As Crown Castle reported third-quarter earnings, the tower company also disclosed a probe by the Securities and Exchange Commission (SEC) into certain of its services business-related transactions.
An 8-K filing shows the SEC has requested company documents from 2015 through present related to Crown Castle’s capitalization and expense policies for tenant upgrades and installations in its services business.
Speaking on Crown Castle’s third-quarter earnings call, CFO Dan Schlanger said the subpoena was served in September and “requires us to produce certain documents but is not a finding of any violation of law has occurred. We believe our long-standing capitalization and expense policies are appropriate and we will of course cooperate fully with the SEC including in connection with their review of those policies.”
Executives did not go into many additional details on the call about what the SEC is looking into, but in a Thursday note to investors MoffettNathanson analyst Nick Del Deo indicated that while the firm couldn’t be certain, several clues suggest differences in the way Crown Castle records certain costs related to services the company performs on its own towers, in contrast to peer SBA.
“Unlike independent providers of contracting services (Dycom, Mastec, Quanta), Crown Castle is performing the work on its own infrastructure, creating a plausible opening to justify that the work improves the revenue-generating potential of its assets and some of the costs should be capitalized rather than expensed,” wrote Del Deo. “However, this is at odds with peer SBA’s policy of expensing all services costs.”
So while Crown Castle “has a legitimate basis for its policy,” the firm still thinks “there is a good chance” it will have to change those capitalization and expense policies and/or restate its third-quarter results.
“While not the end of the world, these changes are large enough to take note of,” wrote Del Deo.
Crown Castle CEO Jay Brown on the earnings call said the company does not have any indication of timing as to when they need to fulfill the SEC request, but reiterated Crown Castle is fully cooperating and will “work through the process as appropriate.”
Strong tower activity continues
In terms of earnings, Brown said in 2019 the company is experiencing the highest level of tower leasing activity in more than a decade and expects to generate a similar level of new leasing activity in 2020, pointing to carriers’ continued investments in 4G LTE to keep up with increasing growth in mobile data traffic demands.
At the mid-point in 2020, Crown Castle estimates site rental revenue will be up 5% year over year to $5.21 billion, adjusted EBIDTA up 5% to $3.59 billion, and AFFO up 8% to $2.68 billion.
The 2020 outlook assumes that T-Mobile and Sprint’s pending merger will close before the first quarter of next year. That outcome, of course, is still in flux, with formal approval from the FCC this week, but a trial in a lawsuit brought by a coalition of 16 state attorneys general to block the deal is still ahead.
A note to investors put out by NewStreet Research ahead of the earnings call said Crown Castle’s 2020 guidance was not as good as it seemed.
“CCI’s guidance assumes that the T-Mobile / Sprint deal will be approved and will close in Q1, neither of which we have much confidence in,” wrote the NewStreet team. “If we back out our estimate for the impact of the deal, we think CCI’s guidance implies declining new leasing revenue for towers and declining overall organic growth, which doesn’t bode well for the other tower companies….”
Executives avoided commenting heavily on T-Mobile and Sprint, or specific customers on the earnings call, but reiterated that growing mobile data demands will require continued investments in tower sites, regardless of whose name may be on the equipment.
Municipalities and utilities still causing small cell delays
In it’s 2020 outlook, Crown Castle expects about $70 million in new small cell leasing activity and expects to install about 10,000 nodes, similar to its 2019 figure.
Brown said Crown Castle continues to experience a meaningful amount of delays from municipalities and utilities as the company works to deploy small cells. He noted that’s causing the timeline to extend from what was previously an 18-24 month process to now a range of up to 36 months.
“We’re working that on a number of different fronts in terms of how do we come up with a solve on how do we…work through the process more quickly with municipalities, but I don’t have at this point any update or more positive perspective,” he said, adding they still believe the timeline will be 18-36 months during 2020.
Schlanger noted Crown Castle has about 70,000 small cells, with 40,000 on air and 30,000 under construction. In the third quarter it brought roughly 2,500 small cells on air.
Schlanger acknowledged frustration at the lengthier timeline but said “we’re really in the early innings of this whole roll out of small cells and really haven’t gotten into 5G. What we’re looking at is how can we make this business sustainable and scale it, because we believe the activity levels are there and will continue to grow.”
At its most basic level, executives said Crown Castle’s business is one that includes significant investment upfront, but for assets that can be shared by multiple tenants and over long periods of time.
The company appears confident in the long-term addressable market for its assets like small cells, which they also said provides a significant opportunity to increase returns on its fiber business by adding additional tenants.
Through its experience in the tower business, Crown has found that “the patient steady execution of adding tenants to that shared asset over a long period of time is how you can drive great returns on the investment we’ve made,” Brown said.
Crown Castle has about 40,000 towers, with an average of just over 2 tenants per tower. The company has less than one small cell equivalent across its 75,000 route mile fiber network, executives noted, meaning significant capacity to add more tenants down the line.
Here are some other Q3 highlights:
- Site rental revenues grew about 6.4% or $76 million year over year
- Capital expenditures were $540 million, including $18 million of land purchases, $29 million of sustaining capital expenditures, and discretionary spending including $371 million attributable to fiber and $120 million attributable to towers
- Services revenues were up 33% year over year to $254 million
- Net income for the third quarter was $272 million, compared to $164 million a year prior
- During the quarter Crown Castle’s paid dividend increased approximately 7% per share