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American Tower (NYSE:AMT)

Q2 2011 Earnings Call

August 02, 2011 8:00 am ET

Executives

Leah Stearns -

Thomas Bartlett - Chief Financial Officer and Executive Vice President

James Taiclet - Executive Chairman, Chief Executive Officer and President

Analysts

Gray Powell - Wells Fargo Securities, LLC

Philip Cusick - JP Morgan Chase & Co

Batya Levi - UBS Investment Bank

Jonathan Atkin - RBC Capital Markets, LLC

Richard Prentiss - Raymond James & Associates, Inc.

Simon Flannery - Morgan Stanley

Clayton Moran - The Benchmark Company, LLC

Jason Armstrong - Goldman Sachs Group Inc.

Operator

Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the American Tower's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Leah Stearns, Director of Investor Relations. Thank you, Ms. Stearns, you may begin your conference.

Leah Stearns

Thank you, Brooke, and good morning, everyone. Thank you for joining American Tower's Second Quarter 2011 Earnings Conference Call. We have posted a presentation which we will refer to throughout our prepared remarks under the Investors tab on our website, www.americantower.com. Our agenda for this morning's call will be as follows. First, I will provide a brief overview of our second quarter results. Then Tom Bartlett, our Executive Vice President and CFO, will review our financial and operational performance for the quarter. And finally, Jim Taiclet, our Chairman, President and CEO, will provide closing remarks. After these comments, we will open up the call for your 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 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 March 31, 2011, our Amendment #1 to our form S-4 filed on July 18, 2011, and in our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.

And with that, please turn to Slide 4 of the presentation which provides a summary of our second quarter 2011 results. During the quarter, our rental and management business accounted for over 97% of total revenues, which are generated from leasing income producing real estate primarily to investment grade corporate tenants. This revenue grew 28% to nearly $584 million from the second quarter of 2010. In addition, our adjusted EBITDA increased 21% to $389 million, operating income increased 20% to $226 million, and finally, income from continuing operations increased to $113 million or $0.29 per basic and diluted common share. And with that, I would like to turn the call over to Tom who will discuss our results in more detail.

Thomas Bartlett

Thanks, Leah, and good morning, everyone. I'm pleased to report that our business produced solid results during the second quarter with our recent acquisitions in Latin America and EMEA further diversifying our overall revenue stream. As a result of our year-to-date performance and further certainty as to the timing of some specific international acquisition closings, we have raised our revenue and adjusted EBITDA outlook for the year. If you please turn to Slide 5, you will see that for the second quarter, our total rental and management revenue increased by approximately 28% to $584 million. And for the quarter, our core growth increased 24.4% and was generated by core same tower revenue growth which is comprised of escalators, new lease up and amendment activity less than churn of 8%, and core growth from the construction and acquisition of new towers of 16.4%. The key drivers of our core same tower growth during the second quarter include new business commitments in the U.S., which have been trending at comparable levels to 2010, with AT&T and Verizon's LTE network investments driving the majority of our U.S. leasing volume. And in Latin America, we've seen recent 3G spectrum auctions increase demand for our legacy sites as our customers plan their next generation network deployments, driving an expected improvement in consolidated leasing volumes for the first half of the year versus the same period last year.

Our growth from new sites reflects the impact of our acquisition, our construction of over 10,000 sites since the beginning of the second quarter of 2010. Over 90% of these new sites are located in our international markets where we have found -- where we have focused on diversifying our portfolio across 3 key regions: Latin America, Asia and EMEA. And our growth from new sites also reflects the increase in our international pass-through revenues which has doubled from the year ago period to $40 million.

Turning to Slide 6. During the second quarter, our domestic rental and management segment was right on plan with revenue growth driven primarily by new cash leasing revenue from our legacy towers. For the quarter, our domestic rental and management segment revenue grew 13.4% to nearly $425 million, with core growth of 11%. Year-to-date and as expected, both our signed and commenced new leasing activity in the U.S. has been comparable with 2010 levels and has been primarily generated by 2 of our largest customers as they focus on deploying their 4G LTE networks nationwide.

For the second quarter, our domestic rental and management segment gross margin increased $43.3 million or approximately 14.7%, which reflects a year-over-year conversion rate of about 86%. And further, as we've previously highlighted during 2011, we continue to make selective investments in systems and people throughout the organization. As a result, our domestic rental and management segment SG&A costs have increased about $4.5 million from the year ago period. We expect these incremental investments in SG&A to be largely isolated to 2011 as we scale our operations to support our future growth initiatives.

And finally as a result of our growth in gross margin, we grew operating profit 13.8% to just under $320 million, maintaining our operating profit margin at 75%.

Turning to Slide 7. Over the past 12 months, we have made significant investments in our International Rental and Management segment, adding over 9,000 tower sites to our portfolio. And as a result, our International Rental and Management segment revenue has nearly doubled to approximately $159 million. Year-to-date, our legacy markets within our international segment have experienced strong levels of signed new leases and amendments. During 2010, we saw a pause in many of our international markets as carriers awaited either spectrum or available equipment to enable their network deployments. As customers in our legacy Latin American markets have now been awarded spectrum and equipment is more readily available for carriers to deploy in India, we are expecting demand levels to strengthen. From a gross margin perspective, our International Rental and Management segment increased 75% year-over-year to approximately $106 million, which when you exclude the impact of pass-through revenue, results in a gross margin of almost 89% and a gross margin conversion rate of about 77%.

Further, our International Rental and Management SG&A expense increased $11.5 million from the second quarter of 2010. The primary driver of this increase has been the costs associated with establishing our local teams in our new markets, as well as investing in scaling our legacy operations to support our ongoing growth. As a result of our International Rental and Management segment gross margin growth, our international segment operating profit increased 68% to $84.3 million.

And finally, I'd like to highlight that as of the second quarter, our international segment represented approximately 27% of our total rental and management revenues or 22% of our rental and management revenues when you exclude pass-through revenue. We believe that our current international operations offer our investors the benefits of portfolio diversification and exposure to higher growth markets. It's currently estimated that the vast majority of wireless net adds in the world will be generated over the next 5 years in emerging markets, which we believe will drive significant demand for new co-locations on our towers.

Turning to Slide 8. Our reported adjusted EBITDA growth, relative to the second quarter of 2010, was over 21%, with our core growth for the quarter at 17.2% on a currency neutral basis and excluding the net impact of straight-line lease accounting. During the second quarter, our adjusted EBITDA margin, excluding the impact of pass-through, was approximately 70%, and our adjusted EBITDA conversion rate was about 63%. I'd like to provide some additional color behind the key drivers of our $20 million year-over-year increase in SG&A expense. As I mentioned, we believe these investments will position our teams to drive solid future growth and better support our rapidly growing global business. First, as Jim highlighted for you earlier this year, we are staffing up key roles throughout the organization to better support our current regional operations and enable future growth. Approximately 1/3 of our increase in SG&A for the quarter was attributable to this initiative. Further, approximately 45% of the increase is due to the impact of our acquisition in India and staffing our new markets in Latin America and EMEA.

We would expect once our new markets and regional teams are fully staffed and our new systems are in place, our incremental SG&A spending will ease.

As outlined in Slide 9, during 2011, we have continued our disciplined approach to capital allocation and have as a result, invested about $1.4 billion in capital expenditures, acquisitions and share repurchases. During the second quarter, we invested about $139 million in total capital expenditures. Our growth capital expenditures, included $75 million of spending, primarily related to the construction of approximately 230 new sites, $28 million paid to acquire some land under our towers and $15 million to upgrade towers to accommodate new tenants. In addition, pursuant to our stock repurchase programs, during the second quarter, we've repurchased about 2 million shares of our common stock for $102 million. Year-to-date, as of July 22, we have acquired 4.7 million shares for over $240 million.

During the second quarter, we spent $275 million on acquisitions primarily in our international markets. Our acquisitions included 170 sites in Chile, 15 sites in Colombia, 23 sites in Brazil, 400 sites in Ghana and 37 sites in the United States.

And finally, we recently announced the signing of definitive agreements to purchase up to 2,126 towers from Colombia Movil or Tigo, a subsidiary of Millicom for up to $182 million. As noted in our announcement of this transaction, Millicom and the other shareholders of Tigo have the right to retain a minority interest in these assets and we expect to fund our share of the purchase price with cash on hand. The initial tranche of towers is expected to close during the fourth quarter of 2011, with the remaining towers expected to close over the course of 2012.

Turning to Slide 10. Our investment strategy in capital allocation process continues to drive growth in cash flow and return on invested capital. We have delivered compounded annual growth in recurring free cash flow and recurring free cash flow per share of 15% and 17%, respectively, over the past several years. For the quarter, our recurring free cash flow was $244.7 million and our recurring free cash flow per share was $0.61. For those refocused investors, we believe that our recurring free cash flow metric is a good proxy for adjusted funds from operations or AFFO, and believe to arrive at an appropriate AFFO for American Tower, you would need to make 2 minor adjustments.

First, add back our redevelopment CapEx, which represents amounts we invest to generate new revenues from incremental tenants, and which, by the way, is often reimbursed by the tenant. And second, add back noncash interest expense or our deferred financing charges, and historically, this runs approximately $3 million per quarter. As expected, our recurring free cash flow growth in 2011 is projected to be below our long-term goal of mid-teens compounded annual growth due to a couple of specific reasons.

First, in 2010, we received a tax refund, which we will not benefit from again in 2011. Second, we have a capital improvement project related to our guide towers in the U.S. which will require us to spend a total of approximately $10 million of maintenance CapEx during the year. Third, we will have higher than normal redevelopment CapEx, of which we've spent about $8 million year-to-date, which is attributable to our Indoor DAS system 4G upgrades. We expect to be fully reimbursed for these costs by our tenants. And finally, incremental interest expense associated with opportunistic debt offerings, which we pursued to fund our acquisition pipeline.

Excluding the impact of these nonrecurring items, our recurring free cash flow would be in line with our target of mid-teen annual growth.

Separately, we've increased our return on invested capital by approximately 160 basis points over the same historical period. Our fundamental strategy continues to be to drive growth in these 2 key metrics, with annual recurring free cash flow growth in the mid-teens while concurrently increasing our consolidated return on invested capital.

Now on Slide 11, we've updated our outlook for the year. We are raising our target revenue by $30 million to $2.35 billion at the midpoint, which is primarily attributable to our acquisition of an additional 320 sites -- 329 sites in South Africa, which was completed subsequent to the end of the second quarter and an increase of about 300 sites over what we previously expected to acquire on in Ghana which is expected to close over the next week. In addition, year-to-date international currencies have been stronger than our initial forecast and this has resulted in incremental revenues primarily from our operations in Brazil. So as a result, for 2011, we now expect total rental and management revenue to increase nearly $414 million, generating annual core growth of over 20% at the midpoint.

In addition, we are now forecasting that our adjusted EBITDA will be $20 million higher, with the midpoint of the new range at $1.57 billion for 2011. The increase in adjusted EBITDA is attributable to the corresponding impact of our third quarter acquisitions and the average FX rates we now expect for the full year.

So as the result, for 2011, we now anticipate adjusted EBITDA to increase over $220 million, generating annual core growth of 15% at the midpoint. Finally, we are increasing our outlook for cash provided by operating activities by $30 million, which reflects the cash impact of our increases in adjusted EBITDA and lower than previously forecasted cash interest expense. As a result, we now anticipate cash provided by operating activities to increase by $95 million or 9% at the midpoint.

On Slide 12, we have provided an overview of our tower count, which as of the end of the second quarter, stood at approximately 38,000 sites, with 56% of our sites in the U.S. and 44% in our international markets. Our outlook currently reflects the following activity during the second half of 2011. Our acquisition of 329 sites in South Africa, which we completed in July; acquiring approximately 800 sites in Ghana, which we expect to complete later this week; and the construction of an additional 880 sites globally based on the midpoint of our outlook. In addition, and not yet included in our outlook, we have signed agreements to secure up to an additional 700 sites in Ghana, 1,880 sites in South Africa and 2,100 sites in Colombia, which we expect to acquire in tranches during the fourth quarter of 2011 and the full year 2012.

Turning to Slide 13, I'd like to spend a moment on our progress with respect to our REIT conversion. First, our internal work streams remain on track as our legal entity reorganization and operational readiness initiatives continue to make solid progress. These operational initiatives include key system modifications to enable our ability to track and manage REIT testing requirements. We are currently working on the Second Amendment to our Form S-4 which we intend to file with the SEC in the coming weeks and will include our second quarter financial information.

In addition, as we near the end of 2011, our final work surrounding our earnings and profits distribution is wrapping up. We continue to expect that our distribution will not exceed $200 million and that it will be paid using cash on hand. And further, we recently received initial feedback from both Fitch and Moody's that our investment grade credit ratings should not be impacted as a result of our REIT conversion.

And finally, we are continuing our outreach to index providers to ensure they have the necessary information to make an informed decision about our treatment within their indexes. And please note, there's no guarantee that we'll ultimately elect REIT status, any election is subject to Board approval, and finally, any determination to elect REIT status will not be made until in the second half of 2011.

Turning to Slide 14, and in conclusion, we've had a very successful second quarter and believe we have built a strong foundation for the rest of the year. We had solid growth in revenue and adjusted EBITDA, and we continue to close on acquisitions that we believe are accretive to our investors. Year-to-date, we've invested nearly $1.4 billion in acquisitions, CapEx and stock buybacks. And with respect to our balance sheet, our net leverage remains at the low end of our target range to 3.4x net debt to second quarter annualized adjusted EBITDA. We have tremendous liquidity of approximately $2.3 billion. And we expect that we'll continue to opportunistically seek access to the capital markets to further ladder and extend our maturities.

Finally, we continue to believe that we are on track to be in a position to elect REIT status as of January 1, 2012. With that, I'd like to turn the call over to Jim.

James Taiclet

Thanks, Tom. Our compelling second quarter results highlight the critical role that the tower sector plays in the expansion of wireless service, and American Tower's unique ability to capitalize on this phenomenon on a global basis. Our vertical real estate is the essential link between the supply and the demand sides of the wireless economy. On the demand side is the ever-growing consumer appetite for mobile services that transcend traditional voice and SMS, and take the user experience to a whole new level. Today, at full Internet connectivity, transactional and business productivity tools, social networking and entertainment at steadily increasing speed and quality is what the user is demanding.

On the supply side, our more and more capable smart phones, laptop computers and tablets, plus the software spectrum, switching equipment and IP networks that result in the availability of greater mobile bandwidth. What connects the supply of mobile bandwidth to the demand of the consumer is the vertical real estate of the tower. As the nexus between the wireless industry and its end customer, our tower's base is highly valuable. Everyone in our company is dedicated to securing, expanding and retaining maximum value from our vertical real estate, and this is what drives the results that Tom so thoroughly described.

The towers pivotal position in the delivery of wireless services secure based on the physics of radio frequency transmission. For the vast proportion of any given mobile coverage area, macro sites are the best solution. In addition, for any given geographic area with its own specific spectrum, topology and population density, when bandwidth delivery increases, the capacity and quality of the radio signal must also increase.

As a result, as the mobile industry delivers more broadband capacity to an equal or greater number of users, existing networks will need additional transmission equipment and a more dense and numerous set of cell sites. In a recent study published by JPMorgan, an increase from 3 to 10 megabits per month of usage by wireless subscribers in Singapore resulted in a reduction of cell site radius of 50% and a 3x increase in cell site density. While these specific results were specific to densely populated nation of Singapore, to us, they indicate the expected direction of the trend across all types of geographies. The challenge for the wireless industry is to meet burgeoning consumer demand for wireless data and entertainment while achieving a reasonable return on investment over time. Consequently, industry suppliers that enhance the overall efficiency of the delivery of mobile bandwidth will thrive. Over the past decade, the U.S. tower industry proved the value of the commercial co-location model for vertical real estate.

In other words, leasing readily available multi-tenant towers from professional companies has proved to be much more efficient than carriers owning and operating single-use towers. Our recent growth in our U.S. business demonstrates that co-location continues to be the preferred method for network deployment.

Since we firmly believe that the co-location model of network deployment should make sense in any country with a competitive wireless industry, one of the core missions at American Tower is to seek additional countries where we can introduce the efficiency of our business model and secure the appropriate value for doing so.

Consequently, American Tower is today positioned as the only major independent provider of vertical real estate to the telecom industry on a global basis. We've been able to secure this position in large part due to the size and performance of our U.S. business. Our U.S. operations which still provide nearly 3 quarters of the company's leasing revenue, has the highest operating margins in the domestic tower industry and generates substantial cash flow. This cash, coupled with the company's traditionally strong balance sheet, has provided the financial wherewithal to invest in new assets throughout the business cycle.

Moreover, our early forays into Mexico and Brazil 10 years ago provided the experience and management talent for operating in emerging markets. And in recent years, we've augmented our executive management team with significant international experience from Asia, Europe and Africa.

As a result, American Tower's developed and continues to pursue a much broader set of investment opportunities. By having access to acquisition candidates both in the U.S. and abroad, we've been able to achieve robust multi-year expansion in revenue, EBITDA and recurring free cash flow per share, as you saw, while also increasing our return on invested capital simultaneously.

This quarter's 28% tower revenue growth and 21% adjusted EBITDA growth are the latest examples. Given the rapid expansion of the wireless industry around the world, we expect to continue to deliver strong growth in our financial metrics while also expanding returns along the way.

Now let's spend some time on a few of our current focus areas for driving maximum value from our business. In the U.S., our highest operational priority is meeting the deployment needs and exceeding the delivery expectations of AT&T and Verizon as they aggressively enhance their existing networks and install next-generation LTE technology. We are also closely monitoring the evolving relationships among Sprint, Clearwire and LightSquared, which we fully believe will bring together a combination of spectrum, financing, technology, hardware and business relationships among them to deliver to U.S. consumers a fully viable and competitive 4G product.

This will inevitably require significant infrastructure enhancements for Sprint, which we believe will be incorporated into their network vision program, as well as necessitate modification to our current master lease terms.

Many of you know that our past practice is not to discuss the counterparty identity, pricing, volume commitments or other details of specific customer agreements, except with the impact of a long-term arrangement with the customer on our overall financial results, especially with result to -- as respect to noncash straight-line revenue, it's material. You can expect this to continue to adhere to this policy as we work with Sprint.

Turning to international, our current focus areas are to consolidate our recent gains and add depth to our presence in key countries. For example, in Latin America, we have in 2011, added over 600 high-quality towers in Brazil via acquisition, and we've recently announced our agreement with Millicom in Colombia, which will add over 2,000 towers to the more than 1,000 we had previously acquired from Telefónica there. In India, we are accelerating our construction program in the second half of the year to meet increasing demand from the major carriers there. And in sub-Saharan Africa, after 4 years of disciplined, targeted business development in the region, we are fully operational now in both South Africa and Ghana. We expect to have approximately 3,000 towers in operation in that region by year-end.

As Tom mentioned, we are also steadily pursuing our initiative to maximize cash available to investors, introduce a return in dividend and expand our investor base via conversion to a real estate investment trust corporate structure. Pending board approval, we plan to implement the conversion January 1, 2012, and we see no impediments at this time, regulatory or otherwise to achieving that date.

To summarize a few key points before we take your questions, first, tower companies like us are in a unique position between the supply side of the wireless industry and the exploding demand from consumers. And American Tower is the only credible player on a global basis.

Second, our global presence and strong balance sheet, with over $2 billion of liquidity, enables us to seek out the best opportunities for asset growth anywhere.

And third, we maintain the highest growth rates, highest operating margins and highest credit quality among our publicly-traded peer group.

Finally, while some of you may have been skeptical of the Red Sox early-season lull-them-to-sleep by losing all our games strategy, you can now see that it's worked brilliantly with the Sox firmly in first place and the best record in the American League.

Operator, now you can open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Tom, you talked about as part the REIT process, the preparing the index inclusion discussion. Could you just update us a little bit on what your understanding NAREIT and others require for index inclusion, the main index, and where you stand on meeting those requirements. And then, if you could just update us on the status of the SEC subpoena, that would be great.

Thomas Bartlett

Yes, with respect to the indexing, we continue to believe that the majority of our revenue, 98% of our income is generated from income producing real estate, and largely, our customers are all investment grade. So when you line up our business versus the indexes is we think that we fall squarely within all of the indexes, including the majority of the NAREIT indexes, the RNC as well as all the indexes. So we've had a lot of ongoing discussions with them. We continue to update the investors relative to our business and ensuring that they understand the complexity of our business and the makeup of our business and how it lines up, we think with the indexes. And so we think we're in a good position and we think we are, again, squarely in the middle of all of the index requirements. Having said that, as you well know, the advisory groups supporting the indexes, it's difficult to predict. And so what we can do is to educate them and make sure that they understand our business and we'll see what kind of shakes out over the next 3 or 4 months. We expected it, again, that once we make the determination to be a REIT, and pay the dividend, the required dividend, that we should be in those indexes early in 2012.

James Taiclet

And, Simon, this is Jim. From a logical perspective, what we've taken is the requirements for say the NAREIT equity, REIT index as an example, we've lined up the requirements, lined up our business right beside it. We feel it's right down the middle, but we do have to wait for the process to play out and let us know where it falls.

Simon Flannery - Morgan Stanley

Understood. On the subpoena?

James Taiclet

Sure. It's Jim, Simon. We've responded to the SEC's request for documentation and we're continuing to cooperate with them on their review. We provided them with a large set of documents related to our tax accounting and reporting. We believe the SEC investigation, in part, relates to one former employee's complaints that we received in the past that the company, as to which we investigated thoroughly and found no material issues all the way up to and including our audit committee and board. So this time, we can't predict the scope or the outcome of the SEC's investigation. But on that particular item, we've reviewed it thoroughly and we feel that the company is in good shape.

Simon Flannery - Morgan Stanley

And just to be clear, it has nothing -- it has no impact on the REIT conversion process?

James Taiclet

Well, we believe that the comments to the S-4 that we've gotten from the SEC which I think comes from actually a different department are ordinary course in nature, separate from the tax accounting and reporting matters involved in this other inquiry and we frankly, haven't received any indication that the request for documents that centered around those GAAPs tax accounting questions will impact the timing of our REIT conversion.

Operator

Your next question comes from Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc.

I guess one of your peers, Comcast specifically talked about domestically seeing expectations up 15% to 20% in the back half of the year, really sort of an inflection. You're not making that change that I can see in your guidance. It's more sort of FX related. Do you see the potential for the same uptick, I guess is the first question. And then second question, you, for a longtime, have had sort of this target of 30% of the business being international. We're obviously sort of approaching that. We haven't heard that for a while. I'm just wondering the time for a reset and the target percentage and what do you think that will ultimately be?

James Taiclet

Sure, Jason, it's Jim again. On the U.S. demand side, our expectation and what we included in outlook is tracking very closely to reality this year. You might remember that, and this is my recollection of Crown's public statements, I believe they said that they had decremented 2010 to 2011 about 15% in their original guidance and they brought it back up I think about the same number. We've not decremented. We went from 2010 to 2011, we thought at or slightly above in the U.S. as far as the tracking performance. That's what we're seeing. It sounds like that's what CCI may also be seeing and I think it's in complete synchronization with our original outlook.

Thomas Bartlett

And, James, I just would add -- I might just add to that, on a consolidated basis, performance has been just as Jim said right where we expected it to be. The first half's commence activity is well ahead of 2010 with the U.S. tracking slightly ahead in our international markets well ahead of 2010 leasing level. And with regards to guidance, we are increasing revenue by $30 million, $25 million of that is actually due to the acquisition activity that we have going on. So it's a relatively small piece is actually related to FX.

James Taiclet

Yes. And on the international target ratio, 4 or 5 years ago, I put out the 25% to 30% international target, alongside that growing U.S. business, and our team has actually been able to accomplish. We're going to probably see that by the end of the year, so we'll be around 30% run rate year end 2011. So having established that original goal is having international a major part of this company, and an ability, Simon and Al, execute transactions really anywhere in the world on a major basis. We're going to continue to seek to make investments that meet our return criteria and we're going to apply that approach to the U.S. as we've always done and abroad. And so rather than picking another number and tacking it on the wall, we're just going to continue to run our process, choose the very best opportunities as we move along here. Now just based on reality, the U.S. is still the vast majority of our revenue, probably will be for a long time, but I think we've hit that original target and we'd build a capability to just pick the best spots as we move forward inside or outside the U.S.

Jason Armstrong - Goldman Sachs Group Inc.

Great. And, Jim, just as it relates to where the potential international penetration could move to, I'm wondering is there any limitation as it relates to REIT status, is there income and asset tests that you'll be subject to? Obviously, you've got some balance sheet flexibility in terms of where you put leverage but any sort of limitation you would see as it relates to REIT?

James Taiclet

We actually don't see any limitation. I'll let Tom give you some more details but we've looked at this from every direction. All the REIT tests can be satisfied. There are other REITs with large international operations as well, historically. There are a lot of tools to stay within the REIT test and Tom can give you a little bit more there.

Thomas Bartlett

Yes. Jason, as we've said and as you all know, converting to a REIT is a tax strategy for us designed to reduce the company's tax burden and provide a meaningful distribution to our investors. We don't expect that it will impact our core business strategy or growth plans. Our international operations, as I laid out in some of my slides, will be held within the taxable REIT subsidiary structure, the TRS structure, really to allow us to retain the cash flow generated by our international operations and fund the future international growth. The net asset value cannot exceed 25% of our consolidated gross assets, but as Jim said, there are a lot of different ways for us to be able to ensure that we meet that IRS requirement with the addition of leverage, external, as well as intercompany, or even moving the international assets into our qualified REIT structures as may REITs do. So we think we have a lot of vehicles available to us to allow us to continue with that ongoing and continued growth.

Operator

Your next question comes from Batya Levi with UBS.

Batya Levi - UBS Investment Bank

Some of your peers has adjusted increased opportunity for tariff deals in the U.S. Can you talk about how you think about increasing your domestic portfolio? And the regulators have recently suggested that they're going to look at the AT&T T-Mo's 17,000 company-owned towers to see if there any divestitures to see if there are any divestitures that should be required. Do you think there could be an opportunity there and are there any limitations as it relates to the REIT status?

James Taiclet

Batya, it's Jim. On the U.S. deal side, we've been U.S. deals for as long as I've been here. We did the first major tower consolidation. We've done 4 or 5 midsized transactions over the last 18 months in the U.S. even during the financial crisis, we're able to finance and accomplish those. So we're in the market all the time and we used our 10-year DCF model on large and small U.S. acquisitions when we see one we like, we go ahead and do it. So we don't have a large number of tower acquisitions to report year-to-date. I think it was sub 130s, as far as our tower count. That doesn't mean we're not looking at many things. But we're very disciplined here and we're very disciplined in the U.S. So things really haven't changed for us. We'll take the opportunities as they come, evaluate and we'll do them when it makes sense. As far as the AT&T and T-Mobile towers, that's a regulatory issue that we'll let the government look at and we'll stand aside from it. If there is an outcome where towers are available due to that or any process that goes on in the industry, we would certainly take a look at them.

Operator

Your next question comes from Ric Prentiss with Raymond James.

Richard Prentiss - Raymond James & Associates, Inc.

I want to ask a couple if I could. On the REIT conversion process and the S-4, when do you anticipate the S-4 becoming effective and how does that fit into the timing of a shareholder meeting? And if the S-4 does not become effective, are there other options as far as the REIT conversion go?

Thomas Bartlett

Yes, Ric, we're actually -- have received one set of comments as Jim remarked and they're now responded and now we've received another one. So we're actually in the Second Amendment, if you will, phase of the S-4. The questions continue to get less, which is good and nothing that we didn't expect there at all. And we really are now planning to have this second amendment include our second quarter results which we would have normally had to do anyway. So we would expect to file that within the next couple of weeks. And we would expect over the next 45, 60 days, if you will, to be through this process. I think we're in a good step in terms of being able to accomplish that, which is consistent with our initial planning strategy to then have the -- in the fourth quarter, if you will, the shareholders meeting and then subsequent to that, the distribution. So we think we're in a good step right now. We're right where we expected to be, and as well as on the operational side, we think we'll be fully ready to be REIT ready on January 1.

James Taiclet

And, Ric, just to put a larger framework around it, the merger outlined in the S-4 is designed primarily to implement some ownership provisions that will enable our company and really any company that wants to act as a REIT to more effectively comply with the IRS regulations and standards going forward sort of into infinity. We're not close to any of those ownership standards today, we're not close by a mile to any of them. So while we believe it's prudent to put those ownership restrictions in place, then it's a traditional thing that REIT converters do, those provisions are not a prerequisite or a requirement for REIT conversion. Now that's just the framework we intend to go after, get it done, have it done by the end of the year. But for any reason that we might get delayed on the merger front, that does not necessarily preclude us from conversion.

Richard Prentiss - Raymond James & Associates, Inc.

And on the U.S. side, I know you don't want to talk about any specific contracts, as you look at master lease agreements and amendments, how do you balance the positives and negatives about your needs to show that you're collecting revenue on your towers and your empty space versus carriers needs as they go through plans? Just walk us through how you kind of would negotiate a contract or what are the puts and takes might be.

James Taiclet

Ric, there are many, many puts and takes as you know, but I think our fundamental objective is to guarantee, to the extent that we can, a rise in revenue line with each and every carrier that we've dealt with whether it's inside in the U.S. or outside. In exchange for that rising revenue line, we've got to offer value to those carriers. Some would rather pay by the drink in a way, site by site, amendment by amendment. Others would like to bundle those and have an easier planning cycle and an easier budgeting cycle for them, quicker transactions, if you've already got that more complex transaction already standardized. And so we try to meet the needs of our customer and maintain a rising revenue rate faster than we think we otherwise could and that's the whole basis of our negotiation of an MOA.

Operator

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

Jonathan Atkin - RBC Capital Markets, LLC

From a real estate perspective, can you tell us the percentage of land you currently own under your towers and where do you see that percentage growing to over the coming year or 2?

Thomas Bartlett

Yes, sure, Jon. I mean, within the U.S., about 25% is actually owned or under a capital lease and our statistic in terms are kind of over 90% is greater than 10 years. We've been fairly aggressive this year, I think, through the first half of the year, we spent about $48 million buying land and I think we've acquired over 300 parcels, if you will, of land. Our outlook for this year is $100 million. And I think we will be there or even exceed the $100 million in terms of land acquisitions. So probably doubling the kind of the parcel acquisitions that we've done in the first half of the year, so maybe over 600 or so. And we continue to build up the organization, to be as aggressive as we can where it makes sense. We do have the same disciplined approach to buying this land, as Jim identified, when we're looking at U.S. deals or any deals outside of the U.S. So we have very specific IRR requirements in terms of what we want to achieve. And generally speaking, up for renewal, if you will, within the U.S., it's 30 or 40 parcels per year that are kind of up for renewal. And our group, who is actually looking to acquire land, is actually looking at land that's going to be coming up for renewal 3 to 5 years out. So we're well ahead of the renewal schedule here, if you will. But we remain very active and we do believe that the land is a very important asset and we'll continue to be very aggressive in the marketplace. But only where the financials make sense.

Jonathan Atkin - RBC Capital Markets, LLC

Are there any operational levels you have at your disposal to accelerate that if you so chose to or is it strictly going to be IRR based and you see no need to ramp that up?

Thomas Bartlett

No, I mean, it's always IRR based. Our commitment is to continue to increase recurring free cash flow per share and ROIC. So it's always going to be IRR based, it's always going to be the kind of the foundation of it. Now having said that, there are going to be some parcels of land that are more strategic than others, but on balance, as I said, we're still actively looking at land and ensuring it meets our internal hurdle rates.

Jonathan Atkin - RBC Capital Markets, LLC

Again, on the U.S. leasing side, is there any change in the pace of second-half activity that you're expecting as a result from network vision or other projects? Or is it going to be more or less similar to the first half?

Thomas Bartlett

No, I mean based upon our outlook, it's not that different from prior years. It's 45% really in the first half versus 55% in the second half, which really does follow the normal CapEx spending of our customers. And so that's what's built into our outlook.

Jonathan Atkin - RBC Capital Markets, LLC

And then finally on a redevelopment CapEx, if you exclude the Indoor DAS that you referenced, is most of that weighted to the U.S. or is there a significant portion of that occurring internationally?

Thomas Bartlett

No, actually both. I mean, we do have the DAS investment, but we do see a significant amount of activity down in Latin America, for example. And so as a result, we're making sure that we're able to be positioned to be able to support the growth coming from the likes of Nextel International and Tim and America Movil and Telefónica, all of those that have actually secured spectrum over the last 12 months. So there's a good piece of the increase in redev coming in that particular market as well.

Operator

Your next question comes from Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co

Let's focus on the cost for a minute. Can you talk first about the U.S. SG&A? You talked about an isolated increase in 2011. Does that mean it's sort of stable from here going forward or should we look for it to sort of come back in, in 2012 and beyond?

Thomas Bartlett

No, I think overall, I mean, if you take a look at our -- kind of our $20 million increase in SG&A, half of that is actually coming from new markets, so things that we've actually acquired, if you will, over the last 12 months. And an additional $4 million or $5 million is actually coming from regionalization. Just I think a smarter way, if you will, to be able to be closer and closer to the market place. Overall, being incurred to be able to support and scale our businesses going forward. So I would expect the SG&A that we are incurring to be isolated, if you will, to 2011 such that I would expect it to come back to more historical levels and this isn't guidance, if you will, but what I would see, if you will, over in the next couple of years, they would come back to more historical levels relative to, say, a couple of years ago, if you will.

Philip Cusick - JP Morgan Chase & Co

Okay. So that's the U.S. And then for international, you have built out a lot of new markets, you bought a lot of new markets, that SG&A now running higher than the U.S., is that going to continue to grow from here or is that going to start scaling as you sort of build those markets up?

Thomas Bartlett

No, it definitely will scale. I mean, a lot of the upfront costs that we've incurred is in preparation of supporting the existing business and new business. So like the U.S., I would expect that to trail down as well and continue to support the revenue growth. And so as that revenue continues, I would expect the SG&A as a percentage of revenue to decline.

James Taiclet

Yes, that's across the management team, that's the view. Phil, it's Jim again. You've got to remember we went from 3 countries on 2 continents to 9 countries on 4 continents and there's some level of infrastructure needed to operate globally like that. We put the majority of it in place and Tom's exactly right. The growth rates in SG&A going forward, will moderate.

Philip Cusick - JP Morgan Chase & Co

So in the U.S., we can expect it to sort of decline on a dollar basis and then international, sort of scaling percentage down, is that fair?

James Taiclet

Yes. That's fair.

Operator

Your next question comes from Clay Moran with Benchmark Company.

Clayton Moran - The Benchmark Company, LLC

Could you talk about the same tower growth across your 4 largest markets, U.S., Mexico, Brazil and India? And then, the services business, have you taken that to any of these foreign markets? And if not, do you plan to?

Thomas Bartlett

Okay. Clay, let me cover the -- just on the same tower perspective. And again, remember, same tower is on those towers that we had 12 months ago, right? And it doesn't deal with the things that we've built or acquired in the last 12 months. And I would say the same tower in the United States and internationally overall is not dissimilar in kind of that 8% to 9% range. And we would expect, on the U.S. side, I think relative to what our outlook has, the continued kind of same type of same tower growth. And on the international side, I would expect it to start to increase relative particularly down in Latin America, where we've seen a lot of new spectrum being deployed, if you will, in -- across the markets, particularly in Brazil and in Mexico. And we would expect in longer-term to really start to develop the single-tower co-location market that we built in Chile, Peru and Colombia where we acquired those towers from Telefónica and have one tenant on them and we now expect to be able co-lo on those towers with other people coming into the marketplace.

James Taiclet

And, Clay, it's Jim. On the services side, just again to put it in context, it's only about 2% of company revenue to begin with. The only reason we do some of these services is to facilitate and reduce the timeline or the cycle time for a tenant to get on our tower. In the U.S., there is a range of services that we think is helpful in that regard including site acquisition and getting zoning and building permitting because some of those processes are pretty thorough. But internationally, we don't believe that all of those elements are needed. The one we might attempt to globalize a little bit is our structural engineering capability, which I frankly think is the best in the world at this particular skill set. But that's only about 0.5% of company revenues. So aside from that, you're not going to see a big deployment of our services business outside the U.S.

Clayton Moran - The Benchmark Company, LLC

Okay. Going back to the same tower growth then, India is about 8% and probably stays at about that level?

James Taiclet

I mean, today, it's generally -- I mean, I'm talking about the international market overall. And India over the last 12 months or so, we've continued to see increased levels of co-location in the marketplace. As Jim mentioned before, we would expect to see even increased build over the next 6 months. So longer-term, I think when the spectrum continuously get build out, I would hope that we might even see higher levels of same tower growth in the marketplace. Tenancy is still down in that kind of the 1.6, 1.7 range. So we remain very bullish on India.

Operator

Our last question comes from Gray Powell with Wells Fargo.

Gray Powell - Wells Fargo Securities, LLC

Just to make sure that I completely understand the updated guidance correctly. Is the $30 million increase entirely FX and acquisitions and there's no organic based upside there?

Thomas Bartlett

That's right.

Gray Powell - Wells Fargo Securities, LLC

Okay, got it. And then one chart that you guys had, I thought it was pretty helpful, it was on Slide 5 where you basically have the waterfall going from reported revenue growth to core revenue growth, to same tower revenue growth for Q2, can you kind of give us those stats or the stats that are implied by your 2011 guidance?

Thomas Bartlett

Yes. Actually, it's pretty consistent on an overall basis. I think that the same tower is going to be in that 8 plus or minus -- plus percent range and the -- actually the new sites will probably be in the 12% range such that our overall kind of on a core basis, we'll be in that 20% range.

Gray Powell - Wells Fargo Securities, LLC

Got it. Okay. And just in terms of the assumptions driving your outlook, is it safe to say that activity from AT&T and Verizon still account for, call it, half of leasing and that you haven't really baked in any potential upside to the extent that Sprint gets more aggressive in the second half of the year?

Thomas Bartlett

The way I would characterize it, Gray, is that in the U.S., AT&T and Verizon by far are the most active carriers, yes to that. And also, you're correct, on the second half of your assumption is, we don't have significant expectation in the outlook of Sprint activity at this point.

Operator

I will now turn the conference back to the presenters for closing remarks.

Leah Stearns

Great. Well, thank you, everyone, for joining us today and we look forward to speaking to you on our next quarter call.

Operator

Thank you. This concludes the conference. You may now disconnect.

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