Crown Castle Inc (CCI) — Q3 2018 Earnings Call Transcript

Thank you, Jonathan, and good morning everyone. Thanks for joining us today as we review our third quarter 2018 results. On the call morning are Jay Brown, Crown Castle's Chief Executive Officer; and Dan Schlanger, Crown Castle's Chief Financial Officer. Today 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 the Risk Factors section of the Company's SEC filings. Our statements are made as of today, October 18, 2018, 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. So with that, I'll turn it over to Jay.

Thanks, Ben, and good morning everyone. Thanks for joining us on the call this morning. Over the last two decades, we have established an unmatched portfolio of more than 40,000 towers and 65,000 route miles of high capacity fiber in the top U.S. markets where we see the greatest long-term growth. We continue to believe the U.S. represents the best market in the world to earn shared communication infrastructure, and we believe our ability to offer a combination of towers, small cells, and fiber solutions to our customers provides a valuable differentiation in the market. On this call, I wanted to highlight two important things. First, our strategy to invest in towers and small cells and fiber has positioned us to capture accelerating leasing activity which is driving dividend growth. And secondly, we continue to see tremendous opportunities to invest in new assets that we believe will generate future growth. On the first point, executing on our strategy is leading to consistent dividend growth. As we increased our annualized common stock dividend by 7% to $4.50 per share, in line with what we believe our AFFO per share growth will be in 2019. The growth in 2019 is based in part on our pipeline of contracts with new business which has increased in each quarter this year and is driving the accelerating new leasing growth we expect to see in 2019. As shown in our outlook, we expect the positive trends to continue as we expect towers to contribute approximately $125 million to new leasing growth in 2019, which is up nearly 15% from the $110 million we expect to see in 2018. Likewise, we expect small cells to generate new leasing activity of approximately $75 million in 2019, which is more than 35% higher than the $55 million we expect in 2018. In addition to the expected acceleration of new leasing activity, our pipeline of contracted small cell nodes to be constructed over the next 18 to 24 months continues to grow, and currently stands at an all-time high of approximately 35,000, which is up 40% from this time last year. This increased activity is a result of all four of our large customers investing in their networks through towers and small cells to both keep pace with the current 4G demand environment and position their networks for 5G. Carriers in the U.S. are expected to lead the way and be among the first operators in the world to deploy commercial 5G services with all four national carriers working to rollout 5G services currently. Underscoring how attractive the U.S. market is for communications infrastructure ownership, Ericsson estimates that 5G will account for nearly 50% of mobile subscriptions in North America by 2023, compared to just 20% globally. According to industry estimates, mobile data traffic in North America will increase by 40% per year between now and 2023, resulting in a staggering eight-fold increase in the volume of data traveling across mobile networks. This growth in data will require substantial densification of wireless networks. And we believe Crown Castle is in a great position at the center of these megatrends as our portfolio of well-located towers and dense high-capacity metro fiber assets remain the most cost-effective option for our customers' deployment needs. In the near term, since 2014 and inclusive of the dividend increase we announced yesterday, we have grown our dividend by a compounded annual growth rate of approximately 8%, fueled by these underlying industry trends and the resulting revenue growth. Turning to the second thing, we’re excited about the significant investments we are making to build new assets that we expect will drive long-term growth in cash flows and dividend per share. We believe we are in the very early innings of a huge opportunity with high-capacity dense metro fiber, which has become critical for wireless and wired networks. Over the last several years, we have built and acquired an unmatched portfolio of more than 65,000 route miles of high-capacity fiber in the top markets where we see the greatest long-term demand from multiple customers. Consistent with our expectations, we continue to see very attractive initial returns on our fiber investments with initial yields of 6% to 7% for the first tenants. Over the long term and similar to towers, we expect the returns on these investments to increase as we add more customers to our fiber assets, which will drive future dividend growth. We are using the same playbook we used with towers by sharing the asset across multiple tenants to generate attractive returns and it’s playing out better than we expected. Looking back five years ago, we had an aspirational goal to be able to deploy about 10,000 nodes per year. At the time, we were adding 1,000 nodes per year, so this was seen as a significant increase in capability. Looking ahead to 2019, we expect to deploy between 10,000 and 15,000 nodes, exceeding our aspirational goal. Our team has done a terrific job building capability and expertise that can deliver for our customers at significant scale. Further proving out the model, we are seeing demand from multiple tenants on the same fiber asset with a meaningful portion of the nodes we expect to deploy in 2019 collocating on existing small cell networks. By collocating additional tenants on existing fiber networks, we are able to generate high incremental margins that we expect will grow the yield into the mid to high teens over time. With our leading capabilities in fiber solutions, we have the ability to increase the yield on our fiber investment by growing cash flows from both small cells and fiber solutions customers that need access to the same high-capacity in dense metro fiber assets, while the current utilization of our fiber portfolio is similar to that of a single tenant tower. Our current 8% yield is more than double what we saw when our towers had only one tenant. All of this increases our conviction to continue investing in new fiber assets that we believe will expand our long-term opportunity. So in closing, our strategy to invest in towers, small cells, and fiber has positioned us to capture this accelerating leasing activity which is in turn driving dividend growth. And we continue to see tremendous opportunities to invest in new assets that will further this strategy over the long-term. With our unmatched portfolio of assets and operating capability, I believe Crown Castle is best positioned to capture these immense long-term opportunities while consistently returning capital to shareholders through a high-quality dividend that we expect to grow 7% to 8% annually. And with that, I'll turn the call over to Dan.

Thanks, Jay. Good morning, everyone. As Jay mentioned, we had another great quarter resulting in the third quarter. That sets us up to finish 2018 on a strong note and provides a solid foundation for 2019. As you can see in the initial 2019 outlook we provided, we expect to grow AFFO per share by 7% which led us to increase our dividend by the same amount. The third quarter results in 2019 outlook reflect the strength of our business model and our ability to leverage our leadership position in the U.S. across towers, small cells, and fiber solutions to generate continued growth. Starting with Slide 4 of the presentation on our website, in the third quarter, we exceeded the high end of guidance for site rental revenues and AFFO while adjusted EBITDA exceeded the midpoint of the range. When compared to our prior third quarter outlook, site rental revenues and adjusted EBITDA benefited from approximately $3 million of additional straight line revenues which were primarily a result of term expenses associated with leasing activity as well as some additional contributions from our Lightower acquisition. These benefits were partially offset by approximately $2 million of higher straight line expenses. Further, while AFFO did not benefit from the straight line revenues, it did benefit from approximately $3 million of lower sustaining capital expenditures which are now expected to occur during the fourth quarter. Adjusting for the impact of these items, third quarter site rental revenues, adjusted EBITDA, and AFFO each exceeded the midpoint of our prior outlook. Beginning in 2019, and consistent with our intention to align our public communications with the long-term approach we take internally in managing the business, we will no longer provide guidance for quarterly results. Turning to the balance sheet, we finished the quarter at a 5.1 times debt-to-EBITDA ratio and intend to finance the business with five times of leverage longer term as we remain committed to maintaining our investment grade credit profile. To that point, we were excited that earlier this week Fitch upgraded our senior unsecured credit rating to BBB flat, which we believe is a reflection of the stability and attractiveness of our business model. With the increasing interest rates we have seen over the recent past, we are pleased with the structure of our balance sheet with a weighted average duration of our debt of greater than six years and only 20% floating rate debt. Now moving to Slide 5. At the midpoints, we increased our full year 2018 outlook for site rental revenues and adjusted EBITDA while leaving the outlook for AFFO unchanged. The increase to site rental revenues reflects the outperformance from the third quarter that resulted from a combination of better than expected performance from our Lightower acquisition and the additional straight line revenues I mentioned earlier. Meanwhile, the increase to adjusted EBITDA reflects the higher than expected site rental revenue offset by some additional expenses, while AFFO remains unchanged as the higher straight line revenue does not contribute to AFFO. Staying on Slide 5, our full year 2019 outlook highlights include 7% expected growth in AFFO per share from $5.49 in 2018 to $5.85 in 2019 at the midpoint of the outlook and a 7% increase to our annualized dividends per share from $4.20 to $4.50. This dividend increase is supported by the expected acceleration and leasing activity in 2019 and demonstrates our ability to deliver on our growth targets while investing in new assets that will drive future growth. Moving now to Slide 6. At the midpoints, we expect approximately $220 million of growth in site rental revenues from 2018 to 2019 consisting of $280 million of organic contribution to site rental revenues offset by a change in straight line revenues of approximately $60 million. Organic growth in 2019 is distributed by new leasing activity of $365 million at the midpoint, up from $205 million at the midpoint in 2018 representing an acceleration in activity levels. As Jay mentioned earlier, at the midpoints of the outlook, new leasing activity in 2019 is expected to be $125 million for towers, up from $110 million in 2018, $75 million for small cells, up from $55 million in 2018, and $165 million for fiber solutions, up from $45 million in 2018. In addition to new leasing activity, we expect annual contracted tenant escalations to contribute approximately $90 million in growth at the midpoint in 2019. Growth from new leasing activity in tenant escalations is offset by approximately $175 million of expected non-renewals, resulting in organic growth of $280 million at the midpoint. Expected non-renewals in 2019 consist of non-renewals in our tower business at the high end of our historical 1% to 2% range, over half of which is related to wireless carrier consolidations that occurred earlier this decade, and also includes less than 1% non-renewals in our small cell business and high single-digit non-renewals in our fiber solutions business. The approximately $280 million organic contribution to site rental revenues represents approximately 6% growth year-over-year that consists of approximately 5% growth from towers, approximately 20% growth from small cells, and approximately 5% growth from fiber solutions. Turning to Slide 7, I'd like to walk through the expected AFFO growth from 2018 to 2019 of approximately $160 million at the midpoint of the outlook. Starting on the left, organic contribution to site rental revenue growth of $280 million at the midpoint is partially offset by an approximately $80 million increase in cash expenses. This increase in expenses is a combination of the typical cost escalations in our business and the direct expenses associated with accelerating new leasing activity. Moving to the right, we expect the contributions from network services to increase by approximately $25 million from 2018 levels consistent with the higher expected leasing activity in the towers business. And finally, we expect AFFO to be negatively affected by approximately $70 million of other items, in this case, increased financing costs. The approximately $70 million increase in financing costs from 2018 to 2019 is inclusive of approximately $25 million related to higher expected average floating interest rates in 2019 when compared to average interest rates in 2018, as well as $45 million related to the funding of our discretionary capital expenditures. Similar to 2018, we expect our overall capital expenditures in 2019 to be around $2 billion or around $1.5 billion net of capital contributions from our customers. Summarizing our results, we expect to deliver 7% growth in AFFO per share in 2019 driven by accelerating leasing activity, offset by the higher financing costs I just mentioned. In closing, our unmatched portfolio of shared communications infrastructure assets uniquely positions us to return capital to our shareholders in the form of a high-quality dividend and to meet our goal of growing that dividend by 7% to 8% annually, while allowing us to make investments in new assets we believe will extend our long-term growth opportunity. With that, Jonathan, I'd like to open the call to questions.

Just on the quarterly guidance. Can you give us any color about the 2019? Is there any pacing first half versus second half or anything that's unusual through the year? And then, you were talking about the long term drivers, the FCC has been moving to get a lot of spectrum out in the marketplace. Can you just give us a little bit of color on the CBRS and the C-band? Do you think that's more for the small cell portfolio or for the macro tower portfolio? Or do you think you'll see leasing on both of those over the next few years?

Hey, Simon, good morning. I'll take the first one and hand it over to Jay for the second one. The quarterly pacing, there's nothing really to point out other than I would say that some of that small cell pacing the 10,000 to 15,000 nodes we're talking about is a little back-end loaded, but there's nothing that would be any different than the general pacing we typically see through the business and what we're seeing to 2018 in terms of when we expect to turn on revenue either on a tower site small cell side or services.

Thanks for the question, Simon. I would tell you if you look back over the last couple of decades of winter, the days have been the best for the infrastructure business around now towers and fiber and the deployment of small cells. Anytime there's new spectrum coming to market and you have a commitment from the owners or the operators that hold that spectrum, you see increased leasing activity. So, as the FCC is looking at how do we compete globally with regards to 5G, I think it’s a combination of network densification and the deployment of additional spectrum. Some of that spectrum is lying fallow currently in hands of operators that haven’t deployed it. And some of the spectrum that the FCC is looking at, trying to figure out a way to get it deployed and into the hands of operators. I think both of those are supportive of kind of our long-term expectation of growth and point to a longer runway of growth. Specifically on CBRS and C band, I think we will see activity on both macro sites and small cell. But I would tend to believe, we’ll probably see a bigger impact around small cells than we will at macro sites, but I think it will contribute to long-term activity on both assets.

Just one question on rising rates. How does the current environment influence your perspective on discretionary investments in fiber? You’ve mentioned focusing on organic growth, so I’m curious about how your viewpoint might shift in a rising rate environment. Additionally, do you believe the business can maintain growth in the long-term range of 7% to 8% despite the changes in rates?

The recent increase in rates does not affect our perspective on discretionary investments because the returns from those investments significantly surpass our cost of capital, even with rising rates. We don’t foresee any impact on the long-term advantages those investments will provide for us and our shareholders over time. As Jay mentioned, we are excited about the trends we are observing, particularly in the acceleration of our small cell business and the ongoing success of our fiber business. We believe these investments will remain attractive even in the current rate environment, and it would require a substantial increase in rates to change our outlook on this. While rate changes can affect specific periods, as seen in 2019, we feel very positive about the long-term investment profile. Regarding the potential for the business to continue its growth, we believe the answer is yes. Our small cell business is experiencing around 20% year-over-year growth, consistent with our expectations for 2018. The fiber solutions business is showing approximately 5% growth, which we have been anticipating as mid-single-digit growth. We believe that the positioning of our high-capacity metro assets allows us to effectively serve multiple markets with the same resources, and we foresee continued growth in the long term.

If I could just follow up, you also mentioned a meaningful portion of the nodes that are coming online in 2019 are going to be collocating. Can you maybe give us a little bit of a ballpark estimate in terms of how that compares to the 70-30 set you’ve given us in the past?

It’s really not a lot different. It’s just that the total amount is a lot higher, because we have such a larger pipeline. We’re still around 70-30; it’s just the total amount of collocation has gone up, which has been very encouraging to us. Because it means that, as we put new assets in place to build small cells, we're then coming back and getting collocation on those new assets. But we're still investing a lot in building out markets which we anticipate will do for a while now just given how early we are in this investment cycle.

Matthew, I think one of the ways to frame it is, if you were to go back two or three years and look at the number of collocations that we're doing now, it would exceed the total number of nodes we were deploying three to four years ago. So, we've seen significant growth in that collocation which is, both Dan and I have commented on. We've seen not only terrific returns, but we've also seen the model prove out which has given us more conviction around continuing to invest in the assets and grow the opportunity as we follow the wireless carriers and their deployment of 5G across markets.

I have a couple of questions regarding the inputs for the AFFO guidance. The $25 million associated with the variable cost funding suggests an increase of 75 basis points for 2019, and I wanted to confirm that. This aligns with general expectations for rising rates. The second question concerns the $45 million in funding costs related to discretionary CapEx. Can you clarify whether the expectation is to raise $1.5 billion in the middle of the year or $1 billion at the beginning of the year? Some insight on this would help us understand the overall structure better.

Sure. Thanks for the question, David. On the first question, what we baked into our 2019 guidance is forward curve out as of when we put it together, which is very recently. So, it's in the ballpark of what you're talking about, but it's just a forward curve of future interest rates through 2019 which we think will add about $25 million to our interest expense year-on-year. On the $45 million funding, there are a lot of assumptions that we put into that, but as I mentioned in the prepared remarks, we have about $1.5 billion of net capital to spend which when added to our dividend is higher. There is more capital going out than we would have in AFFO. We're going to have to fund that externally as you know. The mix of that funding and how we're going to do that funding and when is really based on when the nodes come on air over the course of 2019. And then to the extent that we generate additional EBITDA that generates additional debt capacity, we will use that and anything else we would issue equity for to keep our debt to EBITDA on the five times range. And all those assumptions and when and how are baked in, we have ranges around it because those are assumptions and we're going to see how it all plays out.

So the guide implies a stable share count. So, is it safe to assume that the base case expectation then is that $45 million is related primarily to debt financing over the course of the year?

Yes, David, I believe that if we aim for a funding strategy that maintains our debt at around five times EBITDA, we may need to consider issuing some equity to support this and to preserve our investment-grade ratings. The way we approach this and the timing will require careful consideration as we plan our capital expenditures for 2019. We have several factors that will influence our financing decisions, and we'll keep you informed about our strategy to ensure we remain on track.

I think maybe the other way to add, David, and maybe this is kind of where you’re driving toward. As Dan said, as we factor in those various scenarios around how we need to finance the business to maintain our investment-grade credit rating, we factor that into the $45 million. So, our intention would be to deliver on the AFFO per share, which you can calculate and the dividend growth. We expect to be able to deliver on that, given the funding that we expect in front of us in 2019 of funding about on a net basis, about $1.5 billion. So we’re factoring in the various financing scenarios and giving that guide.

So two questions. One on the escalator guide for next year, it’s a little off from 2018 levels and I wonder what’s driving that. Is that product mix or anything around term extensions or NOAs? And then secondly in the fiber segment, I’m just kind of interested now that we’re a couple of quarters in. What has surprised you on the upside versus the downside in terms of the business mix, whether it’s e-rates or cell site backhaul or enterprise or what not if you can maybe drill down a little bit into that would appreciate it?

Thanks, Jon. I’ll take the first one again, I’ll hand it over to Jay for the second one. On the escalator, it’s not nominally and it’s not different than anything we would have expected. The tower businesses still just below 3% on an escalator basis, small cells around 1.5%, and fiber solution has no escalator. So any change for a percentage basis is on the business mix that goes into that escalator.

On your second question, Jonathan. As we look at the business particularly Lightower, the largest portion of that. What I would tell you is we’re now almost a year in since that acquisition. And the business has performed in line with what our expectations are, as you’ve seen over the course of this year. We’ve delivered right in line with where we expected the business to perform. And on the integration front, all of the integration activities have been on track. So we think we’ll come out of this year with the asset largely integrated and financial performance that’s in line with the outlook that we provided when we originally bought the assets. So I wouldn’t necessarily point to anything as big surprises. We’ve made, we said multiple times that what has surprised us to the plus side is the level of collocation that we’ve been able to achieve on fiber. Now we certainly believe that to be the case when we made the investments into the business. But collocation has occurred at a higher rate and faster than what we initially anticipated. When we’ve underwritten these investments, we’ve taken an approach that’s very similar to what we’ve done with towers, where we assume that we add one tenant over a 10-year period of time or about 0.1 per year. And what we’ve actually seen is collocation on fiber from small cells in particular, that’s about twice that rate. So, the total return on fiber is driven in part by fiber solutions customers, which you referenced schools and e-rates and other things and the leasing of dark fiber assets to enterprise customers, hospitals, et cetera. And the deployment of small cells and the deployment of small cells has driven that collocation and returns at rates that are higher than what we originally underwrote. And the fiber solutions business as a standalone mix of customers, that’s performed in line with our expectation in the first year of significant ownership.

We are seeing activity from all four of the operators on small cells. The broadening as we have talked about both the increase in the number of nodes that we are turning on year-over-year, but also the number of new contracted nodes that we are seeing in the business. That's in part a function which we saw over the course of early 2018. Some of that was the broadening of the customer base and all of them beginning to deploy small cells. But I think more recently, if you took this quarter and what we expect to see into 2019 as the activity accelerates there is really a broadening of the number of markets in which those nodes are deployed. Historically, the vast majority of the activity has been focused in the top 10 markets, and I think a couple of quarters ago I mentioned that we had expanded that out to really NFL cities, and we're continuing to see a deepening of the need for small cells in those NFL cities and then seeing the carriers and some places are starting to move out even beyond the NFL cities. But at the moment, the vast majority of the activity would be concentrated in the top 30 markets in the U.S. roughly, which is an expansion from what was a couple of years ago where it was almost exclusively related to the top 10 markets. And that's driving the increased level of activity.

I wanted to revisit the fiber business after looking at the Lightower presentation when it was announced. It mentioned a 7% growth expectation, but your recent comments indicate you anticipate 5% growth next year. Is that a direct comparison? If so, does that suggest a slowdown in growth, and if that’s the case, can you explain why? Am I misunderstanding this? Also, regarding the 10,000 to 15,000 small cells planned for deployment in 2019, as we look ahead, is that a realistic target? I'm asking because of the workforce and resources needed, can you scale beyond that rate? Additionally, do you think carriers can accelerate their growth rate beyond that, even if they wanted to?

On the first one, Jay mentioned this earlier, but one of the things that I have been impressed by in the first year with our Lightower, we gave guidance last year this time before we owned Lightower, and we are coming and we are hitting that guidance. And it's something that during the course of an integration like we are going through which has been a complicated integration as we have talked about before of merging Lightower into Crown Castle and merging a bunch of other fiber companies into Lightower at the same time. The ability to hit those numbers that we put out before we actually own the business is really impressive and something that I think has been a testament to the people working in the business, but also just the business model itself. So as we look at the growth that we see going forward, we've talked about the mid-single-digit growth for a while. And we think that that's something that will continue and we're generally in line with what the expectations were and what we expected when we bought the asset and how effective the assets to perform going forward. And as we incorporate all those other fiber assets or fiber businesses that we bought historically into it, we hope we can expand markets and push that on and make it higher, but we think that mid-single digits is the right expectation to have in mind.

Colby, in response to your second question, there are two important points to address. First, regarding our current operational capacity, we can manage the 10,000 to 15,000 nodes discussed for 2019 without significant changes to our cost structure. Our outlook assumes typical cost increases and does not involve additional staffing. It’s worth noting that building these nodes takes 18 to 24 months, and while they become operational in 2019, preparations began well before that. Currently, we are adequately staffed for the activity we are experiencing. Broadly, in terms of small cell opportunities, I believe that 10,000 to 15,000 nodes annually will not meet the carriers' publicly stated needs for small cells and the density required for 5G. Given our operational capabilities, expertise, assets, and relationships with municipalities and customers, I am confident we will be the preferred provider as these opportunities grow. Looking at the long term, based on our desire to invest, I believe the opportunity will continue to expand, and we aim to participate in that growth. We want to be the provider of choice for wireless operators. We will monitor the situation, and if the long-term demand increases as I anticipate, we may need to add more resources to meet that demand, which will be supported by appropriate cash flows and returns. In the short term, our organization is well-prepared, and in the long run, we are competing to expand our opportunities, adjusting as necessary to ensure we can deliver for our customers.

And one other thing, Colby, we mentioned as the capabilities of our customers to accelerate. I think one of the benefits of our business model of being shared infrastructure provider is, if they want to go faster, we'll figure out a way to go faster and that benefits all of our customers. So they somehow figure out that more small cells are needed in 2019 or 2020 or 2024 than 10,000 to 15,000 nodes, we'll make that happen, because we've shown the ability to scale our business. And that helps them because they don't have to pay for the upfront costs, that's really on us and they get to share those economics, and it's the best way to deploy small cells is to share them amongst multiple customers because then the cost gets shared. So, we think that our business model is in line we’re trying to accelerate that, as Jay was talking about, and we become the best option for making that happen.

I had a couple of questions on the discretionary CapEx items. You mentioned the, I think 2 billion gross, 1.5 billion net. What was that in 2018 as far as where you think you’re going to end up?

It’s about the same, Ric, in the same ballpark.

Okay. And as we think about that 2 billion for 2019, can you help us peel that back as far as how much you think might be towers versus small cell versus fiber?

Yes. It’s about $400 million or so in tower and the rest is fiber. As you know, the fiber is a shared asset, so we don’t really break it down between fiber and small cells. It’s the fiber segment in total that is the remainder of it.

And that does not include the maintenance capital, right, this is all just discretionary?

Yes. But we’re giving ranges here, so to describe that, the maintenance cap is relatively small to begin with. So, these are all ballpark figures. So this is all in the range.

And then when you think about the $500 million range being contributed back by the carrier. How should we think about how much of that is coming back from tower versus small cell fiber?

It’s probably a similar breakdown between how much the total capital is.

And then kind of all it's all related questions together, the change in the amortization of prepaid rent. Are you still looking at something in the mid-30 to 40 million in ’18? And then should we think that number goes up in ’19 and given the additional capital contributions?

It’s about the same, because we’re talking about the growth in prepaid rent. It’s going to be in that $40 million range. $35 million to $40 million range in ’18 and in ’19. And because capital is the same in both years and contributed capitals the same in both years, it’s about the same amount of growth.

And last one for me. We get a lot of questions on Sprint and T-Mobile obviously it’s a hot topic out there. I think in your supplement, you mentioned Sprint was 14% of your total lease revenues or rental revenues with seven years left. Can you break out how much Sprint is on your macro towers because a lot of people are thinking that might be where the more exposure to potential churn might be?

Yes, it’s in that ballpark, Ric. There's no real difference between that. So it’s around, it’s in that 14% range for the Sprint contribution to our macro business.

One of the questions in terms of the pace of small cell deployments, I mean we’ve seen some of the new regulations come out by the FCC to sort of try and reduce some of the timing on in terms of deployment. How do you see that sort of impacting the opportunity for you folks going forward here? Could we see a further step up by operators to deploy at a quicker rate? And then sort of as follow-up question? Clearly you folks have made a lot of investments over the last couple of years in building up necessary fiber and putting the assets in place to capitalize on this opportunity. As we start to think about this opportunity going forward, I mean clearly collocation is going at a faster rate than you folks had anticipated. Do you believe that this provides you with a very differentiated competitive opportunity or should I say very sustainable differentiation in capitalizing on greater share of the small cell deployment as network evolves to embrace that type of technology?

Sure. On your first question, I believe the deployment of both fiber and small cell is forever going to be a very localized business. So what the FCC did last month is helpful to the industry to the wireless carriers and to ourselves by making clear what the underlying fees are associated with deploying and the public right-of-way and then setting forth some timeline, which municipalities are expected to respond to requests in order to do that. So, what it does is it gives a clear line of sight both in terms of cost and timing. But it in no way negates the necessity and the importance of us continuing to work with those municipalities as we manage and deploy the infrastructure in ways that are sensitive to the aesthetic and the needs of the local community. So I wouldn't look at that and assume that we're going to see a material change in our 18 to 24 month deployment cycle. In fact, we don't believe that will result. But we do believe that it is helpful in some problematic municipalities where they've been absolute basically blockers to the deployment of the technology and the deployment of fiber and small cells in the public right of way. So in some places, we may actually see a little bit of benefit, but I think on the whole what you should expect is our deployment cycle will continue to be in that 18 to 24 months range, and the FCC order is helpful as the scale of the deployment, as I was mentioning earlier moves well past just the top 10 markets and moves across the larger portion of the U.S., as it gives us greater visibility on what the economics are going to look like and the timing of approvals etc. at the local level. On your second question, this is very similar our view in the deployment of fiber to what we saw with towers, which is the low-cost provider, ultimately wins the day. And we've invested in an asset that can be shared across multiple customers thereby lowering the cost of those customers and whether the customers are the university, school district or a wireless carrier who's looking to deploy small cells. That shared fiber asset means that we're able to deliver to them a very low-cost provision of that fiber. And in markets where we have and own the fiber we do believe over the long term that low cost will win and it will attract additional customers as they look for the lowest cost alternative and the deployment of their network. As we look at opportunities outside of the markets that we're in, we may see an opportunity for us to continue to invest capital and expand the portfolio of assets that we have or it may be that the returns are such that we choose to just own the assets that we build in the top markets that we've done thus far. And we see the model transition more towards the collocation model. So it just depends on how the market develops and where the returns are, whether we continue to expand the footprint or utilize the assets that we've acquired to date. But as I mentioned in my comments, what has been clear in the early days of this is that having the asset in place drives what we fundamentally believe was the business model when we got into this business that it's a shared asset just like towers. And our goal is to put as many tenants on that shared asset as we possibly can, and the benefits customers at low-cost provision and it benefits us as it increases financial returns and that's the way we're seeing the business play out and pretty excited about where we're positioned relative to the deployment schedules that are ongoing around 5G.

And as you pointed out, Amir, just to add a little bit to that, we do believe we have sustainable advantages, especially in the markets where we have built fiber and have a pretty broad expanse of that fiber within a market. It's hard to come in and overbuild and try to compete on price and try to compete on network quality and try to compete on all of the capabilities that Jay talked about. So as this market would expand, if it expands and we believe it will, I think we hope to maintain that competitive advantage and press on it. As we invest in future markets that Jay talked about but especially in the markets we're already in, we think that we are in a really good spot.

First, if we go back to your Q1 2017 earnings call, you guys know that you had about 25,000 small cell nodes on air at the time, and you said that your backlog number of nodes on air would approximately double after 18 to 24 months. So, we don't know the exact cadence with those installations, or how the pricing for those nodes compared to the installed base, but it still seems like it would have been sufficient to drive an increase in small cell revenue in '19, in excess of what you guided to. So can you talk a bit about what might bridge that gap? Or alternatively, if there's something wrong with the notion that if you're on air node count doubles your small cell revenue should roughly speaking also double?

So a couple of things I would point to. Broadly, if you think about what has happened over the last couple of years and you look at revenue growth, if you look at our revenue growth in 2017, and then look at the revenue growth that we're expecting in 2019 from small cells, it is basically a double from in terms of revenue growth over that period of time. So that, that come that's one way of thinking about it. The second thing, I would point out to you is as we talked about the average of deployment cycles of 18 to 24 months, depending on where that falls, that can have a little bit of an impact of the pacing of that. And you'd have to look at both the pacing in 2017 and when those came on air, and then also the pacing in 2019. And those two things could have, if you were trying to put a really fine point on a couple of million dollars to figure out where that falls one way or the other. The timing in both periods could affect the way that those numbers fall out. As I've talked about, on this call this morning, from a return standpoint, we haven't seen the returns change at all over that several year period of time. So we haven't seen any real change in pricing as a result of that. So it's not a pricing difference, I think you're probably just looking at a bit of timing differences and when this activity falls, and obviously if some portion of the nodes that we're talking about in 2019 fall towards the second half of the year, then the financial impact in calendar year 2019 is relatively small. Last thing, I would mention to you is, I think probably the best indication of how we're performing on this front is the statement of customers and how we're doing on winning additional nodes. And as I made the point in my comments, I mean our pipeline is up about 40% year-over-year from this time last year. So, we're delivering on the customer commitments that we've made and that's resulting in those customers giving us increasing levels of activity because we're the best provider in the market and they believe us to be able to deliver on the goal. So I think if you look at revenue growth, if you look at returns which have stayed the same and then you look at kind of activity and what we’re seeing as additional business from the customers. I think all of those signs point to the fact that the business is performing in line with what we expected in ’19 at this point looks like it’s shaping up to be a pretty good year in terms of the deployment of additional nodes.

And maybe one more on the fiber segment this quarter. It looks like fiber segment revenue grew about a percent sequentially or something less than 1% that we backed out and they should be paid rent. If we assume that small cells are about a quarter of that business and they’re growing at a rate in the teens that would imply fiber solutions revenue was flat or down sequentially. Because I know there can be credits and settlements and stuff like that, that can swing things around. But is there anything going on there is that we should be cognizant of?

Yes, Nick, there’s nothing really to be going on there, and I think that’s borne out in our 2019 guidance. We really look at the trajectory of the growth of this business has been pretty consistent in that mid-single-digit range. And any quarter-over-quarter move, like you’re talking about is it may not go exactly stair step, but we think generally speaking, it’s going to go up in that 5% range year-over-year. And there shouldn’t be huge differentials in quarter-to-quarter moves. But if there are there, there’s nothing that would, we think we would want to call out or pull your, put your attention to, or else we would actually do that in a way that would make it pretty clear. But there’s nothing that happened in the third quarter that would rise to that level.

Hi. This is Richard for Phil. Given your commentary about the backlog and the amount of small cells that might be coming online, it seems like we might be ramping from the 10 to 15 to something higher. Should we expect CapEx and OpEx to come up longer term as these are the returns are very good? So it’s worth it. But how should we think about that opportunity and the impact on CapEx and OpEx?

Thanks for the question, Richard. On the OpEx side, as we put these nodes on air, the margins are in the neighborhood of about 60%, roughly. So there’s going to be operating expense that we see track with those, with the deployment of nodes. Specifically, as Dan mentioned earlier, about 70% of what we’re putting on are new systems and about 30% are collocations. So I think on a blended basis, somewhere in the neighborhood of about 60% is probably the right guidance in terms of impact of OpEx or direct OpEx. From a CapEx standpoint, we talked about what we’re turning on air in '19 and the capital spending that we think there will be in 2019. If you’re trying to go out further than that, I think you have to start to make us scale decision. And I’ll leave that to you in terms of how much you want to scale the business beyond the level that we’re seeing currently. For a like level of activity, I would assume a like amount of capital that would be the guidance that I would give you. And if you want to scale it up or down from there, I think you can scale the capital relative to that, and I think that’ll be a pretty good answer. And then maybe the last component to round out on the OpEx side, around the staffing levels that we have in place for the deployment of small cells. We believe we’re appropriately sized at the moment for delivering on those 10,000 to 15,000 per year. And then if we see a scale increase from there, or I guess a decrease then we’ll adjust the cost structure appropriately, but without having a specific number to talk to it's difficult to give you that. I think what I would say is, if the returns stay as they are and then we are happy to put additional investment around our ability to deploy nodes, and we think those will be attractive returns and if they are not then we would pass on the opportunity or pass on the investment opportunity. But if everything holds as it is now and we are certainly hopeful we are going to continue to see the business. We will be happy to make investments around the capabilities to continue to deployment scale if the market has the opportunity to.

I was wondering if I misunderstood your implication that there's a larger opportunity and a growing backlog.

Oh, no, we are definitely seeing a bigger opportunity. I think I'm just trying to limit my comments to calendar year 2019 rather than go out beyond 2019. So, we are certainly pointing to the fact that there are many early signs suggesting that the business will continue to scale and grow. As we approach calendar year 2019 and start considering guidance for 2020, we will be happy to update you on what the cost structure looks like.

Can you provide more details on churn? I know there's a lot happening in that area. What are you observing regarding churn with towers, small cells, and fiber? It would be helpful to go through that.

Sure, Richard. As I mentioned earlier, the tower churn is at the high end of our 1% to 2% range, around 2%. More than half of that is due to the remaining acquired network churn. Historically, we had previously provided information about acquired network churn because we expected it to push our overall tower churn above the historical range of 1% to 2%. Now that we are back within that range, we have removed that disclosure, as we believe this 1% or 2% reflects what the future will look like, including for 2019. Looking at our last disclosure, beyond 2020 we are estimating churn between $35 million and $60 million, which aligns with the churn we anticipated from the acquired networks this year, contributing to the higher end of the range, while still remaining within our historical 1% to 2%. For small cells, we are seeing very little churn, less than 1% of what we previously mentioned, which is a small number. This reflects the early stage we are in and indicates that once small cells are installed, it's challenging to transition away from them since we are providing service to customers. On the fiber side, we are in the high single-digits range, and when you combine all these factors, it totals around $175 million in overall churn that we have included in our outlook.

Thanks, I wanted to follow up on Dave's earlier question regarding your funding plan for the year. I believe I understood Dan's response, but please correct me if I'm mistaken. It seems you have decided that issuing equity financing was appropriate, which indicates that your share count will be higher than it currently is. Additionally, I think I heard that your interest expense might be lower because you wouldn't necessarily need to issue as much debt as suggested in the interest expense assumptions in your guidance. Is that an accurate interpretation of those comments?

It is Brett.

It is Brett. Yes.

Okay. Good, now, I'll ask a business question then. There's been a lot of focus on sort of what's been driving power leasing activity in the U.S. this year. And there seems to be an embedded assumption that the year has been sort of ramping in part because projects have been ramping, whether it's first net or things other carriers are doing. And so as you were trying to think about what was an appropriate outlook for your tower business for 2019? And we know that you think you're going to have more new leasing activity than you saw this year. Are you sort of saying that you're comfortable that the exit rate of 2018, which is a higher exit rate than you started the year at, is sustainable? Or is there something else more nuanced in terms of how you got there? And then just as an extension of that, how sensitive is that outlook to whether or not Sprint and T-Mobile actually starting to combine your businesses in the second half of 2019?

When we evaluate this aspect, particularly concerning tower leasing, small cells, or fiber solutions, we recognize that we lack complete visibility into what will occur over the next year. Our outlook is based on current activities and discussions with our customers, which inform our financial expectations for the year. Regarding tower leasing, we've witnessed an acceleration in leasing activity throughout 2018. This trend is influenced by several factors, including initiatives like FirstNet, the rollout of 5G, general network upgrades, and ongoing diversification efforts, all contributing to our expectations for 2019. We anticipate a high level of activity to persist throughout the year. In terms of leasing activity related specifically to T-Mobile and Sprint, we expect business as usual to continue. Based on T-Mobile's public comments concerning the Sprint acquisition, it is evident they intend to invest significantly in 5G deployment, aiming to exceed the combined efforts of T-Mobile and Sprint standing alone. Therefore, we believe this will shape our activity level for 2019. However, it's worth noting that the timing of the merger and its effects may vary, but at present, both companies are operating independently, and our outlook reflects their current activities.

And I would imagine that if, you're in the middle of the year, and they started to execute leases, which probably wouldn't even put in place until later in the year. At that point, you're kind of locked into the remainder of the year anyway, even if they decided to modify what they're doing and say, 2020 or longer. Is that fair?

Yes, that's the nature of the businesses, six months, six months into calendar year 2019 at that point, the vast majority of everything that will be turned on air the carriers have committed to. And then if you think about small cells or what happens on the small cell side, that activity was lower than committed to a couple of years ago. So we have some visibility around when that will turn on. So events that happen as we get towards the certainly as we get towards the middle of the second half of the year have very little to no impact on the financial results in that calendar year.

Just a few follow-ups, if I could. First, on the description that some of that churn, the towers is getting pulled in. Does that also create an accelerated amount of payment for the customers to exit a lease early? And if so, is that in the guidance? And then if I could also then follow up on the fiber business. Can you talk a little bit more about what goes into new leasing activity and churn? So for example like price increases, price decreases, service upgrades or downgrades. How you treat that within the revenue bridge? And is fiber churn that you’re expecting for 2019. Is that a normal year of churn or are there some helps or hurts that we should just be thinking through?

I’ll take the first one Mike. Thanks for the question. I wasn’t trying to say that our churn was being pulled in. The thing is there’s acquired network churn that is in line with what our expectations have been. And so, they’re not accelerated payments that we would have in our guidance to have that. It’s just churn that we expected and it’s coming in as we expected. On the fiber side...

Yes. On the fiber side, on the churn, this is probably a bit of a difference between the way we typically historically talked about what happens in the tower business and some of what happens in the fiber business. And we’ve chosen to just sort of conform to the industry norm. So I’ll give you an example. In the tower business, if a customer comes out and wants to add an amendment and put additional antennas on an existing array. Historically, as the tower industry we've called that an amendment and taking that additional revenue in the form of an amendment. In the fiber business, they actually count the legacy lease as churn and then put in a new lease that’s post the legacy dollar amount and then the new amended rate. And so in some ways that causes churn to look elevated beyond what we would think about in the tower business as churn. In the tower business, the churn means that the customer went away and there was no replacement of revenue. In the fiber business, you have a component of what I just described as an amendment, where the customer very well may end up paying more for the services as they take on additional capacity in the fiber network. And in some cases, you have occasions where a large enterprise will move office buildings and go to a new location. And you have an asset there and potentially a new tenant that moves into the building and you release that same fiber network and at a cost of virtually little to no additional capital investments. Again that’s counted as churn even if the entire revenue stream is replaced by the tenant taking over that location. So in some respects, I think you could look at the 9% number and say, it’s a higher percentage than is actually functionally happened in the business as we experienced churn. But we’ve just sort of taken the course of let’s continue to report the number in a way that’s consistent with the way others have thought about the fiber business consistent with the way Lightower thought about the business given that they had public debt and then in a number of meetings and explain the business. But all of that I would say well, maybe helpful for your own thinking about what the impact is for the business. At the end of the day, the right way to think about the business is what's the net revenue growth which is why we talk about Dan talked about kind of the specific net growth in the fiber business around 5% net growth. We think that's a good assumption, and we believe we can continue to operate the business in the mid-single digits of growth at the revenue line there. And obviously, that bolsters our total returns on fiber.