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American Tower Corporation (NYSE:AMT)

Q1 2013 Earnings Conference Call

May 1, 2013 08:30 AM ET

Executives

James D. Taiclet, Jr - Chairman, President and CEO

Tom Bartlett - EVP and CFO

Leah Stearns - VP, Investor Relations & Capital Markets

Analysts

Simon Flannery - Morgan Stanley

Richard Prentiss - Raymond James & Associates, Inc.

Tim Horan - Oppenheimer & Co.

Colby Synesael - Cowen and Company

Jonathan Atkin - RBC Capital Markets, LLC

Michael Rollins - Citigroup Inc

Richard Choe - JP Morgan Chase & Co.

Jason Armstrong - Goldman Sachs Group Inc.

Brett Feldman - Deutsche Bank AG

Operator

Good morning, my name is Derek, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Tower First Quarter 2013 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now like to hand the call over to Ms. Leah Stearns, Vice President of Investor Relations and Capital Markets. You may begin.

Leah Stearns

Thank you, Derrick. Good morning and thank you for joining American Tower's first quarter 2013 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks, under the Investors tab on our website, www.americantower.com.

Our agenda for this morning's call will be as follows. First, I will provide a brief overview of our first quarter results, then Tom Bartlett, our Executive Vice President, Chief Financial Officer and Treasurer, will review our financial and operational performance for the quarter as well as our updated outlook for 2013. And finally, Jim Taiclet, our Chairman, President and Chief Executive Officer will provide closing remarks. After these comments, we’ll open up the call for your questions.

Before I begin, I’d like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include those regarding our 2013 outlook and future operating performance, including AFFO growth and dividend per share growth; our capital allocation strategy, including our stock repurchase program and REIT distributions; and any other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release, those set forth in our Form 10-K for the quarter ended December 31, 2012, and in our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.

And with that, please turn to slide 4 of the presentation, which provides a summary of our first quarter 2013 results. During the quarter our Rental and Management business accounted for approximately 97% of our total revenue, which were generated from leasing income producing real estate primarily to investment grade corporate tenants. This revenue grew 13.7% to approximately $777 million from the first quarter of 2012.

In addition, our adjusted EBITDA increased 13.4% to approximately $524 million. Operating income increased 9.2% to approximately $300 million and net income attributable to American Tower Corporation was approximately $171 million or $0.43 per basic and diluted common share.

During the quarter, in connection with the refinancing of our 1.75 billion securitization, we recorded a $35 million loss on retirement of long-term obligation, which includes the write-off of deferred financing fees and an early prepayment consideration. In addition, during the quarter we recorded unrealized non-cash gains of approximately $22 million, due primarily to the impact of foreign currency exchange rate fluctuations related to our inter-company loan nominated in currencies other than the local currency.

For accounting purposes, at the end of each quarter these loans are re-measured based on the actual FX rate from the last day of the quarter end. As a result of the weaker U.S. dollar, as of March 31, 2013 compared to December 31, 2012, the re-measurement of these loans generated non-cash gains for accounting purposes.

And with that, I would like to turn the call over to Tom, who will discuss our results in more detail.

Tom Bartlett

Thanks, Leah. Good morning, everyone. As you can see from the results we released this morning, 2013 is off to a strong start with solid growth across all our key metrics, supported by continuing favorable demand trends across our entire global footprint. As expected it was another very strong quarter and commenced new business in the U.S. as carriers continue to invest heavily in initial 4G deployments.

We also experienced very positive leasing trends in our international operations as new spectrum is deployed and more advanced wireless services are extended to more and more people globally. While we continued our operational momentum, we nonetheless maintain our focus on enhancing the company's investment grade capital structure as he completed the refinancing of $1.75 billion securitization in March. This refinancing decreased the weighted average cost of our secured debt by nearly 300 basis points.

If you will please turn to slide 6, you will see that for the first quarter, our total Rental and Management revenue increased by nearly 14% to $777 million. On a core basis, which we will reference throughout this presentation as reported results excluding the impacts of foreign currency exchange rate fluctuations, non-cash straight-line lease accounting, and significant one-time items, our consolidated Rental and Management revenue growth was over 20%. Of this core growth, nearly 10% was organic with a balance attributable to growth from new sites.

Our organic growth in the U.S. continued to be driven primarily by amendment activity resulting from all four of the major carriers aggressively deploying 4G indicative of their phase 1 network deployment initiatives. In fact, while we have seen a substantial portion of our new business activity driven by amendments, we’ve also seen the average rate per amendment more than double from a year-ago period as our customers begin to add more than just initial 4G capabilities to their networks.

As a result of this trend, our signed new business in the U.S. increased more than 60% from the year-ago period. Meanwhile, our international segment continues to provide compelling complimentary growth, and during the quarter, our international segment contributed over 60% of our consolidated core growth. Our focus internationally continues to be around partnering with well capitalized global wireless service providers.

Turning to slide 7; during the first quarter, our domestic Rental and Management segments revenue growth was driven primarily by an increase in recurring cash leasing revenue from our legacy properties, partially offset by a $4 million year-over-year straight-line revenue decline.

Reported domestic revenue grew by nearly 6% to approximately $516 million. This growth comparison with the prior-year period was impacted by two nonrecurring revenue generating items that occurred in Q1 of last year totaling nearly $16 million. However, domestic core revenue growth, which adjusts for these items as well as straight-line revenue, was about 11% or nearly $50 million.

Our domestic Rental and Management segment core organic revenue growth was approximately 8% in the quarter. This growth continues to be generated by revenues primarily from existing lease upgrades or amendments from the big four carriers as they continue to overlay 4G technology across their existing networks. For example, we saw T-Mobile's new business activity increase nearly fivefold over the prior-year period as they ramped up their challenger network modernization strategy.

Beyond the strong new business commitments I alluded to earlier, signed new business in the quarter remained at elevated levels increasing over 60% versus the same period last year, and we would expect most of these contracts to commence over the next year. Given our application pipeline, we expect these favorable leasing trends to continue for the rest of the year and into 2014. At this point, about 65% of the domestic new business included in our outlook is already in that pipeline.

The remainder of our core growth, about 3%, was generated from more than 1,000 new communication sites we've acquired or constructed in the U.S. since the beginning of the first quarter of 2012, predominantly from the mid-sized acquisitions we closed at the end of last year. Also for the quarter, our domestic Rental and Management segment gross margin increased approximately $30 million or nearly 8% representing a year-over-year conversion rate of over 100%. This conversion rate includes the benefits of our strong ongoing property level cost management program, particularly with respect to our land rent expenses.

We continue to manage our land cost by proactively acquiring and extending leases, and during the quarter, we purchased over 100 parcels and extended more than 300 ground leases by an average of 26 years. Over the last few years, our acquisitions of land under our sites have reduced operating expense growth by several percentage points a year, and we expect to remain active in purchasing land.

Lower straight-line rent expense and repairs and maintenance also contributed to the higher conversion rate. So going forward, we would expect recurring gross margin conversion rates more in the 80% to 85% range. As you can see, our U.S. operating profit increased about 7% to over $400 million, the margin was 78%.

Moving on to slide 8, during the quarter, our international Rental and Management segment reported revenue increased 33% to $262 million. International core revenue growth was over 40% and international core organic growth was nearly 15%, which continued to be driven primarily by strong new lease commencement activity from tenants such as Telefónica, Nextel International, and America Móvil in Latin America, Vodafone and MTN in South Africa, as well as Bharti and IDEA cellular in India.

Commencement activity was particularly strong in Latin America during the quarter when we exceeded our internal plan by nearly 15%. We also had a solid quarter of signed new business activity in our international operations, particularly in South Africa where we saw year-over-year increase of over 200%. Consistent with the last few quarters, about 90% of our signed new business internationally was in the form of new leases rather than amendments as carriers augmented their networks and added new sites.

I do just want to note that we don't expect core organic growth in our international segment to remain at the 15% level going into next quarter; particularly since we recorded about $5 million non-runrate items in Q2 of 2012 due to a revenue reserve reversal for one of our customers in Mexico. However, we do still continue to expect to see international core organic growth rates of 200 to 300 basis points above that of the domestic segment for the full year.

During the quarter, we constructed about 400 sites and acquired nearly 900 more continuing on our path to meaningfully increase the size of our portfolio. We've added over 9,100 communication sites to our international portfolio since the beginning of the first quarter of 2012, contributing 27% to our international core growth and driving our international revenue to about 34% of our total consolidated rental and management revenues.

As we add new sites to our international portfolio, our pass-through revenue continues to increase as we are able to share a portion of our operating cost with our tenants. During the first quarter, our international pass-through revenue was nearly $70 million, which is up about 43% from the prior-year period.

From a reported gross margin perspective, our international Rental and Management segment increased by about 28% year-over-year to $166 million, reflecting a 56% gross margin conversion rate. Excluding the impact of pass-through revenue, our gross margin and gross margin conversion rate would have been over 86% and 82% respectively.

Our international segment operating profit increased almost 29% to roughly $137 million. Our international segment operating profit margin was 52%, and excluding the impact of pass-through revenue, exceeded 71%.

Turning to slide 9, our reported adjusted EBITDA growth relative to the first quarter of 2012 was over 13% with our adjusted EBITDA core growth for the quarter at nearly 20%. Over 90% of our adjusted EBITDA core growth was attributable to our Rental and Management segment, which generally represents recurring run rate contributions to EBITDA as opposed to the non-run rate nature of EBITDA generated by our services business.

Reported adjusted EBITDA increased by approximately $62 million in the quarter. Of the approximately $31 million increase in direct expenses that impacted this growth, $21 million was related to international pass-through costs. SG&A increased about $14 million from the prior-year period, driven primarily by our international expansion initiatives as well as select investments we've made in our domestic business.

For the quarter, our adjusted EBITDA margin was 65% as compared to approximately 66% in the prior-year period. Excluding the impact of international pass-through revenue, our adjusted EBITDA margin for the quarter was about 72%, and our adjusted EBITDA conversion rate was nearly 73%.

Despite adding over 33,000 sites in the last five years, many with single tenants on day one, we've been able to maintain EBITDA margins in the 65% range, which we believe is at a leadership level for the industry. This is a reflection of both the disciplined cost controls we have implemented across the business and the strong organic growth that we have seen worldwide, as both our legacy U.S. portfolio and newer international sites have experienced significant lease up.

The strong EBITDA performance we saw in the quarter also translated in solid growth in adjusted funds from operations or AFFO, which increased by approximately $32 million or almost 10% relative to AFFO in Q1 of 2012. The AFFO increase was driven by the $62 million increase in adjusted EBITDA offset by increased cash interest and cash taxes.

Core AFFO grew nearly 21% and excludes the impact of foreign currency exchange rate fluctuations, one-time EBITDA contributions from customer settlements in the first quarter of 2012 and the tax refund received during the first quarter of 2012. However, here I want to clarify the basis of our AFFO comparisons. We've adjusted our AFFO metric to exclude acquisition or new market launch startup capital expenditures in both periods. This quarter, startup CapEx was about $7 million as compared to about $2 million in the prior-year period. We continue to target mid-teen core AFFO growth going forward, as our business continues to generate strong recurring cash based returns.

Now moving on to slide 10, as we've highlighted in the past we are extremely focused on deploying capital while simultaneously increasing AFFO and return on invested capital. And as you can see in the chart, we believe that our investment discipline has created meaningful value for our shareholders.

Since 2007, we have invested over $12 billion in capital expenditures, acquisitions, stock repurchases and dividends, adding more than 33,000 new sites and expanding into eight additional markets on three continents. Concurrently, we've consistently increased both our AFFO and AFFO per share on a mid-teen compounded annual basis.

In addition, based on the investments we’ve made to-date; we expect to have increased our return on invested capital by nearly a 170 basis points to 10.7% by the end of the year. We feel that we’re uniquely positioned to continue to deliver these types of sustained long-term returns utilizing the same discipline capital allocation strategy we’ve used in the past. In addition to returning significant cash to our shareholders, via our regular dividend distributions, we seek to maximize our returns as we deploy capital for new builds and acquisitions worldwide.

With experienced development and operational teams in place we remain focused on strengthening and expanding our existing operations while also seeking new investment opportunities. We believe that the strong AFFO growth in ROIC expansion resulting from these efforts coupled with a meaningful dividend will continue to provide a compelling return by shareholders.

Turning to slide 11, we deployed about $124 million in capital expenditures in the first quarter, including $57 million on discretionary capital projects associated with the completion of the construction of over 450 sites globally. Of these new builds about 50 were in the U.S. with the remainder throughout our international markets. The majority of our international new tower build were in India where we continue to build sites predominantly for large incumbent carriers like Bharti and Idea.

We continued our discretionary land purchase program in the U.S. to secure additional interest under our existing tower sites. In the first quarter we invested about $15 million to purchase land under our existing sites and as of the end of the quarter we owned or held long-term capital leases under 29% of our domestic sites. Our first quarter 2013 spending on redevelopment capital expenditures which we incurred to accommodate additional tenants on our properties was $22 million.

Finally our capital improvements in corporate capital expenditures for the quarter came in at about $23 million. In additional to these discretionary capital spending items as I mentioned, we are introducing a new category of discretionary capital expenditures called startup capital projects to provide further transparency into our capital expenditure activity. This capital specially relates to costs associated with either an acquisition or a new market launch. We see this spending concentrated around initial 12 to 18 months after we launch a new market or close an acquisition, and primarily consisting of capital projects as it's opening a new market office, upgrading certain security and monitoring systems or structural capacity enhancements at newly acquired sites to meet our global standard requirements. During the first quarter of 2013 spending on startup capital projects was about $17 million. As we said on our Q4 earnings call for the year we expect spending on startup capital projects to be about $20 million.

From a total capital allocation perspective we deployed nearly $500 million during the first quarter including declaring a dividend of $0.26 per share or approximately $103 million, about a $124 million on capital expenditures and about $245 million for acquisitions. During the first quarter we added 22 communication sites through acquisitions in the U.S. and nearly 900 communication sites internationally. Finally during the quarter we spend over $12 million to repurchase about 160,000 shares of our common stock pursuant to our stock repurchase program. We continue to expect that we will manage the pacing of our stock repurchases based on market conditions and other relevant factors.

Moving on to slide 12, we are reaffirming the full-year 2013 outlook for rental and management segment revenue that we issued just two months ago on our fourth quarter earnings call. In the U.S. we continue to expect core organic revenue growth of over 7% for the year with our international operations expected to generate core organic growth of about 11%.

Consistent with historical practice we have not included any contributions from pending acquisitions in the outlook we are issuing today. Should these transactions close during the year, we will update our outlook accordingly. And virtually should these transactions not come to provision consistent with prior periods we would expect to increase the pacing of our buyback activity. We are also reaffirming our prior outlook for adjusted EBITDA due to the expected leasing trends I just spoke about as well as our continuing focus on property level cost controls.

We continue to leverage the co-location model to drive strong flow through from the top line to the EBITDA level and expect our rental and management segment to drive essentially 100% of adjusted EBITDA growth for the full-year. Finally we are raising our full-year AFFO outlook at the midpoint by $60 million to account for the recurring impact of reduced interest expense we will incur as a result of the refinancing of our securitization in March at a weighted average interest rate of about 2.65%. This transaction reduced the cost of our secured debt by nearly 300 basis points and illustrates our ability continue to access the capital markets at favorable rates to fund our global growth initiatives. Additionally we had excluded the previously mentioned $20 million in startup capital expenditures we expect to incur during the year from our AFFO metric.

Turning to slide 13, the securitization refinancing that I just mentioned as well as our issuance of our $1 billion in senior unsecured notes in January and other recent debt market transactions have enabled us to significantly extend our debt maturity profile while reducing our cost of debt to further improve our best in class industry balance sheet. As of the end of the quarter we had extended our average remaining term of our debt to nearly seven years while simultaneously decreasing our average effective interest rate to approximately 4.4%. We continue to manage our leverage around the midpoint of our range of three to five times net debt to adjusted EBITDA, and as of the end of the quarter we ere at about four times with liquidity of over $2 billion and our proven ability to opportunistically access the capital markets at favorable rates we feel we are very well positioned to continue to fund our global expansion initiatives.

And now on slide 14, and in summary so far this year we have been able to sustain our strong growth trajectory in our served markets while materially improving our already investment grade balance sheet both in terms of tenure and costs. We continue to remain focused on capitalizing on the secular trends we’re seeing in the global wireless space and believe we are in excellent position to continue to expand our portfolio in operations while simultaneously growing recurring cash flows in support of our goal to double our AFFO per share over the next five years. We remain very encouraged by the demand trends we are seeing across our global footprint and continue to expect carriers in 2013 to be more active than they were in 2012. Further more given what we are seeing in terms of our application pipeline as well as the trends in wireless data we continue to expect the current demand environment to continue well beyond 2013 as carriers continue to prioritize network quality as a differentiating factor in their offerings. We believe that our diverse portfolio of nearly 56,000 sites provides us with a unique ability to leverage these trends and drive meaningful incremental revenue and recurring cash flow for many years to come.

And with that, I’ll turn the call over to, Jim.

James D. Taiclet, Jr

Thanks, Tom, and good morning everyone on the call. American Tower’s solid financial performance in the first quarter reflects the gathering strength of advanced mobile network deployment in the U.S. and around the world. As Tom, pointed out our company strategy is to leverage these domestic and global trends to both maximize the performance of our assets today and to position our company for an enhanced growth profile over a very long time horizon.

In our most advanced mobile communications market the U.S, our major tenants are all currently in the midst of initial fourth generation technology deployments resulting in the addition of equipment to tens of thousands of transmission locations. This technology known as 4G LTE provides for a very high broadband transmission rate to support rapidly growing wireless data and entertainment applications such as streaming video.

Moreover by adding incremental equipment and new cell sites to support broadband data and entertainment our customers are now beginning to look towards the deployment of voice over LTE also known as VoLTE. Based on recent independent technical assessments that we’ve commissioned, we now believe that VoLTE will result in significant network densification or cell splitting for coverage in suburban, highway and rural areas. I’ll elaborate on these findings a little later in my remarks.

But first, I want to take a few moments to layout American Tower’s overall global strategy to provide the context for our technical analysis of the long-term impact of LTE data and VoLTE on mobile infrastructure.

Our strategic positioning in 11 countries on five continents enables us to benefit from three successive stages of wireless technology deployment around the world. In the forefront are the advanced wireless markets such as the U.S. and Germany, where consumers have had access to 3G mobile technology for a number of years now, and where carriers are experiencing significant data usage on their networks already, including mobile ecommerce and bandwidth intensive screening video.

Mobile carriers in these countries are now in the process of deploying 4G to meet increasing demand and to grow their revenues. A few years behind are the rapidly evolving wireless markets such as Mexico, Brazil and South Africa where carriers are in earlier stages of wireless data network deployments, while an ever increasing number of subscribers become engaged in intermediate mobile applications such as email and basic web browsing on their handsets.

In most of these countries, 3G is still being deployed and planning is a part of process for initial introduction of 4G soon. A few more years behind the front-edge of the technology deployment curve are emerging wireless markets like India and Ghana, where reliable voice coverage is not yet universally available and wireless carriers are selectively beginning to make investments in third generation data networks at the moment.

This morning I'll focus primarily on what we currently see evolving in our core market, the U.S., which we think provides the further window into the future of mobile communications worldwide. Ultimately, we believe that the dramatic expansion and data usage that we're currently seeing in the U.S. and the corresponding demand for tower space will be replicated across our other markets.

Consequently, we expect to significantly elongate our Company's growth profile by discipline investing in these geographies and thereby establishing a leading position for independent commercial tower leasing in each of them.

In the U.S., we're in the midst of a wireless data explosion and as we touched on in our fourth quarter call, the projections for wireless data growth here over the next five years are through the roof with Cisco expecting mobile data traffic to increase tenfold over the next five years in the U.S.

Today, we are seeing carriers attempt to meet the initial stages of this demand by deploying overlays of 4G LTE equipment across their existing networks, introduced a relatively thin level of 4G coverage. The four national mobile operators in the U.S. are in the process of this initial phase of their LTE build programs.

Currently, Verizon and AT&T have stated their expectations of completing this initial phase 1 of nationwide LTE over the next 6 to 12 months. Meanwhile, Sprint and T-Mobile are aggressively ramping up their LTE deployments and it’s anticipated that they will complete phase 1 in 18 to 24 months.

Our experience in both 3G and 4G phase 1 deployments in the U.S. has been a roughly 80 to 20 proportion of amendments to collocation new leasing revenue. Therefore, phase 1 LTE amendments have driven the strong organic growth we've reported in the U.S. over the last several quarters. However, given that LTE handset penetration is currently below 10% in the United States, phase 1 networks will simply not be able to keep pace with the volume of data that will be generated as more consumers switch to high bandwidth 4G handsets and tablets.

As this LTE device penetration increases and data usage exponentially also increases, we believe that the carriers will shift from their initial coverage investments into phase 2, which will focus on both increasing network capacity and improving single quality of the outer ranges of existing cell sites.

Based on our recent technical analyses and review of third-party research and carrier public statements, we expect the phase 2 will involve significant cell splitting and network densification, and this activity will begin to ramp up over the next 12 months. A major catalyst for phase 2 mobile operator network planning, we believe will be the introduction of voice over LTE or VoLTE which I mentioned earlier.

We believe VoLTE is likely to necessitate further network densification even beyond data as we move forward and we think it represents significant opportunities for tower leasing as VoLTE is deployed. Recent statements from our customers as such Verizon indicate that the first commercial deployments are scheduled to incur within the next year.

So what exactly is VoLTE and why does it appear to make sense for the carriers to deploy it, given the incremental network density we think it will require? First and foremost, the difference between traditional voice and VoLTE lies in the fact that rather than being circuit-switched to traditional voices, VoLTE delivers voice in data package that move through the Internet, similar to the way the existing networks deliver wireless data.

By utilizing VoLTE, carriers can achieve increased efficiency regarding their wireless spectrum and also eventually reassign some of this spectrum to 4G data and entertainment services. In addition, VoLTE has the potential for improving handset battery life.

And finally for CDMA providers like Verizon, VoLTE will allow simultaneous voice and data sessions on phones with the single chipset, thereby improving the user experience while reducing device costs. As a result of these benefits, VoLTE seems to be a compelling investment for the carriers to free up some much needed spectrum and deliver a better experience to customers. The question is then, how does the migration from dedicated voice service to VoLTE impact towers?

The answer lies within the fact that the packet switch nature of VoLTE is far more vulnerable to signal degradation than in pure data session using LTE or voice session that utilizes the old circuit-switch technology. In a typical data session over LTE, as a subscriber gets farther away from a cell site and closer to the cell edge, he or she can usually handle some degree of signal degradation in the lower quality of service that you'll experience. At this weakened signal area on the cell edge, an Internet browsing or social networking section for example may be slowed down or paused as indicated by the little spinning icon that we all stare and frown at on our phones. But the section usually does continue.

Conversely with a voice section over LTE, the listener must continuously be able to comprehend what the person on the other line is saying in order for the session to be successful. Only getting every other sentence or every other phrase just won't cut it for voice. Therefore, the quality of service requirement is elevated especially at the outer ranges of cell sites.

As a result to avoid garbled or dropped voice calls on VoLTE, our independent estimate is that the effective radius of a given cell site could be reduced by 10% to 20%. Consequently, in order for carriers to effectively rollout VoLTE, cell sites may well need to be closer together than they are in a network design for data only LTE. The exact amount of further cell site identification to deliver high-quality VoLTE service depends on a number of factors, including existing network layout and spectrum characteristics. But our initial estimates indicate that networks may ultimately have to be up to 20% to 30% more dense than an already densified data-only LTE equivalent network.

As a result, we anticipate that the implementation of VoLTE is likely to drive meaningful and incremental leasing revenue opportunities due to the strengthened signal coverage requirement at the cell edge. This will be in addition to cells fully required to handle the elevated capacity needs of pervasive 4G data.

Moreover, while 4G capacity requirements are likely to first be experienced in more densely populated urban environments and then move out into suburban and rural environments, VoLTE-driven densification will stand all types of geographies immediately such as urban environments but also including suburban, highway and rural areas where cell sites are further apart in towers predominately.

As VoLTE deployments coming into play concurrent with the carriers’ plans for data driven capacity builds, we've continued to expect our core domestic business to show significant growth for a number of years to come. This strong domestic growth outlook provides a solid foundation for our Company as we do generate about two thirds of our revenues from our 22,600 U.S. towers. But we are also energized about the unique opportunities we have in our international markets where we now have over $33,000 towers.

As I mentioned earlier, we anticipate that over time the trends that we’re seeing in the U.S. including 4G data and LTE voice will be replicated overseas, first in rapidly evolving wireless market such as South Africa and Brazil and then in the several emerging markets in which we operate. As we move towards the end of the current decade, carriers in emerging markets are likely to be in phase 1 of the deployment of their own 4G network build outs, which extends our visible growth trajectory based on known technology road maps far into the future. And that is what our international strategy is all about.

Finally, I wanted to take a moment to thank our investors and business partners for their messages of concern and support following the terrorist attack at the Boston Marathon. Though our offices are just a block away from the scene, we were very fortunate that none of our employees nor their family members were harmed. We're thankful for that, but also our thoughts go to those who suffered losses and we are grateful to all those who helped others in need from that difficult day.

Turning back to the matters in hand, thanks to everyone for joining us on the call today. And at this point, we will ask the operator to open-up the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Great. Thanks very much. Jim, thank you very much for the VoLTE discussion. That was very helpful. Question for Tom, you’ve got some nice improvement in the AFFO this year. Your leverage is coming down, you’ve done some modest buybacks. Can you just help us think about how you're thinking about that incremental dollar, and in particularly around dividend policy, you’ve obviously put out that long-term growth policy for dividends, is there the ability perhaps to raise that growth rate and perhaps you'd update us on where the NOL balance is and how you expect that to play out over the next couple of years? Thanks.

Tom Bartlett

Yeah. Sure, Simon. I think we're really focused on the 20% compounded annual growth rates in dividends. We think that provides a nice compelling accelerating growth over the next several years. With regards to our NOLs, I think I mentioned in the last call, we ended the year with about $900 million of NOLs, and we expect to use somewhere between $200 million and $300 million of NOLs this year. I think that with regards to our capital structure as a mentioned, we do have a number of things, investments that we are looking kind of in the pipeline, but as you all know, those may not come to fruition, and to the extent that they don’t, then we’d increase as we did last year towards the end of the year, the pacing of our buyback program. We think that’s a good use of cash and we can keep some predictability to the growing dividend stream going forward.

Simon Flannery - Morgan Stanley

Okay. Thank you.

Tom Bartlett

Sure.

Operator

Your next question comes from the line of Rick Prentiss with Raymond James.

Richard Prentiss - Raymond James & Associates, Inc.

Yes. Thanks guys and our thoughts were definitely with you in Boston, and glad you were okay. First question if I may, in your guidance which you left operational guidance unchanged, can you talk a little bit about what you are seeing from Clearwire and have you started seeing anybody going over their MLA so far in the U.S.?

Tom Bartlett

With regards to Clearwire, it's been exactly kind of what we expected Rick, it's not a significant amount of activity going on there, but again that is really what we expected. And with regards to the amount of business over and above the MLAs as you put it, we are seeing activity on all of those carriers, and as you'd expect, and I think it's largely due to some of the things that Jim talked about not just in their initial 4G rollout for data, but now we will start to see it with the rollout of VoLTE. I think, we will continue to see what we call additions to pay or revenue over and above that – those MLAs that we put in place. So, yeah, all the carriers have been very aggressive, and I think that's consistent with the increase in commenced revenue that we are seeing in the Q1 and the sizeable application pipeline.

James D. Taiclet, Jr

And just to add to that Rick, it’s Jim. There is no clear substance of significant Clearwire future of new business for this year in the guidance at all either, so the point of exceeding MLA limits, when we speak of holistic or comprehensive master lease agreements, we should all know that those are very tightly negotiated as far as what the equipment limits are, how many sites you can be on at certain points in time, even spectrum constraints that some of these deals have been included in them, so we work with the carriers to help support their initial expectations of build out and as you can hear from some of the commentary really across all the sector calls that you’ve heard over the last week or so, we’re seeing additional needs by the carriers to be based on their success in bringing 4G handsets into the population. So, that’s where the over and above comes from. It’s that joint success between the carriers raising their revenues and operating profits through advanced data and our partnerships with them to support those network goals.

Richard Prentiss - Raymond James & Associates, Inc.

Makes good sense. On the leverage question, obviously you’re at four times the middle of your range, if there was a large portfolio, there has been obviously every couple of months speculation on a large U.S. portfolio may be coming out, what are your thoughts about taking leverage above your target range or issuing equity for a particularly large transaction?

Tom Bartlett

Well, the good news with some of those types of – all those types of transactions, they come along with a sizeable amount of cash flow, right. So, over a period of time after the acquisition, you have kind of the natural evolution back to more appropriate levels relative to your net debt-to-EBITDA. But to the extent of the transaction, as we have said in the past Rick, it is strategic, we will go above the five times, but to the – but we know that the cash flow we will be able to bring it down naturally over the next kind of 6 to 12 months period after that. To the extent that it goes up sizably over the five times and we think it is very strategic and very accretive to our business, we think that our shareholders would also think that, and yeah, we’d use form of equity.

Richard Prentiss - Raymond James & Associates, Inc.

Makes sense. Thanks, Tom. Thanks, Jim.

Operator

Your next question comes from the line of Jonathan with Evercore Partners. Jonathan (indiscernible) your line is open.

Tom Bartlett

Operator, let's take the next question.

Operator

Your next question comes from the line of Tim Horan with Oppenheimer.

Tim Horan - Oppenheimer & Co.

Thanks guys. Two questions. Can you talk a little bit about the pricing trends in the market both here and more importantly internationally with the strong demand, do you think you can maybe start to get higher pricing that you’ve got in the past, and then secondly Tom maybe can you talk about the multiples in the private market, have they changed much from where they were in the last few years, I think they have kind of being running in the 20, 21 times EBITDA range, have you seen much change there? And I know that's post synergy type numbers. Thanks.

James D. Taiclet, Jr

Tim I will take the first one. This is Jim. Pricing is relatively stable for new colos build-to-suit, and amendments for the reason that we cited in the past which is the factors of production for the next best alternative to leasing a tower is building your own if you are a carrier. Those factors of production don't change that much. So, for a given unit of capacity, whether it’s weight or wind load on the tower or ground space, we have got pretty stable pricing and again the good news is the volume of those incremental units has been moving upward based on the success of 4G data deployments in the U.S. and 3G and 2G in other markets.

Tom Bartlett

And Tim just with regards to some of the transactions, as you know, we look at transactions on a ten-year DCF basis, risk adjusted depending upon where it might be done. But generally speaking, in the international markets than in the Latin America, they continue to be at kind of the 11 to 13 times kind of range. In the U.S. market, yeah they are in the high teens, 20 to 21 times rather, and again it’s a function of where they are, what kind of lease up we see potentially going forward after we’ve acquired the towers, and as you well know, we’ve turned down a number of transactions over the last 12 months where we didn’t see the kind of value that others thought it could be created.

Tim Horan - Oppenheimer & Co.

It sounds like prices have been fairly stable on that market?

Tom Bartlett

Yeah, I think it has.

Tim Horan - Oppenheimer & Co.

Thank you.

Operator

Your next question comes from the line of Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company

Great. I just wanted to talk about the cell splitting. If we think about some of your competitors this quarter, they talked about how some of the new properties they've acquired in 2012 have been a source of cell splitting already, so obviously the T-Mobile assets for Crown and the Mobility and Tower co-assets for SBA. And you haven't really made that many meaningful acquisitions in the U.S. market over the last, at least 12 maybe 24 months. And I'm just curious if you see as big of an opportunity for cell splitting, particularly as it relates to your current portfolio or do you think that when you think about cell splitting going forward, you're going to actually have to build a lot more towers to get that opportunity? Thanks.

James D. Taiclet, Jr

This is Jim. We feel that our 22,600 towers that we bought and built mainly from original legacy 800 carriers are extremely well positioned for collocation and for future growth. The issue around U.S. M&A is not the growth profile which I think all the towers communicatory is strong; it's on your investment decision-making process and the availability of investment opportunities beyond the U.S. market. So what we do regarding U.S. mergers and acquisitions is we're very focused on the U.S. market first of all as I said is three-thirds of our revenue as we did the first industry consolidation in the U.S. with SpectraSite almost a decade ago. But we also need to make sure that we meet our investment criteria, and for U.S. assets frankly we look at the current performance profile which we think we understand very well with our existing asset base. We compare that to the characteristics of what may be on offer. And if the price point for sale makes that whole equation work based on our investment criteria, then we're going to go ahead and go through with the transaction. When you see it not go through with such transactions that means that we think that we're better off frankly buying stock at those acquisition prices than going through with the deal. So we do an apples-to-apples comparison of our tower base which is substantial versus what again maybe for sale and the purchase price of that if the math doesn’t work, we'll keep the money, spend it in other markets or as Tom said, repurchase our own stock.

Colby Synesael - Cowen and Company

Okay, thanks.

Operator

Your next question comes from the line of Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC

Good morning. Early on you made a comment about amendment rates increasing. I don't know if that was a reference to on a unit basis or not, but can you clarify why that would be the case if LTE has been kind of the source of amendment activities in the last several quarters? And then on Tom's comments about startup capital, I'm wondering how those projects translate into kind of an end-stage G&A expense level across your various regions, what do we end up on kind of the G&A expense side? Thanks.

Tom Bartlett

Hi, Jonathan, it's Tom. I think with regard to – remember, what we're seeing now is that we are passed kind of – for so many of the carriers. Some of that initial coverage rollout that the carriers were doing with regards to LTE and now we're starting to see more equipment being added to the towers, the existing platforms to be able to handle some of the additional capacity requirements that they're now seeing as more handsets get out into the market. So I think that's largely what's probably driving the increase in the amendment pricing per unit, if you will. The second question was relative to some of this startup CapEx. As I mentioned, we have $20 million of startup CapEx this year. It's largely in our new markets obviously down in Colombia and over in Africa. And like our SG&A which we need to incur out of the gate to be able to support these markets, I mean our strategy is to get denser and deeper into each of those existing markets. So while our SG&A as a percentage of revenue was hovering around 10% this quarter, we would expect that to come down over the next two to three years as we've been able to work into, if you will, those types of some costs. And so we would expect over the next three years or so to get back down into kind of that 9% range, if you will. And again, it's a function of us just getting deeper and into the markets and driving the densification on our towers.

Jonathan Atkin - RBC Capital Markets, LLC

And then finally, is there any update on progress towards reclassifying some of your international properties into more the REIT qualified income?

James D. Taiclet, Jr

As we mentioned last quarter, I believe, we're going to be bringing Mexico into the REIT. It will be effective in the first quarter. That's the only one that we have planned bringing to the REIT at this point in time. We'll continue to look at some of the other properties. And that was largely driven by our ability to generate some cash tax savings in the local market.

Jonathan Atkin - RBC Capital Markets, LLC

Thank you.

Operator

Your next question comes from the line of Michael Rollins with Citi Investment.

Michael Rollins - Citigroup Inc

Hi. Good morning. Thanks for taking the questions. Two questions. First, I was hoping you can talk a little bit about the opportunities for further refinancing and maybe where you think the average cost it gets you over the next couple of years, assuming the rate environment were to be unchanged from its current form? And then secondly, if you could talk a little bit about the DAS market in a little more detail in terms of the opportunities there, whether you think it's time to get more aggressive on the outdoor side? Do you see any change in carrier behavior towards DAS, just be curious for your feelings on that? Thanks.

Tom Bartlett

Michael, this is Tom. On the debt front, we still have two tranches of debt less than $1 billion I think in total that were put in place prior to our becoming investment grade and make (indiscernible) on those were pretty expensive. Right now we've just got some indicative pricing yesterday I think still for a 10-year unsecured note, we're still on that kind of 3.5% range. We have driven down the two really, I think the cost of borrowings I think our capital markets group have done an outstanding job in terms of driving that cost down and we'll continue to be opportunistic going forward and determining what kinds of products and what kinds of tenures we would look at. But as you've seen, our strategy is to continually look at longer tenures driving down the average cost of debt, which better matches our fundamental master lease agreement rents, and I think we've done a nice job over the past. It's very difficult to say going forward where that – what that rate environment might look like.

James D. Taiclet, Jr

Mike, its Jim. Regarding the DAS or Distributed Antenna Systems, we're actually I think still the leader in numbers of indoor and outdoor DAS venues combined, it's about 300. It was about 250 in the U.S. and the balance outside U.S. actually. So we're actually globalizing that kind of business. But again, entry pricing is really important to us, so we've decided that based on the characteristics of DAS asset performance over time that a build strategy is more appropriate for us versus a large acquisition strategy for a number of these existing venues. And we actually have a partnership going into a couple of markets with major carriers to work together on these things as launch customers, which then gives us the head start on leasing others up later because of the good locations that we can collaborate with our carriers on to get started. So we're very interested in all this happening in the DAS business, but we invest in it in the context of a very successful and well understood macro state business which is the core of the company.

Michael Rollins - Citigroup Inc

Thanks very much.

Operator

Your next question comes from the line of Phil Cusick with JPMorgan.

Richard Choe - JP Morgan Chase & Co.

Hi. This is Richard for Phil. Given the strong start to the first quarter in both domestic and international, it's kind of hard to not move to the high end of guidance. Is there some headwinds that we should be thinking about for the year or are you just staying conservative especially given the VoLTE comments which should probably help the back half of the year?

Tom Bartlett

Richard, this is Tom. We just released our guidance 60 days ago and we did increase guidance of our AFFO by $60 million. So I think where we are, we'll look at it in the second quarter and to the extent that there is a need for a change, we'll make it then.

James D. Taiclet, Jr

And there are strong underlying trends as you pointed out. And mid-year, we'll look at everything, including our currencies are landing and give you all an update.

Richard Choe - JP Morgan Chase & Co.

Great. And I guess, can you give us a little more color on the generator business, I guess that seem to have picked up and kind of what are you seeing there and what are the plans for that?

Tom Bartlett

That share generators are a nice adjacent business for us by less than a percent of revenue as we speak today. But given the track record of storms and other issues that have been experienced in the U.S. which is where we had that business predominantly we’re seeing increased demand for it. So, we’re again I think the early industry leader in share generator systems we have an extremely good relationship with one of the leading carriers and essentially seed us with opportunities. We build those opportunities and they’ll lease them up. So, I think it will be again a nice adjacent business line for us as we move forward.

Richard Choe - JP Morgan Chase & Co.

Great. Thank you.

Operator

The next question comes from the line of Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc.

Hey, thanks, good morning. Couple of questions; first can you talk through what percent of your sites are on LTE at this point, maybe what the pacing has been on that? And then maybe second just sort of bigger picture, I guess, it’s a philosophical question that what's the better credit environment for you to do deals, the low rate environment seems like the obviously answer, but low rate environment also means you’ve got a lot of competition for deals. I’m wondering would a steeper rate actually benefit you guys enough that it may benefit you to wait for a larger deal because it may mean less competition and lower multiples. Thanks.

Tom Bartlett

Sure. On the first question, I would say probably 30% to 40% of our sites have some form of LTE technology sitting on them today, and it varies by carrier as you would expect. And I think with regards to the rate in environment, it will vary by market. What we are trying to do now is really to leverage the position that we have in each one of those markets. And I think that gives us a very compelling positioning if you will in that market. And there’s certain transactions that I’ve been told that we weren’t even the high bidder on, but it was as a result of the people that we had in the market, the capability and the skills of the people that we have in the market that really positioned us to be able to close those particular transactions.

And I think from a carrier perspective, particularly from a CTO’s perspective, they want to make sure that the assets are being put in the hands of people that can manage them, maintain them and grow with them and support their further growth in wireless broadband. So it's very difficult to say in terms of looking at kind of the interest rate environment and how that may play out, as I said I think it's critical for us to be as disciplined as we have been on all of these transactions and being able to look at all of these investments on a risk adjusted basis.

I think that from a capital structure perspective we are uniquely positioned in terms of looking at our tenure and cost and so we could be in a better position than others. But at the end of the day it's going to be a function of where we think the value is and what kind of value we think we can create from these transactions. Hopefully that’s helpful.

Jason Armstrong - Goldman Sachs Group Inc.

Yeah. Thanks, Tom.

Tom Bartlett

Sure.

Operator

Your next question comes from the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG

Thanks for taking the question. And Jim thanks for the discussion about how you’re seeing that we’re poised to move from a period of mostly network overlays to densification, and so I wanted to ask two follow-up questions on that. The first is that, when we start to see an increase in the deployment of new cell sites, and I think we’ve already started to see a little bit of that in the industry. That typically is beyond the scope of your MLAs. So could you just help us understand what that means for your business from a revenue standpoint, is it exclusively in enhancement to the organic revenue growth rate or do the MLAs actually have some step-downs in them or decelerators in them once the upgrade periods have been completed. And then the second question is some of this densification will be accomplished through small cells. Do you think you could maybe increase your investment there for example do you see any interesting opportunities in rooftops or WiFi?

James D. Taiclet, Jr

Okay, Brett let me start with generally how our major master lease agreements were. By in large with some modest exceptions they don’t include new co-locations or global suites across these comprehensive agreements in general, again with a few small exceptions. And there is absolutely no decelerator based on the trend inside of each carrier of amendments versus co-locations. So, these are fixed escalators plus used rights over a period of X numbers of years that we have negotiated. And within those used rights again for the existing base of contracts, there’s some flexibility in there at which we’re getting paid for, for the (indiscernible), so no decelerators whatsoever.

Getting back to small cells, we’re again very aggressive on some traditional DAS. The only difference between the newer small cell offerings in traditional DAS is that it's a mini base station instead of being fibered back to a central base station all via antennas. That still leaves a couple of issues for either DAS or small cells. First of all, from a carrier perspective while your initial equipment cost maybe similar so a macro sites runs about $250,000 for OEM equipment today. Small cells or DAS nodes could be sort of $25,000. So, if you do 6 to 10 cells, small cell instead of a big macro cell your equipment cost is about the same. That’s not the problem, the problem is soft cost upfront, much more expensive for either the tower company or the carrier itself to get the project zoned, construct is, building permits put in place, legal costs and longer duration of actually getting these things approved. And then the carrier faces higher operating cost afterwards.

And again not so much from the leasing side necessarily, because I think the industry is pricing DAS leases up probably 100 or 200 basis points above the tower leases. So, it's actually a reasonable lease cost. But the issues around DAS that I would suggest are for the carrier more on backhaul, fiber connections or better to each of those kind of 10 cells versus one fiber connection to a tower, and they have also got added utility costs. There are more locations to the [truck rolls due] if anything goes wrong. The switching costs are higher. The storage costs in the back of the network are higher, and the handoffs are tougher to engineer. So, from a carrier’s perspective, the macro site tends to be again more of the priority, and we're focused on that but we’re also focused on the complementary aspect of small cells. And in the middle as you pointed out on rooftops, we’ve got about 3,000 rooftops sort of on offer today. We’re adding to those and getting some easements in place in other sites we don’t even have access to today. So, we’re active on all fronts I would say, but we’re mindful that the carrier’s ongoing operating costs are higher with small cells and that they’ll be introduced in an appropriate rate, in the appropriate geographies which tend to be pretty densely populated.

Brett Feldman - Deutsche Bank AG

Okay, thanks; and just to be clear, is with regards to the first quarter. If we were to see a continuation of new site deployments particularly into next year that is, that’s incremental in other words we don’t have to ratchet down anything in the run rate from the MLAs?

James D. Taiclet, Jr

Correct.

Brett Feldman - Deutsche Bank AG

Great. Thank you.

Operator

Thank you. And we have reached the allowed time for questions. Are there any closing remarks?

Tom Bartlett

No, I just want to thank everybody for joining us on the call. And to the extent you have any questions or follow-ups please give us a holler. Thank you.

Operator

And thank you for your participation in today's conference call. You may now disconnect.

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