American Tower (AMT) CEO James Taiclet on Q1 2016 Results - Earnings Call Transcript

| About: American Tower (AMT)

American Tower Corp. (NYSE:AMT)

Q1 2016 Earnings Conference Call

April 29, 2016 8:30 AM ET

Executives

Leah Stearns - SVP, Treasurer and IR

James Taiclet - Chairman, President & CEO

Thomas Bartlett - CFO & EVP

Analysts

Ric Prentiss - Raymond James

David Barden - Bank of America

Amir Rozwadowski - Barclays

Mike Bowen - Pacific Crest

Jonathan Atkin - RBC Capital Markets

Jonathan Schildkraut - Evercore

Colby Synesael - Cowen & Company

Matthew Niknam - Deutsche Bank

Brett Feldman - Goldman Sachs

Philip Cusick - JPMorgan

Simon Flannery - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the American Tower First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]

And at this time I'll turn the conference over to your host, Senior Vice President, Treasurer and Investor Relations, Ms. Leah Stearns. Please go ahead.

Leah Stearns

Thank you, Tony. Good morning everyone and thank you for joining American Tower's first quarter earnings conference call. Our agenda for this morning's call will be as follows: First, I will provide some brief highlights from our financial results. Next Tom Bartlett, our Executive Vice President and CFO will provide a more detailed review of our financial and operational performance for the first quarter 2016, as well as our full year 2016 outlook. And finally, Jim Taiclet, our Chairman, President and CEO, will provide a brief update on the US mobile market and our strategy. 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 expectations regarding future growth, including our 2016 outlook, foreign currency exchange rates and future operating performance, technology and industry trends, anticipated closings of signed acquisitions and the impact of recently closed acquisitions, 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-K for the year ended December 31, 2015 and in the other filings we make 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.

In addition to this morning’s press release, we’ve posted a presentation which we’ll reference throughout our prepared remarks under the Investor Relations tab on our website. In addition on our IR website, you will also find our quarterly supplemental package which includes expanded disclosure on the components of our revenue and revenue growth including historical trending of our run rate revenue, which reflects revenue associated with tenant leases that are typically non-comparable and include renewal options as well as annual escalation provision. We believe this disclosure will provide investors with greater visibility into the key drivers of our revenue model and a simple base line on which to model our business.

Accordingly we have introduced a new metric to track the currency neutral growth of the organic components of our run rate revenue, which we will refer to as property revenue run rate organic growth. To the extent you have any questions on the new disclosures please don't hesitate to reach out to myself or another member of our Investor Relations team.

So, with that please turn to slide four of the presentation, which highlights our financial results. During the quarter our property revenue grew over 19% to nearly $1.27 billion. Total revenues grew over 19% to nearly $1.29 billion. Adjusted EBITDA grew over 15% to approximately $833 million. Adjusted funds from operation increased by over 17% to approximately $602 million and net income attributable to American Tower Corporation common stockholders increased by over 35% to $248 million or $0.58 per diluted common share.

And with that I would like to turn the call over to Tom.

Thomas Bartlett

Thanks Leah. Good morning everyone. As you can see from the results we released this morning, we had strong start to 2016 with solid organic core growth in revenue and good margin performance across our global asset base. We also distributed our first quarter common stock dividend of $0.51 per share, which was up over 21% from the prior year period. And just last week we closed our previously announced Viom transaction in India. Our teams in India are now working hard to seamlessly integrate Viom’s more than 42,000 towers into our portfolio. This transaction is expected to be immediately accretive to AFFO per share and we expect it will help us continue to deliver strong growth across our key financial metrics.

If you please turn to slide six, let's take a look at our quarterly results. You can see that we drove strong growth in all of our key metrics in the first quarter, all in the 23% to 25% range on a core basis. Our total property revenue core growth of about 25% included consolidated organic core growth of nearly 9% or over 8% on an organic run rate basis, which excludes the impact of decommissioning revenues. This strong revenue growth combined with our disciplined expense management led the double digit growth and adjusted EBITDA, AFFO and AFFO per share.

Turing to slide seven, our US segment generated organic core growth for the quarter of about 7.1% which includes the positive impact of $31 million of decommissioning revenue as compared to approximately $17 million recorded in Q1 of last year. On a run rate basis, again which excludes the decommissioning revenues, US organic growth was in-line with our expectations at about 5.9%.

Our international markets generated organic growth over 600 basis points higher than the US and over 350 basis points higher than it generated in Q1 of 2015 at over 13% on a consolidated basis, the highest rate in the last two years.

On a run rate basis, organic growth was about 14% with escalators associated with rising local market inflation contributing about 7% to our international run rate growth and organic new business commencements were even larger components of the growth at about 8% that growth was partially offset by some churn of less than 1%.

There was broad strength across our international property segments with all three posting double digit organic core revenue growth rates. Our Latin American organic core growth was over 13% including 10% and 13% in Mexico and Brazil respectively as network rollouts remained consistent throughout the region even with some macroeconomic challenges.

In India we generated organic core growth of over 12% as large incumbent Indian wireless operators continue to spend aggressively to support the deployment of new technologies and spectrum. And in our fastest growing region EMEA, organic core growth was over 14% or 18% excluding our more mature German market. These strong growth rates continue to highlight the benefits of our diversification across countries, customers and technologies. On a global basis there are nearly 2.5 billion people in the markets that we serve and our largest customers will be investing tens of billions of dollars in those markets just this year to meet their customers rapidly growing wireless needs.

Complementing our organic growth on a consolidated basis where contributions from more than 25,000 sites built, leased and acquired since the beginning of the last year. Including the Verizon, Airtel and TIM portfolios as well as the roughly 3,700 sites we built ourselves. Collectively these new assets contributed over 16% to our core growth rate in the quarter and we are especially encouraged by the performance of our Nigerian assets which have so far exceeded our expectations for new business. Of the 3,700 new built sites, about 500 were completed this quarter generating average day one NOI yields of over 10%.

In addition we also built 14 new indoor DAS or small cell networks in the quarter many in our international markets. Within the US where the indoor networks have been in place the longest, our tenants per note stands at approximately 2.3 driving gross margins in the 70% to 75% range. Our return on these investments is about 15% including those of Viom we now have over 700 indoor DAS venues globally.

Moving on to slide eight, the combination of solid revenue growth and tight cost controls led to strong margin performance across our business. A gross margin excluding pass-through remained above 80% despite the impact of the additional 25,000 new lower tenancy, lower margin sites we brought into our portfolio over the last year. This was a result of our strong organic gross margin conversion ratios approximately 19%. We have been generating these types of conversion ratios for several years now.

Adjusting for the impact of our recent acquisitions this grew 83%. Our land acquisition in extension team also made significant progress towards driving incremental NPV for the portfolio while enhancing our long term US gross margin and preserving future cash flows affecting more than 700 land leases this quarter by either acquiring them outright or extending them. About 50% of these transactions related to the Verizon portfolio and as a result of our continued progress in this area over the last year the percent of owned sites increased over 300 basis points in the US from the prior year period to nearly 27% and the average remaining term of sites and lease land increased to nearly 24 years.

In addition, our adjusted EBITDA margin increased about 20 basis points year-over-year after excluding the impact of the lower margin, lower tenancy acquired sites. Cash SG&A as a percentage of revenue declined about 30 basis points year-over-year to about 8.4%.

Our adjusted EBITDA and AFFO growth in the first quarter is detailed on slide nine. Adjusted EBITDA grew over 15% or about 24% on a core basis to approximately $833 million as a result of our top line growth coupled with diligent operational expense management. A strong adjusted EBITDA to AFFO conversion ratio of over 81% as well as some lower cash taxes and cash interest in capital improvement CapEx relative to our internal expectations led the AFFO growth of over 17%. On a core basis AFFO growth was about 25% and AFFO per share grew by about 13% to a $1.41 per share.

As a result of our solid first quarter performance and improvements in foreign currency exchange rate forecast, we are rising our full year guidance for 2016 as detailed on slide ten. At the midpoint of our outlook we are raising our expectations for property revenue by $40 million or nearly 1% resulting in projected growth of about 21% on both the reported and core basis. The increase is being driven primarily by $50 million and FX assumption favorability as compared to our prior outlook, partially offset by approximately $40 million associated with the delay in closing the Viom acquisition versus prior expectations. As you recall we closed the Viom transaction on April 21 versus unexpected April 1 closing.

In addition we expected $20 million increase in pass-through revenue and around $9 million in incremental straight-line revenues. Within our total revenue projections, we are reiterating our organic growth outlook for our US and international businesses. We continue to expect mid 5% organic core growth for our US property segment given consistent activity levels that have been in-line with the expectations we discussed in late February. As we have touched on previously, there are few items impacting this rate in 2016 versus 2015 including more evenly distributed new business versus of being more frontend loaded last year and flat decommissioning revenue, which are being partially offset by lower churn expectations as compared to 2015.

On an ending run rate basis as of December growth for 2016 is expected to be closer to 6%. Internationally organic growth is still expected to be nearly 12%, at a consolidated level our expectation for total organic core growth remains unchanged at approximately 7% for the year or nearly 8% on a run-rate organic growth basis. Newly acquired in-built sites which include the impact of Viom are expected to contribute the balance of our anticipated core growth for the year or about 14%.

Our outlook highlights the benefits of the increasing diversification of our revenue base and our decreasing dependence on any one country to deliver consistent and predictable growth. We are vital provider of communications real estate in vibrant markets like Mexico where aggressive 4G rollouts are ramping up. In Brazil where significant 3G network augmentation is continuing and India where the transition from 2G is only now getting underway for majority of the populations. This diversification supports our ability to generate consistent, sustainable growth rates on a consolidated basis.

Our improved revenue growth outlook and strong conversion rates are in turn expected to lead to a higher 2016 adjusted EBITDA. We are raising our adjusted EBITDA outlook by $25 million or nearly 1% at the midpoint. This reflects a negative $20 million impact due to the delayed Viom closing. This is being more than offset however by a $10 million increase in cash EBITDA projected from our existing business as a result of better cost performance as well as an expected $35 million benefit from improving foreign currency exchange forecast and incremental net straight line impacts.

As detailed on slide 11, we are also raising our outlook for AFFO by $20 million at the midpoint or nearly 1% versus our prior outlook, despite the negative $20 million impact of the delayed Viom close on cash adjusted EBITDA. The impact of the delay has been partially offset by $10 million increase and expected legacy cash EBITDA of $5 million decrease in the combination of cash interest, cash taxes and capital expenditures on an FX neutral basis as well as benefit of approximately $25 million resulting from the improvement in foreign currency forecast. As a result assuming a weighted average diluted share count of 429 million shares, the midpoint of our outlook now implies an AFFO per share of $5.65 representing year-over-year per share growth of over 11%.

Turning to slide 12, we remain committed to our capital deployment strategy and continue to focus on our goal of simultaneously funding growth, returning cash to our stockholders and maintaining a strong balance sheet. To this end, we declared over $240 million in common and mandatory convertible preferred stock dividends and deployed nearly $160 million in CapEx in Q1. We believe that the combination of our growth and AFFO per share and consistent return of capital to stockholders to our REIT distributions will create meaningful value for our stockholders.

In 2016 this includes expected growth in our REIT distribution subject to board approval of at least 20%. We are also committed to maintaining a substantial basic liquidity and a solid balance sheet. As of the end of the first quarter our net leverage ratio stood at 5 times net debt to annualized Q1 adjusted EBITDA with liquidity of over $3 billion. We continue to expect to end the year with 5 times net debt or below and longer term our target leverage range remains between 3 and 5 times.

As a result of our consistent capital deployment strategy, we expect to extend our track record of delivering strong financial results in 2016 as is detailed on slide 13. And even more importantly positioning ourselves for strong sustainable growth going forward. In fact, at the midpoint of our outlook we will have grown property revenue, adjusted EBITDA and AFFO at a mid teen percentage clip since 2007 while at the same time maintaining return on invested capital between 9% and 10%, despite adding over 25,000 new sites since the beginning of 2015. We expect these new sites will enhance our future growth trajectory over the long term while enhancing total returns.

Turning to slide 14 and in summary we started 2016 with a strong operational quarter, announced our entry into Tanzania built nearly 500 sites and closed our acquisition of controlling stake in Viom networks just last week. Our top priority remains driving continued operational excellence while focusing on the integration of our recently acquired portfolios.

As a result, we believe we are well positioned to sustain strong growth in all of our key metrics in margin performance and are raising our 2016 outlook for property revenue, adjusted EBITDA and AFFO. Similar to last year we expect core growth in all three to be above our long term targets. By year end we expect to have nearly 150,000 sites worldwide with a solid balance sheet, ample liquidity and leverage back within our target range. Due to our disciplined consistent global capital allocation program, we continue to generate strong organic core revenue growth supported by a high quality asset base diversified across geographies, carriers and network technologies with a global portfolio more than triple the size of our closest US public traded peers.

Our significant exposure to high growth market in our carefully cultivated assets base positions us to not only benefit from significant near term network investments, but to also deliver strong and steady growth over the long term. As a result, we expect to continue to generate consistent recurring growth in AFFO per share in a highly compelling total return to stockholders.

And with that I will turn the call over to Jim for some closing remarks before we take some Q&A. Jim?

James Taiclet

Thanks Tom and good morning to everyone on the call. The first quarter results we have just reported today again demonstrates continued solid demand for Tower space both in the US and in our diversified international markets. In the United States consumers ever increasing appetite from mobile bandwidth has supported cumulative wireless carrier CapEx of nearly $180 billion over just the last five years with approximately another $95 billion in spectrum auction spending as well.

The deployment of 4G technology at higher spectrum bands has driven significant collocation during this period due to the need from more dense network array. In addition each new spectrum band acquired and deployed into the network has driven additional amendment activity in the form of more antennas and remote radio heads on our towers.

In the United States the four major wireless carriers are at or close to the completion of their phase one coverage deployment of 4G technology. So what does this mean for the level of demand for tower space going forward domestically?

The primary message of my remarks today is that we expect demand from macro tower space to remain robust as mobile operators progress through their subsequent deployment phases for 4G and then onto 5G deployments thereafter. Our conclusions are based on a combination of internal and external analysis that we have conducted over the past two years. Now in the past you have heard us describe many of the technical and economic factors that support the continued use of towers as the optimal citing solution for mobile transmitter especially in suburban and rural environments and a long transportation corridor such as highways.

Today I would like to focus the discussion at a much more personal level. The factors that drive a satisfying user experience on are mobile devices. Each of us is very familiar with these performance factors as we use our smart phone every day. These factors are first coverage, second capacity and third and more importantly as time goes on peak speed. So coverage, capacity and peak speed.

So let's say you are taking the metro North train for your commute for ride to grand central station, a ride of about 45 minutes or so along that route most of your trip would be served by wireless transmission sites on macro tower including our towers in [Arizona], the Meronek and in the Bronx. While on the train you want to watch CNN.com video clips for the day's news on your phone. Coverage would be represented by the number of signals bars you see in the upper left hand corner of your screen and by the way it's just coverage.

Capacity meanwhile would determine how many people on the train could watch streaming video at the same time as you. If capacity isn't sufficient even if the coverage bar is there then many of viewers will experience buffering, they will start to see the spinning wheels that we all dread instead of the video we want to watch. And finally peak speed will determine the quality of that video experience.

Does it come across crisp or is it grainy choppy and pretty much unwatchable. So coverage, capacity, and speed all need to be there to give you a good user experience. Based on the level of investment by your particular wireless service provider, your experience could vary drastically on each of these dimensions as you progress along your commute.

We are now at the stage where most US wireless carriers have deployed the majority of their 4G coverage sites so in practice the vast majority of US mobile subscribers have access to 4G bars when we look at our phone. The anticipated six times increase in mobile traffic from 2015 to 2020, however, can't just be solved through these phase one coverage sites. Wireless carriers are continuing to make significant investments in their networks to increase capacity across most of their sites including in suburban and rural areas and also along those transportation corridors.

This capacity augmentation happens in two ways. First, carriers can add new spectrum bands often resulting in amendment on our sites through new or larger modest frequency antennas. We are seeing this with band such as AWS 3, WCS and 2.5 Ghtz already and second wireless carriers are actively re-farming 2G and 3G spectrum into 4G to gain better spectra efficiency across all of their spectrum. This is currently being implemented across the sale of 800 Mhtz band by some carriers as well as PCS bands and also drives amendment on our towers as other antennas are typically swapped up for larger more advanced antennas when the re-farming of spectrum occurs.

In addition to their focus on coveraging capacity, you have been seeing in their advertisements that carriers have also now started to shift their marketing towards an emphasis on peak speed. This shift drives further investment into cell sites through technologies such as carrier aggregation as well as adding new cell sites to reduce the transmission radius and therefore the quality improvement for each signal. This increase in cell site density is expected to drive incremental collocation opportunities on macro towers as customers like us demand higher and higher peak speeds to enhance our user experience.

All these points to not only significant continuing 4G LTE investments, but also to the subsequent deployment of 5G, which is not expected to be wirely available until at least 2020 time frame those some free standard or trial deployments are possible over the intervening next few years. So similar to 3G and 4G deployments in the past 5G is likely to start in those dense urban environments in which capacity and signal strength challenges are the greatest and then spread to suburban rural locations overtime.

While very high frequency bands of spectrum such as millimeter wave might be effective for 5G and dense urban mobile environments and maybe is a fiber to home substitute it's our view that lower band spectrum will continue to be used for mobile 5G service in suburban and rural areas where our towers are located given the need for broader coverage and the requirement for point capacity. Coincidentally the 600 MHz spectrum currently being auctioned should be cleared in the same general 2020 time frame as the commencement of large scale 5G deployment. The newly available 600 MHz spectrum could be used for 5G rollouts outside of dense urban locations without disrupting 4G spectrum bands already in use are causing significant interference.

As a result carriers will once again need to install additional or larger multiband antennas on towers which we would expect to result in incremental revenue growth for us. Even that more than 80% of the US population resides outside of urban areas, we view this as a long term opportunity for our 5G prior portfolio as 5G gets implemented down the road.

So to summarize even in 5G world we believe that macro towers will continue to be a foundational building block for mobile network deployment in the US and globally. Consequently we are confident that the demand for tower space will continue to remain robust for many years to come.

So thanks again for joining us this morning and Tony you can open the line for questions now.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] And the first question will come from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss

Thanks good morning guys.

James Taiclet

Good morning Rick.

Ric Prentiss

Lots of puts and takes in the quarter, so I just want to make sure I understood everything you laid out for us there. In the first quarter the $31 million of decom revenue how is that compared to what you expect for the year in decom revenue I think last quarter you mentioned you might have been $37 million for the year and was that expected in guidance?

Thomas Bartlett

No Ric, 37 is exactly as you stated we expect that for the full year, we don't give quarterly guidance so as last year we also recognized $36 million or $37 million we had about 17 in the first quarter. This year we recognized more but the balance we recognized throughout the rest of the year and year-over-year of the relatively flat just as we expected in guidance.

Ric Prentiss

Got you. So in the quarter was high was already expected in guidance for the year?

Thomas Bartlett

Yes, exactly.

Ric Prentiss

Okay. And then, on the puts and takes on the AFFO increased in revenue it looks like the revenue increase was really straight line impact so it’s not really any pace business. EBITDA was cost cutting of about 10 million plus some straight line and on the AFFO, the straight line of the cost cutting continues and then there was 5 million for was it the cash tax and the interest just trying to understand what that extra AFFO benefit was?

Thomas Bartlett

Yes, that's exactly right some lower interest expense some lower cash taxes than previous thought and the services is down a little bit and so we have a couple of million dollars less of services AFFO there as well.

Ric Prentiss

And just the clear Tanzania is not in the guidance yet?

Thomas Bartlett

Yes, we expect to close that probably then hopefully by the end of the second quarter.

Ric Prentiss

Great, okay that helps to clear a lot. Thanks.

Operator

Thank you. The next question in queue comes from David Barden with Bank of America. Please go ahead.

David Barden

Hey guys, thanks a lot. Tom I think you pointed in this closure so organic growth rate domestically in the US was 5.9% and then in the prepared remarks I think you said that by the end of the year you expected the run rate existing near to be 6% any update guide for the full year as 5.5%. Could you kind of bridge how we get down to 5.5% rate with those kind of two end points in the chain and then just second I understand that you are consolidating Viom for purposes of the AFFO presentation could you kind of comment on its contribution for instance we back out for the 49% that's not yours what that would be and kind of what your strategy is for bringing the rest of it in-house? Thanks.

Thomas Bartlett

Sure David, on the first question two different metrics the kind of the run rate metric that Leah talked about in her opening remarks is a new metric that we are adding we talked about it last time we were together but it isolates just the kind of recurring lease base run rate revenue that we generate on an FX neutral basis and we think it provides more transparency into the components which really drive the tenant run rate growth. And so, that's what is driving the 5.9%, so it excludes the decommissioning revenues and those types of things back billing amortization, revenue those types of things and we think it gives more clarity in terms of what really is the run rate growth in the business. The 5.5% is our traditional core organic growth which is the one which we have historically talked about which represents the kind of the same tower store growth on those assets that we have owned for at least 12 months. And so that's what’s really driving the difference between the two metrics.

And on the Viom piece in 2016, we now expect to generate about $555 million revenue from Viom about $245 million in gross margin contribution I think around $215 million in EBITDA and that represents the closing as of the April 21. Going forward over the next 12 to 18 months we will look to merge our existing legacy business which is our 15,000 sites that we have within ATC India generates couple hundred million dollars a year with the Viom business. And then, overtime and that will take our ownership interest up from the current 51% to the mid 60s and then following that period of time we will look at whether how financially what makes sense in terms of bringing the rest of the business in.

I mean, it's our objective that we would want to own 100% of the business with some very strong partners within the business including the TATA as in Macquarie and so we are really excited about controlling the business running the business with that kind of participation and so I would expect over the next three to four years we will have more clarity in terms of just what we ultimately end up with from the ownership perspective of the business but our immediate goal is to merge the two business where then we can really start to recognize what we believe in some synergies.

James Taiclet

And David I think the first step of this to summarize is we will go from 51% to the mid 60s or high 60% just by merging the existing asset and Viom together. And then that's sort of incremental piece will be implemented via more traditional investment process over number of years actually.

David Barden

Got it, okay thanks guys.

Operator

Thank you. The next question in queue comes from Amir Rozwadowski with Barclays. Please go ahead.

Amir Rozwadowski

Thank you very much. Just telling on my prior question sort of US growth there has been some discussion earlier this year with select carrier looking to perhaps save some money with respect to some of their tower leases. I was wondering if you could give us any clarity in terms of what you are hearing from the operators at the moment because we are seeing some tampered CapEx trends coming out o the operators than similarly some of the component suppliers at the macro site are talking up sort of the demand environment so some mix data points there I would love to hear your thoughts on sort of overall US trends from that perspective?

James Taiclet

So, Amir first of all this is Jim. First of all, the overall CapEx from year to year in the wireless industries are expected to be flat around $30 billion, so if there are moderated ups and downs in individual carriers that total is looking to be about the same which means our aggregate new business opportunity among that major tower operators looks similar from 2015 to 2016. That’s how we introduced our guidance and informed our guidance and at the end of the day we’re looking more at the overall markets now, especially with the segment reporting we’ve moved.

And so, the US run rate leasing metric that Tom talked about, we expect 6% of sell in United States which is very solid. The other thing I would like to say about the run rate metric, we’re giving you yet another lens to look at the business. I think, it’s a good lens because it actually, it is very similar to the way lot of real estate investors look at the assets which is what are your rate increases and rent pricing overtime and what your occupancy increases overtime. And that really just encapsulate solid bet in the run rate and it takes out some of these amortized contributions and other one-times settlements and things like that, that pause you to have to pull them apart to figure what the real run rate is, so we’re just going to give that to you.

So, when you take the US 6% run rate and then the other part of our strategy is diversification across carriers, technologies, continents etcetera and our international run rate leasing is 14% this year. So, the weighted average is about 8% and this is what we’re trying to preserve over many, many years which is a weighted average smooth raising curve of revenue growth which then drives the double digit expectation and objective we have as a way for share growth.

So, individual carriers within the US are really important, but we’re looking at more to market level now and when you look at the aggregates we still got $30 billion spending and 6% of run rate growth out of domestic business. And then, the last thing I’d say and Tom referred to it a couple of times is, we’re really starting to focus on efficiency especially in the domestic business to get cost of out it, performance to be out or above as far as revenue and top line growth and that’s going to help us with the AFFO per share contribution from the US overtime as well. So, I really think it’s important if you want to understand the carriers individual plans to refer to their public statements specifically you’ll talk to them individually, but we’re really going to be looking at market level and region level trends from this point on.

Amir Rozwadowski

Thank you very much for your additional color.

Operator

Thank you. Our next question in queue will come from Mike Bowen with Pacific Crest, please go ahead.

Michael Bowen

Yes, thank you very much. I was interested in the chart that you had in your supplemental going to the international portfolio and I was wondering if you could just walk us through a few of the examples. If I’m reading this correctly few of the examples would have literally, even over 100% gross margin, maybe that’s what showing in the chart if I’m reading it right in Mexico. And beyond that if you could give us a little bit of your thoughts as to which of these countries do you think these metrics are going to move the most going forward? And thanks for the chart, but I want to make sure we understand it. Thanks.

Thomas Bartlett

Yes Mike, I’m not sure exactly which chart you’re referring to, I think you might be talking to the conversion rates. So, it’s the percentage of that incremental revenue that’s actually coming down to the margins. But, I’ll highlight though that the margins in our international business, particularly in those that we’ve had some history, Mexico and as well as in Brazil, where we’re passing through the land cost in the business, the margins there are actually higher than that of the United States. So, we’re achieving higher margins there than as I said, than the States because of some of the incremental pass-through.

I don’t know specific chart, maybe after the call you can just give Leah call, just in case I’ve misstated that. But, my sense is that you might be talking about those conversion ratios which is the ratio of revenue that we’re bringing back down to margin.

Michael Bowen

Yes, I think that’s right, alright thank you very much.

Thomas Bartlett

Okay, sure.

Operator

Thank you. Our next question in queue will come from Jonathan Atkin with RBC Capital Markets, please go ahead.

Jonathan Atkin

Yes, good morning. So kind of keeping things at a market level for the US at this point, if you see any interest in removing or entering into spending holistic NOIs and probably related to that on the international, I wondered if you could talk about the in-building a little bit more, do you have exclusivity, what are some of the main markets, do you face a lot of competition that will be my question? Thanks.

Thomas Bartlett

Jon, you little garbled on it, but let me just repeat what I think you’re asking. On the US side, getting a little bit more color in terms of what’s going on from a market perspective and specially –

Jonathan Atkin

No, for the US I wondered if you’re seeing interest on the part of the carriers or entering into holistic NOIs?

Thomas Bartlett

Okay. And what was the second part again please?

Jonathan Atkin

And the second one related to in-building internationally and what are some of the most target rich markets, do you have that exclusivity that face a lot of competition, just a little bit more color on that in-building international where there seems to be – you’re focusing more on in-building international rather than US?

Thomas Bartlett

Sure. Jon, if I think, we don’t speak the individual contract negotiations or even outcomes with the mobile operators relay anywhere. We have described that we have offered holistic type of agreement when mobile operators are in server ramp up or high spend mode and that just helps them in a couple of ways one is to budget more accurately and understand what their cost will be going forward. And secondly, it reduces the cycle time and therefore increases the security of when their deployment will be implemented as far as schedule perspective.

So those benefits are still there some of the mobile operators are taking advantage of those now some of them have decided to either stay on or move toward or away from a more retail type of operations so without specifying any of those that those are the range of options and carriers move among those options based on their investment cycles which again speaks of the benefit diversification when you can do those multiple type contracts.

So secondly, on in building side I would like to think we are bit of pioneer in a way especially in Latin America introduces technology it will come into EMEA and especially African next on our part. But Mexico and Brazil have been really strong for us in building and Viom to its credit is more of a pioneer in in-building in India market where the couple of hundred venues are much actually than we even have so it's actually very good match on the small sell size as well as Viom and ATC India but those are probably the three places with the most opportunity right now Mexico, Brazil and India.

Jonathan Atkin

Thank you

Operator

Thank you. Our next question in queue come from Jonathan Schildkraut with Evercore, please go ahead.

Jonathan Schildkraut

Great. You got a lot of the key issues already but I would love to say you can spend just a few extra minutes talking about the Mexico market it does seem like that's one that which seems really acceleration and investment seems to be broadening out in terms of the carriers there? Thanks.

James Taiclet

Sure Jonathan its Jim. What’s happening in Mexico right now is something again it's happened in the US and other markets ahead earlier and that is the rate of 4G job adaption can be sort of governed if you will by two things in any market. One is service pricing and the other one is handset pricing. So the lower the handset pricing and lower the service pricing the more people can afford it will sign up and start using it and grow overtime in their usage. So in Mexico the government successfully increased the level of competition in that country service pricing moved in a constructive way for the population we’re able to adapt their service more rapidly than they could before.

And globally, handset pricing for 4G is also reducing at the same time so you have these two complementary cost reductions in handset and service pricing and people in Mexico are signing up so that then is as we by seen every other case increase smart phone penetration 3G usage and ultimately 4G drives gigabytes from month on a network and that network demand needs to be serviced and large part often buy adding equipment to real estate including towers. So it's the typical cycle we have seen but I would say the two drivers are reduced handset pricing reduce service pricing for data.

Jonathan Schildkraut

Thanks Jim.

James Taiclet

Yes.

Operator

Thank you. Our next question in queue will come from Colby Synesael with Cowen & Company, please go ahead.

Colby Synesael

Hi, two questions, one is on escalators so historically we have thought about escalators as being something north of 3% for your business particularly in United States. But escalators as we all know is supposed to be tied to inflation that's essentially the whole purpose of why they are designed. And inflation as we all know, both when we look backwards and I think when you look forward is much left in that right now. And I am curious if because of that you are starting to see some push back on the escalators on new deals you are signing in the United States and if you are still able to achieve the 3 plus percent that actually now something closer to example 2%?

And then, my second question goes back to some of the comments Jim made talking about the U.S. market. I think one of the things that's going to be different with the built out of 5G relative to previous generation builds is the use of outdoor small cells. And it looks like from the topology perspective particularly when you think some of the higher band frequencies are going to be used small cells are going to command the great portion of the overall investment dollars for network built out and stand out to historically happened. And I am curious if you think that that's going to win the level of macro tower growth you are going to see any United States tied to 5G versus the growth rate we have seen in previous generation built out? Thanks.

James Taiclet

So, let me start with the escalators the traditional service 3plus percent escalators really not as solely tied inflation in the US, it's tied to real estate rent increases overtime, which have sort of been around the 3% level when it come to land rents upon which towers are built. So there of course, is an inflation kind of concept second order behind that but land rent cost are the largest cost of volume going tower operations and ground less source have been able to secure 3 plus percent escalators off and out of ground. So those are mirrored in the tower list.

Moving to the outdoors small cell 5G issue I would invite to get a hold of Leah separately because we have got some pretty in depth technical assessments on how this works whether it's 3G, 4G or 5G. And yes in dense urban networks, dense urban environments networks do have to have much shorter transmission rate, small cell makes sense for them for 3G, 4G and ultimately they will it makes sense for 5G. But what we serve is the suburban rural and transportation corridor market not urban or dense urban. 97.5% of our towers are in non-dense urban environments and the reason that carrier use tower predominately in those environments because that is the optimal height power setting and transmission radius for suburban rural and transportation corridor use cases.

The proportion of small cell spending, our projection is that yes as a percentage of CapEx we will double over the next five years from 5% to approximately 10% that's our estimate therefore we think 90% of the spend rate is or so is going to continue to be on macro sites mainly towers and also rooftops and more of an environment so that's how we see going forward again if you want more depth in some of the detail we can even provide a separate session for anybody that wants that just contact Leah.

Colby Synesael

Thank you very much.

Operator

Thank you. The next question comes from Matthew Niknam with Deutsche Bank, please go ahead.

Matthew Niknam

Hey guys thank you taking the questions. Two if I could, one on Viom, how soon do you sense you can integrate these assets with the existing ATC India portfolio and just wondering really where the margins on the Viom portfolio can go from the roughly 40% that's in tied by the current guide and then just secondly on the Verizon portfolio of towers can you just give us an update on what you are seeing on the demand front and latest expectations for list of activity in 2016? Thanks.

James Taiclet

So this is Jim. I will speak to the Viom integration the most important part of the integration from the commercial standpoint is one sales force face to the customer which is in the process of being implemented right now and that's on a fast track. The second largest piece from a again customer and revenue point of view will be the integration of multiple master lease agreements between the two portfolios among many customers that's going to take probably 12 to 18 months to really get those consolidated but those things have already started.

As far as the lease ability of the sites Viom has been run as a independent third party tower company already and therefore the documentation the system as the data to be able to quickly release sites is largely already there that's a difference then say carrier portfolio like Verizon where at least collect the lot of that from the field officers as such.

So the Viom integration from an effective feasibility standpoint is going to be I think on a very fast track this entire portfolio this combined portfolio is going to be jointly marketed to our customer base early on and we are already in discussion volume discussions with many of them as to how they can take advantage of the now number one independent tower company in India along with our traditional sub-operating capabilities that they come to service back. So I think the Viom integration takes 12 to 18 months to get it completely renegotiated around the master contract and have some of the field work done in some of the organizational alignments fully completed.

As to Verizon we have said just recently in our last call and it's still the case we have 9% to 10% long term sort of cumulative average growth rate expectation over ten years for that portfolio and we still do so every month or two it's not going to change I can imagine materially. We are seeing new business on the sites. And really great shape as far as the carrier portfolio for capacity ground space the documentation I referred to earlier so we are progressing through our plan and expect to be able to deliver what we have stated in the past.

Matthew Niknam

Thank you

Operator

Thank you. The next question will comes from Brett Feldman with Goldman Sachs, please go ahead.

Brett Feldman

Thanks and just going back to Colby’s question about network design even before we get the 5G one of the things that's happening now and this is something Verizon discussed when it met with analyst earlier week is that carriers are moving to a centralized win designs so they are taking some of the equipment that has historically been at tower locations and moving them to central locations. However, Verizon also said that in many cases those central locations are other macro sites and so since this is happening now and I imagine you seen some of it going on your site how does this affect your business I mean are you seeing some reduction of footprints in other place, but meaningful increases in a carrier footprint in other locations and on net what does this mean for you?

Thomas Bartlett

So, the net effect is changes in ground equipment and installation and locations spread is not material. There are some offsets like you said but generally the way our contracts are structured the vast majority of the lease rate if you will and none of it is separable or severable if you will. But the vast majority of the pricing calculation is really what goes on the tower not necessarily on the ground again none of it severable, so because you took one cabinet off of your ground space you are still paying for the square foot footprint of that ground space. And you can put whatever you want or not on it so we don't tend to reduce prices because someone moved the cabinet from one place to another took it off the site.

One of the benefits of central ran or cloud ran in our view is that it frees up more resources for the radio access network that transmission equipment that goes up on the tower, which again we charge for and that's what most of the amendments have to do with. So over the long term it we think it's ran centralization or cloud ran is going to be constructive for our lease growth on our sites because if much less and I think a couple of mobile operators have said this is reducing their core network cost fairly significantly that more resources could then be potentially voted to the radio access network which again 90% of what we of that we think will spend on tower and related rooftops sites.

Brett Feldman

Yes, and this is a quick follow-up since they are using carriers are using certain macro locations to be the centralized hubs are finding that towers sites to happen to have a lot of ground space all of the sudden maybe have more revenue potential than they would have because that place is useful for the data centers that they are running?

Thomas Bartlett

I think the margin conceptually that would be right Brett, but again our sites tend to have substantial ground space what’s been helpful for example is [indiscernible] from having essentially a tractor trailer full of equipment on the site down to today's Sprint two cabinets and much smaller footprint. The miniaturization of the base station electrics has actually helped us free up more ground space overtime now there are cases where we need to get more because we have multiple customers now which is great but yes, I think that we are going to be in good shape to be able to host not only serve extra cloud ran equipment on sites which are closer to the edge of the network but also distributed some day we think we could be an opportunity for distributed storage caching specially entertainment type volumes of data at the tower site to reduce the latency of transmission of content.

That's something down the road there are ground space could be useful and we have some examples of this in our international markets where we are doing fiber docs and other sort of very closely related and solar uses of the ground space for incremental amendments. So we will get every dollar we can on every square foot of ground we can, but I think it's bit of a long cycle again kind of therapeutic trend.

Brett Feldman

Got it. Thanks for the color.

Operator

Thank you. The next question will come from Philip Cusick with JPMorgan. Please go ahead.

Philip Cusick

Hey guys thanks for getting me in. So, the first our peer sponsors are doing a month can you give us any flavor of conversations you are having with the potential bidders for this?

James Taiclet

Our interaction with the mobile operators on this is that we will support you set you have a part in first and they know that we will, we are not a sort of designated sub-contractor in a bid to any particular mobile operators so our view of first that is there is spectrum to be put to work there is a national security or homeland security need to be filled. It's very unclear as to how that's going to be filled but at the end of the day they are going to need to transmit off of largely towers and we will be there to serve that need depending on who wins how they are structured if it's take wise versus national etcetera. So, we are going to have our real estate asset ready and by having good operational practices and good structural capacity on the sites available for these kind of things that's the best we can do right now and just get ready for this wave if and when it hits the lease on to our towers.

Philip Cusick

I think, a bidder will have to have some idea of what he is going to pay for towers. Do you have some levels of view on what those amendments might cost if a carrier were to add like that capacity?

James Taiclet

We don't know the bill of material as yet first of all what equipment will go on we don't know the redundancy and hardening factors it might need to be put in place for example, what is the generator dedicated to this need at every site so until we know the bill of materials and the specifications of the loading and the ground requirements we can't price it. Now I think you are absolutely right that bidders are going to have to make estimates of this but there is market pricing out there for them to draw from today and imagining that's how people are doing it but we are not committing pricing because we don't we can't do it until we have a bill of materials.

Philip Cusick

And what about the fact that the carrier want actually own the spectrum does that change the way you expect to price it or you think it will be sort of similar to an owned band?

James Taiclet

We will have to see what the legal relationship is between the government and entities whoever they maybe and operators whoever they maybe and then compare those two existing agreements that may or may not apply to this type of service depending on who the operator is so it's all going to be very case specific but we will again deal with it specially if it's one of our current customers in the constructive way as we try to always do.

Philip Cusick

Good thanks Jim.

James Taiclet

Yes.

Operator

Thank you. We do have time for one last question that will come from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery

Great, thanks a lot. You just comment James on the M&A environment, you obviously done that a couple of big deals here and obviously try to get your leverage down we have seen some transactions going for sale in Europe and I think you talked in December about a lot of markets in Asia opening up so how are you thinking about the deal activity and what are you seeing out there at the moment? Thanks.

James Taiclet

Sure, we have since 2007 position business development teams very skilled ones in Asia and Latin America to always be ready when and if mobile operators or others were willing to divest their sites or engage in some kind of a merger with us. So referring to some successes we had in Brazil, India and Nigeria recently. We are still pursuing those.

We are pursuing them in light and full understanding of what our leverage targets are and Tom keeps very close triangulation on all that with EVPs that run the region, so everybody is well aware of what the parameters are here. In Europe specifically the team in that region is carefully evaluating the situation right now where there has been some movements either privately held companies or third party tower companies or carrier portfolios being separated and spun out etc. But their evaluating it carefully in the context of our discipline kind of approach that Tom referred to already and the perhaps the biggest factor in any of these deals whether it's in Asia, the US or Europe or elsewhere is the asset pricing at that moment versus the expected revenue and EBITDA growth rates through the medium and long term and when there is a dislocation between asset pricing and those long term prospect you do not see us act any major investment for us specially given us the scale we are at today and diversification we have today, actually Simon needs to enhance the expected performance of our existing asset portfolio.

So something we do on top of the transactions and organic growth we have already done has to make the whole cash flow to occur better overtime and so those deals are difficult to find specially when you impart the discipline and patience that are hallmarks of our investment committee which is me, Tom and our general counsel add here. So this one process and this is one example not try to make any kind of prediction for any other reason, but you will recall that we entered the India market in 2007 and we kind of deliberately built the business a piece a time increase of increasing size over a nine year period before securing a leading position in the market with Viom. So if that's what takes us we will do on the other hand if opportunities emerge quickly like in Nigeria there were three heads within 9 to 12 months, we were very active in those as well. So it's hard to predict the environment, the M&A environment is not such by the seller but also by the buyer community and if the asset prices are too high you are not going to see us active if asset prices are within our investment criteria you will see us move very quickly to move forward so really not much specific to say that we are out there we are active and we still use the same process and asset pricing reported to us.

Simon Flannery

Okay. Thank you.

James Taiclet

Thanks Simon.

Leah Stearns

Great. Thank you everyone for joining us today and if you have any follow-up questions on the results please feel free to reach out myself or another member of our IR team and we are here to help. Thanks.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 11 AM Eastern time today running through May 13 at midnight. You may access the AT&T executive playback service at anytime by dialing 800-475-6701 and entering the access code of 391078. International participants may dial (320) 365-3844 once again those telephone numbers are 800-475-6701 and (320) 365-3844 using the access code of 391078. That does conclude your teleconference today. We do thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.

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