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SBA Communications (NASDAQ:SBAC)

Q4 2012 Earnings Call

February 22, 2013 10:00 am ET

Executives

Mark DeRussy - Director of Finance

Brendan T. Cavanagh - Chief Financial Officer and Senior Vice President

Jeffrey A. Stoops - Chief Executive Officer, President and Director

Analysts

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Richard Yong Choe - JP Morgan Chase & Co, Research Division

Mark Albanese

David W. Barden - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

Michael McCormack - Nomura Securities International, Inc.

Michael Rollins - Citigroup Inc, Research Division

Kevin Smithen - Macquarie Research

Michael G. Bowen - Pacific Crest Securities, Inc., Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SBA Fourth Quarter Earnings Conference Call [Operator Instructions] And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark DeRussy, Director of Finance. Please go ahead.

Mark DeRussy

Good morning, everyone, and thank you for joining us for SBA's Fourth Quarter 2012 Earnings Conference Call. Here with me today are Jeff Stoops, our President and Chief Executive Officer; and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss in this call is forward-looking, including, but not limited to, any guidance for 2013 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, which documents are 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 statements we may make. Our statements are as of today, February 22, 2013, and 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 the most directly comparable GAAP financial measures and other information required by Regulation G has been posted to our website, www.sbasite.com.

With that, I'll turn the call over to Brendan to comment on our fourth quarter results.

Brendan T. Cavanagh

Thank you, Mark. Good morning. As you saw from our press release last night, our fourth quarter financial and operational results were excellent. We exceeded the high end of our guidance for leasing revenue, services revenue, tower cash flow, adjusted EBITDA and AFFO.

Total revenues were $293.8 million, up 59.9% over the year-earlier period. Site leasing revenues for the fourth quarter were $260.8 million or a 57.9% increase over the fourth quarter of 2011. Our leasing revenue growth was driven by organic growth and portfolio growth, including the impact of the Mobilitie and TowerCo acquisitions, which closed during the second and fourth quarters, respectively, of 2012.

The vast majority of our site leasing revenue continues to come from the U.S. and its territories, with approximately 5.3% of total leasing revenue in the quarter coming from international operations. Site leasing segment operating profit was $198.6 million or an increase of 51.3% over the fourth quarter of 2011. Site leasing contributed 97.2% of our total segment operating profit.

Tower cash flow for the fourth quarter of 2012 was $187 million or a 46.7% increase over the year-earlier period. Tower cash flow margin was 77.7% compared to 80.5% in the year-earlier period. As expected, margins were slightly impacted by the addition of the less mature Mobilitie and TowerCo portfolios.

With respect to the domestic Mobilitie towers, we calculate tower cash flow margins by recording expenses as ours and grossing up revenue by the same amount in order to reflect the triple-net reimbursement of these expenses by our tenants. This produced a reported tower cash flow margin of approximately 65% on these towers in the fourth quarter, notwithstanding the economic reality of 100% tower cash flow margins.

We continue to experience strong leasing demand both domestically and internationally. Amendments continue to be numerous and contributed approximately 88% of U.S. leasing revenue added in the quarter. Most of these amendments were LTE-related. The big 4 U.S. carriers contributed approximately 86% of our consolidated incremental leasing activity in the quarter. We have a solid leasing backlog and expect that the first quarter will be another strong one in terms of customer activity.

Our services revenues were $33.1 million compared to $18.7 million in the year-earlier period, reflecting generally higher activity levels and work mandated to us by our Sprint Network Vision contract. Services segment operating profit was $5.8 million in the fourth quarter compared to $2.3 million in the fourth quarter of 2011. Services segment operating profit margin was 17.6% compared to 12.4% in the year-earlier period.

SG&A expenses for the fourth quarter were $19.6 million, including noncash compensation charges of $3.3 million. SG&A expenses were $15.8 million in the year-earlier period, including noncash compensation charges of $2.7 million.

Our overhead efficiency continues to improve as we grow. As a percentage of revenue, SG&A expenses were 6.7%, a decline of 190 basis points compared to the fourth quarter of 2011.

Adjusted EBITDA was $177 million or a 50.9% increase over the year-earlier period. Adjusted EBITDA margin was 64.7% in the fourth quarter of 2012 compared to 66.2% in the year-earlier period. Strong organic margin expansion from our leasing segment was slightly offset by the inclusion of the less mature Mobilitie and TowerCo towers and an increase in our lower margin services revenue.

AFFO increased 60.5% to $113 million compared to $70.4 million in the fourth quarter of 2011. AFFO per share increased 37.5% to $0.88 compared to $0.64 in the fourth quarter of 2011.

Net loss attributable to SBA Communications Corporation during the fourth quarter was $52.5 million compared to a net loss of $29.1 million in the year-earlier period. Contributing to the net loss in the fourth quarter were $18.6 million in acquisition-related expenses primarily associated with the TowerCo transaction. Net loss per share for the fourth quarter was $0.41 compared to $0.27 per share in the year-earlier period. Quarter-end shares outstanding were 126.9 million.

In the fourth quarter, we acquired 4,134 tower sites, including 3,256 towers acquired from TowerCo and 800 tower sites in Brazil. The company paid $1.43 billion in cash and issued 4.6 million shares for these towers, including $175.9 million related to the Brazilian towers paid in January of 2013. SBA also built 103 towers during the fourth quarter. We ended 2012 with 17,491 owned towers, an increase of 66% versus 2011 and an increase of 32% in the fourth quarter alone. 14,929 of these towers are in the U.S. and its territories and 2,562 are in international markets.

Total cash capital expenditures for the fourth quarter of 2012 were $1,315,000,000, consisting of $3.9 million of nondiscretionary cash capital expenditures, such as tower maintenance and general corporate CapEx, and $1.31 billion of discretionary cash capital expenditures. These amounts exclude the cash payment for the Brazilian acquisition, which was paid in the first quarter of 2013.

Discretionary cash CapEx for the fourth quarter includes $1.25 billion incurred in connection with tower acquisitions, exclusive of any working capital adjustments and paid earn-outs. Discretionary cash CapEx also included $26.2 million in new tower construction, including construction in progress, and $8.6 million for gross augmentations and tower upgrades. Of the $8.6 million augmentation figure, approximately $5.6 million or 65% was simultaneously reimbursed by our customers, resulting in net augmentation cash expenditures to us of $3 million. Reimbursements are amortized in the site leasing revenue over the lease or amendment term, which gave rise to the augmentation.

With respect to the land underneath our towers, we spent an aggregate of $24.1 million to buy land and easements and to extend ground lease terms, our most active quarter of the year. Our investments in land are both strategically beneficial and almost always immediately accretive. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 70% of our towers. At the end of 2012, the average remaining life under our ground leases, including renewal options under our control, is approximately 31 years.

At this point, I'll turn things over to Mark, who will provide an update on our liquidity position and balance sheet.

Mark DeRussy

Thanks, Brendan. SBA ended the quarter with $5.4 billion of total debt. We had cash and cash equivalents, short-term restricted cash, short-term investments of $266.3 million, resulting in net debt of $5.2 billion. Our net debt to annualized adjusted EBITDA leverage ratio was 7.3x, which is squarely within our target leverage range of 7x to 7.5x. Pro forma for the Brazilian acquisition, our leverage at year end would have been 7.5x.

Our fourth quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 3x. Our revolver balance at the end of the year was $100 million, which we borrowed for the Brazilian acquisition. Our available committed capacity was $630 million, pro forma for an increase in commitments from $700 million to $730 million that occurred early in 2013.

During the quarter, we repurchased 66.2 million in principal of our 1.875% convertible notes and privately negotiated transactions for $107.5 million in cash. The notes will mature on May 1 of this year, and we have formally elected to settle both the principal and associated premium in cash. Our total remaining settlement obligation is approximately $615 million net of hedges, prior conversions and assuming a hypothetical stock price of $70 a share. We expect to fund this maturity with a combination of cash on hand and proceeds from future secured debt financings, which we believe will give us an opportunity to borrow at lower rates and to extend the tenor of our debt maturities.

As of the end of the fourth quarter, our debt had a weighted average annual cash coupon of 4.3% and a weighted average remaining maturity of 4.6 years. We did not repurchase any shares of our common stock during the quarter and currently have $150 million remaining under our existing $300 million authorization. We continue to view stock repurchases as an opportunistic rather than systematic allocation of capital.

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

Jeffrey A. Stoops

Thanks, Mark, and good morning, everyone. The fourth quarter was a great end to a great year for SBA. Not only were our financial results excellent, we ended the year with a collection of assets and markets that we believe will help drive growth for us for years to come. I'm extremely pleased with our positioning. As you can see from our increased outlook, we expect to produce material growth this year in all key metrics, including AFFO per share.

Domestically, our leasing and services business is being driven by the big 4 U.S. carriers, all of whom were very busy in the fourth quarter. Activity is mostly still amendments, but we are seeing an increasing number of new leases. The lease-up we executed in the fourth quarter well exceeded our expectations and is responsible for about $4 million of the increase in the midpoint of our full year 2013 tower cash flow outlook.

Current activity levels with the big 4 U.S. carriers remain high. If these levels stay this high all year, we will have experienced a greater level of incremental domestic leasing activity from the big 4 U.S. carriers than we currently assume in our 2013 outlook.

We are also starting to see more activity from Clearwire, which, if it continues, could be another basis for outperformance.

We have yet to see any activity from DISH or Public Safety.

Our outlook includes a second half of the year loss of $6 million in item revenue, reflecting the worst-case scenario pursuant to our agreements with Sprint. Any result better than the worst-case scenario will reduce that number, and we have received no termination notice as yet.

Our full year 2013 site leasing revenue guidance includes $62 million of noncash straight-line revenue, while our tower cash flow and adjusted EBITDA outlooks are cash only. Excluding the noncash straight-line revenue at the midpoints, our full year outlook implies an approximately 77% tower cash flow margin and a 66% adjusted EBITDA margin.

All this domestic leasing activity has benefited our services business. Activity in general is up, plus we have certain work mandated to us through our Sprint Network Vision and T-Mobile 4G agreements. As a result, we are expecting our busiest services year in quite some time. Services backlog at December 31, 2012 was $46 million compared to $15 million a year earlier.

Internationally, we continue to see good levels of activity in all our markets. We see 3G and 4G activity in Canada and 3G activity in Central America with 4G still to come. We've built towers in all international markets in the fourth quarter and ended the year with solid backlogs for both leasing and newbuilds in all markets.

Our biggest international news in the fourth quarter was, of course, our entry into Brazil through the acquisition of 800 towers from Telefonica. We had been analyzing the Brazilian market for a long time, making inroads, establishing contacts and looking for the right opportunity. We found it in December in an expedited process run by Telefonica. Our familiarity with Telefonica through our Central American operations and prior Telefonica tower sales processes, as well as our ability to close by year end, greatly contributed to our success in this process. This was the opportunity we were waiting for, giving us 800 high-quality, ground-based towers located throughout Brazil with existing collocation revenue and relationships with all of the major Brazilian wireless carriers. It was the perfect size and configured platform for us to enter Brazil. We are very attracted to Brazil for a number of reasons: growing population, low 3G penetration, no real 4G penetration yet, future plans, spectrum auctions, reasonably good zoning and land use protections, 4 major carriers all relatively similarly positioned and a strong regulator intent on competition and quality of service. We believe Brazil currently has only about 20% of the number of cell sites that we have here in the United States but almost 2/3 of the population. We believe these factors have caused and will cause a huge demand for additional wireless infrastructure, and we're very excited about what we might accomplish in Brazil in the next decade. We expect to grow in Brazil by building towers and also by acquiring additional towers. Right now, we are in the process of building a team in Brazil and integrating the Telefonica assets, which we expect to have substantially completed by the end of the second quarter. We're very excited about Brazil and expect it to occupy much of our international focus for the remainder of the year.

With respect to additional portfolio growth, in 2013, we probably will not replicate last year's success. We do, however, have confidence in achieving our annual goal of 5% to 10% portfolio growth, particularly now that we have established a presence in Brazil. We intend to continue to actively pursue newbuild and acquisition opportunities that we believe will meet or exceed our return requirements. Based upon our outlook and assuming a typical multiple paid for acquisitions, we would have almost $1 billion of discretionary spending ability while still maintaining our target leverage levels. Between our expected AFFO generation and our revolver availability, we have the cash resources to be able to fund that level of investment. If we were successful with that level of investment, depending on the timing, there would be upside to our 2013 outlook, as today, it only includes approximately $375 million of discretionary spending in 2013, of which $176 million was already spent in Brazil.

Our balance sheet is in great shape, which I'm particularly proud of, given the amount of acquisition activity last year. As Mark mentioned, we intend to satisfy all of our obligations, our 1 7/8% convertible notes in cash, and we are working on secured financings now to accomplish that. Markets are very good. We expect to be very successful and to accomplish at least this good a financing result, as set forth in our outlook. After the refinancing of our 1 7/8% convertible notes, we have no debt maturities until October 2014.

Before we open it up for questions, I want to recognize and thank all of our employees for a record-breaking 2012. The amount of time and attention that resulted in our successes last year was extraordinary and a true team effort across our entire company. It is because of all the hard work and contributions of our employees last year that we are able to stand here today and expect a very successful 2013.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll first go to the line of Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

I was interested in the color that you provided domestically on leasing trends and wondered for international, does your guidance kind of imply higher lease-up rates or similar lease-up rates compared to the U.S.? And then with regard to a possible portfolio expansion overseas with regard to, specifically, carrier transactions either in Central America or in South America, what do you see as the prospects there?

Jeffrey A. Stoops

Yes, internationally, the lease-up that we've assumed and have been experiencing, Jonathan, is similar, although it's coming from different places. Internationally, it's more new leases. In the U.S., it's more amendments. But in terms of the revenue contribution per tower, it's similar. I believe there's going to be a lot of international acquisition opportunities for the next several years. You're starting to see international carriers become more comfortable with and embracing the outsourcing of their infrastructure and selling assets. Obviously, that's how we got into Brazil. That's how we got a lot of the towers in Central America. Some of our peers have had similar experiences with carrier divestitures. So I think it has the potential to be very active, and we'll be watching and looking closely and picking our spots.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

And then with regards to FX, I might have missed this, but should we just sort of assume current rates in your guidance then for your foreign currency exposures?

Jeffrey A. Stoops

It's actually in the press release, Jonathan that we've assumed a BRL 2.0 to USD 1 as of now. I realize the real strengthened slightly from that level, but for now, that's what we're assuming.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Okay. And then with regard to staffing throughout the year for international, where do things stand compared to where you need to be?

Jeffrey A. Stoops

We're building a team. We have more work to do. We have assumed an incremental SG&A burden of about $2 million to $3 million for Brazil. We're not spending that kind of money today because we're not fully staffed up, but that would be the kind of the run rate that we would expect from that. And if we were to step up to that level of back office, we would have substantial additional operational capabilities down there.

Operator

We'll go to the line of Ric Prentiss with Raymond James.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

I want to talk a little bit about the debt market, been a lot of questions about it recently, obviously. How do you think about the debt market? And maybe talk about the rates you're seeing versus the yields, how it impacts valuation and deal prices and your ability to pursue deals.

Jeffrey A. Stoops

Well, there has been some headlines on the movement of the treasury. The way that the financing, that we source works is really a combination of 2 things. It's the base rate and then it's the spread. And spreads continue to be wide by historical standards. And the investment community is really looking for an all-in yield so that there is room, as base rates rise, for spreads to contract, and everybody still get where they want to be. So we feel particularly good about what we're going to be doing this year. And I don't want to get too far ahead of ourselves, but by the next time we speak with our first quarter results, we'll have done what we're going to do, at least that's the plan. So while it's -- we're watching it, and obviously, it impacts companies like ourselves, which are fundamentally real estate-based companies that as you move farther and farther down the acceptance of AFFO per share, it's going to be impacted by interest rates. So we understand that, and our job is to be thoughtful and opportunistic around capital structure to continue to source debt that makes sense for us at the lowest rates possible with the best certainty and laddering maturities and all that stuff. What has happened in the last month or 2 has not impacted our thoughts at all around continued growth ability.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Great. The second question is -- you mentioned, I think, in your remarks that you're starting to see Clearwire show up. We also, in digging through the Sprint, Starburst, SoftBank proxy notice that, kind of with or without Clearwire, Sprint is expecting to put in a lot of 2.5 gigahertz cell sites. As you think about your MLAs, and not to talk specifically to T-Mobile or Sprint, but as you think about 2.5 gigahertz frequency being deployed and DISH making a lot of noise that they'd really like to get their 2.0 gigahertz spectrum deployed, how does that fit into your MLAs? The RAD centers that are out there, what height this new equipment might be placed at. Just kind of what's the opportunity if we think generically about 2.0 frequency and 2.5 frequency being deployed.

Mark DeRussy

Well, for us not to benefit from that, all the things that you talked about would have to fit within the existing RAD centers and the existing prescribed equipment specifications that we have agreed to. Based on everything I know, and there's a lot that I don't know about exactly how those items will be deployed, so I think it's still yet to come, I think it's very unlikely that those types of deployments will be able to be fit within the existing entitlements. But obviously, that means an opportunity for us for additional rent.

Jeffrey A. Stoops

And also, Clearwire mentioned the other day on their call, they think some of the stuff might have to start happening at lower heights because of the densification of these networks.

Brendan T. Cavanagh

Yes, and that brings up a whole new -- that's a brand-new deal.

Operator

We'll go to the line of Phil Cusick with JPMorgan.

Richard Yong Choe - JP Morgan Chase & Co, Research Division

This is Richard for Phil. I wanted to get a sense of how much of the sequential $10 million increase in leasing revenue quarter-to-quarter is organic versus acquired.

Jeffrey A. Stoops

A little less than half of it, Richard, is organic.

Brendan T. Cavanagh

You're talking Q3 to Q4?

Jeffrey A. Stoops

Q4 to Q1, I think.

Richard Yong Choe - JP Morgan Chase & Co, Research Division

Q4 and 1, yes.

Jeffrey A. Stoops

Yes, Q4 to Q1, approximately 40% of it is organic.

Richard Yong Choe - JP Morgan Chase & Co, Research Division

And then for the year, I guess in terms of the incremental leasing revenue, what are you looking for, for splits from amendment versus new leases? Are we still kind of heavy towards the amendments?

Jeffrey A. Stoops

Yes. Although we are seeing increasing numbers, the absolute numbers of new leases is going up.

Richard Yong Choe - JP Morgan Chase & Co, Research Division

Great. And then finally, on the services revenue side, it looks like we saw some great sequential growth throughout last year. Is that kind of topping off now? And should we expect it to fade away? Are you seeing something specific? Or is it just being conservative that you might not maintain this high level?

Jeffrey A. Stoops

Yes, I would have to say it's us being conservative.

Operator

We'll go to the line of Jonathan Schildkraut with Evercore Partners.

Mark Albanese

This is Mark Albanese on for Jonathan. A question on the longer-term growth. How do you think about leasing in the 2014 and 2015 time frame? And what have you done and will continue to do to extend the high-growth portion of the demand curve?

Brendan T. Cavanagh

Well, we, for the most part, are recipients of carrier demand needs. So we're benefiting from all that as opposed to doing anything proactive that would alter the customer demand curve. I will tell you that there are a lot of resources constraints in the market today, which cause me to doubt that all the work that cumulatively has been said by our customers will get done in 2013 will, in fact, get done. Running a part of our business on the services side and seeing the resources issues there, I'm fairly confident that a lot of this stuff will spill over into 2014. So you have some basic work that people might be thinking about getting done in 2013, which will not, that will spill over. And then we're also starting to see positive signs, the cell splitting, which, I believe, as we talked about before, will be the next leg of the curve once we get the basic 4G networks in place. But we still have quite a bit of ways to go before the 4G networks will be basically in place.

Mark Albanese

Great. And just a follow-up, there's been a lot of news flow on small cells recently. Can you give us some thoughts on that opportunity and if this is something you potentially would pursue on your own, perhaps, through your investment in ExteNet or another acquisition?

Brendan T. Cavanagh

Well, we'll clearly be watching it closely through ExteNet. We will be looking for opportunities, obviously, to add small cells to our existing assets should those opportunities arise, and we think there will be some opportunities for small cells to come in at lower heights and actually be utilized on some of our towers in the more urban areas. In terms of actually going in a brand-new small cell installation, I think we're going to really wait and see how things play out. The bedrock of our business model and I think our success as we've acquired assets that have multi-tenant capabilities, and we just have to kind of wait and see if that is, in fact, the small cell world as it ultimately gets rolled out.

Operator

We'll move on to the line of David Barden with Bank of America.

David W. Barden - BofA Merrill Lynch, Research Division

I think there's been a lot of recognition that there's a lot of opportunities that's pent up for the tower companies, and we've been very optimistic about the secular trends that are going to unfold over the course of the year as the wireless players are kind of racing to build the best and the biggest networks they can. There's obviously been some renewed fears that have kind of baked into the stocks over the last month, I think, specifically around alternative cases for consolidation. And I think we all know what those kind of cases are. People are wondering if Sprint comes in and buys PCS, how the industry might look different than people thought it might look a month ago. Could we go back and revisit a little bit about your MLAs and how they're structured with respect to PCS and Sprint and T-Mobile and kind of how -- I think you've protected yourself with respect to those relationships if consolidation does happen differently than people expect. That will be helpful, I think, to go over that again.

Jeffrey A. Stoops

Yes, correct me if I'm wrong, Brendan, but the Sprint MLA gives us about 9 years. The T-Mobile gives us about 7. We do not have an MLA with Metro, so it kind of falls as other non-MLA type customers do. So there's probably about 3 years on average left of term there. Metro, as of year-end, was about 3% of our site leasing revenue, and that number is moving down because everything else is moving up over the course of the year. So we're not too worried about it, David.

Brendan T. Cavanagh

And from an overlap standpoint between a T-Mobile and a Metro, Metro only represents about 1% of the revenue on the sites where they both exist today. So it's fairly de minimis.

David W. Barden - BofA Merrill Lynch, Research Division

Got it. And I know that this is -- it's not, I think, is relevant now as it's been in the past even, but people are wondering about how rates, as they move up through time, impact a company like an SBA. I think there's a recognition that there's long-term revenue contracts, there's long-term cost contracts. Is there anything more to know about how rising interest rates impact a tower company from your perspective, Mark or Brendan?

Brendan T. Cavanagh

Yes, and I think this kind of goes along with what Jeff was saying earlier. Obviously, there's risks as rates go up as we carry the amount of leverage that we do, but it would affect our cost of financing, which ultimately feeds into AFFO and AFFO per share. So from that standpoint, there's some risk, which we try to address now through longer tenors and mixing markets that we're in. But as it relates to the operational side, we've got fixed rates in our leases to the extent that inflationary rates were higher than our fixed contractual escalators. We wouldn't necessarily share in that, but on the same side, most of our expenses are tied up in our ground leases, which also have fixed escalators, so our costs are controlled. So we don't see it as a huge risk.

Mark DeRussy

If you look at our buckets of expense, David, the cost of site leasing revenue is the largest, and there's not really much inflationary pressure there. Another good chunk, although this would be third after interest expense, would be our SG&A. And that -- we would have some ability -- that's more of a variable cost that we could work on if we needed to. And then there's our interest rate -- expense, which we will continue to be thoughtful around and opportunistic around. And as I've said all along, one of the factors that causes us to be comfortable in the 7x to 7.5x terms of leverage is the current interest rate in the immediately foreseeable interest rate environment. I mean, if things were to change dramatically there, we would have the ability to take leverage down.

Brendan T. Cavanagh

And most of our debt is fixed-rate also. I think it's important to point out that as we sit here today, approximately 86% of our outstanding debt is fixed rate and offloading.

Operator

We'll go to the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

I wonder if you could spend a little bit of time on the international business. Are you going to give us a little bit more color on sort of percent of revenues, just give us a percent of growth or just a little bit more color as this becomes a more material part of your business? And specifically, on the Telefonica towers, what has Telefonica done in terms of leasing those towers up? Is there much there already, or do you see a lot of leasing up opportunity? And I think you talked about building up a staffing effort. When do you think you can really start to build new sites in earnest in Brazil? Is that more of a second half event or are you at that straightaway?

Jeffrey A. Stoops

That's a good question, Simon. And I'll tackle the last one first. If you noticed, we have not increased our international or our overall newbuild targets from the last time we put out guidance. And that really leaves us room to take the rest of this year, although that's not our goal in Brazil to get newbuilds cranked up. So we were hopeful -- we are not positioned today to go out and make a full-scale assault on it, but I do believe in a quarter or so, we will be so that we do have some opportunity for some upside there on the newbuilds in Brazil, which frankly, our outlook today does not include any of those in 2013, although long term, that's the primary reason we are attracted to Brazil. The towers that we bought, actually, one of the reasons we really liked them is that they have proven to be good locations to others. They have about 1.33 or...

Brendan T. Cavanagh

Yes, that's right.

Jeffrey A. Stoops

Correct? 1.33 tenants per tower included, and all the rest of the co-locators are the other 4 big -- or the other 3 big carriers in Brazil, Claro, TIM and Oi. And we've already started to receive some very good inquiry for additional collocation on those sites. So we're extremely pleased with the assets that we have and kind of tickled that, that's our first -- that's how we've entered the country, with those assets. In terms of percentage of revenue, I think we're slightly below 6% for the year. It will grow faster just because it's not in absolute dollars, of course, given the size of the U.S. business, but on a percentage basis. But as we've said for many years, we're going to try and get to 10% and see how things look at that time. I don't think that's going to be in 2013, and it may not be in 2014, depending on the balance of how things go. But in general, we like what we've done so far. We think international is an extremely good value creator for our shareholders if executed well, and we expect to continue to look for opportunities to expand that portion of our business.

Operator

We'll go to the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG, Research Division

The first one is just to clarify the increase in the guidance for the year. I think you mentioned that $4 million of the increase in your tower cash flow guidance was related to the strong demand trends you saw in the fourth quarter flowing over into this year. I think you took the range up by about $17 million, so I was hoping you could break down the rest, in particular, with the contribution from the Brazilian towers.

Brendan T. Cavanagh

Yes, that's going to be about $10 million and the rest of it is going to be from other M&A that closed earlier than expected from the last time we -- or it was either added or closed earlier than we expected from the last time we gave guidance. I want to make clear on that point, though, that we're actually extremely busy on the organic side. But rather than carry that level of activity through, in our conservatism, we're only going to increase as we actually beat [ph] On a quarter-by-quarter basis.

Brett Feldman - Deutsche Bank AG, Research Division

Okay. And I'll just stick with the M&A thing for a second here. Thinking about the deals you closed last year, 2 large portfolios that had high exposure to Sprint and T-Mobile but very low exposure to AT&T and Verizon. Since you announced those deals, AT&T disclosed that they're going to be adding 10,000 additional cell sites over the next couple of years. How do you feel about the positioning of those newly acquired portfolios to get that business, and are you actually starting to see it flow in yet?

Jeffrey A. Stoops

Well, not only do we feel great about it, we are actually starting to see lease-up on those assets from both AT&T and Verizon.

Brett Feldman - Deutsche Bank AG, Research Division

And because you don't have master lease agreements, all of this is incremental, correct?

Jeffrey A. Stoops

Absolutely.

Operator

We'll go to the line of Mike McCormack with Nomura.

Michael McCormack - Nomura Securities International, Inc.

I know you mentioned the fact that you're going to be focused primarily on Brazil, but could you just give us your thought post maybe this year, what other countries that might fit your criteria and what those criteria might be?

Jeffrey A. Stoops

Well, we're looking for countries similar to the ones we've entered, where there is a good political and regulatory stability, reasonably good and predictable land use regulations, a multiplicity of strong carriers, where there's not any one single dominant player in the market, and opportunities to kind of get in early in terms of 3G and 4G deployments and it'd be even better if there are some announced prospects for future spectrum auctions. So you kind of mix all that together, Mike, and that's what we look for.

Operator

We'll go to the line of Michael Rollins with Citi Investment.

Michael Rollins - Citigroup Inc, Research Division

As we think about the possibility for other carriers in the U.S. to maybe do a sale-leaseback of their tower portfolios, how do you look at that in terms of the growth and the health of the tower collocation model these days? Is it a situation where the denominator of revenue that public tower companies could hold is bigger, the demand might be the same, so there's just a slower level of growth? Or do you think that the addition of supply from the acquisitions that you've done domestically over the last few years, do you actually see that driving incremental demand from carriers? Because there might be site collocations that they either didn't have access to beforehand or were less aware of the availability. Just some insights in terms of the evolution of this market would be great.

Jeffrey A. Stoops

Yes, I mean, the carrier towers that exist today, should they -- they're kind of on the market today in terms of collocation availability. But there are varying degrees of activity levels and focus on that by the carriers that continue to own towers. They're not competitive to the independently-owned towers because all through the history of our industry, if there were a tower that satisfied a carrier's need, that's where they would have gone rather than building a tower. So that's not -- should those towers come to trade hands, Mike, that's not going to really change the dynamic. You will obviously have bigger denominators if those move to private hands. And there is probably a decent, although I wouldn't say hugely material, opportunity for different focus to bring about increased activity levels. I don't think there's any carriers today who own their own towers that are actively prohibiting others from collocating on those towers. They may not be as focused on it or it's certainly not their top priority, but they're not prohibiting it.

Michael Rollins - Citigroup Inc, Research Division

And how should investors just be thinking about cash organic revenue growth in the business over the next few years as you balance amendment activity, new spectrum in the market, typical densification relative to maybe some of the churn risks from transactions that have already been announced and you're aware of that could cause just some of those leases, when they expire, to get decommissioned? Is there an average organic run rate that you guys keep in mind as a rule of thumb on, like, a 1- or 3-year view?

Jeffrey A. Stoops

Every year, we try and be as precise as we can, but I would say over the next 3 years, we're looking and putting everything together that we know about, the puts and the takes, that we're looking for, high-single-digit tower cash flow growth, which, as you then ripple down the income statement, should produce increasing levels of EBITDA growth and then AFFO growth. And that would just be on an organic basis, and we hope to do better than that through portfolio growth.

Operator

We'll go to the line of Kevin Smithen with Macquarie.

Kevin Smithen - Macquarie Research

Very little was ever spoken about the subtle nuances between the 3 public tower companies in terms of revenue recognition or contract terms with the carriers. Can you talk a little bit about your contracts with Sprint and AT&T, any provisions that might cause you to see more reported upside, if you will, from those 2 carriers in 2013 and '14 and maybe some of your other competitors are seeing?

Jeffrey A. Stoops

Well, let's start, Kevin, with AT&T. We don't have a master agreement with them, so every piece of business that we do with AT&T is recognized when we do it and contributes to increases in tower cash flow and adjusted EBITDA. In terms of Sprint, we have a master agreement with Sprint, which, over a multiyear period, obligates Sprint to basically upgrade a specified number of CDMA sites. And the way that works is we begin to accrue cash revenue recognition at the later of either an end date, which hasn't come yet, or the date that Sprint actually completes the upgrade on the tower. And we only had about -- well, we had actually less than 10% of the towers that are subject to that agreement that had actually begun to accrue that cash revenue in the fourth quarter. So we have a lot of -- even though the straight-line has already been taken, what's yet to come and why we believe we will have very, very good tower cash flow and adjusted EBITDA growth is -- that only hits those metrics when, in fact, the work is done and Sprint has actually commenced their activity on the upgraded site. I'm not exactly sure how anyone else's agreements work, but that's how ours work.

Kevin Smithen - Macquarie Research

Great. And also, we've heard that your visibility into Verizon's AWS build-out is starting to improve. Will it have any revenue impact in 2013, and is this incorporated in your guidance at all?

Jeffrey A. Stoops

It could, and it's not.

Operator

We'll go to the line of Michael Bowen with Pacific Crest.

Michael G. Bowen - Pacific Crest Securities, Inc., Research Division

A couple of things. Can you talk about, just in general terms, what your expectations are for margins in Brazil for the towers? And then secondly, we've been out there talking about LTE builds and amendments for 4G in the U.S. being strongest this year and then maybe tailing off a little bit next year. Can you just give us your opinion from an industry standpoint in the U.S. what your thoughts are and whether you think we're on the mark or whether you think the activity will continue to be really robust in 2014?

Jeffrey A. Stoops

I'll take the last one first. I think that concern is a bit off the mark for a couple reasons. Primarily, the resources constraint that I talked about earlier is going to cause a lot of what people might have liked to have accomplished in 2013 to spill over in 2014. And if you look at AT&T's VIP project, I believe it's called, there are 10,000-plus additional macro sites and a bunch of small cells. Verizon's AWS plans, where Sprint and T-Mobile are likely to be, we see a very robust 2014 as well.

Brendan T. Cavanagh

And then Michael, as it relates to Brazil and our expectations around margins, one thing that is different about Brazil from the U.S. is that the carriers typically pick up the cost of the ground leases. However, as we do with our Mobilitie numbers, where we are passing through expenses to the carriers, we will record that ground lease expense on the books and we will gross up the revenue accordingly. So if you ignore that from a practical economic standpoint, the margins will be very high. They'll be close to 90%, 95%, even right out of the gate. When you take that into account, we only have a portfolio, obviously, that we have today, we'd be in the 60%, 65% range initially because the towers are still relatively immature at 1.3 tenants per tower. But as we add every incremental lease or amendment that we add there, we'll start to see those move up rather quickly. And we would expect to see the same thing as we do newbuilds and we start off with one tenant right from the get-go. But they'll move quickly up as you add that second tenant.

Michael G. Bowen - Pacific Crest Securities, Inc., Research Division

Okay, great. And one last thing, if I could. There's been a lot of talk, obviously, about rates, and if rates go up, if that was to put your business in a slower acquisition environment, can you talk about your expectations and opportunities in an environment where you're not acquiring as many towers per year? Because in the past, all the tower companies have done very, very well in that environment, but there's been a lot of concern around that.

Jeffrey A. Stoops

Well, I mean, if we're not acquiring as much, our focus would be on maximizing organic growth. We'd probably have some SG&A opportunities, and we would look more towards stock repurchases, all of which we -- all of those leverage we are very comfortable would continue to really propel AFFO per share growth.

Operator

We'll go to the line of Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company, LLC, Research Division

Just 2 questions, if I may. The first one, I was curious, did your relationship with ExteNet preclude you from becoming more aggressive in small cell on your own, or would you have to kind of allow them to do that? And then the second question, just kind of going back to the comparison of amendment activity versus cell splitting, obviously, as we move forward, there'll be more and more cell splitting. Can you just remind us in previous upgrades, is cell splitting worth 1/3 of what you've seen from amendment activity? Is it worth 50%? Is it the same? Just trying to get some context in terms of how big the cell splitting opportunity could be, perhaps, over a 3-year period relative to what you've seen in the last 3 years relative to amendment activity.

Jeffrey A. Stoops

Yes, we do have -- in our relationship with ExteNet, we can't do DAS without offering it to them and they can't do towers without offering it to us. Small cell is a bit vague since nobody really contemplated that when we did our deal. But it would be our -- I mean, to the extent that there were active developments of that, that would probably be something that we would steer towards ExteNet's way regardless of what the legalities of our relationship were. But that, of course, wouldn't preclude us from leasing up small cells on any of our existing assets, including our 5,000 managed sites and our 17,000 -- well, 15,000 U.S. towers. So that, of course, we're free to do as the opportunity arises. Your other question is really impossible to answer. Some of our best, I think, analogous situations was when Verizon launched their 3G through the EVDO Rev A. That was primarily a software upgrade that the technology -- we didn't even really see that unlike what we're seeing now with 4G. But then as that got rolled out, you saw an increasing level of cell splitting as the demand for the product took off, and we think that's exactly what's going to occur in this case. But to kind of compare it to the magnitude of the existing 4G, you really can't. I mean, the answer is it's going to all depend on where the data and video demand curve is 3, 4 years out.

Operator

[Operator Instructions] We'll go back to the line of Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

The rooftop business, are those kind of mature assets from the leasing standpoint? Are you seeing equal amounts of growth there in your domestic towers?

Jeffrey A. Stoops

Yes, it's a very small part of our overall leasing revenue, Jonathan, but we are seeing good activity on the rooftops as well, particularly with the LTE upgrades.

Well, thanks, everyone, for joining us, and we look forward to reporting our first quarter results sometime in May.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 1:00 p.m. Eastern today through midnight, March 8, 2013. You may access the AT&T replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 278507. International participants may dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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