Crown Castle International Corp. (NYSE:CCI) Goldman Sachs 2022 Communacopia + Technology Conference September 15, 2022 12:15 PM ET
Company Participants
Jay Brown – Chief Executive Officer
Conference Call Participants
Brett Feldman – Goldman Sachs
Brett Feldman
All right. Welcome. We’re going to get started with our next session this morning. It’s my pleasure to welcome to the first-ever Communacopia + Technology Conference, a long-standing participant in the Communacopia Classic Conference, Jay Brown, the CEO of Crown Castle. Jay, thanks for coming out for this.
Jay Brown
Thanks for having me, Brett. Good to be here.
Question-and-Answer Session
Q – Brett Feldman
I want to start by talking about one of the key things that makes you differentiated from or the early differentiated business models in the space, which is that in addition to being essentially the largest tower operator in the country, American Tower, peers on that basis, you’re also the largest provider of small cells. You’re one of the larger providers of enterprise fiber, independent providers of enterprise fiber.
And so in a sense, you were early towards broadening into more of a diversified communications infrastructure provider than your peers. And I think we’ve started to see a lot of other operators in the space start to think about things that way. What was it that encouraged you to think more broadly? And how do you feel the business opportunity has been unfolding since you first started to make some of those acquisitions in the fiber and small cell space?
Jay Brown
Yes. Really broadly, the way we’ve always thought about our business is providing the infrastructure that was necessary in order to deliver wireless communications to both consumers and to enterprises. And the way that we’ve thought about investing in towers, historically was around ensuring that we put the assets in the places where wireless traffic was going to end up both being and growing over a long period of time. And about a decade ago, as we started to study wireless networks and where we thought the future was going to be in the networks, we certainly thought that we would see significant amounts of data traffic growth as the world went from 4G into 5G. And in order to accomplish that kind of growth, we realized that the networks would have to densify well beyond any densification that occurred in the span of 1G through 3G and the beginning of 4G.
And we also realized that, that densification will require a very different kind of asset than what macro towers existed. Macro towers are — obviously, they’re tall. They’re very difficult to zone and plan. And so the densification of just macro towers of putting more of them in a small area was not a viable alternative. And so we saw small cells at the place where the carriers would use in order to densify their network as data traffic growth.
So it’s the tower model 2.0. It’s the place where wireless traffic is existing. It needs to be brought into their network. And so it was the logical asset to own. And that’s how we thought about it is, how do we put assets in the places where the wireless carriers are going to need it. And how it’s gone is basically as we expected. We put the assets in following a carrier to a location just like we would either built or build towers. Verizon says we need we need an asset in a location, we build the asset with the expectation that the other carriers, T-Mobile or an AT&T are going to need it. Same thing has happened on the small cell side. We have followed the carriers. We don’t build any of these on spec. We follow 1 of the major carriers to build the assets where it’s needed. And the expectation is you follow a T-Mobile or an AT&T to a location and you assume the other carriers are going to need it based on data traffic.
And so it’s gone as expected. We’ve seen co-location happen at a rate that’s faster, frankly, than what we saw historically with towers. And we’ve seen the yields on those assets that we initially built, and then co-located on over time, we’ve seen the yields on those track at or above the rates of what we’ve seen in the tower business do.
So it’s kind of towers 2.0, and excited about where we’ve positioned ourselves. I don’t see anything else on the horizon. You mentioned a couple of the other things that people have done. I don’t see anything else at this point that really fits that same kind of model, but that’s the frame through which we’re thinking about it. How do we own assets in the places where the wireless carriers and that wireless traffic are going to be created and used, and how do we put assets there to accomplish what they need for network builds.
Brett Feldman
I’ll ask 1 more question about this, and then we can kind of get into some of the fundamental drivers of the businesses that you’re in. It’s interesting to see that as large tower operators are looking to be invested in adjacent forms of infrastructure, everyone’s kind of have approached it a little bit differently. And at least in the case of what we’ve seen with you, Americans, to the extent SBA has done less of it, it’s generally been on balance sheet, part of your portfolio owned and operated.
Earlier this week, we had Marc Ganzi, I know you know very well from Digital Bridge. And he’s a big proponent that you need to be diversified. But the way they’ve approached it is to think about a portfolio of sort of sister companies. So run them all separately, have separate balance sheets, but have them work in harmony. Do you think that there may be an opportunity as the industry evolves, to have some sort of a similar model evolved for Crown Castle?
Jay Brown
Yes. I think in Marc’s case, he thinks about it as almost a portfolio of investments, and he’s got a really light — wide lens of what that opportunity is. I think we’re much more narrowly focused in terms of who our customers are and what the long-term strategic value of aligning with those customers and with the business model driving returns for our shareholders. So we’re much more narrow in terms of our focus and how we would think about opportunities than they are.
I think there is value in being valuable to the customer. And the shared solution that we’re providing to our customers is core to the development — the deployment of wireless communications to both consumer and to enterprises. And in that space, I think the opportunity in the United States is really, really attractive, and we have more opportunities than we need to deploy capital. So some of the more far-flung things that people could refer to as telecom infrastructure or data infrastructure, those, frankly, they don’t fit our strategic focus and where we think the most attractive, highest growth, lowest risk opportunities are.
Brett Feldman
All right. Let’s spend a little more time talking about your tower leasing business. Your outlook this year implies organic growth of around 6%. That’s faster than your peers. You’ve actually been growing faster than your peers for a period now. I think the conventional wisdom has always been, well, it actually makes sense because you have the most urban and densely populated portfolio that tends to be where a project start. We know where a lot of the C-band builds, for example, began in the biggest markets. And so the question is, are you inevitably going to start to see some deceleration as you move past this? Or are there other elements of your portfolio or your contracts that actually might make this more of a run rate?
Jay Brown
Yes. You’re right, over the last several years, we have outpaced significantly the growth in towers of that of our peers. Some of it is certainly asset location. Our portfolio is very focused on the most densely populated areas in the U.S. That’s true, both of towers and of small cells. We have historically focused capital there. They’re usually the markets where you see the most amount of capital invested and first. So I think there’s probably some first advantage there of — as the carriers have started to deploy 5G networks. They focused on those top markets, and so we benefited probably disproportionately from that respect.
I think we’ve also benefited from having a diverse offering of products to them that really meet both on the small cell and the tower side has helped our tower business — or in the side of the last 18 months or so, we’ve done the large DISH transaction where we contracted with them to take up to 20,000 towers. And they were very public about the fact that part of the reason they anchored their network on our network was the provision not only of towers, but also of fiber.
And so I think the thinking about the deployment of their entire network and for all of the carriers, both on the fiber side and on the tower side, gives us a really unique purview into how they’re thinking about deployment. I think it creates opportunities on both sides of the house, both for towers and for small cells to be so integral to their overall network deployments.
Brett Feldman
Yes. I was going to follow up and ask about DISH because obviously a sort of a new entrant to the space, a new source of demand for your assets. I believe the agreement allows them to lease space on up to 20,000 of your sites. And as you pointed out, based on where your sites are located, it’s very well situated for DISH to meet these population build-out requirements. DISH claims they met their population build-out requirement in June of this year. They now have a 70% requirement that they need to meet next year. And they actually have a few other geographic requirements that fold in after that as well.
So I guess the question would be, have they been fairly material recently, just knowing that they met a requirement that was sort of uniquely well suited to your portfolio? And then the follow-up is once they sort of meet these next build-out tranches they have to hit next year, they’ll have a lot more optionality in terms of their network strategy in the sense that they have 2 big MVNO partners. And so they could make a decision that maybe they don’t want to build as aggressively as they were to meet that buildout and maybe use the MVNO offload for some period of time. How material is it to Crown Castle depending on what DISH decides to do what the single customer decides to do?
Jay Brown
Yes. Obviously, it’s a significant commitment that they made to us to go up on up to 20,000 towers. And you can see from our public disclosures and theirs that, that total commitment is about a $4 billion commitment over a multiyear period of time. So it’s significant to us. And I would tell you in terms of the way they’re operating the business, they look like they’re deploying a nationwide network. They’re doing all of the things that you would expect of a company committed to building a nationwide network would be doing both in terms of local personnel, the way they’re thinking about directing those activities. And we’re acting in the same way. We’ve got a lot of folks working on their work for them and deploying their network for them.
And so we’ll have to see over time how they rely on their own network versus offloading some portion of the traffic onto other networks. But the commitment that they’ve made, the financial commitment that they’ve made to us would suggest it’s going to be meaningful for us for a multiyear period of time. And as the activity may flow one way or another, it’s not quite as important to us in terms of the timing of when we’ll receive those cash flows given the nature of the contract that we have with them.
Brett Feldman
Okay. I know you’re not going to be giving your 2023 guidance until your next call, so I won’t ask you for any ranges just yet. But if we just think conceptually about not just next year, but let’s say the next couple of handful of years, we get questions about what are the headwinds, what are the tailwinds for tower operators.
You could highlight a tailwind, and you could say some of the big operators like AT&T and Verizon have only recently got their hands on mid-band spectrum. And so they’re just commencing those projects right now. That should take them at least through next year, and probably beyond that just to get the initial wave of those sites deployed, that would feel like a tailwind. But then if you just go and simplistically look at the CapEx budgets that they have outlined, and they’ve all actually given multiyear CapEx budgets. This seems to be the peak year for wireless CapEx. So CapEx is going down, so isn’t that bad.
I mean as you just sort of think about the cross currents for your business at this stage of the 5G cycle, how do you think about what the demand environment is likely to look like for some period of time?
Jay Brown
Yes. I’ll do both the positives and the negatives. On the positive side, we’re still in the very early stages of 5G deployments. If you go back and look at 2G, 3G, 4G, those were 8 to 10 years of activity in order to fully build out the network. 3G is no different. So depending on which carrier you want to talk about, we’re somewhere between year 1, year 2, something in that neighborhood, early, early stages of deployment. And we got a lot of years to go. And beyond 5G, people are already starting to think about 6G and what’s going to happen in their network in 6G. So the forecast and — for network build, is very long-dated, and I think there’s a long runway of growth on that side. And it’s driven by these applications that are very low latency and increased speed. And today, almost all of that traffic is driven just solely by the consumer. But as you get into really low latency and high-speed traffic, I think we’re going to see a whole plethora of enterprise applications that start to enter that are going to create another leg of growth in the business.
And the growth — I mean the data traffic growth is absolutely staggering in terms of the amount of it. If you look at growth today, it’s the equivalent of the U.S. population doubling about every 2 years. So if we were to — a little over 2 years. So if you were to think about it in that context, if we were 50% penetrated in the U.S., and then we were going to be at 100% in 2 or 3 years, everybody would be like, wow, that’s a lot of traffic, where is it going to go? And that is what’s in front of us. And I don’t see anything about that curve that suggests it’s going to slow down that we’re going to be full on data traffic in 2 or 3 years.
So given that, I think we’re on a long trajectory of seeing significant growth, growth from the consumer as well as from enterprises as new applications are developed. And that’s the underlying driver of what we’ve talked about of being able to grow the dividend, 7% to 8% per year over the long term and believe that that is intact and it’s going to do really well.
And then we’ve invested, as we were talking about a few minutes ago around small cells, we think that adds even a kicker to kind of the growth because we’ve positioned ourselves where that data traffic is going and driving returns. So I like where our assets are situated, and I love kind of the environment that we’re in, in terms of data traffic and applications.
On the drags to future growth, I think there are probably 3 that are a bit near term. One is interest rates, obviously, impacting us and everybody else in the world. As those have risen, so some component of our cash flows will face that headwind. We talked about that on our last earnings call, the step up of interest expense.
Brett Feldman
It’s not a fundamental thing though, that’s just the financial impact of a macro.
Jay Brown
Yes. So it’s a onetime step. And once it’s in the cash flow stream, then it’s like, okay, you’re growing off of that base. And then on the — then we’ll face some of the headwinds of the consolidation between T-Mobile and Sprint. We’ve got some of that impact in calendar year ’23, which we’ll give more guidance on when we talk about our forecast for ’23, here in a couple of weeks. And then in ’25, we’ve got the consolidation on the tower side of Sprint and T-Mobile. There’s about $200 million of consolidation that will expense — offset to kind of revenue growth that will hit us in 2025. So those are kind of the 3 headwinds that I see.
The other things like you mentioned kind of where are the carriers at in terms of peak CapEx and things. I think it’s really hard to tell the points at which the offsets and where CapEx is and how it’s going to play itself out. I’d take a much longer view and say, there’s going to be a lot of network spend, they’re going to need a lot of sites over a long period of time. And I think we’ll go through these couple of headwinds with flying colors, I believe, and come out the other side of it doing really well and on track to kind of grow the dividend 7% to 8% per year.
Brett Feldman
I have a feeling this next question is going to end up being the transition between our discussion of towers and our discussion of small cells. So I’m just leading the witness here. If we think about the prior generations of wireless technology, there has been this very predictable and very positive cycle for the tower operators where they move to a new technology, they move to 3G, they move to 4G. They need to deploy that technology at their sites. They’re typically taking advantage of spectrum bands they previously haven’t used to do that.
And ultimately, it means they’re putting more stuff on towers they were already leasing from you. To support that, they then see usage. They realize they need densification, meaning they need new sites. So they say, “I’d like to start putting equipment on towers you own that I’m not currently on. They start amending that and that just becomes a virtuous cycle. And it seems like that has been a wash, rinse and repeat for at least 4 generations of technology.
My question to you is, what do you think that densification phase is going to look like in 5G? Because what’s interesting about 5G is that essentially all of the spectrum that is being used to support it is at higher frequency bands than we’ve seen in 4G networks, in some cases, significantly higher frequency bands, and we’ve typically thought of those as not having excellent propagation. So how do you think the densification is going to play out across your tower assets? And then I think the follow-up is going to be how are you seeing that impacting your small cell infrastructure assets?
Jay Brown
Big picture, I think the carriers will continue to think of the macro sites as the most cost-effective and efficient way to deploy spectrum. And regardless of what spectrum bands you think about, I think they will try as much as they can to deploy their network on macro site. It is very cost effective and efficient to do it. So macro sites will benefit across the spectrum band, but they’re not enough to accomplish all that needs to happen.
Data traffic has grown to the point in certain areas of the country where macro sites just simply cannot provide an ability for the carriers to split and reuse their spectrum enough time to cover that data traffic. And that’s where small cells enter. Small cells are complementary to towers. They offload some of the traffic on macro sites and fill in places where macro sites just cannot cover the geography and the density of people that are using these wireless networks.
So I think small cells will — the difference between the past generations and 5G will be we’re going to really see a lot of traffic being generated in places outside of macro towers. It doesn’t mean that traffic going across macro towers is shrinking. In fact I think it will continue to grow. But I think a portion of that growth in totality is going to be accomplished by small cells, by putting them in places where there’s gaps in coverage, there’s holes in their network, and the traffic has just gotten so great that the macro sites just can’t serve that much traffic. I think that’s sort of critical.
As we think about our own investment, the way we thought about investing in the fiber is we’re trying to go into dense urban areas where traffic is going to be the greatest, and we’re trying to own high-capacity fiber. So when we build it, we’re building north of 288 strands of fiber. It’s why there have not been acquisitions really available to us. We’ve done — we did 1 sizable one back in 2017, but we’re going on almost 5 years without really any meaningful acquisitions. My view has been, and continues to be, the vast majority of the assets that we want to own for small cells, given wireless data traffic growth are going to be built, purpose-built by us. And so we’re looking at for the places where there are those holes in the network where there’s going to be a big need for small cells, and then we want to invest our capital into those assets that are going to be shareable by multiple carriers over a long period of time, and drive great returns for shareholders, just like we did with towers.
Brett Feldman
In the last 18 months, you have signed contracts representing, I think, about 50,000 small cell nodes with T-Mobile and Verizon. I think before you signed those, you only had 65,000 that you had ever signed to date. So that was a pretty big step-up. Should we be thinking about this as an inflection point? And what does the funnel look like that gives you confidence that we are indeed at an inflection point?
Jay Brown
Yes. I think there’s — we’ve talked about this year as kind of the trough year, if you will, the low point of what — where small cells will be, and we think it grows from here. We expect to deploy in 2023, double the number of nodes that we’re deploying in 2022, and then grow beyond that. So we have a view based on the comments that you just made, which are spot on. We have a commitment of 50,000 nodes just between T-Mobile and Verizon that have been done in the last 18 months, and we’re working hard on deploying those nodes.
I certainly do not expect though that that’s all of the nodes that we’re going to gain from those customers or from others. And we’re working hard on both the practical operating side of we’ve got to get those notes that they’ve committed to us deployed as well as working with them on markets and other locations and more nodes that they have not committed to us yet. Because I think ultimately, you go out 10 years, 20 years, I think there’s going to be millions of small cells in the United States.
I don’t believe we’ll be the provider for all of those. We’ll pick our spots in the places where we think there’s — it’s shareable, where there’s going to be multiple operators needing a particular location. And then in the places where the financial returns are the greatest opportunity for us to invest capital. Those would be the places where we invest the capital. But I think the market opportunity is enormous, and I think we’re at the very, very beginning stage.
Brett Feldman
One of the — really, the primary competitor to your small cell business is your customers is deciding to self-perform, meaning they use their own fiber and AT&T and Verizon, in particular, deploy a lot of fiber, not just in their landline regions, but increasingly outside those regions. Do you ever do node-only deals, meaning Verizon and AT&T just want to leverage their own fiber, but they’re looking for someone who can manage the nodes for them? Or is that just not core to what you do?
Jay Brown
We’ve done a little bit of that, but it’s a very small, small portion of the business. And those are places — if we were just doing that, they’re just not that interesting to us because it’s not — the asset — the shareable asset is the fiber. So that’s where we’re going to focus our capital and our time. And if you think about the carriers options on small cells, I would argue they have to be in the self-perform business. We are not going to build small cells everywhere they need them. we’ll build them in places where it’s shareable, where we think there’s going to be a lot of co-location and where we can deliver great returns for shareholders, which means there are going to be, by definition, a lot of places that we’re going to say it just doesn’t make sense for us to extend our capital there.
We’ve spent the vast majority of our capital in the top 30 markets in the U.S. We’ll continue to study markets beyond that top 30 for opportunities that we think will make sense that will drive great returns over time. But there are going to be places where Verizon and AT&T look at it and say, we’re going to have to build it ourselves because Crown Castle, it doesn’t — for whatever reason, it doesn’t meet the return thresholds that we’ve set for ourselves. We’re going to be disciplined around that. So there needs to be places where they self-perform. And I don’t think of them so much as a competitor because we’ve never seen them come in and overbuild this. If the fiber is there and they can co-locate on it, they co-locate on that existing fiber, which is great for us.
They want to put their capital in places where there isn’t another alternative. No fiber exists in the ground, and we’re not willing to build it for whatever reason. So they’ll continue to self-perform. I think that will be a mark of the industry for a long period of time.
Brett Feldman
Yes. You’ve explained in the past that the way you price out a small cell contract is you essentially design it such that you’re getting a 6% to 7% yield on the capital that you’ve invested on day 1 from the anchor tenant that you designed and built the system for. And the reason you picked 6% to 7% is that’s what you’d roughly estimated to be your cost of capital. So you’re no worse off than you were when you started, and everything after that is additive. Has anything changed as you’ve watched interest rates climb?
Jay Brown
No, it has not. Rates are up, obviously, we talked about that a little bit before. But we were really underwriting those, assuming a more normalized long-term cost of capital rather than thinking about an abnormal — abnormally low interest rate environment that we’ve been operating in the last several years. So it doesn’t change our view. These are long assets. We’re going to own them for 20 or 30 years. So we really needed to use a long-term cost of capital when we thought about how we were investing and how we were pricing those assets. So nothing has changed in terms of the way we think about either pricing to the carriers or as we think about our desire to continue to invest assets.
We started about a 6% to 7% yield. We get that second tenant. We’re in the high single, low double digits in terms of the yield on the asset. By comparison, if you look at the tower business that we’ve been over — been in over 20 years, our yield on those tower assets is about 11%. We started at about a 3 — a little less than a 3% yield initially when we owned those assets. So our yield on assets in the small cell space is about double that of where we started with towers. And then as we get into kind of that second carrier, it starts to look pretty close to what a tower looks like after 20 years.
We think the returns over a long period of time, frankly, will match or exceed what we’ve seen in towers. And certainly, as you look at some of our legacy projects, our early projects like — we talk about — Orlando is one of the markets that we talk about annually when we give an update on how the business is growing and how yields are progressing. And in Orlando, we’re up in that 20% yield on invested capital. We’ve been in that market for about a decade. It was the first place that we went, and we’ve just seen terrific growth over time in co-location. And we think we’ll see the same thing in small cells across the markets that we’re investing in.
Brett Feldman
I just hope we could spend a little more time thinking about that path to higher yields. I believe the last data point you gave is that the small cell business is yielding like 7.4% right now. So that would imply, it’s a substantially anchor tenant driven system with some degree of co-location on top of it. The key to co-location is putting nodes on fiber that you have already built. How — what has that mix been like? And where do you see it going? And what do you think that balance is going to be going forward?
Jay Brown
Yes. So we’ve had different periods of time. So just like towers, there’s a period of sow, and then ultimately, you harvest yield on the assets. And in the case of small cells, if you go back and look at what were we sowing a decade ago, we’re harvesting significant yields, back to my Orlando example, today in that market because of what we put in a decade ago.
As we got comfortable with the co-location aspects that, yes, additional carrier customers would come back and go on the same fiber and on the same assets and therefore, drive yields, we began to invest more capital. So today, we’re harvesting the benefit of those early assets. We’re also sowing into a lot more assets than we did previously.
So you mentioned the kind of the blended yield of 7.4%. That’s a makeup of these early assets that are driving great yields after a lot of co-location and us putting in immature assets in much larger quantity than what we used to put them in at kind of that 6% to 7%, which pertains into the future a lot more growth and a lot more return on the investment. So we’re watching both of those.
And when you look at — I’ll just — to bring it back to kind of what are we seeing currently. We did the large deal inside of the last 18 months with T-Mobile where they committed to 35,000 nodes, the vast majority of those nodes are on the existing fiber. That’s why they refer to it as upgrades in their network because they’re going back to the same locations of fiber that they put their initial notes on. So we’re reusing it and densifying in that network. We’re seeing additional customers or new tenants on that new co-locations on that same fiber network, and that drives yields because we’re using the asset. In the Verizon case, there’s a blend of both sites where they’re going to go on existing systems and markets as well as us continuing to build new anchor nodes. So it will be a mix.
When we get to a point, which is — I don’t expect to happen in the near term, but when we get to a point where the current investments and the pile of assets that we’ve accumulated over time and built is not so disparate in terms of its scale, then I think you’ll see the benefit in the financial results on the face of the financials of that investment, and then the growth. But right now, it’s — the legacy investments are so small relative to the opportunity. As you mentioned in your comment a few minutes ago, we did 65,000 committed and built — history to date. And then inside of the last 18 months, we’ve had 50,000 committed from customers. So the business is scaling dramatically, which is what we had expected.
Brett Feldman
You mentioned that you had made a good handful of important acquisitions to scale up your fiber and your small cell business. A lot of what you acquired had been initially designed as enterprise fiber, and you saw an ability to use it for a supplemental source of revenue, which is small cells. And so you still actually get most of your fiber revenues from the enterprise space because of these businesses you acquired, we tend to think of enterprise as having an element of cyclicality to it. How is that business being affected by the macro environment right now?
Jay Brown
Yes. We’ve seen revenues grow at about 3%. We saw them grow at top — net 3% growth all throughout COVID. I don’t know that in our lifetimes, we will ever see such a disruption in the way business is done as what we’ve seen in the last couple of years with the pandemic. And so I feel really good about the security and the strength of that revenue stream and our ability to grow it in and around that kind of 3% level.
Our business is really unique compared to a lot of other fiber providers that have an enterprise component to it. We’re really only doing — we’re doing large enterprises, government, universities and health care. And that’s — that is our customer base. So small- and medium-sized businesses. There’s no residential, there’s no small businesses, medium-sized businesses. And that large enterprise space, government, university, healthcare space has been incredibly stable, and we see an ability to continue to grow the revenues there.
And will we do better than that? We’re certainly working on it. But feel comfortable that we’ll be able to continue to grow kind of in that neighborhood of about 3%. And that provides additional yield to the assets. So it is a — I think of it as in the same way I think about on the tower side. When we first bought the towers, early, early days of acquiring towers, there was almost 40%, 50% in a lot of cases of the portfolios that we bought of the revenue stream. We’re not from the voice carriers that we think of today. They were almost half the revenue at the time. And those business models, they still make up 10% of our revenues on the tower side, and we talk most of the time about the 90% that come from the voice carriers.
I think the small cell business will have a similar aspect over a long period of time. Enterprise will become a decreasing portion of our overall revenues out of that business. The value and the returns to shareholders will be driven by small cells, and the deployment of small cells into the future by the wireless carriers. And enterprise fiber will still be important to us because it will still contribute to the overall yield on the asset.
Brett Feldman
When we talk about macro pressures, one of the most pronounced is high rates of inflation. To what extent is your business seeing inflationary pressures? And then just as a follow-up on the enterprise side, where pricing can be revisited more quickly, have you actually attempted to flow through any price increases?
Jay Brown
Yes. On our — probably two questions on the big picture side of the company, our cost structure and our revenue structure are not as susceptible to inflation. Our largest single expense line item is our ground leases, and those have fixed costs or fixed rents for more than 30 years on average. So we don’t see much volatility. We — the other 25% of the operating cost component of our business does have some inflationary pressures associated with it, which are largely being offset by the embedded escalators that we have in the business. Enterprise fiber, as you say, is unique in terms of its ability. Typically, the contract life there are 4 to 3 to 5 years. And so we will have an opportunity over time. It’s probably too early to see much of an impact, but over time, could have an ability to adjust the revenue there.
Brett Feldman
Okay. And just sticking with sort of the macro environment. Any other disruption, for example, supply chain, particularly labor supply, whether it’s on the small cell side or what you have to do with the sites?
Jay Brown
The place where we have worked really closely with our customers is around the procurement of their equipment and staying in lockstep with them. Incredibly important to our customers and, therefore, to us is the predictability of when we will be able to put assets on air so that we can communicate those time lines with them and they with us in terms of the availability of equipment. And I think we’ve done a pretty good job of that with our customers. There are some places where we could have done better and been a little bit more predictable for them, but they have done a very good job of predicting when equipment will be available, letting us know when sites are going to be needed, and we’ve been able to align those things pretty well.
So not saying it hasn’t been without hiccups on the supply chain side, but it has not been impactful to kind of our guidance or our ability to deliver the results that we expected. Our supply chain team, along with working with the carriers have done a really good job of navigating a pretty difficult situation.
Brett Feldman
We’ve also seen interest rates move higher. We talked a little bit about this earlier. Kind of a couple of questions about this. Your leverage right now is at 4.9x net debt to EBITDA. That’s actually essentially just below your target of 5 turns. I’m curious whether you feel a need to reconsider where you want to be from a leverage standpoint? And then just sort of as a subset, I think about 15% of your debt is floating rate. Any thoughts around refinancing that to something? Or over time, using less floating rate debt?
Jay Brown
Yes. A couple of things on the debt side. I think the right leverage ratio is somewhere in that 5 to 5.5x leverage. Again, to my earlier comments, we think about that more in terms of the long-term cost of the debt rather than the short term that was abnormally low. The debt obviously is much cheaper than the equity, particularly given our view of where the world is heading and how well our business is going to do over time. We want to make sure we protect the equity because that’s expensive relative to the cost of the debt even in this — in the current period where rates have gone up.
So I see us continuing to keep the balance sheet levered at or above the levels that we’re at today, and to use that capacity as we fund the growth that we’ve been talking about, particularly around the investment in small cells. So I think that’s how you’ll see us continue to operate and manage the capital structure and the balance sheet.
Brett Feldman
And then coming back to inflation, we talked a little bit about revisiting price, potentially on the enterprise side. You essentially have fixed price escalators on the tower business, a small portion of your leases are CPI-based. The model outside the U.S., and you don’t operate outside the U.S., has been CPI-based for a long time. Now that we’ve seen this spike in inflation, is there any thought around maybe migrating your tower leases over time to be CPI-based as well?
Jay Brown
Well, we’ve been winning on that fixed rate for 10 years plus of being well above CPI. We took a long view on that. So there may be some periods of time where CPI would have tracked the revenues higher. But in the case of those who are operating outside of the U.S., in particularly developing portions of the world, that’s as much an offset to the currency challenges as it is anything else. And so we don’t have that embedded in our business. We don’t have any currency risk. And so as we think about the return opportunities, we thought — we think fixing the escalator is the best way to manage both our expectations as well as that of our customers over time.
Brett Feldman
Okay. You had talked about your long-term goal of 7% to 8% growth in the dividend. If we look back over the last several years, you’ve actually been doing a bit better than that. And so a question we get is, are you being conservative? And what would be the type of scenario that you could potentially be sustainably above 7% to 8%?
Jay Brown
Yes. I think our base case is — we take a range of outcomes, but our base case assumption around data growth data traffic drives that 7% to 8%. We took a long view on interest rates. And while it’s a headwind to the model in the short term, we were using the same kind of similar assumption that we thought rates were going to rise over a long period of time. They’ve gone up more quickly than what we had anticipated, but the absolute level of rates was embedded in kind of our long-term forecast of thinking that we would be able to grow 7% to 8% per year. So it’s a range of outcomes in terms of what revenue grows.
The place where we have the opportunity to outperform most notably is going to be on the small cell side. We’re investing in a lot of assets that have a great return kind of out of the gate, as you said, approximately in line with our cost of capital. And the co-location opportunities for those have the real opportunity to drive outsized returns over a very long period of time. And I’m in the camp of believing that the upside opportunities, broadly, in the market are more likely to come true than not.
Everyone in our industry has underestimated how important wireless is and how much wireless traffic they will go — there will be. And whether I look at healthcare, oil and gas, look at any sort of consumer retail applications, look at safety, look at real estate, every single industry is trying to figure out how do they use wireless and wireless applications to either reduce cost, gain greater access to their consumer or drive revenues.
There is going to be enterprise traffic, I think, in the coming years in ways that we just don’t have applications for, think about today. And I think 5G is that platform for that innovation and technology changes that are going to drive a lot of revenue to our sites, particularly around the densification of the network that will be required on the small cell. So I think that upside case of, if you’re a believer in long-term kind of 5G, 6G enterprise data traffic and new applications that all require low latency and faster speeds, I think we’re really positioned well to outperform that kind of 7% to 8% over the long term.
Brett Feldman
And if you were outperforming that 7% to 8%, because it’s really designed to match what you think AFFO per share growth would be, would it be your preference to put that outperformance into the dividend or maybe become more diversified and look to do buybacks as well?
Jay Brown
Yes. I think our fundamental view of — we run the shareholders’ company, and it’s their cash flow. So as we produce the cash flows, we basically pay out almost 100% of the cash that we produce in the business, pay that out to shareholders in the form of a dividend. And then we go back and make the case to investors, this is why we should continue to invest. Here’s the opportunity to not only grow the dividend in the short term. But over the long term, these are good investments for that. I love that discipline. I think people with limited capital make better decisions with capital. And so I think you would see us continue — as we grow the cash flows in the business, continue to pay those out to shareholders and then articulate why it’s worthy of continued investment to make future investments that will drive dividend growth over the long term.
Brett Feldman
It’s a great place to end. Jay, thanks for being here.
Jay Brown
Thanks for having me.
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