Kris Hinson, the Vice President of Corporate Finance and Treasurer, welcomed everyone to the Crown Castle Second Quarter 2023 Earnings Conference Call and introduced Jay Brown, the Chief Executive Officer, and Dan Schlanger, the Chief Financial Officer. Kris also reminded everyone that the call would contain forward-looking statements, which could vary from the expected results, and that non-GAAP financial measures would be discussed. Finally, Jay welcomed Kris to the team and thanked everyone for joining the call.

The U.S. wireless carriers have spent over $100 billion on spectrum in the past few years, leading to increased tower activity and dividend per share growth. However, tower activity has recently slowed, leading to a decrease in the 2023 outlook for tower services margin. Despite this, the company has achieved consistent organic tower revenue growth since 2013 due to their decision to pursue long-term agreements with their customers that provide them with flexibility and stability.

American Tower has contracted 75% of their expected annual tower organic growth and have complemented their portfolio with fiber and small cells to capitalize on long-term growth and data demand. They have a current backlog of 60,000 small cells and are expecting double digit small cell revenue growth beginning in 2024. They have updated their analysis across five markets and have seen their yield expand from 9% to 11% in Phoenix, and 8%-9% yields in Los Angeles and Philadelphia. They are encouraged by these results as they accelerate small cell deployments.

The company has a large backlog of 60,000 nodes, most of which are co-location nodes, which has enabled them to achieve double digit small cell revenue growth. The company has strategically positioned itself to benefit from both towers and small cells and has reduced its risk through long-term customer agreements and a stronger balance sheet. As a result of their efforts, they expect to see 5% organic tower revenue growth, 10,000 small cell node deployments, and 3% fiber solutions growth by the end of this year.

Jay discussed the company's expectation of returning to its long-term annual dividend per share growth target of 7-8% beyond 2025. Dan discussed the changes to the 2023 outlook due to the end of the initial surge in 5G investment and rising interest rates, which has reduced the outlook by $105 million. The company is managing its business and cost structure to match the lower activity levels and has seen 6% tower organic growth, 12% organic growth, 14% AFFO growth, and 10% adjusted EBITDA growth.

In the second quarter, Sprint Cancellations had a net contribution of $100 million to site rental billings. The decrease to adjusted EBITDA and AFFO is primarily driven by a lower contribution from services, partially offset by lower expenses. Tower organic growth remains at 5%, while consolidated organic growth is unchanged at 7%. Interest expenses have increased by $15 million, offset by higher expected interest income and lower sustaining capital expenditures. The company has taken steps to minimize its exposure to floating rate debt, including twice issuing fixed rate bonds this year totaling $2.4 billion at a weighted average rate of 5%.

The company has taken steps to derisk its balance sheet, including increasing the weighted average maturity of its debt, decreasing its floating debt exposure, and reducing secured debt. The strategy has positioned the company to benefit from network augmentation and densification regardless of whether it is focused on towers or small cells. Additionally, customer agreements have been structured to generate organic growth that is resilient through deployment cycles. The company believes it is positioned to return to its long-term dividend per share growth target of 7-8% beyond 2025 and is open to questions.

Jay Brown responds to Alex Waters' questions regarding MLAs and the new leasing guide for the fiber segment. He explains that the MLAs provide benefits to both parties by allowing customers to predict costs and providing visibility into cash flows. Brown also states that the fiber business is expected to rebound in the second half of the year and should be back to 3% growth by the end of 2023.

Jay Brown answered a question from Greg Williams of TD Cowen about the slowdown in tower activity in the second quarter. Brown noted that history shows that the initial surge of activity does not mean the end of growth, and that there will be consistent growth over a long period of time. He also mentioned that the contracts they have with their customers represent stability and resilience in their cash flow stream, and that their customers need continued investment in towers, particularly their towers, over a long period of time.

Jay Brown explains that the services business will track with tower leasing activity over the long term, and Dan Schlanger adds that due to the slowdown in activity in the second quarter, services revenue in Q2 will likely be lower than the first half of the year and this is reflected in their outlook, resulting in a $90 million decrease in gross margin outlook.

Jay Brown explains that the costs associated with services business can be adjusted to meet the level of activity, and the margins should remain in line with what has been seen historically. He also mentions that there is a chart in the supplement that shows large chunks of cash payments for T-Mobile in 2025 and AT&T in 2023, suggesting that there is an AT&T renewal coming up this year.

Jay Brown explains that their MLA agreements usually have 5-10 year option periods, and the percentage growth for future periods is already contracted. Churn rates on the tower side are expected to stay in the 1-2% range, and renewals for customers other than the specifically named customers are expected to remain normal. The big number in 2025 is due to the predisposed Sprint cancellation, but the chart is for all of their businesses together, not just wireless.

Ric Prentiss and Jay Brown discuss the fiber contracts that roll off over time and that AT&T typically sees a high single digit churn rate. They also discuss the normal course of contracts and how they move into option periods. They explain that this is a normal thing for customers and that AT&T expects these options to renew into a new term and be reflected in the supplement. Batya Levi then follows up with a question about the decline in the second half of the payment schedule and whether it is related to a payment that was pushed out to 2026.

Jay Brown explains that the changes to the payment schedule are due to the normal course of their business, where contracts have provisions that move around. He also points out that the T-Mobile contract will end in 2025, and that the fiber business typically experiences a churn rate of 1-2% for towers, 1-2% for small cells, and high single digits for fiber.

Jay Brown discussed that the company has not changed the terms of their MLA and that the numbers in the schedule are moving due to leases coming up to their natural end and the passage of time. When asked if there is something else causing the pullback, Brown stated that they are aware of Verizon and T-Mobile's plans to wind down their 5G build with front end loaded CapEx and activity in 2023, but did not provide a percentage of sites upgraded to 5G.

Jay Brown and Dan Schlanger address Simon Flannery's questions about 5G and the dividend. Jay Brown explains that there was an initial surge of activity for 5G, but now they are in a period of good growth. Dan Schlanger adds that the tower count for 5G has not changed much and that they will not update it quarter to quarter. Jay Brown also states that they will give guidance for the next year's dividend in October.

Jay Brown explains that the need for small cell nodes arises when consumers increase their activity and the network capacity needs to be increased. Initially, 5G is deployed on macro sites, but when the capacity created by the 5G overlay on towers is quickly consumed, small cells are used to supplement the capacity.

Consumer demand and data growth has been exponentially increasing, driving the need for small cells. In order to meet this need, carriers are deploying small cells across fiber assets that they already own. Carriers will first deploy new spectrum bands across their macro sites, and then use small cells to address the pain points created by network capacity. This is consistent with the conversations, contractual arrangements, and activity that the company expects, leading to double-digit revenue growth in 2024 for small cells.

Jay Brown discusses how fixed wireless is a good example of a 5G use case, and it is driving nice margins for their carrier customers. He also believes that there will be other uses for 5G beyond fixed wireless, and that fixed wireless deployments correlate with increases in small cell nodes and investment. Michael Rollins then asks if carriers are deploying mid-band spectrum and getting better propagation, which Jay Brown says they are not always specific with, but he does not go as far as trying to find causation.

The speaker discusses the expected growth of the wireless network and consumer demand for wireless data, which will lead to continued investment in the industry. He also mentions that Crown is considering the value of its services business and whether it is strategically important to them, and whether it will ultimately drive shareholder returns and help grow the dividend.

Jay Brown explains that cost cuts for the second half of the year are due to a decline in revenue from the services business. He also mentions that SG&A will be adjusted based on activity level, and that the cost structure for 2024 will depend on the activity level and revenue. He states that the company will update their guidance for 2024 in October.

Jay Brown explains that carriers are using towers to densify and add more equipment to existing sites, and that there will be a surge of activity initially which will continue to grow over time. He also notes that if macro sites cannot solve network capacity constraints, small cells will be used to densify. Conversations and contractual arrangements are consistent with this trend, which is expected to continue over the next several years.

Dan Schlanger states that their target leverage is around five times and that it may fluctuate up and down due to investments in front of revenue and cash flows. He does not specify what level of leverage would make them uncomfortable, but they will consider the forward look of growth and if they need to fund investments, they will consider equity if the returns exceed their cost of capital.

In the second quarter of the year, Deutsche Bank's Matthew Niknam asked about the decline in services activity and how it could affect the expected 5% revenue decline each year between now and 2027, excluding Sprint churn. Jay Brown responded that there was a greater drop off in services towards the end of the quarter, and that any revenue signed this year would roll over into the following year, meaning that any decrease in expected leasing this year would have a follow on effect in the following year.

Dan Schlanger explains that the predictability of the tower business comes from knowing the leases and contracted escalations, enabling them to estimate revenue growth. He then goes on to explain that the 5% growth guidance is an annualized multi-year view, and that there may be some variability in the quarter-to-quarter core leasing activity due to timing of demand and leasing outside of MLAs.

Jay Brown and Dan Schlanger answer questions from Brendan Lynch and Brandon Nispel about their forward growth and sustaining CapEx guidance. Brown states that 75% of their growth is contracted, while the remaining 25% is un-contracted and can vary from quarter to quarter. Schlanger clarifies that the reduction in sustaining capital is $15 million, not $25 million. Nispel asks about the decline in leasing activity from last year and how the $60 million guide for the second half should be split between 3Q and 4Q. Brown answers the first question and Schlanger answers the second.

The company expects 5% tower organic revenue growth over a multi-year period, and they expect to be able to return to growing the dividend at 7% to 8% once the Sprint site rationalization process is complete. In October, they will give a view of what the leasing environment will be like in 2024. In the first and second quarters, they have stayed in line with their previous $140 million leasing guide.

Jay Brown and Brandon Nispel discussed the expected $60 split between the next two quarters, noting that there may be minor fluctuations. They then answered a question regarding their expectation of 5% organic macro tower growth through 2027. This growth will be a combination of spectrum that is currently owned by carriers but has not been deployed, as well as densification of existing spectrum. There is no expectation of an additional spectrum being auctioned and deployed within the timeframe.

Jay Brown speaks to potential financial burden on tenants arising from a recent report highlighting sizable cleanup costs on legacy telecom networks. He states that the tenants have a long history of navigating through various cycles and that the wireless business and consumer demand is expected to remain strong. He then thanks everyone for joining the call and looks forward to giving guidance for 2024.

This summary was generated with AI and may contain some inaccuracies.