Crown Castle inks 15K small cell deal with Verizon

Crown Castle secured a deal with Verizon for 15,000 new small cells, while T-Mobile cancelled thousands of sites planned for Sprint.

The lease agreement with Verizon, announced Wednesday, calls for 15,000 small cells over four years to help build out the carrier’s 5G service. Once installed, Verizon signed on for an initial 10-year term.

“The Verizon agreement is real affirmation in our small cell strategy. They believe there is real value in a third-party providing infrastructure to them and I think we’re in a great position to do that,” said Crown Castle CEO Jay Brown, speaking on the company’s fourth quarter earnings call Thursday.

It represents the largest-ever small cell node commitment for the tower company, he said, and suggested it’s just the start in terms of small cell deployments for 5G.

“This agreement is really…the floor. It’s the beginning of what we think is a big start towards 5G and I think we’ll see more of this as time passes as we work to build out these 5G networks,” Brown said.

Separately, in the fourth quarter T-Mobile canceled 5,700 planned Sprint nodes with Crown Castle that overlap with its own. Most hadn’t been built yet but about 1,000 to be installed in 2021, which Crown Castle executives expect to “fill up another way.” T-Mobile paid Crown Castle rent obligations and any capital costs laid out so far related to the canceled sites.

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Crown Castle has a backlog of about 30,000 small cells yet to be installed, and reiterated a pace of getting about 10,000 on-air per year.

The deal with Verizon and cancellations by T-Mobile didn’t change Crown Castle’s outlook for 2021.

The exact node locations for Verizon haven’t been determined yet, which the companies will work through together, so it’s unknown how many will be new construction versus colocations at existing small cell sites.

The location impacts returns for Crown Castle depending on a new build or leasing an existing site. On the call executives reiterated returns should be consistent with what they’ve seen historically  – initially between 6-7% in places where Verizon is the first, or anchor tenant, and then returns in the low-double digit percentages if they are collocated.

In a note to investors Thursday, New Street Research wrote the Verizon deal is significant for a trio of reasons, including likeliness that “it will lead to more, larger deals with AT&T, T-Mobile, and eventually DISH.”

Crown Castle was the first and still only of its peers to sign a master lease agreement (MLA) with Dish Network. That was for up to 20,000 towers and fiber services.

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New Street believes it also “demonstrates the important role that CCI will play in 5G network deployments,” with the firm noting Verizon has by and large deployed small cells on its own fiber.

MoffettNathanson analysts viewed the Verizon deal as a positive, but not enough alone.

“15K nodes is clearly a good thing, and is supportive of the thesis that carriers will still outsource a good chunk of small cell nodes even if they choose to self-perform many of them,” wrote MoffNathanson analyst Nick Del Deo in a Wednesday note to investors. “However, 15K over four years isn’t enough on its own to sustain Crown Castle’s growth; the company expects to install about 10K nodes in 2021, and after adjusting for the T-Mobile/Sprint terminations it now has about 30K in its backlog.”

In talking about confidence in the pacing of 10,000 small cells per year, Brown cited a parallel to what they’ve seen happen in the tower business.

He said that a carrier signing on for a new number of sites helps put protocols in place to make it easier for both parties to work together through the process of deploying infrastructure (which often faces hurdles at local levels). But he indicated it’s not necessarily representative of how many sites will ultimately be deployed over the long-term.

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“The carriers over time have made commitments to us for a certain number of new sites that they’ll collocate on or we’ll build for them, but those are a fraction of the overall tower activity that they ultimately did with us,” Brown said of two decades in the tower business history.  “I think the same thing is true on the small cell side.”

Ease of business and providing data points for investors are helpful, he said, but he thinks small cells will follow the tower pattern, where “ultimately the amount of sites that get deployed will be far in excess in the size that just show up in the commitments.”

Like MoffettNathanson, New Street doesn’t view Verizon’s agreement enough by itself to upgrade Crown Castle.

“CCI’s backlog had dwindled to 20K nodes before the Verizon deal, and at their current pace of deployments, it would have been exhausted in just two years,” wrote New Street analyst Spencer Kurn. “In other words, they were due for a big contract, and this one breathes life into their small cell strategy which came under pressure from investors last summer.”

Some highlights 2020 highlights:

  • Site rental revenue grew 4% or $227 million in 2020 over 2019.  That includes 5.6% organic contribution. 
  • Adjusted EBITDA and AFFO for full year 2020 were up 12% and 21% to $3.7 billion and $2.87 billion, respectively.
  • 2020 Capital expenditures were $1.6 billion, including $1.2 billion discretionary spending for fiber and about $321 million attributed to towers.