Crown Castle reported a good quarter yesterday with a broad beat and strong guidance. CCI beat on both site rental revenue and networks services revenue, and reported better than expected EBITDA and EPS.
Thesis intact, highlights on the quarter:
· The company is experiencing the highest level of tower leasing activity in more than a decade, and management expects this to continue.
· Organic site rental revenue was +6%
· CCI small cell pipeline in 2019 is 10 – 15 thousand nodes (trending now on the lower end around 10k)
· Management provided FY20 guidance for the first time for ~8% AFFO growth and assumes the proposed merger between T-Mobile and Sprint in 1Q20
· Strong 2020 outlook for new leasing activity for towers: +$145 million at the mid-point is $5 million higher than +$140m outlook for 2019.
· Fiber guidance reflects an expectation for improved leasing activity. Initial outlook for new leasing activity in 2020 of $165 million is +$15 million higher than the company’s 2019 outlook for $150 million in fiber solutions.
· CCI’s outlook on fiber and small cells reflects carriers’ deployment of new spectrum and densification of their networks in preparation for 5G
· Big 4 carriers make up 90% of site rental revenue – AT&T, Sprint, T-Mobile and Verizon.
· Could see churn picking up from the TMUS/S merger in 2020. However, management views a T-Mobile/Sprint merger as a long-term positive as Sprint has valuable spectrum holdings which it has not been able to fully deploy due to capital constraints, and T-Mobile appears likely to accelerate deployment of 5G as part of its anticipated integration. Management believes that the investment from a combined T-Mobile/Sprint, with or without DISH as a fourth wireless carrier, will likely more than offset the impacts of T-Mobile decommissioning duplicative sites.
· Dividend increase of 7% delivered on targeted annual range of 7-8%.
Valuation:
· Strong AFFO growth will drive the valuation (2020 expected 8% YoY). They have a 10 year AFFO CAGR of ~14%.
· High incremental margins means AFFO growth should outpace or be in line with site rental revenue growth.
· Low maintenance capex (~2% of revenue) supports high AFFO margins.
· Expected $2.479B in AFFO ($5.94/share) in 2019 is a yield of just under 5%. This is an attractive yield given the secular growth potential.
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.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CCI.US
[tag CCI]