CCI reported strong results during the quarter reaching the high end of guidance for site rental revenues ($893M) and adjusted EBITDA ($605M). Additionally, AFFO exceeded guidance as CCI benefited from lower than expected capital expenditures due to timing. The acquisition of Lightower is expected to be concluded by year’s end. Due to strong industry trends and the acquisition, CCI improved its 2018 outlook with increases in AFFO/share, dividends/share, and site rental revenue. We remain mindful of the potential risks that may be caused by a Mobile/Sprint merger but understand the significant regulatory hurdles facing industry consolidation.
Current Price: $103 Price Target: $103
Position Size: 2.1% LTM Performance: +17%
Thesis Intact. Key takeaways from the quarter:
1. Q3 results at high end of expectations and guidance.
a. Q3 cash tower revenue falls to 3.9% yoy but higher than expectation
i. Tower site rental revenue was up 3.9% yoy, 2.1% on a GAAP basis
ii. Small cell site revenue was up 65.6% yoy, 64% on a GAAP basis
b. Q3 site rental revenue up 9.9% yoy, 5.1% yoy organic
i. Network services revenue was 5.3% lower than expected but up quarter over quarter
ii. Tower site rental revenue was up 1.0% over Q2 and small cell revenue grew 11.1% over Q2
c. Q3 adjusted EBITDA came in line with estimates
2. The outlook for CCI has improved based on its plan to acquire Lightower and positive secular trends
a. CCI is paying annual dividends of approximately $4/share and estimates an 11% dividend increase in 2018 (reflective of Lightower acquisition)
b. Organic site rental growth is expected to accelerate from 5.2% to 5.8% in 2018
c. CCI expects AFFO/share growth of 10% yoy vs 6% growth in 2017
3. The acquisition of Lightower is expected to be complete by year end. By combining Lightower’s dense metro fiber footprint with Crown Castle’s industry-leading small cells platform, the Transaction is expected to expand the small cell opportunities available to Crown Castle and enhance its ability to meet the small cell deployment needs of its wireless carrier customers while reducing the time and capital required for such deployments
a. Acquisition enhances Crown Castle’s position as largest provider of shared wireless infrastructure in the U.S. with approximately 40,000 towers, 50,000 small cell nodes on air or under development and 60,000 route miles of fiber in the U.S. pro forma for the acquisition
b. Expected to be immediately accretive to AFFO per share and long-term growth rates. Significantly increases opportunities for small cell network deployments in top metro markets in the Northeast including Boston, New York and Philadelphia
Why does CCI value Fiber? Fiber connects small cell nodes to each other and carries data to and from communication hubs operated by wireless carriers
• Soaring demand for faster internet service, especially wireless, has sparked a race for fiber-optic capacity. Volume on wireless networks is growing 40 percent a year, and the towers that handle mobile phone traffic are all connected to fiber-optic networks. The move to fifth-generation, or 5G, wireless networks in the coming years will boost demand for data further, making fiber more critical
• The wireless industry needs to add tremendous network capacity to handle massive mobile-data usage growth – the Lightower acquisition gives CCI the ability to capture more of this growth
The Thesis on Crown Castle:
1. CCI is well positioned to capitalize on secular mobile data demand growth and small cell/urban opportunity
2. Strong competitive position. Leading US tower company
3. Toll booth business – offensive (secular growth) & defensive (4.3% dividend & contracted cash flows) characteristics
4. Revenues derived from long term contracts with price escalators and good visibility
5. Valuation: CCI trades at a 5.5% AFFO/FCF yield which is reasonable for a stable earnings stream and highly cash generative business