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Executives

Jay A. Brown - SVP, CFO and Treasurer

Analysts

Simon Flannery - Morgan Stanley, Research Division

Crown Castle International Corp. (CCI) 14th Annual Needham Company Growth Conference January 12, 2012 5:30 PM ET

Simon Flannery - Morgan Stanley, Research Division

Okay. Good afternoon, everybody. My great pleasure to introduce Jay Brown, Chief Financial Officer of Crown Castle. Before we get started, please note that all important disclosures, including personal holdings disclosure and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

The tower industry is going through a pretty special time right now and we got – heard a lot here about LTE deployments and clearly you and your peers are very well positioned to help the carriers deploy those networks. Why don’t you just talk about some of the key priorities for Crown in 2013? You’ve obviously got some deals to integrate – you’re continuing to invest in your DAS systems with NextG and so forth. So just give us a little bit of inside into what you’re really focused on?

Jay A. Brown

Sure. Good afternoon, everybody. Thanks for the invitation. Simon, it’s great to be here again with you.

Simon Flannery - Morgan Stanley, Research Division

Thank you.

Jay A. Brown

The business is going very well and it’s really an unprecedented time in the industry where you have all four of the big operators spending significantly on their network. Obviously, Verizon, AT&T, T-Mobile and Sprint are in the middle of deploying next generation technologies, LTE technologies. And we’re seeing a lot of activity from them and so top of the list of things that we’re working on is trying to keep up with the demand for the assets and the amount of equipment they want to – that they want to add to our site.

If we look at it on a purely activity basis and by activity I mean, if someone wants to add an additional antenna or line to an existing site, that activity is multiples of kind of the base line activity that we’ve seen over the last four to five years. So we’re incredibly busy and our employees are incredibly busy.

On top of that, sort of operating activity and adding additional tenants to the assets or integrating two large acquisitions that we did during calendar year 2012, the NextG acquisition in the distributed antenna space we’re continuing to integrate those assets. I would describe those as basically integrated at this point and we’re spending more of our integration activity in that space and you may have some questions that you want to sort of get to there, so feel too much of that. But as we think about building out additional systems and so we’re – we’ve tried as we talked about in previous conference calls, we’ve tried to scale that business in terms of the amount of staffing that we have and the type of employees that we’ve hired to take advantage of potential opportunities in that space.

And then on the T-Mobile agreement that we did acquiring the 7,200 towers from T-Mobile were early stages of that integration where about 90 days and continuing to make good progress there. We probably have another three to five months left of really locking and tackling activities related to that integration activity and – but well on our way and things are progressing well there.

Simon Flannery - Morgan Stanley, Research Division

Right. And if we look at you, you gave your guidance originally, I guess, in – it was about October, late October-November and you didn’t really update the organic guidance of that, which I think is pretty common for how you typically approach that sort of Q4 earnings results. But it did seem like you had very good visibility into – already into your revenue stream for this year and you already – you had very good services momentum into Q1, which you didn’t really extrapolate into the rest of the year. It struck as you’ve been pretty conservative particularly when we heard subsequently with another month under their belt and a sense from SPA and AMT. Can you just give us a little bit of color around that?

Jay A. Brown

Yeah. The big key variable I think for 2013 in terms of our results and where do we ultimately end up by the time we finish ’13, it’s going to be around the activity for in-fill site. And an in-fill site for us as we were describing would be a site where Verizon or AT&T, T-Mobile, Sprint or the other operators are not on that tower and they want to install on the asset and so they put a full installation on that tower. It could also come in the form of they’re at a given height and they want to add an additional installation at a different height on the tower.

And that activity appears to us to be increasing. As we talked about on the fourth quarter call and we have to see how it develops over the course of the year and what the impact is to our calendar year ’13 results. But I would also say, if you put it in context, year-over-year AFFO growth per share and the guidance that we gave is 21% calendar year 2012 to calendar year 2013. And that’s coming off of a base of more than $3 a share. If you look at our historical results over the last five years, there been very two periods of time where we’ve exceeded 20% growth in the calendar year or so. We are certainly scrapping and applying for every dollar we can find and every percentage growth we can find. But from an early year standpoint in terms of our outlook for growth, it’s pretty aggressive relative to what we’ve seen over the last half decades. Some of that has been driven by the refinancings that we did, we got some benefit from those. But there is a lot of core organic growth in those numbers as well.

Simon Flannery - Morgan Stanley, Research Division

Okay, great. And I think SBI was mentioning last week that they’re starting to see some more activity from Clearwire which I don’t think any of you absolutely put in your guidance. Are you starting to see that as well?

Jay A. Brown

We have seen some of that and we haven’t baked really hardly any of that into our outlook for 2013. But it does look like that could be a 2013, 2014 event see them come back and start to (indiscernible).

Simon Flannery - Morgan Stanley, Research Division

So you talked about fill in and Verizon should be pretty much down with their geographic rollout mid-year. AT&T is going to be a 250 million pops by the year-end, T-Mobile, Sprint a little bit behind that. How do you think about the growth rate over the next two to three years, we go from this geographic footprint towards more of a densification of the network or AT&T was here today talking about their WCS 2.3 spectrum would presumably need some utmost density as well.

Jay A. Brown

Right.

Simon Flannery - Morgan Stanley, Research Division

Is that really what keeps the growth rate fairly comparable levels for several years to come?

Jay A. Brown

Yeah, I think the – if you were to look at kind of a three-year timeframe, that will be the timeframe that T-Mobile and Sprint would complete most of their activity where they’re going out and touching sites at they’re already on. I don’t know that people are generally counting on a lot of in-fill sites from those two carriers over that period of time, from their announced plans of upgrading to next generation technology. Thinking about with the comments that Verizon and AT&T had made, it certainly would appear that as a transition from upgrading their existing sites that they’re going to be adding a lot of brand new sites throughout their network and not likely to drive revenue growth.

So from a – I made the comment earlier, its unprecedented levels of activity, also frankly unprecedented levels of visibility until what the carriers are going to spend over the next several years. The carriers historically have been more on a annual cycle in terms of budgeting and this is what their networks going to look like and this is where they’re going to spend capital and we could get some sense as to what those sites would look like over a 12-month period of time. And all of them have two to four year deployment cycle budget plans that are in the market and certainly looks like we could sustain a level of growth that looks similar to what the outlook is for this current year.

Simon Flannery - Morgan Stanley, Research Division

Good. And you have them allays with the number of the carrier spend which gives them a certain amount of room, are you starting to see, maybe you talked about go to a different height on the tower you’re starting to see some more sort of out of the bucket activity?

Jay A. Brown

We are –all of the new activity that I spoke about whether that’s going on a different level on the tower or going on a tower that they’re not on currently, all of that is incremental growth to us that shows up the GAAP revenue line. Some of the activities was maintenance we’ve presold some of that. Little over half of probably the activity that’s ongoing currently with presold. And so as that activity grows to the extend that they continue to do maintenance task kind of the levels that we presold, we would see some benefit of the revenue line from that. But that’s today most of that has been presold.

Simon Flannery - Morgan Stanley, Research Division

Okay. And you’ve just – you said that you’re 90 days with the T-Mobile towers, but is there some secret source that you can bring to bear given your scale, given your team, given your systems to really help AT&T and Verizon in particular, get on those towers and away that maybe T-Mobile wasn’t just as effective as you might be given – that is what you do, this is your core business?

Jay A. Brown

Yeah, I think you hit on it in your last comment, it’s our core business. It’s our core competency what we do with antennas to powers. And obviously that’s not what T-Mobile’s core competency is and so we’ve seen a meaningful amount of pent up demand from carriers who wanted to be on those assets and not being able to collocate on them. And pleased in the early days in terms of the amount we’re seeing growth that we’ve seen on those assets and the demand that we think what’s going to be there over time. So the secret sauce of making it fast and easy for the carriers it’s a matter of getting all of the documents into the system, making sure we understand the various contractual terms and limitations whether that’s from the ground lease standpoint, structural standpoint and then being able to execute quickly once the carrier does want to go on those site. We think we did that pretty well and that’s what we’re working on now in this last phase of integration activities.

Simon Flannery - Morgan Stanley, Research Division

Okay. Let’s turn to the NextG deal then, distribute antenna systems it strikes me that there is a little bit of divergence in terms of just as the race on international, particularly emerging markets between the three major carriers. It’s not divergence on DAS systems and I think one of the debates is around to what extend you can get multi-tenants economics on DAS? So you just talk through your experiences, you’ve talked about some very significant growth that you’re experiencing or expect to experience going forward?

Jay A. Brown

Yeah, our experience thus far has been distributed antenna systems built in the right location, see multiple tenants added to them and we had great success in the early days of being able to do that. Just for the benefit of the audience, distributed antenna system are a alternative infrastructure to towers and they’re used in places where traditional towers won’t meet the need. In a location where a tower will meet the need, it’s by far the cheapest alternative, most cost effective way for the carriers to deploy the infrastructure and so they would choose traditional towers over another alternative distributed antenna systems really hit the bill in a place where the carrier can’t solve the need whether that’s capacity or coverage, it can’t solve the need with a traditional tower. We’ve done – we count nodes to some degree which are location where RF signal has being distributed. We’ve about 10,000 nodes today and the early systems if you look at them on advantage basis, meaning systems that we built in 2008, built in 2009, built in 2010, those legacy systems that have been on air for multiple years have seen lease-up that’s significantly faster than what we saw in towers.

And that’s as you probably would expect because the best locations in the highest need are what’s getting developed and built right down the distributed antenna systems market and so early days have been it’s a model that looks like multiple tenants on a system and returns are very good.

Simon Flannery - Morgan Stanley, Research Division

Right. Can you talk about some of the churn you’re expecting to see from iDEN (indiscernible) and from MetroPCS? How should we think about that over the next couple of years?

Jay A. Brown

On iDEN churns, Sprint is in the process obviously of their network position and they’ve indicated that they’re going to remove their iDEN equipment that iDEN equipment makes up about 3% of our consolidated revenues. They have the contractual right to remove that equipment on our assets beginning in 2014 and then part of the way through 2015. They may remove some of that equipment earlier than that, but in terms of the stream of revenue continues for us until those timeframes 2014, 2015. Ultimately whether or not we see them actually take down all of that equipment or do they replace that equipment with LTE equipment, I think we’re going to have to wait and see. It's still too early for us to tell whether that equipment or that slot on the tower is going to be reused and we don’t see that churn with regard to Metro and I’m assuming irrelative to kind of the T-Mobile combination there. Historically we’ve just not seen a lot of equipment come off the assets following consolidations, and so in the case of the Metro and T-Mobile combination ultimately maybe there’s some equipment that comes off the towers. The amount of overlap that’s there is relatively small, it's got a 1.5% of consolidated revenue. So, relatively small amount of overlap and frankly I wouldn’t expect based on past experience to see a lot of churn there.

Simon Flannery - Morgan Stanley, Research Division

Your international business in Australia it sounds like it's performing very well, it's seeing a lot of the dynamics that we’re seeing in the U.S. market. How are you thinking about, it looks like -- we’ve just seen you’re dealing KPN selling comes from towers. It looks like maybe some of the other Europeans are considering tower portfolio, so you don’t necessarily have to go to emerging markets where a lot of the opportunities were before. Are you thinking you may see some more opportunities internationally or is -- are you pretty much sticking we think to North America?

Jay A. Brown

We’re open to looking at other markets and certainly continent of Europe would be interesting to us, yeah but we used to own a large business in the U.K. Australia has done very well and is continuing to do very well. They’re in a similar mode as the U.S. in terms of deploying 4G technologies and LTE and that looks to be a real driver for us of growth in Australia. The capital allocation conversation is really in, the way we think about it tied to the alternative investment that we could make of using our cash flow to buy back our own share. And to the extent that we would look at an asset whether that’s in the U.S. or in Australia or some other market that we’re not currently in, that opportunity is compared against just buying back our own shares and the return that we think we can get doing that. And to the extent that we looked at opportunities and thought there was an opportunity to beat the returns of buying back our own shares, we would be open to doing that whether that’s in a European market or Australia, and that was kind of the analysis for why we did the T-Mobile transaction. We looked at it and got the returns on, to find that T-Mobile assets was better than that of buying back our own shares at that point.

Simon Flannery - Morgan Stanley, Research Division

I think the success of that transaction may have caused some of the carriers to rethink owning versus selling towers. So if the fault was that lot of the mid-sized tower private tower portfolios had been consolidated, there wasn’t much more to do here, but it feels like we may get certainly U.S. cellular has said that they will look at divesting some of their towers but some of the bells maybe looking at options there. Is that something that you think may make, we may see more M&A around that?

Jay A. Brown

We might. We might see the carriers go and look at divesting some of their assets and our interest in those would really come down to, what do we think the growth prospects on those assets are against what’s the ultimate price required to pay to acquire them. It certainly I think makes good sense for the carriers for these assets to be in the hands of independent tower operators, because I think we do a good job of making that space available at a reasonable cost to the carriers and then the price that we’re willing to pay really comes down to how we think about underwriting the potential growth there.

Simon Flannery - Morgan Stanley, Research Division

All right. I think the financing cost has helped.

Jay A. Brown

They certainly have, long dated data at low cost; it's been a very good environment to grow the portfolio.

Simon Flannery - Morgan Stanley, Research Division

So what was staying on capital structure, we just had Equinix here few minutes ago, getting ready for their REIT conversion in 2015, what's the latest trend from you?

Jay A. Brown

Our REIT conversion is likely in the 2015 timeframe. We have about $2.8 billion of net operating losses to consume and at the current pace we would consume them in calendar year 2015 maybe early 2016. So our timeframe continues to be in that 2015, 2016 timeframe that I would expect we would convert to a REIT. I don’t see us converting prior to consuming the majority of the NOL, and but do think longer term that makes good sense for us to make that conversion.

Simon Flannery - Morgan Stanley, Research Division

And where are you in terms of the preparation and considering filing of private letter ruling and so forth?

Jay A. Brown

We're early days of that. We have spent a reasonable amount of time meeting with advisors and considering what would be the right team to help us grow through that process. We’re obviously not quite on the clock or verdant to get it done quickly, but we have begun the preliminary work associated with it. And I think if we -- we’ve done enough work to get ourselves in a position that if it was at -- end of 2014 or beginning of 2015 event that we could get there by then.

Simon Flannery - Morgan Stanley, Research Division

Sure. And the American tower did a lot of the leg work in terms of presumably getting the IRS up to speed or …

Jay A. Brown

There’s been a number of private letter rulings in the REIT space associated with tower related assets and so we don’t really expect that to be a hard conversation because there’s been a lot of ground work laid as you point out by Americans certainly on a sizable basis. But, there’s been a number of other smaller tower companies that have gone through that process, so we think we’ll be successful as we go through that process.

Simon Flannery - Morgan Stanley, Research Division

We talked a couple of times about your ability to raise capital cheaply here. Are we pretty much done in terms of refining the balance sheet and how should we think about leverage, you made a couple of big deals as we talked about, but you do have this REIT consideration down the pipes of, I think in the past you’ve talked about wanting to get your leverage down before you convert. Now what's the latest on that?

Jay A. Brown

Well the average cost of debt is now 4.5% and it's got an average term remaining of a little over seven years. So, there’s not a lot of meat left on the bone so to speak. There’s $500 million bond that’s got a coupon of 708 that at some point in time probably makes sense to refinance that the markets hold where they are. The opportunity to do that is probably later this year before it would economically make sense for us to do that relative to the make whole cost associated with taking in out early, but that’s the last piece of the capital structure that we didn’t touch over the last 12 to 18 months as we were refinancing all the debt and pushing it out long.

As I think about REIT conversion, I think there are a couple of things that we think as a business makes sense for us going into that REIT space and I talk about it as trying to hit the ball right down the center of the fair way and there are -- it's impossible to take any one attribute of the business and say well if we just did this one thing then it would be attractive in the REIT space, but I think there are a couple of things that are important as we go in there. One is, our long-term strategy on having assets that are low risk and it's one of the reasons that we’ve avoided going into the emerging market because we think the credit quality underlying this growing annuity that we produce to investors will matter long-term in terms of the cost of equity.

Second thing is the quality of the assets and the location of those assets, and thirdly I would point to capital structure. So, I don’t necessarily think we have to be investment grade in order to be a REIT, but I think as in any boxes as we can check off in the REIT space as looking like center of the fairway, I think plays to our advantage, quality of assets, quality of the tenants and in the capital structure I think as much as we can model our business to look similar to like a Simon Properties or Boston Property I think long-term that plays well for us in that space and so we’ve tried to take deliberate actions both in terms of the way we’ve acquired assets, the way we think about different markets around the U.S. and as we think about capital structure with that view in mind because we think it will drive shareholder value as we look to reduce the cost of equity long-term when we’re converted to a REIT -- when we’ve converted to a REIT and we’re paying out the majority of the cash flow.

Simon Flannery - Morgan Stanley, Research Division

All right. Okay, we’ve got time for some questions from the audience. Wait for the microphone.

Question-and-Answer Session

Simon Flannery - Morgan Stanley, Research Division

Could you talk a little bit about DAS lease-up in general and kind of broadly speaking in the market how early site experience quick lease-up. Could you talk more specifically about the NextG assets and how lease up has been in those networks relatively to expectation?

Jay A. Brown

Sure. The question was around lease-up, I’m not sure everybody in the room could hear it; the lease-up on the NextG assets that we acquired during 2012. When we underwrote that transaction we assumed that we could increase the amount of EBITDA coming off of the NextG assets by five to six times over a five-year basis. And we’re today in terms of the run rates of revenues and cash flows coming off of those assets slightly ahead of what we underwrote in that acquisition so the lease up associated with those assets has done very well and slightly ahead of what we had expected when we did the acquisition.

We talked about this a lot when we announced the acquisition that we thought it was both the platform for us to grow the business but a transaction that was underwritten just solely based on the assets that were there today, and both have been true. The assets that were there at the time that we acquired the business, those assets have continued to perform and add tenant for the pace faster – slightly faster than what we had expected. And the team that we gain through that acquisition has given us an ability we think to bid and win on assets longer term that we think will be great in the portfolio and give us future lights of growth in that market.

So, we have got a great team out of it and give us the opportunity to invest more capital on that space longer term and drive returns as well as outperforming at least in the short-term – outperforming what we initially expected.

Simon Flannery - Morgan Stanley, Research Division

So then continuing on the capital structure, what's your capability; your ability to buyback stock if that’s something that you think you can revisit this year after taking on some debt for the acquisitions?

Jay A. Brown

We’ll do in terms of cash flow this year. We used AFFO to measure that after our maintenance CapEx, we’ll do over $1 billion in 2013 that’s the outlook. The base level of CapEx that we would expect to somewhere in the neighborhood of $350 million to $400 million somewhere in that range, and that would be comprised of buying back land underneath our own sites, doing distributed antenna systems, and then a little bit of CapEx associated with adding additional tenants to the existing sites that we own.

After that the $650 million is really available for whatever we think is the highest -- has the highest potential to grow long-term cash flow for share and historically the majority of that has been allocated towards buying back shares. Over the last eight or so years we have bought back about a third of the Company, shares outstanding and have invested about $2.8 billion buying back shares, and I would tell you Simon that’s kind of top of the list of where I would expect us to allocate the capital that excess capital beyond that normal level of CapEx. To the extent that we have opportunities to do things like buying land or distributing antenna systems we’d love to make those investments beyond the levels that I’m mentioning here, but that’s sort of been the outer bans of where we think the opportunities will be in the calendar year.

So, if more opportunities show up we’d be happy to spend more capital there, but in the absence of that I think our default position will likely be to buyback shares. There could always be an acquisition that comes along that may take some portion of that capital and we’d be open to that but again if we were to do that acquisition it would be because we thought the contribution to long-term cash flow per share of those acquisitions was better than the benefit of buying back our own shares.

Simon Flannery - Morgan Stanley, Research Division

So your de-leveraging primarily comes from growing your EBITDA.

Jay A. Brown

I think it will primarily come from growing EBITDA.

Simon Flannery - Morgan Stanley, Research Division

So you touched on the ground leases, perhaps you just remind people of your portfolio where you are today in owned and under long-term leases?

Jay A. Brown

A little over two thirds of the assets are on lease land. We have on average over 30 years remaining on those ground leases. Over one third – little over one third of the assets are on land that we own. We are constantly in the market offering to those landlords that are on the lease land either the opportunity to sell their land to us or alternatively extending the leases. And as I think about that it's really off balance sheet that and if a landlord is willing to lease us via the land lease at a lower cost than what ever I can bring it on balance sheet for I am happy to extend the lease with them, alternatively at the right price point we’re a buyer of land and bring it on balance sheet. We think we have the best portfolio of land position in the industry and on the list of why we think we’re low risk that certainly goes on there and makes us look much more like a traditional REIT in terms of control of the land for a very long period of time. I think longer term that will be something that REIT investors will focus on as we convert to a REIT and we think we’ve made great strides in making the underlying land really a perpetuity and eliminating any concerns or risks associated with loss of the tower because of the loss for ground lease.

Simon Flannery - Morgan Stanley, Research Division

So you’re not seeing too much exposure to some of the aggregators?

Jay A. Brown

No, we really haven’t and a part of that has been because we started earlier than early anybody else in the industry of buying back around land and extending ground leases. So before the aggregators really were able to accumulate any significant amount of ground leases we had already gotten focus on ours and taking care of it.

Simon Flannery - Morgan Stanley, Research Division

Okay. And maybe we just finish up with big topic in the industry is Dish and they now have their spectrum available with some build that requirements and I think they’ve noted that they’re really looking to partner to be that. So just talk us through that their ability to partner and how that would work in with some of the MLAs and would that be essentially an amendment to an existing MLA that you added, that they did indeed build it with one of the big four?

Jay A. Brown

Yeah, if they would have partner with one of the big four operators, we don’t have any agreements in place with any of the operators today that will allow them to collocate or to share with any of our existing tenants without coming to us and having a discussion about what’s the right rent structure for that. We said publicly lot of times we will be completely open to that. I think it makes good economic sense for them to share existing networks and in past days we’ve done some of those agreements. We did one with Sprint and Clearwire, when it look like that was kind of the path that they were going down. So we would be open to that and I think that makes good sense for both parties. But if that were to occur, if you were to see that in the news that would be a revenue added (indiscernible) within for us and sometime we would need to work on, we don’t have any of those in place today.

Simon Flannery - Morgan Stanley, Research Division

Great. Well, unfortunately we’re out of time, Jay. Thank you very much. We appreciate your time.

Jay A. Brown

Thank you. It’s good to be here.

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