Q3 2022 Crown Castle Inc Earnings Call
Please standby.
Good day, everyone and welcome to Crown Castle's Q3, 2022 earnings call. As a reminder, today's call is being recorded at this time I would like to turn the conference over to Ben Lowe VP Senior VP of corporate Finance. Please go ahead Sir.
Great. Thank you Melinda and good morning, everyone. Thank you for joining us today as we discuss our third quarter 2022 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 section of the company's SEC filings. Our statements are made as of today October 20th two.
<unk> thousand 22, 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, Ben and thank you everyone for joining us on the call. This morning as you saw from our third quarter results and the six 5% increase to our dividend. We are seeing the benefits of a strong leasing environment as we support our customers growth initiatives with their deployment of <unk>.
With this increase we have grown dividends per share at a compound annual growth rate of 9% since we established our long term growth target of 7% to 8% per year in 2017.
Returning over $10 billion or 20% of our current market capitalization to shareholders over that period of time or.
Our customers have focused on utilizing towers during their initial deployment of <unk>, resulting in the second consecutive year of 6% organic revenue growth in our tower business as we continue to outpace the industry.
We expect this momentum to carry into 2023 with another year of solid organic growth of at least 5% for our tower business.
In addition, we expect to double the rate of small cell deployments next year compared to the 5000 nodes, we expect to install this year to meet the growing demand for our customers as <unk> networks will require small cells at scale.
For fiber solutions, we expect revenue to be flat in 2023 compared to 2022 as a result of several discrete items that Dan will discuss later, we expect revenue growth to return to approximately 3% by the end of the year.
Consistent with what we have previously disclosed we also expect the rationalization of a portion of Sprint's legacy network by T. Mobile to have some near term impacts on our financial results without altering our long term growth potential of our strategy.
We continue to believe the total impact of the sprint network rationalization will be approximately 275 million of annualized churn concluding in 2025.
As I'll speak to in just a moment I see tremendous opportunities ahead of us, giving us confidence in our ability to deliver on our long term target of growing dividend, 7% to 8% per year.
However, with 225 million of remaining sprint churn and $140 million of additional run rate interest expense, we expect dividend per share growth in 2024, and 2025 to be below our long term target.
Looking back over the last several decades in the wireless industry, we have experienced periods of network rationalization by our customers following consolidation events in.
In each of those instances, we saw increased demand for our assets over time as our customers reinvested the synergies gained from those combinations back into their networks to further improve their competitive positions and keep pace with wireless data growth I.
I expect we will see a similar dynamic play out this time around.
As such over the long term I believe our strategy and unmatched portfolio of 40000 towers 115000 small cells on air or under contract and 85000 route miles of fiber concentrated in top U S markets have positioned crown castle to deliver significant value to shareholders for many years.
To come.
We are focused on the U S. Because we believe it represents the best market in the world for wireless infrastructure ownership, when considering both growth and risk.
The relative strength of the U S market has been clear to us during times of global economic prosperity.
And I believe that gap in performance is widening further in current challenging macroeconomic environment.
The operating conditions underlying our shared infrastructure model have been better in the U S than any other market in the world. 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.
As a result of the quality of the networks and the user experience enabled by this level of investment U S. Consumers have used their wireless devices, more and more and had been willing and able to pay for that improving mobile experience.
In turn the wireless carriers have taken the higher cash flows generated from their customers and invested even more in the networks and the cycle continues when.
When we assess the global landscape for wireless infrastructure ownership, we do not see evidence of that same virtuous cycle in any other market.
The combination of 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.
Further I believe our core value proposition of reducing the overall cost of deploying and operating communications networks is even more compelling for our customers in times of increasing capital costs.
Adding to our positive view of the opportunity we have in the U S. I believe we are still in the early stages of <unk> development, providing a long runway of growth in the demand for our comprehensive communications infrastructure offering across towers small cells and fiber.
Similar to other generational network upgrades, we expect <unk> to drive sustained growth in our tower business as our customers add equipment to our 40000 towers.
We also believe <unk> 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 deployed across macro towers will not be sufficient to keep up with the growth in mobile data demand.
As a result of the requirement to build out this denser network, we believe the duration and magnitude of <unk> investment will likely exceed prior network investment cycles further extending our long term growth opportunity.
With this view in mind, we have invested $6 billion of capital in high capacity fiber and small cells that are concentrated in top U S markets.
That capital has a weighted average life of approximately five years and is yielding more than 7% today.
With more than 60000 contracted small cell nodes on our backlog, including a record number of co location nodes, we expect the yield to increase over time as we put those small cells on air.
In 2023, we expect to double our small cell deployments with over half of the nodes co located on existing fiber.
With the increased mix in co location, we expect our net capex to increase by only 10% over 2022 levels, reflecting attractive incremental lease up return.
The resulting incremental returns are consistent with our expectations for small cell co location to drive two tenant system returns to low double digit yields on invested capital.
Just like we have achieved in towers.
As we've proven out the value proposition for our tower assets over time those assets now generate a yield on invested capital of approximately 12% with meaningful capacity to support additional growth.
Looking at how well our overall strategy is performing since 2017, we have increased our consolidated return on invested capital by 160 basis points to nine 5%.
And returned over $10 billion.
To shareholders through our dividend that has increased at a compound annual growth rate of 9%.
While also investing $7 billion of capital into attractive assets, we believe will generate returns well in excess of our cost of capital and contributed to dividend growth in the future.
I believe that the combination highlights how compelling and differentiated our strategy is.
We provide investors with the most exposure to the development of next generation networks with our comprehensive offering of towers small cells and fiber.
Our pure play U S wireless infrastructure provider with exposure to the best growth and the lowest risk market.
A compelling total return profile with a current yield of nearly 5% and a long term annual dividend growth target of 7% to 8%.
And the development of an attractive of attractive new assets that we believe will extend our runway of growth and shareholder value creation.
In the context of our six 5% dividend per share growth. This year. It is remarkable to consider that the unbilled to consider the underlying strength of our business can absorb the significant headwinds of interest expense increases and sprint cancellations in the near term without disrupting the long term growth of the business.
I believe this durability of the underlying demand trends, we see in the U S that provides significant visibility into the anticipated future growth of our business. The deliberate decisions. We have made to reduce the risks associated with our strategy and our history of steady execution makes crown castle and excellent investment that will generate compelling returns.
Turns over time.
And with that I'll turn the call over to Dan.
Thanks, Jay and good morning, everyone. We delivered another solid quarter of results in the third quarter as our customers are actively deploying <unk> at scale.
Our strong operating results. This year are helping absorbed the impact from higher interest rates, leaving our 2022 asset growth expectations unchanged looking.
Looking ahead to 2023, we expect overall leasing activity to remain healthy for us.
<unk> and growth in cash flows flows that supports the sticks and a 5% dividend increase we announced yesterday.
Before I walk through some of the moving pieces within the 2023 outlook I want to briefly discuss our third quarter results.
Turning to page four.
Core organic growth of more than 5% benefited from a robust tower growth of 7% and included 4% small cell growth and 1% growth in fiber solutions.
The strong topline growth contributed 10% growth in adjusted EBITDA and.
And 5% growth in <unk> as our operating results were partially offset by higher interest expense.
Turning to our outlook on page five our expectations for 2022 remain unchanged and for 2023, we expect 4% site rental revenue growth, 3% adjusted EBITDA growth and 4% <unk> growth.
As you saw in the earnings release, there are a few moving pieces within the 2023 outlook that are not typical so let me spend a minute walking through those components.
Consistent with what we previously disclosed we expect T mobile to cancel a portion of their tower small cell and fiber leases over the next few years related to the consolidation of the legacy Sprint network.
We expect to see an impact of this network rationalization and our financial results and 2023.
As Jay mentioned, we continue to expect total churn from the T mobile sprint network consolidation to be approximately $275 million.
Consisting of tower churn of approximately $200 million occurring in 2025, as well as approximately $45 million of small cell churn and $30 million in fiber solutions over the next three years.
As you saw in the press release, we expect a reduction of $30 million in small cell and fiber solutions run rate revenue in 2023 from the sprint cancellations.
Based on our customer agreements T mobile is obligated to pay the remaining contracted revenue on those sites at the time of cancellations, resulting in expected cash payments of $165 million into 2023.
Given the nature of the churn and the associated payment of accelerated future contracted revenue until they make the comparisons more helpful. We've.
We have excluded the $135 million net benefit in 2023 from the organic growth.
Parison in the remainder of this discussion.
Turning our focus to the fundamental trends, we expect in 2023 on page six we anticipate another year of solid tower growth complemented by a doubling of our small cell activity as we expect to install 10000 nodes in 2023 up from 5000 this year.
With respect to fiber solutions, we expect underlying activity growth to be offset by items that contributed to 2022 revenue that are not forecast to recur in 2023 as well as the rollover impact from approximately $10 million of sprint churn that occurred in 2022.
As a result of these discrete items, we expect fiber solutions revenue to be consistent with 2022 levels I believe the business will return to our previously discussed 3% per year revenue growth going forward.
Putting those components together, we expect 2023 organic contribution to site rental billings of approximately $360 million.
Our $225 million, excluding the $135 million net benefit from the sprint cancellations.
The $225 million of organic growth consists of 5% growth in towers, 8% growth in small cells and flat revenue and fiber solutions.
Turning to page seven 2023% <unk> growth is expected to be $100 million to $145 million.
Which includes the $135 million net benefit of the sprint cancellation of $140 million increase in interest expense and $20 million of cost increases above typical levels due to labor and other inflationary related expenses.
The rapid rise in interest rates has accelerated the increase in interest expense. We included in our long term planning.
Causing some near term headwinds, but not impacting our capital allocation decisions.
We believe our investment grade balance sheet is well positioned with 85% fixed rate debt a weighted average maturity of approximately nine years limited debt maturities through 2024 and more than $4 5 billion in available liquidity under our revolving credit facility.
We ended the third quarter with four nine times debt to adjusted EBITDA and expect to remain around five times through 2023, as we plan to fund our discretionary capex with incremental debt capacity generated by growth in cash flows for full year 2023.
To that point, we expect our discretionary capex to increase in 2023% to approximately one four to $1 5 billion.
From approximately $1 2 billion this year.
Out of our total capital expenditures next year approximately $300 million is expected to be spent in towers and one one to $1 2 billion in our fiber segment.
Consolidated capital expenditures net of prepaid rent contributions are expected to be approximately $1 billion in 2023 compared to $900 million this year.
As Jay mentioned, the relatively small increase in net capital expenditures in 2023 demonstrates the benefits of our co location model, even while we continued to invest in new assets that we believe will contribute to long term growth.
Wrapping up we are excited about the opportunity we see as our customers continued to deploy <unk> in the U S. We.
We believe focusing on the U S provides the highest risk adjusted return for our shareholders as our portfolio of towers small cells and fiber provides unmatched exposure to the best market in the world for communications infrastructure ownership.
Since we made significant investments in the small cell and fiber portion of our business. In 2017, we have delivered 9% dividend per share growth, while continuing to invest organically in new assets to take advantage of the opportunity ahead of us.
The ongoing <unk> investment cycle, and the persistent growth in mobile data demand.
Combined with the inherent to the durability of our business model and our low risk balance sheet provide us confidence in our ability to deliver on our long term, 7% to 8% dividend per share growth target and create a compelling total return opportunity consisting of current yield and future growth.
And with that Melinda I would like to open the call to questions.
Thank you Sir.
I would like to ask a question. Please press star one on your telephone keypad.
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I'll pause for just one moment to allow everyone an opportunity to signal.
And we will take our first question from Simon Flannery of Morgan Stanley .
Great. Thank you very much thanks.
Thanks for all that color on the small cell business, you've got a large backlog here could you give us a little bit more color about the pacing of the bill and to what extent there are supply chain issues that you need to take into account is.
Is it possible that you can take this right above 10000 I think.
Years passed there was the hope that it could continue to accelerate from these levels and any updated thoughts on the demand side given the rise of fixed wireless system more interesting than densification, even than six or 12 months ago. Thank you.
Good morning, Simon Thanks for the questions.
As we mentioned Dan and I think both mentioned in our comments, we would expect in 2023, we're going to double the number of nodes that we put on air compared to 2022, so seeing an acceleration from that and then given the number of nodes that we have in the backlog and the significant somewhat recent commitments that we received from Verizon and T.
Mobile is 50000 nodes to be put on air.
It's certainly pretense and a continued acceleration as we go into 2024 and beyond.
So thats what we currently have in the backlog I think I would draw out from from that a little bit and based on what we're seeing for the deployment of <unk> and the Densification that's required in the networks.
We think theres going to be a lot of demand for small cells well beyond just what's currently in the backlog.
Some of that is probably drawn from our experiences nodes are going on air and meeting the need in the network solving the solving some of the gaps in and.
And covering some of the increase in data traffic that we're seeing a discrete locations in the network, where small cells are in place and how well that works as a network strategy to reuse the spectrum on both macro sites and small cells and then also our view of where data traffic is is going to grow too.
The combination of those two things both our actual experience in that where we think traffic is going pretends a continued increase in the overall number of number of nodes that are going to need to be built in inside of these networks.
Supply chain challenges have have certainly occurred I think our team has done a really good job working closely with the carriers to navigate through those supply chain challenges.
I don't want to don't want it sounded like there are no challenges to that because there have been numerous challenges, but our team has been able to navigate those without impacting our expectation of no builds and as we sit here today I don't think that will impact our ability to get to 10000 or more nodes in 2023 as we as we put.
Into our into our into our guidance.
I think thats, what I would I would point to in answer to your question.
Great. Thank you so much.
And next we'll hear from Jon Atkin of RBC.
Thanks, very much I was interested in if you can comment on your ability to adjust for for higher CPI either in your new contracts New co locations are euro amendments or even any provisions under your existing msas.
Yes, John typically.
And our revenues that are on the books currently are most the vast majority of those revenues are fixed escalator and not CPI based.
I would note. The same thing is true on the cost side of the equation, our largest cost being our ground leases, which also have a similar characteristic of a high percentage of those being fixed escalator. So for the majority of the current run rate cash flows were fixed at both the revenue line and then down at the.
Downtown La.
The largest item that affects.
Direct margins and then on the balance sheet side.
We obviously have more than 80% of the debt. That's fixed currently so the current cash flow stream is largely fixed with regards to CPI and implications from from inflationary pressure.
If you think about the go forward when we when we contract with customers. We're typically doing some some some level of three to five years of a framework under which they will sign new leases.
So we're in the middle of that at any given point and when we reached the natural end of those contracted periods of time with the customer that that relates to new sites that they will go on then we have the opportunity to think about okay. What will the appropriate escalation provisions be in that next set of contracts and we as we have.
In the past, we balance out the benefits of doing floating rate versus doing a fixed rate on those contracts.
And then just on small cells, given given what you talked a little bit about the backlog, which.
The conversion of that backlog seems to be kind of accelerating or we do assume that it will be more of a backend weighted contribution to the topline.
For 2020 during 2023 for for small cells.
Yes, it will be backend loaded.
<unk> calendar year 2023.
We will get the benefit of getting those nodes on air into the run rate as we go into 2024, but the actual work and the completion of those notes coming on air and then turning into cash paying nodes that will be backend loaded in the calendar year.
And then finally, just given the higher discretionary capex that you're projecting for 2023.
Any.
Maybe just review a little bit I know Dan mentioned this at the end, but kind of how you fund the dividend if it is going to stay at a similar level next year.
Sounds like you will need to kind of lever up using the revolver or how do we think about the sources of funding in a similarly sized dividends.
For next year, if that's what the board decides.
I just want to make sure I answer the question, you're asking are you referring to the dividend in 2024 of the dividend in 2023.
23.
Okay.
So when we thought about.
Sizing the dividend we did the same process that we do have done historically and I'll go back to kind of 2017 at the end of 2017, when we increased our targets of 7% to 8% we look at the subs.
Upcoming when we get to this time of year in the October timeframe, we look at the upcoming year.
And we look at what will the cash flow generation of the business be and then what do we expect the run rate of cash flows to be by the time, we exit the year. So the dividend that we sized the increase of six 5% considers where do we think we're going to exit.
The next 12 months period of time as we roll around to October of next year, and we look at the uplift that will occur in that run rate and the dividend that we gave the six 5% increase is size. So that when we roll around to October that's basically the run rate of the business. The other benefit that we got the other thing that we're considering is what is the cash flow.
Characteristics during that 12 month period of time and in the case of the next 12 months, we're obviously benefiting from the payment of T mobile.
The of the early cancellation fees that Dan referenced in his comments, which increase the cash flow. During this calendar year. So those are the two considerations that we make.
When we're when we're setting when we're setting our dividend policy for the for the upcoming year and.
And so John just to put it put a point on that we don't anticipate that we would fund any of that dividend with debt borrowings thats from the operating cash flow of the business as Jay mentioned and Thats, how we sized the dividend.
That's how we think about size of the dividend in any period.
Thank you.
And moving on to Ric Prentiss of Raymond James.
Thanks Noel.
Good morning, Rick.
A couple of questions first.
On the churn front it looks like based on 'twenty two guidance churn is going to step up sequentially from third quarter fourth quarter anything special to call out there as far as what's driving that increase in churn is at par that fiber sprint T mobile.
I don't think there is really a step up going from the third quarter to fourth quarter and there is nothing going on that would increase the churn that we see in the business at all.
That will likely be on the low end of our churn for 2022 as we as we end the year. So.
Like I said, there is nothing going on the business that that we see as increasing our churn at all its pretty flat quarter over quarter.
Okay.
And then on the sprint cancellations for 275 is expected to be total.
Did I hear you, Jason you're talking about there is 225 left and that I'm sorry.
Great maintenance SaaS early.
Yes.
That's less going into 2024 and beyond so we're going to realize some of that in 2023. So as we look into 2024 and I think what Jay was mentioning was thinking about the 2024 and 2025 dividend. So we are just sizing the amount that would be remaining at that point.
Okay.
In the second round of questions is kind of around rates. What are you assuming for interest rates. When you updated the guidance. We didn't have to change 22, but when you look at 'twenty three what kind of rates are you assuming in there just so we can kind of.
Keep track of what the slide actually doesn't wear rates head.
We have assumed at this point the.
Forward curve for rates as of right now, which.
It does move around a bit but if you just look at the forward curve. That's what we have in our in our assumptions.
So this whole thing in the low 4% range kind of.
Yes ultimately.
And like I said, it moves around a little bit so low to mid fours.
Okay.
Similar to on the rate question.
What are you hearing if anything from the carrier customers as far as.
As the debt market and interest rates doing anything to their capital spending or activity with you any worry about we get some questions from investors about what happens if there's a recession what are you hearing from the carrier customers as far as.
Concern about recession pressure or concern about interest rates as far as their ability and desire to spend with you in the short term.
We have seen the carriers to be remarkably consistent in their activity and focused on five and focus on fiber deployment and that has been our experience frankly through past economic cycles as well the carriers, obviously are well funded they have the cash flow capabilities to continue to invest in <unk> and we haven't seen any change.
In the consumer behavior.
<unk>. So I think I think the place to watch for for that is really is the consumer behavior changing its not.
In fact, the consumer demand continues to grow and and as we as I mentioned in my comments consumer has been willing to pay for that improved and increased service and so we've.
We've seen the carrier investment cycle continue in and at this point.
Don't have any concern that we're going to see a pullback from that front on the on the carrier side. They all have multiyear plans that they've shared with us and.
They've obviously made sizable commitments to us around that around those deployment cycles. So our teams are busy working with them closely on multi year deployment.
Don't expect to see.
A change in that and that demand profile.
Okay. Thanks, guys.
And next we'll hear from Michael Rollins with Citi.
Thanks, and good morning.
First I'm curious if you can unpack the change from the tower leasing organic growth in 22 of about 6% to about 5% in 'twenty three and then stepped out as activity dollars and.
Within that context, if you can give us an update on the visibility that you have going forward in terms of.
What the shape of tower leasing organic tower leasing with Apple T mobile churn.
It looked like you know I'll save one for the follow up.
Let me just talk about a little bit about the environment and then Dan can kind of walk through the numbers on the organic calculations.
We're in the cycle as I made I made some comments around early in the cycle around <unk> and at the beginning part of every one of the technology upgrades that we've seen in the business over the years with the carriers have gone from <unk> to <unk> <unk> to <unk> and now the same we're seeing the same thing as the carriers go from four to five <unk>.
They focus the early day investment on macro sites the towers that they're already on.
In the places where they go through and they upgrade their they upgrade their network add additional equipment to those sites that they're already on in order to accommodate the new technologies are once they do that overlay then they go back and they start to focus on increasing the density of their network and they they have done that historically just by going on towers that.
We're not on previously.
What's unique about.
The <unk> <unk> cycle relative to prior cycles is that a part of that network planning is not only going on macro sites, but also utilizing utilizing small cells to increase the density of the network. So we're working with the carriers both on the on the tower side, the macro site side as well as the small cell.
Side to cover the increase in traffic that they're seeing as well as the technology upgrades that we're seeing.
And we think there's a really long runway of growth on the tower side. Our view is we're going to be multi year north of or about 5% growth on the tower side and we will continue to see really good and healthy demand for towers for an extended extended period of time, and we will see that coupled with.
Investment by the carriers on the small cells in order to increase increase the density.
And Mike just.
We are moving from about 6% growth in 2022% to 5% growth in 2023, but as Jay said, we're excited about that because we've been about 6% for a couple of years now and.
And continuing on at 5% is a really good continuation of a long trend of growth and what we look for is to try to stack really good years of growth year over year over year as opposed to have outsized growth in one year, and then undersized and another and this is just that type of trend playing out.
And it puts us what we think is like we've talked about the last couple of years, leading the industry in the last couple of years and staying within what is a relatively robust level of tower leasing growth of 5% to 6% and as Jay said, we have a lot of visibility of that growth going forward. So you add all that together.
We're excited about I think it's a great place to be.
And just a follow up.
And I apologize just a little bit more of a complicated setup, but I was looking at two different numbers in your supplemental so I was looking at it.
Mid point of the revenue guidance.
And I was looking at what you disclosed on the projected site rental billings from tenant contracts that you gave over a multiyear period of time.
And if I compare like for 'twenty, three I adjust it to make it apples to apples take a straight line takeout prepaid pick up the one time benefits.
Yes, if I look at the 23, what's implied in the guidance. It's about at the midpoint, it's about 90 basis points higher than what that contracted tenant revenue number is later in the supplemental.
If I do the same thing historically.
Last year, it was 200 basis points.
So the couple of years before that it was an average of almost 300 basis points. So I apologize for that complicated set up but the question is there something different about 2023, where you're expecting less incremental activity above the commitments that you have from customers or did you approach may be guidance.
In a different way than you've done historically.
Yes, Mike Thanks for the question I think.
We can we can probably work we could try to reconcile the numbers that youre talking about but I think the big picture answer to your question is the way that we've contracted with customers and what's occurred over the last several years, we have a much higher percentage of our growth that has been contracted with customers as a result of the holistic agreements that we've signed with them.
So there is not a change in the way that we're thinking about doing the guidance or the aggressiveness or conservatism thats in our forecast for the year, but rather youre seeing the benefit of the significant amount of contracted revenue that we have Dan mentioned this a couple of times in his prepared remarks, but were north of <unk>.
$40 billion of contracted.
Customer commitments so.
Over a multiyear period of time, we've contracted that growth so going back to the comments that I made in answer to your first question. We have a lot of visibility around that 5% plus growth because it's so much of it is contracted we still have the benefit of the upside is on uncapped, but we have a really solid.
<unk> view of where growth is so I think what youre seeing when you go back and look at the billings and you compare the historical in.
In each of the years that you laid out.
When you look at the forecasted revenue compared to the amount that was in the billings those are going through past periods, where we were adding some of these holistic agreement. So at each of those points. We may have had kind of no holistic agreements all the way up to <unk>.
Holistic agreements with several of our customers as we sit here today.
Thanks for that additional color.
Sure.
David Barden with Bank of America has our next question.
Hey, guys. Thanks, so much.
A couple if I could I guess first one was.
I guess I want to ask this question in the context of normalizing 2023, rather than maybe 'twenty 'twenty four but Dan I think during your comments you mentioned that.
Net of churn the fiber solutions business is not going to grow or at least not expected to grow in 'twenty three but you made the comment that were it not for some of the macroeconomic headwinds you would expect it to grow at a more normal long term target of 3% I was wondering if you could kind of maybe give us some color as we kind of look at the other segments small cells.
Presumably losing the sprint churn will help it on a normalized basis and then in macro obviously, a little bit down from the 2021 level, sorry, 2022 levels of growth guided in 'twenty 'twenty three if there is kind of wiggle room.
And quote unquote more normal circumstances for that to maybe be better.
And I guess the second question is.
We're guiding to roughly flat prepaid rent amortization in 'twenty, three but that obviously is benefiting from a $50 million a one timer.
And then at least on the forward looking prepaid rent amortization schedule that you put inside.
Number 18 in the supplement.
It looks like it's kind of dropped down pretty substantially from there again in 2024 so.
Looking at those offsets potential normalized performance in the core business.
Offset by declining prepaid.
Rent amortization, recognizing it's noncash, but how should we think about.
What the revenue and EBITDA trajectory might look like.
On a normalized basis with those two forces opposing each other thanks.
But I'll I'll take the normalized revenue growth question and Dan can speak to kind of some of your questions around prepaid.
And I'll just tick through each of the business lines.
And.
If I Miss something that Youre trying to reconcile feel free to ask again, Dave but on the on the tower side.
If you exclude the sprint cancellations, the bulk of which we talked about it's going to occur to us in 2025.
If you ignore that and just look at normalized activity, we think that normalized activity in the business.
Is going to see churn of somewhere in the neighborhood of about 1% to 2% just like our historical average has been so there is nothing else occurring on the tower side that I would point to as the need to normalize other than removing the sprint cancellations and a couple of couple of years and my comments before around the growth that we're seeing both the.
<unk> growth and the opportunity for upside gives us confidence that we think will be able to see organic growth.
In and above that kind of 5% organic organic growth growth levels I don't think theres anything else in those numbers, you really need to normalize in order to get the right run rate.
On the small cell side.
We obviously talked about the churn and where that churn is going to hit if you ignore the churn and get down to the normalized level.
The one thing you have to adjust for is the significant rate of growth and the timing of that growth.
The number of nodes that we're going to turn on air next year, doubling obviously increases the activity.
And the fact that the activity itself in Windows notes turned cash paying being backend loaded when you look at our contribution to the to the financial results, whether it's organic growth in terms of number of dollars or you look at it on the face of the financial statements you don't see the full effect of those 10000 nodes until.
As we roll into 2024, and we get to the full run rate of those nodes getting turned on air by the end of 2023. So you have to normalize for the activity.
The doubling of the activity as well as the backend loading in order to get to a more normalized run rate of growth.
On fiber solutions as I mentioned in my comments, we think the revenue growth is going to be flat. That's a function of impart the churn activity that we saw this year, partly due to the strength cancellations that will see lapping over into 2023, but by the time, we get to the end of the year.
When we get to the kind of fourth quarter result, and look backwards over a quarter over quarter, meaning quarter of 2023 compared to quarter. Four of 2022, we think we'll be back at that 3% growth that we've expected in the business normalizing for all of the churn and the other items, we're seeing that level of activity current.
And the business. So we're not forecasting growth in growth in activity as we get towards the back of the year. We're just looking at normal activity and removing all of the one time items and that gets us back to growing we think that'll be reflected in the results of growing at about 3% per year, which is our base expectation.
Okay, and Dave I'll take the prepaid rent amortization I.
I think <unk> positioned it well this year there was a if you looked at and going into 2023 at the tables in the supplements or it looked like there was going to be a big drop off.
The table itself is just the book of business that we have at the time, we put the table together is not a forecast and.
And the difference between those two concepts of the book of business and the forecast is as we get more prepaid or capital expenditures reimbursed to us from our customers as we build out any type of of assets either towers or small cells.
We then amortize that additional prepaid rent that we receive over the life of the contract.
We don't project that out and put it into the table. The table is just what do we know as of the date that we put that table.
And.
Because of that you will see a decline at times like this like we see in the tower business specifically.
That decline will be offset by in 2023 whatever additional.
Reimbursements capital reimbursements, we get from our customers that will then be amortized over the life of those contracts and typically speaking those the life of our contracts are in the range of 10 years.
So that would be the only thing that would offset a reduction going from 22 into 2023 is the additional.
Capital.
Get reimbursed for and as I mentioned in my comments earlier, we think our total capital expenditures in 2023 will be about $1 41 billion five and the net capital expenditures will be about $1 billion. So thats about $450 million of capital that we anticipate we will get back from our customers and the amortization of that will add to the table.
And.
As you look out going forward, we continue to do that.
Add those additions over time, as we get more reimbursements, but other than that I think everything you said about the prepaid rent and then to the table is exactly right and we do anticipate that there will be drop offs.
Particularly in our tower business.
Got it.
<unk>.
And as we kind of think about.
I think the earlier question about the dividend and funding the dividend and how you think about it coming out of operating cash flow, obviously, a lot of that cash flow coming this year is coming from the termination payments.
<unk> hundred 65 million mid point from the sprint situation.
In the absence of those payments being present.
Either you have to have had a smaller dividend growth or you would have had to either get more aggressive on leverage to fund it or use equity to fund it could.
Could you kind of walk us through your thought process on.
What if the sprint terminal termination payment that didn't exist.
Sure.
Let me just go back and start with how do we size the dividend and then we can talk about the what ifs.
So we sized the dividend each year, what we look at is what do we believe the cash flows in the business are going to grow over the subsequent 12 12 month period of time.
And given the visibility that we have in the business. We have a really good view of what the growth is going to be over the year because by this point as we talked about on the tower side, 70% plus of the overall business. That's largely contracted at this point. So we have a really good view of that.
On the small cell side.
Similarly, those notes have been contracted and we've been working on them. So we have a good sense of when theyre going to come on air So that we start there with what do we believe over the subsequent 12 months the growth in cash flows are going to be and then what we look at secondly, as we look at what's the cash flow generation of the business over the next over the next 12 months when we set the dividend.
Policy historically, if you go back and look at go back to 2017 and rolled out all the way forward through the conversation that we're having this morning, we have sized that dividend between 96% and 99% of the expected cash flows in the business for that subsequent 12 months and we did the exact same.
Thing in this in this quarter as well as released in the expectation for dividend growth.
And throughout 2023.
If if we had gotten to this place and there was a different set of circumstances, a different set of facts and the cash flow generation were different.
It was higher or lower or the expected run rate of cash flows as we exited 2023 were higher or lower than our dividend would be higher or lower.
We don't utilize the capital markets to fund our dividend. So if the cash flows of the business were lower.
Then the expectation we would have is that we would lower the lower the dividend, we would not be accessing the debt markets or the equity markets to fund that to fund that dividend.
When we think about the opportunity to invest in things Thats, where we utilize the capital markets so that.
The comparison that we're making there with the utilization of as Dan mentioned the opportunity to use growth in cash flows and EBITDA to fund growth.
We look at what's the highest and best use of that capital.
And then we will access the capital markets as appropriate to up to fund those opportunities, but the dividend is funded based on the cash flow characteristics of the business and we set the policy based on that.
Alright, Thanks, Joe Thats clear I appreciate it.
<unk>.
Okay.
Next we'll hear from Phil Cusick of Jpmorgan.
Hey, guys. Thank you.
To ask you about the services guidance, which looks pretty steady year over year should we think of that shifting some from towers to fiber and small cells and is there any shift in margins as that happens. Thank you.
Good morning, Phil No Theres no shift we would expect a similar contribution from towers as what we were expecting and seeing in 2022 to continue into 2023.
And no change in behavior from the carriers or margins or anything else that would that would cause us to lead to a different answer. So we think we will see a pretty similar result, both in terms of of revenue and margins.
And mix in 'twenty three.
Got it thank you.
And moving onto Brett Feldman of Goldman Sachs.
Hi, Thanks, two questions. If you don't mind. So you said during your prepared remarks that the sprint cancellation payments you are getting are tied to when they actually terminate leases I guess the biggest year for the churn coming off of sprint is going be 2025. So does that mean that actually in 2025, there could actually be some fairly significant cancellation payments as well.
<unk>.
And then.
The second question is it looks like Youre using a bit more stock based compensation. This year and we see that in the <unk> reconciliation I'm curious if this is a bit of a philosophical shift in how youre looking to compensate the team going forward and if we should be modeling out a higher run rate from here. Thanks.
On the first question the sprint cancellations those are coming to their natural term end dates in 2025 on the tower side. So we would not expect to receive any any significant payments in 2025 from T mobile.
Just to be clear about what we're receiving in 2023 are expecting to receive in 2023. Those are the cancellations of nodes that have contracted terms remaining and so they are funding the remaining years of those contracted payments in 2023, so it's a little bit different approach to how they're thinking about their.
Work.
Between towers, and small cells and why Theres a difference in terms of the cash flow characteristics.
On the noncash comp.
I would say first of all there is no change in our philosophy in terms of the way, we're thinking about percentages or contribution of overall comp for the organization.
From past years, I think what Youre seeing there is just a range of potential outcomes that we put into the outlook as we look forward so not not a meaningful shift in the way that we're thinking about using using stock.
About using stock as we as we compensate employees.
Great. Thank you.
And next we'll hear from Matt Mcconnell of Deutsche Bank.
Hey, guys. Thank you for taking the questions.
Two if I could first on the sprint cancellation payments any color you can share on the cadence of those payments how they roll in over the course of next year.
And maybe the allocation of those payments between small cells and fiber solutions and then secondly, maybe bigger picture question. We've seen a couple of invest of announcements from cable around starting to build out some of their own spectrum to supplement around V. I know I'm. Just wondering if you can comment on how meaningful this can be for your business given your ownership of both towers and small cells.
Thanks, Matt on the Etfs, the payments will happen as Jay mentioned Windows.
Contracts ultimately get canceled.
Will likely be at the beginning of the year, we think but we are not in control of that specifically, so we'll wait and see and we'll let you know, but it could happen through the course of the year may happen.
Closer to the beginning of the year.
The majority of the cancellations are going to be in the small cell business. So I would just say that there is more than half in small cells less than half in fiber solutions.
On your second question around cable, we're certainly working with the various cable companies as they're thinking about their mobile strategy.
And have seen some benefit both on towers as well as small cells.
I think we will continue to see that over time and believe that we have an opportunity for that to be a growing component of our of our revenue growth.
Broadly.
Without just being completely limited to cable companies. There are a lot of institutions that are in organizations and are thinking about their mobile strategy and so we have seen an uptick in the last couple of years of customers outside of what you would traditionally think of as.
The big the big four operators the big four carriers.
Leasing space on towers, and also small cells and.
We think that's a growing opportunity one more focused on capturing as much of that demand as possible I wouldn't describe it in our either our current results 2022, or what we expect in 2023 as being material.
But it is a growing segment and I think it gives us opportunity for future growth.
In the years 2024 and beyond.
That's great. Thank you.
And moving on to Nick del Deo of Moffett Nathanson.
Hey, good morning, Thanks for taking my questions.
First.
For Dan can you just share the expected $1 of churn and the expected dollars of escalation for towers in 'twenty three.
Having those alongside the leasing number would be helpful.
Yes, the leasing as we talked about I'll give you kind of mid points to try to help with that as around $140 million on towers on escalators that should be in the neighborhood of $90 million in uncharted should be in the neighborhood of $35 million.
Okay, great. Thank you and then.
On the small cell front I think you've historically said that anchor small cell nodes typically costs about $100000 each.
From a gross Capex perspective, and obviously a fraction of that for co locations.
I guess in light of the inflation, we've seen in some of the expense pressures that you've called out are those average is still about right.
<unk>.
And if there has been any upward pressure there are you seeing any pushback from.
Forgetting corresponding lease.
Lease rates up or are customers kind of accept yet.
Yes, Nick Thanks for the question.
We've used a $100000 as a proxy to try to help people understand the quantum that affects our financial statements, but the way. These agreements are priced based on yield our expected yield.
So when we build nodes were typically seeing a 6% to 7% initial yield on invested capital and and then growing that invested capital as I referred to in some of my comments around what we think in 2023 the percentage of co located nodes.
And of that high single digit yields once we get to the second tenant low double digit yields.
As we get to a two tenant system.
So we're pricing think about customer contracts the way the way the actual contracted rate of revenue works itself out through the combination of both.
Upfront funded capital from the carrier and then the ongoing rent being driven more by the yields required to get to the levels that I just described.
And that $100000 is more theoretical than it is anything than it is anything else. Each system is differently priced and it's priced to return so the inflationary pressures that that youre, referring to are absolutely have absolutely happened they have a similar and direct impact on what.
We received from a customer in front of us in terms of upfront capital as well as where the rental rate on those nodes goes once they're built.
Okay, Okay, so <unk> been able to.
Push that through in pricing due to sustained your yields at your historical levels.
Correct, yes.
Okay, great. Thank you guys.
You bet.
And next we'll hear from Brandon Knispel of Keybanc capital market.
Great. Thanks for taking the question two one for Dan <unk>.
Going back to Michael's question, the $140 million in tower leasing how should that trend throughout the year is it linear or is it first half second half weighted.
Dan or Jay second question is just on.
Overall backlogs in the small cell business been stuck at 60000 nodes for a year and obviously.
For years to build those nodes at 10000, a year to really work through that backlog, but how should we expect the backlog to build really over the next 12 to 18 months if at all thanks.
I'll take the first one thanks.
The.
Tower leasing is pretty ratable through the course of the year I wouldn't call out any.
Difference between the first half or the second half.
The course of the year.
On your second question around small cell builds in the backlog I think this is a business thats going to.
Likely forever be very different than what we've seen with towers, where theres more a consistent level of activity with towers, where we see the backlog build and grow at a more consistent pace small cells by their nature because of the number of them that have to be deployed and how they are deployed at the market level.
We'll always see kind of lumpy orders and the work that we're doing now with customers is impart working on deploying all the commitments that they've given us as you referenced the 50000 commitment that we received from from Verizon and T. Mobile. We're also working with them as they think about the next leg of Av.
Small cells and what theyre going to need in the next part of the Densification of their network and so while it hasnt resulted in orders yet those are the conversations that we're working on with them across multiple multiple market. So my expectation for how will it builds if you. If you if you take a really long term view Brandon on your question.
And my long term view is the total number of small cells in the backlog will go up into the right and over time, we'll see this business continued to scale and grow but I don't think we're likely to see that business have a backlog, where it's a steady change every quarter to quarter I think.
We will see some lumpiness in it as we get large commitments from the carriers.
Visibility towards what their future build is and then.
And then we go through the process of working on it with them and then figure out what's next on their agenda for Densification around the network I think it's just the nature of the way the business is going to work.
Great.
You bet.
Operator may we have time for one more question.
Yes, Sir our final question will come from Greg Williams of Cowen.
Great. Thanks for taking my questions first one is on the small cell capex, obviously, youre doing a good job leveraging existing nodes with over half of the nodes.
I tried in the past those capex efficiencies could be up to 401.
What's a good run rate as we think about beyond 'twenty three of how often you could leverage existing nodes is it going to be around that 50% pop and I imagine it goes way down as you have to greenfield additional nodes.
Question is just around.
Fiber M&A landscape.
When you try to get color on funding the dividend just the cash, but when you go out and grow.
The debt markets.
Or equity markets, obviously, not a good time now, but multiples are also coming down quite a bit in the fiber space. We're hearing so just trying to understand.
Calculus on what Youre seeing in that fiber M&A landscape. It should you should you go out.
And need additional fiber thanks.
You bet Greg.
For the questions on your first question our history, our last several years, if we look at the the percentage of co locations, we've been in and around 20% to 30% of the total activity that we've seen has been in the form of co locations.
And.
As I mentioned mentioned in my comments and you referred to we expect in 2023 that about 50% of the activity will be co location.
If you roll that forward into into the future years.
We've talked about that the vast majority of the nodes that we're committed by T. Mobile 35000 node commitment that they made the vast majority of those will be co located on existing fiber systems. So.
Vast majority of those are co locations and then on Verizon commitment, we think that the mix of new markets and and co location. So we'll get we'll get some of both but but based on the current backlog that would tend towards.
Towards that higher percentage of co location, so driving capex efficiencies and increases the return on those systems.
And we're continuing to see as I said in my earlier comments really encouraging trend lines, when we get down to the system levels of seeing the returns the incremental returns come in where we expected when we underwrote those investments so really encouraged by that story starting to shape up more and more like the tower model and what we've seen historically is to get scale.
Towers, and then grow the return.
Through the acquisition process.
The second question around fiber M&A and we've been really careful about what we look to acquire in order to be interesting to us as an acquisition.
The fiber strands has to be high capacity and they need to be located in densely populated areas that we believe there is going to be significant small cell opportunity in order to grow those returns to.
To date as evidenced by the fact, we haven't done any acquisitions. Since 2017, we have not found any acquisitions that meet that criteria and at this point. We continue to believe that the vast majority of the opportunity is going to be through organic builds rather than rather than acquisitions. So we'll continue to look and pay.
Attention to what's out there and if there is an opportunity that makes sense, we would consider it.
But we think it's much more likely that will be an organic builder of the fiber that will be needed for for small cells for the carrier customers rather than that and then in the acquisition mode in order to gain that fiber.
Got it that's helpful. Thank you.
Greg.
Well, thanks, everyone for joining us this morning.
I appreciate the time and we look forward to catching up with you soon.
And that does conclude today's conference. We thank you for your participation have a wonderful day.
Okay.
Two.
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[music].
Okay.
<unk>.
Okay.
Yes.