Q4 2019 Earnings Call
Good day and welcome to the Crown Castle Q4, 2019 earnings call. Today's call is being recorded at this time I would like to turn the conference ever get them, though Sir. Please go ahead.
Thank you Kt and good morning, everyone. Thank you for joining US today is we review our fourth quarter 2019 results.
With me on the call. This morning are Jay Brown Crown castles, Chief Executive Officer, and Dan Schlanger Crown castles Chief Financial Officer.
They the discussion we have posted supplemental materials on the Investor section of our website at Crown Castle Dot Com, which we will refer to throughout the call. This morning.
This call. This conference call will contain forward looking statements, which are subject to certain risks uncertainties 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 actually see filings.
Our statements are made as of today February 27th 2020, and we assume no obligations to update any forward looking statements.
As you saw from our press release yesterday, Weve restated our historical financials, all the financial information we discussed in this call includes the expected effect of the restatement.
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 Investor section of the company's website at Crown Castle Dot com.
With that let me turn the call over to Jay.
Thanks, Dan and thank you everyone for joining us on the call. This morning.
As you saw from our results we closed out another year of solid growth in 2019.
Which included generating the highest level of tower leasing activity in more than a decade.
I believe our strategy, an unmatched portfolio of more than 40000 towers and approximately 80000 route miles of fiber concentrated in the top U.S. markets has positioned crown castle to generate growth in cash flows and dividends per share both in the near term and for years to come.
Dan will discuss the results for full year 2019, and the full year 2020 outlook in a bit more detail. So I want to focus my comments. This morning on two key point.
First we expect 2020 to be another year of significant growth in cash flows and dividends per share.
And secondly, I'm excited about the long runway of growth for Crown Castle as we are sitting on the door stuff of another investment cycle by our customers as they deploy fiveg.
On the first point, we expect to grow answer so per share in 2020 by approximately 8% supported by similar levels of growth and our tower and fiber segment when compared to 2019.
We expect the elevated level of growth that we expect that we experienced in 2019 to continue with similar levels of tower leasing this year as our customers respond to the ongoing growth in mobile data demand.
Uncertainty around the outcome of the pending merger between T mobile and spread caused a decrease in activity during late 2019 and early 2020.
However, we believe the slowdown will ultimately prove temporary and short lived as we anticipate a significant increase in industry activity in the second half of this year, that's clarity around the merger drives a ramp in Fiveg investment.
Within our small cell in fiber business is 2019 was a terrific year as we successfully deployed approximately 10000 small cell no nodes, making the high making it the highest your production in our company's history.
We expect to deploy another 10000 small cell nodes. This year as we continue to respond to the significant increase in demand from our customers. While at the same time navigating ongoing hurdles that remain challenging with many municipalities and utilities.
We finished 2019 with more than 40000 small cells on air and another approximately 30000 NR construction pipeline as remains the leading U.S. small cell provider in terms of scale and capabilities.
Adding to the returns we are generating from a touching small cells to approximately 80000 route miles to fiber, we generated 3% revenue growth from our fiber solutions business in 2019.
And we anticipate similar levels of growth this year.
We see a path to further improve our returns over time by sharing the same fiber asset across this larger addressable market of fiber solutions customers that require high bandwidth conductivity, including large enterprises healthcare institutions and government agencies.
Simply put 2019 was a great year of growth and 2020 is shaping up to be similar, albeit potentially more backend loaded than we previously expected.
And as excited as I am about 2019 in 2020, I'm, even more excited about the bigger picture.
We have positioned Crown castle with the right off the and the REIT market.
Market, leading capabilities to deliver value to our customers and generate shareholder returns for decades to come.
As is often the case the natural tendency is to overestimate what is possible in any given 12 months stretch well underestimating the dramatic change that can occur over a 10 year period.
Looking back over the last decade, we have significantly expanded our tower business from approximately 22000 towers in the U.S. generating approximately one and a half billion dollars annual site rental revenue in 2009.
So where we are today with 40000 towers generating nearly three and a half a billion dollars and annual site rental revenues.
We also established a common stock dividend during that time that provides a consistent return of capital to our shareholders.
Currently totaling $2 billion on an annual basis or nearly 35% of our total revenues.
Further we have built a market leading position in small stuff in the small cells industry and have invested approximately $15 billion of capital to establish fiber footprints and prime locations across the top U.S. markets, where we see the greatest long term demand.
Well, making those significant investments in assets and capabilities that we believe will expand our future growth opportunity as fiveg is deployed our equity market capitalization.
Has increased from less than $10 billion to over $60 billion generating a compound annual total return of greater than 18% for our shareholders. During the last 10 years.
And the combination of the market dynamics and our unique portfolio of assets sets us up for a long runway of continued growth as the wireless industry embarks on an investment cycle to him to deploy fiveg.
This has the potential to make the next 10 years look a lot like the last 10.
The current demand environment that is generating the highest level of tower leasing activity in more than a decade is largely tied to our customers investing heavily in their fourg networks to keep pace with the 30% to 40% annual data demand growth.
On top of that continued investment.
We anticipate significant long term demand for infrastructure as Fiveg becomes a reality and wireless networks expand from conducting everyone to conducting everything.
Adding to my optimism I believe recent industry developments will help to accelerate the deployment of fiveg in the U.S.
We believe the new T mobile along with a TNT and Verizon are in a great position to leverage their scale and valuable spectrum assets.
Ultimately promoting more investment across the industry.
Adding to the opportunity. This is the first time in more than a decade that we just had visibility into a potential new customer entering the wireless market at scale with this networks looking to the point nearly 100 megahertz of spectrum over the next several years in order to compete with the established operators and meet significant buildout recall.
Uh huh.
And finally, there are several large spectrum auctions on the horizon that we believe will bode well for the future tower and small cell demand.
With our unmatched asset base and expertise operating in the best market in the World for communications infrastructure ownership.
I believe Crown Castle is in a great position to capture these substantial long term opportunities and consistently deliver.
A return of capital to our shareholders through a high quality dividend that we expect to grow 7% to 8% annually.
With that I'll turn the call over to Dan to go through some of the more specifics of the quarter in the last year.
Thanks, Jay and good morning, everyone.
We delivered another great year financial performance in 2019 with several highlights we grew dividends per share by approximately 7%, reflecting the underlying growth in our business and our commitment to returning capital to our shareholders.
We generated the highest level of tower leasing in more than a decade.
We accelerated the deployment of small cell knows by delivering approximately 10000 small cells last year, the highest annual production in our history.
And we continued to improve our financial flexibility by increasing commitments under our revolving credit facility the $5 billion.
While also lowering our weighted average borrowing cost and increasing the average maturity on our debt.
Refinancing $1.9 billion of debt at attractive long term rates.
As I walk through our full year 2019 results and our updated outlook for 2020.
Please note that where applicable all financial figures reflect the impact of the restatement, we disclosed in our earnings release yesterday, which I will discuss shortly.
Turning to our full year 2019 results on slide three the presentation.
Relative to the midpoint of our prior outlook.
Outperformance in site rental revenues was primarily offset at the adjusted EBITDA and ask the phone lines by lower contribution from services tied to a slowdown in activity during the quarter fourth quarter.
As Jay mentioned uncertainty around the outcome of the pending merger between T mobile and spread.
Led to lower activity levels in late 2019 that we believe will continue through early 2020 before rebounding later this year.
As a result, we expect our financial performance and 2020 to be more back end loaded than we previously anticipated, particularly in our services business.
Turning to slide four and looking at full year 2019 in more detail.
Rental revenues increased by $298 million inclusive of $290 million, an organic contribution to site rental revenues that a question just over 6% growth.
That 6% growth is comprised of approximately 6% growth in towers.
17% in small cells and 3% in fiber solutions.
Moving onto investment activities during the year, we deployed approximately $2.1 billion and capital expenditures, including $1.9 billion of revenue generating capital expenditures comprised of $1.4 billion in fiber and approximately $450 million and towers.
Additionally, during 2019, we returned significant capital to our shareholders through our quarterly common stock dividend totaling $1.9 billion in the aggregate were $4.58 per share representing growth of approximately 7% compared to full year 2018.
From a balance sheet perspective, we ended 2019 at approximately 5.5 times debt to EBITDA.
We remain committed to our investment grade credit rating and anticipate a glide path back to our target leverage for approximately five times by the end of 2020 based on the expected EBITDA growth throughout the year.
Turning to our full year 2020 outlook, starting on slide five of the presentation.
You can see our outlook remains unchanged apart from the effect of the restatement.
To wrap up 2019 was another very successful year for Crown Castle.
We are excited about the growth opportunity going forward as Fiveg deployments are just beginning and are expected to drive significant demand for our tower in fiber infrastructure.
Currently we are seeing the benefits from the investments our customers are making in wireless networks to keep pace with pace with increasing data demand, which allows us to provide near term result returns through a high quality dividend that we expect to grow 70% annually.
At the same time, we're making significant investments in our small cell in fiber business that we believe will position Crown castle to take advantage of the long term growth trends, Jay discussed earlier and generate shareholder returns for decades to come.
Before opening the call it up to questions I'd like to spend a minute addressing the restatement of our previously reported financial statements as described in detailed in our press release yesterday.
In connection with our year end procedures and after receiving the previously disclosed subpoena from the FCC.
Engaged in review internally and with our independent auditors of our accounting policies for our tower installation services.
Following that review, we decided with our augers to seek additional input from the office of the Chief accountant of the FCC also referred to as you'll see a regarding whether a portion of our tower of our installation services revenues to be recognized over the term of the lease of the installation work.
Oh, the lease up at least the installation work is associated with.
After consulting with the FDA, we determined that a historical practice of recognizing the full transaction prices services revenue upon completion of the installation was not acceptable under GAAP.
Instead, a portion of the transaction price for installation services.
Specifically the amounts associated with permanent improvements recorded as fiscal fixed assets represents a modification to the least to which the service workers related and therefore should be recognized on a ratable basis, a site rental revenues over the road associated remaining lease term.
To be clear this restatement only impacts the results in our tower segment and has no effect on our fibers.
It is important to note two key facts as it relates to the restatement.
First over the term of customer lease contract will recognize the same cumulative amount of total revenue and total gross margin as our historical practice.
And second the new accounting treatment will have no impact on our net cash flows our business operations or expected dividend per share growth going forward.
As noted in our release, our consultation with the FDA was not part of the previously disclosed FCC investigation or subpoena.
Based on our internal review, we continue to believe that our capitalization and expense policies, which were the subject to the subpoena are appropriate.
We will of course cooperate fully with the FCC, including in connection with their view of those policies.
With that Katie I'd like to open the call up Swift.
Thank you Sir if he would like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to allow your said no to return.
Again, Please press star one to ask a question.
All for just a moment to allow everyone opportunity to signal for questions.
My first question will come from Philip Cusick with JP Morgan.
Hi, guys a couple.
First on the restatement can you give us some examples of the types of projects for the counting on revenue is changed and why you're confident that the costs should be capitalized versus expensed.
In in a ratio where they are today.
And then second can you give us any update on progress in the small cell business on applications and permitting timing. Thanks.
Sure Phil I'll take the first part of that and leave Jay for the second one the types of projects. We're talking about is when we do services work in essence, what we're doing is putting new equipment onto our towers.
In order to do that we have to add.
Some permanent improvement to those towers, so think of something like a bracket or amount that holds the antenna in place.
As we do that we're creating a permanent asset that we believe adds to the value in the revenue generating potential that tower going forward and as we do that we have to capitalize we believe we need to capitalize those because those are permanent improvements as I just said.
That capitalization leads to.
The.
Deferral of revenue.
That portion of the services work that is associated with the capital.
So as we put that piece of equipment on the tower that adds value to the tower, we to further revenue associated with that and we capitalize the cost associated with it. The reason, we're comfortable with that and remain comfortable there capitalization policy as we do believe that we're adding to the permanent.
Revenue generating potential the tower going forward and therefore to capitalize portion of the of the work.
To add to the fixed asset base that we had in place.
And does this now more closely match the the expensing versus capitalization on the cost side.
Yes, it does it differs Galileo and and capitalizes and then.
I appreciate that overtime.
How are those roughly related in terms of sites.
Are those.
Well you can see that what we do is the capital is around it for 2019 is around $210 million.
That's the revenue that we are.
Moving from the services business and then we get about $110 million the amortization of prior and 2019 work in 2019 related to what we've done historically than amortize up through 2019.
Sorry, I meant more on the on the cost side, the relative ratio of of expense versus capitalization of those costs.
How are those the similar or different to the revenue side.
I'm, sorry fill them I'm, having a hard time following the question the relative ratio of the capitalization the expense.
On the cost side.
In terms of the costs, you're you're generating how much of it are you capitalizing or versus expensing immediately alongside the revenue.
Yes, so that the amount of costs that were capitalizing a little higher than the amount on a percentage basis, a little higher than the amount of revenue that we're deferring just because we have we have margin associated with some of that so it's pretty close, but it's probably slightly higher on the cost capitalization percentage of expense as it is the deferred revenue as percent of <unk>.
Okay, but it's pretty clear.
Okay, and then on the applications and and permanent well thanks.
Yeah happy to.
Take that one.
I think we've made great progress progress during 2019 clearing a number of different hurdles to run municipalities and utilities and we're getting better in terms of how we approach the projects.
How we how some of the work that the pre work that we do in order to get ready to launch a new project in a market.
Certainly the.
The feedback and hope that we received during the calendar year from the FCC and their new policy was helpful. As I've mentioned in past calls.
There there help was was mostly a affective in markets, where we were at a complete standstill and they clarified the timeline to be able to go through the process as well as the cost associated with doing that so that that was helpful and I think reflective of the comments the both Dan and I made around.
10000 that these nodes on aired during calendar year 2019, we would've loved to have done more obviously, but that was the highest level of production we've ever done in the in the company's history and so our team worked incredibly hard.
To to get to the place where we could deliver at that kind of scale and we think 2020 plays out very similar to that about 10000 knows that will put on this year.
But we're continuing to work on a broader efforts around the best way to overcome some of the continuing hurdles in.
And challenges of getting through municipalities and utilities.
And I every time. This question comes up but one of the things that I think is important to keep in context is.
So a lot of the hurdles associated with this I don't think or ever going to go away. So I I don't ever anticipate that our timeline today.
Between 18, and 36 months to get these small cell notes on air I I doubt that there's ever a time when we're telling you that we're able to get these done inside of a calendar year on average the timelines are long because we have to work with the municipalities in the utilities booked to navigate some of the existing infrastructure, but just to make sure that.
These these assets that's comply with the desire to statics and the community and the barriers to that entry are incredibly high just like the tower business. So I think long term, we will always be overcoming.
The hurdle or the challenge of getting these things on on quickly that's largely a relational work that we need to do with municipalities and communities that were putting this infrastructure into and making sure that that we balance appropriately the need for the infrastructure and ER and the desire to statics up the community in which the.
The infrastructure is going into.
Thanks, guys.
But.
Thank you. Our next question comes from Simon Flannery with Morgan Stanley.
Oh, great. Thank you. Good morning, just follow continuing on the small so maybe you could just share a little bit of the kind of same store sales, what's happening on a nodes per mile and your ability to lease it up and just that is there any change there in the permitting if you already have the fiber deployed and somebody wants to add another node and then just.
On the enterprise fiber business.
And any changes in your go to market and kind of your salesforce or anything like that to help drive to booking bookings engine. Thanks.
You bet on the on the first questions around small cells, we're seeing similar levels of lease up to the existing assets that we've seen over the last the last few months that we've talked about I guess the last couple of quarters that we've talked about.
We're continuing to see.
A a desire from the wireless operators to go on fiber that we built originally for an anchor tenant and mostly top 10 markets in the U.S., where the preponderance of the investment has been made we're still seeing significant activity and lease up on on on that legacy fiber.
And then the density of a new nodes when a carrier asked us to construct additional fiber to build is as stayed relatively similar so we're in the neighborhood of two to two and a nodes per mile and then as we see a carrier come back and want to go on that existing fiber I'd say generally across the country the build.
Now this is similar to similar to that.
I think you could and in a more upside cases, we think about long term.
Both from what's currently being driven for Fourg as well as what we expect in Fiveg, when Dan and I talk about kind of the upside opportunities that we have and why we're so excited about the quality of these assets over a decade I think back to the learnings around towers and in the early days of towers 20 years.
To go in the assets were built we looked at the landscape and solve that there was going to be some lease up associated with the assets, but we sit here today 20 years later and the lease up was far in excess of anything that we underwrote when we made those initial investments.
And I think the parallel on small cell side is we're underwriting these investments assuming.
Current levels of data traffic and the need for these assets in Fourg and at the same time the underlying drivers for the needed the asset data growth, which is continuing to grow at 30% to 40% per annum and fiveg coming.
We believe give us the opportunity that the underwriting criteria in the run underwriting assumptions that we've made on these assets may prove to be much lower than than the actual usage of the assets over the long term and therefore create lots of opportunity for additional return well beyond what we're underwriting and everything that.
We're seeing in the market today, what we saw throughout 2019 and all the conversations that we're having currently in 2020 and that's the carriers. We think we're starting to see the early glimpses of real Fiveg activity as we head towards the end of 2020 give us a great deal of comfort that are that the lease up is coming and the density with which we.
Underwritten these assets.
We'll be at least as good as what we've what we've expected.
And just building on that a little bit Simon.
We're still building about Oh, no activity levels about 70% anchor builds and 30% lease up.
So we're continuing to add miles of fiber to.
Accommodate the type of lease up to is talking about and what we think we're doing is getting those is kind of the first mover advantage. So when we go into a market, we build that fiber where there.
It does provide us a competitive advantage forgetting that lease up and if we're right at the at least have could be significantly more than what our underwriting than they were just building more and more of that upside into art into our asset base as we go along and therefore, one of the questions you asked as a node per mile. It really hasn't changed much it it's been in that.
Neighborhood of one node per mile on average if you look at just decided we have 80000 miles and about 70000 nodes on air under construction doesn't change much because we keep building miles a fiber that we think is just embedding more and more of that upside that Jay was talking about.
Understood I'm only that's around.
[noise] Simon did you have another question on that topic before I go to fiber. So we don't know.
Gone on the Fibria.
Okay on the fiber solutions side, we continue to I think get better at running that running that business as we as we've talked about a dance lots about specifically in the guidance for 2020, we're assuming a similar level of net growth as we had in 2019, so about 3% growth.
Growth in the business. We continue to believe that that's those are very attractive form of and sources of revenues in the across the fiber assets.
They add to the incremental yield across the asset so.
We're getting I think we're getting better at a at both the identifying and building a pipeline of a future tenancy and this strategy is playing out exactly as we thought were focused on the small cell opportunity. We think that's the biggest driver of the long term returns of the fiber business and along that alone.
As we're chasing the biggest opportunity in the biggest driver of returns we want to supplement that with the opportunity of putting enterprise clients.
On the on that same on that same fiber plant and that's playing out a similar to what we what we expected as we've talked about it both last year and then going into 2020.
Okay. Thank you.
Yep.
Thank you. Our next question comes from David Barter pardon from Bank of America.
Hey, guys, it's Josh on for Dave Thanks for taking the question.
Verizon said, they expect to deploy about five times more small cells and 2020 versus last year, maybe if you could provide any sort of insight as to what role you're playing in that and maybe you can also speculate on how you think that's possible kind of given the permitting issues and the steady deployment volumes you guys.
You're having and then secondly is there any relationship between the FCC subpoena and the restatement you did yesterday. Thanks.
On your first question Josh I.
I think I'm not going to comment specifically on Verizon or they are there plans, we try as much as we can to avoid speaking specifically to any one customer what their buildup plants are so I'd I'd refer you there.
To Verizon to get more color on on what they're expecting for 20, I I would say more broadly I think their comments match, what you hear from all of the wireless carriers and that is.
The historical pace at which we've been doing small cells is nowhere close to the long term demand for small cells and the need for small cells.
The reality of of the networks today, given the data traffic and the amount of spectrum. That's that says is is today available or will in the future be available. The density required in the network is just not possible without the use of small cells. So macro sites continue to be the lowest cost most the fish.
At way for them to deploy spectrum and to handle data demand, but the density of those sides. We do you just can't get them dense enough in order to meet the is the total market demand, which is why small cells are necessary. So I think you're going to see a common similar to Verizon and others have made those those kind of comp.
It's about the large scale necessity of small cells I know a lotta industry observers have made comments like theres going to need to be well over a million small cell built over the next decade, and we certainly believe that to be the case. The last thing I'll say about about that that topic is.
We're not underwriting that we're going to continue to capture the same level of market share that we have historically I think is we've talked about the business we've been pretty clear that we've we've been capturing about 50% of the total activity in the market for small cells.
We're not going to build fiber in every location in the U.S. and order to continue to keep pace with it and I think from the carrier comment I think there's an expectation that we have curious are going to build small cells are well beyond the top 100 markets in the U.S. in terms of total number of nodes that will ultimately get built and we may not follow.
Them to all of those markets. The vast majority of our capital. Thus far has been invested in the top 25 markets and particularly in the top 10 markets in the U.S. and I think over time the driver of our revenues and continued investment is more likely to be biased towards those top markets in the U.S. It is everywhere in the U.S.
And so as a as a tool as you see the total addressable market grow and I think you will see it grow.
We're going to be we're gonna be selective in terms of where both we invest the capital and and that investment of capital will drive kind of the the subsequent view of how many knows do end up on our on our fiber the trajectory, though I think is right in line.
With that with everything that I said in my prepared remarks about the drivers of Fourg and Fiveg.
And the growth in data necessitate a significant increase in the number of of small cell deployments relative to where we are today. So that's kind of multiplier. So when I hear our customers talk about that I'm I'm really encouraged about how we've positioned our business and give rise to the comment that I made around the optimism that I have not just for 2020, but.
Over the next decade, there's going to be a lot of growth and I think we're very well positioned to capture a significant portion of that both in terms of towers and on the fiber side is they they spent on on small cells.
And Josh Let me just address the second part of your question, which was the relationship between the subpoena restatement.
The clear sensors that they really don't have to do with each other the subpoena is ongoing and we will update when we have something to update.
And it had to do as I mentioned in my.
Statement had to do with the capitalization policies, we haven't place rather our installation services business on the restatement.
I would say though is.
When we've gone through our year end I'm reviewing and after having received that subpoena, we looked at all the policies around our installation services business.
And.
Like I mentioned, we remain comfortable with the capitalization policies, we have in place.
But what we did in conjunction with our independent Auditor was was we found a part of the of the installation services revenue recognition that was it was sufficiently technical and nuanced enough that we with our internal auditor decided that we needed to go seek and some input from the office of the chief accounting of the FCC and have had.
Done that we then figured out that we needed to restate because of a change or the way. We had done historically was not acceptable. So like I said, they're not they're not related but it did drive is down a path that let us to the us yet.
Got it thanks for taking the question guys.
But.
Thank you. Our next question comes from John Atkins with RBC.
Thanks, very much I wondered if you could just maybe give it a little bit of the update on edge computing and vapor and kind of thoughts around around those opportunities and then as it pertains to your tower business and I think we're still kind of working through the math as it pertains to the restatement that you appear to be guiding.
Towards a healthier leasing.
Year, this year compared to last year, despite it being back half weighted so am I correct in that assertion and if so what what what's driving that given given the backend nature of this year. Thanks.
Sure on the first question around edge and vapor vapor Io is a company that we made an investment in a couple of years ago, they're focused on edge computing.
And providing an ability to put a.
Small scale data centers, if you will at a at the very edge of the networks, namely at the edge of the networks means that top four sites. We made an investment in that a number of years ago, because we believe there's significant opportunity in both managing data traffic and reducing the cost of the movement of that traffic as traffic grows.
And the Interconnectivity of people, who want to connect at the very edge of the network and I think as we move towards Fiveg, it's going to open up even more opportunities at the edge, both for compute power and for Internet connectivity of.
Folks who want to get at the very edge of the edge of the networks I think our tower sites are very well positioned to capture that opportunity.
If you think about it on a base level around just a real estate play.
The the tower site provide a location for the equipment to be located and to build these co location facilities at the edge of the networks I think tower sites are well positioned for that and a significant amount of the overall wireless traffic is going to be a going across those towers. So it makes logical sense to put these facilities that the edges that when you're putting them at the edge of the net.
Work to put them at the tower sites.
The other component of our business, though that I think will equally benefit is the fiber that we have and I think as we move towards the Fiveg world and even as we're seeing in Fourg.
Fiber becomes a vital inseparable part of the wireless wireless networks and the link as the world more moves much more towards.
C ran.
I know ran is to connect sites with fiber both the macro sites.
In the small cells over over fiber and I think the assets that we have or will grow and increasing value as that as that happens in the synergies around those two assets I think open up opportunities for us uniquely for things like vapor and that's a that's why that's why we made the investment I would say just as a.
The one cautionary part of this is it still really early so we're getting revenues from from from vapor and we've deployed a number of co location facilities.
But it's not a meaningful portion of our revenues.
It's not it's not driving our our guidance yet, but we do think the the returns in the opportunity or are worthy of the investment that we made in the opportunity that lies ahead if the world develops as we think it will.
Good one day be made meaningful so we're pretty pretty excited about the about that on your second question around the tower updating and Dan can step in.
Maybe a little more specifics, if that's where your questions going I'm.
The change in tower revenue is related to the risk the effective the restatement and we have maintained our assumption in terms of total leasing for 2002 tower leasing activity for 2020 is the same as what we had previously when we gave our guidance for 2020, so we've shifted it to be.
Little bit more backend loaded but in terms of total activity, we don't actually see us slow down year over year, when compared to 2019 and.
That's a that's pretty exciting as I as I mentioned in my comments 2019 was the highest level of tower leasing activity that we've had in a decade.
More than a decade, and we think 2020 is shaping up to be similar in terms of its level of activity. So the uplift that you're referring to I think is just the effect of the restatement and the amortization of the deferred revenues that that Dan was walking through in its earlier comments.
And then on small cell tenancy grows as well as kind of build to suit activity you've talked about the 30 70 split is that relatively weighted evenly across national carriers or is it more of those narrower subset given given the emphasis.
To your customers has almost one fiber initiatives.
Oh, similar similar levels of activity across the across the industry.
There is a as I was making the comment in my or a minute ago I think the Josh as the carriers think about the deployment.
They are focused as our capital is focused largely on the top 25 top 10 markets in the U.S. is where a preponderance of the focusing capital is going currently.
So there are co locating does that's where most of the co location moving to the extent that we're making investments beyond that the ratios would be a little bit higher in terms of new assets being built a relative to co location, so arm or legacy assets would have higher levels of additional tenancy and then our our newer assets.
As we go out from that core obviously with would increase but I wouldn't draw I would draw distinction geographically rather than drawing a distinction among customers in terms of the type of activity that we're seeing.
Thanks very much.
Yep.
Thank you. Our next question comes from all these tennis daily with Cowen and company.
Hi, Great two questions. One is Jay if you look at a year plus from now and you think about beyond the T mobile sprint merger and what's happening with dish getting that there's a bigger opportunity for crown specifically as it relates to your fiber business.
Post your tower business just given.
Where those companies are in terms of their fiber build outs and what actually own and then secondly, your commentary around this you being potentially more back end loaded when would you have to see the improvement in activity for that ultimately prove correct in terms of translating into revenue and if we don't see that by that period of time.
Is there actually a risk that you might have to end up reducing your 2020 guidance. Thank you.
Sure Colby on your first question I think the opportunity look at kind of the assets that we have in the scale of those assets.
As we moved from Fourg and Fiveg, there's going to be a tremendous amount of opportunity on the tower side and from just purely from a scale standpoint nominal dollars I think towers will still still outpace outpace what we see from a fiber in small cell standpoint.
I do think though as we move towards as we move towards Fiveg and my comments around the density required and the networks. The returns the incremental returns and the total returns on the asset overtime. Yeah. I think we will be we will be benefiting on fiber disproportionately realm.
To type relative to town sports because of the total amount of activity relative to the size of the capital investment that we've made there.
And that that leads to is kind of the the upside opportunity that Dan and I've spoken a lot about and why we were in the business.
Our arts our returns on invested capital today of about 6% to 7% initially.
No get pretty close to covering our cost of capital out of the gate. The incremental returns beyond that are very attractive and as we've got these assets that we think are unique and very valuable overtime as whether its T mobile and sprint or Verizon eighttwenty at or others as they come across those asset.
I think we're going to see a really nice increase and the yield on those assets overtime and that incremental change from kind of the six to seven to the step to more than covering our cost of capital and delivering an equity return that change in yield I think we'll be more significant around fiber in small cells.
Than what what it is in towers, but believe towers is going to continue to.
Continues to do well as as we see growth on the on the tower side.
To your second question about the backend nature of the of the year.
I would go back to kind of a real basic of the way our business operates and how we think about our guidance for any given year.
There are three buckets of revenue for which we're always looking forward to the next year and making sure that we sort of count them in order to come up with our outlook. The first bucket is leases that we signed in the previous year. So your question related to 2020, we look at all of the leases that we signed during 2019 and then turned on air do earned.
2019, but only received a portion of the full years revenues. During 2019, So we turn to lease on in October of 2019, we only receive three months of rent from that lease in 2019, but will receive 12 months of rent in calendar year 2020, so that that.
Looks like significant growth in 2020 from those leases that were turned on the second second bucket of activity.
Is related to leases that we signed during 2019, and we know they're going to turn on air in 2020, and giving the timing of how long. It takes to turn on tower leases that sort of takes us through about halfway through calendar year 2020. So those leases have already been signed we know where they're going we're now what we're going to be paid on those leases and we're just schedule.
Going out those rents to be turned on they had no contribution to 2019, but they're known today and then the third bucket, which is by far the smallest bucket is leases that were working on today that ultimately will be turned on and we'll make some contribution to our revenues those generally will come on air.
For the back half of this year, if not the fourth quarter of this year as we go through the process and we may not have perfect visibility of those but that's why we give a range of revenue outcomes for the calendar year. It basically is making up for that third bucket of okay. If we do really well we come in at the high end to if we don't do quite as well we.
Come in towards the lower end of it but that's a relatively small portion of the guidance and relative to the activity level the spread on the guide.
Or the outlook is it's pretty wide in terms of what could happen with those leases because of the timing of them.
And.
In totality, though most of the revenues that we turned on this year. This year are are more known at this point so.
That's a that's probably the best way to think about.
How we how we gave our outlook and why we're comfortable saying we think the total leasing activity for calendar year 2020 is going to be pretty similar to 2019.
So your point coating only that if you are glad.
No go ahead please.
Hi. This is this kind of just make sure I understand so year to point Jay was making was that if you guys don't see the.
Back and the increase in activity. If you on the next quarter Q that translates into that more back end loaded year come through the way that you're anticipating you still are likely to be at that lower end is it that range being as wide as it is.
That's that's the way, we think about putting together our outlook correct.
And it's why when when we get on these calls and we start to talk about the business.
We tend to zoom out really quickly. So we'll talk about the year and then we start to talk about much more the long term nature of the business because whether those the whether a license turns in on in October of 2020 or January of 2021 has very little impact on the total return and it's why we talk.
Kind of our dividend growth of 7% to 8% annually over a long period of time.
The reason why circle back on kind of a decade long look any one quarter is really not determinative in terms of how that how the business operates we're much more driven by the macro trends of what are the what is the need for investment what is data growth mobile data growth and then how our assets positioned relative to that and as I looked.
The landscape things like additional spectrum coming the growth in the growth in data a new entrant all of those signs point towards much greater activity and what kind of see how the year. Your plays out we think the range that we have given us a pretty good outlook of what we think the incremental activity will be towards the back half of the year.
But regardless of where we fall in that in that range of the outlook I think the dynamics and the underlying trends of the business look really positive over the over the long term.
Probably the only thing I was going to add is that.
There is theres more volatility on our services business in one day was talking about on the tower leasing so if that comes to be whereas where the he gets pushed out it would come into our services business in may and that could impact 2020.
And that's where we would if anything happened it would be there. So we don't we actually see activity coming back we feel pretty comfortable with it otherwise we wouldn't about affirmed our guidance, but that's where it would come you would see the impact.
Yes, Thank you Dan.
Thank you. Our next question comes from Michael Rollins with Citi.
Hi, Thanks, and good morning.
So if I could just first one is just going back to the economics of the network services business. If we walk away from the income statement and just think about for every hundred dollars that a customer gives you for the full complement of network services, including and you often haitians your reinforced.
So if you're tower.
How much of that after all those investments all the people expenses like on a net cash basis, how much of that hundred dollars do you get keeping your pocket.
And then the second question is that you mentioned, a glide path to get back to five times net debt leverage how do you contemplate it using equity to try to accelerate that glide path or increase your flexibility to augment other investments. Thanks.
Yeah. So on the first one Mike I would say some of the neighborhood of $40 is what we would make a after that $100. If you just say that's the cash that we come out with with regard to.
The services business.
On the glide path.
What I would say is we're committed to investment grade rating and we will.
Get back to our five times debt to EBITDA.
We believe as as we pointed out that based on a year that we have an EBITDA growth that we expect throughout 2020 that we will.
Get back to that five times by the end of the year.
If something changes then we might have to use equity as we've always said as a way to.
Filling a gap it happens between the amount of capital expenditures in dividends, we have any amount of leverage capacity, we generate by increased EBITDA and the cash flow regenerate through.
Our AFFO.
So we we always had that option open but we believe at this point that we have leverage capacity and that the glide path works.
But we are committed to investment grade rating and we'll do what we need to do in order to maintain it.
Hey, Mike you asked the question. The first question there around kind of stepping back which I think is I think it's helpful I want to.
Take the question step back even maybe even a step further from just the economics around services and talk a little bit about how do we think about services and the and the site rental components of our business.
We pay our current dividend from the recurring cash receipts from site rentals.
The services and whether it's the the deferred revenue amortization that Dan was discussing earlier in his comments or prepaid rent all of those are related to activities that enable us to grow the dividend from its current level.
You know and I am we've referenced several times, we think we can grow the dividend over the long term, 7% to 8% annually based on all the positive industry industry trends that I've been mentioning on in my comments during the call, but with that growth comes the need for us to spend capex to both improve our existing assets and to build new asset.
Yes.
And we pass a portion of these capex cost to our customers in the form of upfront payments and services and other things, thereby in essence, reducing our net required investment for growth and these these upfront payments, they're not necessary to fund our dividends so the cash.
Margin. If you will we don't think about that as funding or funding our dividend or maybe said another way if the if the growth in our business were to stop entirely I would expect our dividend would continue at its current level and then the capex associated reimbursement services all of those would come down to a much lower.
For a much lower level than what we're we're we're currently experiencing so there's there's nothing about the restatement here that changes that dynamic we size historically in our current we size the dividend.
And we'll size the dividend payout based on the recurring cash components of our business and then the elements that are more volatile or the net cash as you kind of asked the question. Those are just indications of growth that helped offset the net capital investment that we that we need to make.
Thanks very much.
You bet.
Thank you. Our next question comes from Ric Prentiss with Raymond James.
Hi, good morning, guys.
Good morning.
Two quick ones I take on the restatement and then one more strategic question on the on the revenue side of the restatement.
It goes into amortization of prepaid rent or amortization of deferred rent.
Right and thinking that that level in 2019 was now like $460 million up 50 million year over year and how much do we expect amortization of prepaid resident would grow from 2018 to 2020.
So first of the answer your question is yes, you're right as it goes through prepaid rent amortization and to further yes, you're right for $460 million in 2019.
And that is $50 million growth over 2018, we would anticipate that it grows in the neighborhood of $60 million to $65 million again into 2020.
So the the amount of prepaid rent amortization and into 2020 is around 525 million.
Make sense and the other question. The restatement is on the cost side to Phil's question, you talked a bit about how it is capitalize those items you put on because it does help make the the tower a better asset long term.
But I assume that Capex goes into growth Capex, and then gets depreciated, which would not be NFS correct [noise].
That is true.
Okay, and then the more strategic one for Jay or whoever CBR S is another interesting topic, you've talked about auction vans coming out a lot of people looking at the CBS auction coming up in June as a potential to see more indoor systems developed where does your thoughts on.
Prs and indoors and would that be someplace that you might put capital to work or is there just so much opportunity in outdoor not that assertion.
Yeah, we're really excited about the long term opportunity that Crs the brings and I would say, we think theres opportunity, both indoor and outdoor applications I.
I think initially you're right and the bias will be towards indoor applications. Initially it's going to be interesting to watch. These the private auctions for some of these licenses and what the opportunity is there. We also think that the open spectrum.
Public spectrum that will be deployed that there's opportunity for us to use the infrastructure that we own both on the fiber small cell and tower side that theres going to be opportunities around that long term or the the component about CBR rest. It's the same as you know Rick.
From everything that's happened in the past in terms of the deployment of spectrum is the broad deployment of spectrum, regardless of what name it gets a needs the infrastructure that we own. So we look at it and think maybe initially we may be more biased towards Ah towards indoor, but we think theres outdoor applications and overtime that spec.
From will be used to meet the the growing demand for for mobile data and that that's likely to benefit well beyond.
Then user indoor applications.
Makes sense thanks, guys.
You bet.
Thank you. Our next question comes from Nick del Deo with Moffat Nathanson.
Hi, Thanks for taking my questions.
First as we look ahead is there any reason to think that you won't be able to monetize the coming wave of integration related amendment activity at the same level as your peers.
You don't like to comment on specific customers, but to put a finer point on it I'm trying to understand the capacity right you're ready to mobile back in 2012 as a part of that acquisition remain relevant consideration today.
Sure Nick No I don't I don't believe there's any reason why we won't be able to monetize that it's been a few years. Since this was a significant topic of conversation on our earnings calls, but for the most part we burned through the space rights that that our anchor tenants had on those transactions and.
So.
I think it was.
Somewhere in the 2018 timeframe that we started talking about that virtually every a every new tenant that we had was generating additional revenues as they touch the tower and Thats still the case today, we havent done any transactions that would have would have would have changed that so I think as we see incremental touches whether that's the form.
In the form of first time installments, or a or new amendment activity, that's going to be driving revenue.
And I think you can see from our results and expectations around 2019 2020.
That the those those elevated levels of activity are coming as a result of both amendments and ER and new first time installed.
Okay, that's good to hear.
The second one on small cells.
As you talk a bit about the mix of spectrum bands that are underpinning the small cell booking taking today versus what it was a few years ago.
Yes, I'm trying to understand the degree to which deployments just given the pipeline today are primarily in higher bands like millimeter wave you ever since versus mid band.
No.
I think initially when we first went into the business. Many people thought that the only the only areas where spectrum bands to be used on small cells, where the where the millimeter wave. The reality is the carriers are using the small cells across all of the bands that they that they owned.
And we will see in a given geography, a carrier will often time.
Start their initial deployment with one spectrum band.
Build out small cells for that band and then come back and add additional nodes across that same run a fiber, thereby providing lease up for us if you will and ER and adding additional spectrum bands beyond their initial deployment, but the vast majority as we talked about the number of small cell notes that we both have have built a 40000.
We've built in the 30000 that are in the pipeline almost all of those would be mid band spectrum, we're not at the point, yet where we're deploying significant numbers of millimeter wave.
I felt like that would be a that would be an modeled upside. If you will when we talk about the fact that we underwrote a fourg LTE deployments and build outs. That's under the assumption that that's a small cells would only be used for kind of mid band spectrum. So millimeter wave and things that will be used for five.
Gee those are those are on modeled upside in the way that we underwrote the assets Yeah, I think part of that Nick is because the carriers use small cells to offload some of the tower congestion so whatever bands around those towers can go onto the small cells because when when a lot of people gathered in one area. It takes up all the capacity the tower has and putting small cells there.
Other than allows the tower to become useful again and that require a similar band and similar coverage that that would happen with the tower. So we're seeing it across all spectrum bands as Jay is talking about.
Got it thanks guys.
The.
Thank you. Our next question comes from that young Levi with yes.
Great. Thank you couple of questions first on the restatement can you just explain why the amortization of the tower installation work goes on to decide to rental side as opposed to staying on the surface tide and how much closer to 5.9% organic growth corridor.
Came from that amortization piece and then secondly, you mentioned the services business being a little bit Lumpier and so right now can talk about <unk> profitability over during the quarter. If there were any onetime expenses that really low.
Margin contribution.
And lastly on churn I think churn picked up about 50 bed sequentially any items to call out there. Thank you.
Sure.
I'll start with the.
First question to ask on site rental revenue versus services because the portion of the services that we are now deferring become a modification of the lease. They therefore become a portion of the site rental revenue as opposed to services.
So it's a it's the way the accounting works, it's how we were.
Part of the reason that we went [noise].
Excuse me and discusses our auditors and ultimately CA is because this is a nuanced accounting treatment treatment and where we ended up is that.
To defer once we defer these revenues, where we recognize that amortization is in site rental revenues.
With regard to the amount of a of growth that's happening in.
In sight room revenues in the fourth quarter.
It is probably 50 basis points are so thats result related to this restatement.
I'm going to do services profitability services, yeah on the services side, there weren't any onetimers in the quarter that drove.
That drove an outcome either to the positive parts of the negative for what we were what we reported.
We did we did not have any onetimers in the quarter and I think the profitability that we should that you can see from the historical statements.
Is is what we would expect.
But going forward and then on the <unk>. The last question that you asked around churn.
That that.
We talked about it I think last quarter.
Most of the churn has worked its way through in terms of we've received notice of the churn.
But it wasn't reflected yet in the result, so the uptick was expected.
And a similar to the comments that I made around the buckets of revenue those would be leases that went away late in the year that we'll have a full year impact in 2000 2020. After after we get 2000 through 2020, we expect the the amortize the amount of churn that we see in the business comes back down.
Down towards the lower end of our guide of 1% to 2% annually of upturn. So we're working off the very end of the consolidation churn that happened from the carriers. Several several years ago, and we think it'll go back to a more normalized level beyond that and just to be clear on that that is all tower turned that we're talking about there so that that increment paid came.
Because the activity was on the towers and everything as Jay said was around the tower site.
Got it thank you.
Thank you. Our next question comes from Tim Horan with Oppenheimer.
Hi, guys can we just focused on a fiber a little bit on seat talk about the ability to leverage the conduit and fiber in the ground maybe with the you know all their surfaces and.
What do you see from a competitive environment and I guess by by other service. So you're trying to build out in areas, where you can tie into the office buildings apartment buildings data centers.
And or are you seeing any or anyone kind of overbuilt in areas that you're building out it at this point and I just had a quick follow up thanks.
Sure.
When we when we decide to take on fiber projects, we look at Holistically, what we think the total return on that fiber could could be.
The primary driver as we've said.
Of our strategy around fiber is based on what we believe will be necessary for the wireless networks, specifically what will be necessary for small cells.
And as we look at that opportunity that determines what markets what areas of the country are of interest to us in terms of owning fiber assets.
So heavily driven by what we believe in wireless opportunity is.
As a component of that though we then start to look at once we've determined whether or not it's interesting from a wireless standpoint, then we want to capture as much revenues as we possibly can along that route path from a universities hospitals, a large financial institutions or other other enterprises that may need to use that fiber.
But the strategic decision around where is driven by is driven by the way our assessment of whats necessary for wireless and and then from there we want to maximize the return on the maximize the return on the asset. So it's as many customers as we can possibly get to use that asset increases the yields and return on the asset mix.
For us to do so.
We're not seeing an overbuild of any material nature.
The assets are really expensive to build and to the extent theres existing assets. There we find that people allocate their capital to other places where the assets don't exist I think what has become increasingly clear because of the amount of fiber that's necessary in order to build out to build out small cells.
Is there is no plant in the ground that can meet this this need today and so there needs to be a significant investment broadly across the entire U.S. in places, where we will build and we won't build for dense high capacity fiber to be built because it doesn't exist today.
And it's why our strategy in terms of what we think the growth opportunities are is much more leverage towards the opportunity for us to build new fiber. We just don't see any opportunity just go out and acquire the fiber because it just doesn't it doesn't it doesn't exist.
And just a clarification your your 50 cents a flow share on on small builds is that where you have infrastructure is that due to the entire market.
We think it's the entire market as as Weve as with measured it over the last several years.
Great. Thanks, guys.
But.
Then we have time for a one more question operator. Thank you. Our final question will come from Spencer Kurn, You Street research.
Hey, guys. Thanks for taking the question.
So you disclose your total share of revenue from your tenants, you've got about 20% from each of horizon.
18, TNT mobile about 15% for sprint I was wondering if you could provide some color on how that breaks down for small cells, specifically and do you skew towards any of the carriers.
The general answer is it's very similar in terms of a small cells is what it is on the on the tower side I wish that we've seen activity across all of the all of the carriers on small cell site.
Okay. Thanks, and then one follow up it seems that T mobile and sprint are unlikely to shift their focus towards macro towers over the next few years.
As a day integrate their networks.
Could you provide some thoughts and how the merger impacts your view of your ability to ramp or small cells backlog over the next couple of years.
What it potentially stalled growth are you seeing enough demand outside of sprint and T amount that you can grow through it.
Thanks.
Yeah, you bet I think there's two factors a that.
In terms of broad assessment of what will happen with sprint and T mobile over a long period of time I think they will they will as they said publicly they'll look to rationalize some sites, where they have overlap where both of them are located on the same side I think they will rationalize some some macro sites over time.
As you know, we have pretty long dated leases there and.
Some portion of those sites.
Probably will be rationalized as they think about the network.
But we think the amount of new sites that they will take on in order to build out and and and broadcast the spectrum bands that there will be acquiring a from sprint as a part of the transaction, they're going to need a lot more macro sites, both because of spectrum that they're acquiring that is not currently broadcast today by sprint and spectrum that is being broadcast that.
They may or may adjust the whether their network plays out and that data that broadcast of that spectrum will happen through a combination of both macro sites.
On small cells, and we think we're very well positioned to capture capture components of both of those and certainly very well positioned on the on the small cell side.
As I think about kind of broad opportunity with them I would really go back to the comments that I made around the whole industry and and and the way that our assets are positioned relative to demand coming from Fourg, buildout and and Fiveg Buildouts and I think we're very well positioned with what we've done with the T mobile stuff to help them.
Accomplish their goals of building out the building out fiveg.
Got it thank you.
You bet well I wanted to thank everyone for joining the call. This morning, obviously, we expect 2020 to the another significant year of growth and cash flows and dividends that we're excited about.
And even more excited about the long runway of growth that sets up for US. This we're sitting on the door step of another big investment cycle by our customers as Fiveg is coming so thanks for joining the call. This morning look forward to talk a decent.
Thank you ladies and gentlemen. This concludes today's call. Thank you for your participation you may now disconnect.
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