SBA Communications Corp (SBAC) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SBA second quarter earnings conference call. At this time all participants in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, and then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Pam Kline, Vice President of Capital Markets. Please go ahead.

Thank you for joining us this morning, for SBA's second quarter 2004 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer, Kurt Bagwell, our Chief Operating Officer, and Tony Macaione, our Chief Financial Officer.

Before we get started, I need to get the standard SEC disclosure out. Some of the information we will discuss in this call is forward-looking, including, but not limited to, any guidance for 2004, and beyond. These forward-looking statements may be affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in last night's press release, and our SEC filings, particularly those set forth in our Form 10-K for the fiscal year ended December 31st, 2003, which document is publicly available. These factors and others have affected historical results, may affect future results, and may cause future results to differ materially from those expressed in any forward-looking statement we may make. We have no obligation to update any forward-looking statement we may make. Our comments will include non-GAAP financial measures, as defined in regulation G. The reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures and the other information required by regulation G, is included in our earnings press release, which has been posted on our website at www.sbasite.com.

Tony, would you please comment on our second quarter results?

Thank you, Pam. Good morning, everybody. In the second quarter, both site leasing revenue and site development revenue were up significantly over the comparable period in 2003. Site leasing revenues for the second quarter were 35.5 million, up 11.8% over the second quarter of 2003, and a quarterly record for a us. Site development, or services revenue, were 20.9 million, up 46.4% over the year earlier period. Site leasing gross profit, or tower cash flow, was 24.8 million, up 17.6% over the year earlier period, also a quarterly record for us. Services gross profit was 1.7 million, compared to 1.3 million in the year earlier period. Total revenues were 56.3 million, up 22.6% over the year earlier period.

Loss from continuing operations was 22.8 million and net loss was 23.2 million for the second quarter 2004. 2 million of the loss from continuing operations was attributable to asset impairment charges taken on 8 towers, and the write-off of deferred financing fees and net gains associated with the extinguishment of 34.8 million of our 10.25% senior notes, which were repurchased in the second quarter. In the future, we may make additional repurchases of our high yield debt, and, therefore, may incur the same type of charges. Loss per share from continuing operations for the second quarter was 40 cents. And loss per share after discontinued operations was 41 cents. Excluding the 2 million of asset impairment and debt extinguishment related charges, loss per share from continuing operations was 36 cents.

Weighted average shares outstanding for the quarter were 56.9 million, adjusted EBITDA was 19.5 million, up 23.1% from the year earlier period. Leasing revenue growth was strong at 11.8%, which was a higher rate than the last couple of quarters, as we saw more of the financial statement impact from our relatively strong lease-up in the fourth quarter 2003, and the first quarter of 2004. Our tower cash flow margins were 7%, relatively flat with the first quarter, and up 340 basis points from the year ago period. We believe the tower cash flow margin will continue to increase year-over-year, driven by revenue growth exceeding expense growth. We expect modest leasing expense growth going forward, with likely increases in property taxes, offset in large part, by our ability to tighten control on maintenance repair and utility expense, and our anticipated success in our efforts to purchase the land underlying some of our towers that we currently lease.

Services margins were 8.1% in the second quarter, compared to 9% in the year earlier period, and 3% in the first quarter. We saw substantial improvement in both services revenue, and margin in the second quarter. Kurt will discuss the services business in more detail shortly. As previously disclosed we have adopted a plan to sell our site development services operations in the western U.S. We have sold or shut down all but 1 service group in the west, and continue to hold the last group out for sale. To date, we have not received any material proceeds from these transactions, with each transaction being structured as an assumption of our backlog, offices and work force, and fixed assets transferred at or below book value. In connection with these dispositions, we incurred a loss in the second quarter of $600,000, most of which was non-cash. Unless otherwise noted, all the information we will discuss today and for any period, will be from continuing operations and will exclude the results of discontinued operations.

SG&A expenses for the second quarter were 7.1 million, or 7 million excluding non-cash compensation items. We expect SG&A, excluding non-cash compensation, to remain relatively flat per quarter through the remainder of 2004, as expense reductions from our exit from services in the west, and additional cost cutting measures, will likely be offset by increased insurance costs and the cost of complying with Sarbanes-Oxley. Our adjusted EBITDA margin for the second quarter was 34.7%, and our leasing segment contributed 93.6% of our gross profit in the second quarter. We disposed of 6 towers in the second quarter, 5 of which were from assets held for sale for 175,000. We built no towers in the second quarter, and ended the quarter with 3,045 towers in continuing ops, and an additional 32 towers held for sale.

Cash capital expenditures in the second quarter were approximately 1.4 million, which number was benefited by the return of a $300,000 deposit on a prior new build project. Of the total capital expenditures, we spent 700,000 on maintenance tower CapEx, 600,000 for augmentations and rebuilds, and 250,000 on general corporate CapEx. In last night's press release, we updated, and in most cases increased, the midpoint of our full-year detailed 2004 guidance. Jeff has a few comments on that later.

At this point, Pam is going to provide some information about our capital structure.

Thanks, Tony. Debt balances at June 30th, 2004, were 295 million, under our 400 million senior credit facility. 289.3 million of 9.75% senior discount notes. 304.3 million of 10.25 senior notes, and net debt of 860.5 million, after giving effect to 28.2 million of cash and restricted cash, and adjustment for deferred gains on previously terminated swap arrangements. Additionally, we had an additional approximate 26 million available to us under the credit facility of June 30th, for total liquidity of 54.2 million. We are not anticipating any material amounts from the disposition of the remainder of our western services business, or the remaining 32 towers held for sale, nor are we anticipating putting any additional towers up for sale.

In the second quarter, we repurchased 34.8 million of our 10.25 senior notes. We paid 33.2 million of cash, plus accrued interest, and issued 390,000 shares of our class A common stock. As a result of our refinancing and debt repurchase activities, we have reduced our weighted cost of debt, from 10.5% a year ago, to 8.2% at June 30th, 2004, with the opportunity to reduce that cost even further, by continuing to use credit facility proceeds to repurchase higher cost debt. In February of next year, we will have the ability to refinance the material portion of our capital structure, when our 10.25% senior notes become callable.

Reducing our leverage is now our primary capital structure goal. We made great strides in the second quarter, reducing our net debt to annualized adjusted EBITDA leverage ratio by 1.6 turns, to 11.0 times at June 30th, 2004. Through expected EBITDA growth over the remainder of 2004, we believe we will further reduce our leverage ratio by .5 times, to 1.0 times by year end. We intend to continue to take steps to reduce our cash interest, total interest, and overall interest at SBA. And exactly what we do, and when we do it, will depend on market opportunities and our liquidity position at the time.

Kurt, would you please provide an update on operations?

Thanks, Pam. Good morning. As you heard from Tony, the second quarter of 2004 continued to produce very strong results for SBA, on the site leasing business, and both top line revenue and gross profit growth. The activity was strong from a variety of carriers they continue to develop their networks to meet capacity demands, performance requirements, and signal availability expansion. Our execution on the marketing and operational fronts was exceptional, and I would like to thank our employees for that.

As have you seen from the Q2, 2004 results announced so far by the carriers, subscriber and MOU growth continues to be strong. Wireless data penetration and usage is increasing, as well as the carriers continue to deploy higher speed technologies and enhanced data products on a wide spread scale. We also like the continued activity in the NBNO arena, with multiple providers working with at least 5 of the major carriers. Nextel and Nextel Partners, Cingular, Verizon and T-Mobile were our strongest leasing clients in the second quarter, with many others also staying active, including some of the large regional carriers and affiliates.

Our second quarter operational lease-up results were almost as good as Q1, which was our strongest since early 2002. Both the first and the second quarters have now come in well ahead of our lease-up expectations at the beginning of the year. In the second quarter, 82% of our new leasing revenue came from the big six, with an additional 14% coming from other telephony carriers, for a total of 96% of new leasing revenue. Our mix in the second quarter between new revenue from new installations, and new revenue from amendments, was 87% and 13% respectively. The continued high percentage from new installations is another strong sign of total network development growth. We also feel that amendment activity will continue, to some degree, for the foreseeable future, as there's always a need for upgrades, modifications, additions and changes to the physical equipment on the tower, and at the base of the tower. In addition, our backlog for leasing remains very strong going into Q3, 2004. Same tower revenue growth on the 3,039 towers we owned at June 30, 2003 and 2004 was 10%, and tower cash flow growth was 16%.

We continue to believe same tower revenue growth will remain in the 9 to 11% range for the remainder of 2004. Quarter end tenants increased to 7,048, and monthly cash basis rents on our existing portfolio increased to $1,660 driven by higher initial rents, amendments, and escalators. Those are operational numbers, and include newly signed leases that have not yet begun to accrue revenue for financial statement purposes.

Lastly, turn was flat with previous 2 quarters, at a rate of less than 2% of annualized revenues. Our tower maintenance OpEx and CapEx continue to stay low at levels in Q2, 2004. On the maintenance OpEx front, the second and third quarters of each year are typically the highest, due to the storm seasons, but we have been able to hold our maintenance and repair expenses in this area flat year-over-year so far, on an absolute basis, and feel good about our ability to continue in that direction. In our construction, site acquisition, and technical services business, Q2 showed an increase in both the top line revenue and gross profit from Q1, 2004.

Our services business and continuing operations was much steadier in Q2, and all geographic territories, from a backlog and productivity perspective, helping create the higher margins. Although the services margins are not still at levels we would ultimately like to see, the business did cover its costs in the second quarter, and continues to prove itself to be a valuable asset for our carrier relationships and industry intelligence. Backlog continues to be strong for this segment, and we continue to modify the overhead structure to achieve the highest possible returns.

Major projects right now in our services business, include those with Sprint, Cingular, Bechtel, AT&T Wireless New York, and Verizon Wireless. Last quarter, we announced a plan to exit our west region services business, and we have been busy executing on that front. We offered both site acquisition consulting, and construction services in the west. We have successfully shut down or sold, significant components of both during the quarter. We expect to complete this process in the third quarter of this year.

As you can tell, we feel good about the direction of the wireless industry right now. Our backlogs are solid. The carriers are all very busy executing on multiple initiatives. The customers and potential customers, continue to show their appetite for wireless services, and we feel SBA is positioned well to continue to capitalize on this front.

At this point, I will turn it over to Jeff.

Thanks, Kurt and good morning, everyone. We had a good quarter. We accomplished many things, improved much of our business, and built good momentum for the second half of the year. We made significant progress in our 3 primary focus areas: EBITDA growth, improved cash flows, and leverage reduction. We also made a lot of progress in a number of other areas. We further reduced the weighted average cost of our debt. We reduced capital expenditures for the lowest level ever in our history as a public company. We increased our cash basis rents per tenant, and our percentage of leasing revenue, from the 6 largest wireless carriers, to new highs. Our leasing revenue and tower cash flow growth rates accelerated from the first quarter. We improved our services business such that it produced a net positive contribution to EBITDA. And the list goes on. It was one of the better quarters we have had in sometime, and I thank our employees for their hard work and success.

We feel very good about the second half of the year, and our anticipated full-year results. We have raised the midpoint of most of our full year 2004 guidance items. We are carrying strong backlogs into the second half, in both leasing and services segments. Our strong operational lease-up results for first 6 months will, in large part, drive our reported financial results for our leasing business for the remainder of the year. Our services backlog is of a longer duration than it has been in some time, giving us improved visibility through the remainder of 2004, and into 2005. Our customers continue to be busy in general, with the typical customer and location specific stops and starts, that are always part of our business. As with every period, some carriers will be busier than others over the next 6 months, but we expect overall activity levels to remain strong and increased over the comparable period of 2003.

I understand that one of the questions of the day, is whether the second half will be as strong as the first half of 2004 in lease-up activity. I don't know the answer to that question today. It certainly could be. Because of the strength of the first half, we are well ahead of our lease-up plan for the year, and expect to stay ahead of plan. The business we booked in the first half is substantially permanent in nature, given the long-term recurring characteristics of leasing revenue, and only serves to support and increase results in future periods. As a result we have increased all parts of our full-year leasing guidance.

Long-term, our expectations are that our customers will devote substantial amounts of capital for years to come, to improve their networks and offer new products and services competitively. Our customers are enjoying strong growth and improved financial results, and we believe increasingly recognizing that continuous network spending and improvement are essential to their long-term success. As a result, we expect over the long term to continue to produce strong growth, particularly on the leasing side of our business. We believe our strong results continue to evidence the quality and desirability of our tower portfolio. Strong overall revenue growth, solid margins that increase year-over-year, rent per tenant growth, and low maintenance and augmentation are upgrade CapEx. I'm told there's a new term for augmentation or upgrade CapEx, which is revenue enhancing CapEx. Whatever the term, it is very low for us, and expected to stay that way.

Given the quality and capacity of our tower portfolio, we have never had to spend any material amounts of money to produce revenue growth. We don't expect any material changes in our maintenance or augmentation CapEx. The increase we are projecting for second half CapEx, is primarily to cover anticipated ground lease purchases, that we currently have under contract. We believe ground lease purchases are currently a better use of our liquidity than bond repurchases, and will produce better cash flows over time. Although bond repurchases obviously, are still very good.

On the balance sheet side, we have now had 5 quarters in a row of some type of debt refinancing, or repurchase activity to reduce our cost of debt. You should assume we are interested in more of that activity in the future, if we decide market conditions are favorable. We have not, however assumed in our new guidance, any benefits from additional debt refinancing beyond that which has already been completed.

I understand that another question or questions of the day, revolve around industry consolidation and the best path to produce shareholder value in the tower industry. I will express our position on that issue by reiterating our vision and the path SBA is on. We believe we are a growth company, in a growth industry. Our goal with respect to our shareholders, is and has always been, to produce superior share price appreciation. Our near term plan to accomplish that goal, is to continue to delever our balance sheet primarily through organic EBITDA growth, and through that success, transfer enterprise value to our shareholders. We have a ways to go there, but we are making very good progress.

Our long-term plan for increasing shareholder value will be to deploy capital in ways that will produce superior returns for our shareholders over time. Given our size, we think that we will have some opportunities that will not be available to, or won't be pursued by our peers. One of those, of course, would be building new towers, an activity we believe we are very good at, and in which we believe we would have a competitive advantage. We are watching that market and it continues to look attractive. Those activities, however, are for a future date, as right now we are working hard to improve our balance sheet, leverage ratio, and cash flows, so that sometime in the future we can return to capital deployment.

That's plan we are on. If an opportunity presents itself that facilitates that plan, and our goal of providing superior shareholder returns, we'll certainly consider it. The full year is now more than half over, and we continue to feel very good about our full-year prospects and achieving our goals. We look forward to our next opportunity to report our progress.

And operator, at this time we are ready for questions. Operator?

Ladies and gentlemen, if you wish to ask a question, please press star, and then 1, on your touch-tone phone. You will hear a tone indicating have you been placed in queue. You may remove yourself from queue at any time, by pressing the pound key. If you are using a speaker phone, please pick up the hand set before pressing the numbers. Once again, if you have a question, please press star, and then 1, at this time. And one moment, please for the first question. The first question today comes from the line of Rick Prentiss with Raymond James. Please go ahead.

Good morning, guys.

Hey, Rick.

A couple of questions for you. First, Jeff, you mentioned the land program. Can you talk to us a little bit about how much money you expect to be able to deploy there. What kind of multiples you are seeing. You suggested currently better than buying your bond repurchases. What kind of IRRs are you seeing on the land program side?

Well, we are looking to buy the land underneath some of the leases Rick, for, you know, in the 8 times current annual ground rent, which is kind of an effective bond yield of 12.5%. Which is a better deal than we currently can get in the market today for our bonds. We kind of look at bonds and ground lease purchases similarly. They are both long-term obligations, and actually have a lot of the same economic characteristics. It's not easy to buy ground leases. It's a one-off negotiation with every ground owner, and, you know, pretty much every one of our ground leases is -- is owned by a different guy. So I don't know that our -- if we can spend, you know, more than 2 million in the second half of the year, I would be very pleased, but I'm not sure that we'll be able to do that on the ground lease side.

Okay. And on your total CapEx, I missed what Tony had laid out. What was the split this quarter, between maintenance and all the other items?

Well, it was 1.4, but that was benefited -- I mean, really you should think of this more like 1.7, because we got a benefit of a return of a prior deposit on a new build project. But if you go to the last page of the press release, we break it out for you. And maintenance CapEx was 700,000, and tower upgrades and augmentations were 595,000, you know, say 600. And general corporate was 250 -- 250,000. So it is very low. You know, I understand there is some buzz, I guess, about what we're calling or some people are calling, revenue generating CapEx, but if that means the same as tower upgrade and augmentation CapEx, I mean that's a very low number for us. As I mentioned earlier, we just don't need to spend that money to add tenants to our towers.

It looks like the maintenance CapEx is pretty low, too. Do you have kind of a thought on what you think the maintenance CapEx per tower would be for you guys long term, given your young age towers?

We feel that it is going to be pretty flat, and, you know, at this rate, it's within the -- you know it's actually less than the $1,000 per tower per year, that we generally ask people to think about.

Okay. And then a final question on leasing trends. I also missed what Tony said as far as, what the top leasers were in the quarter and just kind of what you are seeing out there in pricing.

Pricing is good. We have, over time, been able to continue to move prices up on an apples-to-apples basis. And who is busy, and who is not, constantly shifts. You know, Kurt mentioned earlier -- well, Kurt why don't you --

Nextel, Cingular, Verizon, and T-Mobile in Q2. I think you will -- obviously with the T-Mobile revisiting their plans, I think you will see a little slowdown there. But, you know, we feel pretty good about Nextel, Cingular, Verizon, and Sprint is pretty steady.

And PCS is really coming out --

Metro, Cricket, they are --

It really comes and goes. And you have been in this business a long time, Rick, and when somebody drops off, there's usually somebody else to pick up the slack.

And if anybody drops off, they usually have to catch up at some point in time.

It doesn't last long.

Yeah, okay. Good luck, guys. It looks like you are on the right path.

Thanks.

Next question is from the line of Jonathan Atkin with RBC.

Yes, thanks for taking my question. I just wanted to review, I might have missed this. What portion of the site leasing revenues were recurring in nature, and then I wondered also if you could talk about your initial feel for site leasing activity, looking into 2005, based on what you are hearing from your customers.

Well, all of our site leasing revenue is recurring in nature, Jonathan. I mean, it -- it -- I mean there are some out-of-period things that you get from time to time where you, basically through reconciliations of revenue streams but it's all -- it's all from the lease agreement. None of the stuff that we included, the leasing revenue deals with application fees or anything like. That so we kind of look at it all as recurring revenue. And in terms of 2005 trends, I mean we really don't see any reason to think that activity levels, you know, will not be strong again in 2005. You know, you have the data that's going to pick up then, Verizon is out about their business there now. Nextel is committed to do something, but really hasn't yet chosen that path. You've got the Cingular announcement. They are not really going to start, until they complete their AT&T merger, so that means 2005. So we feel pretty good about leasing trends, next year as well.

On the churn that you talked about, is annual churn in the 1 to 2% range a reasonable expectation going forward? Or would there be any factors that drive that number lower or higher than that range?

Well, it -- for the next year or 2, that's reasonable. Over time, I believe it should drop close to, or below 1%, because the tenants that are churning off, are more narrow banded type, and the one-off type tenants. Our big 6 churn, or a better way to look at it is, what is the renewal rate, and it's better than 99%. So over time, as our -- as our mix of credit moves more and more towards big 6, you should see churn slightly decline, you know, in the same proportion.

And then finally in the release, you talked about returning 14 towers to continuing operations that previously were up for sale. Is it correct to assume that those were not included in the first quarter results? And what affects your thinking on whether to return towers back into continuing ops.

Well, the towers that were in discontinued ops, were towers that were in our western region that were not included in the AAT transaction. The reason that they weren't included is they -- at that time we did the deal, they probably had either zero or no tenants on them, so that they were either flat or negative cash flow at the tower level, and that actually would have hurt our purchase price. So we pulled those towers out of the deal. And since that time, these -- some of these -- actually the ones that we are pulling back in, have either leased up or are on the verge of leasing up, and they are on the edge of our new western border, right around the Mississippi River. So they -- over the last year, they've looked to be, you know, better towers than we thought, and have better prospects than we thought. So we pulled them back into continuing operations.

Great. Thank you very much.

We have a question from the line of Jessica Brewer with Credit Suisse First Boston.

Hey, guys.

Hey.

My question is, Pam mentioned the opportunity to reduce interest expense when the 10.75 notes become callable next February. I wondered if you could go through how you thought -- implying that you may call them and how you intend to refinance them, or what -- what would be the sources of that.

Well, to -- to take out the full issue, you know, we would have to do, obviously a transaction. A refinancing transaction. I mean, our yields are moving in the right direction. Our credit is improving. Our cash flows are growing. You know, we'll have to see where the market is. But, you know, all refinancing is predicated upon the market being there for us, and we come out of the refinancing with, you know, a better rate than what we had before. We feel like that is very realistic for us to be looking forward but, you know, we have to get there.

Okay. That's fair enough. But I guess you would consider doing a partial call with some -- some cash that you had on hand, if that made sense?

Oh, sure. I mean, we don't have to call the whole issue.

Right.

As you know. We can call any or all of it, and what the call does for us, is it just gives us certainty in our ability to pull bonds back in, as opposed to what we have been doing so far, which is relying on, you know, the supply and the demand in the open market. We won't have to rely on that after February.

Okay. That's great. Thanks, guys.

We have a question from the line of Anthony Klairman with Deutsche Bank.

Thanks. Kind of a follow-up to that. I was wondering -- obviously, I'm sure you are not thrilled where your stock is. But, it's up a bit year-to-date. I was just wondering what your thoughts were on perhaps being more aggressive in your use of equity as currency, to make additional debt reductions, and if it's not at, sort of the level where you would look to be more aggressive, what type of point would you be looking for to perhaps, use a more aggressive mix of equity in recapitalizing the business, as opposed to cash and the revolver draw.

Well that is a good question. I mean we have used equity in increasingly effective share prices, and that really is our strategy, to go very, very, light, just use it to help a little bit of our leverage reduction efforts, because we don't like the stock price today. We -- we believe the stock price, you know, should go higher, and believe that, obviously that's our goal, and we are doing everything we can. Now obviously the market will decide that for us, or not. But we're really not interested in doing a lot, and more than kind of what we've been, if you look at our average over the last 3 quarters, that should give people a pretty good idea of what our appetite would be maximum, you know, at these price levels. I -- I don't really want to put out any kind of number today, Anthony, because that changes, but we're not really interested in issuing a lot of stock at today's prices.

And I guess, just sort of talking about the buy-backs a bit more, the 10.25s are now well over par, and I think if we use the average stock price that you had for the quarter, plus what you told us you used in cash, it seemed like you bought back in most of the 10.25s just a little below par. I'm wondering if your methodology in buying back 10.25s will change, now that they are over par, and might you actually look at taking out some of the zeros, even though they don't give you the immediate cash interest savings, they would give you a bit better bang for your buck on absolute debt reduction?

Well that's a great question. And the answer to that would change. In a cash purchase, we would -- you know we have favored the 10.25s because it was easy to favor them, they had the higher yield, and they were a cash-paying instrument. We would look long and hard at using bank proceeds that we do pay interest on, cash interest to buy in the zeros. You know, but it still may make sense under the circumstances. To the extent we would consider stock, it's -- it's more of a toss-up because, you know in either event there, what you are really accomplishing -- I mean we don't need necessarily to be buying in the 10.25s to produce more cash. We have -- we feel very good about liquidity today and going forward, but then it's more about, you know what is the right deal to reduce leverage in the Company for the ultimate benefit of the shareholders? So we would look at -- would definitely look at the zeros under certain circumstances.

Thanks very much.

We have a question from the line of Alex Rygiel with Friedman, Billings, Ramsey.

Thank you very much. To follow-up on one of the earlier questions. Could you comment on what your plans will be with regards to ground lease purchases in 2005?

We will look to continue our program, Alex, and, you know, whether it's 2 million or 4 million, or -- I just can't really give you much more color on that. I think, you know, basically the time line for these deals is, once would you get them negotiated and agreed to, they would close in a relatively short period of time. So it's hard for me to say we have the visibility, went we don't have the visibility. But if the market conditions are what they are today, we would certainly have the desire and would believe it would be the best thing -- or one of the better things to do with our liquidity.

With regards to telephony versus data, and big 6 carriers, and their affiliates, and so on, versus maybe some new wireless carriers, can you just kind of talk a little bit about the new wireless carriers and data products that are out there? And how they could impact your lease operates over the next, foreseeable future.

Kurt?

Yeah, I think -- you know, I'm not sure there's going to be -- there could be a couple of new wireless data carriers. I foresee more so, the technology evolving such that the current carriers have better access to technology that allows them to offer the service themselves. I think that's probably the bigger piece out there. There there's a lot of buzz about WiMAX. I'm not convinced that adds so many new carriers, as it does give existing carriers chances to either offer data products, or reduce back haul expenses. So I think there's some incremental benefit to our lease-up over time, but it's a little too early to say exactly how much true impact on entrants there is going to be.

And one last question. You know a few quarters ago, your gross profit margin goal for 2004 was 70% in your leasing business, you have obviously achieved that. Can you help us to understand what 2005's goal might be?

Well, it should be at least on a full-year average, it should be 150 to 200 basis points higher.

Great. Thank you. Nice quarter.

Thanks.

We have a question from the line of Richard Worley with Pyramid Capital.

Hi, Jeff and Kurt and the others. Terrific job. The continued good growth in the leasing business, and it was nice to see you turn around services. A question on services. Do you think that -- you said in the last quarter's call, that you had some seasonal but also some operational issues, and that you were going to work on fixing them. This is a good increase in the service margin. Do you think you have them fixed so that services could be counted on over the next year to, you know -- to be at least break even, rather than the kind of hit we had in the first quarter?

Hey, Richard, this is Kurt. We believe so. You know a lot of Q1 was client diversity at kind of the territory level for us, that was lacking. So a certain area may have a good book of business and be doing well. One area may -- you know their client may have slacked off. We look at our backlogs right now, and we have much better diversity, multiple clients in more of our territories than we have had. So to the extent we can continue to -- to work with multiple clients, I think you are going to see a steadier business. We've just spoke that we kind of got a longer duration in our backlog, and really what that means is, we've gotten some more higher volume projects going on that, you know, bridge us from quarter to quarter, more turn-key work that keeps our business steadier. So probably the biggest single driver of our margin is, you know, if we have good, steady work in all of our areas and, you know, obviously we did a better job of that in Q2. It's a much harder business to predict, but we're -- we're learning every quarter as to how to keep that up there. So we hope to be able to do that.

Well that was a good job. On the pricing, looking at some of the data that have been in some of your reports, I think one of the things many have missed, is that there's a pretty good and pretty steady increase over the last few years, in prices on both the existing leases through escalators, but also presumably on new leases. And did I take your earlier comment to mean that prices are continuing to hold firm and be able to be increased some with the passage of time, as opposed to prices on sort of stabilizing and flattening out.

No, they are firm and up, over year-over-year periods.

Well, this was just an outstanding quarter. Keep up the good works, guys.

Thanks, Rick.

We have a question from the line of David Marsh with Friedman, Billings and Ramsey.

Thanks for taking the questions. First, on the services revenue for the second quarter, did they exclude the western region?

They do.

Okay. And could you tell us what you received for the -- in your sale of the western services business at this time? And kind of how it impacts the P&L going forward?

What we received was not much.

It was -- you know, I mean the structure was really to take the existing backlog and transfer it over to the new -- the buyer, transfer all the personnel over, they assumed office leases, and paid us for vehicles and other fixed assets. But the -- the actual premium for the business is one we're trying to move out of it quickly and it is a short cycle business, it's tough to garner, right now.

On the future P&L impact, David, it's really -- we've rolled it all through the guidance. On a continuing ops basis, you won't see it because everything that happens out west from this point forward, is now in discontinued ops. But actually, you know, I think you did see a bit of a benefit, by exiting the west. That certainly helped to improve the margin, and I think that will be one of the reasons why, you know, we feel pretty good about life going forward. Because it just will be a more manageable business. It will be tighter, more compact, and the -- the larger project aspect of it, which is a benefit, that Kurt was mentioning earlier, for us that's always been more prevalent in the east than the west, where out west we had to do more bid work and job-by-job type projects. So all of those things, we see as a benefit going forward.

And is the Sprint work progressing sort of as planned? Are margins tracking as planned? And do you have some sense for us about, you know, how long the duration of that project will be?

Yes. On your first question on progression. It is moving forward as planned. We'll be busy on that project throughout this year, and full next year as well, in 2005. You know it probably -- I think it represented about 20% of the business in Q2. So it's a substantial project, but it is not the majority of our business by any means. So it is a nice mix for us. So it's good, steady work.

Great. On the towers you put back into service, Jeff, did you say that you have leases or pending leases on all of them, all 14 of them?

No. What we have is leases on some, pending leases on others, and a -- and a new and improved sense of optimism on the rest, as to how they will perform.

That's great. And then lastly, just sort of a 10,000 foot question, Jeff, I guess this is for both Jeff and Kurt, mainly. Since a number of your towers are more rural, in more rural locations, or deemed to be in more rural locations, do you think that perhaps, they lag the industry generally in leaseup, as carriers initially concentrated on sort of more metro areas, and that they are benefiting now as carriers seek to fill in holes in their coverage, and perhaps may benefit more going forward, due to their use relative to the rest of the industry?

Yeah, we love our portfolio. The lease-up that we have is spread across. It's not really concentrated, so we are seeing good growth across everything. You know we have always had either the highest, or close to the highest, you know same tower revenue growth and lease-up statistics for 5 years now. So we -- we think the portfolio is pretty good. We are seeing capacity and coverage needs, actually more coverage from people like Nextel and others who are, you know, just now getting to all the spots that they didn't get to before. Particularly -- I mean, the big picture -- and the reason I feel so good about our portfolio is, every single nationwide carrier, they talk about the deploying products and services on a nationwide basis. They don't talk about deploying products only in X market or Y market. It's on a nationwide basis. And if they are really going to do that, and I think they are, and their history has been that they do, we're going to do very, very well over time.

I couldn't agree with you more. Great quarter, guys. Thanks.

We have a question from the line of Jessica Brewer with Credit Suisse First Boston.

I actually just wanted to follow-up on the credit facility. I think 50 million is supposed to -- an incremental 50 million is supposed to become available in the fourth quarter. Do you still think that you're going to be in a position to draw that 50 million.

We do. We have already drawn, how much? 15 of that .

Oh you have already drawn 15. Okay. Thanks.

We have a question from the line of Mark DeRussy with Raymond James.

Hi, good morning. I have a sort of strategic question for you, Jeff. You mentioned short and longer term goals to drive equity value. Short term being, you know the reduction of leverage and interest expense. Clearly you have been very successful in that, and it sounds like you have got a good path ahead of you. But then in the longer term, you mentioned actually deploying capital. I'm wondering, where is that sort of cross-over point where you would be comfortable enough with your financial situation, to actually go out and start spending money? I guess what I'm trying to understand is, you know, what's that sort of key leverage ratio that you would feel comfortable spending money at?

Well, it -- I think the lower the leverage, you know, the higher the level that we -- of deployment that we feel comfortable with. So it -- it's likely to be a very sliding scale type of a -- it won't be a spigot off or on, but it will be a gradual approach that will start very small, and then grow, as leverage reduces and cash flows increase. But, you know to even start the process, we want to get, you know, below 10 times leverage.

Okay. And Kurt, could you kind of describe some of the amendment activities that you are seeing out there right now?

It's -- it's still very similar to what it was in the past, Mark. It's, you know little microwave on some sectorization of taking Omni sites to sectored sites. It's -- you know, there's still a little bit of overlay work trickling on that. We're -- it's just now it is early, but we're starting to feel some activity, some questions about EVDO, which will probably be a little bit bigger from Verizon, due to their frequency needs and more legacy networks than Sprint, but it has not really changed -- the makeup of it has not changed that much. It's really just a little bit of everything.

Okay. And then do you have a revenue mix breakdown on the services side, between construction and consulting?

I believe, Tony, it was probably 80/20 construction?

You just can't wait for the Q., hmm, Mark?

I've got to update my model now!

85% construction, 15% site acquisition.

Okay. Thanks, guys.

We have a question from the line of Rick Prentiss with Raymond James.

A quick follow-up I forgot to ask earlier on the land program. Where are you at right now, as far as the percent of the land that you own under your towers versus leases?

We own about 10%. We lease -- we lease about 90%.

Certainly a long runway then, as far as being able to go after and bring those leases into being owned property.

Yeah, and people should keep in mind, as they think about, you know, their views on this, that our ground leases represent about 70% of overall leasing expense. So it's -- it's a big number.

Right. Okay. And then back haul, you touched on microwave, as far as the amendments go. Are you doing anything, still looking at providing back haul for the carriers?

No, we're not. We're not looking at doing that directly ourselves anymore. We'll look at facilitating it from a services perspective, but not in the ownership side.

And it's really more of a capital deployment issue, Rick, than it is a desirability. We still think it could be a very good business, but we just want to focus on getting our leverage further down.

That's job one and get the value for the shareholders.

Yes.

Good luck, guys.

We have a question from the line of Richard Worley with Pyramid Capital.

Sorry, you have already answered it. Thank you.

And a question from the line of Jonathan Atkin with RBC.

On the topic of ground leases, you leased 90% and you own 10%. What portion of that 90% involves any kind of a revenue share component?

Probably 5ish percent. If that.

Thank you.

If there are any additional questions, please press star, and then 1. At this point, speakers, I will turn the conference back over to you for any closing remarks.

Great. Well, we certainly appreciate everyone's interest and attention this morning, and we look forward to our next report. Thank you.

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