Hi, welcome to the 51st annual J.P. Morgan TMC conference. My name is Phil Cusick. I follow the communications and media space. I am pleased to welcome Dan Schlanger, CFO of Crown Castle. Dan joined Crown in April of 2016 and is the Vice President and CFO, Senior Vice President and CFO. Dan, thanks for joining us today.
Thanks for having me.
I promote you.
Appreciate being here. Well, not quite, 'cause I'm now Executive Vice President and CFO. You're close.
I demoted you, sorry. You know, let's start with a very high level. 2023 is a lower level of activity than 2022. How does that compare to the average of the last three to five years? I'm trying to think about, you know, where are we in a longer cycle than just last year, and then how you think about going forward.
It's a good question because our business moves in relatively long cycles, and what we see right now is the core of our business, which is a tower business where we lease space on towers to the wireless carriers, we think grows in the neighborhood of 5%-6% at revenue per year. Over the last couple of years, we've been above that range, close to 6.5% in 2022. When you look at, where we are in 2023, we think we'll grow around 5%, which is in the range, but on the lower end. Those types of up and downs within a cycle for us as our carrier customers are deploying new technology, in this case, 5G, is normal.
What we've seen historically, to your point, Phil, is that the level of activity we've seen over the course of the last couple of years and even this year is somewhere in the neighborhood of 50% higher than what you had seen at the average for five years prior to that. Even at lower numbers, we're still well above what historically has been the case because of those kinda dips and ups. But we do believe over a pretty long period of time, given the nature of the contract structure, given the nature of what the drivers are for our business, which generally boils down to wireless data demand in the U.S. and how quickly it's growing, we think we can maintain the 5%-6% growth on towers for the foreseeable future.
Where are we in this sort of 5G cycle? How many of your towers have been upgraded with mid-band 5G at this point?
I would say, to answer your question directly, about 50% of our towers have been touched with 5G. Where we are in the cycle, though, is harder to pinpoint. These cycles take a long time to play out. The way our customers generally go about deploying a new generation of network technology is they start on towers where they already have equipment. In the, in our tower business, that's called an amendment because we're amending a previously in place lease on our tower. The reason that our customers start with amendments is because those are the easiest to get done. They're already in the network. The tower's already in the network. They understand the propagation characteristics of that tower, how much traffic is going over that tower, and therefore the need on that tower.
That densification comes in the tower on the tower side also, but most of the time after amendments, not always, but that's kind of the general view. Where we are now, if we say we're about 50% of our towers are touched with 5G, we're somewhere in that amendment cycle moving into the densification cycle.
We're in the amendment cycle. You said about half have been touched with 5G at this point.
Yes.
Do you think that because there is so much spectrum being deployed this time that the overlay is a longer, the lag to densification is longer, or you're already starting to see that densification side?
We are already starting to see it. I don't know whether it's longer. I doubt it because part of what's going on is just the overall demand for data in the U.S. continues to grow at 20%-30% per year, which requires more antennas on more towers in order to serve that growth. As our customers are hitting one tower, that growth is coming again, and they need to hit that tower again as well. I don't know whether that's gonna elongate substantially. I doubt it. Even if it does, we are in a position where we think we can continue to grow through that period, and our customers will continue to be active through that period.
What we're seeing now, the reason that we can say we're moving at least somewhat in the densification phase is a second part of our business, which we would call small cells, which is exactly the same thing, just a vertical structure with an antenna on it, just shorter, which is why they're called small. That is a densification play for our customers because towers can't get closer together generally than where they are. They already exist in most areas. Getting them too close together causes interference between the two, just the thing of the waves, they cancel each other out. Most municipalities don't allow towers to be built because they don't want any more infrastructure where there already is infrastructure that exists.
The next step will be to go onto a small cell, a shorter piece of infrastructure, but by definition, densification, because it'll be closer together. While our customers were very focused on deploying towers over the course of the last several years, which led to our above average tower growth, they also gave us significant orders for small cells that we are currently building. They were both focused on the coverage of the tower and the densification of the small cell all at the same time. We believe that we're kinda in that transition period.
You mentioned densification. When you think about densification, is it more on small cells than it is on macro?
It's both. When we say densification in total, it's both getting towers that are closer together. Towers exist, but they're on one tower and not on the other, and they wanna add equipment to that other tower, and then into small cells. Even densification on towers will happen, in our opinion, before densification on small cells, because towers are more efficient. To cover a given area of population with cell signal, it's more efficient to use one tower than several small cells. Just economics dictate that you go through the best and you move on. The best would be amendments. It's the easiest and fastest. You go to co-location on towers, then you move into small cells. We're already into some of the small cell densification as well.
Okay. You know, Verizon signed a deal with Vertical Bridge a week or two ago where they're for new sites. Verizon's talked about getting owners economics on sites with Vertical Bridge. Is that something, a contract that you looked at? Is it, is it, was it sort of out there in bid?
I'm not gonna speak directly to how we go about with negotiations with our customers, but I will say that it is not new for our customers to try to enter into agreements with other companies to try to build new sites. We have not built a lot of new sites recently, so for the past 10 years, because the economics we've seen for building new sites have not been attractive enough to get our capital allocated. Generally speaking, and I can't say exactly what that deal was, 'cause it's between two parties that are we're not part of, but we have not seen a way to make good returns building new towers in new areas, which is what that agreement seemed to be focused on, is building out where towers don't already exist somewhere else.
If you think about as a city expands with new suburbs, we need towers in those new suburbs. Those need to be built. That could be part of this agreement, but building where we already have towers is very unlikely because it's hard to compete and hard to get them built. It's just not something that from a big picture perspective we're worried about. Like I said, the returns on building new towers have not been attractive enough to allocate our capital to.
Let's talk about the overall service revenue or revenue growth this year, your guide to $135 million-$145 million, and in core leasing activity for the year. How should we think about that sort of split first half to second half, why is that a little bit different this year than some others?
That $135 million-$145 million corresponds to about the 5% I was talking about earlier. Generally speaking, in our business, there's traditionally been a little bit of back half waiting. There's, you know, 40% of the activity in the first half and 60% in the back half. This year, we think it's likely gonna be closer to 50/50 than it historically has been. No real reason for that. It's just how we see the market playing out, and that was what we said when we gave guidance in October. It's still our anticipation. What we would call that is kinda level loading through the year and just indicative that we don't see any type of speed up or slow down as we get to the back half of 2023.
How much of that is being contributed by DISH? How should we think about your contribution there?
Yeah. Within growth, Not gonna quantify each customer. Overall for DISH Network, our revenues are, our site rental billings are a little less than 3% of our tower business. Overall, if you include all of our revenues, it's a little less than 2%.
Okay. That 3% has really come on over the last two or three years. Is it fair that maybe 100 basis points a year has been contributed by DISH?
Yeah. All of your math is right. We signed the contract at the end of 2020, so we're kinda two and a half years in, and we've gotten to that almost 3%. That doesn't mean that's what we're gonna get going forward. It's a contract that it was structured to provide a pretty substantial minimum payment on a monthly basis to give DISH access to up to 20,000 of our tower sites.
The reason that we structured it that way was that we wanted to attract as much of the DISH work as we could because, as we would anticipate DISH being successful in building out a network and having consumers on their network, if they needed more capacity, which we would anticipate they would need over time, they would come to our towers first and generate more amendments and more revenue for us. We wanted them to be on as many towers as they could, so we gave them access to up to 20,000 towers, meaning that if they went on more towers, they amortize the cost of that minimum payment across more towers, so each tower got less expensive.
The other reason we thought that that would be important was so that we became integral to DISH's overall network build-out, which makes us really key to them meeting their goals of their requirements for maintaining the license on the spectrum of 70% population coverage by 2023, June of 2023. We think we're integral to that because we were among the first places DISH went for towers, and we believe that they built a lot of their anchor around our system and have been utilizing us very much. When you add all that together, we think we've incentivized them to be on our towers, put ourselves in a very good position, and given ourselves some growth in the process.
Are they running in line with or ahead of that sort of minimum use fee?
I'm not exactly sure what you mean? The minimum use fee is no matter how much they run.
Okay.
That is why it's a minimum use fee. It doesn't matter how many towers they go on. They have been very active with us. They've required us to move very quickly to put a lot of antennas on a lot of sites.
I mean, Charlie's been very open about slowing his build after we get through this June deadline, is that part of, I imagine, the back half slowdown, and should we expect a continued slowdown next year?
Yeah. We don't have a back half slowdown, which is what we said earlier. That was part of what we were saying, is we don't see that there is a back half slowdown in our business. Going into next year, we'll talk about when we give guidance in October.
Okay. That's fair. Otherwise, that visibility on that $135 million-$145 million at this point, late May, the business is effectively fixed for the year.
Yeah. I would say it a little differently than effectively fixed. I think that the cycle of the business is long enough that we understand what's gonna happen in the back half of this year. I think that's the same thing you're saying. Fixed sounds like it's contractual. What it is that, you know, it takes about six to 12 months from the time that we get an order from our customer to the time that we put the antenna on a tower and start generating revenue. If you take the average of about nine months, we generally know what the business will look like for the year by March, by May, we feel pretty good about it, and we still feel pretty good about where we are.
A lot of the business we do is entered into in the year prior, because if we get an antenna on a tower on July 1st of any given year, that means we only have six months of revenue that year, an additional six months the next year, so that's actually growth year-over-year. That's the other bucket of growth that we come up with. All of that together is part of the 135-ish, 140-ish that we talked about in terms of billings growth for the year or the 5%. Yeah, we feel good about where we are. We generally have a pretty good sense for our business at, by this time.
Where's churn running at this point? You've got there's Sprint churn for the industry, there's a regular churn for the industry. How is Crown set up?
For our tower business, we have one chunk of Sprint churn, which happens in 2025, and it's about $200 million, and we don't have any other real significant Sprint churn on the tower side to speak of. Churn generally in the tower business is 1%-2% a year, and we're running this year on the low end of that churn.
You know, you and I had a conversation about how activity and churn are tied together. I've never really understood where 2% churn would come from on a regular basis, 'cause there's not that many customers who aren't big carriers going away. What's the relationship there?
Yeah. Where churn comes from is when they look at their, the customers, our customers, the carriers generally, look at their network and see where there's overlap or not in full utilization of a certain tower. It's too expensive for them to keep that, they pull it down because the network has evolved in a way that made that one tower obsolete. That's where most of the churn comes from. As they have more and more activity in putting up more and more sites, That activity in and of itself may cause some of that churn to happen, because the more sites they put up, the more the network moves around a little bit, could unearth a place where a tower is no longer necessary.
Having said that, even in relatively high periods of growth the last couple years, our churn has been on the low end of our 1%-2% range. We feel pretty good about where we are on the churn side. It's a great business because if churn's 1%-2%, which it is, we have 3% escalators built into our contract structure, which means that just every time, every year that comes up, we're growing more contractually than what our churn is, which puts us into long-term growth without having to spend capital, which is what makes the tower business as good of a business as it is.
I think what one thing people worry about with Crown is that the business has been running very strong, and yet if it reverts to normal, sort of a slower rate, one thing people worry about, but churn reverts from the 1% where you've been toward more of a midpoint, 1.5% or 2%, that the net growth sort of compresses. Your point is more that if activity is lower, it's probably churn is lower as well.
Yeah. I think that's true because like I said, you have to have the activity that generates the place where the churn comes from. If the network is static, there's very little churn that's gonna happen in that network. When a different band may be added to a specific tower or a set of towers within that area, it could make one of them obsolete. Yes, I think the activity and the churn are somewhat tied together. Although I wouldn't say that correlation is perfect.
Right. What about services revenue? How is that correlated with activity, and is it different by carrier?
Yeah. The activity. We have a services business, which in essence helps our customers put antennas on towers. There are two parts of our services business, as we would call it. One, we would call pre-construction services, and the other we call construction services. Pre-construction services consist of land work, so permitting, site acquisition, getting appropriate utilities, that type of thing, zoning, those things. In addition to construction drawings and making sure that the tower has a sufficient capacity to put more equipment on. In the construction side of our business, it's actually managing general contractors that climb a tower, put the antenna on a tower, and get it ready to deploy spectrum so we get paid.
You could put those in sequence, is that the pre-construction work has to happen first in order for the customer to be ready to go on the site, and then construction work happens later for the customer to actually go on the site. We see early in the activity periods, more pre-construction, and later in the activity periods, more construction. The pre-construction work is at a higher margin than the construction work, but the construction work generally has higher revenue. What we have seen over time has been this evolution from higher margin, lower revenue pre-construction work into higher revenue, lower margin construction work, and our true gross margins have generally held consistent over the past several years.
You know, again, help me with as activity is sort of steady for the next few years, should we anticipate services revenue being relatively steady?
Yeah. I think services are very much tied to where the activity ultimately goes because we have to have activity, no matter how it's structured, we have activity that goes to put a new antenna on a tower. Somebody has to provide the service. We don't provide 100% of the service to our sites. We try to provide as much as we can as long as it's profitable to us. We think it's a good ancillary business and revenue stream for us.
Do you have the right to do that and sort of right of first refusal on that business or?
It really depends on what the business is. I think what we really have, particularly on the pre-construction side, is superior knowledge about our assets than anybody else could have. Because that side of the business is more about what's on the asset already and what structure you have to put around it to add any antennas and then what permitting and zoning to do, and we already have the structure in place, we generally are better equipped or better positioned to get that business than other competitors. On the construction side, it's a little bit more competitive because it doesn't have the same knowledge necessity, knowledge-based necessity, which is part of the reason that the gross margin percentages are lower.
Okay. help me think about how fiber and the small cell and tower businesses sort of work together. Is towers and small cells, do you go hand in hand with a team to a customer? Does the customer buy your small cells because of your fiber and your towers, or how do we think about that?
Yeah. The first thing I would say is that their towers and small cells are driven by the same underlying business characteristics. Similar customer base of the wireless carriers, similar underlying demand driver, which is wireless demand in the U.S., similar contract structures. Although small cells have about 1.5% escalators as opposed to 3% on the tower side. It's a very similar business, doing this a very similar thing, which is just putting a vertical piece of infrastructure in place where an antenna can go at height to be able to deliver wireless signals to your phone. The way our customer buys is really dictated by our customer.
There are very many times where we go in with a consolidated offering of towers and small cells and fiber all together to a customer and pre-present that as an offering to our customer to say, "In this area, you need network coverage. We can help you no matter what you do, and how can we do so?" There's sometimes our customers are broken out a little bit more, where they have a tower team and a small cell team that look at things differently. It really depends on how our customer wants to buy as opposed to how we want to sell. Generally speaking, it isn't that we get small cells because we have towers. That is not what happens. I would say what happens more is we're able to have a conversation with our customer that's more solution-based than product-based.
Instead of a customer coming to us and saying, "Hey, we need a tower," and we say, "We either have it or we don't," they can come to us and say, "Hey, we need this coverage area." We can say, "How do you want to do so?" We can put together a package. That solution-based selling is, I think we all can agree, is generally more effective than just going to somebody and saying, "Which tower of ours do you want?" Having that deeper relationship and understanding what our customer needs are at a deeper level because we have different levels or different ways to address their network needs, I think does lead to better relationships and ultimately more revenue for us.
I would not say that you have to be a tower company to be a small cell company, nor do you have to be a small cell company to be a tower company. We do believe there are synergies between the two, and we have noticed and seen how those come to bear because we have negotiated very similarly at times. The one aspect of our business I didn't address in that is fiber. The way the network is structured is that the wireless signal goes from the antenna to your phone and back to the antenna. Once it hits the antenna, it turns into some sort of signal that then gets transported by fiber. In our small cell business, that small cell requires strands of fiber to the small cell.
We own that, those strands of fiber because that's actually the shared asset that we're talking about, because most of the capital of building small cells is in fiber. Whereas the tower becomes the shared asset, and anytime you can sell more revenue on that tower, you get better margins, better returns. On the small cell side, it's how much of that fiber run can you sell to get more small cells on it. Therefore, we own the fiber primarily because we have small cell business that requires fiber in order to operate effectively. Therefore, the fiber is part of small cells. As we own that fiber, we also want to add as much revenue to that fiber as we can, so we pass buildings.
We pass J.P. Morgan's offices, potentially, and we say, "Hey, we need to be providing data services, communication services to those offices, those enterprises." We do so that we can increase the revenue and increase the returns on the fiber we've already built for small cells. That synergy is really important because we wanna get as much return as we can, and we wanna be able to go to as many places as we can to make as much money as we can, and that is helped by having more revenue and more return from the fiber, the enterprise side of our fiber business. And all of that works together, and we have also seen that having that fiber has helped us with our tower customers, which was not really the thesis going in, but we knew it could happen.
That was evidenced by the agreement we reached with DISH, the same agreement we were talking about earlier on the tower side. It included fiber as well, which on what they were looking for was one contractor, one company to go out and say, "Okay, we wanna build out this network of towers. We want them connected by fiber, but we don't wanna go contract with this company for some towers, this other company for more towers, this company for fiber here, that company for fiber there." They gave us kind of a big package deal, and that was important to them more than it was to us.
We didn't go to them and say, "You have to package these." They wanted that fiber in the agreement overall because they thought it was an important aspect to which company would be able best to serve them as they built out their network.
Help me think about the pace of small cell growth. Last year, I think, was 5,000. This year, you've talked about 10,000 and I think alluded to a faster pace going forward. What should we think about the pace through this year and then exiting into next year?
The level set where we are, we have about 60,000 small cell nodes, which is the unit of measure we utilize, which is one customer deploying one signal through our small cell. We have 60,000 on air and 60,000 that are in our pipeline having been contracted, but not yet built. Last year, we put 5,000 small cell nodes on air. In 2023, we anticipate that we'll put 10,000 small cell nodes on air, obviously a doubling between those two. In 2024 and beyond, we believe we will put more than that on air and grow our business more because it's based...
That deployment profile is based on basically two large contracts that we signed over the last couple years, one with Verizon for 15,000 small cell nodes and one with T-Mobile for 35,000 small cell nodes. That's 50,000 of the 60,000 backlog I just spoke of. This majority of what we have or what we're building are for T-Mobile and Verizon. Most of Verizon's is anchor build, new small cell systems that are being built, and most of T-Mobile is co-location, which is putting small cells on networks we've already built. A second tenant, the same equivalent of what putting a second tenant on a tower would do. As we are building out, the pace is really dictated by how quickly our customers want those small cells to be on air.
We're going from 5,000 to 10,000 because our customers are going faster. There is some requirement for them to move, and we believe that they will need more and more as we go forward, and therefore we will build more and more in 2024 and 2025. Obviously, again, we'll give more detail on that when we give guidance in October, but that's the pace that we're looking at. It's been an acceleration over time because the 60,000 nodes we have on backlog obviously are equal to the number of nodes we have built to date. That's a pretty substantial increase in the pace at which we're deploying small cells. We've been in the business for a decade or so.
We put 60,000 on air over that decade. Now we have 60,000 in our backlog over the course of a couple years that will be built out over the course of several years. That's a significant uptick in the number of small cells being built by us in the U.S., which we think is reflective of the requirement that our customers see to densify the network like we were talking about earlier, because the data demand is coming quickly to them, and they need a way to satisfy that demand with new sites. The only way to do so is through small cells. The premise of our investment in small cells is coming true, and we're seeing that acceleration over time.
How should we think about the mix this year of overlay versus new sites and then maybe going forward? I didn't realize that Verizon was mostly new sites and T-Mobile was mostly overlay. Obviously, the dominant portion is overlay.
Yeah.
on the two.
I think what we've said about this year is that, it's a pretty even split between co-location and anchor builds. Going forward, again, we'll give more detail to that, but you can look at the backlog and say, of that 50,000, most of the Verizon is anchor build and most of the T-Mobile is co-location. You can kinda do some rough math around that and see what the generally is in our backlog. What we're excited about that is that co-location does come with significantly less capital intensity. You would imagine that moving from 5,000 small cells being built in 2022 into 10,000 being built in 2023, that there would be an increase in capital.
For a doubling of the small cell node count, we're increasing capital around 12%, which means we're having a significantly lower capital intensity going into 2023 than we did in 2022, precisely because we have this pretty substantial number of co-location nodes being built in 2023. Which is just a somewhat of a proof point of one of our thesis, of our overall thesis in small cells, that it follows a very similar pattern as to what towers does, which is you put the first customer on air. That first customer does not pay for your costs and your cost of capital for having spent the capital.
The second customer can and gets you closer in the tower business, but we believe we can make a return with the second customer in the small cell business. We're seeing that come true right now with that lower capital intensity coming through our numbers for 2023. What we believe will happen over time is, we'll continue to have some amount of co-location and some amount of anchor build that will kind of mix with each other. I don't think you'll see a substantial increase in yield all of a sudden because all of it's gonna turn to co-location. At least we're having some reasonable mix between the two that we think evens out our returns. On the anchor build side, when we build a new small cell system, it's.
The returns are about 6%-7% on a gross margin basis, so yearly gross margin divided by the capital. The second tenant, when we add another customer to that same small cell system, we get to low double digits. When we add a third, it gets to mid to high teens digits, returns. Those are really solid returns based against our cost of capital. What we're seeing is with the move into co-location that we see with a lot of the T-Mobile nodes, we're actually coming up with examples of how that's coming true, and it's showing up, and our yield does tick up a little bit, but then it's brought back down as we build the anchor sites.
Is it fair to think that the anchor mix would go up next year, given sort of Verizon's focus on expansion?
Yeah, we're gonna have to see how it comes out. That's something we'll give more in October because it's hard to tell. It this, building a small cell takes us and our customers working together to site each of those small cells and then go build them. When that happens versus when that might happen for other customers and how that lays out between co-location and anchor build happens much closer to when we give guidance. It's not, it's not as clear right now.
Okay. Let's finish up on the balance sheet and AFFO. You know, you've guided to AFFO per share growth of 78% over time, but you noted on the earnings call there would be minimal dividend growth in 2024 and 2025. Just remind everybody how we should think about AFFO and dividend growth over the next sort of three years.
We size our dividend to the cash flow generation of our business and then fund any discretionary capital, including the build of small cells with external capital predominantly has been debt capital because our incremental EBITDA provides leverage capacity that then pays for the CapEx. We take the cash flow of the business and return it in the form of a dividend. Because of interest rate headwinds and then the Sprint churn, 2024 and 2025, 2024 interest rate headwinds and 2025 of the Sprint churn, in total, those two things add up to $350 million-$370 million of headwinds to our growth. Our dividend is $2.5 billion-$2.7 billion, our goal is to grow our dividend 7%-8% a year.
That $350 million-ish is about two years of growth. That's why we've said the dividend growth will be minimal even though the activity underlying our business continues to be at pace that would allow us to grow 7%-8%. We have two discrete events that are taking away from our growth, which leads us to have minimal dividend per share growth over the course of the next couple years. As we get to the backside over the Sprint churn in 2025, the $200 million I mentioned earlier, when we go into 2026 and beyond, we believe that we can return back to the 7%-8% growth that we had guided to previously.
Makes sense. A good place to leave it.
Okay.
Dan, thank you.
Thanks, Phil.
Thanks, everybody.