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Crown Castle International Corp (NYSE:CCI)
Q3 2019 Earnings Call
Oct 17, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Crown Castle Q3 2019 Earnings Call. Today's conference is being recorded.

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

Benjamin Raymond Lowe -- VP of Corporate Finance

Great. Thank you, Samantha and good morning everyone. Thank you for joining us today, as we review our third quarter 2019 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 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 actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the Company's SEC filings.

Our statements are made as of today, October 17, 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 A. Brown -- President, CEO & Director

Thanks, Ben, and good morning everyone. We delivered another quarter of strong financial results that reflect the significant demand we are seeing for our shared infrastructure assets. I believe our strategy and unmatched portfolio of 40,000 towers and 75,000 route miles of fiber, concentrated in the top US markets has positioned Crown Castle to generate growth in cash flows and dividends, both in the near-term and for years to come.

Steady execution against this strategy is resulting in consistent dividend growth. As we increased our annualized common stock dividend by 7% to $4.80 per share, in line with what we believe our AFFO per share growth will be in 2020.

Over the last five years and inclusive of the increase we announced yesterday, we have grown the dividend at a compounded annual growth rate of approximately 8%, while investing heavily in assets that we believe will generate significant growth over the long-term.

Dan will discuss the results for the quarter and the full-year 2020 outlook in a bit more detail. So I'm going to focus my comments this morning on two key points. First, new leasing activity across our business is expected to be higher in 2020 than in 2019, including activity in our Tower business remaining at the highest level in more than a decade.

And second, I'm excited about the long runway of growth for Crown Castle as 4G investment remains robust and the deployment of 5G is just getting started.

On the first point in 2019, we are seeing a significant acceleration in tower leasing, as our customers add capacity to their wireless networks in response to the rapid growth in mobile data traffic. The current demand environment is largely tied to our customers investing heavily in their 4G networks to keep pace with 30% to 40% annual data demand growth.

As you can see in our outlook for 2020, we expect the elevated level of tower leasing to continue into next year. As 5G becomes a reality and wireless networks expand from connecting everyone to connecting everything, we believe new use cases will develop, that will generate significant long-term demand for our infrastructure. With towers remaining at the core of the wireless networks.

As I think back on my time at Crown Castle over the last 20 plus years, there have been significant advances in the broader wireless industry. Like the rapid deployment of technology that has taken us from tracking mobile penetration rates and voice minutes with 1G to the current 4G unlimited data plans that feed a seemingly insatiable demand for data from consumers.

And now the industry is in the beginning stages of what is likely to be the next decade long investment cycle, with the deployment of 5G, which brings with it the promise of a step function change in the role that wireless networks will play in supporting the digital economy going forward.

While technologies have changed, there has been one constant. The significant and sustained demand for tower assets in the US. This steady growth has been driven by increased data traffic and investment to maintain and improve the wireless user experience. With continued strong data growth, we believe the carriers will respond to pressure on their networks, as they have over the last couple of decades by leasing access to our infrastructure.

In addition, future networks will need to be significantly more dense than current infrastructure can handle, which brings me to my second 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.

We are at the very beginning of what the World Economic Forum has deemed the Fourth Industrial Revolution. The first use water and steam's power to mechanized production; the second used electric power to create mass production; the third used electronics and information technology to automate production; and the fourth will be the digital revolution that leads to long-term gains and efficiencies in productivity, and impacts almost every person and every industry.

The fourth industrial revolution is closely tied to the deployment of 5G, which will allow for billions of devices to be connected and communicating in real-time. This level of connectivity is unprecedented and will require a network that is denser and closer to end-users than has ever been the case.

We saw this change in network architecture begin with 4G, driving us to expand our shared infrastructure beyond towers and build the leading industry small cell business in the US. We believe creating this unique portfolio has increased our opportunity to deliver long-term growth and dividends per share by tapping into the same underlying demand trends that make US towers so valuable.

The extension of our strategy utilizes the same playbook we used with towers by sharing the asset across multiple customers. In the case of small cells, fiber is the critical shared asset. We have rapidly scaled our small cell business to where we are today with 70,000 small cells on air or under construction, and we believe we are still in the very early innings.

According to CTIA the number of small cells deployed in the US is expected to increased nearly tenfold from 85,000 at the end of last year to 800,000 by 2026. Against that backdrop, we see tremendous opportunity to increase the returns on our fiber investments over time by adding new small cell tenants to existing fiber networks, as we're doing today.

We also see a path to further improve our small cell returns by sharing the fiber asset across a larger addressable market of customers that require high bandwidth connectivity including large enterprises, healthcare institutions and government agencies.

When I look at the entire opportunity in front of us, I see we are generating a 9% recurring yield on the $37 billion of capital that is invested across our 40,000 towers and 75,000 route miles of fiber. With the lease-up, we have driven over the past two decades, we are now just over two tenants on average per tower. In a similar vein, with an average investment age of just three years, we have less than a small cell -- one small cell tenant equivalent across our fiber networks, giving us a long runway of growth, as we have significant capacity to add more tenants to our assets over time.

So to wrap up, the growth we are seeing in our business reflects the positive underlying fundamentals driving demand for our infrastructure, including the continued growth in mobile data on existing 4G networks, and the early stages of our customers developing 5G networks.

With our unmatched asset base and expertise, operating in the best market in the world for communications infrastructure ownership, I believe Crown Castle is in a great position to capture these substantial long-term opportunities and consistently return capital to shareholders through a high quality dividend that we expect to grow 7% to 8% annually.

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

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Thanks, Jay and good morning, everyone. As Jay mentioned, we delivered another great quarter of results that sets us up to finish 2019 on a strong note and provides a solid foundation for 2020. Our third quarter results were positively impacted by higher services contribution and lower sustaining capital expenditures than we had expected. So this is just timing related. So our full-year expectations for both remain unchanged.

During the third quarter, we also continue to improve our financial flexibility by taking advantage of favorable market conditions to proactively lock-in attractive long-term interest rates and extend the weighted average maturity of our outstanding debt to nearly seven years. We finished the quarter with leverage of 5 times debt-to-EBITDA, which is consistent with our investment grade credit profile.

Turning to our full-year 2019 and 2020 outlook on Slide 5 of the presentation. There are few items I would like to highlight. First, the 2019 outlook remains unchanged from our prior outlook. Second, the 2020 outlook assumes the proposed merger between T-Mobile and Sprint closes prior to the end of the first quarter 2020. And lastly, in 2020, relative to 2019, we expect a similar contribution to growth from towers, a consistent number of small cell deployments with approximately 10,000 nodes constructed and consistent contribution to growth from fiber solutions.

Also, please note the 2020 outlook reflects the impact of the mandatory conversion of preferred stock that we anticipate occurring in August 2020. The conversion will increase the diluted weighted average common shares outstanding for 2020 by approximately 6 million shares and reduce preferred stock dividends paid by approximately $28 million when compared to 2019.

In addition, we increased our annualized common stock dividends per share by 7% from $4.50 per share to $4.80, tracking the expected growth in AFFO per share.

Moving to Slide 6, we expect approximately $245 million of growth in site rental revenues from 2019 to 2020 at the midpoints, consisting of $285 million of organic contribution to site rental revenues, offset by a change in straight-lined revenues for approximately $40 million. With these expectations, we anticipate consolidated contribution -- organic contribution to site rental revenues of approximately 6% in 2020, consisting of 5% organic growth from towers inclusive of 3% contribution from escalators, offset by 2% churn, 15% organic growth in our small cell business, inclusive of 1.5% contribution from escalators, offset by 1% churn, and 3% organic growth from our Fiber Solutions inclusive of 9% churns and no contribution from escalators.

As it relates to the expected tower churn in 2020, the 2% remains at the high end of our long-term 1% to 2% range, as the last of the acquired network churn is expected to occur in late 2019, having an impact on 2020 financial results.

Turning to Slide 7, I'd like to briefly walk through the expected AFFO growth from 2019 to 2020 of approximately $210 million at the midpoints of outlook. The growth is primarily driven by the organic contribution to site rental revenues growth of approximately $285 million at the midpoints, which is partially offset by an approximately $90 million increase in cash expenses. This increase in expenses is a combination of the typical cost escalations in our business, including lease escalations and cost of living adjustments and the direct expenses associated with new leasing activity.

The balance of the changes relates to the expected contribution from network services and other items that are primarily related to changes in financing costs. To support this growth, we expect our overall discretionary capital expenditures in 2022 to be around $1.7 billion or around $1.3 billion net of capital contributions from our customers. Based on our expected cash flow growth and the incremental leverage capacity that growth will generate, we believe we can finance this level of spending without issuing equity.

In closing, we are excited about the positive growth trends driving demand for our tower and fiber assets. Looking forward, we believe we're in a great position to continue delivering on our annual dividend growth target of 7% to 8%, while at the same time, making significant investments in our business that we believe will generate attractive long-term returns and support future growth.

Before taking questions, I want to address one other item. As you saw in our 8-K filed yesterday, we received a subpoena from the SEC in September requesting certain documents from 2015 through the present, primarily related to our capitalization and expense policies for tenant upgrades and installations in our services business.

Additionally, we have previously provided information to the SEC relating to certain of our service related vendor transactions, which are not material in amount. The subpoena requires us to produce certain documents, but is not defining that any violation of law has occurred. We believe our long-standing capitalization and expense policies are appropriate, and we'll of course cooperate fully with the SEC including in connection with their review of those policies.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question will come from Simon Flannery with Morgan Stanley.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thank you very much. I appreciate it. So, just following up on the SEC. Do you have any sense on timing of when you've got to get back to them and when you might hear some more clarity around what exactly they're looking for here? And then on the outlook for next year, you talked about the small cell business being similar to this year. Any more clarity around your ability, maybe to revisit an acceleration, clear up some of the zoning and other issues to get -- If it's not next year, at least in the outer years to back to that sort of 15,000 type number over time? Thank you.

Jay A. Brown -- President, CEO & Director

Sure. Good morning. Simon. On your first question, we don't have any indication of timing. So as Dan mentioned, we'll fully cooperate with the requests that have been made of us, and we'll work through the process as appropriate. On the second question around small cells. We do think -- we talked about extensively on the last quarter call, we're seeing a meaningful amount of delays from both municipalities and utilities in certain jurisdictions around the country where we're trying to deploy small cells, which has caused the timeline, expected timeline to extend from what we had previously seen around 18 to 24 months to now a range of about 18 to 36 months. And we're working that on a number of different fronts, in terms of trying to come up with the [Indecipherable] on how do we do that more quickly and work through the process more quickly with municipalities and utilities, but I don't have at this point any update or more positive perspective.

I think we still believe as we sit here today that the timeline is going to be18 to 36 months and the activity that we're giving for 2020 on the call this morning reflects that timeline of 18 to 36 months, and to the extent that we do have some breakthroughs on that front will certainly update you.

On the backlog we did, as we talked about, that is upto 70,000 small cells in the backlog. So we put about 2500 on roughly during the third quarter and then we took on some new orders, so the total pipeline and constructed small cell nodes went from 65,000 to 75,000 from second to third quarter of this year.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

All right. Thank you.

Yeah, just to be clear that number 70,000 are the ones that are on air and under development, which is around 40,000 on air and 30,000 under development, which as Jay mentioned, you can see that we added to both of those numbers in the quarter. So we had some bookings in the quarter that I think are indicative of what Jay was talking about earlier, which looking at the big picture of all this it does feel like -- and we're a little frustrated about it too that it's taking longer to put these on air, than we would have anticipated at this point. But we're really in the early innings of this whole rollout of small cells and really haven't gotten into 5G, so what we're looking at is how can we make this business sustainable and scale it because we believe the activity levels are there and will continue to grow and we think we're making progress on that front. But as Jay mentioned, there are going to be some hurdles we need to get over and we're working really hard to get over them.

Simon Flannery -- Morgan Stanley -- Analyst

Thanks a lot.

Operator

Thank you. Our next question will come from Philip Cusick with JP Morgan.

Richard Choe -- JP Morgan -- Analyst

Hi, this is Richard for Phil. I wanted to get an update on your current thoughts around incremental opportunities around data centers, and towers and nodes and along with that alternative connectivity solutions such as directly connecting Crown at One Wilshire to other networks and bypassing meeting room? Thank you.

Jay A. Brown -- President, CEO & Director

Yeah, I think at this point that is the strategy that we've undertaken is the core of our focus. So we're focused on the components of the network-related to towers and fiber, particularly around small cells. We think that the vast majority of the opportunity is going to lie in those two areas as the world goes through what I talked about in terms of the fourth industrial revolution. We have, as you know, we've made some investments around edge data centers in Vapor and we're continuing to watch that space. We think there is opportunity not only to create potentially a lease up business by utilizing the space at the very edge of the network, which we would have as a result of our investments in small cells and towers but it also gives us a perspective on kind of where the world is going.

So at this point, I really don't see data centers playing a significant role and our long-term strategy. We think the opportunity for us really relies around towers and in the use of fiber for small cells and then utilizing that same asset for, as I mentioned in my comments, for other customers like hospitals and universities and other users that need high-bandwidth fiber.

Richard Choe -- JP Morgan -- Analyst

All right. Thank you.

Operator

Thank you. Our next question will come from David Barden with Bank of America.

David Barden -- Bank of America -- Analyst

Hey, guys. Thanks a lot for taking the questions. I've got a few , but I guess the first one would be on the Sprint/T-Mobile merger assumption. Could you kind of talk us through how you landed on choosing to assume it closed in the first quarter and kind of what does it contribute to the guide incrementally if it didn't happen at the quarter or happen at all? Thanks .

Jay A. Brown -- President, CEO & Director

Sure. I think -- we needed to make an assumption, obviously as we went through the guidance portion and based on the approvals of the of the DOJ and the FCC of the transaction, we believe the industry is operating under the assumption that the deal is going to close in the first quarter of next year. I think as we think about the business and as we sit down to do the outlook each year in October for the following year I think it's important to keep in context how our business operates and how it works. We often times talk about how few inflection points we have in the business and the reason for that is because how -- because of the amount of visibility that we gain into the business. If we think about the 2020 outlook and talk specifically about kind of the leasing component of that. It's a combination of three components as we sit down and try to figure out what we're going to do for the year. One, it would be the leases that have commenced during 2019 that are contributing to our results in calendar year 2019, but didn't contribute to the full year of 2019. So as we go over into 2020 we get a full 12 months contribution from all of those leases that were signed and commenced during calendar year 2019 that adds to growth.

The second component would be leases that we signed during 2019, but they won't actually turn on until 2020. So those leases are committed, they're signed, we know when they're going on air roughly, and that would be the second component of how we lay out the outlook. And then the third component and the smallest component of the contribution to growth in any given year is the leases that we'll sign in the next calendar year, in the year that we're giving guide to and some component of those leases that are signed next year, those will commence in the second half, in all likelihood toward the second half of next year, that's a relatively small component of the guidance.

So, one of the things that we used to say, and we haven't talked about it in the long time, but still true, in any given year when we get to this point of thinking about the next year of our guide around site rental revenue growth, a very significant percentage of the 6% growth that Dan was speaking about in his comments, we already have visibility to and in many cases more than half of that is probably already signed by customers or is already producing revenue, in our statements today. And we'll get the benefit of a full-year of it next year. So that's on the site rental side.

And then on the services side, as we start to think about it, there's two components of the services business. There's the installation component, where we're project managing the work for carriers and that benefits from all of the leases that have been signed in this year that will get installed next year and then some component of what gets done in 2020 that we don't have visibility to yet but leases that we think we signed.

And then the last component would be around pre-construction work that we do or what we often call site development services. And that is pre-work that's done. So we would be doing the site development services today for leases that are going to go on in 2020. And then we'll do some work in 2020 for pre-construction work. The construction work won't even be done until 2021. So when we look at all of those elements, it gives us a tremendous amount of visibility into the business, which is why we guide in October of every year for the next calendar year because significant portions of it are known today.

So, and I know you asked specifically about how we think about, Sprint/T-Mobile, Dave you followed us for a long time. So we don't like to talk about specific customers and don't want to do that on the call. But that's how we've built up our outlook in any given year, and we did that consistently for 2020 as to what we've done in prior years.

And then to put a finer point on it. We thought for sure someone would ask us, what did we do with the Sprint/T-Mobile merger. And so the assumption that we made was that it goes on in the first quarter, but I think the explanation more broadly of how we think about the outlook and what drives that outlook should help folks understand kind of the visibility that we have toward that outlook. And then to the extent that there is a development broader in this space that changes -- forces us to need to change the assumption that we've made here, we're happy to come back and give you that update to our outlook when it occurs or when certain development necessitates us revisiting our assumption.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Just to add one point of clarity of that, David, is that as Jay mentioned, the three components that can add to new leasing activity in the subsequent year that we're giving guidance for and that last one he talked about, leases that we would sign in the year and put on in the year that would impact the financial statements in '20 that's the smallest piece, and that's what we would be talking about if there were a significant change in either the timing or outcome of the T-Mobile and Sprint merger. It's what we would be signing next year and would go on air next year. So that's like you said, it's a smaller portion of what could impact new leasing activity from the tower side.

David Barden -- Bank of America -- Analyst

Awesome, and thanks for that guys. And I guess maybe a second question would be just on the small cell lease-up side. So you've been talking about kind of 2019 and 2020 kind of look at roughly similar in terms of no deployments presumably. And then the leased up in revenue terms is also pretty similar.

I was wondering why the leasing incremental revenue on the small cell business wouldn't be higher because if you're going to deploy the same amount this year as you did last year. But you've got the opportunity to lease-up last year's systems for incremental tenants, we should be seeing kind of a revenue acceleration in dollar terms rather than flat. Is there something I'm missing in that equation ?

Jay A. Brown -- President, CEO & Director

I don't think you're missing anything in the equation, David. I think what is happening is the timing of the new nodes going on air in 2020 is back-end loaded, which results in not having as much contribution to the new leasing activity in the year, but we believe that will over time come into play.

David Barden -- Bank of America -- Analyst

Okay, got it. All right. Thanks, guys.

Operator

Thank you, our next question will come from Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin -- RBC Capital Markets. -- Analyst

Thanks. Couple of questions, so as you laid out the components of guidance for 2020 in these different buckets. Where do MLA's play a role is that strictly in the escalator or is there a part -- portion of that in leasing ? And then related to guidance and David Barden's question, I guess just to kind of put a finer point on it. You do -- it sounds like you do assume some modest amounts of integration-related CapEx in 2020, is that correct ?

Unidentified Speaker

On the, MLAs component. And you know this, Jonathan, but just for the broader audience oftentimes the term MLAs it's used to describe agreements that we strike with the customers where they make committed levels of activity to us. Oftentimes, those are over a multi-year periods of time. We generally do not assume and have not assumed anything with regards to this outlook, with regards to new customer agreements in our outlook for 2020. So it's business as usual, if you will, in terms of how we're contracting with customers and the activity that we've baked into that outlook.

I'm not sure I understand your question on the second one, could you rephrase that or ask it a different way?

Jonathan Atkin -- RBC Capital Markets. -- Analyst

Yeah, yeah. If two carriers were to emerge before March of 2020, presumably they would embark on some integration-related CapEx that might lead to elevated amendment revenues, let's say, as one carrier deploys 2.5 [Phonetic] and then the other deploys lower, different spectrum is going to get cross pollinated onto the different sets of fixed assets. So that could lead to maybe a little bit of a higher pace of amendment revenues next year.

So the question is, is that -- it sounds like that's contemplated in your guidance, but to Dan's comment, it's the smallest part of your guidance, is that a fair characterization ?

Jay A. Brown -- President, CEO & Director

Yes. I think, obviously, as we noted, we are assuming that the T-Mobile/Sprint merger happens in the first quarter and I think broadly the industry is working and thinking under that assumption. The pause that I would have, and I think consideration of this that's important is in the activity cycle of the deployment of what's coming. And obviously, when you listen to Sprint and T-Mobile, talk about the rationale for the merger and you listen more broadly to all of the players in the space. The capital spending is going to start to transition here in the next 18 to 24 months from largely being focused on 4G to 5G and those activities while they will start in the next 18 to 24 months really in earnest. This is going to be a decade long, we believe, investment cycle that will go through with the carriers. And I'm trying to put a really fine point on which quarter of that activity actually starts in and what the scale of that activity is -- we have proven I think to ourselves over 20 years of trying to do this, but it's nearly impossible for us to be that precise. And so we generally talk about the business, think about the business, manage the business over kind of a year, year plus cycles. And I think as we get into 5G. I think what you will hear us talk significantly about is that the wireless carriers will go out and touch the sites that they're on already and upgrade that technology toward 5G. And commensurate with that some of the comments that I made, I think you will also see them increase the density, particularly in the top 30 markets in the US where there's greater density of users in order to provide 5G and 5G is going to require a greater density of the network. We think that will really benefit small cells. And then the last phase of it will be a densification around the macro sites, where you see carriers come back and try to find opportunities to put in additional antennas and lines in macro sites that they're not on existing. So I do think -- to your point, I do think, you're right that we'll see in the early stages, kind of amendment activity to existing leases. But I think that's going to happen over a very, very long period of time, I think decade, rather than trying to put a finer point on a quarterly outcome.

Jonathan Atkin -- RBC Capital Markets. -- Analyst

And then lastly, related to new business, that there may be auctions that take place perhaps in the C-band at some point in the first part of next year and then unrelated to that there'll be the sort of mandated fourth network that gets built out as part of DOJ's approval of the deal. So I wondered how much -- what are the timelines to sort of contemplate and do we see any of that in 2020 around C-band deployments and then maybe a mandated fourth network deployment or was that not part of what you were thinking when you gave your initial outlook ?

Jay A. Brown -- President, CEO & Director

I think as we think long-term about the network, certainly we would expect that the FCC will continue to go down the path of trying to make additional spectrum bands available. I think they have been really clear and all of the research has shown that despite the significant amount of investment that's going to happen around densifying the networks, there is not enough capacity in the existing spectrum bands to meet the demand that's going to come both from consumers and industry around the deployment of 5G. So I think we will see -- the C-band is an example of that, I think there are multiple other examples that are being talked about in terms of coming to auction. But I think even beyond what's contemplated today, I think we're going to see over the next decade additional spectrum bands freed up and come to market, and as those bands get freed up, the absolute best thing -- the best place to be as an infrastructure provider is when there is a combination of new spectrum being deployed or spectrum that has previously been fallow, and that ends up in the hands of a provider, whether that logo is known to us today or otherwise. And then that provider then has either an incentive as mandated by the FCC to get it deployed or has a business interest and an economic desire to get that spectrum deployed and when those two things come together and opportunity to -- and capital to invest in the network along with new spectrum bands, that goes really well for our industry and has for a long period of time. As we contemplate the guidance that we're giving this morning, we're not assuming that there are additional spectrum bands that are given in the next 12 months, as we think about 2020, back to my earlier point around what contributes to that, that would really have to be known today and we would already have leases to the extent that with any of those things that I'm talking about now, that would be very small and frankly pretty much inconsequential to our guide. But I wouldn't dismiss that in terms of the long-term benefit that those things are going to bring to our business, we think those are significant, and if we think about the upside from the investment that we've made around fiber and our long-standing assets that we have on towers, both of those assets are going to benefit significantly, as additional spectrum bands are deployed over the long-term.

David Barden -- Bank of America -- Analyst

Thank you very much.

Operator

Thank you. Our next question will come from Michael Rollins with Citigroup.

Michael Rollins -- Citigroup Inc, Research Division -- Analyst

Hi, good morning. Just going back to the SEC inquiry. Is the accounting that you use for tenant upgrades and installation similar or the same as your competitors and do you know if they've also received a similar request. And then maybe just moving over to the network services business more broadly. How would you look at the potential for the gross profit that you're generating from that business to be similar or greater over time to the current level? And is there a framework that you use to sort of measure what that might look like relative to the underlying activity for leasing within the financials that you report? Thanks.

Jay A. Brown -- President, CEO & Director

Sure. On your first question, I can't speak to the accounting of our peers or whether or not they've received a letter. On the second question around services gross profit over time. Historically, this is basically tracked leasing activity in the tower business. The amount of services that we perform are really small outside of the tower business. So virtually all of the gross profit that we have comes from the tower business. And as I mentioned in my earlier comments, there are two primary things that we do for the wireless carriers in the services business, and I'll do this sequentially not in order of scale. The first thing that we do for carriers would be, what we would call site development services, those would be things that are pre-construction. There are things like site acquisition, application fees, and other things that we do prior to actually beginning the construction process for a new tenant, and whether that new tenant is an amendment to an existing lease or a brand new installation on the tower, we will do some of that work for them pre-construction. That represents, I think in 2018, that represented about 40% roughly of the total services activity that we had. The 60% which would be the second component of it, is the project management of actually installing their equipment on our sites.

And in that regard, we're providing project management services to tenants as they are wanting to install the equipment, whether it's again amendments or brand new leases.There have been occasions over time where the growth in our gross profit has been a function of us capturing greater percentages of the activity. In periods where activity in towers was relatively light, if you go back historically, lighter than levels today. At times, people will come into that business and they will bid the price and the margins really tightly and will walk away from some of that business because they just don't see margins in it.

In periods of time where activity is more robust there are times when we capture a higher percentage of it. So it generally tracks activity, but not perfectly. So if you look at the increase in services gross profit over the last several years, you can basically track that to our continued increase in activity around tower leasing activity. And as we've mentioned a couple of times this morning, we're, in 2019 and we think we'll be again in 2020 in terms of tower leasing activity, we're at the highest level we've seen in more than a decade. And so our services business is obviously tracking with that.

Jonathan Atkin -- RBC Capital Markets. -- Analyst

And it seems like in 2019, you may have gotten a little bit of a multiplier on that gross profit growth relative to the -- gross profit growth network services relative to the movement if we measure activity by just the internal leasing dollars. Is that fair? Or is there more to unpack to try to get at the change in activity relative to the change in gross profit?

Jay A. Brown -- President, CEO & Director

Yeah, there is a bit of it, that's why I made my comments about this -- it's not single dimension. We did benefit from 2018 into '19. We've captured a higher percentage of both pre-construction work as well as installation work. So we've grabbed some market share there during 2019 relative to 2018. So it's a combination of the activity and a little bit higher market share.

Jonathan Atkin -- RBC Capital Markets. -- Analyst

Thanks.

Jay A. Brown -- President, CEO & Director

You bet.

Operator

Thank you. Our next question will come from Colby Synesael, with Cowen and Company.

Unidentified Participant

Great. This is John on for Colby. Thanks for taking the questions. Within the fiber business can you talk about the bookings trends you witness in the third quarter versus maybe the second quarter. And do you believe there's some potential that the 3% growth for 2020 could ultimately prove conservative? Thank you.

Jay A. Brown -- President, CEO & Director

Yeah, we saw the business continue to perform well in the third quarter, it obviously came in line with our expectations. You saw from the numbers that we gave on a incremental basis in 2020, our midpoint of growth $165 million compared to $150 million in 2019 of that larger asset -- of that larger revenue base, the growth is still 3%, which is where we guided. I think our outlook for that and guidance around it, as we've said a couple of times this morning, is that 3% we feel good about that. We believe we can sustain that over a long period of time.

And, we're doing everything we can to increase it. As I look at the quality of the fiber and where it's located and the opportunities there, that fiber is running right past a significant addressable market that I believe our fiber could provide services to. And I think as we get better at the business, I'm hopeful that we will be able to increase it and see an opportunity. Our 2020 outlook is a balanced view of what we think the best thing that could happen to us, the worst things that could happen to us and trying to weigh a number of different assumptions around it. And as we get into 2020, if we figure out a way to do a little better in the business we will certainly update you.

John Blackledge -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Rick Prentiss with Raymond James.

Rick Prentiss -- Raymond James -- Analyst

Good morning, guys.

Jay A. Brown -- President, CEO & Director

Good morning.

Rick Prentiss -- Raymond James -- Analyst

A couple of questions if I could. Jay, I think you mentioned that the change in the straight line adjustment for 2020 looks like about maybe $40 million improvement there. We have been expecting maybe more like $100 million change there. Looks like T-Mobile now is more like six years versus five years. But how should we think about that change that also, as we look into maybe '21, are we expecting a bigger change from straight line adjustment as we go from '20 to '21, and get that to be a positive adjustment since cash is so important to look at?

Jay A. Brown -- President, CEO & Director

So, Rick, let me take that one.

Rick Prentiss -- Raymond James -- Analyst

Sure.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

The -- what adds to that straight line, as you know, is extension of current leases and signing new leases. And we believe that the combination of those two activities will lead to an additional $40 million straight line revenue. Can't really -- I can't really speak to your expectation of $100 million compared to that number, but we believe that what we've captured in there is a new leasing activity that we expect in our guidance, in our outlook. And then included in that, like I said, is the extension of current leases to the extent that that happens.

And looking into 2021, we are giving guidance for 2020, now. So we can get into that when we start talking about 2021 and how it all may lookout. But right now we're talking about, as we mentioned at the midpoint, around $40 million for 2020.

Rick Prentiss -- Raymond James -- Analyst

Sure. In the supplement, you do give a little extra detail, but obviously it's a static picture, as far as what the adjustment between book and straight line. So that's kind of where we had gotten the early indication on 2020 and thinking on 2021. So that's what I'm just trying to get. I know you don't give guidance on '21, but you do provide that supplement, some extra kind of color.

Jay A. Brown -- President, CEO & Director

That supplement, as you pointed out is a snapshot in time, as of our business. That relates to our business, as of September 30, 2019, and it will move depending on what happens with the business, as we signed new leases and extend new leases. So that's why we give it, because we want to give as much detail we can. But looking into the future, we want to give that, as part of our outlook, not as a static picture.

Unidentified Participant

Sure, OK. Second question is, amortization of prepaid rent. It looks like the amortization of prepaid rent went up maybe about $25 million from 2018 to 2019. As we look into 2020 guidance, should we assume a similar increase of maybe $25 million, more or less, just trying to think of what the amortization of prepaid rent contribution in for 2020?

Jay A. Brown -- President, CEO & Director

Yes. First, that's about right, it's in that neighborhood from 2018 to 2019. And we believe that going into '20, it'll be a little higher, but not anything that would be material.

Rick Prentiss -- Raymond James -- Analyst

Okay. And then the last one. Dan, you mentioned on churn, on the tower side, be up at that 2% level in 2020, because of kind of wrapping up the acquired network churn late '19. How much dollars are left in there. So we just kind of get a sense of what that is, as we get to the finish up '19 and into 2020 on a dollar basis?

Jay A. Brown -- President, CEO & Director

Well, what we've seen now is that, we think we've taken almost all of it at this point and it will just be the flow through from the activity that we've already seen going into the remainder of this year and then into 2020. And it's most of the difference between our -- what will be normalized at 1%, and where we are now at about 2%. And therefore, as we get into the back-end of 2020, we think that number of incremental churn will come down and will get closer to the lower end of our 1% to 2% long-term guidance.

Rick Prentiss -- Raymond James -- Analyst

Makes sense. So long-term, more or like 1% what you're seeing in the historical, as in any other acquired network et cetera?

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

I think that's fair. It's within that range. And we'll be on the lower end of that range, as opposed to higher in that range.

Rick Prentiss -- Raymond James -- Analyst

Great. That helps. Thank you.

Operator

Thank you. Our next question will come from Nick Del Deo with MoffettNathanson.

Nick Del Deo -- MoffettNathanson -- Analyst

Hi, thanks for taking my questions. Dan, can you walk us through the mechanics of what gets expensed and what gets capitalized in the services business?

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Sure, Nick. I want to take a step back and just talk about that generally, as how we think about capitalization and what we do, and I think this is -- what any company does, but it's basically looking at what are the expenditures that add to the long-term value of an asset can generate future revenues on an asset. Anything that does that, we will capitalize. To the extent that we are making expenditures, that for instance are more maintenance in nature, but do not add to the long-term revenue generating potential of that asset we will expense it.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. Are you capitalizing -- so does that mean you're capitalizing costs incurred for the services business to PP&E? Like tower improvement?

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Nick, like I said, we capitalize the cost of that add to the long-term nature of the asset. And I think you can appreciate that given where we are with our discussions right now, we don't want to get into a lot more detail here.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay, understood. Maybe switching gears then, one on the small cells front. As we think about the lengthening installation time frame. Are there any exit clauses in customer contracts, if you're not able to deliver the small cells in the given time frame? I recognize that they may not choose to exercise them because waiting might be a better option than exiting. I'm kind of curious if they are?

Jay A. Brown -- President, CEO & Director

I'm sure they have an exit should we not perform appropriately under the contract. But these are committed contracts. So to the extent that we're performing appropriately, we're not on the hook based on certain barrier like municipalities and utilities that would make the timeline very, very long. So I think as we talk about the contracted base of small cells that we have, we don't view those at risk as long as we can get them on air at some point.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay, got it. Thanks, guys.

Operator

Thank you. Our next question will come from Batya Levi with UBS.

Batya Levi -- UBS Investment Bank, Research Division -- Analyst

Thank you. Couple of questions. Just going back on the guidance given that you're expecting a similar organic growth in macro next year, and this includes a small amount from new leases that could be signed when the deal closes. Can you provide more color on what type of activity you think actually could slow down to make it for that difference? And maybe any thoughts on commercial availability of CBRS, if you're seeing any increased activity from the carriers, as they deploy that? And a final question on the discretionary CapEx. It looks like it's a little bit lower versus '19. Can you talk about what's driving that reduction?

Jay A. Brown -- President, CEO & Director

Sure. On the first point, I really don't want to get into a specific customer guidance around what we expect in calendar year 2020. We've tried to frame this in a way that's helpful and shows relatively minimal amount of activity that would happen in 2020, and how that would flow through to the guide that we've given. So I'm not sure I can add much color to that. We certainly assume that during 2020, we'll see new macro leases across the portfolio and across the industry, and those will have some contribution in 2020. But those leases will frankly have more meaningful contribution to our 2021 results. On CBRS, we are watching that activity, there is some event, but it's not material to the results today. We don't expect that it will be material to our results in 2020 and the outlook that we're providing. Initially, I think most of the CBRS activity appears to be focused in building. So we're seeing some of that in the venue opportunities that we have and they -- and that may contribute there, but it's really small at this point, and not a material driver of the business.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

On the discretionary capital Batya, the reduction really is to -- is related to what we believe will -- it will take to put on air, all of the assets that we believe will generate a new leasing activity that we have coming into 2020, and we believe that's just lower in 2020 than it is in 2019. As you know there was a step-up in activity going into 2019 and we're leveling out a bit in 2020, and the result of that is a slightly lower capital expenditure profile than what we're seeing in '19.

Batya Levi -- UBS Investment Bank, Research Division -- Analyst

Okay, one just follow-up. Can you give us a rough split of the fiber and small cell revenue base, as we exit the year. Is it more or like 80% fiber 20% small cell?

Jay A. Brown -- President, CEO & Director

Yes it's closer to 70% Fiber, 30% small cell going into 2020, then it's 80%, 20%.

Batya Levi -- UBS Investment Bank, Research Division -- Analyst

Okay, got it. Thank you.

Operator

Thank you. Our next question will come from Robert Gutman with Guggenheim Securities.

Robert Gutman -- Guggenheim Securities -- Analyst

Yes, thanks for taking the question. The site leasing -- fourth quarter site leasing revenue implied given year-to-date progress and even at the high-end of full-year guidance, it seems like the fourth quarter implication is pretty flat versus third quarter, just a hair higher. As we think about fourth quarter usually being seasonally stronger. So can you talk about -- a little bit about the timing through the year there, and maybe pull into that a little bit about, we -- how you see order activity in the second half of the year versus the first half of this year?

Jay A. Brown -- President, CEO & Director

Yes, happy to answer that question. We had, maybe a reasonably strong third quarter, as we think about historically the activity in Q3 was stronger. So I would just -- I would chalk that up to timing, obviously we're not changing our full-year outlook for 2019. We did expect Q3 to be really strong relative to the full-year. And so to the extent you're noticing a little bit of movement between Q3 and Q4. We believe that to be just timing.

Robert Gutman -- Guggenheim Securities -- Analyst

And what about the pace of new order activity in the second half of the year versus the first half of the year?

Jay A. Brown -- President, CEO & Director

Well, the second half of the year leads right into our 2020 Outlook.So the leasing in the bookings that we're doing in the second half of this calendar year does flow into leases that are turning on in 2020 to the extent we don't get them on air at the end of 2019. So I think a good read through for particularly second half activity of '19 that is you can get a good proxy for that by looking at the outlook for 2020. So when we make comments in 2020 to say that the leasing activity in '20 looks substantially similar to that of 2019 in terms of change in our reported revenue growth. That's really a proxy for what's happened for the second half of 2019. So say all that to say second half of 2019 activity is at the highest levels we've seen in a decade, except for the periods in the second half of '18 through the beginning of '19. So it's been incredibly strong and really hopeful as we go into '20.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

And as you remember, Robert, we have increased our new leasing activity expectations earlier this year-- increasing level of activity through 2019. So we believe that this higher level activity we're seeing now will continue.

Robert Gutman -- Guggenheim Securities -- Analyst

Great, thanks. And on the incremental small cell orders , how much of that is new builds versus second tenants. The breakout proportionately?

Jay A. Brown -- President, CEO & Director

Similar to what we've seen over the last several quarters . So we're still seeing the predominant amount of the activity is coming from new locations where we're going to extend fiber of the plan, but we're seeing co-locations in that mix as well to the tune of about 30% to 40% of the activity is coming in co-locations and about 60% to 70% would be new extension of the fiber networks that we have in place. The activity continues to be focused in the Top 30 markets of the US, so there is some marginal activity outside of that but certainly this increase that we're talking about this morning. That's coming in almost entirely in the Top 30 markets.

Robert Gutman -- Guggenheim Securities -- Analyst

Great, thank you.

Operator

Thank you. Our next question will come from Tim Horan with Oppenheimer.

Tim Horan -- Oppenheimer -- Analyst

Thanks, Jay. Maybe just asking I'm sorry , guys . Thanks, Jay maybe just asking the question a little differently on Sprint, T-Mobile, dish. Do you think that merger ends up changing the trajectory of revenue at all over the next five years for -- does it improve it, does it keep things relatively the same, but does it hurt. I mean I know there's a million moving parts. And then secondly, are you seeing much interest from the cable companies yet or do you think their engineering wireless networks at this point?

And then lastly are the municipalities and utilities are they improving on their ability to kind of process all the orders here for small cells or when do you think that improvement comes where we get to a good run rate again? Thanks.

Jay A. Brown -- President, CEO & Director

Sure. I think to your question around longer-term the driver of our business is really data traffic growth, which I referenced a couple of times in my comments and I think regardless of the logos, the number of logos, who owns what spectrum. I think that what drives our business and the investment in the infrastructure goes to what is the data traffic opportunity. And if our assumption is right around the coming of 5G and the amount of infrastructure that's going to be required for that, I think our business is going to perform really well regardless of the outcome there.

There may be some short-term changes that we're talking about on a quarter-to-quarter basis depending on what the ultimate outcome of the industry structure is, but the long-term trajectory of revenue growth, we believe that is a very favorable environment and that's why we -- when Dan and I are having these kind of conversations, that's why we spend so much time trying to focus around the dividend and our dividend growth of 7% to 8%. Inside of that range of 7% to 8%, we're taking into consideration a number of different outcomes, whether it's movements and activity around leasing as well as changes in interest rate environment and other things. We're trying to look out over a really long period of time. And so how do we think the business will perform over a long period of time and that drives us to talk about kind of the dividend growth of 7% to 8%.

And to your question, looking at the longer term of kind of what does it look like over the next five years or so. I would say, I think our view around dividend growth of 7% to 8% encapsulates the number of different industry structures, deployments of new technologies, different spectrum bands and we believe it will be really favorable.

On your second question around cable companies, again I'm going to beg-off on that. Because I really don't like to talk about specific customers. I think more generally as we move toward 5G, there is a mix of a lot of customers that are starting to look at the need for infrastructure and how they could own wireless networks in ways that go beyond what we've historically seen, and we've seen leasing from players outside of the 4 big operators in the US this year and that activity has been up compared to prior year. So we've benefited from some leasing outside of the big 4 operators, I think as we move toward 5G you're likely to see that continue.

And then your last question around the municipalities and utilities. We're certainly working really hard to try to get there. There have been a number of governmental entities that have been helpful on that front. Obviously, the FCC has worked really hard to try to put out some guidance and some rules that are intended to give clarity to the timeline and the amount those rules have been helpful in a lot of cases, but we also run into utilities and municipalities that just fail to comply with the orders and the rules of the SEC.

A number of states have undertaken activities and to try to help this activity and so we're up to mid 20s in terms of number of states that have passed legislation that enables our ability to deploy this with committed timelines and committed cost structures. And there are a number of other states that we're working on at the state level. In general though, I would say, as we talked about kind of the operating components, how long it's going to take us to deploy these -- all of those changes and opportunities, they really haven't changed our trajectory of how quickly we think we can deploy these. Ultimately, though, I mean just going all the way back to kind of where we started in the conversation in my prepared remarks. This business at its most basic level is a significant investment of capital upfront to own an asset that can be shared and that's sharing occurs over a very long period of time.

And the timing, while we certainly are working on it and we want to deliver for our customers a small cell nodes absolutely quickly as we can, ultimately as we think about looking at the business and whether or not it makes sense for us to won the shared asset and what the returns are, we're less focused on the exact timing of when we can get the small cell nodes on, and much more focused around what's the addressable market and what's the opportunity there? And we have found by running the tower business over a long period of time that the patient steady execution of adding tenants to that shared asset over a long period of time is how you can effectively drive great returns on the investments that we've made and we're really focused on how do we do that cost effectively and thoughtfully and then position ourselves really well with our customers to be the go-to-provider because we can provide them with a low cost solution that they can count on. And that's what we're focused on day-in and day-out to run the business as well.

Tim Horan -- Oppenheimer -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Spencer Kurn with New Street Research.

Spencer Kurn -- New Street Research -- Analyst

Hey, guys. Just a couple of questions but on small cells, you talked about your new leasing revenue being back-end weighted, I was wondering if you could provide a little bit of context on the cadence of new leasing activity that you expect in the guide for towers and fiber?

Jay A. Brown -- President, CEO & Director

Those are generally flat across the 2020 outlook, Spencer. There is no significant change from first half to second half.

Spencer Kurn -- New Street Research -- Analyst

Okay, got it. Thank you. And then on CapEx. I was just wondering if you could put a finer point on where you expect the lower CapEx to come from, whether its towers, small cells or fiber in 2020?

Jay A. Brown -- President, CEO & Director

It's in the fiber, small cells arena, Spencer. Towers is going to be relatively similar and then building the asset out for the fiber and small cell business is what we're spending a little less money on in '20 than we did in '19.

Spencer Kurn -- New Street Research -- Analyst

Got it. And then just lastly on small cells have you -- you've historically talked to a win rate of around 50% of the market and in the meantime, it feels like we've seen more growth from carriers building small cells themselves or cable companies talking about adding CBRS or WiFi to their own infrastructure. So I was just wondering if you could update us on your perspective of the competitive landscape anything changed, are you seeing better win rates, or they are remaining stable? Thanks.

Jay A. Brown -- President, CEO & Director

Yeah you're correct in that our historical experience has been, we've won what we believe to be about 50% of the opportunity that's been available in the market. And the small cells that have been deployed we believe we've won about 50% of that activity. We're certainly not underwriting, as we think about the long-term returns in the business, we're not underwriting that as what we believe will be a significant growth in the amount of activity. I quoted the CTIA stat in terms of a 10-fold increase in the number of small cell nodes between now and 2026, we don't assume that we're going to continue to win 50% of the activity. We believe we'll win a very high percentage of the activity that happens in the areas where we have existing fiber and to the extent that there is activity outside of where we have fiber today, then it will just be an investment decision around whether or not we would like to continue to expand the business and that goes back to kind of my comments on a couple of questions go around how are we thinking about running the business. We're focused on how do we grow the dividends per share over a long period of time. And to the extent that we continue to expand the base and follow the carriers in the markets beyond what we have today that will really be an investment decision around what do we believe the returns are, the initial returns, plus the opportunities for future growth there. And to the extent that the return structure stay similar to what it is today I think we'll continue to do that. If it changes, then we'll evaluate that capital at that point, but we're not underwriting an assumption there.

To your question around self-perform, we believe it is the most likely, if Crown Castle is not building the small cells the most likely scenario is that the work is being self performed by the carriers. Again, similar to kind of the tower industry in the earlier days where there were a few providers who were building a bunch of towers, but the curious were also self-performing. There are locations that we choose not to build small cells and build fiber and in those cases, oftentimes the carrier is going to do it themselves. There are other cases where we would potentially be interested in doing it, but the carriers decide that they want to self-perform. I think the scale of what's going to be needed around small cells over the coming decade is you're going to have some of all of that and more and so I think we'll continue to see the carriers self-perform and build a significant number of small cells themselves. And I think we will do really well in the places where we've chosen to build fiber and capture lease-up opportunities against that fiber to drive our returns.

Spencer Kurn -- New Street Research -- Analyst

Great, thank you.

Jay A. Brown -- President, CEO & Director

Maybe we'll take -- given the time maybe we'll take one more question.

Operator

Thank you. Our last question for today's presentation will come from Brandon Nispel with KeyBanc Capital Markets.

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Awesome. And thanks for squeezing me in. Wanted to follow up on Robert's question on bookings activity specifically on towers though, is the backlog of business signed, but not commenced up year-over-year and maybe just provide some color from a year-over-year and quarter-over-quarter perspective in 3Q? And then I have a follow-up question.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Yeah, just to clarify, Brandon, you're asking third quarter of 2019 over third quarter of 2018?

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Yes.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

I think from -- you can piece together, especially from how we've talked about the new leasing activity being higher in '19 than '18 and then increasing it during '19 from our original outlook and expectation. That it has been building over time and that hasn't included into the third quarter and we believe that as Jay has mentioned a few times at this activity level in towers, which is the highest we've seen in a decade will continue into 2020. So it has been increasing and we think it will continue around this pace going forward.

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Got it. Then on the small cell business you guys called out 1% churn and small cells. Why is that happening? It's a pretty new in the last couple of years, I'm you just curious why there is any churn in that business at all? Then on the escalator for the small cell business is 1.5% sort of the best that you guys do and does that cover your cost inflation in that business longer-term? Thanks.

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Sure. The churn of about 1% -- I know this may not be a totally satisfying answer, but they're going to be times when there are certain nodes that just aren't performing in a way that is appropriate or that somehow we want -- that our customers don't want at one particular point or one particular location. And a 1% churn level now, I think you can take it to say that it's pretty deminimis and not something that I think is indicative of anything other than there are just certain times where nodes get churned off. With regard to the escalator itself the 1.5%, as we've talked about historically, there has been somewhat of a thought process split. It's not in the contract, but I thought process between the escalation on the node portion and the escalation on the fiber portion, where the fiber portion doesn't get an escalator. The node portion, which is approximately more -- it's like more of the tower business does get an escalator. And as we've kind of worked through that we've gotten to the point where the escalator is on average about 1.5% in the small cell business. We don't think that that will go up over time. No, I don't think it will get better than that, for that dynamic I just spoke of is that fiber generally doesn't have an escalator associated with it, and I'd say that's a significant portion of the build. And as far as cost escalations, there aren't really many cost escalations within that small cell business once we, just like in the tower business, once we have the asset in place, it is in place and we believe that because of that what really will drive the incremental revenue -- incremental returns and ultimately the incremental gross margins associated with small cell business will be lease-up as we add those at higher incremental returns and margins then the anchor build is added.

So what we'll see, we believe is increasing returns and margins over time as we lease up the assets and the escalator recover any cost increases that we seen in the underlying business.

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

Great. Thanks for taking the question.

Unidentified Speaker

Thanks everyone for joining us this morning. We're obviously incredibly thrilled with the results in the third quarter. I want to give a shout out to our employees who have done a terrific job delivering for our customers, during 2019 thus far and we are looking to finish out the year strong and we're obviously really excited about the long-term opportunity that's in front of us, as we turn the page from largely focused on 4G and I think as we get into 2020 there will start to be even greater conversations around the opportunity in 5G and what it's going to mean for our business. We think it's going to be great, thanks. So, thanks for joining us this morning. Look forward to catching up with you soon. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Benjamin Raymond Lowe -- VP of Corporate Finance

Jay A. Brown -- President, CEO & Director

Daniel K. Schlanger -- Senior Vice President and Chief Financial Officer

Unidentified Speaker

Simon Flannery -- Morgan Stanley -- Analyst

Richard Choe -- JP Morgan -- Analyst

David Barden -- Bank of America -- Analyst

Jonathan Atkin -- RBC Capital Markets. -- Analyst

Michael Rollins -- Citigroup Inc, Research Division -- Analyst

Unidentified Participant

John Blackledge -- Cowen and Company -- Analyst

Rick Prentiss -- Raymond James -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Batya Levi -- UBS Investment Bank, Research Division -- Analyst

Robert Gutman -- Guggenheim Securities -- Analyst

Tim Horan -- Oppenheimer -- Analyst

Spencer Kurn -- New Street Research -- Analyst

Brandon Nispel -- KeyBanc Capital Markets -- Analyst

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