Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Crown Castle International Corporation third quarter 2009 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, November 4, 2009.
I would now like to turn the conference over to Fiona McKone. Please go ahead, ma'am.
Thank you. Good morning, everyone and thank you for joining us as we review our third quarter 2009 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer, and Jay Brown, Crown Castle's Chief Financial Officer.
To aid the discussion we have posted supplemental materials in the Investor 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 and uncertainties and assumptions. Information about the potential factors that could affect the company's financial results is available in the press release and in the risk factor sections of the company's filings with the SEC.
Should one or more of these or other risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. Our statements are made as of today, November 4, 2009 and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
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 section of the company's website at crowncastle.com.
With that, I'll turn the call over to Jay.
Thanks, Fiona, and good morning, everyone. Before I take you through the results for the quarter, I'd like to make a few summary comments, which are highlighted on slide three.
First, I'm very pleased with our excellent third quarter results, as we exceeded the top end of our guidance for site rental revenue, site rental gross margin, adjusted EBITDA and recurring cash flow. These results reflect the continued demand for wireless infrastructure, in general, and significant demands from the deployment of 4G.
In addition to a great quarter in our site rental business, our services business also performed very well. Service's revenues were up 8% and service gross margins were up 12% compared to the same quarter last year.
Second, we maintained a disciplined approach to cost holding our direct towering expenses approximately flat year-over-year.
Third, we continued to see strong application volume from wireless carriers to go on our towers. In fact, year-to-date applications are up 38% in the U.S. over application activity in the first three quarters of 2008. Applications in the third quarter of 2009 were up 41% compared to the third quarter of 2008.
Further, we recently completed our fourth financing since the beginning of the year, taking advantage of improvements in the credit market to refinance our debt and significantly extend our debt maturity schedule.
The combination of very strong year-to-date revenue growth, 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 results for the quarter, the increase in our 2009 outlook and full year 2010 outlook.
As highlighted on slide four, during the third quarter, we generated site rental revenue of $397 million, up 12% from the third quarter of 2008. Site rental gross margin, defined as site rental revenues less cost of operations, was $282 million, up 18% from the third quarter of 2008. Adjusted EBITDA for the third quarter of 2009 was $261 million, up 20% from the third quarter of 2008.
It is important to note that these growth rates were achieved almost entirely through organic growth on assets that we owned as of July 1, 2008, as revenue growth from acquisitions was negligible. The 6% decrease in the Australian dollar to U.S. dollar exchange rate from the third quarter 2008 to third quarter 2009 had a slight negative impact to our consolidated results in the third quarter.
Turning to slide five, recurring cash flow, defined as adjusted EBITDA less interest expense less sustaining capital expenditures, increased 16% from the third quarter of 2008 to $144 million. Recurring cash flow per share increased 15% from the third quarter of 2008 to $0.50 in third quarter of 2009.
Moving to the outlook for the fourth quarter and full year 2009, our fourth quarter outlook is shown on side six. We expect site rental revenue of between $397 million and $402 million, and adjusted EBITDA of between $259 million and $264 million.
Turning to the full year 2009 outlook on slide seven, based on strong year-to-date results and our expectations for the remainder of the year, we have increased our outlook for site rental revenues by $14.5 million, site rental gross margin by $17.5 million, adjusted EBITDA by $20.5 million and recurring cash flow by $20.5 million for the full year 2009.
Our 2009 outlook now reflects the 10% and 17% increase in site rental revenue and adjusted EBITDA, respectively, compared to the full year 2008. Substantially, all of the anticipated growth is expected to come from the assets we owned at the beginning of 2008, as we've made no significant tower acquisitions during the last two years.
The components of the expected 10% growth in revenue from 2008 to 2009 are comprised of the following; 4% of the growth is from the existing base of business that was in place at the beginning of the year through contracted escalators, through renewal of tenant leases, net of any churn, and 6% growth attributable to the additional tenant equipment added to our sites reflecting the significant leasing activity we have experienced since the beginning of the year.
For the full year 2010, I would highlight a couple of numbers. We expect site rental revenue growth of approximately $116 million or 8% growth. We expect recurring cash flow to grow approximately 16% year-over-year. This projected recurring cash flow growth is impressive, given the significant increase in interest expense as a result of our 2009 refinancing.
I should note that our outlook for 2010 does not assume any benefit from the repayment of debt with the proceeds from the recent $500 million senior notes offering. However, I expect that these proceeds will be used to retire outstanding indebtedness, which would reduce interest expense and increase recurring cash flow. With the investment of these proceeds, our recurring cash growth could approach 20% next year.
Turning to the balance sheet, as illustrated on slide eight, total net debt to last quarter annualized adjusted EBITDA as of September 30, 2009, was 5.7 times. Overall, leverage is down approximately 1.2 turns over the last 12 months, illustrating how quickly this business can delever.
Adjusted EBITDA to cash interest expense as of September 30, 2009 was approximately 2.8 times. Both our adjusted EBITDA leverage ratio and cash interest expense coverage ratio were comfortably within their respective debt covenant requirements.
As shown on slide nine, the liability on a settlement basis associated with our forward starting interest rate swaps is currently approximately $400 million, up from $261 million at the end of the second quarter, as a result of lower swap price. As shown, we have also provided sensitivities if these swaps to changes in interest rates.
Moving on to the investments and liquidity section on slide 10, during the third quarter, we spent $32.4 million on capital expenditures. This represents a 77% decline in capital expenditures compared to the same quarter in 2008. As depicted on the graph, this level of capital expenditures continues to drive strong site rental revenue growth.
Turning now to the capital structure on slide 11 of the presentation, since the beginning of the year, we have made significant progress in raising capital in order to refinance our balance sheet. This activity continued with our recent completion of $500 million of 7.125% 10-year senior notes, bringing the total capital raised this year to $2.85 billion.
The yield on the recent $500 million bond was the lowest yield to maturity of any non-investment grade rated deal completed so far this year, including BB-plus rated issue. The considerable improvement in pricing, combined with our ability to access multiple debt markets during the year, including high yield, secured debt and the structure debt market, illustrates a significant improvement in the credit markets as we consider our plans to refinance our tower revenue notes, which I will elaborate on more in just a moment.
I would note that our access to the credit markets in this significant way and at attractive pricing relative to market conditions reflects the underlying stability and growth of our business. In the third quarter and in October, we purchased at par $192.8 million of the tower revenue notes due June 2035 in the open markets.
Pro forma for these purchases, we have $1.7 billion of tower revenue notes due June 2035. As of September 2009, pro forma for the completion of the $500 million notes offering and after taking into account the aforementioned purchases of tower revenue notes due June 2035, we have approximately $750 million in cash and cash equivalents, excluding any restrictive cash, and our $188 million revolver is undrawn.
In summary, we have refinanced, repurchased or repaid all of our debt maturities until 2014 and made considerable progress in achieving our goal to spread our debt maturities into smaller increments, thus limiting the amount of debt maturities in any one year.
With respect to future financings, the aforementioned improvements in the credit market have greatly enhanced our refinancing options, as we look to refinance the remainder of our debt. We have a total of $3.25 billion of tower revenue notes, $1.7 billion due in June 2035 and $1.55 billion due in 2036, with anticipated refinancing dates of June 2010 and November 2011, respectively.
Currently, we believe we have access to a variety of credit markets, including the bank, bonds and securitization markets, all of which have opened up considerably in the past few months. We would expect to reduce the $3.25 billion financing requirement by applying the proceeds of the recent $500 million senior notes offering, thus reducing the nominal amount of debt to approximately $2.75 billion so that the leverage is below five times run rate adjusted EBITDA on the entities supporting these tower revenue notes.
So to recap, I'm very pleased with the excellent operating results and the successful financing activities we've accomplished thus far in 2009. I'm currently focused on refinancing the tower revenue notes and look forward to resuming our traditional investment activities, namely investing the majority of our cash flow in purchasing our shares, land acquisitions, new tower builds and acquisitions to enhance our growth and recurring cash flow per share.
With that, I'm pleased to turn call over to Ben.
Thanks, Jay, and thanks to all of you for joining our call this morning. As Jay just mentioned, we had an excellent third quarter, exceeding our outlook for site rental revenue, site rental gross margin, adjusted EBITDA and recurring cash flow. As I reflect on the business, we are uniquely positioned in several respects.
First, we have the largest U.S-based tower portfolio concentrated in the top 100 markets. Next, we have carefully optimized the capital structure to maximize growth, as noted in our 2010 outlook, of 8% revenue growth yielding 16% recurring cash flow growth before investments.
Third, we have a team of employees executing for customers at an industry-leading level, turning the secular move to wireless data services into site rental revenue while keeping costs understand control. This company is well-positioned to translate growth into value without raising our risk profile.
Based on the strength of the business, we've again raised our full year 2009 outlook and remained very excited by the continued growth prospects for our business as evidenced by our outlook for 2010. As Jay previously mentioned, the application activity was up considerably in the third quarter by 41% compared to the same quarter last year.
This continues the trend we enjoyed in the first and second quarters. In fact, application activity to date is up 38% compared to the first nine months of 2008. We believe that the increase in activity is attributable to several drivers. First, demand associated with the next generation of high-speed wireless networks has accelerated meaningfully and expected to increase in 2010 and beyond.
We saw significant activity from Clearwire in the third quarter and year-to-date, as they launched 4.7 million POPs in the third quarter with their Ymax technology and upgraded an addition 10 legacy markets to Ymax. We expect Clearwire activity to continue, as the company launches a number of additional markets in the fourth quarter including Chicago, Philadelphia and Dallas, and more to come in 2010, including New York, Boston, Washington D.C. and Houston.
Furthermore, Sprint has publicly expressed its intention to further invest in Clearwire to support their continued build-out, noting the importance of the Ymax 4G network to Sprint's future. Similarly, LTE deployments are expect to ramp up in 2010, with Verizon's plans to launch in 30 markets by 2010 covering approximately 100 million POPs, and AT&T's commitment to trials in 2010 and deployment in 2011. These deployments are expected to take place over a number of years, as described in Verizon's third quarter call when they indicated they expect to complete nationwide LTE coverage by the ends of 2013.
As in previous quarters, the second driver of increased leasing activities continues to be consumer demand for smartphones. Wireless data grew approximately 40% year-over-year, driven by messaging and non-messaging wireless data applications, primarily by mobile Internet browsing on smartphones.
Text and picture message usage continued to grow robustly, with total messaging traffic up 98% year-over-year and expected to increase with the increased use of applications, such as Twitter for mobile devices. An increasing number of available data applications for smartphones continued to further increase mobile data growth.
While 18% of cell phones users in the U.S. currently have a smartphone today, they account for 42% of all new handset sales. Analysts expect smartphone growth to exceed expectations, as carriers begin to offer tiered data plan pricing and the emergence of a mid-tier smartphone segment over the 12 months priced significantly below the current $340 a unit average, as reflected in comments by most major smartphone vendors. A recent Cisco study estimates that a smartphone generates 30 times the traffic of a basic feature phone.
Further compounding the growth in wireless data traffic, smartphone penetration is expected to double by 2012. However, the insatiable appetite for higher download speed and reliable connections still rank among the top causes of frustration for wireless smartphone users. Despite the shortcomings, the adoption of smartphones continues unabated with the expectation of ubiquitous Internet access on demand and a projected doubling each year of mobile Internet and data traffic through 2013.
Importantly for our business, growth in wireless data services is driving carrier revenue growth and incremental returns on the network investments the carriers were undertaking. We believe this secular shift to broadband wireless networks capable of delivering services comparable to wired networks, will be the driver of site revenue growth in the years ahead.
I'd be remiss if I didn't mention that our performance to date this year also reflects our strong and continuing commitment to operational consistency and excellence, and our customer-centric approach to the business. As Jay mentioned, we kept operating costs approximately flat year-over-year, enabling us to exceed the top end of site rental revenue gross margin, adjusted EBITDA and recurring cash flow. That doesn't happen by accident.
Furthermore, our latest customer survey revealed, again, we rank highest in the tower industry in customer service. We remain convinced that our commitment to excellent customer service is directly related to our higher than expected site leasing application volume and higher take rates in the services business.
I believe the combination of the best located assets in the industry with significantly more towers in the top 100 markets than anyone else and industry-leading customer services resulting in our company capturing more of the opportunities in the market than ever before.
Finally, we continue to be focused on growth in recurring cash flow per share. There are a lot of positive dynamics in the industry working in our favor and we've positioned the capital structure efficiently such that as these trends are realized, we should be able to grow long-term recurring cash flow per share in the range of 15% to 20% for the foreseeable future.
As Jay mentioned, the 2010 outlook for recurring cash flow growth is 16% before external investment or share purchases. As we work to make our 2010 outlook a reality I look forward to the two-year comparison, where we'd look back from 2010 to 2008, were based on the comments Jay has made earlier I can see a path toward recurring cash flow per share growth in the range of 30% over this period, while refinancing the virtually the entire balance sheet in these turbulent markets and gaining the additional benefit of an appropriately laddered debt maturity schedule. This will be quite an accomplishment, and one that I and the rest of the team are working very hard to make it reality.
So in closing, we had an excellent third quarter. I want to express my appreciation to everybody in our company that is making these types of results seem easy when they are not, and we look forward to finishing the year very strong.
With that, operator, I'd like to turn the call over to questions.
(Operator Instructions). Our first question comes from the line of Rick Prentiss with Raymond James.
Rick Prentiss - Raymond James
Feel a little bit like the kid at the magic show wondering how'd you do it. Obviously, very strong numbers in the third quarter, very nice guidance for '10. Walk us through a little bit, were there any one timers in the quarter?
Also, Clearwire sounds like it was a pretty significant part of your applications, can you slice up that 38% applications up year-to-date and say how much of that was Clearwire and are you expecting in your '010 guidance, Clearwire to get any additional funding or is it really just what they're funded for today in your guidance?
Rick, I'll take the first one on one timers. We had a little bit of one timers, virtually all of which was expected when we provided the outlook originally, so our numbers in the quarter really were not helped by any significant amount of one timers.
That was $3 million?
It was about $3 million in the quarter, virtually all of that was in the outlook.
So, Rick, your second question on Clearwire, I would say a couple of things. We are enjoying a very robust and productive relationship with Clearwire and working very hard with them to make their market launches a reality and do everything we can to assist them. We have enjoyed a very active year with Clearwire and I'll probably refrain from dissecting exactly how much that is as we don't typically get into the detail with respect to specific customer activity. That's really for them to speak about on their own behalf.
But as we go forward into next year, I think your second question was as we think about next year, our guidance for 2010 implicitly backs off some of the activity we've enjoyed this year. I think that's an element of conservatism on our part. It is only November and they have a well known and described funding gap for next year where they're seeking to raise capital to continue their build-out.
So, until we get more visibility on the second half of next year, we have lightened up on our expectation, just in the modeling, for Clearwire going forward. But we would certainly expect that they'll be successful in raising that capital and perhaps to the extent we can continue to execute for them and to their satisfaction that we have another robust year with Clearwire next year.
Rick Prentiss - Raymond James
That makes sense and it probably leads to the other question I had on the guidance. Do you think its kind of front-end loaded, rear-end loaded, level loaded? It sounds like it might be a little front-end loaded, at least as far as your guidance goes.
Yeah, that's probably right. It's always a little hard when you start looking out in the second half of the year when we're sitting here still in November and trying to figure out if it's front loaded or back-loaded. Probably the way it's modeled would be a little bit skewed to the front half, but not a lot.
Rick Prentiss - Raymond James
Then fiber backhaul, we've been hearing all the carriers that we talk to on their conference calls talk about how backhaul is really a big impediment. Have you had a chance to circle back around to some of your towers and see how much have been fibered, are you working with the fiber guys? Even a little Shenandoah today on their conference call talked about fiber backhaul. Can you update us just what you're seeing in fiber?
Yeah, Rick, clearly, there is a desire on the part of carriers and, frankly, on our part to assist them with having fiber capacity run to the towers to aid in their backhaul needs. We think that'll continue to grow over time. We're talking to a number of different parties with a number of different business models, some large companies and small companies, that are seeking to assist the carriers in doing that and making that a reality and the revenue models are different.
As we sit here today, I would not venture a guess. Clearly, we're looking at opportunities that could create some revenue for Crown Castle to assist in that process, but it's not implicitly modeled in our guidance nor would I think it would be material next year by any stretch. But there is a possibility that to facilitate that location and sharing fiber among multiple tenants on the tower that there could be a revenue opportunity to the extent we're able to facilitate that. But as we look at it today, I'd say it's not significant in our planning horizon.
Our next question comes from the line of David Barden with the Banc of America/Merrill Lynch. Please go ahead.
David Barden - Banc of America/Merrill Lynch
A couple of questions on that. First just, Jay, with respect to the sequential step-up we saw 2Q to 3Q and then looking at the guidance 3Q to 4Q, it seems like there is a massive deceleration and to your point about their being relatively small one timers that were kind of driving the quarter-over-quarter performance, again is this just kind of a very conservative approach towards looking into the realization of that 41% application demand growth year-over-year in the third quarter?
The second one is, maybe Ben, we've heard a lot about this smartphone utilization factor, just 30 times, and looking ahead we know that there is going to be more data demand. But can you turn that number, 30 times data demand for a smartphone into a tower demands factor? How do we think of modeling out the future of total industry demand growth for wireless and data and then translating that into maybe the old equivalent of 1,000 people equals one cell site? How do we think about how many smartphones equals a cell site in a go-forward market?
Dave, I'll take the first one there. If you are looking at the sequential changes from Q2, Q3, Q4 and then into next year, I think a couple of things. The question that Rick asked about one timers is important for that sequential number. If you look at the benefit we got in the third quarter of about $3 million, wouldn't expect that to repeat, so that changes the sequential quarter-to-quarter numbers.
With regards to how the timing of the revenue comes on, largely that's related to when tenants turn on, on our towers and that can, as you're looking at the sequential numbers, move sort of within quarters enough to where maybe your sequential quarter number looks like it's moving around.
As we look at the fourth quarter, I would say most of the tenant activity, we think will be pushed towards the end of the year, which is a very typical thing to have happened in our industry, where there is a real push at the very end of the year to turn on a lot of cell sites. So there maybe a little bit of timing difference and spread of when tenants turn on in the third quarter versus the fourth quarter, so that's a little bit of it.
But really going back, what I would encourage everyone to do is come back up to really a big picture view. We have said for a long period of time that we're trying to grow revenue in the business of about $100 million on an annual basis. We think that is a normalized level of revenue growth that we can achieve through a variety of market cycles.
The guidance that we're providing would suggest $116 million of revenue growth from 2009 to 2010. That's a 15% to 16% increase above what we would consider sort of a normalized environment. Yes, it's off a little bit from our 2008 to 2009 levels, but still a very robust and healthy amount of revenue growth. It's early, so we'll see how the year develops. As Ben mentioned, there are a number of things that could affect the number and push it higher than that, but we'll have to wait and see how the year develops.
David Barden - Banc of America/Merrill Lynch
Dave, let me come back to your question. I wish we had a very simple formula to convert smartphone or wireless data traffic into cell site demand. We've spent a fair amount of time on that and unfortunately, I'm going to tell you there is no sort of free lunch there or simple equation.
It certainly goes to some of the statistics we're seeing around wireless data traffic expected to continue to double every year through 2013. We take queues from our customers and what we're seeing around the LTE applications for upgrading sites in preparation for LTE, and then the Clearwire build in various markets where we're helping them, as well as even legacy 3G upgrades on certain of the networks today that are continuing.
So, as we look out today, the most interesting thing I've seen in terms of how to get your head around what's happening in wireless and the Internet, broadband wireless Internet conversion is to go back and look at the broadband adoption curve when we all went from dial-up modems to DSL or cable modems broadband speed.
That appears to be what's happening on the wireless front today. Clearly, there will be traffic that's offloaded onto DAS systems, in-building systems, Wi-Fi, so it's not just a straight linear curve all on towers, I wouldn't begin to suggest that, but the amount of traffic that we're talking about growth, frankly, needs a number of complimentary technologies to handle the traffic.
It's also impacted by competitive market pressures, what's going on between the wireless carriers in the market, and access to capital and the cost of that capital. So notwithstanding a clear need for a site to actually get leased or built-out to assist a carrier in a particular locality, we also see the competitive dynamic and the cost of capital come into the equation, which sometimes elongates that decision process beyond which the pure engineering need would suggest.
So, as you know, we continue to drive test our sites. We continue to do a major refresh of that demand model, which suggests what is the latent demand, depending upon the signal strength threshold's that you want to assume at these sites. I can tell you that it continues to suggest a very robust outlook for leasing at an engineering level for an number of years to come.
Clearly, that again is impacted by the competitive marketplace and access to, and cost of capital. But, again, I go back to what I look at in terms of the behavior we see on behalf of the carriers that are building out data networks and what it looks like, as well as that Internet adoption curve and where we are in wireless is really in the very early days of that.
Our next question comes from the line of Jon Atkin with RBC Capital Markets. Please go ahead.
Jon Atkin - RBC Capital Markets
Yes, I apologize if these were asked earlier, I was off the call briefly, but I wondered if you could talk about how much of the third quarter site leasing revenue with straight line impacts and how that compares with the prior quarter and prior year period, as well?
Then with regard to the FCC shot-clock proposal, I wanted to get your thoughts on how that might impact the timing of the site leasing revenues, assuming that it's approved and enacted?
Yeah, Jon, on your first question, I mentioned in my prepared remarks, if you look at our 2008 results versus our 2009 results the impact to the existing base of business since we came into the year, the benefit from all of those changes netted against any churn that we saw in the business grew 4%. Then the remaining portion of it is for brand-new equipment going on to the tower. So it's 4% from the existing base of business and then 6% from new equipment.
Obviously, the 4% would be a whole host of dozens of incremental changes across a tenant base that's nearly 60,000 tenants. So in that number would be the rollover of existing leases into their new term, you would have leases that would be on a cash-contracted basis where the revenue is just stepping up, and then you would have, obviously, the churn portion of that, as well, coming off the tower. So, hopefully, that helps to reconcile the numbers somewhat.
Said another way, Jon, about 40% of the growth, 4% out of the 10, would be from the book to business, net of churn and about 60% of the growth, 6% is from new tenant additions including upgrades on sites.
Jon Atkin - RBC Capital Markets
Straight line impacts, though, you're not breaking out within that 4%.
Not breaking it out within the 4%. I think that's helpful to however you're thinking about. Base of business is growing at about 4% and then everything else would be new.
Jon Atkin - RBC Capital Markets
Then on the FCC shot-clock?
Yeah, on the shot-clock proposal, we were quite heartened to see that included in the recent comments from the FCC. I would expect it will directionally accelerate, I think that conversation is not completed yet and certainly hasn't been implemented. It sounds like it could actually be potentially elongated from their initial proposal, but frankly, any recognition on the part of the FCC of the need to try to expedite, particularly co-location and the differentiation between co-location on existing sites versus brand new sites, we think is certainly helpful to the industry, not only our industry but certainly to carriers, they can continue to provide consumers the services that they desire.
We've got sites that have been years just to get co-location approval to add an additional installation on an existing site. So to the extent this directionally can help that and help the industry, help us all actually get more of the wireless services, particularly in the harder to cover areas. So we're very pleased to see that being addressed.
Jon Atkin - RBC Capital Markets
Yeah. Shortening that period to 90 days certainly would be helpful if that does become the case. Then finally on international, given what some of the peers are doing incrementally, can you maybe just king of revisit your thoughts or refresh us on your thoughts of any international initiative outside of Australia?
Sure. Phil Kelly on our team here and the executive team continues to be active in a number of conversations. In fact, we're not aware really of anything going on around the globe that we're not in dialog or have seen the information. We continue to pay pretty close attention to that with an eye towards if there is an opportunity that seems to fit our investment criteria in terms of a risk-adjusted return with similar barriers to entry, we will be very interested in that. We have no predisposition to suggesting we're only going to stay in these two markets we're in today.
I will tell you, though, that so far it appears that we're going to stay in the two markets we're in today and we're going to continue to exploit and maximize the opportunity in what we think is the largest underdeveloped market with adequate barriers to entry and that be the U.S. market and Australia the same. So while we'll continue to look at opportunities and you'll probably continue to see us written about in articles in foreign countries, we haven't seen anything to date that suggests it's as attractive an environment as the one we see here in the U.S.
Our next question comes from the line of Jason Armstrong with Goldman Sachs. Please go ahead.
Jason Armstrong - Goldman Sachs
Maybe a question on 2010 guidance, as you talked about '09, you guys keep referencing this 4% and 6%; so 4% from the existing base and then 6% from new tenants. As you thought about 2010, how would you split that guidance into these two categories?
Then second question just on lease-up trends. Another strong quarter, you guys have seen better same tower lease-up trends than your peers, I'm wondering if you step back and sort of think about the granularity here around what's causing this. Is it over indexing the Clearwire or is it over exposure to urban markets? Just any color around sort of why you think this is going on would be great. Thanks.
Yeah, Jason, on your first question, I think the split will be relatively similar in 2010 based on what we see now. Now we've backed off a little bit on our lease-up assumption as we talked about in the year-over-year revenue change from 2009 going into 2010, but a relatively similar split.
Then, Jason, I'm not going to speculate, frankly, on the reasons for our success, I mean, in terms of relative to our peers. I don't think that's a constrictive dialog. The fact is the tower industry is well-positioned to take advantage of the growth and what's going on in wireless, both on the traditional networks as well as on the data side as we've talked about. We are having a good year. Clearly, we spend a lot of time internally focused on customer metrics. We do an extensive survey every quarter, we follow-up, and the customer-centric approach in our company is pretty ingrained and you can tell that by just how we're executing.
The other distinction I would draw or perhaps credit I would give internally is that we've got a lot of people making a lot of smart decisions at the field level every day and that impacts value to customers and creates value to the company at the same time while serving their needs. So we're having a tremendous year with Clearwire and others. But, again, I would not suggest that comes necessarily as to the detriment of some of our peer companies. We are all very well-positioned and to take advantage of this secular move in wireless data.
Jason Armstrong - Goldman Sachs
Ben, let me maybe ask the question this way. If you look at the original guidance you gave and then the way you sort of stepped it up through the quarters, especially in this latest quarter, the reason for the change is that fairly broad based or is that attributable to sort of one or two players you see in the market?
Well, if you go back to our comments a year ago when we first gave guidance for 2009, I believe we were pretty clear about saying we were very, very cautious about the amount of activity we would put in for Clearwire, because they were just beginning their massive build effort and so we were very conservative.
So if I look at the biggest delta or biggest upside pleasant surprise for the year, undoubtedly it's the Clearwire activity and we worked very hard to secure those results and perform for them and expect it to continue. So that is the biggest delta in terms of original guidance to actual results.
Our next question comes from the line of Gray Powell with Wells Fargo Securities. Please go ahead.
Gray Powell - Wells Fargo Securities
Just have a few. I know you've already touched on this, but can you talk about carrier leasing activity in Q3 versus Q2 levels and then what you expect going into Q4?
Yeah, it's Q2 to Q3 is about the same based on application volume continuing. Q4, here we are in early November, it's possible it's down a little bit in Q4 just based on the pipeline of activity that we're executing on throughout the first sort of nine months of this year, again the application volume, which we've spoken about. So as we commence those licenses on our sites, I'm not sure that it's going to continue to track 40% above last year.
Obviously, you'll get into some pretty tough comps into 2010 as you look back on 2009, so I wouldn't expect that trend to continue. But I think generally, Gray, as we look out I think it's important to sort of keep a year-to-year change in mind and as we think about 8% revenue growth, which, again as Jay mentioned, don't get lost in the percentage changes. That's still $115 million year-over-year which is driving a 16% growth in recurring cash flow.
That two to one ratio is something we've enjoyed before and it comes from two things; keeping a very tight control on costs, which we're doing a very good job at in the company, and then financing and optimizing the capital structure, such that that growth in revenue falls through to the recurring cash flow per share line, and we think we're doing a pretty good job on both fronts.
Gray Powell - Wells Fargo Securities
I guess I'm asking the question excluding Clearwire because it sounds like you're being conservative there. But just generally speaking, do you expect carriers to be more or less active in 2010 than what they were in 2009? Do you see any one or two initiatives that could move the needle in either direction next year?
Well, again, I mean there are some things that could be positive. I'd say our original outlook would be pretty, year-over-year, about the same, okay, and that's interesting. There could be some things that are pretty positive. You could actually have something negative happen that it slows down, but not materially. Listen to Jay's comments previously, 40% of the revenue growth came on the existing book through escalators net of churn and normal activity, 60% of the growth coming from new leasing.
If that leasing were up or down a bit, maybe it's 1% or 2% on revenue, I mean again this is a long-term program we're on here and as we think about growing long-term recurring cash flow per share, we think all of the dynamics are in place to see that occur. How that happens year-to-year and quarter-to-quarter, frankly we don't get too lost in. It's really a matter of us continuing to execute and maximize every potential opportunity that's out there and we'll see how that goes. But as I look at it, it may bounce around 100 basis points or 200 basis points year-to-year, but directionally it's certainly in our favor.
Gray Powell - Wells Fargo Securities
Then just last question and switching topics. With potential refinancings coming up over the next year, what kind of rates do you think you could get today on a secured basis? Then I believe, historically, when you were targeting share buybacks, you used to target something like two or three years for accretion. It seems like maybe you could do a little bit better than that today. I was just curious about your thoughts there.
Gray, you're probably not going to get me to predict what interest rates will be on the refinancing, but let me give me you a little bit of a view on the capital structure and how I'm thinking about it. We did this most recent bond offering of $500 million up at the holding company on an unsecured basis. That puts leverage up at the holding company somewhere in the neighborhood of an about a turn, turn-and-a-half, which I think is appropriate.
Then down at the secured level, at the outset level, we end up with somewhere in the neighborhood four to maybe five times of leverage down at the secured level, probably closer to approaching four times, which in a lot of cases of the options that I discussed results in an investment-grade credit rating on that offering. I think that's an optimal sort of capital structure based on current market conditions that the holding company would end up resulting in a little higher coupon on that debt and then down at the asset level a lower coupon.
As I've said over the last several quarters as we've been talking about refinancing, the aim is to lower the overall cost of capital and with regards to the debt structure, lower the coupon as low as we can while spreading maturities across multiple years. I'm pleased with how we've been able to spread the maturities across multiple years.
I think from an all-in financing rate, we have done very well as a company relative to broader market conditions, as the coupon and our overall debt hasn't ticked up near as much as what I think some had anticipated could happen to us. So, we're aiming to keep it as low as we can and more work to be done there over the coming months.
Our next question comes from the line of Jonathan Schildkraut with Jefferies and Company. Please go ahead.
Anupam Palit - Jefferies & Company
This is Anupam Palit for Jonathan. You guys have had, compared to your major peers, a larger percentage of your U.S. tower portfolio in the top 50 or 100 BTAs. Can you just give us an update on what percentage of your portfolio is in kind of the top U.S. markets?
Do you think that gives an advantage over some of your peers in terms of the new network build-outs that are taking place along 4G, which would presumably come in the kind of top U.S. markets first?
I'll come right back to that, I just want to finish the point with Gray. I think we missed his last question about the share accretion. He is absolutely right. In year's past, given the valuation we would've taken, appropriately in our view, two to three years of dilution in terms of purchasing shares with borrowed money; again the difference between the implicit yield or multiple on the share purchase versus the incremental cost of debt.
Today that relationship is much, much closer to sort of one-to-one or even positive accretion, depending upon what the last dollar debt is you raised, if it's at the secured level, as Jay was suggesting. So it gives us an opportunity certainly, once we get this last piece of financing sort of nailed down, in and around these levels that accretion or dilution equation is quite a bit more favorable to the company than it was historically over the period where we took about a third of the shares of the company over a four-year period. So, just wanted to clarify that and get back to Gray on that last point.
Your next question about our concentration of assets, our sites are 72% located in the top 100 BTAs, which is considerably more than any of our other tower company peers. We would suggest to you that as wireless data services are rolling out, certainly, as you can see from the announcements, those are happening in the major cities first and then will ultimately rollout into more suburban and ultimately rural locations.
So perhaps it's a timing situation, but clearly, I think it's a location-based business fundamentally and having sites located in the top 100 markets is very important and was one of the original investments theses of this company, as well as in the subsequent follow-on acquisition doubling the size the portfolio with the Global Signal towers now almost three years ago.
Anupam Palit - Jefferies & Company
Then just to follow on very quickly, can you talk about any prepayment penalties you might have on the tower revenue notes?
Yeah, the prepayment penalty, if we were to do the June 2010 anticipated refinance date currently that numbers at $40 million, and if we were to do the November 2011 today that prepayment penalty would be about $130 million.
Our next question comes from the line of Mike McCormack with JPMorgan. Please go ahead.
Manish Jain - JPMorgan
This is Manish Jain for Mike. Just a couple of quick questions. One, you mentioned that you're not in a position to start allocating cash flee to more normalized levels of CapEx. I wanted to get a sense of within discretionary CapEx where you're maybe looking to invest. Is it more on the construction side or more on purchasing ground leases?
Then secondly, just wanted to get an idea of, when you're talking about growth for the next year, what's the mix like between new leases versus amendments and maybe how that's different from 2009 and what might be driving the difference?
On the CapEx side, what I would suggest to you is we're going to gradually bring our capital spending back up to more normalized levels and there is already places in the company where we've sort of loosened the purse strings a little bit on discretionary investments and the most obvious one would be on land purchases going forward. It won't be dramatic. It won't be hundreds of millions of dollars, but certainly gradually sort of resuming that activity and other activities. We're active in the DAS business for example.
As we address these ARD notes, these tower revenue notes, principally for June 2010 issue, as Jay has outlined the various options we're looking at, we would expect to resume, basically, putting all our free cash flow back to work in a productive manner to grow long-term recurring cash flow per share. I wouldn't venture exactly where that'll be. It depends upon the options that we see at the time, but the list includes share purchases, acquisitions, and construction, new construction and then including even international as we've talked about prior and then land purchases.
So it's sort of a return the way we have historically operated the company where we will seek to evaluate the options and pursue the ones that add to long-term recurring per share. On a lot of given days our assessment has been that value of our own towers as denominated through shares of stock is the most attractive thing available to us at any given point in time. But as you've seen, we've also done a significant amount of acquisitions and so we wouldn't rule any of that out. We look forward in relatively short order to having that menu to choose from going forward again.
Then new leasing next year on the mix between amendments, this year it's more like 75/25 in terms of new tenants versus amendment activity and that's not on a revenue basis. That's then in the 65/35 range before. It's really sort of hard to say. It probably hinges a lot around Clearwire and their activity next year, if that adds to new site development versus continued amendment activity from others, so that mix is a little bit hard to comment on. But this year, it's about 75/25.
Our next question comes from the line of Clay Morgan with Benchmark Company. Please go ahead.
Clay Moran - Benchmark Company
It's Clay Moran. I've got a few things I'd like to ask about. First, what's the annual churn rate this year?
Clay, the churn would be embedded in the escalator number. I didn't give any more granularity to kind of where our churn number is other than what I spoke to previously. So base of business is growing at about 4%. Embedded in that would be all the cash escalations and net of churn.
Clay Moran - Benchmark Company
Okay. escalators I think you've said in the past is about 3%, right?
3% to 4% is what we're said historically, so on the base of business that we're doing now of in and around $1.5 billion we would expect the contribution from that to be somewhere between $45 million and $60 million, which sort of works out to that split that I talked about, 4% and 6%.
Clay Moran - Benchmark Company
Then you wouldn't quantify the Clearwire impact, which I understand. Could you possibly just tell us what of your recent activity and your pipeline, what are the three biggest contributors in terms of customers? Is Clearwire at the top or are they second or third? How does that break out?
Well, again, going beyond where we historically are comfortable in terms of giving specific detail on what carriers are doing. This year, 2009, we have experienced more business with Clearwire than any other single carrier. I guess it's been our top performer this year in terms of new revenue added on what was a very small base.
So in terms of customer ranking, it's our most active relationship this year without diminishing, frankly, anything that's going on with any of the rest. I mean we're continuing to doing to do a substantial amount of business from all of the big four carriers, as well as others in the market, and the list goes many pages as you go down to sort of the single applications. Not an insignificant amount from the sort of government and other category that is, again, many pages that does add up to the equivalent of a full big four carrier.
Clay Moran - Benchmark Company
So would it be safe to assume the top three are Clearwire, AT&T and Verizon this year.
Actually I didn't go back and even look, but some were of the big four would be, yes, in that range.
Clay Moran - Benchmark Company
Then lastly, a couple of years ago when you bought the Global Signal with the Sprint towers, there was concerns about tower and space constraints on that portfolio. Can you talk to sort of how that's played out? What the tenants per tower looks like there and the remaining capacity available?
Sure. Clay, we and I think frankly our peers have all gotten pretty good at putting additional loading on the sites by incrementally making improvements to the sites such that it's a very rare occasion. Usually it's a zoning issue, frankly, where a site cannot accommodate an additional tenant.
There has been no distinction we could draw through our experience or data that would suggest that Global Signal towers have performed any differently than the Crown towers, the original legacy Crown towers. So while you remember those conversations. We did put more capital improvement dollars in our budgeting and forecasting around the Global Signal activity. I think it's only been modestly higher and nowhere near what we had originally planned for.
But even at the higher levels, I think the point is, as most of us have followed the business a long time, those are phenomenal investment dollars. The payback on the dollars for capital upgrades that bring a new tenant with them are very high returning and probably the highest returning activity available to the company at any given time
So I'm pleased to say that through that investment of additional capital we are able to accommodate these customers and can find almost no instances of where that becomes a constraint. And we're just to round out the math about $60 million to $80 million a year on the tower augmentation activity, but that's bringing with it the revenue that you see, growth here that's a phenomenal return.
Our next question comes from the line of Simon Flannery with Morgan Stanley. Please go ahead.
Sean Ittel - Morgan Stanley
This is Sean Ittel on behalf of Simon. I'm just wondering, can you discuss what's typically installed for a 3G overlay and do you expect 4G LTE deployment to be similar to a 3G overlay? On average, how much incrementally monthly lease revenue is a 3G overlay in Ymax [result] and should we anticipate this to be similar to a LTE overlay?
Yeah, I'm happy to try, it's not all together clear cut, it depends upon the location and what's already installed on the site, but let me take it sort of sequentially. What we've traditionally seen on a 3G install would have been would have been an additional three lines and antennas that would have priced, depending upon the market, in and around $400 to $600 a month. That's occurred over the last, let's just say four years, within various locations and various customers as these networks have been built.
What we're seeing on the initial stages of 4G builds in terms of LTE, let me be specific as opposed to Ymax with Clearwire, a 4G upgrade, if you will, is bringing lines and antennas some of the time, other times it's a change out of existing antennas and lines depending upon what's already there. If it's already got 12 installed, or even in some cases 15 or in other cases just adding additional lines. In the case where a site may only have nine lines and nine antennas then you may see a full three line and three antenna upgrade, so it's across the map.
But if I were to suggest to you over this very early stages of the LTE applications we've seen, because of the higher build-out, or higher loading installed base around 3G, the occasion of the opportunities where they're switching out lines and antennas and resulting in a smaller up-charge for us is more often.
So the average for the 4G overlay is coming in thus far, again in the urban markets where the sites would have been the highest loaded, are coming in, in and around sort of the $200 to $300 a month as opposed to the $400 to $600 a month. But again, that's early and over time that average probably walks itself up. As you go out into the more suburban and rural sites it may not be as loaded as the existing sites. That's a long-winded answer to a fairly simple question, but again, its early days and that's what we're seeing.
Sean Ittel - Morgan Stanley
Also, of the 60% growth in new equipment and leases, how much was amendment activity?
It was about a 75/25 split between brand new installations and amendment activity.
Our next question comes from line of Batya Levi with UBS Financial. Please go ahead.
Batya Levi - UBS Financial
Just two quick questions. Can you provide a sense for your current revenue backlog and how that compares to the year ago period and to the last quarter? This is only a nit-picky question but I was wondering, it looks like your SG&A expense as a percent of sales is a bit higher than your peers. Can you provide some color on what the difference may be and if there is some more room to cut there? Thanks.
I'll take the first one and Jay will take the second one. On the revenue backlog, the best way to think about that would be the application volume and so, if you were to compare it last year to this year, it'd be higher. I don't have a specific number for you. On average, from a time an initial application hits the door [still] commencing revenue is about five months.
In our company that runs everywhere from one month to 12 months or longer depending on zoning issues am and certain things. But on average its five months and so the pipeline compared to last year would be higher just based upon the application volume that we've discussed.
On your second question related to G&A in comparison with the peers, some of the difference is probably maybe internal allocation differences between how we account for direct tower expenses and direct services expenses versus G&A, so that may account for some of it. But I think the second thing I would say, as Ben mentioned a couple of times in his comments, based on our customer surveys, we're delivering the highest level of customer service in the industry.
That customer service comes with a cost, a cost that we are more than willing to make and invest in the business, because we think it drives long-term recurring revenues. So while it maybe a fraction higher than some of our peers, we think that investment is paying significant dividends.
I think we're right on an hour, so with that, I want to thank everybody for joining the call today. Again, I want to express my appreciation to the employees in Crown Castle for making these results possible and wish everybody a happy holiday season. We'll see you at the end of the January with hopefully some good fourth quarter results. Thank you very much.
Ladies and gentlemen, this concludes the Crown Castle International Corporation third quarter 2009 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 followed by a passcode of 4173226. ACT would like to thank you for your participation. 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!