Earnings Call Transcript - CCI Q2 2021

Operator, Operator

Good day, and welcome to the Crown Castle Q2, 2021 Earnings Conference Call. Today's call is being recorded. And now at this time, I'd like to turn the conference over to Mr. Ben Lowe, Vice President of Corporate Finance. Please go ahead, sir.

Benjamin Lowe, Vice President of Corporate Finance

Great, thank you Cody, and good morning, everyone. Thank you for joining us today as we discuss our second quarter 2021 results. With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer; and Dan Schlanger, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com that will be referenced throughout the call this morning. This conference call will contain forward-looking statements which are subject to certain risks, uncertainties and assumptions and the 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, July 22, 2021, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the Company's website at crowncastle.com. Before I turn the call over to Jay, I want to mention that we will take as many questions as possible following our prepared remarks, but we plan to limit the call to 60 minutes this morning. So with that, let me turn the call over to Jay.

Jay Brown, Chief Executive Officer

Thanks, Ben. And thank you everyone for joining us on the call this morning. As you saw from our second quarter results and increased full year outlook, we continue to generate significant growth in cash flows and dividends from the deployment of 5G in the U.S. We are experiencing the highest level of tower activity in our history, resulting in a year of outsized growth as we now anticipate 12% growth in AFFO per share for full year 2021, meaningfully above our long-term annual target of 7% to 8%. Our current 7% to 8% growth target was established in 2017 when we expanded our fiber and small cell strategy through the completion of our largest acquisition. This 7% to 8% growth target was an increase of 100 basis points from our prior target, since we expected a diverse portfolio to increase our ability to consistently drive long-term growth. Since that time, the strategy has worked better than expected as we have grown our dividend per share at a compounded annual growth rate of 9% with some years being driven by outsized growth in our fiber and small cell business like last year, and other years like this one being driven by higher growth in our tower business. This record level of activity is tied to the existing wireless carriers increasing their spend to add more equipment to tower sites and DISH starting to build a new nationwide 5G network from scratch. We expect this elevated level of activity to continue beyond this year and support future growth on our towers. While driving strong growth in our tower business this year, the initial focus by our customers on towers has also led to some delays in our small cell deployment shifting the timing of when we expect to complete the nearly 30,000 small cells contractually committed in our backlog. When combined with zoning and permitting challenges as well as the previously disclosed Sprint cancellation, we now expect to deploy approximately 5,000 small cells in each of this year and next year with the remaining nearly 20,000 from our current backlog completed beyond 2022. This delay has not impacted our view of long-term attractiveness of small cells since the fundamental need for small cells continues and the unit economics remain in line with our expectation. With more than 50,000 small cells on air, we have already seen how important small cells are as a key tool used by the carriers to add network capacity by reusing their spectrum over shorter and shorter distances. We believe small cells will be an even more important tool going forward as the nature of wireless networks requires continued cell site densification to meet the increasing demand for data, especially if 5G networks are deployed. As a result, we believe these timing factors will not alter our long-term returns on our investments or our ability to deliver on our growth objectives. Dan is going to discuss our second quarter results and our expectations for the balance of 2021 in a bit more detail, so I want to focus my comments this morning on our strategy to deliver the highest risk-adjusted returns for our shareholders. One of the core principles of our strategy is to focus on the U.S. market because we believe it is the best market for communications infrastructure ownership with the most attractive growth profile and the lowest risk. With that view in mind, we have invested nearly $40 billion in shared infrastructure assets that we believe are mission critical for today's wireless networks and sit in front of what is expected to be a massive decade-long investment by our customers to deploy 5G in the U.S. As you can see on Slide 4, our tower and fiber investments are at two different stages of development and maturity. Our tower investment began more than 20 years ago at an approximately 3% yield when we built and acquired assets that we could share across multiple customers. By providing a lower cost to each customer, we have leased up those assets over the years and generated compelling returns for our shareholders. As we have proven out the value proposition for our customers over time, our tower assets now generate a yield on invested capital of 11% with meaningful capacity to support additional growth. As we realized that wireless network architecture would need to evolve with 4G requiring a network of cell sites that would be much denser and closer to end users, we expanded our shared infrastructure offering beyond towers, establishing the industry leading small cell business in the U.S. It's encouraging that the business is already generating a current yield on invested capital of more than 7%, given the relative immaturity of these investments. To provide additional visibility into how our investments are progressing, we've updated our analysis of the cohort of five markets we introduced a year ago. Looking at a collective view of how these five markets have performed over the last year on Slide 5, growth from both small cell and fiber solutions has contributed to an incremental yield of 7% on the approximately $200 million of incremental net capital investment. Adjusted for the timing impacts associated with the large in-process small cell projects where capital investment has occurred in advance for the corresponding revenue and cash flows, the incremental yield is approximately 8%. This incremental yield resulted in a modest decline in the combined cash yield from 9.2% a year ago to 9% currently. This is in line with our expectations as we have invested in new small cells at a 6% to 7% initial yield that we expect to grow over time as we lease up those assets to additional customers. During the last year in these markets, we have added more than 500 route miles of new high-capacity fiber to support the deployment of approximately 2,000 small cells. Importantly, approximately 40% of the small cells deployed were co-located on existing fiber with the balance representing new anchor builds in attractive areas of these markets where we expect to capture future small cells and fiber solutions demand. We believe each of the markets shown on Slide 6 provides a helpful representation of how our overall strategy is performing over time, given how different these markets are when it comes to the average life of the investment, the density of small cell nodes per mile of fiber and the degree of contribution from both small cells and fiber solutions. Generally speaking, we would expect markets that have a longer average investment life to have higher returns than those with less mature assets. This is true because we have more time to add customers to existing assets which is consistent with our historical experience with towers, where we have on average added about one new tenant every 10 years. Similar to our experience with the movements in yield and tower investments over time as we showed back on Page 4, sometimes the steady climb of yields on legacy investment is less obvious as we invest in less mature assets that bring down the overall market yield. This is certainly true of some of the cohort. Very much related to the average life of the investment is the density of small cells per route miles of fiber. Since as in the tower business, the co-location of additional nodes on existing fiber is what drives the yields up over time. Consequently, we typically see a higher percentage of nodes co-located on existing fiber as the density of nodes increases. On the third characteristic, we believe the markets with both small cells and fiber solutions will ultimately have higher yields than those with only one of the two revenue streams. With this setup as a backdrop, I want to share a few observations that I think are important to highlight as we assess this dataset on Page 6. Looking across the markets, you can see the longer average investment lives tend to correspond to higher yield. Denver has the least mature capital base and the lowest market yield, but Orlando has one of the most mature capital bases and highest yield. In addition, the higher density of nodes per mile, which is generally correlated with the longer investment life and higher percentage of co-located nodes, generates higher market yield. The financial benefit associated with co-locating nodes is apparent when looking at the incremental yield in Los Angeles and Phoenix. In the last year about half of the small cells deployed across those two markets were co-located on existing fiber, resulting in a strong incremental yield. Meanwhile, Denver does not fit neatly into this framework, featuring the highest node density but the lowest yield. Part of the explanation is that Denver is a market where we spent more than we originally budgeted on our initial build activity, which weighs down the starting yield. Importantly, during the last 12 months, we achieved strong yields on incremental invested capital in Denver, increasing the market yield by 70 basis points. This is consistent with our experience more broadly in the small cell business as co-located nodes on existing fiber come at high incremental yields driving attractive returns over time. And finally, looking at the financial benefit of having those small cells and fiber solutions leveraging the same asset base, you can see the markets with a meaningful contribution from both offerings are generally performing better. The best example to point to here is Philadelphia, where despite having a less mature capital base and lower node density even versus Phoenix, it is generating a similar yield on invested capital of nearly 10% due primarily to the higher contribution from fiber solutions. Our experience in Philadelphia also highlights another important point when assessing the performance of a portfolio of assets. Similar to what we've seen throughout our long history of towers, when you zoom in on a particular set of assets and focus on a short time period, the picture is rarely perfect. Over the last year, the market yield in Philadelphia contracted by 60 basis points due to a combination of a lack of small cell activity as this was not a priority market for our customer, and more muted growth from fiber solutions. Despite this, Philadelphia is still generating a very attractive yield on invested capital, and we believe our dense fiber footprint in this top market is positioned well to capture future small cell and fiber solutions growth. In summary, the combined performance of this cohort of markets provides another point of validation for our strategy with small cells and fiber solutions growth contributing to attractive incremental yield while we continue to make discretionary investments in new assets that will expand the long-term growth opportunity. Turning back now to our overall strategy. As it's been obvious to all of us over the last 18 months, connectivity is vital to our economy, and how we live and interact with one another. Our strategy is to provide profitable solutions to connect communities and people to each other. Our business is also inherently sustainable; our shared infrastructure solutions limit the proliferation of infrastructure and minimize the use of natural resources. Our solutions help to address societal challenges like the digital divide in underserved communities by advancing access to education and technology. As you've seen in our last two sustainability reports, we've enhanced our focus on ESG, which we believe will drive increased revenue opportunities from things like smart cities and broadband for all, and lower operating costs in areas like power lighting, electric vehicles and interest savings, which Dan will discuss in just a minute. Importantly, none of this is possible without a team at Crown Castle that embraces diversity and inclusion ensuring that our employees and our business partners are empowered to help us serve our customers, connect our communities, and build the future of communications infrastructure in the U.S. So to wrap up, we expect to deliver outsized AFFO per share growth of 12% this year, as we capitalize on the highest tower activity levels in our history with our customers deploying 5G at scale. We expect this elevated level of tower activity to continue beyond this year. Our diversified strategy of towers and small cells has driven higher growth than expected as we have grown our dividend at a compounded annual growth rate of 9% since we expanded our strategy in 2017. And looking forward, I believe our strategy to offer a combination of towers, small cells, and fiber solutions, which are all critical components needed to develop 5G will extend our opportunity to deliver dividend per share growth of 7% to 8% per year. And when I consider the durability of the underlying demand trends we see in the U.S., that provides significant visibility into the future growth for our business, I believe Crown Castle stands out as a unique investment that we believe will generate compelling returns over time. And with that, I'll turn the call over to Dan.

Daniel Schlanger, Chief Financial Officer

Thanks, Jay, and good morning everyone. As Jay mentioned, 2021 is shaping up to be a great year of growth for Crown Castle, as our customers deploy 5G nationwide. The elevated tower activity drove strong second quarter financial results, and another increase to our full-year outlook, which now includes an expected 12% growth in AFFO per share. Turning to second quarter results on Slide 7, site rental revenue increased 8%, including 5.3% growth in organic contribution to site rental revenue. This growth included 8.6% growth from new leasing activity and contracted escalators net of 3.3% from non-renewal. The higher activity levels also drove a $40 million increase in contribution from services when compared to second quarter 2020, leading to 15% growth in adjusted EBITDA, and 18% growth in AFFO per share. Turning to Slide 8 with the strong second quarter and continued momentum we have again increased our full-year outlook highlighted by a $30 million increase to adjusted EBITDA and a $20 million increase to AFFO. The higher activity in towers drove the majority of these changes to our outlook, including an additional $15 million in straight-line revenue, a $45 million increase to the expected contribution from services, and $15 million of additional labor costs. The lower expected volume of small cells deployed this year that Jay discussed earlier results in a $10 million reduction in organic contribution to site rental revenue, which translates to a 20 basis point reduction in the expected full-year growth in consolidated organic contribution to site rental revenue to 5.7%. Our expectations for the contribution to full-year growth from towers and fiber solutions remains unchanged at approximately 6% for towers, and 3% for fiber solutions. With small cell growth now expected to be approximately 10%, compared to our previous outlook of approximately 13% growth. Moving to investment activities, during the second quarter, capital expenditures totaled $308 million, including $19 million of sustaining expenditures, $60 million of discretionary capital expenditures for our Tower segment, and $223 million of discretionary capital expenditures for our fiber segment. Our full-year expectation for capital expenditures has reduced to $1.3 billion from our prior expectation of $1.5 billion, primarily attributed to the reduction in small cells we expect to deploy this year. Turning to our balance sheet, we exited the second quarter with a net debt-to-EBITDA ratio of approximately five times, which is in line with our target leverage. Consistent with our overall focus on delivering the highest risk adjusted returns for shareholders, we have methodically reduced risk across our balance sheet over the last five years, by reducing our exposure to variable rate debt and extending the maturity profile of our borrowings to better align the duration of our assets and liability. Specifically, since our first investment grade bond offering in early 2016, we have increased the weighted average maturity from just over five years to nearly 10 years, increased our mix of fixed rate debt from just under 70% to more than 90%, and reduced our weighted average borrowing rate from 3.8% to 3.2%. Consistent with that focus, we issued $750 million of 10-year senior unsecured notes in June at 2.5% to refinance outstanding notes maturing in 2022, and to repay outstanding borrowings on our commercial paper program. Additionally in June, we amended our existing credit facility, extending the maturity date to June 2026 and incorporating sustainability targets that resulted in lower interest rates in the facility as we achieve specified sustainability metrics over the next five years. We believe this was the first time sustainability targets had been incorporated in the credit facility for a tower company. Adding quantifiable sustainability metrics to our inherently sustainable business model that Jay outlined earlier highlights our commitment to delivering value to all our stakeholders. Stepping back and to wrap things up, we are excited about the record levels of tower activity as our customers deploy 5G at scale. We are capitalizing on those positive fundamentals and expect to deliver a great year of growth with AFFO now expected to grow 12% for the full-year 2021, meaningfully above our long-term annual target of 7% to 8%. Our diverse portfolio of assets and customer solutions has performed better than expected since we meaningfully augmented our fiber footprint with a large acquisition in 2017. As we have grown our dividend per share at a compound annual growth rate of 9% over that time. Importantly, in some years like last year, our fiber and small cell business has driven that outperformance, while in other years like this one our tower business is the driver. We continue to invest in new assets that we believe will allow us to grow our dividend per share at 7% to 8% per year going forward. This growth provides a very attractive total return opportunity combined with our current approximately 3% dividend yield. And we believe our investments in new assets will extend this opportunity into the future. With that Cody, I'd like to open the call to questions.

Operator, Operator

And we'll take our first question from Michael Rollins from Citi.

Michael Rollins, Analyst (Citi)

Thanks and good morning. Curious if you could just unpack a bit more in terms of the change in the small cell target for 2021 and 2022 in terms of weighing the impact that the customer decisions had relative to the zoning impact and some of the issues you're experiencing just on that timeline to get small cells constructed. And then just a follow-up question, curious in the supplemental deck there were some additional straight line that was highlighted into the quarter, and there was an extension or an increase in duration of average lease length for the non-big three national carriers. I'm just curious if you could unpack the activity that you're seeing just outside of what you've experienced from the big three national carriers in the context of what was in the deck and how that may come through in the future? Thanks.

Jay Brown, Chief Executive Officer

Yes, good morning, Mike. I'll take the first question and Dan can address the second one. As we highlighted, there are three primary components of our decision to push out some of this activity beyond 2022. There is the customer prioritization which we highlighted, the Sprint cancellation, and then also the zoning and permitting challenges. Breaking that out by years, I would put the customer prioritization and some of the zoning and permitting challenges as hitting us in 2021. And then, the Sprint cancellation in 2022 is the biggest impact there along with some of the timing of the new nodes and those going out in the years beyond 2022. Big picture, if I go back to what drives that and why we are seeing it, I would go back to past experiences as we've gone through technology cycles and upgrades. The network went from 2G to 3G, 3G to 4G, and now we're in the middle of this move from 4G to 5G. The carriers go through a process of prioritizing the sites that they're already on and upgrading those sites with the new technology. In this case, it’s a combination of new technology and upgrading those sites with the new spectrum bands that they've acquired. What we've seen in these early stages of 5G is a real focus on getting those new spectrum bands out on macro sites. So there has been a reprioritization of the capital spend in calendar year 2021 toward getting those macros upgraded for 5G and de-prioritizing in the near term some of the small cells. We think it's just timing, as I mentioned earlier they're pushing this to the right and when you look at our results and our outlook, we're seeing the push on that toward towers, so meaningful uplift on the services side and the tower activity at levels we've never seen in our company's history. We think that's going to continue into 2022 as the carriers over-allocate toward macro sites this year and next year, and then we think it probably comes back to a more balanced activity level as we get into 2023.

Daniel Schlanger, Chief Financial Officer

Yes Mike, I'll hit your second question around the straight-line increases and extension. As we've discussed before, the straight-line increases happened a couple of ways. On a first-time install, you can see it where we get a 10-year contract, and that includes some straight-line impact. But on an amendment where we go and add additional equipment on existing sites, we actually extend the term of the contracts or the leases at that point. We get additional straight-line for both of those things. So what I would say is the increase in activity that Jay just talked about across both first-time installs and across new amendments is causing a lot more activity and then more straight-line to hit our numbers this year. And some of that is also having the impact you're talking about of extending the contracts both within the large three national carriers, but also outside of that as other companies are increasing their activity, especially like we've talked about with DISH starting to deploy a nationwide 5G network going forward. So all of those things will add into both straight-line and the extension of contract life over time.

Operator, Operator

We'll now take our next question from Simon Flannery from Morgan Stanley.

Simon Flannery, Analyst (Morgan Stanley)

Great to hear the commentary on the macro business, and the historical rate of activity. Could you just be a little bit clearer about what you mean by activity, where are we today? Obviously, the services business is extremely strong, but what are you seeing in terms of signed leases and when do you expect these commencements to impact your numbers in particular? Is there anything materially in your numbers this year for DISH? Thanks a lot.

Jay Brown, Chief Executive Officer

Yes, Simon, thanks for the question, good morning. When we talk about activity, we're speaking specifically about applications for our towers. In some cases, those applications are related to going on towers that they're not previously on, and in some cases those applications are for amendments on sites they're already co-located on. We count them collectively in terms of total applications. I don't want to get specifically into which carriers we're getting the benefit from, but we're seeing it across the board on the tower side, from the major carriers as well as carriers that are outside of the large nationwide carriers. We're seeing activity increase and 2021 represents a meaningful step up from anything that we saw in the years prior to 2021. As I mentioned before, we think that activity is going to continue into 2022 and will be reflected in our results. Last year we saw an allocation away from towers toward small cells, which helped our growth rate, and this year we've seen an allocation more toward towers, which is driving current performance and we think continues into 2022 as carriers focus on upgrading their macro sites. Historically, carriers focus on the sites they're already on and upgrade those sites for new technology. We're in the cycle of the longer-term deployment of 5G where they're focused on upgrading sites they're already on before moving more heavily into densification with small cells.

Simon Flannery, Analyst (Morgan Stanley)

Great. And just one follow-up on the CapEx point. I know you're not giving 2022 guidance, but is it fair to think then given 5,000 this year, 5,000 next year, the discretionary in CapEx should be similar to 2021?

Daniel Schlanger, Chief Financial Officer

Yes, I'm going to say yes to everything you just said there Simon. We don't want to get into the guidance right now. We'll do that in three months. It's not that far from now and we will get there. But yes, the CapEx does follow activity levels. So we'll follow that along and give more specific guidance in October.

Operator, Operator

We'll hear next from Matt Niknam with Deutsche Bank.

Matt Niknam, Analyst (Deutsche Bank)

Thank you for taking the question. First just to go back on small cells, I'm wondering you highlighted three points in terms of what drove the lower outlook for this year and next. I'm wondering is there a risk you are starting to see more self-build from the carriers taking a greater share of some of the newer small cells coming on air? And then secondly, given the strength in services you've increased the outlook for services the second time this year. Any initial thoughts you can share in terms of how tower site leasing growth could be trending into next year just as you see momentum on the tower side pickup? Thank you.

Jay Brown, Chief Executive Officer

Yes, Matt. On your first question, I don't see it as a risk to small cells. One of the hallmarks of the way we think about capital investment is a rigorous process where we consider how we invest capital. That process analyzes where we think demand will be over the long term for a particular asset. On the small cells side where we're putting assets in at an initial yield of 6% to 7%, we depend on future lease-up of those assets over a long period. We analyzed the opportunity to invest based on what we believe the long-term prospects for lease-up will ultimately be. There are plenty of places around the U.S. where small cells will be built but our analysis may indicate it doesn't make sense for us to invest our capital there. We've tried to allocate our capital to places with the highest return and lowest risk of lease-up. The cohort markets we discussed have similar characteristics regarding co-location and we have a lot of data around what leads to that co-location. We're trying to allocate capital based on lessons learned and where we think future demand will be. That will leave opportunities for others to build small cells where it doesn't clear our return thresholds. I believe carriers will build some themselves and may find other third parties to help build some. Public research indicates about half of overall demand for small cells has been constructed by us, with the other half split between other third parties and carriers. We focus on our returns in markets where we invest. Regarding 2022 guidance, I'll mostly defer. The largest portion of our business is our tower business. We're at elevated activity in 2021 and think that continues into 2022. We feel good about meeting our long-term target of growing AFFO per share at 7% to 8% and will provide specific numbers next quarter when we give guidance for 2022.

Operator, Operator

We'll hear next from Phil Cusick with JPMorgan.

Phil Cusick, Analyst (JPMorgan)

Sorry to harp on this. I'm surprised that with all the carrier discussion of macro through the year and the long path the small cells did something happen in 2Q that was a surprise on carrier prioritization to move away from that. Was there a particular event that happened, and the slower small cell trends and what you highlighted as the better return from markets would get both fiber and small cells revenue. Are you more interested in selling fiber to enterprise in the next year?

Jay Brown, Chief Executive Officer

Phil, on the first question, we're not surprised that carriers focus on macro sites first in 5G; they've done that in past cycles. I think we were a bit surprised by how quickly the reallocation happened and how fast they shifted capital toward macros. We were close to the final stages on many nodes and carriers made capital allocation decisions to invest in equipment around macro sites over some small cells. Again, we believe it's timing and it doesn't impact long-term returns. Regarding fiber solutions, we look to grow all revenue streams. If opportunities arise to sell fiber or pursue enterprise fiber solutions, we'll do it. Our field sales team has done a good job coming out of the pandemic as the economy opens up. We've seen good activity with companies returning to offices and capturing opportunities.

Phil Cusick, Analyst (JPMorgan)

Okay, just a follow-up there. The backlog, how solid is that backlog in terms of timing and size? Is this sort of a goal over a multi-year period?

Jay Brown, Chief Executive Officer

Yes, the backlog is contractually committed. Those are not nodes where we're just having conversations; those are nodes where the carriers have signed contracts. The discussions we have with carriers and opportunities for additional nodes would be above and beyond the contracted backlog we disclosed.

Operator, Operator

We will hear next from David Barden with Bank of America.

David Barden, Analyst (Bank of America)

I want to follow-up on Phil's question. Jay, you've talked about build cycles being 24 to 36 months for new builds and add-ons. If small cells accelerate in 2023, you would need visibility today to prepare to get that online in 2023. Could you talk about the funnel and your conviction about how we go from 5,000 nodes this year and 5,000 next year back to 10,000 or better? And secondly, on the services side, this activity is driving higher employment expense. Where is that $50 million of higher employment expense going and will that stay with the company as long as elevated service activity persists? Thanks.

Jay Brown, Chief Executive Officer

On your first question, yes, the build cycle is typically about 24 to 36 months. We signed the largest commitment of new nodes in company history a few months ago. Carriers plan deployments over a long-term basis, not just 12 to 18 months. The 15,000 nodes we've contracted to build are in backlog and we're working with customers to identify exact locations. The macro environment is healthy for towers, but the need for densification remains. The 50,000 small cells we deployed during 4G showed benefits to networks, and we expect similar or greater dynamics in 5G. We'll give 2022 guidance next quarter and more in coming years, but the fundamental view that small cells complement macro sites remains intact. On the services staffing, the majority of the cost is coming as we scale up for the elevated level of services and much of that is outsourced activity and costs to perform that work. There are components where we staff internally and we scale internal staff as activity dictates. If service revenues come down, we would scale down those costs accordingly.

Operator, Operator

We'll take our next question from Jonathan Atkin from RBC Capital Markets.

Jonathan Atkin, Analyst (RBC Capital Markets)

Thank you. With strong leasing demand on macro sites and small cells, are there any constraints on the ability to deploy equipment, whether it's your own services division or contractors? Do they have any implications on book-to-bill as we look at second half of the year and next year?

Jay Brown, Chief Executive Officer

Certainly it's a tight labor market, so it's not without challenge. We feel good about where we are and the activity we're seeing and our ability to deliver that activity. It's a tight labor market and a challenge, but we feel good about our ability to deliver on the numbers we've put out.

Jonathan Atkin, Analyst (RBC Capital Markets)

And I apologize if this was asked earlier, but the source of the upside you posted—how broad-based was that? Do you see the variety of demand increasing as we move into the second half of the year, or is everyone equally active in mid-band and 5G deployments at this point?

Jay Brown, Chief Executive Officer

It's broad-based across all wireless operators. There's a lot of work going on to upgrade existing sites and add spectrum bands and new technology to legacy macro sites. We're also seeing new entrants and IoT-driven deployments from parties outside the four nationwide operators, and that benefits macro sites.

Jonathan Atkin, Analyst (RBC Capital Markets)

Finally, regarding your lease contracts, is there any constraint on how customers can use the spectrum—for their own retail operations or leasing to other parties entering the market—and what exposure do you have to customers using spectrum in ways that may not give you full economics?

Jay Brown, Chief Executive Officer

We've been careful since the beginning to ensure there's no opportunity to replace our role as a shared infrastructure provider. Our leases prohibit network sharing and spectrum use that would replace our role in the ecosystem. Carriers have the right to use their spectrum for their own network, but network sharing that could replace our role would require conversations with us and would represent additional revenue opportunities. We would be open to those conversations, but such arrangements are not permitted currently without additional economics.

Operator, Operator

We'll hear next from Colby Synesael with Cowen and Company. Please go ahead.

Michael (for Colby Synesael), Analyst (Cowen) - Michael on behalf of Colby Synesael

Hi, this is Michael on for Colby. Two questions if I may. First, in the past two quarters the tower and network services gross margins have been over 30% versus around 15% in 2020. Do you expect to sustain those 30%-plus tower network services gross profit margins through year-end? Second, can you give us a sense of your willingness or openness to sell fiber assets in markets in which you don't expect to build small cells? Thank you.

Daniel Schlanger, Chief Financial Officer

I'll take the first question on service gross margin. We would anticipate that the higher service gross margin would continue through the end of the year. The increase in service gross margin has a lot to do with the mix between which services we're providing. We have a higher gross margin associated with pre-construction services around site acquisition and permitting and getting the site prepared to accept additional antennas on the tower. We have a somewhat lower gross margin associated with the installation work of putting antennas on the tower. Right now, given where we are in the cycle and the activity we see, there is a lot of pre-construction work coming through, which is what's driving the higher service gross margin, and we would anticipate that continuing through the end of the year.

Jay Brown, Chief Executive Officer

On your second question about selling fiber assets in markets where we don't expect to build small cells, that's largely theoretical given how we've analyzed and invested in fiber. We've focused on markets where we think there's the greatest long-term opportunity for small cells and wireless demand. If one of those markets were to turn out not to need small cells, we could consider alternatives, but given our investment strategy the likelihood of that is low.

Operator, Operator

We will hear next from Rick Prentiss with Raymond James.

Rick Prentiss, Analyst (Raymond James)

A couple of questions. With the small cells push out and discretionary CapEx coming down, what about your expectations for prepaid rent received? I think you might have originally thought this year maybe $550 million. Are you thinking that's more like $300 million to receive?

Jay Brown, Chief Executive Officer

Going from gross to net CapEx is probably the easiest way to frame this. We now expect to be in the neighborhood of $1.3 billion of gross growth CapEx whereas we were at about $1.5 billion in our prior expectations. Right now, we think we'll be around $900 million of net versus about $1 billion previously. So prepaid rent received comes down a bit in line with what we see in activity levels and where we are in building assets and getting money back from customers.

Rick Prentiss, Analyst (Raymond James)

The non-cash amortization of prepaid rent takes a bit longer to change that needle. Are we still thinking an increase year-over-year from 2020 to 2021 maybe in the $40 million to $50 million range?

Jay Brown, Chief Executive Officer

Yes, that's fair. We think the growth in our prepaid amortization will be about $40 million in total going from 2020 to 2021.

Rick Prentiss, Analyst (Raymond James)

And on DISH, how should we think about straight-line and timing? Is growth tied to when equipment actually goes on air?

Jay Brown, Chief Executive Officer

Yes, regarding DISH, as we sign new leases we will have additional straight-line revenue because we recognize escalators ratably over the lease term instead of when they occur. To get the straight-line treatment in the DISH contract, we need to have a lease which means putting equipment onto a site. The timing of straight-line recognition is therefore associated with DISH placing equipment on site and starting billing. We have said that there is a limited amount of DISH work in our 2021 guidance since October, and that remains true. We'll speak more about 2022 activity in October.

Rick Prentiss, Analyst (Raymond James)

Last one from me: augmentation CapEx for towers has been trending down. With carriers putting more antennas and radios out there, should we expect an acceleration of augmentation spending at towers in the future versus what we've seen in the last three quarters?

Jay Brown, Chief Executive Officer

Not necessarily. Augmentation depends on how much we must modify towers to accept additional weight and wind loading of equipment. We've seen that many towers don't require modification to accept additional equipment, which drives that number down. One of the benefits of the tower business is we often add revenue without having to add capital to make it happen; that's just a function of the asset base and available capacity on our towers.

Operator, Operator

We'll hear next from Jeff Kvaal with Wolfe Research.

Jeff Kvaal, Analyst (Wolfe Research)

Thank you. First, how long should we expect this elevated activity to last, when might it translate into revenues, and how long might those revenues persist for you as the elevated level of new leases comes through, maybe compared to prior cycles?

Daniel Schlanger, Chief Financial Officer

Jeff, I'll be careful because I don't want to give specific guidance for 2022. But the tone and activity suggest the elevated level of activity currently is going to continue into 2022. We haven't spoken about whether it continues beyond 2022. Over the last one to two decades there's been a baseline level of activity that consistently occurs in and out of cycles—carriers continually invest in their assets which drives our topline organic leasing activity. I think that will continue and underlines our long-term forecast of growing dividend 7% to 8% annually. Everything we see with 5G deployment suggests that long-term view is intact. Elevated levels are expected this year and next year compared to the last three to five years.

Jeff Kvaal, Analyst (Wolfe Research)

Do you think the elevated levels are correlated more with a technology transition or more with the addition of incremental spectrum, which may or may not align with technology migration?

Jay Brown, Chief Executive Officer

Historically it's been a combination of both. The best times in the infrastructure business occur when carriers have new spectrum, new technology and sufficient cash to deploy. Today, multiple carriers are well capitalized, have spectrum, and are deploying new technology, which explains elevated activity. It's hard to precisely predict timing for a particular asset; towers on a short-term basis can look choppier, but over 10 or 20 years the portfolio effect smooths returns. The assets we own are in places with long-term demand for upgrades, and stacking consistent growth over time is how we achieve our returns.

Operator, Operator

You bet. Maybe we have time to take one more question this morning. We'll take our final question from Batya Levi with UBS.

Batya Levi, Analyst (UBS)

Two quick questions. Could you talk a little bit about the fiber trends and what drove the sequential decline this quarter? And second, on the AT&T DISH wholesale deal, how should we think about that in terms of the impact on overall activity that you were expecting from DISH? Is there anything you could say about the minimum requirements that are in the backlog right now?

Jay Brown, Chief Executive Officer

On fiber trends, we've guided fiber solutions growth this year to be about 3% year-over-year. In Q1 we were up a bit more than in Q2; the sequential change is mostly timing and not indicative of a fundamental change in the business. For calendar year 2021 we expect about 3% growth, and quarter-to-quarter movement reflects timing. Regarding the AT&T DISH wholesale deal, I'll let them speak to the details of that arrangement. We have a significant commitment from DISH and are actively working to build their network. We appreciate their commitment and are focused on delivering what we've committed to get on air as quickly as we can. Thanks everyone for joining us this morning, and we'll look forward to catching up with you soon. A special thank you to all of our employees. The 12% year-over-year AFFO growth is not possible without a lot of hard work from many people navigating through the pandemic and working in ways that were different than our historical approach. Our team has done a terrific job, and I know many of them are listening this morning—thank you for all you've done and we look forward to the balance of the year.

Operator, Operator

Thank you. That does conclude today's conference. We do thank you all for your participation. You may now disconnect.