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SBA Communications Corp. (NASDAQ:SBAC)

Q1 2009 Earnings Call

May 05, 2009 10:00 AM ET

Executives

Pamela J. Kline - Vice-President, Capital Markets

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

Kurt Bagwell - Senior Vice President and Chief Operating Officer

Jeffrey A. Stoops - President and Chief Executive Officer

Analysts

Dave Coleman - RBC Capital Markets

Michael McCormick - JPMorgan

Ric Prentiss - Raymond James

Brett Feldman - Barclays Capital

Simon Flannery - Morgan Stanley

Jason Armstrong - Goldman Sachs

Chris Larson - Piper Jaffray

Gary Powell - Wachovia Securities

Jonathan Schildkraut - Jeffries & Company, Inc.

David Barden - Bank of America/Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SBA First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

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

Pamela J. Kline

Thank you for joining us this morning for SBA's first quarter 2009 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer; Kurt Bagwell, our Chief Operating Officer, and Brendan Cavanagh, our Chief Financial Officer.

Before we get started, I need to get the standard SEC disclosure out. Some of the information we will discuss on this call is forward-looking, including but not limited to any guidance for 2009 and beyond. These forward-looking statements may be affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in last night's press release and our SEC filings. Particularly those set forth in our Form 10-K for the fiscal year-ended December 31, 2008, which documents are publicly available.

These factors and others have affected historical results, may affect future results and may cause future results to differ materially from those expressed in any forward-looking statement we may make. Our statements are as of today, May 5, 2009, and we have no obligation to update any forward-looking statement we may make. Our comments will include non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and the other information required by Regulation G has been posted on our website, www.sbasite.com.

Brendan, would you please comment on the first quarter?

Brendan T. Cavanagh

Thanks Pam. Good morning. As you saw from our press release last night, our first quarter financial results were excellent. We exceeded the mid-point of our guidance for site leasing revenues, site development revenues, Tower cash flow and equity free cash flow. We were above the high-end of our guidance for adjusted EBITDA.

Total revenues were a $135.1 million; up 22.9% over the year earlier period. Site leasing revenues for the first quarter were $115.5 million or 29.2% increase over the first quarter of 2008. This site leasing revenue growth was driven by both organic growth and acquisitions.

Site leasing segment operating profit was $87.9 million or an increase of 30.6% over the first quarter of 2008. Site leasing contributed 97.1% of our total segment operating profit in the first quarter.

Tower cash flow for the first quarter of 2009 was $89.3 million or 31.9% increase over the year earlier period. Tower cash flow margin was 78.7% up 120 basis points over the year earlier period.

Our services revenues were $19.6 million compared to 20.5 million in the year earlier period or a 4.7% decrease. Services segment operating profit was $2.6 million in the first quarter of 2009 compared to 2.4 million in the first quarter of 2008. Services segment operating profit margins were 13.3% in the first quarter of 2009, compared to 11.5% in the year earlier period. Kurt will discuss services in more detail shortly.

SG&A expenses for the first quarter were $12.5 million, including non-cash compensation charges of 1.6 million and acquisition related expenses of 0.4 million. Acquisition related expenses were capitalized in all periods prior to 2009. SG&A expense was $10.5 million in the year earlier period, including non-cash compensation charges of 1.4 million and 0.9 million of one-time net benefit associated with the reduction of accruals that were originally recorded at estimated amounts.

On a normalized basis, our cash SG&A expenses are only up approximately 5% over the year earlier period, despite portfolio growth of over 26% in 2008.

Net loss during the first quarter was $17.9 million, compared to a net loss of 19.2 million in the year earlier period. Net loss for the first quarter of 2009 included a $5.9 million gain on the early extinguishment of our debt, net of the write-off or deferred financing fees. Net loss per share for the first quarter was $0.15, compared to a net loss per share of $0.18 in the earlier period.

Weighted average shares outstanding for the quarter were 118 million.

In our press release and in our 10-Q, which will be filed soon, you will notice some restatements related to the accounting for our convertible note transactions. We will require to adopt APB 14-1, effective January 1st of this year.

This accounting pronouncement requires that we bifurcate and record a fair value to debt and equity components of our convertible notes. This accounting results on us recording an initial discount to the principle balance of our convertible debt.

Over the life of the instrument, a caring value is accreted up to its full face value to a non-cash interest expense. APB 14-1 required us through retroactively apply this new accounting and restate our prior period financial statements accordingly. Although the accounting rules have changed and our reporting will be somewhat different, the economic nature of the transactions has not changed.

Adjusted EBITDA was $81.7 million in the first quarter of 2009 or a 32.9% increase over the year earlier period. Adjusted EBITDA margin was 61.4%; up from 56.9% in the year earlier period.

Once again, equity free cash flow increased materially in the quarter; reflecting strong adjusted EBITDA growth. Equity free cash flow for the first quarter of 2009 was $52.8 million; a 37.9% increase over the year earlier period.

Equity free cash flow per share for the first quarter of 2009 was $0.45 or a 28.6% increase over the year earlier period. In the first quarter, we acquired seven towers and built 25 towers, ending the quarter with 7,884 towers owned and the right to manage approximately 5,000 additional communication sites.

Total cash capital expenditures for the first quarter of 2009 were $11.7 million consisting of 1.6 million of non-discretionary cash capital expenditures such as tower maintenance and general corporate CapEx, and $10.1 million of discretionary cash capital expenditures.

Discretionary cash CapEx includes $4.1 million incurred in connection with land acquisitions and acquisition earn out. $5.1 million in new tower construction and 0.9 million for augmentations and tower upgrades.

With respect to the land underneath our towers, we spent an aggregate of $4.9 million to buy land and easements and to extend ground lease terms. As of March 31, 2009, we own or control for more than 50 years the land underneath 26% of our towers.

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

Pamela J. Kline

Thanks Brendan. SBA ended the first quarter with 2.5 billion of total debt. We had cash and cash equivalents, short-term investments and short-term restricted cash of a $126.5 million resulting a net debt of 2.4 billion. Our ability to repurchase some of our debt at discount continued in the first quarter. During the first quarter of 2009, we repurchased and privately negotiated in open market transactions. 52.3 million of our 0.375% convertible notes and 7.55 million of our CMBS notes, for 42 million in cash and approximately 618,000 shares of our Class A common stock.

During the quarter, we issued approximately 274,000 shares in connection with acquisitions and our share count at quarter-end was approximately a 118.7 million.

At March 31, 2009; our net debt to annualized adjusted EBITDA leverage ratio was 7.3 times. This represents a reduction in leverage of 1.5 turns in just two quarters and demonstrates just how rapidly we're able to reduce leverage.

At March 31, 2009, our net secured debt to annualized adjusted EBITDA leverage ratio was 5.3 times. As of quarter-end, 85% of our debt was fixed rate in a weighted average cash keep on all of our debt was 4.3% per year. Our first quarter cash interest coverage ratio of adjusted EBITDA to net cash interest was a very strong 3.1 times.

Subsequent to March 31, 2009, we have repurchased an additional 3.9 million of our 0.375% convertible senior notes and 9.8 million of our CMBS notes for 13.2 million in cash.

In April, we issued 500 million of 4% convertible senior notes, due in 2014. The note per issued with an initial conversion price of $30.38. Growth proceeds from the offering of 488.1 million after deducting underwriting fees.

We used 50 million of the proceeds to repurchase 2.016 million shares of our common stock.

As we've done in the past with our convertible issuances, we used 61.6 million of the net proceeds and the proceeds of the warrant, we sold concurrently; to purchase a hedge, which effectively increases the conversion price to $44.64, which was a 180% of our stock price on a due to the transaction.

The notes are due on October 2014, and the net proceeds will be used to repurchase annual retired debt and for general corporate purposes. In addition to this transaction, we unwound the hedges and warrants associated with the 264.1 million of our 0.375% convertible senior notes due 2010 that we had previously repurchased.

We elected to receive the value associated with the unwinding of these hedges and warrant, which was approximately 13.5 million in shares of our stock. As a result, we have retired an additional 546,000 shares of our common stock. As of today we have 81.9 million of 0.375% convertible senior notes outstanding, 1.5 billion of CMBS notes outstanding and 116.4 million shares outstanding.

I'll now turn it over to Kurt to discuss the operational results.

Kurt Bagwell

Thanks Pam and good morning. Now that you've seen and heard the numbers, you know why we feel very good about our start in 2009. The wireless infrastructure market has been busy. Our assets are right in the middle of the action and our employee teams performed very well. Our leasing results were good, our services division performed well, we built a lot of good new towers and operationally we provided very high level of service to all of our customers.

We have fully integrated the three big tower portfolios we bought in the second half of last year and they have been leasing up well, well along with our legacy assets.

Specifically related to our first quarter results, our gross tower leasing revenue signed in the quarter was good on both accumulative and a per tower basis. Activity was again highest from T-Mobile and AT&T, as they continue to expand their footprint and overlay their networks for 3G Technology.

Other leasing activity was diversified amongst Verizon, MetroPCS, Leap and other regional carriers, along with activity from private and governmental entities deploying specialized systems.

Activity from Clearwire has been picking up as well. Our leasing backlog has increased substantially since beginning of the year, leading us to believe that operationally, lease up will be greater in the second half of the year. 72% of our new revenue signed in first quarter came from new tenant leases while 28% came from amendments to existing leases.

Rental rates with state firm in our averaged cash basis ramps across our 19,447 tenants increased to $1,913 per month.

Brendan mentioned spending just $900,000 on tower augmentations in the quarter. This is by far the lowest augmentation rate per tower in the industry and further demonstrates the quality of our portfolio and the capacity remaining on our assets despite already having 2.5 tenants per tower on average.

Our tower company employees continue to perform well; provides great customer service and continue to keep our cost in check.

On the asset growth front, we closed on fewer towers in the first quarter as we made our balance sheet, a priority over portfolio growth. We bought seven towers during the quarter but we starting to ramp our acquisition activity backup and we expect to close some more towers in the next two quarters.

Our new tower build team completed 25 new towers, their best first quarter since we've restarted the program four years ago.

Our backlog in new tower build was strong and we expect to complete 80 to 100 new towers in 2009. This owning a new tower remains as tough as ever, which makes leasing towers price product, once we get through that process and place the asset into service. Our lease up statistics on these towers had been excellent today.

On the services side of our business, Q1 was very solid. Our backlog was more diverse in most of 2008, as we continue to perform our core services of the last 20 years including tower acquisition, construction and technical services.

The teams' put their time between new cell site development, augmentations of existing cell sites and overlay to existing cell sites, while posting good numbers for revenue and gross profit and what a typically the seasonally weakest quarter of the year for the services segment.

Again, we feel good about our strong start to 2009 and look forward to the next three quarters as the wireless industry continues to progress rapidly.

I'll now turn it over to Jeff.

Jeffrey A. Stoops

Thanks Kurt and good morning everyone. The first quarter was another strong quarter for us and a continuation of the solid results that we've been proud to produce for the last several years. We continue to perform well operationally, our customers are busy investing in their networks, some are expected to stay that way, and we believe our future continues to look very bright.

I want to address three topics and then we will open it up for questions. The first topic is our balance sheet. Our recent $500 million convertible note issuance materially improves our debt and liquidity profile and puts us in excellent shape to resume material portfolio growth. With the proceeds of the issuance, we have all the cash we need to payoff all of our hard maturities until 2013. Those are our remaining 0.375% convertible notes, our Optasite Credit Facility and our SBA Credit Facility.

Given the strength of our business, we were confident in our ability even in very tough markets to access the capital that was needed to eliminate any maturity risk and we have now done so.

Next, we will turn our tension to refinancing our 2005 CMBS. Even though that instrument does not mature, it does increase its interest rate and restricts certain cash flows if not refinanced by November 2010. Those are outcomes we intend to avoid and we are confident in our ability to do so.

To appreciate our positioning, I encourage you to look at the net secured debt to adjusted EBITDA leverage ratio disclosure in our press release and apply the proceeds of the convertible note issue to pay down secured debt. That will reduce the pro forma ratio to 4.2 times. This is the level well below three different secured financings that have been successfully completed in our industry since December and we don't even need that much secured leverage to refinance the 2005 CMBS.

We are currently thinking about pursuing a secured financing in the fourth quarter of this year or first quarter of 2010. We have the luxury of waiting until then and by waiting, we believe the secured debt market will continue to approve SBA, our cash flows will continue to grow and we can reduce or eliminate any pre-payment penalty on the refinancing on the 2005 CMBS.

Just for example, we choose to do a 600 to $800 million transaction, which we believe would be achievable based on expected cash flows and 4.0 to 5.0 turns of secured leverage. We could entirely refinance the 2005 CMBS and provide a material amount of additional proceeds for growing the company or partially refinancing the 2006 CMBS before November 2011.

We have a lot of confidence around this outcome, so much so that we are comfortable in recommencing some acquisitions for cash this year. Because our industry in general and SBA in particular, has demonstrates such good access to capital, growing very difficult capital markets, I fully anticipate that as we move into 2010, we will once again be targeting 5% to 10% for more annual portfolio growth, which leads me to the second topic I'd like to discuss.

While we have spent much of our focus over the last eight months on balance sheet positioning to address the dramatic changes in the capital markets. We believe there has been enough improvement in SBA and the capital markets, than it is appropriate to begin to return our focus back to the three-part strategy that has served us so well over the years in building shareholder value. Appropriate balance sheet, leverage, organic growth and operational execution and material portfolio growth.

We remain committed to portfolio growth as the key component to increase equity free cash flow per share and shareholder wealth. You can see from the press release that we have taken some small steps in that direction which we believe will turn into bigger steps as we move through the rest of 2009 and into 2010. We continue to see a very positive environment for future tower cash flow growth. We also see a number of opportunities that give us confidence around our ability to grow the company 5% or 10% or more per year through portfolio growth for a number of years.

Acquisition prices have declined in response to increased cost of capital, and we believe we will continue to find opportunities where the price and future growth will provide returns well above our cost of capital. Those are the reasons we like portfolio growth so much as it holds to increase shareholder wealth is because of our efficiency in terms of new asset cash flows into adjusted EBITDA and equity free cash flow.

We are very good at integrating new towers into our portfolio and then operating them efficiently. You could see from our press release how much we have grown tower cash flow and adjusted EBITDA margin in the last year. The tower cash flow margin growth is particularly pleasing as each of our three large acquisitions last year came in with lower tower cash flow margins than the portfolio average at the time.

We were pretty leanly at SBA. As an exercise to see just how leanly we operate our core leasing business, I would encourage you to strip out the services segment revenue and cost from SBA and each of our peers, and then re-run adjusted EBITDA margins. About 1.6 million of our cash SG&A each quarter relates to our services segment, which after subtracting that and the services revenue and associated gross profit implies a 71% adjusted EBITDA margin on our core leasing business.

I believe that would be either equal to or higher than any other EBITDA margin in our industry on the core leasing business, even though our peers are several times our size.

I want to note that we are committed to our services segment and this was only an exercise, but one that I hope demonstrates just how efficient we are in our core leasing business and how we can create additional value through portfolio growth.

The third topic I want to touch on is the very favorable macro environment that we continue to find ourselves in SBA, not withstanding the difficult general economy around us.

Within the telecom universe, wireless continues to grow in contribution an importance. For diversified companies like AT&T and Verizon, wireless is the most important segment and is expected to become more self overtime.

Customer demand for SBA continues to be strong and reflects we believe the current and expected growth in wireless data.

A lot of really smart people are betting that real money will be made in wireless data and that the consumer will pay increasing amounts of money for increasingly satisfying wireless data product and experience.

Result so far support that belief, as data ARPU is increasing rapidly and Apple's results for sales of iPhones and applications have led to huge investments from others seeking to replicate those results, such as Microsoft, Google and Intel. 4G technology, which will provide greatly increased data speeds is actively being pursued by multiple providers.

Total wireless minutes of use continue to grow at a rapid rate with data minutes growing much faster than voice minutes. To handle increasing data minutes of use at ever faster speeds, networks which handle both voice and data traffic needs continuous expansion and improvement even of growth in subscribers slows and voice minutes decline. As long as our customers find the wireless data business profitable and demand continues to grow, SBA should benefit. Wireless is a finite resource, the quality of which is impacted by a number of factors; the biggest of which are demand, spectrum and network.

As demand grows, quality will suffer unless more spectrum is utilized or the network is improved. Where spectrum is limited, network expansion is typically the only solution. Proof of this maybe seen over the last 20 years in the form of increasing in kind of densities which has directly led to steady growth in revenue and cash flow per tower.

While quarterly results will always vary somewhat particularly on a carrier-by-carrier basis, over the long-term, the basic themes I have outlined remained and I believe will continue to remain intact and remarkably steady. Those themes are the reasons we remained so optimistic about our future while we continue to invest in our business and why we are confident in our ability to create additional wealth for our shareholders.

Before we open it up for questions, I do want to mention one very special item. This is our 10th year as a public company and our 20th year in operations. To celebrate, we will be rendering the opening at NASDAQ on June 16th, which is 10 years since today we went public. Through it all, the ups and the downs, I want to say on behalf of myself and our management team that we have thoroughly enjoyed every moment and the relationships we had developed over the years with our investors, customers and employees. I consider the SBA story a great success, and one that we are very proud of. I want to thank all of you for your part that you played in our success.

And all of with that, at this time we're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And first we will got to the line of Dave Coleman with RBC Capital Markets. Please go ahead.

Dave Coleman - RBC Capital Markets

Thank you. Was there any one-time non-recurring revenues during the quarter, and if so how much were they. And then Kurt, can you just repeat the number of signed leases at the end of the quarter, and then Jeff you mentioned possibly doing a secured debt deal, second half of this year. Can you talk about what rate you'd anticipate getting on that debt deal, size you mentioned? Thanks.

Brendan Cavanagh

Dave, this is Brendan. There were no non-recurring one-time type items in our revenue numbers for this quarter.

Jeffrey Stoops

Dave, on the tenant count, it was 19,447.

Brendan Cavanagh

On the financing day, one of the reasons we do want to wait until the fourth quarter, as we see rates continuing to decline as they have since the beginning of the year. I would hold out a couple of -- well actually one example in particular, Carr (ph) recently did a secured debt deal which I think the effective deal came out at 8.25% and that was just couple of weeks ago and is now trading around 7.5%.

So we think the markets will continue to improve, we think our company in particular will continue to look good and perform well and also the banks loan market is starting to reopen which actually has been shut now for six months or so but prior to labor day, it was a very good and one of the main sources of secured financing for our industry. So, all that stuff is coming together well, and at this point I believe we would do something below 8% and we're going to actually work towards improving what we could do today in terms of rate and we think we will do that later on this year.

Dave Coleman - RBC Capital Markets

Just going back to the number of signed leases, it looks like it increased by just over 100 versus year-end '08, which is I think the lowest number of signed leases in any given quarter. Is that just seasonality or was there is work slower during the first quarter than anticipated?

Brendan Cavanagh

No, what actually had to do with just cleaning up our system and some churn from some small tenants but its really the top line, the growth ads were inline with what we've done over the last couple of years, it was really removal of some tenants that resulted in lower net increase.

Dave Coleman - RBC Capital Markets

Great, thanks a lot.

Operator

Thank you and next we will go to Mike McCormick with JPMorgan. Please go ahead.

Michael McCormick - JPMorgan

Great, thanks guys. Couple things, just may be your thoughts on what's printed yesterday with the boost on limited subscribers, is there an opportunity you think maybe somewhat near-term to have Sprint re-up spending on the other network, and is that an opportunity for you guys and secondly, just a follow-up on the last question on the CMBS reified, any sense on what preference the former take to get that done?

Kurt Bagwell

The boost results were good. We have actually seen some money being spend little bit, not a one over state this because is not big numbers, but we have seen some spending by Sprint Nextel on the Idiom (ph) network and, Mike, clearly as the network continues to do well and the demand continues to increase, we think that will lead to an additional -- well need to lead to additional spending, I think Sprint is doing what they need to do in terms of managing their finances and they're pushing off CapEx, as long as they feel possible. But we do not give our 20 years in the business that at some point demand continues to improve, that will need to be some additional network investment.

And, in terms of your question about the form of the financing, we wanted to do a secured financing and there are typically three markets that historically have been available for that, one is the high yield secured market which is the one that one of our peers just accessed. The other is the bank institutional loan market which has traditionally been one that our industry has been very active in, and the third is the CMBS market. We don't hold out a lot of hope that the CMBS market will be the one we choose but we do have the architecture in place and if it does recover, it makes sense to do so, we would be quick and ready to go out there.

So, other than being focused on a secured financing, we're going to continue to monitor and probably decide closer to the end exactly which of those markets we will tap.

Michael McCormick - JPMorgan

Great, thanks guys.

Operator

Thank you. And next we will go to the line of Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss - Raymond James

Thanks. Good morning guys.

Jeffrey Stoops

Hey Ric.

Ric Prentiss - Raymond James

Its been here all ten years I think, so nice to reflect back on those cycles. Three questions for you, maybe in reverse order of what your three points were. First, Jeff can you talk to us a little bit about what you feel the organic growth rate is in this industry, not just this year but as you look out kind of medium term. What do you think tower revenue, tower cash flow, EBITDA, even going into equity free cash or what do you think this industry can sustain given what you're seeing in the macro environment?

Jeffrey Stoops

Yeah, I think 9 to 10% top-line. I think 12 to 14% tower cash flow line and high teens on the EBITDA line. I'm a little hesitant Rick with the equity free cash flow because obviously the biggest driver there, once you leave EBITDA is interest expense but its moving in the direction where it should be north to 20% growth, and the interest rate is moving positively so that we do feel confident that overtime it settles in north of 20 as long as the things we just talked about above that revenue, tower cash flow and EBITDA come in where we think.

Ric Prentiss - Raymond James

And do you think there is any systemic difference or portfolio difference that would cause your numbers to be higher lower than your public peers?

Jeffrey Stoops

Well, I do think the difference in our portfolio helps us quite a but there, having built the majority of our towers or bought from people like us who build the towers for this industry. I think we have some inherent operating expense benefits and multi-tenant capacity benefits that should really help sustain those numbers. I think it has been apparent over the years, I think its really apparent on the point that Kurt and Brendan made earlier about the low augmentation CapEx per tower. As we've always said and one of the things that has been consistence about SBA over the 10 year history of being in tower ownership is, we are very careful about the quality of our portfolio, we like what we have a lot, and we think it has served us well and we'll continue to do so.

Ric Prentiss - Raymond James

And second point on the portfolio growth. Can you update us a little but about what you are seeing in the multiples as far as on tower cash flow and then also as you look at using stock versus cash, how you kind of do that math?

Jeffrey Stoops

Yeah, what we're seeing on an apples to apples-to-apples basis compared to a year ago, as probably two to three turns lower in terms of cost. The batch of towers that we bought this year, I think it was nine or -- was it nine or ten?

Brendan Cavanagh

So far ten

Jeffrey Stoops

Ten. We actually were slightly more mature towers. They were around three tenants per tower and we bought those for about 10.5 times. The batch that we have under contract is less mature actually than our existing portfolio. So about 1.5 tenants per tower and we are looking at about 15.5 times tower cash flow multiple on that and both of those Ric, if you dial back a year ago, those multiples are probably two to three times below where similar assets would have been.

And in terms of the use of -- I mean we take opportunities to bring stock back in which is what we did in the converts. We actually really managed to a balance of the equity and debt capitalization. So we use some stock and we'll turn also right around and use some cash but in general while we are above seven in terms of leverage, I think you can assume that we will continue to use some stock if presented with good acquisition opportunities that will meet our long-term return on investment criteria.

Ric Prentiss - Raymond James

Okay. And the final question is on the balance sheet then, as you look at using the proceeds from the recent convert, I think your phrase was a substantial repayment or repurchase on the debt, how should we think about that, are there any prepayment penalties, how do you think about leading cash on the balance sheet versus paying it off? And on the CMBS, does that come up, what are the prepayment penalty windows there? Is it six months in advance or you don't have any prepayment penalties?

Jeffrey Stoops

Last question first. Its nine months for us. On the 2005 CMBS, we are free to prepay without penalty starting in February of '010. In terms of leaving cash on the balance sheet, it's not interest efficient to do that. We are going to see how we do. I would say over the next quarter or so in terms of our ability and success in repurchasing, our debt in the market. If we don't have much success there, we will probably take a big chunk of our cash and use this to pay down the SBA credit facility. The reason we would chose that one is that it is re-drawable overtime if we need it for our portfolio growth. And we would typically just use that to manage interest rate. And if we don't need to be sitting on $500 million of cash certainly given that the low cash needs with the business generates on a day-to-day basis.

But we are hoping to replicate some of our prior successors with buying that as a discount although obviously it's not going to be the discounts that we generated back in the October November timeframe.

Ric Prentiss - Raymond James

Sure, thanks. Good luck guys.

Jeffrey Stoops

Thanks

Operator

Thank you and next we will go to the line of Brett Feldman with Barclays Capital.

Brett Feldman - Barclays Capital

Thanks for taking the question, you written some new recent reports that operating expense of your large customer is considering outsourcing the management network. I think that has opened up some questions about what that exactly means for vendors such as tower operators. I know you don't exactly what an agreement could look like. But, I'm just curious m would it be possible on your outsourcing deals for that vendor to assume control over the leases and potentially go back and renegotiate since one their mandates would be to save money?

Kurt Bagwell

Hey, Bret, this is Kurt, we all been saving that so you're hearing about it, I think its really from my understanding of it's really there current outsourcing program as a relate to and then possibly that vendor can grab another carrier there are some true efficiencies in the point as resources. So we don't worry about it all from the tower side, our leases are exclusive real estate that can't be replicated and when -- if that carrier is in better financial position to deploy more capital, the natural network needs, this middleman vendor obviously in-charge of getting that deployed. So we don't really see that's big issue for us at all.

Jeffrey Stoops

We had an obviously been in the middle of the specifics but I believe its really about people more than anything lease I don't think and outsourcing deal changes the fundamental characteristics of whether spread will need more of nor do I think that should they move to outsourcing that it will change the party with whom micro-machining contract with for tower space, I think it will continue to be Sprint. So, we really don't see it as affecting our business, certainly in a diverse way and we will help that as some true savings there would find its way back into network expansion.

Brett Feldman - Barclays Capital

What about the site services side, I mean it had historically been a pretty big customer of yours and if they were working with an outsourcing vendor, could that potentially changing the amount of demand you would see?

Jeffrey Stoops

Not on the tower leasing side, that demand is driven by what they need to do with their network, no matter who comes through. On our services business, we work directly for the carriers today; we also work directly for all of these middle man and program management firm. So, obviously, it might be different to we who are contracted with but we work for a lot of different -- today.

Kurt Bagwell

Erickson doesn't perform services, they manage it. So what they will do is they will then setup a system there will be a program manager and they will continue to hire firms like ours we suspect. And much the same way that we've done business with Vector (ph) for example doing bunch work for AT&T, general dynamics they fill that kind of role Brett, as appose to being in guide to actually due to work which is what we do.

Brett Feldman - Barclays Capital

Great. Thank you for taking the questions.

Operator

Thank you. And next we will go to the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. You touched briefly on 40 with them some comments. Perhaps you could be a little bit more -- provide a little bit more color about what you're expecting in the balance of the year from both Clearwire and potentially Verizon on the LTE side? And your comments where I think you said lease up in the second half could be greater perhaps than you'd expected before, perhaps you just comment a little bit on what you've seen so far this year and how that's translating into your conference in the second half. Thanks.

Kurt Bagwell

Simon, Clearwire and Verizon, I don't want to get into two very specific customer details obviously. We have both in pretty public, where they're taking there WiMAX and LTE programs. And we are seeing what they're saying and are doing, Clearwire is been deploying their older technology for years and they revamping some of those markets now and continuing on with what the Sprint's own people started in the other markets. That's very real and moving forward.

And Verizon as they've stated, it started in several select markets and why these overlay work is they go out and -- 4G or 3G or any other overlay, its really -- they go up and do side assessments and bio assessments and come back to develop a specific game plan for each site of custom and then they go out and start creating -- the lease amendment work to happen, to modify their lease, to handle their installation and they're creating a set of site drawings to match the installation up to that lease. So -- yeah. Otherwise on the leasing in general, this year often we have a more seasonal first quarter which is a little lighter and those as we said in the backlog is already up quickly and we're talking to it's their block going on the economy, piece you know I think they've viewed that as -- they've got a lot of networks, it's up to do. They've got capacity issues; they've got performance issues. Their performance issues are seen or seem to a lot of just basic expansions into other areas. So, it's -- we've been fortunate that they continue to follow ahead and so it's been good and we expect it to be a little stronger in the second half.

Jeffrey Stoops

Yeah I would add on the Clearwire point side, Simon. They've been very active but so far at least from our observation, they're staying within the ten markets that they have publicly talked about and on the lease to upside, keep in mind that operationally we talk about leases signed up and then there is a typically one to two quarter lag from when it hits a report; that's a financial statements. So I think the increase in activity not only that we expect to see in the second half over first half and first half is been fine. Its actually been what we've budgeted and expected our first quarter rather that you will not only see that manifest itself by the end of the year particularly in the fourth quarter financials but as we move into 2010 as well.

Simon Flannery - Morgan Stanley

Great. Thank you.

Operator

Thank you. And next we will go to the line of Jason Armstrong with Goldman Sachs. Please go ahead.

Jason Armstrong - Goldman Sachs

Okay. Thank you, couple of questions. Maybe just back to the sort of the range of opportunities here now that there is comfort around the balance sheet to think about strategic activity. As you look at the range of opportunities out there, whether its small tower acquisitions, maybe getting back to eventually mid-size tower acquisitions, land purchases et cetera.

As we think about the correction here, is this whole market kind of correcting together or their parts that are really lagging would provide you with sort of an opportunity, their arbitrage, the timing of the recovery. And then maybe just quick question on just revisiting the leasing activity into the second half. Obviously the comments on positive. You look at the run rate size leasing revenue, where you are right now just annualize that -- that sort of implies what you're sure projecting is the low end of guidance. I'm just wondering, why leaves that type of low end out there, why not move that up at this time, -- what you say? Thanks.

Jeffrey Stoops

Well, we did move it up a little and we don't like to get too far ahead of our speeds. But I think that math is good and people should take comfort from the last ten years of history that site leasing revenue doesn't go backward sequentially. So, people should feel good about our ability to hit our leasing revenue guidance. In terms of the opportunity base Jason -- I don't know that towers versus new builds, acquisitions versus new builds -- whether there will be an arbitrage opportunity within any of the different things that we do, maybe the one example or the one exception there might be lands purchases where given the very singular nature of the people we're dealing with and the less financially substantial some of those sellers would be.

That might lag a little bit and provide us some additional opportunity there, but just exactly -- I mean the market around towers is pretty sophisticated and there is some very, I think its two folks who see that operationally the growth in the tower cash flow side has remained steady. So, really they are just changing the bids and the answer is based on changes in interest rate, which as those continue to I mean its very rational how the market has behaved over the last year as interest rates have spiked up and access to capital has got more difficult, prices have dropped not withstanding the operational side of growth is the same and as the credit markets improve that will firm the bit up, I believe on towers.

So I don't know that there would be as much of an arbitrage, our strategy has always been take what we believe is a lower cost of capital that we have compared to some of the folks we compete with. Take our ability to really efficiently integrate those towers and squeezes the most out of them that we can once we owned them and use the combination of those to grow the portfolio in a way that's very accretive to shareholder wealth.

Jason Armstrong - Goldman Sachs

Okay great. Thanks.

Operator

And next we will go to the line of Chris Larson with Piper Jaffray, please go ahead. Your line is open.

Chris Larson - Piper Jaffray

Hi, sorry about that. I just wanted to circle back to the 4G comments you made earlier, and really there is -- get a sense for that type lease up you'll see whether its going to be a traditional augmentation like we saw on a 3G conversion. Whether there is something more to it, both on a Verizon, AT&T basis and also on the Clearwire; are we seeing a lot more new sites versus using existing sites. And then you mentioned you've got a number of or at least one acquisition lined up if you could talk about the interest in using stock versus cash flow acquisitions?

Kurt Bagwell

Chris, on the I guess I will serve with WiMAX and Clearwire that they will be working with some of the existing contacts or locations in amending those. We also believe they will be taking some new locations on sites even if it is going next around those just because of the current loading or the structural capability of the site flying poles out there and things like that there is certain physical limits. So, there will be a mix on that plus they will be taking we believe a lot of new sites without contracts on just because our plans and the frequencies they are going to be utilizing. So, that will be a mix bag on the LTE side, I guess you could get quite that somewhere to 3-G in terms of frequency inside of amendments. It obviously depends on their existing load on the structure today and what how much reserve state they signed up four years ago, when they signed up for that lease. In certain markets and certain sites they reserve with more space for the future than others. So, it's really a side-by-side equation and overall I think you can equate an LTE over way somewhat to a MCS 3-G over that.

Jeffrey Stoops

Yeah, I would add...I think we as an industry, we need to be careful and I would encourage the analyst community to be careful with the terminology. I think we're got run into potential confusion when we talk about new leases versus amendments with Clearwire and Verizon, I mean traditionally an amendment has been driven by legal issues as to whether what is being added falls with inside the existing terms and maturities of an existing lease. Most of what we signed up with Clearwire has not been an amendment it's been brand new standalone lease, not quite sure how that will play out yet with Verizon whether they will want to bring that LTE with inside some of the existing parameters of leases, the CDMA leases or whether they want it to spend totally on it's own in terms of maturity days and renewals. So, we need to all work together to be careful to make sure we're talking apples-to-apples there.

In terms of the acquisitions, its not one acquisition as at 42 towers is probably five or six different little deals, and as we've mentioned earlier, we'll still use some stock while we're levered north of 7 times, but we'll also now probably use some more cash and really the only thing that has changed with our new financing and the statements that we are making today is prior to our financing, we really were not working to use much of any cash at all in growing the portfolio through tower acquisitions and now that's changed and we are willing to use some cash, now that we feel better about the balance sheet and our liquidity position.

Chris Larson - Piper Jaffray

Thank you. It's helpful.

Operator

Thank you. And next we'll go to the line of Gary Powell with Wachovia. Please go ahead.

Gary Powell - Wachovia Securities

Good morning, everyone. Thanks for taking the questions, just have a few. So you guys mentioned going back to the target of going to portfolio by about 5 to 10% in 2010, and using cash to do that. How should we think about your target leverage going forward and then what next of tower construction versus acquisition would be involved in that 5 to 10% growth rate?

Jeffrey Stoops

Yeah, I think as we said today Gary and this has been an evolving answer to that question and it will evolve again as we other capital markets develop but, I would say today that I think 6 to 7 turns of total leverage is appropriate, provided that couple of those turns can continue to be accessed in the unsecured market with five or less turns in the secured market.

So that's kind of what we think today, that was a very different answer than you got in October and it maybe different; we may give you different answer six months from now. I'm sorry, your other point?

Gary Powell - Wachovia Securities

How should I think about the mix of construction versus acquisitions in terms of your overall tower portfolio growth?

Jeffrey Stoops

Well, the biggest variable has been and will continue to be acquisitions, our new builds have been not really constrained by capital but more by operational issues and we're going to do more this year, I don't know if we'll do much more than a 100. Our goal is 80 to 100. You might get a little bit more out of that in years to come but probably not materially more. So the big variable for us in terms of portfolio growth will continue to be acquisitions.

Gary Powell - Wachovia Securities

Okay. And then just speaking on the acquisition side, would you consider looking outside the U.S for opportunities?

Jeffrey Stoops

Yeah, we will, overtime as we kind of think about our next ten years. I think we have to be open minded. It is a business plan that we think can be taken internationally, obviously we want to replicate to the greatest extent possible with the conditions and drivers that exist here in United States. We think there will be some opportunity, some places to do that. So we are open.

Gary Powell - Wachovia Securities

Okay. And then just last question I have, looking into the remainder of the year, and going into 2010, what do you see as the biggest driver of leasing demand and do you see any carrier initiative or anything that can sort of be a swing factor in either direction?

Jeffrey Stoops

Actually I don't think you'll see material changes going forward, I think what the -- at this point in the year what the carriers, I have said publicly about what they want to accomplish the rest of the year will remain in place. I think without material change, I think we are going to have another very good year for lease up and this year we'll be a little more back-end loaded.

Gary Powell - Wachovia Securities

Okay. Thank you very much.

Operator

Thank you. And next we'll go to the line of Jonathan Schildkraut with Jefferies. Please go ahead.

Jonathan Schildkraut - Jeffries & Company, Inc.

Thanks. Actually my questions have been asked and answered.

Operator

Thank you. And we have one more question; David Barden from Banc of America. Please go ahead.

David Barden - Bank of America/Merrill Lynch

Thanks guys for taking the question. Just to the wrap it up; I guess one, with respect to the kind of pending Verizon, Alltel merger divestures; is this -- are you seeing carriers who are kind of coming in and looking to map out potential integration or growth opportunities here?

Bottom-line is, is this something that could be incremental to the growth profile when these deals are expected to close probably around the end of the year?

And then last Pam, could you -- I know there's some method that involves fees and other things with respect to the net proceeds from the convert. All this is specific dollar value of the hedge that you've acquired for the purpose of just calculating effective interest rate? Thanks.

Jeffrey Stoops

On the Alltel Verizon thing David, it depends obviously on who ends up with what markets but if its anybody other than AT&T and even if it is AT&T, and whosever hands those assets and I think there is some more that needs to be done with respect to bringing 3G service and ultimately 4G service to those assets.

A subset of that answer is, if they end up in new hands as some of the rumors would imply, that would obviously take away any type of decommissioning risk. So that would be our preferred outcome provided it goes to good healthy new player. Pam?

Pamela Kline

Dave to answer your question it was 61.6 million and if you amortized -- we look at that and amortized that over the life for the instrument of five and a half years and we compute an effective interest rate.

David Barden - Bank of America/Merrill Lynch

Perfect. All right guys thanks. Congrats.

Operator

Thank you. And there are no more questions please continue.

Jeffrey Stoops

Great, well we want to thank you everyone for joining us today, we're off to good start for the year. And we look forward to our next quarter's earnings call.

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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