SBA Communications' (SBAC) CEO Jeff Stoops on Q2 2016 Results - Earnings Call Transcript

| About: SBA Communications (SBAC)

SBA Communications Corporation (NASDAQ:SBAC)

Q2 2016 Earnings Conference Call

July 28, 2016 17:00 ET

Executives

Mark DeRussy - Vice President, Finance

Jeff Stoops - President and Chief Executive Officer

Brendan Cavanagh - Chief Financial Officer

Analysts

Phil Cusick - JPMorgan

Matt Niknam - Deutsche Bank

Jonathan Atkin - RBC Capital

Amir Rozwadowski - Barclays

David Barden - Bank of America

Justin Ages - Evercore

Ric Prentiss - Raymond James

Spencer Kurn - New Street Research

Simon Flannery - Morgan Stanley

Brett Feldman - Goldman Sachs

Walter Piecyk - BTIG

Michael Bowen - Pacific Crest

Nick Del Deo - MoffettNathanson

Operator

Ladies and gentleman thank you for standing by and welcome to the SBA 2016 Second Quarter Results Call. [Operator Instructions] And also as a reminder, this teleconference is being recorded. At this time, I will turn the conference over to your host, Vice President of Finance, Mr. Mark DeRussy. Please go ahead, sir.

Mark DeRussy

Thank you. Good evening, everyone and thank you for joining us for SBA second quarter 2016 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer and Brendan Cavanagh, our Chief Financial Officer.

Some of the information we will discuss on this call is forward-looking, including but not limited to, any guidance for 2016 and beyond. These forward-looking statements maybe affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in today’s press release and our SEC filings, which documents are publicly available. These factors and others have affected historical results may affect future results and may cause future results to differ materially from those expressed in any forward-looking statements we may make. Our statements are as of today July 28 and we have no obligation to update any forward-looking statements we may make.

Our comments will include non-GAAP financial measures as defined in Regulation G and other key operating metrics. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and the other information required by Regulation G can be found in our supplemental financial data package. In addition to the Regulation G information, this package also contains other current and historical financial data. This is located on our Investor Relations website landing page at sbasite.com.

With that, I will turn it over to Brendan to comment on our second quarter results.

Brendan Cavanagh

Thank you, Mark. Good evening. We had another solid quarter. We were above the high end of our guidance for site leasing revenue, tower cash flow, adjusted EBITDA and AFFO driven by both favorable moves in foreign currency and by operational outperformance on the leasing side of our business. In discussing our adjusted EBITDA and AFFO results, guidance and related calculations, unless otherwise indicated, we are excluding the oil reserve discussed in detail in our press release as we believe it to be one-time in nature and not to be repeated in future periods. Total GAAP site leasing revenues for the second quarter were $381.8 million, or a 3.1% increase over the second quarter of 2015. Eliminating the impact of changes in foreign currency exchange rates, total GAAP site leasing revenue increased 4.8% over the year earlier period.

Total cash site leasing revenue was $373.1 million in the second quarter, an increase of 4.4% compared to the year earlier period. Eliminating the impact of changes in foreign currency exchange rates, total cash site leasing revenue increased 6.1%. On a gross basis, constant currency organic total cash site leasing revenue growth was 8% materially the same as the first quarter. On a net basis, including the negative impacts of approximately 2.2% from iDEN decommissioning and 1.7% from normal churn, organic growth was 4.1%, exactly the same as last quarter.

As we have previously discussed, the loss of iDEN revenue during 2015 will negatively impact year-over-year reported growth rates during the first three quarters of 2016 and we will be free from the negative comparisons starting in the fourth quarter of this year. Domestic cash site leasing revenue was $312.8 million in the second quarter, an increase of 4.2% compared to the year-earlier period. On a gross basis, organic domestic cash site leasing revenue growth was 7.5%, exactly the same as the first quarter. On a net basis, including the negative impacts of approximately 2.6% from iDEN decommissioning and 1.7% from normal churn, organic growth was 3.2%. Approximately 65% of incremental domestic leasing revenue added came from amendments and the Big Four carriers represented 82% of total incremental domestic leasing revenue added during the quarter.

Domestic tower cash flow for the second quarter was $255.4 million, an increase of 4.6% over the year earlier period. Domestic tower cash flow margin was 81.7%, an increase compared to 81.3% in year earlier period despite the negative impact of iDEN churn. International cash site leasing revenue was $60.3 million in the second quarter of 2016, an increase of 5.7% compared to the year earlier period. Eliminating the impact of changes in foreign currency exchange rates, international cash site leasing revenue increased 16% driven by both organic growth and acquisitions. On a constant currency basis, net organic international cash leasing revenue growth was 10.1%, inclusive of 1.1% of churn, most of which was from one narrowband customer in Canada. Gross organic growth in Brazil was 12.3%.

During the second quarter, cash site leasing revenue denominated in currencies other than U.S. dollars was 11.5% of total cash site leasing revenue. The substantial majority of which was from Brazil. Brazil represented 10.8% of all cash site leasing revenues during the quarter and 7.5% of cash site leasing revenue, excluding pass-through revenues. International tower cash flow for the second quarter was $40.9 million an increase of 2.7% compared to the prior year or an increase of 12% eliminating the impact of changes in foreign currency exchange rates. International tower cash flow margin was 67.9% compared to 69.9% in the year earlier period, reflecting increased pass-through revenue.

Adjusted EBITDA in the second quarter was $278.1 million, an increase of 1.4%. Eliminating the impact of changes in foreign exchange rates, adjusted EBITDA growth was 2.7%. Eliminating both the impact of FX changes and the impact of iDEN churn, adjusted EBITDA growth was 5.5%. Adjusted EBITDA margin was 70.1% in the second quarter compared to 69% in the year earlier period. Approximately 99% of our total adjusted EBITDA was attributable to our tower leasing business in the second quarter.

AFFO increased to 0.8% to $185.8 million in the second quarter compared to $184.5 million in the year earlier period. Excluding the impact of both iDEN churn and changes in foreign currency exchange rates, AFFO increased 7.1%. AFFO per share increased 4.2% to $1.48. Excluding the impact of both iDEN churn and changes in foreign currency exchange rates, AFFO per share increased 10.5% over the year earlier period.

We continued to selectively deploy capital towards portfolio growth. In the second quarter, we acquired 42 communication sites for $40.6 million in cash. We also built 90 sites during the second quarter. These additional sites are located in both domestic and international markets. We continue to invest in the land under our sites as this is both strategically beneficial and almost always immediately accretive. During the quarter, we spent an aggregate of $19.8 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 74% of our towers. And the average remaining life under our ground leases, including renewal options under our control, is approximately 33 years.

Looking forward, our second quarter earnings press release includes an updated outlook for full year 2016. The full year outlook excludes the impact of the Oi reserve. We have increased our full year leasing revenue guidance to reflect our second quarter outperformance and improved assumptions around foreign currency translations. Our core expectation for organic leasing growth continues to assume steady amounts of incremental revenue added in the U.S. through the end of the year. The midpoint of our guidance assumes gross U.S. and consolidated fourth quarter to fourth quarter cash leasing revenue growth rates of 7.2% and 8% respectively, which are unchanged from our prior guidance.

At this point, I will turn things over to Mark, who will provide an update on our liquidity position and balance sheet.

Mark DeRussy

Thanks Brandon. SBA ended the quarter with $8.6 billion of total debt. We had cash and cash equivalents, short-term restricted cash and short-term investments of $159.6 million. Our net debt to annualized adjusted EBITDA leverage ratio was 7.6x. Our second quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 3.4x. Both of these metrics exclude the Oi reserve. During the quarter we spent $100 million to repurchase just over 1 million shares of common stock at an average price per share of $97.80. We currently have $550 million of authorization remaining under our stock repurchase program. Quarter end shares outstanding were $124.6 million, down from 128.2 million shares a year ago. Subsequent to the end of the quarter, on July 7, we issued $700 million of secured tower revenue securities out of our existing tower trust. These notes have a coupon of 2.877% and an anticipated repayment date of July 2021. A portion of the net proceeds of this offering were used to prepay the four $550 million outstanding of our 5.101% secured tower revenue securities. The remainder of the net proceeds will be used for general corporate purposes. We ended the quarter with $30 million outstanding under our $1 billion revolver and we have zero outstanding as of today.

At quarter end, in pro forma, with the July 7 offering, the weighted average coupon of our outstanding debt is 3.7%. And our weighted average maturity is approximately 4.5 years. Our leverage target remains in the 7x to 7.5x range. Our primary capital allocation focus continues to be portfolio growth that meets our investment return requirements, which could be augmented with share repurchases at prices that we believe are below intrinsic value as we’ve done over the past several quarters.

With that, I will now turn the call over to Jeff.

Jeff Stoops

Thanks Mark and good evening everyone. As you have heard from Brendan earlier, we had another solid quarter. The volume and type of organic activity recaptured was virtually identical to that we experienced in the first quarter. Our site leasing business demonstrated continued steady demand, which our operational excellence was able to translate a continued strong margins and EBITDA growth. We allocated capital to a mix of stock repurchases and portfolio growth, while keeping leverage steady. AFFO was growing and share count is shrinking. Through a combination of these factors, we were able to continue to grow AFFO per share and our results and actions in the second quarter positively contribute to achieving our goal of over $10 per share of AFFO in 2020.

In the U.S., customer activity has remained steady for four straight quarters in terms of both contract volume and revenue added. The type of work we are seeing continues to be primarily around the re-farming of 2G and 3G spectrum to LTE as well as AWS-1 and 700 megawatts deployments. We still have not yet seen much in the way of AWS-3, WCS or 2.5 gigahertz spectrum deployments, all of which remain opportunities ahead of us. By application and executed contact volume, the activity remains substantially amendments. On a revenue basis, the mix was 65% amendments and 35% new leases. Three of the four nationwide U.S. carriers were responsible for substantially all of our domestic activity. This continued amount of activity underscores the current and future importance of macro sites and our customer’s network plans. We expect the investments in macro sites by our U.S. customers will remain heavily weighted towards amendments for the remainder of the year. Our backlogs remain steady compared to last quarter and our domestic leasing outlook for the second half of the year remains unchanged from last quarter. We continue to believe second half organic leasing activity will be materially similar to the first half.

Our services results were at the low end of our expectations for the quarter, reflecting a very competitive environment for the work that is available and our choice to pass on unprofitable or less profitable business. Internationally, leasing activity was steady and in line with our expectations. Activity was more balanced between new amendments and new leases compared with the U.S. International organic activity outside of Brazil came in above plan, while Brazil’s results were at expectations. Given the macro challenges in Brazil, we are actually very pleased with the results we are producing. On a positive note, second quarter reports from the Brazilian carriers paint a stable to improving picture for the second half of the year. We continue to grow our portfolio internationally and we had a nice increase in towers built internationally compared to the first quarter.

With respect to the Oi reserve, we intend vigorously pursue those amounts in the reorganization process and we will see what happens. While not an insignificant amount, we believe the $16.5 million should be more than offset over time by the benefit to SBA of an Oi that has materially strengthened as a result of a restructured balance sheet. To that point, Oi has already recommenced new leasing activity with us post petition. Beyond the legal obligations to pay us rents to SBA during and subsequent to the reorganization process, Oi has strongly expressed its commitment and operational need to honor our agreements, reflecting the necessity to a successful reorganization of Oi’s continued access to the towers hosting its equipment.

Operational excellence remains a guiding principle at SBA, one that prevails on entire organization with a heavy focus on cost control. Our reported second quarter tower cash flow margin was 79.4% compared to 79.5% in the year earlier period, which we are quite pleased with given the negative impact of foreign exchange rates, iDEN churn and a growing international inclusion of pass-through revenue. We continue to post low cash SG&A expenses as a percentage of revenue and for the second consecutive quarter, posted adjusted EBITDA margins above 70%.

Our tower cash flow and EBITDA margins are actually materially higher, excluding pass-through revenue, which is a better picture of true economic margins and we have got that set forth in our supplemental package. Beyond organic growth and execution in our business, we continue to focus on driving incremental AFFO per share and therefore we believe incremental shareholder value through the deployment of capital and the optimization of our balance sheet. As has been the case for some time, our primary uses for capital are portfolio growth and stock repurchases. The decision around the aggregate amount of capital we deployed towards these two uses starts with our view around how we want to leverage the business. As Mark mentioned, our target leverage remains in the 7x to 7.5x range. While the bias is to grow the portfolio, we are very disciplined about meeting our return targets and the actual allocation mix will depend on the relative returns available between repurchases and portfolio additions.

We stayed fully invested in the second quarter as we took advantage of excellent opportunities for stock repurchases. We invested approximately $183 million of discretionary capital, of which $100 million was for stock repurchases, $57 million for acquisitions and lesser amounts for new tower builds, land purchases and tower augmentations. One of the reasons for our views on balance sheet leverage is that we believe we are in a lower for longer interest rate environment and that we can access debt at historically low rates today. The securitization deal we have priced in July was done at some of the most attractive terms we have seen in a number of years and had the affect of lowering our weighted average coupon and at the same time increasing our weighted average maturity. We have plenty of liquidity and over the next 12 months, we expect all liquidity to remain over $1.5 billion, including the cash we generate.

Looking forward, we see many years of continued activity from our customers, which will generate additional revenue opportunities for SBA. In the U.S., the AWS-3, WCS and 2.5 gigahertz spectrum deployments I mentioned earlier will come and deployments will occur of the DISH spectrum, the FirstNet Spectrum and soon to be auctioned 600 megahertz spectrum. More spectrum is anticipated to be made available in connection with 5G, which we also expect to provide opportunities for us. All these items and I m confident others will keep macro sites a critically important part of our customers networks. We see similar dynamics and prospects in our international markets. The deployment of the 700 megahertz spectrum in Brazil is an example of a large spectrum deployment yet to come. With our high quality asset portfolio that we have spent close to 20 years carefully assembling, we are very well positioned to participate in this activity, which overtime we expect to be very material. We are very optimistic about the future and we take a long-term approach to the business.

Speaking of our long-term approach, I want to spend a moment reviewing the assumptions around and our confidence in our long-term goal of producing more than $10 per share of AFFO in 2020. The goal assumes organic leasing revenue added per tower at materially the same rate we are experiencing today, which we have previously discussed is at or around historical lows. Portfolio growth is assumed at 5% per year. The goal does assume little to no foreign currency translation losses. Refinancings are projected using the forward interest curve and we assume we end the period 2020 at or below the low end of our current leverage target of 7.0x. Our assumptions do not contemplate any dividends through 2020 even if we elect REIT status earlier, because our tax loss position is expected to shield us from any dividend obligations through 2020.

Our assumptions do include a healthy amount of stock repurchases, which could be reduced and offset with additional portfolio growth. We see the assumptions underlying our long-term goal as very achievable. We are confident that achieving the goal will create material additional value for our shareholders as we will be compounding AFFO per share by a mid-teens percentage per year. We have very steady second quarter and expect the stable second half of the year. We accomplished a number of things this quarter that directly and clearly help us to achieve our goal of more than $10 per share of AFFO in 2020 and we look forward to reporting and measuring future results with that perspective in mind.

Tony, at this time, we are ready for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] First in queue is Phil Cusick with JPMorgan. Please go ahead.

Phil Cusick

First, I think Brazil, can you walk through a little bit more, you said expect second half to be similar to first half, but I think you said stable to improving. Can you clarify that for me, Jeff?

Jeff Stoops

Yes, our view is stable. The carrier commentary was stable to improving.

Phil Cusick

Okay. And then in terms of the buyback, that was up nicely this quarter-to-quarter. Should we expect this level going forward or with the rally in the stock, should we expect more like 1Q or even lower?

Jeff Stoops

Yes, I think the best I can tell you, Phil, is that you should expect that we will stay at or slightly above the high end of our target leverage range and that investable capital will either go into acquisitions or stock repurchases, but we are only going to buy acquisitions that meet our return requirements and we are only going to buy stock when we believe it’s below intrinsic value. Now, we believe our stock is below intrinsic value at today’s prices, but we have a history of being opportunistic around where we buy the stock and I expect we will continue to do that.

Phil Cusick

Yes, if I can just follow-up, how do you see the M&A environment right now?

Jeff Stoops

There is actually fair amount of stuff out there, but prices continued to be high. And when you do the relative weighting against stock repurchases particularly at the prices we were able to buy in the earlier quarter, the decision tree was a pretty easy one that went towards the stock repurchases. So, it continues to be a relative equation and you should not think we went for stock repurchases, because there weren’t acquisition opportunities, it was because the stock repurchase opportunities were better.

Phil Cusick

Thanks. That helps.

Operator

Thank you. The next question in queue will come from Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam

Hey, guys. Thank you for taking the questions. Just two if I could. One following up on the last question, I think this was the first quarter in some time total portfolio growth actually dipped below 5%. So, I am just wondering, is it still fair to assume you are targeting 5% portfolio growth for the year? And is it fair to assume you would reallocate capital to more buybacks, if there is still a lack of maybe more attractive portfolio growth opportunities? And then secondly, in the U.S. you talked about 65% amendment activity in terms of incremental revenue. Maybe if you could touch on how that compares to what you have seen in recent quarters and whether the current outlook implies this stays constant over the course of the year? Thanks.

Jeff Stoops

Yes. I will take the second one first, because it’s easy. The relative splits between amendments and leases, has been consistent at least two quarters, maybe two or three. And I think Matt based on our backlogs today that it should be relatively similar as we move through the year. And in terms of allocation, we have built the company growing the portfolio. We like to grow the portfolio when the opportunities make sense from a return on investment perspective. Our 5% number that we use each year is one that is well supported by the cash we generate and the leverage we expect to operate at. So, we are going to continue to look for opportunities to grow the portfolio. And if it’s the jump ball between portfolio growth and stock repurchases, we will favor portfolio growth, but we will likely not leave any investment capacity unutilized for this year. So, if we don’t spend it on acquisitions, we will spend it on stock repurchases.

Matt Niknam

Thank you.

Operator

Thank you. The next question will come from Jonathan Atkin with RBC Capital. Please go ahead.

Jonathan Atkin

Yes. So, one thing I noticed on the CapEx guidance, in terms of new tower construction as that’s been hedging down the last couple of quarters. And I wonder what you kind of look to what’s driving that in terms of build opportunities, it seemed to be a little bit fewer this year than you thought 3 months ago and 6 months ago?

Brendan Cavanagh

Yes, hey, Jon, it’s Brendan. We basically have reduced the number of towers we expect to build this year with about half of that being related to Brazil. It’s been a little bit of a slow go with some of our customers down there based on the pace of progress with those customers. We are anticipating that in a number of those sites will actually slip into next year. The other half of the reduction is related to expectations around domestic new builds. In line with what Jeff was saying about M&A costs as the opportunities for these new builds have become extremely competitive, we simply made what we believe our appropriate capital allocation decisions and chosen not to participate in a number of the new build opportunities that are currently available. So, that’s really where the changes there.

Jeff Stoops

And I would just also add that compared to years past, the opportunity set for new builds this year is lower.

Jonathan Atkin

Yes. Can you elaborate on that? I didn’t quite follow to the last points.

Jeff Stoops

We believe there is less total new tower builds this year than in years past on average.

Jonathan Atkin

Great, thank you very much.

Operator

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

Amir Rozwadowski

Than you very much and good afternoon folks. Jeff, I was wondering if we could touch a bit upon some of the opportunities that you see with respect to some of the new spectrum goals. And there has been a lot of discussion among carriers about how they are going to try to optimize some of those new spectrum builds perhaps using different types of structures or I am talking a bit about how they are very much focused on escalator rates when it comes to some of the tower companies. I was wondering if you could provide a little bit more color in terms of with tower conversations you have right now and whether or not as that new spectrum comes to market in terms of being able to build out, whether you see the same size and scope of opportunities you have seen in the past?

Jeff Stoops

Yes. I would start by saying, Amir that our customers are working hard as they should as we all do to maximize revenue and minimize cost and that’s really not anything new over the history of the relationship. The traditional way of rolling out new spectrum by far the most efficient way for our customers is to come back and amend existing installations where they have already the legacy power, the backhaul, the shelters, so that kind of sets a bit of starting point for the discussions. And there is a often – well, sometimes, I would not say often, but the way we have always approached leasing is on a one-off basis, where every single lease or every single amendment is subject to its own discussion. And when there are high rents on a site, because it’s either been very much loaded up or it’s been around for 10 years or 15 years and it’s escalated to 3% plus, we absolutely take that into consideration when we work out arrangements with our customers. So there will be many instances where we charge less for that particular site than we might otherwise with the existing rent in mind. And in many cases, certainly not near a majority, but not a substantial amount of amendments and I have mentioned this before, we actually work with our customers and let them do things for zero dollars on the amendment side. For exactly that reason, this is a partnership that we have. Their success is very important to us. And that’s how we approach it. And it’s worked pretty damn well for 20 years and we expect it to continue to work well. In terms of the actual spectrum that’s being still to go, almost every new bit of spectrum is going to require its own radio head, whether it’s WCS or 2.5 gigahertz or AWS-3 certainly 600 megahertz. There are some opportunities for the AWS-3 to be pumped on an antenna basis through the AWS-1 antennas. Depending on how those antennas were set up originally, our customers may or may not get the most efficient bang for their buck there. So we are actually seeing a variety of types of installations there. The 600 megahertz when it does come, clearly it’s going to require both new radios and new antennas. So we think the world will continue to be one that is focused on new and changing and in many cases additional equipment. And then when we worked that out with our customers, we kind of take everything into consideration and find something that works for both of us.

Amir Rozwadowski

Thank you very much. And one quick follow-up, if I may, I appreciate the color when it comes to your longer term guidance outlook, you mentioned no plans for a significant dividend payout, does that a way to interpret more expectations for REIT conversion, I just – because I know there was a lot of debate going on since the last earnings call in terms of timing…?

Jeff Stoops

Yes. Actually – I am glad you asked that question, because please do not interpret the no dividend comment through 2020, which basically is a statement of the assumptions that underlie the $10 per share or more of AFFO in 2020. That’s not connected with when we will convert to a rate. We fully expect to convert to REIT prior to that time. But what people should not assume is that by converting to a REIT, we will immediately and automatically begin to pay a dividend. We continue to believe, particularly with our stock trading where it is, that stock repurchases are a more capital efficient and better long-term creator of value than paying dividends when you don’t have to. And we won’t have to pay dividend, because even if we converted to a REIT say next year or early 2018, we would have NOLs that would carry us through and allow us to avoid the necessity of paying dividends through 2020. Does that make sense?

Amir Rozwadowski

Very helpful. Thanks so much. Thank you.

Operator

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

David Barden

Hi guys. Thanks for taking my question. So Jeff sorry, I wasn’t totally clearly to me just there and so I just want to see if SBA became a REIT, it would be your intention to shield income with NOLs, not pay a dividend and devote those capital resources to the highest and best use between portfolio growth and share repurchase, I think that’s what I understood you to say, I just want to make sure I heard it right. And then the second was just on...?

Jeff Stoops

Before you even get to that, the answer to that is, yes.

David Barden

Okay, good. Thank you. And then the second comment was just on a little bit of your – I think Brendan’s comments on the build-to-suit market or the new tower development market being increasingly aggressive domestically and not an attractive deployment of capital opportunity for you, are you seeing – we are kind of seeing and expecting T-Mobile and AT&T and others to kind of invite this type of activity in an effort to either use it as a negotiating tool to achieve some of these options that you discussed earlier in terms of your carrier relationships, are you seeing a market up-tick in that activity level with more private equity money and cheaper money being available in the market impacting the business in any measurable way, that would be helpful? Thanks.

Jeff Stoops

No. Not in any measurable way. I mean, maybe it cost us 50 new builds a year. I mean what’s happening is, as you have less new builds that are being built in general, you have a whole subculture of developers who have spent the last 5 years, 10 years building towers to sell to people like us. They are not getting as much work because there isn’t as much work to be done. So they are chasing that business. And that is really working to our customers benefit today. Good for them. It’s not particularly work that we feel like we should be chasing. Unlike those developers who really don’t have anything else to do, we have other uses for our capital including stock repurchases. So we do have alternate uses, which is I think an important thing to keep in mind. But other than that – other than our customers getting some towers built pretty damn cheaply and good for them, really doesn’t affect anything else.

David Barden

Okay, great. Thanks Jeff.

Operator

Thank you very much. Our next question in queue will come from Jonathan Schildkraut with Evercore.

Justin Ages

Hi, this is Justin on for Jonathan. I was just hoping you could talk briefly about how you guys come up with your FX assumptions just given the past two quarters we have kind of seen some FX headwinds from what is a conservative assumption set? Thank you.

Brendan Cavanagh

We – consistent with the practice we adopted earlier this year, we have adjusted our forward assumptions around exchange rate to be in line with the median of updated projected forward rate that are published by economists at several large banks. It’s usually generally in line with forward curves, but sometimes not exactly. And so based on what they are putting out in their forecasts, we are basically going in line with that. And obviously the forecast rates imply weakening in the exchange rates during the rest of 2016, but the levels impact on our 2016 numbers is much lower than what we provided in our prior full year guidance. And substantially lower than what we have experienced over the last couple of years.

Justin Ages

Alright, great. Thank you.

Operator

Thank you very much. Our next question will come from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss

Thanks. Good afternoon guys.

Jeff Stoops

Hi Ric.

Ric Prentiss

Hi, couple of quick ones if I could. So obviously like Jonathan asked about the build program, we have seen you new trying to build a program at the midpoint of 60 towers last time, 70 more this time at the midpoint, what keeps changing, I think the build environment in the U.S. has been kind of what you described for quite a while, was it more on the international side and could we see further the cuts, I guess in the program?

Jeff Stoops

Yes. I mean most of it, Ric of the roughly say 130 or so sites, roughly 100 of that is Brazil and consistent with what I said before. We cut that last time based on Brazil and this time as well just a little bit slower go down there for I think somewhat obvious reasons around the economy in a way it’s affecting our customers. There are still are obligations under build-to-suit agreements that we have down there. And those will be fulfilled just the timing I think is shifting back a little bit. And the balance of it is domestically, we kind of came into the year with certain expectations, which were lower than what we did last year. But based on the competitive nature of what we have seen, we were making the decision there. We are probably going to build a few less sites this year than we thought at the beginning of the year, so that’s simple.

Brendan Cavanagh

Yes. But in the U.S. it’s not really, I mean it’s not a material change.

Ric Prentiss

Yes. That makes sense and it’s the right decision. So the 450 in your middle of the build program, how much would be international versus U.S. then in total?

Jeff Stoops

The vast majority of it, I would say in the 350 to high-300 range.

Ric Prentiss

Is international?

Jeff Stoops

International, yes.

Ric Prentiss

Great. One other I think easy one, we were pleased to see the first – the second quarter U.S. business being higher than we thought. Last quarter you had some one-timers maybe about $2 million worth of one-timers, were there any one-timers in the 2Q number or is it clean?

Brendan Cavanagh

Basically pretty clean. I mean, there are always little miscellaneous things, but nothing material.

Jeff Stoops

Not like the million of last quarter.

Ric Prentiss

Yes, okay. And final question Jeff, you mentioned that you are going to pursue vigorously the oil receivable, what is the process? I will admit I am not that familiar with how it goes – works down there in Brazil with this jurisdictional item?

Jeff Stoops

Well, that part of it is just like the U.S. You have all the claims that accrue as of the date of the petition. They are broken up into classes. And then ultimately, for those to be paid or converted into equity or however they are resolved, a plan needs to be approved by all the creditors in each class, voting by both amounts of claim and by number of creditor. So, there will be – there is bunch of us, obviously who have operating monies owed in the pre-petition period and we will be a class and we will all pursue it. But how much of that we ultimately get back will be a part of the bigger resolution, which is exactly I believe how it works in the United States Chapter 11 for amounts that are owed pre-petition.

Ric Prentiss

It sounds like it could take several quarters owe to play out?

Jeff Stoops

Yes, it could. And it will be nice whatever we get back when we get it. But at our abundance of caution we have taken everything we could think of and put it in the reserve, so that at least from a reserve perspective, we are done and any other new news will be on the side of recovery.

Ric Prentiss

Right, makes sense. Thanks, guys.

Jeff Stoops

Yes.

Operator

Thank you. The next question will come from Spencer Kurn with New Street Research. Please go ahead. Please go ahead.

Spencer Kurn

Hey, thanks for taking the question. Just wanted to get your thoughts on how 5G will impact your business? Also AMT said they are in early stages of exploring options for new structures that are targeted for adding capacity in dense markets. That unlike outdoor small cells today could generate tower like returns. Is there something that you are right now where in an avenue of growth that you might be interested over the next couple of years? Thanks.

Jeff Stoops

Yes. We are certainly watching and studying and working on all that. And if we can find something that we think is a good allocation of capital in that regard, we definitely will do it. I think 5G in terms of our portfolio, which again is primarily a non-urban residential highway or portfolio. I think you are going to see further equipment on the towers, but a continued reliance on macro sites. The high-frequency spectrum that people are talking about, really most people do not think that will work outside of a dense urban environment. Actually, there was some good commentary on that from Neville Ray on T-Mobile’s calls as to what he thought about 28-gigahertz spectrum outside of dense urban markets. And he had some pretty negative things to say about its feasibility. So, we are watching it all very carefully, but I think for – well, as long as there has been wireless, the laws of physics and how radiowaves promulgate kind of drives and dictates things. And you just aren’t going to get that outside of urban markets any kind of good promulgation with these high frequencies that folks are talking about. So, I think the true economically viable prospects there – you are not going to have 5G out along the highway corridors that runs only on 28-gigahertz, it will not be economically feasible. We think our towers will continue to be extremely important, more so as fiber hubs as allocation points for backhaul. So, we are actually pretty optimistic about where all that takes us and we definitely do not believe that systems and networks that run on 28-gig or even some of the higher stuff that they have talked about is going to replace or even dilute the macro networks that is the bulk of our portfolio.

Spencer Kurn

Thank you.

Operator

Thank you very much. Our next question in queue will come from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery

Great, thanks a lot. Jeff, I wanted to come back to your assumption about 5% portfolio growth and you talked about the challenges of finding attractively valued assets. Perhaps you can just help us think about your international strategy right now. You have really concentrated Central America than Brazil. Are you still really focused in North America and do you think the portfolio growth will continue to skew international and we see number of portfolios coming up in Europe? Do you think you might go beyond the Americas or stay there? And any color there would be great. Thanks.

Jeff Stoops

Yes. Our first preference, Simon, is to continue to flush out the markets that we are in and potentially expand into new countries in the Western Hemisphere. There is plenty of opportunities to do that and build towers and relatively easily hit 5% per year portfolio growth. So, that’s our first and foremost focus and I will continue to be there for a while. We will look and have looked on the other side of the ocean. Keeping in mind though that our plan as it exists today we are very confident we will produce mid-teens AFFO per share growth compounded. We would want to see assets that are at least that good. And historically, the European assets have been lower growth yield type assets that don’t necessarily or not even necessarily that don’t fit a higher capital appreciation type model.

Simon Flannery

So, it would be fair to say that of that 5% it would skew more international than domestic?

Jeff Stoops

Yes, probably, probably.

Simon Flannery

Okay, thanks a lot.

Operator

Thank you. Our next question will come from Brett Feldman with Goldman Sachs. Please go ahead.

Brett Feldman

Thanks. And just going back to the last call when you first started talking a little bit more specifically around potential timelines for converting to REIT, I think you would imply that ‘17 or ‘18 was kind of the range and it depends on where you were with the E&P dividend. And so my question is if you were going to convert say next year, when do you have to decide? In other words, you have to sort of make an affirmative decision and sort of operating differently by January 1 or can you wait until you file your tax return and look back and figure out whether you really think you met the qualifications or not? And then I don’t know if it came up last time, bur are you going to seek appeal already you feel it’s unnecessary considering all the other tower companies that operate as REITs? Thanks.

Brendan Cavanagh

Yes. Brett, we have actually been operating we believe in alignment with all of the requirements of being a REIT already. We just haven’t made the formal election as of yet. So, in terms of structuring our operations, having what would be taxable REIT subsidiaries properly cordoned off and making sure that we meet all asset tests and income tests that would be required as a REIT. We have been doing all of that now for the last 2 years actually in order to allow us the flexibility to choose to convert whenever we would like. And so it really is a matter of pretty much just making the election on the tax return. So, we could effectively do it even retroactively if we chose to so long as we haven’t yet filed our tax return. So, the flexibility remains. In terms of the PLR, we do not expect to look for PLR. We think it’s been well determined and there is plenty of precedent for tower companies as REITs.

Brett Feldman

Yes. And thanks. If you could just remind me, what was it about ‘17 and ‘18 and sort of the sensitivity around that? And do you have a bias as to whether it’s more likely one year versus the other based on how you are running those calculations?

Jeff Stoops

Well, it was – I mean, you have said it right upfront. It’s around the E&P calculation. We had – we basically – I think we disposed on the last call that our current estimates around our cumulated earnings and profits which are currently in the deficit position is that they would move into a positive position in the latter part of 2017.

Brett Feldman

Got it. Thank you. Appreciate it.

Operator

Thank you. The next question will come from Walter Piecyk with BTIG. Please go ahead.

Walter Piecyk

Thanks. My first question is, had mentioned that a small cell cost about 20% of a macro, I am just curious if in your experience you couldn’t replicate the coverage or capacity in the same coverage diameter as a macro site with five cell sites, five small cells?

Jeff Stoops

Most people say no. It takes eight to ten. And I am not sure we necessarily would agree with the 20% mark.

Walter Piecyk

Okay. My second question is on, was on band 70, you earlier on the call I think you were talking about being able to put AWS-3 through to AWS-1 antennas, do you think that, that would extend to band 70, which as I recall I think the frequencies there on the uplink is about the 1,700 megahertz and then the downlink is right around 2000 megahertz or 2 gig?

Jeff Stoops

You got me there Walter. I don’t know the answer to that.

Walter Piecyk

Okay. But at least on AWS-3, you think they can pump the signals through the AWS-1 antennas, obviously you are having the radio head for each of them?

Jeff Stoops

Yes. But we have been told by the equipment manufacturers that if they do that, they are going to leave some performance on the ground so to speak.

Walter Piecyk

Interesting.

Jeff Stoops

It’s not – performance will not be optimized by running AWS-3 through AWS-1 antennas.

Walter Piecyk

Got it. And then my last question, I think I may have asked this before, so I just kind of want to refresh to the last three months or so, have you had any new discussions with people that are not wireless operators in the U.S. that are interested in looking at what your portfolio of assets are, where they are with the consideration of new lease ups?

Jeff Stoops

Yes. A fair number of Internet of Things players, machine to machine. I don’t know if we have had any of the big guys who I think you are talking about on the fiber side. But definitely there is everyday there is some interest from folks that are outside the traditional wireless world.

Walter Piecyk

Got it. Can I ask you one more and then – I think it goes back to – I forgot whose question it was, but on Brazil, you just – obviously it’s always been dead for a while, but when you think about the change more recently, is it more heavily weighted towards collateral or are you seeing a little softness across all of the three other national operators there?

Jeff Stoops

It’s I would say, it’s probably spread with Telefonica probably being the most steady and active. And any changes really is a result of the combined activity of the other three.

Walter Piecyk

Got it. Thank you.

Jeff Stoops

We are actually – and we are not projecting this, but it is logical to think that Oi who is being watched closely by Anatel through all this and now has a whole lot of better cash flow actually picks up. They certainly have the network needs for that. So it’s certainly possible. So we will be watching all that.

Walter Piecyk

Okay. Thanks.

Operator

Thank you. Our next question in queue will come from Michael Bowen with Pacific Crest. Please go ahead.

Michael Bowen

Okay. Thanks. Most of my questions have been answered, but just one follow-up, I apologize if I missed it, but this question on CapEx quarter-over-quarter, I think your outlook went up around $40 million I was hoping you could give us any thoughts there. And then I appreciate the chart where you basically go through the – I guess about 10 different line items with year-over-year growth rates and then taking out Oi and FX impact and iDEN impact, looking at that quarter-over-quarter, second quarter over first quarter, obviously it continues to come down, literally almost across the board line item by line item, so I was just hoping you can give us some thought there as whether you think may we are reaching an inflection point here or just some thoughts on it, that would helpful? Thanks.

Brendan Cavanagh

First, Mike on the second one. Some of that is driven by other things. So for instance, our AFFO per share growth year-over-year was 10.5%, which is lower than last quarter. But our services margins were very, very high last year. And if you just adjust it for that, one item alone and said it was flat from last year. The growth would have been 14%. So I think when you take out – there are other items of noise that perhaps could be adjusted out of there and we are very confident that there is not a steady drop. It’s just an accumulation over the trailing 12 months. And then the first question, discretionary CapEx, yes, we raised the discretionary CapEx by $35 million, I believe at the midpoint or maybe it was $40 million at the midpoint. Yes. That is primarily made up of new acquisitions that we put under contract. We did also have some decline in new tower build spending, but not a lot because a lot of the new tower build reductions that we are assuming are really just timing. And we are still incurring much of those costs. So, it’s mainly new acquisitions put under contract offset by a little bit of a decline in new builds.

Michael Bowen

Okay, thanks a lot.

Operator

Thank you. The next question in queue will come from Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo

Hey, thanks for taking my question. I will keep it to one given the time. Could you say that you are looking to acquire more assets in your Latin American markets? What all to shake loose any carrier-owned assets that remain? And do you see any movement there given some of the macroeconomic turbulence?

Jeff Stoops

Yes, you never, never say never, Nick, but right now with Claro’s forming Telesites, although none of their South American assets have gone into that yet. And Telefonica’s formation of Telxius, you are probably looking at all carriers other than those for the most likely opportunities. And I don’t want to get into rumors, but there are definitely some rumors, some of which we think are more real than others that there are some carriers down there that are looking to monetize their assets, but it’s really like it is everywhere else, where carriers – they need the money and they believe that the terms of the deal that they get any additional OpEx that they take on is outweighed by the capital that they take in and that’s really – that’s a different recipe for everybody. So, more will happen, do I think any of it is like next quarter? No. I don’t think that. But I do think over time there will be additional carrier portfolios available.

Nick Del Deo

Thanks, Jeff.

Jeff Stoops

Tony, we have time for one more question.

Operator

Actually the queue is clear. There is no additional questions.

Jeff Stoops

That’s great timing. We appreciate everyone joining us this evening and we look forward to reporting next quarter’s results. Thanks.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 8:00 p.m. Eastern Time this evening running through August 11 at midnight. You may access the AT&T executive replay system at anytime by dialing 800-475-6701 and entering the access code of 396632. Again the phone number is 800-475-6701 using the access code of 396632. That does conclude your conference call for today. We do thank you for your participation and for using AT&T’s executive teleconference. You may now disconnect.

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