Crown Castle Inc (CCI) — Q1 2015 Earnings Call Transcript

Great. Thank you, Hannah, and good morning, everyone. Thank you for joining us today as we review our first quarter 2015 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer, and Jay Brown, 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, which we will refer to 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 Risk Factors section of the company's SEC filings. Our statements are made as of today, April 23, 2015, and we assume no obligations 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. With that, I'll turn the call over to Jay.

Thank you, Son, and good morning, everyone. We began 2015 on a strong note with an excellent first quarter. The US wireless carriers are actively investing to enhance their networks in response to rising consumer demand for wireless services. We anticipate robust leasing activity throughout 2015. As for our first-quarter results, site rental revenue increased by 3% year-over-year, rising from $747 million to $768 million. Organic site rental revenue grew by 5% year-over-year, driven by approximately 3% growth from cash escalations in tenant lease contracts and around 6% growth from new leasing activity, offset by approximately 4% from non-renewals. In the first quarter, adjusted EBITDA and AFFO surpassed the upper range of our earlier projections. Our earnings release from yesterday highlighted that this outperformance was influenced by the timing of two key items affecting our first-quarter results and second-quarter outlook. First, our network services gross margin was roughly $9 million better than anticipated for the quarter because services expected in the second quarter occurred in the first quarter instead. Second, our sustaining capital expenditures were approximately $6 million lower than forecasted. This amount is set to be invested in the remainder of 2015. Even without considering the timing benefits from these two items, adjusted EBITDA and AFFO would still align with or exceed the midpoint of our earlier first-quarter outlook. Regarding our investment activities, during the first quarter, we allocated $205 million in capital expenditures, which included $17 million in sustaining capital and $24 million in land acquisitions. We processed over 500 land transactions in the first quarter, with 20% being purchases and the remainder consisting of lease renewals. For the entirety of 2015, we are aiming for over 2000 land transactions. This proactive method of securing long-term rights to the land beneath our sites is fundamental to our business and crucial for controlling our largest operating expense while generating steady and increasing cash flow over time. Currently, about one-third of our site rental gross margin comes from towers on land we own, and around 70% from land we either own or lease for more than 20 years. This proportion rises to 90% when including ground leases with terms of 10 years or longer. Our average remaining term for ground leases is roughly 30 years. Further detailed information about the land interests underneath our towers is available in our supplemental information package on our website. Of our remaining capital investments, we committed $164 million towards revenue-generating capital expenditures, which includes $96 million on current sites and $68 million for constructing new sites, primarily focused on small cell networks. We have seen substantial growth in site rental revenues arising from small cells, exceeding 35% year-over-year. Presently, small cells account for 7% of our site rental revenue and gross margin. They offer a shareable model akin to towers, allowing wireless carriers to address network capacity challenges in areas where traditional macro tower sites may not be feasible or sufficient. Our small cell anchored investments typically yield an initial return of 6% to 8% and boast gross margins of 60% to 70%. With co-locations added from a second tenant on the initial fiber investment, we often observe additional margins of 80% to 90%, pushing internal rates of return above 20%. We see this investment in small cells as a natural extension of our core capabilities as the leading provider of US wireless infrastructure, leveraging our established relationships with wireless carriers. Much like towers, tenant leases for small cells are generally long-term, spanning 10 to 15 years with annual escalators. Based on signals and public statements from wireless carriers, we believe we are just at the beginning of small cell adoption and rollout. Following the pattern seen with towers in the late 1990s and early 2000s, we are focused on establishing small cell networks in prime US locations such as Manhattan, Washington DC, Southern California, and Chicago. As mobile data needs continue to rise, the demand for small cells will become increasingly apparent, as indicated by our expanding pipeline of over 2500 anchor builds and co-locations, which have been awarded to us but are not yet under construction. Since acquiring NextG in 2012, we have invested about $1.7 billion in small cells, achieving a current investment yield of 7%, including a $1 billion investment in NextG with an initial yield of around 4%. With our leadership position encompassing over 14,000 nodes operational or in construction, and 7000 miles of fiber, we are capturing new opportunities and enhancing yields on existing small cell network investments. Transitioning to our financing activities, in the last quarter, we distributed a common stock dividend of $0.82 per share, totaling $274 million. As of March 31, our total net debt to the last quarter's annualized adjusted EBITDA stands at 5.3 times. We aim to maintain a leverage ratio at five times as we focus on attaining an investment-grade credit rating. Our average cost of debt is currently 4.1% with an average maturity of six years. We are confident that our disciplined approach to leverage and capital management, alongside our dividend policy, will reduce our cost of capital over time. A key strategy for us is to lower this cost and, in turn, increase shareholder value through our substantial, growing annuity-like business. Looking ahead to the second quarter on slide six, we anticipate certain seasonal or timing effects will affect our outlook for site rental gross margin, adjusted EBITDA, and AFFO on a sequential basis. Repair and maintenance costs in the second quarter of 2015 are likely to be about $4 million higher than in the first quarter due to seasonal patterns consistent with previous years as the weather improves. As noted in our press release, any expected sequential changes in our outlook for network services gross margin and sustaining capital expenditures are also related to timing, with expectations remaining largely unchanged from our full-year 2015 outlook. For our full-year 2015 outlook on slide seven, we have raised the midpoint of our site rental revenue outlook by $7 million and increased AFFO by $3 million. This updated outlook reflects the strong performance in the first quarter while also accounting for the negative impact of lower foreign exchange rate assumptions regarding our operations in Australia, which we expect will affect site rental revenues and AFFO by about $8 million and $6 million, respectively. Given the favorable underlying fundamentals that Ben will discuss momentarily, we remain optimistic about generating annual AFFO growth of 6% to 7% organically over the next five years, with cash escalations on tenant leases contributing to half of this anticipated growth. We believe this growth, coupled with our commitment to returning significant capital to shareholders through dividends, offers compelling long-term total returns. With that, I will hand over the call to Ben.

Thanks, Jay and thanks to all of you for joining us today on the call. As Jay mentioned in his remarks, we are focused on providing shareholders with an attractive total long-term return proposition. We measure long-term total returns as dividend yield plus growth in AFFO per share. I'd like to take a moment to explain the composition of the total return profile we offer to shareholders. Turning to slide eight, based on yesterday's closing stock price, we expect to deliver on average long-term total returns of approximately 10% to 11% per year. This 10% to 11% total return is comprised of approximately 4% from our current dividend yield plus 6% to 7% from our expectation of growing AFFO per share organically. While the dividend yield ultimately will be determined by the market, we believe our business model given its growth and quality compares very favorably to some of the best-in-class REITs who have dividend yields of approximately 3%. Turning to our expected growth, of the 6% to 7% annual growth in AFFO organically, about half of this growth comes from our existing book of business via the cash escalations and our tenant lease contracts. For some context, we currently have approximately $22 billion of high-quality future revenues under long-term contract, primarily with the four largest US wireless carriers. The remaining 50% of expected AFFO growth comes from new leasing activity. This activity is driven by carrier network investments as the carriers deploy more equipment to add capacity and coverage either in the form of new tenant colocation on our sites or amendments to existing locations. As has been true since the early days of the wireless industry, network quality continues to be the market differentiator for carrier success. Today, the industry is seeing unprecedented data growth on new LTE networks supported by more robust devices and applications. As a result, growing consumer demand and usage is leading to an inevitable need for carrier network investments. As can be seen on slides nine and ten, there is a strong relationship between consumer usage, unit economics and carrier capital investments. With strong unit economics of approximately $50 per subscriber per month or $600 annually, US carriers are able to generate positive incremental returns on their incremental capital investment. The relatively high ARPU is supported by the staggering amount of mobile data consumption by US subscribers. As we look to the future, demand for mobile data is seemingly limitless. Cisco's latest report confirms this view, projecting that US mobile data traffic will increase seven-fold between 2014 and 2019 after accounting for Wi-Fi offloading. There are many factors contributing to this insatiable demand for mobile data. However, a couple of things jump out to me including innovation around devices and applications and user demographics. First, there is an immense amount of innovation taking place around mobile devices and applications. Businesses and consumers are reinventing the way we live and do business, taking advantage of the convenience and accessibility that mobile data provides. For example, there is increasing adoption of Internet TV or over-the-top content offerings. Today, we can stream video on demand on a safer network with applications such as YouTube, Netflix and Hulu just to name a few. Applications such as these drove mobile video data growth of 60% in 2014. And by 2019, mobile data traffic from video is expected to be nine times higher than current levels. Video enriched content represents an exciting revenue opportunity for wireless carriers and promises to propel the next wave of network investment. Machine to machine, or M2M connections, including wearable devices is another example of an area of innovation that is expected to drive significant growth in data usage. Today, there is, on average, 1.2 connected devices per US wireless consumer. Amazingly by 2019, that's estimated to be up to 3.2 connected devices for US wireless consumers. Examples of M2M connections include home security and automation, smart metering and utilities and connecting cars. Mobile data traffic generated from M2M connections is expected to double each year between now and 2019. Turning to demographics, consumer profiles play a significant part in mobile data usage. Applications such as text and email are widely embraced equally across all age groups. However, social networking, video viewing and music streaming are skewed towards younger subscribers, which over time will become a larger percentage of the overall subscriber base. Subscribers in the age range of 18 to 29 stream video and music at 2 to 3 times the rate of subscribers 30 years old and above. The upcoming change in demographics alone will likely lead to significant increased mobile data demand. Based on the expected growth in US data growth, we have intentionally been expanding our portfolio of wireless infrastructure in the US by investing in the AT&T mobile tower transactions adding over 17,000 towers and making significant investments in small cell networks over the past few years. As nearly three quarters of our sites are located in the top 100 markets, we have a tremendous opportunity to capture incremental leasing from increasing cell site density necessary to keep up with demand. Further, we have ample capacity and opportunity to accommodate additional carriers on these sites. Towers continue to be the most efficient and cost-effective way for carriers to add network capacity and coverage and support our bullish long-term view on site leasing. As Jay has already mentioned, we are also very excited by the small cell opportunity. It's an opportunity for us to extend our leadership position in shared wireless infrastructure. With initial yields of 6% to 8%, which is higher than a typical tower acquisition yield, and the same underlying shareable model, that leads to IRRs above 20% with the second tenant added, it clearly meets our return thresholds. We believe small cells is a great investment and we are at the very early stages of this opportunity. Three years ago when we acquired NextG Networks, the then leader in the field of small cells or distributed antenna system deployment, we had a thesis that this architecture of fibre-fed deployment will play an important role in adding capacity to networks of the future as carriers seek to monetize the data opportunity. Today, our investment thesis has been validated beyond our expectations as we examine the large and growing pipeline of system developments or deployments upon which we are engaged, it’s apparent this is not a niche technology. Rather, it promises to be the solution to add capacity in virtually every urban and suburban geography in the US. Just like towers, some of the best assets will be those that were secured early, where co-location, upgrades and expansion is virtually assured. So in summary, we are pleased with the start of the year and very excited about the long-term trends that promise to bring more opportunity for Crown Castle to assist our customers in realizing their objectives. In so doing, we believe our capabilities and portfolio of assets will continue to provide an attractive investment for shareholders and a great place to work for employees. And with that operator, I’d be pleased to turn the call over for questions.

Great. Thanks very much. Good morning. Ben, can you just talk a little bit about carrier activity through the year. We saw some very low CapEx from AT&T and Verizon this first quarter. Were you seeing any impact from people waiting to see what they ended up within the AWS auctions and is there a sort of a sense that activities picking up through the year and then for Jay, you mentioned your investment grade target, you're getting pretty close now to that five times, what do you think the path and the timing is here to actually close the deal on that? Thanks.

Sure, Simon. Thanks for the question. As we look at carrier activity, it's shaping up pretty much like we thought for the year. I think on the Verizon call, they intimated a little bit back-end loaded on CapEx spending, reconfirming their guidance for the whole year. That's probably what we are seeing, little back-end loaded, but that's consistent with how we originally forecasted guidance and to just sort of think about how various carriers ebb and flow with their network enhancements and their capital spending, we've gotten to the point where we don't get really that worked up about individual carriers and individual quarters of how it shapes up. It's gotten fairly consistent across the years and sort of the inevitability of the need for cell site density and more upgrades on existing sites. We are seeing each of the carriers work on increasing network quality in their own way and they talk about it publicly and obviously with us and that's what we work on every day. So I'd say it's shaping up about like we thought and perhaps a little bit back-end loaded.

Regarding your second question, I cannot provide a specific timeline or path for when we will achieve our goal. However, I can share that we have had numerous discussions with the rating agencies and have maintained an ongoing dialogue on this topic for more than a year concerning our aim for an investment-grade credit rating. As you correctly noted, we are approaching our leverage target, and the majority of our credit metrics are either within or very close to the published criteria for obtaining an investment-grade credit rating. We feel optimistic and are satisfied with our progress and the approach taken by the agencies towards upgrading our credit over the past 18 months to two years. While we believe we are on the right track, the exact timing remains uncertain.

Great. Thank you.

Sure.

Hey, guys. Thanks. Thanks for the details on the small cell business, 7% of revenue. I think this is the first time that you may have shared it. It’s also 7% of the site rental margin as well, which suggests that even at this stage of development, the small-cell business is generating margins that are equivalent with the totality of the business, and I guess that’s a little surprising given that these are mostly presumably one tenant businesses thus far and they could advance from here, could you kind of elaborate a little bit on the kind of cost structure and margin opportunity that's developing in the small-cell business? Thanks.

Sure, David. That speaks to the initial yield differential between a typical tower you would acquire or a small cell system you might build. As we mentioned, across our entire cumulative investment, we're at 7% today, which is pretty staggering, given that $1 billion of that came at 4%, three years ago, as we remember with NextG. So obviously that incremental $700 million had to do pretty well. And obviously we’ve grown NextG appropriately as we would have forecasted. So it reflects that initial higher yield on invested capital and then the very high incremental margins from colocation and we are adding colocation on a significant number of the original NextG systems, where we are adding to that existing plant as well as additional laterals off of it. So from a financial perspective, we are extremely comfortable with what we see going forward. I guess maybe to broaden your question a little bit, the challenges are around deployment. We are extremely busy, as Jay mentioned, about our backlog, we've got a lot going on, we've added a lot of people to that business, it's not all capitalized, so we've got overhead dragging that business a little bit, but we’re thrilled with what we see in terms of the opportunity and more and more as we really dig into the engagements that we’re getting and you look at the geographies. You come to the conclusion as I mentioned in my notes, it's not a niche product, it's not and it's somewhat random actually, you're seeing capacity needs in so many urban and suburban areas that you can quickly start to figure out that we're talking about a universe here, I think of hundreds of thousands of nodes over time. Obviously, we will never be able to accomplish all of that ourselves, there will be many other people in this market, but the size of the opportunity honestly reminds us a little bit of the early days of towers and we are going about as fast as we possibly can.

Thanks, Ben. And Jay, if I could follow up with one question just on the churn side, it looks like you trimmed a little bit the expectation for non-renewals in this year, is that on the Sprint-Nextel side or is that on the other kind of acquired carrier side and how do you kind of see the moving parts now moving for the rest of the year? Thanks.

Yeah, Dave. We really don't see much of a change from our previous expectations around churn, so for the full year, we basically expect to see about the same amount of churn as we did previously, maybe a little bit of it has been pushed out further in the year. So on a percentage basis, it’s moved a little bit, but there is nothing underlying that tenth of a basis point there that we saw moving the numbers, no real change in our expectation or actual activity to any meaningful amount.

Okay, great. Thanks, guys.

Hey, guys, thanks. Talking about the services side, it seems like the services slowdown pretty highly correlates to AT&T, Verizon, probably Sprint lower CapEx. Would you anticipate a pretty quick rebound here as carriers ramp CapEx in the second half?

Yeah, Phil, we made the comments around the timing from first quarter to second quarter and it is obviously challenging for us in the business to necessarily know exactly how things are going to fall out in the year. The services business, because all of the work that we're doing is related to work that’s done on our sites, we have pretty good visibility to the balance of the year around leasing activity. And so as we went into the year and as evidenced by the fact that we increased the outlook about $15 million on an FX neutral basis for site rental revenue, from a leasing standpoint, the year is shaping up to be maybe slightly better than what we had originally expected. And so our services assumption follows that, that services for the full year are about what we had previously expected. So I wouldn't get too tied up in sequential quarter to quarter move. It has to do with how the carriers allocate their capital and when they spend it. But for the full year activity looks like it's going to be about the same as what it was in 2014, and so our services business is basically not just that.

Okay. And then as I think about, Simon mentioned the leverage getting down toward five times, with the stock trading where it is, why not be looking into buy some of that back? Are you working on trying to get the rating agencies through before you look at that or should we look at that as being a more near-term possibility?

Well, it's always a possibility and you know we are not shy about buying stock, but as you can tell from our results, we're spending pretty much all our free cash flow and a little bit more on what we think are incredibly attractive investment opportunities as we’ve outlined on this call, it’s small cells primarily. And so I look for that to continue, I don't see a huge amount of free cash flow availability to buy stock for the near-term. And I do think that certainly as we’ve outlined, one of our core strategic objectives is to secure the investment-grade rating, which I think completely sort of maximizes the monetization of the dividend power of this business and then insulates the balance sheet going forward to a decree on just the overall cost to debt long-term. So it's something we are going to focus pretty carefully on. And I think we are on the path to that, hopefully sooner than later.

I think over the longer term, as you have seen us do for a long period of time, once we get to the targeted level of leverage, so about five times, once we're down there at that level, that will produce borrowing capacity if we're growing EBITDA in and around just for instance $100 million a year, that's creating about $500 million of investment capacity once we get down to that target level of leverage. So on the short-term I think you're going to see us focus, as Ben mentioned, on getting down to the five times level. And then once we are down there, then we create additional capacity for investment and absolutely stock purchases that are the benchmark against which we compare all the investments that we make in the business.

Okay. Thanks, Jay.

Thanks for taking the question. I was hoping you can maybe give us an update on the process involving the Australian segment, and then if you do determine to close the transaction, how do you think about prioritizing the cash. And could you just remind us how you may be able to utilize the NOLs?

Sure, Brett. As we've mentioned before, and put out a press release, we are engaged in a process to evaluate the sale of our Australian business. I don't have anything to announce this morning other than to say that that is ongoing and we have a number of very highly qualified folks that we are speaking with about that. And so I don't want to predict the outcome there for you, because it's certainly not complete. If we were to elect and pursue a transaction there and complete a sale, I think we would first approach it from a leverage neutral proposition as we talked about just a moment ago on Phil’s question. So in and around $500 million of proportional debt reduction is sort of required for that. But that would still leave a significant amount of proceeds available that then we would have for investment opportunities. And just like with any proceeds or capacity we have, we would look to do what maximizes sort of long-term AFFO per share that could include buying stock, it could include buying other assets, continuing to invest around the core business. So all of that is on the table and we will seek to maximize the outcome of those proceeds. And finally to your last point, Brett, on the tax position, we have the benefit of the NOLs, so there won't be any taxes paid at the corporate level. We also believe that as a REIT, we will generate a significant capital gain inside the REIT, that will then get passed out to shareholders in the form of the next amount of dividend that we pay will be in fact capital gain treatment. So to the extent we were paying in and around $1.1 billion of dividends on an annual basis, that capital gain would go out at a lower tax rate than the ordinary income tax rate that the normal quarterly dividend receives. Then to the extent the reminder doesn’t in fact cover all the income within the REIT, that's where we could actually use the NOL to make up that gap. So the shorter answer is there is no tax paid at the corporate level and at the shareholder level, to the extent of the gain, it would be a capital-gains treatment is our best estimate today versus ordinary income. So we think that's extremely favorable.

Hi, this is Justin in for Jonathan. Thanks for taking the question. If I could just ask further on the investment grade, and I know you said getting down to around 4.1 as your cost of debt, but I was hoping to get more color on the total cost of capital if you are able to reduce to investment grade?

Well, I think ultimately that's determined by the market. What I would tell you and based on the work that we've done, if there is meaningful benefits to the company over time we believe from achieving investment-grade credit rating, our aim as a business, as we've talked about over the long period of time, we think we can generate a significant amount of shareholder value by the way we add additional revenue to the existing assets that we own, allocate the remaining portion of the capital outside of the dividend distribution, smart investments like we've talked about this morning for small cells. And then thirdly, providing a risk profile of the business that lowers the cost of capital. And there's a lot of things that go into that. Part of it is how we allocate the capital and the percent of that capital that is distributed to shareholders in the form of basically a certain return on investment that's made. We think another component of that is capital structure so that the business regardless of the cycle that the market may be in, has a view that the business and the balance sheet are sustainable and can continue to achieve a low cost which provides additional certainty to the payment of the dividend. And so I'll leave investors to make their own judgment on where they think ultimately the cost of the equity should fall. Today, if you look at where our credit rating is and where bonds are trading and if you were to assume that we were at the low end of an investment-grade credit rating, there may be 80 to 100 basis points of a difference in where we would issue a bond, a 10-year bond investment-grade, non-investment grade. So there are certainly some debt costs associated with that and improvement in the overall cost of debt, but more broadly as we speak about this, we think there are more broad implications in terms of how the business achieves a lower overall cost of capital over the long-term and that's why we're focused on it.

Great, thank you.

Thanks. Good morning, guys.

Hey, Rick.

Hey. Two questions, if I could. First, I think Ben you were mentioning how a lot of the services business – it might have been Jay, at your own towers, if I remember right, you guys had about 6,000 towers from Sprint back from the old Global Signal acquisition. Are you seeing any activity from a services business standpoint in your guidance for Sprint starting to activate its Spark Project, the 2.5 gigahertz stuff?

Yeah. Rick, I think we are going to probably decline to get into specifics around what a particular carrier is doing on our sites. You know we normally refer you back to them to talk about their own activity, that’s sort of their business. And we've talked about overall, I think to Simon's original question, overall activity we are seeing that’s consistent with what we saw at the beginning of the year and up a little bit as Jay mentioned in our guidance that we’ve trimmed up a little bit for the year of the first quarter. So probably not going to get into a whole lot of specifics there. I would actually make a comment about our services business, though, that's helpful to remind everybody. In 2014, we grew that business about 40%, which was consistent with the growth in the portfolio really over the last year or so from ‘13 as we brought on the AT&T Towers. So when we projected for 2015 that the services contribution would be similar to what we saw in ‘14, that's also consistent with the size of the portfolio. So that's effectively what's happening this year is that we are running, we think, pretty well flat to last year's contribution, which is consistent with the size of the portfolio and so just an observation for those that may not be paying that close attention to our history.

Okay. And then a bizarre question next. With Sprint, we understand there is a lot of discussion with vendors, equipment manufacturers about providing vendor financing to help them maybe look at deploying that Spark Project, have you ever considered offering financing to carriers for higher rent?

Let me just say this, yes, we have considered it. It has been proposed and when we’ve looked at it, we haven't found it to be an attractive proposition for us, nor a gating factor that determined whether a carrier went on a site or not. So, obviously, our objective is what we work on every day is getting carriers on our towers and we could not satisfy ourselves at providing financing or not would actually influence the buying decision whether they needed that tower or not. So, typically the carriers have access to capital from many different sources from public markets, vendor financing as you suggest and we have had it proposed a few times and it frankly did not look that compelling to us to actually sway the buying decision and so, we decided so far not to do it.

That makes sense, right. So, a lot more nice to be a tower company than an equipment company. The final question I've got for you is on the small cells, Jay, you mentioned 2,500 anchor or co-los are in backlog awarded but not in construction. How much CapEx should we think is associated with that? And then, you said one of the challenges is just deploying it. Talk to us a little bit about the gating factors there, is it money, is it people, what do we talked about there?

The 2,500 I mentioned includes both anchor builds and co-locations on existing systems. For new anchor builds, we typically invest about $100,000 per node, with most of that expense tied to fiber construction for the system locations. In comparison, the capital needed for co-locations is considerably less. If you examine our small cell activities and the capital expenditures we've incurred in the past few quarters, we anticipate maintaining a spending level similar to that of the last couple of quarters, possibly trending upward. As discussed previously, our business performance is closely linked to returns. If returns remain steady, we are poised to pursue RFPs and additional initiatives from carriers across various markets, and we are willing to invest more capital beyond our current rate as long as return expectations are met. The primary challenge isn't a lack of capital, as we have sufficient access, but rather ensuring that returns align with our vision for the business and its growth potential. Additionally, we need to evaluate if we have enough manpower to meet the demands set forth by carriers.

And really it's the gating factors, as you suggested Rick, are really the whole cycle of construction. It’s the designing of the systems with the carriers input, real estate permitting and then real estate rights, securing those rights and then permitting and then the construction and the longer we’re at this, the better we get, we've got a lot of folks that are extremely good at what they do and I think actually by far leading position in the industry in that capability but it hasn’t necessarily shortened us the construction cycle and I'm very convinced it's a significant barrier to entry in this business, because there is a lot to actually building on these systems and getting the carriers installed on time and on budget and we're getting pretty good at that.

If I remember right, it was about $50 million last quarter, $70 million this quarter, so maybe a $120 million for the last two quarters in CapEx or maybe $240 million to $250 million annual is kind of what you're thinking like?

That's our current run rate, and if we identify more opportunities, we're willing to invest additional capital.

Thanks. Jay, what is the expected incremental small cell node revenue connections required to hit the midpoint, high-end and low-end of guidance? Of the 2,500 in backlog, how many will actually generate revenue by the end of December?

There is very little, if any. Typically, once we begin constructing small cells, we follow a 15 to 18-month cycle in most cases. Therefore, these would likely represent activities that will become operational in 2016. We currently have a strong backlog of nodes under construction. Looking at our total revenue guidance for 2014 to 2015, we anticipate revenue growth of between $150 million and $160 million overall, with small cells expected to contribute about $50 million to $60 million of that growth, while towers will account for the remaining $100 million. This is how it breaks down. Notably, a significant portion of that $50 million to $60 million growth in small cells consists of nodes we are activating now in the second quarter, which will generate revenue for the remainder of the year.

And then, if I start to look at the 5.0% organic cash growth and 2.3% cap growth and you factor in these small cell connections straight-line and incremental churn, it appears you could see a nice bump up of cap and organic cash leasing growth in ‘16, is that the right way to think about it all else are being equal, knowing what you know today?

I want to clarify that we are not providing guidance for 2016, but I can share our five-year forecast, which suggests an organic growth in AFFO per share of about 6% to 7%, along with the dividend distribution we plan to make. This forecast assumes a level of leasing activity comparable to what we experienced in 2014 and 2015. The anticipated change from 2015 to 2016 includes a decrease in the impact of churn. For 2015, we expect churn to impact us by approximately $115 million, while for 2016, our long-term forecast suggests that number will drop to about $75 million. Therefore, the expected increase is not due to a change in activity but rather a reduction in non-renewals by around $40 million, which should enhance our AFFO or net organic leasing. This could translate to roughly a 2% increase in the AFFO line when comparing 2015 to our projections for 2016.

Got it. And any color on straight-line for next year?

I wouldn’t provide that much detail on this call. We’ll discuss the 2016 outlook when we reach the third quarter. One thing to note is that we are offering a considerable amount of information in the supplemental package, where you can see the current status and the gradual decrease of straight-line revenues over the years, extending well beyond 2016. This information reflects all the leases that are currently signed and generating revenue, and you can observe how that progresses through 2022.

Great, thank you.

Thank you very much and just following up on the prior question, sort of understanding the longevity of what seems to be a healthy investment environment, it does seem like your expectations are baking in sort of a reduction in the churn impact, which should ease moving away from 2015. I'm sort of sitting back and thinking, we've got commentary out there that Sprint seems to be focused on network densification initiatives, T-Mobile has been vocal about its A-Block spectrum build. Obviously, we just had the AWS-3 spectrum auctions and public safety, if I start to put all of those pieces together, can we find ourselves in a situation in which you have a spending environment that at least as good but potentially better when looking at all these sort of moving pieces from the carrier side?

Sure, Amir, this is Ben. I believe everything you've mentioned is feasible, and beyond that, there's the deployment of the AWS-3 spectrum that was recently auctioned. Additionally, you touched on FirstNet and the Dish spectrum. Having been in this industry for quite some time, like many of us here, we experience constant changes. The leasing environment could improve in 2016 or 2017. However, it's important to note that we are currently adding about $100 million in new revenue per year from our tower base, as Jay just stated. If that were to increase by, say, 30%, that would only represent a 1% change in revenue growth, or about a 2% change in AFFO growth. We work on that every day, and it's what everyone listening to this call is focused on. I want to emphasize that the fluctuations in this business are generally subtle, and as we've mentioned, out of a total return profile of around 10% or 11%, two-thirds is already secured through our current dividend and the contracted escalators. While we are absolutely focused on that last third, which is growth, the improvements in AFFO growth may only be a few percentage points, and while we would love to see more, the reality is that this business doesn't move drastically.

That's very helpful. And then just a follow-up question here, obviously you folks have taken a differentiated view versus some of your peers on the international arena. We’re starting to hear some I guess chatter about potential assets coming available in Europe, which is sort of a different investment profile than where we’ve seen sort of international expansion take place with some of your peers before. I was wondering what your thoughts could be around if some of those assets became available, whether or not, they would be attractive and if that would sort of change a shift in focus for you as some of those assets became available?

Sure. It's certainly something we would look at. We used to operate in the UK in a very large way. The European market has developed in a much different way than North America, so we would want to make certain that the underwriting of those assets are appropriately took into account and what the collocation opportunity was going to be over time there. I would in a positive sense, we’re marking our ability to finance locally there at a very attractive level, so to the extent, we have been looking at something there, we could certainly put an implicit hedge on the currency by financing locally. So there are a lot of attractive attributes to look into Western Europe, it would come down in my mind to what’s the underwriting on the towers and what’s the opportunity for revenue growth around the marketplace there and there are some dynamics in the Western European market that's made it a little more challenging to underwrite collocation growth and so we would want to make sure we would get that right, but I have absolutely no natural aversion to that, and think it's something that we could certainly look at.

Thank you very much for the incremental color.

You bet.

CWAN:

Colby, on your first question around total CapEx, as we gave the guidance previously, I think we would expect to consume all of the excess cash flow if you were to take AFFO, subtract out the dividend that we're – our current policy suggests for the balance of the year, I think we will spend all of that on activities, the vast majority of which is likely to be directed towards small cells. As I answered one of the earlier questions about activity and interest in expanding it, given the returns that we're seeing in small cells, we would be willing to go beyond that cash flow amount and finance opportunities to the extent they exceeded the amount of cash flow that's produced, but I think as a starting point, what I would suggest is that you assume we utilize all of the excess cash flow beyond the dividend for investment in assets and that may ebb and flow a little bit quarter to quarter depending on how many projects we complete in any given quarter.

Colby, without taking everybody through technology lessons, I'm certainly not qualified to do on the call, I will make one comment about what we’ve seen around the CWAN architecture and the possibilities there, and it’s extremely early. Essentially what it may do for us is, it may remove some of the ground space requirements at towers and so to the extent you got a tower that may have a ground space challenge, i.e. not a very big footprint, by moving those base stations offsite into sort of a base station hotel and remotely powering that through fiber is something that we look at positively over time and potentially makes the upgrade cost of some of the smaller monopoles diminished and makes them more attractive over time. So it's extremely early, but I think the trend will be if we go down that path with that kind of architecture is that it's going to add value to some of the smaller sites, but potentially would have been challenging or expensive to add additional land and that may not be required now. That's about all I have on that so far.

Okay, great. I'll take it. Thank you.

Thank you. I have a couple of follow-up questions. First, regarding the capital expenditures on the existing sites, which I believe amounted to $98 million, can you explain how much capacity that generates? Additionally, could you help us understand the potential impact on revenue growth over the long term and whether there will be a shift towards more small cells, particularly if we see a boost in one quarter? Also, could you provide insight into the $15 million increase in organic growth? Was that primarily driven by small cells, and can you break down the activity between amendments and new licenses? Thank you.

Sure. Regarding your first question, when we invest in capital expenditures for existing sites, it is always based on success. This means we do not allocate any funds until a tenant is ready to utilize that site. In terms of enhancing the capacity of our current sites, there are times when we see a natural increase in capacity, but generally, the site is prepared for the tenant who is positioned to move in. The impact on revenues often includes some upfront prepaid rents associated with the site, which benefits longer-term recurring revenues since we receive some of that rent upfront instead of on a monthly cash basis. For your second question about the $15 million increase in the outlook for site rental revenue, almost all of that is linked to small cell activity, with very little coming from towers. The majority was from small cells, and we achieved a significant portion of that increase in the first quarter, boosting our run rate for the remainder of 2015. The distribution of new licenses and amendments aligns closely with our expectations. We believe the full year of 2015 will reflect a situation similar to what we observed in the quarter, with around 60% to 65% of the activity being new licenses and the remainder being amendments, similar to what we saw in 2014.

Great, thank you.

Thank you for taking the questions; most of them have been addressed. However, I'm interested in clarifying something. You mentioned AFFO, but also referred to AFFO per share growth over the next five years being in the 6% to 7% range. What scenarios could lead to this figure not remaining steady? Given the spectrum allocation and the additional spectrum expected next year, along with more deployments, it seems you're suggesting there might be a headwind affecting other growth despite the strong spectrum deployment and ongoing capital expenditures on the wireless side. Could you elaborate on that?

To clarify your first question, we are referring to growth on a per-share basis for AFFO. This growth is what we focus on, and our projection of 6% to 7% AFFO per share growth represents our five-year outlook. Regarding your comment about headwinds, it may actually be the opposite. This year, our guidance indicates about 5% AFFO growth while accounting for 800 basis points of non-renewals and roughly 100 basis points due to foreign exchange headwinds. I take pride in achieving a 5% net growth despite these challenges. The 5% net figure this year suggests that if we project 6% to 7% over five years, we will need to accelerate growth in the later years. We expect to achieve this growth by reducing non-renewals, as outlined in our supplementary materials. This year represents a peak for non-renewals, and as this trend decreases, we anticipate gaining a few hundred basis points in the following year and potentially more thereafter, assuming leasing levels remain consistent. Additionally, we will pursue more leasing opportunities as they arise. Each carrier is focusing on enhancing self-identity and meeting the requirements associated with spectrum auctions and mobile data demands. Continued leasing seems likely, although I can’t predict specific outcomes. There is a chance that we could see a significant increase in leasing activity—perhaps 30% more—which could translate to about 1% additional revenue growth and around 200 basis points of AFFO. However, this would require all four carriers to align their orders simultaneously, which isn’t common in our industry, as companies are typically at different stages in their deployment cycles. While we do not plan for a significant shift upward, we acknowledge that such an outcome is possible, and if it materializes, we will be ready to capitalize on it.

And then a quick follow-up actually, you mentioned four carriers now we possibly might have a fifth with the announcement from Google yesterday on Project Fi, can you give some thoughts, have you had discussions with Google, have you talked to them about this and how this may impact your business?

We have actually had a number of conversations with Google, I really won’t go into the substance of those, but as you would expect, they’re extremely well-versed in wireless and wireless networks. I think what we see in their announcement yesterday is a continuation of what we've seen for a long time and that is, there is a lot of outside companies with a vested interest in having access to wireless consumers. And so, that's always been the case, and Google being the latest one. I look at it as a net positive and that it’s going to drive to the extent they’re successful, it's going to drive additional network capacity requirements into the Sprint and T-Mobile networks, which fundamentally and gives them a revenue stream to then reinvest in network capacity to accommodate that demand. And given the fact that and I don't say this lightly, given the fact where we sit, we are the most expeditious and cost-effective way to add network capacity unlike where we sit. And so, we’ll see how that develops over time, but as carriers deploy additional spectrum, as they add additional equipment and new cell sites, we as Crown and frankly the industry are the most effective cost-effective way for that to occur.

Okay. Thanks for taking those questions.

Hey, guys. Thanks for taking the question. Given the new AMX tower spend in Mexico, I just wanted to know if you have any thoughts on how the Mexican market compares to other international markets you looked at, whether you're more comfortable with risk profile there? Thanks.

To be honest, we haven't examined that closely recently. It's clear that in many emerging markets, the potential for wireless growth is significant. It's easy to see how consumers who previously lacked access to wireless or the Internet would likely become heavy users of wireless data when presented with an affordable option, and a shared infrastructure model makes sense in these markets. It ultimately comes down to how we approach it; we would be entering these markets with a different currency, which affects the initial pricing of assets and reflects the risks associated with currency fluctuations. Additionally, we need to consider the fundamental growth opportunities based on revenue per site and colocation to ensure an attractive return on investment. Up to this point, we haven't observed the pricing dynamics aligning favorably in these markets, although opinions may vary. To me, this isn't about the business model, but rather a reflection of pricing and the currency mismatch.

Thanks. And just one more if I may on small cells. The revenue growth has been accelerating, pretty steadily for the last four or five quarters. Could you talk about you know do you have enough longevity to know to get sense for the organic contribution that you've been seeing?

I don't know how to parse that for you Spencer, there's a lot of nomenclature in that business that's not the same as towers and so, what I would say is, we have a significant amount of colocation going on, which you might say is, okay, well that's organic, I would agree with you, but every time you look at one of those, there is always typically an additional lateral or two or three that a new carrier would take that the old carrier didn't, and so that would not be organic, that would be new, if you will. So, I don't want to take with you all this on the call, but it's a hybrid, it's always a hybrid between colocation and new. And if we look at our total growth in that business, it's a significant contribution from colos and then a significant contribution from new. That's about the tightest thing you might get.

Spencer, as you analyze the business, it's important to note that when it comes to tower cases, the costs for building towers, monthly rents, and operating expenses have remained quite stable over time. In contrast, with small cells, we are engaging in financial transactions where we set rent prices for carriers based on various factors that differ significantly from the tower model. The costs can fluctuate based on the system, such as the number of nodes per fiber mile, the method of fiber installation—whether aerial or buried—and location-related expenses, like the cost of digging in certain areas. This variability in costs leads to differences in revenue and profit margins. As we consider our business strategy and capital allocation, we examine it through the lens of yield and total return, which differs from the historical approach to tower construction. Our primary focus in past communications and today has been on the yield from total investments. Notably, the largest segment of the $1.7 billion we invested came from an asset purchased at approximately a 4% yield, which we have now increased to a 7% yield for the entire small cell contribution, indicating strong performance on an organic basis. However, as Ben highlighted, this is a blend and not a straightforward comparison, as it doesn't purely reflect the performance of towers over time. Instead, our focus is on enhancing yields and maximizing returns on our overall capital base. I hope this provides clarity as you model the business.

Very helpful. Thanks again.

I think we have time for maybe one more question.

Hi, thanks very much. I will try to make it quick. I just wanted to follow-up on the earlier comments, and there is a lot of focus on the benefits of getting to an investment grade rating and the companies intend to do that in the short term, but then when you talked about the potential completion of the Australian asset sale or unit stake, you said the intend would be to leave leverage neutral and I’m wondering why isn’t that an opportunity to reduce leverage and really be the catalyst to get the company over the goal line into the investor grade rating?

Sure, Ana. I think when we say leverage neutral; we mean that on a ratio basis, not nominal dollars, so we would think about it as maintaining leverage neutral on a ratio basis. When we have looked at this and have done this over time for a long period of time, there is obviously one would call away or a path towards getting to five times that is not necessarily necessary. So we think about this and have worked on this for a number of years of letting the growth in EBITDA naturally deleverage the business towards investment grade and we don't see any impetus or need frankly to accelerate that beyond what we would see in due course. So I think in all likelihood as Ben described, if we’re ultimately successful in monetizing our Australia business unit, then you should expect us to maintain leverage ratio neutral and then invest the balance of the capital in either assets or the purchase of our own stock and we’ll naturally grow towards getting to the investment grade credit ratios that we’re aiming towards.

I mean it's a great question, I think the answer is we’re going to get there soon enough either way and so we don’t, we would use that capital for incremental growth in all likelihood.

Okay and then just as a quick follow-up, one of the issues with I think the overall rating is the company has taken advantage of the secured and securitized market, where you do get a low cost of capital, but that does put pressure on the rating. Where are you guys, I’m thinking of moving towards more of a investment grade type capital structure where you really have less secured and it does lift the pressure that the agencies put on the overall corporate rating?

You’re right and I think over time, as we get towards that investment grade credit rating and maybe even as we achieve it, you’ll see us having more simplified capital structure today, we have several entities underneath our parent that have availed themselves to securitize debt and that's enabled us to achieve a very low cost of capital even though leverage may be outside of what would be typical be an investment grade credit. So, I think what you’ll see over time is, we’ll clean up some of the complexity in the capital structure, which will mean a lessening of our exposure to securitized debt and more of the debt move towards the holding company. But I don't think you should expect that all of it will go away, I think we’ll continue to avail ourselves of that market, it gives us some diversity of sources of capital and even once we do achieve an investment grade credit rating, I think we’ll still find that attracting some debt capital on a securitized basis with some portion of our assets makes good sense and helps to lower the overall cost of debt and capital.

Okay, great. Thank you very much.

Very good. I think that wraps us up. Thank you for staying with us. I guess we went 70 minutes. Appreciate everybody's attention and we look forward to speaking with you on next quarter’s call. Thank you.