Crown Castle Inc (CCI) 2016 Q2 法說會逐字稿

Good day and welcome to the Crown Castle International second-quarter 2016 earnings call. Today's conference is being recorded.

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

Thank you, Vicky, and good morning everyone. Thank you for joining us today as we review our second-quarter 2016 results.

With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer, and Dan Schlanger, Crown Castle's Chief Financial Officer. To aid the discussion we have posted supplemental materials in the investor section of our website at crowncastle.com which we will refer to throughout the call this morning.

This call will contain forward-looking statements which are subject to certain risks, uncertainties and assumptions. Actual results may vary materially from those expected.

Information about potential factors which could affect our results is available in the press release and the risk factors section of the Company's SEC filings. Our statements are made as of today July 22, 2016 and we assume no obligation to update any forward-looking statements.

In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the investor section of the Company's website.

In response to recent public comments and guidance by the SEC regarding the use of certain nonfinancial measures we have adjusted the presentation of our quarterly earnings information including information in our supplemental information package. We have not changed the definitions of our continuing non-GAAP financial measures discussed on this call or in the quarterly earnings information.

With that I will turn the call over to Jay.

Thanks, Son, and good morning everyone. As you saw from our earnings release last night we had another quarter of great performance meeting or exceeding the midpoint of our previously provided second-quarter outlook and allowing us to increase our full-year 2016 outlook.

The results reflect our continued focus on creating shareholder value through solid execution, disciplined capital allocation and strong balance sheet management, all of which positions us to achieve our goal of delivering long-term annual dividend growth of 6% to 7%.

What I'd like to do this morning in my prepared remarks is spend just a few minutes providing a bit more detail on each of the key focus areas that underpin our ability to drive our 6% to 7% per year dividend growth and then hand the call over to Dan to talk about our financial results for the quarter. The first point I will touch on is our long-term track record of execution. We have a highly motivated, very talented team of people who are dedicated to delivering strong results.

They have developed the systems and processes necessary to operate and manage our business to generate strong cash flows through a variety of business cycles. Additionally, we have been able to grow through both organically and acquisition including integrating those acquisitions effectively. This solid execution has resulted in very good financial performance.

Since 2007 we have grown AFFO per share from $1.33 to our current expectation of $4.71 for the full year of 2016 representing 15% compounded annual growth per share. Additionally, since 2014 we have returned approximately $7 per share in dividends, further enhancing the returns for our shareholders. The combination of our track record of execution, the quality of the portfolio of assets that we have accumulated, the secular tailwinds of increasing demand for wireless connectivity and the strength of our business model position us well to capitalize on the positive industry trends we're seeing coming our way, which is the second topic I want to highlight.

As we look to the future we believe wireless carriers will continue to invest in their network infrastructure as they take advantage of what many expect to be a multifold increase in mobile data usage between now and 2020. Specifically, we believe our runway of growth is supported by the amount of spectrum that is expected to be deployed over the next several years including spectrum from last year's AWS-3 auction, the spectrum currently held by the carriers and others such as DISH and FirstNet that have yet to be deployed and spectrum from future expected auctions.

Further out on the horizon we expect the deployment of 5G will drive growth on both our tower and small cell assets as the carriers look to densify their networks to provide the coverage, capacity and speed needed to support mobile video, the Internet of Things, fixed wireless broadband and other developing use cases. Given these expected developments and consistent with carrier commentary, we expect the carriers to continue to invest over the long term to maintain and improve network quality.

As the leading US provider of towers and small cells we have the opportunity to lease our assets and capture significant organic growth by providing the wireless carriers with a comprehensive offering of wireless infrastructure solutions. In addition to the organic growth we see in our business we have also had a tremendous opportunity to invest capital to drive attractive returns, which is the third key area I would like to focus on.

From a capital allocation standpoint, we are particularly excited about the small cell opportunities that we see ahead of us. Because small cells are deployed closer to the end user and in more dense array such as on traffic lights or telephone poles, they represent the natural progression of network densification required to provide continuous, consistent high-capacity and low latency connectivity. This is important as consumers are increasingly looking to utilize their wireless devices for high usage applications including on-demand video, virtual reality and the Internet of Things.

As these demands continue to increase, wireless carriers are increasingly turning to small cells to provide wireless connectivity across urban and suburban geographies where towers are not available or cannot solve the network needs alone. To get a better understanding of how we think about small cell investments we would encourage you to think of fiber as a tower. Fiber is the critical shareable element in small cells, much as the tower structure is the shareable element in macro sites.

Similar to towers, the majority of the capital for small cells is invested initially with the first wireless carrier deployment. This initial investment relates primarily to the buildout of fiber and, again, similar to towers we expect to increase the yields on our investments over time by co-locating additional carrier customers on the fiber we constructed for the first carrier. We are seeing this increase in yields in small cells play out at the pace we expected.

Importantly, in both our tower and small cell businesses this model of constructing an asset that can be utilized by multiple carriers and other customers reduces the cost for our customers compared to what they would otherwise have to spend to build the assets for themselves. We believe our fiber footprint of 17,000 miles in top metro markets combined with the capabilities that we have acquired and developed over time give us time to market and economic advantages that should allow us to capture significant share of this large opportunity.

Finally, the last aspect I wanted to address is how we think about financing our business. Our revenues are primarily derived from long-term leases that deliver a stable, growing and high-quality cash flow stream, which is the underpinning of our dividend to shareholders. And our investment in small cells represents a significant growth opportunity to further enhance our long-term dividend growth.

Against this backdrop our goal is to match the quality of our business with a strong balance sheet. We believe that maintaining an investment grade balance sheet provides us with access to a deep, stable and low cost of capital, reducing risk to our cash flows and providing us with increased flexibility to pursue potential investment opportunities that we believe will increase our dividend in the future.

In summary, how we operate, manage and finance our business is focused around growing the dividend. I believe that increasing our dividend consistently over time is the best way to create value for our shareholders. Given the leasing potential of our portfolio of assets, the long runway of expected network activity and our opportunities to invest capital at attractive returns I believe we are well-positioned to do just that by delivering upon our stated goal of growing dividends per share 6% to 7% annually over the next several years.

With that I will turn the call over to Dan to discuss our financial results for the quarter.

Thanks, Jay, and good morning everyone. Before I get to our results I wanted to talk briefly about my first few months at Crown. When I joined the Company I was enthusiastic and optimistic about the business, the Company and the people.

As I have spent time meeting with employees, learning about the industry and developing an appreciation for how the Company operates all of my expectations have been exceeded. As I have learned more I'm starting to really understand how the combination of steady, high-quality cash flows, secular growth trends and Crown's solid execution is a hard one to beat.

What I did not realize is how talented and genuinely nice the people are who work here. So I want to thank everyone who has made my transition so smooth. It truly is a great place and I appreciate the opportunity to be a part of it.

With that, I will now turn to discussing our second quarter. As Jay mentioned we delivered another strong quarter of financial results, meeting or exceeding the midpoint of our previously provided quarterly outlook. In addition, due to the solid first-half results we have generated combined with what we believe will continue to be a steady leasing environment we have raised our full-year 2016 outlook.

Turning to second-quarter results on slide 4, site rental revenues grew 9% year over year from $737 million to $805 million inclusive of approximately 7% growth derived from organic contribution to site rental revenues. The 7% or $49 million growth from organic contribution of site rental revenues consists of approximately 9.5% growth from new leasing activity and cash escalation net of approximately 2.5% from tenant non-renewals.

Moving to slide 5, our second-quarter results for site rental gross margin, adjusted EBITDA, AFFO and AFFO per share each met or exceeded the midpoint of our previously provided second-quarter 2016 outlook, reflecting the overall healthy leasing environment.

Moving on to investment activities, during the second quarter we invested approximately $200 million in capital expenditures of which $19 million were sustaining capital expenditures and $180 million were discretionary investments. Included in these discretionary investments is approximately $19 million of land purchases we completed to further strengthen our control of the ground beneath our towers.

Today nearly 80% of our site rental gross margin generated from towers is on land we own or control for more than 20 years. Additionally, the average term remaining on our ground leases was over 30 years. The proactive approach we take to managing the ground beneath our towers is core to our focus of producing stable, growing, high-quality cash flows.

The balance of our discretionary investments was in revenue-generating capital expenditures that we believe strengthen our portfolio of assets, extended our leadership position in shared wireless infrastructure and enhanced our ability to deliver strong long-term growth and dividends per share.

Moving on to financing activity, during the quarter we continue to proactively manage our balance sheet while returning significant capital to our shareholders through our quarterly common stock dividend of $0.885 per share which was 8% higher than in the same period in 2015. As part of a balance sheet management in April we issued $1 billion of unsecured notes to refinance debt maturities coming due in 2017 and borrowings under our credit facilities. This offering represented the culmination of our long-standing goal of reaching an investment grade credit rating at each of the three major rating agencies.

We believe this credit profile underscores the stability and quality of our long-term cash flows and it lowers our overall cost of capital which we believe is an advantage in our business of providing shared wireless infrastructure. Following this offering the only debt maturity we have prior to 2020 is a $500 million tranche of notes due at the end of 2017.

Shifting to full-year 2016 outlook on slide 6, we have increased the midpoint of our guidance by $3 million for site rental revenues, $3 million for site rental gross margin, $9 million for adjusted EBITDA and $7 million for AFFO. On an AFFO per share basis compared to 2015 our updated midpoint for full-year 2016 outlook of $4.71 represents an increase of approximately 10%. The increase in our full-year outlook reflects the strong results from the first half of the year, our expectations that the level of leasing activity from our carrier customers will remain steady, an increase in expected contribution from network services gross margin for the remainder of the year and the timing benefit related to tenant nonrenewals occurring later than previously expected.

It is important to note that our expectations for tenant nonrenewals associated with the decommissioning of portions of the Clearwire, MetroPCS and LEAP networks remained unchanged in the aggregate. Looking beyond 2016 we believe we are in a multiyear cycle of network upgrades and enhancements as carriers focus on meeting significantly increasing demand for wireless connectivity which we believe will benefit both our tower and small cell businesses. Given this backdrop and combined with our leading portfolio of wireless infrastructure across both towers and small cells we believe that we are well-positioned to achieve our stated long-term goal of delivering compound annual growth of 6% to 7% in AFFO and dividends per share.

With that, Vicki, I'd like to open up the call to questions.

(Operator Instructions) David Barden, Bank of America.

Hey guys, thanks for taking the questions. I guess two questions if I could.

Maybe for you, Dan, if we look at the organic year-over-year revenue growth as you define it in 1Q it was 7.8 in 2Q, it's 6.9 and for the full year it's going to be 6.3 as you've been guiding. Could you kind of waterfall the contributing factors to that deceleration? I'm assuming it has mostly to do with your inclusion of the small cell revenues in the organic growth number, but if you could map that out for us it would be helpful.

Then second, Jay, I'm sure you know that there's a big conversation out there about the AT&T tower RFP comments from T-Mobile about trying to find quote, unquote competitors for towers that are getting too expensive. Could you opine a little bit about that RFP and talk a little bit about your portfolio in terms of what you might sense as the percentage of towers that have a combination of expiring leases and very expensive leases coming up for renewal where there might be substitutes near you? It's a topic we're addressing and it would be great to hear your thoughts on it. Thanks.

Sure, maybe I will take the second question first and then Dan can go through the first question there. We're not going to get into, obviously, specific conversations that we're having with each of the carriers. But as we look at the business we haven't seen the dynamic change from what it's been like in a long period of time.

The towers that we provide to the wireless operators provide them with a very cost-effective solution. And over time, obviously, tower rents have escalated but the main cause of that escalation is the underlying cost of that asset. And we've done a good job over a long period of time of extending ground leases, as Dan mentioned in his comments, and investing capital there in order to own the ground underneath those assets.

And like any real estate asset over time there is appreciation in that overall cost. And so we feel comfortable about where we are positioned relative to all of the carriers and the provision of where rent is relative to the space that they are using and the underlying cost of the asset. And while this topic I think over the last six to nine months has maybe gotten more conversation than what it has over the last couple of years it's not really a new conversation.

We've had this conversation all the way dating back to the 1999 period and it comes up from time to time. And the value equation and the provision of that value to the carriers today is about a 2.5% to 3% cost of leads against the overall cost of the asset. And we believe that's a very attractive cost position as we share the asset across multiple carriers and in essence provides them with a really low cost alternative.

And, frankly, we don't see that the pricing dynamic in the business or the overall structure or arrangements that we have with the carriers, we just don't see that changing.

Dave, to your first question on the organic year-over-year revenue growth, a lot of the leasing activity last year was back-end loaded, which because of the offset of when it comes into play comes into the first half of the year. And so the early part of the year here in this year looks like there's more growth. And as the activity is again a little back-end loaded this year we won't see that until 2017.

And we really think of it as a year-over-year basis as opposed to quarter-over-quarter. So the way I would say it is it depends on the timing activity comes in but it's really more of a quarter-to-quarter anomaly more than anything else. And so I think the year-over-year is what I would generally focus on.

Got it. All right, thanks guys.

Simon Flannery, Morgan Stanley.

Great, thanks for a much. Jay, in your remarks in the press release you talked about a healthy leasing environment. Perhaps you could just characterize a little bit more around that. I think Dan was just talking about second-half loaded, so what is the level of activity that you're seeing right now versus say last quarter and versus your expectations and I think you said before maybe 60% of activity in the second half of the year?

Then there's been a number of press reports just about the challenges of siting small cells with municipalities, etc., particularly for some of the characters who are not going your route. But can you just talk about where you are in terms of getting what you need from the municipalities, being able to deliver on time and on budget for your carrier customers? Thanks.

Sure, Simon. Thanks for the questions.

On the first question around the leasing environment we're expecting, as we have been through the course of the whole year, about $170 million of revenue growth, organic revenue growth comprised of about $115 million on the tower side and then about $55 million in growth on the small sell side. That was really our expectation going into the calendar year 2016 and it's held throughout the year and we see that holding through the balance of the year which is why our expectation is unchanged. That is very similar to the long-term expectation that we have in the business that underwrites or underpins our 6% to 7% dividend growth in the comments that I made.

So we view that as a very healthy environment and we're seeing activity across the spectrum from the carriers on both small cells and towers and feel good about what that's going to look like for the balance of the year.

On your second question this has certainly gotten some play I think in the news recently around some of the difficulties of siting small cells as you referenced. And our experience has been that they are difficult to site and to locate. And in essence that underpins a big component of what we think about the business.

One would say the same thing about towers, about how difficult they are to get sited and to get put into municipalities. It is a great barrier to entry.

And as we look at small cells we would say the same thing about small cells, that they are operationally difficult in terms of moving through municipalities and local restrictions around planning and zoning. They take a long time to do. Generally our experience has been that it's an 18- to 24-month process in order to work through that.

On top of that it's very challenging from an RF design standpoint. So it takes an enormous amount of skill and expertise in order to deploy these.

And both the combination of the high barrier to entry that's created by the local municipality as well as the operational expertise required in order to navigate both the RF side as well as the municipality, we think is core strength for us and is supportive of the business long-term. And, frankly, the more difficult it is we think it really separates us from our competitors and shows how skillful the team really is.

So we are seeing it but I wouldn't necessarily describe it is worse than what it's been in the past. And, frankly, I think it's supportive of the value of the business.

Great, thank you.

Phil Cusick, JPMorgan.

Hey guys, thanks. Two if I may.

First, can you talk about competition in the small cell space? You referenced a little bit earlier but are you see more bidders for RFPs and is that impacting pricing at all?

I don't know that I would characterize it as we're seeing more competitors than what we've seen in the past. We do see competitors in the space. It hasn't changed our expectation around returns.

We haven't seen the returns that we're experiencing when we're bidding on new small cell. We haven't seen those come down from what we've seen previously.

So there are competitors in the space. I wouldn't describe it as a changing landscape. And in terms of returns we've seen those hold in there where they've been over the last couple of years.

Okay. Second, can you talk about network services trends both in the macro and the small cell business?

Yes, in the macro business, which is really the more relevant component given how small small cells is in services, we have seen as reflected in our expectation for the balance of the year we're assuming a bit higher capture rate on activity in the back half of the year than what we had previously expected. So leasing activity is about the same and we're assuming we capture a few more things.

I would point out, I know there has been a number of questions over the last couple of years around items that have been things such as pay and walk fees and other things that have benefited our services business. Our expectation of growth here is really what we would describe as core services related to installing tenants on the towers or doing amendments. And that's what's driving our increased expectation in the back half of the year.

Thanks, Jay.

Amir Rozwadowski, Barclays.

Thank you very much for taking the question, folks. One of the leading equipment manufacturers, Ericsson, made some comments earlier this week on their surprise on the pace of 5G and initiatives, particularly in the US.

There seems to be a lot of debate going on right now on how this technology could impact macro site investments versus the need for increased densification by small cells. You folks seem to be in an interesting place given your key positioning in both parts of the market. And so would welcome any thoughts you have on how you think about the potential opportunities or even headwinds as that technology rolls out?

I think I would say similar to what I made in my prepared remarks that we believe we'll see in a 5G environment carriers make investments across both towers and small cells. We don't believe that either one of them could deliver the kind of speed and low latency and ubiquitous coverage that they are describing, whether that is regardless of the application that they are trying to ultimately drive towards by the deployment of 5G.

So I wouldn't, at this point I wouldn't try to put much more of a finer point on it than that. We think it will benefit both towers and small cells. And as you reference we're pretty excited about our position because we think we will benefit from the combination of both.

And then if I may a quick follow-up to the prior question on the small sell side, it seems like you haven't seen any change in some of the initial returns expected on some of the small cell deployments. Do you think that there is a potential risk of that going forward depending on what happens with certain fiber providers?

And the reason I ask the question is that we are hearing that select carriers outside of the Sprint commentary that's been pretty notable are looking to densify their small cell footprint by going direct to metro fiber providers. So I would love your thoughts on that topic.

I think if you were to think about this as kind of a long-term business model we make investments based on the returns as we see them today. And we're not undertaking any obligation or we're not signing up for capital investment in an environment that in later years may have lower returns on it than what they do today.

By way of example, if you rolled back the business and looked at what we did in the 1999, 2000 era, we were building 1,000 to 2,000 towers a year back then because the returns were attractive to the business relative to the cost of capital and what we thought we could drive in terms of shareholder value. Today we build less than 50 on an annual basis. And the reason for that is because we just don't see the incremental returns as high enough.

So if you roll this forward I would certainly hold out the possibility that there would be competitors in the space and that there would be a change in the pricing environment and if the returns weren't attractive to us than we would stop making the investments as we're making them. We haven't seen that to be clear, though. Today what we're seeing is very attractive returns and an opportunity to invest capital that we think will further our growth rate over time.

And similar to the comments that I make about building towers or building new fiber the assets that we already have today we would expect over the long period of time to continue to see lease-up which will drive those incremental yields and incremental returns. So I think of this really as we're choosing today to invest in and build immature assets because we believe there will be an environment over time that will fill those assets up and increase the yield over time and then as we get into future periods, frankly, we'll just have to make the right capital allocation decision and ensure all along the way that every time we make the investment we're doing so because we believe that we'll increase our dividend growth over the long term.

Thank you very much for the incremental color.

And Amir, it's Dan. Just to follow up on that a bit, you can see in our second-quarter results from the small cells that the investments that we have made to date are actually coming in at returns that we find very attractive and I think you'd find very attractive for those new assets that Jay is talking about. So I think that even the financials we're showing today can kind of bear out what Jay was talking about.

Thanks very much, Dan.

Ric Prentiss, Raymond James.

Thanks, good morning guys. Continue the small cell theme, Jay you mentioned that small cells are hard to do, takes a lot of skills that you guys have. Could be 18 to 24 months to build them out.

Have you thought about being able to provide us maybe some of the pipeline or backlog that you have? You mentioned $55 million of organic revenue from small cell building construction in 2016 but how should we think about what you're looking at 2017 and even 2018 to get a little more comfort on filling Amir's questions?

I think, Ric, the best way probably to describe it is at this point we think the buildout that we'll see in 2017 is similar to the levels that we've assumed in 2016. We will give you more guidance on that as we get towards October and giving you a full outlook in 2017.

But at this point I think where I would guide you towards as we've talked about in the past the $170 million of revenue growth in the business is about $115 million from towers and $55 million from small cell. That's what we've baked into our longer-term forecast of driving towards that 6% to 7% dividend growth. And so as you're thinking about the model, at least the way we're thinking about the model is a level of growth that's similar to what we've seen in the last couple of years.

I think you also mentioned think of the fiber as kind of the tower asset and I noticed that this time the fiber miles are listed at just 17,000. I think last time might have been 16,500. Was there an increase in the fiber or was it just you guys are going to a rounded point there?

There is increase in the fibers. We're making investment in building out the small cells. Our mix of co-location and new is similar to what we've seen this year of about 30% co-location, and about 70% of what we're doing is building new anchor built systems.

Great. And last question, churn continues to slip out each quarter. The expectation it looks like this quarter the expected churn from acquired networks shifted about $5 million out of 2016 into 2017 based on the supplement. What are you seeing there and is it possible that that churn might not ever manifest itself?

What we're seeing is exactly what it looks like. We thought the churn was going to come in 2016. We pushed it out to 2017 because we now believe it will be in 2017.

It would be great if it never manifested itself. It would be something we'd be really happy about. But as you can tell from what we put in the supplement right now we think the aggregate level of churn is going to stay what we thought it has been over time.

Great, thanks, guys.

Nick Del Deo, MoffettNathanson.

Thanks for taking my question. Regarding your comments around the focus on growing the dividend and maintaining a solid balance sheet, I was hoping you could talk a bit about how you balance those goals against your level of investment in small cells and whether you think it would be appropriate to or if you will have to issue any meaningful amount of equity in the future?

I think it's a good question around how are we spending the capital and overall cash flow in the business. And at this point as we're talking about guiding and thinking about our expectation of investment we really don't see that at the current level. But there may be opportunities in the future that would lead to that.

And, again, I would point you back to the discipline that we've shown over a long period of time and would expect to show in the future as we look at those investments. There are obviously opportunities that would make sense to pursue and may include some equity associated with it, but you can be sure if that were the case we're looking at this on a real cost of capital associated with that. And then going back to does it really at the end of the day drive the business?

One thing I would point out is don't miss the growth in EBITDA that we've got generating in the business. And the aim here is to run the balance sheet at about five times debt to EBITDA. And so over time we're creating leverage capacity even as we go towards our target of five times debt to EBITDA.

And at this point we think that sufficient to cover the investment that we're making in small cells as well as covering the dividend. You can see that maybe a real quick look just look at the cash flow statement. First six months we've got about $900 million of cash flow from operations, $600 million of dividends and we've got about $392 million of CapEx.

So there's year to date there is about $92 million or so of CapEx in excess of the cash flow. Obviously that's well within our ability to handle by drawing on the revolver given the growth in EBITDA.

Okay, that's great. And maybe I can slip in one on small cells.

What portion of your base of small cells would you characterize as being in what we think of as being classic big-city urban locations like New York or Philly as opposed to other areas like the high-end residential examples you gave in last quarter's presentation? And is the pipeline any different than the base of business?

Yes, about 90% of the revenues in those fiber, etc., would be in our top 10 to 15 markets in the US. If you were to look at areas that were outside of that they make up venues and other things that wouldn't be in those top markets there is about 2% of our revenues in high-end locations that would be outside of top markets. So the vast majority of the cash flow is being generated in those top markets and the vast majority of the fiber that we've built in small cells that we've constructed are in those top markets.

Okay, that's great. Thanks much, Jay.

Jonathan Atkin, RBC Capital Markets.

Yes, good morning. So I had a question about there's a comment yesterday that one of the operators that they are going to be doing 35,000 carrier adds this year, approximately double the levels of last year. And I just wondered that kind of activity how does that manifest itself in terms of generating amendment revenues on the legacy AT&T assets that you now own versus the legacy Crown assets that were not bought from AT&T, what would be some of the differences in how you see revenues from that type of activity?

Yes, Jonathan, we would see that in the form of increased recurring revenue, site rental revenues, as the carriers. And I don't want to speak specifically to the example that you raised, but across all of the carriers as they look to improve their network and increase the capacity or utilize additional spectrum the results of that is amendments on our site and on our sites which drive increased site rental revenue.

I think we mentioned this the last couple of quarters. But at this point virtually every lease that we see on our sites as a carrier of that equipment, that's driving additional revenue growth. And we're obviously seeing that reflected in the reports.

Okay. And then on the 2016 AFFO outlook, I noticed there is a $10 million increase in expenses and I apologize if you addressed that earlier but what's driving that?

A couple of items I would point to. One is on the services side given the increase in activity there's a little bit of additional cost that we incur associated with that.

Some of it is another component of it is our out-performance for full-year 2016, or expected out-performance against our original plan, drives some increase in our expected employee bonuses. And then I would also point out that as we look at the year moving up the bottom into the guidance we did in this quarter and as we did prior quarters, that just migrates the cost structure towards a little higher in. So a lot of that is honestly just narrowing the range.

In terms of expectation, which is frankly probably more helpful if you think about modeling the business, from the Q1 level of G&A we basically think it runs flat for the whole year. So we had previously been assuming based on the guide that there was going to be some costs that were going to come out. And we're forecasting that to basically be flat for the balance of the year for the reasons that I gave you.

Okay, then finally you broke out land purchased CapEx between towers and small cells I believe for the first time. It's a small amount but I just wondered if that's indicative of more land CapEx activity going forward in the small cell business?

No, not really. Not indicative of that.

Okay. Great, well thanks very much.

Colby Synesael, Cowen and Company.

Great, thank you. You made a comment, and you've done it before where you compared the small cell business to the macro tower business and referenced fiber as being comparable to towers. But when I think of the tower business I think of it at this point a very well-defined and structured business.

There's not much variability from one build to another in terms of getting a required initial yield. You guys talk about with the small cells business getting on average typically 6% to 7% initial yields when you deploy it for an anchor customer. I guess my question is how standardized is that?

Does that vary quite a bit? Are there some small cell deals where you are doing right now and it's actually something below that and there's others that are well above that and it's really averaging that 6% to 7%? Are you seeing that pretty consistently deal by deal?

Then my second question, you guys have talked about 6% to 7% AFFO and dividend growth over the long term. You've mentioned it again on today's call. But when I look at the growth that you're doing right now, the 10% AFFO growth, 8% dividend growth I appreciate you have the converts, I appreciate the law of large numbers but is there anything else there that we should be aware of that would explain why we could see a few hundred basis points reduction in growth perhaps as we go into next year? Thanks.

Sure. On your first question there are obviously, and you would expect there would be any time you're investing the amount of capital that we're investing, I'm sure we could find you a couple of examples that would be outside of that normal range. But the vast majority of the investments that we're making in small cell would come in right around the average that we're giving you in terms of return and you're correctly pointing out that's the way we would think about it.

So it really depends on market dynamics and other things around where the exact dollars are. So we are really pricing this to yields and we are seeing the vast majority of them fall within the range that we're giving you around at initial investment for an anchor carrier.

On your second question around the target, maybe an easy way to think about it is in this calendar year the 10% is benefited by about 200 basis points from acquisitions that we made that were immediately accretive. And so that we take it down to cut the 8% range. And then from there you correctly point out the convert, the preferred that we have coming due at the balance at the end of this year.

So maybe a simple item would just be to take that 10%, make it 8% with the acquisition. And it very well may be that over time we find opportunities like that that are attractive, accretive acquisitions but we're not going to bake that into our base forecast.

Great, thank you.

Batya Levi, UBS.

Great, thank you. A couple of questions.

First on the guidance for the year you increased it slightly because of the delay in turn but it looks like the new leasing revenue growth is also expected to be slightly lower. Can you talk about the driver for that?

And then the second question on small cell margins, it looks like it picked up nicely year over year. Is this a good level that we can continue to see? Where do you think margins for small cells could get to over time? Thank you.

So on the first question on new leasing you can see that we actually haven't changed our outlook on that. It was $170 million in our prior outlook and it's $170 million now.

I think one of the things that we're noticing is we give ranges of these things which is the approximations we put in those charts and it gets to be too precise. And so I would not extrapolate that to say that our new leasing activity is any different. As Jay pointed out it's what we thought it was going to be at the beginning of the year has held through this year $115 million from towers and $55 million from small cells.

And in terms of the small cell gross margins, those will fluctuate quarter to quarter. But generally what we see is that we look at this more like Jay was talking about on the returns that we get in these projects and the overall margins we get may fluctuate depending on how the deal is structured and what happens and when things come on. So it's probably not going to fluctuate terribly from where it is now but I wouldn't focus on that as the driver of how we would think about the incremental investment in those projects.

Okay, thank you.

Mike McCormack, Jefferies.

Hey guys, thanks. Jay, maybe just a quick comment on the AWS-3 deployments, what you're expecting from a timing perspective? And then also second on 5G, just your thoughts around what that means to you guys, opportunity, threat?

Yes, on the first one, AWS-3, it's a component of what we're seeing in terms of leasing activity and our expectation would be that as we go through the balance of this year and into 2017 it's going to continue to be a component. That's embedded in our $170 million of increased leasing activity that we would expect.

5G, it's important I think whenever we talk about longer term where we think the growth rate in the business, the thing that we like to point out to investors around future opportunities is the level of activity that we've seen from the carriers over a long period of time is inside of a relatively close band of activity. And so we would look at 5G, for instance, or additional spectrum that we think will get auctioned off or FirstNet and we would look at all those opportunities as likely to extend the runway of growth in the business. And so at the moment or in the near term we may see more benefit from an AWS-3-like deployment or additional carriers being added across the towers for various reasons today.

And then over the longer term we would look at it and say well, we'll probably see activity from things like the deployment of 5G and FirstNet and other spectrum that's not currently being used by the carriers. So I would describe that as extending the runway of growth is probably the best way to think about it.

Great, thanks, Jay.

Jonathan Schildkraut, Evercore ISI.

Thank you for fitting the question in here. So look, I'd like to ask a couple more questions on small cell if you're not too tired of hearing about it.

But it's interesting in terms of your laying out the development and expected yields over time. And I was wondering if you could give us a sense because in the past you've talked about most of the capital being for anchor tenant builds, if that's still the case if you could give us a little color on where the tenancy is? And more specifically, if there are any older systems that you have out there where you could isolate the economics and give us some visibility into how the yields grow over time as the systems mature I think that would be really helpful. Thanks.

No, Jonathan, we're not tired of talking about small cells. We enjoy the subject. Most of the capital is invested up front as we build the fiber, that remains to be the case today.

And then over time you have a couple of things happen. The case studies we talked about last time on the call I think are instructive and helpful there. In both cases we saw a couple of things happen.

One is that over time we see the initial carrier come back and add additional nodes across a given geography of fiber that in essence increases the density. And that looks, if you are making the comparison to the tower model that looks like amendments to the base business where that first tenant, the yield associated with that first tenant in essence increases across the fiber.

The second thing that we see is that as additional carriers come they co-locate on the fiber that we've build for the first carrier and then they also at times want to extend the fiber into new places. We describe that typically as laterals across that base system. So as we have co-locations over time it's a combination of extending the plant as well as co-locating in the same across the same fiber that was built for that initial tenant.

And generally speaking we find the yield fits a pure co-location, we will find the yields as we move into the second tenant into the teens and then as we get to the third tenant as we showed you last quarter will be plus 20% oftentimes by the time we get to the third tenant. Some of that mix depends on how many co-locations go there, the density with which they go across a given geography of fiber and then how many laterals do we put in, are we extending the fiber mix.

So really the value proposition there as we think about it to the carriers is it's a shared infrastructure just like we do with towers and it provides a very cost-effective way for them to deploy across that fiber. And then once the fiber is in the ground it becomes a speed to market advantage that we have because we're able to install them on the fiber that we've already deployed for the first carrier.

All right, thank you.

Spencer Kurn, New Street Research.

Hey, thanks for taking the question. Just back on the small cell yields you've been talking about, could you just help me understand how you factor in prepaid rent into that 6% to 7% initial yield you talk about?

Sure, Spencer. We call it checkbook math around here. So we would think about it as what's the net received after the amount the net capital invested, meaning the gross capital we put in day one against any upfront receipts of prepaid rent that we get from the carriers, so it sort of a net concept of capital investment against the monthly recurring rent that we would receive and then annualize that. So we're looking at it on a cash yield basis net investment against annualized margin from the systems that we deploy.

Got it. And just to clarify, look at your total portfolio you've talked about adding -- you talk about investing $3 billion of capital into your total small cell footprint. About how much of that invested capital base would you net out from your prepaid rent denominator?

I would take about $500 million out of that. So net investment is about $2.5 billion.

Got it. Thanks.

(multiple speakers) ride back to about your 6% to 7% yield across that whole base. Keep in mind we initially started with about $1 billion of that, went in at about a 3% initial yield. So of that net $2.5 billion of the $2.5 billion about 40% of that went in at about a 3% yield.

The rest of it would have gone in the ballpark of about a 6% to 7%. So we've driven the entire investment up to 6% to 7% total return there which speaks to, as Dan mentioned earlier, if you look at the incremental returns you just take Q1, look at the incremental capital we invested during the quarter and then see what the returns on that are you can see why the base of the overall capital and the increase on yield has occurred over time. We're continuing to see that happen in the sequential results.

Thanks. And just one housekeeping question. You closed TDC and that added about $8 million of say leasing revenue to your tower business sequentially.

I noticed that revenue only increased $3 million sequentially for towers. I'm curious why it didn't go up by more.

We actually included the TBC in our prior outlook. So if you look at that we included that, so the site rental revenues were up in the outlook we had last quarter. So this is just in and above what TDC was.

Yes, I was actually talking about reported results from Q1 to Q2.

I think you have a combination we had a bit of one-time items in the first quarter. And then the net impact of churn I think is probably going to reconcile you the balance of the way, Spencer.

Great, thank you.

Michael Bowen, Pacific Crest.

Thank you very much. Most of my questions have been answered and I'm sorry if I missed this one. But back with regard to the small cells, can you talk a little bit about whether you think you're seeing or will see a little bit more demand either from a coverage or capacity standpoint for small cells as we go forward or am I not thinking about it the right way?

No, you are. I think we will see, typically what I would say is it's going to be a capacity issue that would be the biggest driver of what we're doing for small cells. There are places where there is virtually no coverage today from macro sites. And so we're going in and covering an area where there is no coverage.

But typically where these small cells are going is there is a capacity issue where there's a macro site providing we often think about it as an overlay and an underlay strategy. So there's a macro site that's providing good coverage but from a capacity standpoint or a latency standpoint the carriers utilize small cells to underlay that macro site and increase the capacity of both the macro site as well as using those small cells to increase the capacity of their overall network. So they are synergistic in their usage in those cases.

All right, thank you.

Timothy Horan, Oppenheimer.

Thanks, guys. Historically Ben used to talk about charging for space and weight on the towers.

If I'm reforming spectrum and I'm using existing equipment do I have to pay more? And I guess the same thing if I'm using new spectrum. Maybe just how the pricing model has shifted a little bit.

And it would seem fairly complicated to do this on every location. So would you expect to see more master lease agreements or new master lease agreements at some point?

Tim, the pricing model hasn't changed. So we continue to charge customers if they take up space and weight on the towers. And I think your question is you could say there is a theoretical answer where the carriers could literally re-utilize the space in a way, in a different way.

There may not be additional rent for that. That's not been our experience over a long period of time. Typically as they deploy additional spectrum or new spectrum bands on new equipment, they do make modifications to the site in order to improve the coverage or the capacity of the site and that's what results in additional rent to us and, frankly, we haven't seen that behavior change.

Great. And do you think that will drive master lease agreements at some point given all the changes occurring?

I wouldn't necessarily dismiss it as never going to happen again. There was a point in time where the conditions were I think very favorable for us to strike a transaction like that where the carriers knew they were going to touch or several of the carriers knew they were going to touch all of their existing sites. And so they were willing to pay us for an amendment across all of the sites in order to accomplish that.

If those conditions were right from a financial return standpoint those transactions worked out very well for us. But we don't have any today and, frankly, I wouldn't necessarily tell you that we would expect for those to occur again. But I would also say based on the value that we received from the transactions that we did previously, if there was a similar opportunity we would certainly study it closely and figure out what the best approach was.

And then lastly just to follow up to the very first -- David's first question, with the towers have you seen any of your competitors willing to lower prices or do more term and volume contracts at lower prices or any new entrants in which clearly seems to be what the carriers want, but have you seen any of that activity?

We haven't seen anything of any material in nature. As I referenced earlier if you look at where we're building towers which is very few today there have been people who have been willing to come into this space because they wanted to start a tower business or expand a tower business. And so they been willing to do tower builds at economics that aren't really attractive for us to go build sites.

Those occur, though, in places where there is not existing coverage. Most likely to occur in places where there is a new neighborhood in a suburban location. And we just choose not to pursue those given the low returns.

Very helpful. Thank you.

Walter Piecyk, BTIG.

Thanks. Can you just refresh our memory or at least my memory on why you guys stopped reporting nodes for small cells? because it seems like that would be a pretty interesting metric to look at as far as nodes per mile and see how that business has ramped or maybe otherwise can you provide some sense of how many nodes you guys are adding per year?

Yes, Walter, we talked about this a little bit last quarter. And I think some of it was confusion around the nomenclature of what does a node mean? And so we've tried to focus the conversation much more on revenues and yields to show the returns.

I wouldn't dismiss the idea that at some point over time maybe we do come up with a way to show that in a way that makes sense. But what we found when we were disclosing it was it actually was not very helpful for people in building their models and, frankly, caused people to draw conclusions that we weren't consistent with kind of the financial returns. And so that was the reason why we stopped doing it.

Over time maybe the nomenclature becomes a little more settled and maybe there is a way to help with that. But I think in the short term you will see us continue to focus on talking about this in terms of financial returns. And then what you can see, as Dan mentioned in his earlier comments, by looking at the numbers on a sequential basis you can see with the mix of co-locations and anchor builds you can see those incremental returns being driven.

Okay. And then just more of a 10,000 foot question.

Can you give us -- I mean I know it's early stage, Verizon is probably ramping up and other guys are at their even earlier stages. Can you give us a sense of what the mix is of those service providers selecting someone like yourselves versus maybe doing a build on their own?

And then as that particular customer type of customer progresses I would think there might be some bias to shift more towards building your own as the vendors like a MasTec or whoever get a little bit more expertise, which they don't have today, that they might want to shift that direction. Have you seen that with Verizon or again from 10,000 feet kind of where are we today and where do you think we're going to be in that mix five years from now?

I would probably describe it pretty similar to what we saw in the tower business over a long period of time is that the carriers will self perform in some cases and then you will have an independent provider of the infrastructure that will do it in other cases. Haven't really seen the dynamics of that change in the market over the last couple of years. Big picture today, we're probably somewhere in the neighborhood of about half of the activity that gets put out by the carriers.

We're winning about half of that business. The pie is growing quickly as multiple providers are now focused on this. But ballpark I would tell you we're about 50% of the market.

The other 50% would be a combination of self perform by the carriers and then other providers winning RFPs. And we obviously don't have to have a 50% win rate in order for the business to be interesting to us. It's really around where do you have infrastructure and what's the incremental returns from there.

Again back to the earlier conversation which I think is really important as we think about this business and compare it to towers is we believe that a shared solution is the lowest cost solution for the carriers. And we provide that solution for the carriers at a cost lower than what they could do themselves.

And a combination of that is our own low cost of access to capital which we have, the expertise which we have so we can get it done faster and more cost effectively just in terms of cost of the deployment and then by sharing it with multiple parties the entire return and justification for that investment doesn't have to be driven by one carrier. That model has helped out very well in towers and we see the same dynamics in small cells and believe it will continue.

Understood. And then on the 50%, the other 50% you were basically including other people like yourselves. So do you have a sense of on self perform is that like 10%, 20%? And I'm just curious in your -- pick any time frame you want five, 10, 15, two even where that self perform rate, does that go down, up or does it kind of stay where it is now?

I feel like to speculate on that would almost being able to step into what the carriers are going to do and what they are going to invest in the core asset versus maybe noncore infrastructure assets. So I'd probably let them opine on that. We feel good about the value proposition that we provide to them and then they will have to make their choice over time in terms of how much they want to self perform.

Great, thank you very much.

Maybe we have time for one more question, operator.

Matthew Niknam, Deutsche Bank.

Hey guys thanks for squeezing me in. So just two if I could.

First on FirstNet, if you could just give us any updates on the latest you're hearing and timing wise when you think this may be a potential revenue driver? And then just one last one on small cells, specifically around the cost side rental expenses were actually down $3 million sequentially. Just trying to figure out what drove that?

And then on the SG&A side, fairly stable sequentially. Do you think we can maintain this sort of similar pacing as the business ramps? Thanks.

Matthew, I don't have any insight on FirstNet beyond what you would have. I think best case scenario is this is a late 2017, early 2018 before it starts to affect our revenues based on all of the public commentary. But I, frankly, don't have any inside baseball beyond what you would read and know.

I think we continue to believe that over time there will be a first responder network that is constructed whether that's at the federal level over at the local level. The legacy systems are aging and there's a real need for it and that we believe the deployment of that system and any of the constructs that are currently being talked about and are possibilities, any of those constructs would be good for the tower industry and for us particularly.

On the second question, cost did tick up a little bit sequentially there in small cells. And I think when you get to that level of granularity I wouldn't necessarily point to anything that's indicative of what's going on in the business.

What you're going to find over time is as we build new anchor systems and there's a mix of anchor and co-locations you may see a little bit of volatility up and down quarter to quarter. But in total the economics are hanging there as we expect them.

On the G&A comment I would go back to my prior bigger picture comment. First-quarter G&A looks to us like it's going to be the run rate for the balance of the year and we're not seeing really any meaningful movements there.

Back to the more bigger picture comments that were asked around what the opportunity is around small cell obviously if we were to find more opportunities or ramp up the investment that we're making in that space then we would need to increase the G&A. But that G&A would come with returns as we've seen in the past. So it will be a function of the activity that we see and the opportunity to invest capital.

Well, with that maybe I'll wrap up the call. Thank you everyone for joining this morning.

As you heard on the call the story is the same as it's been for a long period of time. We're focused on growing cash flows in the business and growing the dividend.

And we'll get back to work and look forward to talking to you next quarter about the results. Talk to you soon.

That does conclude today's conference. We thank you for your participation.