Welcome to the Crown Castle International Corp. fourth quarter earnings conference call. (Operator instructions) I would now like to turn the conference over to your host, Fiona McKone, Vice President of Finance. Please go ahead, ma’am.
Good morning everyone and thank you all for joining us as we review our fourth quarter and full year 2008 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer; Jay Brown, Crown Castle's Chief Financial Officer; and John Kelly, Crown Castle's Executive Vice Chairman. To aid the discussion we have posted supplemental materials in the investors section of our web site at crowncastle.com, which we will discuss throughout the call this morning.
This conference call will contain forward-looking statements and information based on management’s current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about the potential factors that could affect the company’s financial results is available in the press release and in the risk factors sections of the company’s filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.
In addition, today’s call includes discussion of certain non-GAAP financial measures, including adjusted EBITDA, recurring cash flow and recurring cash flow per share. Tables reconciling such non-GAAP financial measures are available under the investors section of the company’s website at crowncastle.com.
With that, I will turn the call over to Jay.
Thanks Fiona and good morning everyone. I’d like to take you through the excellent results for the quarter and the full year 2008 as well as highlight the reductions we have made in capital expenditures and the improvements we have made in the capital structure since the last quarter call.
Turning to the fourth quarter we generated site rental revenue of $355 million up $17.5 million. On a currency neutral basis this represents a 7% increase from the fourth quarter 2007. As highlighted on slide three of the presentation, the fourth quarter results were impacted by the 24% decrease in the Australian to U.S. dollar exchange rate from the fourth quarter of 2007 to the fourth quarter 2008.
Site rental gross margin, defined as tower revenue less cost of operations, was $240.8 million, an increase of $16 million or up 9% on a currency neutral basis from $224.8 million for the fourth quarter 2007. Adjusted EBITDA for the fourth quarter 2008 was $225.4 million, an increase of $16.2 million or up 9% on a currency neutral basis from the fourth quarter 2007.
Recurring cash flow, defined as adjusted EBITDA less interest expense, less sustained capital expenditures, increased 15% on a currency neutral basis to $125.1 million from $110.9 million in the fourth quarter of 2007. Recurring cash flow per share increased 14% on a currency neutral basis from $0.39 in the fourth quarter 2007 to $0.44 in the fourth quarter of 2008.
The comparisons between full year 2008 and full year 2007 were not significantly impacted by the Australian dollar to U.S. dollar exchange rate because the exchange rate was approximately the same when considering the full year 2007 and the full year 2008. For the full year 2008, as illustrated on slide four of the presentation, site rental revenues were approximately $1.4 billion, up $116.1 million or 9% from 2007. Site rental gross margin grew 12% for the full year 2008 from $843.1 million for full year 2007 to $946.4 million.
Adjusted EBITDA for 2008 increased 14% to $8617.1 million from $758.6 million for the full year 2007. Recurring cash flow grew 26% to $485.9 million from $385.1 million and recurring cash flow per share grew 25% from $1.38 for the full year 2007 to $1.72 for the full year 2008.
Our fourth quarter and full year operating results continue to demonstrate our ability to grow revenue and cash flow even in these challenging economic times.
Moving to the outlook for the first quarter 2009 we expect site rental revenue for the first quarter of between $363-368 million. We expect site rental gross margin for the first quarter of between $250-255 million. We expect adjusted EBITDA for the first quarter of between $232-237 million and interest expense of between $103-108 million. We expect sustained capital expenditures to be between $8-10 million and recurring cash flow is expected to be between $119-124 million.
As shown on slide five we expect site rental revenue for the full year 2009 of between $1.485 billion and $1.5 billion which is approximately 8% growth on a currency neutral basis. We expect 2009 site rental gross margin to be between $1.15 billion and $1.30 billion. We expect 2009 adjusted EBITDA to be between $925-945 million which is approximately 9% growth on a currency neutral basis and interest expense to be between $440-445 million. We expect 2009 sustained capital expenditures to be between $25-30 million.
This 2009 outlook translates into expected recurring cash flow for the full year of between $455-475 million. The adjustment to our outlook for recurring cash flow is wholly attributable to the interest expense related to the 9% senior notes we issued last month net of the interest savings on the notes repurchased to date.
Turning to the balance sheet, as of December 31, 2008 securitized debt totaled $5.3 billion for the quarter and our corporate credit facility totaled approximately $808 million for total debt at the end of the quarter of $6.1 billion. We also had $314.7 million of the 6.25 convertible preferred stock outstanding as of December 31, 2008.
Total net debt to last quarter annualized adjusted EBITDA as of December 31, 2008 was 6.6 times. This approximates the lowest level of leverage in the company’s history and I suspect this will continue to be true on an ongoing basis as we use cash flow to retire debt. Adjusted EBITDA to cash interest expense as of December 31, 2008 pro forma for the 9% notes was approximately 2.3 times. Both our adjusted EBITDA leverage and our cash interest expense coverage ratio were comfortably within their respective covenants and our corporate credit facility.
At quarter end we had approximately $155 million of cash, excluding the restricted cash, and we had $30 million of availability under our revolving credit facility.
Moving to investments and liquidity in the fourth quarter of 2008, capital expenditures were $108 million. Sustaining capital expenditures totaled $12.2 million. We spent $33.2 million related to the addition of new tenants on existing sites. As illustrated on slide six and following through on our commitment to reduce capital spending which I discussed on our third quarter call we reduced capital expenditures related to land purchases and new towers to 34% compared to the third quarter activity.
During the fourth quarter 2008 we spent approximately $37 million on land purchases and $26 million on new towers completing the majority of our in-process, committed projects.
Moving on to 2009, based on our current expectations we believe first quarter expenditures on land and new tower construction will be approximately $13 million or a further 80% reduction from fourth quarter 2008 spending. For the full year 2009 we expect to spend approximately $32 million on land and new tower construction, a 90% reduction from 2008 levels as we complete the limited in-process projects. To be clear, we have not been taking on new capital projects. Given that we expect revenue growth in 2009 to be consistent with that of 2008 levels we do expect to invest $80-90 million related to adding new tenants to our existing towers.
Before I turn the call over to Ben I would like to make a few comments about our capital structure. Since we reported our third quarter results we have made significant progress in raising capital and reducing capital expenditures in order to deal with our upcoming debt maturity. We are one of the very few companies that have had access to the credit markets since Labor Day 2008 reflecting the quality of our business. Our ability to raise debt in these difficult credit markets reflects the long-term recurring nature of our contracted revenue stream, the recognition that we own and operate what has become essential wireless infrastructure and the expectation of continued growth and operating results.
As demonstrated by the recent offering, we will be opportunistic and proactive in refinancing upcoming debt maturities. To that end, during the first quarter of 2009 we issued $900 million of senior notes due in 2015 and we extended our revolving credit facility. The net proceeds from the notes offering of approximately $800 million will be used for general corporate purposes including the repayment or repurchase of certain indebtedness of our subsidiaries.
Since the third quarter call we purchased 135.1 million of the global signal securitized notes for $125.8 million which represents a 7% discount on the face amount of such notes. These purchases were comprised of $47 million face value of the global signal securitized notes due in December 2009 and $88 million of face value of the securitized notes due in February 2011. As of February 24, 2009 we had approximately $860 million in cash and investments excluding our restricted cash and $30 million of undrawn capacity under our revolving credit facility.
We are very pleased to have accessed the credit markets successfully and to extend our revolving credit facility and issue the senior notes. While I am pleased with the most recent offering I don’t want to leave you with the impression that we expect to refinance the entire balance sheet in the high yield market. Since the offering of these notes we have received numerous inquiries and proposals related to refinancing upcoming debt maturities with potentially lower cost securities. We are working through these alternatives and would expect to take actions well ahead of debt maturities.
However, the proceeds of the note offering together with the significant cash flow generated by the business and the reduction in our discretionary capital expenditures allows us to both repay the $411 million of debt maturities due in the next 12 months and considerably reduces our future refinancing requirements.
As shown on slide seven, we expect to have approximately $734 million in cash at the end of 2009 which is after we have used cash to pay off the near-term maturities comprised of the remaining GSL trust two notes of approximately $247 million which are due in December 2009, fully retiring the $158 million currently drawn under our revolver which is due in January 2010 and settling the December 2009 interest rate swap assuming its current value.
Another view, as illustrated on slide eight, is that today we have $860 million of cash on hand which is sufficient to pay all of our 2009 and 2010 debt maturities including our interest rate swap liability. To be clear, this is before considering the benefit of cash flows that we expect the business to produce during 2009 and 2010. As shown on slide eight, while the final maturity date for the $1.9 billion and $1.55 billion tower revenue notes are 2035 and 2036 respectively, the anticipated refinancing dates of those notes are June 2010 and November 2011. It is our intention, as I mentioned before, to refinance the outstanding balance of these notes prior to the anticipated refinancing dates thus avoiding the interest rate step up and accelerated amortization.
Importantly, by June 2010 we expect to have de-levered the consolidated balance sheet to approximately 5.5 times as shown on slide nine through growth in adjusted EBITDA and the use of cash flow to retire debt. Our projected June 2010 leverage of 5.5 times compares to the consolidated leverage of approximately 7 times at the time of the recent notes offering and suggests that unless the credit markets are completely closed we will be able to refinance these notes at the then reduced leverage levels.
Now I would like to spend a few minutes discussing the detail and rationale of our interest rate swap since we have received a number of questions over the last couple of months. As many of you know, in 2006 and 2007 we put in place five-year forward starting interest rate swaps as shown on slide 10. The purpose of these swaps was to lock in LIBOR at around 5.2% for the five years following the various anticipated refinancing or maturity dates of our $5.3 billion of our debt.
For the sake of comparison, the average LIBOR rate over the last 20 years is 5.9%. The swaps are intended to provide protection in a high interest rate environment. The use of swaps is a common practice to hedge against interest rate fluctuation. In fact, we hedged the underlying LIBOR rate to fix our current $5.3 billion in debt at the time of the transaction and in the even we refinance our existing debt in the current low LIBOR environment we would likely lock in the low rate.
Clearly today in a historically low LIBOR environment our swaps are under water as LIBOR is significantly below where we locked in at. Our obligation is based on the present value of the difference between what we locked the rate at, approximately 5.2%, and the five-year forward LIBOR rate. Simply put, as LIBOR goes up our liability decreases and as LIBOR goes down our liability increases.
As you can see on slide 11 the liability over the last 14 months has fluctuated between a low of $61 million in June 2008 to a high of $616 million in December 2008 as LIBOR rates reached an all-time low. Today the liability is approximately $486 million. However, the swaps are not due to be cash settled until the various settlement dates which are reflected on page 10 and those dates do not change irrespective of when we refinance or repay the debt underlying the swaps.
So, we will not know what the actual cash obligation is until the various dates of the swaps the majority of which will be settled in 2010 and 2011. We have provided some sensitivities on slide 11 to illustrate the impact of an increase or decrease of LIBOR on our cash settlement obligation. I fully realize that in a simple business like ours these interest rate hedges appear to be complicated.
Let me try to boil it down like this. When we settle each swap we will either pay or receive in cash the difference between what LIBOR is trading at on that date and the rate that we locked approximately 5.2%. So if LIBOR on that date is trading above 5.2% we will receive a cash payment. If it is below 5.2% we will make a cash payment so that the effective LIBOR rate we will pay over the following five years is 5.2%. I hope this brings some clarity to our interest rate swaps.
To recap, we are very pleased with the results we achieved in the fourth quarter and the full year 2008 and look forward to a very strong 2009. We have sufficient cash to meet all of our 2009 and 2010 debt maturities without accessing the credit markets and we have made considerable headway in addressing our long-term debt maturities.
With that I am pleased to turn the call over to Ben.
Thanks Jay. Good morning everybody and thank you for joining our call this morning. As Jay just mentioned we had an excellent fourth quarter and full year 2008 exceeding our outlook we provided you in November for site rental gross margin, adjusted EBITDA and recurring cash flow.
Before we turn the call over for questions, I’d like to make a few comments about our operating performance and the overall environment in which we are operating. Notwithstanding the challenging macro economic environment our business remains strong as reflected in our 2008 full year results. We continue to enjoy solid growth in our core business and our expectations for revenue and EBITDA growth for 2009 are the same on a currency neutral basis as we enjoyed in 2007 and 2008.
We can say this with confidence as over 97% of our revenues for the next 12 months are already contracted which differentiates us from most other companies. In addition, new leasing applications this month are the highest we have seen in the last 16 months and the fundamentals of the wireless industry remain very good for towers and for Crown Castle specifically.
The drivers of our site rental revenue growth continue unabated. As carriers continue to invest in their networks, both voice and data, including the anticipation of roll out of 4G networks in the years to come. As I have done in past calls, I’d like to make a few comments on some of the important industry trends and statistics that are driving our business.
As many of you are aware, wireless remains the strongest growth market in telecom today and wireless data revenues continue to resist the underlying macro economic trends, growing 38% in the last 12 months to September 30, 2008. Data revenues continue to be of increasing importance to the carriers as they represent a significant area of growth.
During their recent fourth quarter calls, both Verizon Wireless and AT&T stated wireless data revenues in the quarter grew 41% and 51% respectively year-over-year and wireless remains the carriers’ most important business segment. In fact, AT&T reported that the data average revenue per user (ARPU) was up 36% year-over-year and represented 27% of AT&T’s fourth quarter 2008 revenue, up 20% from the fourth quarter 2007. Similarly, data represented 27% of Verizon’s fourth quarter wireless revenue, up 21% from the fourth quarter 2007.
At AT&T, total data revenue was $10.6 billion in 2008, an increase of $3.6 billion over 2007 reflecting the rapid adoption of wireless integrated devices and increased usage of wireless internet access, messaging and related services. A big driver of data usage is the availability of 3G or third generation services. Both the number of 3G devices and the 3G active data users on AT&T’s wireless network has more than doubled over the past year. 3G laptop connect cards and services also nearly doubled during that period.
The growth in wireless data revenue is also driven by the increase in integrated devices. In fact, AT&T reported that in the fourth quarter 2008 25% of post-pay subscribers now use an integrated device, up from 13% in the fourth quarter 2007 and nearly 60% of AT&T’s post-pay net adds during the fourth quarter came from customers using an integrated device.
Smart phones are the fastest growing segment of the handset sales globally and while handset sales are expected to grow 6%, sales of Smart phones are expected to grow 45% over the period of 2008 to 2011. Total ARPU on Smart phones is 48% higher than other devices and data ARPU on Smart phones is 147% higher according to Nielsen.
As an example, iPhone users have an average ARPU of 60% more than the average post-pay subscriber. The relevance of these statistics for us is that wireless carriers are gaining incremental returns for their 3G network investments and are leasing more sites in order to support the growth in demand for Smart phones and wireless data services to capture the higher ARPU opportunity.
Many of you have asked us over the last three quarters for a Project Southpoint Measurement update. I am pleased to provide that to you this morning. As you are aware, we continually evaluate through engineering drive tests approximately 80% of our sites to assess the leading opportunities as measured by deficiencies in wireless carrier networks. Our most recent assessment of the leasing opportunities on our U.S. tower portfolio which now includes the Option 66 spectrum owners is 1.5 tenants per tower of indicated need.
Put another way that is over $30,000 of additional revenue per site or 9 years of leasing at the current pace of growth. I would note that the indicated need has increased from our assessment two years ago of 1.25 tenants per tower despite the significant amount of leasing we have enjoyed over that period.
The final point I would make is until further developments clarify the impact of network design of new technologies and usage trends from 3G and 4G Smart phones we will not model those services’ impact on leasing demand.
Finally, the number of wireless only households in the U.S. has increased 18% in the first half of 2008 up from 14% in the second half of 2007. As customers choose wireless exclusively over land line phones, particularly in this economic climate, the need for wireless network enhancements delivered through our sites continues to increase.
Furthermore, we expect to begin to see some leasing demand from LTE, which is a fourth generation technology, later this year as some carriers begin deploying their LTE networks. Some of the wireless carriers have already begun conducting LTE trials and we would expect to see LTE networks launch some time in the next 18-24 months.
To wrap up, before we turn the call over to questions I would like to reiterate a few of the points from the call this morning that I believe create a compelling investment thesis for Crown Castle. First, Jay and I are absolutely focused on being proactive and opportunistic in refinancing this balance sheet as evidenced by our recent actions.
Next, I would expect that over the next 24 months we will be down to approximately five times leverage by a combination of growing EBITDA from organic growth on our towers and using cash flow to retire debt. Further, we have taken the necessary steps to increase cash flow by significantly reducing our discretionary capital expenditures. Finally, we are very pleased with the level of leasing demand we see for 2009. As mentioned earlier, it looks very similar to levels we achieved in 2007 and 2008 and given our fundamental confidence in the long-term demand for leasing we remain committed to making decisions that are consistent with maximizing long-term shareholder value.
With that operator, I would be pleased to turn the call over for questions.
(Operator Instructions) The first question comes from the line of Brett Feldman – Barclays Capital.
Brett Feldman – Barclays Capital
I am hoping you could talk about the drivers of leasing activity right now and I’m not sure what you think is the best way to characterize it but maybe you could talk about it either in terms of technology? Are you seeing a very 3G heavy leasing? Is it maybe more appropriate to talk about the types of carriers or is it more interesting to talk about geography? Parts of the country, even just urban versus rural. I’m just curious what type of color you can give around where demand is coming from.
It is not dissimilar from other years and as we spend time with our sales team reviewing details both geographically, by carrier and technology it is a very healthy mix. It is everything from brand new voice deployments for carriers deploying in markets for the first time to roaming over-builds which are additional full antenna array installations, the 3G amendments which are upgrades on a number of sites to some brand new carriers that have just announced they are going to build out spectrum that they have acquired.
Just like it has always been, it typically comes in not exactly as you expected. We can do our best to forecast overall growth but it always ebbs and flows just a little bit from quarter-to-quarter and technology-to-technology and carrier-to-carrier. The fundamental reality is that it is a broad based continued build and enhancement of the existing networks as well as some new networks and that fundamentally goes to just the strength of the overall consumer demand for wireless.
As I mentioned in my comments one of the things we focus very obviously on is the incremental returns available to carriers from this incremental capital investment and we continue to see it being quite healthy as evidenced by the statistics I ran through. The incremental data ARPU from network enhancements that are enabling consumers like most of us to access 3G services on our devices are high returning activities and that continues unabated. So I can’t really be precise with my answer to your question because it is broad based, it is all over the country and it is technology that frankly expands from 2G voice installations to some very early applications we see around some of the LTE upgrades we will see in the coming years.
Brett Feldman – Barclays Capital
Let me think about it a little differently then. If you think about your legacy customers, the ones that have been around for quite a long time, what type of behavior are you seeing out of them? I’m wondering if they are at the point where the majority of the business they are giving to you is much more related to lease amendments and augmentations than new cell sites. For example the big GSM guys are very heavy with their 3G activity right now.
You might think that but that is not actually the case. We are continuing to see a substantial amount of brand new, first time installs as well as a lot of amendment applications as you would expect. Our leasing activity from the big four carriers both amendments and new continue to remain about 60% of our total and wireless in general including sort of the second and smaller-tier carriers would be about 90% of our overall activity. That is a mixture of brand new installations as well as amendments and upgrades on existing sites. The amendment activity in terms of revenue has been about 20-25% depending upon whether you are looking at the quarter or the full year last year so it has been as high as 35-40% in various quarters. For the trailing period I would say the new installations, first time installs are actually proportionately higher than we have seen in the last year or so.
Brett Feldman – Barclays Capital
The stimulus package, the tower companies are eligible for that money. Do you see an opportunity there?
It is a development we are watching very carefully. The notion of encouraging broadband wireless development. We don’t have any specifics we can report to you today on exactly what the impact will be in terms of the stimulus package on building out wireless broadband. It is something we are pursuing on our own as well as PCIA channels and as soon as we have some specific details on the impact we will certainly make them public.
The next question comes from Simon Flannery – Morgan Stanley.
Simon Flannery – Morgan Stanley
It sounds like you are talking a little bit more about 4G now. It seems like the clarity from some of the conferences and so forth is improving. Can you give us a sense of how we should think about augmentation opportunities and new build? If I am a CDMA carrier going to LTE how much more spend, is that an entirely new carrier per tower versus somebody who is on HSPA moving to LTE? Then just on the balance sheet a lot of color there, thank you for that. Can you think about how you weigh up the pro’s and con’s of refinancing ahead of June 2010 versus letting that then reset and facing some of the constraints there? What are the arguments there and the rate if the market is tough you might just say let the thing reset and deal with it or is it too restrictive from an amortization point of view?
That’s a great question and I’m going to let Jay take the second part. With respect to LTE amendments it is early days and we are still working through with the carriers the exact configurations but as best we can tell it looks like a full amendment consistent with what you would have typically seen on a 3G installation. So typically three antennas in line in and around approximate a third of a full broadband installation which is as we have talked about for years on the 3G upgrade activity. So it looks very much like the next generation build out. It is too early to say precisely the number of sites that will be hit.
Obviously you roll out in phases and you would see a less densely and populated roll out initially but then as you get devices and consumer take up, as has been the case in every next generation roll out, you come back and fill in density to be able to provide the bandwidth and high speed data services that are going to be required and supported by the LTE technology. So the best I can tell you is it looks very similar right now to us to a 3G roll out which was a significant amount of amendment activity and continues to be a significant amount of activity.
We are by no means complete on the 3G roll out for carriers in various markets and while I am certainly not forecasting a material impact in 2009 I think we do have some applications in the door that are LTE applications we will begin working on and it is likely to be a 2010 and 2011 type impact.
On your second question related to the balance sheet and the notes that come up for their anticipated refinancing date in June 2010, as I stated in my comments my intention is for us to refinance those notes before we get to the ARD date. As I look at the market and what we were able to do in the notes offering if we project out where we expect leverage to be on a consolidated basis in June 2010 we would expect to be about 5.5 times leveraged compared to where we just were when we issued these notes at about 7 times which improves my confidence we should be able to refinance those notes.
In a down side case scenario if the credit markets were closed or we had to roll into an ARD date because we roll beyond the anticipate refinancing date because we weren’t able to access the markets or fully retire those notes we don’t have a hard maturity there. One of the nice benefits that we have discussed on past calls about those notes is that what happens is the interest rate steps up to 10% which in this market is not all that bad and then we have accelerated amortization meaning that all the excess cash flow from that entity goes to retire the debt.
We have enough cash flow from the other entities in the company to be able to service our consolidated obligation on the notes we just issued as well as pay for the Capex and the G&A that we have in the business. While it may be a little bit tight, we have plenty of cash and we wouldn’t be concerned about rolling into that ARD date. I want to be clear that some I think have taken my comments on the third quarter call that our assumption was we were just going to roll into the ARD date and let the interest rate step that is not our intention. Based on the facts as they are in the market today I think we have a reasonable chance of being able to refinance those notes ahead of the ARD date.
Obviously there is a lot of time between now and the. That is 16 months away from today so a lot can change as we have found over the course of 16 months. Some of that may move in our favor, some of it against us. We have good optionalities that move against us and we have good a lot of time for it start to move for us.
The next question comes from Rick Prentiss – Raymond James.
Rick Prentiss – Raymond James
A couple of follow-up questions there. If you refinance early, which it sounds like obviously a pretty high priority, proactive as I heard a couple of times there, what happens to the interest rate hedge liability? If you had June 2010 $192 million current valuation of that one piece of paper do you have to settle that interest rate hedge if you replace that note?
No we don’t. How we refinance the debt does not affect our obligations under the interest rate hedges. Those dates would remain under the interest rate hedges and we are free to refinance the debt when we so choose without having to settle the swap.
Rick Prentiss – Raymond James
That is pretty good. So those dates or the amounts you gave based on current five-year swaps and the dates we can kind of live with that regardless of what you do as far as refinancing?
Exactly. They are completely disconnected. They are just contracts that are synthetic in nature if you will.
Rick Prentiss – Raymond James
As you look at use of cash you have been pretty active already I think in the first quarter, not since third quarter call, that you have bought back $135 million face in the first quarter. How do you look at use of cash sitting there with $860 million on the balance sheet, $30 million available under the credit facility? How do you look at use of cash, timing, is there anything that modulates your ability to buy back debt sooner than the call date? Just kind of walk us through your though process on your use of cash.
As we look at the upcoming debt maturities into 2010 at the anticipated refinancing dates and then into 2011 with the hard maturity on the GSL trust three notes, I think it is prudent for us to keep maybe a little bit higher balance of cash than what we have historically. To some degree the market has dictated this as our structured notes have traded much closer to par. The GSL trust two notes are trading just a point or two off of par. The GSL trust three notes are trading a few points off of par. I take that as a very good indication that holders are much more comfortable today than they were three months ago about holding the structured debt and probably improves our ability to be able to refinance structured notes in one form or another particularly at the AAA and potentially at the AA level.
I think that is a positive. Obviously the arbitrage of the discount there of deploying the cash to buy back the notes at a significant discount that is no longer available. I think what we will do is utilize the cash probably in concert with the refinancing and then as we find the appropriate refinancing approach we may want to combine refinancing proceeds from a debt offering along with a portion of our cash to fully retire a particular debt instrument. I think what you are going to see us do is maintain a lot of flexibility over the next couple of years as we approach refinancing the balance sheet.
It is likely we are going to have some secured opportunities at the asset level that as Jay said maybe it is a historic AAA or AA level of leverage where we may want to then put in some of our cash to augment those proceeds to get it down to a level where you can refinance basically at the AAA level. So to optimize the overall rate we get acting on the back side of this refinancing.
Rick Prentiss – Raymond James
When you mentioned other refi opportunities other than the high yield market, what type areas are you looking at?
As you saw us do in the high yield market there is no requirement that we refinance the mortgage loans that we have today with similar mortgage loans so we are open to going back to the high yield market, although I wouldn’t expect to refinance the whole balance sheet in that market as I mentioned before. We could do bank debt. We could do some form of note be it structured notes or notes that are some type of hybrid between a bank loan and structured notes. Right now I think we have several options based on the proposals we have seen after doing the notes offering and many of those look like they are going to come at potentially lower cost than what we saw in the high yield market.
Rick Prentiss – Raymond James
My other question has to do with the guidance. Obviously you had a good fourth quarter versus expectations. I think first quarter is probably surprising to a lot of people. Very strong, out of the gate start to first quarter guidance but it is unchanged for the calendar year 2009.
Can you talk a little bit about if you think it is a front-end loaded year versus a level loaded year? Are you being conservative as you look out through the back part of the year? Just kind of your thoughts on out of the shoot very strong first quarter, also tower operating expense seems to be kind of flat to down first quarter versus fourth quarter and then maybe ticking up the rest of the year? I’m just trying to understand any one-timers, front end loaded?
That’s a great question. We don’t expect any one-timers but it is a combination of several things. We think it is about a 40/60 year in terms of leasing front half versus back half. That is similar to 2008. We can see that in the application volumes where December and January were sort of traditionally light. There is about a four month lag from application to revenue commencement in our company so we also see a very strong February, as I mentioned the highest in 16 months which would suggest about a June commencement for that revenue. So we are looking at a little bit of a back end loaded, not severely but possibly 40/60 kind of arrangement in terms of revenue.
Two other things that would be tempering our enthusiasm a little bit would be in the warmer months we will see tower repair and maintenance expense pick up through the summer months. So historically the first quarter will be the lightest and that would be reflected in the guidance. Then secondarily as we always do early in the year and have been pleasantly surprised on the high side we always temper our guidance or outlook on service margin because it is very hard to forecast so year-over-year the implied, although you don’t get specific guidance on this, the implied service margin is about $6 million less than we did in 2008.
So if the application volume goes as we believe and our take rates, this is really important, if our take rates continue which we have actually made some really good progress on then I would say that it looks like the service margin is actually going to hang in with levels that look like 2008 and so you could have some potential out performance just from the service margin contribution but it is too early in the year to suggest that things would change on the leasing front.
Again, as we look at it with as much detail as we can get here at the end of February it looks very much like the levels of activity we originated in 2007 and 2008.
Rick Prentiss – Raymond James
Does Clear Wire fit into that second half 40/60 split?
Yes it does. It is in there and it is a mixture. Obviously we are working on a lot of things with them right now.
The next question comes from Jonathan Atkin – RBC Capital Markets.
Jonathan Atkin – RBC Capital Markets
Following up on the service margin comment, there does seem to be some fourth quarter seasonality to that and I wonder if you can give us a refresh as to what is it you are doing in the servicing business and are there any cost allocation practices in terms of how you split costs between site rental and perhaps the labor side or site rental related costs and services that might affect why your margins are different from those of your peers? Then any update on outdoor [inaudible] given there has been some recent market launches that heavily leveraged that technology?
On the services for the fourth quarter we had a good quarter. We did better than we originally expected and it really goes to the take rate comment I made earlier. We are executing well for customers and continuing to increase our take rates throughout the company. So to refresh everybody’s knowledge of what that business is, it is basically managing the installation both in terms of new installs and amendment upgrades of the antennas on our site on behalf of the carriers. That is essentially what that is.
We pursue that business. There is margin in it. It also, probably most importantly, retains control over improvements that are going on at our site and it is a higher touch activity than just essentially giving somebody a notice to proceed and letting them go out and access our site. It is an activity we continue to grow in expertise and take rate and I think it is something we will continue.
In terms of the cost allocations, Jay may want to comment on that. There is really nothing.
I don’t think there is anything different there. The direct costs associated with the site rental business would be the things that you would expect. So land lease expense, repairs and maintenance directly on the tower, other fixed costs you would have such as utilities and some things like cutting the grass.
And overhead. We have obviously the personnel overhead associated with the tower management business is in the tower line as well.
Then on the services side what you have is the direct costs associated with performing that service. It is fairly easy to delineate between the two activities.
Jonathan Atkin – RBC Capital Markets
On outdoor [DAS] any up tick in your activity level or given how you are scaling that business?
There are a couple of opportunities out there that we are looking at that are small in nature that probably get into Jay’s small amount of spend he discussed which is scored down 90% year-over-year. But we are going to be very, very judicious about that. Notwithstanding the transactions or the systems we have today are very high returns and we are very pleased with the results.
Given the environment we are in and the desire to take recurring cash flow and re-direct it to retiring debt we are going to be very judicious about how we pursue that and we are looking at some alternatives that may provide some alternative sources of funding that we would participate in but not be the direct investor in that activity. We will talk more about that later if those come to pass.
Jonathan Atkin – RBC Capital Markets
With respect to microwave back haul demand on your sites is that kind of going along at a steady pace? Maybe taking Clear Wire out for the moment are you seeing more fiber coming in relative to microwave or is that mix kind of similar?
It is both. We are continuing to see carrier’s self-provide microwave as well as pull fiber as well as use copper continuing to order more T1 capacity at sites. So it is a mixture and I don’t think there is one solution that the carriers, at least to my knowledge as we have spoken to them [audio interference]. Clearly it is a constraining point for them and they are looking for multiple solutions to solve their problem but from our perspective what we see is continued self-provision of microwave, some share microwave back haul as well as pulling fiber to sites and then the traditional ordering 4-5-6 T1 to the site.
Jonathan Atkin – RBC Capital Markets
James Young’s appointment, he has been with the company for awhile so I am guessing that doesn’t portend any major changes in your operating practices. If you could just talk about that.
Jim has been with us a couple of years and has made a tremendous contribution and this is further recognition of the contribution he is making and really leading the operating activities as you would think about the tower operation side of the business. Jim has taken a very strong leadership position and done very well in refining and improving efficiencies particularly around cycle times in terms of cycle times of application processing to commencement, standardizing practices and also building this service business we have been talking about and increasing take rates. A very strong leader and one we are very happy to see elevate to that level in the company.
The next question comes from David Barden – Banc of America.
David Barden – Banc of America
First, last week we saw the high yield offer you put out in the market which at the time was priced at kind of the 11% yield range trade around 9.5%, it has widened out a little bit with the market and issues with banks recently. It feels like if you are looking at a range of secure financing options to replace structured financing operations or other issues that what we are really talking about is refinancing costs that seem to be trending south of 10% and maybe even south of 9%. I was wondering, you have been approached and I was wondering if you could share with us kind of how attractive these refinancing options could be because it really starts to make the growth in the out years look better I think relative to what the market seems to be assuming today.
The second question if I could was just going back to that guidance question. You set this full year guidance which you didn’t change after third quarter results when Clear Water hadn’t been funded, Sprint had major questions about it, uncertainty about Verizon and AT&T. As I look at your first quarter guidance if I multiply the low end of adjusted EBITDA by four and assume it doesn’t grow all year you are at the low end and if you hit the higher end of first quarter guidance and don’t grow all year you are already above the high end. I’m just wondering is there any reason to believe this just isn’t hyper conservative guidance? Is there some other issue lurking out there?
Then the last question, if I could, I apologize it is kind of a geeky question but the white papers we have been reading about LTE seem to suggest that at the 7-8 MHz range these systems could have gigantic antennas, 7-8 feet tall. How do you think about the revenue opportunity and structuring towers to accommodate this kind of array?
I’ll take the first question and certainly hand the last question over to one of the guys sitting here on my left. With regards to the debt markets I think you have described it correctly. Our high yield notes offering has traded very well in the market and did trade as low at a yield basis of about 9.5%. If you think about the capital structure and the plan we are on here to use cash flow to retire debt, it is likely that the $900 million notes offering by the time we get to the end of 2010 or maybe the end of 2011 is going to represent about 12-15% of our debt outstanding. That has a cost to us of about 11%.
We accomplished two things by issuing the notes offering. One is that we accessed another market which gives us a liquid issue that we could subsequently go back and add an additional notes offering to and we know about where that would price so we have gained access to another market which I think is helpful. The other thing it does is it gives us cash on the balance sheet and gives us a lot of time and flexibility about what step do we take next. Your point about the fact that the debt at the structured level or at the asset level coming in at prices lower than what the high yield notes are trading at we would agree with. I think it is an excellent point and one that we are very focused on.
Certainly we don’t believe that as you look at leverage two years out we have got five times leverage that all of that needs to be done in the high yield market. We have historically been able to put four to five terms of debt on the asset at the AAA and AA level and if you look where our structured notes are trading today those are trading in and around 8% at the AAA level. Some of them are actually inside of 8% or have been over the last couple of weeks.
So to the extent, and obviously there is no guarantee as to where we will be able to access the market or if we are able to be successful at it but based on trading levels it would give me some confidence that the number could be well inside of the 10% ARD step up in coupon and obviously well inside the 11% where we just printed these high yield notes.
There is a little cryptic way to look at this that we are doing internally just out of simplicity. If you take our comments and my comments that Jay just reiterated, two years out you say we are probably going to be about five times leveraged, call it $5 billion by the time you pay down the cash flow and then you go through the refinancing transactions that are inevitably going to take place and optimizing the mix of what is secured versus the high yield we have already taken on, if you just say to yourself let’s assume a blended rate of 8% then that is $400 million of interest expense. If it happened to be a blended rate of 9% it would be $450 million. That is in and around the level of expense we are now incurring in this forward guidance for 2009.
So it is our sort of working assumption that the interest expense level we are running with today is basically the run rate as we work through the pay downs and refinancing at an inevitably higher rate. It is going to sort of wash itself out. So from our perspective it looks like 2009 is sort of the flat spot year in terms of recurring cash flow per share growth because of this increased interest expense we have just taken on board and from this point forward it is sort of a wash such that the organic revenue and EBITDA growth starts dropping through starting in 2010.
Just to share that with you that is sort of how we as a management team are sort of working through this and how the numbers sort of fall out.
With respect to the guidance of multiplying first quarter times four that is always what we are apt to do and we do that as well. Yet it doesn’t take much to move…when you have an expectation of a very good quarter which again is coming off of activity volumes we had back in the fall which we did talk about in the third quarter call as being very strong, you are having a great quarter.
We have lots of great carry over opportunity in the services side so we have high expectations for the first quarter. It is always tempting to annualize that and yet increased run rates in R&M expense, a decreased take rate or run rate in service margin can eat up some revenue growth pretty quickly on a quarter-to-quarter basis.
So you will have to trust us for a minute when we say look the full-year guidance is consistent almost to the penny in terms of currency neutral revenue growth on an organic basis that we delivered in 2007 and 2008. Could it be higher? It always could. We mentioned services and that could be higher as well if the take rate continues and activity continues. But perhaps we are being a little bit conservative here on the front end of the year but we think that the organic growth is certainly more than adequate.
With respect to the white papers you are reading we have seen some of the same things. I would tell you it is probably too early but what we are seeing from some of these early applications are not in fact the surfboard type. They look more like a more traditional antenna array from a 3G installation. So while we have seen some of those same impact or white papers obviously this is in a very, very early stage and there will be different configurations depending upon the site, terrain and the density. Thus far we haven’t seen an application with some outlandish amount of antenna capacity requirement.
The next question comes from Jason Armstrong – Goldman Sachs.
Jason Armstrong – Goldman Sachs
Sorry to just keep hammering the 1Q versus full year guidance. Maybe on the revenue side the site rental revenue guidance for 1Q09 big pick up. I think on the high end of guidance implying $13 million sequential up tick. That is a faster up tick or bigger pick up than we have ever seen sequentially in this business. I guess as we look forward to the rest of the year the leading indicators in the fall that would have pointed you to this type of number in 1Q09 have those indicators slowed down such that you are not adjusting the full year guidance? Maybe you can talk to the revenue side of it?
The second question is just on M&A, cost of credit clearly and cost of hedging credit is up, the equity currency is down. I’m just wondering why are you being linked to deals in India at this point. There are a number of press reports about you and American Tower looking at assets over there and it just seems inconsistent with the current environment.
Can I take that one first? Because that is a fun one. I think it is just people’s attempt to create an auction and to create some competitive deal tension. I can assure you that is not going on.
Jason Armstrong – Goldman Sachs
That’s what it seemed like and I wanted to make sure.
I’ll take a shot at the revenue question. What you have to look at, as Ben was going through his comments before on the application volume, typically when we receive an application it takes approximately four months before we start to see revenue from it. Though seasonally when we get to December and January we see a slow down in the application volume as the carriers are focused on getting on air with all those sites they had given us applications for during the year. Around about the November time frame we start to see traditionally a bit of a slow down and the focus is on getting sites on air.
Obviously what that means is you don’t see it necessarily in the fourth quarter revenues in terms of sequential growth but as we enter the January 1 run rate we get the benefit of all of those sites that went on air towards the end of the year and as you can imagine there is a rush to get sites on air to get them counted for the fiscal year and in this case getting them on before 12/31/08 which means as we stepped into Q1 we have all of that revenue running for the entire full quarter which makes our sequential increase in revenue from Q4 to Q1 look like a significant step and it is.
Obviously we then get the benefit of those revenues for the entire full year of 2009. When you look at Q1 it then has the counter point to that which is the drag from the fact that from December and January applications slowed down so as you look at what would come on air in the April/May/June time frame we would expect that to be a little bit light. So you don’t have as much revenue coming on in the second quarter.
However, as Ben mentioned, because applications are at the highest level we have seen in about 16 months in the month of February if you roll that forward 4-5 months out that means by the end of the summer going into Q3 and Q4 we would expect to be installing those [phone] towers. So as we look at our numbers for the balance of 2009 it looks like Q1 we get the higher step rate up and then in the back half of the year we would see the revenue start to grow again sequentially quarter-to-quarter but in the meantime we might expect a bit of a lull in the second quarter. At least that is how we are currently forecasting it based on application volume.
Obviously while some may be, it sounds like from your question, a bit concerned that maybe we are seeing something to the down side here I actually think it is a pretty strong statement about the achievability of our numbers in 2009. Obviously given the volume that we have and our visibility for a quarter out in Q1 we can basically achieve our 2009 forecast based on achieving and then replicating Q1 over the following quarters.
So there may be some up side here. I think we believe really what you are probably looking at is increased run rates in the fourth quarter 2009 probably not impacting significantly the total results for the full year 2009 but it does bode well for us as we look at our run rates going into 2010.
The next question comes from Michael Rollins – Citigroup.
Michael Rollins – Citigroup
Just a few follow-up questions. Maybe just to keep on this revenue theme for another couple of minutes in the first quarter are there any straight line benefits that you are seeing to revenue that are just mark up revenue from 4Q to 1Q or are you seeing any sort of transitory revenue items built into the guidance that you are expecting?
Secondly, on one of the slides you talked about the drop in some of that discretionary capital spending. You segmented it between land, acquisitions and new tower builds. If we focus on the land and the new tower builds how should we think about the revenue impact? If you spend half roughly the amount on new tower builds in 2009 over 2008 what does that mean for the forward 12 months in terms of the revenue contribution? Then if you spend very little on land this year versus last year what does that mean in terms of cost implications, the average cost of a tower so to speak in terms of your land rents and all the things that go along with that?
On the first question we have got about 60,000 tenants across our towers so there are always renewals and step ups from our various leases. Q1 historically has had more of a step in it related into renewals and there is some of that in Q1. Probably not so significant to draw a question. I think the biggest impact you are seeing there with the comments I made to Jason in terms of the activity we saw given that the activity in 2008 was back end loaded you have a significant number of new starts of revenues and our January 1 run rate lease expense was higher than what we had previously expected.
With regard to your second question on land purchases, we spent a lot of time on the last quarter call talking about land purchases and how we think about it. We have undertaken to extend or purchase a number of our sites. We now own about 23% of the land in the U.S. We have average lease maturities of a little over 30 years on the leased sites in the U.S. so we have a very long-dated portfolio there. We continue to actively work on the portfolio to extend the maturities.
There is some detriment in doing that though in terms of the way the GAAP numbers are presented because as we extend a lease we then straight line that rents expense over the term of the lease which creates a step in land lease expense. That has been largely offset in the past by the purchases we have done. What I would tell you is that we have managed that extension program, both purchases and lease extensions, is that will pare back the amount we are willing to incur in terms of step up and non-cash rent expenses we straight line over a longer term to mitigate the impact of not spending cash to buy land.
I don’t think that will be an impactful number and for the purposes of modeling it anyone could assume about a 3% growth in that expense on an annual basis. Obviously given that we are not building towers or acquiring towers that is about the only thing that should impact that land lease number.
With regard to the new tower build, we really frankly have not done very much in terms of new tower build. We have talked about in the past trying to ramp up the activity to get us to the place where we were able to do 200. We have not, quite frankly, gotten to the point where we were able to build that many towers. Tower acquisition and new builds in total in 2008 added less than 0.5% to the revenue growth. I really don’t think you will see much of an impact from us stopping to do tower builds or land purchases. I think we will be able to adjust kind of the way that we operate those activities and certainly at the EBITDA line would not expect to see any significant impact from the slow down.
A couple of quick things I would add, on your non-cash straight lining question if you look in our press release as we always do we provide you what the non-cash portion of revenues and non-cash portion of ground lease expense are and for the entire 12 months it was $1.8 million difference cash versus straight line. That will ebb and flow a little bit but given what Jay was saying about what we have done, again long-term view on protecting the ground lease side we have in fact ramped that number up because of this non-cash expense he was referring to. At the margin line it sort of all washes back to virtually zero and I would expect that to roughly continue over time.
Just to sort of punctuate the ending of your point the notion that the continued investment of the recurring cash flow in acquisitions or build drives a substantial amount of the growth in the business is just not a mathematical reality. Certainly borrowing additional capital or issuing shares over time can drive nominal results but that obviously comes with a cost. It comes with a capital cost.
We believe the cost of that capital today is extraordinarily high and absolutely our judgment is the way to reduce that cost of capital both on debt and the implied cost on the equity is to take cash flow and use it to retire debt and ultimately access the refinancing as we hopefully come through this credit environment that is clearly sort of unprecedented and certainly not reflective of the ultimate credit quality of the recurring nature of this business.
Just on an organic basis, as it always has been, the real value in these businesses comes from organic operations and growth on sites you already have and then judiciously financing those as we have over the years.
The next question comes from Mike McCormick – JP Morgan.
Mike McCormick – JP Morgan
Ben you talked a lot about what is happening from a wireless user standpoint. Can you give us a sense what you are hearing from the carriers and carrier behavior given what is going on in the current environment? Whether or not there is some concern about economic impact on discretionary data spend. I know some of the air card numbers look like they experienced a slow down. AT&T was the first one to report that. Just your sense for whether or not the economy could start to have a negative impact on carrier data behavior?
Given the events that we have all been through, the entire country, in the last six months I don’t think any of us go whistling past the graveyard in respect to making predictions about whether things are going to be impacted or not. Clearly there has been impact around our business and the volatility we have incurred are well beyond what the reality of the operations would suggest. I would never on this call suggest to you that we would sort of say you would never see or we would never expect any economic impact or a carrier couldn’t make a discretionary decision on slowing capital spending. They absolutely could do that.
What I can tell you on this call is that we have not seen it. We have not seen it to date. We have application volume that is, again, higher than what we have seen in the last 16 months. We are seeing carriers continue to report very strong results around specifically the incremental returns around the 3G data investment. We see other carriers working very hard to catch up and have a comparable product in the market recognizing that is their growth engine in their business today.
Everything that I can see today tells me that the logic follows that they are going to continue to invest to drive this network and that the consumer product that we are all desiring. I would never suggest to you never say never. They could make a discretionary decision and slow down. But that has not been the practice of late and we certainly don’t see it as we sit here today.
Mike McCormick – JP Morgan
Could you give us also your thoughts on the 1.5 additional tenants and what sort of assumptions you are making around that? I know you made some commentary about new technology and usage trends but what is the base case scenario there?
That is continuing to measure as it always has been voice carriers that are currently deployed in the market as well as now as we mentioned we included Auction 66 spectrum so we have new carriers launching in various markets. It doesn’t at all measure 4G technologies or frankly a signal strength quality of a traditional goal of a 3G network. It is largely around our traditional voice, albeit at higher standards than historical, but voice requirements for carriers deployed in the market.
The counter intuitive point I want people to make sure they walk away with is we continue to lease these sites over the last couple of years and yet the indicated need as measured by input even we get from carrier customers suggesting what their thresholds are for signal strength quality at site level the overall indicated need has continued to go up.
Let me qualify that in one respect. One thing we always talk about with this measurement is it doesn’t suggest timing. It doesn’t suggest over what period of time the carriers will actually work through those deficiencies in their network. Clearly there are prioritizations of spend between even as we have been talking about even a potential continued 3G build out and ultimately a 4G build out. It is somewhat likely you will continue to see some sites that just under perform for the foreseeable future but at the same time it is helpful from our perspective as a management team to realize that there is still latent demand of a significant amount.
Again at the current pace of leasing it would suggest about 9 years of additional leasing we can evidence today from the engineering drive tests we see today by continually refreshing this engineering material on our sites.
The next question comes from Jonathan Schildkraut – Jefferies & Co.
Jonathan Schildkraut – Jefferies & Co.
I just want to go through two things here. The first is, and I guess you were driving with this with Mike Rollins, an organic growth scenario for the company then just to kind of firm this down is top line of 6-8% and on the EBITDA line maybe 8-10%? Is that how we should think about it in a situation where the company can’t acquire new tower assets?
Secondly, would you give us a little bit more color on the longer dated tower revenue notes? As I understand it the tower assets underlying those notes are maybe 50-55% of your total tower portfolio. I’m just trying to get a sense as to that. Then also whether it is the same set of towers underlying both of those notes?
I’ll take the first one. Absolutely you pegged it. The 6-8% revenue growth and 8-10% EBITDA growth are sort of the operating metrics we pursue. Understanding that just because the law of large numbers, a static level of growth in revenue which again we expect to do this year compared to 2008 and 2007 will diminish that rate of change by about 80 basis points a year. So obviously you will come off of that.
What is important, as we always talk about, is how that ultimately translates on a per share value. So on a per share basis whether you are investing the capital to retire debt or even purchase stock as we have historically done, certainly not contemplating currently, either shrinking the share count or shrinking the interest expense through the availability of that recurring cash flow will augment the growth rate substantially beyond what you are getting on just a nominal EBITDA growth. So the value transfer just literally from transfer from debt to equity as you retire debt is not insignificant and is something I would point out to everyone.
On your second question there are basically three groups of assets in the U.S. business. There are about 1,200 assets underlying the GSL trust two that matures in December of this year. Then there are 12,000 assets underlying the $1.9 billion and $1.55 billion of tower revenue notes. Those have the expected refinancing dates respectively of June 2010 and November 2011 so they share in the same collateral pool. Then the other collateral pool or group of assets would be the GSL trust three notes. Those have about 7,500 towers underlying them and those are due in February 2011.
So if we talk about refinancing and this probably goes to the question you are asking and some of the earlier questions about how would we think to refinance, each of those assets have a discrete level of financing on them and we do have the ability under both our notes offering we recently did as well as our corporate credit facility to refinance the debt at those various entity levels as they come up for either their maturity dates or their expected refinancing dates. We have some flexibility as to how we do that.
Specifically to your question the $1.9 billion and the $1.55 billion of the tower revenue notes share in the same collateral of about 12,000 towers.
Jonathan Schildkraut – Jefferies & Co.
When you talk about refinancing those sets of assets that is how you get to your 4-5 times leverage and potential AAA and AA rates?
Correct. It is a combination of taking the cash on the balance sheet which today is about $860 million, add to that the cash flow that we would produce over the next couple of years and using the cash on hand as well as the cash flow to pay down the debt combined with growth in EBITDA it is the combination of those two things, the growth and the use of cash to pay down the debt that gets us to the assumed leverage levels we were talking about.
The next question comes from Anthony [Clareman] – Deutsche Bank Securities.
Anthony [Clareman] – Deutsche Bank Securities
First, if you could just talk about the buy backs that you did make of the two securitization facilities. I assume that the buy back level you made given you had liquidity that was far in excess of those was really due to liquidity that was available in those. Are there things you can do to repurchase more meaningful chunks of those securitizations particularly the GSL three in advance of that maturity or are there [make hold] provisions that would make that financially onerous?
At some level we would probably get to the place where we thought we needed to tender for the notes. It is a functionality of the amount of liquidity in those notes and also the reality that I was speaking to earlier in terms of what the price has done on those notes. At the end of 2008 many of those notes were trading in the $60’s from a price standpoint. Virtually all of our structured debt has been trading in the 90’s now. So while the opportunity to gain those notes at a steep discount I think is gone it certainly bodes well for our ability to hopefully be able to refinance in those markets as the holders of the notes have firmed up in terms of their view of the credit quality of the business.
I would tell you as I mentioned earlier I think it is prudent for us to keep some cash on the balance sheet given that these notes have traded close to par now and then use that cash in concert with a refinancing in order to completely retire a debt issue and then move onto the next maturity.
That goes to your view of probably not availing ourselves of the ARD provisions unless it is just an absolute necessity so we may want to keep some of that cash to be able to refinance the tower notes that have the ARD in 2010. So that is some of the flexibility and the different alternatives we are looking at which would then keep you from necessarily taking all that cash and just chasing the bid on the global signal notes to fully deploy the capital as quickly as you could and ultimately make a significant amount of headway retiring that 2011 part of the maturities.
It looks to us there will be some opportunities to finance at the asset level as Jay was mentioning so you just want to keep that flexibility.
Anthony [Clareman] – Deutsche Bank Securities
I was mentioning the GSL three only because when I had looked at it originally it looked like that facility was even more onerous in that in addition to the rate step up there were other things that could potentially happen in terms of the agent sort of taking possession of those assets to waterfall the principle down. So I guess that is why I was assuming you might target that one versus the cash balance.
The GSL three notes are a hard maturity. So we think about those as though you could take a high yield piece of paper with a hard maturity date. There are some provisions that could work in our favor but I think in this environment you can’t assume that the servicer or the trustee would be maybe what they would be in a more normalized credit environment. So I would look at those as a hard maturity that we need to refinance by February 2011 and obviously to your point to the extent we were into an ARD date or thought we couldn’t refinance those notes in February 2011 then we would look to apply the cash we have on hand to reduce the refinancing requirements we would have on those trust three notes.
I think what you are hearing from us though and I think this is an important point to make, the market has moved considerably since our third quarter call. In the third quarter call we tried to take everyone through the downside case of not being able to refinance our tower notes and rolling into an ARD period. That is something that today we are still comfortable with if we had to do it. That provides us enough liquidity as I mentioned before to pay our G&A and to service our debt up at the holding company.
However, I think we are more optimistic we will be able to refinance our various upcoming debt either anticipated repayment dates or our debt maturities with a combination of cash and refinancings and I think it is prudent for us to keep some cash to we can be a little bit more flexible in terms of how we approach those various markets and hopefully achieve the lowest cost of financing possible. We certainly don’t want to lock ourselves in too quickly on that.
Anthony [Clareman] – Deutsche Bank Securities
If I look at the CapEx numbers you talked about and you expanded your CapEx view to include sort of non-sustaining type CapEx, the top line growth range at the mid point is down obviously from 2009 over 2008 versus 2008 over 2007 and I realize we are missing two weeks of GSL in 2007 but is that all basically attributable to the decline in what I would call maybe success based CapEx you were spending over and above the sustaining CapEx?
No, it is two things. You mentioned the stub period which you are right about. That is about $15 million going back in 2007. If you back off the FX adjustment, if you make it currency neutral within those two periods the number is within like a million dollars of the change year-over-year.
Anthony [Clareman] – Deutsche Bank Securities
Could you just remind us how your escalators work? Are they at all tied to CPI or CPI related indices such that if there was deflationary pressure in the U.S. would you see a meaningful revaluation of any of the annual escalators you have in your contracts?
We have a portion of our lease contracts both at the rental revenue line as well as the land lease expense line that are tied to CPI. In both cases it is about 35%. In virtually all of our contracts both in terms of our expense side of that equation and the revenue side there is a floor of zero. So if CPI was to turn negative either the rent that we are paying or receiving would not decrease, they would just stay the same as they had been in the previous period. Most on both the land lease side and the rent side are fixed.
The next question comes from Gray Powell – Wachovia.
Gray Powell – Wachovia
A longer-term question on wireless data and LTE, I have heard industry estimates that 4G adoption could shrink the radius of wireless carrier cell sites by 30% or more. Could you just talk about what your longer-term thoughts are here and do you have any rough statistics on how cell density has increased in the last few years as we have gone from 2G to 2.5G to 3G?
We have been the great beneficiary of cell site radius shrinking over the last ten years. Really with every generation of technology and the consumer take up that is now over 80% penetration and 700 minutes per month, so we have been the great beneficiary of that. That does not appear to be abating. That is clear when we see the network search ring data from carriers as they are planning their roll outs and their upgrades.
I couldn’t specifically opine, it is too early, on 4G but if the phenomenon holds and as you continue to want to put additional bandwidth through a certain amount of cell sites and combine that with consumer take up which has continually been underestimated it is a combination that has historically resulted at about 2-3 times the density requirements on a 3G network than we would have seen on an older, traditional 2G network. That is in order to make the bandwidth applications interesting so you can get reasonable speed on an internet session. We don’t see that abating and the conversations we are having with carriers would continue to suggest that is in play.
Gray Powell – Wachovia
The drive test statistics you gave I thought were very interesting. On the 1.5 additional tenants of demand I just want to make sure that does not include 4G right? Then can you just tell me what Crown Castle’s updated number is in terms of tenants per tower? It has been awhile since we have gotten that update. Is it closer to 2.7 tenants per tower now?
It is about three. Again, I say about because it is hard whether you do physical tenants versus revenue. We have lost track of physical tenants in a sense because we have had so many upgrades over time. You may have an AT&T or a Verizon or somebody who has continually improved an installation which is very common. So the old notion of a broadband tenant has been a little bit sort of washed out here and it is probably just a revenue number. That is probably the best way to look at it but it is effectively about three today.
When we do that drive test measuring I should have added we do that on a carrier specific and site specific basis. So we are looking at what the either observed average signal strength is in a market for a carrier or in some cases where they will actually tell us what their targets are we are loading that into our system to actually predict or determine deficiencies at the site by site level. So that is just a quick recap of how we are doing that.
Gray Powell – Wachovia
On Clear Wire we have heard from other tower companies that more of their deployments will be treated as new tenants paying closer to full rent versus just a typical amendment. How do you expect that to play out with your portfolio and also because you have the Global Signal assets do you expect that to give you any incremental advantage in terms of attracting Clear Wire?
I’d say it is going to be a mixture of both and would probably confirm what you have heard about it looking like a lot of discrete installations, not a full installation necessarily but certainly materially more than an amendment and then there will also be those sites where the obvious best approach is to upgrade an existing Sprint installation and we are working through both those scenarios and I think they will be meaningful on both sides.
The next question comes from Michael Bowen – Piper Jaffray.
Michael Bowen – Piper Jaffray
The first question I wanted to ask is Sprint made an announcement the other day talking about in 2008 they did a significant, well over $50 million, investment in Houston, San Antonio, Little Rock, Oklahoma and in talking with SBA they said basically they saw nothing out of Sprint in 2008. I wanted to find out if in fact, I think Sprint is about 26% of your customer base if I am not mistaken and larger than second place AT&T and Verizon. I was wondering if you could give a little bit of detail if you are allowed to on what you are seeing out of Sprint and what you might expect in 2009?
Then with regard to MRR trends, I think we calculated it as flat to slightly up in the fourth quarter over the third quarter but still very good numbers and I was hoping you could talk to us a little bit surrounding how we might think about that in 2009 and also whether there is any seasonality there? There typically has not been but give us some ideas there?
We are going to make this quick. With respect to commenting specifically around Sprint we are just probably not going to do that. We have taken it as a practice of the company to not give real specific, customer by customer activity levels. We feel like that is really their place to talk about that. So if you will forgive us we are probably not going to go into too much detail with you about what Sprint may or may not be doing market by market.
I’ll just confess…
On your second question was that monthly recurring revenues you were referring to?
Michael Bowen – Piper Jaffray
I mentioned I think on Jason’s question earlier in the call we obviously saw a significant step up during the fourth quarter as we added additions. You can look at our first quarter results or forecast and sort of back into what the monthly amount of those recurring revenues are. As I mentioned I think that creates some of the fluctuation and questions about how do we look at the full year 2009.
Michael Bowen – Piper Jaffray
Do you think there will ever come a point on your towers where perhaps the monthly recurring revenue flattens out on a per tower basis or do you just foresee this to continue to grow?
You never say never. Obviously there are a number of things that can affect that. But if you look at the base of the revenues there they have contracted escalators. The terms are on generally initial terms customers are signing up for 7-15 years on the initial term and those contracts have embedded escalators or 3-4% in most cases. So assuming there isn’t a broader impact then yes we would expect the monthly recurring revenues to grow on an annual or monthly basis.
Michael Bowen – Piper Jaffray
With regard to FX and with regard to Australia, obviously it forces you to play economist here but how do you think about that? What were your processes to go from 0.67 to 0.65 and clearly I am assuming that you think that is probably a bottom but what were your thoughts and methodology behind that?
I certainly would not want to try and predict FX rates and the way we did it was pretty simple. Honestly we just looked at the spot rate which is typically what we use for the quarter in which the next quarter in which we are giving guidance and then we look at the forward rate for the following 12 months to figure out what we believe about the guidance for 2009. We are just using basically what the market assumed rate is between AU dollars and U.S. dollars.
I want to thank you all again for participating in this call and hanging in 1.5 hours with us. I think we were able to cover a lot of good material this morning. We remain very optimistic about the prospects for 2009 and we will talk to you on the next call. Thank you.
Ladies and gentlemen this concludes the Crown Capital International Corporation fourth quarter 2008 earnings conference call.
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