Welcome to the Crown Castle International Corporation second quarter 2009 conference call. (Operator Instructions) I would now like to turn the conference over to Fiona McKone, Vice President of Finance.
With me on the call this morning are Ben Moreland, Crown Castle Chief Executive Officer, and Jay Brown, Crown Castle Chief Financial Officer. To aid the discussion we have posted supplemental materials in the investor's section of our website at Crowncastle.com which we will discuss throughout the call this morning. This conference call will contain forward-looking statements and information based on management's current expectations.
Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about potential factors that could affect the company's financial results are available in the press release and in the risk factor sections of the company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should such underlying assumptions prove incorrect, actual results may vary significantly from those expected.
In addition today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, recurring cash flow and recurring cash flow per share. Tables reconciling such non-GAAP financial measures are available under the investor's section of the company's website at Crowncastle.com
With that, I'll turn the call over to Jay.
Before I take you through the results for the quarter, I'd like to comment briefly on our business in general and what we are seeing, as shown on slide three. First, I am very pleased with our excellent second quarter results, which reflect the continued demand for wireless infrastructure as we exceeded the top end of our guidance for site rental revenue. As shown, we continue to deliver top line growth consistent with our expectations.
Second, we've maintained a disciplined approach to costs, holding our direct tower expenses approximately flat year-over-year, and reducing cash G&A expenses by 7%. This enabled us to exceed the top end of our guidance for site rental gross margin, adjusted EBITDA recurring cash flow.
Third, despite prevailing economic conditions, we have had strong application volume for wireless carriers to go on our U.S. towers. In fact, applications in the second quarter were up 30% in the U.S. over application activity in the second quarter of 2008.
Fourth, we recently announced our third financing since the beginning of the year and have now addressed all the debt maturities until 2014. The combination of a very strong first half of the year together with higher tenant additions expected in the second half of the year, disciplined cost control, and stellar execution allows us to meaningfully increase our site rental revenue, adjusted EBITDA and recurring cash flow outlook for the full year 2009.
With that, I'd like to take you through the excellent results for the quarter, the increase in our 2009 outlook, and the continued improvements in our capital structure since the last quarter call. As highlighted on slide four, during the second quarter we generated site rental revenue of $376 million up 8% from the second quarter of 2008. The first quarter results were negatively impacted by the 19% decrease in the Australian dollar to U.S. dollar exchange rate from the second quarter 2008 to the second quarter 2009.
The impact of the FX is also illustrated on slide four. Site rental growth's margin defined as site rental revenues less costs of operation was $263 million, up 12% from the second quarter of 2008. Adjusted EBITDA for the second quarter of 2009 was $247 million, up 16% from the second quarter of 2008. It is important to note that these growth rates were achieved almost entirely through organic growth on the assets that we owned as of April 1, 2008.
Turning to slide five, recurring cash flow defined as adjusted EBITDA less interest expense, less sustaining capital expenditures increased 10% from the second quarter of 2008 to $132 million, and recurring cash flow per share increased 8% from the second quarter of 2008 to $0.46 in the second quarter of 2009.
Moving to the outlook for the third quarter and full year 2009, our third quarter outlook is shown on slide six and reflects expected site rental revenue growth and adjusted EBITDA growth of 9% and 14% respectively over the same quarter in 2008.
Turning to the full year 2009 outlook as shown on slide seven, based on a strong first half of the year and our expectations for the second half of the year, we have increased our outlook for site rental revenues by $17.5 million, site rental gross margin by $25.5 million, adjusted EBITDA by $22.5 million, and recurring cash flow by $20.5 million for the full year 2009. This increased outlook corresponds to a 9% and 14% increase in site rental revenue and adjusted EBITDA respectively, compared to full year 2008.
Turning to the balance sheet, as of June 30, 2009 performance of the completion of the $250 million senior secured notes offering, repayment of the December 2009 note, and the purchases of $196 million of the tower revenue note, pro forma debt was $6.2 billion as shown on slide eight.
Total net debt to last quarter annual adjusted EBITDA as of June 30, 2009 was 6.1 times, overall leverage is down approximately one turn over the last 12 months and is now at the lowest level of leverage in the company's history. Adjusted EBITDA to cash interest expense as of June 30, 2009 was approximately 2.6 times. Both our adjusted EBITDA leverage and cash interest expense coverage were comfortably within the expected covenant.
As illustrated on slide nine, the liability associated with the forward starting interest rate swap is currently approximately $261 million down from the $547 million at the end of the first quarter as a result of higher swap rates. As shown, we have also provided sensitivities for these swaps to changes in interest rates.
Moving to investments and liquidity, during the second quarter we spent $39.6 million in the quarter on capital expenditures. This represents a 72% decline in capital expenditures compared to the same quarter in 2008. As depicted on the graph on slide ten, this level of capital expenditures continues to drive strong site rental revenue growth.
Before I turn the call over to Ben, I'd like to make a few comments about our capital structure. Since the beginning of the year we have made significant progress in raising capital in order to refinance our upcoming debt maturity.
Turning to slide 11, two weeks ago we announced $250 million of senior secured notes, the proceeds of which are expected to be used to repay in full the GSL Trust II notes of which $222 million is outstanding. These notes meaningfully extend the maturity of the debt. The $250 million offering consists of two classes of notes, Class A1 and Class A2, both of which were rated investment grade and issued at par.
The Class A1 note consists of $175 million of 6.25% notes and fully amortized during the period beginning in January 2010 and ending on the final maturity date in August 2019. The Class A2 notes consists of $75 million of 9% notes and fully amortized during the period beginning in September 2019 and ending on the final maturity date in August 2029. The weighted average interest rate on the notes is 7.1%, and the debt on the entity represents approximately 5.8 times run rates adjusted EBITDA.
I think it is interesting to note that the ten-year 6.25% Class A1 note ranks approximately 50 basis points higher than the structured notes with an expected five-year maturity that we issued in December 2006, obviously in much more favorable credit market conditions at that point.
Importantly, subject to certain conditions in the structured notes, we are permitted to issue additional indebtedness on the respective asset securities notes as the entity delevers to the expected growth in cash flow and principal payment.
In essence, the long days of maturity with scheduled principal amortization and the ability to issue additional indebtedness, allowed us to refinance these structured notes opportunistically as the market permits, thereby avoiding the inherent risks associated with bullet maturities. I believe that the amortization and the long days of maturity of these structured notes represent important milestones for Crown Castle, reflecting the long-term nature of our assets and the contracted cash flow.
Moving on, since April 1, we have purchased $196 million of the tower revenue notes due in June 2035 in the open market at par evidencing the market's view that these notes are refinancable. Pro forma for these purchases, we have $1.7 billion of tower revenue notes due June 2035.
As of June 30, 2009, pro forma of the completion of the $250 million notes offering, the retainment of the December 2009 notes and the July purchases of the tower revenue notes due June 2035, we expect to have approximately $177 million in cash and cash equivalent excluding restricted cash. Further, our $188 million revolving credit facility will be undrawn.
In summary, as shown on slide 12, we have no significant debt maturities until 2014 having significantly extended the maturity profile of our debt. I'm especially pleased that we have been able to accomplish both of the most recent financings without increasing the run rate interest expense from the January 2009 run rate level.
Furthermore, we have made considerable progress in achieving our goal to better ladder the maturity profile into smaller increments limiting the amount of debt of maturities in any one year. I believe that these smaller and more manageable size tranches will enable us to refinance the debt more easily, particularly in difficult credit markets.
I would expect to apply a similar laddering approach as we contemplate refinancing the remaining $3.25 billion of tower revenue notes. The debt issuances thus far in 2009, demonstrated our access to multiple debt markets in a difficult credit environment. We now have time and flexibility to be opportunistic in how we refinance the remaining tower revenue notes.
As I have discussed on previous calls, we are not required to refinance or repay the $1.7 billion and the $1.5 billion tower revenue notes on the anticipated refinancing dates of June 2010 and November 2011 respectively, as these notes have final legal maturity dates of 2035 and 2036 respectively.
If we choose not to refinance or repay the notes by June 2010 and November 2011, the cash generated by the assets underlying these notes would begin to amortize the debt. It is instructive to point out that the growth in our outlook is virtually all organic and the expected level of CapEx necessary to support this growth is currently available, even if we were to begin to amortize the notes with underlying cash flows.
Effectively, this is the way we are operating the business today with no impact on our performance, as you saw from the excellent results this quarter. Based on our current trajectory, we would expect leverage in June 2010 to be approximately five times run rate adjusted EBITDA on the entity supporting the tower revenue notes. This compares very favorably to the 5.8 times leverage on the entity we just refinanced with the $250 million notes offering at a blended rate of 7.1%.
Our refinancing goals are clear and multilayered and we will strive to achieve the most beneficial structure that serves the following objectives. Continue to ladder and extend the maturities over multiple years, ensure the most flexible use of cash flow permissible, maintain a reasonable level of leverage that we believe will enhance shareholder returns and, obviously, seek a favorable interest coupon.
I believe we can accomplish these goals as we refinance the tower revenue notes without meaningfully increasing our run rate interest expense. So to recap, I'm very pleased with the operating results achieved in the second quarter, the indications for an even stronger second half of the year, and the refinancings we've accomplished.
With that, I'm pleased to turn the call over to Ben.
As Jay just mentioned, we had an excellent second quarter exceeding our outlook for site rental revenue, site rental gross margin, adjusted EBITDA and recurring cash flow. As reported in the press release, we expect net new tenant additions to be significantly higher in the second half of the year compared to the first half of 2009, fueled by a 30% increase in second quarter application activity versus the same quarter last year.
A continuation of very robust application activity we enjoyed in the first quarter. Based on this activity and the strong first half of the year, we have raised our full year 2009 outlook and remain very excited by the continued growth prospects for our business. The trends driving our business, as we've noted on prior calls, continue to strengthen.
Smartphones now account for 28% of the big four subscriber base, compared to 16% to 18% just a year ago, and continue to be the predominant driver of top line growth in wireless data services. The trend for users to consume larger and larger amounts of data upon acquiring a data-enabled phone continues unabated.
As the network and devices become faster, more efficient and more multifunctional, the consumer responds by using more data services. A good example of this is the YouTube experience. YouTube saw its mobile uploads increase 400% a day in the week after Apple released its iPhone 3GS, the first version of the iPhone to offer video capture capabilities.
Similarly, according to a [PU] Internet and American Life survey conducted in April across almost all wireless data categories, including text messaging, gaming, picture taking, emailing, accessing the Internet and playing music. Survey respondents meaningfully increased their activities from just 15 months ago. In fact, 44% of the respondents were now regular users of non-voice mobile services, up from 32% just 15 months earlier.
This continued demand for data was reflected in the carrier's second quarter results. In fact, data revenue growth has been impressively strong throughout the recession and is expected to remain robust with average data revenue per user or ARPU rising materially.
Once again, Apple beat sales expectations on the 3GS, selling more than a million units in the first three days of sales. The iPhone helped drive robust wireless data growth and ARPU improvements at AT&T. Specifically, more than 2.4 million iPhones were activated in the second quarter for a total of 3.5 million integrated devices activated on the AT&T network in the quarter.
At AT&T, Smartphone users have a percentage of postpaid subscribers doubled from the second quarter of 2008 to 36%, and the average integrated device ARPU was 1.8 times more than the nonintegrated device ARPU. This contributed to a 37% increase in wireless data revenues at AT&T versus the same quarter in 2008.
And data, an increasing percentage of the carrier's overall revenue represented 29% of AT&T's second quarter wireless service revenues, up from 23% a year ago. Driven by strong data growth, AT&T's postpaid data ARPU increased to 26% to $17.72 compared to this same quarter last year. At AT&T postpaid subscribers with data plans are now more than 50% of the postpaid base.
Similarly, Verizon enjoyed a 33% increase in wireless data revenues versus the second quarter of 2008. And data represented 29% of Verizon's second quarter wireless service revenues, up from 24% a year ago. Data ARPU at Verizon increased to just under $15 per month, up 23% from a year ago. As data services drive incremental returns, the carriers are leasing more of our sites, to support this growth and network demand from wireless data services to capture the higher ARPU.
We also saw significant applications from 4G developments in the second quarter, Most of which were not in our guidance at the beginning of the year, and reflects the launch and pre-launch activities of these coming 4G services. Specifically Clearwire, the first wireless company to launch 4G services, has been very active. And we expect the level of leasing activity to remain high through the remainder of the year and into next year as they plan to launch a number of markets this year and next.
We would expect to be a significant beneficiary of these launches by virtue of Sprint's ownership in Clearwire and our ownership of most of the Sprint towers following the global signal acquisition. We believe the increased application activity we're seeing and our increased 2009 outlook are consistent with the wireless carrier's recent comments on their expected network investments over the coming years.
In addition to a great quarter in site rental revenue, our U.S. services business performed very well. Service revenues were up 19% and service margins were up 82% compared to the same quarter last year. This is attributable to the higher take rate on the part of most of our customers. Furthermore, while the services business is not as predictable as our core leasing business, it has become somewhat less volatile over the past 18 months.
On another positive note, I would like to take this opportunity to recognize our employees' diligent efforts to contain costs, which resulted in a 7% decline in cash G&A expenses and flat operating expenses compared to last year. Notably this reduction in G&A expenses was achieved without a decrease in headcount and despite substantially higher leasing and service activity, reflecting an enormous and commendable effort by our employees.
Finally, the strong growth we're delivering against this exciting market backdrop does not happen by accident. It is the result of a very focused strategy we have put in place to maximize our business opportunity in the U.S. and Australian markets.
With the combination of our tower portfolio being located predominately in the top 100 U.S. markets, with 3,700 more towers in these top 100 markets than any other company, and industry-leading customer service as voted by our customers, our company today is capturing more of the opportunities in the market than ever before.
We are executing at a very high level right now whether you measure it by leasing applications, customer feedback or high take rates in our service business, the opportunity in the U.S. market as the mobile Internet deploys across the competitive landscape, is tremendous for Crown Castle. Our strategy is to be the leader in this market by all objective measures and I believe our results are bearing that out.
I'd like to comment a little on my view of international expansion opportunities given some of the recent erroneous press reports regarding Crown Castle's potential participation in the Indian tower market. As we have always done, and will continue to do so, we stay abreast of opportunities in international markets.
Given the challenging capital markets, there are a lot of towers for sale around the world right now, particularly in developing countries. When we look at developing countries, we continue to observe that they do not have the same characteristics that mark the U.S. business. Specially, there appear to be fewer barriers to entry and less ability to secure long-term real interest.
Notwithstanding some growth potential which we acknowledge, we do not see the long-term risk reward relationship as attractive. Our long-term goal is simple and unchanged we are focused on maximizing long-term recurring cash flow per share without increasing the risk profile of our business. I'm excited by the progress we've made on the balance sheet this year and look forward to our continued execution as the industry leader and further enhancing our growth with opportunistic investments over time.
With that, operator, I'm pleased to turn the call over for questions.
(Operator Instructions) Our first question comes from Jonathan Atkin – RBC Capital Markets.
Jonathan Atkin – RBC Capital Markets
Ben, you raised an interesting point about the Clearwire builds and the fact that you benefit because of your ownership of the former Sprint assets. So is it fair to say that in a vast majority of cases there's a meaningful revenue amendments, or lease amendment events that benefits revenues in cases where Sprint has the underlying original [inaudible] lease? And then on a bit more broader level, apart from that factor, is there anything else non-4G related that you see fuelling incremental growth in the second half compared to the first half?
The Sprint situation with Clearwire locating on the Sprint site, I think we talked about it a little bit before. There is an inherent savings and some sharing of infrastructure on a Sprint site so there is a financial incentive, as well as an organizational incentive I believe not speaking for them, to locate on the Sprint towers. And so clearly it's our presumption that we're seeing a disproportionate amount of that given the concentration of the Sprint assets that we have. But I wouldn't limit it to that.
We're getting a lot of brand new applications on sites where Sprint is not located, but certainly I think we're getting the benefit of both. So there's a propensity to hit a Sprint site, as well where there's not a Sprint site. We're executing very well for that company.
As well as non-4G activity I would argue is continuing quite well. We're continuing to see other emerging carriers rollout in new markets. We're seeing a lot of amendment activity still for 3G enhancements. We're seeing roaming over build and things like that with T-Mobile, so it's pretty broad based across the rest of the group with Clearwire's 4G build and obviously LTE applications for Verizon being really the distinction this year.
Jonathan Atkin – RBC Capital Markets
And then I might have missed it, but any one-timers that affected revenues or expenses?
No, not this time.
Jonathan Atkin – RBC Capital Markets
Finally, I think you are the last major tower company to buy directly or indirectly a sizable portfolio of carrier-built assets and there still are sizable carrier owned towers out there. How do you kind of view the possibilities of possible consolidation either by yourself or others over the next couple of years?
Well, we'll view it as we always have which is, again, back to the goal of maximizing recurring cash flow per share over a long period. When you buy assets obviously it costs capital. It's either debt or equity, not free. Or its cash flow you otherwise could have put to doing something with. So we will evaluate anything out there against the backdrop of running our core business as we currently are with pretty healthy organic growth rates. I look at the market out there just more broadly and suggest it's beginning to sort of pick up on the smaller acquisition front seeing more opportunity out there.
We're going to take a very measured approach here for probably just a few more months as we work through our final refinancing on these tower revenue notes, as Jay mentioned, but we're beginning to see it pick up and prices haven't really adjusted downward that much. But back to your question of consolidation in our carrier towers, we're not aware of anything out there on the market today. There could be something in the future and obviously we'll take a pretty hard look at it.
Our next question comes from the line of Rick Prentiss – Raymond James.
Rick Prentiss – Raymond James
A couple of questions for you, first it takes a lot to stun me, but I thought your guidance increase was pretty stunning, two quarters in a row of pretty big guidance increases. Talk to us a little bit about where you started the year in guidance, what's really changed since then on the three main areas of revenue, tower revenues, tower cash flow and adjusted EBITDA.
Typically this business has been seen as a very high visibility business, not many surprises, [inaudible] take guidance up. So it's pretty amazing when somebody puts up these kinds of guidance numbers. So that's the first question.
Rick, let me try to answer that. We put out guidance you remember at the end of third quarter call last year, so at the end of October when the world felt frankly a lot worse than it does now, we were very concerned, or I should say maybe cautious, about the carriers ability to raise capital, particularly the emerging carriers, and then willingness to spend it.
So we were appreciably conservative in our guidance and, in particular, around the 4G build for Clearwire and the LTE amendments on Verizon. But appropriately cautious really for everyone else as we can all remember how the world felt in the fourth quarter of last year.
So I would say that we were very conservative on our leasing assumptions and have been very pleasantly surprised by the level of activity, as we've noted in the press release, that we've seen really since kind of the March timeframe. January, February were still a little bit slow but then March on through has just been really strong. So we've been very pleased with that.
The second thing I would mention is again to commend our team. We have found more cost savings in our company than we probably thought possible. I'll just go ahead and admit it. The team is being very diligent on how we're spending discretionary expenses as we mentioned around G&A down sequentially for the year and operating costs at the tower level basically flat year-over-year.
That's just from being smart and I would not suggest we can continue to do that year-over-year. Obviously that gets harder, but certainly this year has been wonderful to see. And then the last thing I would say has been we have been very successful in continuing to grow and to perform and execute for customers around our services business. And for those of you who are not that familiar with it, that's typically the business of facilitating the installation of antennas on our sites on behalf of carriers.
We have grown our take rates there. We have improved our execution. We have more balanced the execution across the nation as opposed to having certain regions do extremely well and others not get very much. So we're more balancing that across the country. And that has been a pleasant surprise. As you know, that's a difficult business to forecast and we've always been conservative.
And when we put out guidance, we don't actually put out guidance but you can implicitly back into it. We're always typically down from the prior year just out of conservatism because it's not a recurring business. And yet this year looks like we'll probably end up doing more than last year. And so when you take those three things combined leasing, cost saves and services, you end up with the kind of performance that we're posting.
Rick Prentiss – Raymond James
On the Clearwire item on the revenue on the 4G being funded now and ramping up, this isn't just lease applications you're suggesting this is actual revenues showing up in the Clearwire business. Two questions on that.
One, is have they applied for this in advance and were waiting for funding so it's maybe you are seeing some quicker revenues take rates as it was kind of sitting on G waiting on O. And also is it possible as you look at your Clearwire applications that just proportionally higher on the Sprint side than none Sprint site, so maybe they're using this as kind of their first shot at getting coverage and then will come around to you and other tower guys probably to fill in behind that.
Rick, I probably don't have that level of granularity and you probably need to ask the company specifically you know how their phasing their market builds. But we are seeing significant revenue growth out of the Clearwire application turning into leases that continues through the rest of the year, and into next year I would forecast. And we're very pleased with the activity we see from them.
Rick Prentiss – Raymond James
Other questions on the balance sheet, now that you done a major job refinancing getting maturities pushed out, we've seen a lot of activity from the other tower guys as well. How do you think about one your target leverage ratio? What's the right range to be in, interest coverage I'm sure you'll bring up as well.
But then also as you look at your balance sheet where excess cash goes, how do you consider stock buyback verses portfolio growth, and if you get up to this, just what is going on with the land program?
You had kind of ramped up that towards the end of last year, just kind of those three areas as you get the balance sheet lock down, stock buyback, portfolio growth and land program.
On the relative to target leverage and you're right I will go to interest coverage because I think that is the right way to think about leverage on the business. From an interest coverage standpoint, we've' targeted being north of two times interest coverage and really aimed to keep the business somewhere in the neighborhood of about 2.5 time cash interest coverage, which is at about at the level where we're running at currently.
As I noted in my comments, I'm hopeful that we can go through the process of rate financing the tower revenue notes without meaningfully increasing our overall interest expense, our run rate interest expense from where it is currently, which would suggest that we're in and around the level of leverage that we would be comfortable with. We may see it tick down, as Ben mentioned earlier comments, for the next couple of quarters or months. But we're approaching a level where we get pretty comfortable with the total amount of leverage outstanding.
Maybe I'll speak of land purchases and Ben can take the question broadly on cash allocation. But on the land purchase side, as we talked about in prior calls, we've touched nearly 1/3 of our portfolio over the last five or six years extending ground leases purchasing land, such that today more than half of the cash flow is onsite that we either own or control for greater than 30 years. We've moved that number significantly over the last couple years with the work that we've done.
We've transitioned the program largely to lease extensions and have been very successful at that. We still have in place the team that we've had over the last several years that have been focused on this and we continue to see an activity level commensurate with the levels we have seen over the last couple of years. Just lower amounts of purchases, much greater allocation towards lease extension.
And we could certainly ramp that back up over time and probably will to some degree as we complete the balance sheet rollover. As you know, Rick, the finance team has been pretty busy around here since January and it's been almost $2.5 billion, if you include the bank deal since the beginning of the year. I look at the balance sheet and think were approaching levels we're very comfortable with assuming that we're able to accomplish this refinancing on the tower notes on a similar basis, which is laddering out the maturities with fixed rates.
If that gets accomplished, which we believe it will based upon what we've recently done and what we're seeing in the market, then I'd say we're probably getting pretty close to comfortable on sort of balance leverage and coverage and at that point we're back in the investment game. So I'd say we're not quite there yet, but we're close. And we'll take a very measured look, as we always have, whether we're doing stock buybacks against valuation of our own company across our own leasing expectation versus M&A, which we been very aggressive on both fronts over time.
And I think you should continue expect we will act in that manner. We do have a team engaged in M&A today. We're looking at everything on the market. Again, we will probably be a little measured in how we pull the trigger here for short period of time, but I'd say we are getting pretty close to being back in that game in full swing.
Our next question comes from Anthony Carmen - Deutsche Bank.
Anthony Carmen - Deutsche Bank
I wanted to expand on that prior comment that Ben just made. I just wanted to make sure that I'm understanding it clearly and Ben you kind of [pooh-poohed] the international expansion in your prior comment and there was obviously that direct article about you guys in India.
But I guess just from a macro perspective, are you saying that until you have 100% certainty on what the cost of capital will be on the CMBS that it really precludes you from a larger type transaction, whether it be an M&A deal or a big buyback or something of that nature?
Not completely Anthony, I'd say that we would have to make a judgment a call. We've had great success in the debt market thus far this year. I think we are getting more and more confidence in the ability to rollover the ARD notes at something substantially less than what the ARD trigger interest rate would have suggested.
But nonetheless we've all been through a period where we saw a capital markets completely shut and I think you're going to take a little bit of an appropriate measured approach. Again, it's not about leverage it's about the fact that note steps to 10% and we think we can be substantially better than that. So I would say we'd have to make a judgment call on that and we'd look at the facts and circumstances.
I would make a note overall point about acquisitions and investment, and I think this is good quarter to reiterate this. Remember in this business, whether you're 8,000 towers or 24,000 towers, most of the value gets created in this business from organic growth, which is what we are delivering and certainly haven't compromised at all through this period where we've been rolling over the balance sheet and otherwise conserving discretionary capital expenditures.
That's where the real value driver is. It is clearly supplemented by external investment, whether that be in our case as we've done in the past buying assets or buying stock. And it can be accretive over time as long as you don't change the risk profile of the overall business. But let's not put the cart before the horse or the tail wagging the dog, so to speak.
The real value is sweating the assets we already own and I'll remind you we doubled the size of the company two years ago, positioning ourselves in these top 100 markets just for what's occurring. And so we are working very hard to actually deliver on the 11,000 sites we bought two years ago. And so while we may go out and find the100 sites here, 200 sites there. It's going to be a fairly small rounding error.
Specifically on international, I wanted to direct my comments to that press report that we saw that was just inaccurate. I would not suggest to you that we would never consider an international acquisition of course that's not the case. We will continue and look and evaluate situations. I'm only making the point that as of today as we've looked at these situations and there are a number of them out there, as I suggested. We haven't seen a risk reward relationship appropriate from our judgment that compels us to one investment capital. And that's probably where I'll leave it.
Anthony Carmen - Deutsche Bank
Jay, when you're comparing sort of keeping interest coverage neutrality on the refi you're comparing that to what the CMBS would step up to with the ARD or just on the current rates where they're fixed right now?
I'm talking about where the current rates are today. The run rate interest expense is a little over $440 million. The average interest rate on the balance sheet is about 7.1%. So the combination of timing, using cash flow that we have cash on the balance sheet today and how we go through the process of refinancing, I'm saying my aim is to keep the nominal amount of interest expense in and around that 440 level.
Anthony Carmen - Deutsche Bank
Do you think to help yourself achieve that that you would sort of consider buying down the size of the refi by rededicating some of your excess cash in free cash flow towards reducing the refi amount?
Yes, I think that's exactly what we're speaking to, Anthony, and that spends point about, we don't know exactly what the timing is when we're back able to start to allocate cash flow to investment. It's really going to be dependent on market conditions in the credit markets and at what point are we able to refinance the debt, but it's a combination of those two things.
Anthony Carmen - Deutsche Bank
One sort of operational model question, as we think about all these amendments that come in and let's just take Verizon and example, will their deployment of LTE to the extent it's on a site where they already are also be a similar type amendment to what you guys were talking about earlier with Clearwire. And do those all then roll into the master lease arrangement that you have with these companies, such that in future years the amendment revenue will also be subject to an escalator or will it be more one-time in nature?
The answer to the second question is, yes, absolutely it becomes part of the overall run rate for any of the carriers that would be doing amendments. Without getting into specific contract details, there are significant differences in a Clearwire deployment, which is much moer like a brand new sort of full install versus and LTE amendment, which can run the gamete from just a couple of lines or to maybe a couple three lines and antennas.
So on average LTE amendments are running less than we would have historically seen on the original 3G amendments, however, we're seeing many, many of them and we'll expect to see significant increase in those applications going forward as LTE rolls out in these markets. But then Clearwire is much closer to a full installation.
Anthony Carmen - Deutsche Bank
And both would be subject to the escalators going.
Our next question comes from Simon Flannery – Morgan Stanley.
Simon Flannery – Morgan Stanley
Ben, just to follow up a little bit on that last one microwave backhaul some of the carriers are look at that are you seeing any major changes there. And then more generally you've had strong earnings you've got strong guidance. It seems like you've got better trends than some of your peers here. What would you attribute that to? Is there something in terms of your tower portfolio of your customer relationships that is giving you this particular strength versus the industry overall?
On microwave, we are seeing a lot of leasing for dish space. As you can appreciate, carriers are attempting to address the backhaul issue in any number of ways and so we're seeing a lot of dishes and charging for that. We're seeing carriers bring fiber to sites, which bringing fiber through a utility and using it for their own benefit is not a revenue opportunity for us. But nonetheless creates an opportunity to make that site more valuable to the extent its got significant backhaul capabilities for that particular carrier.
Backhaul has been widely discussed. It is a revenue opportunity for us but I think it likely just sort of goes all in the overall mix of 4G and ultimately mobile Internet connectivity that result in more revenue per site. And then secondly to speculate with you on what we're seeing, it's hard to do but I have to go back to the interaction I have with our own employees that are out dealing with customer, as well as our tower footprint.
With 72% of the sites in the top 100 markets, as well as customer survey results we're getting upwards of 300 to 400 respondents a quarter telling us that we're doing, not only better than our peers, but better than we have done before is leading met go believe that execution around the business, as well as the location of the towards, we're not missing very much fright now. And that's a very good feeling.
So as I mentioned in my prepared remarks, we're executing at a very high level. Clearly you have to have carriers actually doing something to actually perform in our business, so you can't create it out of nothing. But we are executing at a very high level and I've probably never seen us capturing more of the potential opportunities in a market than we are doing right now.
Our next question comes from Batya Levi – UBS
Batya Levi – UBS
With higher than expected growth in revenues, I wanted to ask if you think that you need to adjust CapEx accordingly. I believe the original target was about $80 million to $90 million for revenue in house in CapEx in '09. Do you think there will be any upside to that? Also, similar if you could talk about the driver for the number of tower reduction in the quarter and how we should think about it going forward. Do you need to add more to support the growth you're seeing?
On both of those questions, the CapEx impact, no, I wouldn't expect there to be any change relative to the outlook or our services business should be any impact there to CapEx. I think the prior comments that we made still hold and wouldn't expect CapEx to change much off the run rate that we showed in the second quarter.
With regard to your second question, I think we took down about 36 towers in the U.S. during the second quarter. We go through a process pretty diligently to look at towers that we don't believe will have lease up opportunities in them. They may be negative margin sites. And so we had some in this second quarter maybe a little bit more than we would expect on a normalized basis, but that's just a normal way of operating the business and wouldn't expect that to impact revenue growth rate.
Batya Levi – UBS
Do you expect that number to grow in the second half?
No, I wouldn't expect it to grow.
Our next question comes from Gray Powell – Wells Fargo Securities.
Gray Powell – Wells Fargo Securities
You've been asked this a couple different ways, but at least one of your peers has a pretty similar percentage of Sprint revenue in their tower portfolio that you have and they just weren't seeing as dramatic a pickup from Clearwire. So I guess my question is, is it something specific about the 6,000 Sprint towers in the global signal portfolio? And are those towers getting more demand than the legacy Crown towers where Sprint is already a tenant.
Gray, I think Ben spoke to a couple of different ways so let me take my shot at it. I wouldn't try to attribute the growth in revenue all to Clearwire. I think Ben was trying to speak to the fact that we are seeing significant activity from them and more than probably what we expected going into the year. But we're seeing leasing demand across the board and, as Ben mentioned, we have 3,700 more towers in the top 100 markets than any other company and more than 70% of our existing revenue streams are coming from the big four carriers.
So when you have the massive scale deployments of 3G upgrades driven by the iPhone that we talked about and many of the other trend lines related to 4G, we would just expect that we would see a disproportionate share of that given the location and number of assets that we have in those markets. So I think Clearwire is a part of it, but I don't think that's all of it. So if you're trying to draw a direct correlation to Clearwire, maybe that's where it falls apart a little bit.
Gray Powell – Wells Fargo Securities
Can we just talk about your ability to supplement growth by reinvesting in your business, whether it be share buybacks, new tower builds or acquisitions? And I don't want to get too specific, but just by my math I roughly estimate that you can grow the absolute dollar amount of free cash flow by a mid to high teens rate for call it the next four years on an organic basis. When you think about reinvesting in your business, how much can you supplement your free cash flow per share growth?
Gray, I'm probably going to refrain from giving you full year guidance on this call, but your on the right path in terms of how the math works and its something we've practiced for years admittedly taking this year off, as we're essentially going to rollover the entire balance sheet in a 12 or 18 month period.
But if you go to our previous comments about we're getting very close to being comfortable with leverage and you say look okay you're going to generate call it $500 million recurring cash [inaudible] to work and maybe you get comfortable at 5, 5.5, 6 times leverage so you're re-leveraging that. You're over $1 billion a year of investable capital, and this is the same math we took you through back in 2006, 2007 and 2008. And putting that money to work you are very wise to remember that it creates a significant amount of benefit over a long period of time.
And so whether you're shrinking the share count, as we've done, we bought basically 1/3 of the company back in at an average price of about $25 over a number of years or you're buying assets, which come with initial yield obviously and then hopefully growth over time through additional leasing. No matter how you slice that, that redeployment of upwards of $1 billion a year makes a difference over time. In the short-term, you can barely see it. In the long-term over five years, it's obviously material.
Our next question comes from David Barden – BAS-ML
David Barden – BAS-ML
Shorter term picture, Jay, with respect to the usual seasonality's into the back part of the year given the ramp that you seem to be talking about, is it fair to say that we'll probably see kind of higher expenses going into maintenance and kind of situation towers for this growth in the third quarter per usual? And then are you seeing kind of the ramp trajectory for the development side of the business kind of accelerating into the fourth quarter, which would kind of give us that end of year revenue bump.
On the seasonal expenses side, during the warmer months we do typically incur more repairs and maintenance expense on our assets and so you can see from the guidance that we have provided we would expect direct site rental operating expenses to pickup a bit between the second quarter and the third quarter. And that's largely related to the seasonality there.
In terms of the growth in revenues, we've obviously increased our expectations for where revenues will be in the third and the fourth quarter in this most recently provided guidance from where we were previously, and that's largely impacted from the application volumes that Ben spoke about and I spoke about in my comments turning into actual leases and beginning to pay rent. And you're right to say that the impact we would expect to be a bit greater in the fourth quarter and then really mostly affecting the beginning run rate as we go into 2010.
David Barden – BAS-ML
I apologize if I missed it, but could you then also give us a quick update on what the status of the Australia properties is?
Australia continues to perform quite well. We enjoy viewing that market, not only from just the financial returns and execution business, but also just seeing what we believe is a preview of the wireless landscape in the U.S. with much more robust data speeds available in that market primarily on the Telstra network but with others catching up over time.
It's exciting to see something like what Verizon has been talking about in terms of 8 to 12 megabytes per second speeds being available in that market and what that actually means on a handset where you can see seven or eight streaming channels of video and do pretty much anything you want. And there's a lot of iPhone users in our office down there and they do a whole lot on those iPhones that I think we all expect we'll see here in the coming years. So we're very comfortable with that business and I think we'll continue business as usual there.
With that, I will probably end the call. I want to thank everybody for joining us today and being interested in our results and look forward to speaking with you in the coming months and on the next call. Thank you very much.
Ladies and gentlemen, this does conclude the Crown Castle International Corporation second quarter 2009 conference call. If you'd like to listen to a replay of the conference, please dial 303-590-3030 or 1-800-406-7325 with the access code of 4114093#. We thank you for your participation and at this time you may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!