Crown Castle Small Cell and Tower Update- 2ndQ 2016

New replacement pole small cell
New replacement pole small cell

While the call itself was pretty understated as compared to even other CCI calls, it was in the Q&A where the call got interesting.  Here is what we took from the call.

TOWERS:  ($115M organic revenue growth in 2nd Quarter)

New Builds:  In regards to new builds, CCI is not building many new towers- only 50 of them in the last quarter.  They don’t say it, but we believe that the majority of those towers are replacements of their existing towers where the underlying landowner wasn’t willing to extend the underlying tower ground lease at a fair market value rent.   Crown doesn’t expect this slow pace to change, noting specifically that there are a number of new tower company entrants or established mid-tier tower companies that will do non-sensible build-to-suit deals in order to establish market share.

Collocations:  It appears that Crown had a limited number of new collocations and that the primary justification for revenue growth was from modification work on existing towers.   Crown expects that 2017 will be similar to 2016 but that 2018 may see some increase in terms of new colos as FirstNet and possible other holders (hoarders) of spectrum who haven’t built anything out may seek to start building.  (DISH)  Personally, I believe this is optimistic.

Ground Lease Buyouts/Extensions:  Crown Castle closed about $19M in land purchases during the 2nd quarter.   This represents about 75-100 leases that were purchased.  Crown now controls over 80% of their “Site rental gross margin” for more than 20 years.   We would be curious about how many actual leases as a percentage of ground leases that represents- as most of their single tenant towers have little to no margin.

AT&T and T-Mobile “Noise about Possible Relocation”:  Unsurprisingly, Crown was pretty vocal in response to concerns by analysts about AT&T’s RFP to move colos off expensive CCI or other tower company sites.   They suggest that the return on investment to the carriers to move (2.5% to 3%) isn’t justified.  I believe that CCI’s numbers are optimistic but that relocation isn’t justified except in rare circumstances.  (High colo rent in rural areas with low barriers to entry for new towers or relocation to another similar existing tower nearby that isn’t owned by the Big 3 tower companies)  We regularly do our own internal analysis of when relocation is justified for our clients who are considering lease extensions of CCI or AMT expiring ground leases and the results rarely justify relocation.   On a macro-economic basis, relocation of existing collocations really doesn’t make sense.  On a site specific basis, it can.   If you need help evaluating a threat to relocate your tower please reach out to us.

SMALL CELLS:  ($55M in organic growth in 2nd Quarter)

New Site/Collocation Ratio:  Crown is experiencing 30% collocation and 70% new system builds for their small cell buildouts.   The collocation number includes both additional nodes within existing small cell fiber routes and “laterals” that stretch from the existing routes.   We believe that there should be more visibility provided to what percentage of “collocations” require new laterals as opposed to those that just require addition of the specific node to an existing fiber route.

Location/Difficulty:  Crown clarified that 90% of their revenue is from the top 10-15 markets in the US.  Only 2% comes from valuable locations outside those markets- which consist primarily of individual venues.  The vast majority of these builds are capacity builds, not coverage although there are some coverage builds in hard to zone neighborhoods, such as the Denver example they held out earlier this year that we questioned was representative of their typical small cell build.  This is as to be expected given the location of the Sunesys fiber routes.  Crown alleges that it takes between 18-24 months to procure permits and authorization to build new small cells.   They don’t clarify if they mean locations where there is not existing Crown owned fiber or not.   We assume the latter.   This doesn’t match what Mobilitie is claiming- they are indicating that they are ahead of schedule with their permitting and acquisition of small cells with the exception of some difficult markets.  (We suspect otherwise.)   Crown directly addresses that other companies don’t have the RF design experience and/or operational experience necessary to compete with Crown’s depth.

Competitors in Small Cells:  Interestingly, one of the questions from the analysts was about rumors that the analysts had heard that some of the wireless carriers were in discussions directly with metro fiber providers to attach small cells directly to those provider’s fiber rings.   CCI claims that this hasn’t impact their returns yet, but that doesn’t mean anything given that it is still too early to see whether metro fiber providers and the above referenced carriers will choose competitive locations in the same area as Crown’s fiber routes or whether they will collocate on the same route.   I anticipate that the answer will be contingent upon pricing and available assets.   This is a material question that bears further investigation and clarification from Crown- especially since as they admit in their earnings call they see 20% margins on their third tenant on a fiber route.   Given that Sprint is solely focused on using Mobilitie for the time being, that means that Crown has to get all three remaining carriers (AT&T, VzW, and T-Mobile) in order to see the expected returns.

Crown anticipates that 50% of small cells currently are self-built by the carriers, while 50% are built by third party companies like Crown.  We don’t know whether Crown infers that Mobilitie/Sprint is self-built or third party built.  If the latter, Crown’s share of the 50% that are third party builds outside of Mobilitie/Sprint should be fairly high.

Capital Reimbursement:  Crown indicated in the call that they have paid approximately $3B in capex towards their small cell systems.  ($1B of which was for Sunesys) Of the remaining, $2B, it appears that Crown has collected $500M of that capex from the carriers in the form of prepaid rent.

 

Comments

  1. says

    Regarding New Builds, these non-sensible build-to-suit deals CCI mentions are surely a function of the sometimes hefty (20X), sometimes ridiculous (30X+) EBITDA multiples that tower portfolios get bought at, meaning this kind of premium invites a lot of opportunistic capital, pushing the yield down. CCI itself is not totally without blame in this.
    It also seems, that several mid-tier tower company management teams are going for a round 2 after successful exits in round 1. This time probably much better incentivized. Nothing wrong with it per se, just seems the field is getting a bit crowded for decent returns.

    Regarding small cells, maybe I’m missing something, but I really dont see how this is the new “thing” in town to milk for growth long term. Macro was always more about steel and zoning and laying cables that takes a lot of time and resources, but once you incur the sunk cost, it keeps on earning, whereas small cells seem to be all about fast perishing equipment (and maybe urban fiber, which – granted – is an important asset to hold). It’s difficult to see a business model with long term enviable margins in a field where the equipment gets old fast and “zoning” takes about 2 hours, that is, meeting with the venue’s manager. Or at most – bulk zoning, when talking about utility poles. Again, maybe i’m wrong, but seems like the moment the carriers start to feel they’re being robbed, they can walk (just build it out themselves, if the ROIC justifies it, when compared to CCI terms). This has all the marks of becoming a low margin business in about 5 years, when it matures enough to run the numbers.

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