Crown Castle Inc (CCI) 2015 Q1 法說會逐字稿

Good day and welcome to the Crown Castle international Q12015 earnings conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to Son Nguyen. Please go ahead sir.

Great. Thank you Hannah. Good morning everyone.

Thank you for joining us today as we review our first-quarter 2015 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer and Jay Brown, Crown Castle's Chief Financial Officer. To aid the discussion we have posted supplemental materials in the investors section of our website at CrownCastle.com which we will refer to throughout the call this morning.

This conference call will contain forward-looking statements which are subject to certain risks, uncertainties and assumptions and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and risk factors section of the Company's SEC filings. Our statements are made as of today April 23, 2015, and we assume no obligation to update any forward-looking statements.

In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these certain non-GAAP financial measures are available in the supplemental information package in the investors' section of the Company's website at CrownCastle.com. With that I will turn the call over to Jay.

Thanks Son. Good morning everyone.

We started 2015 with a great first quarter. US wireless carriers continue to make investments to upgrade their networks to keep pace with increasing consumer wireless demand and we expect to see strong leasing activity throughout 2015.

Turning to the first quarter results on slide 3, site rental revenue grew 3% year-over-year from $747 million to $768 million. Organic site rental revenue grew 5% year-over-year comprised of approximately 3% growth from cash escalations in our tenant lease contracts and approximately 6% growth from new leasing activity, net of approximately 4% from non-renewals.

Moving to slide 4, adjusted EBITDA and AFFO exceeded the high end of our previously provided first quarter 2015 outlook. As mentioned in our earnings release yesterday, the out-performance during the quarter includes the timing of two items that impact first-quarter 2015 results as well as our second quarter 2015 outlook.

First, network services gross margin contribution was higher than our expectations for the quarter by approximately $9 million due to network services activity that was previously expected to occur during the second quarter taking place during the first quarter. Second, sustaining capital expenditures during the first quarter was lower than expected by approximately $6 million. This expected $6 million in sustaining capital expenditures is expected to be invested during remainder of 2015. Ignoring the benefit from the timing of these two items adjusted EBITDA and AFFO for first quarter would be at or higher than the midpoint of our previously provided outlook for the first quarter.

Turning to investment activities, as shown on slide 5, during the first quarter we invested $205 million in capital expenditures. These capital expenditures included $17 million in sustaining capital expenditures and $24 million in land purchases. During the first quarter, we completed over 500 land transactions of which 20% were purchases with the remainder being lease extensions.

For the full year 2015, we are targeting completing over 2000 land transactions. Our proactive approach to achieving long term control of the ground beneath our sites is core to our business and as we look to control our largest operating expense and produce stable and growing cash flow over time.

Today approximately one-third of site rental gross margin is generated from towers on land we own and approximately 70% on land we owned or leased for more than 20 years. This number increases to 90% when we include ground leases of ten years or more. Where we have ground leases the average term remaining on our ground leases is approximately 30 years. More detailed information regarding the ground entrance beneath our towers is available in our supplemental information package on our website.

Of the remaining capital expenditures we invested $164 million in revenue-generating capital expenditures consisting of $96 million on existing sites and $68 million on the construction of new sites, primarily small cell construction activity. We continue to see significant growth in site rental revenues from small cells which grew in excess of 35% year-over-year.

Today small cells represent 7% of our site rental revenues and site rental gross margin. Small cells offer a shareable model similar to towers that provide the wireless carriers with the solution to address network capacity constraints where a macro tower site is not available or is insufficient. Our investment in small cell anchored build typically generates 6% to 8% initial yields and gross margins of 60% to 70%.

With the colocation of the second tenant on the initial fiber investment, we typically see incremental margins of 80% to 90% bringing IRRs above the 20% level. We believe investing in small cell builds on our core competency as the leading provider of US wireless infrastructure leveraging our existing relationships with the wireless carriers. Like towers, tenant leases on small cells are typically long term with 10 year to 15 year committed terms with annual escalators.

Given what we are seeing from the wireless carriers and their public commentary, we believe we are in the very early stages of small cell adoption and deployment. Similar to towers built in the late 1990s and early 2000s, we are focused on building small cell networks in the most attractive locations in the US -- in places like Manhattan, Washington, DC, Southern California, and Chicago.

As mobile data demand grows, the necessity of small cells has increased as evidenced by growing pipeline of over 2500 anchor builds and colocations on existing systems which have been awarded to us but are not yet in construction. To date, inclusive of our acquisition of Next-G in 2012, we have invested approximately $1.7 billion in small cells.

Our current yield on investment of 7%, inclusive of our $1 billion investment in Next-G at an initial yield of approximately 4%. With our leadership position of over 14,000 nodes on air or under construction and 7000 miles of fiber, we are winning new opportunities and driving yields up on our existing investments and small cell networks.

Shifting to financing activities during the quarter we paid a quarterly common stock dividend of $0.82 per share or $274 million in aggregate. As of March 31, our total net debt to last quarter annualized adjusted EBITDA is 5.3 times. We continue to maintain a target leverage ratio of five times as we remain focused on achieving an investment grade credit rating.

Our weighted average cost of debt stands at 4.1% with a weighted average maturity of six years. We believe over time our disciplined approach to leverage and capital allocation, including our dividend policy, will lower our cost of capital. A core strategy of the Company is to reduce our cost of capital and thereby increase the value to shareholders of our large and growing annuity-like business.

Turning to the second quarter outlook on slide 6, on a sequential basis the second quarter 2015 outlook for site rental gross margin adjusted EBITDA and AFFO are expected to be impacted by certain seasonal or timing items. Repair and maintenance during the second quarter of 2015 is expected to be higher by approximately $4 million as compared to the first quarter, reflecting a seasonal nature of certain activities consistent with prior years as the weather warms.

As mentioned in the press release, the expected sequential movements in our outlook for network services, gross margin and sustaining capital expenditures are attributable to timing. As expectations for network services gross margin as well as sustaining capital expenditures remains substantially unchanged from the previously provided full-year 2015 outlook.

Moving on to the full-year 2015 outlook on slide 7, we have increased the midpoint for our full-year 2015 outlook for site rental revenue by $7 million and AFFO by $3 million. The increased outlook reflects the strong results from the first quarter and includes the negative impact from a decrease in foreign exchange rate assumptions related to our Australia business, which is expected to impact site rental revenues and AFFO by approximately $8 million and $6 million respectively.

Given the underlying favorable fundamentals, which Ben will speak to in a moment, we remain confident in our ability to generate annual AFFO growth of 6% to 7% organically over the next five years with cash escalations on our tenant leases contributing to half of the expected growth. We believe this growth, combined with returning significant capital to shareholders through dividends, provides shareholders with compelling long term total returns.

With that, I will turn the call over to Ben.

Thanks Jay and thanks to all of you for joining us today on the call.

As Jay mentioned in his remarks, we are focused on providing shareholders with an attractive total long term return proposition. We measure long term total returns as dividend yield plus growth in AFFO per share. I'd like to take a moment to explain the composition of the total return profile we offer to shareholders.

Turning to slide 8, based on yesterday's closing stock price we expect to deliver, on average, long term total returns of approximately 10% to 11% per year. This 10% to 11% of total returns is comprised of approximately 4% from our current dividend yield plus 6% to 7% from our expectation of growing AFFO per share organically. While the dividend yield ultimately will be determined by the market, we believe our business model, given its growth and quality, compares very favorably to some of the best in class REITs who have dividend yields of approximately 3%.

Turning to our expected growth, of the 6 to 7% annual grow in AFFO organically, about half of this growth comes from our existing book of business via the cash escalations in our tenant lease contracts. For some context, we currently have approximately $22 billion of high quality future revenues under long term contract primarily with the four largest US wireless carriers.

The remaining 50% of expected AFFO growth comes from new leasing activity. This activity is driven by carrier network investments as the carriers deploy more equipment to add capacity and coverage either in the form of new tenant colocation on our sites or amendments to existing locations.

As has been true since early days of the wireless industry, network quality continues to be the market differentiator for carrier success. Today the industry is seeing unprecedented data growth on new LTE networks supported by more robust devices and applications. As a result, growing consumer demand and usage is leading to an inevitable need for carrier network investments.

As can be seen on slides 9 and 10, there is a strong relationship between consumer usage, unit economics and carrier capital investment. With strong unit economics of approximately $50 per subscriber per month or $600 annually, US carriers are able to generate positive incremental returns on their incremental capital investment. The relatively high ARPU is supported by the staggering amount of mobile data consumption by US subscribers.

As we look to the future demand for mobile data is seemingly limitless. Cisco's latest report confirms this view projecting that US mobile data traffic will increase seven-fold between 2014 and 2019 after accounting for Wi-Fi off-loading.

There are many factors contributing to this insatiable demand for mobile data. However, a couple themes jump out to me including innovation around devices and applications and user demographics.

First there is an immense amount of innovation taking place around mobile devices and applications. Businesses and consumers are reinventing the way we live and do business, taking advantage of the convenience and accessibility that mobile data provides.

For example, there is increasing adoption of internet TV or over the top content offerings. Today we can stream video on demand on a sailor network with applications such as YouTube, NetFlix and Hulu, just to name a few. Applications such as these drove mobile video data growth of 60% in 2014. By 2019, mobile data traffic from video is expected to be nine times higher than current levels.

Video and rich content represents an exciting revenue opportunity for wireless carriers and promises to propel the next wave of network investment. Machine to machine or M2M connections, including wearable devices, is another example of an area of innovation that is expected to drive significant growth in data usage.

Today there is, on average, 1.2 connected devices per US wireless consumer. Amazingly, by 2019, that's estimated to be up to 3.2 connected devices per US wireless consumers. Examples of M2M connections include home security and automation, smart metering in utilities and connected cars. Mobile data traffic generated from M2M connections is expected to double each year between now and 2019.

Turning to demographics, consumer profiles play a significant part in mobile data usage. Applications such as text and E-mail are widely embraced equally across all age groups. However social networking, video viewing, and music streaming are skewed towards younger subscribers which over time will become a larger percentage of the overall subscriber base.

Subscribers in the age range of 18 to 29 stream video and music at two to three times the rate of subscribers 30 years old and above. The upcoming change in demographics alone will likely lead to significant increased mobile data demand.

Based on the expected growth in US data growth, we have intentionally been expanding portfolio of wireless infrastructure in the US by investing in the AT&T and T-Mobile tower transactions adding over 17,000 towers and making significant investments in small cell networks over the a past few years. As nearly three-quarters of our sites are located in the top 100 markets, we have a tremendous opportunity to capture incremental leasing from increasing cell site density necessary to keep up with demand.

Further, we have ample capacity and opportunity to accommodate additional carriers on these sites. Towers continue to be the most efficient and cost-effective way for carriers to add network capacity and coverage and support our bullish long term view on site leasing.

As Jay has already mentioned we are also very excited by the small cell opportunity. It's an opportunity for us to extend our leadership position in shared wireless infrastructure.

With initial yields of 6% to 8%, which is higher than a typical tower acquisition yield, and the same underlying shareable model that leads to IRRs above 20% with the second tenant added, it clearly meets our return thresholds. We believe small cells is a great investment and we are at the very early stages of this opportunity.

Three years ago when we acquired Next-G networks the then leader in the field of small cells or distributed antennae system deployment, we had a thesis that this architecture of fiber-fed deployments would play an important role in adding capacity to networks of the future as carriers seeked to monetize the data opportunity. Today our investment thesis has been validated beyond our expectations.

As we examine the large and growing pipeline of system developments or deployments upon which we are engaged, it's apparent this is not a niche technology. Rather, it promises to be the solution to add capacity in virtually every urban and suburban geography in the US. Just like towers, some of the best assets will be those that were secured early where colocation upgrades and expansion is virtually assured.

So in summary, we are pleased with the start of the year and very excited about the long-term trends that promise to bring more opportunity for Crown Castle to assist our customers in realizing their objectives. In so doing, we believe our capabilities and portfolio of assets will continue to provide an attractive investment for shareholders and a great place to work for our employees. With that, operator, I'd be pleased to turn the call over for questions.

Thank you.

(Operator Instructions)

We'll go ahead and take our first question from Simon Flannery with Morgan Stanley.

Great. Thanks very much. Good morning. Ben, can you just talk a little bit about carrier activity through the year? We saw some very low CapEx from AT&T and Verizon this first quarter. Were you seeing any impact from people waiting to see what they ended up with in the AWS auctions, and is there sort of a sense that activity is picking up through the year?

Then for Jay, you mentioned your investment grade target. You are getting pretty close now to that five times. What do you think the path and the timing is here to actually close the deal on that? Thanks.

Sure, Simon. Thanks for the question.

As we look at carrier activity, it's shaping up pretty much like we saw for the year. I think on the Verizon call they intimated a little of back-end loaded on CapEx spending reconfirming their guidance for the whole year. That's probably what we are seeing, a little back-end loaded. But that's consistent with how we originally forecasted guidance.

If you just sort of think about how various carriers ebb and flow with their network enhancements and their capital spending, we have gotten to the point where we don't get really that worked up about individual carriers and individual quarters and how it shapes up. It's gotten fairly consistent across the years and sort of the inevitability of the need for cell site density and more upgrades on existing sites.

We are seeing each of the carriers work on increasing network quality in their own way and they talk about it publicly and obviously with us. And that's what we work on everyday. I'd say it's shaping up about like we thought and perhaps a little bit back-end loaded.

Thank you.

On your second question, I am not really able to provide you with a path or timing necessarily on when we'll get there, but what I can tell you is that we have had a number of conversations with each of the rating agencies and have been engaged in an ongoing dialogue on the subject for over a year around achieving the investment-grade credit rating. As you rightly point out, as we are nearing our leverage target. The vast majority of our credit metrics are, if not within, very close to meeting their published criteria for achieving an investment-grade credit rating.

We are optimistic and pleased with where we have gotten to and the approach the agencies have taken towards upgrading the credit over the last 18 months to 2 years and we think we're on the right path. I just don't know the exact timing of that.

Great. Thank you.

Sure.

We'll take our next question from David Barden with Bank of America.

Hey. Thanks. Thanks for the details on the small cell business at 7% of revenue. I think this is the first time that you may have shared that it's also 7% of the site rental margin as well, which suggests that even at this stage of development the small cell business is generating margins that are equivalent with the totality of the business. And I guess that's a little surprising given that these are mostly, presumably, one-tenant businesses thus far and could advance from here. Could you elaborate a little bit on the cost structure and margin opportunity that's developing in the small cell business? Thanks.

Sure, David. That speaks to the initial yield differential between a typical tower you would acquire or a small cell system you might build. As we mentioned, across our entire cumulative investment, we're at 7% today, which is pretty staggering given that a billion of that came at 4% three years ago, as we remember with Next-G. Obviously that incremental $700 million had to do pretty well and, obviously, we have grown Next-G appropriately as we would have forecasted.

It reflects that initial higher yield on invested capital and then the very high incremental margins from colocation. And we are seeing colocation on a significant number of the original Next-G systems where we're adding to that existing plant as well as additional laterals off of it. So, from a financial perspective, we are extremely comfortable with what we see going forward.

You know, maybe to broaden your question a little bit the challenges are around deployment. We are extremely busy as Jay mentioned about our backlog. We've got a lot going on. We've added a lot of people to that business. It's not all capitalized, so we've got overhead dragging that business a little bit.

But we're thrilled with what we see in terms of the opportunity and more and more as we really dig into the engagements that we are getting and you look at the geographies, you come to the conclusion as I mentioned in my notes, it's not a niche product. It's somewhat random actually. You are seeing capacity needs in so many urban and suburban areas that you can quickly start to figure out-- we are talking about a universe here, I think--of hundreds of thousands of nodes over time.

Obviously we will never be able to accomplish all of that ourselves. There will be many other people in this market. But the size of the opportunity honestly reminds us a little bit of sort of the early days of towers. And we are going about as fast as we possibly can.

Thanks, Ben.

Jay, if I could follow up with one question just on the churn side, it looks like you trimmed, a little bit, the expectation for non-renewals in this year. Is that on the Sprint Nextel side or is that on the other acquired carrier side and how do you see the moving parts now moving for the rest of the year?

Thanks.

Yes, Dave.

We really don't see much of a change from our previous expectations around churn. So for the full year we basically expect to see about the same amount of churn as we did previously. Maybe a little bit of it has been pushed out further in the year, so on a percentage basis it's moved a little bit. But there is nothing underlying that tenth of a basis point there that we saw move in the numbers, no real change in our expectation or actual activity to any meaningful amount.

Okay. Great. Thanks.

Yep.

We'll go to our next question with Phil Cusick with JPMorgan.

Hey. Thanks.

Talk about the services side, it seems like the services slow down pretty highly correlates to the T, Verizon probably Sprint lower CapEx. Would you anticipate a pretty quick rebound here as carriers ramp CapEx in the second half?

Yes, Phil, we made the comments around the timing from first quarter to second quarter. It's obviously challenging for us in the business to necessarily know exactly how things are going to fall out in the year. It is the services business because all the work we are doing is related to work that's done on our sites. We have pretty good visibility to the balance of the year around leasing activity.

So as we went into the year, and as evidenced by the fact that we increased outlook about $15 million on an FX neutral basis for site rental revenue, from a leasing standpoint the year is shaping up to be maybe slightly better than what we had originally expected. And so our services assumption follows that, that services for the full year are about what we had previously expected.

So I wouldn't get too tied up in sequential quarter to quarter moves. It has to do with how the carriers allocate their capital and when they spend it. But for the full year, activity looks like it's going to be about the same as what it was in 2014 and so our services business basically matches that.

Okay. Then as I think about-- Simon mentioned the leverage getting down toward five times-- with the stock trading where it is, why not be looking into buying some of that back? Are you working on trying to get the rating agencies through before you look at that? Or should we look at that as being a more near team possibility?

It's always a possibility. You know we are not shy about buying stock. As you can tell from our results we are spending pretty much all our free cash flow and a little bit more on what we think are incredibly attractive investment opportunities as we have outlined on this call, with small cells primarily.

I look for that to continue. I don't see a huge amount of free cash flow availability to buy stock for the near term. And I do think that certainly, as we have outlined in one of our core strategic objectives, is to secure the investment grade rating, which I think completely maximizes modernization of the dividend power of this business and then insulates the balance sheet going forward to a degree on just the overall cost of debt long-term. So it's something we are going to focus pretty carefully on, and I think we are on the path to that, hopefully, sooner than later.

Got it.

I think over the longer term, as you have seen us do for a long period of time, once we get to the targeted level of leverage-- so it's about five times -- once we are down there at that level, that will produce borrowing capacity. If we are growing EBITDA in and around, just for instance $100 million a year, that's creating about $500 million of investment capacity once we get down to that targeted level of leverage.

So, in short term I think you are going to see us focus, as Ben mentioned, getting down to the five times level. Once we are down there, then we create additional capacity for investment and absolutely stock purchases that are the benchmark against which we compare all the investments that we make in the business.

Thanks, Jay.

We'll go to our next question with Brett Feldman with Goldman Sachs

Thanks for taking the question. I was hoping you could maybe give us an update on the process involving the Australian segment and then if you do determine to close the transaction, how do you think about prioritizing the cash and could you just remind us how you may be able to utilize the NOLs?

Sure, Brett.

As we have mentioned before, and put out a press release, we are engaged in a process to evaluate the sale of our Australian business. I don't have anything to announce this morning other than to say that that is ongoing and we have a number of very highly qualified folks that we are speaking with about that and so I don't want to predict the outcome for you because it is certainly not complete.

If we were to elect to pursue a transaction there and complete a sale, I think we would first approach it from a leverage-neutral proposition as we have talked about just a moment ago in Phil's question. So in and around $500 million of proportional debt reduction is sort of required for that.

But that would still leave a significant amount of proceeds available that then we would have for investment opportunity. And just like with any proceeds or capacity we have, we would look to do what maximizes sort of long term AFFO per share. That could include buying stock, it could include buying other assets, continuing to invest around the core business. All of that is on the table and we'll seek to maximize the outcome of those proceeds.

Finally, to your last point Brett on the tax position, we have the benefit of the NOLs, so there won't be any taxes paid at the corporate level. We also believe that, as a REIT, we will generate a significant capital gain inside the REIT that will then get passed out to shareholders in the form of the next amount of dividend that we pay will in fact be capital gain treatment.

To the extent we were paying in and around [a billion one] of dividends on an annual basis that capital gain would go out at lower tax rate than the ordinary income tax rate that the normal quarterly dividend receives. Then to the extent the remainder doesn't, in fact, cover all the income within the REIT that's where we could actually use the NOL to make up that gap. So, the shorter answer is there is no tax paid at the corporate level and at the shareholder level, to the extent of the gain, it would be a capital gains treatment is our best estimate today versus ordinary income. We think that's extremely favorable.

Great. Thanks for that color.

We'll go to our next question with Jonathan Schildkraut with Evercore ISI.

This is Justin for Jonathan. Thanks for taking the question. If I could just ask further on the investment grid, and I know you said getting down to around 4.1 is your cost of debt, but I was hoping to get some more color on the total cost of capital, if you are able to reduce to investment grade.

I think ultimately that's determined by the market. What I would tell you, and based on the work that we have done, there is meaningful benefits to the Company over time, we believe, from achieving the investment grade credit rating. Our aim as a business, as we have talked about over a long period of time, we think we can generate a significant amount of shareholder value by the way we add additional revenue to the existing assets that we own, allocate the remaining portion of the capital outside of the dividend distribution to smart investments like we've talked about this morning for small cells, and then thirdly, providing a risk profile of the business that lowers the cost of capital.

And there is lot of things that go into that. Part of it is how we allocate the capital and the percent of that capital that's distributed to shareholders in the form of basically a certain return on the investment that's made. We think another component of that is capital structure, so that the Business, regardless of the cycle that the market may be in, has a view that the Business and the balance sheet are sustainable and can continue to achieve a low cost, which provides additional certainty to the payment of the dividend.

I will leave investors to make their own judgment on where they think ultimately cost of the equity should fall. Today if you look at where our credit rating is and where bonds are trading and if you were to assume that we were at the low end of an investment grade credit rating, there may be 80 to 100 basis points with a difference in where we would issue a ten-year bond investment grade, non-investment grade. There are certainly some debt costs associated with that and then improvement in the overall cost of debt, but more broadly, as we speak about this, we think there are more broad implications in terms of how the Business achieves a lower overall cost of capital over the long term, and that's why we are focused on it.

Great. Thank you.

We'll go to Rick Prentiss with Raymond James.

Thanks. Good morning. Two questions, if I could.

First, I think, Ben, you were mentioning about how a lot of the services business, might have been Jay, at your own towers. If I remember right, you have about 6000 towers from Sprint back from the old global signal acquisition. Are you seeing any activity from a services business standpoint in your guidance for Sprint starting to activate its spark project, the 2.5 gigahertz stuff.

I think we are going to probably decline to get into specifics around what a particular carrier is doing on our site. We normally refer you back to them to talk about their own activity. That's their business.

We have talked about overall, I think to Simon's original question, overall activity we're seeing that's consistent with what we saw at the beginning of the year and up a little bit, as Jay mentioned in our guidance, that we have trimmed up a little bit for the year off the first quarter. So probably not going to get into a whole lot of specifics there.

I would actually make a comment about our services business, though, that's helpful to remind everybody. In 2014 we grew that business about 40%, which was consistent with the growth in the portfolio really over the last year or so from 2013 as we brought on the AT&T towers. When we projected for 2015 that the services contribution would be similar to what we saw in 2014, that's also consistent with the portfolio size.

So that's effectively what's happening this year, is that we're running, we think, pretty well flat to last year's contribution which is consistent with the size of the portfolio. And so, just an observation for those that may not be paying that close attention to our history.

Okay. And then a bizarre question next. With Sprint we understand there is a lot of discussion with vendors, equipment manufacturers about providing vendor financing to help them maybe look at deploying that Spark project. Have you ever considered offering financing to carriers for higher rent?

Let me just say this. Yes, we have considered it. It has been proposed. And when we've looked at it we haven't found it to be an attractive proposition for us nor a gating factor that determined whether a carrier went on a site or not. So, obviously our objective is, what we work on everyday, is getting carriers on our towers.

We could not satisfy ourselves that providing financing or not would actually influence the buying decision whether they needed that tower or not. Typically the carriers have access to capital from many different sources--public markets, vendor financing, as you suggest. We have had it proposed a few times and it, frankly, did not look that compelling to us to actually sway the buying decision and so we've decided, so far, not do it.

Makes sense why it is a lot more nice to be a tower Company than an equipment Company. The final question I've got for you is on the small cells. Jay you mentioned 2500 anchor colos are in backlog, awarded but not in construction. How much CapEx should we think is associated with that? And, Ben, you said one of the challenges is just deploying it. Talk to us a little bit about the gating factors there. Is it money? Is it people? What are we talking about there?

The 2500 I referenced is the combination of anchor builds as well as colocations on existing systems. The anchor builds, typically when we are building new anchor builds, we are spending about $100,000 per node. The majority of that cost is associated with building the fiber to build the system where those nodes are going to go. The amount of capital necessary as we colocate on existing systems is significantly lower than that.

What I would guide you towards is, if you look at our activity and small cells and the amount of capital that we've been spending over the last several quarters, our forward look is about the level that we spent over the last two quarters if you were to annualize the two to three quarters. If you were to annualize it--maybe trending upwards a little bit. Obviously you have heard us talk about this business over time. This is directly related to the returns that we see in the business.

So to the extent that the returns stay intact, as we see currently, then we are happy to continue to pursue RFPs and other initiatives that the carriers are launching in various markets to pursue to expand and frankly to invest more capital than even our run-rate would suggest, as long as the return expectations stay the same. So, if you think then about what's the biggest hurdle-- the hurdle is not necessarily around not having enough capital to pursue it.

We have access to plenty of capital to continue to do it. We would be focused on where the returns appropriately reflecting what we like about the business and where we think the growth is. And then frankly, do we have enough manpower to achieve and accomplish what the carriers are looking to do?

Really it's the gating factors, as you suggested, Rick, or really the whole cycle of construction, the designing of systems with the carriers' input, real estate rights-- securing those rights and then permitting and then the construction. The longer we are at this, the better we get.

We've got a lot of folks that are extremely good at what they do and I think actually by far the leading position in the industry in that capability, but it hasn't necessarily shortened the construction cycle. And I'm very convinced it's a significant barrier to entry in this business, because there is a lot to actually building one of these systems and getting the carriers installed on time and on budget and we're getting pretty good at that.

Great. If I remember right it was about $50 million last quarter, $70 million this quarter so maybe $120 million for the last two quarters in CapEx, so maybe $240 to $250 annual is what you are thinking like.

That's our current run rate and to the extent we find more opportunities we are happy to invest more capital than that.

Great. Thanks.

We'll go to Kevin Smithen with Macquarie.

Thanks. Jay, what is the expected incremental small cell node revenue connections required to hit the midpoint high-end and low-end of guidance? Of that 2500 in backlog, how many will actually generate revenue by the end of December?

Very little, if any. Typically once we start a construction of small cells, we're in a 15 to 18 month cycle in most cases. So those would likely represent activity that will come online in 2016. We have a very healthy backlog of notes that are currently in construction.

If you look at our total revenue guidance, 2014 to 2015 we're expecting revenue growth of between $150 million and $160 million in total and small cells would comprise about $50 million to $60 million of that growth and towers being the remainder $100 million of that growth. That's the way it falls out. Obviously, when you look at the year over year impact, the number of meaningful portion of that $50 million to $60 million of growth in small cells are nodes that we're turning on now during the second quarter that will then produce revenue for the balance of the year.

And then if I start to look at the 5.0% organic cash growth and 2.3% GAAP growth and you factor in these small cell connections straight line and incremental churn, it appears you could see a nice bump-up of GAAP and organic cash leasing growth in 2016. Is that the right way to think about it, all else being equal, knowing what you know today?

We're certainly not going to give guidance this year for 2016, but what I would tell you is we've laid out a five-year forecast of how we think AFFO per share grows on an organic basis of about 6% to 7% and add to that the dividend distribution that we're going to make. Assumed in that is a level of leasing activity similar to what we saw in 2014 and saw in 2015 and are seeing in 2015.

The change that we expect to see in 2015 to 2016 is a reduction in the impact of churn. In calendar year 2015, we are expecting the impact of churn to be approximately $115 million. In 2016 as we have laid out our longer term forecast for non-renewals, we expect that number to be approximately $75 million in 2016.

So the pick up that we would expect, at least based on our longer term forecast that we've provided to you, would be not so much a change in activity, we have assumed a similar level of activity, but in the amount of non-renewals we are assuming a reduction in that by about $40 million, thereby increasing amount of AFFO if you want to think about it that way or net organic leasing. It's about a 2% increase, roughly, at the AFFO line if you are comparing 2015 to what would be flowing through those assumptions 2016 impact.

Got it. Any color on straight line for next year?

I wouldn't get into that much detail on this call. I think we'll give 2016 outlook when we get to the third quarter. One thing that I would point you to, which can be helpful if you are looking at that, we are providing a significant amount of detail on that supplemental packet. And you can see what's currently on the books today and what the burn-off of straight line revenues over time for years well beyond 2016 and those would reflect all of the leases that are currently signed and producing revenue. And you can see how that flows, I think, out through 2022.

Great. Thank you.

Next we'll go to Amir Rozwadowski with Barclays.

Thank you very much. Just following up on the prior questions, understanding the longevity of what seems to be a healthy investment environment, it does seem like your expectations are baking in sort of a reduction in the churn impact which should ease moving away from 2015.

But I am sitting back and thinking we've got commentary out there that Sprint seems to be focused on network densification initiatives. T-Mobile has been vocal about its A-block spectrum build. Obviously, we just had the AWS-3 spectrum auctions and public safety. If I start to put all of those pieces together, can we find ourselves in a situation in which you have a spending environment that's at least as good, but potentially better, when looking at all these moving pieces from the carrier side?

Sure. This is Ben. I think everything you just outlined is possible and longer than beyond even that is the deployment of the AWS-3 spectrum that was just auctioned.

And then you mentioned first net potentially and then the Dish Spectrum. Having been at this a long time, like many of us here have, there are always ebbs and flows. And, sure, the leasing environment could improve in 2016 or 2017.

I would caution you though that, remember, we're adding about $100 million of new revenue per year on the tower base today as Jay just mentioned. And so if that were to increase by, let's just say 30% for example, to take some of your upside, that's a 1% change in revenue growth, or about a 2% change in AFFO growth. We work on that everyday. That's what everybody listening to this call that works at Crown is focused on.

I want to caution you, and it's one of the wonderful things about this business, the inflections up or down are relatively muted. As we mentioned, out of a 10%, 11% total return profile, two-thirds of that is already on the books in the current dividend plus the contracted escalators. So that last third which is growth, absolutely focused on it. But maybe the up and down on that is a couple percentage points on AFFO growth, which we would love to see, don't get me wrong, but that's one of the wonderful things about the business: it's not very moveable, to tell you the truth.

That's very helpful, Ben. And then just a follow up question here. Obviously, you folks have taken a differentiated view versus some of your peers on the international arena. You know, we're starting to hear some chatter about potential assets coming available in Europe, which is, you know a different investment profile than where we have seen international expansion take place with some of your peers before. I was wondering what your thoughts could be around if some of those assets became available, whether or not they would be attractive and if that would change a shift in focus for you as some of those assets became available.

Sure. It's certainly something we would look at. We used to operate in the UK in a very large way. The European market has developed in a much different way than North America. So we would want to make certain that the underwriting of those assets appropriately took into account what the colocation opportunity was going to be over time there.

I would in a positive sense remark on our ability to finance locally there at a very attractive level. To the extent we could look at something there, we could certainly put an implicit hedge on the currency by financing locally.

So, there are a lot of attractive attributes to looking at Western Europe. It would come down in my mind to what's the underwriting on the towers and what's the opportunity for revenue growth around the marketplace there. And there are some dynamic in the Western European market that's made it a little more challenging to underwrite colocation growth and so we'd want to make sure we get that right. I have absolutely no natural aversion to that and think it's something that we could certainly look at.

Thank you very much for the color.

You bet.

We'll go to Colby Synesael with Cowen & Company.

Great. Two questions if I may.

I was hoping you can give us a little bit color on expectations for total CapEx for the remainder of the year based off the 205 that you just did in the first quarter that was a little bit higher than we had anticipated. And then also, we have been hearing that you're seeing carriers increasingly looking to use C-RAN architecture in their deployments not just at the small tower DAS level but also at the macro site. I was hoping you can comment on whether or not you actually are seeing that, and if you are, how that's changing, if it is at all, how carriers buy from you or what they buy from you?

Thank you.

Colby, on your first question around total CapEX, as we gave the guidance previously, we would expect to consume all of the excess cash flow. If you were to take AFFO, subtract out the dividend that were -- our current policy suggests -- for the balance of the year, I think we'll spend all of that on activity, the vast majority of which is likely to be directed towards small cells. As I answered one of the earlier questions about activity and interest in expanding it, given the returns that we're seeing in small cells, we would be willing to go beyond that cash flow amount and finance opportunities to the extent they exceeded the amount of cash flow that's produced.

But I think as a starting place what I would suggest is that you assume we utilize all the excess cash flow beyond the dividend for investment in assets. And that may ebb and flow a little bit quarter to quarter, depending how many projects we complete in any different quarter.

Colby, without taking everybody through a technology lesson, which I am not qualified do on the call, I will make one comment about what we have seen around this whole C-RAN architecture and the possibilities there. It's extremely early.

Essentially what it may do for us is it may remove some of the ground space requirements at towers. So to the extent you've got a tower that may have a ground space challenge, i.e., not a very big footprint-- by moving those bay stations off site into sort of a bay station hotel and remotely towering that through fiber is something that we look at positively over time and potentially makes the upgrade cost of some of the smaller monopoles diminished and makes them more attractive over time.

So it's extremely early, but I think the trend will be if we go down that path with that kind of architecture is that it's going to add value to some of the smaller sites that potentially would have been challenging or expensive to add additional land. That may not be required now. That's about all I'd have on that so far.

I'll take it. Thank you.

Next we'll go to Batya Levi with UBS.

Great. Couple of follow ups. First on the CapEx spend on the existing side, I think it was $98 million, can you talk about how much capacity that creates and if you could help us gauge what the incremental boost of revenue growth it would provide over the longer term? And if that level shifts towards more small cells in sort of like a one quarter pick up? And if you could also provide some color on that $15 million increase in the organic growth: was that mostly coming from the small cells and maybe the breakdown of activity in terms of amendments and new siting. Thank you.

Sure. On your first question, when we spend CapEx on existing sites, that's always success-based as we like to say around the place. Success-based means that we don't spend any of that capital until there is a tenant ready to go onto that particular site.

And so in terms of increasing the capacities of our existing sites, occasionally there is some natural increase to the capacity of the site, but generally the site is just made ready for the tenants who are standing there ready to go on it. The impact that we have to revenues, as you know, often times is a part of that transaction. We receive some up-front prepaid rent associated with the site, and so it does benefit longer-term recurring revenues as we receive some of that rent up front rather than amortized -- rather than receiving it on a cash basis month to month.

On your second question around the increase in $15 million that we increased 2015 outlook for site rental revenue, virtually all of that is related to small cell activity. It was very little that came from towers, the vast majority of it was small cell and achieved a good portion of that in the first quarter, increasing our run rate for the balance of 2015.

The split of new licenses and amendments -- very similar to what we expected. We think full year 2015, pretty similar to what we saw in the quarter, is in the neighborhood of 60% to 65% new licenses and the balance being amendments. That's what we saw approximately in 2014 and we expect a similar level in 2015.

Great. Thank you.

Next we'll go to Michael Bowen with Pacific Crest.

Thank you for taking the question. Most have been asked. I am curious about when you talk about-- I think you said it both ways on the call; I am hoping you can clarify this. I believe you said AFFO, but then AFFO per share growth over the next five years in that 6% to 7% range.

So once we clear that up, under what scenarios could we possibly see rather than that staying steady, given the spectrum allocation and more spectrum to come next year. More deployments obviously, it almost implies that you are predicting a headwind against some of the growth, given a backdrop of strong spectrum deployment and continued CapEx on the wireless side. So if you could talk to that, that would be helpful.

Okay. Sure.

To clear up your first one that's easy. We mean per share. AFFO per share is all we work on around here. That's all that really matters. So, certainly our statement is 6% to 7%, AFFO per share growth is our five-year outlook on what we can deliver.

And then to the headwind comment actually, it's maybe exactly the reverse. Let me walk you through. As you can tell this year, our guidance is about 5% AFFO growth and I would just point out that's carrying 800 basis points of non-renewals and about 100 basis points of FX headwind. So you can -- I am actually kind of proud of that, if you look at that the core growth in the business that we're able to generate that 5% net. The 5% net number this year, if we're making a five-year statement saying 6% to 7% over five years, well then, obviously then, it has to pick up in the second through the fifth year.

I think where Jay took the previous question is where I would go which is for planning purposes, we would suggest that we capture that additional growth to get back to that 6% to 7% over five years by the reduction in non-renewals as we have laid out in the supplement. This is the peak year for non-renewals and, as that tails off, we pick up a couple hundred basis points for next year and probably more the following year just on the basis of the same level of leasing.

As I was answering the question earlier, we will absolutely work on capturing additional leasing opportunities if they're there. And there is a scenario where they are there. I think that each of the carriers in their own way are talking about adding cell site density and the requirements to do that. I think that's an inevitable outcome of the spectrum auctions and the demands being placed on the systems by mobile data as we talked about earlier.

I think it's inevitable that we're going to see continued leasing like we're seeing today. I can't today forecast for you if that's going to -- a bunch of favorable trends conspire to the point where we pick up maybe another 30% of leasing which would be, again 1% incremental revenue growth and about an incremental 200 basis points at the AFFO line. That would be tremendous if that happened, but it would require that all four carriers pull on the ores at the same time. That's not often the case in our industry.

We have people in various stages of their deployment cycle. That's always been the case. We don't plan on seeing an inflection point up, but there is case that can be made that that's possible, certainly. And if it's there, I can assure you we'll capture it.

Then a quick follow up. Actually you mentioned four carriers and now we possibly might have a fifth with the announcement from Google yesterday on Project Fi. Can you give us some thoughts? Have you had discussions with Google? Have you talked to them about this and how this may impact your Business?

We have actually had a number of conversations with Google. I really won't go into the substance of those but, as you would expect, they're extremely well versed in wireless and wireless networks. I think what we see in their announcement yesterday is a continuation of what we have seen for a long time.

And that is there is a lot of outside companies with a vested interest in having access to wireless consumers. And so that's always been the case and Google being the latest one. I look at it as a net-positive in that it's going to drive, to the extent they're successful, it's going to drive additional network capacity requirements into the Sprint and T-Mobile networks, which fundamentally can give them a revenue stream to then reinvest in network capacity to accommodate that demand.

And given the fact that, and I don't say this lightly, given the fact that where we sit we are the most expeditious and cost- effective way to add network capacity, I like where we sit. So we'll see how that develops over time. As carriers deploy additional spectrum, as they add additional equipment and new cell sites, we as Crown and frankly the industry are the most effective cost-effective way for that to occur.

Okay. Thanks for taking those questions.

Sure.

We'll take Spencer Kurn with New Street Research.

Hey. Thanks for taking the question. Given the new AMX tower spin in Mexico, I just wanted to know if you have any thoughts on how the Mexican market compares to the other international markets you've looked at, whether you are more comfortable with the risks profiled there. Thanks.

To be honest we haven't looked at it that carefully lately. It's true that in many emerging markets the case for wireless growth is very clear and we can all understand how consumers who may not have had access to wireless, or certainly to the internet, are now offered an affordable alternative would be high users of wireless data. And a shared infrastructure model in many of these markets makes perfect sense.

It all depends in our mind on we bring the wrong currency to any other market that we would enter, by definition. It's completely a function of initial pricing the assets such that it reflects the risk we would be undertaking in terms of the currency movement and then what the fundamental growth on the revenue per site opportunity is in terms of colocation to achieve an attractive total return on investment.

And thus far in most of those markets, frankly in all of those markets, we haven't seen that price equation come back into congruity for us, but others have different views. So to me it's not a question of the business model. It's purely a reflection on price and pricing and that mismatch of currency.

Thanks. Just one more if I may.

On small cells, the revenue growth has been accelerating pretty steadily for the last four or five quarters. Could you talk about-- do you have enough longevity to know to get a sense for the organic contribution that you have been seeing?

I don't know how to parse that for you Spencer. There is a lot of nomenclature in that business that's not the same as towers. So what I would say is we have a significant amount of colocation going on which you might say, okay, well that's organic. I would agree with you.

But every time you look at one of those, there is always typically an additional lateral or two or three that a new carrier would take that the old carrier didn't. And so that would not be organic. That would be new, if you will.

I don't want to take you through all this on the call but it's a hybrid. It's always a hybrid between colocation and new and if we look at our total growth in that business, it's a significant contribution from colos and then a significant contribution from new.

Spencer, I think one of the things just as you are the modeling business and thinking about it that you find over time is that in the tower cases you are building towers. The input costs as well as the monthly rent and the operating costs are relatively stable and have been for a long period of time. When we look at small cells we are making a financial transaction where we're pricing the rent to the carrier, the various components of the relationship between the carrier that installs there against a very different proposition.

The costs can vary per system. The number of nodes per fiber mile can vary per system thus varying amount of cost of fiber. Some of it can be aerial. Some of it can be buried. We can be in locations where it's very expensive to dig up a sidewalk for instance and other places where the cost of laying fiber is not as high. So because the costs are so variable, therefore the revenue and the margin in terms of nominal dollars vary.

So as we think about the business and allocate capital we are always looking at it on a yield and total return basis and those conversations and systems look very different than what they do historically when we have built towers. So, where we have given most of our disclosure and as we have talked about the business as you heard on past calls and then again this morning, we focus on how is the yield on total investment doing? And as we mentioned the largest portion of the $1.7 billion that we have invested was an asset we bought at about a 4% yield.

We have taken the entire small cell contribution and return on the investment that we have made in small cell-- we have taken that entire $1.7 billion to a 7% yield today, which implies a significant amount of contribution on-- I think as we would all call it --an organic basis. As Ben mentioned, it's a blend so it's not as clean as just looking at-- did you own the tower yesterday and today and what portion of the revenues or cash flows came on a same tower basis? It's not as clean.

So we focus more on yields and looking at yields and looking at driving total yields up on the existing total base of capital. Hopefully that's helpful color as you think about modeling the business.

Very helpful. Thanks again.

I think we have time for maybe one more question.

We'll take our last question from Ana Goshko with Bank of America.

Hi. Thanks very much. I'll try to make it quick.

I just wanted to follow up on the earlier comments. There is a lot of focus on the benefits of getting to an investment-grade rating and the Company's intent to do that in the short term. But then when you talk about the potential completion of the Australian asset sale, or a unit stake you said that the intent would be to leave leverage neutral? I am wondering why isn't that an opportunity to reduce leverage and really be the catalyst to get the Company over the goal line into the investment grade rating?

Sure I think when we said leverage neutral we mean that on a ratio basis not nominal dollars. So we would think about is as maintaining leverage neutral on a ratio basis. When we have looked at this and done this over time for a long period of time there is obviously what one would call a way or a path towards getting to five times that is not necessarily necessary.

So we think about this and have worked on this for a number of years of letting the growth in EBITDA naturally deleverage the business towards investment grade, and we don't see any impetus or need frankly to accelerate that beyond what we would see in due course. I think in all likelihood, as Ben described, if we are ultimately successful in monetizing our Australia business unit, then you should expect us to maintain leverage ratio neutral and invest balance of the capital in either assets or the purchase of our own stock. And we'll naturally grow towards getting to the investment grade credit ratios that we're aiming for.

It's a great question. I think the answer is we're going to get there soon enough either way and so we would use that capital for incremental growth in all likelihood.

Okay. Then just as a quick follow up. One of the issues with, I think the overall rating, is you know the Company has taken advantage of the secured and securitized markets where you do get a low cost of capital but that does put pressure on the rating. Where are you in thinking of moving towards more of an investment grade type capital structure where you really have less secured and it does lift the pressure that the agencies put on the overall corporate rating?

You're right. I think over time as we get toward that investment grade credit rating and maybe even after we achieve it, you will see us having more simplified capital structure. Today we have several entities underneath our parent that have availed themselves to securitized debt and that's enabled us to achieve a very low cost of capital even though leverage may be outside of what would typically be an investment grade credit.

I think what you will see over time is, we'll clean up some of the complexity in the capital structure which will mean a lessening of our exposure to securitized debt and more of the debt moved towards the holding Company. But I don't think you should expect that all of it will go away. I think we'll continue to avail ourselves of that market, it gives us some diversity of sources of capital. Even once we do achieve an investment grade credit rating, I think we'll still find that attracting some debt capital on a securitized basis with some portion of our assets makes good sense and helps lower the overall cost of debt and capital.

Okay. Great. Thank you very much.

Very good. I think that wraps us up. Thank you for staying with us. We went 70 minutes. We appreciate everybody's attention and we look forward to speaking with you on next quarter's call. Thank you.

That concludes today's conference. Thank you for your participation.