Crown Castle Inc (CCI) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Castle International Q2 2013 earnings call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, July 25, 2013.

I will now turn the conference over to Fiona McKone, VP of Corporate Finance and Investor Relations. Please go ahead miss.

Thanks Angel. Good morning, everyone, and thank you all for joining us as we review our second-quarter 2013 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer, and Jay Brown, 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 which we will discuss throughout the call this morning.

This conference call will contain forward-looking statements and information based on management's current expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks and uncertainties and assumptions. Information about the potential factors that could affect the Company's financial results is available in the press release and in the Risk Factors section of the Company's filings with the SEC. Should one or more of these other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. Our statements are made as of today, July 25, 2013, and we assume no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, today's call includes the presence of certain non-GAAP financial measures, including adjusted EBITDA, funds from operations, funds from operations per share, adjusted funds from operations, and adjusted funds from operations per share. Tables reconciling such non-GAAP financial measures are available under the Investors section of the Company's website at CrownCastle.com.

With that, I'll turn the call over to Jay.

Thanks Fiona and good morning everyone. Let me start with a few summary comments as outlined on Slide 3 and then I'll go through our results and outlook in greater detail.

As you've seen from our press release, we had an excellent second quarter, exceeding the high end of our previously issued guidance for site rental gross margin, adjusted EBITDA, AFFO and AFFO per share. We continue to make good progress integrating the T-Mobile towers and are substantially complete with the integration of the land acquisition. The strong year-to-date results and our expectations for the second half of the year allow us to meaningfully increase our 2013 outlook for site rental gross margin, adjusted EBITDA, and AFFO.

Turning to Slide 4, during the second quarter, we generated site rental revenue of $617 million, up 19% from the second quarter of 2012. Site rental gross margin, defined as site rental revenue less the cost of operation, was $438 million, up 13% from the second quarter of 2012. Further, our network services significantly exceeded our expectations, contributing $48 million in gross margin compared with the $28 million in the second quarter of 2012, reflecting the continued level of network upgrade activity in the market.

Adjusted EBITDA for the second quarter of 2013 was $444 million, up 17% from the second quarter of 2012. AFFO was $304 million, up 41% from the second quarter of 2012, and adjusted funds from operation per share was $1.04, up 41% from the second quarter of 2012. We significantly exceeded AFFO in the second quarter compared to our outlook issued in April 2013 primarily due to approximately $12 million more contribution from services than expected, approximately $2 million of nonrecurring items in site rental revenue and higher-than-expected contributions related to reimbursement for wireless infrastructure expenditures necessary to accommodate carrier equipment which is directly related to the increase in leasing activity which I will elaborate upon in a few minutes.

Turning to Slide 5, during the second quarter, we invested $228 million in activities related to our core business. We spent $138 million on capital expenditures. These capital expenditures included $27 million on our land lease purchase program. Since we began this important effort, we have completed over 14,000 individual land transactions. As of today, we own or control for more than 20 years the land in these towers, representing approximately 77% of our gross margin. We believe this activity is a core competency of Crown Castle and we continue to enjoy significant success with this program as evidenced by the fact that, today, 36% of our site rental gross margin is generated from towers on land that we own, up from less than 15% in January of 2007.

Further, the average term remaining on our ground leases is approximately 33 years. We continue to focus a significant amount of effort and capital on purchasing land beneath our towers and extending our ground leases.

Of the remaining capital expenditures, we spent $10 million on sustaining capital expenditure and $101 million on revenue generating capital expenditures. Our revenue generating capital expenditures consisted of $66 million on existing sites and $35 million on the construction of new sites, primarily the construction of small cell networks.

Additionally, we spent $15 million on acquisitions during the second quarter.

Also during the second quarter, we purchased approximately 1.1 million of our common shares for $75 million, or at an average price of approximately $70 per share. Since 2003, we have spent $2.8 billion to purchase approximately 102 million of our common shares and potential shares at an average price of $27.45 per share. Without this significant investment in our shares, our existing share count would be more than one-third higher our current shares outstanding.

Importantly, during the same period of time, we have more than tripled the size of our tower portfolio and developed a significant number of small cell networks. Additionally during the second quarter, we refinanced the existing $1.58 billion term loan B and effectively lower the rate on the loan by 75 basis points, saving approximately $12 million in annual interest expense.

We ended the second quarter of 2013 with total net debt for last quarter annualized adjusted EBITDA of six times, down from approximately 6.3 times at the time of the T-Mobile tower acquisition in November of 2012. As of June, adjusted EBITDA to cash interest expense was 3.7 times.

Moving to the outlook for full-year 2013 on Slide 6, we have meaningfully increased full-year 2013 outlook from what we provided in April, increasing adjusted EBITDA by $28 million and AFFO by $61 million primarily based on our year-to-date results.

I am delighted with the performance of our business and our increased expectations for the balance of 2013. We now expect 2013 year-over-year site rental revenue growth of 17%, adjusted EBITDA growth of 13%, and AFFO per share growth of 34%. We expect to augment our AFFO growth through opportunistic investments in activities such as share purchases, tower acquisition, new site construction, and land purchases. Consistent with our past practice, our outlook does not include the benefit from these expected investments.

As we noted in the press release, based on currency movements, we decreased our expected contribution from our Australian operations for full-year 2013 outlook by approximately $8 million for site rental revenue, and by $6 million for adjusted EBITDA and AFFO.

As shown on Slide 7, for 2013, we expect to generate approximately $1.2 billion of AFFO and invest approximately $500 million on capital expenditure related to the purchase of the land beneath our towers, the addition of tenants to our towers, and the construction of new sites, including small cell networks. Ignoring our borrowing capacity, the portion of our AFFO after expected capital expenditures represents $175 million per quarter of cash flow that we could invest in activities related to our core business, including share purchases, tower acquisitions, new site construction, and land purchases. As such, we remain focused on investing our cash in activities we believe will maximize long-term AFFO per share. I believe that this level of capital investment can add between 3% and 5% to our organic AFFO per share growth rate on an annual basis.

In summary, we had an excellent second quarter as we continue to execute around our core business and we are very excited about the balance of 2013.

Additionally, during the second quarter, we stepped up our preparations for our anticipated future lead conversion and have engaged accounting and legal advisors to assist us in this effort. Currently, we have approximately $2.7 billion of net operating losses. I expect we'll convert to a REIT no later than the exhaustion of these NOLs. Based on our internal model, I believe we will consume the entirety of our NOLs by late 2016 or early 2017.

Before I turn the call over to Ben, I would like to provide some additional color on prepaid rent, which has been a popular topic of discussion with investors since our first-quarter earnings. In our press release yesterday, we provided additional disclosure regarding prepaid rent related to our site rental revenues, which details the amount of prepaid rent and amortization included in AFFO.

By way of example, on Slide 8, we show a single lease we added this quarter to a tower just north of Phoenix, Arizona and the associated prepaid rent we received in connection with the addition of this tenant to our tower. Our tenant leases will typically have two rental components, a monthly rent a prepaid rent. A prepaid rent reflects a carrier's contribution towards the capital expenditure necessary to modify the tower to accommodate the additional carrier equipment associated with the new lease. This contribution can either be made as prepaid rent or incorporated into the recurring monthly rent we receive from the carrier.

Since the very early days of our business, our customers have contributed to the required tower modifications as they install additional equipment on our towers. We would expect this pricing construct to continue as long as carriers are adding equipment to our towers.

Consistent with GAAP accounting standards, both rental components, regardless of when cash payments are received, are straight-lined over the term of the lease, as reflected on Slide 8 and shown in the GAAP revenue line on the graph. As the chart indicates in this example, the GAAP revenue shown by the orange line is flat for each of the years over the 10-year term of the lease and is calculated as the average of the prepaid rent and all contracted future rent payments.

The cash received, shown by the blue bar, reflects the prepaid rent in year one, along with the monthly rent payments with contracted escalators in future years. As such, our AFFO metric reflects the impact of the cash bar shown on the chart while our adjusted EBITDA metric reflects the impact of the solid line on the graph.

Moving back to a high level on Slide 9, as you can see from our press release, our current amount of site rental revenue on a GAAP basis are greater than the cash amounts we are currently receiving for site rental revenue, inclusive of prepaid rent. As we shown in the past, we have graphed all of our existing tenant leases for years 2013 through 2022, showing the expected reported amounts for GAAP purposes and the respective cash received.

Similar to this single lease example, we have shown the expected GAAP site rental revenue as a solid line and the expected cash receipts as bars. As you can see from the graph, we expect that, beginning in about 2017, our cash receipts from tenant leases will exceed the amount of reported site rental revenues. This is, as you would expect, given the average life on the leases across the entire portfolio, is currently approximately eight years, suggesting the crossover should be in approximately four years, or 2017 as the graph illustrates.

I should note that the graph only shows existing contracted revenue streams and prepaid rent is not included in this analysis for years 2014 and beyond, as it is associated with new leasing activity. However, prepaid rent could accelerate the timing of when cash receipts will actually exceed reported site rental revenue, as illustrated by the impact of prepaid rent in 2013.

We continue to think it is helpful to include prepaid rent in our AFFO metric as we believe it has helped investors understand the timing of the cash generated by our business. The nominal amount of prepaid rent has increased over the last couple of years as we have significantly increased the number of assets that we own, and we have seen a meaningful increase in leasing activity, both from new leases and amendments to existing leases.

In 2013, our outlook suggests that prepaid rent, net of amortization, will be approximately 9% of our 2013 AFFO, which is the same percentage of contribution we saw in 2012. I hope you find this additional disclosure and extended explanation helpful.

Back to the big picture and in summary, we had a terrific second quarter and I'm very excited about the balance of 2013 as we continue to execute around our core business and make investments we believe will maximize long-term AFFO per share.

And with that, I'm pleased to turn the call over to Ben.

Thank you Jay, and thanks again for everybody joining us on the call.

As Jay just mentioned, we had an excellent second quarter, exceeding our outlook for site rental gross margin, adjusted EBITDA, and AFFO, and we are excited about our business as we look to the balance of the year.

As you know, there's a significant amount of activity in our industry currently as all four major US wireless carriers are engaged in major network upgrades simultaneously. We are enjoying a significant ramping of leasing activity as reflected in our increased 2013 guidance.

As we noted in the press release, we saw new revenue from tenant additions almost double in the second quarter of 2013, compared to the second quarter of 2012. In fact, an important component of these new tenant additions, first-time installs or colocations are up 2.5 times for the first half of 2013 compared to the first half of 2012, reflecting the shift in activity towards infill sites. This densification activity is the expected second wave of the LTE network deployment and provides us with a longer runway of expected future growth as carriers strive to improve network quality and to add capacity through cell-splitting in the face of continued growth in mobile technology demand. Give the urban concentration of our sites with 74% of our sites in the top 100 markets, where we expect the majority of network densification to occur, we are very excited about our prospects as this next wave of leasing materializes.

From a macro perspective, the trends underlying the phenomenal growth in wireless data continue unabated. And carrier capital spending plans reflect that reality. In the first quarter of 2013, US mobile data revenues grew 14% year-over-year to reach $21 billion and are expected to reach $90 billion for the full year of 2013.

Recent carrier contract terms that bring forward the ability of consumers to switch handsets earlier is expected to result in even faster adoption of the newest smartphones and other connected devices which typically offer greater breadth of application and faster connectivity, leading to even more consumption of data.

Research from Google shows that smartphones continue to drive consumers' wireless purchases with 35% of respondents in a new survey saying that they purchased their phone to obtain the latest and greatest device, up from 25% last year. Smartphone adoption continues to fuel the growth in mobile data with mobile data consumption at some operators averaging over 1 gigabyte per month, already bumping up against established data tiers with some devices averaging close to 2 to 3 gigabytes per month. In fact, in Verizon's recent results, they noted that 33% of their postpaid subscriber base is on their LTE network and already consumes 59% of their total data traffic.

As CTI recently reported, for the last six months of 2012, data traffic was up 59%, and for the full year 2012, data traffic was up 69% compared to 2011. And Cisco continues to estimate that US mobile data traffic will grow ninefold from 2012 to 2017.

Further, the expanding LTE networks are expected to accelerate the growth of computing devices, including smartphones and tablets, over the next several years, as well as countless machine-to-machine applications, including connected automobiles. Increasing wireless capacity and broadband speeds driving more data usage and applications built for a mobile environment with a continuing reality.

Before I turn the call over for questions, I want to spend just a minute on LTE and where we think we are in the cycle. To help provide a framework for LTE build-out and our expectations for the longer runway of growth that we see, it is useful to compare how 4G LTE subscriptions are trending versus 3G subscriptions in the early days of that technology's rollout.

For the initial eight quarters beginning in the fourth quarter of 2010 through the third quarter of 2012, LTE subscriptions significantly outpaced the initial eight quarters of 3G which began in the first quarter of 2003, both in terms of growth rates and absolute numbers. Estimates are that total LTE subscribers could exceed $180 million by the end of this year and $260 million by 2017. With the total number of LTE customers representing 70% of all US mobile inscriptions by 2017. Further

, as each of the carriers have discussed publicly, the process of building LTE coverage and capacity is a multi-year commitment. We are very pleased to be playing an integral part in each of the big four US carriers' LTE deployment plan and network densification needs for the long term.

We have a unique portfolio of sites and capabilities that we are bringing to bear every day to assist carriers in realizing their plans. Further, the network densification needs of the carriers will be accomplished by both macro cells and small cells. Indeed, small cells are an integral part of the LTE operators' network strategy.

As the leader in small cell networks, we are seeing tremendous growth in this part of our business with organic leasing growth on small cells tracking well above our expectations, and we are excited to be investing for growth in this area. While small cells represent a small percentage of our overall site rental revenue, we expect and are seeing growth from small cells contribute significantly more than their relative size, as we've talked about on previous calls.

So, to wrap up, our strategy remains unchanged. We are the largest wireless infrastructure provider in the US with an urban-centric portfolio where leasing activity and demand for mobile technology is the highest. We remain focused on the US market, the largest and fastest-growing wireless market in the world where the ability of the wireless carriers to make profitable investment is most apparent and barriers to entry remain high.

As consistently demonstrated in our results, we believe our well-located tower portfolio and the ability to execute for customers allows us to drive the opportunity in the US market. Leveraging our experienced management team, customer relationships, and services offerings across our unrivaled tower footprint, together with our leadership in small cell networks, positions us to be the provider of choice as carriers continue to enhance their network to meet ever-increasing wireless demand.

We believe providing carriers with access to our 30,000 sites, extensive small cells and fiber resources a through shared infrastructure model remains the most efficient means of delivering mobile technology to consumers. I'm excited about the significant growth we are experiencing in our business and how we are positioned for the runway of growth we anticipate in the future.

So, in closing, we had an excellent second quarter and look forward to the balance of the year and beyond. With that, operator, I am pleased to turn the call over for questions.

(Operator Instructions). Jonathan Atkin, RBC Capital Markets.

Yes, good morning. I was interested in the small cell aspect of the business. And as you expand that platform, how much of that is leveraging your existing fiber footprint versus requiring the additional expansion, not just the fiber laterals but the fiber [packed on] itself. And then, secondly, I was interested in the T-Mobile MetroPCS integration and what you're seeing of that on your higher tower assets.

Sure Jon, thanks for the question. On the small cell side, we are seeing a significant uptake in colocation, if you will, on existing fiber plant and networks for systems that we have. As we've talked about before, it's a long runway to build new. We are working on that and actively engaged in a very significant build effort to add additional capacity and additional networks.

But a very significant component of what we are seeing is, as we would affectionately call it in the tower business, colocation. It's not quite that simple in small cells because it can either be in that same box or it can be the next pole over, as we've talked about and demonstrated with many of you in the past. But the financial reality is the same. So we are seeing a very significant amount of colocations on the small cell networks and are very excited about what we see there. Again, having that plant, if you will, that embedded fiber and the networks up and running, is very key to being able to deliver really any kind of speed to market to satisfy a need for a customer in an urban area. So that's proving to be very valuable.

Next, with respect to T-Mobile and MetroPCS, I think they're just beginning to get their heads around what they have. We certainly anticipate on the small cell side that continuing, upgrading for the different additional frequencies that are required there, but we expect that to continue as it has in the past with additional opportunity on the T-Mobile side.

On the tower side, I think we've disclosed, Jay, we've gone through sort of what the overlap is. You might want refresh everybody on that.

Total exposure to the Metro is about 4% of our consolidated revenues and the overlap is somewhere in the neighborhood of about 3%. And term remaining, we still have several years on those leases. So as Ben mentioned, it's probably too early for us to have any view as to do we see them renew the equipment in the overlap site? We'll have to see how it goes. But at least then you have the bookends and you can model it as you think appropriate.

Given the term of those remaining Metro leases and the pace with which we are adding equipment and additional RAD centers on occasion for carriers, we'll just have to wait and see what that ultimately looks like when they get to the end of those leases.

And finally, as Sprint starts to wrap its arms around the 2.5 frequencies in Clearwire and then build that out, can you remind us, given (technical difficulty) leave we would have in place, to what extent that triggers extra revenue for you?

With the 2.5, it depends on what's up on the site. But generally I would say it's a relatively minor revenue event, given their network vision equipment and the compatibility of that spectrum built in. Again, we think it is some incremental but probably not at the magnitude you'd see in a typical amendment cycle, because that equipment is compatible with that 2.5 already.

We do expect we'll see that the Clearwire sites that are built for LTE, there was some coordination there with Sprint, as you would expect. We anticipate that those sites continue. And then again the overlapped sites, we'll have to see over time how that plays out when we reach the natural end of the Clearwire licenses. I believe that's, again, about 1% of overlap in the Company.

Thank you.

Simon Flannery, please go ahead.

Thank you very much. Just continuing on the expense situation, I think you'd said in the past you expected about a 3% of the impact from the iDEN decommissioning next year. Have you had any sort of further color from Sprint as certainly the network is a big focus, or are they going to take their sites down, might they repurpose them, or might it be too late?

And secondly, Jay, on the weak conversion, you talked in the past about leverage. Your leverage is down to 6 times. Do you still want to get that down to around 5 times before you convert? Thanks.

Sure. On the first question, the exposure that we currently have to iDEN makes up approximately 3% of revenue, which we think is the bookend impact of the agreement that we struck with Sprint several years ago. They have the ability over calendar years 2014 and 2015 to renew that on a ratable basis. And we, at this date, we don't really have perfect clarity on what they're going to do there. They may decide to renew some of those installations or they may decide to remove the equipment as they have the contractual right to do. And I think we'll have to get into those years to really understand where it's going to come out. But that could be the impact over the next two years on a consolidated basis.

With regards to re-converged, as we did note in the press release and I alluded to in my comments, we certainly stepped up the amount of effort that we've made on that front, and we are working diligently towards taking the steps that will be necessary for us to make the reconversion over the next couple of years.

And with regards to how we think about that relative to leverage, I think we've been pretty clear in the past that we think there's value in being at the corporate level in investment grade rated credit. We think that gives us access to capital and ultimately has a positive benefit on the cost of equity.

So I wouldn't describe this necessarily as a bright line or something that we have to do or need to do prior to reconversion. I think, longer-term, we think it's appropriate and helpful to the cost of equity to bring it down if we achieve that investment grade credit rating. So I think it could be something where we get there prior to reconversion. It could be also something that, as we're converting into a REIT, we have a plan of deleveraging to get down to that level.

Now, whenever we talk about this subject, about target level of leverage and how we deploy leverage, it's always I think a bit of a relative measure against What are the opportunities in front of us, and what is the cost of the debt?

We obviously went above our long-term targeted level of leverage. It's been 4 to 6 times for a number of years. We went above that level in order to acquire the T-Mobile assets, thought that was the right decision. We were able to acquire another 7000 towers and didn't issue any shares associated with that acquisition. We were able to do it with a very low cost of debt and long-dated maturities on the debt. So I would say it's a target for us, but it's always relative to what is the opportunity.

And historically, we've used our leverage capacity to buy assets and to buy stock based on what the prices of our stock and assets were as well as managing the balance sheet. So, I wouldn't draw any bright lines, but I think the targeted range here is where you have seen us operate and probably in the years forward as we convert to a REIT, it moves us towards the lower end of the range so that we are able to accomplish getting an investment grade credit rating.

Thank you.

David Barden.

Hey guys. Thanks for taking the questions. I guess two.

So first, Jay, obviously I think there's a lot of excitement about what's going on in the wireless industry. There's a lot of energy going on into network builds. And I think the stock price today is reacting a little bit to a sense that there's a lack of that energy being realized on Crown's part in the revenue at the site rental revenue numbers.

Your kind of hitting a midpoint of the guidance is good, but it doesn't seem to necessarily reflect how much activity there is going on in the market. I guess taking out one-timers, the first quarter was 611.4, 2Q was 614.8, so that's only $3.5 million.

But then as I look at the end of the year, you've got -- doing the math on your full-year guidance, you're looking at something like $11 million or $12 million of sequential revenue growth in 4Q. So can you kind of map out a little bit for us what's happening in these numbers? Why the growth looks anemic now and kind of really ramps up in the back part of the year?

And then the second part is kind of following up on the leverage and the capacity question. There's a sense that there are several big deals to be done not just overseas but also domestically, potentially AT&T as well as maybe some large private companies. What is your capacity to do a deal size-wise right now and your comfort level on leverage? Thanks.

Sure. Thanks for the question. On the first question about sequential growth, I think it's pretty typical in our industry to see activity during the course of the year ramp. And that's certainly the case if we look at our 2013 expectations. We are seeing more leasing activity in the second quarter than what we saw in the first quarter and expect more activity in the back half of the year than what we saw in the first half of the year. So it's a term that's thrown around a lot in our industry that the years become back-end loaded with regards to sequential growth, and it certainly appears, as you pointed out from the numbers, that's going to be the case again this year.

The GAAP numbers, and you've adjusted them as you talked about them, but certainly if you look at our sequential growth, you have to adjust for the FX. I think you get to normalized growth, which you did in your comments. And I think you can see in the back half of the year the growth that we've been talking about, both in terms of leasing activity and applications and new installations that are going on the tower. So I think you correctly identified it, and it's a function of how the carriers deploy their network. In the early part of the year, they set forth their budgets and what they're planning on doing in the year, and then we see more activity in the back half of the year than we do in the first half of the year. And so sequential growth in revenues and EBITDA follows that trend line.

Let me just point to your second question. Also, if you recall, on the first-quarter call, we talked about new revenue leasing picking up dramatically over last year. That is continuing to happen, as we've mentioned in our comments. But that really started from January, so really it's a ramping affect that you see throughout the year. And based on our pipeline, we put out the guidance that we did, which implies significant growth.

David, you mentioned about some acquisitions. And basically what I would say on the acquisition front is just as we've always done, we are constantly evaluating from a capital allocation perspective the ability to acquire assets and provide additional growth in AFFO per share against buying our own shares. So it's always a relative trade-off. And as you've seen over time, as Jay mentioned his comments, we've taken a third of the share count out of the Company in the last two years, at the same time we've tripled the size of the portfolio. So we are very comfortable doing both. But we will look very carefully at what maximizes long-term growth rates and act accordingly. And you don't -- that's how we've acted for a number of years and certainly would expect that's how we will act going forward.

Perfect. Thanks Ben.

Ric Prentiss, Raymond James.

Just one quickie follow-up on the REITs topic. You mentioned how, in earnest, it's been stepping up the pace. As you think about paying a dividend and converting to a REIT, any thoughts on when the accumulated earnings and profitability would have to be paid out or possibly paying a dividend before turning into a REIT?

I would separate the REIT conversion from the capital allocation decision around whether we pay dividends or buy back stock. And so I think, as we talked about it, you should view our comments that those are two separate decisions that we would make.

On the REIT conversion and how we think about it, I would anticipate when we talk about converting about -- exhausting the net operating losses in late 2016 or early 2017, I would expect that we'll convert to a REIT prior to accumulating a significant amount of operating or taxable income that we would need to distribute upon conversion. And so I don't think there will be a date upon which we are making a significant payout of accumulated earnings in order to convert to a REIT.

On the second part of the question around capital allocation, us paying the dividend, we could certainly do that as C-corp. today. We have, as you know, Ric, had a lot of conversations about this and talked a lot about it.

When you look at the growth rates achieved in this business, and I think no matter how you want to look at a cash flow metric on a per-share basis, our business is growing about 30% year-over-year. And we think buying back the shares is a very phenomenal investment relative to the alternatives. And so we have continued to stay on that and have done it for a number of years consistently. And I think, at this point, we think that's the best path to go. But there will come a day when we are paying a dividend and ultimately be in a REIT structure, and we look forward to that day as well. And between now and anytime when we do pay a dividend, the aim is to get cash flow per share as high as we possibly can to maximize what that dividend will be.

And the second question is on Slide 9 of the presentation where you showed kind of existing US tenant leases. Your guidance I think for leasing revenues for this year is around $2.475 billion. Looking at that slide, the expected reported revenue from existing tenant leases -- obviously they're not in full-scale there -- looks to be noticeably lower than that. Is that kind of tying back to David's question about are we expecting some ramp-up in the second half of the year? And then also looking into 2014 and 2015, I'm trying to think through what that graph is showing us.

Sure. We are showing you just our US business. The vast majority of prepaid rent comes from our US business, and so the numbers that are shown there would be our US tenant leases. If you were to include Australia, then it would (inaudible) our consolidated numbers and obviously be considerably higher.

That makes sense. One follow-up on Jonathan's question. On the Sprint SoftBank Clearwater item, if SoftBank does do the $8 billion spending a year at Sprint this year and does another $8 billion next year, it sounds like they want to deploy a lot more 2.5 gigahertz sites. Ben, in your answer to the previous question, are you assuming you will not get much benefit to that or was that a different number?

No, that's a different answer. I'm talking about -- if they back to the network vision overlay and add 2.5, many of those sites are configured for that today. That would not be a significant revenue event. I, like you, continue to expect that they are going to continue to add capacity and build that network to compete, and so we would fully expect in our comments around network densification, you're going to see Sprint right in there with everybody else adding additional sites that they were not previously on. And so this runway, we talk about an extended future growth around colocation, absolutely it's been for Sprint and our expectations for what that brings in the future.

Right. That's beyond the terms of the existing MLA. That's all --

Oh, absolutely.

-- nice to your revenue too so that if they do start spending that significant CapEx, the lag time is maybe late this year but more likely some nice benefit in 2014.

Yes. In fact, you mentioned our presold agreements. As we look at this year versus last year and current run rates, we're down by about half on the amount of new applications that are attributed to existing presold MLAs, so that is tailing off, as we would expect, as we reach the end of those sort of initial LTE overlays.

And then the new revenue items, whether it be a new co-lo or an amendment on a site that's outside the scope of those MLAs, those are ramping dramatically and those are what we talk about doubling year-over-year. So that mix is changing in a very material way in our Company such that the overall activity is up as well. But certainly from a revenue side, the new revenue items, both co-los and amendments outside the scope of the existing presold MLAs, are ramping very significantly.

I think it's a key point for the market to understand as far as what you're seeing in your guidance revenue versus what could be coming shortly.

Right.

Thanks Ben.

Brett Feldman, Deutsche Bank.

Thanks for taking the question. I was hoping we can maybe just dial in a bit to where you see the highest potential returns on the use of your cash right now. And there are two things I'm interested in getting a little more color on. The first is you've talked a lot about network densification, so I'm wondering whether you are seeing a renewed opportunity to increase the rate at which you develop the new towers to take advantage of that, because historically you've generated your highest returns off of new tower development. And then secondarily, your stock obviously has underperformed the market. Are you thinking that maybe now is the time to step on the DAS with buybacks?

Let me take a crack at that. With the colocation activity in the market we are talking about and the expected multi-year runway that we think that entails for all four major carriers in the US, building towers is certainly something we are revisiting. We have really come out of that business in a significant way over the last three years for obvious reasons, because most of the activity borderlining on all of the activity has been around amendments around LTE. I would tell you that it's certainly on the table, something we are looking at. I would not be surprised if you didn't see us building some sites in the US in the future, again to capture that new colocation densification we see going forward.

Other than that, high returning activities, we are quite pleased with our stock purchases over the years. We think we have done extremely well on obviously evaluating the growth opportunity in the business, discounting that against the market view, and then acting accordingly. But at the same time, we are constantly looking at acquisitions and opportunities to grow the business, because we are still very bullish on the long-term growth aspects of our current assets and many that we could potentially acquire. That was true with NexG in the small cell business. And we have been very pleased with what we've seen to date tracking originally -- above our original business plan, colocation activity on an existing asset, whether it be a small cell network or the towers, it's obviously probably the highest recurring activity there is in the industry. And we are very gratified to see that happening on the small cell side as well as towers as we've talked about. So it's really going to be more of the same.

We are constantly running sort of a dynamic comparison around where we are currently valued based on our best estimates for our own future growth against what other assets may be in the marketplace. We expect to act accordingly and we expect to do that in size given the fact that we are generating, as Jay alluded to, about $700 million of excess cash flow beyond what I would call sort of normal CapEx that we're doing on land purchases and tower augmentations and small cell builds, as we mentioned.

So we've got a lot of money to put to work. And as you can tell, that's a very significant component of our overall growth over time.

And back to Ric's question, I certainly don't want to trade that flexibility to be opportunistic for a dividend prematurely. There is certainly a day coming where we will pay a very significant dividend, we expect, based on the lack of tax shield, because the depreciation will be exhausted. And so that's just the reality. But in this interim period, as Jay was alluding to, I think we have an opportunity to grow AFFO per share either through shrinking the denominator or adding to the numerator, and we're going to continue to focus on that.

Great. Thanks for taking the question.

Amir Rozwadowski, Barclays.

Thank you very much for taking the question. One of the topics that you folks have mentioned that you're benefiting from right now is this sort of network densification. As you are building out sort of additional capacity to support traffic for carriers, I was wondering if you could highlight sort of the trade-off with the small cell choice versus sort of cell-splitting or augmenting the macro network. It seems as though there's a bit of debate going on in the industry as to whether or not small cell capacity would offset some of the macro cell capacity. And I was wondering if you could give us some color with your experience on what you're seeing in the market today.

Yes. The vast majority of what we are seeing around the small cell augmentation or densification that is happening where small cell networks are, so colocation as we've referred to it on a small cell basis, is occurring in places where macro sites really are too large or unavailable. So, the purpose is to repurpose the spectrum and in smaller sell, if you will, in an urban environment where the usage patterns are very, very significant and capacity is continuing to be challenged. Where there is an existing small cell network available, that's a very efficient way to add it and continue to get the maximum resource out of that spectrum because you are reusing it in very small cells, if you will.

Many places, though, where that's the need, there is not a small cell network available. And absolutely adding additional sites, if it's an urban settings, potentially a rooftop or adding to macro sites, is the preferred approach, it's the quickest approach. But it's really both. It really depends on what the availability of the infrastructure is in the location that's there. And in small cells, while we've got a nice business that's growing, it's still very small relative to the overall geography that the carriers are trying to deal with.

So the macro sites, in terms of bang for the buck, it's always more efficient to split a macro site, but appreciate that, in an urban setting, often that's not a choice or those sites are in fact too big and they were need to reuse that spectrum and a smaller cell which is in fact what we ultimately do with a small cell deployment. So it's really both, and I certainly would not suggest one is cannibalizing the other. It's frankly two separate issues and two tools that they are using to add capacity to their networks.

So just to follow-up there, it does sound like, based on what you're seeing in the marketplace, that not only are one not cannibalizing the other but really this is much more of an incremental opportunity for both you folks and for the carriers to extend their capacity.

Exactly. And again, what's most important is having that existing asset available, whether it be a tower portfolio well located in markets where growth is needed, where that capacity enhancement is needed, or having embedded fiber with an existing network where you can relatively easily add an additional tenant across that existing fiber plan.

So the major thing we bring is obviously the assets, the portfolios where they need them, and the ability to execute for customers on a timely basis. And that's, in fact, what we are seeing this year significantly ramping.

The last thing I'd say is you can certainly see that. I know most of you listen to our carrier customers' earnings calls, and you can certainly hear that in their tone as well.

Great. Thank you very much for the incremental color and for taking the question.

Philip Cusick, JPMorgan.

Hi guys, thanks. I guess, first, maybe this was addressed, but I don't think it was. Can you talk about what the sort of gross prepaid rent was the last few years? Is 2013 really out of line, or is this just a little bit bigger than normal?

Sure. It grew meaningfully in 2012, and it's grown to a lesser extent from 2012 to 2013 as the activity that we've been talking about, both in terms of amendment activity for LTE and then new leasing has begun to pick up. It's been part of the business, as I mentioned in my comments, since the beginning. So if you go back and look well back into history and you were to adjust for the number of towers that we own and then the leasing activity, what you would see is a graph that ebbs and flows. In some years, it's higher and in some years it's lower related to what leasing activity is going on. And so any period of time like what we have been in where there's an increase in activity, you're going to see that prepaid rent number increase.

And as we think about the driver of that, is it more just activity overall, or did new tenants sort of drive a higher level of prepaid rents than amendments?

It would be a combination of both. Typically speaking, if there's new leases going on the tower, there's going to be more equipment and therefore the structure is going to need likely to have greater reinforcement. So I expect, generally speaking, that you're going to have higher prepaid amounts on new leasing activity, so that would certainly factor into it.

The other thing, if you are doing a comparison to history, that would also be true. We talked about the fact that about 75% of the prepaid rent activity is related to tower and 25% is related to small cell. So if we've been building the small cell business, that wouldn't have been there if you went back and looked at, say, you are trying to compare it to another high period of activity in the mid-2000s, 2005, 2006. That activity wouldn't have been there, so that would've been another reason why it would be higher today than what it would've been if you were looking back four or five years ago.

And the tower activity was up from 2011 to 2012 as well as the addition of the small cell business.

Yes. Activity increased on towers from going into calendar year 2012 and then again into calendar year 2013. And then obviously given the timing of our two acquisitions in the data space as well as the things that we built outside of those acquisitions, our exposure to small cells and the size of that business has increased significantly since 2010.

Okay. And then separately, on the services business, I think I ask this question every quarter, but strong again, a little less strong than the last quarter. Should we think about that as being indicative of activity overall, or is that just sort of it varies pretty wildly?

It does vary but it's mostly been varying on the upside for a number of quarters, as you can see, a lot of people working very hard on that. Still it's been growing. We've been doing additional scope of work on a per-app basis, pre-construction zoning work all the way through the installs. But we've done a very nice job of capturing more of that opportunity within the Company as carriers are catching our sites.

There's obviously a revenue and margin opportunity that we are capturing. There's also an asset control and sort of high-touch approach that we take to our assets that we think makes being in the service business important for us. And so we are continuing to seek out and gain those opportunities, and it's continuing to grow as it relates to level of activity going on in the marketplace today. And so we certainly expect that to continue as we see continued leasing.

Good. Thanks guys.

Kevin Smithen, Macquarie.

Thanks. Tower improvement and construction CapEx has been elevated over the last few quarters versus historical absolute and relative to sales levels. I know there's a number of projects, including DAC. How long is this going to last? And when should we start to see -- or is this the normalized sort of CapEx to sales ratio, and -- or when will we return back to sort of 2011, early 2012 levels?

(inaudible) leasing.

Yes, Kevin, I was going to say it's a function of leasing, and it's a combination of two things. If you look at our historical results and you go back to 2011 and look at the six-year period of time from then, we have tripled the number of towers that we own. So even if activity were constant, the level of improvement I would expect would be triple today what it would've been on a historical basis if you were to look back over time.

On top of that, what we are seeing is a significant increase. As we talked about it, depending on how you want to measure it, more than a double of activity from 2012 to 2013. When we look at new leases that are going on the asset. So it's a combination of growth in assets and a significant increase in leasing activity.

As you look forward, the answer kind of stays the same. The level of assets stays constant (inaudible) at least for modeling purposes that you're looking for. And then how much CapEx we spend is going to be a function of what's the leasing activity. And today we are not here to provide guidance beyond calendar year 2013. But would expect that the level of spend would be matched with whatever the activity level is.

Obviously, when you compare the whole of it, you get fantastic investments. If you look at an average tenant that goes on our tower, it's paying us in the neighborhood of $2000 a month to go on an asset. To the extent we make a capital improvement to hold that asset, and as we've shown, they reimburse us for a significant portion of that capital expenditure, this is a fantastic investment that we have in our business. And we are happy to spend the money and make the sites ready for these additional tenants. It's the highest and best use of capital we have in the business.

And then on the construction side, that's dominated, at least for now, dominated by small cell network builds that we've talked about. As I alluded to, we make it back in the tower building business as well as depending upon the opportunity we see there. But for now, that number is primarily around the small cell business.

Great. That's helpful color. Thank you.

Tim Horan, Oppenheimer.

Thanks. Just a clarification. Ben, do you think the services revenue here, this is kind of the new normal? It used to be around $15 million per quarter. Do you think you built up the infrastructure and you have the customer base if this can kind of stay at this level to grow from here? And I just had another question on LTE also.

You know, I can't represent you to that. Honestly, we are doing the best we can. We are capturing a lot of opportunities and it's continuing to grow every quarter. But it is completely dependent on application volume and leasing opportunities, and so it's a function of that. And so we see a long runway towards leasing.

We've come through a period where we've had all four major carriers building out LTE. That mix is going to now shift to augmentation in terms of new self-floating and new colocation as some of the carriers finish their coverage build, their initial coverage build on LTE. So we'll just have to see.

We are continuing to look for ways, successfully I should say, to expand the scope of what we're doing with carriers, and so maybe we can manage to see that stay relatively at these levels even if app volume were to taper off a little bit over time, because we are doing more scope within each application. But it's something we are looking at carefully, and we're managing it and, frankly, going about as fast as we can go right now given the opportunity out there.

And so with the LTE build currently, I would say a lot of the equipment is going on existing leases that were modified. Are we basically done with that process at the end of the year, and the new LTE builds and cell-splitting will be absolute incremental revenue for next year and beyond?

I would say substantially done this year with AT&T and Verizon as they have confirmed. And then we certainly anticipate, as we are continuing to see the pipeline built for them in terms of cell-slitting both for macro sites as well as opportunities on the small cell networks, to augment capacity around LTE as their sort of second wave. And then as you listen to Sprint and T-Mobile talk about their LTE build with Network Vision and their network modernization plan, a little bit further behind but obviously very committed to delivering that same product to consumers. And so you can sort of follow down through the Big Four and see this wave coming, and that's exactly what we have seen.

Verizon announcing that they basically hit 300 million POPS and their coverage build is initially complete, and then they're going to come right back and add capacity for all the purposes and reasons they've stated. We anticipate that times four, because you can see that right behind happening with AT&T, Sprint, and then T-Mobile.

So that mix change over time, back to your first question about what was augmentation on an existing site, we think you can see it in our numbers, absolutely that's tailing off. A lot of that was pre-contracted, if you remember, pre-sold. That's tailing off and then the revenue-generating activity is more than making up for that tail-off.

Thank you.

Jonathan Schildkraut, Evercore.

Great. Thanks for taking my questions. Two if I may.

First, in terms of the prepaid, and you've given a ton of detail already, but one of the things you noted was that it was -- the breakdown was maybe 25% DAS and 75% towers. It doesn't seem like DAS is 25% of your revenues, so just understanding if there is a larger component of upfront prepaids associated with DAS relative to the revenue stream versus towers?

And then secondly, in terms of activity, you've again given us a lot of color on the new cell site activity. I'm wondering if you are seeing amendments then, the activity there slow, or that activity has kind of been steady and the new cell site activity has been incremental. And then I guess if you could give us the breakdown of new cell sites versus amendment activity in the quarter, it would be helpful. Thanks.

Sure. On your prepaid rent question, 25% of it is DAS related. And well, if you counted the number of assets that we have, we obviously have a much larger portfolio of towers than DAS. We are building and deploying a significant number of small cells. And so we've talked about the fact that while it represents less than 5% of the business, it could be in the neighborhood of about 20% of our growth in calendar year 2013. And we are seeing a very similar thing in terms of the prepaid rent as it would match where the activity goes. So while it's a smaller portion of the overall assets, it's a meaningful amount and meaningful contribution to the growth rate that we are seeing in the business.

The only thing that's tailing off on the leasing side is what I mentioned before, which is amendments related to MLA terms that were presold which would've been the initial labor to LTE upgrade specifically. So we are continuing to see applications around amendments that are outside the scope of that, [microwave] issues and new colocations grow very significantly. As I mentioned, co-lo's-standalone comparison up 2.5 times year-over-year, total new revenue-generating activity up sort of double year-over-year. And the only thing tailing off in our activity levels are what was presold, if you will, as we sort of reach -- again my guess is we are probably 60% for 70% through that presold commitment, if you will, as it tails off.

Thank you.

Batya Levi, UBS.

Great, thanks. We show another increase of expectations for gross margins in this quarter, and also G&A as a percent of sales improved. Can we expect these trends to continue from here, and can you also talk a little bit about the drivers of that improvement?

Sure. The gross margin improvements are related to revenue growth. And the cost structure is relatively stable, particularly with regards to towers. As we build and deploy additional small cell networks, the initial margins for those networks would be lower than our legacy portfolio. So it has a bit of a drag effect, but we've seen great growth there and the margins are increasing significantly, and that obviously helps our overall margin.

On the G&A side, as we've ramped the Services business and seen the additional activity, we've certainly added additional people in the business to manage that activity. And so I would point you to the fact that those two items are correlated and would expect the G&A line will move to some degree in proportion with what we see from our Services business over time.

Great. One other question on public safety. We've been reading something from some (inaudible) some activity on a regional basis. Have you had any discussions with public safety network sales?

Yes. Would be the short answer. As you can imagine, we are in the middle of that dialogue. I wouldn't elaborate a whole lot yet and it's certainly not in our leasing, existing or future, but it's nice to see an opportunity out there like that where, with our portfolio that we have assembled, I think we can bring a lot to the table to help them there. And you can assume that we are in the middle of those conversations.

Okay, thanks.

Michael Bowen, Pacific Crest.

Okay, thanks guys. Appreciate you taking the question. I wanted to get back to Sprint a little bit. By my numbers, it looks like your revenue is the most exposed to Sprint. I wanted to find out if you are seeing any pickup of activity over there, given the recent closures of their deals.

And I guess, correlated with that, did you see some slowdown in the first half, and particularly in the second quarter? And then I guess the same thing could be said for T-Mobile and PCS, if you could give us an update on build activity there. Thanks.

Yes Michael. We always are a little careful about letting the carriers speak for themselves around specific activity, but let me just say I think, for the last two years, we have been going flat out with Sprint on their Network Vision upgrade. And I would not say there's been any slowdown that we can perceive. We've got a very significant amount of amendment activity work from Network Vision, and we've done a lot of services work there as well. I would anticipate with the SoftBank closing, obviously it's early days, but what they've said publicly we can anticipate a network build that looks a lot like what you are seeing from others. So if they get the initial coverage build done on LTE, you'll see significant densification and additional sites added. Again, that's -- you sort of need to finish the first pass on coverage build first, but we haven't seen a slowdown. It's been very active.

And with T-Mobile, with MetroPCS, obviously they're going through an integration phase there. We've seen a lot of activity around their network modernization program, and we certainly expect that they are going to make the significant investment required. And we'll see that same sort of movie all over again with T-Mobile.

And one last question if I could. Obviously, there's been a lot of speculation out there with regard to the large portfolio of towers at AT&T, probably less so at Verizon, but I guess the question is the same for both. If you could talk to us a little bit about what type of towers and whether those towers are attractive, not just to you but to the tower industry in general, can you talk about maybe some of the puts and takes there with regard to some of those towers in both their portfolios that they still own?

Sure. What's attractive, and you could most recently see this in our T-Mobile example and the towers we acquired from T-Mobile, what's attractive is having a portfolio that available for colocation, obviously in the locations where you need assets, where the densification is going to occur. And that's urban sites. That's top 100 cities. And that's been our focus for the last 10 years. And that's how we've ended up with a portfolio that looks as it does.

And so our evaluation of really any opportunity, whether you mentioned a couple, would always center around the location of the assets and the opportunity that represents to solve additional needs for other carriers through the occupancy of those sites. And as equipment get smaller and more creative and the lines even begin to blur between a full macro site and small cell, I think you'll see the industry get more creative over time as to what you put on a tower that ultimately solves the carrier's needs, all against the backdrop of the benefit of the shared economics of the sharing of the sites, which again we think is sort of a compelling thing that we bring to the market. The ability to get carriers on the air and also give them the benefit of sharing the economics of a site we think is sort of what makes our industry, and that's how we'll evaluate portfolios in the future.

Okay, thanks.

Colby Synesael, Cowen & Co.

Great. Two if I may. The first one, a lot of talk about rising interest rates the last few months, and just curious how you may have seen that impact your business. And I guess more specifically, as rates were rising, did you see that impact deal valuations, and maybe did that actually impact how you were valuating potential tower acquisitions?

And then the second question, I know this has been talked about already, but as it relates to cell-splitting, can you just remind us what the impact is of that on GAAP? And I guess with you calling (technical difficulty) I'm trying to understand (technical difficulty) the income statement. Thanks.

Sure. On the first question, the direct impact to our interest expense was relatively minor from rises in interest rates. The vast majority of our existing debt is financed for a long period of time and it's fixed rate. We do have some exposure to floating-rate de. T, most of that floating-rate debt already has a LIBOR floor and current LIBOR rates are well below the floor, so we have not seen anything there.

Obviously if you think about buying assets or buying back stock, the cost of the capital is a factor in how we think about that. And so we would adjust, as we go along, how we think about relative value of assets and stock, and (inaudible) through the land or building towers.

On your second question around the impact of new leases, we have not done any presale agreements related to -- in our GAAP revenue numbers related to brand-new leases. So, the activity that we presold which we talked about that we think we've gotten through most of that activity thus far that we're going to see related to what was presold, that activity was all amendment-related. Sop to the extent that a tenant wants to go on a tower they are not currently located on, that would be additive to our growth rate.

And my prior comments, I think you can see this in the numbers, the sequential growth in revenues, if you adjust for the one-time items that we noted for you and adjust for the FX headwind that we are facing in the back half of the year, is meaningful in the back half of the year. If you look at our leasing as we look at the numbers, there is significantly more leasing in the back half of the year on a net basis than what we saw in the first half of the year. And so the sequential growth in steps would be -- we would expect to be larger in the back half of the year, as is typically the case in the tower business that revenue growth is backend loaded in the calendar year.

Great. Thanks guys.

Jonathan Atkin, RBC Capital Markets.

Yes, my follow-up was already asked. Thank you.

Great. Listen. I Appreciate everybody hanging with us today. We went a little bit long, about 70 minutes. We have a long runway, a lot to get accomplished this year. Very much excited about the balance of the year. And thanks for your attention this year. We'll talk to you on the next call.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.