Crown Castle’s fiber investments could buoy ‘bleh’ outlook

small cell technology on a pole on a sidewalk

Crown Castle’s heavy investments in fiber in recent years are paying dividends as the small-cell market finally begins to pick up some steam. And that fact might help buoy the company during what could be difficult 2017.

The venerable tower company agreed in 2011 to pay $1 billion to acquire Distributed Antenna Systems provider NextG networks in a deal that included rights to more than 4,600 miles of fiber. A few years later it purchased 24/7 Mid-Atlantic, adding 800 route miles of fiber infrastructure across the Maryland, Delaware and northern Virginia region. And last year it doubled down on that strategy by shelling out $1 billion in cash to acquire Quanta Fiber Networks, which is also known as Sunesys.

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“These investments are generating a yield of low double-digits, demonstrating the higher margins and returns we are driving through co-location,” Crown Castle CFO Dan Schlanger said during a conference call with analysts last week discussing the company’s latest quarterly results. “These results reinforce our view that small cells exhibit similar shared economics as towers and provide us with attractive growth opportunities in the future.”

To underscore Schlanger’s point, CEO Jay Brown pointed to Crown Castle’s growth in Chicago. The company had roughly 300 tenant nodes in use on 100 miles of cable in 2013, Brown said, and has 1,100 nodes live or under construction on 250 miles of fiber.

Meanwhile, “tenant nodes density” has increased from three tenant nodes per mile of fiber to five tenant nodes, and they are all on fiber that Crown Castle owns. “This results in a yield in our investment in Chicago of about 10 percent,” Brown said.

“The expansion beyond the central business district into the surrounding Chicago suburbs is an example of why we believe the total addressable market for small cells will be so significant,” he continued, adding that fiber buildouts account for “the vast majority” of the cost of small cell nodes. “Chicago is representative of what we are seeing throughout major U.S. metro markets, which is why we remain so bullish on the opportunities we see in small cells.”

Those fiber investments are beginning to pay dividends as analysts question the near-term outlook for Crown Castle and perhaps for the tower industry as a whole. The company “will set the tone for the industry heading into 2017,” MoffettNathanson analysts opined, but last week it lowered its guidance for next year. And that may not inspire confidence in the tower leasing model that remains the underpinning of the market.

“On that note, Crown Castle’s 2017 outlook looks, well… bleh,” MoffettNathanson wrote in a research note. “Results in Q3 were actually solid, and guidance for Q4 is about in-line, but those will be overshadowed by the lackluster 2017 bottom-line forecasts.”

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