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American Tower (NYSE:AMT)

Q1 2011 Earnings Call

May 03, 2011 8:30 am ET

Executives

Thomas Bartlett - Chief Financial Officer and Executive Vice President

Garth Williams -

James Taiclet - Executive Chairman, Chief Executive Officer and President

Analysts

Richard Choe - JP Morgan Chase & Co

James Ratcliffe - Barclays Capital

Michael Rollins - Citigroup Inc

Philip Cusick - Macquarie

Simon Flannery - Morgan Stanley

Richard Prentiss - Raymond James & Associates, Inc.

David Barden

Jason Armstrong - Goldman Sachs Group Inc.

Scott Malat - Goldman Sachs

Operator

Good morning. My name is Geneva, and I will be your conference operator today. At this time, I would like to welcome everyone to the

[Technical Difficulty]

Garth Williams

I will provide a brief overview of our first quarter results. Tom Bartlett, our Executive Vice President and CFO, will review our performance for the quarter and provide an update of our expectations for 2011. Finally, Jim Taiclet, our Chairman, President and CEO, will provide closing remarks. After these comments, we will open up the call for questions.

Before I 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 2011 outlook, our pending acquisitions, our consideration to elect real estate investment trust status, our stock repurchase program and any other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect us in the future and could cause our actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release, those set forth in our Form 10-K for the year ended December 31, 2010 and in our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.

And with that, please turn to Slide 4 of the presentation, which provides the summary of our first quarter 2011 results. Highlights from the first quarter included a 23.2% growth in total Rental and Management revenues to $546.7 million, adjusted EBITDA growth of 21.1% to $377.1 million, operating income growth of 22.1% to $218.3 million and a 4.7% decrease in our income from continuing operations to $92 million or $0.23 per basic and diluted common share.

The decrease in net income was primarily due to an increase in the effective tax rate this quarter. During the first quarter of 2010, our tax provision was reduced by approximately $33 million as a result of onetime restructuring activities in Latin America.

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

Thomas Bartlett

Thanks, Garth, and good morning, everyone. I'm pleased to report that our business produced solid results in the first quarter.

If you please turn to Slide 5, you will see that for the first quarter, our total Rental and Management revenue increased 23.2% to $547 million. Adjusting for the impact of FX straight line and a couple of onetime items accumulating to $1.6 million in revenue that occurred during the first quarter, core growth in total Rental and Management revenues was approximately 18.5%.

Turning to Slide 6. I thought it'd be helpful to highlight some of the specific items that generated the growth in our first quarter versus last year. Contractual escalations accounted for approximately $18 million of incremental revenue or about 4% of the Rental and Management revenue growth for the quarter. The base rents under MLA were escalated last year when one contract was executed and the annual escalator was moved forward to January of each year.

Organic growth in our existing Tower portfolio, as a result of new co-location and amendment activity, accounted for about $24 million of incremental revenues in the quarter. And between the fourth quarter of 2009 and the end of the first quarter of 2011, we added over 9,900 new sites. New run rate revenue from these sites in the quarter accounted for about $47 million. And as expected, our turn was approximately $12 million.

Finally, the U.S. dollar has weakened against most of the currencies in the markets in which we operate, and our straight-line revenue increased as a result of the new MLA we signed. These factors, combined with other items, generated a benefit of approximately $26 million, so around $103 million of incremental revenue in the quarter. I hope that detail was helpful.

Turning to Slide 7, continuing with some highlights relative to our Domestic Rental and Management segment for the first quarter of 2011. Revenue increased 12.9% to just under $418 million. For the first quarter, our Domestic Rental and Management segment gross margin increased $41.8 million or 14.3%, which reflects a year-over-year conversion rate of approximately 88%. And excluding the impact of FX, straight-line lease accounting and onetime items, our core growth and revenue was 10.1%. And as you can see, our profit margin in our Domestic segment increased 76%.

Turning to Slide 8. As expected, our International Rental and Management segment also produced strong results during the first quarter of 2011, generating year-over-year revenue growth of 75%. Between the fourth quarter of 2009 and the end of the first quarter, we have added over 8,900 towers to our international site portfolio, including 5,320 in India, 2,643 in Latin America and 959 sites in South Africa.

The new tower sites we have added in India, Brazil and South Africa themselves accounted for approximately $35 million of the incremental revenue growth of this quarter. In several of our international markets, as many as you already know, we passed through ground rent, and in India and South Africa, fuel cost to our customers. Pass-through revenues totaled approximately $19 million and $33 million in the first quarter of 2010 and 2011, respectively, which is an increase of about $14 million. Our International Rental and Management segment gross margin increased 62% year-over-year to $87.9 million, which reflects a 68% gross margin. And excluding the impacts of our pass-through revenue, our International segment gross margin would have been 92%.

Further, our year-over-year international gross margin conversion rate for the quarter was 61%. Excluding the impact of pass-through revenues, our gross margin conversion rate would have been over 80%. The international sites, which we have acquired or constructed, typically have from 1 to 1 1/2 tenants per tower and as a result, have gross margins below those of our Domestic segment. We believe these investments in both our legacy and new international markets provide us with the benefits of diversification, as well as opportunities to participate in the higher growth markets. Further, we believe there is tremendous potential as we lease these sites up and become more efficient operationally post start up to drive future margin growth.

Finally, our International Rental and Management segment increased operating profit by 55% to $70.4 million. Our segment SG&A increased by $8.5 million to $17.5 million as we expanded into our new markets like Chile, Colombia, Ghana, Peru and South Africa, as well as expanding our existing operations in India. In Ghana, for example, we've had a team in place throughout the first quarter in anticipation of the formation of the joint venture.

Turning to Slide 9. Our reported adjusted EBITDA growth relative to the first quarter of 2010 was 21.1%, with our core growth for the quarter at 13.5% on a currency neutral basis, excluding the impact of straight-line lease accounting and onetime items. During the first quarter, our adjusted EBITDA margin was approximately 67%, and our adjusted EBITDA conversion rate was about 61%, which as we discussed on the last slide, included the impacts of international pass-through revenue, which negatively impacted our conversion rate by about 8 to 9 percentage points.

Excluding the impact of pass-through, our adjusted EBITDA margin would have been just over 71%. As outlined on Slide 10, during the first quarter, we continued our disciplined approach to capital allocation. We invested almost $840 million during the quarter. We built 240 sites and acquired over 1,880 sites. The total purchase price for the acquired sites was approximately $769 million, of which $617 million was paid to the sellers in Q1, the balance of which will likely be paid in Q2. The sites we acquired in Brazil are high performing towers and the multiple pay was in the range of 12x to 13x adjusted EBITDA. We invested almost $98 million in CapEx. The discretionary element included $57 million of spending primarily related to the construction of approximately 240 new sites and $21 million paid for land.

Finally, consistent with our capital allocation strategy, we repurchased about 2.4 million shares of our common stock for $123 million during the quarter and 2.9 million shares for $147 million year-to-date as of April 22, 2011, pursuant to our stock repurchase program established by our Board of Directors in 2008. As of April 22 of this year, we have repurchased a total of 32.7 million shares of our common stock for an aggregate of $1.3 billion pursuant to the 2008 buyback program. And as you recall, in March of this year, our Board approved a new $1.5 billion stock buyback program.

Turning to Slide 11. We continue to aggressively expand and grow our business, both domestically and internationally. Since the fourth quarter of 2009, we've acquired and built over 1,000 sites in the U.S. Over that period, we have also spent over $100 million acquiring land under our towers. We believe there continues to be opportunities to invest in and grow this segment of our business.

And internationally as of Q1, we have acquired and built over 8,900 sites since the fourth quarter of 2009. In the first quarter of this year alone, we have added over 2,000 sites. If we close on the sites under contract that we've included in our guidance and complete our forecasted builds in 2011, we project that we will have close to 18,000 international sites, representing approximately 45% of our portfolio by the end of the year.

We have selected the international markets entered because we view them as having relatively stable political environments, growing economies and a wireless market with a sufficient number of operators and spectrum to support an independent tower industry. However, in many of these markets, we are the only independent tower operator, and we believe that we provide our investors with the unique and diversified opportunity to invest in the growth of international wireless services. Due to the aggressive build program and co-location activity, the total growth in our International segment has outpaced that of our Domestic segment and further broadens our growth opportunities.

During the first quarter, we closed on an initial 959 sites from Cell C, the third largest carrier in South Africa. We expect to acquire about 400 additional existing towers and up to 1,800 other sites that are either under construction or will be constructed over the next two years or so. We had previously announced that we are buying up to 565 sites in Brazil for a purchase price of approximately $420 million subject to post-closing adjustments. These are very attractive sites concentrated in and around Sao Paulo. Following our due diligence and review process, there were another 62 sites that we agreed to buy, bringing the total sites purchased to 627. There may be up to an additional 40 sites under construction that we will acquire over the next several months.

Over the course of the period between the initial negotiations that began nearly a year ago and the actual closing date, the EBITDA on the sites has increased. As a result of the higher number of towers and greater EBITDA achieved, the aggregate purchase price increased to approximately $553 million. We are in the process of completing the closing on an initial tranche of 400 sites from MTN in Ghana. As announced previously, we have partnered with MTN in Ghana, and under the terms of the JV, we will have operational control and own a 51% stake. We currently expect to close on an additional 500 sites from MTN in the third quarter.

Our agreement calls for up to a total of 1,876 sites to be purchased.

Having closed on an initial 116 sites in Q1, last week, we closed on an additional 171, and we also plan to acquire another 50 to 60 sites associated with our agreements with Telefónica in Chile and Colombia by the end of the third quarter. And as we have previously disclosed, we acquired 140 sites from VTR in Chile in the early part of the first quarter.

Turning to Slide 12. Our investment strategy and capital allocation process continues to drive growth in cash flow and return on invested capital. We have delivered compounded annual growth and recurring free cash flow and recurring free cash flow per share of 17% and 19%, respectively, over the past several years. Our recurring free cash flow per share in the first quarter was $0.62 per share, an increase of 12.7%. And we have increased our return on invested capital by approximately 165 basis points over the same historical period.

Turning to Slide 13. There has been a lot of discussion in the market about the impact on the tower sector from carrier consolidation. We have previously provided specific metrics on the AT&T/T-Mobile transaction, like the fact that T-Mobile comprised 8% of total 2010 revenues and that there are approximately 3,100 sites where T-Mobile has co-located on a tower with AT&T on our towers. As we have stated, the total revenue from T-Mobile on those 3,100 sites was about 4% of our 2010 revenues of approximately $2 billion, and that the weighted average remaining contracted length, that's the period until the carrier can elect to terminate the contracts, is about 5 to 6 years for T-Mobile and 9 to 10 years for AT&T. In our view the AT&T/T-Mobile transaction needs to be looked at in the broader context of the demand wireless carriers continue to face from their customers.

Slide 13 shows some estimates provided to us by wireless industry experts. New devices and smartphones, tablet and other wireless-enabled devices, combined with bandwidth-intensive new applications, are driving exponential growth in network traffic, as AT&T and Verizon themselves have pointed out in the recent calls with investors. Over the next three years alone, the number of smartphone users are expected to double. The carriers are in the process of deploying new 4G equipment to service this demand. However, in our opinion, the latest generation of equipment, while offering substantial improvements in meeting capacity needs, cannot meet all future wireless demands. And as a result, we believe the carriers will have to deploy more towers and equipment over time to meet this demand.

In our view, the U.S. market can support 3 to 4 nationwide wireless networks. The combined AT&T/T-Mobile entity will have the financial wherewithal and spectrum position to enable it to deploy a dense and robust 4G network. As a result, we believe there will continue to be strong demand for our towers and that any non-renewal of existing contracts in future years will be offset by incremental lease up and amendment activity as AT&T works to support customer demand.

Turning to Slide 14. We are adjusting our outlook for Rental and Management revenue growth for 2011 to reflect two tower acquisitions and revisions to our forecasted FX rates. As noted earlier, we closed on 627 sites in Brazil during the quarter, and we plan to close soon on 400 sites in Ghana and under our 51% owned JV. We expect to close on an additional 500 sites with MTN in the third quarter.

As a result, we are raising our forecasted 2011 revenues by approximately $100 million. This includes about $47 million of incremental pass-through revenues related to our new sites in Brazil and Ghana.

In Ghana, although we only plan to close on initially 400 sites, we have agreed to manage the entire remaining portfolio for MTN prior to adding those towers to the joint venture, and we'll recognize pass-through revenue and expense across the entire portfolio.

We have also adjusted the FX rates in our outlook as the U.S. dollars continue to decline against the currencies in several of the markets in which we operate. In addition and as a result, we are raising our outlook for 2011 adjusted EBITDA by $40 million. Consequently our Rental and Management revenues and adjusted EBITDA are forecasted to grow about 20% and 15%, respectively, year-over-year.

Let me point out that the pass-through revenue is now expected to increase $83 million in 2011 versus 2010 to a total of about $182 million, which represents about 4% of the 2011 revenue growth. And at the adjusted EBITDA level, without pass-through, the margin will be about 70% to 71%, consistent with prior years calculated on the same basis. We continue to estimate that our Domestic Rental and Management segment will grow by roughly 8% to 9% year-over-year, the vast majority of which will come from organic growth. And we expect that our International segment will continue to generate solid organic growth while also experiencing strong contributions from our recent expansion activities in anticipated acquisitions. As a result, we are currently projecting our International segment to contribute just over 25% of our total Rental and Management revenue for the full year with segment revenue growth of about 70%.

Turning to Slide 15. Let me walk you through our current view of our 2011 investment profile. We started the year with over $880 million of cash in the balance sheet. We estimate, based on our revised outlook, that our cash from operations will be just under $1.1 billion. Assuming we maintained our net leverage based on a net debt to EBITDA target of 3.5x, we could raise an additional $220 million of incremental debt. We would then have about $2.2 billion to invest over the course of 2011.

On the Use side, our plan calls for CapEx of $400 million to $450 million. Based on our completed and committed acquisitions that we've included in our outlook, we have funding commitments of about $900 million, and as I already mentioned as of April 22, we bought back $147 million of our stock this year, pursuant to our 2008 approved stock repurchase program. Netting all these items out, we would have up to $700 million of incremental capital to deploy.

In addition during the quarter, we have executed a new $860 million 5-year revolving unsecured supplemental credit facility, which may be increased to up to $1 billion. Our existing $1.25 billion credit facility, which had $175 million drawn at the end of the first quarter and $325 million term loan facility, which are still both in place, mature in June of 2012.

Turning to Slide 16. Before I close, I also wanted to highlight some important brief updates. First, we are very pleased to announce that we have received a favorable private letter ruling from the IRS with respect to the application of certain significant requalification test to our assets and operations. Our tax team has worked very hard to obtain this ruling, but is only one element of the tax due diligence that we continue to work through.

Second, we have further refined our estimates such that we believe our accumulated earnings and profits, or E&P, should be no more than $200 million by the end of 2011. This number could vary if our actual 2011 earnings and profits generated differs from our estimates. The actual form, amount and timing of a special distribution, if any, related to E&P will be determined by our Board of Directors. And we continue to actively evaluate making an election to a REIT and continue to believe that it is the optimal tax strategy for our operations given the nature of our assets and business.

Our goal in 2011 continues to be to position ourselves to qualify as a REIT commencing January 1, 2012. We are continuing to finalize our tax due diligence, and we are also working to ensure that our systems and processes are REIT-ready as of year end. And please note there is no guarantee that we will ultimately elect REIT status. Any election is subject to Board approval and finally, any determination to elect REIT status will not be made until late in the second half of 2011.

Turning to Slide 17 and in conclusion, we have had a very successful first quarter and believe we have built a strong foundation for the rest of the year. And with respect to our balance sheet, our net leverage remains at the low end of our target range and at the end of the first quarter, we had about $1 billion of liquidity available under our old credit facility and almost $360 million of cash and cash equivalents on hand. And as I mentioned, we also have full availability under our new supplemental credit facility, and we expect that we will continue to opportunistically seek access to the capital markets to further ladder and extend our maturities.

With that, I'd like to turn the call over to Jim.

James Taiclet

Thanks, Tom, and good morning to everyone on the call.

With over 23% tower revenue growth and over 21% adjusted EBITDA growth in the first quarter, American Tower demonstrated that our strategy, as executed by our people, can deliver truly compelling results. These results also reinforce the attractiveness of our unique position as a leading player in both the U.S. and international arenas.

In the first quarter, our international markets contributed 24% of the company's Rental and Management segment revenue, with an impressive 40% of the combined segments growth in operating profit. By taking advantage of opportunities in both the domestic U.S. and select global wireless markets, we believe that we are maximizing our two key metrics to drive shareholder value. Tom showed them, and they are first, increasing recurring free cash flow per share at a robust rate while continuing to expand our return on invested capital.

We also believe that we will continue to demonstrate ongoing improvement in both recurring free cash flow and return on invested capital due to the strength of the tower business model in combination with consumers' increasing appetite for mobile broadband data and entertainment services in both the U.S. and around the world. It's also our strongly held view that the physics and the engineering fundamentals of radio frequency base communications will require additional transmission equipment within a more dense network of locations over time. Therefore, we view the increase in penetration of smartphones, tablets and similar broadband devices and the monthly volume of bandwidth drawn by each device as the two most important indicators of future further demand for tower space in any given market.

As Tom's chart on tower demand drivers showed, we expect smartphone penetration to more than double in the U.S. to nearly 200 million by 2013. In the meantime, we also expect tablet and other connected device penetration to nearly double in the U.S. every year from now until 2013. Moreover, monthly data usage per device continues to expand, with capacity-hungry mobile video as the leading contributor.

The multiplier effect of increasing penetration and increasing usage will create tremendous requirements for wireless network capacity over many years. Improved technology and additional spectrum will absorb some of these capacity increases. But as Tom said also, additional transmission equipment and more dense arrays of cell sites will also play a major role. To address the opportunities presented by consumers' desire for wireless data and entertainment, as well as the challenges, our wireless carrier customers are taking necessary and prudent actions.

I'll focus most of the rest of my prepared remarks addressing head-on the major industry developments going on in the U.S. that are on everyone's mind today and describe how we believe they will effectively American Tower's future prospects.

These industry developments includes Sprint Nextel's Network Vision initiative, the efforts of Clearwire and LightSquared to provide 4G network coverage and the proposed acquisition of T-Mobile USA by AT&T. I'll address each of these in the context of three essential factors for the deployment of a viable 4G network: first, spectrum; second, funding; and third, the OEM-enhanced set supplier base. And finally, for each case, I'll summarize the anticipated implications for our company regarding each of the three major industry developments.

Overall, American Tower's position is that if an industry development is likely to increase the penetration of high-bandwidth devices at a faster rate to consumers, then that development will benefit American Tower over time and therefore, our company's goal is to be supportive of those efforts. So let's first then consider Sprint's Network Vision program in light of the three essential success factors of a 4G deployment. The program, as we understand it, will enable more effective use of Sprint's spectrum, specifically in the 800 megahertz band. They did use it then for high-speed 3G and potentially, 4G services. From a funding perspective, the program is designed to add Ethernet and fiber backhaul capabilities to Sprint's core network, which will then reduce the cost of providing true broadband service. The project would bring in more advanced OEM base station equipment and enable more broadband handsets and tablets to be supported. As to implications for the Tower business, we anticipate in the early years of this project that amendment revenue from Sprint would increase due to additional antennas, lines and frequencies needed for the transition. We would then conversely, and as Tom pointed out, likely experience some churn from legacy iDEN overlap sites. This might begin in the 2015 time frame and take a number of years to be completed. In the meantime, we'd also expect that since by then, Sprint Nextel should have many more smartphone and tablet subscribers that they'd also need to be increasing cell site density and equipment installation broadly across its footprint. We'd also expect that Sprint would monitor iDEN subscriber churn as Network Vision is being implemented and to modify the pacing if needed.

As to Clearwire and LightSquared, both hold extremely valuable resources in the form of their spectrum. We fully expect that this spectrum will be put to work in some manner over the next few years. Both companies are seeking to enhance their position regarding the three essential factors for 4G. Of course, they have both already had the spectrum, but both need reliable sources of medium to long-term funding. They're both also continuing to seek suppliers that will provide the kinds of efficiently priced base station equipment and those iconic type devices to run on their respective technologies and frequency bands. In the end, we fully expect that both Clearwire and LightSquared will find a way to bring their valuable spectrum to bear on a national basis, either through independent network deployments or in some sort of collaboration with an existing carrier. While a well-funded national network deployment by both Clearwire and LightSquared would be the optimal outcome for the Tower industry, we also view any arrangement that accelerates either or both of these companies launching 4G service, and thereby accelerating rate of penetration of 4G devices in the U.S. as very positive.

The most recent major new development in the U.S. wireless industry was AT&T's announcement of its proposed acquisition of T-Mobile USA. In view of the three essential elements for 4G, this combination would bring some major benefits. Our internal analysis suggests that the spectrum position of T-Mobile would enhance AT&T's current position by approximately 60% on a weighted average basis. Regarding funding and OEM and handset supply base, AT&T would bring a substantial financial resources and its robust supplier base, including Apple iPhones and iPads, to T-Mobile’s 30 million-plus subscribers. Consequently, we expect that the combined company would increase the adoption rate of next-generation broadband mobile devices more rapidly to a larger number of people.

In our experience as a major wireless network infrastructure provider, we've seen three previous examples of wireless carrier mergers that were immediately followed by strategic initiatives by those newly combined carriers to launch or accelerate next generation technology deployments. The first of these examples and the closest precedent to the proposed AT&T/T-Mobile transaction was the 2004 combination of Cingular and AT&T Wireless. Post merger, the larger and financially stronger company deployed 3G then at a faster pace than we believe Cingular and AT&T Wireless would have done independently. In addition, the combined company launched the iPhone, ushering in a new chapter in the sophistication and attractiveness of wireless handsets to consumers.

The second example was the merger of Sprint and Nextel in 2005. After that transaction, the combined company initiated the first national carrier 4G launch in the U.S. And then forming an alliance with and providing funding for Clearwire. The third precedent was the acquisition of Alltell by Verizon in 2009. Following which, the larger business then began an aggressive nationwide 4G rollout.

We've also reviewed our revenue trend data with respect to these three previous national wireless carrier mergers. Our assessment of the data supports our conclusion that the combined companies grew their network investments and consequently, their leasing of tower space. In each case, we compared our revenue from the combined carrier two years after the mergers closed versus the total revenue from the original independent carriers the year prior to the closing.

In the case of both the Cingular AT&T Wireless and Verizon AllTell, our post-merger Tower revenue two years later was approximately 30% higher than pre-merger levels. In the case of Sprint Nextel, revenue was approximately 40% higher. In other words, accelerated technology deployments and other network improvements were in excess of any short-term churn.

So in keeping with our prior experience and analysis as outlined above, we have been historically and are currently supportive of our customers' strategic initiatives that are designed to improve their network performance and accelerate the deployment of advanced technologies. This position also applies to the pending acquisition of T-Mobile USA by AT&T as we found similar combinations beneficial to the subscriber base through faster technology rollouts and thereby, to our business as well.

Now you may have seen a few weeks ago in the press a contrary view attributed to our company. This report misrepresented the position of American Tower and relevant facts were taken out of context. We've requested a correction be made, but we just wanted to take this opportunity to set the record straight for our investors.

In summary, we believe that demand for tower space in the U.S. will support continued strong growth. Moreover, we are highly confident that similar dynamics around wireless data and entertainment adoption will occur in our international markets. We feel that American Tower has a unique combination of experience and intellectual property that our people have developed over our many years of operation in both the U.S. and in Mexico and Brazil that can be directly applied to build further value for our shareholders globally. We have bolstered both our Senior Executive and our Regional Management teams with the talent needed to expand our business to four continents.

We're also partnering with some of the world's leading global telecommunication companies to bring the Tower Leasing business model to new countries. These include Telefónica in Latin America and MTN in Africa. Again, we are confident that our growing international operations will lengthen and strengthen our company's growth potential. So we believe that American Tower offers you a unique and compelling investment pieces, significant exposure to the mobile data and entertainment phenomenon in the U.S. and in attractive international markets as we also attract towards a potential REIT conversion, which is targeted for January 1, 2012.

Finally, we're also pleased here in Boston to see that the Red Sox's new "lull them to sleep early" strategy seems to be working. By losing the first six games in a row and quietly hiding out in last place in the AL East, the Sox are perfectly positioned for their shock-and-awe assault to the playoffs.

Thanks, everyone, and operator, we can now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Rick Prentiss from Raymond James.

Richard Prentiss - Raymond James & Associates, Inc.

A couple of questions for you if I could. First, appreciate very much that head-on addressing of the key industry items, that was great. A couple of follow-ons with that. In your guidance right now, what are your thoughts as far as the 3 to 4 nationwide networks in the U.S.? How are those reflected in your 2011 guidance? And then as you think forward to 2012, how does the growth in '11 versus '10 look versus what might be the growth in '12 versus '11?

James Taiclet

Rick, it's Jim. Our guidance applies, as you know, only to 2011 and within that time period, which there's only seven months left in the year, 7.5 months, it's a big shift to turn for the carriers. I mean, they're going to stay on the tracks that they're on today. T-Mobile still doing some work on its network, even though it's in a merger discussion, less than I would have hoped at this point, but they're still going to continue to press on. They've got an approval process that it'll be a year to a year and a half, so they're going have to keep the network up and running. So probably not a lot of major changes to any of the networks this year versus current course of speed. In 2012, we're going to -- towards the end of the year, do our bottoms-up review as we always do with our management team. We'll talk to our customers then, they'll probably have some budgets lined out, but it's too early to tell how this will all affect 2012, Rick.

Richard Prentiss - Raymond James & Associates, Inc.

Is it safe to say that you've not seen a lot of Clearwire or LightSquared in the 2011 progress so far and that if they were to solve that funding item you talked about that, that will lead to probably a better '12?

James Taiclet

That's absolutely right. I mean, we had zero tower leasing revenue in our plan for LightSquared, modest amount for Clearwire versus prior year, assuming again, no new markets for them. So positive developments there would be additional opportunity for us. But now let me just caveat that for a second. Again, there's only six months left, 6 to 7 months effectively left in the year now. Any announcements would probably end up in leases and probably the fourth quarter of the year and then lead into 2012.

Richard Prentiss - Raymond James & Associates, Inc.

Makes sense. And then one for Tom, maybe on the international side. I think I understood you to say that you're going to manage the MTN Ghana assets, and that's probably why we see a higher revenue in the guidance than EBITDA in the guidance. And could you just kind of quantify if that is correct, how much of that increase was from the Ghana side?

Thomas Bartlett

That's exactly right, Rick. Part of the arrangement that we have with MTN, while we're going to be closing on an initial 400 sites and then picking up 500 probably in the third quarter, we've agreed to manage the entire portfolio. So that there is approximately $47 million of total pass-through that is included in the guidance, and probably 2/3 of that is related to the transaction with MTN.

Scott Malat - Goldman Sachs

Great. That helps.

Operator

Your next question comes from Simon Flannery from Morgan Stanley.

Simon Flannery - Morgan Stanley

Going back to the helpful discussion on the impact of Network Vision vs. the iDEN shut down and the timing there, are you expecting -- I think Sprint had talked about eight markets being turned on this year, perhaps you can just talk about any contribution from some of those extra facilities and where you are on that contract negotiation, or amendment activity. And then on the REIT conversion on the dividends side, perhaps you can talk about timing of the purging dividend and any current thoughts on payouts given some of the work you've done so far.

James Taiclet

Simon, it's Jim. I'll take the first question and Tom will address the REIT question. To our understanding, Sprint Nextel is in the planning stages, as you indicated, of initiating the Network Vision program. From our perspective, it is the planning stages. In other words, we're not necessarily seeing applications on sites quite yet, we're looking forward to that. But given the early days of the program, and I think you understand that we don't put things into our guidance or attempt to quantify them until we get application, so it's not included at this moment.

Thomas Bartlett

Simon, on the REIT question, as I outlined, our accumulated earnings and profits that we estimated at the end of this year will be up to $200 million. The actual dividend that might be related to this earnings and profits distribution would be perhaps in the second half of the year, it's kind of the timing that we're thinking about, but that's really up to the Board of Directors, and the actual amount will actually be up to the Board of Directors as well.

Simon Flannery - Morgan Stanley

Okay. And what about the overall ongoing dividend once you become a REIT?

Thomas Bartlett

Yes, I mean those kinds of discussions are going on with our Board, and that's really for them to determine, and it'll be more -- we will be able to talk more about that perhaps later in the year or early next year, but the Board is still deliberating through all of the concepts associated with dividend policy.

James Taiclet

Simon, just generally, the intent of the company is very easy to summarize in two words: growth plus yield. We're going to move into a position over the course of the second half, as Tom said, into next year, where we do provide that additional element of yield at some level in a predictable fashion and a smooth entry to our investors.

Operator

Your next question comes from Phil Cusick from JPMorgan.

Philip Cusick - Macquarie

This is Richard Choe for Phil. Going into the Brazil deal, I guess it was upsized a little bit and you said you paid 12x to 13x cash flow. Was that because the incremental sites were higher or was this kind of looking back and kind of re-upping the price for the sites? And then going forward, it seems like Brazil is doing very well, and it's an area you want to focus on. Are there more deals -- should we expect more deals from Brazil the rest of the year?

James Taiclet

Richard, it's Jim Taiclet. Basically, what happened with our Brazil transaction is the purchase prices adjusted for the actual cash flows that were occurring up the towers new and existing in the deal. But the bulk of it was driven by the new towers that were completed and ready to transfer. So those both contributed. Brazil, generally, is we think a very attractive market. There was a spectrum option last year that NII ended up winning a fair amount of spectrum for them to rollout a 3G network. And we've partnered with them extensively in the past, expect to in the future. So for that and other reasons general to my prior discussion, the rollout of data and entertainment in Brazil is going to be exciting in the next few years.

Richard Choe - JP Morgan Chase & Co

Great. And then I guess a follow-up on the M&A side. In terms of U.S. prices, have you seen any changes in the market or are people expecting a reasonable private market prices still?

Thomas Bartlett

Well, our consistent public statement is we don't speak to specific pricing on U.S. transactions prospectively. Each of those transactions is unique, as was site sharing in Brazil frankly, based on the counter parties, the tenants, the capacity of the sites and a number of other factors. So it's not a one-size-fits-all multiple, and that's how we consistently like to discuss it.

Operator

Your next question comes from Jason Armstrong from Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc.

Great news on the IRS private letter ruling. I'm just wondering if you can help us think through international activity from here as it relates to the asset test associated with the REIT structure, just what you're sort of theoretical limit on what you can do there. And then second question, we focused a lot of the comments on addressing the deal, addressing the Sprint sort of trajectory from here, but if you look at where a lot of the incremental momentum has surfaced in the quarter for the carriers, it's companies like MetroPCS this morning producing a record net add result weighted towards smartphones, Leap Sprint announced some decent numbers, so that seems to be where we're getting a lot of the incremental sort of inflections in the wireless industry. Why wouldn't these type of companies start to show up more meaningfully on sort of fill-ins on existing city networks, especially given their spectrum constraints?

Thomas Bartlett

I'll take Jason the first question on the asset test. We don't expect expansion in the U.S. or international to be impacted by our decision to move to a real estate investment trust. I mean, there are a lot of flexibility within the IRS guidelines in terms of leverage that can be used. There's also a flexibility in terms of being able to move those assets, which would qualify as REITable assets into our QRS. So we think that we have a lot of flexibility within the guidelines to be able to continue, as Jim mentioned before, and continue to be a high growth, good-yielding real estate investment trust asset.

Jason Armstrong - Goldman Sachs Group Inc.

When you think about leverage, it is the concept to raise debt sort of at core to tier end and transition down to international properties or would you start raising more debt sort of in local markets?

Thomas Bartlett

Jason, it's kind of a combination of the two. I mean, we're still very committed to our existing range of leverage. I'm not talking about on a consolidated basis changing our leverage ratios at all. But we can and have started to raise debt at local markets, for example, in South Africa, part of the financing for that particular transaction was debt that we raised locally. And/or we can do it through intercompany loans, which was one of the elements of the PLR to make sure that we can do that. In fact, do that would actually assist us in terms of being able to meet the asset tests.

James Taiclet

And going back to the regional carriers, including Metro and Leap, they were in our plan and in our guidance as well in the U.S. at a fairly modest level as compared to some of the nationals. We'd expect that, that guidance is going to be fulfilled over the course of the year. We are pleased to hear both companies outperforming because that should help them fund additional network investments if they believe that's in their best interest. So that's great news for us.

Operator

Your next question comes from David Barden of Bank of America.

David Barden

Maybe just a couple of more detail kind of questions or thoughts on the REIT conversion process, Tom. #1, kind of what is your appetite and what have your conversations been like about potential REIT index inclusion as you think about converting to REIT? Is that important to you and if so, how are those conversations going? Also with respect to your S&P 500 inclusion, would you guys become a REIT for all intents and purposes or would you stay a telecom company? And then my last one maybe, Jim, if you could just opine a little bit, as we have in the past, on kind of where the public safety network fits into your thinking as a potential upside opportunity for presumably next year. It's in the budget, we're coming up on the 10th anniversary of 9/11. Presumably, this was done in order to have something to say as we got towards the end of the year here on public safety and federally funded networks. If you kind of give us your latest thoughts on that, it'd be great.

Thomas Bartlett

David, it's Tom. Let me take the comment to REIT questions first. I mean, clearly, what has been driving us to contemplate moving to a REIT has been the ability to pass that cash along to shareholders, right. I mean, that's the biggest benefit, it's really part of our global tax strategy. Relative to the index in terms of the inclusion, we have had discussions with many REITs, but it's very difficult to say exactly how they may consider us. There is some precedents that you can look at that have recently converted from C Corp into a REIT, and that might give you some sense, at least perhaps how we're thinking of it. But clearly, from an investor perspective and I think it is very important to be included in as many indexes as we possibly can, with regards to the S&P, we believe at the S&P 500 simply because of the weighting would be the same. But it's unclear as to the telecom index and whether that would, in fact, we would move out of telecom index or more into real estate or a REIT-type of index. So not a lot of Christmas, if you will, in terms of a lot of the indexes because a lot of that is kind of determined behind closed doors. So I'm sure we'll have or clarity on that going throughout the next 12 months or so, but it is very important to us, but that wasn't the principal driver, clearly, in terms of what we're doing here.

James Taiclet

And on the public safety side, David, that's been a program that our company, and me personally, have tried to advocate in Washington for. And it's great to see that it's getting some traction. But if you go back to the prepared remarks, before we see a lease commence, the carrier or the customer needs to have three or four things in place: one is spectrum; second is funding; third is a business plan that the owner believes in; and the fourth is OEM equipment and handsets. And there is starting to be progress on the first two, which is great. The D block spectrum seems to have been, at least informally, assigned for this purpose. Secondly, the funding has been touched on and quantified. And thirdly, there is some momentum inside the government to proceed with this. What hasn't been announced is the schedule of deployment and network design, vendors, which could be large-scale vendors or even down to the suppliers of handsets, none of those have been identified or announced yet to our knowledge. So those things are all going to have to come into play before we see leases. Now having said that, it makes a lot of sense we hope it will happen, but there's probably a little bit more of a timeline to it, certainly as you suggest, beyond the end of 2011 before we see some commenced leases.

David Barden

All right. Great.

Operator

Your next question comes from Michael Rollins from Citi Investment.

Michael Rollins - Citigroup Inc

Really two. First is if you look at I think Slide 6 it was, which is a great slide, it showed the different pieces of where revenue came from and some of the churn. The churn calculated out to be about 2.7% on last year's base of revenue. Is that a more normalized rate of churn that we should expect going forward? Or is there room for that to come down further? And then second question I had is if you were just to look at your 2011 guidance and as you're doing all the prep work for the REIT, what would be to qualify as a REIT based on your 2011 guidance, what would be the minimum amount you have to pay in a dividend basis to retain your qualification?

Thomas Bartlett

Well, let me take the first one, Michael. On the churn, the 2.7%, the answer is no, that's not going to be our run rate. As a matter fact, for 2011, if you take a look at our guidance, it's about 2%. What you actually see happening in the first quarter this year is that -- in the beginning of the second quarter, we actually restructured a contract with a large carrier then in Mexico. And so that artificially overstates, if you will, what the churn is from a run rate perspective in the first quarter of 2011 for us. And relative to your second question, I mean the easiest way -- I mean, 90% of our taxable income needs to be distributed to qualified as a REIT. I think that was your question.

Michael Rollins - Citigroup Inc

Yes, I mean because we can't see exactly what's taxable at a high level. Can you give us a sense of maybe what that number would shake out to be?

Thomas Bartlett

Well, if I recall, kind of looking, think about kind of 2010, if our kind of our GAAP taxable income was in the 500 general million dollars per range, assuming that all of that income was actually generated by the REIT, which is not going to be, correct? Because part of that income will be generated as part of the taxable REIT subsidiary make up, but 90% of that GAAP income would be distributed. Now keep in mind there's timing differences with regards to taxable depreciation, which is generally around -- it has been historically about $100 million. So if you look at the kind of the GAAP taxable income or pretax income of $500 million and you take $100 million away, which is really the timing associated with accelerated depreciation because we depreciate an average of 15 years versus 20 years for book, if you're talking about $400 million and 90% of the $400 million would be $360 million. But again, that reflects 100% of all of the income being generated within the business would be considered part of a QRS. And right now again, I'm throwing a lot of numbers out of here and you have to kind of pull them together, but right now, if you take a look at our international assets, I mean, they represent 15% to 20% of kind of our total base. So you can consider that as being that part of the total consolidated business that would be part of the taxable REIT subsidiary make up.

Michael Rollins - Citigroup Inc

That's helpful, and just one other question. As you're getting ready to do all the prep work on the final steps for the REIT and if you look at your financial leverage ratios, you compare it whether it's your tower peers or some of the REITs that you might be compared to in the MO&I sort of sub index of the REIT category, your leverage seems to be at the very low end of that sort of spectrum of ranges. Is there any consideration, as you're moving forward, to look at whether 3.5x is the right target leverage ratio in the future?

James Taiclet

Mike, it's Jim. I just want to begin to reply to that question with the two words I talked about earlier, growth plus yield. The growth part of those terms is first on purpose because we intend to maintain our position as a growth company through this whole REIT transition and maintain our strategic direction. Therefore, that's the main issue when it comes to our leverage. We want to be able to keep growing. In fact, I would argue that our ability to add 10,000 or so towers in the last year or so is directly a function of our capital structure through the financial crisis down turn cycle. We were able to keep investing in our business when others could not, and we are able to get transactions done at prices that weren't available to us before and may not be available to anyone after. So we're going to keep our financial policy around leverage similar. It may be at the low end of certain ranges, but we're maintaining our growth strategy both domestically and internationally, and you can expect us to continue to do so.

Operator

Your final question comes from James Ratcliffe, Barclays Capital.

James Ratcliffe - Barclays Capital

Just one quick one if I could. Regarding international, just going forward, do you see any future JV structures and beyond simply the benefits of having you manage the towers? How do you think about JVs in terms of usage of equity capital?

James Taiclet

James, it's Jim. Our preference in most markets is to own 100% of the asset and manage it in a way unilaterally. However, when the situation of either the customer, and often the counter party, to a deal has an interest in staying involved, we're certainly going to entertain that and also, the further afield from our traditional markets we may go, there's a risk management aspect to sometimes having a local partner that's beneficial. Those will be the two factors that would be on the consideration in the future. We don't have any other specific joint ventures to talk to you about today.

Thomas Bartlett

And I think our use of equity capital would be the same, whether it's a joint venture or not. We would look to continue to leverage up some of those local assets to better way to mitigate some cash to access out in those particular markets and hedge cash flows and to the extent that the market is open for us to be able to borrow in at attractive rates, that works well for us in a number of different fronts.

James Ratcliffe - Barclays Capital

And just would it be safe to assume that certainly the strong preference in JV would be for one-way of a majority stake?

James Taiclet

Absolutely.

James Ratcliffe - Barclays Capital

Great.

James Taiclet

Well, thank you very much for calling in this morning. Operator, you can close the call.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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