Crown Castle Inc. (NYSE:CCI) Q3 2023 Earnings Call Transcript

Crown Castle Inc. (NYSE:CCI) Q3 2023 Earnings Call Transcript October 19, 2023

Operator: Good morning and welcome to the Crown Castle Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, VP of Corporate Finance and Treasurer. Please go ahead.

Kris Hinson: Thank you, Kate, and good morning, everyone. Thank you for joining us today as we discuss our third quarter 2023 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 Investors section of our Web site at crowncastle.com that will be referenced 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 Factors sections of the company’s SEC filings.

Our statements are made as of today, October 19, 2023, 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 Investors section of the company’s Web site at crowncastle.com. With that, let me turn the call over to Jay.

Jay Brown: Thanks, Kris, and good morning, everyone. Thanks for joining us. Our third quarter results continue to demonstrate our ability to generate consistent growth in the face of changes in the industry environment, allowing us to maintain our full-year 2023 outlook for revenue, adjusted EBITDA, and AFFO. Based on the multi-year strength of our business model, we are confident in our ability to grow our dividend beyond 2025 once we get past the Sprint-related churn. Therefore, we are committed to maintaining our dividend in 2024 in the midst of the impact from the non-recurring Sprint Cancellations and lower contributions from services. Based on the timing of these headwinds, we expect the low point of AFFO to occur during first-half of 2024, before returning to growth in AFFO in the second-half of next year, and beyond.

Demand for our assets has consistently been driven by our customers investing in their networks to keep pace with the rapid growth in mobile data demand. Through our shared infrastructure model we have helped our customers maximize the benefits of their investment by lowering the cost of deploying networks, networks that have significantly improved our ability as consumers to connect with the people and the world around us. The combination of persistent data demand growth and our ability to provide low-cost shared infrastructure solutions has enabled resilient underlying growth for us throughout generational upgrades and across macroeconomic cycles. Our full-year 2024 outlook demonstrates the benefits of complementing our tower business with a leading portfolio of small cells and fiber.

As our customers increasingly focus on 5G network densification so that they can meet the needs of their end users, we expect the total demand for our diverse portfolio of assets to increase. For towers, we expect to generate organic revenue growth of 4.5% in 2024. For small cells, we expect to generate organic growth of 13% driven by around $60 million of core leasing activity as we increase new nodes, from 10,000 in 2023, to 14,000 in 2024. And for fiber solutions, we expect continued acceleration of leasing activity combined with lower churn to generate organic growth of 3%. Excluding the impact of Sprint Cancellations, the combination of organic revenue growth across our business is expected to generate consolidated organic growth of 5% in 2024, up from 4% in 2023.

While our growth remains robust, we know we need to continue to get better. Therefore, we continue to simply, streamline, and centralize our business processes and operations, which will reduce our long-term costs and improve our customer experience. Since announcing the restructuring plan, in July, we have reduced our workforce and achieved $105 million of annual run rate savings. Having completed that plan, we have identified additional opportunities to drive further efficiencies, including a plan to move approximately 1,000 employee positions from several locations nationwide to a centralized location by the end of the third quarter, 2024. The strong organic growth and improved operating leverage from the actions we continue to take to reduce costs supports our maintaining our current annualized dividend of $6.26 per share.

As reflected in our results and outlook, our differentiated strategy to invest in and build an unmatched portfolio of assets diversifies our sources of growth. Our 40,000 towers, 115,000 small cells on air and under contract, and 85,000 route miles of fiber concentrated in the top U.S. markets make us well-positioned to capitalize on long-term growth in data demand regardless of how carriers deploy spectrum and densify their networks. At the beginning of 5G, our customers moved quickly to deploy record amounts of newly acquired spectrum. This drove record tower activity levels. As this initial surge in tower activity ended, our small cell growth is accelerating as customers shift focus to densifying portions of their networks that have experienced the most traffic.

In 2024, we expect to deploy a record 14,000 small cell nodes. Our ability to capture the accelerating growth in small cell demand is driven by the assets and core capabilities that we have built as the largest operator of shared infrastructure in the United States. Our 85,000 route miles of fiber include high strand counts in heavily populated areas where the density of demand is the highest, which makes them the most desirable locations for small cell deployments. We are a highly reliable operator of that fiber network. If fiber goes offline, small cells go offline. And for our wireless customers, network quality and reliability are paramount. We have a world-class team of network operators and engineers that ensures our network is designed to mitigate the impact of any outage, and is capable of fixing these outages quickly and efficiently.

We have also developed expertise in navigating the permitting processes with multiple municipal organizations, regulatory agencies and utility companies across hundreds of disparate local markets, each with a unique set of regulations and stakeholders. This expertise allows us to navigate the difficult process of building small cells in the markets across the United States. Finally, we are consistently finding ways to build small cells and fiber more efficiently. These efficiencies allow us to provide the most cost-effective and reliable network solutions for customers. We look to deliver the highest risk-adjusted returns for our shareholders through continuously building on the core capabilities that I just mentioned that generate unique value in the businesses we own and operate.

These capabilities reduce the overall cost of deploying and operating communications networks, which becomes even more compelling for our customers in times of increasing capital costs. Of course, higher capital cost impact us as well. Our disciplined approach to capital allocation means that as our cost of capital increases, so must the returns we require from our investments. We are continuously evaluating the expected returns of all of our investments against the rising cost of capital and other potential investment opportunities, including repurchasing our own shares. Consequently, we allocate capital to whatever we believe will generate the highest long-term returns. Being disciplined allocators of capital means that we appropriately adjust the scale and economics of our investments based on changes in technology, customers, and macroeconomic conditions.

It doesn’t mean that we stop investing. We apply a consistent, rigorous approach to pursue opportunities that generate superior expected returns for their given level of risk. Long-term value is created when we invest in those opportunities. We have a long history of success in towers built on investing through various macroeconomic cycles. And we believe the small cell business is another great example of how we can build a business where our unique capabilities drive sustainable advantages that can grow significant long-term value. In 2024, we plan to capitalize on these opportunities, resulting in approximately $1.2 billion in discretionary capital expenditures net of customer contributions, with $1.1 billion in our fiber segment. This capital is supporting the acceleration of expected 10,000 nodes in 2023, and 14,000 nodes in 2024, reflecting a 40% increase in new nodes with only a 20% increase in capital as we expect more than 50% of the nodes to be colocation nodes.

Importantly, we expect to fund this with discretionary CapEx in 2024 without issuing equity. Compared to 2022, this means that we expect nodes deployed in 2024 will be up three times while fiber CapEx is only up 30%. Again, reflecting increasing colocation on our existing assets. The colocation and increasing yields on multi-tenant system continue to be similar to the development of the tower business over the last 25 years. There is one more item I wanted to discuss. As you saw on the release, Dan will be departing Crown Castle next March. While he is not leaving for another five plus months, I wanted to take the opportunity to thank him for the contributions that he has made to the company over the last seven years. He has been integral to the growth of our business and strategy.

We are benefiting from the work he has led to increase the duration and predictability of our balance sheet. And he has developed a strong finance team. We will wish him all the best in his next endeavors. We have begun a search to find his replacement and will be considering both internal and external candidates. As a wrap up, we believe the low point for AFFO will be in the first-half of 2024 as we work through the non-recurring Sprint Cancellations and the services headwinds that I mentioned earlier. The consistent growth of each of our lines of business driven by persistent growth in data demand, gives us confidence in our ability to fund our CapEx budget in 2024, without issuing equity to maintain our current dividend in 2024 and to pursue sustainable dividend growth beyond 2025.

And with that, let me turn the call over to Dan.

Dan Schlanger: Good morning, everyone, and thanks for the kind words, Jay. I just wanted to start by saying how grateful I am for having the opportunity to work at Crown Castle last seven years. It’s a great company. And I continue to strongly believe it is pursuing a strategy that will generate significant value for shareholders. As a large release for me shareholder, I am excited to see that strategy play out over the next several years and look forward to the company’s continued success. Turning to the results, our third quarter was in line with expectations and demonstrated the resiliency of our business. With our customer transitioning beyond the initial surge in 5G deployments, we were able to deliver 4% consolidated organic growth in the quarter, including nearly 4.5% organic growth in towers and accelerating growth in small cells and fiber solutions.

Following third quarter results, we updated our outlook for 2023 to reflect the impact on our expected net income of approximately $110 million of charges related to our restructuring plans announced in July as well as a $100 million reduction in tower CapEx. All other items remain unchanged as shown on Page 5. Moving to our 2024 outlook, there are three significant issues that are negatively impacting our results. First, the $165 million of Sprint Cancellation payments we have received in 2023 will not occur in 2024. Second, we will see a combined $240 million reduction to our straight-lined adjustment and amortization of prepaid rent. Both of which are non-cash items. And lastly, a combination of existing the construction services business in lower tower activity levels causes a reduction of approximately $55 million in our services gross margin.

Due to these impacts, our 2024 outlook shows year-over-year decline in site rental revenues of $140 million, adjusted EBITDA of $260 million and AFFO of $275 million. Excluding these headwinds, a strong organic growth across each of our businesses contributes $220 million to 2024 adjusted EBITDA, resulting in $65 million AFFO growth. Turning to Page 6, looking ahead we expect attractive revenue growth trends to continue with consolidated organic growth accelerated from 4% in 2023 to 5% in 2024, as we are seeing an increase in demand for our small cell and fiber assets. Contributing to our organic growth is $305 million to $335 million of core leasing. An increase of $30 million at the midpoint compared to full-year 2023. Our 2024 consolidated core leasing of $320 million at the midpoint includes a $110 million from towers compared to a $130 million in 2023; $60 million in small cell compared to $35 million in 2023 and $150 million in fiber solutions compared to a $125 in 2023.

This year-over-year increase in core leasing results in an increase in Organic Contribution to site rental billings excluding the impact of Sprint Cancellations of $265 million at the midpoint or 5% which includes 4.5% from towers, 13% from small cells and a return to 3% growth in fiber solutions. The organic growth is offset at site rental revenues by the non-cash decreases and impact of the Sprint Cancellations I referenced earlier along with an additional $10 million of Sprint Cancellation related small cell churn. This is primarily related to approximately 5,000 nodes that were terminated midway through 2023, which creates a rollover effect in 2024. Turning to page seven, we are delivering this increase in organic contribution to site rental billings with a limited increase in expenses of only 2% or $45 million at the midpoint, which benefits from $35 million of savings related to the restructuring we announced in July, when combining this $35 million of expense reduction in 2024 with the $30 million we expected to achieve in 2023 and $40 million of cost savings embedded in the 2024 change in service margin.

The total annual run rate savings of our restructuring program is expected to be a $105 million. Inclusive of the $40 million decrease in cost and the impact from exiting the installation services business, we expect services margin to be $65 million to $95 million in 2024. Margins as a percentage of revenue in our services business are expected to improve from approximately 25% in the third quarter of 2023 to nearly 50% by the end of 2024 as we phase out installation services activity and benefit from our cost reduction initiatives. Moving to interest expense, we expect an increase of approximately $105 million at the midpoint as we fund our 2024 investments with incremental debt. When forecasting interest expense, we assume a cost of borrowing implied by the current rate environment slightly above 6% to fund our 2024 capital requirements.

Our 2024 AFFO growth, excluding the impact of the Sprint Cancellations and outsize non-cash movement, which more closely reflects the underlying growth of the business is expected to be $40 million to $90 million. With contracted long-term tower leasing agreements, a backlog of 60,000 small cell nodes and a largely fixed cost structure. We have visibility into this underlying growth continuing over a multi-year period providing a solid foundation both for our current dividend and for our expectation of returning to sustainable dividend growth after 2025. As our wireless customers increasingly expand their 5G network investment focus to include both coverage and densification, we are seeing a growing number of value creating investment opportunities.

And as Jay already mentioned, our 2024 discretionary capital program is $1.5 billion to $1.6 billion or $1.1 billion to $1.2 billion net of $430 million of prepaid rent received. Importantly, we believe we can fund these investments without issuing equity in 2024. We recognize the collective impact of the reduction in non-cash items and the Sprint Cancellation payments not recurring in 2024. Results in our leverage ratio exceeding our target of five times net debt to EBITDA. However, we expect our durable cash flow growth to organically reduce our net debt to adjusted EBITDA ratio over time to levels in line with our investment grade credit profile as we have seen our business do on multiple occasions through our investment grade history. Since transitioning to investment grade in 2015, we have intentionally strengthened our balance sheet to mitigate risk by extending our weighted average maturity from five years to eight years, decreasing the percentage of secured debt from 47% to 7% and increasing the percentage of fixed rate debt from 68% to 86%.

Further, we ended the quarter with approximately $5 billion of availability under our revolving credit facility and only $750 million dollars of debt maturities occurring through 2024, providing us with ample liquidity to fund our business for their foreseeable future. To wrap up, the underlying growth of the business remains solid and the contracted agreements we have in place provide line-of-sight into continued underlying growth over a multi-year period. We believe this growth provides a stable foundation for our current dividend and the ability to continue to pursue our value creating investments in 2024 without issuing equity. Longer term, our unparalleled domestic portfolio of tower, small cell, and fiber assets provides unique access to a growing number of opportunities with superior risk-adjusted returns, which we believe will create value for our shareholders and increase our long-term total shareholder return.

With that, Kate, I’d like to open the call to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question is from Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery: Great, thank you, and good morning. And Dan, all the best for the future, it would be great working with you. And I guess you’ve got one more call with us. Perhaps we could start just talking about leasing activity and the guidance expectations. It seems it’s a pretty tricky year. I know you always guide before your peers, but we’ve got a lot of moving parts with the 5G CapEx cycle winding down here. So, could you just characterize when you set your guidance for next year, particularly on towers, how you characterize the current activity and the expectations for next year in terms of what we expect to see from the major carriers and from the likes of DISH. Is there less visibility, say, than in prior years, and has that caused you to perhaps just be somewhat conservative?

And then you talked about the leverage being above trend. Are any ability to sell assets, anything that you might be looking on the strategic side, and also any opportunities on the M&A side given some of the strategic moves by some wireless carriers out there? Thank you.

Jay Brown: Sure. Good morning, Simon. On your first question around leasing activity, the tower guide for 2024 assumes a similar level of activity to what we’ve seen in the second-half of 2023, so underlying our view is, basically, a consistent level of activity as the surge, the initial activity from 5G came to an end during the first-half of the year. We saw the level of activity stabilize, and we think that carries into calendar year ’24. I think we have good visibility around that. Much of the work, given the nature of the business, we go into the year with a significant portion of that revenue already contracted, and we have good visibility as to when we think it will actually come online. So, I would characterize our visibility from a reported results standpoint, pretty similar to what we’ve seen historically.

And feel like that level of activity is sustainable over the long-term as the carriers continue to upgrade the sites that they’re already on with 5G equipment and as well as densify the network using towers that they’re not currently on. As I noted in my comments, we think that we will see and have seen a shift and a focus from the carriers as they start to use small cells to a greater degree to densify their network. So, our view is based on a pretty holistic view of the way the carriers are thinking about their networks as we wrap up 2023, and get into 2024, and feel good about the organic growth that we’re showing in both segments there related to the wireless carriers. On the second question on the leverage trend, as Dan mentioned in his comments, obviously with some of the headwinds that we talked about in our comment, it’s going to cause to leverage to tick up a bit.

That’s happened in the past, and we would expect, over time, that we’ll see good growth in the business that will allow us to de-lever back down and get back at levels that — or where our target would be. So, the headwinds will create some uplift around that leverage ratio. And then, we think, over time, we’ll be able to bring it back down in line. On the last part of your question around ways to manage the business, and M&A, and other things, I don’t think there’s anything specific that I would comment on. But just generally the way we think about running our business, is there are three ways that we view we can create long-term shareholder value. The first way is to add additional revenue to the assets that we own. That organic growth comes at great incremental return.

And the second way is we can invest in more assets that would extend — we believe would extend the runway of growth into the future. And then, the third way is to lower the cost of capital. We think all three of those are ways of driving long-term shareholder value. And we are constantly working on all three of those. What’s unique about the current environment that we’re in is that, often times in periods of disruption, more opportunities arise. And I made reference to that in terms of the capital costs of our customers can create opportunities for us to invest capital that can drive returns over the long-term. That also happens sometimes around the way assets are priced. And so, us being really thoughtful about how we can create value on those three fronts.

And we are always looking at those opportunities. And I would say, in periods of disruption, our experience has been that, often times, there are some pretty unique opportunities that arise. And so, we’ll continue to work on all three, growing the revenues on the existing assets, looking for opportunities for new assets, and then trying to find ways to lower our cost of capital.

Simon Flannery: Great, thanks a lot.

Jay Brown: You bet.

Operator: The next question is from Michael Rollins of Citi. Please go ahead.

Michael Rollins: Thanks and good morning. I also want to send my best wishes to Dan as well. Two questions, if I could, today. The first one is, as you’re just describing returns, curious if you can give us an update on how the returns for small cell, as the growth is now accelerating, how those returns are pacing versus your expectation, and if you’re seeing any difference in pricing on a per-node basis relative to the current portfolio? And then just drilling down into the earlier question on assets, do you have a significant amount of non-core assets or non-core ground leases? And can you possibly unpack the size, if you have any of that, given the recent press reports?

Jay Brown: Sure. On the first question, around returns of small cells, we continue to see really attractive returns in our small cell business. And the amount of co-location that we’re seeing, both in 2023 and 2024, and the economics of those incremental adds well in excess of 20% is encouraging. As we have seen systems develop, we continue to be initial returns going to that second tenant, we get into the low double-digit returns. And as we get to the third tenant, we’re high teens, low-20% from a systems standpoint. Given the quantity of nodes that I talked about in my comments, both that we’re seeing in 2023 as well as when we go into ’24, and half of those nodes being co-location, we’re seeing the multi-tenant systems track those expected returns.

And so, feel really good about where they will start going. As we think about pricing, we have always priced the business based — focused on returns. So, there’s not a — unlike towers where there’s more of a national pricing across assets, small cells is different. So, small cells is priced based on the required returns based on the cost to build systems. And so, in areas where the costs are higher, the pricing follows. And that has had some uplift in it as a result of some of the inflationary pressures that have been in the environment. And so, that does affect the pricing, and we’re able to lift pricing associated with that in order to maintain and grow the returns associated with the system. And so, we’ve seen the business develop as we would have expected.