Crown Castle International Corp

NYSE:CCI

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the Crown Castle Q4 2018 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Ben Lowe. Please go ahead, sir.

[Ben Lowe, VP, Corporate Finance]

Great. Thank you, Brian, and good morning, everyone. Thank you for joining us today as we discuss our fourth quarter 2018 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've posted supplemental materials in the Investors section of our website at crowncastle.com, which we'll 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 any 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, January 24, 2019, and we assume no obligations 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.

So, with that, let me turn the call over to Jay.

[Jay Brown, CEO]

Thanks Ben, and good morning, everyone. Thanks for joining us on the call.

As you saw from our results, we've kept off another year of growth with solid fourth quarter results. As I look forward, I'm optimistic the positive trends we see in the market will drive demand for our communications infrastructure assets. And I believe Crown Castle is well positioned to take advantage of those trends and deliver growth and returns for shareholders for years to come.

Through disciplined capital allocation and execution, we have established an unmatched portfolio of more than 40,000 towers and 65,000 route miles of high capacity fiber in the top U.S. markets, where we see the greatest long-term growth and opportunity.

On this call, there are three important themes I want to discuss. First, 2018 was a successful year for Crown Castle. Secondly, our strategy of offering towers to small cells and fiber solutions is delivering the results we expected. And third, I'm excited about the long runway of growth as 4G investment remains robust and the deployment of 5G infrastructure is just getting started.

On the first point, we delivered 10% growth in dividends per share in 2018, supported by cash flow growth across both our tower and fiber assets. Tower leasing increased in the back half of the year as all of our major customers' were actively investing in the network by deploying new cell sites and additional spectrum.

Further, highlighting the strong demand for our infrastructure, we deployed a record number of small cells during 2018. In addition to the great operational performance in small cells, we added significantly more small cell nodes to our backlog than we installed in 2018. Meaning, we have a larger contracted pipeline of small cells to build today than we did at this time last year.

Importantly, our team delivered these results while integrating our recent fiber acquisitions. With the integration work substantially complete, I'm excited as I look ahead and see the potential growth opportunity as we focus on adding both small cell and fiber solutions customers to our 65,000 route miles of dense, high capacity fiber.

This brings me to my second point: our unique strategy of offering towers, small cells and fiber solutions which are all critical components of communication networks that can be shared across multiple customers is delivering the results we expected.

With the volume of data delivered by both wireless and wired networks growing rapidly, our customers are leasing access to our tower and fiber assets to increase the capacity of their networks and keep pace with that growth.

Because we have the ability to share our assets across multiple customers, we can provide our customers with cost-effective assets to the critical infrastructure they need, while generating significant value for our shareholders over time as we lease our assets and drive cash flow growth.

Steady performance and consistent execution over the last two decades has proven that providing shared infrastructure assets in the U.S. is a great business. Over that time frame, we've invested approximately $23 billion in tower assets and continue to create tremendous value for our shareholders as we grow the cash flows and returns on those investments by adding tenants.

Since 2001, we've increased site rental revenues in our tower business at a compound annual growth rate of approximately 14%, scaling the business from approximately $350 million in annual revenue in 2001 to more than $3 billion in 2018.

In recent years, we've expanded our infrastructure offering beyond towers by investing approximately $13 billion to establish fiber footprints in prime locations across the top U.S. markets where we see the greatest long-term demand. Our fiber investments are already yielding 8% and have significant available capacity to add new small cells and fiber solutions.

As you can see in our 2019 outlook, we are seeing increasing levels of demand for our fiber assets. Following a record year in 2018 in terms of the number of small cells we deployed, we expect to nearly double our production this year by deploying 10,000 to 15,000 nodes.

In addition, we have approximately 20,000 additional nodes in the pipeline that we expect to deploy in 2020 and beyond. Since it typically takes about 18 to 24 months for contracted nodes to be put on air and start generating revenue, we have a line of sight into meaningful small cell revenue growth beyond 2019.

With respect to towers, we expect the higher new leasing activity we saw in the back half of 2018 to continue, resulting in a meaningful acceleration in tower new leasing in 2019 as compared to 2018.

With higher levels of new leasing activity across towers and small cells and steady growth from our fiber solutions business, I'm excited about our opportunity to continue to translate revenue growth into anticipated long-term growth in dividends per share of 7% to 8% per year, which brings me to my third and final point.

I see a long runway of growth in front of Crown Castle as our customers continue to invest heavily in their 4G networks to keep pace with data demand growth from existing technologies, while the deployment of 5G is just getting started.

According to the latest estimates from Cisco, mobile data traffic in the U.S. is expected to grow five-fold from 2017 through 2022. To put that growth into perspective, that means mobile data traffic in 2022 is expected to be equal to 12 times the volume of all Internet traffic in the U.S. in 2005.

While the sheer scale of the expected growth is staggering and should drive significant demand for our infrastructure assets, I get even more excited when I consider how early we are in the digital transformation of the U.S. economy and the critical role mobile infrastructure will play.

I think we're just scratching the surface when you consider mobile traffic is expected to account for just 6% of total IT traffic in the U.S. in 2022, up from 3% a couple of years ago. While we continue to underwrite our investments based on existing applications and existing technologies, we believe the network infrastructure needed to support the next generation services will dramatically increase the demand for our tower and fiber assets. The journey from first generation mobile technology through 4G has changed the way we as consumers, live and work.

What I find really intriguing about 5G and some of the emerging technologies is that they have the potential to fundamentally alter the role of wireless networks, going from connecting over 300 million people in the U.S. to potentially connecting billions of devices in the future.

Some of those emerging technologies include autonomous cars augmented to virtual reality and industrial applications that require networks to provide availability anywhere at any time and on any device.

To meet those requirements at the speeds and latency that will be necessary, industry estimates predict that carriers will need to achieve a ten-fold increase in network performance as measured by latency, reliability and speed.

From an infrastructure perspective that will require the deployment of additional spectrum across more cell sites both on towers and on small cells for decades to come. And we believe Crown Castle is in a great position at the center of these megatrends with our unmatched portfolio of towers and high-capacity natural fiber assets.

Given these long-term opportunities, we are investing in assets we believe will attract and generate long-term returns for shareholders, while paying a high quality dividend that we expect to be able to grow somewhere between 7% and 8% on an annual basis.

And with that, I'll turn the call over to Dan.

[Dan Schlanger, CFO]

Thanks Jay, and good morning, everyone.

As Jay mentioned, we closed 2018 with solid fourth quarter results, completing another very successful year for Crown Castle in several fronts. We increased dividends per share by 10%, consistent with our growth in AFFO per share and our commitment to return capital to shareholders.

We substantially completed the integration of our recent fiber acquisitions and made significant investments in new fiber assets across the top markets, where we see the greatest demand for small cells and fiber solutions. And we made those investments, while improving our overall financial flexibility by proactively refinancing upcoming maturities and increasing the average majority of our debt.

Turning first to the fourth quarter 2018 results on Slide 4, I'm going to walk through a few items that should be considered when comparing the results to our prior outlook. First, site rental revenues exceeded the midpoint of the prior range by approximately $15 million, including $10 million of additional straight-lined revenues, primarily resulting from the term extensions associated with leasing activity.

In addition, there are approximately $10 million of higher costs associated with the combination of additional incentive accruals for 2018 and the expenses associated with certain natural disasters that occurred during the quarter.

The results were also impacted by approximately $5 million of lower services contribution that is timing-related. So we now expect that contribution in 2019. And finally, AFFO benefited by approximately $10 million from lower sustaining capital expenditures in the quarter, a portion of which are expected to now occur in 2019.

Adjusting for the total impact of these items, results were within the ranges provided in our prior outlook for site rental revenues, adjusted EBITDA, and AFFO. For the full year 2018, site rental revenues increased approximately 29% or $1.05 billion including approximately 5.6% growth in organic contribution to site rental revenues.

Moving on to investment activities during the year, we deployed approximately $1.7 billion in capital expenditures including $1.6 billion of revenue-generating capital expenditures comprised of $1.2 billion in fiber and approximately $350 million for towers.

For the full year 2019, we expect gross CapEx of approximately $2 billion or approximately $1.5 billion net of prepaid rent. Based on our expected cash flow growth and the incremental leverage capacity that growth will create, we believe we can finance this level of spending without issuing equity.

Supporting this belief, we ended 2018 at just over five times debt-to-EBITDA, consistent with our intent to finance the business with approximately five turns of leverage as we remain committed to maintaining our investment-grade credit profile. Additionally, with more than $3 billion of available capacity on our revolver and no maturities until 2021, we're comfortable with our debt balance sheet flexibility.

Turning now to Slide 5 of the presentation, at the midpoints, we increased our full year 2019 outlook for site rental revenues and adjusted EBITDA by approximately $40 million due to higher straight-lined revenues, primarily resulting from the term extensions associated with leasing activity that I mentioned earlier. As you can see, AFFO guidance remains unchanged at approximately $5.85 per share as the higher straight-lined revenue does not contribute to AFFO.

Turning to Slide 6, we now expect between $223 million and $268 million of growth in site rental revenues in 2019. As you can see in the chart on the Slide, when compared to the prior outlook, the only change relates to the impact of the higher straight-lined revenues I just discussed.

Our expectations for growth in organic contribution to site rental revenues remain unchanged at approximately 6%, up from 5.6% in 2018. We continue to expect higher 2019 new leasing activity for both towers and small cells with consistent levels of growth from fiber solutions.

To wrap-up, 2018 was another very successful year for Crown Castle and we're excited about the anticipated growth in our business in 2019. Currently, we are seeing the benefits from the investments our customers are making in wireless networks to keep pace with increasing data demand, which allows us to provide near-term returns through a high quality dividend that we expect to grow 7% to 8% annually.

At the same time, we're making significant investments in our small cell and fiber business that we believe will position Crown Castle to take advantage of the long-term growth trends Jay discussed earlier.

Because we are still early in the growth cycle for small cells, we believe our investments will provide significant long-term upside as we add tenants to those new assets. It is this combination of near-term returns and expected long-term upside that I think makes Crown Castle such an attractive investment.

And with that Brian, I'd like to open the call to questions.

[Operator]

[Operator Instructions] We'll now take your first question from Simon Flannery from Morgan Stanley. Please go ahead. Your line is open.

[Simon Flannery, Morgan Stanley]

Coming back down to your comments around the balance sheet, could you just talk a little bit more about the use of leverage versus equity? So what are you comfortable with in terms of taking the leverage from where it is today? What's that upper end of that range?

And then is there something that you might amend if say you were looking at some M&A? Maybe if you could just comment more broadly on any M&A opportunities that you might be considering? Thanks.

[Dan Schlanger, CFO]

As we've discussed a lot in the past what we look at is we want to maintain an investment grade credit profile, which we believe means we need to stay at five times debt-to-EBITDA which is our target leverage.

We've been right around there. We ended the year right around there, right at five times just north of it, and so when we look out and see what our expected capital spend is over the course of 2019 and the incremental EBITDA that we believe we will generate and the leverage capacity it will create, we think that we're going to be able to use that leverage capacity in our internally generated cash flow to pay for the capital expenditures and maintain around five times debt-to-EBITDA.

So that's why we think that we're in a position where we don't need equity. From what we can tell right now, we don't need equity through 2019 based on what we see the capital spend profile to be.

To your point though, if we do see some M&A activity out and think that's something that's attractive for us, that would be external to what we just talked about. That would be funded in a way that would be consistent with maintaining our investment grade rating and five times leverage, and would likely include equity because I think we're going to buy whatever company or assets we would buy it would be for more than five times.

So it would include some equity at that point. But when we're talking about our capital program from 2019, we feel pretty good about our ability to finance it.

[Jay Brown, CEO]

Simon, more broadly on the M&A front, we've talked about this I think the last several quarters on the call. We really don't see opportunities in the market of large scale that are going to fit our strategy, our focus around earning metro fiber that's dense with high capacity and believe the more likely approach for us is going to be to invest to be a building ourselves organic build.

There may be some tuck-in acquisitions in some markets where we find an opportunity where it makes sense to buy it versus build it, but we think the more likely outcome is that we're going to be building fiber to meet the demand that we see coming for small cells.

[Simon Flannery, Morgan Stanley]

And it limited interest internationally?

[Jay Brown, CEO]

Yes. We continue to believe the U.S. market is the best market in the world for the investment in communications infrastructure. We're always open to learning and seeing what else is going on in the world. But based on everything we've had the opportunity to see thus far we think the best opportunity for returns exist here in the U.S. it continues to be the largest and fastest growing market in the world.

And to my comments that I made around 5G, we certainly believe the U.S. is going to lead the way on 5G in the amount of capital investments here and the potential opportunities we think are the greatest here in the U.S.

[Operator]

We'll now take our next question from David Barden from Bank of America. Please go ahead. Your line is open.

[David Barden, Bank of America]

I guess, one follow-up on that, Dan. Just when you guys gave guidance last quarter with the interest expense that you built in, it was clear that the debt funding was going to be the lead vehicle for financing the business.

So can you give us any more color now in terms of what you're thinking in whether it's a revolver or debt unsecured or secured and kind of the timing as we think about kind of the numbers flowing through in the year?

And then the second one is, could you guys share any kind of incremental color on the tenant extension that you kind of announced with the source of kind of the guidance raise this quarter?

When I look at the supplement on page 18, it's really hard to see that anything really changed there at all? So it wasn't clear kind of what the moving part there was will be helpful. Thank you.

[Dan Schlanger, CFO]

Sure. I'll take the first one Dave, and thanks for the question. When we put together the guidance as you pointed out, we had assumptions around how we would finance the business and through 2019, and nothing has significantly changed in the way we think about that. We clarified just now on the equity point but nothing has changed on how we think about financing our business.

What we're trying to do is maintain our investment grade credit profile and do it at the lowest cost we possibly can. And when we look out and see what the market looks like in terms of trying to term out debt or what our revolver capacity is, we feel good about the flexibility we have on our balance sheet and we'll just be opportunistic as we look out and see when it makes sense to try to turn things out to the extent that we want to between secured and unsecured and anything - any other funding source we could possibly get our hands on because we want to be open to everything.

[Jay Brown, CEO]

Dave to your second question, we did not do a new - as people would often term it a new deal during the quarter. So what we're speaking to and the adjustment that we made to the outlook doesn't have to do anything with something new that we crafted a new deal with customers.

It was just related to the activity that we saw and then the term of the leases on those - on that leasing activity. So as you know we're hesitant to get into the specifics of how we transact with customers but that's what's driving the reference in both the press release and in the numbers.

[David Barden, Bank of America]

So this wasn't something new. And it was not a term extension that got signed in the quarter?

[Jay Brown, CEO]

It was not a new deal that we did no. It would be term related to the leasing activity that we saw during the quarter.

[Operator]

We will now take our next question from Ric Prentiss from Raymond James. Please go ahead. Your line is open.

[Ric Prentiss, Raymond James]

Appreciate for taking the question. Two quick ones. Dan you mentioned in your prepared remarks the CapEx, the 1.7 billion in 2018 and then in 2019 2 billion gross, 1.5 billion net. The 2018 number, is that 1.7 billion, is that a gross number or the net number?

[Dan Schlanger, CFO]

That's a gross number, the 1.7.

[Ric Prentiss, Raymond James]

Okay. So the 1.7 we compared with the 2.0 gross in 2019.

[Dan Schlanger, CFO]

Yes.

[Ric Prentiss, Raymond James]

And then following on Dave's question on page 18 of the supplement, the one thing we noticed was - I know you don't like to talk specific but the numbers that are out there that I think T-Mobile 2022 annual rent, cash payments at renewal went from 560 to 510 in 2022. Is that part of what we're seeing that as some of that renewal timeframe got extended out beyond 2022?

[Dan Schlanger, CFO]

Ric I don't want to tie components of what we've given together but you're correctly reading the supplement to see that the term for components of revenues that were in earlier periods are getting pushed out to later dates. I would be careful about drawing too many connections between the numbers. But as you read the supplement on the face of the supplement you're accurate that term has been extended.

[Ric Prentiss, Raymond James]

And the average life I think did come down for Sprint from seven years to six years, all the other guys stayed at their previous number is that just that we've rolled off another year and if somebody stays at five years or six years that there's been some extension? I'm just trying to think how should we read the supplement kind of year-to-year and what happens to the remaining life?

[Jay Brown, CEO]

Yes, I think the way you described it is a good way to think about as we've just crossed over the year. And so depending on what the terms of given contracts are absent activity on a site and you're going to see those come closer to zero. And to the extent that there is activity or new leasing activity it's going to move the book out towards the right.

[Dan Schlanger, CFO]

The only thing I would mention Ric is that maybe to clarify the point you made is because they're whole numbers, there's rounding there too. So, the fact that one stays at five from one period to the next period it doesn't mean that we extended it. It just means that it hadn't crossed over from a rounding perspective.

[Ric Prentiss, Raymond James]

Makes sense. And we haven't heard any comments from you guys on DISH, but it does feel like other people are starting to see DISH show up. Has that been helping the benefits? Have you seen some movement from DISH on putting their narrowband IoT network out there?

[Jay Brown, CEO]

As you know we don't like to comment specifically on individual customers. I would tell you outside of the Big 4 that there is spectrum that's being deployed for a number of different uses and that is helping our revenue growth results and we think there's opportunity for more of that in the future.

The majority of the revenue growth that we see both on towers and small cells is really being driven by the Big 4 operators. But beyond that the infrastructure is useful for anyone who wants to deploy a wireless network and we're seeing demand from a number of customers outside of the Big 4.

[Operator]

We will now take our next question from Brett Feldman from Goodman Sachs. Please go ahead. Your line is open.

[Brett Feldman, Goodman Sachs]

Thanks for taking the question. You were talking about the increasing pace of small cell no deployment going from 10,000 to 15,000 up to 20,000. And what we've seen in the past is that as you've ramped up your capacity to deploy small cells, there has been some increase in your operating expenses.

I was hoping maybe you could just explain that dynamic to us. Are you at a point right now where there's some type of a linear relationship, meaning if you'll increase your deployment pace by 1,000 nodes or so, there's going to be a certain amount of increase in your expense?

Are you beginning to hit a point where there's an increasing degree of operating leverage within the business that as you scale your growth, you may be start to see more conversion of that revenue towards the bottom-line?

[Jay Brown, CEO]

Yes, Brett I would say based on what we have in the backlog currently that we're working on both for 2019 and the work that we're already beginning on nodes that will go on air in 2020 and beyond, we think that our operating structure as is currently situated is sufficient to manage that growth.

To the extent that the pipeline growth even larger or we're trying to put on air more than - as I mentioned in my comments, trying to get on air somewhere between 10,000 and 15,000 nodes in 2019. If we were to meaningfully raise that number beyond that, then we'd have to come back and talk about what we think the cost structure is appropriate.

If it were to get to that things that would matter in that analysis is how many new markets are we having to go towards. To the extent that the increase with end markets that we exist in, it might have less of an impact towards rising cost.

If we see the opportunity expanding beyond existing markets, then that would have a different calculus in terms of thinking about operating expenses. But I think the right way to look at it now is for the pipeline that we have currently contracted, we think the operating expenses are a stable level of activity to handle that level of demand.

[Brett Feldman, Goodman Sachs]

You mind if I ask a quick follow-up. As we think about the bottleneck in your ability to deploy at any given pace, what would you say it is? Is it the absolute level of demand for small cell deployments? Is it your own capacity to meet that demand? Or is it external factors like the zoning process?

[Dan Schlanger, CFO]

Well, in terms of timing, obviously, as we talk about the timeline to deploy this 18 months to 24 months to get them deployed we could - if we were to see an increase in the amount of nodes that we're contracting today, we'd be two years away from actually benefiting from the revenue associated with that.

So in terms of financial results, I think the biggest bottleneck I would point to is the amount of time it takes to get these deployed. The regulatory hurdles to get there are significant and the FCC has obviously helped us through their recent order and it gives some clarity around what the nature of the deployment should good look like and it gets us to the path towards working with communities in order to get something in place. But nonetheless, the hurdles are there and the timeline is significant. So that's probably the biggest bottleneck.

Obviously, we think based on everything that we know and what we're seeing around 5G, we think the opportunities for small cells is very likely to increase over time. And so to the extent that the overall demand for small cells increase that is certainly a gating item currently in terms of what the cap on what our opportunity is. And over time we think the opportunity is going to grow. But specific to financial results, it would be the timeline currently that it takes between when it's contracted and when we can get it on air.

[Jay Brown, CEO]

And the only thing I would add to that Brett, I don't think it's our internal capability or capacity that is a bottleneck at all. We've been able to scale, as Jay was talking about in an answer the first question you asked, from 5,000 nodes or so a few years ago to 10,000 to 15,000 nodes now do you think we can continue to scale. It's really the combination of how big that demand will be ultimately in the time it takes to get there.

[Operator]

We will now take our next question from Jon Atkin from RBC. Please go ahead. Your line is open.

[Jon Atkin, RBC]

So I was interested the natural disaster reference what specifically were you referring to? And is there any sort of continued impact into 1Q?

[Jay Brown, CEO]

We don't expect there will be any flow-through to Q1. Specifically, what we're referring to was Hurricane Michael in Puerto Rico and then the significant fire that happened in Southern California.

[Jon Atkin, RBC]

And then during the script you mentioned the word latency. So that made me think about Vapor IO. I'm wondering if you could kind of provide any update operationally and potentially financially what we can kind of expect over the next year or so.

[Jay Brown, CEO]

We're continuing to do some work on edge computing. As the networks get designed and traffic increases to my comments around, where traffic is increasing on mobile networks, we continue to believe that some of the traffic in order to get to the latency required for Internet-of-Things, some portion of the network is going to have to be designed where information is kept at the very edge of the network, some for cost purposes, but also for reduction in latency. And we believe that it makes a lot of sense for a meaningful portion of that edge compute to be put in places where there are existing macro sites connected to small cells.

So we're continuing to do a number of trials there. But it's still very early and you shouldn't expect to see any impact to our financial results certainly not in 2019 and the outlook that we've given from the work that we're doing there. But long-term, it could be an opportunity. It may result in us having another use for leasing our sites whether it's the ground or space on the towers related to edge compute.

[Jon Atkin, RBC]

And then finally, I was wondering, if you could comment on the organic growth rate within fiber exclusive of small cells, so enterprise fiber essentially?

[Dan Schlanger, CFO]

What we're looking at is about mid-single-digit growth rate on the revenue basis for the fiber solutions business exclusive of small cells. Small cells growth we think is going to be closer to 20% range and that's comprised in the fiber solutions business. That's net of high-single digits of churn. So the overall growth we think we'll get there is around 5%.

[Operator]

We will now take our next question Colby Synesael from Cowen & Co. Please go ahead. Your line is open.

[Colby Synesael, Cowen & Co.]

You've historically talked about expanding the number of markets where you see the small cell opportunity. I was wondering if you can give us color on what that looks like today and how many of those markets do you have fiber in at this point versus you'll need to get there? And those markets that you don't have fiber, is it about organically building or is it more like that you'd do those tuck-ins that you described?

And then secondly, when would you expect to see massive MIMO type of equipment start to get put up on towers? Based on the conversations that you're having with your customers, is that something that you're starting to happen in 2019 in a material way or is that still out there? Thanks.

[Jay Brown, CEO]

Yes, Colby to your first question the vast majority of the spend by the wireless operators for small cells continues to be in the top 30 markets in the U.S. so basically the NFL cities. And we have fiber plant in many if not all of those markets now or we're in the process of constructing it.

To the extent that the expansion goes beyond those top 30 markets, which we're doing some of that, but it's not a meaningful amount of capital or frankly a meaningful amount of small cells yet, so that's where the opportunity is currently. And that would stands for both the pipeline of nodes that we're deploying and we'll put on air in 2019 as well as our contracted backlog at this point is mostly focused on those top 30 markets.

As I mentioned earlier, my comments around the M&A I intended those to be more broad than just the markets that we're currently working in. As we look at markets even beyond the top 30, we don't see acquisitions as a likely outcome for any meaningful amount of the fiber that we may want to own. We think it's more likely that we're going to end up having to build it. And that's a result of us assessing the type of fiber that exists in the market.

We just don't see the dense high-capacity urban fiber in markets whether we're talking about top 30 or beyond the top 30 that are likely targets of any meaningful size to us, we think we're much more likely to be more organically building that fiber.

On your second question around MIMO and tenants, we are seeing some of that, but I don't know that that's - frankly that relevant ultimately to our investment story. As carriers deploy equipment on the small cells and on towers in order to deploy network and manage both their spectrum position and capacity needs.

They do a number of different things with the antennas in order to meet that. And in order to design the network, there are a lot of demographic characteristics that are going to fall into that analysis.

The relevance for us is much more around - is there need for it and then how are they designing the network. We are seeing some of the massive MIMO antennas being deployed, but I don't know that that's really a meaningful component of our investment story. I would look much more at just the overall activity and the deployment of network and the carriers will make different choices around how they deploy that network depending on the demographics.

[Colby Synesael, Cowen & Co.]

I think for the lower band spectrum, massive MIMO will require significant pieces of equipment. Some people will say like the size of a small dorm room type or refrigerator. And as a result of that just considering the size of that there's a viewpoint that that could by itself be a material driver to growth for the tower operators when that happens. I guess your point is that we shouldn't isolate that as a material revenue opportunity is that what I'm hearing?

[Jay Brown, CEO]

Exactly, because they could solve the same thing by using more sites or different types of equipment depending on what spectrum bands they use and how they choose to do it. So just in isolation, I wouldn't necessarily assume that would be a large revenue driver for us.

[Operator]

We will now take our next question from Matthew Niknam from Deutsche Bank. Please go ahead. Your line is open.

[Matthew Niknam, Deutsche Bank]

Thank you for taking the question. It's on light towers. So I guess it's about a year now or over a year since you closed that deal. Can you just update us on some of the revenue synergies you are talking about for both CCI's existing enterprise and fiber assets to leverage the Lightower network and then obviously your ability to add new small cell revenue on that existing fiber?

And then on the cost side, I know there wasn't much that you'd outlined in the way of cost synergies. But is there anything to think about now that you've fully integrated the asset on a go-forward basis having multiple fiber assets under CCI's ownership? Thanks.

[Jay Brown, CEO]

Sure. When you're into the Lightower acquisition things have gone basically as we expected. So we've been pleased with how things have gone the first year into ownership. We, as part of the acquisition have the benefit of attracting about 900 employees that came with it and they have been terrific, very seasoned, great skills and haven't done a good job continue to run that business and have been an integral part of the integration of the other fiber assets that we had acquired previously.

I'm pleased today that we've effectively completed almost all of the integration activities and have everything on a common system. So excited about what's that going to mean for us with regards to revenue synergies.

When we announced that transaction and as we look today, there are a number of nodes that are going on existing fiber and some of the fiber that we acquired we were down the road on already contracting the nodes. And so we're using the fiber that we acquired to handle some of those nodes.

And given the markets that we acquired mostly in the Northeast Lightower and in the two Texas markets that regard with FiberNet, there is a significant amount of opportunity in those markets for small cells. So we're really early days in terms of the deployment of small cells against the fiber that we've owned, but the pieces is playing out as we would've expected 12 months into it.

[Dan Schlanger, CFO]

From the second part of the cost synergy standpoint, what we're talking about is what we meant we thought - as Jay said, we breakup 900 people and knew what they're doing and we've kept - we've kept the vast majority of those people and we're not looking to try to bring out cost synergies to try to make sure we're operating that any differently than it has been operated in the past. What we're looking to is trying to expand our market.

[Operator]

We will now take our next question from Nick Del Deo from MoffettNathanson. Please go ahead. Your line is open.

[Nick Del Deo, MoffettNathanson]

I realized that it might be a challenging question to answer just given the very nature of fiber. But can you try to give us a sense for what share of your purpose-built small cell systems are also generating some sort of revenue from non-small cell source like an enterprise customer or perhaps what share do you sell a few years after they were constructed?

[Jay Brown, CEO]

I don't know that I have a number of the top off my head Nick, to be able to answer that - answer that question for you. As we look at individual markets which is - we tend more to look at the business on as we study how have we done in particular markets when we talked about some of these case studies in the past, we'll do a deep dive in a market like Chicago or New York and look at what was our initial investment, how much fiber did we own initially, what was the nature of that initial fiber relationship whether it was K-12 or enterprise or small cells and then watch it develop over time.

And as we look at individual case studies what we've seen if the thesis has played out as we expected. When you own fiber in areas where there's a dense population of people those are the places where the wireless networks are challenged and they need to add capacity and so we see those fiber networks. Whether we start with small cells or we start with a fiber solutions application, we see overtime it being an asset that's shared and we find that in areas that are dense, urban, downtown business districts.

And then we find it in more suburban applications. In both situations, the fiber ends up, where the people are, the fiber ends up being needed for business enterprise hospitals universities, schools and being necessary for wireless.

[Dan Schlanger, CFO]

And one of the good things about the strategy we've deployed is - and why we're so interested in the fiber we're interested is having lots of strengths high-capacity fiber and lots of density really plays into all of that. So having the ability to serve all those markets at the same time with the level of service that isn't necessarily available in the market because the fiber is so unique just that the capacity we have is unique through most - through a lot of that positions us really well to take advantage of all the markets we can serve.

[Nick Del Deo, MoffettNathanson]

And then Jay in your prepared remarks you talked about expected wireless traffic growth and how that drives your outlook for your wireless infrastructure and historically with towers exclusive nature of the assets in the physics of wireless deliveries meant just to be of pretty strong linkage between attractive growth and monetization rates, when I think about fiber solutions that relationship doesn't seem quite as clear given ongoing improvements in Medtronics and there being more competition. So with respect to fiber solutions, specifically, how do you think about the long-term relationship between traffic growth and revenue growth?

[Jay Brown, CEO]

Nick appreciate that question because I think there is a sense in which that question drives towards the heart of our strategy of all the IP traffic that's out there, Internet traffic that's out there, is not the target of our business. And so there's a significant portion of that traffic that we don't serve today, a significant portion of it that we wouldn't ever aim to serve.

The portion of the market that we're aiming for is large enterprises, universities, hospitals, in some cases government systems that are large users most of the time a few multi-location businesses.

And that's really our only - that's our target for providing fiber solutions where really all we're providing is the pipe and the pipe happens to run along places where because of the demographics of an area, there's going to be a lot of users in mobile technology there and constraints on the network and therefore that fiber is going to be needed for small cells.

So I think overall traffic is indicative to some degree of the opportunity that's in front of us with those large enterprises, hospitals, universities, et cetera. But I would not try to take our fiber solutions business and draw a direct connection to overall growth in Internet or IP traffic over time as a direct correlation to what our revenue growth in our fiber solutions business is.

I do think of the mobile side, which is why I made the comments that I made, I do think that on the mobile side that that traffic is a good indication of the necessity of improvement in network particularly with regard to the uses of that network.

As latency comes down, not only is it latency a concern, but reliability has to go up pretty meaningfully from where the wireless networks start today in order for the devices that are likely to be used in the 5G environment to actually be effective and be able to be relied upon for industrial uses.

And that increase and the reliability of the networks and the reduction in latency is going to mean a pretty significant increase we believe in a number of places where there's deployment of wireless spectrum both on towers and small cells. So to wireless traffic, I think, it's a pretty good indication on the total traffic side or wire side probably not the best indication for our business.

[Operator]

We will now take our next question from Michael Rollins from Citi. Please go ahead. Your line is open.

[Adam Ilkowitz, Citi]

This is Adam Ilkowitz on for Mike. I was curious about the site leasing growth in the fourth quarter came in a little bit above what we're expecting.

I was wondering if you can give a reason for what drove that, and maybe why didn't flow through the 2019 guidance that wasn't updated for organic? Thank you.

[Dan Schlanger, CFO]

The driver of the most of that incremental activity was actually our small cell business where we saw the activity levels a little higher than what we expected going into the quarter. And the reason it didn't roll through is because we've given ranges around what we think 2019 will be and this is all within those ranges.

So we don't anticipate updating guidance every time something moves by a couple million dollars. We're trying to make it where the range is incorporate what we think is a reasonable expectation of the potential outcomes and this falls within that range. So we're not going to update it for that.

[Adam Ilkowitz, Citi]

And then just a follow-on. The small cell business and the tower business given that a lot of customers are overlapping, can you talk about what type of relationships those two businesses are having in the sales process?

Are you signing joint contracts for both products? Or are your customers continuing to think about those products in areas that are addressing separately? Thank you.

[Jay Brown, CEO]

On the carrier side, the individuals who are deploying network would be handling both towers and small cells. So we don't see separate groups that we're having those conversations with. They're very different conversations though in terms of as we think about value.

On the small cells side, we're deploying a significant amount of capital generally speaking about 75% of the activity that we have or thereabouts is going to be related to anchor activity and the balance would be colo.

So in that 70%, 70%, 75% of the total activity being anchor activity we're deploying significant amount of capital in order to build those systems. So the conversation on that front is around the yield and return on that invested capital.

As we've talked about before, we would expect in order to deploy capital somewhere in the neighborhood of a 6% to 7% initial yield and then ultimately we get to a return to justify the investments and an acceptable return ultimately to the shareholder of adding multiple tenants beyond that. So our evaluation on the small cells side comes down to what's the investment required and what do we think the potential return is based on location and other things.

On the tower side, it's a different conversation. It's around what assets exist in the market that will need or solve the needs that they have. And there because of the agreements that we would have with all the customers, we're not really doing an analysis around what the return on a per-dollar basis is for the investment of capital because the capital investment has already been made.

So it's a conversation that happens with the same people, but it's a very different conversation depending on the type of product that they're trying to buy from us.

[Operator]

We will now take our next question from Walter Piecyk from BTIG. Please go ahead. Your line is open.

[Walter Piecyk, BTIG]

I just want to ask obviously again about the prepaid my favorite question. It looks like for the year, you were guiding to 35 to 40. It was at the minimum of the high end maybe over. Can you talk about what were the issues there?

And then for next year, you had talked about doing 35 to 40. What's on top of this year? What's the increase? Is the baseline for that is at 3.27 million that's reported? Or is the baseline the 2.92 million or maybe lower that excludes the acquired prepaid for the quarter? Thanks.

[Dan Schlanger, CFO]

Sure, Walt. So first, yes the prepaid came in a little bit above our 35 to 40 guidance. Small cell activity was a little higher and so we got a little bit more prepaid activity - prepaid rent proceed in that case for 2018. Going forward, I think what we said is somewhere in the 30 to 40 range in 2019. That would be over and above the 3.27 million you talked about so total all in. That's the number I think you're looking for.

[Walter Piecyk, BTIG]

And then just one other question, as far as the churn makeup, when you look at the guided churn, assuming the tower churn is in this kind of whatever 2% to 2.1% ballpark, right? And then so for the fiber business, what's left over is if you get 25% of your business is small cells and that's whatever let's say 1.5% churn that's probably high given its early stage.

To get to your the guided churn or disconnect stuff that's implying like a 10% churn number for the enterprise business. Am I thinking about that properly in terms of kind of breakdown of the churn?

[Jay Brown, CEO]

Yes. I think you're close. I think on the tower side both for 2019 and years beyond, we think the churn rates are around 1% to 2%. And as you mentioned, we're going to be at the high end of that for 2019. Our working assumption for long term is that small cells are going to have about the same level of churn.

Fair to say that maybe in the short term here we don't see quite that level, but in that same 1% to 2% range. And then on the fiber side, we think it's high single digits. So we've talked about the fact that we think it's about 9% in 2019 in the outlook that we gave.

[Walter Piecyk, BTIG]

So your base is pretty conservative then because the numbers - if you put 9% in there then now that would kind of to get to the low-end of the range. So I guess that the guidance in the churn sounds like it's fairly conservative then, unless - because there is no exogenous churn events in macro towers I don't think expected in 2019 right?

[Jay Brown, CEO]

Yes. I think we're probably - we're trying to give ranges, so depending on where you point in the range you squeeze out the other side and - we're just trying to give a range. But I think from modeling purposes I think somewhere in the neighborhood, we think the fiber business is going to run in an around those high-single digits around 9% and then 1% to 2% on tower and small cells.

[Walter Piecyk, BTIG]

Got it. Thank you.

[Dan Schlanger, CFO]

And Walt, just to clarify on the exogenous tower event. We do think that some of the - about half of the churn, we're going to see in towers is because of the acquired network churn that's coming through. So, I'm not sure you call that exogenous or not, but we didn't want to call it out. It's something that we see is we don't think it repeats forever.

[Walter Piecyk, BTIG]

I may have to look that word up from the dictionary. You just used it. I'm not even sure what that means. But I appreciate the answers. Thank you.

[Operator]

We will now take our next question from Amy Young from Macquarie. Please go ahead. Your line is open.

[Amy Young, Macquarie]

I guess I'm just following up on our previous question, but I think your past view was that small cells return will be similar to macro sites at scale. I guess where do you think you are? And how far along are you to reach scale? And has there been anything in the past year that's changed your view on that? Thank you.

[Jay Brown, CEO]

Amy, we're really early days on small cells. So our initial yields on small cells as I mentioned are around 6% to 7%. If you look at our entire Fiber segment with small cells and the fiber solutions, we're getting about an 8% yield on the invested capital around fiber. So we've taken both the acquisitions that we've done as well as the builds and we've grown - we've already grown the yield on the $13 billion that we spent there above kind of our initial entry point.

On the tower basis, if we roll the clock back to a couple of decades ago when we first started acquiring towers, we acquired a significant number of our towers at about a 3% yield and have grown that yield over the last two decades.

If you look at this on a micro sense and we look at what's the return on tower versus return on a small cell system they're very comparable. As we add additional tenants to small cells, we see the returns and the margin expand at about the same pace, if not maybe slightly faster on the margin side than what we saw in the tower business.

And at the end of the day, we see returns with pretty reasonable assumptions around what we think lease-up is, somewhere in the neighborhood of about the equivalent of little over two tenants per tower. On a tower basis, if we were to do that same math on the small cell side, we would get two returns that are well above a blended cost of debt and equity and provide substantial return as we think about growing the dividends per share over the long-term.

Last thing, I'll mention about this is, the key characteristic around what drives that return is what is the lease-up associated with the asset. So you enter the asset with an anchor tenant and have a going-in yield from a tower aside. Historically, it's been about 3%. Small cells it's about double that at 6% to 7%. But then what's the co-location model look like and at what rate do we see co-location and that drives the return long-term.

Our experience has been thus far that the pace of leasing on existing investments we've seen lease-up that's about twice the pace of what co-location is on the tower has happened over the last decade or so. So we've accelerated the pass towards co-locating and sharing the asset as we've deployed these early systems with the small cells as the second and in some cases third tenant has come along and use that same system.

So our thesis in terms of the model is similar to towers is playing out at the same time that we're scaling the business significantly. As I mentioned, I think I mentioned this last quarter in 2019, we think we'll deploy roughly double the number of small cells or double the growth that we had in 2017. So that kind of growth is expanding the overall size of the pie.

And as we look at it on a micro sense, the model is playing out, but it's playing out against the scale of assets that's much smaller than the entire size of the investment is today, because it's grown so significantly in terms of our investment and opportunity that when you look at the yields on the total, yes it's headed in the right direction going from initially 6% to 7% to now 8%, 8% plus. But the overall book of that growth and the total return yield is going to take many years just like what it did in towers as we move the base and increase the opportunity.

[Amy Young, Macquarie]

And I guess just following up on that, I think we've seen one or two carriers deploy small cells internally. And what do you think is driving that decision? And does that potentially shape your view on what you just said?

[Jay Brown, CEO]

I think there are - I think all of the carriers are deploying small cells in some form of a self-perform. We certainly don't anticipate that we'll win 100% of the market share just like we've never done that on the towers side either. We think at the moment we're somewhere in the neighborhood of about half of what's getting deployed that we're winning.

And I think the fact that the carriers are self-performing should be a good indication of the fact that it's a good business, and they need small cells. There are certain locations where we're going to choose not to build them, because we don't see the lease-up opportunity there, and therefore we don't see the shared economics for great returns over the long-term.

So I think the carriers will continue to self-perform in places where we don't view those to be the best places to invest capital. And just like we saw for a long time on the towers side where carriers built their own towers in places where tower companies or others were not willing to invest the capital in order to build the infrastructure.

[Operator]

We will now take our next call from Spencer Kurn from New Street Research. Please go ahead. Your line is open.

[Spencer Kurn, New Street Research]

I'm just wondering you've guided to $120 million to $130 million of new leasing revenue on towers in 2019. How does that compare to what you guys saw in the fourth quarter? I'm just trying to gauge whether your guidance assumes any acceleration in activity or is it pretty much an annualization of this past quarter? Thanks.

[Dan Schlanger, CFO]

Spencer, it's similar to what we saw in the fourth quarter. But as what we're talking about and have talked about what we're excited about is just the level of activity increasing over time and all of our customers being active across our towers business. So we do think that that will continue through 2019.

[Spencer Kurn, New Street Research]

And I just have one other question on node density, I think in small cells. I think today you've got around two nodes per mile on average. And sorry it's actually lower than that. But my question is, we've heard of some deals where carriers are signing deals for 10 to 20 nodes per mile. I was just curious, could you talk about the sort of distribution of your small cell node density? Sort of how many markets do you have with node density maybe 10 nodes per mile or five nodes per mile? I'm not sure how you break it out. And then also, are you seeing this set of deals becoming more prevalent in your conversations? Thank you.

[Jay Brown, CEO]

Yes, Spencer, just to clarify a couple of points. So when we're deploying new fiber and building it for the purpose of small cells, our average is just over two nodes per mile currently as we're deploying. That's how pretty consistent. When you get to the specific examples and we start to look at some case studies, we could show you many examples in dense urban markets where the node count is between six and 10 nodes per mile and we don't think those are by any means isolated examples.

We think that over time, we're going to continue to see a density that's significantly beyond what we are currently in terms of small cells per mile. That's well beyond - if we start talking about six to 10 nodes per mile that's well beyond what we're underwriting when we do - when we decide to make these investments.

We're closer to underwriting in the neighborhood of about four or little over four nodes per mile in terms of the density. So if ultimately networks get to kind of some of the numbers that you're talking about and I believe there is a case where that could happen that's not in our underwriting case, but we've both seen it in practice and believe depending on the density that ultimately happens and is necessary for the 5G, we could get well beyond what we are underwriting when we make these investments. And time will tell on that front.

But as we look at individual case studies and look at some markets some of the early deployments in both center of business districts, as well as some areas of suburbia, we do find examples. As the carriers go out and initially deploy they're deploying somewhere in the neighborhood of two per mile. A second carrier comes along and does a similar deployment and then one of those two original carriers comes back and adds additional nodes to that existing deployment in order to increase the density.

So we end up getting lease-up if you will in co-location both from the existing deployment, as well as a secondary deployment that comes back and has additional nodes in order to increase the density. We think over time that's the way this is going to play out.

[Operator]

We will now take our next question from Robert Gutman from Guggenheim Partners. Please go ahead. Your line is open.

[Robert Gutman, Guggenheim Partners]

It seems like almost 80% of CapEx is on the fiber and small cells side. It seems like small cells specifically would be a small portion of that at this point. Can you discuss broadly how it's being spent? Is this on the organic sort of dense fiber builds in markets and markets that you mentioned earlier that you're trying to get to organically? What is the timing of associated revenue generation on that? In other words, is it specifically linked to the backlog of small cells? Or is it just building without specific contracts? That's basically what I'm trying to get at.

[Dan Schlanger, CFO]

Sure. I think just trying to take a step back and tell you how we think about spending capital. What we're doing is we're spending capital to build the fiber in markets where we see significant demand for small cells and continuing increases in that demand for small cells.

So what we're trying to do is take markets where we think it's going to ultimately be very conducive for small cells. And we will only start building in those markets when we have a contract in order to do so.

So when we think about what that new capital expenditure - revenue-generating capital expenditure looks like, the majority of it isn't our fiber segment, but the vast majority of that is going in to build small cells systems.

Having said that, those small cells systems include fiber that as Jay was pointing out earlier will put us in a position to go after some fiber solutions business that we're really interested in within those markets because it will likely be that the small cell deployment is close to where that fiber solutions business will come as well.

But to your specific point on what the revenue timing is, since the vast majority of that is for fiber, I mean, is for small cells, the fiber that support small cells, it's an 18-month to 24-month on average deployment cycle, which means that the capital will come in through the course of that 18 months to 24 months before we see the revenue come in from it. But there's not going to be a case where we're spending capital and hope that someday we'll get revenue on it.

[Robert Gutman, Guggenheim Partners]

And earlier in the call you mentioned, I think prior to this call you targeted 6,000 to 8,000 deployments in 2018 of small cells nodes. You had also prior mentioned the 35,000 node backlog.

I think earlier today you said 20,000 node backlog, but I would assume that's net of the 10,000 to 15,000 you expect to deploy this year. So then conclusion would be the backlog is unchanged? Is that right?

[Jay Brown, CEO]

Yes. So the short answer is yes, but I just want to make sure we get to all the same points. We have about 65,000 nodes either on air or under development. That number really hasn't changed. And so there hasn't been a significant move in that.

We've put around 7,000 nodes on air in 2018. And as Jay mentioned, the ending 2018 backlog was higher than the beginning 2018 backlog and so that we more than replaced the nodes we put on air with new bookings.

Looking forward, we think 10,000 to 15,000 nodes we put on air in 2019 and then we have 20,000 or so that will be put on air 2020, in the year 2020 or beyond. So you're right. The short answer is no. The backlog really hasn't changed. We're just trying to get a little more color around the timing and how that looks going forward.

[Robert Gutman, Guggenheim Partners]

Last small point, could you break out the final leasing by segment sort of in a light as it compares to the guidance that was outstanding in terms of tower of small cells and fiber?

[Jay Brown, CEO]

Are you asking for 2018?

[Robert Gutman, Guggenheim Partners]

Yes.

[Jay Brown, CEO]

So the new leasing activity was around 110 for towers around 60 for small cells and around 45 for fiber solutions.

[Operator]

We will now take our last and final question from Phil Cusick from JPMorgan. Please go ahead. Your line is open.

[Phil Cusick, JPMorgan]

I guess two please if I can. First as we think about those term extensions that drove higher straight-lined revenue it seems like that would be activity beyond regular way. But you've raised straight-line guide nearly every quarter in the last couple of years.

Can you give me examples of what this is sort of unexpected activity might be and why it might not happen in a particular quarter?

[Jay Brown, CEO]

Yes. It's not unexpected activity. It's related to new leases that we think - we understand are coming. It's just the timing of that is sometimes difficult to predict, but it's also the length of the term extension that we get maybe different than what we have in our forecast and that can drive incremental straight-line activity.

[Phil Cusick, JPMorgan]

Is it fair to say that you come in guiding for sort of the worst case in what those extensions might look like? And then as they come in you just stretch out the straight-line?

[Jay Brown, CEO]

I wouldn't call it worst-case, but it's hard to predict. And so I think we're probably on the conservative side of that assumption specifically yes.

[Phil Cusick, JPMorgan]

That helps. Thanks. And then what do you see - any change in the trends in enterprise fiber demand? Any change in bookings or churn pace there? Thanks.

[Jay Brown, CEO]

We really haven't seen any trends there. As we've now had the business for about a year. I think it is played out roughly in line with what our expectations were going into the business. I think we're getting better at understanding how the business works and how to position ourselves in the market. But I wouldn't point to anything that's changing our long-term view of how that business will perform.

[Jay Brown, CEO]

Well, thanks, everyone, for joining the call this morning. Obviously, we were thrilled with the outcome in 2018 and excited about the opportunity ahead as we talked about on the call this morning on a number of fronts the increased level of leasing activity around towers and small cells is exciting given what it means not only for calendar year 2019, but also what we think it what it will mean over the long term as the carriers look to deploy beyond 4G and into the 5G world.

So thanks for joining us this morning. Look forward to catching up soon.