Crown Castle could be poised to narrow the performance gap in coming years between itself and tower REIT peers as T-Mobile and AT&T use up certain capacity rights and the company pushes through its small cell backlog, according to a new report by Wall Street firm MoffettNathanson.
In a report to investors that outlines the potential opportunity from Crown Castle’s underperformance, MoffettNathanson analyst Nick Del Deo wrote: “To be clear, Crown Castle’s stock hasn’t underperformed the market; it has equaled the performance of the S&P 500 over the past year and has handily beaten it over the past three and five year periods.”
He pointed to the underperformance relative to domestic peers American Tower and SBA, saying, “these three business are far more similar than they are different, making the shortfall especially apparent.”
Contributing to the comparative drag on Crown Castle, Del Deo cited small cell installation backlogs because of delays at municipalities, the timing of its entry into fiber “just as the sheen on that business model was wearing off” and slower U.S. tower growth.
When it comes to small cells, Crown Castle executives during the third quarter described elongated timelines that extended to 36 months, up from 18-24 months, because of an influx of small cell applications at municipalities and utilities.
Even if the installation process takes longer than expected, MoffettNathanoson noted the current 30,000 node backlog represents committed growth.
“Crown Castle may have set the stage for nice incremental revenue and profit contribution from small cells given the backlog it has built and the capital it has already sunk into the business,” wrote Del Deo.
The firm pointed to 30-40% of Crown Castle’s small cell leasing described as colocation rather than new builds and still solid small cell demand, despite approval hurdles.
The analyst noted a 2019 MoffettNathanson report that found the number of small cells deployed across six major cities had roughly tripled over the two years prior.
“And carriers remain interested in millimeter wave spectrum despite its warts, as evidenced by the progress of Auction 103 for upper 37 GHz, 39 GHz, and 47 GHz bands, which has drawn over $7B in bids as of the date of this report,” wrote the MoffettNathanson team. “Smart people in those organizations clearly think these bands are valuable, and the only viable way to deploy these licenses will be via small cells.”
In terms of higher-band spectrum, MoffettNathanson said the argument could be made that Crown Castle could benefit more than American Tower and SBA in new tower leasing activity if the new norm for spectrum deployed for 5G is in higher bands, since its portfolio leans more toward urban locations.
“Crown Castle’s portfolio skews toward more urban locations than American Tower’s and SBA’s, and higher frequency bands are less viable outside of more densely populated areas because of their propagation attributes and cost to deploy,” wrote Del Deo.
American Tower executives have previously said they aren’t seeing much 5G activity from millimeter wave on macro towers, but reiterated the stance that there will be a huge need for mid-band spectrum deployments, which they’ve said could serve as the backbone of 5G.
Reaching limits on capacity rights
MoffettNathanson expects improvements in Crown Castle to happen over time, including its tower growth as T-Mobile and AT&T eventually eat up previously granted space on towers.
“The primary driver of Crown Castle’s tower growth lagging that of its peers appears to be the capacity rights it granted T-Mobile and AT&T in conjunction with the portfolios it acquired in 2012 and 2013,” wrote the team.
According to the report, agreements in those deals gave T-Mobile and AT&T capacity rights that enable the carriers to add additional equipment to towers where they already had a presence and not pay incremental rent. T-Mobile was granted equipment with a wind load surface area up to 21,000 square inches, and AT&T up to 27,000 square inches.
When determining if T-Mobile or AT&T are getting close to surpassing these limits, the firm noted it didn’t have information as to what the equipment load was at the time the deals closed or what’s been added since, but spoke to independent operators to get a widespread understanding.
“Based on discussions with independent operators our sense is that T-Mobile’s typical equipment package is likely getting close to its 21K square inch reservation and that adding another round of equipment may push it over,” he wrote. “In contrast, it appears as though AT&T likely still has a reasonable amount of cushion before it, on average hits 27K square inches.”
He added that one operator internally describes leases with more than 25,000 square inches in capacity rights as “unlimited” deals because the odds that a “a carrier will generate amendment revenue are very slim for the foreseeable future.”
This could be positive in terms of getting paid by T-Mobile, according to MoffettNathanson, if it’s pending merger deal with Sprint closes as upgrading sites with Sprint’s spectrum, including 2.5 GHz, would likely push it over the capacity threshold. Without the deal, ongoing activity from T-Mobile would have the same outcome, but at a slower pace, the firm said.
However, it’s less appealing at AT&T and the firm expects that dynamic to continue for some time. “Moreover, AT&T seems likely to dial back its pace of leasing in the near- to medium-term, which would weigh on industry-wide growth,” they wrote, noting the potential for limited network investment capital given AT&T’s rapid FirstNet deployment progress and pressure to deliver near-term financial results.
The detailed report also noted gaps in churn between Crown Castle and American Tower were also impacted by the latter’s longer average remaining time on lease contracts with MetroPCS and Leap Wireless before they were acquired by T-Mobile and AT&T, respectively, as well as Sprint’s Clearwire acquisition and its decommissioning of the former Nextel iDEN network.
“American Tower shielded itself from much of the churn that weighed on its peers through a combination of good foresight and good fortune (only on legacy American Tower towers, not legacy GTP or Verizon towers. But there’s no such thing as a free lunch,” wrote the team. It categorized the churn outperformance as “transitory rather than lasting,” as Crown Castle and SBA have already absorbed most of the impact from those events.
The issues addressed by the MoffettNathanson report including tower capacity right consumption, small cell backlog installation, as well as sour sentiment, led the firm to bump up and rank Crown Castle in second for towers, behind SBA and ahead of American Tower, saying the issues introduce the greatest potential for upside vs. expectations.
“We find it harder to make a case for American Tower, in large part because the company has outperformed so strongly, both from an operational perspective in the U.S. and its stock return,” wrote the team.