozen and, you know, sell them to one of the big tower companies with...
Yeah, it's a good point. What we've seen is that building small cells is significantly more difficult than it was to build towers. As you pointed out, there really wasn't much scale to towers. If you owned this tower and I owned that tower, okay, we both make money. If we own both of them, we make more money. Owning both of them didn't really do anything to change the dynamic. With small cells, it's very different. It is a difficult business to work. It's a difficult business to do at scale. We believe the combination of our assets, which are very high capacity, meaning lots of strands of fiber in most of the dense metro markets in the U.S., top 30 markets.
Our capabilities, which is working with our customers to site these small cell nodes with RF engineering appropriate characteristics, and working with municipalities to get the zoning and permitting, and working with utilities to get the power, and getting all the permissions from all of the different associated parties. We believe that combination of asset and capabilities across the nation provides us a competitive advantage that is very difficult to overcome for somebody else, which is why we've seen 50,000 nodes of bookings in the last 18 months, and we haven't seen a third party other than us announce another booking. We believe that scale is really a competitive advantage. One of the things we are trying to do is press that in competitive advantage.
Get more scale, build more assets, have more capabilities, talk to our customers more, get more nodes so that they give us more and more. Because what their buying pattern has been is focused on markets at a time, and therefore big systems at a time. It's not 10 or 15 nodes, it's 500 or 1,000 nodes or something like that. And it's hard for somebody who's never really built one to come in and say, "Oh, we can build a thousand for you." Like, that's a really tough place. It's like the old adage of you never get fired for choosing IBM. We are the ones who have proven that we can provide these nodes on time and for our customers. It's really important to our customers because small cells are required to make their network operate efficiently.
Do you have the fiber assets that you need? You've mostly grown organically in that business recently, but you had done a number of acquisitions, and that was a perennial question. You know, prices have come down some, I guess, and certainly funding's harder for some of these companies. Any interest there?
We don't have all the fiber assets that we need. We believe strongly that the majority, the vast majority of those new fiber assets for us will be built by us as opposed to bought by us. We just don't see the combination of characteristics that make fiber attractive to us in the market. We, like I said, we want big markets because that's where our custom we believe the carriers will spend first on.
Top 30.
Top 30. density of the fiber, meaning it's already in a lot of the market.
Yeah.
High capacity, which means lots of strands. The reason lots of strands is important is because each small cell node takes 2 strands of dark fiber, one going from the network to the node, one going from the node back to the network. Therefore, if you have 6 strands of fiber, you can build 3 small cell nodes. Like we talked about, you need a lot more than 3 in a system or down a run of fiber. We typically build 288 strands, and our acquisitions were in the 120 strand range when we were doing acquisitions. We don't see that type of fiber asset-
Yeah.
available in the market. The markets weren't built that way. We feel really good about building our own because we think it will, again, just extend the lead we've already put in place.
Great. Well, maybe just one last one on capital allocation balance sheet. You talked about the steps you'd taken to shore up your balance sheet and prepare for a tougher rate environment. How are you thinking about leverage in this sort of rate environment? Are you happy with where you are?
We are. Like I said, we have purposefully managed the balance sheet over the last 5 years for periods of time like this, where we believe that we have the right liquidity and right term profile to our balance sheet. The amount of debt that we have, we are very comfortable with. Five times debt to EBITDA, we think is appropriate for our business, and we believe that we will maintain that because it circles back to the question you asked earlier. The predictability and security of our cash flows.
Sure.
Is really high. We do not believe that there's anything, even in a higher interest rate environment, that would lead us to lower debt.
Great. Well, Dan, great conversation as always. Thank you so much for your time.
Thanks. Great seeing you. Thanks, Simon.