Crown Castle Inc (CCI) — Q4 2020 Earnings Call Transcript

Good day, and welcome to the Crown Castle Q4 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vice President of Corporate Finance, Ben Lowe. Please go ahead, sir. Great. Thank you, David, and good morning, everyone. Thank you for joining us today as we review our fourth quarter 2020 results. With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer; and Dan Schlanger, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com, 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 sections of the company's SEC filings. Our statements are made as of today, January 28, 2021, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the company's website at crowncastle.com. So with that, let me turn the call over to Jay.

Thanks, Ben, and thank you, everyone, for joining us on the call this morning. As you saw from our announcements last night, we delivered another year of solid growth in 2020. We expect to generate double-digit AFFO growth per share in 2021, and we secured our largest-ever small cell commitment with the 15,000 node award from Verizon to support their 5G build-out. Dan will discuss the results in our full year 2021 outlook in a bit more detail in a minute, so I want to focus my comments on two areas: our strategy to maximize long-term shareholder value while also delivering attractive near-term returns and the recent positive developments that increased my confidence in our strategy and growth opportunity. I believe our strategy and unmatched portfolio of more than 40,000 towers and approximately 80,000 route miles of fiber concentrated in the top U.S. markets have positioned Crown Castle to generate growth in cash flows and dividends per share, both in the near term and for years to come. Despite the challenges presented last year, we continued to build on our long history of consistently delivering compelling growth through various market cycles, highlighting both the strength of our business model and the significant value-creation opportunity our strategy provides to shareholders. One of the core principles of our long-term strategy is to focus on the U.S. market because we believe it represents the fastest-growing market for wireless network investment with the least amount of risk, leading to superior long-term returns. The demand for our shared infrastructure is fundamentally tied to the insatiable demand for mobile data in the U.S., which increased by 30% again last year. Because these growth outlooks and market fundamentals are so compelling, the U.S. wireless market continues to attract a disproportionate amount of capital investment. This dynamic is again apparent with the C-Band spectrum auction with gross proceeds of more than $80 billion. During my more than 20 years at Crown Castle, large-scale wireless spectrum auctions in the U.S., like this one, have followed a consistent pattern. First, industry observers questioned whether the capital required to secure the valuable spectrum will crowd out investment in wireless networks. And second, these questions are answered with long periods of sustained significant investment. Similar to the past, the seemingly insatiable demand for data drives the need for additional spectrum. Further, the only way the spectrum can meet the demand is for our customers to deploy it on towers and small cells. I am confident that we will look back in the years to come and recognize how important this auction was for the development of nationwide 5G in the U.S. In addition to deploying more spectrum, cell site densification has always been a key tool that carriers have used to add network capacity, enabling our customers to get the most out of their spectrum assets by reusing the spectrum over shorter and shorter distances. The nature of wireless networks requires that cell site densification will continue as the density of data demand grows, particularly given the higher-spectrum bands that have been auctioned in recent years and that have shorter propagation characteristics. Slide 3 illustrates this point. The higher-frequency spectrum bands are valuable because they provide our customers with the ability to significantly increase network capacity given how much more spectrum is available in those higher frequencies. However, as you can also see on this slide, the signal travels over shorter distances, requiring more cell sites. As a result, we expect both the deployment of additional spectrum and this densification trend to drive significant demand for our tower and small cell assets for years to come. To address this sizable and growing opportunity, we have invested nearly $40 billion of capital over the last couple of decades in shared infrastructure assets that we believe are mission critical for wireless networks. Our tower investments began more than 20 years ago when we built and acquired assets that we could share across multiple customers, providing a lower cost to each customer while generating attractive returns for our shareholders over time as we leased up those assets. More recently, as wireless network architecture evolved to require a network of cell sites that is much denser and closer to the end users, we established the leading small cell business in the U.S. with the same thought process in mind: provide a shared infrastructure solution that lowers the cost to each customer while generating compelling returns for our shareholders over time as we lease up those assets. We believe the addition of small cells and fiber to our strategy both complements our tower business and provides substantial potential upside to our 5G growth strategy. To that point, we recently signed two strategic agreements. In November, we announced a 15-year agreement to lease DISH space on up to 20,000 of our tower sites. This strategic agreement established Crown Castle as DISH's anchor tower provider and includes certain fiber transport services to further support their nationwide 5G build-out. This agreement will contribute to our financial results over time as DISH deploys on our tower sites, and we expect to start in the back half of this year. We're excited to partner with DISH to support their long-term infrastructure needs and look forward to working with them as they deploy a nationwide 5G network. As we announced yesterday, we are also excited that we have expanded our strategic relationship with Verizon by signing a long-term small cell agreement to support Verizon's 5G ultra-wide band and 5G nationwide deployment. Under this agreement, Verizon has committed to lease 15,000 new small cells, representing the largest small cell award in our history and demonstrating the value of sharing small cell and fiber infrastructure assets with multiple customers. While we believe it is our ability to provide the full breadth of wireless infrastructure assets that allowed us to secure the agreements with DISH and Verizon, highlighting the benefits of the unique portfolio we have built over the last 20 years. With our 40,000 towers and 80,000 route miles of high-capacity fiber concentrated in the top U.S. markets, we believe we will continue to reap the rewards of our investments as our customers continue to roll out their nationwide 5G network. As we noted in our press release, late last year, T-Mobile notified us that they were canceling approximately 5,700 small cells that we initially contracted with Sprint. The majority of the small cells were yet to be constructed and would have been located at the same locations as other T-Mobile small cells once completed. The Sprint cancellation resulted in T-Mobile accelerating the payment of all contractual rent obligations for those small cells as well as the payment of capital costs we had already incurred. In addition to receiving the future rent associated with the canceled nodes, the small cell locations are now again available for future customers. And this development does not impact the long-term growth opportunity for our small cell business. As a result, we finished 2020 with approximately 50,000 small cells on air, and we have meaningfully increased our backlog of small cells committed or under construction to approximately 30,000. As I reflect on 2020, I'm proud of how well our team delivered for our customers and our shareholders during a difficult operating environment. Looking forward, I'm excited about the growth opportunity as our customers embark on what is likely to be a decade-long investment cycle to develop 5G in what remains the best wireless market in the world. Our strategy remains unchanged as we focus on delivering the highest risk-adjusted returns for our shareholders by growing our dividend and investing in assets we believe will drive future growth, and I believe Crown Castle offers shareholders an unmatched opportunity to benefit from the launch of 5G wireless networks. We provide a compelling total return opportunity with a high-quality dividend yielding more than 3%. We are delivering the highest tower revenue growth rate in the U.S. among our peers. We expect to generate double-digit AFFO per share growth this year, even before 5G spending occurs in earnest. Our customers are affirming the value we bring with our comprehensive portfolio of shared infrastructure assets by entering into long-term agreements to access those assets, and we are investing in new infrastructure assets that we expect will extend the opportunity to grow dividends per share 7% to 8% per year. I believe this combination is as compelling for future value creation as we've ever seen at Crown Castle.

Thanks, Jay, and good morning, everyone. As Jay mentioned, our 2020 financial results add to our long history of consistently delivering attractive growth. Specifically, we increased dividends per share by 8%, which reflects our commitment to return capital to shareholders and demonstrate our ability to grow through various market cycles. We delivered approximately 6% growth in organic contribution to site rental revenue, and we continue to improve our financial flexibility as we lowered our weighted average borrowing costs, extended the average maturity of our debt and reduced our leverage. Before I walk through the financial results in more detail, I wanted to briefly discuss the non-typical items described in our earnings release yesterday that impacted fourth quarter and full year 2020 results. The Sprint cancellation Jay mentioned generated the biggest of these impacts, including an increase to other operating income, partially offset by a related increase in operating expense and the write-off of capital already spent on the construction of the canceled nodes. Additionally, we implemented a reduction in staffing primarily in our fiber segment that resulted in associated severance costs in the fourth quarter. The fourth quarter and full year 2020 net benefit of these non-typical items, which were not contemplated in our prior full year 2020 outlook on both adjusted EBITDA and AFFO, is approximately $286 million. We do not anticipate the non-typical items will have a material impact on our 2021 outlook, which remains consistent with the outlook we've provided in October. To make the financial figures in this earnings presentation more comparable, full year 2020 results and growth figures for full year 2021 have been adjusted to exclude the impact of these non-typical items. Turning to Slide 4 of the presentation. Full year 2020 results were consistent with our prior expectations with site rental revenues and adjusted EBITDA increasing 4%, while AFFO increased 9% when compared to full year 2019. The 4% growth in site rental revenues included approximately 6% growth in the organic contribution to site rental revenues, consisting of approximately 5% growth from towers, 15% growth from small cells, and 3% growth from fiber solutions. Focusing on investment activity during the year, we deployed approximately $1.5 billion toward discretionary investments in 2020, including $1.2 billion for fiber and approximately $320 million for towers. These investments were balanced with approximately $2.1 billion paid in common stock dividends or $4.93 per share, representing 8% growth when compared to dividends paid during 2019. Now turning to Slide 5. Our full year 2021 outlook remains unchanged with 4% growth in site rental revenues, 5% growth in adjusted EBITDA and 12% growth in AFFO. As shown on Slide 6, the expected 4% growth in site rental revenues includes approximately 6% growth in the organic contribution to site rental revenues, consisting of approximately 6% growth from towers, 15% growth from small cells, and 3% growth from fiber solutions. As a reminder, DISH has publicly stated they expect to begin their network deployment later this year, so our outlook does not include a material contribution from DISH's build-out. Likewise, our recent agreement with Verizon is not expected to have a material impact on 2021 results. As it relates to the balance sheet, we finished the year with approximately 4x debt to EBITDA on a last quarter annualized basis, which includes the net benefit from the non-typical items discussed earlier. Adjusting to include those items as one-time impacts that are not annualized, our leverage would have been approximately 5x. During 2020, we improved our balance sheet flexibility by extending the weighted average maturity by nearly 2 years, reducing our average borrowing cost by 40 basis points and reducing our leverage to our target of approximately 5x. Looking forward, our expectation for 2021 capital expenditures remains unchanged at approximately $1.5 billion. We expect we will be able to once again fund this discretionary capital with free cash flow and incremental borrowings, consistent with our investment-grade credit profile. As I wrap up, we are excited about the positive demand trends in the U.S. wireless market and the opportunity we see to translate that demand into double-digit growth in AFFO per share this year. Looking further out, we believe our focus on the U.S. market and our ability to offer a broad portfolio of towers, small cells, and fiber solutions, which are all integral components of communications networks, provides us the best opportunity to deliver superior long-term, risk-adjusted returns for our shareholders. Before we open the call to questions, I want to also mention that we were recently informed by the SEC that they have concluded the previously disclosed investigation and that they do not currently intend to pursue an enforcement action. With that, David, I'd like to open the call to questions.

Just curious if you could spend some time discussing more of the small cell deal that you announced with Verizon in terms of how to think about the economics for this larger small cell deal versus maybe some of the others that you signed. How much might be on existing infrastructure versus infrastructure to be built and how that can flow through the P&L over the next few years?