Fourth quarter results were within the outlook range provided last quarter. Revenue for 2017 was $4.4B, up 35% (organic revenue growth of 5.5%). Leading this growth was small-cell revenue which was up 25% and included some revenue from the Lightower acquisition. Full year AFFO was $1.6B or $4.29/share. Guidance for 2018 total site rental revenue was increased to $4.6B (+25% yoy), but AFFO guidance was maintained. The dividend increased 8% for 2017, and is now close to a 4% yield; 7-8% growth continues to be the target going forward. They improved their balance sheet. Over the course of 2017 they reduced their leverage ratio to 5.3x (down half a turn). And with recent bond offering they lowered their average interest rate, increased their average maturity profile and increased their portion of fixed rate debt to 90%.
Current Price: $110 TTM Return: 30%
Target Price: Under Review Position Size: 2%
Thesis intact, highlights on the quarter:
Secular growth trends on track:
• Q4 total site rental revenue up 29%; Q4 AFFO up 26%
o Tower site rental revenue up 2.5%
o Fiber site rental revenue up 90% (including acquisition)
• Increased demand for wireless data is primary driver and mobile data demand expected to double every 2 years. Carriers need capacity and CCI is a low cost solution and fast to market.
• New leasing activity is accelerating. Lease-up on the small cells are about 2x the rate they experienced on towers.
• Churn remains low at 1-2%.
Capital spending by carriers may improve:
• Big 4 carriers make up 90% of site rental revenue – AT&T, Sprint, T-Mobile and Verizon. Corporate tax reform may prompt them to increase infrastructure investments.
• AT&T may begin constructing their FirstNet emergency network which will be funded in part by the government.
Benefit of new fiber assets:
• Closed three acquisitions in 2017: FiberNet, Wilcon and Lightower, expanding their high capacity metro fiber assets.
• Lightower closed in Q4, two months ahead of schedule.
• Assets have capacity to support organic growth and high incremental margins.
• Return assumptions on these fiber asset acquisitions based on current applications, i.e. new technologies like 5G, IoT, augmented and virtual reality would be upside. These technologies all would rely on CCI infrastructure assets for higher speed and lower latency requirements.
• If 5G comes to fruition, as expected, there is a stair step increase in densification required.
• Attractive shared economic model in small cell business. Lowest cost and fastest time to market for their customers. Multiple ways to monetize fiber assets improves returns and lowers cost and value proposition to customers.
Valuation:
• Strong AFFO growth will drive the valuation (up 16% in 2017). They have a 10 year AFFO CAGR of 14%.
• High incremental margins means AFFO growth should outpace site rental revenue growth.
• Low maintenance capex (~2% of revenue) supports high AFFO margins.
• $2.2B in AFFO ($5.50/share) in 2018 is a yield of 5%. This is an attractive yield given the secular growth potential.
• Price target is under review.
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% dividend & contracted cash
flows) characteristics.
4. Revenues derived from long term contracts with price escalators and good visibility.