SBA Communications Corp (SBAC) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SBA second quarter results conference call.

At this time, all participant lines in a listen-only mode. Later we'll conduct a question-and-answer session with instructions being given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to the Vice President of Capital Markets, Pam Kline. Please go ahead.

Thank you for joining us this morning for SBA's second quarter 2005 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 give the standard disclosure out. Some of the information we will discuss on this call is forward-looking statement including but not limited to any guidance for 2005 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 31, 2004, which document is public 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 statements 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, www.SBAsite.com.

As described in our SEC filings, all historical financial results presented herein for the three month and six months ended June 30, 2004, have been restated to reflect the Company's change in its method of accounting for ground lease expense. The results of the Company's western services segment which was exited in 2004, are reflected as discontinued operations, in accordance with Generally Accepted Accounting Principles for the three months and six months ended June 30, 2004. Other than the net loss information, all other financial information we will discuss is from the company's continuing operations.

Tony, would you please comment on the second quarter results.

Thanks, Pam. Good morning, everyone. We had another solid quarter. With good year-over-year growth and very good results in the leasing expense side of our business. In the quarter, both site leasing revenue and site development revenue were up significantly over the year earlier period.

Total revenues were $63.2 million, up 12.2% over the year earlier period. Site leasing revenues for the second quarter were $38.9 million up 9.8% over the second quarter of 2004. Included in the year ago period was approximately 600,000 of nonrecurring leasing revenue items. We had none this quarter. If you exclude that amount from the year ago period, site lease in revenue growth from the current quarter was 11.7%. Site development or services revenue were $24.3 million, up 16.4% over the year earlier period.

Site leasing segment operating profit was $27.2 million, up 16.3% over the year earlier period. Our site leasing segment contributed 95.4% of our total segment operating profit in the second quarter.

Services segment operating profit was $1.3 million compared to $1.7 million in the year earlier period. Services segment operating profit margins were 5.5% in the second quarter compared to 8.1% in the year earlier period.

Carriers were materially busier in the second quarter of 2005 compared to the first quarter, but profitability remains a challenge for us in the services segment. Kurt will discuss the services business in more detail shortly.

Under our definition of tower cash flow that excludes noncash leasing revenue and ground lease expense, tower cash flow was $28.4 million, a 15.2% increase over the 24.6 million in the year earlier period. Tower flow margin was 73.3% compared to 69.9% in the year earlier period. Leasing expenses came in lower than expected. With most of the progress made in the area of property taxes, and some from our ongoing ground lease purchase and extension program.

We have been working hard to reduce property taxes, and based on these efforts in a clearer picture of property taxes paid in 2005, the 2004 property tax year, we reduced our annual accrual for property taxes by approximately 8% from the amount accrued in the first quarter and reduced our reserve by approximately $400,000. We expect to accrue for property taxes at the lower second quarter rate for the rest of the year.

Year-over-year, we improved our cash flow margin by 340 basis points. About 100 basis points of which is one-time in nature, from the 400,000 reduction of the 2004 property tax reserve. We believe cash tower flow margin for all of 2005 will be approximately 200 basis points over the comparable 2004 margin. Driven by revenue growth, materially exceeding expense growth. These results in the historical trend of steady margin increase are the reasons we believe that tower cash flow margin will eventually reach 80% or more.

SG&A expenses for the second quarter were $7.1 million. Or $7 million when you exclude noncash compensation items. This is the same amount in the year earlier period, and we feel confident about our ability to continue to hold our SG&A expenses in line. Adjusted EBITDA which also excludes noncash leasing revenue and ground lease expense, was $22.7 million in the second quarter, up 17.3% compared to 19.3 million in the year earlier period. Adjusted EBITDA margin was 36%, up from 34.5% margin in the year earlier period.

Our net loss from continuing operations was $26.4 million and net loss was $26.3 million for second quarter 2005. 8.2 million of the net loss is attributed to the write-off of deferred financing fees and net losses associated with the extinguishment of approximately 68.9 million of our 9.75% Senior discount notes that we redeemed late in the second quarter.

Net loss per share from continuing operations for the second quarter was $0.38. Excluding the $8.2 million of debt-related charges, net loss per share from continuing operations was $0.26. Weighted average shares outstanding for the quarter was 70.3 million. We disposed of five towers in the second quarter from assets held-for-sale. We built two towers in the quarter, acquired 23 towers, and ended the quarter with 3,138 towers. We no longer hold any towers for sale.

Cash capital expenditures in the second quarter were approximately $9.9 million. Of which we spent $400,000 on maintenance tower CapEx. $400,000 for augmentations and rebuilds. $200,000 on general corporation CapEx. We also spent $5.2 million on acquisitions from related fees, prorations and earn-outs. $700,000 on ground lease purchases that were accounted for as capital expenditures, and $3 million on new tower builds and new build work in process. Kurt will talk about the new build program in a few minutes.

In addition, we issued 300,000 shares of common stock in the acquisition of the 23 towers. Our cash flow from operating activities in the second quarter was $1.8 million, slightly lower than expected due to increasing working capital for our services business, as revenue and carrier activity levels grew.

We also paid approximately $1.2 million for lease term extensions under our ground leases, which usually go up to 99 years, which impact cash flow as a prepaid expense. Total amount spent on the ground lease purchase and extension program were approximately $2 million in the quarter.

At this point, Pam's going to provide an update on the balance sheet and our capital structure.

Thanks, Tony. Debt balances as of June 30, 2005, were $331.8 million under our $400 million Senior credit facility. $248.3 million of the 9.75% Senior discount notes, and $250 million of our 8.5% Senior notes. We had net debt of $806.9 million after giving effect to $23.2 million of cash and restricted cash. In addition approximately 53.8 million available to us under the credit facility at June 30th for total liquidity of $77 million.

In the second quarter, we redeemed 68.9 million of our 9.75% senior discount notes. That's $87 million of face amount with the 75.6 million of net proceeds from our 8 million share common stock offering. Our net debt to annualized adjusted EBITDA leverage ratio was 8.9 times at June 30, 2005. Down by over a full turn from the first quarter.

As a result, we're very confident of hitting our goal to reduce leverage to or below 8.7 times by year-end. Our weighted cost of debt at June 30 was 7.7%. During the second quarter, we repriced the term loan portion of our bank facility to reduce the LIBOR spread from 275 to 225.

A main priority for us continues to be further reductions in our weighted average cost of debt. We're currently working on refinancing our senior credit facility. Our current focus is on the opportunities in the mortgage-backed securities market. We're working hard to complete the refinancing by the end of 2005 but there are, of course, no guarantees that we'll be successful.

To mitigate our interest rate risk in the refinancing, on June 22, we entered into an interest rate swap that will fix effectively for economic and financial statement purposes through December 22nd, the 5-year forward swap rate for the refinancing at 4.19%. If we were to issue in the CMBS market, the securities would be priced at a spread above the 5-year swap base rate, and the swap now fixes that base rate for us.

If we're successful on refinancing our senior credit facility in the mortgage-backed securities market, the future goal would be to use that market and the structure we create to refinance our 9.75% Senior discount notes and the 8.5% Senior notes in one or more transactions, sometime between the beginning of 2006 and the end of 2007. Many things including some beyond our control, would need to happen for those refinancings to occur in that timeframe. At this time, we have not taken any steps beyond those directed at refinancing the Senior credit facility. We will keep you posted on our refinancing progress on a regular basis.

We've included our third quarter and updated full year 2005 outlook in our press release. The ranges of all of the items of our full year 2005 outlook have changed, so we encourage you to review that portion of the press release carefully. Please keep in mind that our definitions of tower cash flow and adjusted EBITDA in our outlook, exclude noncash revenue and ground lease expense.

Kurt would you provide an update in operations?

Thanks, Pam, good morning. From an operational perspective, the second quarter is very strong for our tower leasing business. Carrier activity was very good for both new leases added and lease amendments, while our turn remained at very low levels. Operationally, the second quarter was our strongest leasing activity quarter in three years in terms of revenue added, which will be reflected in our future financial results.

Our customers have continued to deploy capital in all parts of their networks for coverage, growth, capacity, performance, technology upgrades and overlays. During Q2, same tower revenue growth on the 3,045 towers owned at June 30, 2005 and 2004 was 9%, while same tower cash flow growth was 15%. 82% of our new leasing business signed in Q2 was from new tenants. While 18% came from amendments to existing installations. This was a higher percentage than typical for us on amendments, but our gross leasing activity for new leases was higher than the past several quarters as well.

Our end of the quarter tenant count was 7,641 with average cash basis rents rising to $1,734 per month, our highest ever. That's an operational jump of over $6 million in annualized run rate leasing revenue in just one quarter. Solid new tenant rents drove this number higher as did strong amendment activity, and new towers added to the portfolio. Approximately 93% of our new business signed in the quarter came from telephony, which is the same as our average across the entire portfolio.

The most most active new tenants for us in Q2 were Cingular, Verizon and Nextel. We came out of the quarter with a good leasing backlog, and feel confident about realizing solid operational lease up results again in Q3 and Q4. We believe that our continued strong leasing activity reflects not only high levels of customer activity, but also the strength of our tower locations. Whether urban, suburban or highway locations, carriers continue to work towards ubiquitous service in all of their service areas.

A big driver for our new leasing business is the needs of our customers for coverage expansion cells, and fill-in cells for better penetrating coverage and performance and also for capacity to off-load cells. The nature of our portfolio is such that we have towers in key locations with high remaining capacity, that carriers have continued to show the need for. Our quarterly results evidence this and they have for some time.

On the tower operations side of our business, we continue to hold the line on operational and capital expenses. Whether it is utilities, repairs and maintenance, or any other item, we have, again, been able to keep those virtually flat or even lower in some cases year-over-year. We continue the successful roll-out of our broadband wireless backhaul for our tower light monitoring systems. This project will cost about $1 million in one-time augmentation CapEx this year. The systems are working well and the operational expense savings are very real. Even with these expenditures, our net cash augmentation CapEx, or structural CapEx, continues to be managed closely and we ran it lower than $500,000 in the second quarter. In addition, maintenance CapEx for our towers continues to run at an annualized rate of less than $1,000 per tower per year.

In the services segment of our business, Q2 came in with higher revenues than expected. With margins above Q1 levels but still below our target range. Total revenue was $24.3 million with segment operating profit at 5.5%. Our backlog is still firm in this area, and we expect carry activity to remain solid in the third and fourth quarters. Profitability, however, in the segment remains challenging. This business continues to be very competitive with price points being difficult to expand.

We're currently performing services work in all core functions that we have been historically, including site acquisition and zoning, construction and technical services. This group continues to support our new tower build efforts as well, with both turnkey build to suit opportunities, as well as individual new tower leads for us to pursue.

On the asset growth front, our new tower build program continues to expand. We've added 19 towers since reinstituting the program in 2004 with a goal for 2005 of at least 50 new towers. We're being very selective in the assets we take on, with all of them being built with at least one tenant on day one, and all of them modeling out to produce at least a 20% internal rate of return through the first five years. There is strong competition in the area, as there is on the tower M&A front, and we will not sacrifice the quality of the new builds in return for volume.

We're working on building the backlog for 2006 right now. We now have over 150 opportunities in front of us. With those in varying stages of execution from lease signed, to zoning complete, to under construction.

At this point, I'll turn it over to Jeff.

Thanks, Kurt. Good morning, everyone. We had a very strong second quarter, both in terms of our financial results and the level of carrier activity we experienced. Our customers are very busy improving their wireless networks.

The drivers behind their network investment continue to be very strong as evidenced by the second quarter results of our wireless carrier customers. Subscriber and minutes of use growth were very good in the second quarter, and when combined with strong first quarter results, cause us to believe that full year subscriber and minutes of use growth for the U.S. wireless carriers will likely exceed expectations, which were relatively high to begin with.

This type of growth and the desire to offer new and improved wireless services, most prominently data, requires our customers to invest more in their networks, and their improved financial help, gives them the confidence and ability to do so. Based on our customer's second quarter results, data services are real and growing. We're a direct beneficiary of this current environment, evidenced by our operational lease-up in the second quarter, which was the best in over three years in terms of revenue added per tower.

This will bode well for second half financial results and as a result, we expect higher sequential leasing revenue growth Q3 over Q2, than we had this quarter over Q1. We also realized higher than anticipated services revenues and strong backlogs moving into the second half, in both the leasing and services segments of our business. We see no signs of any material decline in customer activity for the remainder of the year.

The bottom line is our customers are busy and we expect them to stay that way into 2006. As a result, we have increased the midpoint of our full year outlook for both leasing and services revenues.

In addition to the strong revenue growth environment, we're currently in, we enjoyed some successes in the second quarter on the expense side of our business. Two areas stand out in particular. Leasing expense and interest expense. Tony and Kurt both spoke to the specifics on our control of leasing expenses. We believe the success we have achieved there in the second quarter is of a lasting nature, and is a primary reason behind our increasing the midpoint of our full year outlook for tower cash flow.

On the interest expense side, we achieved a material and permanent reduction in interest expense with our 8 million share equity offering, and resulting debt reduction of approximately $70 million. We also will benefit to a lesser degree from the repricing of our bank facility. None of that interest savings was reflected in our second quarter results, as the debt was retired on June 30 and the bank repricing was effective June 16th. But it will be reflected in our second half results.

As a result, we were able to reduce our full-year outlook for total interest expense. Our increased outlook for tower cash flow and adjusted EBITDA, together with our outlook for reduced interest expense has allowed us to increase the midpoint of our full year outlook for equity free cash flow.

I have to say things are going currently, reasonably well for us here at SBA. Given the activity of our customers and our ability to control and predict our expenses, I don't see any reason why things should not continue to go well for us for the remainder of 2005 and into 2006. We like the tower leasing business a lot. And believe it will be a good business for years to come.

As a result, we remain interested in adding good towers to our portfolio where we believe we can do so at reasonable prices that will, over time, be accretive to shareholder value. We added a few towers to the portfolio in the second quarter. A few more already in the third quarter. We plan to add more in the remainder of the second half of the year. We think the towers we built and bought are of high quality, and consistent with the quality of our existing portfolio, in terms of capacity, percentage telephony use, growth rate, and operating profit margin.

We're particularly pleased with the way we've managed the balance sheet while adding these assets. We expect to end the year with more towers, higher growth and cash flow than we otherwise would have without the portfolio additions, good liquidity and reduced leverage that will be at or ahead of plan.

We're very excited about our prospects for the rest of the year. Besides our expectations for continued strong customer activity, organic growth of our existing business, and portfolio growth through new tower additions, we're working on a major refinancing of a portion of our balance sheet. That, if successful, could and should, over time, allow us to materially reduce our cost of debt and close the gap that currently exists between our cost of debt and the cost of some of our peers. Pam discussed earlier our short and long-term current plans with respect to tapping the mortgage-backed securities market. While other debt markets have recently improved for us, particularly in light of our ratings upgrade from Standard & Poors last week, at this time, we believe the CMBS market is the most attractive for us.

We're excited about the potential for our Company in this market, because it is focused more than any other market on the quality of our towers which we have always viewed as our primary strength here at SBA, and the principal differentiation between us and our peers. Please keep in mind, we've shared with you our current thinking respect to our target long-term debt structure and market, and we haven't yet accomplished any of it. Like any financing, any number of things could go wrong that would prevent us from refinancing our credit facility by the end of the year. We're currently hard at work on the steps necessary to refinance by the end of the year, and is a long and cumbersome process, but it seems to be on track. Please stay tuned for our refinancing efforts. We look forward to continuing to report our progress to you.

Operator, at this time, we're ready for questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question is from the line of Ric Prentiss from Raymond James. Please go ahead.

Good morning, everyone.

Hi, Ric.

I'm glad to hear the tone of business has been so strong. Good to see the recovery back from that three years ago, and that business has been growing quite well. Couple of questions for you. First, have you seen any evidence of the decommissionings? We continually get questions from people about the effects of the mergers, Cingular with AT&T, and the upcoming Sprint/Nextel.

Second is on the services business, Kurt and Tony both mentioned about how it is challenging, profitability is difficult there. How important is that for components of the services business to helping you guys hit your goal of 50 new towers built this year, when it is such a challenging, problem area, couldn't that be outsourced and you could get it just as well, maybe?

We have had a handful of requests from Cingular for decommissioning. They've been located in one particular geographic area and they were accompanied by requests to amend the other installation. So, we really don't know what the net impact will be, if any, and it certainly will be very immaterial. And that actually hasn't been worked out yet because we're still trying to figure out the net effect of what they want to add, versus what they may want to decommission. So, that still is a very -- there's just not much happening in that area.

In terms of the -- I'll let Tony and Kurt speak to the specifics of the business but you know, our position on services has been the same, for years. We think the business is strategically important for customer knowledge, staying close to our customers. Making us smarter on the tower ownership side but most importantly, you know, it is the best source that we've had historically for new tower builds, which is a primary focus of ours going forward.

Profitability improved a little bit in the second quarter. Still not where we want it to be. It is better than it was in the first quarter and we expect things, you know, will continue to be more like or better than the second quarter for the rest of the year, than they were in the first quarter.

So, when you weigh all of that together and it is always a weighing process and a judgment that we're constantly reviewing, we think that the nets to the business for us are positive. You could outsource it, but you would not have the same pipeline and the same connection to our customers, in terms of new build opportunities that we think we have by continuing to keep it in house.

Then on the acquisition front, you've been adding towers, continue to add towers with the balance sheet cleaning work that you've done. Where are multiples headed out in the marketplace right now? What are you seeing as far as what it takes to win deals or to walk away from deals?

I think the ranges currently are anywhere from 13 times to some deals go at or above 16 times tower cash flow. I think the key there is really digging in under the surface. What are you getting for that? Where is that asset in terms of its profile, its maturity. I think valuations in the sector clearly have been rethought by everyone over the last year as growth rates have actually been better on the tower cash flow side and leasing revenue side than I think people expected, and a much better vision for continued growth in the future.

And you know, the ability to finance these assets now in markets where the financing costs are lower than I think anybody certainly years ago, ever thought possible. Those two items in combination have changed people's views on the ultimate value of these assets. You know, I know it has changed ours but the reality is you still have to be very careful. What are you getting? What are the growth rates. You know, it is one thing to pay a higher multiple for a one antenna tower that you see clear that will get to three tenants. It is difficult to pay that multiple for something that's already at 4-10s.

Good luck. You guys are so on the right path with the delevering and refinancing. Good luck with that process.

Thanks, Ric.

our next question is from the line of Anthony Klarman from the line of Deutsche Banc.

Couple of questions here. First on the sequential growth this quarter, it was below the sequential growth that you had showed in Q1 2005. It was also below the low end of what you're expecting for the third quarter. I was wondering if there was anything anomalous. It sounds like a lot of the backlog comments you're making are really relating to the second half of the year. But was there anything in the second quarter, one-time disconnections or churn or anything that dampened the sequential revenue growth?

Well, we had an absence of one-time events, Anthony, which helped in Q4, and Q1 a little bit. And we were also really feeling the impact of our lease up two quarters ago. You know, your financial results always lag your operational results because of the timing of the installations, and the way the leases commence revenue. While our fourth quarter of '04 lease up was very good. It was actually our lowest of the year. And you know, lower than we expect any quarter to be this year.

So, the combination of those two things really caused that sequential revenue growth to be where it was Q2 over Q1 but as you correctly put, and you can tell from our guidance and our comments, you know, we expect to bounce right back and be well up there in terms of Q3 over Q2.

Thanks. And on the new build program, It would seem like 50 at this point is going to be a bit of a challenge just given where you are. You know, feasibly, do you still think you have the capacity to make up the difference in the final two quarters, you know, especially considering that the last half of the fourth quarter, there's not a lot of activity due to weather-related issues. Are there refined thoughts on the new build target for '05?

It will be tight to get there. We've got the backlog. We've got to finish some zoning. We've got to finish up lining up some other things. It is still very do-able at this point.

Again, we're watching our costs very close. We're not going to blow up the CapEx just to get stuff done early, if that's meaningful. I'm not very concerned about the weather. That's a bigger issue in Q1 than Q4 typically . It is more about finishing the zoning, and the permitting process, and getting these done. It will be tight but we've got the backlog to get there. 50 is still our number.

If you could just talk about any financial or legal hurdles that you still need to get through to get to where you need to be on the asset back securitization side, I think, if I recall correctly, your credit facility, one or two iterations ago, already had -- you had already gotten mortgages against a lot of your towers from that facility. Was wondering if that was something you were going to pursue in the ABS market, or whether you envisioned doing that without mortgages?

I don't want to say too much given the sensitivities of future financing but you know, I'll say we have the mortgages in place, and we don't want to waste that. And you know, we're well underway. As you know, it is a very lengthy process. I don't think there's any legal or financial or other roadblocks other than it just takes a while to pursue these financings in the markets that we're targeting. You got you get through the rating agencies. You got you get what you need to get done an on asset-by-asset basis. So, it is really a slugging it out in the weeds to get one of the deals done. We're knee-high in the weeds as we speak.

Final question. You mentioned some small almost inconsequential decommission requests from Cingular. I was wondering if those would have any positive one-time events on the income statement. Would there be lease break payments that Cingular would have to make in getting out of those, and whether that might be something that works its way into the income statement this year and if there was a magnitude you were thinking about on that?

Clearly, there would be. If it goes that way, breakage fees but we're talking about a number of leases that I don't even think you would notice.

Okay. Great. Thank you very much.

our next question is from Clay Moran from the Stanford Financial Group.

Good morning. Couple of questions. On the acquired towers, how are you factoring that into the tower cash flow guidance? Was that already included previously? And how does that work? Because the guidance increase doesn't seem to possibly reflect the full -- or could be due to the contribution of the acquired towers solely, so I'm wondering what percentage of the increase, if it is, is due to the acquired towers. And then you talked about the services business. Is that business a positive contributor to EBITDA at this time?

The pending acquisitions, Clayton, the 31 towers, none of that is in full-year guidance because we are not anticipating -- we've said that they're anticipated to be consummated by the end of the fourth quarter. So, none of that is in there. The stuff that is complete has been factored in but the big driver -- but some of that stuff was already -- what we've done on the completed was not too different than what we forecast at our last quarter. So, it kind of was already in.

The primary driver and I can't put a percentage on it, but substantially all of the increase in the guidance is coming from increased leasing activity. And on the services side, while we're closer and just about at breakeven, we're probably just a tad below on a fully allocated SG&A basis to EBITDA but you know, better than we were in the first quarter and hopefully better yet again in the third quarter.

If I could follow up, on the acquired towers, you add them in as they close. So, for instance, this quarter, we added I guess 23 towers. And you're saying the primary driver behind the increased tower cash flow is new leases which is good news, but I thought you had said previously in the call, something about the expense control also being a primary reason behind that.

It would be. It is not really the acquisitions. It is the other parts of our business. It is leasing revenue growth and it is also expense control on tower cash flow side.

Okay. Thank you.

Our next question is from Michael Rollins from CitiGroup Smith Barney.

Thanks, good morning.

Good morning.

Quick question on just a little bit more on the topic of leverage. If had you to look out whether it is a year, two, three years, ultimately, where do you want to see leverage get to so that you could be at a point where you would consider either greater investment in your business or repatriation of cash flow, and as you think about that ratio, are there other options that you're exploring today to try to accelerate getting there even sooner? Thanks.

Our views on target leverage have been shaped recently by new financing markets, opening up for our industry. And it is also a function really of where the rating agencies are, and the general corporate market.

Now, with the recent upgrades that we all got and we got in particular, you know, our cost of debt in the regular corporate market, you know, we think will be going down clearly. But it is still -- yet again in the other market, the securities backed market, you've seen deals done where it is very, very low.

And ultimately, we, as a Company ,and I think we as an industry, will be looking at what's the right relationship of leverage to rate because we're all going to be, you know, immensely free cash flow positive.

And I think that vision is changing and it's been interesting for us to watch as the investment community has continually inched up its comfort level with leverage over the last -- I would say two years. And in the securities backed market, Michael, the -- it looks like the right today, these markets change as we speak but today, it looks like the right relationship of leverage to rate could be between 6 and 8 times.

So, is that what you're targeting then?

Well, today. And obviously we're not there yet, which means we need to keep going down. You know, when we get there, we'll have to figure out if that continues to be the right spot to be, to maximize shareholder value long-term. Which is really all we really care about here because we think we'll have plenty of financial flexibility. It is all about finding the right balance to maximize shareholder value long-term.

Thank you.

our next question is from Blake Barth from Lehman Brothers.

Good morning, Blake.

I wonder if you can talk a little bit more about your revenues from lease augmentation. I think you said something about the percentage of revenue growth being about 18%. That was coming from lease augmentation. Can you just talk about the average amount of either monthly or lifetime revenues that you're getting from those augmentations?

As well as some other measures like the percentage of your towers that have broadband data equipment on them, and where you would expect that to be by year end '06. Just trying to get a better sense for where the incremental revenues are going to come from, from the existing tenants. Thanks a lot.

This is Kurt, Blake. You know, I would give you a range of probably 400 to 500 a month for our average amendment that we do here and --

Are those ten-year leases that people assign?

Typically they're co-terminus with the underlying tenant lease.

They become part of the base lease.

Okay. Fair. Okay.

And it escalates with that. The percentage of broadband data on our towers is really tough, because the carriers with different technologies, you know, some of it requires an amendment and extra equipment on the tower itself. Some of it does not require anything on our tower, they do it within the box. Then you've got some that have a mix there.

You really just have to watch what the carriers are saying about their deployment of data whether it's Sprint getting into EVDO right now, and the number of markets and percentage of markets covered between now and the end of next year, and Verizon is a little bit ahead of that. And you've seen all of the numbers on Cingular's UMTS. It is very tough for us to know exactly the data on our towers just from the amendments.

Unfortunately, they won't tell us a heck of a lot in terms of the percentage of their existing towers that they are putting data equipment on.

Well, I mean, when they do a market though, it is at all of the sites. So, if they say, you know, the core of Miami we've launched EVDO, my understanding and you know, and I think I'm correct is it is at every single site, because it has to be ubiquitous coverage within that core area. So, when they say they're done with the spot, it is everywhere.

Okay , thank you.

Our next question is from the line of Jim Ballan from Bear Stearns. Please go ahead.

Couple of quick questions. One is we saw that your average rent per tenant went up again this quarter. How much is coming from escalations, and how much of it is coming from pricing going up, whether it's augmentations or higher prices for new tenants coming on. Also, it is great to see you being able to drop your property tax rates. Is that something you think there's more room or more opportunity to take advantage, or do you think that this is pretty much where you are for now?

Well, on the rate, the primary driver is still brand new tenant rents above the average. That's what's driven the increases in that number now quarter after quarter, and it continues to do that. Any amendment, Jim, is likely to help push the average rent number up. Given just where base rents started in the industry, and where they've come with the escalator. Our escalator continues to average 3.5%. You know, we've give than average number out pretty consistently now, so if you go -- I don't know what it is off the top of my head for a year ago, but 3.5% or so of that increase would have been due to escalators. Everything else is due to new things being added that raise the base rent above the average.

Can you give me an idea of like where, maybe on a national average, you're seeing the pricing for new tenants coming on?

Well, we've talked publicly that you know, previously that rents for new tenants on a typical installation, telephony customers are north of $1800 on average. That is clearly the case in the second quarter, and it was very, very good in terms of that -- I don't want to put too fine a point on it, but we had probably the second best quarter we've had, in terms of average rent per telephony customer that we've ever had.

Terrific. On the property taxes?

Well, we're working hard. We want to keep pushing the number down and down and down. I don't know that you're going to see a lot of additional progress there, but we are encouraged by what we've done, and are able to do so far. We've been devoting additional resources to people to actually challenge and go back and push as hard as we can on some of these issues, so we're going to give it our absolute best to try to keep pushing that down but at this point, We certainly wouldn't hold that out for people's expectations.

Got it. If I could sneak one more in. I don't want to beat a horse to death. I know Cingular decommissioning conversations, you aren't going to have that much of an impact on your numbers. The ones that they've -- the sites that they've identified, are those sites -- where you have both an AT&T and a Cingular site on the same tower, and when they talk about -- when you mentioned that they're also looking for amendments, do you have any idea if whether or not that amendment is to run both networks off of one array? Or if it is just where they're -- where they're adding capacity to the other -- to the network that's remaining up?

I'm not sure we know on the latter part of your question but the first part is yes, it's on towers where there were both AT&T and Cingular. They want to get rid of one, but amend the other.

Okay. Thanks, Jeff.

Our next question is from William Dobbs from Merrill Lynch. Please go ahead.

Good morning. I had a question about -- in your press release, you talk about a $400,000 credit to the cost of goods sold. This quarter. Nonrecurring benefits. What are those benefits?

This is Tony Macaione. As w've gone through and looked at the property taxes that have been paid year-to-date, as it related to the accrual that we set up at the end of 2004, because there is a differential between the assessment period, and when the actual cash tax gets paid.

We now have six months into 2005 where we've been able to look at tax paid in 2004. As a result of a favorable payment strain, we've been able to lower that reserve by $400,000. That was a one-time permanent reduction of that accrual requirement as a result of lower taxes paid in 2005.

Okay. But that -- I mean, getting into that reserve there, I mean that helped your earnings by a penny a share. So, Should we expect any more of these going forward in the second half?

No.

It was about 100 basis point impact for the quarter.

On the margin.

On the margin at the margin line which we would not expect to repeat itself in the future. But we have lowered in our guidance, the reduction that we expect, the balance of 2005, as a result of favorable property tax expense accrual.

I want to talk about the new tower investments that you talked about, the 23 that you purchased in the quarter, and then I think since the quarter ended, you purchased 19 and then you have an agreement to purchase another 31. Are those from -- can you tell me a little bit about in those three transactions, are they coming from the same seller or -- ?

No, they're all different sellers. They're not carriers. They're private owners. And they're in our existing focus of Eastern seaboard gulf states, eastern third of the U.S. footprint.

Are these grouped by footprint when they go off, or just as you can sign up individuals to sell them?

The deals are generally geographically configured. They're not all over. They're in each pocket. The 23 towers, I forget how many deals comprised the 23 towers. It might have been 3. And they would be three deals probably in one or two states each.

Okay. And then the other two, I mean we've agreed to purchase 31 more towers, kind of what are the hurdles to the closing there? Any hurdles to where we're getting, or is it just timing issue, individual paperwork or what's that about?

Timing and due diligence. We typically enter into agreements with the due diligence work yet to come. Much like any other real estate transaction. So, I would say typical closing conditions.

Okay. Great. Then if I look generally, last follow-up here, with the Towers, if you look at kind of -- am I looking at this wrong? I'm new to this industry, but if I looked at your tower portfolio on the basis of your enterprise value per tower, it is about $615,000 at your current stock price, but then I would look at what you say are towers that you're acquiring are of high quality comparable to your portfolio. And we're able to buy them for let's say $400,000 a tower, and 31 towers it looks like we're buying for $329,000 a tower. What kind of -- I guess what's the pickup there? It is just being a big company and large amalgamator of towers that you can get them so cheaply?

I would caution you to not put too much stock in the price per tower metric. The price per tower is a function of the tower cash flow that's on the tower, and the multiple that you pay. Now, these towers on average, when you add them all up, will be below where our existing average tower cash flow per tower is. Not by much but a little bit. That's why we like the growth potential. But the whole -- the whole valuation per tower is purely a derivation of the cash flows on that tower and the multiple you want to pay.

Right.

It costs an average of $200,000 to $250,000 replacement value for these, and that number will apply across the industry, not just SBA. Anything above that has to do with something else and it has to do with the leases on the tower and the tower cash flow.

So if we go through the towers that you're purchasing now, we might say that the cash flows and the incrementally, they're of poor quality unless we can improve them by adding tenants. Is that basically the case?

Well, I would prefer you look at it the way we do, which is that we think these towers are going to be good growth that will grow at or higher than the rate of our existing portfolio.

Right. Okay, great. Thanks a lot.

Our next question is from Avi Benus from J.P. Morgan.

Thank you very much. Thanks for the color on your refinancing plans. It is very helpful. I had a question regarding that.

Why are you positioning yourself to just refi the credit facility this go around not trying to do something larger, maybe including some of the bonds, either just the 9.75, or the whole capital structure. Given that the cost of capital in the credit facility is very low. What's the real advantage to getting rid of the credit facility right now?

The advantage is it is the first do-able step in our long-term plan and what we -- I'll speak to this briefly. But it is a pretty long and complex answer that involves a lot of analysis under our existing bonds. You know, we want to get out into the market with a good structure and a good first foot forward and the credit facility would give us the -- refinancing that would give us the ability to do that. Very briefly and again, this is an overly simplistic answer to a complex question, we're not looking to do the whole balance sheet today, because of where our existing leverage is, where we would have to pay to take the bonds out, and relationship of proceeds necessary to the leverage and rate calculation that's available in the other markets. I don't know if that made any sense.

Sure, sure. So, is there any specific covenants in the credit facility that you need to get rid of in order to set the stage for the second and third deals?

The credit facility?

Yes.

No, because it will be gone.

But you're packing that instrument specifically, is it because of the covenant you want to get rid of, or just a good first step forward? You know what I mean?

Good first step. And the real confining covenants are in the 9.75 notes, which have a 4- time senior debt limit which the credit facility and any refinancing of the credit facility must fit under, prior to those 9.75 bonds being gone, and then after that, that same restriction goes to 5.5 times senior debt under the 8.5% notes so, right now, everything we're doing is intended to fit within the covenants of both bond indentures.

Got you. In terms of -- you know, of course you've seen the other asset-backed deals that are getting done around 5% or tight to that, is there any price that we should be thinking of on the bonds just to get a better sense of the timing for a second and third phase of the deal, when it becomes economically incentivized for you to go out and do the second and third phases?

Well, I mean you would have to really understand what target leverage would be. What the relationship of leverage in a market to rate would be. You can derive all of that from the other deals that have been done. Then I think you can kind of back into where our target would need to be, in terms of EBITDA to, you know, take this thing beyond just refinancing the credit facility. I mean, we've -- I think, painted a fairly clear and public picture of where this is headed with our interest rates swap, and the rate that we've locked in.

Now, of course, those instruments priced at a spread above that. You can go look at some of the other deals that have been done, figure out what you think is right there. But you know, this is a very -- we think, because we've been thinking about it for a long time, a very good and solid plan that, you know, ultimately will get us where we want to be from a balance sheet restructuring perspective within the timeframes that Pam outlined.

We agree. Just a last question along those lines. You mention that market looks for like that 6 to 8 times leverage range. So, is another way to think about it that once you do get inside of 8 times, that should open the door hopefully to the entire capital structure?

I don't know if the market looks for a particular range as much as they price their rate against a particular leverage range. And our analysis of rate benefit versus leverage benefit, you know, currently falls within that 6 to 8 times. That's just the pure function of where that market is today. Could change tomorrow.

Sure. And that kind of new securities should be triple A, double A, single A from the rating agencies, right?

Probably best we can do is refer you to what of some our peers have done there.

Our next question is from the line of Christian Schwab from Craig-Hallum Capital Investments Group. Please go ahead.

Hi. On the build, just to follow up on the build versus purchase, have your plans in the last three to six months changed versus what you thought was available to purchase versus build? It seems like the builds are a lot lower than we suggested they would be over the last few quarters and the purchases have been greater. Is there anything there that has changed, or is that just basic market dynamics?

No. We're finding, Christian, zoning is tougher and that has caused us to reduce our expectations for 2005. It is purely, you know, the towers that we want to build, we want to build in exclusive spots. All requires zoning, and zoning has gotten tougher so that's been a change there. And while we're going as fast as we can to build that side of the business up in light of tougher zoning, we're finding good opportunities in the M&A market. We have the capital to invest so we're doing it.

Fantastic. Then, did you give an update on what your projected plans for 2006 for builds would be?

Still between 100 and 200.

Great. Thank you.

Operator, we'll take one more question.

It is from Jonathan Atkin from RBC Capital Markets. Please go ahead.

One question. Given the two major consolidation deals going on in the towers sector, how do you see your relative positioning within the tower group, in terms of how your customers view you, or your ability to attract new business?

The consolidations on the customer side?

Yes, Global Signal bought Sprint and then --

Those two consolidations.

Yes.

Well, I think it clearly demonstrates the attractiveness of the business. But from an operational perspective, we continue to believe, as we always have, that the business is an asset by asset business, and that carriers will lease space on towers that are, you know, well located in spots where they need to be. And that's been the way we've been successful over the years, and the fact that there is -- you know, a 20,000 tower company instead of the 12,000 tower company, really doesn't change that at all.

We don't see any revenue issues or impact at all on our ability to grow our portfolio. I think those guys will see some nice expense savings, which I think everyone has always recognized, is the primary driver of those types of transaction, but in terms of our relationships with our customers, and our ability to keep growing our Company according to our plans and goals, we don't think that's changed at all, Jonathan.

Thank you very much.

Thank you.

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