Q2 2022 Crown Castle International Corp Earnings Call
Speaker 1: I.
Speaker 2: Please stand by. We're about to begin.
Speaker 2: Good day and welcome to the CrownCathal Q2 2022 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Ben Lowe. Please go ahead sir.
Speaker 3: Great, thank you Paula and good morning everyone. Thank you for joining us today as we discuss our second quarter 2022 results.
Speaker 3: With me on the call this morning, our J. Brown Crown Castle's Chief Executive Officer and Dan Schlinger Crown Castle's Chief Financial Officer. With me on the call this morning, we have our J. Brown Council's Chief Executive Officer financial officer.
Speaker 3: To aid the discussion, we have posted supplemental materials in the investor section of our website at crowncastle.com that will be referenced throughout the call this morning.
Speaker 3: 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.
Speaker 3: Information about potential factors which could affect our results is available in the press release and the risk factor section of the company's SEC filings.
Speaker 3: Our statements are made as of today, July 21, 2022, and we assume no obligations to update any forward-looking statements.
Speaker 3: In addition, today's call includes discussions of certain non-GAF financial measures.
Speaker 3: Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the investors section of the company's website at crowncastle.com. With that, let me turn the call over to Jay.
Speaker 3: Thanks Ben and good morning everyone. Thanks for joining us on the call. As you saw from our second quarter results and updated full year outlook, the strength of the US market continues to stand out. We are seeing the benefits of a strong leasing environment as we support our customers growth initiatives with their deployment of 5G.
Speaker 3: This activity drove 6% organic revenue growth in our tower business in the first half of the year, which we believe will meaningfully continue to through the remainder of the year. And as a result, is resulting in higher operating performance relative to our expectations at the beginning of the year. In addition, we expected double the rate of small cell deployments next year compared to the 5,000 nodes we expect to put on air this year to meet the growing demand from our customers with 5G networks require small cells at scale.
Speaker 3: Looking further out, I believe our strategy and unmatched portfolio of 40,000 towers, 115,000 small cells on air or under contract, and 85,000 route miles of fiber concentrated in the top U.S. market have positioned Crown Castle to achieve our long-term annual dividends per share growth target of 7 to 8 percent.
Speaker 3: Dan will discuss the financial results and updated outlook, so I'll focus my discussion on our strategy to deliver the highest risk-adjusted returns for our shareholders by growing our dividend and investing in assets that will generate future growth.
Speaker 3: To that end, we are focused solely on the US because we believe it represents the best market in the world for wireless infrastructure ownership when considering both growth and risk.
Speaker 3: As you saw on the release, to better reflect our strategic focus on the US market, we are changing our company name from Crown Castle International Corp to Crown Castle Inc, while our ticker will remain CTI.
Speaker 3: As you can see on slide three, the demand drivers for our infrastructure have been strong since the early days of wireless network investment in the US.
Speaker 3: We have benefited over time from persistent growth in mobile data that has required hundreds of billions of dollars of network investment by our customers.
Speaker 3: During the 2G deployments in the mid-90s, wireless operators invested approximately $125 billion over eight years to enable wireless voice services nationwide.
Speaker 3: As network and handset technology rapidly improved, that investment cycle gave way to the development of nationwide 3G, which enabled basic mobile internet browsing that consumed significantly more data than legacy voice services.
Speaker 3: Over the next eight years or so, wireless operators invested approximately $200 billion, both to deploy new spectrum on existing cell sites and deploy thousands of new cells in order to add to the network capacity needed to keep pace with the substantial growth in mobile data.
Speaker 3: The virtuous cycle continued with network investment and technology innovation, allowing our customers to meet the increasing demand for mobile data that US consumers are willing to pay for.
Speaker 3: As we entered a new decade in 2010, wireless operators began deploying nationwide 4G that delivered a step function change in how fast data is transferred from cell sites to mobile devices.
Speaker 3: This innovation led to the development of data rich applications and use cases that were simply not possible with 3G networks.
Speaker 3: including mobile video, e-commerce, and social media platforms.
Speaker 3: which drove another step change and mobile data demand.
Speaker 3: Over that decade, wireless operators invested approximately $325 billion to develop their 4G network, and mobile data demand increased by a factor of 96 times during that same period. Perse tragic memories against our period.
Speaker 3: As a result of the quality of the network and the user experience enabled by this level of investment, US consumers have used their wireless devices more and more, and they have been willing and able to pay for that improving mobile experience. Thanks for that improving mobile experience.
Speaker 3: In turn, the U.S. wireless operators have taken the cash flows generated from their customers and invested even more in their networks and the cycle continues.
Speaker 3: The combination of this persistent growth in mobile data and the value we deliver to our customers by providing a low-cost, shared infrastructure solution has enabled us to consistently generate growth through various macroeconomic cycles.
Speaker 3: As you can see on slide four, our business has a long track record of delivering growth through periods of US economic expansion and contraction.
Speaker 3: Similar to past generational network upgrades, we expect 5G to drive sustained growth in our tower business as our customers upgrade existing stealth sites and add new sites to our 40,000 towers. And add new sites to our 40,000 towers.
Speaker 3: We also believe 5G will be different as it will require the deployment of small cells at scale to increase the capacity and density of wireless networks as more spectrum deployed across existing macro towers will not be sufficient to keep up with the growth in mobile data demand.
Speaker 3: As a result of the requirement to build out this sensor network, we believe the duration and magnitude of 5G investment will likely exceed prior cycles.
Speaker 3: Further extending our runway of growth.
Speaker 3: With this view in mind, we have invested $16 billion of capital in high-capacity fiber and small cells that are concentrated in the top U.S. markets.
Speaker 3: That capital is yielding more than 7% today. And with more than 60,000 contracted small cell nodes in our backlog, including a record number of colocation nodes, we expect the yield to increase over time as we put those small cells on air.
Speaker 3: To put this in perspective, our tower investment began more than 20 years ago, at approximately 3% yield. When we built and acquired assets that we could share across multiple customers.
Speaker 3: As we have proven out the value proposition for our customers and leased up our tower assets over time, those assets now generate a yield on invested capital of 11.5% with meaningful capacity to support additional growth. Take it frankly.
Speaker 3: To provide investors with additional visibility into how our fiber segment investments are progressing, we have updated the analysis, we have provided each of the last two years, outlining the activity and returns for five specific markets.
Speaker 3: Looking at the collective view of how these five markets have performed over the year, over the last year on slide five, growth from both small cells and fiber solutions has contributed to solid returns with yields that are largely consistent year over year.
Speaker 3: The performance across these markets demonstrate our ability to generate strong overall returns as we co-locate additional customers on our fiber assets, while also investing capital to build new assets and expand the long-term growth opportunity.
Speaker 3: To that point, we are seeing co-location at scale with followed returns.
Speaker 3: Across our entire fiber business, about a third of the small cell nodes we have deployed since the beginning of 2018 have been co-located on existing fiber with returns that are consistent with the targets that we have communicated.
Speaker 3: Looking at how well our overall strategy is performing, since 2018, we have increased our consolidated return on invested capital by 160 basis points, 9.5%.
Speaker 3: Return nearly nine and a half billion dollars to shareholders through our dividend that has increased at a compound annual growth rate of approximately nine percent.
Speaker 3: while also investing $7 billion of capital into attractive assets that we believe will support the future 5G buildout and contribute to dividend growth in the future.
Speaker 3: I believe that combination highlights how compelling and differentiated our strategy is.
Speaker 3: We provide investors with the most exposure to the development of next-generation networks with our comprehensive offering of towers, small cells, and fiber.
Speaker 3: A pure play, US wireless infrastructure provider with exposure to the best growth and the lowest risk market. A
Speaker 3: A compelling total return with a current yield of 3.5%, and a long-term annual dividend per share growth target of 7-8%.
Speaker 3: and the development of attractive new assets that we believe will extend our runway of growth.
Speaker 3: When I consider the durability of the underlying demand trends we see in the US, that provides significant visibility into the anticipated future growth for our business.
Speaker 3: The deliberate decisions we have made to reduce the risk associated with our strategy and our history of steady execution, I believe Crown Castle stands out as an excellent investment that will generate compelling returns over time.
Speaker 3: Before I wrap up, I did want to draw your attention to one other announcement that we made yesterday. We released our 2021 Environmental, Social and Governance Report, and we also launched a new ESG website as a part of our effort to provide timely and accessible ESG Disclosures. And accessible ESG Disclosures. And accessible ESG Disclosures.
Speaker 3: Our business is inherently sustainable with our shared infrastructure solutions, supporting connectivity that is vital to our economy while limiting the proliferation of infrastructure and minimizing the use of natural resources. And minimizing the use of natural resources.
Speaker 3: We continue to build an inclusive and diverse community at Crown Castle and are committed to further improving the impact we have on the communities in which we operate, with specific goals to be carbon neutral in scope 1 and 2 emissions by 2025
Speaker 3: and meaningfully increase our addressable spend with diverse suppliers by 2026.
Speaker 3: We hope you find these new disclosures and the website helpful. And with that, I'll turn the call over to Dan.
Speaker 4: Thanks, good morning everyone. As J discussed, 5G deployments continue to create a strong operating environment and are driving another year of solid growth for us.
Speaker 4: Results for the second quarter were in line with our expectations, so I want to start by discussing our updated expectations for full year 2022.
Speaker 4: Turning to page 8, our outlook for 2022 site rental revenues and AFFO remains unchanged, while we increase the outlook for adjusted EBITDA by $20 million.
Speaker 4: The increase to adjusted EBITDA reflects a $20 million increase in the expected contribution from our services business.
Speaker 4: as we continue to capitalize on the consistently high levels of tower activity.
Speaker 4: In addition to updating our 2020 two Outlook for Strong Operating Performance
Speaker 4: We also reduced our expectations for full year sustaining CAPEX and cash taxes by $25 million as we focus on operating the business as efficiently as possible.
Speaker 4: These positives do not flow through to additional AFFO growth in the year due to an increase in expected interest expense of $45 million.
Speaker 4: This $45 million increase reflects the significant increase in interest rates. We have experienced over the last few months and incorporates the now higher forward curve on our $3.3 billion floating rate debt.
Speaker 4: As a result of these changes, our AFFO outlook remains unchanged.
Speaker 4: In light of the increasingly uncertain macroeconomic and rate environments, I'd like to review our approach to capital allocation and balance sheet management.
Speaker 4: Our first capital allocation priority is to return the majority of the free cash flow generated by our business to our shareholders through a quarterly dividend with future dividend growth by the future growth in cash flows.
Speaker 4: Our second priority is to invest in assets to meet our underwriting standards and generate expected future growth. That's it.
Speaker 4: And we fund those discretionary investments with external capital and a manner consistent with maintaining our investment grade credit profile.
Speaker 4: When we underwrite these investment opportunities, we set our hurdle rates based on an assessment of our long-term cost of capital to align with the long-term nature of the assets we're investing in.
Speaker 4: Our underwriting assumptions contemplate a rate environment that approximates a long-term average interest rate.
Speaker 4: But we expected the increase in rates to happen over a few years versus the move we've witnessed this year that happened over a matter of months.
Speaker 4: As a result, the current rate environment does not impact our long-term cost of capital, or our desire to continue to pursue investments with the return profiles we have consistently discussed with investors. We have been working on the current rate of capital. We have been working on the current rate of capital, and we have been working on the current rate of capital. We have been working on the current rate of capital. We have been working on the current rate of capital.
Speaker 4: Since we believe those returns will significantly exceed our cost of capital.
Speaker 4: Having said that, the pace at which rates have normalized will present some near-term challenges. As you can see with the $65 million increase in our 2022 Outlook for Interest expense, when compared to the Outlook we established last October . When compared to the Outlook we established last October .
Speaker 4: Our last capital allocation priority, if we have excess capital after paying our dividends and investing in new assets, is to return that capital to our shareholders through sharing purchases.
Speaker 4: Turning to the balance sheet, we ended the second quarter in a very good position, with 4.9 times, debt to the justice of Ibiza.
Speaker 4: currently have approximately nine years of weighted average term remaining, 85% of our debt tied to fixed rates, and limited maturities through 2024.
Speaker 4: Additionally, we continue to focus on ensuring we have sufficient liquidity to meet near-term debt materities and fund our discretionary capital expenditures.
Speaker 4: We believe we have accomplished that goal by amending our credit facility in early July to increase the revolver capacity to $7 billion.
Speaker 4: leaving us with nearly five billion dollars of available liquidity.
Speaker 4: So to wrap up, we're excited about the demand we're seeing across our shared infrastructure offering as our customers deploy 5G at scale in the best market for wireless infrastructure ownership. In the best market for wireless infrastructure ownership.
Speaker 4: We believe we have sufficient capital to invest in new assets to take advantage of the densification of communications networks required to meet the future data demand growth spurred by 5G.
Speaker 4: And we believe our comprehensive set of solutions across tower small cells and fiber, which are all necessary to build next-generation wireless networks, will allow us to deliver on our long-term growth target of seven to eight percent annual to be of it in growth per share.
Speaker 4: Sorry, annual growth and dividends per share. With that, Paula, I'd like to open the call questions.
Speaker 2: 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. And we'll pause for just a moment. And we'll pause for just a moment.
Speaker 4: We'll take our first question from David Barton with Bank of America. Hey, guys. Thanks so much for taking the questions. I guess a couple if I could. First, Jay or Dan, you know, is this big step up in revolver capacity, should we be reading something into this about maybe your view as to the potential for opportunities to acquire new portfolios increasing as maybe the rate environment and other things can maybe put some pressure on?
Speaker 4: prepaid rents. Obviously, the accounting amortization of that is going to fall through time, but presumably it's falling because, you know, new prepaid rents cash coming in the door is also falling. And how should we think about that informing your outlook for maintaining seven to eight percent dividend growth annually? Thank you.
Speaker 3: Thanks, Dave. Good morning. I'll take the first question and I'll let Dan speak to the second two questions. On your first question around the revolver, no, there's no read-through here in terms of what we're seeing on the acquisition front. We've been really consistent about our view of particularly fiber assets over the last several years, that the vast majority of the additional assets that we will own over time will likely be as a result of assets that we build.
Speaker 3: As we assess the landscape, we don't see an opportunity to acquire assets at scale that meet the criteria of dense urban footprints with high capacity fiber that will be used for small cells. The increase in the revolver is more as Dan spoke to balance sheet management and gives us some more flexibility as we think about funding upcoming catbacks over years as well as navigating through any debt maturities that may come.
Speaker 3: We believe around this 15% range is a good strike of that balance where we get to take advantage of the lower cost of capital that comes with having shorter or variable debt. And we believe that we can withstand as we've seen in our 2022 outlook, the ability or the consequence of having debt increase in the period. And, and.
Speaker 5: I think as most of us have seen and understand, the rate at which the interest rates have increased in 2022 has been the fastest rate of interest rate increases in the last 50 years. So even in that period, we were able to withstand having 15% debt and still maintain our FFO outlook. So we think we're in a good balance at this point between fixed and variable debt. We've definitely gotten to a point where
Speaker 5: On your last question of prepaid rent amortization
Speaker 5: I think that the last thing he said was, was as prepaid rent amortization goes down, does that impact our dividend growth? The answer to that question is, I don't believe so because we size the dividend based on the cash flow generation of our business in the period that we're talking about.
Speaker 5: that prepaid rent amortization doesn't increase cash flow in that period.
Speaker 5: So we believe we will still have the opportunity to grow at seven to eight percent, even if we have amortization coming down over time, which you can see in the schedule that we've added to our supplement. The time is fine, but here you can see that I'm still night on a shot homework. If you liked to comment on the topic in the video, if you found it useful, please click on the link below. Please try out your information at welcome. If you've noticed that current. Hopefully.
Speaker 5: But I do want to take a step back and just talk about prepaid rent amortization more is what is driving it and why it's important to us.
Speaker 5: And it is an economic trade that we and our customers make at the time of building assets for them.
Speaker 5: When we put capital into our assets, even in the form of new assets or modification of existing assets, or modification of existing assets,
Speaker 5: We get reimbursed for a portion of that capital from our customers.
Speaker 5: That reimbursement and accounting gives rise to a deferred revenue.
Speaker 5: that we have to amortize over the course of the remaining life of the contract.
Speaker 5: And that is what prepaid rent amortization is.
Speaker 5: But what you can see in that is that our customers are paying for some of our capital.
Speaker 5: that is true economics that we are receiving and therefore we as an industry overall decided the best way to try to reflect that economic trade was to include the amortization within the definition of AFFO.
Speaker 5: But because we know that it isn't exactly clean one way or the other however we figured it out, we as Crown Castle wanted to give as much information around that prepaid rent amortization as we could, which gave rise both to the tables that are in our supplement that show in period amortization, in period prepaid rent received, and over the next five years what that amortization is going to look like over time.
Speaker 5: And we hope that that gives investors the ability to make whatever decision on how to judge within the AFFO calculation prepaid rent amortization. But I just wanted to make sure everybody understands there's a true economic trade that's happening where we're getting benefit. We want that to be reflected in our financial state. We want that to be reflected in our financial state.
Speaker 1: Thanks, Dan.
Speaker 2: And moving on we'll go to Simon Flannery with Morgan Stanley .
Speaker 6: Thank you very much. Good morning. I just wanted to follow up with a couple of things from the AT&T earnings call. The first thing they said was that they had pulled forward their 5G bill. They are now at 70 million pops covered with mid-band by the mid-part of this year, six months ahead of schedule. So my question around that is just where are we in this sort of mid-band 5G build-out cycle? Are we kind of plateauing now? Still accelerating. You know, we're seeing some of the carriers with CAPEX peaking this year.ope haha.
Speaker 3: On the first question, I wouldn't speak specifically to any one of our customers, but broadly, when you look at what's happening on the tower side of our business, we're in the middle of a multi-year acceleration of activity, which has been driven by 5G and the deployment of largely 5G equipment across sites that they were already co-located on for 4G or prior generations.
Speaker 3: and across the whole industry, across all of our customers, I should say, we think that acceleration continues kind of through that at least the balance of this year. I don't want to get into giving guidance for 2023 and what we expect activity there to be. But we think as I alluded to in my comments, this is, there's a very long runway of activity from 5G buildouts and trying to pick the years where they're the highest over a long period of time.
Speaker 3: Each of those cycles, as I mentioned in my comments, has increased the total amount of catbecks for the carriers. And I think we'll see a similar thing play out in 5G as you already see a very large amount of capital that's been spent on 5G. And as I alluded to, I think we've just scratched the surface on what that's gonna look like. So that's on the tower side. And I think it leads into the small cell side as the carriers have started to really increase the amount of focus as they densify their network. And needs small cells as a part of that. And we're obviously seeing that.
Speaker 3: seen any change there. You mentioned this in your comment, which I would echo, that our business really has not been very susceptible to movements in economic cycles historically. The vast, vast majority of the services that we provide are to large enterprises, to government institutions, healthcare, universities, and we do very little of small and medium businesses.
Speaker 3: and do nothing direct to consumers. So we just don't see volatility and haven't seen historically the kind of volatility that many fiber businesses see through economic cycles. So we would not expect the current economic conditions to really impact our view of seeing about 3% growth this year.
Speaker 7: Great, thanks a lot. Great. Thank you.
Speaker 2: And next we'll go to Brett Feldman with Goldman Sachs.
Speaker 8: Thanks for making the question. I was hoping you can maybe give us some insight in terms of the nature of the leasing activity on your towers. And what I mean is if I was just guessing, I would assume that the large majority of the leasing on your towers is your carriers deploying recently acquired mid-band spectrum on sites where they already collocate. And so I'm curious that that's actually the case, or maybe we misunderstand what's driving leasing. And then I know this is a bit of a guess, but...
Speaker 8: Whenever they do complete the process of putting their mid-band on sites that they already operate, it's obviously at a much higher frequency, and so presumably they're going to look to densify. Do you have visibility that they're going to look to do that by putting equipment on towers they don't currently have any equipment on so it could lead to more amendments, or are you thinking it may be more of a small cell project? Any insights you have about that I think would be appreciated. Thank you.
Speaker 3: Yeah, good morning, Brett. Thanks for the question. Yes, to your question about, you know, are we seeing a lot of spectrum being added to existing sites, that is the most cost-effective way and has been for years for the carriers to increase the capacity inside of their network. So to the extent that they have spectrum they haven't used and have acquired and they're deploying that spectrum across the sites, then obviously under the nature of the contracts that we've negotiated with them.
Speaker 3: driver of the activity. Typically, as has been the case with past generational upgrades, the densification that comes from additional macro sites is traffic increases is kind of a second layer of activity. So we have some of that, but frankly most of the activity is on sites where they're already co-located on and they're adding additional equipment to those sites already. So that would be the bulk of the activity.
Speaker 3: And more broadly on the densification question that you raise, there will be some densification in the network that happens from additional towers that will be filled in. But as we have talked about extensively on these calls in another situations, a big portion of that densification really cannot be accomplished with macro sites. They can't be any closer together and there's nowhere to build them. And there's nowhere to build them.
Speaker 3: Most of that densification, particularly in dense urban areas, we believe is going to come from small cells. That's consistent with the large commitments that we've received out of both T-Mobile and Verizon and the activity that we see underway across the top markets in the US where they need to densify their network and they're doing so in large part with the use of small cells. And the traffic that we see going across those small cells is significant. So...
Speaker 3: It'd be small cells that are being deployed, it's working to densify their network and reuse that spectrum again and again over smaller areas, which is the core of how the shared infrastructure model has worked for 25 years. The opportunity to deploy equipment on shared assets that we own, drive the ability for the carriers to provide more capacity than the network which gets consumed by...
Speaker 3: by the users and we're seeing that at play in small cells. So it pretends good things over the long period of time as those 5G networks densify beyond the initial activity. Now for the speedy passing majored in a call linguistics of PaRoShina, tiveris neighborion. Please do accept that, as the popularity of many different classes will get reduced because of Raspberry sehr ?? terminated degree. Look at such a quick pitch brush. Here, look at the AIR expression differences between standard magnitude, measuring for its features. you
Speaker 1: Thank you.
Speaker 2: And next we'll hear from Rick Prentiss with Raymond James.
Speaker 9: Thanks, good morning, everyone.
Speaker 7: Corn brick?
Speaker 9: First, thanks for the disclosure. You know, I've been a big advocate on removing prepaid amortization rent from AFFOS. I really appreciate you guys laying out that exhibit. I want to come back to one of David's questions. What are the underlying assumptions on what kind of prepaid rent you'll receive over those timeframes? Because clearly, that's a great thing when your customers want to pay you to help fund capital. But just to help us understand what maybe the underlying assumption is, what kind of prepaid rent you'll receive. This year, I think you were thinking maybe 400 million.
Speaker 5: That is right, it is $400 million and as you pointed out, the amount of prepaid rent we receive will be dictated by both the amount of capital we spend, therefore the activity that we see.
Speaker 5: the negotiations that we have with our customers and how much they're going to foot of that and those are those are ongoing discussions at all times. So there's nothing I can point to that would say it would be significantly different than the 400 million dollars that we see in 2022 but there's no there's also not a specific forecast we can give on that at this point.
Speaker 9: Okay, second question, appreciate you guys emphasizing nodes on air, 5,000 this year, 10,000 next year. Is that a gross or a net number? I know at one point there was a thought that you would have maybe 5,000 nodes that came off air next year with the T-Mobile Sprint thing.
Speaker 3: That's our gross number. That's the number that we're going to build this year and next year. And you're right, we did mention when we did the T-Mobile transaction earlier this year that we expected, we expect to see some churn in small cells. They have the ability to remove about $45 million of sprint small cells. We think a majority of that will happen in 2020-23. With all that context, we're really excited to see the design we hope to get right in
Speaker 3: So the net number will be lower than that 10,000. And then as we get into giving guidance for next year and then as we get into the year we'll update the numbers obviously as we go from there. And as we get into the year we'll update the numbers obviously as we go from there.
Speaker 9: And can you update us as far as how many nodes on air you have now? And any change in the trends as far as how much outsourcing?
Speaker 9: Carriers are doing as far as self-performing small sales versus outsourcing it to third parties.
Speaker 3: Yeah, on air, we're north of 55,000 now. And so on track this year to put on air 5,000 total for the full year, as I mentioned. In terms of broadly the activity and the conversations, I think there are two things that are at play that are consistent with the way we thought the business would play out. One is that the shared solution is a much lower cost deployment than for people to build it themselves.
Speaker 3: exactly the same dynamic that we saw in towers where it was not the most cost-effective way for each carrier to build their own towers. They shared assets and as the tower model developed and there was a third-party owner, the carriers co-located on those towers rather than continuing to build their own infrastructure in places where there was a shared solution because it was so much more cost-effective. The same thing is playing out with small cells to the extent that there's a third party owner that's either willing to put up capital or there are existing assets there that the carriers can
Speaker 3: And the carriers will build it themselves because there's not an economic, at least in our view, not an economic opportunity there to deploy a shared infrastructure model. So I think in large part, most of the activity will end up on third party shared infrastructure. We feel like we're very well positioned to capture that. And certainly in the dense urban markets in the U.S. that's true. As it moves out beyond those dense urban markets, we'll study carefully whether or not that makes.
Speaker 5: other various other categories and just any any trends to call out that you see in this year, then any kind of macro impacts on those drivers within fiber solutions that you see coming out. And then secondly, as you think about protective.
Speaker 10: and also the deployment, any color around the next major versus minor league cities and where you see yourself out of the expanding. And then where you see yourself out of the expanding.
Speaker 3: Sure, thanks, John . Good morning. On your first question, there's no trend lines that I would really call out. As I mentioned, most of the activity that we're doing, whether it's for very large enterprises, government, financial institutions, universities, those have been relatively stable through economic cycles. And so I really wouldn't call out any trends that are changing in the business. We think we'll grow that business about 3% this year.
Speaker 3: and the activity across the various segments in that business is relatively similar. The one thing I probably would call out in the businesses as we've continued to operate it and as the market develops towards 5G, I think the opportunities that we're seeing where there's the convergence between wireline and wireless have created some opportunities for us on the wireless side.
Speaker 3: And that has been beneficial and we think there's more opportunity in your, your's to come on that front.
Speaker 3: On your second question around the mix of CapEx between major and minor league markets.
Speaker 3: I mean the bulk of the capital that we spent to date, and I think this will continue to be true, will be in kind of those top 30 to 50 markets in the US. That's where the the densest populations are obviously and where the majority of growth in data traffic is occurring and so most of the capital and focus is continuing to occur around building out those markets and handling the growth in data traffic and the densification that's needed in those networks.
Speaker 3: Once it gets beyond kind of those top 30 to 50 markets, there's really disparate outcomes around whether or not the dynamics in the market makes sense for small cell deployments and for our interest or investment in deploying those small cell markets. So I think as far as we can see in the next several years, I think we're going to be mostly focused on spending the capital in the top markets.
Speaker 10: I'm interested in the backlog conversion within small cells and how much of the taste of that is dictated around when the carrier just sort of gives the green light to kind of continue with the process around provisioning versus your own ability to execute or maybe there's other factors that I haven't identified but the taste of backlog conversion, how can that change going forward? You talked about the...
Speaker 10: You know, about a thousand over ten thousand, but maybe put a fire point on it. What if that's just behind that?
Speaker 3: and converting it back to the revenue. Thank you. Yeah, John , you've correctly identified the two most important characteristics. One is the coordination with our customers and the timing with which they're receiving equipment and wanting to put those sites on air and the identification of exactly where those nodes are going to be located. That's an important part in the early planning stages of the process. And then the second part is navigating through the various municipality and utility requirements.
Speaker 3: that's been done on the planning associated with employing small cells and that has increased with our expected doubling of activity going into 23 as well as all of the activity that's going on behind the scenes, us working on municipality and utility coordination in order to ensure that we're able to construct those and grow them as we go into 2023. Yeah, and John , I just want another point of clarification there is...
Speaker 5: with that coordination with the customers that we go through.
Speaker 5: One impact it has is whether they ultimately decide to go on systems where we've already built small cells or whether we built greenfield and that will have an impact on how fast we can then put them on air. So the more that they decide to go to colocation the faster we'll go through the backlog the more they decide to go greenfield it'll take longer.
Speaker 1: Thank you.
Speaker 2: And next we'll go to fill QSEC with JP Morgan.
Speaker 10: I guess, thanks. I was going to dig into exactly that. What do you see in the proof points for that runaway, for that acceleration in 2023? And does it make sense for that 10,000 in 2023 will be mostly second half with it?
Speaker 3: Yeah, good morning, Phil. Certainly the activity and proof points are the pre-work that's being coordinated with the carriers. In order for us to turn on sites in 2023, at this point we basically have to have them identified and be working on getting them constructed. So we've got a lot of visibility on what nodes we believe we'll be able to turn on in 2023. So...
Speaker 3: Beyond that, I don't know that there's much else to mention. The coordination activities and the work that has to be done with municipalities is ongoing associated with that. So we've got to continue to do that well. But most of the activity around identifying exactly what sites those are has already occurred. So we feel good about where we're going to come out in 23.
Speaker 11: And does that 23, 10,000 look more sort of co-location versus new footprint?
Speaker 3: Well, there's gonna be a mix of co-location and new. We've talked about, we've transitioned from several years ago of being almost exclusively new builds, but we'll have a combination of new builds and co-location. As I mentioned in the comments since 2018, when we look at total nodes, we've added, we're about a third of the total nodes have been co-location. And...
Speaker 3: So we get into next year and start to give you more specificity. We'll be clear about what we see from a co-location versus new building where those are occurring. We'll be clear about what we see from a co-location and start to give you more specificity. We'll be clear about what we see from a co-location
Speaker 11: Thanks. Last thing for me, should we assume that that 45 million in revenue from Sprint goes away at the beginning of the year or their indications that they might to the stretch fell out.
Speaker 3: Are you referring to my reference to the churn on small cells?
Speaker 3: referring to my reference to the churn on small cells? Yes, thanks.
Speaker 3: Yeah. What we've indicated previously is that we expect in 2023, a majority of that $45 million to occur, but we haven't been specific about exactly when in the year it would occur. So as we get towards October and we give guidance, we'll be more specific about the impact on our 23 numbers. But there's at risk about $45 million of annual run rate and we think the majority of that occurs.
Speaker 2: 23. Thanks, Jack. But. We'll hear from Michael Rollins with City.
Speaker 8: Thanks, and good morning. Two questions. First, earlier on a call, you mentioned that the performance was better than you originally expected. And just curious, where you may be seeing that in some of the organic leasing numbers, or if that's something that...
Speaker 8: potentially comes through in the back half of the year. And then just secondly, in terms of...
Speaker 8: capital allocation just back to that.
Speaker 10: topic. How do you think about over time when you think of cash AFO per share growth? Do you want over time to create more flexibility in coverage of that over time? Or do you like the current payout that's been over the last few years on cash AFO per share that's been close to 100 percent? to up province central declined in the Century Post Dracula been close to 100%.
Speaker 3: Sure, good morning, Mike. On your first question, the comments around the businesses performed a little better. Certainly from a tower standpoint over a multi-year basis were well above the average of historical. And we're in the middle of a multi-year acceleration around the activity and growth and towers and a little bit of movement inside of the year. But the real call out we were trying to make in our comments and the adjustment to the full year outlook was around.
Speaker 3: and then we can talk about, I'll make some comments about any given year. You know, big, big picture, as we've talked about our guide of believing we can grow the dividend at 7 to 8% per year over a long period of time, in order to come up with that statement, we're looking at what we believe, the two most important assumptions in that, what we believe around those two assumptions. One assumption is, what do we think the leasing activity is going to be over a long period of time?
Speaker 3: And then the second key assumption is, what is the impact of interest expense against that? Those are the two most impactful to our long-term model.
Speaker 3: And on the leasing side...
Speaker 3: When we look out over a long period of time, we see tremendous growth coming from 5G. That's gonna benefit us both on the tower side and on the small cell side as the networks densify. So a lot of activity, both for towers and small cells over a long period of time and growing over a multi-year basis that gives us a lot of top-line comfort that we're gonna be able to drive that bottom-line result over time. The part of that that we've also talked about is some of the offsets to that.
Speaker 3: environment for that.
Speaker 3: The second assumption that's really critical to what we think about long-term growth is our expectation around interest expense.
Speaker 3: Dan made some comments in his prepared remarks that alluded to this, but we had an assumption over a long period of time that we would see interest rates come back to a more normalized level than where we've been with just historically incredibly low interest rates that we've been able to capture and take advantage of on the balance sheet.
Speaker 3: In the short term, those long rates have accelerated at a pace, at a historically high pace.
Speaker 3: So our long-term model assumed that we would revert more to a more normalized, average level of cost and expense. And we have accelerated into that, closer to that average expense at a rate much faster than I think anybody previously expected.
Speaker 3: So over the long term, that has almost no impact to our model or our expectations of growth. Over the shorter term, when it moves up that much, well, it has an impact to our 2022 interest expenses we put into the guide. And then it has obviously an impact as we think about what happens in 2023, depending on where interest rates' assumptions are.
Speaker 3: So as we think about any given year, we take those broader assumptions. What do we think about growth both for towers and small cells against any movements and interest expense and underlying rates and use that the balance to come out with where we believe, kind of in the near term or shorter term period of time, where that cash flow is going to be. Where that cash flow is going to be.
Speaker 3: That gets us down to, I think, kind of the heart of your question of how do we think about the payout over time. Our view is that the cash flow that's generated from the business, we should be returning that to shareholders and then we'll finance any capital expenditures that are needed because the opportunity to invest that capital comes with returns well and excess of the cost of the capital and allows us flexibility to think about it to ensure that we're appropriately getting returns from the capital.
Speaker 3: that we're taking from shareholders and debt holders to finance those activities. So we like the discipline of paying out the cash flow, playing out the cash flow in the business. So hopefully that's helpful to your question around how we're thinking about it. Nothing has changed on that front. Still think the best approach is to be disciplined, pay out the cash flow, and then as we look at any given year, we'll look at the ins and outs and be thoughtful about how we adjust the dividend from current levels. And last thing I'll say is when we...
Speaker 3: When we give guidance in October , as has been our practice, we would expect to make that dividend adjustment as we have in past years in the same way that we've done in past periods. So, the next time we're talking, we'll likely be talking about the adjustment we're making to the dividend, as well as the update for our 2023 outlook.
Speaker 1: Thanks. Bye.
Speaker 2: And moving on we'll go to Matt Nicknam with Deutsche Bank.
Speaker 11: Hey guys, thanks for taking the questions. Just to if I could first on discretionary CAPEX. So as you get closer to 2023, seeing we have better visibility on the new notes that come on air, how should we think about a presumably increase in discretionary CAPEX relative to this year's low 1 billion range? And then secondly, we've talked a lot about some of the moving parts for 23, whether it's amazement prepaid rent, sprint, small cell churn, some rising interest rates.
Speaker 11: We can extrapolate. I know you're going to give guidance for 2023 in October , and I don't want to jump the gun, but is there any maybe initial framework or just range you can provide in terms of how you're thinking about AFFO for shared growth next year relative to that traditional 7 to 8% you've talked about in the past? Thanks.
Speaker 5: Hey, Matt, it's Dan. I'll take the first question on discretionary capex.
Speaker 5: Yeah, we're going to be in the 1.1 to 1.2 range in 2022 and as we've discussed...
Speaker 5: We believe that there will be an increase in the number of small cells that we're going to put on air in 2023 over what we're putting on air in 2022. Generally speaking, that will come with more capital. The amount more capital will depend on all the things we were talking about previously about the discussions with our customers, when the small cells will go on air, how many will be co-located versus new builds.
Speaker 5: So we don't have a way of framing that yet, but like you mentioned in your question, as we get to October , we'll give more definition around what that 2023 capital could look like. Although we would expect, just given the acceleration and the number of small cells, that it will be higher than what we've seen in 2022.
Speaker 5: And in terms of your second question around initial framework for AFO per share growth, I think you answered part of it is we're going to give guidance in October and you hit on a lot of the aspects that may have an impact on that 2023 growth. It's the continuation of the growth trends we've seen in our business, both in the towers and small sale side. And then how the impacts will shake out between all the things you mentioned, interest expense and the prepaid rent amortization.
Speaker 5: But we've given a lot of that context to date. There's nothing more that we can point to now until we get to October and I think give you all of the information that you're looking for.
Speaker 7: That's great, thanks Dan.
Speaker 2: And next we'll go to Nick Del Dello with a Muffin Knicks incident.
Speaker 11: Hey, good morning guys. Thanks for taking my questions. First, Jay, a few minutes ago you talked a little bit about the potential for non-traditional or new tenants on your towers. Were you suggesting that your assessment of the likelihood of one of those potential customers becoming a real customer in coming periods is higher than you might have thought a year or two ago? Or was there not really a change in your view there?
Speaker 3: Good morning, Nick. I think my comment was specifically towards the value that we're seeing created by having a comprehensive offering of five or small cells and towers. It puts us in conversations with customers or potential customers that I don't think we would have identified without the more robust product offering. And so, yes, I would say there are some customers that we have bumped into and we think we'll get the benefit over time.
Speaker 3: that we would not have anticipated. I don't know that I would go all the way to where you went to in terms of the significant, you know, are we talking about that this is that any one of those customers is going to end up looking like one of our big four customers. I don't, I think the likelihood of that at least at the moment is relatively low. However, the combined activity is meaningful to our growth. And, and I think over the long term, we're going to see people enter this space and deploy wireless networks that will have a combination of small cells and towers. And towers. And towers. And towers. And towers.
Speaker 10: that will be additive to our growth rate. Okay, okay, appreciate that clarification. And then maybe second, you know, one on small sales, you know, you always note that you price small sales based on yield. But when you sign small sale deals, is the pricing based on the cost you estimate at the time the deals are signed? Or is it based on realized costs? Or, you know, maybe stated a bit differently, if the cost to deploy small sales ends up being higher than you initially modeled for whatever reason.
Speaker 3: Is that a risk you bear or does the customer bear that risk? I'm just trying to think about any cost inflation risk associated with your large small cell backlog. Sure, thanks for the question. So the way we would negotiate with customers would be based on the cost of deploying in various markets. So if you took a market and the cost was relatively low, the price to deploy that market to the customer would be lower than the price.
Speaker 3: being in a higher cost or more dense area. And so the cost is variable to the customer ultimately based on the cost of the cost of deployment, which is how, when we talk about yield as the way that we price that, we've gotta have security in terms of ultimately, once we get to the point where we're actually building the nodes to know we're gonna be secure on yield, not thinking about it as a fix.
Speaker 10: six price otherwise, obviously those yields would be at risk at that point. Okay, so just to be clear, if the cost of a node in a particular market to which a customer is committed, if it ends up being more expensive to deploy there than you initially expected, you're suggesting the customer ultimately pays more to compensate for that?
Speaker 3: Well, I think there's a continuum, right? So when we signed customer agreements and they make large commitments to us over time, we're not bearing the risk of inflation if that's the way you're thinking about announced contracts that we've talked about. Once we get to the place where we've committed with a customer that we're gonna build a node and we've told them what the cost of that associated. If we're not good at actually operating and constructing that node, then that risk is ours, then we're gonna have to get to the place where we're going that it's operating.
Speaker 3: that's operating risk. So depending on where in the continuum we are, we could have potential risk if we haven't done a good job estimating and pricing the activity. But we've been very good at that and have good visibility into where the costs have been done and our operating teams have done a terrific job of operating those budgets to the levels that were underwritten.
Speaker 10: Okay, okay, got it. Thank you, Jay. Did I answer your question? Yes, yes it did. Thanks.
Speaker 10: Got it. Thank you, Jay. Did I answer your question? Yes, yes, it did. Thanks. Did you see his screen horrors?
Speaker 2: I think we have time for one more question. Thank you and that will come from Brandon Nispell with Key Bank Capital Markets.
Speaker 12: Okay, great. Thank you for taking the question and squeezing me in. I was hoping to ask on the organic growth guidance. Could you talk about the variability and core leasing activity from one queue, which was 92 million to two queue, which was 75 million? And where do you really do you expect to exit the year? And hopefully you can sort of outline that in terms of towers versus the small-cell in fiber business. Then similar question on-churn, they guided to 185 million for the year, but you only had...
Speaker 12: 81 year to date. We're to expect turn to finesse a year at. Thank you. Sure, let me take the first question first. The very building from Q1 to Q2. The very building from Q1 to Q2.
Speaker 5: Excuse me, as we as we pointed out last quarter we had some non-recurring items that hit Q1. When you normalize for that the...
Speaker 5: organic growth is relatively flat and there are going to be some increases and decreases on a quarter to quarter basis which is why when we talk about our business we talk about the yearly growth and in 2022 we're seeing what we believe will be 6% organic growth for our tower business and that's generally consistent across the year so you can see what that exit rate will look like is pretty consistent with the amount that we see in each of the first few quarters be normalized for those non-recurring items.
Speaker 5: With respect to churn, as you know, most of the churn in our business is a result of our fiber solutions operations. And we do expect some of that churn to increase over the course of the year. But we believe that the 3% overall growth rate will maintain as Jay has spoken to a few times on the call. And that's again, a lot of timing around that churn because that's a faster velocity business because things just happen faster. So.
Speaker 5: There can be some changes period to period, but again, we like to look at that as an overall one-year type of look and we see that the growth
Speaker 5: bookings and churn very much in line with what we had in our outlook. So around high single digits churn, which means you know the low double digits gross bookings to get us to the 3% net growth in the fiber solutions business.
Speaker 12: If I could just follow up real quick on that Dan, did you say 6% net organic growth for towers? I thought the previous guide was maybe 5% and I guess are we picking up an extra point on the gross side or on the churn side? Thanks.
Speaker 5: Yeah, overall that our growth in the tower business is around 6% and that is no change from our previous outlook. Okay, thank you for clarifying.
Speaker 3: Okay, thanks everybody for joining us this morning and thanks to our team for doing a great job through the first half of this year. We look forward to finishing 2022 strong and laying out our guidance for 2023 the next time we're together in October . Thanks so much.
Speaker 2: Thank you, and that does conclude today's call. We'd like to thank everyone for their participation. Thank you, and we now disconnect. Thank you, and we now disconnect.