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American Tower Corporation (NYSE:AMT)

Q4 2013 Results Earnings Conference Call

February 25, 2014; 08:30 a.m. ET

Executives

Jim Taiclet - Chairman, President & Chief Executive Officer

Tom Bartlett - Executive Vice President & Chief Financial Officer

Leah Stearns - Vice President of Investor Relations

Analysts

Simon Flannery - Morgan Stanley

Batya Levi - UBS

Jonathan Schildkraut - Evercore

Ric Prentiss - Raymond James

Jonathan Atkin - RBC Capital Markets

Imari Love - Morningstar

David Barden -Bank of America

Eric Frankel - Green Street Advisors

Operator

Good morning. My name is Carmine and I will be your conference operator today. At this time I would like to welcome everyone to the American Tower, fourth quarter and full year 2013 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

I would now turn the call over to Leah Stearns, Vice President of Investor Relations and Treasurer. Please go ahead.

Leah Stearns

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

Our agenda for this morning's call will be as follows. First, Jim Taiclet, our Chairman, President and CEO will provide opening remarks. Then Tom Bartlett, our Executive Vice President and CFO will review our financial and operational performance for the fourth quarter and full year 2013, as well as our outlook for 2014; and after these comments we will open up the call for your questions.

Before we begin, I would like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include those regarding our 2014 outlook and future operating performance, including AFFO growth and dividend per share growth, our capital allocation strategy including our redistribution and any other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect U.S. in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release, those set forth in our Form 10-Q for the quarter ended September 30, 2013, and in our other filings with the SEC.

We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.

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

Jim Taiclet

Thanks Leah and good morning to everyone. A year ago we reestablished an aspirational goal of once again doubling our AFFO per share by 2017, as we had previous done in the 2007 to 2012 timeframe. Today I’m pleased to report that we’re well on track to meet our re-doubling goal.

In 2013 we drove record levels of organic growth in both our U.S. and international segments and added over 10,000 sites to our global asset base through the acquisitions of the GTP and NII portfolios and our ongoing site construction program. We continue to implement our disciplined investment strategy and to drive operational execution, which we believe has positioned American Tower for sustainable and consistent growth for years to come.

During the more than 12 years that I have been at the company we’ve purposely and methodically expanded our asset base to over 67,000 towers that deliver strong organic growth, as well as the highest margins in our industry. Today I’ll cover three main topics before turning it over to Tom for the details on our 2013 results and 2014 outlook.

First I’ll discuss the solid foundation we built in the U.S. in which we expect to generate 66% of our 2014 rental revenue through our high quality asset base, operational acumen and solid customer contracts. Next I’ll summaries how we extended our expertise to take advantage of robust, wireless growth trend outside of the U.S., through prudent investments and partnerships with large multinational wireless carriers. And finally I’ll outline how our legacy portfolio and newly acquired assets together should enable us to continue generating at least mid-teen annual core growth and AFFO per share for the foreseeable future.

So, turning to slide five, the quality of our U.S. properties and our strong contractual arrangements with the big four wireless carriers have led to sustained out performance in our domestic business.

Throughout our history we have focused on purchasing assets constructed by third party tower providers like us, or by cellular operators, both of whom have traditionally invested signification timing capital in developing the quality and maintenance of the tower structure, along with relatively generous ground space with favorable land lease terms.

We believe that our domestic sites are very well positioned for the long-term growth for a number of reasons. First, of these is the structural capacity of our towers is substantial. With approximately 2.5 tenants per tower versus the design capacity of typically around 5 tenants, the vast majorities of our properties in the U.S. have significant incremental structural capacity without the need for redevelopment capital spending. Our average tower height of approximately 210 feet provides ample vertical space for numerous platforms of transmission equipment as well.

Second, we believe that the locations of our U.S. sites position us well to capture significant incremental co-location. With the majority of our towers in suburban rural areas, our portfolio can take advantage of strong wireless usage trends in areas where macro-sites are and will remain the preferred deployment option for carriers, and this is from a cost technical performance and spectrum efficiency perspective.

In combination, the structural strength and location distribution of our assets has yielded strong performance in our domestic business today and provides solid upside for future leasing activity.

Third, our U.S. assets are predominantly owned macro-towers, which generate approximately 95% of our domestic revenues today. It’s our experience that traditional tower structures continue to generate the highest leasing demand and the most resilient long-term recurring cash revenue streams. Our focus therefore continues to be on maximizing the quality and efficiency of our macro tower portfolio.

Finally our domestic assets have a very strong land rights profile. Currently we own the land under 28% of our U.S. towers and conduct a highly active program to either purchase additional land or extended ground lease, depending on what’s most economically attractive in each case. Today over 50% of our U.S. land leases have remaining terms of 20 years or more, with an average remaining lease term of 24 years.

Turning now to slide six, with the proliferation of advanced data services such as mobile, video, music and gaming, wireless date consumption trends in the U.S. continue to drive up Average Revenue Per User or ARPU for our carrier customers.

Demand for wireless data continues to rise and the latest Cisco VNI report projects wireless data carriers over macro networks to grow at a nearly 50% cumulative average growth rate through 2018. So to preserves quality of service and minimize their customer churn, our carriers are spending significantly more CapEx to bolster the quality and coverage of their networks.

As you can see in this chart, total domestic wireless CapEx was over $30 billion in 2013 compared to historical levels of between $20 billion and $25 billion per year. These record levels of spending have supported our domestic growth over the last several years and given the further explosion in data usage and upcoming voice over LTE deployments, we believe carrier activity will remain elevated into the future.

Each of our customers is at a different phases in the 4G rollout cycle. While Verizon has finished its initial LTE coverage build out and AT&T is largely complete, T-Mobile and Sprint continue to work on achieving their coverage goals. The leasing environment in the U.S. remains very strong and with the overall 4G coverage base progressing well, we are now seeing mobile operators in the U.S. moving into expanding capacity and driving new lease activity as they densify their networks to handle 4G traffic.

Then turning to slide seven, as the major carriers began investing aggressively in their networks, we negotiated with them, comprehensive, long term contractual arrangements to drive strong domestic core growth for American Tower, while streamlining application and installation processes and reducing time lines for our customers.

What we call the holistic master lease agreement that we have in place with three of our four largest customers, provide compelling time-to-market advantages to them, making us then a preferred provider of tower real-estate. Furthermore given the aggressive network upgrade programs that carriers have in place, in many cases the limits establishing our holistic agreements have been exceeded and resolved in incremental revenue for us above and beyond the initial contract.

Our master lease agreement contracts and operational capabilities in areas such as rapid lease amendment processing and in-house structural engineering have contributed to elevated core organic revenue growth, reaching a record of 8.7% in 2013.

Further we continue to leverage our strong asset base to driver additional leasing activity across our sites at minimal cost to our company. In most cases because of the quality of the assets, our towers require no development capital expenditures to support incremental co-location. In those circumstances where CapEx is required, we spend an average of less than $20,000 of net investment per project. In addition to low redevelopment costs, we also have low historical maintenance CapEx with an average between $1,500 and $1,700 per property per year.

So taking together our solid asset base, operational excellence and strong customer relationships, have led to consistent recurring long-term growth in our domestic business. With our recent GTP acquisition and our continuing emphasis on driving organic leasing growth, carefully managing site level costs and maintaining an active construction program, we believe our domestic segment will drive a substantial portion of our projected growth and AFFO per share up to and beyond our 2017 time rise.

Now turning to slide eight, we’ve been able to extend our rich operating history and experience in the U.S. to selective international markets, where we are strategically aligning America Tower with many of the worlds leading multi-national mobile operators.

Over the past seven years we have consciously positioned the company to take advantage of a well-diversified set of international opportunities, ranging from voice centric to data centric markets. Given the minimal wireline, telecom cable and fiber infrastructure in most of our international markets, we expect wireless deployments will be the primary means to achieve nationwide broadband deployment and the associated economic benefits of functions such as online commerce and mobile banking.

As subscribers continue adopting high bandwidth applications in devices overseas, we anticipate seeing even further investments in these networks, which will continue to driver demand for our international sites. As a result we’ve already seen substantial co-location activity on our non-U.S. towers and given the early stage of technology deployment in many of these markets as compared to the U.S., we expect this trend to continue over many years.

Turning to slide nine, it’s clear that leasing activity on the international sites we’ve built and acquired to-date has been quite strong. In the years following the 2008 financial crisis, we were able to secure a significant number of international tower deals at attractive prices. Since integrating a majority of these new assets into our portfolio in 2011, we have achieved organic growth rate ahead of our target range and we continue to believe our international operations will consistently generate a core organic growth rate, 200 to 300 basis points in excess of our domestic operations.

Now moving to slide 10, we provide some quantitative evidence of our ability to make disciplined strategic investments for the business that have then generated solid growth delivered by our operations teams around the world.

Let’s first take a closer look at the significant leasing activity and margins we’ve been able to achieve with out assets in the U.S. that we’ve operated for 10 or more years. Specially, we have more than doubled the revenue per tower and increased gross margin percentage by over 1,300 basis points on sites that have been in our portfolio since the end of 2003 or using a wine connoisseur's perspective, our pre 2004 tower vintages.

Our ability to achieve this kind of financial performance on these towers is largely predicated on the key areas of focus I discussed earlier; the quality of the assets, our solid contractual agreements with our customers and our operational ability to maximize the leasing on these towers. Between 2011 and 2013 we’ve added over 6,000 new properties to our U.S. portfolio, which we believe provide us with an excellent opportunity to replicate our prior success.

As you can see on the chart sites that we added to domestic portfolio over the last three years current generate revenues per tower and margins well below that of our early vintage U.S. assets. As we drive leasing activity onto these new sites, including the excellent the GTP portfolio that we just acquired, we expect to driver incremental revenues and improve our margins significantly on these new assets.

Now turning to slide 11, we have demonstrated a similar track record with the investments we’ve made in our international markets. As shown on the left hand side of the chart, we nearly doubled our revenue per tower on a constant currency basis for our international sites in place since the end of the 2003, while simultaneously increasing the gross margin percentage.

Excluding pass through revenues such as ground rent and generator fuel in the relevant markets, these sites currently generate gross margins significantly in excess of 90% today.

We believe the new properties we’ve added to the portfolio since 2011 will produce a potentially even stronger trajectory given the quality of these assets, their lower initial tenancy of just over 1 per tower and their correspondingly lower gross margin profile. Further these sites have solid structural characteristics and attractive geographic distribution, where we anticipate seeing tremendous lease up opportunity over the next few years.

In turning to slide 12, our strong organic growth and acquisitions in 2013 have positioned us well heading into 2014 and as you can see, we are ahead of the growth trajectory we set forth as an aspirational goal just last year. As a result we are well on our way to again doubling our AFFO per share by 2017.

It’s important to note that a component of our future success is the company’s commitment to a strong balance sheet. We continue to contain our exposure for the possibility of rising interest rates with just 20% or so of our capital structure being comprised on floating rate debt.

We currently have no material near term maturities and since the beginning of 2013 we’ve extended the average duration of our debt to nearly six years, while reducing our average borrowing cost to about 4%. Further we are increasingly utilizing local currency debt to create an addition hedge for fluctuations in foreign currency exchange rates.

So in conclusion, through years of disciplined investments and operational focus, America Tower’s built a high quality global asset base that largely hosts the worlds leading telecom providers as tenants. We demonstrated an outstanding track record for achieving solid leasing and financial performance on our assets and we are highly confident that the recent investments we have made will generate similar success.

Our 2013 results and outlook for 2014, which Tom will discuss in further detail, reflect this expectation for continued strong performance. As a result, we are well on our way to accomplishing our five-year aspirational goal of achieving at least $6 of AFFO per share by 2017.

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

Tom Bartlett

Hey, thanks Jim. Good morning everyone. We finished 2013 with a very strong fourth quarter, adding over 10,000 new tower assets, achieving very strong global organic growth and building on long standing relationships with our wireless carrier customers. 2013 was an excellent first step towards achieving our goal of doubling our AFFO per share from 2012 levels to 2017, and we feel we are very well positioned for another terrific year in 2014.

If you’ll please turn to slid 14. We achieve solid growth across all of our key metrics in the fourth quarter. On a core basis, which we will reference throughout this presentation as reported results excluding the impacts of foreign currency exchange rate fluctuations and non-cash straight-line lease accounting and significant one-time items, our total rental and management revenue growth was nearly 31%.

Our organic core growth was over 11%. The balance of our core revenue growth came from the over 16,000 new properties we’ve added to our portfolio since the beginning of October in 2012. This core growth includes the nearly $100 million in revenues, generated by our newly acquired GTP and NII assets.

We converted this solid growth in rental revenue into significant adjusted EBITDA growth, which on a core basis was over 27%. Substantially all of this growth was attributable to our rental and management segment, where we generate recurring contractually based cash flows, rather than the project base type of revenues generated by our services segment.

Additionally, our international segment, which accounted for roughly 25% of adjusted EBITDA during the quarter contributed close to 40% of the total growth in EBITDA. This was a result of both solid organic growth and our recent acquisitions, including the NII sites in Brazil and Mexico.

Finally we generated core AFFO growth of over 27% in the fourth quarter, significantly above our long-term mid-teen target range. Our newly acquired GTP and NII towers generated just over $0.05 of the $0.22 in core AFFO per share growth in the quarter.

Turning to slide 15, we also generated excellent full year results. Our total rental and management segment core revenue growth was over 22%, with nearly 10% attributable to organic core growth and the remainder driven by the nearly 22,000 new assets we’ve added since the beginning of 2012, with an average of about 1.3 tenants per tower on day one.

Due to the significant wireless carrier network investments being made worldwide, 2013 represented a record year of activity for us, both in the U.S. and internationally. Global commenced new business rose 20% versus 2012, while signed new business was up nearly 30%.

Our 2013 core adjusted EBITDA increased by almost 20% from 2012. On a reported basis we ended the year with adjusted EBITDA, over $70 million above the mid-point of our initial 2013 outlook, despite FX headwinds of an incremental $30 million. Similar to the fourth quarter, substantially all of our adjusted EBITDA growth for the full year was attributable to our rental and management segments. Our EBITDA margin for the year was sustained at nearly 65%.

AFFO growth in 2013 was over 23% on a core basis and reflects the strong adjusted EBITDA growth we experienced, net of the funding costs associated with our acquisitions. Virtually all of our AFFO growth were distributable to our rental and management segments and was complimented by opportunistic refinancing activities and our continuing access to capital markets at very attractive borrowing rates.

For example, we refinanced our $1.75 billion 2007 securitization in March, with an interest rate savings of nearly 300 basis points, while extending the weighted average expiration to about eight years. We continue to believe that our prudent balance sheet management will continue to play an important role in our growth going forward.

2013 was a terrific year for us with core growth in rental and management revenue of over 22%, adjusted EBIDA of nearly 20% and AFFO of over 23%. We ended the year with over 67,000 site in 13 markets around the globe and believe the dispositioning will generate strong growth again for our shareholders in 2014 and beyond.

Moving onto slide 16, our expectations for 2014 rental and management revenue growth reflect our belief that the strong leasing levels we experienced in 2013 will continue. At the mid point of our outlook, we expect core rental and management revenue growth of 23%, driven by about 9% of organic core growth, with a balance being generated from new properties, including the new sites we expect to construct in 2014.

We’re forecasting a consolidated churn of about 1.5%, which reflects the high contract renewal rates of our tenant base, as well as the protective impact of the holistic agreements we have in place with three of our top four tenants in the U.S. On a reported basis, we expect rental and management revenue growth of about 18% at the mid point, which includes about $150 million of negative impacts from foreign currency exchange rate fluctuations and straight-line revenue accounting.

Turning to slide 17, we expect the 2013 drivers of both our domestic and international segments to carry forward into 2014. U.S. wireless carrier CapEx spend projections for the year are nearly $35 billion, as all four major nationwide carriers continue to spend aggressively on their various network initiatives. Demand for wireless data continues to rise and the latest forecast project wireless data carried over macro networks to grow at a nearly 50% compounded annual growth rate through 2018 as Jim described.

In addition, with both these rated to come online over the next few years, we believe the network densification initiatives throughout the U.S. will need to accelerate even further for our tenants to maintain a consistent quality of service for their customers. With a domestic portfolio of nearly 28,000 own towers, more than 300 dash systems and access to a nationwide managed rooftop portfolio, we believe we are extremely well positioned to capture the incremental U.S. demand for communications real estate generated by these drivers.

We believe that the underlying growth drivers in our international markets are equally compelling. Large multi-national carriers are investing aggressively in 3G and 4G networks throughout our served markets and we expect the relationships we’ve built with those carriers to continue to yield significant benefits, both in terms of new business commitments and future tower acquisition opportunities.

In 2013 for example, nearly 50% of our total signed international and new business was driven by five carriers, including Vodafone, MTN and Telefónica and of our total international revenue in 2013, more than 50% was attributable to investment grade tenants, reflecting our ongoing focus on aligning our sales with large, well positioned, multi national carriers.

We have very carefully and deliberately positioned the company to benefit from a broad range of network development and deployment activities across our international footprint. Ranging from initial 3G network rollouts in India, Ghana and Ugandan to 3G densification and initial 4G builds in Brazil, Mexico and South Africa, to more mature 4G build outs in Germany.

As our international markets progress throughout the voice centric and data centric migration path, we expect to participate in each successive network deployment cycle just as we have done in the U.S. As a result we believe our international operations will continue to generate organic core growth rates, significantly in excess of our domestic operations. In our view, the long-term growth story in international is very exciting.

Moving onto slide 18, as a result of these demand drivers, we expect our domestic and international rental and management segments to show significant growth in 2014. In the U.S. we expect core revenue growth of over 20% with organic core growth of between 8% and 9%. We expect our organic core growth to also include about 12% in new property core growth, with the majority coming from the newly acquired GTP portfolio.

Outside of the U.S. we expect our markets will generate core growth of roughly 28%, including organic core growth of about 11%. Core growth from new properties, including the recently acquired NII portfolios in Brazil and Mexico is projected to be about 17%.

Our international organic core growth is projected to outpace that of the U.S. by about 250 basis points, which is trending towards the high end of our long-term target range, and is indicative of the aggressive investments our international wireless carrier customers are making in their networks. As has been the case over the last few years, we expect the majority of our new business outside of the U.S. to be driven by large multi-national carriers like MTN, Telefónica, Vodafone and Bharti.

Turning to slide 19, we also expect solid growth and adjusted EBITDA and AFFO in 2014. Beginning with adjusted EBITDA, we are forecasting core growth of over 22% at the midpoint of our outlook, with reported growth of about 16%. We remain focused on property level cost controls, as well as the SG&A costs and expect SG&A as a percentage of revenue to fall to approximately 9.6%. Accordingly, EBITDA margins are expected to be in the mid-60% range and as we generate incremental new business across our portfolio of properties, we expect our margins will expand over the long term.

Turning to our outlook for AFFO, we expect core growth of almost 21% at the midpoint, which will be driven by the growth and adjusted EBITDA, net of cost associated with our recent acquisitions, including interest expense and maintenance CapEx. We expect substantially all of our AFFO growth to be generated by our rental and management segment. At the midpoint of outlook and assuming a weighted average diluted share account of about 400 million shares, our outlook for AFFO per share will be roughly $4.30.

Moving onto slide 20, in 2014 and consistent with the last several years, we expect our primary method of returning capital to stock holders will be our REIT distribution. The amounts and timing of our dividend payments are at the discretion of the board, but our goal continues to be to deliver annual dividend growth of at least 20% over the next five years.

We currently plan to spend between $850 million and $950 million in CapEx during the year, which includes the construction of 2,500 sites at the midpoint. We expect to build between 400 and 500 sites in the U.S. compared to just over 300 in 2013, in response to increased carrier network densification activity.

Pro form for our construction pipeline and additional sites, which we may acquire pursuant to previously announced acquisitions, we expect to have over 70,000 sites by year-end. In addition we expect to spend about $110 million on land acquisitions, while also targeting to opportunistically extend over 2000 leases domestically in 2014.

And finally we continue to maintain an active deal pipeline and expect to continue evaluating acquisition opportunities around the world. Our capital allocation priorities in 2014 continue to support our corporate strategy of growing our asset base, while maintaining a strong balance sheet.

In turning to slide 21 and in summary, we believe we had an excellent year in 2013, with solid growth across all of our key metrics. As a result of the acquisition of the GTP tower portfolio, we re-levered the company to our home U.S. market, where all four major carriers continue to aggressively invest in their networks.

Internationally we continue to deepen our presence in our legacy markets, particularly in Mexico and Brazil through the acquisition of towers from NII, while continuing to build on existing relationships with major carriers throughout our global footprint.

We continue to proactively manage our balance sheet, extending our average debt tenure to about 5.5 years, while reducing our average drilling cost to about 4% as of year-end. By combining our newly acquired and built towers, the solid organic growth we generated in 2013 and our strong balance sheet, we believe we’ve positioned ourselves to achieve another terrific year in 2014.

So in conclusion, we expect another year of global heightened customer demand for our communications real estate in 2014 and as a result expect to post strong organic core growth of about 9%, core adjusted EBITDA growth of over 22% and core AFFO growth of nearly 21%. We believe that this type of growth, coupled with our anticipated dividend, will generate meaningful shareholder returns in 2014 and position us well to drive strong, sustainable returns for many years to come.

And with that we’d like to open up the call for your questions. Operator.

Question-and-Answer Session

Operator

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

Simon Flannery - Morgan Stanley

Follow-up on the guidance around doubling the AFFO per share. Does that envisage some of these opportunistic acquisitions or do you think that you can get there, even if you don’t do any deals from here and perhaps you just talk a little bit about the landscape. It seems like in the U.S. there’s not a whole lot left of any scale. You know Latin America we’ve had a lot of transactions. Where do you see the most fruitful areas for expansion going forward? Thanks.

Tom Bartlett

Sure. Hey Simon, this is Tom. With regards to doubling the AFFO per share, there are few components of it. Clearly the organic growth of 6% to 8% in the U.S. and 200 to 300 basis points on top of that, extending that to 2017 really gets us a half way through the target.

The build program that we had ongoing was just 2,300 sites last year and 25 at the mid point, 100 this year. We would expect to continue that. Get to another 10% to 15% to 20% of the target and the balance will come from the additional cash that we’re generating, either buying back shares or to the extent that the opportunities are there, moving forward with some acquisitions that hit our cost of capital requirements. So we think we have all of the ingredients in place candidly to be able to achieve that $6 plus per share.

Jim Taiclet

Simon, its Jim.

Simon Flannery - Morgan Stanley

Hi, Jim.

Jim Taiclet

In summary is, we’re not dependant on the additional acquisitions, internationally or domestically we think to hit our target with the asset base we have along with everything that Tom just pointed out is sufficient to hit the target. We’re going to try to beat the target however and that’s the thing to watch.

Simon Flannery - Morgan Stanley

And any particular regions of focus for the next couple of years?

Jim Taiclet

Well our strategy is to continue to be, to deepen our position in existing major markets for us on one hand and then secondarily to continue to weave kind of a fabric in our international markets across these major multinational carries like MTN, Telefónica, America Movil, etcetera.

So we are first and foremost having the U.S. as a priority, but you correctly pointed out the number of opportunities of size are getting less. Nevertheless we will continue to evaluate and pursue those, but also the international aperture we have across the four continents we’re participating in outside of North America give us a lot of opportunities and as I said these multi nationals that we work with tend to be in numerous markets, many of which we’re already in.

So it’s really a balance between domestic and international. What’s great about the five-year plan is we don’t have to reach for a deal to get it. So we’re shooting for accretive deals just like GTP and NII. If we can get them, it will augment the slope of that curve in the upward direction, but that’s not a dependency.

Simon Flannery - Morgan Stanley

Thank you.

Jim Taiclet

Yes.

Operator

Your next question comes from the line of Batya Levi with UBS.

Batya Levi - UBS

On CapEx the 2014 outlook seems to be a bit higher than the trend and what we were looking for. Can you talk a little bit about the drivers of higher redevelopment CapEx? I’m assuming maybe some incremental CapEx that will be required for the acquisitions and also maybe some guidelines on what the start up capital projects may be. And when you look at the new site builds, I think it’s about 2500 for this year. Similar to last year, but discretionary CapEx is a bit higher. Any color on the cost to build, that will be great. Thanks.

Tom Bartlett

Yes, sure Batya, its Tom. I mean your right, on the redev its largely driven by building up the DAS network and upgrading the network to LTE and as you know, much of the capital that we do invest for redev, we do get back from our customers, so the numbers that we’re looking at are gross CapEx numbers.

On the start up fees, as we have in some of the transaction identified structural engineering efforts that you need to get up to be able to support the kind of ongoing co-location activity that we expect for that portfolio. So NII is probably the most significant one in 2014 and we identified that back when we actually did the transaction. Its embedded in the deal model if you will, but for 2014, 2015 there’ll be some additional start up CapEx for the NII transaction.

And back on the redevelopment, we expect some of the additional redevelopment CapEx to probably get back about $130 million in reimbursements in 2014. Again, that’s an area of organization where we actually share the cost with our customers.

And on the cost to build, it is going up on a per basis, largely because of the additional sites that we’re actually building in the United States. So, last year 2013 we built about 300 sites in the U.S. We expect that to be upwards of about 500 plus in the United States and that is actually driving up the cost per build from an average of like $70,000 to $90,000.

Batya Levi - UBS

And what’s the cost of build in international now?

Jim Taiclet

It varies by market. In India its less than $50,000 and in Latin America its in the $150,000 range. Similar ranges in EMEA if you will and in the United States its $200,000, $225,000.

Batya Levi - UBS

Great, thank you.

Jim Taiclet

Sure.

Operator

Your next question is from the line of Jonathan Schildkraut with Evercore.

Jonathan Schildkraut – Evercore

Hey, first if you could give us a sense as to the level of activity that falls underneath those holistic arrangements that Tom mentioned during your prepared remarks and maybe compare that back to a year ago and if we can sort of separate between sort of capacity sites and coverage sites. So maybe some of the carriers have eaten up their pre-determined buckets for those capacity increases.

And then a second question, just wondering where you were on small-cell and DAS. Obviously there’s been a lot of news, both coming out of mobile world congress about carriers employing these more as part of their network configurations and just wondering if you are seeing any difference in trends and how you are pivoting relative to that math. Thanks.

Jim Taiclet

Sure. Hey Jonathan, let me take the first part and Jim will take the second part. On the core organic growth rate we’re generating in the U.S. its I think to the point of your first question, its in that, kind of that 8% to 9% range. About half of that is coming from the cash escalator and the right to use fee, 3.5% and 1.5%. So actually it’s a little bit over half; it’s actually coming from that piece.

The additions to pay, which is what you were alluding to before which are those revenues, those fees coming from activity outside of the holistic range with the holistic customers is about 75 basis points and then the balance is coming from or the organic growth is coming from the non-holistic co-location and amendment activity net of churn.

So its very consistent and we expect 2013 versus 2014 kind of core organic growth as I said in that 8% to 9%. Over half of it is coming from the fixed element if you will, that cash escalator plus that right to use fee.

Tom Bartlett

So Jonathan regarding small cells, we studied this extensively with outside advisors and our own engineers and with our customers actually in some cases and the best way I think to think about small cells is their role in the mobile network versus the fixed line substitution network right, and what I mean by that is mobile applications are for when we are out and about moving around, whether actually in motion or just in places that are not our home or not our primary work place. So that’s what the mobile network is designed to address, that’s what we serve.

A lot of small cell applications tend to be WiFi, sort of local fixed line replacements where you’re not mobile; in your home, the small hot spots that you can get for your home, fitness category, office WiFi or small cell networks and campuses off the tower buildings etcetera fit in that category. So what we’ve analyzed is what growth is going to happen in the mobile network and how much of that will be “offloaded” to these kinds of technologies.

Going back to the Cisco study, we think that the assumptions in there are very reasonable and that you are going to have this significant caterer of year-over-year mobile network deployments and this doesn’t count WiFi substitutions in homes and things like that and that’s the 50% a year CAGR. When you multiply that through over five years, it’s a dramatic increase obviously.

Our estimation, our technical assessment is that 80% of that mobile application will be covered through macro sites, towers predominantly and 20% of actual mobile applications will be offloaded.

Now lets just go to the other side for a second. Fixed line substitution is going to be largely small cell, because it makes sense. You are just replacing your phone line or your Internet connection in your home, in your office; it’s not a mobile application. We think that’s how a lot of small cells going to be deployed.

So our view is that tower demand is not adversely affected by these small cell deployments, because of the nature of where our assets are as we pointed out suburban and rural predominantly.

Those geographies and topologies really demand a macro sighting. They don’t make sense economically, technically or from a spectrum in interference perspective to do them with small cell. So our sort of wheelhouse of large sites, relatively wide coverage areas, you know between an eighth of a mile and two miles, that’s always going to be the tower and that’s where we play.

Jonathan Schildkraut – Evercore

Thank you for answering the questions.

Jim Taiclet

Sure.

Operator

Your next question is from the line of Ric Prentiss with Raymond James.

Ric Prentiss - Raymond James

Can you hear me now?

Jim Taiclet

Hi, absolutely. Hey Ric.

Ric Prentiss - Raymond James

Hey, sorry about that. Hey, a couple of questions. One, on your guidance, can you let us know a little bit about, there’s a couple of major projects underway. Just trying to figure out if that’s in your guidance or not. Sprint has talked about their Spark project heavily focusing on the 2.5 gig hertz frequency they got from Clearwire. T-Mobile looking to buy low frequencies, 700 band from Verizon by the middle of the year. How much of Sprint, Spark and T-Mobile low band would be either explicit or implicit in your guidance?

Jim Taiclet

Yes Ric, I mean based upon what we see from an activity perspective with all of our customers, they are based upon kind of what we have built in over the next three to six months if you will, and so with regards to the United States we’re expecting really our organic run rate if you will, but these are consistent with where it was in 2013.

So no meaningful changes if you will in terms of their deployment cycles. Now to the extent that they continue to get more aggressive, we may see some more activity towards the second half of the year. But based upon what we’re seeing right now, those kinds of items, those kinds of events are in the forecast.

Ric Prentiss - Raymond James

Okay. And then next on international you closed some of the portfolio in the fourth quarter, but I think there was still some slopping over. How much of the ’14 guidance assumes the completion of the Nextel portfolios and what kind of timeframe?

Jim Taiclet

Yes, none of the – your right. About 1,000 sites were not picked up relative to the NII transaction and none of that activity; none of those sites are in the guidance.

Ric Prentiss - Raymond James

Okay, because when you did the transaction, you said here’s what it might add annually and so you’ve not put that full amount in yet.

Jim Taiclet

That’s right.

Ric Prentiss - Raymond James

Great. And then Jim there’s been some New York Times article recently about some different technology and one called pCell. I must admit, I’m not that familiar with it, but have you guys looked into what that kind of left field technology current status is?

Jim Taiclet

We actually have and that is in the very early stage, I would stay lab-based approach of that. Once you think about scaling something like that up into a network where you’re going to have 300 million devices using 2 or 3 gigabites a month of traffic; the computing power to actually use a technology like that to provide service. I think there is some very difficult issues in physics and technology that has to be overcome.

So ultimately maybe this is the point solution for certain kinds of applications. Like again in workplace environments where you got a lot of people in an office, on the floor of an office building that need that kind of augmentation, but as far as a wide scale deployment, technology vis-à-vis the macro site network that’s out there globally, I don’t see it.

Ric Prentiss - Raymond James

And that’s kind of like, what four years ago Lite Radio made a flurry and we are just now starting to see it show up a little bit.

Jim Taiclet

Yes. So I would expect that this type of technology can be a knit solution to offload real high volume traffic. Again that’s not what the towers are really there for in the first place.

Ric Prentiss - Raymond James

One cleanup question for Tom, the leverage range of 3x to 5x wanting to get back in the target within 12 to 15 months, where are you guys out as far as thinking where you want to live in that target range. And I know its probably contingent on what kind of M&A opportunity might be out there, but is it 12 to 15 months to get to the five, are you comfortable staying at five? I’m just trying to gadget where the three to five plays out.

Tom Bartlett

Yes, I mean the 12 to 15 months, I think Ric this is sort of five, perhaps slightly below the five. I think that we stated our target range in the three to five range. If you look historically over the last couple of years, we’ve been pretty comfortable to live in the four to five range. So we think that’s a bit of a suite spot for us at this point.

Ric Prentiss - Raymond James

Great. Thanks guys.

Operator

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

Jonathan Atkin - RBC Capital Markets

Well, on churn the 1.5% in 2013, I wondered where that came from and then how that might differ in 2014. And then regarding the global tower partners acquisition I’m just wondering, the leasing trends you are seeing on that portfolio and how does that differ qualitatively and quantitatively compared to your, legacy U.S. assets.

Tom Bartlett

Hey Jonathan, it’s Tom. Relative to the churn it’s very consistent, 2013 versus 2014. It’s around 1.5%, $45 million as you can see on page 16 of the page. And with regards to the GTP, I mean we did have a very good quarter I have to say with GTP what we expected and we’re looking to have a really solid 2014 lease up on that portfolio as well. We are putting all of those towers in the front of our customers and expect some real exciting things to come of it.

Jim Taiclet

So Jonathan on source of the churn, it consistently is very small customers, paging companies, local mobile radio operators either converting to a different technology or just sort of declining in their business. This churn does not come from major wireless carriers in the U.S. or overseas frankly and I also want to point out specifically that there is no idea in churn possibility for our company whatsoever, because we’ve included that in our holistic deal and have eliminated it. So the vast majority of churn comes from these very small customers.

And then just to point on GTP, the sales team already beat the deal model in the first quarter that we were responsible for the business, which was Q4, and what’s interesting about GTP is their contracts are non-holistic and we’ll have an opportunity maybe to bring those sites into an even larger and more comprehensive holistic deal, extending terms and really locking in some nice growth on a bigger portfolio as time goes on. So we are really interested in that aspect of the GTP opportunity.

Jim Taiclet

I might just add, just to put a final note on it. On the GTP side they do have some, a very small but of churn associated with iDEN over the next couple of years, which is baked into the 2014 outlook, but it’s minimal.

Jonathan Atkin - RBC Capital Markets

Great. Thank you very much.

Operator

Your next question comes from the line of Imari Love with Morningstar.

Imari Love - Morningstar

Thanks for taking the call guys. Good quarter and I wanted to ask you about in terms of invested capital, both here and abroad you had the graphic after I believe the second quarter results last year of the international returns. I think that’s the capital being in the low 20s and the mid-teens here in the U.S. Any insights or color in terms of what the targets are for that going forward and have the internal rates of return target that you have on a per country basis have shifted or changed over the last 12 to 18 months.

Tom Bartlett

Yes, I mean on the ROIC side, I mean you see how we define return on invested capital. I mean if you exclude the impact of GTP and NII, it actually rose about a 100 basis points over the last couple years. So what we are really trying to do here is to drive AFFO per share, as well as drive ROIC and its an and, its not an or. So we think that – and it’s largely based upon kind of a disciplined strategy that we have in terms of how we look at allocating capital.

From a cost of capital perspective, we update our cost of capital estimates monthly. So yes, there are changes that go on on a monthly basis, looking at interest rates and looking at local country risk as well as betas and all of the things that go into the kind of the CAPM model.

But generally speaking, the IRR requirements if you will in the United States and Germany are in the kind of the high signal digits, kind of the 7% to 9% depending up on the particular type of product. A DAS investment might require a higher rate of return than a pure tower investment.

And looking down then at Latin-American, we’re kind of in the 11% to 13% plus range and as well as in India, and then in African it will range from kind of the 12% to 13% range, whether its south Africa or up to the 18% to 20% range if we are in some of the other emerging markets there. You know that’s kind of the baseline, and then on top of it we’ll look at the counter party risk associated with the transaction and some additional elements associated with the type of a structure of agreement that we’re putting in place.

And all told, if we go back and we take a look at kind of the results that we’ve had across the portfolio, then I think its important to look at the ROIC and that’s where we’ve been able to increase the ROIC by 100 basis points over the last couple of years. So hopefully that’s helpful.

Imari Love - Morningstar

Yes, it is, great thanks.

Operator

Your next question is from the line of David Barden with Bank of America.

David Barden -Bank of America

Good morning. Thanks for taking my questions. So just Tom, maybe a couple for you. Just first, given the increased capital allocations to the build-to-suits. Could you kind of walk us through the economic model there on the build-to-suit a little bit in general terms? Specifically, are you still kind of dedicated to the notion of bringing two players to a new tower build or are you doing a little bit more even on the spec side? That would be king of helpful to understand.

And then second, just some of the questions people are kind of filtering through, one of the things is looking at the domestic fourth-quarter rental income, multiplying it by four, and then comparing it to your 2014 guidance implies something around a compounded rate of growth quarter-to-quarter through 2014 of around 5%, which feels low to people relative to some of the commentary you’ve given about expectations for very strong performance in the domestic market.

So could you kind of square for people the 2014 guidance relative to the strength we saw in the fourth quarter? It would be helpful. Thanks.

Tom Bartlett

Yes, sure Dave. Let me start and if I miss a piece, just let me know. I mean, if you take a look at the bill-to-suite program, that’s on of the highest areas that we can allocate capital. We’re building for a customer generally under a master lease agreement with an anchor tenant around the globe and we expect very high rates of returns on that particular activity and so even if you look at – if you use TCF, tower cash flow divided by cost, its kind of a surrogate for a rate of return.

If you go back and you take a look at our 2009 towers that we built, we are generating 20% rate or results on our international portfolio and over 10% on the U.S. portfolio. And so we are very excited about that program. As I said, they come with an anchored tenant and generally we will be looking for another tenant on that particular tower over the following 36 months if you will, and that additional tenant then gets baked into quota for our local sales teams. So it is a very high rate of return and we’ll continue to allocate as much capital as possible as we can for that particular category, because of the ROI characteristics of it.

With regards to guidance, we have I think perhaps a couple of things going on I guess. I mean if you talk a look at the organic growth that we are seeing going on the market, its terrific. I mean its 8% to 9%, really consistent with 2013, the new business run rate is almost identical to what it was in 2013, and with the spend that we see in the marketplace, we’re excited about the opportunity there. We layer on that growth with what we expect to be generated from the GTP transaction and the delta for GTP in 2014; it has $250 million to $260 million.

What we have that perhaps in working against that is the straight-line lease accounting in the United States, which is upwards of about $40 million. So that’s one element I think if you will David that could be cutting back on the incremental, Q-to-Q type of growth. I think if you take a look at the core growth that we are generating in the market though from a cash perspective, I think its exciting as it was in 2013.

In the international markets, again we have a couple of things. We have 11% core gain or growth rate. We have a little bit less pass through revenues that’s being generated in the year. Its about $40 million versus I think it was upwards to $60 to $70 million in 2013 versus 2012, and that’s why we had core organic growth if you will and our international markets are up in the kind of the 12% to 14% range if you will and they are about 11%.

And then we’ve taken a – you can say a rather conservative approach with regards to looking at FX, but we are looking to about $115 million of FX headwinds if you will across our footprint and the slightly different approach that I’ve taken this year is to not just look at the forecast for what FX will be by market around the globe, but I’m also comparing that to the existing spot rates and I’m being the most conservative when taking the most conservative FX if you will, relative to the sport rate or to the forecast. That’s for the year, that’s a slightly different approach I’ve taken this year versus last year.

David Barden -Bank of America

Got it. All right, so that’s helpful Tom. So I guess in the domestic market, obviously there's always that issue of trying to make sure you are not reading too much into the GAAP numbers relative to the cash. And then I know we had this issue last year where you used to look at the, maybe the one-year forward rates and you've gotten more conservative on the FX. So it's a new practice, kind of being a little bit more conservative in using the spot FX rates.

Tom Bartlett

Exactly.

David Barden -Bank of America

Okay cool. All right, thank you very much.

Operator

And your final question will come from the line of Eric Frankel with Green Street Advisors.

Eric Frankel - Green Street Advisors

Thank you very much. I was wondering if you can go through your land purchase program and just talk about the increased guidance. I’m assuming that is what's related to the increased tower count.

Jim Taiclet

Yes, largely. I mean we’ve had a pickup in our land acquisition program over the last three years. I mean our U.S. tower land acquisition group have been terrific and they continue to up the anti in terms of the amount of the leases that they are impacting on a year-over-year basis. We’ve increased the capital that we are going to spending on that program in 2014, as well as impacting about 2,000 other sites and its really just a function of I think the process that we built there.

Clearly we are brining on more sites from GTP with the 5,000 sites, so there’s going to be an opportunity there. But whatever I ask of our land accusation group up in our U.S. tower group, they deliver. So I’m really proud of what they’ve done and as a result of it, they’ve been able to significantly reduce the overall rent expense on a year over year basis.

Eric Frankel - Green Street Advisors

Great thanks. And then just regarding the ground lease extension, is there a big step-up in the rent that you negotiated or is it pretty flat? I'm just kind of curious how that economics work related to the extend versus buy decision.

Jim Taiclet

There is a modest increase at times. So when the escalator is in the kind of 2% to 3% range, so its not different than what it has been historically and really it just comes down to dealing with the landlord at a time what their interest are and to the extent that it makes sense for us to be able to buy. Just due to the economics we’ll do that, if not we’ll put it out on an extension and as Jim mentioned, the average length on our portfolio is about 24 years.

Eric Frankel - Green Street Advisors

Great. And then finally just regarding your AFFO aspirations in a few years, do you have an ideal land profile when you reach that target.

Jim Taiclet

No, I really don’t. I mean the key is to look at the kind of the underlying economics of it. We want to continue to knock out the average years if you will, so that’s why we’ve taken it from some 20 years to 24 years and we just want to stay on top of it. The group is roughly looking at leases that are expiring three or four years from now. We have about a 100 parcels that will come due at any given year, but we just look at it as we look at all of our investment activities on a very disciplined approach and when it make sense to acquire, we’ll acquire, and if it doesn’t we’ll continue to put it out on lease.

Eric Frankel - Green Street Advisors

Terrific. Thank you very much.

Tom Bartlett

You bet.

Tom Bartlett

Thank you very much. I appreciate everyone being on the call this morning. Lee and I are here obviously to be able to answer any other phone calls and we appreciate all your attention. Thank you.

Jim Taiclet

Take heart. Pitchers and catchers and others are already practicing in Florida, so that’s good enough. Bye everybody. Thanks for joining us today.

Operator

Thank you again for participating in today’s call. You may now disconnect.

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