Q4 2021 Crown Castle International Corp Earnings Call
Please standby we're about to begin.
Good day and welcome to the Crown Castle Q4, 2021 earnings call today's conference is being recorded.
At this time I would like to turn the conference over to senior Vice President of corporate Finance Ben Lowe. Please go ahead Sir.
Great. Thank you Paula and good morning, everyone. Thank you for joining us today as we discuss our fourth 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.
To aid the discussion we have posted supplemental materials in the investors section of our website at Crown Castle Dot com 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 the actual results may vary materially from those expected.
Information about potential factors, which could affect our results is available in the press release and the risk factors sections of the company's SEC filings.
Our statements are made as of today January 27th 2022, and we assume no obligations to update any forward looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures.
Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the investors section of the company's website at Crown Castle Dot com, 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 results last night 2021 was a tremendous year for Crown Castle, we delivered 14% <unk> per share growth, we grew our common stock dividend by 11%.
We benefited from the highest level of tower application volume in our history, resulting in a 35% increase in core tower leasing activity and a 6% and 6% organic growth leading the industry by a wide margin. We saw an inflection in the demand for small cell securing commitments for more than 50000, new small.
During the last 12 months, which is equal to 70% of the total small cell booked in our history prior to 2021.
We entered into a new 12 year agreement with T. Mobile that provides committed long term tower revenue growth and we made significant progress toward our goal to achieve carbon neutrality for scope, one and two emissions by 2025.
We successfully sourced 60% of the total electricity, we expect to consume this year from renewable sources.
These results reflect the positive fundamentals underpinning our U S centric business as our customers are busy upgrading and deploying their nationwide <unk> networks, resulting in robust activity across our towers and small cells from new installation and amendments.
As we start 2022, we expect elevated levels of tower leasing to continue this year and anticipate leading the industry. Once again with the highest U S tower revenue growth supporting our announced 11% dividend increase which is well above our 7% to 8% target.
Our customers are also committing to the next phase of their <unk> build out that will require the deployment of small cells at scale to increase the capacity and density of their networks as more spectrum deployed across existing macro towers is not sufficient to keep up with the growth in mobile data demand.
With that in mind, I believe 2022 will be an important transition year for our small cell and fiber business as we prepare to accelerate our deployment of small cells from the approximately 5000 nodes. This year to what we expect will be more than 10000, beginning in 2020 23.
Dan will cover the financial results for 2021, and our updated expectations for 'twenty, two and a bit more detail. So I'm going to focus my comments on our strategy to create significant shareholder value by providing profitable solutions to connect communities and people to each other.
We are focused on delivering the highest risk adjusted returns for our shareholders by investing in shared infrastructure assets that lower implementation and operating costs for our customers, while generating solid returns for our shareholders.
As a result, we continue to solely invest in the U S market because we believe it represents the best market for wireless infrastructure ownership with the most attractive growth profile and the lowest risk.
Over the last 25 years the performance of our tower assets has proven the value of this strategy.
We began investing at approximately 3% yield and today those assets now yield more than 11% we.
We are building value from this strategy again, with our small cell and fiber business.
Since the beginning of our small cells and fiber strategy investors have had two primary questions.
Small cells would be required at scale and would customers co located on the same assets to drive attractive returns.
Today I believe these questions have been answered.
At a time when our customers have been upgrading a record number of our tower sites for five G. We secured commitments for more than 50000, new small cell nodes.
This is in addition to the 55000 small cell nodes, we have on air today.
Importantly, a significant portion of the 50000, new nodes will be co located on existing fiber assets at attractive returns.
So clearly we have very positive answers to these key questions.
Small cells are required at scale and will be co located on existing assets.
As these small cells are deployed they will contribute to improved network performance, which history has taught us will attract additional small cells as carriers compete on network quality.
This dynamic is similar to our tower experience were a significant driver of the value created has been from carriers deploying more spectrum on existing towers to keep pace with mobile data demand growth.
As a result I believe this is just the starting point for total small cells needed by wireless networks.
This view is further supported by recent work completed for US by third party experts that predict the long term environment, where small cells accelerate.
As the clear leader in small cells, we are uniquely positioned to benefit from this growth.
The advancement of our small cell strategy continues to remind me of our journey as the U S tower industry developed ultimately creating significant value for shareholders.
Although it's easy to forget there was significant investor skepticism during the early years, when we were proving out the tower business.
During that time, we faced questions about the long term return potential of the business the negative free cash flow profile and when or if ever it would inflect and whether we would ever see customers co located on the same assets essentially each carrier had different spectrum portfolio and unique network requirements.
Those questions were eventually all answered for U S towers, but oftentimes the turning points in the business that address those questions only became widely accepted after the fact.
I see a similar pattern with our small cell business.
I am convinced that this period is one of the most important proof points for the small cell business model.
We have more than $15 billion invested in more than 80000 route miles of high capacity fiber connecting 55000 small cells that are on air and concentrated in the top U S market.
The weighted average life of this capital is less than five years and already yields nearly 8%.
Following the recent commitments for small cells, we have more than 60000 contracted small cell nodes on our backlog, including a record number of co location nodes that we expect will increase the overall yield on our invested capital.
This sets us on a course to accelerate growth in our small cell business beginning in 2023, as we expect to deploy more than 10000 small cell nodes next year with the potential to scale from there.
We also continue to see opportunities to add to the returns we are generating from small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth.
We remain disciplined as we allocate capital to these opportunities with decisions driven by return targets consistent with how we've executed our fiber strategy from the start by focusing on small cells is the key driver of long term value creation.
So to wrap up we had a terrific 2021, we expect to once again lead the industry with the highest U S tower revenue growth in 2022, and we see the recent large scale small cell commitment at the beginning of a dramatic moves in the deployment of future wireless networks for which we are well positioned as the clear leader.
I believe our strategy capabilities and unmatched portfolio of more than 40000 towers and more than 80000 route miles of fiber concentrated in the top U S markets put crown castle in the best position to capitalize on the current environment and to grow our cash flows and our dividends per share both in the near term and for <unk>.
Years to come.
Because of our position Crown Castle provides an excellent opportunity for shareholders to invest in the development of <unk> in the U S, which we believe is the best market for communications infrastructure ownership with its attractive growth and low risk profile importantly.
Importantly, we provide this access to such attractive industry dynamics, while delivering a compelling total return opportunity comprised of a high quality dividend is currently yielding yielding over 3% with expected growth in that dividend of 7% to 8% annually and with that I'll turn the call over to Dan.
Thanks, Jay and good morning, everyone.
As Jay discussed 2021 was a great year for Crown Castle, and we expect that momentum to continue in 2022 <unk> deployments continue at scale.
With our comprehensive.
Comprehensive offering of towers small cells and fiber solutions, we're able to support our customers expanding infrastructure needs as network architecture evolves.
Turning to slide four of the presentation full year 2021 results exceeded our prior expectations with site rental revenues, increasing 8% adjusted EBITDA, increasing 12% and <unk> per share increasing 14% when compared to full year 2020 results excluding non typical items.
Some of the outperformance in 2021 was due to approximately $10 million of additional site rental revenues $10 million of additional expense reductions and lower than expected sustaining capital expenditures the majority of which we do not believe will recur in 2022.
The 8% year over year growth in site rental revenues included approximately 6% growth in organic contribution to site rental revenues.
<unk> of approximately 6% growth from towers, 10% growth from small cells and three 5% growth from fiber solutions.
Turning to page five we have increased our full year 2022 outlook to reflect the additional $250 million of straight line revenues associated with a long term agreement with T mobile that we announced earlier this month.
Other than these additional straight lined revenues our 2022 outlook is unchanged.
These additional straight lined revenues reflect the significant additional contracted tower revenue growth. It comes with a new agreement, but they do not contribute to 2022 assets.
In addition to the contracted tower revenue growth.
The agreement with T. Mobile includes a contractual commitment for 35000, new small cell nodes over the next five years.
The agreement with T. Mobile also results in several events related to the decommissioning of the sprint network.
Including tower non renewals are expected to reduce site rental revenues by approximately $200 million in 2025 small cell nonrenewals that we expect to reduce site rental revenues by approximately $45 million.
With the majority occurring in 2023.
And approximately $10 million of additional fiber solutions non renewals in 2022.
Importantly, except for these discrete events, we expect consolidated annual tower and small cell non renewals to remain within our historical range of 1% to 2%.
Turning to page six we now expect growth in the organic contribution to site rental revenues in 2022 of $235 million to $275 million.
The reduction in the expected growth in organic contribution to site rental revenues compared to our prior 2022 outlook announced in October reflects the impact from the $10 million of nonrecurring revenue that contributed to fourth quarter 2021 results, while our 2022 outlook remains unchanged.
We expect we will generate four 5% consolidated growth in 2022, consisting of approximately five 5% from towers, which we believe will be the highest U S tower growth rate in the industry again this year.
Four 5% from small cells and 3% from fiber solutions.
As many of you may be aware in our third quarter 2021 earnings release, we broke down our organic growth to show total new leasing growth in prepaid rent amortization and a new concept, we call core new leasing, which excludes the impact of prepaid rent amortization.
Based on feedback we've received since adding core leasing activity to our disclosures.
Starting with our first quarter earnings release, we will speak to organic growth exclusive of the impact of prepaid rent amortization or what we'll call core organic growth.
This presentation provides information investors can use to analyze our performance that we believe and we've been told is more consistent with other companies in our industry.
As I have mentioned and you can see on page seven.
The majority of the outperformance in our 2021 <unk> is not expected to recur in 2022, and therefore impacts year over year growth. Despite no changes to our 2022 <unk> expectations.
Turning now to our balance sheet. We finished the year with approximately five times debt to EBITDA on a last quarter annualized basis in line with our leverage target.
During 2021, we improved our balance sheet by extending the weighted average maturity to nine years and reducing the average borrowing cost to approximately three 1%.
Part of why we've extended our debt maturities and emphasize fixed as opposed to floating rate debt was to protect our ability to grow our dividends even during periods of increasing interest rates and we believe we have done exactly that which is another example of our focus on driving the highest risk adjusted returns for our shareholders.
Looking forward, we expect our discretionary capital expenditures to begin to trend higher as we accelerate the pace of small cell deployments.
With a record level of colocation nodes in backlog, which require less capital to.
Less capital relative to anchor builds we expect to be able to fund this higher level of investment with free cash flow and incremental debt capacity, while maintaining our investment grade credit profile.
So to wrap up.
2021 was a great year for us with record tower activity driving significant financial outperformance.
After leading the industry in 2021, we expect to again generate the highest U S tower growth in the industry in 2022 with core tower leasing activity approximately 50% higher than our trailing five year average.
Over the past 12 months, we have booked over 50000 small cell nodes equal to almost 70% of the nodes, we had booked in our history prior to 2021.
We see this as an inflection in the demand for small cells and expect to accelerate growth in our fiber segment in 2022 and beyond.
Longer term, we believe we are in strategic we are strategically positioned to benefit from all phases of the <unk> build out with our comprehensive infrastructure offering that provides us the best opportunity to consistently deliver dividend growth as wireless network architecture evolves and our customers' priorities shift overtime.
And with that Paula I'd like to open the call for questions.
Thank you to signal for a question. Please press star one on your telephone keypad also if you are using a speaker phone. Please make sure. Your mute button is turned off to allow your signal to reach our equipment.
Once again it is star one at this time for questions and we'll pause for just a moment.
Hum.
Our first question will come from Michael Rollins with Citi.
Thanks, and good morning.
Good morning, Mike.
A couple of questions if I could first on the tower side I am curious given the comments you made about leasing activity.
If you could frame the backlog on the tower side that crowd is carrying into 2022, and maybe give us a sense as you look at what the carriers are doing how much of their footprints are covered by the bookings and the billings.
<unk> recognized to date and what might be on the come and then just separately on small cell and just ask one other question.
The comments about the ramping small cell demand.
As <unk> highlighted over the last few months.
Does it make you want to take a more expansive strategy.
Fiber outside of maybe that top 25 30 market.
Historically focused on and be prepared for a more expansive small cell deployment cycle from your customers. Thanks.
You bet on your first question around the backlog in towers, obviously as we spoke to we had the highest level of activity in the company's history. During 2021, and we're expecting that level of activity to continue into <unk> into 'twenty two.
And if you frame it in terms of historical context, what's really unique about this cycle is that we've got four carriers deploying.
You've got AT&T, Verizon and T mobile and dish all deploying network, they've got significant amount of spectrum to be deployed and they have the capital to be able to deploy that I can't think of another time in history of our business, where we've had for well capitalized carriers with spectrum and the desire to deploy network. So we're certainly <unk>.
Writing the wave of that.
In terms of what they're touching similar to past to upgrade cycles to focus for the three legacy carriers is to touch the sites, where there already is.
Listing on the assets on the macro assets.
And we would expect the next phase of <unk>.
<unk> build out.
We'll be to densify their network and we expect that some portion of that Densification is going to going to happen through new installations on towers that theyre not located on but a big part of that we see that happening in terms of small cells and the 50000 nodes that we booked.
<unk> booked over the last 12 months.
The commitments from them I think really just speak to that is that second phase of network deployment as they start to try to densify the network and the need there is going to be both macro sites as well as significantly needing a lot of small cells in order to in order to do it.
So in terms of the footprint being touch theyre going to touch virtually all of their existing sites as they upgrade through <unk> and that will take that will take a few years to happen. So feel good about the activity that we're going to see again in 'twenty two and then as we get to periods beyond that we'll update you as we as we get later into the year and give our guidance in October later.
This year.
On your second question around.
The activity for fiber.
Where we are.
<unk> focused on building and owning high capacity fiber in dense urban areas in the top U S market and our strategy has been based on our view that as data demand grows it will grow most significantly in the in the densely populated areas of the U S and those are the area.
Is where macro sites in particular won't be able to to handle all of the network capacity that's going to be created so I think as a general rule youre going to continue to see our investments focused in those top markets.
There are going to be some markets outside of the top 25 top 30 markets, where we will go and build nodes for our carrier customer, but we wouldn't do that on a speculative basis. So to the extent that one of our customers has a market. We assess that market is having a good attractive economics at an entry point similar to what we've.
Talk about our return thresholds have been and we see lease up from other carriers, who are going to need those same areas. Then we would be open to expanding that but I think youre going to see the concentration of the capital as well as frankly the activity from the carriers, we really focused on those those top U S markets.
Speaker 1: see lease up from other carriers who are going to need those same areas, then we would be open to expanding that. But I think you're going to see the concentration of the capital as well as, frankly, the activity from the carriers be really focused on those top U.S. markets.
Thanks.
You bet.
Speaker 2: Moving on, we'll go to Simon Flannery with Morgan Stanley .
Moving on we'll go to Simon Flannery with Morgan Stanley .
Alright. Thank you very much good morning, I want to talk about M&A, if I could for Doug you've been fairly quiet in terms of your activity over the last couple of years here I know you've talked in the past about interest in developed markets Theres a lot of activity in Europe . So perhaps you could just update us on that and then the other would be on ground leases.
It looked like it was a fairly quiet year in terms of extending and purchasing ground basis. So any color there on perhaps being able to continue to own more and push the maturities out. Thanks.
Sure Good morning Simon.
On your on your first question around M&A and how we think about this core to the business around towers and small cells. This is certainly our focus and really don't see anything outside of our core business of towers and small cells that would be of any interest to us.
Around what markets to be and I mentioned this a couple of times in my comments, we look at the U S market is the most attractive market in the world.
For investment in the kind of infrastructure that we want to own we think the growth profile is most attractive here and we also think the risk is the lowest and so as we've assessed both developing markets as well as developed countries. We just we don't see those two characteristics exist in the market and so.
We've stayed solely focused on the U S. We continue to watch what's developing in the world and to see if maybe our calculus in our view would change over time with some characteristics, but based on the work that we've seen to date. We just don't we don't we haven't seen anything that's attractive to us and frankly, we're really excited about the opportunity to put cap.
Little work and continue to invest in the U S market because it does have that low risk and high growth and we see that growth continuing unabated for a long period of time, so really excited about the opportunity in the U S. I think we have plenty of places to put capital to work here in the U S.
On the second question around ground leases.
And this has been an initiative we've been out for about 15 years.
Our average ground leases are well over 30 years remaining on them on average and so as we look at the ground underneath our assets where we.
We're focused on both extending the leases to the extent that they start to get inside of the kind of a 10% to 20 year period of time, and then where it makes sense to bring those leases on balance sheet in the form of a of an acquisition. We're certainly open to doing that and at different points in time is as the markets move around we get opportunities that arise.
And we will continue to do that but given the maturity of the portfolio, there's not really any pressure on us to feel like we need to put capital to work to buy to buy ground leases. So we will do it it's opportunistic when the financial returns makes sense, yeah, and just to add to the maturity of the portfolio point there Simon.
Over 80% of our leases are either owned or greater than 20 years and the average life of the leases that are not owned or over 35 years. So last Jay mentioned Theres just no pressure for us to do anything unless the financials returns make sense at this point.
Great. Thanks, a lot.
Yeah.
And next we'll go to David Barden with Bank of America.
Hey, guys. Thanks, so much for taking my questions I guess just two.
The first would be just over the last couple of days, we've heard new news to a degree from Verizon pulling forward accelerating.
C band build with extra capital.
Getting in the hands of Com Lady.
Then tea at the same time kind of kind of pushing back their build out with respect to waiting for 110 to do a one tower climb I just wanted to kind of.
Kind of see how that lined up with what you were expecting for the year and how you set your guidance et cetera, and then I guess the second question.
Yeah.
For the T mobile deal in terms of the non renewals how do those nonrenewals manifest themselves does is it hot cut on January one.
Does it happen ratably over the course of the year.
And specifically with respect to the $10 million or losing in.
In fiber and 22 thanks.
Good morning, Dave.
On your first question.
I would just without being really specific about individual carriers.
I think the activity as I spoke to a minute ago that we saw in 'twenty, one and expect to carry into 'twenty. Two we haven't seen anything that would cause us to.
Look at our guidance and have to shift our expected growth in revenues.
The we have pretty good visibility as you know with <unk>.
Good visibility into what their deployment plans are and so to the extent that they start to to adjust those plans could probably six to nine months away from seeing any impact in what we do so it starts to if there is a movement upward it would push it pretty late into this year and wouldn't have a real meaningful results.
Impact on our results in calendar year 'twenty two.
Probably more pretense, what's going to impact as we start to think about site rental revenue growth going into 2000 2023. So.
We will continue to watch it and be responsive.
As they work on their <unk> networks.
Yes, David.
Speak to the non renewal point.
As we talked about when we announced the agreement.
On the tower side, we think it's going to be $200 million impact to 2025, which you can assume happens the first of the year and is $200 million through the course of the year. So it's all of that.
On the small cell side, it's a similar.
It's about $45 million a majority of which is in 2023 again you can just assume that happened at the beginning of the year it impacts the entire year and the $10 million is a.
Of fiber solutions churn in 2022 has an impact.
Again $10 million to the total revenue in 2022. So I think you can for modeling purposes, and how you think about it just assume that happens on January one and it just it impacts revenues negatively by $10 million.
Okay, great. Thanks for the help guys.
Yes.
And next we'll go to Nick del Deo with Moffett Nathanson.
Hey, good morning, guys. Thanks for taking my questions.
First one for Dan.
Yes, it looks like your cash tower cost of service is up about 9% year over year in the quarter was up about 7% last quarter.
It's been pretty muted.
Looking at unallocated G&A in the quarter it was kind of higher than it's been before too. So maybe talk a little bit about what's behind that cost growth and how we should think about the trajectory from here.
And then I have a follow up.
Yeah, if you look year over year, it's relatively stable. So it's just when costs come in and what happens on a quarter to quarter basis, I would think that when you think about the cost structure, especially in our tower business, it's pretty stable over over a long period of time. So I would just I would just ask that when you when you look into it Nick.
At the year over year growth as opposed to any quarter over quarter moves and that probably is more indicative of what's going to happen through the course of of long periods of time, including in our 2022 guidance.
Okay. Okay. So nothing nothing unusual going on there to call out.
Yes, I guess the second second one on small cells, you kind of thinking about the T mobile and horizon deals today.
Presumably structured those deals to cover their anticipated needs for the foreseeable future.
Youre kind of thinking about the cadence of signings going forward from customers with long term deals like those.
Is it appropriate to think that it might be several years before they come back to do more with you kind of a feast or famine outlook or are there reasons to think that they might come back to the wellbore on a more regular basis.
Before those deals conclude.
Yes, Nick.
I would say frame.
Framing that I would think about two things. The first thing I would think about is the.
The 50000 node commitment that we received as a hard contractual commitment so theres a balance whenever the carriers, we're working with the carriers around contracted future leasing activity, whether it's on towers for amendments or new new installations or in the case of small cells, we're not going to get one.
Hundred percent of what they think they're going to build contracted and committed that early so I wouldn't we don't view this and don't think this is a 100.
Sent of everything they're going to need or contract for cause.
We're just not going to make that that level of commitment. The second thing that I think is.
But when I think about your question is the amount of and scale of the commitment relative to historical activity is really frankly astonishing.
We've said this a couple of different times, but we've been at this for 10 years, We've got 50000 nodes on air and in the last 12 months, we've gotten 50000 node commitment.
It feels to us like this is a very significant turning point.
And I think that turning point and the commitment from the carriers, while we think about it in terms of then in my comments I talked about the return element the revenue growth elements and why it's important there, but the other aspect of this is how difficult. This these are to build I think is very well understood by our carrier customers and so theres an ela.
I meant to this of the carriers know theyre going to need the site and unlike towers, where we can get them on air in six months.
There has to be significant planning that goes into this and they recognize the difficulty of it which I think is really the value proposition that we bring to the table of an ability to deliver these nodes and implement and so it's really a statement of confidence also in our operating ability. In addition to the macro elements of what's needed in order to make their net.
<unk> work and I think the combination of those two things is just really compelling.
Okay, Great. That's helpful. Thanks, Jay.
Okay.
And moving on we'll go to John Atkin with RBC capital markets.
Thanks.
So I.
I noticed that the cash yield on our debt to capital showed a nice sequential increase drove <unk> for fiber and can you speak a little bit as to what drove that.
Yes, John .
A couple of things drove it one is just performance in the business as we continue to add.
More revenue to existing fiber either through both through fiber solutions and co locating small cells on the assets we already own.
So I think part of that is just the continuation of improved that this business does generate incremental returns that add to the overall yields but I think there was a little bit of it that we called out.
Some some expense reductions in the fourth quarter that we didn't expect those hit on the fiber side and therefore increase the gross margin.
And ultimately the yield because that calculation is in last quarter annualized. So we got the benefit of that kind of one time.
$10 million reduction in expenses. So some of it is from that too, but the majority of the increase in the yield is because the business is just performing well and we're increasing the revenue and returns on the assets that we already own.
So on the tower side it was in the kind of the low 11% range and do you expect fiber too.
What at what Heath is fiber.
Kind of converge towards that 11%.
Do we think about that.
Yeah. So first of all on the tower side, there is substantial growth there and that's all just on the performance of the towers. We are continuing because this business is a great business to add revenue on existing towers, which increases the yield which we would anticipate to happen in 2022 as well.
The timing of when we're going to get the fiber business to an 11% yield.
We've always had a hard time answering that question, specifically because it really matters not only the amount of small cells, we get but how many are co located as Jay pointed out, though we're going to make significant progress towards that given the 50000 that we just booked because not only do we get a lot a significant portion of them are going to be co locating on existing assets, which will drive that yield up.
And what's so important to understand about that is at the same type of maturity timeframe of towers, we were much below the 8% that we're on at the fiber business right. Now. So we think that the the proving out of the small cell business is happening faster than what happened with towers and that we will get to those <unk>.
7% and as we've talked about as we get to three tenants per a fray.
Overall small cell deployment, we will get into that drives the returns up to the mid to high teens.
We feel like Theres, a lot of upside that is going to be realized in our fiber business and those yields will creep up and approach in.
Where we are with towers towers will continue to increase also so hopefully youll continue to ask the question of when are you going to get to the 12% on towers or the 13% on towers, and we will keep saying, we're going to chase that with small cell.
50000 small cell.
A lot of that co location any kind of rough numbers you can share on the capital intensity of that and then more broadly for the business.
Given all the MLA as you now have in place how do we think about 2022 growth outlook.
And how much of that is not contractually locked in.
Under MLA terms.
Thanks.
The capital intensity on the co locations are substantially lower than capital intensity on anchor builds.
And as we start getting clarity around what the timing is of building those nodes.
With anchor builds and co locations within the 50000, we will continue to update you on the capital, but right now what we believe is the capital in 2022 will remain relatively consistent with what we saw in 2021.
But it is clear that that over time, we would anticipate that to go up because we're going to increase the number of nodes being put on air from from what we expect this year to be 5000 to what we expect next year to be over 10000. So we are expecting an increase in capital, but not commensurate with the increased number of nodes because the capital intensity is coming down.
On the on the long term MLA and the percentage under those.
We think of our MLA as the way we structure the growth so whether we put it in an MLA or take it all a card that growth is going to occur because our assets are so important to the functioning of the network.
And we've signed a lot MLA as but we always think about what is the best present value, we can get within them and whether we go Ala carte or.
Or more holistic pricing is really dictated by the NPV, we get plus the benefits that both we and our customers get from having a holistic pricing just making it easier to operationalize, but we also always leave room for upside through that so.
We're not we're not pricing all of our tower capacity and saying that's what we get paid within our MLA as we're pricing. It was with respect to how much activity. We think is going to happen. So we believe that.
The contracts provide all of that both.
The underlying contractual obligations plus the upside and the operational.
Ease that comes with having more pre described pricing, which is really all it is because.
Like I said, however, we want to monetize the growth, we think theres going to be growth and we're monetizing it.
John one other thing maybe just to think about that that I would add to dan's comments around the MLA says the more near term period that you think about the more certainty we have of that revenue stream and as we get towards outer years. The more optionality, we have towards the upside and we would think about it that way and obviously, our counter parties to think about it that way as well because.
The nearer term the more certainty they have as to what exactly what theyre going to need and as we get into outer periods. Then we end up with more optionality towards towards future future growth. That's just the nature of the way those contracts end up coming together usually.
Thanks very much.
Yes.
And next we'll go to Ric Prentiss with Raymond James.
Thanks, Good morning, everybody.
Good morning, Rick.
Hello.
Couple of questions if I could.
One I appreciate the focus on core.
Cash lethal.
Thanks, you guys report by segment.
Activity, hopefully, we'll get that by quarters as you go forward a couple of questions on the sprint T. Mobile items that you discussed earlier this year and <unk> touched on this call.
Right I think you said, maybe 5000 loans would get decommissioned.
Small cell nodes get decommissioned by T mobile.
'twenty three time frame should we assume that the 10000 is a gross out of nodes not a net add of nodes.
Yes, yes.
The net add of note.
The $10 on a gross out of nodes. The 5000 will be decommissioned in 2023 so.
Yes, the 10 thousands of growth or more than 10005 thousand will be decommissioned.
Gross will obviously lead to new lease activity in the dotcom, we'd go to churn.
Yes, correct.
Okay.
Second question on the on the.
T mobile small cell I think you also mentioned there was a five year specific number commitment, but is the 35000 commitments spilled over the five years as a spread over a longer period of time.
Couple questions on that one.
Yes, the 35000 node commitment is spread over five years.
Okay.
Great.
It looks like you guys simplified the sprint churn.
The 200 million hitting in 2025.
Sure and kind of hangs in the 1% to 2% range. Other years should we assume that it goes more towards the 2% range in the 1% range, though as we think about just trying to understand.
Because I think you'd previously acknowledged that you had $679 million ballpark of sprint leases. So just trying to think of how we should think about the $200 million versus that 679 and over what period of time will they be coming off.
Yeah, Rick as we get into those outer periods, obviously, theres, probably a little bit of movement. As you would expect from year to year. So we're trying to give you a range.
In each of the years, we would be within so we would expect it to kind of be 1% to 2%.
At this point, we are ready to be more precise than that in that range.
Okay.
Can you give us an idea of how much total sprint churn do you expect to occur. If it was 679 was the most exposure 200 total lumps on can you give us an idea of how much.
Sprint churn do you expect to occur over a multiyear period then.
Yes, I think when we get out into these outer periods of time and history has been such a.
A great place to go back and look at how these networks get deployed and at what ends up happening when there is consolidation churn.
Today, putting a precise answer on that on that question I don't think we have we don't we don't have great visibility towards that we can we can range bound it we know kind of the outer limit of it around the 2% the lower end of kind of 1% and as they deploy the network and upgrade it to <unk> T. Mobile goes through that process there were going.
Some sites for sure that they're going to they're going to not need there will probably also be some sites that today. They look at it and maybe on the list of potentially losing that ultimately will have have need is as data growth data growth occur. So I think as we get into those outer years, we'll be able to give you a better estimation, but in terms of modeling when we look at the total.
Business, we think as we look at the contractual committed revenues on our assets today, we're pretty confident we'll be inside that.
And between that 1% to 2% churn in any years other than the specific years, we were calling out.
One other quick housekeeping one.
The supplement I guess the settlement has not been updated for the new straight line.
The adjustment for T mobile, but should we assume again ballpark ZIP code that the straight line adjustment that went up by $250 million in 'twenty two guidance should that straight line adjustment kind of dropped by 50 or changed by 59, a year just kind of theoretically.
Yeah, I won't speak specifically to the $50 million a year, but the.
You are right that that $250 million will drop over time and it'll it'll.
Ultimately, obviously reversed towards the back half of the 12 your agreement.
So, yes, it's going to be somewhere generally in that range.
That's what I expect and want you to give us kind of the more detailed schedule that you have time to kind of finish it up yes, yes, yes.
It didn't happen in the period that we're reporting on in the supplement so we wanted to put it in the period that that would actually occur. So we'll have that all laid out really well in our supplement in the after the first quarter.
Makes sense, thanks for all the answers and everybody stay well hopefully we're moving into 'twenty.
'twenty two.
Great you too Rick.
And next we'll go to Phil Cusick with J P. Morgan.
Hi, this is more for Phil.
Two if I may.
Guys have talked over the years about at check in.
Third tenant on small cells being accretive to return.
How should we think about the co location and pricing that first tenant and later driving up the return.
Sure. So the pricing environment that we've talked about for years is unchanged. We've seen the economics, whether it's the two large deals that we spent a lot of time talking about this morning or as we do one off markets with the carriers, we've seen that pricing stay in line in terms of our underwriting we tip.
<unk> see a 6% to 7% initial yield on invested capital.
As we add a second tenant to those to those same assets are on that same network, we get we get into the double digits.
Returns are above 10% yields and then as Dan mentioned earlier by the time, we get to the third then we're into the mid to high teens in terms of our yields on invested capital as we add that third tenant we've seen that pricing basically be unchanged for the last five or six five or six years and so those are the economics, you should expect as we add.
Additional tenants.
Typically when we're underwriting these investments we will be we don't do anything speculatively. So we'll start off with some sort of 6% to seven in the neighborhood of 6% to 7% initial yield on that investment we're building it for a carrier purpose built.
And in order for us to sign up for that we're going to have a view on on future tenancy and what will go there and.
The things that we underwrite are going to have at least one additional tenant beyond that anchor tenant. So we're underwriting things with yields that are into the double digits and then and then over time getting in achieving that lease up to drive our returns.
Above well above our cost of capital and one of the things that we've talked about historically and remains to be true is that when we talk about a second tenant it doesn't have to be a second specific customer that a the first tenant coming in intensifying on their own network can be their own second tenant and we will see the economics that look almost exactly.
<unk> the same whether its the same company or a different company as the second tenant and Thats true in these agreements as well as any time that we're seeing the densification on the existing network that those will drive returns that are very consistent with everything Jay just talked about.
That's helpful. Thank you and then my second question.
In the material.
The carriers are planning the next phase.
Phase of the build will require small cells at scale can you expand on what those conversations looking like.
I'm sorry, what was the last part of the question.
Can you expand on what.
E Commerce.
Like.
Talking to the carriers is about like the next stage of the five T. Bill that requires the smartphone.
Yes, Amir I'll only speak to it at a really high level and then I would I would let you inquire of each of the carriers as to how they are thinking about it the conversations that we have have brought to fruition. The 50000 nodes that they committed to and so we have an understanding of how they're thinking about their markets, where they are wanting to densify, how they're thinking about.
Putting it in places, where we have existing fiber or not.
So we have a good view of that but specifically, how theyre thinking about spectrum management and Densification. That's really a question that I think they should speak to.
Great. Thank you.
You bet.
Moving on we'll go to Colby <unk> with Cowen.
Great. Thanks. This is Greg Williams sitting in for Colby I have two questions. If I may one I just wanted to revisit the.
Idea of At&t's messaging yesterday about one tower climb I don't want to talk about that customer specifically, but what are the one tower climb our one touch program mean in terms of impact on your on your leasing expectations.
Specifically.
If the radios aren't ready for late spring early summer if it's one piece of equipment or two pieces of equipment.
How does that how does that impact you.
Your lease ups in the way our contracts are constructed the price on space equipment.
Some of your peers can price on a frequency specific level.
The second question is just on the services business, how are we going to see services volume on the tower side.
2022 versus 2021, and what are the gross margins looking like for 2022 on service margins. Thanks.
Thanks, Greg for the questions on the first question I think.
It's a thoughtful approach to try to limit the number of truck rolls that you have in the network and so obviously AT&T is being thoughtful about how they're thinking about truck rolls and a number of times to touch the touch touch a site because it just increases the cost of that cost of that activity.
It doesn't matter that much to us in terms of our ultimate financial results on site rental revenue, whether it's one or two touches in order to get to.
The steady state of the final state of the of the network. We're obviously happy to work with our customers as they do things like try to eliminate the number of truck rolls that they have in order to help them accomplish those those lower cost of deployment in terms of the pricing in the second part of your question related to that we price based on space used up on.
The top of the tower space used at the base of the tower the ground space that the equipment takes up as well as our agreements are oftentimes spectrum specific as to what Theyre deploying are using on those on those sites. So all three of those elements.
It can impact the ultimate price on the site.
On the services question, we expect services as we as we talked about in terms of tower activity to be similar in 'twenty two as it is in 'twenty, one we have a similar expectation around.
Services.
<unk> and 'twenty two relatively similar to what we saw in 2021.
The timing in the quarters may change a little bit, but as you think about it in the totality of the year. Our outlook assumes that services is about the same in 'twenty two as it was in 'twenty one.
That's helpful. Thank you.
Got it.
And next one operator may we have time for two more questions. Thank you and next we'll go to Sami Badri with credit Suisse.
Alright, Thank you very much for fitting me in.
There were some some references made earlier.
The difficulty of the small cell business and this is kind of the rationale for war.
The competitive advantage that you guys have built over many many years and even entrenched yourselves have been able to watch where the puck is going on another dynamic that really kind of entered in 2021 was the increases up costs and decreases of labor firepower for a lot of organizations involved in the telecommunications.
The industry is.
This environment conducive of a dynamic where the telcos will begin outsourcing more of their telecom infrastructure builds over time rather than in sourcing.
Yes. Good morning. Thanks for the question, we believe that to be the case certainly the economic proposition that we have the wireless operators on the tower side has proven out over 25 years that the shared infrastructure model reduces the cost of the network for the operators.
And it has played out over a long period of time very successfully that exact same dynamic as it play with small cells, where we're willing to put up the capital.
And then deploy the capital initially and then share it across multiple operators such that each operator has a much lower cost of operating than what they would have if they own their own and each of them built their own their own network. So we absolutely see those dynamics at play and what youre, highlighting around an environment where labor costs.
Increase inflationary pressures may drive up interest rates I think it just underpins.
Underpins our value proposition to our to our carriers that we're happy to provide the capital at a much lower cost than what the markets can provide them capital because of the opportunity that we have to to see returns from multiple operators across that same same asset so.
That's the business model and feel like we're really well positioned for that.
And in a period of time, where we're where we're trying to where everyone is trying to figure out ways to reduce overall costs were a very good alternative as they think about network deployment.
Got it thank you.
And then one comment or question actually on just some of the FAA and airline type things that we've been seeing has there been any change and payments or negotiations or under contracts that you have with your major customers regarding some of the noise that non telco constituents are making.
There has not been any change in that behavior with our with our customers and we don't expect there to be any impact to our 2022 outlook.
Thank you.
You bet.
Operator may we have time for one more thank you and that final question will come from David Guarino with Green Street.
Thanks, two questions I'll ask them upfront for you. The first one is on valuations for fiber assets have moved significantly higher over the past year do you think it might make sense to recycle a portion of your fiber assets that maybe aren't as well suited for small cell colocation.
And then the second question is on data centers you guys have made some small investments in data centers, but what are your thoughts on a larger scale data center acquisition in CNS evidenced today their datacenters and towers under the same roof makes strategic sense.
You bet on your first question around valuations for fiber I think I think the world is starting to see the real value of fiber and the necessity of it for small cells and a desire for folks to try to figure out a way to invest in that space has certainly driven up the valuations.
We've talked for years around our strategic focus and what the interest in fiber is for US we wanted to be in the top U S markets and we wanted to acquire fiber that was dense in those markets and had a lot of capacity.
And as we said I think it was coming on now about four years ago, we really didn't see any more meaningful acquisitions in the U S or opportunities to acquire fiber that met those criteria of dense urban markets high capacity fiber and so the majority of what we have been investing in since then.
Has been building fiber in markets for carriers.
To deploy small cells. So when I look at our capital base and the assets. There is not a portion of those assets that are extraneous to the strategy of any meaningful amount.
The assets that we acquired and Bill we're really in the locations that we chose and we didn't buy large nationwide portfolios of assets that we look at it and say okay. These are these are underperforming are unlikely to perform long term. So like the asset base that we have and think we're going to be able to drive really nice returns across them over a over a long period of time and I think the actions.
Over the last 12 months really.
Really speak to the opportunity that lies ahead, so feel good about where the assets are.
On your second question around data centers.
Large scale data centers, we don't see that as core to our strategy don't see a need to owned data centers don't see how it relates frankly to the edge data centers that will ultimately be needed.
As as wireless networks ultimately expand so I don't see owning our operating large data centers as part of our business model and it's frankly not something we're interested in doing we're focused on investing our capital in the towers and small cells. We think that's the highest growth opportunity.
In the U S and and see a lot of opportunities to deploy capital there as well as drive great returns for our shareholders and so we're going to stay we're going to stay focused there and if ultimately we get to.
Our upside case for small cells, and certainly I think the edge data centers will come around and we are well positioned given our fiber footprint to benefit from those edge data centers, if we get into the upside case outcomes for small cells will we'll certainly take advantage of where our hub sites are and our assets are located.
To capture that edge edge data demand, but don't see large scale data centers playing out in our in our strategy. So I appreciate the.
Did you have a follow up.
Well just just to clarify so when I said large scale I was referring more to a larger platform not necessarily a hyperscale data center, but it sounds like based on your.
A response that same would hold true the timing is not there yet from your view, but in the future you could be more open minded to a smaller edge data center strategy is that correct way to read what you said.
Well I think I'm trying to separate the difference between the large block that large box data centers and the edge data centers.
We see potential on the horizon for edge data centers to come to fruition in the in the wireless networks in the use cases in order to get to a place where edge data centers are a meaningful opportunity for us. We're talking about cases that are upside cases, as we think about small cells, we'd have to get to that kind of level of.
Data demand in the U S. So if we get to kind of the upside cases.
On small cells and fiber and edge data centers are an opportunity we feel like we're really well positioned with the assets that we have to capture that and we would absolutely be willing to to build out sites. We've we've made some investments in vapor Io we have a good position there to an edge data center company they've done well.
We've built a number of.
Their assets on our sites and so we've got a good partnership there and we're watching the development of that space, but for it to become meaningful in our operating results.
It's a pretty big run from where we are today in terms of total data traffic that would be needed.
So that's where I would see our opportunity, but don't see are frankly don't see an opportunity in the big box data centers.
Today or in the future as being really a part of our core strategy.
That's helpful. Thanks.
You bet.
Well. Thank you everyone for joining this morning, and let me just conclude by thanking our employees for job well done in 2021.
The level of activity is remarkable the way you delivered for our customers was outstanding and so thank you for all of your work I know you already busy working on 2022, but thank you for what you accomplished in 'twenty, one and I look forward to talking to all of our investors next quarter. Thanks for joining.
And this concludes today's call. Thank you for your participation you may now disconnect.