Crown Castle’s recent large-scale small cell deals with Verizon and T-Mobile mark an inflection in demand in the small cell business and are just the start as carriers begin to tee up the next phase of 5G network deployments, according to CEO Jay Brown.

At the start of the year Crown Castle announced a new deal with T-Mobile that includes a commitment for up to 35,000 small cells over the next five years. That followed on an early 2021 deal with Verizon for 15,000 new small cells. Together the agreements, both coming in the last 12 months, represent 70% of Crown’s total small cell volume booked to date.

Speaking on the tower company’s quarterly earnings call Thursday, Brown said he believes 2022 will be a key transition year for the small cell and fiber business, ahead of a ramp up in deployments for Crown in 2023 and beyond.

This year the tower company expects to deploy 5,000 small cell nodes and increase to more than 10,000 small cells starting in 2023, with Brown citing potential to scale from there.

Crown Castle’s focus on small cells and fiber sets it apart from other U.S. tower companies, but the strategy has raised questions among investors. Brown said the most common questions were whether small cell demand would scale and if carriers would actually collocate, or use the same infrastructure asset, to yield strong returns.

Both of those have been positively answered, Brown said Thursday, with a significant portion of the new nodes to be colocated on existing fiber assets. In addition to 40,000 U.S. macro towers, Crown Castle has 80,000 route miles of fiber in 30 of the top U.S. markets.

“I’m convinced that this period is one of the most important proof points for the small cell business model,” Brown said, noting there was similar skepticism around the U.S. tower model before that was well proven in the market.

It’s a similar sentiment to what Crown Castle CFO Dan Schlanger expressed at an investor conference this month the same day the T-Mobile deal was announced.

Crown Castle now has more than 60,000 nodes in its backlog, and the company expects demand to only increase. That’s in addition to the 55,000 small cell nodes on air today.

“As these small cells are deployed, they will contribute to improved network performance, which history has taught us will attract additional small cells as carriers compete on network quality,” Brown said, adding that the same dynamic has been seen on towers as carriers continue to deploy new spectrum to keep up with data demands. “As a result, I believe this is just the starting point for total small cells needed by wireless networks… as the clear leader in small cells we are uniquely positioned to benefit from this growth.”

Positive traction in the small cell business comes as Crown Castle saw continued high levels of core leasing activity for towers in 2021 and expects levels for 2022 to be around 50% higher than its trailing 5-year average. AT&T, T-Mobile and Verizon are all deploying 5G networks, with both new spectrum and capital at their disposal, he noted, as is emerging operator Dish as it builds out a brand new 5G network.

Dish also already marked a major tower deal with Crown Castle that includes access to fiber assets.

While initial phases among the Big Three carriers’ respective 5G rollouts are focused on deploying more spectrum from existing macro sites, Crown anticipates the next step of densifying to keep pace with data demand to be driven significantly by small cells alongside macro.

“We also continue to see the opportunity to add to the returns we are seeing on small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth,” Brown said.

In a note to investors Wednesday, MoffettNathanson analyst Nick Del Deo wrote that Crown Castle’s stock has lagged behind among its peers American Tower and SBA but called out a handful of positives the tower company now has. That includes more favorable Sprint-related churn, more exposure to “unencumbered” Verizon sites, a unique deal with Dish that “positions it to capture an early lead in new business” with that customer, alongside small cell momentum with T-Mobile and Verizon.

“Crown Castle’s gross growth performance seems likely to have some legs to it, as evidenced by its Q4 results and 2022 outlook,” wrote Del Deo. “But it’s reasonable to ask if the small cell deals mark an inflection in or a pull forward of demand (we think it’s likely something in between).”

Recognizing the value proposition

With such big commitments from T-Mobile and Verizon, analysts on the call questioned if it could be several years before carriers return to Crown with more orders for small cells or if they’re likely to come back more regularly.

Crown Castle executives said they don’t believe the numbers already under contract represent 100% of the small cells that carriers will need or commit to, mainly because they aren’t going to sign up for all of their build requirements at the get go.

While key aspects for Crown are returns and revenue growth, another element Brown called out is carriers’ understanding of the difficulty associated with building new small cells that they know they’ll need.

“Being able to deliver these nodes and implement it” is the value proposition Crown brings, he said, adding that the large-scale customer agreements give credence to Crown’s operating ability.

For Crown, the company needs to spend more on anchor builds than colocation, the latter of which has significantly lower costs, faster time to get online and higher returns once a second tenant is on the asset. It’s previously said that once the fiber asset is collocated, or there are two tenants using the same system, returns for Crown increase to the 10-12% range, up from 6-7% yields when it’s a new anchor build. 

Crown expects its own level of capital investment to trend higher alongside the accelerated pace of small cell deployments in 2023, with updates expected to come later as it receives more details on timing.

But like it has for towers, the shared infrastructure model benefit of reducing network costs for the operator is also coming to bear for small cells, Crown management said.

“That exact same dynamic is at play with small cells, where we’re willing to put up the capital and then deploy the capital initially and then share it across multiple operators such that each operator has a much lower cost of operating than they would’ve if they owned their own” and each built their own small cell network.

Particularly in an environment where labor costs might be increased and inflationary costs could drive up interest, “it underpins our value proposition to our carriers” of providing capital at a much lower cost than what the market can offer, he said.  

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