Crown Castle Inc. (NYSE:CCI) Q4 2022 Earnings Call Transcript

Crown Castle Inc. (NYSE:CCI) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good morning and welcome to the Crown Castle Fourth Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ben Lowe, Senior Vice President. Please go ahead.

Ben Lowe: Thank you, Kate and good morning everyone. Thank you for joining us today as we discuss our fourth quarter 2022 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 website 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 the 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, January 26, 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 website at crowncastle.com. So with that, let me turn the call over to Jay.

Jay Brown: Thanks, Ben and thank you everyone for joining us on the call this morning. As you saw from our results, 2022 was another successful year for Crown Castle and the positive trends across our business remain intact. With fourth quarter 2022 results coming in as we expected and no changes to our 2023 outlook, I plan to keep my prepared remarks brief before handing it over to Dan to talk through the numbers in a bit more detail. As I reflect on 2022, I am proud of what our team accomplished. We led the industry again with nearly 6.5% organic tower revenue growth as our customers upgraded existing tower sites with additional spectrum and added equipment to thousands of tower sites they were not previously on to support nationwide deployment of 5G.

And we deployed 5,000 small cells to support initial network densification efforts while growing our fiber solutions revenue by 2%. The positive operating trends in 2022 exceeded our initial expectations for the year and offset the impact of the rapid increase in interest rates, demonstrating the resilience of our business model and strategy. As a result, we were able to deliver strong bottom line growth that supported more than 9% dividend per share growth. As we discussed when we initially provided guidance in October, we believe that a positive operating momentum will carry into 2023, driving another year of expected strong growth with 5% organic growth in towers and a doubling of our small cell deployments to 10,000 nodes. With respect to tower leasing trends, the established national wireless operators are deploying mid-band spectrum in earnest as a part of the initial phase of their 5G build-out.

To-date, only about half of our sites across our top three customers have been upgraded with mid-band spectrum, providing a significant opportunity for additional revenue growth as additional sites are upgraded over time before their focus will likely shift to more infill with new co-locations. Adding to the substantial long-term growth opportunity, we continue to support DISH with their nationwide build-out of a new wireless network. And I believe we are in a great position to continue to capture an outsized share of that opportunity. Turning to small cells, we expect to double the rate of small cell deployments this year to 10,000 nodes with over half co-located on existing fiber to meet the growing demand from our customers as 5G networks will require small cells at scale.

With approximately 60,000 nodes on air and another 60,000 contracted in our backlog, I believe 2023 will represent the first year in a sustained acceleration of growth for our small cell business. We also continue to see opportunities to add to the returns we are generating from small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth and we expect to return to 3% growth as we exit 2023. Looking at the bigger picture beyond this year and why I am so excited about our growth opportunity, we are still in the early innings with 5G as the industry is only a couple of years into what we expect will be a decade-long growth opportunity. Our customers are seeing significantly higher levels of monthly data consumption as consumers upgrade to 5G, providing the need for significant network investment for years to come to keep pace with this persistent growth in mobile data demand.

As we have seen in our industry throughout its history, generational upgrades to the wireless network occur in phases with an initial push to provide nationwide coverage followed by periods of continued network augmentation and densification that has led to long periods of sustained growth. We believe we are in the initial phase of the 5G build-out with many phases to follow over the coming years. Consistent with their past practice, we believe our customers will first deploy their spectrum on the majority of their existing sites as they are currently doing before shifting their focus to cell site densification to get the most out of their spectrum assets by reusing it over shorter and shorter distances. The nature of wireless networks requires that cell site densification will continue as the density of data demand grows and we expect 5G densification to require both towers and small cells at scale to fill in the network.

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With that view in mind, we have invested more than $40 billion of capital to-date in towers and more recently, small cells and fiber that are mission-critical for wireless networks to capture as much of this growth opportunity as possible. Importantly, we are already generating a 10% return on our total invested capital with the opportunity to increase that return over time as we add customers to our tower and fiber assets and grow our cash flow. As a result, I believe Crown Castle is an excellent investment that will generate compelling returns by providing investors with access to the most exposure to the development of next-generation networks in the U.S. with our comprehensive offering of towers, small cells and fiber, providing the opportunity to benefit from the best growth and lowest risk market, an attractive total return profile with a current yield of 4% and a long-term annual dividend per share growth target of 7% to 8% and the development of attractive new assets that we believe will extend our runway of growth and create shareholder value.

And with that, I will turn the call over to Dan.

Dan Schlanger: Thanks, Jay and good morning everyone. We generated another year of solid growth in 2022 and we expect the strong operating trends across our business to continue as we see a long runway of 5G investment in the U.S. The elevated leasing activity across our customers contributed to another year of industry leading tower revenue growth in 2022 of nearly 6.5% and to 9% growth in our annual dividends per share. Before discussing the 2022 results and 2023 outlook, I want to draw your attention to some enhancements we made this quarter to the disclosure in our supplemental information package. In response to feedback we have heard from our investors, we provided organic billings growth detail by line of business for towers, small cells and fiber solutions to help investors better understand the composition of organic growth trends.

This enhanced disclosure includes historical organic growth information going back to 2019. In addition to expanding our disclosure, we also reorganized the supplemental information package, in many cases, by line of business to make it easier for readers to follow. We hope you find this additional information and the new layout to be helpful. Now turning to the full year 2022 financial results on Slide 4 of our earnings presentation, site rental revenues increased 10%, adjusted EBITDA growth was 14% and AFFO increased by 6% for the year. The 10% growth in site rental revenues included 5% growth in organic contribution to site rental billings, consisting of nearly 6.5% growth from towers, more than 5% growth in small cells and 2% growth in fiber solutions.

Turning to Page 5, our full year 2023 outlook remains unchanged and includes site rental revenue growth of 4%, adjusted EBITDA growth of 3% and AFFO growth of 4%. We also expect organic billings growth of approximately 4% when adjusted for the impact of the previously disclosed Sprint cancellations. The 4% consolidated organic growth consists of 5% growth in towers, 8% growth in small cells and flat revenue in fiber solutions. As we discussed last quarter, we expect the rationalization of a portion of Sprint’s legacy network to result in some movements in our financial results that are not typical for our business. Our expectations for non-renewals and accelerated payments associated with this network rationalization activity are unchanged with approximately $30 million of new non-renewals and $160 million to $170 million of accelerated payments during 2023.

We expect the majority of the non-renewals to occur in the first quarter and therefore impact year-over-year billings growth in each quarter this year. We expect the accelerated payments associated with this decommissioning activity and related services work to be concentrated in the second quarter. As a result, we expect the second quarter to represent the high watermark for adjusted EBITDA and AFFO in 2023. Turning to financing activities, we finished 2022 with leverage in line with our target of approximately 5x net debt to adjusted EBITDA. For full year 2023, our discretionary CapEx outlook is also unchanged with gross CapEx of $1.4 billion to $1.5 billion or approximately $1 billion net of expected prepaid rent. Based on our current backlog of small cells that includes a significant mix of co-location nodes, which have higher returns and require less capital relative to anchor builds, we expect to be able to finance our discretionary capital with debt while we are maintaining our investment grade credit profile.

Earlier this month, we added to our strong balance sheet position when we issued $1 billion in senior unsecured notes with a 5% coupon to term out borrowings under our revolving credit facility. Following this financing transaction, we have more than 85% fixed rate debt, a weighted average maturity of over 8 years, limited maturities through 2024 and approximately $5.5 billion in available liquidity under our revolving credit facility. So to wrap up, we are excited about the strength of our business and our ability to execute on our strategy to deliver the highest risk-adjusted returns for our shareholders by growing our dividend over the long-term and investing in assets that will help drive future growth. We have delivered 9% compound annual and dividend per share growth since we established our 7% to 8% dividend per share growth target in 2017.

And I believe that we are positioned well to return to 7% to 8% dividend per share growth as we move beyond the Sprint decommissioning impacts in 2025. With that, Kate, I’d like to open the call to questions.

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Q&A Session

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

Michael Rollins: Thanks and good morning. And also, I just want to say thank you for the additional disclosures. Very helpful. Two topics if I could. First, on small cells, if you €“ a little bit more color on the small cell leasing that you experienced during the fourth quarter? And then when you look at the backlog and consider the typical 18 to 36-month cycle that you described to install a small cell for your customers, what’s the opportunity to further accelerate that 10,000 deployment pace into €˜24 and 2025? Thanks.

Jay Brown: You bet. Good morning, Mike. Thanks for the comments. On the first question around leasing, as you noted and I made a mention of this in my prepared remarks, we did increase the total number of nodes on air and under contract by 5,000 during the fourth quarter. So we didn’t sign any large deals with customers, but this is just ongoing activity that represents additional commitment for nodes beyond the large commitments that we previously announced. And to my comments around cell site densification, we believe we are going to continue to see this throughout the 5G cycle of upgrades and deployments and beyond as the carriers move past touching the sites, the tower sites that they are on and starting to look at densification of their network.

And I think the activity that we saw in the fourth quarter is representative of exactly those longer term plans, which ties really closely to your second question around the backlog and the timeline. I think we see and have visibility to what they are going to need in their network, particularly in small cells, 24 to 36 months in advance of when these nodes will actually be put on air. And as I mentioned in my comments, we think the acceleration that we are seeing in 2023, doubling the number of nodes that we expect to put on air from 2022 to 10,000, we think that’s the start of an acceleration of growth and deployment of small cells. So I am not really ready to give guidance on how many we will put on in €˜24 and €˜25. But given the backlog and the timing, we do think this is the start of an acceleration of growth in that business.

Michael Rollins: Thanks.

Operator: The next question is from David Barden of Bank of America. Please go ahead.

David Barden: Hi, guys. Good morning. Thanks so much for taking the questions. I guess along related lines, so two questions on this small cell topic, I guess, Jay, one is you have got these large scale relationships on small cells and as you say, visibility on these next 2 to 3 years. There are some carriers that you don’t have these relationships with. And I was wondering if you could elaborate a little bit on why you think that is? Is that because counterparty plans aren’t as evolved? They might be like less evolved in terms of the total size of their network build and not ready for densification or is it the other way around, which is that they have chosen to go the self-perform route and is that impacting the market opportunity that you foresee?

I guess the second question would be related to with respect to what you do have in the backlog, how do we think about how you are budgeting for the upfront CapEx contribution portion of that? Is it a constant drumbeat that’s already known? Is it going to be on a case-by-case basis? Obviously, relevant to the cash flows and how we think about the runoff of prepaid rent amortization over the coming years? Thank you so much.