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American Tower (NYSE:AMT)

Q3 2011 Earnings Call

November 01, 2011 8:00 am ET

Executives

Thomas A. Bartlett - Chief Financial Officer and Executive Vice President

James D. Taiclet - Executive Chairman, Chief Executive Officer and President

Leah Stearns -

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

Michael Rollins - Citigroup Inc, Research Division

Clayton F. Moran - The Benchmark Company, LLC, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Operator

Good morning. My name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Tower Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Ms. Stearns, Director of Investor Relations.

Ma'am, you may begin.

Leah Stearns

Thank you. Good morning, everyone, and thank you for joining American Tower's third 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 third quarter results then Tom Bartlett, our Executive Vice President and CFO, will review our financial and operational performance for the quarter. 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 and future operating performance, our pending acquisition, 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 June 30, 2011, our definitive proxy statement filed on October 11, 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 third quarter 2011 results.

During the quarter, our rental and management business accounted for over 97% of our total revenues, which were generated from leasing, income producing real estate primarily to investment grade corporate tenants. This revenue grew 23% to nearly $615 million from the third quarter of 2010. In addition, our adjusted EBITDA increased 14.5% to over $400 million. Operating income increased 7% to over $228 million. And net loss attributable to American Tower Corporation was approximately $16 million or $0.04 per basic and diluted common share.

During the quarter, we recorded unrealized noncash losses of approximately $145 million due to the impact of foreign currency exchange rate fluctuations related to over $1 billion of nonfunctional currency-denominated intercompany loans, which have been implemented to facilitate the funding of our international expansion initiatives and general operations. These loans, for accounting purposes, are remeasured on a fair market value basis at the end of each quarter based on the actual FX rate on the last day of the quarter end. As a result, the material strengthening of the U.S. dollar during late September, the remeasurement of these loans generated a loss for accounting purposes. It is important to note that we intend to reinvest the cash we generate into our foreign operations and therefore do not anticipate recognizing a corresponding cash loss.

Finally, before I turn the call over to Tom, I'd like to highlight for everyone that we have provided 2 new metrics in our press release this morning: Funds from operations, FFO, and adjusted funds from operations, AFFO, which have been presented on a pro forma basis as if the reconversion had occurred January 1, 2010. We believe these metrics will be helpful to our investors as we move towards our proposed REIT conversion. We've provided definitions and reconciliations for these metrics in this morning's press release, and in addition, you can find historical calculations on our website.

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

Thomas A. Bartlett

Thanks, Leah, and good morning, everyone. I am pleased to report that our business continued to produce solid operational and financial results during the third quarter and as a result of our year-to-date performance being slightly ahead of our expectations, coupled with certain recent acquisitions and events in both the U.S. and our international markets, we have raised our annual outlook for both revenue and adjusted EBITDA.

If you'll please turn to Slide 5, you will see that for the third quarter, our total rental and management revenue increased by about 23% to $615 million or 18.6% when you exclude the impact of our international segment's pass-through revenues. This pass-through revenue is attributable to the roughly 11,000 new sites we have constructed or acquired in our international markets since the beginning of the third quarter of 2010.

For the quarter, our core growth increased 24.2%, which excludes the impact of foreign currency exchange rate fluctuations and straight-line lease accounting. Our core growth reflects core organic growth of 9.1% and growth from new sites of over 15%. The key drivers of our consolidated organic growth include new business commitments in the U.S., which have been trending slightly ahead of 2010 levels. As expected, AT&T and Verizon's LTE network deployments are driving the majority of our leasing -- U.S. leasing volume.

In addition, we are experiencing strong demand in our international markets. In Latin America, for example, recent spectrum auctions are enabling our customers to launch 3G networks, and their initial overlay deployments are underway.

Our revenue growth from new sites reflects the impact of our acquisition or construction of nearly 12,000 sites globally since the beginning of the third quarter of last year. Over 90% of these new sites are located in international markets where we have focused on diversifying our portfolio across 3 key regions: Latin America, Asia and EMEA. Our results this quarter reflect the eighth straight quarter of double-digit rental and management revenue growth.

Turning to Slide 6. During the third quarter, our domestic rental and management segment generated results slightly ahead of expectations 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 9.1% to nearly $437 million. Our domestic segment core revenue growth, which excludes the impact of straight-line lease accounting, was 10.3%.

During the quarter, our domestic core organic growth was over 9%, which reflects commenced new leasing activity in the U.S. slightly ahead of 2010 levels, which as I mentioned previously, has been primarily generated by 2 of our largest customers as they focus on deploying initial coverage for their 4G LTE networks nationwide. The remainder of our core growth was generated from the over 900 sites we've acquired or constructed since the beginning of the third quarter of 2010, including the 113 sites we added during the third quarter of this year.

For the third quarter, our domestic rental and management segment gross margin increased nearly $28 million or approximately 8.8%, which reflects a year-over-year conversion rate of about 76%. During the quarter, our gross margin conversion rate was lower than historical levels, primarily due to a couple of small onetime items, which collectively depressed the conversion rate by over 5%. The largest of the onetime cost was attributable to $1.1 million in higher-than-expected property taxes. On a year-to-date basis, our domestic segment gross margin was 80%, and gross margin conversion rate was 84%, right where we would expect it to be.

Further and as we've previously highlighted, during 2011, we continue to make selective investments in systems and people throughout the organization. As a result of these initiatives, our domestic rental and management segment selling, general and administrative and development costs have increased about $5 million from the year-ago period.

And finally, as a result of our growth in gross margin, offset by our investments in SG&A, operating profit grew 7.1% to just over $325 million. Normalizing for the onetime direct expenses and our higher SG&A costs, our operating profit conversion rate was about 79%.

Turning to Slide 7. Since the beginning of the third quarter of 2010, we've continued to make significant investments in our international rental and management segment, adding over 11,000 tower sites to our portfolio, which includes about 1,800 sites added during this quarter alone. As a result, our international rental and management segment revenue has increased approximately 79% to $178 million and now accounts for about 29% of our rental and management revenues.

Reported revenue growth and core revenue growth, which excludes the impact of foreign currency exchange rate fluctuations and straight-line lease accounting, were both 79% as the favorability of foreign currency exchange rates on a year-over-year basis offset a slight decline in straight-line revenue. In addition, as we add new assets to our international portfolio, our pass-through revenue continues to increase as we share a portion of our operating costs with our customers.

During the third quarter, our international pass-through revenue was $54 million and reflects an increase of approximately $27 million from the year-ago period. Even after excluding the impacts of pass-through revenue, growth in our international segment would have been 71%. Year-to-date, organic leasing demand from our international portfolio has been steadily increasing as our customers in Latin America have begun deployments of recently awarded spectrum while our customers in India continue to focus on adding capacity and coverage to their initial voice networks.

From a gross margin perspective, our international rental and management segment increased 61% year-over-year to over $113 million, reflecting a 55% gross margin conversion rate. Excluding the impact of pass-through revenues, our gross margin and gross margin conversion rate was 91% and 84%, respectively.

Further, our international rental and management SG&A expense increased nearly $9 million from the third quarter of 2010. Nearly all of the increase is attributable to costs associated with establishing our presence 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 60% to approximately $92 million.

Turning to Slide 8. Our reported adjusted EBITDA growth relative to the third quarter of 2010 was about 14.5% with our core growth for the quarter at 16.5% on a currency-neutral basis and excluding the net impact to straight-line lease accounting. As highlighted through 2011, we have been focused on 2 key initiatives, which have resulted in lower than historical levels of adjusted EBITDA margin and conversion rates. We view these initiatives, which include our international expansion as well as regionalization of certain overhead functions as investment, which will position us to drive continued levels of growth in the future.

During the quarter, total revenue increased just over $117 million, of which approximately $27 million was attributable to an increase in pass-through revenue. Direct expenses, excluding stock-based compensation expense, increased approximately $44 million, of which approximately $27 million was attributable to the increase in pass-through costs, and nearly $7 million was attributable to direct expenses in our new markets.

Finally, SG&A, excluding stock-based compensation expense, increased $22 million from the year-ago period, of which slightly more than half was attributable to new market or regionalization cost. Normalizing for the impact of pass-through, our new markets in our regionalization investments, our adjusted EBITDA conversion rate was 78%. For the quarter, our adjusted EBITDA margin was 64% or nearly 70% excluding the impact of pass-through revenues.

As outlined in Slide 9, we continue to deploy our excess capital first into discretionary investments through our capital expenditure program. During the third quarter, we spent $90 million on discretionary capital projects, which includes the costs associated with the completion of the construction of 682 towers, including 57 sites in the U.S. and 625 sites internationally. For the quarter, the majority of our international new tower builds were in India where we are working on a build-to-suit project for both Reliance and Vodafone and the remainder were primarily in Mexico, Brazil and Chile. Year-to-date, we've exceeded our build-to-suit expectations and have now completed the construction of 204 sites in the U.S. and 946 sites internationally.

In addition, we continue to gain traction in the U.S. on our shared generator product line. And during the quarter, we completed the installation of approximately 250 shared generators.

Our discretionary property purchase program continues to be successful securing additional interest under our existing tower sites and have invested about $80 million year-to-date, and on a pro forma basis, as a result of our recent acquisition of land interest during the fourth quarter, we currently own over 20% of the land interest under our U.S. sites.

Our spending on redevelopment capital expenditures, which we incur to accommodate additional tenants in our properties, has trended up during 2011 primarily as a result of 2 key factors: First, in the U.S., we are working on upgrading our Indoor DAS portfolio in Las Vegas LTE. Second, as activity picks up in our legacy Latin American markets, certain sites require further augmentation to accommodate the additional capacity needs of our customers. Finally, our capital improvements and corporate capital expenditures have simply increased as a function of our tower portfolio growth.

From a capital allocation perspective, year-to-date, we spent nearly $400 million on capital expenditures and over $1.2 billion on acquisitions, which includes the acquisition of 135 sites in the U.S. and over 3,600 sites internationally. Finally, we've spent nearly $400 million to repurchase about 7.6 million shares of our common stock.

Looking forward to the remainder of 2011, we continue to have a robust development pipeline, which will continue to utilize a portion of our remaining investment capacity to close these transactions. In addition, and as we have previously disclosed, we expect to make an accumulated retained earnings and profits distribution during the fourth quarter as we move toward our conversion to a REIT on January 1 of next year.

Turning to Slide 10. During the third quarter, our investment strategy and capital allocation process continued to drive growth in recurring free cash flow and return on invested capital.

I'd like to spend a moment reviewing our track record of deploying capital while simultaneously increasing recurring free cash flow and return on invested capital.

Since 2006, we've invested approximately $7.7 billion in capital expenditures, acquisitions and stock repurchases, all while driving compounded annual growth in recurring free cash flow and recurring free cash flow per share of about 13% and 15%, respectively. As many of you know, we are very disciplined as to how we allocate capital. We first seek to reinvest into our business through our capital expenditure program. Our next priority is to invest through acquisitions, both in our existing and potentially new markets. Finally, when our opportunities for reinvestment in assets, which exceed our risk-adjusted return hurdles are exhausted, we deploy our excess cash flow through our stock repurchase program.

We believe we are able to maintain this process largely as a result of our solid balance sheet position, a position we plan to maintain. Throughout this process, our objectives are clear: To continue to concurrently drive growth and return on invested capital and recurring free cash flow. We believe this capital allocation strategy will create significant value for our stockholders and believe our track record stands for itself.

On Slide 11, we've updated our outlook for the year. We are raising our rental and management revenue outlook by $25 million to $2.3.75 (sic) [$2.375] billion at the midpoint, which reflects stronger core business performance of $30 million, which is partially offset by approximately $20 million of foreign currency headwinds compared to our prior expectations and the positive impact of $15 million of straight-line revenues related to a newly executed master lease agreement signed with a major U.S. customer.

Our expectations for stronger core business performance are primarily attributable to better-than-expected levels of new business in our legacy markets, primarily the U.S. and Latin America during the second half of 2011, increased corresponding levels of pass-through revenue due to the addition of new international sites and finally, at the impact of our recent acquisition of about 2,000 property interests, which closed in early October. As a result, we now expect 2011 rental and management revenue to grow by about $440 million, generating annual core growth of almost 22% 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 $1.59 billion for 2011. The increase in adjusted EBITDA is attributable to the increase in revenue previously described. As a result, for 2011, we now anticipate adjusted EBITDA to increase over $240 million, generating annual core growth of 16% at the midpoint.

With respect to capital expenditures, we are increasing our expectations for spending by $75 million at the midpoint, which reflects slightly higher maintenance CapEx, approximately $20 million of additional land interest purchases and $50 million in additional discretionary capital project spending, which we anticipate will be primarily be incurred in connection with the completion of new sites.

For the year, we now expect capital expenditures of $500 million at the midpoint and to complete the construction of between 1,600 and 1,800 new sites. Finally, we are increasing our outlook for cash provided by operating activities by $5 million, which reflects the cash impact of our expected increase in adjusted EBITDA. As a result, we now anticipate cash provided by operating activities to increase by $100 million or approximately 10% at the midpoint.

Turning to Slide 12. We continue to have a strong development pipeline through both our build-to-suit program and pending acquisitions. Our outlook for 2011 currently reflects our completed acquisition of about 2,000 property interests in the U.S., as well as our fourth quarter build-to-suit plan of approximately 450 to 650 sites. Incremental to these investments, we currently have approximately 2,900 additional existing sites under contract, which we expect to acquire over the next year. And our development teams continue to be very active seeking further opportunities for expansion.

Turning to Slide 13. And in conclusion, I'd like to spend a few moments on our remaining objectives in 2011 and provide some context for our expectations in 2012. First, we believe our continued investments globally will generate significant value for our shareholders as our track record has demonstrated. Specifically for the full year of 2011, we expect we will have invested almost $1 billion in the U.S. and just over $1 billion in our international markets through our capital program and acquisitions.

With respect to our REIT conversion, we remain right on track to be able to operate as a REIT on January 1 of next year. Recently, we successfully completed a key milestone as our S-4 was declared effective by the SEC on September 22. In addition, our proxy statement materials have been mailed to stockholders, and we will be holding a special stockholder meeting on November 29 where stockholders as of October 3 will be asked to approve the proposed merger of American Tower Corporation into American Tower REIT. Our NYSE ticker symbol, by the way, will remain AMT.

The merger will affect certain charter provisions to ensure we comply with REIT-related share ownership regulations. In addition, we continue to make substantial progress on our internal work streams. And 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 will be paid using cash on hand. We expect we will provide final certainty around the size of this distribution following our November 29 stockholder vote, as well as guidance regarding our first quarter and full year 2012 dividend.

Please note there's no guarantee that we will ultimately elect REIT status, and the election is subject to board approval. And finally, any determination to elect REIT status will not be made until the end of the year.

Finally, while 2011 has been a very successful year, we believe 2012 will provide further compelling opportunities for us to generate solid financial performance. While we will not issue formal guidance until we report our fourth quarter results in February, I'd like to spend a few minutes framing our expectations for core growth in 2012.

First, we expect the key drivers of core growth, including commenced new leasing activity, escalations in churn to be at comparable levels to 2011 in our domestic segment. In addition, we expect that our new markets will begin to contribute in an even more meaningful way to our commenced leasing activity, driving higher levels of new business on a consolidated basis. Further, we've made some significant investments this year, which we believe will generate meaningful incremental revenue in 2012.

From a margin perspective, we've made select investments over the last 18 months to scale our business to support our growth initiatives globally, particularly in the area of SG&A. Looking to the future, we will remain focused on driving SG&A as a percentage of revenue to more historical levels.

With that, before I turn the call over to Jim, I'd like to take a moment to thank everyone within the organization who has worked tirelessly to ensure we are REIT ready January 1 of 2012. Jim?

James D. Taiclet

Thanks, Tom. I'd like to begin by also expressing our appreciation to American Tower's managers and employees around the world that have delivered the company's first ever quarter of rental and management revenue above $600 million for one quarter and adjusted EBITDA of over $400 million for the quarter. With greater than $600 million for Tower revenue and over $400 million for EBITDA, these are truly memorable milestones for our company and our people.

Before we move on to your questions, I would like to focus on 3 areas today: Additional detail on our capital allocation process that Tom overviewed earlier, the beneficial attributes of communication site real estate what we all affectionately refer to as towers, for short, and the major industry trends that we anticipate for 2012 that will underpin our formal guidance that we'll provide to you early next year.

As Tom emphasized earlier, the fundamental principle of our capital allocation process is it is designed to both drive growth through reinvestment in the business and increase our risk-adjusted return on capital that's invested. We measure the inorganic growth of each of our investment proposals at 3 levels: Leasing revenue, adjusted EBITDA and recurring free cash flow, which is essentially equivalent to adjusted funds from operations.

So to determine the risk-adjusted return of a project, we increase the hurdle rates to such factors as degree of tenant concentration on the lease stream, credit ratings of the major tenants and the sovereign debt spread versus U.S. treasuries if the investment is outside the United States, et cetera. We then overlay the growth and return profile of the investment opportunity over the baseline 10-year business plan for American Tower Corporation, which assumes that excess cash from operations in the baseline case is all returned to shareholders via our stock repurchase plan. If and only if after this modeling, the AFFO and ROIC performance over the planning period exceeds that base case, do we go through with the investments. This deliberate process institutionalizes a high level of discipline to our capital allocation program. We believe that this disciplined process should provide our investors with a very high confidence level that our investments in construction projects and acquisitions are superior to simply and only buying back stock.

Since we hold a strong belief that superior performance for equity holders can be attained through disciplined investing and communications real estate assets, it obviously follows that the wider the universe of investment opportunities, the better the prospects for driving shareholder value. Consequently, we have diligently pursued the expansion of the investment opportunities available to American Tower on 2 dimensions: One is an international dimension, and the other is the product line dimension.

Tom provided earlier some of the key facts and figures such as 29% of Q3 tower revenue coming from international, nearly 80% leasing growth in that international segment and the pro forma for potential deals in the pipeline that over 50% of our towers for the end of this year would be outside the United States.

You also heard that in the U.S., we're accelerating our shared generator product deployment, upgrading our highest profile Indoor DAS properties to LTE and have acquired a sizable portfolio of land interests that brings another lease revenue stream, primarily from our existing domestic customer base.

So let's take a few minutes to drill down into a couple of recent investment decisions, one international and one product line extension. First, we will review one of our recent investment initiatives in Latin America. Earlier this year, we acquired the assets of a third-party tower leasing company in a market in which we've been operating for upwards of 10 years. We have an experienced leadership team in that region and a proven workforce in country, and we determined that we could essentially eliminate the acquired company's SG&A costs. The target's existing lease upgrade was relatively high. Its customer base was quite diversified and well complemented our own existing rent rule in that country. The towers also demonstrated strong additional leasing prospects due to recent spectrum auctions and 3G rollouts that we're getting underway.

All these factors gave us high confidence in our modeling assumptions and led us to an expected internal rate of return on investment in the mid-teens, which is above our risk-adjusted hurdle rate for that country and that kind of asset.

The second example of the disciplined investment approach that we take was our acquisition of 1,800 property interests in the U.S. that we announced a few weeks ago. This transaction provided 3 strategic benefits to American Tower: One, it entails a substantial lease stream from an adjacent asset class, land rights under towers. The vast majority of this lease stream is from our existing customer base, including AT&T, Verizon and Sprint Nextel. The lease stream escalates offers upside if the carrier needs additional rights in the future or nears the final termination date. And this lease stream is far less likely to experience any kind of churn.

Two, we secured land interest under a number of our own towers, which protects our long-term tower lease stream while reducing our run rate operating costs along the way.

Third, a portion of the land interest were under other tower company structures, providing us a vehicle to potentially arrange follow-on transactions with other third-party landowners. We've already accomplished one of these assets in cash land swap initiatives, to secure land interest under an additional significant number of our own towers. So even without quantifying any of these types of potential follow-on benefits in the valuation of the original land deal, our analysis led us to the conclusion that the overall return on that investment should have been above our risk-adjusted hurdle rate for domestic market in this asset class.

So let's now turn to the real estate-related benefits of all these kinds of assets. The vast majority of American Tower's assets are clearly real estate-type investments. As we move closer to our REIT conversion, we're engaged in an active outreach program to introduce American Tower and the industry to dedicated real estate investors. Our message includes, we think, a number of compelling aspects, which should resonate with both dedicated REIT investors, income and value-focused investors, as well as our historical base of growth and telecom investors as well.

First, we generate approximately 97% of our income from leasing our tower sites and other land parcels, primarily through investment grade tenants. Our properties are long-lived structures currently depreciated over 20 years, some of which have been in service for over 50 years indicating their even longer physical lives. Unlike the capital equipment that our customers install, which generally has a much shorter useful life and requires significant ongoing capital investment to maintain and upgrade, our business requires relatively little maintenance CapEx.

Second, we're technology agnostic. Our customers bear the risk associated with technology selection and obsolescence. And as the result of the laws of physics, there's currently no substitute technology that can replicate the signal propagation characteristics that our customers can achieve from installing on traditional macro tower sites.

Third, just like office buildings, tenant improvements are often made on our sites when new tenants and existing tenants choose to occupy space in our towers. Generally, contributions to these tenant improvements are shared by the new tenant and by us.

Fourth, our revenues grow, not only as annual escalation enhances our existing leases and new tenants come on to our properties, but also as our existing customers increase their utilization of space at our tower sites. This occurs if additional equipment is needed to support technology upgrades as our customers network capacity becomes constrained, resulting in rate-enhancing amendments to our leases.

And finally, as we look through the real estate lands, and as I highlighted earlier, we have a solid track record of deploying the significant cash our business generates under a disciplined, institutionalized investment process. And we're committed to maintain our historical capital allocation priorities as a REIT.

We are planning to initiate a quarterly dividend in early 2012, which should be an additional attraction for value and income-focused investors, too. Once we have funded the quarterly dividend distribution to maintain our REIT qualification, we will continue to actively seek investments that exceed our risk-adjusted investment hurdles.

We strive to identify and consummate acquisitions and construction programs to generate unlevered IRRs depending on the type of asset and its location, ranging from the very high single digits for core assets in the U.S., high teens or even low 20s for tower assets in places like Africa. We believe that the combination of our growth and recurring free cash flow or adjusted funds from operations and our future dividend to stockholders will create a compelling investment opportunity for real estate, value and income and growth-oriented investors.

Turning to the key industry trends that will influence next year's planning and guidance. We're now in the midst of our internal budgeting process for 2012. This process begins with a bottoms-up assessment within each of our 5 U.S. regions and each of our international markets that aggregates the detailed forecast of every one of our local sales teams by territory and by customer.

We endeavor to confirm our projections via discussions with executives and senior managers and our customers and further test our conclusions against the public statements that are made by carriers regarding their technology rollout schedules in 2012 capital expense budgets.

As has been our practice, as Tom said, we'll provide our formal 2012 guidance during our next earnings call to enable us to include the latest and most accurate inputs regarding our own 2011 year-end run rate, all closed acquisitions from which we'll be receiving new lease revenues in 2012, all publicly announced wireless carrier budgets and foreign exchange rates.

But many of the key trends that will underpin our ultimate 2012 numbers are already evident today. Regarding the addition of assets, we believe that we're on track to add nearly 3,000 new towers that are not in current 2011 guidance in Ghana, Colombia and South Africa by the end of this year or very early next year. Moreover, we expect to build approximately 500 new towers in the fourth quarter this year, primarily in India and Latin America. We'll enjoy the benefits of all these newly constructed towers, as well as the more than 2,000 land interest that we recently acquired for the full year of 2012, and we'll incorporate all that into our guidance.

Our locally deployed business development teams in the U.S., Latin America, EMEA and Asia are also pursuing additional acquisition opportunities, and we're also hopeful some of these will come to fruition during the year in 2012.

With respect to leasing demand, there's a number of supportive trends. In the U.S., we expect customers and consumers to continue to convert from basic feature phones up to smartphones while at the same time, the popularity of tablets, mobile computing and media devices further increases. Penetration of these advanced devices is being strongly encouraged by all the domestic national carriers especially the ones you just heard do their calls over the last few days: AT&T, Verizon and Sprint, with 3 of them aggressively marketing the iPhone.

Adding to this trend are the regional and value-oriented carriers who are now also marketing smartphones to their customers and installing LTE into their networks. As to build plans, we expect AT&T and Verizon to continue on their current pacing of network investment, with potentially Sprint and perhaps other carriers becoming more active in site leasing and amendments as we cross into 2012.

At the moment, we expect demand for tower space from U.S. carriers in 2012 to be at least as strong as we are experiencing this year. We do not plan, at this time, to include any significant contributions from Clearwire, LightSquared to issue a federal public safety network, but we would add these in later if funding and build-out plans are announced by any of them.

In Latin America, we anticipate that America Móvil and Telefónica will compete vigorously in multiple countries in which we are present and that they will both be investing in strengthening their respective networks to do so. We also expect Nextel International continue to invest in its infrastructure in multiple countries to deploy new 3G spectrum and services.

A couple of other examples are Iusacell in Mexico, which now has access to additional funding through its arrangement with Televisa and Oi in Brazil also seems now poised to have the financial capacity to augment its network. In Sub-Saharan Africa, we're getting excellent traction in introducing the commercial collocation business model into South Africa and into Ghana. So we're looking forward to some nice organic growth there. And in India, the major national carriers are beginning to accelerate their network build-out efforts.

We are currently seeing strong demand for build-to-suit towers that should continue into next year in India, and we're seeing their wireless carriers increasing their outsourcing of new tower builds and collocations.

Finally, we have no known sources of significant incremental churn in any of our markets in 2012 that we're aware of at this time.

Just one last item before we take your questions. We continue to press forward toward our plan to be fully prepared for REIT conversion as of January 1, 2012. Most all of our investors by now should indeed have received documents related to our shareholder vote scheduled for November 29, as Tom said, only a few weeks away. These materials contain important information explaining the proposed reorganization to facilitate a conversion to REIT for federal tax purposes. And if you have any questions about any of the materials or the meeting, please feel free to contact our Investor Relations team.

And as we ask the operator to open up the lines for Q&A, I will remind everyone that we will

make no lengthy public statements nor answer any questions on the recent and devastating collapse of the Red Sox. All we'll say at this time is wait till next year when the newly constituted management team and team of players will surely climb to the top of the heap in AL East again.

Operator, you can open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come from the line of Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

I guess we should just start on you talked through 2012 pretty well and you made it pretty clear that there's no sort of pending Alltel churn. Can you talk, though, about the potential -- the sort of market for new builds out there? As SBA reported, they talked about a little bit weaker new build activity. Is new build sort of coming down? Is it becoming more competitive to be out there? What do you see?

Thomas A. Bartlett

Actually, Phil, on a global basis, our build this year will be 1,600 to 1,800 towers. We'll obviously provide guidance in February of where that is, but I would expect to see similar levels of build programs next year. We've seen increased levels of builds even within the U.S., and I think our U.S. tower team would tell me that the pipeline there is as strong as ever. So I would expect us to be able to continue with strong build program, both in the U.S. and as I said, when you couple that with some of the international markets where they're really still not just filling in the whitespace but really trying to reach, get reach and coverage in many of these markets, I would expect a pretty robust build program next year as well.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. Can you talk about the services business, not necessarily guidance? But as you think about 2012, we could see ramping up in demand. How well are you able to sort of flex that business up if those demands will get bigger?

James D. Taiclet

Phil, it's Jim. Our target objective for our services group is to facilitate and speed up lease collocations and amendments on our own sites. So we can flex that activity as much as we need to, to make sure that our customers get served on our towers, and so we've done that over the last couple of years. It's reflected in revenue going -- it can be up or down 20% a year in that business, but it's only 3% of our total revenue stream deliberately, and we can flex it as much as we need to facilitate people getting on our sites.

Operator

Your next question will come from the line of Michael Rollins with Citi.

Michael Rollins - Citigroup Inc, Research Division

If I just go back to one of the slides that you put up on just the how do you get to the rental and management growth for the third quarter. I thought 2 of the interesting items were that the escalation remained a little bit above the average, but the churn showed some real significant improvement. Can you talk about those 2 variables going forward and how we should think about average escalation on a cash basis and the cancellation rate? And then finally, just on the domestic core growth, you were saying that you thought 2012 could be consistent core growth to '11. What's the core growth in '11 that we should be thinking about? I think you said it was 9% in the third quarter, but just a basis of comparison would be great.

Thomas A. Bartlett

Sure, Michael. It's Tom. First on the last one, our core U.S. core growth this year is around 9%, and I would expect that to be able to continue going forward. Relative to the escalations, I think that the escalation rate going forward, it can vary to a certain extent depending upon contracts of that sort. I mean, we've generally told people that our escalation rate is kind of in the 3.5% rate. But remember from an international perspective, we also have CPI that can fluctuate at plus or minus. So it's 3.8%. I'd say it's kind of the middle 3s, if you will, is probably a fair number. And relative to churn, yes, it is a little bit lower this year. Last year was a bit higher. As you remember, we had the conversion as we talked about in the broadcast side, from analog to digital. But again, I think going forward, churn at kind of that 1.5% rate is probably a pretty good number.

Operator

Your next question will come from the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG, Research Division

I guess it looks like you locked in a new master lease agreement with Sprint, and we've seen that these agreements had been approached differently by different tower companies with different carriers. So in some cases, you kind of just start getting a full payment on day one with no real escalation. Other cases, these agreements kind of lay out the rules of the road to establish what you would get paid if certain criteria are met. Could you just maybe qualitatively talk about how this particular agreement was structured, particularly the extent to which it gives you the opportunity to achieve upside?

James D. Taiclet

Yes, Brett, it's Jim Taiclet. Over the past 2 years, we've been really seeking to elevate our relationship with each of the 4 major U.S. carriers on a contractual basis. The objectives we've had have been to meaningfully contribute to the success of our major customers as they transition to the next generation of technology. But we got to acknowledge along the way the complexity of the transitions with respect to their spectrum positions, equipment loading and changes, many other factors that they're facing. And another goal from the customers' perspective for us was to streamline the application approval process, integrate systems and things like that to reduce the time and reduce the cost of their rollout for them, okay? On our side, our goal has been to lock in steady and significant increases in net leasing revenues from each of these customers for a multi-year period. The elements of that are really that we get a robust top line growth and a core contract by increasing our customers' flexibility within the business base they have with us. And that essentially also eliminates churn risk over a long period of time by doing that. We also, in these arrangements, provide for additional upside to our revenues and I think that's the heart of what you're really asking. So when there's requirements for new assets or things above certain bucket rights, et cetera, then there'll be incremental revenues at a site basis that kick in on top of all that. And so that's how we've striven to elevate our relationship with the customers. And again, it's very beneficial and you get a predictable revenue ramp over time and really eliminate any kind of major churn incident or event based on technology change or something else. We're now halfway there in reaching these types of comprehensive agreements with our large U.S. customers. We've got 2 out of 4 done. In 2010, many of you surmise that we secured such an agreement with AT&T, and today, I'm pleased to confirm that we've also done so with Sprint. Those contracts are different in their terms individually, and we won't necessarily go through each of those today. But we're going to continue to seek elevated contractual relationships like this with all of our major customers inside and outside the U.S. as appropriate over time because we believe these kinds of elevated arrangements are truly mutually beneficial. And again, the basics are they facilitate our customers' technology transitions and they provide us with strong visible line of new growth for American Tower, which essentially eliminates churn during these network transitions. And so that's what we've got in place with Sprint. We think it's going to be good for their migration to their new technologies, and we think it's going to be great for us. So that's really the announcement today for Sprint.

Operator

The next question will come from the line of Ric Prentiss with Raymond James.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

A couple questions. First, Jim, you had mentioned leasing demand for '12 in the parameters and framework, if you will, that T and Verizon would continue and there is potential for Sprint and others to get active. Since you've now announced officially that Sprint with the MLA, have you seen a flow of applications start once you've signed the MLA? Or what are your thoughts as far as what might be changed from AT&T [ph] Verizon continue and Sprint may be active?

James D. Taiclet

Well, we've got a situation where our revenue stream is very confident right now. And the over and above fundamental contract piece, we will see as the year unfolds. So that's the interesting part for us, which is a really nice revenue ramp that's guaranteed with again 2 of our 4 major customers in the U.S. for 2012, and then how much of the over and above are we going to see that comes on a week-by-week basis from each of the carriers that have these kinds of contracts. So that's what I'm referring to, Ric.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Okay. So it's not that you don't expect it to occur, you're just waiting for it to occur, kind of?

James D. Taiclet

Well, in magnitudes, timing, what's within, what's in addition to rights, how many new towers they may need to build or DAS systems, those kinds of things will evolve over the course of the year.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Okay. And then, Tom, you had mentioned, I think, on a couple of slides the regionalization for future growth on the domestic SG&A line, help us understand a little bit about what you're thinking that might lead to.

Thomas A. Bartlett

Well, I think overall right now, if you take a look at the third quarter, Ric, I think our SG&A is north of 10% of revenue. And that's quite a bit above where we've been historically, and we've invested -- if you take a look on a year-over-year basis, about $22 million of additional SG&A this quarter. And well over half of that are for these types of events, either entering new markets or regionalization, putting systems in, kind of boring things, right? Like putting new general electric systems into Ghana and those types of events, which are very important obviously to us. So I would expect that those rates start to trend down well below the 10% level, and I think our historical levels are more in the 8.5% level. So I would hope that over the next couple of years that we would be able to trend back down towards those levels. We're very focused on doing that.

James D. Taiclet

Right, Tom, and it's really a revenue growth ramp that we'll be able to more than cover these investments in SG&A. That's what they're meant to do is to enable the revenue growth ramp in different places and different products.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Appreciate the AFFO information. That was good to see. Do you expect that in 2012, you will actually provide that officially in guidance as well?

Thomas A. Bartlett

Yes, Ric, I think we will. And I think it's very important to provide as many different to be as transparent as we possibly can with every aspect of our business, and investors are looking for that type of information. So clearly, we'll be providing it.

Operator

Your next question will come from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Tom, I know you're not going to give dividend guidance until a little bit later on here. But can you just talk philosophically about how you're likely to use the NOL balance, where you think it's going to end the year and how that's going to phase in and offset dividends over the next couple of years? And then just a clarification on the Sprint MLA. Sprint has been talking about turning down iDEN by the end of '13. I think your leases extend a lot longer than that. Is one of the flexibilities they've got here is the ability to turn off some of those sites quicker than maybe your leases would allow them to give them, to offset that with the new demand that you see over the long term?

James D. Taiclet

Simon, it's Jim and I'll turn it over to Tom on the NOL balance. But the key facet for us on this particular agreement is we will not have a revenue, an adverse revenue effect from iDEN sites being moved, turned off, decommissioned or anything else. So we have a holistic agreement with Sprint now where we're working with them on their overall network. And whether an individual technology moves off in a certain year or a different year is really going to be irrelevant to us now. So iDEN churn is not an issue for American Tower at this point.

Thomas A. Bartlett

And Simon, relative to the dividend, as we've been dialoguing, I mean, the way we continue to look at our return is on a total shareholder basis, largest piece of it coming from growth as we've been able to generate. And I think with the pipeline that we have in place and the base of business that we have, we're quite comfortable and excited about the kind of growth going forward. I think if you take a look at the overall yield what we've been discussing is the fact that our yield will be, I believe, consistent with those S&P 500 companies with similar growth characteristics, which has historically kind of been in that 1.5-plus kind of percent range out of the gate. We will have NOLs of probably north of $1 billion going into 2012. So my sense is that we'll be feathering that in on a pretty much an even basis over the planning period. And if you can just kind of wait for 30 days or so, we'll be providing more visibility in terms of what that is once the board ultimately approves what that payout ratios, including both the E&P distribution this year, as well as then what 2012 dividend program would look like.

Operator

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

David W. Barden - BofA Merrill Lynch, Research Division

Maybe just quickly 2 if I could. Tom, you referenced the organic growth in the international markets, which you think will be accelerating and contributing to 2012. Could you share with us kind of what those international organic growth rates are maybe divided into kind of India and then the other, maybe Latin America bucket? And then the second question, just because these metrics are new, I think to a lot of people with respect to the AFFO calculation in particular, Tom, there's some new items that we're talking about here like corporate CapEx or dividing up the depreciation between the core assets and non-core assets, could you kind of walk us through the calc in kind of how you've come to some of these numbers as a baseline?

Thomas A. Bartlett

Sure, sure. David, first of all, with regards to kind of commenced new business, I would tell you that our -- from an international perspective and I'd like to keep it the international and domestic business, our domestic -- our international business in the third quarter of 2011 was 3 or 4x versus where it was in 2010 at the same period. And a big contributor of this was clearly the new Latin American markets, the 3 new markets there as well as the 2 new African markets. And so we would expect as new spectrum gets deployed and networks are getting rolled out there that we would be able to enjoy some really nice growth, I think, in all of the new markets, those as well as some of the new things that are going on within Mexico as there's new spectrum down there and new entrants into some of our Latin American markets, so...

James D. Taiclet

Tom, I think we can also add we look at our international business then we report it as a segment because we look at it as a portfolio type approach, right? So the best way for, I think, us to talk about and advance the business internationally is the combined organic growth rate, which is about 9% in 2011. We think it could be at that or better next year because of some very good things happening in these individual markets. So we won't necessarily break out country-by-country. None of them are over 10% of revenue anyway. But collectively, they're touching on almost 30% now and that vibrancy within that portfolio is what we're really after.

David W. Barden - BofA Merrill Lynch, Research Division

So roughly the international operations core growth rate is similar to the domestic, but accelerating?

James D. Taiclet

That's a fair statement, yes.

Thomas A. Bartlett

And with regards to your question on FFO as well as AFFO, you can see that in the press release, the one adjustment -- and by the way, these 2 particular items are pretty well thought through and defined from NAREIT. So we're really just conforming with the kind of the NAREIT definitions. But in FFO, what we're really adding back is that cash tax component, if you will, as well as the real estate-related depreciation, amortization, which again is a defined component within the NAREIT index for FFO. And then going for AFFO, we have talked about it in terms of being very similar to our recurring free cash flow. The main difference between the 2 is how we're considering the redevelopment CapEx, or recurring free cash flow we're deducting it for AFFO or not. So you can see that the capital improvements, capital expenditures and corporate capital expenditures are similar to how we would think of recurring free cash flow, but what you don't see in there are those associated with the redevelopment CapEx. And the additional item there is the non-real estate-related depreciation, which is just when you add it to the real estate-related depreciation, you come up with 100% of the depreciation, amortization expense. So hopefully it's pretty well defined there. We've given a fair amount of breakout relative to -- we always do straight-line revenue and expense, but hopefully gave a fair amount of details so that people can reconcile between the 2. But as I said, they're aligned identically really to the definitions that NAREIT has outlined.

David W. Barden - BofA Merrill Lynch, Research Division

And Tom, if I could, just a quick follow-up on that would be is this quarter, as we look at this kind of corporate CapEx as a percentage of total CapEx and then real estate depreciation as a percentage of total depreciation, is this a typical quarter? Should we be looking at kind of the year-to-date as we try to think about next year's calculations?

Thomas A. Bartlett

No, I think it's a pretty typical quarter. As we've mentioned before, David, the redev and capital is up a little bit this year just because of some of the things that we're doing relative to a project out in the U.S. tower business and what we're doing relative to LTE and DAS. IT -- our IT group might be slightly higher just because -- on the capital side because -- corporate capital side because we're deploying Oracle now, for example, in many of our new markets. So that may be a bit high and so you might be able to bring that one down a bit going forward. But I think generally speaking, it's pretty typical quarter.

James D. Taiclet

Yes, and that's validate our -- or you could get a little bit more detail on Page 13 of the press release, guys. So 2010 capital improvements, which is maintenance CapEx typically defined, the last year was about $9 million in the quarter. It's about $19 million this year. So we did have that one project in there that made up almost all that difference. That won't be happening past the middle of next year. And as Tom said, corporate CapEx, which for the most part is IT related, for us is up $1.5 million from last year's quarter. So exactly what you were describing, Tom, but the numbers are available to you guys in the press release.

Operator

Your last question will be coming from the line of Clay Moran with Benchmark Company.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Yes, so there's the potential for sizable portfolios to come to market domestically, say, over the next 6 to 12 months. I'm just wondering how you view domestic versus international expansion today and how you sort of look at your portfolio with 50% of your towers internationally. And in particular just wondering is there further benefit to scale domestically? And what's your perspective on the revenue share model?

James D. Taiclet

Sure, Clay, it's Jim. The great thing about our 5-year investment and putting really senior and capable business development teams around the world is that we can confidently bid on large or small portfolios or new product lines anywhere in the world and right at the top of the priority list would be a domestic acquisition opportunity. So we would treat that exactly along the lines that I talked about in my prepared remarks, the modeling approach that we take. We would match that up against all the other opportunities we have and our hurdle rates and we'd go ahead and go forward with that, if it became available, at the right price and the performance in the asset was there in our view. So it would certainly be something we'd be interested in. But the great thing is even if that doesn't happen next year and if the U.S. acquisition opportunity doesn't come to market, we'll have plenty of chances in other places and along other product lines. Did that cover it for you? Okay. Good. All right. Tom, you want to wrap it up?

Thomas A. Bartlett

Yes, thank you very much, everybody, for listening this morning. As I said I think we had a terrific quarter. We're working hard for you finishing out the year and position us well for 2012, and we look forward to sharing some of our thoughts on that in February of next year. Thanks very much.

Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.

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