Q2 2021 Crown Castle International Corp Earnings Call
Please standby we're about to begin.
Good day and welcome to the Crown Castle Q2, 'twenty 'twenty 1 earnings conference call. Today's call is being recorded and now at this time I'd like to turn the conference over to Mr. Ben Lowe Vice President of corporate Finance. Please go ahead Sir.
Great. Thank you Cody and good morning, everyone. Thank you for joining us today as we discuss our second quarter 2021 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 Jay.
And the discussion we have posted supplemental materials and the investors section of our web site at Crown Castle Dot com that we will that will be referenced 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 and the press release and the risk factors section of the company's SEC filings. Our statements are made as of today July 22, 2021, 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 and the investors section and the company's web site at Crown Castle Dot com.
Before I turn the call over to Jay I want to mention that we will take as many questions as possible. Following our prepared remarks, well we plan to limit the call to 60 minutes. This morning, So 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 second quarter results and increased full year outlook, we continue to generate significant growth and cash flows and dividends from the deployment of fiber and the U S.
We are experiencing the highest level of tower activity and our history, resulting in a year of outsized growth as we now anticipate 12% and growth and <unk> per share for full year 2021 meaningfully above our long term annual target of 7% to 8%.
Our current 7% to 8% growth target was established in 2017, when we expanded our fiber and small cell strategy through the completion of our largest acquisition this 7% and 8% and growth target with an increase of 100 basis points from our prior target since we expected a diverse portfolio to increase our ability to consistently.
Drive long term growth since.
Since that time the strategy has worked better than expected as we have grown our dividend per share at a compounded annual growth rate of 9% with some years being driven by outsized growth and our fiber and small cell business like last year and other years like this 1 being driven by higher growth and our tower business.
This record level of activity is tied to the existing wireless carriers, increasing their spend to add more equipment to tower sites and dish starting to build a new nationwide fiber network from scratch.
We expect this elevated level of activity to continue beyond this year and support future growth on our towers.
While driving strong growth and our tower business. This year. The initial focus by our customers on towers has also led to some delays and our small cell deployment.
And the timing of when we expect to complete the nearly 30000 and small cells contractually committed and our backlog.
When combined with zoning and permitting challenges as well as the previously disclosed sprint cancellation, we now expect to deploy approximately 5000 and small cells and each of this year and next year with the remaining nearly 20000 and from our current backlog completed beyond 2022.
This delay has not impacted our view of long term attractiveness of small cells since the fundamental need for small cells continues and the unit economics remain in line with our expectation.
With more than 50, thousands of small cells on air we have already seen how important small cells are as a key tool used by the carriers to add network capacity by reusing their spectrum over shorter and shorter distances. We believe small cells will be and even more important tool going forward. That's the nature of wireless networks requires continued.
All site Densification to meet the increasing demand for data, especially as <unk> networks are deployed.
As a result, we believe these timing factors will not alter our long term returns on our investments or our ability to deliver on our growth objectives.
Dan is going to discuss our second quarter results and our expectations for the balance of 2021 and a bit more detail. So I want to focus my comments. This morning on our strategy to deliver the highest risk adjusted returns for our shareholders.
1 of the core principles of our strategy is to focus on the U S market because we believe it is the best market for communications infrastructure ownership with the most attractive growth profile and the lowest risk.
With that view and mine, we've invested nearly $40 billion and shared infrastructure assets that we believe are mission critical for today's wireless networks and sit in front of what is expected to be a massive decade long investment by our customers to deploy <unk> and the U S.
As you can see on slide 4 our tower and fiber investments are at 2 different stages of development and maturity. Our tower investment began more than 20 years ago, and approximately 3% yield when we built and acquired assets that we could share across multiple customers.
By providing a lower cost to each customer we have lease up those assets over the years and generated compelling returns for our shareholders.
As we have proven out the value proposition for our customers over time, our tower assets now generate a yield on invested capital of 11% with meaningful capacity to support additional growth.
As we realize the wireless network architecture would need to evolve with forgey, requiring a network of cell sites that would be much denser and closer to end users. We expanded our shared infrastructure offering beyond towers, establishing the industry, leading small cell business and the U S.
It is encouraging that the business is already generating a current yield on invested capital of more than 7% given the relative immaturity of these investments.
To provide additional visibility into how our investments are progressing we've updated our analysis of the cohort of 5 markets, we introduced a year ago.
Looking at our collective view of how these 5 markets have performed over the last year on slide 5 growth from both small cells and fiber solutions has contributed to an incremental yield of 7% on the approximately $200 million of incremental net capital investment.
Adjusted for the timing impacts associated with a large and process small cell project, where capital investment has occurred and advance in advance of the corresponding revenue and cash flows the incremental yield is approximately 8%.
This incremental yield resulted in a modest decline and the combined cash yield from 9.2% a year ago to 9% currently.
This is in line with our expectations as we have invested and new small cells at a 6% to 7% initial yield that we expect to grow over time as we lease up those assets to additional customers.
During the last year and these markets. We have added more than 500 route miles of new high capacity fiber to support the deployment of approximately 2000 and small cells and.
<unk> approximately 40% of the small cells deployed were co located on existing fiber with the balance representing new anchor builds and attractive areas of these markets, where we expect to capture future small cell and fiber solutions demand.
We believe each of the market shown on slide 6 provides a helpful representation of how our overall strategy is performing over time, given how different these markets are when it comes to the average life of the investment.
Density of small cell nodes per mile of fiber and the degree of contribution from both small cells and fiber solutions.
Generally speaking, we would expect markets that have a longer average investment life to have higher returns and those with less mature assets.
This is true because we have more time to add customers to existing assets.
Which is consistent with our hits historical experience with towers, where do we have on average added about $1 and tenant 1 new tenant every 10 years.
Similar to our experience with the movements and the yield and tower investments over time as we showed back on page 4 sometimes this steady climb of yields on legacy investment is less obvious as we invest and less mature assets that bring down the overall market yield. This was certainly true of some of the cohort.
Very much related to the average life of the investment as the density of small cells per route mile of fiber.
<unk> adds in the tower business the co location of additional notes on existing fiber is what drives the yields up over time.
Consequently, we typically see a higher percentage of nodes co located on existing fiber as the density of nodes increases on.
On the third characteristic we believe the markets with both small cells and fiber solutions will ultimately have higher yields than those with only 1 of the 2 revenue streams.
With this setup as a backdrop I want to share a few observations that I think are important to highlight as we assess this data set on page 6.
Looking across the markets you can see the longer average investment lives tend to correspond to higher yields.
Denver has the least mature capital base and the lowest market yield while Orlando has 1 of the most mature capital basis and the highest yield.
In addition, the higher density of nodes per mile, which is generally correlated with the longer investment life and higher percentage of co located and generates higher market yields.
The financial benefit associated with co locating nodes is apparent when looking at the incremental yield and Los Angeles, and Phoenix and the last year about half of the small cells deployed across those 2 markets were co located on existing fiber, resulting in a strong incremental yield.
Meanwhile, Denver does not fit neatly into this framework featuring the highest node density, but the lowest yield part of the explanation is that Denver is a market, where we spent more than we originally budgeted on our initial build activity, which weighed down the starting yields.
Importantly, during the last 12 months, we achieved strong yields on incremental invested capital and Denver, increasing the market yield by 70 basis points. This is consistent with our experience more broadly and the small cell business as co located nodes on existing fiber come at high incremental yields driving attractive returns over time.
And finally looking at the financial benefit of having both small cells and and fiber solutions leveraging the same asset base you can see the markets with a meaningful contribution from both offerings are generally performing better.
The Best example to point to here is Philadelphia, where despite having a less mature capital base and lower node density than Phoenix. It is generating a similar yield on invested capital of nearly 10% due primarily to the higher contribution from fiber solutions.
Our experienced and Philadelphia also highlights another important point when assessing the performance of our portfolio of assets.
Similar to what we've seen throughout our long history of towers. When you zoom in on a particular set of assets and focus on a short time period. The picture may not always be perfect over the last year the market yield and Philadelphia has contracted by 60 basis points due to a combination of a lack of small cell activity is this was not a priority market for our customers and more.
And muted growth from fiber solutions.
Despite this Philadelphia is still generating a very attractive yield on invested capital and we believe our dense fiber footprint and this top market is positioned well to capture future small cell and fiber solutions growth.
In summary, the combined performance of this cohort of market provides another point of validation for our strategy with small cells and fiber solutions growth contributing to attractive incremental yields while we continue to make discretionary investments and new assets that will expand the long term growth opportunity.
Turning back now to our overall strategy assets been obvious to all of US over the last 18 months connectivity is vital to our economy and how we live and interact with 1 another.
Our strategy is to provide profitable solutions to connect communities and people to each other.
Our business is also inherently sustainable our shared infrastructure solutions limit the proliferation of infrastructure and minimize the use of natural resources. Our solutions help address societal challenges like the digital divide and underserved communities by advancing access to education and technology.
As you've seen and our last 2 sustainability reports, we've enhanced our focus on ESG, which we believe will drive increased revenue opportunities from things like smart cities and broadband for all and lower operating costs and areas like tower lighting electric vehicles, and interest savings, which Dan will discuss in just a minute.
Importantly, none of this is possible without a team at Crown castle that embraces diversity and inclusion and ensuring that our employees and our business partners are empowered to help us serve our customers connect our communities and build the future of communications infrastructure and the U S.
So to wrap up we expect to deliver outsized <unk> per share growth of 12%. This year as we capitalize on the highest tower activity levels and our history with our customers deploying fiber <unk> at scale. We expect this elevated level of tower activity to continue beyond this year.
Our diversified strategy of towers, and small cells is driven higher growth than expected as we have grown our dividend at a compounded annual growth rate of 9% since we expanded our strategy in 2017.
And looking forward I believe our strategy to offer a combination of towers small cells and fiber solutions, which are all critical components needed to develop 5 G will extend our opportunity to deliver dividend per share growth of 7% to 8% per year and when I consider the durability of the underlying demand trends, we see and.
The U S that provides significant visibility into the future growth for our business I believe Crown castle stands out as a unique investment that we believe will generate compelling returns over time and with that.
I'll turn the call over to Dan.
Sorry, Thanks, Jay and good morning, everyone.
As Jay mentioned 2021 shaping up to be a great year of growth for Crown castle as our customers deploy 5% nationwide.
The elevated tower activity drove strong second quarter financial results and another increase to our full year outlook, which now includes an expected 12% growth and <unk> <unk> per share.
Turning to the second.
Quarter results on slide 7 site rental revenue increased 8%, including 5.3% growth and organic contribution to site rental revenues.
This growth included 8.6% growth from new leasing activity and contracted escalators net of 3.3% from non renewals.
The higher activity levels also drove a $40 million increase and contribution from services when compared to second quarter 2020.
Leading to 15% growth and adjusted EBITDA, and 18% growth and assets <unk> per share.
Turning to slide 8.
With the strong second quarter and continued momentum we have again increased our full year outlook highlighted by a $30 million increase to adjusted EBITDA and a $20 million increase to assets up there.
The higher activity and towers drove the majority of these changes to our outlook, including an additional $15 million and straight line revenue.
A $45 million increase to the expected contribution from services and $15 million of additional labor costs.
The lower expected volume of small cells deployed this year that Jay discussed earlier results and a $10 million reduction and organic contribution to site rental revenue, which translates to a 20 basis point reduction and the expected full year growth and consolidated organic contribution to site rental revenue to 5.7%.
Our expectations for the contribution to full year growth from towers and fiber solutions remains unchanged at approximately 6% for towers and 3% for fiber solutions with small cell growth now expected to be approximately 10% compared to our previous outlook of approximately 13% growth.
Moving to investment activities during the second quarter capital expenditures totaled $308 million, including $19 million of sustaining expenditures $60 million of discretionary capital expenditures for our tower segment and $223 million of discretionary capital expenditures for our fiber segment.
Our full year expectation for capital expenditures has reduced to $1.3 billion from our prior expectation of 1.5 billion.
Primarily attributed to the reduction and small cells, we expect to deploy this year.
Turning to our balance sheet, we exited the second quarter with a net debt to EBITDA ratio of approximately 5 times, which is in line with our target leverage.
Consistent with our overall focus on delivering the highest risk adjusted returns for shareholders, we have methodically reduced risk across our balance sheet over the last 5 years by reducing our exposure to variable rate debt and extending the maturity profile of our borrowings to better align the duration of our assets and liabilities.
Specifically since our first investment grade bond offering in early 2016, we have increased the weighted average maturity from just over 5 years to nearly 10 years increased our mix of fixed rate debt from just under 70% to more than 90%.
And reduced our weighted average borrowing rates from 3.8% to 3.2%.
Consistent with that focus we issued $750 million of 10 year senior unsecured notes in June at 2.5% to refinance outstanding notes maturing in 2022 and to repay outstanding borrowings on our commercial paper program.
Additionally in June we amended our existing credit facility extending the maturity date to June 2026, and incorporating sustainability targets that resulted in lower interest rates and the facility as we achieve specified sustainability metrics over the next 5 years.
We believe this was the first time sustainability targets had been incorporated and our credit facility for tower companies.
Adding quantifiable sustainability metrics to our inherently sustainable sustainable business model that Jay outlined earlier highlights our commitment to delivering value to all our stakeholders.
Stepping back into wrap things up we are.
We're excited about the record levels of tower activity as our customers deploy 5 gx scale.
We are capitalizing on those present positive fundamentals and expect to deliver a great year of growth with <unk> now expected to grow 12% for the full year 2021 meaningfully above our long term annual target of 7% 8%.
Our diverse diverse portfolio of assets and customer solutions has performed better than expected since we meaningfully augmented our fiber footprint with a large acquisition and 2017 as we have grown our dividend per share at a compound annual growth rate of 9% over that time.
Importantly, and some years like last year, our fiber and small cell business is driven that outperformance while in other years like this 1 our tower business as the driver.
We continue to invest and new assets that we believe will allow us to grow our dividend per share at 7% and 8% per year going forward.
This growth provides a very attractive total return opportunity with combined with our current approximately 3% dividend yield and we believe our investments and new assets will extend this opportunity and of the future.
With that I'd like to open the call to questions.
Absolutely. Thank you if you'd like to ask a question please signal and pressing star 1 on your telephone keypad.
If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star 1 if you would like to ask a question and then.
We'll take our first question from Michael Rollins from Citi.
Thanks, and good morning.
I'm curious if you could just unpack a bit more in terms of the change in the small cell targets for 2021, and 2022 in terms of weighing and the impact that the customer decisions had relative to the Dell.
<unk> impacts and some of the issues you're experiencing just on that timeline to get small sales constructed and then just a follow up question curious.
In the supplemental deck.
There is some additional straight line that was highlighted into the quarter and.
And there is mix and Shane or an increase and duration of average lease length for the non big 3 national carriers and I'm just curious if you pick and pack the activity net.
Youre seeing Jess.
Outside of what you've experienced from the big 3 national carriers and the context of what was in the deck and have it make.
And they come through and the future. Thanks.
Yes, good morning, Mike I'll take the first question and Dan can address the second 1.
As we highlighted there is 3 primary components of our decisions pushed out some of this activity beyond 2022.
There's the customer prioritization, which we highlighted the sprint cancellation.
And then also the zoning and permitting challenges.
Breaking that out by by years.
I would put the customer prioritization and some of the zoning and planning challenges as hitting us in 2021, and then the <unk>.
Brent cancellation and 'twenty 2 is the biggest impact there along with some of the timing of the new nodes and those going out and years beyond.
And 2022.
Big picture, if I could back up to kind of what drives that and why are we seeing it.
And I would go back to past experiences as we've gone through technology cycles and upgrades networks went from <unk> to <unk> 3 to 4 and now we're in the middle of this move from <unk> to <unk>.
And the character the carriers go through a process of really prioritizing the sites that they're already on and upgrading those sites with the new technology and in this case, it's a combination of new technology and upgrading those sites with the new spectrum bands that they've they've acquired and so what we've seen and these early stages of <unk> is a real fee.
Focus on getting those new spectrum band out on macro site. So theres been a re prioritization of the capital spend here.
Here in calendar year, 2021 of moving towards getting those macros upgraded for 5 G and and and deep prioritizing and the near term some of those small cells. So we think it's just we think it is just timing as I mentioned as I mentioned earlier that they are just pushing out to the right and obviously when you look at our results and our outlook.
We're seeing the push on that is going towards towers. So mean.
Meaningful uplift on the services side and the tower activity and.
And our level of elevated activity, we really frankly on the macro tower site have never seen and our company's history, and we think thats going to continue into 2022 as the carriers over allocate towards macro sites not only this year, but then next year and then while we think we think it probably comes back to a more and more.
<unk> activity level as we get into 2023.
Yes, Mike I'll hit your second question around the straight line increases and extensions.
And as we've discussed before those straight line increases happen a couple of ways on a first time out and install as you can see it where we get a 10 year contract and that includes some straight line impact, but all of them are.
Or on an amendment, where we go and add additional equipments and existing site.
We actually extend the term of the contracts that are the leases at that point, we get additional straight line for both of those things. So what I would say is the increase and activity that Jay just talked about across both first time installs and across the new amendments is causing a lot more activity and then more straight line to hit our numbers this year.
And some of that is also having the impact you're talking about extending the contracts both within the large green national carriers, but also outside of that as other companies are.
Increasing their activity is especially like we've talked about with dish starting to deploy nationwide fiber network going forward. So all of those things will add into both straight line and the extension of the contract life overtime.
Thank you.
Sure.
And.
Thank you, we'll now take our next question from Simon Flannery from Morgan Stanley.
Great. Thank you very much great to hear the commentary on the macro business and the historical rate of activity could you just be a little clearer about what you mean by activity where are we today and obviously the services business is extremely strong, but what are you seeing in terms of signed leases and.
When do you expect that these commencements to impact your numbers and in particular is there anything materially and your numbers this year free dish. Thanks a lot.
Yes, Simon and thanks for the question good morning.
When we talk about activity, where we're speaking specifically about applications for our towers. So in some cases those applications are related to going on towers. They are not previously on then and some cases those applications would be for amendments on sites that they are already co located on so we meet it collectively in terms of total applications.
I don't want to get specifically into which carriers, where we're getting the benefit from but we're seeing it across the board on the tower side, obviously from the 4 carriers that everybody thinks about as well as the carriers that Dan was referencing that are outside of the large nationwide carriers, we're seeing activity increase there and.
2021 represents a pretty meaningful step up from anything that we saw and in.
In the years prior to 2021 and as I mentioned before we think that activity is going to continue into 2022 and will be reflected and our results.
Obviously big picture as I as I spoke to the longer term. This diversification I think has really helped us last year. As we went into 2020, we saw we saw and allocation away from towers and towards small cells and and small cells and towers really helped us as we looked at our growth rate last year and and this.
Year, moving the other direction and and allocation and more towards towers and 1 that we think continues.
And the end of 'twenty into 'twenty, 2 and secures focused on upgrading their macro site and I think and maybe this is kind of that the heart of your question around the activity. The carriers, it's very common for them and the pass through past technological upgrade cycles, and we think this will be true and <unk> they'll go.
Back to the sites that they're already on and upgrade those sites for the new technology that will drive activity and then as they move towards Densification activities.
And then we will see more of that focused on on small cells and and then also some on the macro sites as they go on towers that theyre not on currently but were in the in the cycle of the long cycle of upgrading and.
Upgrading to <unk> those early stages, there focused on upgrading the site they're already on.
Great and just 1 follow up on the Capex point, I know youre not giving 'twenty 2 guidance is it fair to think Ben given 5 thousands. This year 5000 next year, the discretionary capex should be similar to 'twenty 1.
Yes.
And I would say, yes to everything you just said there Simon we don't want to give guidance right now, we'll do that and 3 months, it's not that far from now and we will get there.
But yes, the Capex does follow activity levels. So, we'll follow that along and and give more specific guidance in October.
Thanks.
Thank you and we'll hear next from Matt Nick Kim with Deutsche Bank.
Hey, guys. Thank you for taking the question.
First just to go back on small cells and I'm. Just wondering you highlighted 3 points in terms of what drove the.
Lowered outlook for this year and next I'm. Just wondering is there a risk or are you starting to see more self build from the carriers, taking a greater share.
Some of the newer small cells coming on air and.
And then secondly, I hate to go into 2022, but just given the strength and services you've increased the outlook for services and the second time. This year any initial thoughts you can share in terms of how tower site leasing growth could be trending into next year, just as youre seeing momentum on the tower site pickup. Thank you.
Yeah, Matt on your on your first question.
I don't see it as a risk to small cells.
1 other things that we have have been a hallmark of the way we thought about capital investment has been a rigorous process, where we consider how we invest capital.
And that process that we go through analyzes where we think demand is going to be not in the near term, but over the long term for particular assets as.
And as we're investing in assets are gone and small cell side, where we're putting assets and at an initial yield of 6% to 7%.
We have to depend on and count on future lease up of those assets over a long period of time.
And so we analyzed the opportunity to invest and those assets based on what do we what do we believe the long term prospects for lease up against those assets will ultimately ultimately be there are plenty of places around the U S where I think small cells will be built that our analysis will point to an answer.
That said that doesn't make sense for us to invest our capital there we've tried to allocate our capital to the places that have the highest return and the lowest risk against that potential lease up and as we talked about the cohort and look at these markets and have a lot of similar characteristics in terms of what's driving that co location and obviously <unk>.
The amount of co location that we've seen even and just dose cohort that we were talking about this morning have a lot of data around what leads to that that co location and so we're trying to make sure we allocate capital based on the lessons that we've learned thus far and where we think the future demand is going to be now thats going to leave a lot of opportunities for somebody else to build small.
Sales were based on our rigorous analysis, it's just not going to clear our return thresholds and so I believe the carriers will build some of that they may find other third parties to help build some of that I think in general we have talked about publicly and I saw a public research report a few weeks ago that pointed to about half of the overall <unk>.
<unk> offer small cells, we've constructed are built that and and the other half has been split between other third parties and the wireless carriers I think as the market continues to grow we're not so much focused on what is our percent share of the total market, but how are we doing and the particular markets, where we're investing capital.
Or have invested capital and are we seeing co location and that's going to drive long term yield against those assets over the long term so.
It doesn't it doesn't concern me in fact, I think it points to the.
The reality that there's going to be a lot of the a lot of need for these small cells and there are going to be certain locations, where it just doesn't hit our return thresholds and therefore, we want to invest capital. There on your second question around the 2022 guidance I'm going to I'm going to mostly beg off on that other than to make the point that we tried to make and our prepared remarks I think.
There are there are the largest portion of our business as our tower business were at an elevated level of activity and calendar year 2021, we think that continues into 2022 and as we assess kind of our long term target of growing.
The <unk> per share at 7% and 8%.
We feel good about where that target is set and feel like we'll be able to meet that as we go into 2022 and the specific numbers about where that is and where it lands will get into that next next quarter. When we give you guidance for 2022.
That's great color.
Okay.
Thank you, we'll hear next from Phil Cusick with Jpmorgan.
Hey, guys.
Sorry to harp on this I'm surprised that with all the carrier discussion of macro through the year and the long past the small cells.
And if something happened and the <unk> that was a surprise and carrier prioritization to.
And to move away from that is there a particular event that happened and and the slower small cell trends and what you highlighted is the better return from markets that get the fiber and small cell revenue are you more interested in selling fiber to enterprises and the next year.
Yes, Phil I think on the first question.
We're not surprised by the fact that the carriers would focus on the macro sites first and <unk> and and obviously they have done that in past cycles. As we mentioned I think we were a bit surprised by how much how quickly it moves and and how they reallocated as quickly as they did so we got to we got.
Close to the final stages on a lot of these nodes and there was a capital allocation decision on their part to invest and the equipment around macro sites over and over some of these small cell. So again I mean, we said it a couple of different ways, but we think it is just timing and doesn't have any impact on the long term return, so a little bit surprised but.
You would have said the same answer last year. If you asked me about the macro tower business, a little bit surprised about the how allocated they went towards towards towards fiber and small cells and the movement and any in any given year.
And in the moment I guess, maybe maybe could surprise us a little bit but longer term when I look at the underlying returns of the business and the unit economics, and we're and the activity is I think we're on track for free.
And for what we overall would've expected.
With regards to <unk>.
Are we looking for better returns.
And in the fiber business on the fiber solutions side, obviously, we're looking to grow all the revenue streams and so to the extent there is an opportunity there and if that materializes, we'll pursue it and our sales and sales team I think has done a good job coming out of the pandemic as the economy starts to open back up.
<unk> seen good activity on that front and they've done they've done a really nice job as companies are starting to return to the office and and seeing some opportunities there.
Okay, and just a follow up there so.
And you talked about 10000 this year, you've got a big backlog, how how solid is that backlog in terms of timing and size is and sort of.
Roll over a multiyear period.
Yes, the backlog is contractually committed so if we if we show it and see those are not those are not nodes that we're talking about are having conversations and just slowly conversations with carriers and those are at the point, where they are signed contracts with the with the various wireless operators the <unk>.
<unk> that we have with carriers and the opportunity for notes would be above and beyond that contracted backlog that we disclosed.
Okay. Thanks, guys.
You bet.
Thank you and your next from David Barden with Bank of America.
Hey, guys. Thanks, so much I just wanted to follow up on sales question there. So.
Jay you talked about small cell nodes.
<unk> builds being kind of a 24 to 36 month project.
For new builds and add ons. So if theres any reason to believe that the small cell business will accelerate in 2023.
You would either have to know that or have that visibility on that today.
And already preparing to kind of get that online in 2023 could you kind of talk a little bit more.
Specifically about the funnel and your conviction thereabout.
How this goes from 5000 and those years back to the 10% or better and.
The second piece is and then.
The services side, obviously, the huge level of activity could you talk about how your staffing.
And that from a manpower perspective, the in house and contractual is that where the $15 million of higher employment expenses going and is that going to stay with the company as long as elevated.
Surface activity persists.
Good morning, Jay.
On your first question, yes, typically our build cycle is about 24 to 36.36 months and.
And when you think about where is where is the world going it's an interesting year on the small cell site, because while we're talking about the contraction of how many nodes, we're actually going to put on this year, we signed the largest commitment of new nodes and the Companys history, just a few months ago. So when the carriers think about their deployment plans.
And thinking about them on a 12 or 18 month cycle theyre thinking about it over a much longer longer term basis. So the 15000 nodes that we've contracted to build just a few months ago. That's in the backlog and we're working with we're working with the customers around identifying exactly where those locations are and where theyre going to be.
And against that backdrop, I think we are still as Dan and I, both spoke to the macro environment.
Is very healthy today from macro towers, but the need for Densification remains and as we look at the 50000 and small cell nodes that we've put in place and during <unk> and see how those benefited the overall network. We think those dynamics are going to be at play and <unk>, if not greater degrees and.
So the environment and where it goes I mean, we'll give you guidance on 'twenty to next quarter and as we get into years beyond that we'll give more guidance as we get to it but I think the macro environment.
And it would suggest that the fundamental view that we had about the need for small cells complementary complementing the macro site that provide coverage and the market. Those those tenants of our strategy are intact and that havent seen anything that Dissuades us.
From that longer term view of where capital allocation will go from the carriers. The way networks will be deployed and then we're good returns will be achieved by by by balancing the capital investment that we have between both towers and small cells.
On your second question around staffing, yes, the majority of that cost is coming as we scale up for this elevated level of services and.
Much of that would be outsourced activity and cost in order to perform network. There are components, where we staff up internally and.
And and then we need to scale that based on the level of activity. So if we were to see the revenues from the services business come down and we bring back down the costs associated with it that are that are scaling up.
Thanks Jay.
But.
Thank you we'll take our next question from Jonathan Atkin from RBC capital markets.
Thank you Amit.
And I'm interested with all the demand.
And the leasing demand on macro sites and small cells for that matter as well.
From a macro from it from the time being is there any.
Are there any.
And a long poles and the 10 when it comes to possible constraints and the ability to actually deploy the equipment, whether it's your own services division and our other contractors that are used.
For the year does that have any implication on here.
And that's on book to Bill.
As we started looking at the second half of the year and next year.
And Jonathan and certainly it's a tight labor market. So it's not not without challenge.
But we feel good about where we are and the activity that we're seeing on being able to deliver that level of activity, but it is a it's a <unk>.
Site labor market and a challenge, but feel good about where we are and our ability to deliver on the numbers that we've put out here.
And then.
Apologize if this was asked earlier, but.
The source of the upside that you posted.
Kind of how broad base was that and do you see the.
Got it.
The variety of demand, increasing and as we started moving into the second half of the year.
Or is everybody kind of equally active and there are various midband and <unk> deployments at this point.
Yes, I would say, it's broad based across all of the wireless operators. There is a lot of work going on right now.
As I mentioned before to upgrade the existing sites and add additional spectrum bands and get new technology on to those legacy macro site.
We're on so it's broad based across all of the participants and the market and then we're also seeing is driven by some of the Iot stuff.
New entrants into the market that are outside of the 4 nationwide operators deploying infrastructure and various various regions around the country that that's also benefiting macro site.
And then finally as it comes to kind of your lease contracts.
Is there any.
Constraint that customers have and how they can use the spectrum, whether it's for their own retail operations.
And you get 1 and lease it to other parties and try and D&O is that type of thing.
Are you what are some of your exposures there in terms of how the customers can use and spectrum and ways that.
And don't get the full economics or are you completely kind of immune from those sorts of arrangements.
Yes, Jonathan that's been something that we've been careful about since the beginning of the company, where we wanted to make sure there wasn't an opportunity to replace the our role of being the shared infrastructure provider and so our leases prohibit network sharing.
And using our spectrum and a way that would in essence replace our role and the and the ecosystem. So.
And the carriers as we contract with them they have the right to use their spectrum for their own use and for their own network, but as we get into things like network sharing that would be a conversation and they would need to have with us and we.
There is a revenue opportunity there now obviously, we'd be open to having those conversations so to the extent that there was.
Economic value and return for 1 of our customers certainly be open to entertaining that conversation, but think it would come with additional revenues as it is not permitted currently.
Thank you.
You bet.
Okay.
Thank you, we'll hear next from Colby <unk> with Cowen.
Cowen and company. Please go ahead.
Hi, This is Michael on for Colby 2 questions if I may.
First in the past 2 quarters the tower network services gross margins have been over 30% versus around 15% and 2020 and do you expect to sustain those plus 30% tower network services gross profit margins through year end and then second could you give us a sense of your willingness or openness to.
Self fiber assets and markets and which you don't expect to build small cells and thank you.
Sure. This is.
Dan I'll take that first question on services gross margin.
We would anticipate that that would that would continue through the end of the year. The increase in the services gross margin has a lot to do with the mix between which services were providing so we have a.
A higher gross margin associated with what we would call Preconstruction services around site.
Site acquisitions, and and permitting and.
Getting the site prepared to accept any additional antennas on the tower and we have a little bit of a lower gross margin associated with the business of actually what we would call installation of putting the antennas on the tower and right now given where we are and the cycle and how we all the activity we see.
There's a lot of that Preconstruction services coming through which is what's driving that incremental the higher.
Services gross margin and we would anticipate that continuing through the end of the year.
Michael and your second question.
And it's a pretty theoretical question given the way that we've analyzed and invested and fiber we've really focused on the markets that we think have the greatest opportunity for additional small cells.
Long term and the wireless demand that was going to be there. So I guess in the theoretical if 1 of those markets were to turn out not to have a need for small cells. I guess, we would we would consider that but when I look at the portfolio and where we've invested the capital I think the likelihood of that is probably probably pretty low.
Perfect. Thank you.
Thank you, we'll hear next from Ric Prentiss with Raymond James.
Thanks, Good morning, guys.
Good morning, Rick.
Couple of questions makes sense, obviously with the small cell push outside growth discretionary capex.
It comes down what about what your expectations are for prepaid rent received I think we might have been originally thinking this year, maybe $550 million should we be thinking that maybe more like and the $300 million range as far as what youre going to receive.
Yes.
And so going from gross to net Capex is probably the easiest way to do that we're about about we think that now we're going to be in the neighborhood of a $1.3 of growth, where we were at about $1.5 and our prior expectations right. Now we think will be around $900 million of net vs and the $1 billion range.
And so the prepaid rent received comes down a little bit.
But.
And just exactly what youre talking about in line with what we see as the activity levels and where we are and the terms of building out those assets and getting the money back from our customers. So, yes, it's coming down a bit.
And then the evidence the noncash amortization of prepaid rent.
And that takes a little bit longer probably to change that needle or are we still thinking maybe up year over year from 'twenty to 'twenty to 'twenty, 1 maybe and the $550 million range is that kind of a <unk>.
Sure.
Yes.
Yes, that's all very fair what you just said and so we think the growth and our prepaid rent amortization.
There's going to be about $40 million and total.
Going from 'twenty to 'twenty 1.
Thanks, and sorry for all these accounting changes, but a lot of moving pieces here.
Profit change and Lee I appreciate it changed and the straight line, Michael called it out a little bit.
As you enter new leases with say a company like tissue is just now starting to deploy stuff should we expect some future significant increases to straight line adjustments as we look at the rest of 'twenty, 1 and especially then and 22.
Yes, I will.
Speak more generically and then just with dish, it's as we sign new leases, we will have additional straight line as we recognize the escalators over those leases.
On a ratable basis as opposed to as they actually come in to escalate. So were kind of straight line everything as opposed to put those those escalators and place overtime and.
And that that causes that straight line revenue to come in and.
And it is associated with leases and as we discussed and the dish specific this contract specifically in order to get to that treatment, we need to have a lease which means we actually need to go put equipment onto our site.
So the timing of that will be more associated with dish going onto site as opposed to when.
When we would we would sign a lease specifically so we got we got signed and application or get and application sorry is when we actually get it on air and starting billing is when that straight line will will come in so you will see increases of that as we see more from dish.
And but I won't speak specifically to the.
When we expect the dishware to come.
We have said that there is.
Pretty limited amount of that this work and our 2000 and 'twenty 1 guidance that's been true since we gave guidance last October we still see a limited amount of it and 2021 and will speak more to 2022 activity and October.
Okay last 1 from me is augmentation Capex for towers has been kind of coming down and you've talked a couple of times about carriers going back to their existing locations versus putting more and incentives.
Antennas and radios out there should we expect an acceleration of augmentation spending at the towers as we look into the future versus what we've seen and say the last 3 quarters.
Yes, not necessarily net.
And based on what how much we have to modify the towers in order to accept the additional.
Wait and wind loading of additional equipment and what we've seen is as we have more space on the towers that don't require modification that has driven that number down so.
Yet another reason the tower business is 1 of the best business as ever as we get to add all of those revenues without having to add capital to make it happen and Thats just a function of the business itself and the towers that we own.
This business ever I guess I'd also putting up mid band spectrum also probably smaller antenna size helps with that items.
Okay.
Didn't go specifically to which antenna bandwidth and talk through I would just say that like I said there is additional capacity that we have on our towers and we're utilizing that capacity and not having to spend money in order to add additional equipment.
Great. Thanks, guys stay well.
Thanks, Rick.
Thank you, we'll hear next from Jeff <unk> with Wolfe Research.
Yes. Thank you very much for the question.
I guess my first question is.
I understand that you don't want to tell us too much about 2022, which makes a lot of sense and we'll hear from that.
I am wondering though if you can perhaps give us a flavor of how long we should expect.
And this elevated activity last when it might translate into revenues and how long those revenues might might persist.
For Ya.
The elevated level of new leases versus maybe comparing to prior cycles would be a vehicle for doing that.
Yes, Jeff good morning.
I think I'm going to be careful because I don't want to get too far into it really giving specific guidance around 2022, but.
The the tone and the activity, which suggests that this elevated level of activity that we're seeing currently is going to continue into 2022, we have not spoken and about what we think it will continue whether or not and will continue beyond 2022.
And I think big picture, if you look at the last decade, 2 decades of activity as there is a baseline level of activity that we have seen consistently and and out of cycles that deployment of new technologies that in many ways, it's almost like maintenance capex that the carriers continually invest and their assets and.
And that drives our top line, our topline revenue growth number from new organic leasing activity and that has happened at the beginning of cycles middle and towards the end of technology cycles, and I think that will continue it underlines our long term forecast of believing that we can grow the dividend 7.
And to 8% per year on a compounded annual basis for a long period of time.
And everything we see and the environment today.
And <unk> is getting deployed.
Suggest that that that long term view is intact.
And we feel really good about it so.
And how long it will last we will just have to wait and see.
We get into as we get into 2022, we'll start to give you a view for 23 years at that point, but.
Elevated levels certainly this year and next year compared to what we've seen over the last 3 to 5 years.
Okay that makes sense and I guess now I won't ask when small cells might inflect as a result.
So maybe instead.
And I ask you do you think the elevated levels are correlated is kind of more with the transition to a new generation of technology or more towards the addition of incremental spectrum, which may or may not align.
Technology migration.
Historically, it's been a combination of both the best the best times to be and the infrastructure business over our history of Ben times, when the carriers had a combination of new spectrum that they had they had gained either through acquisitions or through auctions with the FCC.
New technology changes and enough cash flow or cash on hand on the balance sheet to be able to deploy that.
And we're sitting at a period of time, where those factors all 3 of those factors are true they have fallow spectrum that needs to be deployed they are engaging and new technologies that are going to lower their overall cost and bring more products to us as consumers and.
And at the same time, they have sufficient cash flows to pay for those deployment. So that's the those are the best of days to be and the infrastructure business and we have multiple well capitalized carriers, who are and exactly that position with spectrum technology and an ability to deploy it and I think that points to why.
We've seen these these elevated elevated levels.
You paused on your on your second question and I would I would just circle back I think it's a fair question to ask around what is the timing of activity and the business and 1 of the things that has held true for me a truism about this industry is that you just can't predict with a lot of precision exactly when activity on <unk>.
Particular asset is going to is going to see going to see that lease up activity, we often colloquial Lee talked about the fact that a tower.
Adds about $1 and tenant every 10 years.
While in reality that means that that 1.1 theoretical tower adds it adds a tenant and in a year and the other 9 years it doesn't add a tenant.
And so looking at any short period of time can really masked what happens over a long period of time the assets that we owned whether its fiber or towers are located in places that we believe theres going to be a lot of need for the upgrade both for Densification and for coverage reasons and these new <unk>.
Acknowledges are driving the demand on those assets and if we look out rather than looking at kind of a shorter period of time or a 1 or a 2 year period of time and look out over 10 years or 20 years. Ultimately that's how we achieve our returns stacking years upon years of good growth consistent growth and that 7%.
And 8% that drive towards a larger overall total return and yield across all of the assets and the portfolio nature of the assets means that in certain markets, we will see activity and certain assets will see activity and a given year and the next year the activity and the capital will flow towards different markets and different assets.
And over a long period of time, the whole portfolio gets the uplift that we see that I pointed to there I think it was on slide 4 around the uplift and towers over a long period of time, that's the portfolio effect, but if you were to if you were to graph any 1 tower. It would be a lot chop here then the smoothness that you.
Steve and on page 4.
Thank you for the comprehensive answer.
But maybe we have time to take 1 more question. This morning.
Thank you, we'll take our final question from <unk> Levi with UBS.
Great. Thank you 2 quick questions..1 could you talk a little bit about the fiber trends and what drove the sequential decline this quarter and.
Second question on the AT&T dish wholesale deal how should we think about that in terms of the impact on overall activity that youre expecting from day is there anything you could say about the minimum requirements.
And that's maybe and the backlog right now thank you.
Sure on the first question, we've guided towards fiber solutions the growth this year of being about 3%.
Year over year, I think and the first quarter, we were up a little bit higher than what we saw and the second quarter I think thats just timing and.
And wouldn't wouldn't point to anything that's fundamentally going on and the business I think for calendar year cash.
Calendar year 'twenty, 1 we would expect by the by the time, we're done and the growth rate will be about 3% year over year and anything youre seeing in the quarter to quarter changes that he is just just timing differences and.
And not indicative of anything fundamentally and the business.
On your second question.
Let dish really speak to other value and benefit of what they've they've recently announced so I don't know that I have a lot of comments. There are obviously, we have a big commitment from them and we've got a lot of activity ongoing working get their network up and built and appreciate the trust and commitment that they've made to us and are excited.
To deliver what they've what they've committed to us and we've committed to them to get on air for them as quickly as we can so we're working hard towards that and and I'll, let them speak to the other other components of their relationships.
Thanks, everyone for joining us.
Thanks, everyone for joining us this morning, and we'll look forward to catching up with you soon and a special thank you to all of our employees.
And the 12% year over year <unk> growth is not done without a lot of hard work from a lot of folks and navigating through this pandemic.
And working and settings and in ways that were much different than our historical approach. Our team has really done a terrific job. So I know many of them are listening. This morning, and just wanted to say thank you as we close out thanks for all you've done and look forward to the balance of the year.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
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