CCI
#Thanks, <UNK>, and thank you, everyone, for accommodating our change in schedule and joining us on the call early this morning as we discuss the Lightower acquisition and our second quarter results
As you saw from our press release yesterday afternoon, we have reached an agreement to acquire Lightower, which owns or has rights to approximately 32,000 miles of fiber in top metro markets in the Northeast, including Boston, New York and Philadelphia
Through a series of transactions in recent years and organic investments along the way, we have strategically positioned Crown Castle as the leading shared wireless infrastructure provider in the U.S
across towers, small cells and fiber
Turning to Slide 4. We believe this portfolio of mission-critical infrastructure will play an important role in helping our customers capitalize on the exponential growth in demand for data and connectivity
As has been our view over the past several years, we see the ownership of deep, dense fiber in top metro markets as a competitive advantage in facilitating small cell deployments in a cost-effective and timely manner
With the addition of Lightower's premier metro fiber footprint located in several of the most densely populated markets, we are significantly extending our reach by adding a highly complementary footprint that doubles the miles we will have available for small cell deployment
Further, the acquisition of Lightower aligns with our longstanding focus on allocating capital to increase shareholder value through growing the dividend
Towards this end, we expect the acquisition to be immediately accretive to our AFFO per share, and as a result, we expect to increase our annual dividend rate by approximately $0.15 to $0.20 per share after closing, subject to our Board's approval
Additionally, we expect that the Lightower acquisition will enhance our long-term growth rate, allowing us to increase our annual dividend growth target by 100 basis points to 7% to 8%
The expected near and long-term accretion is a reflection of the small cell opportunities we see in front of us as well as the high-quality business and assets we are acquiring in Lightower
Turning to Slide 5. We have assembled an unparalleled portfolio of shared wireless infrastructure assets that we believe are well positioned to help our customers meet the growing demand for data
Additionally, we have developed industry-leading capabilities to meet the growing small cell demand
Drawing on our experience with towers we are capitalizing on our first mover advantage to assemble a portfolio where we believe there will be long-term franchise value that will drive significant returns over time through future leasing
We believe the combination of our assets with those of Lightower will represent one of the most extensive and unique footprints of deep dense metro fiber assets assembled today, and this is one of the key drivers of our acquisition
Pro forma for the Lightower acquisition, we will own or have rights to approximately 60,000 route miles of fiber, making us one of the largest owners of metro fiber in the U.S
Further, with our combined footprint, we will own or have rights to fiber in all of the top 10 and 23 of the top 25 metro markets
By creating scale in these top markets, we are positioning Crown Castle to meet the needs of our customers looking to us as an infrastructure provider of choice as consumers and businesses in every industry evolve and adapt to a world where mobile is the platform of choice
This ongoing transition to mobile is evident everywhere
Importantly, Crown Castle is positioned to benefit from this long-term trend as our leading portfolio of towers, small cells and fiber will provide the critical infrastructure needed to enable this shift
As you can see on the maps on Slide 6 and 7, the addition of Lightower will expand our fiber presence with complementary dense metro fiber assets throughout the Northeast
The limited overlap between Lightower's fiber footprint and our existing footprint will give us a large incremental opportunity to deploy small cells in these important markets
As I mentioned earlier, on Slide 8, is the trend in mobile data demand, which is expected to quadruple by 2021. We expect our portfolio of towers, small cells and fiber to play an essential role in supporting the network densification that will be needed to meet this demand
As you can see on the slide, our wireless customers are increasingly turning to small cells to augment and further densify their macro network and deploy spectrum closer to their customers to enhance and improve their network quality and capacity
Consistent with what our customers are saying, we are seeing small cell demand accelerate as evidenced by our first quarter announcement of our record 25,000 contracted small cell node pipeline, and we believe the long-term opportunity could match towers in size and return
Our conviction around the size and attractiveness of the small cell opportunity has grown over time based on the trajectory of activity from our wireless carriers and the returns we have generated to-date
To help give you some additional perspective on why we are so enthusiastic about the opportunity, I wanted to take just a minute and walk you through the returns we have generated to-date across our top three small cell markets: New York City, Los Angeles and Philadelphia
Across these three markets, we are generating a recurring yield of approximately 11% on the approximately $1.3 billion of total net invested capital to-date
The $1.3 billion includes an allocation of the purchase price from our prior acquisitions of NextG and Sunesys and represents approximately 30% of our total net invested capital in small cells, excluding the Wilcon acquisition that we closed just a few weeks ago
The incremental growth we have generated to bring these deals up to these levels has been a result of deploying small cells on the fiber we built or acquired in these markets
Given that small cells are in the early stages of adoption, we find the double-digit recurring yields in these markets to be very compelling, and we continue to see significant opportunities to lease these fiber assets up further to also improve our returns over time
What really excites us is that we believe this success will be replicated across our footprint of now 60,000 miles of metro fiber
To-date, we believe our customers' investments in small cells have been driven by meeting 4G use case demand, and we have underwritten our investments, including Lightower, with this view in mind
As seen on Slide 8, our carrier customers are also making these investments in small cells today with an eye to the future as they prepare their networks for 5G
As 5G takes shape over the coming years, we believe we will see increasing demand for small cells that will drive additional returns on our investment as further densification occurs
Turning to Slide 9. In addition to furthering our small cell strategy, Lightower also brings with it high-quality, long-term cash flows and an experienced operating team with a scalable platform that can enhance and supplement our small cell investment
Lightower generates attractive returns on invested capital by providing differentiated fiber solutions that serve high-bandwidth, multi-location customers
As you can see on the slide, Lightower has delivered consistent revenue growth with attractive margins
As a result of its differentiated service offering and operating discipline, Lightower's portfolio of customer contracts has a weighted average remaining current term of approximately four years, including approximately $2.7 billion of remaining contracted revenues from a high-quality mix of customers consisting of large enterprises, government agencies, health-care providers, educational institutions and carriers
With this approach, Lightower has been able to attract a diverse customer base while maintaining an almost equal split of revenues between carrier and enterprise customers
Importantly, this approach has also resulted in the vast majority of Lightower's assets and revenues qualifying for REIT status
We believe the fiber solutions revenues generated by Lightower will allow us to enhance our competitive position in small cells by increasing the opportunities we serve with the underlying fiber assets, thereby improving the already attractive shared economic model we see in our small cell business, both on the fiber we are acquiring and on our existing base of fiber
Moving on to the transaction details on Slide 10. We have agreed to acquire Lightower for $7.1 billion in cash, representing an EBITDA multiple of approximately 13.5 times
We expect the transaction to close by the end of this year and be immediately accretive to AFFO per share at close
In our first full-year of ownership, we expect Lightower will contribute $850 million to $870 million in site rental revenues and $510 million to $530 million in adjusted EBITDA
We expect to finance the transaction with a combination of equity and debt that is consistent with our policy of maintaining investment-grade credit metrics
With the cash flows generated by Lightower and taking into account our anticipated financing, we anticipate increasing our annual common stock dividend rate, subject to approval by our Board, by approximately $0.15 to $0.20 per share at close
Additionally, we expect that the Lightower acquisition will enhance our long-term growth rate, allowing us to increase our annual dividend growth target of 6% to 7% to 7% to 8%
In short, this is a great acquisition that we think will generate significant value for our shareholders and position us to better serve our customers by expanding our portfolio in some of the best markets in the U.S
And with that, I'll turn the call over to Dan to go through our second quarter results
Thanks for the question
So high level, let me start with this
As we look at the assets that Lightower ran, and this is really consistent with all of the acquisitions that you've seen us do so far, whether it's FiberNet or Wilcon or Sunesys, we have looked at very specific characteristics around those assets, on dense fiber, dark fiber in metro markets where we believe there's a lot of opportunities for small cells to be deployed across that fiber
And the key aspect of it, which is reflected in the comments that we're making around the vast majority of the revenues, qualify as good REIT income, and we believe somewhere in the neighborhood of 80% to 85% of the assets in the revenue are good REIT income
The assets are, in essence, passive for us
So we are purely an infrastructure provider providing a pipe and therefore, it's good real estate income
That passive nature as an infrastructure provider of – in essence, owning the tollway if you will, or the railroad for the deployment of wireless networks, these assets that we're acquiring in Lightower have those same characteristics, and it's why they're so attractive to us
We find that over time, as we've looked at assets, the revenues tend to be stickier
They tend to be longer dated
And they tend to be very attractive for the deployment of small cells
With regards to your question around CapEx intensity and churn, et cetera
On the CapEx intensity side, generally, the payback for the deployment of capital, once you start to develop a market, the payback is in the neighborhood of two to three years on the capital that's been deployed
Historically, the business has seen churn in the neighborhood of about 9%, and the payback on the capital obviously, drives the continued investment
So as you think about the impact of churn and the allocation of capital towards those two things, while we would certainly underwrite it and Lightower has done a good job over time of putting that into the model and thinking about the deployment of capital against the overall characteristics, the stickiness of it, and then the provision of future services using that same fiber
From a backlog standpoint of small cells, they had about 2,000 small cells in the pipeline
It has not been a core portion of their business, although they have provided small cells in the past
Most of the carrier revenues that I spoke to, a big portion of that would be related to fiber to the cell
As we've talked about the architecture of the networks, historically, we believe that fiber to the cell becomes very important as hub sites are developed and small cells are developed in conjunction with the existing macro network
So again, another good indication of what we think is going to be upside from small cells
And then lastly, your question around the three markets that I spoke to, which are the three largest markets that we've deployed small cells in thus far: Philadelphia, New York and L
The 11% return that we have on a recurring yield basis against the net capital invested, consider that a big chunk of that capital put in with the NextG acquisition that we acquired in the neighborhood of about a 2% to 3% yield on invested capital, and then the Sunesys acquisition would have been somewhere in the neighborhood of about a 6% to 7% yield on invested capital
So virtually all of the NextG initial yields would have been small cells along with virtually all of the growth to bring that capital up to an average of 11%, in Sunesys' case, it would have started at about 6% to 7%, and virtually all of the change since then would've been small cells
And then the capital that we put in on an organic basis would've been all done on small cells
So the vast majority of the growth and then the blend would've been coming from small cells
My best guess, although, I don't have the numbers sitting right here in front of me, would be in excess of two thirds of that return, total revenues would have been coming from small cells
You bet
Matt, on your first question, there will be some benefit from the acquisition that we did in terms of reducing the amount of capital that we would spend on the notes that we referenced last quarter that were the recently contracted notes during the first quarter of 2017. But I would encourage you more to think about this as increasing the size of the pie
As we look at the data and the systems that we have built, we have found the returns to be incredibly compelling
And as we think about the way for us to create shareholder value over time, there have been three tenets of our story that we have consistently come back to
One is to add additional revenue to the assets that we already own, two has been to lower our overall cost of capital and three has been to allocate capital to things that we think will grow our dividend over time
And as we have learned and studied and watched the investments that we have made, we have seen the investments we have made around fiber and small cells to deliver very compelling returns, and we're in the very early innings of carriers adopting and using small cells
So as we look for opportunities to continue to deploy capital around this, our intention is to grow the size of the pie because we find the returns to be so compelling
So while we will, I guess, at some level get the benefit of reducing the capital costs in these Northeast markets from the nodes that we already have, which would have – some portion of those would have been embedded in that $1.2 billion, the reality is we're talking about expanding the pie and looking to put more capital to work because the returns are so compelling
And over time, we believe that will provide additional value to the shareholders in the form of increasing our dividend and our dividend growth rate
Thanks for the questions
On the enterprise business, as I spoke to, I think what we have seen in the other acquisitions that we've done is focus on using fiber as a – what we often like to refer to as a dumb pipe, where really all that is being provisioned is a pipe between two or multi-locations for customers
These are typically done for large enterprises, hospitals, financial institutions, some educational institutions
We find that business to be as passive as we are in the tower business
So sometimes, it's referred to as virtual dark fiber or dim-lit fiber
That in our view is not a service business
And obviously, as I spoke to earlier around what qualifies for good REIT income, it's really just the provision of a real estate to real estate asset
The smaller acquisitions that we've done over time in other parts of the country have gotten us comfortable with portions of that enterprise business
So as we underwrote the Lightower acquisition, we're obviously assuming that we're going to continue to be in that business, continue to operate the business and grow the business over time
We find there to be very attractive returns on invested capital and believe we can continue to grow the business
As we thought about the underwriting and whether or not it justified the investment that we're making, this really goes to the heart of the shared economic model
So we're buying the asset in the neighborhood of about a 6% to 7% return on invested capital and able to provision it to the wireless carriers for the deployment of small cells, and it's a means by which we can do the same thing that we've done for a very long period of time with towers, and that has provided the lowest-cost alternatives to the carriers as they deploy their wireless network
Our goal is to use our cost of capital and to invest the capital in a way that provisions these assets in a way that minimizes the overall cost as the carriers deploy their network
And I believe that's why we have been so successful in attracting small cells on the fiber that we already own because it is the lowest-cost alternative
If you go back and think about how the tower model has developed over time, in the early days of towers, we acquired towers in the top – as I spoke to around fiber, we acquired towers in the top 10, top 25 markets at an initial yield of about 3% back in 1999 and 2000 and over time have leased those assets up as densification has occurred in the wireless networks
In this case, there is an existing source of revenues and cash flow on this fiber that we believe will continue to be there over a long period of time
And on top of that, we believe we will add additional revenues from the wireless carriers to really maximize the ultimate return on the asset
So the way that we've thought about it and continue to approach it has been through our wireless view
And then as we've gotten smarter about what's the quality of the cash flows there, it's enabled us to be able to invest in assets like Lightower because of what we think it will ultimately mean from a return standpoint
On your second question around small cell regulatory efforts, we have a number of efforts going on at the federal, state and the local level
Like towers, I would tell you, it will forever be hard, we believe, to deploy small cells and fiber
And what we're trying to ensure is that it's a fair deployment and that both we and our carrier customers are treated equal to others who access the right of way
That regulation has been progressing well, and it's helped us in some markets
But as we look at it, we certainly don't expect that it's ever going to be easy
And I think the story that folks have read about in the press, in the municipalities and at the state level, there's going to continue to be challenges as we balance the desire of people and communities to limit the amount of infrastructure in their communities and the need for the carriers to deploy the infrastructure in order for us as consumers to achieve the kind of services that we really want to use
So it's a balancing act, and we're continuing to work hard at it
I will tell you, the benefit of scale is significant in this front
Historically, on the tower side, most of the conversations that happened as we would construct or build a tower add an additional tenant to a tower
That was largely a conversation that happened at a homeowners association in most cases
This is a conversation that happens at a citywide basis that reaches town councils and mayors' offices, et cetera
And so the amount of scale and effort we have to do in order to deploy small cells is a much more robust effort in order to do it
And I believe that scale is helpful to us as we approach and deliver for the carriers because the capabilities to do so are very different than what has historically happened in the tower side where one individual could basically go out and develop a tower in a good location
The regulations and the challenges of deploying small cells really speak to the value of being able to provide it in scale
I think that's reflected in our ability to attract the number of small cell orders that we have so far in calendar year 2017.
<UNK>, I do believe that ultimately our small cell business could be as big as towers
That is driven primarily though by my view that the carriers are going to invest over a long period of time around their macro sites to densify their network
So I think we'll have two businesses growing, both the component of towers, which, as Dan spoke to, we've continued to see terrific demand for and increased demand in calendar year 2017 over what we saw in 2015 and 2016. So I think you'll see the carriers continue to invest in towers and then also make significant investments around small cells
Our appetite for additional investment in fiber, I think I'd say a couple of things on that front
One is, this is a large acquisition that's going to take us some time to digest
So we were out looking for the absolute best asset that we could
This does doubles our fiber footprint
It more than doubles the investment that we have placed to-date in fiber, and it's going to take us a little bit of time to digest the acquisition in terms of both integration and getting it up and running as we put small cells against it
So we may need a little bit of time as we digest
Broadly, though, the returns that we're seeing in this business, as I spoke to in one of my prior comments, is the investments that we're making today, we're making them not because we're trying to grow scale in the business, but because we think it provides value and return to our shareholders over time
And we believe our dividend five years, 10 years from now will be higher as a result of the acquisition that we're making today with Lightower than if we hadn't done it
And to the extent in the future we see opportunities that meet that test around the strategy that we've articulated, we'll absolutely be open to those
But they will come down to a test against whether or not we believe ultimately we'll be able to return that cash to shareholders at a higher rate than we otherwise would have
Sure
<UNK>, I think you're going to continue to see both
The carriers are going to self-perform some portion of their small cells
We believe we'll see other infrastructure providers outperform small cells for the carriers
We're certainly not underwriting this asset or any of the investments that we made, assuming that we're going to capture 100% of all future small cells that are deployed
So I think you'll see the carriers make comments around self-performing
I think those comments really are supportive of what is the opportunity around small cells and the necessity and essential nature of fiber to the deployment of wireless networks
But we also believe that the shared economic model is the lowest cost available to the wireless carriers
And we believe we have done – as well as we have done with small cells in the early innings of the deployment of small cells because it is the lowest cost provider
So the shared economic model in the same way that it's the lowest cost provisioning of infrastructure from a tower standpoint, we believe the same thing is true from fiber and small cell
So we believe that over time, we'll see a significant portion of the deployment of small cells on shared infrastructure in places where we think it will be shared and maybe other places where the carriers decide to self-perform because maybe there isn't a shared opportunity
Yes, so a couple things there
There is – in some of those notes that we had under contract, we will be helped to some degree
But as I mentioned earlier, this was about the pie just got a lot larger this morning
And so you probably won't be able to find the CapEx savings or a reduction in capital somewhere
It will help on some incremental basis, but really what's happening is we've availed ourselves of the opportunity of capturing even more small cells and the growth from revenue and cash flows associated with this fiber plan
You bet
So FirstNet, I believe at this point, five states have opted into FirstNet
FirstNet had a – has a requirement to submit a plan to each of the states by September 30 of this year
States then have the option to opt in or opt out by December 31 at the end of this year, calendar year 2017. And as I mentioned, I don't know if anybody announced this morning, we've been a little focused on our Lightower acquisition and earnings, but I believe that as of yesterday, there were five states that had opted in
If states choose to opt out, they have about six months to decide what their plan would be
So that's the basic lay of the land
From a geographic coverage standpoint, they have 12 – FirstNet has 12 months to demonstrate 20% geographic coverage, then they have to be at about 60% by 24 months and 80% by 36 months out
And then by month 48, I think they have to cover nearly 100% of the geography
So the opportunity here from a tower standpoint, we think is really significant as we go into calendar year 2018 and beyond
And whether the states are opting in or opting out, we think there'll be a meaningful amount of deployment for first responders
I don't want to get into any particular customer relationships or how we price
What I would tell you is if – whether a state was an opt-in or an opt-out state, those state – the deployment of that spectrum would require either an amendment or a new lease, depending on the nature of it on our sites
And we would expect in the first phase of the deployment of this, this will happen largely around macro sites
And depending on what ultimately the state decides to do, that could be a new lease on a site or an amendment to an existing site
But we do believe that in all cases, there will be additional revenue as a result of the deployment of the spectrum to provide the network for first responders
Yes, on the first question, we did not assume any cost synergies in the acquisition or in our underwrite model
We're not going to cut our way to growth
So our intention is to continue to grow the business and we're not assuming there aren't going to be any cost synergies there
We may around the edges, find some savings, but that was not how we underwrote the asset
I think, <UNK>, as we thought about the asset again, we thought about the growth of the asset and the quality of the platform there and the folks who are running that asset
And so our intention is to continue to grow and expand the opportunity
We may find there are some back office synergies maybe around cost of licenses or other things, but that certainly was not the intention
And we'll be smart operators of the business over time
And I think you can look at our tower business and see a business in terms of the number of assets where it's a stable number of assets and we've been very disciplined around the cost structure there, so to the extent that there are opportunities
We'll avail ourselves of those as any good manager would
But it was not our intention nor in our underwrite model around cost synergies
So I wouldn't expect that we'll see steps from – as a result of reduction of cost
On your second question, the reference we're making for the 25,000 is a reference back to what we reconciled everybody through in great detail around our pipeline at the end of the first quarter
Our pipeline actually grew during the second quarter
Given the amount of content and discussions we're having this morning, we didn't go into great detail around the way the pipeline grew, what happened to it
But the number of sites that we turned operational against the number of bookings actually increased the size of that pipeline
So I wouldn't expect that you will see a lull in the new bookings and new contracted nodes as we put against – as we built to operate and put on air the nodes that we did
The one thing I would mention and I think we talked about this pretty extensively in the first quarter
It was not normal growth that we saw towards the end of 2016 and into the first quarter of 2017. We saw that as a big stair step in the level of activity
So it's continuing to grow, but I certainly wouldn't want to imply
We saw another stair step like what we saw in the first quarter, but it did grow relative to the number of nodes that we put on air
I think we'll talk directionally about what's in the process and where we think the growth rates are because it's related to where our revenue expectations are
But we like to spend our time talking about what the impact is ultimately to our dividend and what the impact is to the growth rate there
So we're more likely to probably transition that conversation back to our historical approach of talking about revenue growth translated to cash flow growth translated to dividend growth and have a more wholesome conversation where we're balanced around the cost of the capital that we put into these systems and the cash flow return against those and then what that implies for dividend growth
I would imagine directionally though, we'll continue to talk about activity levels as we have historically and what we're seeing both on the tower side and then also on the small cell side
Sure
On the first question, yes, we have historically paid out about 75% of our AFFO in the form of a dividend, and that was our working assumption as we laid out this transaction and calculated the $0.15 to $0.20 of expected increase in the dividend related to Lightower
There are no notable differences in our calculation of AFFO or AFFO per share relative to the way we've handled it historically
When you look at their business, and we talk about small cells, as we've discussed, typically, there's about an 18-month to 24-month cycle from when we receive a small cell order to when we have it on air
So we're not assuming that we're bringing our small cell expertise to those assets in a way that would result in first year of ownership additional revenues from small cells
Obviously, we're going to continue to run that business, and they have a pipeline of revenues that we would continue to turn on air and get the cash flow benefit from
But the real revenue synergies, if you want to call it that and the upside from small cells and growth over time, that will be outside of the first year of ownership and really minimal impact in the first 12 months
So that's a longer-term benefit that we'll see and speaks to our comments around our expectation, we'll be able to increase our long-term growth rate by 100 basis points
Operator, we have time to maybe one more question
You bet
End of Q&A
Well, thanks everyone for joining us this morning
Obviously, as you've heard from our commentary, we believe that Lightower is a great acquisition that we think it’s going to generate significant value for our shareholders and positions us really well to serve customers by expanding our portfolio in some of the best markets in America
So I appreciate you joining this morning and we'll talk to you soon
