T-Mobile inked a new long-term lease agreement with tower company Crown Castle and has signed on for 35,000 small cells.
The deal, which involves a 12-year Master Lease Agreement (MLA), is significant for Crown Castle on a few fronts including reducing impact from expected Sprint churn on macro towers and serving as a major proof point for the company’s small cell business, Crown CFO Dan Schlanger detailed during a Citi investor conference Thursday.
Since merging with Sprint in 2020 T-Mobile has been working to consolidate the network including coming off certain macro sites where both companies had a presence on the same tower. With that process, Crown had anticipated bigger impacts from Sprint churn in both 2023 and 2028. Under the new agreement, Schlanger said some of that is pushed down the line while some will happen earlier - meaning only one major churn event in 2025 and lowering the overall financial hit to the tower company.
In a Thursday note to investors, Cowen analysts noted that Crown didn’t give specifics on how much churn it expected to recognize in 2023 and 2028 but the firm estimated it was $500 million overall “whereas now they’re anticipating just ~$200MM in Sprint churn in 2025 which is clearly positive both on an absolute and NPV basis.”
At today’s event Schlanger categorized the deal, which has been in the works for some time, as a significant net positive for Crown. Aside from the tower aspect, the number of small cells over the next five years is key and represents the largest order in Crown’s history for the nascent business (it does expect to see another 5,000 small cells come offline from T-Mobile/Sprint churn mostly in 2023, for a net amount of 30,000).
Before this, Crown’s largest small cell order was for 15,000 new nodes through a deal with Verizon reached last year. Prior to 2021, Crown Castle had booked a total of 70,000 small cells overall. That means that with the T-Mobile and Verizon deals together, 70% of Crown’s total small cell volume booked to date and has come in the last 12 months, he noted.
“We view that as a significant turn in the overall activity levels in the small cell business and gives us a lot of confidence that the strategy we’ve pursued over the last 10-12 years is coming to fruition in a way that will provide significant value for our shareholders,” Schlanger said. “We see this as a continuation of the growth profile we have in the business.”
According to Cowen analysts, it significantly expands small cell revenue over the coming years with a net increase of $250 million per year by 2026.
Of the 35,000 T-Mobile small cells, most nodes are expected to be collocated on existing Crown Castle fiber, which Schlanger said means incrementally higher returns on earlier investments. Crown has previously said 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. As Cowen analysts pointed out, colocations have lower capex requirements and should come online faster than if new fiber builds were needed.
Proof point for small cells, fiber
Crown Castle has stood behind its fiber and small cell strategy but received some push back from investors over the businesses.
Schlanger acknowledged fielding investor questions over the last few years particularly with around deployments, revenue and timing and when small cells will start to be colocated – criticisms that the finance chief believes have now been addressed with the new deal.
“It’s a proof point that not only is the volume coming but the economic basis of our strategy is coming true as well,” he said.
It comes after 2021 when Crown Castle saw record high levels of leasing activity for towers but cut its small cell outlook in half to 5,000 nodes on air – with the same expectation for 2022.
Cowen analysts led by Colby Synesael also see the MLA as meaningfully positive, both for the reduced churn risk from Sprint and the significant expansion in small cell revenue.
“After what was a disappointing 2021 in terms of new small cell leases signed, we believe today’s announcement is a meaningful endorsement of the need for small cells and given investor scrutiny for its small cell business this could help sentiment and ultimately the multiple to which investors value the Small Cell business,” wrote Synesael in a January 6 note.
The tower industry and Crown Castle in particular saw high levels of activity last year and into 2022 as carriers have been largely focused on deploying 5G from macro towers, particularly with new mid-band spectrum coming online.
But within that context, Schlanger said that booking 50,000 nodes between Verizon and T-Mobile shows that they recognize the importance of small cells and that they’ll be key to serve increasing data demand that’s coming down the pipeline.
“We’ve lowered the risk, locked in really good returns on the tower side and given us really significant upside that we do not believe is really appreciated in how big the small cell market can be over time,” he said of the T-Mobile deal.
Like 2021, this year Crown Castle expects to put 5,000 small cells on air. The company didn’t detail timing as to when T-Mobile’s small cells will go live but he said the Verizon and T-Mobile agreements won’t mean a big change this year. However, going into 2023 and beyond “we believe we’ll have a significant increase in the amount of small cells that we put on air.”
The time to get small cells from booked to live in terms of zoning and permitting is typically a 18-36-month cycle for new builds. That is relatively consistent and small cell demand is a greater driver of changes year to year, according to Schlanger. He said that Crown believes it can get back to 10,000 nodes on air per year in 2023 and more than that over time. And Crown thinks that only represents the first wave of what it expects to be continued investment in small cells over a longer horizon.
He also pointed out that Crown is getting the majority of third-party demand for small cells as well.
“We don’t see anybody who anywhere close to 50,000 nodes in their entirety of their business that’s a third-party provider and we’ve signed that much in the last 12 months,” Schlanger said. “We just think that positions us really well to continue to be the supplier of choice going forward in the small cell business.”
An 8-K filing shows that Crown expects a $45 million reduction in site rental revenues from the Sprint/T-Mobile small cell churn largely in 2023, offset by around $10 million per year from anticipated associated upfront payments from T-Mobile for not renewing.
For the tower portion of the T-Mobile deal, Crown Castle now expects to recognize around $250 million in additional straight-line site rental revenues for 2022 compared to its earlier outlook for the year.