On Wednesday, Crown Castle, the leading U.S. owner-operator of telecommunications infrastructure assets used in wireless data transmission, announced its results for the quarter ending September 30. In addition to a four percent increase in site rental revenues compared to the third quarter of 2019, the company announced an 11 percent increase in its common stock dividend to $5.32 per share, and gave an update on the market’s current state of 5G readiness.

Speaking to investors on Thursday’s earnings call, CEO Jay Brown said Crown Castle remains on track to generate growth in adjusted funds from operations (AFFO) per share in 2020 that is consistent with its previously announced 7-8 percent target, and expected to reach 10 percent in 2021.

In addition to the 11 percent increase in the company’s dividend, which Brown noted is meaningfully above its long-term target of 7-8 percent, and represents a compound annualized growth rate of more than eight percent over the last six years (or $10 billion in dividends paid out), he highlighted Crown Castle’s reduced capital intensity in its fast-growing fiber business, and its ability to fully fund its 2021 capital plan without needing to issue more stock.

This ability to fund growth is particularly important amid what Brown called a “decade-long investment cycle” as its customers—primarily wireless carriers—deploy 5G wireless network technology.

Brown noted that since 2010, Crown Castle’s carrier customers have invested nearly $300 billion in capital to upgrade wireless networks, significantly increasing their network density with tens of thousands of new cell sites while deploying additional spectrum.

Why the U.S. market

Brown said that one of the core principles of Crown Castle’s long-term strategy is to focus on the U.S. market, which the company believe represents the fastest growing market for wireless network investment ahead of 5G, with the least amount of risk.

“The US wireless market attracts a disproportionate amount of capital investment, because the market fundamentals are so attractive. In 2019, as an example, carriers in the U.S. invested approximately $30 billion, representing nearly 20 percent of all mobile capex globally, to serve demands from less than five percent of the world population,” said Brown.

In pursuit of what Brown called a “sizable and growing opportunity,” Crown Castle has invested nearly $40 billion over the last couple of decades in shared infrastructure assets that they believe are mission critical for current technology, and the next generation of 5G wireless networks.

“Our strategy [is] to deliver the highest risk-adjusted returns for our shareholders, by balancing a growing dividend, and investing in assets that will drive future growth. To that end, we are deliberately investing all of our capital in the largest and what we believe is the best market in the world for owning communications infrastructure assets,” Brown said.

Why small cells and fiber

Brown said Crown Castle had begun investing in small cells more recently, in response to evolving wireless network architecture under 4G networks. These networks require a much denser network of cell sites, located closer to end users, to handle rapid growth in mobile data demand.

Brown called the impact on wireless networks from a persistent 30 percent-plus annual growth in mobile data demand “staggering.” He quoted data from wireless technology trade group CTIA which found that the amount of wireless data used in 2019 was 96 times greater than in 2010, while incremental growth from 2018 to 2019 alone exceeded total data usage from 2010 thru 2013 on a combined basis.

In response, since 2010, the total number of locations where wireless carriers are broadcasting their spectrum has increased by approximately 115,000 to nearly 400,000 at the end of 2019, with most new sites deployed on existing macro towers as well as new small cells.

Increasing site densification has always been a key tool that carriers have used to add network capacity, he explained, enabling carriers to get the most out of their spectrum assets by reusing spectrum over shorter and shorter distances. The law of physics dictates that cell site densification will continue, particularly given the higher spectrum bands coming to market in recent and upcoming auctions.

““We expect the densification trend to drive additional leasing on our tower assets for years to come. But with the radius of cell sites continuing to shrink, we expect small cells to play a greater role in network densification going forward,” Brown said.

Brown referenced comments he made during the second-quarter earnings call in July, which characterized “significant potential upside, and limited downside” in Crown Castle’s our small cell business. Brown said since that time, he said, the pre-5G wireless ecosystem has begun to show signs supporting Crown Castle’s potential upside cases.

Why Apple

Brown cited an important milestone reached last week in the pursuit of greater network densification, when Apple announced that all of its iPhone 12 models sold in the US will support millimeter-wave spectrum bands—bands that are not yet deployed at scale, but can support very fast 5G speeds—while models offered in other regions of the world are limited to sub-6 gigahertz bands. Brown said that Apple’s announcement was reminiscent of 2007, when the original iPhone was introduced at a time when wireless carriers had acquired a vast supply of 3G-capable spectrum, but (until the iPhone came along) had no use cases identified requiring that much capacity.

Carriers today have nearly 20 times more spectrum capacity than they did in 2007, he said, with a significant portion yet to be deployed and more spectrum scheduled to be auctioned in the next few months. In aggregate, carriers and other market participants have already purchased approximately $15 billion in spectrum at auction, and made acquisitions to gain access to higher spectrum bands needed to deploy 5G. Brown expects that investment will increase with the upcoming C-band auction.

Why millimeter-wave

Millimeter-wave spectrum currently accounts for more than 80 percent of the total spectrum available for use in the U.S., and Crown Castle believes the iPhone 12 will speed up this deployment. Because of its radio frequency characteristics, mm wave spectrum provides significantly more capacity, but over a fraction of the geographic coverage area. As a result, most of this spectrum will be deployed using small cells, rather than towers, a projection that has led Crown Castle to build out a parallel, small cell business in recent years.

These newer investments currently have a three-year weighted average life across approximately $14 billion of invested capital, but the business is already generating a current yield of invested capital approaching eight percent.

Why colocation

Similar to towers, Brown said, Crown Castle’s investments in small cells and fiber have high initial costs that are ultimately shared across multiple customers, lowering the capital and ongoing operating costs to each customer, while generating returns for shareholders as those assets are leased up.

Some of this lease-up benefit will be offset by the pursuit of organic investment opportunities to construct less mature small cell assets for anchor tenants, at an initial yield of 6-7 percent.

Brown said that new anchor builds have accounted for 70-80 of small cell leasing activity in recent years, with colocation at existing sites making up the remaining 20-30 percent.

Based on its current pipeline of nodes planned for construction in 2021, Crown Castle expects the share of colocation activity to reach 40 percent, contributing to a $400 million projected decrease in the company’s discretionary fiber capital expenditures in 2021, compared to 2019 levels.

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