Crown Castle Inc (CCI) 2004 Q3 法說會逐字稿

Good afternoon. My name is Sarah, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Global Signal third quarter earnings call. (OPERATOR INSTRUCTIONS).

Ms. Scalfaro, you may begin your conference.

Thank you. Good afternoon, everyone. Welcome to Global Signal's third quarter 2004 earnings conference call. Joining us today are Wes Edens, our Chairman and CEO, David Grain, our President, and Bill Freeman, our Chief Financial Officer.

Before we turn the call over to Wes, there are a few things to go over. As the operator mentioned, this call is being recorded and a replay will be available after the call. Please see our earnings release or our Web site for more information on the replay of the call.

I would also like to point out that certain statements made today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not necessarily limited to, statements relating to our ability to deploy capital, close accretive acquisitions, close acquisitions under letters of intent, pay or grow dividends, generate growth organically or through acquisitions, secure financing and increase revenues, earnings, adjusted EBITDA and/or adjusted FFO and add telephony time.

Any such statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. The company can give no assurance that its expectations will be attained. Such forward-looking statements speak only as of the date of this press release. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the company's expectations with regard thereto or changes in events, conditions or circumstances on which any statement is based. Please see our earnings press release for the full forward-looking statement legend.

With that, I'll turn it over to Wes.

Great. Thanks, Gail.

Good afternoon, everyone. I'm going to give you a bit of an overview on the business that we had for the quarter. All in all, I'd say it was a very solid quarter for us, both financially as well as operationally and on the investment side. Financial metrics first - FFO per share, 35 cents for the quarter, versus 36 cents in the second quarter. That of course reflects the fact that we started off the quarter with a lot of capital on the balance sheet, yet to be deployed from our IPO.

You're starting to see some substantial and tangible evidence of how that capital is being pushed out the door, and I'll talk about the investment activity thus far, but a good quarter from that standpoint. CAD, our cash flow available for distribution, went from 30 cents to 32 cents, the first really financial metric which is starting to change as we're starting to generate more cash flow from these assets that we are putting on the balance sheet. And, lastly, and also quite importantly, is we did increase the dividend substantially during the quarter from $1.25 on an annualized basis to $1.50.

Just by way of review, our dividend policy that we set at the firm is to basically set a dividend that reflects our approximation of run rate, kind of distributable cash flow, and so obviously given that we increased the dividend from 31.25 cents to 37.5 cents, that should give you some visibility as to what we think is happening as this capital gets deployed and the earnings kind of normalize.

Leasing activity for the quarter was the one disappointing aspect, I'd say. It sounds like it was something that was consistent across the tower business. I don't think this is something which is really specific to us. The first six months of this year was really a terrific period in the leasing markets. In just the outright telephony leases, we signed about two-thirds as many leases in the first six months as we did all of last year.

On the reconfiguration side of the ledger, we did nearly as much business in the first six months of this year as we did in all of last year. So off to a very, very robust start in the first six months of the year. Third quarter was substantially quieter than that, and probably a lot of different reasons for that among the various carriers. Having said that, we're pretty heartened by the pipeline that we've got now, and I'm optimistic that our fourth quarter numbers would be more in line with where we ended up the first six months of the year. That was the one disappointment, I'd say, from an operational standpoint, but that we think and hope is a pretty short-term phenomenon. It certainly looks like it is.

Investing activity for us, which is obviously a big focus of the company, really had a terrific quarter. If you dial back to the beginning of the year when we first started the business of deploying capital and buying assets, since that time we have either bought or put under - and bought and closed or put under APA, which is a binding commitment to purchase, 705 towers, approximately $310, $311 million in total nominal capital deployed. Most of that activity happened in the second quarter to third quarter.

We spent a lot of time in the first part of this year getting organized, identifying what we thought were good target markets for us and starting down to build the acquisition business inside the firm, something that we've made great strides to completing. Both have completed a lot of investments at prices that we think are excellent, number one. Number two, of course, the pipeline for our activity right now remains quite strong.

The LOIs, letters of intent, that we had outstanding on tower portfolio is 488 towers, $150 million in total potential capital use. Our conversion rate on the LOIs has been well in excess of 50%, and while you can't predict exactly what will happen with these, I'm pretty optimistic that a solid number of those LOIs will convert into APAs and then closing here in the not-too-distant future. What that means for us, and Bill will go through some of the specific numbers, is pretty basic.

We had at the beginning of our public life, post the IPO, about $150 million of undeployed capital. We are financing ourselves these days on about a two-to-one basis, so about 65% leverage. So, in round terms, the $150 million would be fully invested if we bought about $450 million in towers. So, obviously, with the $311 million closed or committed thus far and a pipeline of another $150 million, that again a high percentage of that we hope will convert, you can see that we are way, way down the tracks in terms of deploying that capital, and that will start to manifest itself pretty visibly in the fourth quarter numbers, and then of course first quarter of next year, with all these closings, you'll get a full sense of the run-rate activity of the company.

Capital markets activity for the quarter was quiet. That's something that's likely to change here shortly. We did not issue our debt for the second pool of towers that we've been buying yet. That is something that is down the tracks, and my expectation is you'll be seeing that financing coming out shortly. All of the material aspects of that financing, the leverage, the cost of the leverage, the flexibility in terms of our ability to move assets in and out and the amortization terms are all substantially better than our first financing, which in and of itself was a pretty inefficient (ph) financing. So we feel great about the progress that we're making and accessing the capital markets, and hopefully in our next quarterly conference call, we'll have a lot of specifics to talk about with regards to that, but that is something which we do expect to happen sooner than later.

On the equity side, we are not in the equity markets right now and have no immediate plans to do so. Having said that, as I went through the numbers just a minute ago, if we are successful in investing the balance of our capital here shortly, that is something that we will reconsider and evacu (ph).

So, net-net, a lot of hard work in the quarter, a very, very busy summer for us. You think summer is a quiet time. It certainly wasn't down here in Florida. So feel great about things, and now let's turn it over to David for a little more specifics on it.

David?

Great. Thanks, Wes. I'm going to spend a few minutes discussing our revenue mix, our portfolio sites, churn and the efficiency of our operations. In terms of the revenue mix, through our leasing efforts and acquisition activity, we continue to make a positive impact on the mix of our total revenue derived from telephony tenants. Since January of this year, we have increased the portion of our revenue from telephony tenants from 41% to 46%.

During the same period, we reduced our exposure to paging and non-government mobile radio tenants from 40% to just less than 36%. In addition, so far this year two-thirds of the new revenue from our new lease activity has come from telephony tenants. While a large part of our focus is on serving telephony tenants, we're very pleased with the quality of non-telephony tenants added across our asset base this year. To this end, we continue to focus on adding government, utility and broadcast tenants to our towers, and have seen a positive growth rate in sales for those types of tenants over the course of the year.

As Wes mentioned, the overall fundamentals in the wireless telephony sector remain very strong. Subscribers and minutes of use continue to grow, and carrier cap ex is expected to be about $22 billion for 2004, and each week we continue to see new announcements of carrier rollouts of data and other application upgrades to new cities. In addition, Wall Street analysts are projecting about 16,000 new site developments for 2004 and roughly 14,000 sites in 2005.

In terms of the core portfolio, to take advantage of these strong telephony fundamentals, we remain very focused on aligning our portfolio towards wireless telephony tenants, and we've added a significant number of telephony towers to our portfolio through acquisitions, as Wes talked about. As we have mentioned also in the past, our own sites generate approximately 82% of our total revenue and 91% of our total tower cash flow.

For the third quarter, 81% of total new lease-up came on our own sites, and of these own sites, our core telephony towers account for 79% of the company's total tower cash flow and have 78% gross margins.

Incremental new lease revenue added in the third quarter, notwithstanding Wes's comments about the level of lease-up that we experienced, continued this trend, with 72% of revenue from new leases signed in the third quarter coming on to our core telephony assets.

On the churn side, the trend of declining churn established through the course of the first half of 2004 continued in the third quarter. Overall, we've experienced a 40% reduction of churn year to date when compared to a similar period in 2003. For the third quarter of 2004, churn was less than half of churn for third quarter 2003.

The types of sites and tenants contributing to the churn are what you might expect, with a large percentage of reductions or cancellations and billings coming from non-telephony assets and smaller tenants.

On the efficiency side, in terms of efficiency, we've continued on the path of cost reduction, resulting in an increase in our gross margin to 69% from 66% Q3 '04 over Q3 '03. And as Bill will discuss, we've reduced both direct tower costs and SG&A despite acquisitions and the added staffing required to execute them. In fact, SG&A for Q3 '04 represents 12% of revenues compared to 15% of revenues in the fourth quarter of 2003.

Lastly, one of the final stages of implementing our new software platform, which was designed to allow us to efficiently scale our business at minimal incremental costs as we grow our asset base and our tenant base. We implemented the financial portion of this system and utilized it to close the Q3 books without any problems.

With that, I'm going to ask Bill to walk you through our financial results for the quarter.

Bill?

Thanks, David. Our adjusted EBITDA in the quarter increased by 27% in the third quarter of 2003 to $26.5 million. Our adjusted EBITDA margin for the third quarter was 56.9%, which is up 710 basis points from the same quarter last year. Our AFFO grew by 25% to $18.9 million, which is 35 cents per diluted share. Net income in the quarter came in at $6.3 million, or 12 cents per diluted share.

In addition, we paid a quarterly dividend of 37.5 cents of the third quarter, which represents a 20% increase from the dividend we paid in our second quarter. Now let's look at some of the details. Our revenue increased by $4.6 million, or 11.1% from the third quarter last year to $46.6 million.

Our internal growth over this timeframe was 4.1%, with the balance of our growth being contributed by acquisitions. Our core telephony towers that we owned throughout the third quarter of 2004 and 2003 had internal growth of 8.9% and contributed all of the same-site revenue growth. Our internal growth in the third quarter was driven by strong growth in our telephony revenues, which increased 15% over the third quarter of 2003.

More important than our revenue growth is a growth in our gross margins, which we refer to as tower cash flow. Tower cash flow grew 15.5% in the third quarter to $32 million, while our tower cash flow margin grew by 260 basis points to 68.6% of revenue. On a same-site basis, our tower cash flow grew by 7.5%. The internal growth in our tower cash flow in our core-owned telephony owners was 11.1%.

Our SG&A came in at $5.6 million, or 12.1% of revenue, which is down 340 basis points from the third quarter last year. On a sequential basis, our SG&A was down 200,000, despite the growth in the number of sites. We continue to remain focused on cost controls, and believe we have a highly leverageable infrastructure.

Our capital expenditures came in at $2.5 million for the quarter, with $500,000 being non-tower-related and primarily focused on our new system implementation. As David discussed, we completed the first phase of our system conversion in July when we began utilizing our new PeopleSoft system.

As we discussed on our last call, and as Wes mentioned earlier, we have approximately $150 million of capital to invest, and we've previously told you that we thought we could leverage this at about two to one, which means to be fully invested we need to acquire $450 million in tower assets.

As Wes mentioned, we have commitments or have acquired $310 million in tower assets and letter of intents for an additional $150 million, so we have pretty good visibility on a large portion of the $450 million we need to invest. During the quarter, we amended our credit facility to increase our availability to $250 million.

Borrowings under the facility are limited based on the borrowing base, which is approximately 65% of the tower value that we acquire. We utilize this facility on an interim basis to finance our tower acquisitions. We expect to refinance the credit facility on a longer-term basis through a new mortgage loan, which we expect to complete this quarter.

In anticipation of the new mortgage loan, we put two additional swaps in place with the total notional amount of $100 million. The new swaps have a fixed interest of 3.84%. This brings the total notional amount of our hedges to $300 million, with a weighted average fixed rate of 3.56%.

With that, moderator, we'll open the line up for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Ric Prentiss with Raymond James.

Yes, good afternoon, everyone. Couple questions for you. First, can you break out for us the percent of the revenue in the third quarter that was paging as opposed to mobile radio, split out that 36% for us. And second question is on one of the other tower company calls this morning, they were talking about churn as far as an annualized percentage. Can you update us as far as absolute what the percent churn you're seeing on your revenues is, as opposed to what the churn has changed?

Do you want me to take the revenue? Ric, this is Bill. In our third quarter, if you look at our - one sec - if you look at our mobile radio and our paging revenue, we ended up with - and when David talked about 36%, he was pulling out of that number the government mobile radio tenants, which we look at separately and differently than we look at just mobile radio in total.

Sure.

But, in total, the number for mobile radio was 21.8% and for paging it was 20.5% for the quarter.

OK. And churn?

I don't think we really have the churn broken out on an annualized basis, Ric, so it's something we can take a look at.

OK, I'll circle back to you on that one. And then in regards to the pipeline, what kind of multiples are you seeing in the marketplace when you guys are out there moving down to the LOI stage? Also, as you look at putting to work the $450 million between the 150 of liquidity and the leveraging up on it, how scalable is your business model? One of the other tower companies today, it was interesting that their costs haven't really increased for over a year. How scalable is your business, the way you've set it up, both from the folks in Florida and the IT systems. How big could you get, how much money could you put to work without seeing a lot of movement on the cost line?

Well, first question first. The price of the assets is a very asset-by-asset analysis, as you might imagine, both a function of the physical asset as well as the location, existing tenancy, et cetera. I'd say that the range of initial yields on assets that we have bought has been, broadly speaking, kind of 7% to 8% in terms of initial kind of net-net, unleveraged cash-on-cash returns. With - our focus is to buy a lot of assets that we think have excellent growth prospects.

We're trying to migrate our portfolio from its current configuration to one which is more telephony dominant, so we've bought a lot of towers that are in their early stages of development, have relative modest tenancies right now, but we think have good growth prospects for them. That pushes you down in yield a little bit, right, because you buy those assets at a little bit more expensive price on a current basis, but they have a little better growth prospects.

But the net of it is, 7.25, 7.50, 7.75 is probably a good two standard deviation range in terms of initial unleveraged yields. We're financing those assets, let's say roundly, at five-ish percent. We'll see exactly how the financing turns out here when we get done with it. So the assets in terms of the leverage returns on equity are going to be in the low to mid teens out of the box, and so it's pretty attractive for us, obviously.

And we have - just if you look at the numbers, what they exist right now, we've got about 704 towers that we have bought or agreed to buy right now. It looks we'll buy, let's call it roundly another 300-ish towers will fully deploy the capital that we raised. You're talking about increasing your portfolio by roughly 1,000.

So, before we started this acquisition program, we had about 3,200 towers. We're talking about increasing that by approximately 1,000, so net-net, 4,200 towers in total. And as Bill went through, both on a percentage basis of SG&A as a percentage of revenues, as well as an absolute basis - our SG&A continues to ratchet down. A big part of our focus internally is to create a focus that is scalable so when these guys talk about systems integration, the PeopleSoft stuff, et cetera, that's really all about scalability and that's really been the investment that we've made in the platform with the IT folks here have been really directly focused on that.

So we think that we can grow the assets under management from a tower perspective substantially, with very modest increases in SG&A, and when we look at some of the larger transactions that are out in the marketplace, we hope that gives us, at the end of the day, a big competitive advantage, but we'll see how that all shakes out.

OK, good luck, guys.

Thanks.

Thanks, Ric.

Your next question comes from Vance Edelson with Morgan Stanley.

Great, thanks a lot. With the revenue mix improving, can you give us a little bit more of a granular update on the telephony portion, specifically the rough percentages coming now from each of the major wireless carriers, and if we assume that Verizon Wireless and Sprint will be the first to go ahead with the 3G deployment, is that something that comes into your thinking when you acquire towers to try to get that upside?

Well, we don't break out our tenants tenant by tenant, so we can you that we've got 56.6% I think is the real number of all the major telephony carriers, and it's pretty well dispersed among that. But was the second part of your question one of consolidation risk questions?

No, really, when you're looking at towers, are you looking at the Verizon and Sprint towers as being somewhat more valuable if they're likely to go forward with EVDO and with 3G faster than anyone else, which is what it looks like right now.

It would mean the towers that we own where Sprint and Verizon are located, do we think that those have more value because of the overlays of new applications.

Well, also, the towers that you're looking to acquire, is that something that you keep in mind.

Well, I'd say that more generally speaking, we look very closely at the physical location of the towers, because we think that a very substantial driver of incremental lease-up is the geography of them, I mean, places where towers are located where there's more people or more people driving past them lease up faster than towers where there's not. But if you look at the revenue numbers, the vast, vast, vast majority of revenues are still voice revenues. And certainly the data stuff is something which we think is tremendously promising, given our asset mix in general, but to date it has been a very small percentage of both ours and I think other folks' portfolio thus far.

We are pretty hopeful that if you buy towers in good places, that the data applications and the data utility of those towers will be similar to the profile of what you get from utilization from the voice.

I think, Vance, you would know that, I guess, in terms of voice, voice makes up 90% of all the revenues that the wireless carriers are really generating at this point.

Yes, it's just a potential upside. And I guess also on the mix, paging is down nicely. Can you provide an update on the stability of Arch, though, and of paging revenues in general, and maybe what percentage of revenues would you expect to get from paging, maybe a year from now?

Yes, we really don't comment on what we think is going to happen kind of in the future, so no, we can't comment on that.

I mean, I think that the paging stuff has been a lot more stable, and it seems like generically if you look at the paging companies, if you look at the Arches and Metropolitans, certainly their numbers are much better today on a run-rate basis than they were a year ago. So it seems like although that's a declining technology that there is a bottom to it and it seems to be really utilization of that technology amongst certain users. So we feel good that the runoff in that business is abating.

Our revenues right now are quite stable on the paging side, generically, in that we've got a long-term contract still in place with Arch until the middle of next year. And, as David said, we don't want to prognosticate about what we think is going to be the outcome of any of these three negotiations with those folks, but I think it's fair to say that we are cautiously optimistic that some of the windfall problems that we've had with paging in the past are behind us. And obviously to the extent we have more and more telephony-based customers, that becomes a smaller and smaller percentage of our overall mix.

OK, great. And lastly, how competitive would you say the bidding process is when you're going out, looking for towers. Are you bumping into anyone else who's looking to acquire, and similarly, the potential sellers, are they accustomed to receiving offers, or would you say you're sometimes the first to show up?

It's a competitive world for towers, just like it's a competitive world for just about any kind of physical asset these days. But we've made a real effort to try and create a very broad-based acquisition process to give ourself access to as many opportunities as possible, because I think that's really how to create the best price discipline and give yourself the best chance at buying good assets at good prices. And although it's competitive, I feel like I'm very pleased with kind of the performance of our acquisitions group to date. It's something that we're working hard to continue to improve on.

Competition for it specifically, there's no real one competitor that shows up that really does continually crop up with us, so no, there's not one competitor I can really point to.

OK, very good. Thanks a lot.

(OPERATOR INSTRUCTIONS).

Your next question comes from George Day (ph) with MA Weatherby (ph).

Yes, good afternoon. I have one question regarding Wesley's comment. That is the leasing activity in the third quarter has been quiet. Could you elaborate a little bit, and you also mentioned that fourth quarter the activity seems to resume a little bit - so just a little bit more details, please.

Thanks.

We don't provide specific number of leases or activity numbers yet. That's something we've talked about doing. But I think, just as I said, generically we had a very, very robust first six months of the year. It quieted down in the corner. It was the summer, but it did quiet down in the quarter fairly substantially, but the pipeline going into the fourth quarter is quite robust, and early in the quarter, we're pretty optimistic that we'll get the kind of activities that we had earlier in the year.

So, I'm sorry I can't answer your question more specifically than that, but we just don't break that out on a lease-by-lease basis.

Yes, could you provide us with some kind of explanations, I mean, why the summer is so quiet. Is that because people went to vacation, or is it because of some other reasons?

I could make something up, but I would be indeed making it up. I think that looking at any one quarter is a pretty short period of time to draw any real meaningful conclusions about it. I think when you look at our leasing activity over the course of the year, I am still optimistic we're going to have a meaningful increase versus leasing activity last year. But we don't know that yet, and all I can say is that the numbers on the books for the first nine months of the year are still, in spite of a fairly quiet third quarter, are still on pace for us to have an excellent year, but no, I don't have any kind of specific guidance as to why they might slow down. I could speculate about that, but that's all it would really be.

Your next question comes from Mark DeRussy with Raymond James.

I was wondering if maybe David, if you could talk about anything you guys are taking to turn a lease application around into an actual lease?

Sure, I mean, I think cradle to grave in times past, before a lot of the new efficiencies came into place could have been 75 or 120 days, and now we are down on average to between 30 and 45 days. What we have noticed is that by no means are we anywhere but in the sort of upper level of timing for the other tower companies, and we're sort of ready as quickly as the carriers can be ready.

OK, thanks.

You have a follow-up question from Ric Prentiss from Raymond James.

We can't let the call end that fast, guys.

Come on, Ric.

You led off the conversation talking about the AFFO per share and putting capital to work and then talking about your annual dividend policy, and that's clearly been an important part of the story from one of your other ventures, Newcastle. Can you talk a little bit to us about what you think the right ratio is for a dividend policy, what we should expect here on the Global Signal one, how often you're going to address dividend policy, et cetera.

Well, we address dividend policy really on a quarter-by-quarter basis, Ric, and our goal is to pay out substantially all of the capital that we don't need to retain for maintenance and growth cap ex.

The run rate is something that we look at closely, both at the company as well as on the board level, so obviously we increased the dividend substantially, so we must feel like the run-rate revenues are supporting paying a higher dividend. We don't want this number to bounce around, so we try not to be speculative about it. But I think on balance you'll see us pay out pretty close to what we earn. And then to the extent that we think there are incremental investment opportunities, we come back, add on hand (ph) to the marketplace and see if we can organize capital to pursue those investments.

So that's the general philosophy of it, Ric.

OK, and so just want to make sure - obviously, it was a nice boost there and the yield stays plugged in, as well as the whole kind of financing scheme.

Yes.

Great.

Thanks, Ric.

At this time, there are no further questions.

Great, thank you very much.

Thanks very much, everyone.