Crown Castle International Corp

NYSE:CCI

Earnings Call Analysis

Company Balances 2023 Hurdles for 2024 Growth

The company demonstrated resilience with a 4% organic growth, driven by demand in data services and a stable tower business. 2023 challenges include a $110 million restructuring charge and $100 million less in tower CapEx. 2024 forecasts acknowledge a $165 million loss from Sprint cancellations, $240 million in non-cash reductions, and a $55 million service margin cut, leading to decreases in rental revenues ($140 million), adjusted EBITDA ($260 million), and AFFO ($275 million). Yet, excluding these, organic business growth adds $220 million to 2024's EBITDA and $65 million to AFFO. Core leasing is expected to rise by $30 million to $320 million. Towers leasing will drop from $130 million to $110 million, while small cells and fibers will increase, contributing to a 5% organic site rental growth. Savings from restructuring ($105 million) and service cost improvements bolster projections. The company's strategy secures long-term prospects, promising a return to sustainable dividend growth post-2025.

Execution and Financial Resilience Amidst Transition and Headwinds

With the wireless industry transitioning beyond the initial surge in 5G deployments, the company delivered a 4% consolidated organic growth, which was in line with expectations, showing robust business resilience. This includes nearly 4.5% organic growth in towers and notably accelerating growth in small cell and fiber solutions. Despite the challenges, the firm successfully navigated through changes in customer demands and industry shifts, indicating a strong, underlying business model capable of adapting to evolving market conditions.

Navigating Future Turbulence: 2023 Updates and 2024 Projections

Looking into the future, the company forecasted a headwind-heavy period but with a silver lining of robust organic growth. In 2024, while site rental revenues are expected to decline by $140 million, adjusted EBITDA to reduce by $260 million, and AFFO to dip by $275 million due to various non-recurring reductions, an impressive organic growth spread across the business contributes $220 million to the 2024 adjusted EBITDA, leading to a $65 million AFFO growth. Crucially, this growth was pegged on the company's strategic agility and its ability to leverage the increasing demand for small cell and fiber assets, evidencing a proactive posture in an ever-dynamic market.

Strategic Cost Management and Investment Efficiency

Underpinning the financial outlook is the organization's commitment to cost efficiency and the strategic management of its investments. By limiting the uptick in expenses to only 2%, the company expects to realize $35 million in savings thanks to a July restructuring, contributing to a total annual run-rate savings expected to be $105 million by 2024. Moreover, the cost of interest expenses will rise mainly due to funding forthcoming investments, highlighting the deliberate balancing act of bolstering growth while managing liabilities.

Dividend Strategy and Leveraging Position

The dividend policy for 2024 is strategically set with the wider financial landscape in view, particularly considering headwinds and the consolidation effects of Sprint. Nevertheless, the management is seeking to maintain the dividend in 2024 with expectations of tighter cash flow-to-dividend gaps in 2025, followed by a return to growth in 2026. The approach telegraphs confidence in the company's ability to navigate through near-term challenges with an eye on durable long-term growth prospects.

Operational Excellence and Customer-centric Focus

The operational restructuring undertaken by the company which impacted about 25% of its employees, is aimed at enhancing delivery speed and efficiency for customers, ultimately designed to reduce long-term costs and potentially increase revenue. This pivot appears to signify an evolution in the operational ethos, where customer experience and efficiency lead the way in driving both cost management and revenue generation.

Prepping for Proliferation: Small Cell Investment Returns Surpass Towers

Finally, in the growing segment of small cells, initial investment returns are reported to be more than double that of towers, an important metric given that the company anticipates a marked increase in the deployment of small cells to meet 5G network densification needs. A third colocated tenant on a system corresponds to yields in the high teens to low 20% range, suggesting strong profitability as the infrastructure becomes more multi-tenanted and evidencing the strategic potential of small cells in the company’s future growth.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Crown Castle Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kris Hinson, VP of Corporate Finance and Treasurer. Please go ahead.

[Kris Hinson, executive]

Thank you, Kate, and good morning, everyone. Thank you for joining us today as we discuss our third quarter 2023 results. With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer; and Dan Schlanger, 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 that will be referenced 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 the Risk Factors sections of the company's SEC filings. Our statements are made as of today, October 19, 2023, and we assume no obligation to update any forward-looking statements.

In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these 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, let me turn the call over to Jay.

[Jay A. Brown, executive]

Thanks, Kris, and good morning, everyone. Thanks for joining us. Our third quarter results continue to demonstrate our ability to generate consistent growth in the face of changes in the industry environment, allowing us to maintain our full year 2023 outlook for revenue, adjusted EBITDA and AFFO.

Based on the multiyear strength of our business model, we are confident in our ability to grow our dividend beyond 2025 once we get past the Sprint-related churn. Therefore, we are committed to maintaining our dividend in 2024 in the midst of the impacts from the nonrecurring Sprint cancellations and lower contributions from services.

Based on the timing of these headwinds, we expect the low point of AFFO to occur during the first half of 2024 before returning to growth in AFFO in the second half of next year and beyond. Demand for our assets has consistently been driven by our customers investing in their networks to keep pace with the rapid growth in mobile data demand.

Through our shared infrastructure model, we have helped our customers maximize the benefits of their investments by lowering the cost of deploying networks, networks that have significantly improved our ability as consumers to connect with the people and the world around us. The combination of persistent data demand growth and our ability to provide low-cost shared infrastructure solutions has enabled resilient underlying growth for us throughout generational upgrades and across macroeconomic cycles.

Our full year 2024 outlook demonstrates the benefits of complementing our tower business with a leading portfolio of small cells and fiber. As our customers increasingly focus on 5G network densification so that they can meet the needs of their end users, we expect the total demand for our diverse portfolio of assets to increase.

For towers, we expect to generate organic revenue growth of 4.5% in 2024. For small cells, we expect to generate organic growth of 13% driven by around $60 million of core leasing activity as we increase new nodes from 10,000 in 2023 to 14,000 in 2024. And for fiber solutions, we expect continued acceleration of leasing activity combined with lower churn to generate organic growth of 3%.

Excluding the impact of Sprint cancellations, the combination of organic revenue growth across our business is expected to generate consolidated organic growth of 5% in 2024, up from 4% in 2023.

While our growth remains robust, we know we need to continue to get better. Therefore, we continue to simplify, streamline and centralize our business processes and operations, which will reduce our long-term costs and improve our customer experience.

Since announcing the restructuring plan in July, we have reduced our workforce and achieved $105 million of annual run rate savings. Having completed that plan, we have identified additional opportunities to drive further efficiencies, including a plan to move approximately 1,000 employee positions from several locations nationwide to a centralized location by the end of the third quarter of 2024.

The strong organic growth and improved operating leverage from the actions we continue to take to reduce costs supports our maintaining our current annualized dividend of $6.26 per share. As reflected in our results and outlook, our differentiated strategy to invest in and build an unmatched portfolio of assets diversifies our sources of growth. Our 40,000 towers, 115,000 small cells on air and under contract and 85,000 route miles of fiber concentrated in the top U.S. markets make us well positioned to capitalize on long-term growth and data demand regardless of how carriers deploy spectrum and densify their networks.

At the beginning of 5G, our customers moved quickly to deploy record amounts of newly acquired spectrum. This drove record tower activity levels. As this initial surge in tower activity ended, our small cell growth is accelerating as customers shift focus to densifying portions of their networks that have experienced the most traffic.

In 2024, we expect to deploy a record 14,000 small cell nodes. Our ability to capture the accelerating growth in small cell demand is driven by the assets and core capabilities that we have built as the largest operator of shared infrastructure in the United States.

Our 85,000 route miles of fiber include high strand counts in heavily populated areas where the density of data demand is the highest, which makes them the most desirable locations for small cell deployments. We are a highly reliable operator of that fiber network. If fiber goes off-line, small cells go off-line. And for our wireless customers, network quality and reliability are paramount.

We have a world-class team of network operators and engineers that ensures our network is designed to mitigate the impact of any outage and is capable of fixing these outages quickly and efficiently. We have also developed expertise in navigating the permitting processes with multiple municipal organizations, regulatory agencies and utility companies across hundreds of disparate local markets, each with a unique set of regulations and stakeholders. This expertise allows us to navigate the difficult process of building small cells in the markets across the United States.

Finally, we are consistently finding ways to build small cells and fiber more efficiently. These efficiencies allow us to provide the most cost-effective and reliable network solutions for customers. We look to deliver the highest risk-adjusted returns for our shareholders through continuously building on the core capabilities that I just mentioned that generate unique value in the businesses we own and operate. These capabilities reduce the overall cost of deploying and operating communications networks, which becomes even more compelling for our customers in times of increasing capital costs.

Of course, higher capital costs impact us as well. Our disciplined approach to capital allocation means that as our cost of capital increases, so must the returns we require from our investments. We are continuously evaluating the expected returns of all of our investments against the rising cost of capital and other potential investment opportunities, including repurchasing our own shares. Consequently, we allocate capital to whatever we believe will generate the highest long-term returns.

Being disciplined allocators of capital means that we appropriately adjust the scale and economics of our investments based on changes in technology, customers and macroeconomic conditions. It doesn't mean that we stop investing. We apply a consistent, rigorous approach to pursue opportunities that generate superior expected returns for their given level of risk.

Long-term value is created when we invest in those opportunities. We have a long history of success in towers built on investing through various macroeconomic cycles. And we believe the small cell business is another great example of how we can build a business where our unique capabilities drive sustainable advantages that can grow significant long-term value.

In 2024, we plan to capitalize on these opportunities, resulting in approximately $1.2 billion in discretionary capital expenditures net of customer contributions with $1.1 billion in our fiber segment. This capital is supporting the acceleration of expected 10,000 nodes in 2023 and 14,000 nodes in 2024, reflecting a 40% increase in new nodes with only a 20% increase in capital as we expect more than 50% of the nodes to be colocation nodes.

Importantly, we expect to fund this with discretionary CapEx in 2024 without issuing equity. Compared to 2022, this means that we expect nodes deployed in 2024 will be up 3x while fiber CapEx is only up 30%, again reflecting increasing colocation on our existing assets. The colocation and increasing yields on multi-tenant systems continue to be similar to the development of the tower business over the last 25 years.

There is one more item I wanted to discuss. As you saw in the release, Dan will be departing Crown Castle next March. While he's not leaving for another 5-plus months, I wanted to take the opportunity to thank him for the contributions that he has made to the company over the last 7 years. He has been integral to the growth of our business and strategy. We are benefiting from the work he has led to increase the duration and predictability of our balance sheet, and he has developed a strong finance team. We will wish him all the best in his next endeavors. We have begun a search to find his replacement, and we'll be considering both internal and external candidates.

As I wrap up, we believe the low point for AFFO will be in the first half of 2024 as we work through the nonrecurring Sprint cancellations and the services headwinds that I mentioned earlier. The consistent growth of each of our lines of business driven by persistent growth in data demand gives us confidence in our ability to fund our CapEx budget in 2024 without issuing equity to maintain our current dividend in 2024 and to pursue sustainable dividend growth beyond 2025.

And with that, let me turn the call over to Dan.

[Daniel Schlanger, executive]

Good morning, everyone, and thanks for the kind words, Jay. I just wanted to start by saying how grateful I am for having the opportunity to work at Crown Castle over the last 7 years. It's a great company, and I continue to strongly believe it is pursuing a strategy that will generate significant value for shareholders. As a large [ release ] for me as shareholder, I'm excited to see that strategy play out over the next several years and look forward to the company's continued success.

Turning to the results. Our third quarter was in line with expectations and demonstrated the resiliency of our business. With our customers transitioning beyond the initial surge in 5G deployments, we were able to deliver 4% consolidated organic growth in the quarter, including nearly 4.5% organic growth in towers and accelerating growth in small cells and fiber solutions.

Following third quarter results, we updated our outlook for 2023 to reflect the impact of our -- on our expected net income of approximately $110 million of charges related to our restructuring plans announced in July as well as a $100 million reduction in tower CapEx. All other items remain unchanged, as shown on Page 5.

Moving to our 2024 outlook. There are 3 significant issues that are negatively impacting our results. First, the $165 million of Sprint cancellation payments we have received in 2023 will not recur in 2024. Second, we will see a combined $240 million reduction to our straight-line adjustment and amortization of prepaid rent, both of which are noncash items. And lastly, a combination of exiting the construction services business and lower tower activity levels causes a reduction of approximately $55 million in our services gross margin.

Due to these impacts, our 2024 outlook shows year-over-year declines in site rental revenues of $140 million, adjusted EBITDA of $260 million and AFFO of $275 million. Excluding these headwinds, the strong organic growth across each of our businesses contributes $220 million to 2024 adjusted EBITDA, resulting in $65 million of AFFO growth.

Turning to Page 6. Looking ahead, we expect attractive revenue growth trends to continue with consolidated organic growth accelerating from 4% in 2023 to 5% in 2024 as we are seeing an increase in demand for our small cell and fiber assets. Contributing to our organic growth is $305 million to $335 million of core leasing, an increase of $30 million at the midpoint compared to full year 2023.

Our 2024 consolidated core leasing of $320 million at the midpoint includes $110 million from towers compared to $130 million in 2023, $60 million in small cells compared to $35 million in 2023 and $150 million in fiber solutions compared to $125 million in 2023.

This year-over-year increase in core leasing results in an increase in organic contribution to site rental billings excluding the impact of Sprint cancellations of $265 million at the midpoint or 5%, which includes 4.5% from towers, 13% from small cells and a return to 3% growth in fiber solutions.

The organic growth is offset at site rental revenues by the noncash decreases and impact of the Sprint cancellations I referenced earlier along with an additional $10 million of Sprint cancellation-related small cell churn. This is primarily related to approximately 5,000 nodes that were terminated midway through 2023, which creates a rollover effect in 2024.

Turning to Page 7. We are delivering this increase in organic contributions to site rental billings with a limited increase in expenses of only 2% or $45 million at the midpoint, which benefits from $35 million of savings related to the restructuring we announced in July. When combining this $35 million of expense reduction in 2024 with the $30 million we expected to achieve in 2023 and $40 million of cost savings embedded in the 2024 change in service margin, the total annual run rate savings of our restructuring program is expected to be $105 million. Inclusive of the $40 million decrease in costs and the impact from exiting the installation services business, we expect services margin to be $65 million to $95 million in 2024.

Margins as a percentage of revenue in our services business are expected to improve from approximately 25% in the third quarter of 2023 to nearly 50% by the end of 2024 as we phase out installation services activity and benefit from our cost-reduction initiatives.

Moving to interest expense. We expect an increase of approximately $105 million at the midpoint as we fund our 2024 investments with incremental debt. When forecasting interest expense, we assume a cost of borrowing implied by the current rate environment slightly above 6% to fund our 2024 capital requirements.

Our 2024 AFFO growth excluding the impact of the Sprint cancellations and outsized noncash movements, which more closely reflects the underlying growth of the business is expected to be $40 million to $90 million.

With contracted long-term tower leasing agreements, a backlog of 60,000 small cell nodes and a largely fixed cost structure, we have visibility into this underlying growth continuing over a multiyear period, providing a solid foundation both for our current dividend and for our expectation of returning to sustainable dividend growth after 2025.

As our wireless customers increasingly expand their 5G network investment focus to include both coverage and densification, we are seeing a growing number of value-creating investment opportunities. And as Jay already mentioned, our 2024 discretionary capital program is $1.5 billion to $1.6 billion or $1.1 billion to $1.2 billion net of $430 million of prepaid rent received.

Importantly, we believe we can fund these investments without issuing equity in 2024. We recognize the collective impact of the reduction in noncash items and the Sprint cancellation payments not recurring in 2024 results in our leverage ratio exceeding our target of 5x net debt to EBITDA.

However, we expect our durable cash flow growth to organically reduce our net debt to adjusted EBITDA ratio over time to levels in line with our investment-grade credit profile as we have seen our business do on multiple occasions through our investment-grade history.

Since transitioning to investment grade in 2015, we have intentionally strengthened our balance sheet to mitigate risk by extending our weighted average maturity from 5 years to 8 years, decreasing the percentage of secured debt from 47% to 7% and increasing the percentage of fixed rate debt from 68% to 86%.

Further, we ended the quarter with approximately $5 billion of availability under our revolving credit facility and only $750 million of debt maturities occurring through 2024, providing us with ample liquidity to fund our business for the foreseeable future.

To wrap up, the underlying growth of the business remains solid and the contracted agreements we have in place provide line of sight and continued -- into continued underlying growth over a multiyear period. We believe this growth provides a stable foundation for our current dividend and the ability to continue to pursue our value-creating investments in 2024 without issuing equity.

Longer term, our unparalleled domestic portfolio of tower, small cell and fiber assets provides unique access to a growing number of opportunities with superior risk-adjusted returns, which we believe will create value for our shareholders and increase our long-term total shareholder return.

With that, Kate, I'd like to open the call to questions.

[Operator]

[Operator Instructions] The first question is from Simon Flannery of Morgan Stanley.

[Simon Flannery, analyst]

And Dan, all the best for the future. Great working with you. I guess you've got one more call with us. Perhaps we could start just talking about leasing activity and the guidance expectations. It seems like it's a pretty tricky year. I know you always guide before your peers. But we've got a lot of moving parts with the 5G CapEx cycle kind of winding down here.

So could you just characterize when you set your guidance for next year, particularly on towers, how you characterize the current activity and the expectations for next year in terms of what we expect to see from the major carriers and from the likes of DISH? Does that -- is there less visibility, say, than in prior years? And has that caused you to perhaps just be somewhat conservative?

And then you talked about the leverage being above trend. Are any kind of ability to sell assets, anything that you might be looking on the strategic side? And also any opportunities on the M&A side, given some of the strategic moves by some wireless carriers out there.

[Jay A. Brown, executive]

Sure, Simon. On the first question around leasing activity, the tower guide for 2024 assumes a similar level of activity to what we've seen in the second half of 2023. So underlying our view is basically a consistent level of activity as the surge, the initial activity from 5G came to an end during the first half of the year.

We saw the level of activity stabilize, and we think that carries into calendar year '24. I think we have good visibility around that. Much of the work given the nature of the business, we go into the year with a significant portion of that revenue already contracted, and we have good visibility as to when we think it will actually come online.

So I would characterize our visibility from a reported result standpoint pretty similar to what we've seen historically, and feel like that level of activity is sustainable over the long term as the carriers continue to upgrade the sites that they're already on with 5G equipment and as well as densify the network using towers that they're not currently on.

As I noted in my comments, we think that we will see and have seen a shift and a focus from the carriers as they start to use small cells to a greater degree to densify their network. So our view is based on a pretty holistic view of the way the carriers are thinking about their networks as we wrap up 2023 and get into 2024 and feel good about the organic growth that we're showing on both -- in both segments there related to the wireless carriers.

On the second question around the leverage trend, as Dan mentioned in his comments, obviously, with some of the headwinds that we talked about in our comments, it's going to cause the leverage to tick up a bit. That's happened in the past, and we would expect over time that we'll see good growth in the business that will allow us to delever back down and get back at levels that are -- where our target would be. So the headwinds will create some uplift around that leverage ratio. And then we think over time, we'll be able to bring it back down in line.

On your -- the last part of your question around ways to manage the business and M&A and other things, I would -- I don't think there's anything specific that I would comment on. But just generally, the way we think about running our business is there are 3 ways that we view we can create long-term shareholder value.

The first way is to add additional revenue to the assets that we own. That organic growth comes at great incremental returns. And the second way is we can invest in more assets that we will -- that would extend -- we believe would extend the runway of growth into the future. And then the third way is to lower the cost of capital. We think all 3 of those are ways of driving long-term shareholder value, and we are constantly working on all 3 of those.

What's unique about the current environment that we're in is that oftentimes in periods of disruption, more opportunities arise. And I made reference that -- to that in terms of the capital costs of our customers can create opportunities for us to invest capital that can drive returns over the long term. That also happens sometimes around the way assets are priced.

And so us being really thoughtful about how we can create value on those 3 fronts and we are not always -- we are always looking at those opportunities. And I would say in periods of disruption, our experience has been that oftentimes there are some pretty unique opportunities that arise. And so we'll continue to work on all 3, growing the revenues on the existing assets, looking for opportunities for new assets and then trying to find ways to lower our cost of capital.

[Operator]

The next question is from Michael Rollins of Citi.

[Michael Rollins, analyst]

I also want to give my best wishes to Dan as well. Two questions, if I could, today. The first one is you're just describing returns. Curious if you can give us an update on how the returns for small cells as the growth is now accelerating, how those returns are pacing versus your expectation? And if you're seeing any difference in pricing on a per node basis relative to the current portfolio?

And then just drilling down into the earlier question on assets. Do you have a significant amount of noncore assets or noncore ground leases? And can you possibly unpack the size if you have any of that given the recent press reports?

[Jay A. Brown, executive]

Sure. On the first question around returns for small cells, we continue to see really attractive returns in our small cell business. And the amount of colocation that we're seeing both in 2023 and 2024 and the economics of those incremental adds well in excess of 20% is encouraging.

As we have seen systems develop, we continue to be initial returns going to those second -- that second tenant, we get into the low double-digit returns. And as we get to the third tenant, we're high teens, low 20% from a system standpoint.

Given the quantity of nodes that I talked about in my comments, both that we're seeing in '23 as well as when we go into '24, the -- and half of those nodes being colocation, we're seeing the multi-tenant systems track those expected returns. And so feel really good about where those are going.

As we think about pricing, we have always priced the business based on -- focused on returns. So there's not a -- unlike towers where there's more of a national pricing across assets, small cells is different. Small cells is priced based on the required returns based on the cost to build systems. And so in areas where the costs are higher, the pricing follows.

And that has had some uplift in it as a result of some of the inflationary pressures that have been in the environment. And so that does affect the pricing, and we're able to lift pricing associated with that in order to maintain and grow the returns associated with the system. And so we've seen the business develop as we would have expected.

On the second question around noncore assets and potential size there, I don't think we have a lot of noncore assets inside the portfolio of assets. But one of the things that I would say is the ground leases you specifically referenced ground leases, we have, over time, brought a significant portion of ground leases on balance sheet by acquiring the ground leases.

We also extend ground leases for very long periods of time. We're now north of 30 years of duration in our ground lease portfolio. And so we have the opportunity. We see the -- we have the opportunity, obviously, to go out and push ground leases in terms of duration for over very long periods of time. And we may choose to do that off-balance sheet or on balance sheet.

So I would put that in the category of that could be an opportunity for us to lower the cost of capital depending on how we think about it. In order to run the business efficiently, the key is do we have control both in terms of the cost of that activity, and then do we have control in terms of certainty of being able to maintain the asset and add additional revenue.

So the financing decision really just comes down to what's the lowest cost of capital. And we're always looking for opportunities to try to figure out the way to achieve that lowest cost of capital across the assets.

[Operator]

The next question is from Nick Del Deo of MoffettNathanson.

[Nicholas Del Deo, analyst]

First, to continue on the capital allocation theme, in the past, you generally argued that the returns you see from small cells, I guess, fiber more generally, were so far ahead of what you can get from repurchases. The repurchases really weren't in your consideration set. I guess how would you describe that relationship today? Are repurchases starting to look more interesting versus fiber or other uses of capital?

[Jay A. Brown, executive]

Obviously, the move downward in the stock price and the yield associated with it, while we've maintained a long-term view that we'll return after we get through 2025 that we'll be able to return to growing organic growth in line with our targets. Obviously, that becomes a more attractive investment at lower prices.

As I mentioned in my comments, what's also true is there's a growing -- we believe, growing demand and focus by our carrier customers for the assets around small cells. And so it absolutely affects the way we think about the incremental projects that we take on because we're always thinking about things as what is the opportunity cost or the potential opportunity returns that we could pursue by choosing one path over another path.

And our consistent approach has been over a long period of time to do that -- to compare things like repurchasing shares or investing in assets. So as the stock price has moved, it does adjust how we think about opportunities, and it will continue to do so.

[Nicholas Del Deo, analyst]

Okay. Maybe turning to the employee relocation plan that you disclosed last night, it seems to reflect a pretty meaningful philosophical change in how you manage the company, at least from an outsider's perspective. I guess why do you think a more centralized approach is better now? Has something changed in terms of your ability to better manage the business in a more centralized way than you once were? Or am I kind of overthinking it?

[Jay A. Brown, executive]

I don't think you're overthinking it. We are constantly looking at ways to run our business more efficiently. And so as we have come off of the peak of 5G activity, one of the things that we looked at as we were evaluating what's the right sizing of the organization, one of the things that we thought was necessary was to reduce the number of employees in the business, which we did that in the July and completed that work over the last several months.

The second part of it is, how can we run the business more efficiently in terms of our processes and business operations. And so the view that we took on that front is that by centralizing things, we can reduce long-term costs of operating our business. And we can get to the place where we can deliver for our customers more quickly and more efficiently, so improving the customer experience, which we believe will do both the reducing our long-term cost of operating the assets, but also give us an opportunity to potentially increase the revenue that we can deliver for customers by delivering for them more quickly.

I think that's just the way you should always be running the business is looking for ways to reduce the cost, run it more efficiently. And as we've looked at the activity that we believe will occur for the business over the long term, we believe this reformatted business will be the best way to run the business, both from a cost standpoint and then give us opportunity for additional revenues over time.

[Nicholas Del Deo, analyst]

Okay. And any -- just one quick follow-up on that. And any risk of an operational hiccup, given all the changes taking place? Or do you feel like you have that pretty well buttoned down?

[Jay A. Brown, executive]

I wouldn't say there's never -- there's ever a place where there isn't the opportunity for a hiccup. So we've got to be disciplined operators of the assets and run the business thoughtfully, and we intend to do that.

I have a great deal of confidence in our team and our ability to do that. The restructuring plan that we announced in the press release yesterday affects about 25% of our employees. And so I'm confident that the plans that we have in place to work through that, they'll do well.

The 80% that are unaffected, I believe, today are hard at work and doing what you would expect in terms of delivering on the business. So it's something we've got to watch and certainly manage, and we have a plan internally to do that.

[Operator]

The next question is from Jonathan Atkin of RBC Capital Markets.

[Jonathan Atkin, analyst]

A couple of questions. When you say no equity issuance, does that include not drawing on the ATM? And then more broadly on the financial side, wondered what your updated thinking would be about the pace of dividend growth beyond 2025 from your vantage point right now?

[Daniel Schlanger, executive]

Yes, Jon, I'll take the first one on the ATM. Yes, it means that we're not going to be issuing equity even under the ATM.

[Jay A. Brown, executive]

Beyond 2025, I would look at the business and say based on the characteristics that we see for organic revenue growth and our long-term forecast for where we think the carriers are going to invest to continue to build out 5G, which is going to take the better part of the decade we expect, we see organic growth in AFFO returning to that targeted level of 7% to 8%.

And so feel good about the underlying demand drivers of where we're going to -- how we're going to get there. And then as we get closer to that date, we can talk more specifically about what we think the growth rate will be in 2026. But the underlying demand drivers and as we look at it today, look to be healthy and intact, and we think those are sustainable. And as we get through these headwinds over 2024 and 2025 that we'll get back to a targeted level of growth in our AFFO.

[Jonathan Atkin, analyst]

And then lastly from my side, just on the core fiber business ex small cells, what are the types of trends you're seeing in terms of demand, customer renewals, pricing and so forth?

[Jay A. Brown, executive]

Sure. Two big trends that are affecting that. As we've gone through the calendar year and moved past the churn events that we've been talking about, we've seen the -- both the -- we've seen the net growth come back in line with where we expected to get -- we still think we're going to exit this year at about 3%.

You could see in our guide for next year that we're on pace to get -- we believe we'll be on pace to get to next year's level of growth by the time we exit this year. The 2 trends that we're seeing is both an uplift on the core leasing side. So we're seeing more activity from both new logos and an opportunity to continue to sell to the logos that we're already selling to.

We also see a reduction in churn. Our team has undertaken a number of really thoughtful activities over the last couple of years that are starting to bear fruit and that results in a reduction in churn. And so both on the top as well as the reduction in churn is leading to that 3% growth that we see next year.

The more macro drivers of that business are healthy as data demand, not only for wireless, which we've talked a lot about on this call, but also for connectivity on a wireline basis, those growth drivers continue to be healthy. The movement of enterprises towards moving data to the cloud and off-premises continues to create opportunities for that business. We think those trends are intact, especially for the customer base that we serve.

Our fiber business primarily serves large enterprises. We have very little exposure to medium and small businesses, and we don't do anything direct to consumer.

On the large enterprise side, we see those trends towards off-premises and movement to the cloud to be sustainable drivers that are going to drive growth for a long period of time. And we're continuing to be thoughtful about how can we make those revenue streams more sticky.

[Operator]

The next question is from Ric Prentiss of Raymond James.

[Ric Prentiss, analyst]

Dan, enjoyed getting to know you over these last 7 years.

[Daniel Schlanger, executive]

Yes. Thanks, Ric. Me, too.

[Ric Prentiss, analyst]

Want to start on the dividend side. You all know I really like looking at cash more than the AFFO reported metric. But it looks like the midpoint of '24 AFFO [ $3.005 billion ] and the amortization of prepaid rent and noncash items you talked about, it was about $423 million. That kind of implies that a cash AFFO number would be more like ballpark $2.6 billion versus dividends might be like $2.7 billion.

Am I thinking of that correctly? And then what other ways are there to kind of bridge that get to working capital or other ways to get to that kind of how you pay the cash dividend?

[Daniel Schlanger, executive]

So Ric, I would say yes, you're thinking about that correctly. Looking at our AFFO, taking out the prepaid rent amortization to get to a cash level makes sense as a shorthand way to do so. And that number is going to be below our dividend at the midpoint when we look at 2024.

And we believe, as Jay pointed out throughout his comments, is that given that we think that we're going to be returning out to growth in past 2025 that it made a lot of sense to keep the dividend where it is. And we can fund that dividend in all sorts of different ways. We don't have liquidity issue of trying to figure out where the cash comes from.

What we have is -- what we'll do is we'll continue to pay out the dividend. And then as the organic growth in the business continues to increase over the course of the next several years, we feel really comfortable with the trajectory of that dividend over time.

[Ric Prentiss, analyst]

Okay. And a couple of times, I think, Jay, you mentioned maintain the dividend in '24. Obviously, it's a Board decision, but should we assume the intent is to maintain the dividend in '25 as well? And to Dan's point, there's other ways to pay it if cash is short?

[Jay A. Brown, executive]

Yes, Ric, obviously, we're setting the dividend policy for 2024. So I don't want to get ahead of ourselves and start talking about '25. But philosophically, the reason why we're referencing the low point is to help give you a view of this multiyear work through that we've got with the consolidation of Sprint and some of the headwinds that we've been facing.

As you kind of referenced and walked through the math there of the gap, in essence, what we're saying is we expect that gap to be smaller in 2025 than it is in 2024. So historically, as we've looked at the business, what we've done is sized up the cash flow generation of the business, and we've paid out to shareholders in the form of the dividend the cash generated by the business in any given year. That's how we've set our dividend.

As we got into this period of time which we believe is an anomaly in the business, the consolidation of the carriers and worked through the headwinds associated with more of the macroeconomic changes, what we try to do is look through those specific events that we were seeing on the horizon and look out beyond those events and try to figure out where do we think the cash flow generation of the business would be as the business normalized.

As we look through that, our view was it made sense to maintain the dividend in 2024. The gap will be the widest between that dividend payout and the generation of cash in the business in the first half of '24. And then it will close as we go to the second half of '24 and then into '25 and get beyond that. And we believe we'll return to a growth period of time once we get past 2025.

So we're, in essence, looking through these movements in these events and try to set the dividend at a level that we could maintain in '24. The gap between the current level of dividend and the cash generation will be smaller in '25, and then we'll return to growth, we believe, in 2026.

[Ric Prentiss, analyst]

Good. That's clear. Okay. One other question on my side on the small cells. I think you mentioned there were 5,000 nodes decommissioned in mid-'23 from Sprint. Was that within second quarter? Are there more of those to be decommissioned -- sorry, in third quarter, assumed we're done with it. And the 14,000 nodes were in '24, is that a gross or a net number? Or are they almost the same?

[Jay A. Brown, executive]

On the 5,000, most -- there's a little bit of movement. Most of those have come out at this point, which is why you saw our total nodes and contracted nodes come down from 120,000 to 115,000. That's reflective of the churn. So most of those have worked their way through.

The number for 2024, when we talk about 14,000, gross and net are the same. So we don't expect any meaningful churn in 2024 of small cell nodes. So there's no offset there that you need to be made aware of.

[Ric Prentiss, analyst]

Good. And the $10 million Sprint churn and the '24 guidance, is that basically in essence kind of the half year then of the $10 million reflective?

[Daniel Schlanger, executive]

Yes. Basically, exactly. It's the rollover of this year's churn hitting 2024.

[Ric Prentiss, analyst]

And that gets back to that first half versus second half kind of the concept that's a contributing factor in the second half being better then.

[Daniel Schlanger, executive]

Yes.

[Ric Prentiss, analyst]

Dan, best wishes.

[Daniel Schlanger, executive]

Thank you.

[Operator]

The next question is from David Barden of Bank of America.

[David Barden, analyst]

Just a couple on the small cell side. So Jay or Dan, with a 40% step-up in the rate of no deployment happening at the time when you're kind of shrinking the organization, what has to happen? How does that happen to kind of make that step up because this is larger than we've kind of ever seen you guys do before.

And then second question related is, should we assume that this is kind of the new normal, both in terms of discretionary CapEx and in terms of kind of no deployments for the foreseeable future? Or is this more of an anomaly and kind of more like the 10,000 node, $1.2 billion discretionary cash CapEx is more the norm?

[Jay A. Brown, executive]

On your first question, the changes that we made in terms of reduction of staffing happened almost exclusively on the tower side. And what we were adjusting the internal costs related to were both in the services business on the tower side as well as on the tower operating side. And those were adjusted based on the volume of activity that we saw for tower leasing and the movement from those peaks of 5G down to the levels that we provided both -- we think we're going to deliver both in the second half of '23 and then as we go into 2024.

As we think about resources on the small cell side, believe our team and the growth in both use of technology and in refining some of the processes and making ourselves more successful at navigating through municipalities, which I talked about in some of my comments, I don't see a significant need for us to add additional resources to our fiber segment as we tackle this significant increase in the amount of nodes.

Our team has been preparing for this. And one of the benefits of the long lead time that we have in that business is we can be really thoughtful about making sure we plan the work and engage the work and as well as looking for ways to do it more efficiently.

The team has done a really good job of that. So the job shrinkage and the reduction of cost has really not come from that segment of the business. And I believe we're prepared to deliver the growth that we're talking about without material changes to the cost structure on the upward side.

On your second question around the discretionary CapEx, it's hard to give you a really long-term forecast about that because we haven't paired that with what we think the demand is going to be in the amount of activity. At a given level of activity that's similar to what we're doing in 2024, I would say, yes, we would expect the CapEx to be in and around that level if that's the level of activity that we're operating with.

We're continuing to see the business move and navigate towards a greater percentage of colocation nodes. Those returns, as I mentioned to an earlier question, have come in at levels that we would expect -- we expected them to come in at. So we're seeing the multi-tenant model, multi-tenant systems deliver returns that were in line with expectations.

And then as we go out a long way, our view is generally that the carriers are going to need more small cells than what they're currently taking today as they densify the 5G network. And we believe that densification will continue as consumers use the network to an even greater degree.

So the total addressable market and the need for small cells, we believe, will have upward trends on it. And as those upward trends come, I think it creates the opportunity for us to put investment opportunities back through that rigorous process that I talked about in my comments around do these investments in those -- in particular markets that may have opportunity in them, do they make sense for us relative to other alternatives? And we'll just have to see how that unfolds to see whether it makes sense for us to pursue those or not.

[Operator]

The next question is from Greg Williams with Cowen.

[Gregory Williams, analyst]

Just echoing the comments for Dan. I wish you all the best, and thank you for the support. Just the first question is on the higher cost for '24. It looks like it's up [ $30 million to $60 million ] even after the $35 million cost savings. I'm just wondering if you can break out the piece parts there if it's ground lease escalations, et cetera.

And then the second question is just on the comments around the small cell returns. You're saying it's just as good as towers on a multi-tenant system basis. So is there any update to kind of lease-up rates in small cells as we think of that vis-a-vis towers?

[Daniel Schlanger, executive]

Yes. Thanks, Greg. Appreciate the comments. And then I'll start with the first question on higher cost in 2024. You hit on a bunch of them. So the major cost increases that we experienced, we do have ground leases under our towers as a single large line item that we have in our P&L on the expense side. And those ground leases increase at about 3% per year in cost. That has to be baked in.

Secondly, we, like every other company, is faced with -- are faced with increasing cost for labor for people who work here, people we're hiring because the cost of people is going up with inflation.

And then lastly, we had some onetime savings in the back half of 2023 that won't occur going into 2024, which show a little bit more of an increase also. When you add those things up, you get to the type of cost increases you were just referencing.

[Jay A. Brown, executive]

Greg, on your second question around the returns, small cells have been historically continue to be, in our view, would be -- will continue to be initially and with the first colocated tenant and the second colocated tenant on a particular system actually better than what we've seen historically from towers.

When we put capital into the ground for small cells, we are at about double the initial yield on invested capital to what we are with towers. Whether those towers were acquired historically or built, our initial returns are more than double what a tower is.

When we get to the second tenant on a small cell system, we're in the low double-digit range. Generally with towers in order to get to those kind of yields, as you can see in the supplement, we're well over 2 tenants in order to get to low double-digit yields on invested capital.

And then when we get to a third tenant on a system, we're high teens, low 20% yields. You could see some of that in the disclosure that we gave last quarter around some markets that we've been in for a long period of time and have a significant number of multi-tenant systems. In some places where we've got the 3 tenants, we get the very attractive returns that would exceed those of even towers historically.

So we're at the early stages of colocation. So it's -- we're not multi-tenant across the entire system yet, but we do believe over time, like towers, over 25 years of adding tenants, we'll continue to see growth in those returns and yields. And I believe over time, this business on the small cell side will continue to trend towards what we've seen in towers and will create a significant amount of shareholder value over time as we've been able to build assets in the best markets in the United States, those with dense populations and a lot of data demand, and believe as the carriers densify the network, the assets that we have are going to result in a lot of colocation over many years. And that will consistently drive increases in yields and growth in value creation for equity holders.

[Operator]

Next question is from Matt Niknam of Deutsche Bank.

[Matthew Niknam, analyst]

Just 2 quick ones. First, on AFFO per share growth, maybe if you can help us think through the moving parts driving the expectation for second half AFFO per share in '24 to be better than the first half. Is it improved leasing? Is there anything on the cost side in terms of ramp-up of savings to be cognizant of?

And then secondly, on services, if you could just help us think through the progression from the, call it, 25-ish percent range in the third quarter to around the 50% exit rate by the end of next year. Is that linear? Is that more of a stair step higher? Just how to think about the path there.

[Daniel Schlanger, executive]

Yes. Matt, on the first question on what's driving second half, it's really a combination of just normal kind of seasonality in our business, which we didn't see in 2023 and called out in 2023. It's returned more to how that works in 2024, and our business typically works in the second half of the year a bit better than the first.

In addition to some of the churn events that Ric was mentioning, we have kind of hit the first half of the year, not the second. And so we think that all of that added up would lead to the low point in AFFO being in the first half of 2024.

[Jay A. Brown, executive]

Matt, on your second question, I'm assuming you're referring to the margins in the business. Is that the question that you're asking, the exchange of the margins?

[Matthew Niknam, analyst]

Right. Yes.

[Jay A. Brown, executive]

Yes. Okay. The current margins, and there will be some bleed over this into the beginning of 2024 and around the 25% range has to do with our exit of the construction services. Those would be the project management services that historically we performed to help our customers install on the assets that we have. Those margins in that business are much lower than the margins that we have on a go-forward basis, the services that we'll perform on a pre-installation, preconstruction for our customers. So what you're really seeing is a mix change over the course of the year as the legacy business ramps down and goes away and the business that we will continue to perform on a long going -- for the foreseeable future, the margins on that business are better.

So you're seeing that in the guide. And by the time we get to the second half of next year, virtually all of those legacy services that will no longer be performing will have been moved out of the results.

[Operator]

The final question is from Brandon Nispel of KeyBanc Capital Markets.

[Brandon Nispel, analyst]

Great. Dan, thanks a lot for all your help over the last several years, and best of luck. Hoping you guys could unpack the tower leasing sort of both for 3Q and '24. You've always talked about sort of the contracted nature of this business. But on a year-over-year basis, leasing went down roughly 40%. So I was hoping you could sort of unpack the drivers from like a sequential or year-over-year standpoint. And then talk about sort of your first half versus second half expectations for tower leasing in '24.

And secondly, I was hoping you could unpack the churn that you've guided to the $155 million, just from a tower fiber and small cell side and then the one-off churns from the remaining Sprint cancellation.

[Jay A. Brown, executive]

Sure. I'll take the first question, and Dan can walk through the numbers on the second question. Brandon, as we came to our tower leasing guide for '24, we looked at the activity that we were seeing from the customers and embedded in that activity, about 85% of what's in the guide for 2024 at this point is contracted.

So there is some amount of rollover of activity that we'll see in this calendar year where the tenant goes on the tower this year and then shows up for a full 12 months in calendar year '24. There is, by definition, about 15% that we still got to go get in calendar year '24 that we don't have line of sight to.

And our view has been as we came off of the peak of 5G that there is absolutely going to be a needed addition to tower site of our carriers investing to add additional equipment to build out 5G. We're not done with 5G, and they're not done with macro sites.

So that activity will continue, and it's -- based on the conversations that we've had with them, the activity that we've seen and the work that we see ahead still believe that there is good activity on the macro tower side, feel good about where the guidance is and feel good about where we'll be not only in '24, but in the years beyond as the towers are still the most efficient way to deploy network capacity.

And so to the extent that macro tower sites can solve the need, the carriers, we believe, will continue to prioritize those assets and in the portfolio. And we'll continue to see good growth in towers for a long period of time. So we've reset our expectations from where we were at the peak of 5G, but feel good about where we are from this point just going forward.

[Daniel Schlanger, executive]

Yes. And the second question on the $155 million of churn. On the tower side, it's going to be a very similar churn in '24 to what we've seen and what we think we'll see in '23, which is on the low end of our 1% to 2% in the $30 million range of churn on tower.

On small cells, similarly, very similar -- the '23 will be about 1% of our small cells. So without -- as long as you take out the Sprint cancellation. And fiber solutions, as Jay mentioned, we believe the churn is coming down from closer to 10% in '23 to around 9% in '24, so in the neighborhood of $115 million. When you add all those up, maybe $120 million. So when you add all those up, you get to about $155 million total churn.

[Jay A. Brown, executive]

Well, thanks, everyone, for joining the call this morning. I appreciate the continued support, and we look forward to seeing and talking with you soon. And I just want to thank our team broadly for all the work that they have done to deliver the results for '23 so far. We've got a good quarter ahead of us to finish out the year and excited about the opportunity to continue to grow the business as we get into 2024 and beyond. Thanks for joining. We'll talk soon.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.