美國電塔 (AMT) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Second Quarter 2017 Earnings Call. (Operator Instructions) I will now turn the conference over to your host, Igor Khislavsky. Please go ahead.

Good morning, and thank you for joining American Tower's Second Quarter 2017 Earnings Conference Call. We have posted a presentation, which we will refer to throughout our prepared remarks, under the Investor Relations tab on our website, www.americantower.com.

Our agenda for this morning's call will be as follows: first, I'll provide some brief highlights from our financial results; second, Tom Bartlett, our Executive Vice President, CFO and Treasurer, will provide a more detailed review of our financial and operational performance for the second quarter of 2017 as well as our updated full year 2017 outlook; and lastly, Jim Taiclet, our Chairman, President and CEO, will provide some brief thoughts on our international business. After these comments, we will open up the call for your questions.

Before I begin, I'd like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2017 outlook, capital allocation and future operating performance or acquisitions, technology and industry trends and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2016, and in our other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.

Now please turn to Slide 4 of our presentation, which highlights our financial results for the second quarter of 2017. During the quarter, our property revenue grew nearly 15% to $1.64 billion. Our adjusted EBITDA grew 17.5% to approximately $1.02 billion. And our consolidated adjusted funds from operations increased by over 22% to approximately $725 million.

In addition, our consolidated AFFO per share increased by nearly 22% to $1.68, and net income attributable to American Tower Corporation common stockholders increased by more than 114% to $344 million or $0.80 per diluted common share.

And with that, I'd like to turn the call over to Tom.

Thanks, Igor. Good morning, everyone. As Igor just highlighted, we generated another quarter of strong results, posted double-digit growth across our key metrics. Our consolidated organic tenant billings growth was nearly 8%. We continue to de-lever naturally to 4.5x net debt to annualized adjusted EBITDA, and we grew our common stock dividend by about 21%. In addition, we repurchased more than $400 million of our common stock, bringing our year-to-date total repurchases to over $640 million.

With that, let's dive into the details around our second quarter performance and updated outlook for the year.

So if you'll please turn to Slide 6. Consolidated property revenue grew by nearly 15% in the second quarter, including tenant billings growth of about 12% and organic tenant billings growth of around 8%. Our U.S. property segment revenue growth for the quarter was 8.1%, including organic tenant billings growth of 6.2% or 60 basis points higher than Q2 of last year. This strong growth reflects a healthy demand environment, which drove near-record levels of new business.

Volume growth from co-locations and amendments contributed about 5% to the organic growth rate, while pricing escalators contributed about 3%. This was partially offset by churn of about 1.8% on an annualized basis, just 40 basis points of which was associated with operational churn from the big 4 core networks.

International organic tenant billings growth in Q2 was over 400 basis points higher than that of the U.S. at over 10%, continuing to reinforce the high-growth nature of our international business.

Mexico continued to lead among major markets in Latin America, delivering organic tenant billings growth of about 12%, driven by 4G investments being made by several carriers in the market. Notably, organic tenant billings activity in the quarter did not include any significant impact from the new wholesale network being built out in Mexico, which we would expect to start generating some initial cash leasing revenue growth for us beginning in the third quarter.

In EMEA, our largest market in the region, Nigeria, performed in line with internal expectations, while Ghana led the way with organic tenant billings growth up about 20%.

Lastly, in India, organic tenant billings growth was over 10% even after taking into account elevated consolidation-related driven churn. The strong leasing activity across our international footprint reflects our tenants' continuing need to invest in their networks as their customers consume more and more mobile services.

Within our international segment, contractual pricing escalators, driven primarily by local CPI indices in most of our international markets contributed nearly 5% to our international tenant billings growth, while volumes from co-locations and amendments provided an even greater contribution at over 7%. And this was partially offset by churn of about 2%, inclusive of the impacts of the ongoing carrier consolidation process in India. Meanwhile, the Day 1 revenue on sites we've added since Q2 of last year as well as the partial quarter impact of the volume portfolio contributed an additional 4.3% to our consolidated tenant billings growth.

Our new build program also remained active, and we constructed over 460 sites globally this quarter, predominantly in our international markets, where average Day 1 NOI yields were over 10%.

Turning to Slide 7. Our strong revenue generation led to double-digit growth in both adjusted EBITDA and consolidated AFFO for the 17th consecutive quarter, with growth of over 17% and over 22%, respectively. Consolidated AFFO per share and AFFO attributable to common stockholders per share grew nearly 22% and 19%, respectively. This growth reflects our ability to translate strong organic tenant billings growth, prudent investments in new assets and strong cost controls across the business into compelling operating results.

Now turning to Slide 8. Let's now take a look at our updated expectations for 2017. At the midpoint of our revised full year outlook, we expect property revenue to grow by more than 14% to over $6.5 billion, up approximately $25 million versus our prior outlook. This reflects slightly better than expected global new business assumptions, some incremental straight line revenue, about $35 million in positive FX impacts relative to our prior outlook as well as lower expected churn rates, particularly in India, where we anticipate some consolidation-related churn will be delayed until later in 2017 and subsequent years. We expect these benefits to be partially offset by about $17 million in lower FX-neutral pass-through revenue, primarily attributable to our EMEA segment, caused by lower fuel prices in the region.

As part of our property revenue outlook, we continue to expect strong organic growth in 2017 in both our U.S. and international businesses, with consolidated organic tenant billings growth in the 7% to 8% range, supported by our global scale and diversification.

Given our strong first half results and indications of continued network investments by our U.S. tenants, we are maintaining our outlook for U.S. organic tenant billings growth of over 6% for the year. This reflects the expectation that 2017 U.S. co-location amendment activity will be up 15% to 20% versus 2016.

I'd also like to make clear that we have still not included any material leasing expectations from the FirstNet deployments or the expected rollout of the 600 megahertz spectrum in our current outlook for 2017.

In our international markets, we're now projecting organic tenant billings growth of nearly 10% at the midpoint, up slightly versus our prior outlook. This is being driven by continued strong gross new business commitments across our international footprint, particularly in Latin America. Additionally, our international churn expectations are down as compared to our prior outlook numbers, driven by a revised churn forecast in India, which is now 2% lower than our prior outlook assumptions. This reduction is timing-related as some of the consolidation-related churn we had previously assumed for 2017 is being pushed into the fourth quarter of 2017 and 2018. For international, as a whole, churn is now estimated to be in the mid-2% range for the year versus the low 3% range in the prior outlook.

I'd like to point out that our updated outlook does not include any of our pending acquisitions, such as those in Paraguay, Mexico or Colombia.

We are also raising our outlook for adjusted EBITDA by $45 million or over 1%, which reflects the continuing high conversion of organic tenant billings growth to the adjusted EBITDA line, our continued focus on cost controls and increase in straight line recognition and about $16 million in increased FX benefits. Importantly, our adjusted EBITDA margin, which we now expect to be about 61.6% for the year, has increased sequentially for 4 straight quarters. Going forward, we would expect this broad trend to continue as we generate organic growth on our extensive existing portfolio.

We expect to translate this increase in adjusted EBITDA into higher consolidated AFFO. And as a result, are raising our 2017 consolidated AFFO outlook by $55 million, or 2% at the midpoint, to nearly $2.9 billion. The main components of the increase are about $35 million in higher cash-adjusted EBITDA, $16 million in more favorable net interest and $10 million in lower expected maintenance CapEx, partially offset by a $6 million increase in expected cash taxes. This implies $6.64 of consolidated AFFO per share for the year at the midpoint, reflecting a per share growth rate of around 14.5%.

Turning to Slide 9. We deployed nearly $1 billion of capital in Q2, including approximately $79 million for acquisitions and over $400 million for stock repurchases. We spent more than $182 million for discretionary CapEx to build new sites, enhance the capacity of existing sites, strategically invest in land and to bring newly acquired sites up to AMT standards with startup CapEx. We also spent about $28 million on nondiscretionary maintenance and corporate CapEx, representing about 1.7% of our consolidated revenues for the period. In addition, we paid about $291 million in common and preferred dividends in the quarter, growing our common stock dividend by around 21% and our payout ratio to around 38%.

All the while, we continued to de-lever and ended the quarter at our last quarter annualized net leverage ratio of 4.5x.

The strength of our capital deployment strategy continues to be evidenced by our track record of growth across our key financial metrics as well as rising returns on invested capital across our business. The U.S. ROIC, for example, increased over 1.2% year-over-year to 11.4%, with international ROIC rising 130 basis points to 10.3%. In both our U.S. and international markets, this ROIC expansion continues to be driven primarily by organic new business growth.

On a consolidated basis, our ROIC for the quarter was 10.6%, which represents another record for us and underscores the success of our long-term strategy of pursuing geographic diversification, investing primarily in macro wireless sites around the globe.

As you can see on Slide 10, our capacity for discretionary capital allocation continues to grow, and we expect to use that capacity to help us drive compelling total returns for our stockholders.

Given our 2017 outlook for adjusted EBITDA of nearly $4.1 billion, we anticipate having about $1.7 billion in incremental borrowing capacity for the year, which is about $200 million higher than our prior outlook. Since our expectations for our common stock dividend and CapEx program remain unchanged, we expect this incremental capacity to flow directly through to our discretionary capital allocation program. We have spent over $640 million year-to-date for share purchases, have spent around $600 million for acquisitions and have committed about $300 million to pending transactions in Colombia, Paraguay, and for the 100-or-so remaining Axtel sites in Mexico that we have not yet closed. This still leaves us with over $1 billion remaining to allocate at our discretion for the balance of the year, between additional acquisitions and share repurchases, assuming our ability to achieve appropriate levels of internal rates of return. This is on top of the nearly $2 billion in discretionary spending we've already deployed year-to-date. Importantly, the vast majority of these investments have been funded using the nearly $1.5 billion in cash from operations generated during the first half, which has increased itself by about 13% from the prior year.

So turning to Slide 11, and in summary. We extended our track record of delivering compelling growth across our key financial metrics in the second quarter, highlighted by our 17th consecutive quarter of double-digit growth in property revenue, adjusted EBITDA and consolidated AFFO. At the same time, we continued to de-lever, grew our common stock dividend by over 21% and simultaneously repurchased over $400 million of our shares.

Our first half 2017 results and our expectation of continued strong secular growth trends in mobile in the second half of the year have enabled us to, once again, raise our outlook for our key financial metrics.

In addition, we expect to have over $1 billion to potentially deploy either for incremental acquisitions and/or share repurchases in the balance of the year, further enhancing our ability to drive compelling total returns for our shareholders. And with additional catalysts like FirstNet, the 600 megahertz rollout in the U.S. and the wholesale network being built now in Mexico on the horizon, we're also very excited about our growth prospects beyond 2017.

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

Thanks, Tom, and good morning to everyone on the call. In keeping with our annual second quarter earnings call theme, my comments today will focus primarily on American Tower's international operations and how we have positioned the company to benefit from the accelerating growth in mobile broadband worldwide.

But first I'll begin with some highlights regarding our U.S. business, which continues to provide a solid, enduring foundation for American Tower.

As of the end of the second quarter, our 40,000 U.S. communication sites contributed about 55% of our property revenue, so over half; 63% of our group property gross margin; and 65% or almost 2/3 of our property segment operating profit. And as you saw this morning, we had another quarter of U.S. organic tenant billings growth above 6% and have reiterated that expectation for the full year.

U.S. mobile data usage continues to grow at about 30% or more per year, and our tenants continue to spend an aggregate of roughly $30 billion in annual wireless CapEx to deliver the network performance necessary to support unlimited data plans. These ongoing trends support attractive NOI yields across our U.S. portfolio as well.

Consequently, we continue to believe that the U.S. will remain the core engine of cash flow growth and margin expansion for the company for many years to come.

Turning now to our international operations. We have expanded American Tower from what was essentially a U.S.-only business to a truly global organization with significant diversification across several dimensions. We have substantive positions on 5 of the world's 7 continents, providing diversification across regions. We're a leading independent provider of communications infrastructure in a total of 15 countries, enabling diversification among countries and currencies. And we serve many of the world's leading mobile network operators within these markets across a range of 2G, 3G and 4G platforms and provide diversification among tenants and technologies.

As of the end of the second quarter, our 107,000 international communications sites contributed about 45% of our property revenue, 37% of our property gross margin and 35% of our property segment operating profit. These international sites are continuing to produce growth rates and returns that are significantly above even those of our high-performing U.S. operations. For example, international organic tenant billings growth, as Tom said, was over 10% in the second quarter or more than 400 basis points above U.S. levels. NOI yields tell a similar story. On international sites that we have owned since the end of 2010, for example, U.S. dollar equivalent NOI yields in Q2 were nearly 21%, which is even higher than the NOI yields on the equivalent U.S. vintage towers. Additionally, international sites added in 2011 and afterward are also yielding more than their U.S. counterparts at around 10% already today.

In India, where much of the population is still primarily using 2G services, the 4G rollouts that have occurred to date have already led to impressive monthly mobile data usage levels. Between 2015 and 2016, for example, mobile data usage in India increased by nearly 80% and annual growth rates of about 50% are expected through 2021. Trends in demand like this make India a key component of our international footprint and underlie our long-term commitment to building and sustaining a leadership position in the India mobile infrastructure industry.

Now while we do expect some elevated levels of churn over the next couple of years in India as mobile operators consolidate there, we strongly believe that the resulting rationalized industry structure will lead to an even better long-term environment for robust tower leasing.

With potentially 4 to 6 large-scale, well-capitalized mobile operators at the end of the day in India, we will then expect a rapid conversion of the country's massive subscriber base from 2G to 4G technology, which in turn will drive substantial network investment for many years.

In addition, in markets like Mexico, Brazil and others, we're seeing similar trends of more advanced handsets at ever decreasing price points driving accelerating mobile data usage growth and increasing investments in 4G mobile broadband by large multinational mobile operators.

As I talked about last year at this time, our focus on the 3 critical core competencies of gathering physical, intellectual and organizational capital has been instrumental in developing a unique global competitive advantage in telecom real estate for American Tower. We believe that the strategic position that we have established on the world's 5 most populous continents will enable ATC to prudently grow our portfolio even further through acquisitions and new builds.

Moreover, our broad-based and highly diversified strategic positioning also provides us with the opportunity to be highly selective when it comes to inorganic growth or M&A. There is no need for us to chase overpriced deals or pursue asset classes likely to deliver returns less attractive than our existing tower base.

Just like in the U.S., there's significant operating leverage inherent in our international macro tower and indoor small cell businesses. 85% to 90% of every dollar of organic revenue growth typically flows straight through to the operating profit line, whether that growth is from a tower in Boston or a tower in Mexico City.

Moreover, we believe that our international organic growth trajectory is still in its early stages and will continue on for many years. Our addition of nearly 80,000 primarily younger, lower initial tenancy and marginal international sites in just the last 5 years will further expand ATC's growth horizon. At this point, having integrated these sites into our operational and commercial framework, we are poised to transform them into higher tenancy, higher margin and higher cash flow assets at a faster pace than we've experienced in the U.S.

So in closing, our view is that American Tower is uniquely positioned on a global basis as a clear leader in the mobile infrastructure industry. We similarly believe that ATC is ideally suited to serve today's primary tenants, which are multinational mobile network operators as well as future tenants that may emerge in the IoT space or elsewhere.

Our company's foundation is our high-quality, comprehensive U.S. portfolio, which we expect to generate significant organic growth for a number of years to come, and we have an international portfolio nearly 3x the size of our U.S. footprint, including key strategic markets like India, Brazil, Mexico and Nigeria, that we expect to provide a turbocharger to the U.S. growth.

Together, our domestic and international operations form a global presence that we believe is unmatched. And as we look forward, our focus is on translating that global presence into an attractive combination of growth and yield to our investors far into the future.

So with that, operator, please open the call up for questions.

(Operator Instructions) First question in queue, we have Amir Rozwadowski of Barclays.

Jim, I was wondering if we could dial into the U.S. a bit here. Clearly, there's been a lot of discussions around spectrum deployment plans. I realize you folks don't want to get into specific carrier commentary, but perhaps you can provide us with some color on where we are in the process for ensuring that the appropriate comp structures are in place, such as either availability of gear or perhaps MLAs, and your take on when some of those new spectrum deployment plans could commence.

Amir, good morning. I think your point is the correct one, which is the carriers are in the very best position to give you sort of a rollout schedule for various bands of spectrum, et cetera. But what we are doing in preparation for that is just what any other supplier in any other industry, whether it's the aerospace industry, automotive or what we do, and that is to be fully prepared on the 3 dimensions that these purchase decisions are going to be made on, and that's schedule, quality and cost. So from a schedule point of view, we have 40,000 towers, including 11,000-plus from the Verizon portfolio that are ready to go right now for co-location and amendments. We've got a great team that can compress cycle times and get you on-air quickly. So from a schedule perspective, we're literally ready to go with sites in great places all over the country. From a quality perspective, we spent 15 years building up an operational team in the U.S. including developing proprietary and other systems to make sure that we got the highest quality product out there, right? So we've got high structural capacity, we've got good ground space, we've got backup tower if you need it. And again, on a scale that, perhaps we have one peer in the U.S., but that's it. So we've got the quality systems, people and positioning to deliver a good product. And then lastly is cost. And we do have some contractual constructs that allow our customers to aggregate demand in a way that is designed to give them the lowest cost per square foot of real estate as long as there's volume commitments there to support that. So I think we're hitting and prepped and ready to get in the game for these deployments right now on schedule, quality and cost dimensions that are going to make our portfolio pretty attractive.

And if we think about that within this construct of sort of the above 6% site rental growth that you folks are now seeing in the marketplace, do you view that as incremental growth with respect to your business?

What we need to do is get an order book bill from our carrier customers. And so how we do our guidance is, Amir, is, on an annual basis, when we have an application flow, when we have had meetings with our local customers to get a sense of their immediate plans and then we also incorporate public statements from the carriers and, importantly, sort of the aggregate CapEx spend that they plan and are executing on. For example, this year, we've said it's about, in aggregate, $30 billion, in that range again, that supports 6-plus percent growth for our company. And as long as you see those indicators out there and get that application flow, we'll be able to give you some tighter ranges as we go forward. But this year, it's going to be 6%-plus as far as the forecast goes. Next year, we'll have, in 2018, when it gets closer, increasing information visibility and then, of course, in our first quarter -- or fourth quarter call early next year, we'll give you that forecast.

Great. And then just one follow-up, if I may, Tom. On the capital allocation, obviously, we saw you folks pursue a mix of buyback as well as acquisitions. You'd mentioned you still have about $1 billion, I believe, in firepower that you can put to work here. How do we think about sort of allocation plans going forward? I mean, obviously, there's a lot of discussions on potential assets available in the marketplace. Would love to hear your thoughts as you stand today.

Amir, I think you're well aware of the approach that we take and how we value assets. I would look at share repurchases. And it's just going to be consistent methodology going forward. It's where can we drive the best IRR, and depending upon the market, if we can drive higher IRR in a particular asset in the U.S. versus international, then that's how we'll execute the plan. And so when we look at valuations in each of our local markets, it's all done in local currency. It's all done with local cost of capital assumptions. But then we look at that transaction on a U.S. dollar basis versus what kind of accretion that we might be able to generate over the long term versus buying back a share of stock in terms of what our own math looks like, if you will, in terms of what our share price is from our perspective in terms of how it's priced. So it's a continual process of what we've done over the last 10 years, and we look at each and every investment opportunity uniquely. But then we look at it in terms of how it will impact the business overall. And so that's why in the first 6 months, we've had a pretty balanced approach, I think, in terms of buying back shares as well as deals that we've done in the marketplace. We do have some pending transactions going forward. And so with the additional $1 billion that I talked about in the script, we'll continually look at assets that might come available in the business versus what we think the value creation might be from buying back a share of stock.

And our next question is from the line of Jonathan Atkin, RBC Capital.

So I wondered if you could comment medium to longer term in terms of the target mix that you're hoping to generate domestic versus international. And then as we look at the pace of your results this past quarter, you mentioned the FirstNet and 600 megahertz, and is there any kind of shift to the cadence, perhaps an air pocket of demand as carriers kind of prepare to really ramp in the second half of the year and into 2018 that might have affected the growth rates in this most recent quarter?

Hi, Jonathan, it's Jim. Good morning. We don't have a target mix for domestic versus international. We're going to use the process that Tom just outlined, which is a sort of dynamic review of the M&A opportunities versus what we expect to generate as far as the core business over time and, therefore, what the buyback performance could be over the next few years. And then we'll make and execute the deals that makes sense for us and won't do the ones that don't. So there's really no target mix anymore. What I think is very interesting from a basically calculus perspective on our portfolio as it stands even today is that we've got 3x as many international towers as domestic. They grow faster, and they're going to grow for a longer period of time no matter what happens in the U.S. And if you run that curve out 20 to 30 years, it gets really, really interesting. So that's the key to focus on, which is when you've got this sort of core engine in the U.S. that's delivering really nice returns and increasing returns, as Tom outlined, and on top of that, you layer this essentially larger number of assets that grow faster for a longer duration, you aggregate all that math for a long-term period, it's quite compelling. So that's the real thing to focus on for us is performing. And then we're going to augment both the domestic and the international assets whenever we can get returns that are as good or better as what we expect in that plan. On the sort of updrafts of demand in spending, our results even this year in the forecast indicates sort of 15% to 20% better new business than last year and, therefore, our application volumes are supporting that very, very high at the moment and going forward through the rest of the year. So there's already the energy behind a robust deployment going into 2018. And as I said earlier, when we get -- the closer to the end of this year and start into next year, we'll have a lot more visibility even than we do today, but it should be pretty solid.

And then in terms of the tenant composition, whether it's international or domestic, is there anything nontraditional that you're seeing apart from purely RF gear -- antennas, shelters, diesel generators around content caching storage? What are your sort of expectations around that potential demand driver going forward?

Jonathan, that's something that we've actually created and formed an innovation organization to pursue. I think there's some extremely interesting prospects in that, that are too early to talk about now, including agreements that we're under to keep it that way for the moment. But these sites, whether they're in the U.S. or Brazil or India, have some really important attributes, right? We have, in the U.S., 40,000; in India, 60,000-plus sites that have security. They have land. They have electrical power. And they have an internet backhaul mechanism. So when you put those 4 attributes together, there are additional uses that traditional telecom gear, that these sites can support, and we're pursuing many of those.

Your next question is from the line of Ric Prentiss, Raymond James.

You mentioned how you guys are going to be -- continue to be highly selective, not chasing expensive deals or asset classes with lower returns. Maybe if you could talk a little bit about small cells. I know we've talked about it in the past your thoughts on the colocation on small cells, how it compares to macro towers but also the thought of does enterprise business on top of fiber, on top of small cells help that kind of yield and that return but also what's the churn, capital expenditures kind of competition. Just thinking of small cells and fiber enterprise and how that might fit into your thoughts on M&A or asset classes.

Ric, good morning, it's Jim. So we've got running data on indoor DAS versus small outdoor DAS or small cell. Again, smalls cells are both active and passive. Most DAS systems today have passive small cells, meaning that the base station is centralized somewhere in the building or somewhere outdoors and each antenna is running off the base station. Active small cells is simply the intelligence and the electronics are in the cell itself. So we're in the small cell business in a very big way, and we've got 315 indoor DAS -- or indoor small cell systems in the United States and more than 450, 480 outside the U.S. So we're a leader in this indoor small cell space and #1 independent provider in the U.S. So we're very familiar with this market. We also have 35-or-so outdoor DAS systems, outdoor small cell systems up and running, so we have some decent history there. The data basically says the tenancy on our venue base, which are indoor and stadium or racetrack-based small cell systems, is 2.3 tenants per system. And outdoor DAS is 1.2. So that sort of leads us to believe that the leasing -- the leasability of small cells is not necessarily a one-to-one situation if they're outdoors because the RF requirement for a given carrier is not sort of consistent. In other words, one carrier might need 40% of the small cell as you fill it outside and another carrier might need 50%, but another 20% you haven't built yet. So this is the drag we see on actual systems that have been deployed for a few years. We run -- we do regression analysis on all of our assets, and so we have lower leasing assumptions in our outdoor small cell bids than we do on indoor. So that's one aspect that you asked about specifically. Essentially, our leasing performances double on the indoor small cells than the outdoors. So we're focused on that. When you add the enterprise price base in on the outdoor systems, you introduce, in our view, some drags on our base economics. One is there's much higher churn rates. There's shorter contract durations. The SG&A and the salesforce that you need to keep pursuing these enterprise deals is much greater. And then every time you get an enterprise contract, you might have to drag another bit of fiber down another block or up another building riser to serve that new customer, which means you've got a CapEx drag. So these are some of that, just quantitative factors that we've been incorporating, and we'll keep dynamically incorporating them as we evaluate these different assets. So we don't have any religious sort of prohibition against any kind of asset in any market. In fact, we think small cells and fiber in international markets may have better -- much better in some cases -- return prospects than the U.S., but we're just using this dynamic assessment constantly, and these are some of the issues we've seen.

Great. And then I think Tom mentioned a little bit about the public safety of wholesale network in Mexico. But you think you can just kind of expound upon on what you guys are seeing down there, the opportunity down there and kind of the timing?

Yes, Ric. No, we're seeing a significant amount of activity. A lot of applications, some limited amount of business year-to-date, but given the volume of applications and a lot of the activity that's going on, we would expect to start to see that really in the kind of the latter half of the end of the year and we think pretty heavily into 2018. So really excited about the prospects down there, and I think we have a really good relationship with the carrier.

And expression is from the line of Simon Flannery, Morgan Stanley.

This is Landon Park on for Simon. Just wanted to touch base on the opportunity set that you see in Continental Europe, just how you're thinking about expanding your platform there in terms of pursuing additional smaller portfolios and working directly with carriers versus potentially looking at some larger M&A opportunities over there.

Well, we'll pursue our options in Western Europe and Central Europe just as we've pursued all the regions that we've entered. And that is to seek, as Thomas described clearly, assets that are going to augment the trajectory of our cash flow and return on the investment performance over the next few years. So if we can get them at the right price, we'd, of course, love to do a sale leaseback with a big mobile operator in a country the qualifies in Western Europe for our participation. We've made 2 very selective relatively medium-sized investments already in Germany and, most recently, France that we're actually quite excited about because they both presented in different ways the prospect to meet or exceed our investment criteria. So this is the same pattern we're going to continue to use. And if it's a large or small acquisition, if it makes the cut, we'll figure out a way to finance it. We've done that in the U.S. with GTP, which was substantial; with Verizon recently, which was very substantial, and we've done it in our international markets, too. So when the opportunity presents itself, large or small, carrier or third party, we'll act if it meets or exceeds our investment criteria.

And I'll just add. We have a terrific partner in the market, that we're continually developing a really strong relationship with PGGM. So that gives us an additional leg up, if you will, in terms of how we might think about financing some of those opportunities to the extent that they arise.

Okay, great. And then just wanted to touch base on the recent Paraguay and Colombia acquisitions. Just Millicom had indicated a 7% lease yield on those portfolios. Just wondering how you guys are approaching additional lease-up of those assets and what the outlook there is to get the yield maybe more in line with some of your other LatAm assets.

I mean, our teams are really excited about bringing in this asset base into the portfolio. Paraguay will be largely managed, actually, out of our Argentina business. We think collectively, they're going to be, on an annualized basis, between -- those 3 pending transactions generating $30 million, $35 million of annualized revenue and $10 million to $15 million of EBITDA. So they'll fit really well into our portfolio in the region. As I mentioned before, Latin America is now one of our highest-growing markets there. We have a terrific management team in place there. And so I'm really excited about what we're going to be able to do with this portfolio and generating lease-up in the market.

Our next question is from the line of Batya Levi, UBS.

Couple follow-ups. First in Mexico. How much do you think the new hotel network could add to the 12% revenue growth that you're seeing today? And in the U.S., you mentioned a 15% to 20% increase in overall activity. Can you give us a sense if there's any change in terms of the split or amendment versus the new leases that you're seeing? And lastly, on India, can you quantify what you think the elevated churn could be as you exit the year and into '18? And do you think that you can maintain 10%-plus growth as accelerating core growth offsets that pressure from churn?

Well, that's a lot of questions, Batya. But let me try to do them. I'm not sure what particular order this will be. But with regard to the amendment activity in the United States, it's going to be very customer specific. But overall, I would say the amendment activity is still 55% versus, say, 45% on the colocation activity. And if I take a look at the pipeline of activity, I see it continually moving more and more towards colocation. So again, this huge cycle that we have, kind of the sine wave as we've explained before in terms of how customers are deploying, vary significantly by carrier. But that's kind of the overall consolidated view. On the opportunity in Mexico with the growth, it's really hard to say at this point in time. We see heightened application levels. We're starting to see some new business. We expect to be bringing the new business on more significantly in the second half of the year. What that's actually going to be doing next year to our overall growth rates in Mexico, I think we'll continue to monitor that and watch that and, as Jim explained, talk about that on our year-end call in terms of the impacts on that. But I would definitely think that, that would be a positive for the marketplace as they continue to roll this out. And with regards to the India churn levels, I would expect at the end of the year and into 2018 to look at kind of high single digit kind of rates of return. I think given all of the -- I mean, our churn rather, I'm sorry, high single-digit churn rates. But the good news as Jim kind of outlined in that market, it's -- we anticipated these kinds of activity -- almost had to when you're looking at you're going from 15 carriers down to 4. And it's an acceleration right now, I think, of going to those 4 carriers. And there's a significant amount of growth in the marketplace with what our geo is doing. And with their 4G site presence that they have and the other carriers in the market with their 2G and 3G sites, they're all going to be moving those over to 4G sites over -- over I think a very short period of time. And the market itself is growing equally as to what the U.S. in terms of kind of usage -- data usage per customer. So there are a lot of pieces going into the marketplace. I do expect to see increased rates of churn as we've talked about in the past. And kind of what I can't give you a sense in terms of right now is what will that incremental gross business be to offset that. We're very excited about it. We think within a few years time, this market will be much more rational in terms of it being supported by 4 to 5 wireless customers, well-capitalized wireless customers. And in the market of India, we think that, that really gives us great opportunity for growth going forward.

Okay, next question's from the line of Brandon Nispel, KeyBanc Capital Markets.

Can you just talk about the differences that we're seeing within some of your peers on the domestic organic leasing activity? I mean, is there anything different structurally with contracts or positioning of towers that's leading to some outperformance? And then talk about a little bit your different margin targets internationally as we look out maybe in the next couple of years. Are there differences regionally that could cause differences in some of the margin profiles of those businesses?

Hi, Brandon, this is Jim. I'll take the first one, and Tom can speak to the margin expansion. We can only talk about what we've done in our company. We're not aware or have visibility to the arrangements and operational plans of any other company in our space. But again, we've just been focused for the last 15 years since I got here on sort of replicating operational excellence from the aerospace industry, where I and some of my colleagues have come from here. And in that industry, as I said, and others, schedule, quality and cost management is what drives purchase decisions in your direction. So we've been trying to make sure that when it comes to a schedule perspective, we have the most reliable schedule; when we win an application that the customer can count on an X number of days, plus or minus Y number of days they'll be able to go on air. And that has to do with things like Six Sigma, reducing variation in processes and cycle times and things like that. So we had 15 years of replacing systems, hiring people, upgrading process -- we call it process excellence, actually -- of how we do application to notice to proceed, which is when you can install equipment on our sites. On the quality piece, we focused on the very best assets, so what we've bought over the years in the U.S., for example, have been either assets from among the best carrier operators or directly from third-party tower companies like us who do this for a living. And some of those notable acquisitions have been -- in mergers have been Spectracide back in 2005, the #3 independent in our space at the time, very much built like ATC was and added the indoor DAS product as well; then GTP, Global Tower Partners. Again, really well run, fundamentally organized as a third-party tower company in the U.S. And then our last big acquisition from -- one of the best operators in the business anywhere in the world, which was Verizon, right. So we've really focused on the quality of the asset bringing them in. We've also built thousands of towers in the U.S. to our own spec. And when we buy assets, we have something that we categorize as start-up CapEx, which brings those new assets to the quality standard in the field of ours, whether it's road access, structural capacity, et cetera. So we're focused on having high-quality assets and a schedule that is very, very reliable. And when we aggregate supply, which is the number of towers in a country, for example, we can also provide, again, really compelling unit economics at high, high volumes for our customer. So we've been focused on schedule cost and quality for 15 years to get it to the highest level we hope in our industry, anywhere in the world, and that's what I think is driving our outperformance on organic growth, notably in the U.S. but also elsewhere.

Yes, Brandon, on the margin question. The reported -- even on a reported level, if you look at Q2 this year versus Q2 of last year, we increased the reported margin by 70 basis points. And if you actually then exclude pass-through margin, which doesn't drive -- or pass-through revenue, which doesn't drive margin, and straight line, we actually increased it by 130 basis points. And so I think this is indicative of kind of the engine that we've built here, and it's consistent, if looking at the U.S. and the international businesses -- I mean, if you take a look at the international business on -- again, excluding the impacts of pass-through and straight line, we've actually increased the margins a couple hundred basis points. And so what's driving this is our conversion ratios, right. And so we're able to generate -- again, excluding pass-through, we're able to generate $0.90 of every incremental $1 down to the margin level and $0.80 of every $1 down to the EBITDA level. So as we continue to drive more organic growth, we should expect to see continued growth in our margins overall. There are differences in some of the markets, and it's largely a function of just how long we've been there. So if you look at Latin America, where we have been the longest, the margins are the highest. And again, it's just a function of the kind of growth that we've been able to enjoy in the marketplace. Our overall SG&A, as I've been continually saying, is well under 8%, we're about 7.7%. And again, with the kind of conversion ratios that I talked about, we should see declines in the overall SG&A expense per revenue dollar. So again, the edge in kind of -- will drive that kind of performance. I think our reported results really speak to it, and hopefully, we'll be able to enjoy the kind of growth going forward.

And next question is from the line of Walter Piecyk, BTIG.

It's Piecyk. Can you first talk about LatAm? I know Batya was asking earlier about [Altin Reddis], but it was -- the new leasing amendments was flat sequentially. Is AT&T basically done with you guys, and is moving on to other tower companies? Or are you going to expect some level of sequential growth out of them based on some investments that they're making going forward is my first question.

I think on both scenarios, our customers are making purchase decisions on an ongoing basis, and we're putting out, as I said, the schedule, quality and cost platform we think is attractive. And we can only -- we can't comment on individual customers' activity levels or not. I mean, we just can't. But if you look at our aggregate results in Mexico and the United States, we're getting significant new business from the industry, and I think I just would leave it at that. And we continue to expect strong 4G investments from all carriers in all markets. 5G is years away, I think, at scale, especially in mobile -- just from a mobile perspective. So we would expect most if not all large customers to continue to do business with us for the foreseeable future, frankly.

Okay. And then the second question, there's been a lot of press about various tech companies testing or looking at 3.5 or even higher band frequencies, 28 and 38 gig, I think. Some of the implementations that they've talked about or at least that we've heard about are not necessarily requiring small cells, but they're thinking about taking the higher-band frequencies and blasting them from macro towers. So I'm just curious if you could characterize whether there's been any change over the past 3 to 6 months in your dialogue with companies that are not wireless operators, and their interest in your asset portfolio of domestic towers.

So as I said earlier, a lot of those discussions are proprietary at this point, but they're happening. Where this is public -- we're part of the CBRS Alliance, which is the consortium of industry leaders that are trying to work across the aisle, so to speak, and also with government to get the spectrum out and available for traditional and for new types of uses like IoT. And deployment location depends more on the topology than anything else. So if you're in suburban rural transportation corridor situations, which is where 85% of people in America live, you're going to be using towers or other macro-type installations to project that frequency. So the higher the frequency, the closer they'll need to be together, which is a good thing for us. So again, I think introducing this kind of frequency is important for the industry. That's why we're in the CBRS Alliance. And I think it can be a catalyst to bring other types of tenants into the business for us. So that's partly why we're involved.

And I know -- I realize it's too early, but I mean, if it actually -- and these people are trialing so maybe they decide not to, but if they do decide to go forward, have you had a level enough discussions to get a sense of whether this will be material? Because I think most people look at it as kind of a rounding error. It'll put a couple sites here and there, but again, if they make the decision to move forward on this, shouldn't that be a material new tenancy opportunity for you in your domestic business?

It could be. And in fact, we've been sort of quietly working on vertical markets. I give our U.S. tower leadership a lot of credit for this. We've got customers like Gogo computers that, when you use WiFi in an airplane, that's one of our big customers. We've got other vertical markets like financial and government in certain respects. So we've been after this segment for a long time, the nontraditional segment. It's a substantial amount of our domestic U.S. business, upwards of 15%, 20%, and it includes broadcast customers and others that will augment our sort of traditional mobile network operator customer base. So yes, potentially.

And our final question is from the line of Nick Del Deo, MoffettNathanson.

I'll keep it to one given the time. So maybe a follow-up on the portfolio construction question you had earlier on U.S. versus international. So when you think about your overseas portfolio specifically, are there limits to how much exposure you want any one country or region as a share of the overseas total? And specifically -- and my question was prompted by a market like India, where there seem to be a lot of assets that might change hands so you could potentially ramp up the size of your exposure a lot if you wanted, but it has some idiosyncratic risk factors and moving too heavily into any one market might throw off the diversification or nonoverlapping sine wave dynamic that you often talk about.

Our goal is to be in a position with a sufficient number of assets in any of the markets to be a partner for the big -- the large mobile operators in that market or new entrants that come in. And so traditionally, we seek to get from 25 to sort of 35-plus percent of the asset base. There are limits to going beyond that, some of them regulatory, some of them customer-related and some of them risk management on our part. So for us to get above 50% of the asset base in any market, I think, is a pretty tall order just from all those other sort of boundary factors. So I don't expect us to be doing that in many places.

Okay, so sort of natural limit in what you can do?

That's right. All righty. Thanks, everyone, for joining us this morning, and have a good day.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining while using AT&T Executive TeleConference. You may now disconnect. Have a good day.