Welcome to the Crown Castle International Corp. first quarter 2008 earnings conference call. (Operator Instructions) I'd like to turn the conference over to Jay Brown, Treasurer of Crown Castle.
Thank you for joining us as we review our first quarter 2008 results. With me on the call this morning are John Kelly, Crown Castle's Chief Executive Officer, and Ben Moreland, Crown Castle's Chief Financial Officer.
This conference call will contain certain forward-looking statements and information based on management's current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct.
Such forward-looking statements are subject to certain risks, uncertainties, and assumptions. Information about the potential risk factors that could affect the company's financial results are available in the press release and in the Risk Factor sections of the company's filings with the SEC. Should one or more or others of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.
In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, recurring cash flow and recurring cash flow per share. Tables reconciling such non-GAAP financial measures are available under the Investor section of the company's website at CrownCastle.com
With that, I'll turn the call over to Ben.
As you've seen in the press release, we've reported another good quarter of results. We have a little succession news, which we're pleased to discuss with you this morning.
During the first quarter we generated revenues of $370.6 million, which was comprised of site rental revenue, which increased $45.2 million to $345 million, or up approximately 15% compared to the first quarter of 2007. Service revenue for the quarter was $25.6 million.
Gross margin from site rental revenue - defined as tower revenues less cost of operations - was $232.7 million, an increase of $39.5 million or up 20% from $193.2 million for the first quarter of 2007.
Adjusted EBITDA for the first quarter of 2008 was $211 million, an increase of $43.7 million or up 26% from the first quarter of 2007.
Recurring cash flow - defined as adjusted EBITDA less interest expenses and less sustaining capital expenditures was $118.1 million, compared to $82.4 million in the first quarter of 2007.
Recurring cash flow per share grew 40% to $0.42 per share for the first quarter of 2008 compared to $0.30 per share in the first quarter of 2007.
Capital expenditures during the quarter were $61.7 million. Sustaining capital expenditures totaled $3.8 million. Revenue-generating capital expenditures were approximately $58 million, which was comprised of $27 million for land purchases, $17 million for Capex for revenue-enhancing activities on existing sites, and $14 million on the construction of new sites, including the completion of nine towers and the acquisition of 10 towers.
Turning to the balance sheet, as of March 31, 2008 securities tower revenue notes totaled $5.3 billion for the quarter and other debt totaled approximately $857 million, for total debt at the end of the quarter of $6.1 billion. The other debt was comprised of our corporate credit facility, which was drawn $794 million, and $63.8 million of our 4% convertible notes. We also had $314 million of our 6.25% convertible preferred stock outstanding as of the end of the quarter.
As you've seen in our previous filings, the $5.3 billion of securitized notes are not subject to fluctuations in LIBOR for 10 years from their respective initial issuances due to interest rate hedges we have undertaken.
At quarter end we had approximately $97 million in cash excluding restricted cash and $100 million of availability under our revolving credit facility. Total debt to adjusted EBITDA as of the end of the quarter was 7.3 times.
Since closing the Global Signal transaction in the first quarter of 2007, we have reduced total debt to adjusted EBITDA by over 1.5 turns from growth in adjusted EBITDA inclusive of $150 million of net new borrowings. Adjusted EBITDA interest expense as of the end of the quarter was 2.4 times.
As we've discussed in previous quarters, we continue to invest in our own assets through the purchase of our shares. In the first quarter of 2008 we purchased 1.1 million shares using approximately $42 million in cash at an average price of $36.99. In total, since 2003 we have spent $2.2 billion to reduce our fully outstanding shares by 29%.
Moving to the outlook for the second quarter of 2008, we expect site rental revenue for the second quarter of between $344 and $349 million.
In prior years, Crown Castle Australia has benefited from an annual customer payment in the second quarter. This benefit to site rental revenue and site rental gross margin of $2.7 million was achieved in the first quarter of 2008 this year.
We expect site rental gross margin for the second quarter to be between $231 and $236 million, consistent with prior years, this includes a seasonal increase in repairs and maintenance expense of approximately $4.5 million.
We expect adjusted EBITDA for the second quarter of between $208 million and $213 million, interest expense of between $88 and $91 million.
We expect sustaining capital expenditures to be between $6 and $8 million for the quarter, leaving recurring cash flow expectations to be between $112 and $117 million for the quarter.
We've increased our full year 2008 outlook. We expect site rental revenue for the full year of 2008 of between $1.390 billion to $1.4 billion, an increase of $10.5 million from our prior outlook. We expect site rental gross margin to be between $940 and $950 million, an increase of $10 million from our prior outlook. We expect 2008 adjusted EBITDA to be between $858 and $868 million, an increase of $7 million from our prior outlook, and interest expense to be between $355 and $360 million. We expect 2008 sustaining capital expenditures to be between $21 and $26 million.
This 2008 outlook translates into expected recurring cash flow for the full year of 2008 of between $481 and $491 million, an increase of $7 million from the prior outlook, or approximately $1.74 per share based on the 279.2 million shares outstanding for the three months ended March 31, 2008. This $1.74 per share suggests 26% growth in recurring cash flow per share over last year, above our targeted 20% to 25% growth per year.
Over the past few years we have made many significant investment decisions, most notably the purchase of approximately 29% of our fully diluted shares since 2003 as I mentioned and the acquisition of Global Signal, which closed in January of last year. The solid performance of our core tower business and the diligence we have demonstrated through an appropriately levered capital structure, which has enabled us to purchase a substantial amount of our actual and potential shares outstanding, has resulted in 40% growth in recurring cash flow per share in the first quarter of 2008 compared to the first quarter of 2007.
The first year of ownership following our acquisition of the Global Signal portfolio, combined with the appropriate leverage, has resulted in growth rates in recurring cash flow per share significantly in excess of our targets. Consistent with our past actions, we expect to continue to use our recurring cash flow and additional borrowing capacity to make investments, including tower acquisitions and share purchases, based on their anticipated impact on long-term recurring cash flow per share. We have not included the impact of these potential investments in our outlook.
Given the state of the debt markets I would like to comment on how we see the current environment impacting our business. As we stated on the last call and continuing today, there is no requirement for this company to access additional debt to deliver on the 2008 outlook we've laid out. Existing recurring cash flow is more than adequate to fund all our contemplated capital spending around improving our existing sites, selected new tower builds, land purchases, with a substantial sum left over for discretionary investments in tower acquisitions or additional share purchases, which, again, we don't forecast in our outlook.
The rapid growth of adjusted EBITDA and the commensurate deleveraging that has occurred and is further reflected in our outlook gives us a lot of flexibility as we evaluate the credit markets. Absent further borrowings, we would expect to be substantially below 6 times debt to EBITDA when we anticipate refinancing the CMBS notes beginning materially in 2010 and 2011. While it is not our present intention to deleverage to such an extent, should the credit markets not improve I'm confident that these levels of refinancing will not be a significant issue for the company.
Fundamentally, we've not changed our approach to share purchases. I'd say on balance we see this as a continuing opportunity to invest in our company's assets at a substantial discount in our view of fair value based upon our long-term outlook for the business. That said our approach is going to be to watch the credit markets closely and take advantage of opportunistic times to be in the market, remembering that the investment of borrowed money in our business is a relative value trade against the price of the assets or the implied yield on the shares we are purchasing.
Finally, let me say how honored and pleased I am to be moving into the CEO role in July. Crown Castle has thrived under John's leadership and we have a terrific management team in place, and I am very fortunate to be leading going forward. You can be assured I will to the best of my ability work to continue to execute our business plan consistent with our past actions, focused on execution of our core operating plan and capital allocation philosophy to maximize long-term recurring cash flow per share.
With that, I'm pleased to turn the call over to John.
John P. Kelly
Thanks, Ben, and thanks again to all of you for joining our call this morning.
As Ben just mentioned, we had an excellent first quarter. We exceeded our estimates for site rental revenue, site rental gross margin, adjusted EBITDA, and recurring cash flow. The year-over-year growth in recurring cash flow per share of 40% I think clearly demonstrates the significant growth that we are able to deliver with our tower portfolio and capital structure. In fact, the decisions we have made over the last four years have increased our recurring cash flow per share by over eight times.
And before I turn the call over for questions, I'm going to make a few comments about our expectations for Crown Castle for 2008, make a few observations about the successful conclusion of the 700 megahertz auction, and the accelerating growth in data services that are already being realized. In addition, I'll provide some additional background on the succession plan that was announced last night.
On the leasing front, we continue to be excited about our leasing opportunities in 2008. The activity this year is currently driven in large part by two areas - first, by our wireless customers' continued focus on improving network reliability for all their services, voice and data, and then second by the ability of those wireless carriers that secured spectrum in the ABS auctions to increase the pace in which they deploy that spectrum this year by launching new technologies in new markets.
Thus far, 81% of our leasing in the first quarter originated from traditional wireless carriers while 19% of our leasing in the first quarter came from emerging technology companies as well as governmental entities. The distribution of leasing in the first quarter was approximately 70% new installations and 30% revenue-generating amendments to our existing installations on the towers.
The activity we're seeing is reinforcement that the tower industry fundamentals remain strong. There is a direct correlation between the increases in voice and data usage and the need for additional installations on our towers. Wireless minutes of use continue to rise, up some 18% from 2006 when you look at the end of 2007, and this growth is only expected to continue with the adoption of unlimited calling plans by the largest wireless carriers and the continuing election by more customers to cut the cord, if you will, and drop wireline service altogether in favor of wireless.
In addition, wireless data is another long-term driver of growth for our customers and ourselves, and we expect that the next generation deployment of high-speed wireless data networks that rival anything we use at home or the office will increase the penetration of wireless data services such as e-mail, Internet, mobile music and videos.
I'd like to spend a few minutes to discuss some of the mobile data statistics that I believe are instructive as to the long-term effect they will have on growth in the tower industry. In 2007, total wireless data revenue rose 53% to $23 billion and is forecasted to reach $70 billion in 2012. Data as a percentage of total carrier revenues grew to 17% in 2007 from 13% in 2006 and just 8% in 2005. And for those of you that had a chance to listen, AT&T reported two days ago that their wireless data revenues grew 57.3% year-over-year and now represent 21.5% of their total wireless service revenues.
Wireless data, both low bandwidth services such as text messaging and high bandwidth services such as mobile Internet services - searches and things of that sort - are growing rapidly as devices that make it easy to access data services such as the iPhone, the BlackBerry and laptop cards are adopted by wireless consumers. Smart phones currently represent approximately 12% of total handsets, and they're projected to account for 40% of all handsets by 2012 as the demand for mobile data stimulates demand for mobile data-enable handsets.
In a Deloitte & Touche recent survey, 36% of those surveyed viewed their cell phones as an entertainment device, an increase from 24% a year ago. The success of the iPhone, which currently runs on a 2G data network, is a good indicator of where the data trend is headed. About 60% of iPhone users are sending or receiving more than 25 megabytes of data per month, which is the equivalent of sending some 7,500 e-mails. Google has reported 50 times more searches from iPhone users than from other mobile device users, and it has been rumored Apple is expected to launch a 3G version of the iPhone with faster data speeds a little later this year which is expected to further drive the demand for data as experienced in Asia and Europe.
According to Ofcom, the U.K. telecom regulator, the deployment of next generation higher-speed networks in Japan doubled the contribution of mobile data. The same kinds of things that are happening with the handset are occurring with the average laptop card subscriber using significantly higher bandwidth than the initial expectations.
AT&T and Verizon recently spent over $16 billion in the 700 megahertz auction. That represents about 80% of the spectrum purchased, and they are expected to use this spectrum to build out their planned fourth generation wireless networks beginning some time in the 2010, 2011 timeframe. This is great for the tower industry as these companies have the financial capacity to make the deployments of this exciting new technology a reality.
We would expect the deployment of these new technologies to begin on existing sites with revenue-generating amendments to their existing installations. Longer term, we would expect that given the new fourth generation wireless networks will be delivering very high speed data service as opposed to the slower speed and predominantly voice networks that are deployed today that our customers will need to add additional fill-in sites to optimize this new service.
When I look at our portfolio, I believe that our assets are the best located in the tower industry, with 72% of our portfolio in the top 100 BTAs. As such, I believe we are very well positioned to benefit from the increasing use of wireless voice and data services as wireless carriers are expected to concentrate their initial deployments of these new wireless technologies and applications in the top markets, those characterized by high population and higher potential usage.
I'd like to now spend a few minutes on the succession plan. As most of you have read, our Board of Directors has approved a management succession plan for the positions of Chief Executive Officer and Chief Financial Officer. Effective July 1 of this year, Ben Moreland will become our new President and Chief Executive Officer, and Jay Brown will take Ben's current role and become our new Senior Vice President and Chief Financial Officer. I will continue in an executive position as Executive Vice Chairman, with principal responsibility for overseeing Crown Castle's strategy and ensuring leadership continuity. Lanny Martin will continue as our Chairman.
I have had the honor and privilege of leading this company as CEO for the last seven years. Over the years we have built a strong and deep management team that I am very proud of. This team has delivered consistently strong results quarter after quarter and just successfully completed an integration of Global Signal's towers into our company, which effectively doubled our tower count overnight.
Through the years, we've become a stronger company. Working in conjunction with the whole management team, we have strengthened the value proposition for our customers, improved our operating execution, optimized our balance sheet, and institutionalized a disciplined capital allocation process that we believe enhances our ability to grow recurring cash flow per share by our stated goal of 20% to 25% per year for the foreseeable future. I am confident that under Ben's leadership our executive management team will take our company to new heights.
And clearly, from an investor's perspective, the natural question is why would I relinquish the role of CEO, and is there something I see that concerns me about the future of our company or the tower industry? On the contrary.
As you've heard me say, I think the fundamentals of our business are as strong as ever. I continue to foresee demand for our towers as the evolution from wire telecommunications to wireless telecommunications continues unabated. And as you know, this belief is not based on intuition, but is backed up by empirical analysis of leasing demand using our project [self] point methodology.
The simple reason for the management change is that it is the right time. The business is doing well, the wireless industry as a whole is entering a very exciting period with the future build-out of very high speed wireless data networks. Our management team is ready to capitalize on the opportunities that lie ahead, and Ben is ready and fully capable to handle the responsibilities of Chief Executive Officer.
I'm looking forward to continuing with Crown Castle in my new role as Executive Vice Chairman, and as I said previously, my principal focus will be on ensuring a seamless and flawless transition of responsibilities over to Ben and continuing to work with Ben and the rest of our Board on strategy development that seeks to optimize our returns for our investors.
So, in summary, we reported a great quarter of results illustrated by year-over-year growth in recurring cash flow per share of 40%. In addition, given that we are finished with the integration of Global Signal, we believe in our ability to grow recurring cash flow per share by our stated goal of 20% to 25% for the foreseeable future. Leasing and applications through the first quarter are solid and that, coupled with the efficiency of our capital structure and the actions we have continued to take to reduce our outstanding shares have positioned us, we believe, for strong recurring cash flow per share growth in 2008 as evidenced by our increased financial outlook.
And finally, I'd like to congratulate Ben and Jay as they transition into their new roles. These gentlemen have been instrumental in the development and success of Crown Castle, and I am confident that our entire executive management team under Ben's leadership will continue our record of success.
Operator, I will now turn the call back over to you to coordinate the question-and-answer period.
(Operator Instructions) And our first question's from the line of Jonathan Atkin with RBC Capital Markets.
Jonathan Atkin - RBC Capital Markets
Regarding the management transition, are there any other changes or additions contemplated at this time in your overall management structure or are things going to pretty much stay the same in terms of titles and positions?
And then secondly, kind of on the operating front, just wondering what you're seeing from the major national carriers in terms of we've seen trends relative to last quarter as well as the AWS-related build-outs. We've seen some modest delays in market launches, and we're wondering whether you're seeing that in terms of your site leasing activity or are activity at the tower unaffected.
John P. Kelly
Yes, Jonathan, in terms of the management changes, the plan as described is, in fact, the major change that is taking place, in the roles of CEO and CFO. There aren't any other changes contemplated other than those two announced changes.
With respect to the leasing for the year, what I would suggest is that it depends clearly on the carrier, but for the most part, as I was indicating in the prepared remarks, among the large wireless carriers, those that are not affected by the capital markets to the degree that some others might are continuing on their plans to deploy. Some had their plans more evenly loaded through all four quarters. Others we're seeing through the application process will be building as the year continues where the total activity in the first quarter was lighter than the applications would suggest the activity will be as you go through the rest of the year. And so that really is a budget execution issue with any one of these wireless carriers. But for the whole year we're seeing among those that are not impacted today by some of the financial challenges leasing at a rate that is either consistent or slightly higher than what we had seen in 2007.
With respect to the AWS carriers, once again, that is somewhat dependent upon the - AWS deployment by carriers that's somewhat dependent upon the carriers impact of the capital markets. Clearly in one case there is an aggressive deployment of that spectrum associated with bringing out a 3G wireless data network. That was a fully budgeted activity, and that activity, which started in 2007, is continuing at an aggressive pace in 2008.
Some of the other carriers deploying AWS spectrum, we clearly see a lot of activity in that regard, both leasing and application. The delays in some of the markets are not necessarily manifesting themselves all that directly on the tower side of the equation because the plans that these companies have clearly are to launch markets from going this year on into next year, and in order to make that a reality there is a certain amount of activity that has to take place.
But you can, from quarter to quarter, certainly sense if there is maybe a little bit of slowing on an actual revenue producing lease versus the application. We're not seeing a lot of that, but we think that it will probably build as the year continues and some of the capital market questions are otherwise resolved going down the path.
So in summary, Jonathan, long answer, in essence we see this year shaping up to be, as we sit here today, with everything on the table, slightly better than what we saw last year, and it has the potential to continue to grow from there as some of the capital market issues are resolved hopefully later in the year.
Jonathan Atkin - RBC Capital Markets
What trends are you seeing in terms of pricing on new leases? Is there any kind of variation there?
And then with respect to the $14 million spent on tower construction and tower acquisition, what portion of that went to the tower acquisition side?
John P. Kelly
With respect to the pricing side of the equation, we're not seeing any softness in that particular side, Jonathan. It really is always gauged by what is the substitution, and we're not seeing any softness on that side at all. Ours are up just slightly from the prior year.
And then with respect to the $14 million, we had a total of 10 sites that were acquired and then 9 sites that were finished construction. And then as you can imagine, Jonathan, part of that $14 million is construction in process for sites that are going to be turning on in the second quarter, third quarter, and fourth quarter. So there is a component of that $14 million that are for sites that are yet to come online that are going to be newly constructed.
Our next question's from the line of Jason Armstrong with Goldman Sachs.
Jason Armstrong - Goldman Sachs
And a couple questions on your sort of approach to the business, maybe number one on, through the deal front, for the right deal - domestic or international - could you review what your leverage threshold would be and sort of talk us through that?
And then secondly, as you assess sort of the non-site leasing investments we've seen historically in this business, be it Modio or FiberTower, can you walk us through sort of what the lessons learned are from your perspective and maybe talk about the approach or willingness to consider something like this in the future?
On the leverage front and looking at deals, I think probably the best way to characterize our outlook would be to look back at our history and what we did on Global Signal. We were extremely careful about the number of shares we issued into that transaction. And as you remember, we levered the company right up to about 2 times interest coverage, which I think - and I've said this repeatedly - is the most instructive way to think about leverage because it's self-governing as interest rates fluctuate, whether they be LIBOR or spreads.
And so today we're approaching 2.5 times interest coverage. The outlook would suggest we're going to be below, pretty healthfully below 7 times leverage by the end of the year if we don't re-lever the business. And yet, as I've said, we continue to have a view that that is the most efficient way to grow cash flow per share is reasonably releveraging the business.
But you could probably assume that 2 times interest coverage metric is something that we are pretty well going to stay in bounds with, and that sort of takes you to the 6 to 8 times leverage outlook on an adjusted EBITDA basis if you think about it that way.
And that will obviously change as markets ebb and flow, and we watch it carefully today. There's various pockets of opportunistic sort of views around the market. There's some strength developing, but it's still a little bit early and we're not going to get out there and do something in the credit market that I think we could potentially short term live to regret. And so we're going to be very careful about that.
But in terms of looking at deals, absolutely have that open and are in fact working in the small deal transaction market today. We do not forecast that in our outlook until we actually close transactions, but I fully expect that it will make a meaningful contribution to our financial results this year.
As we would think about sort of adjacent business opportunities over time, the largest remaining opportunity we have still is our 17% ownership in FiberTower, which remains, we believe, a very attractive business opportunity. As you know, John actually serves on the Board of FiberTower, a public company, and so that is our approach at this point to sort of the nontower related leasing business in the backhaul, wireless backhaul, [micro] backhaul business.
That's the only thing we see today that looks directly adjacent and interesting in terms of growth from our perspective. That's not to say there wouldn't be something else that comes along. You know, the Modio example is an interesting one. Remember, we bought that spectrum for $9 million and, notwithstanding the amount we spent on the New York build-out, turned around, and leased it for $13 million a year. So there have probably been worse outcomes that have been had for folks. So I would not characterize that one necessarily as a bad outcome, and it turned out to be very significant and consistent with our overall leasing business.
So as I sit here today, there's nothing I can tell you today that we are looking at directly, but I wouldn't close out the notion that we would look at something in the future if it met our criteria of maximizing what we believe would be long-term growth in RCF per share, risk adjusted accordingly.
Our next question's from the line of Rick Prentiss with Raymond James.
Richard Prentiss - Raymond James
Let's hit a couple of questions. First, in your '08 guidance, obviously a nice increase in the midpoint, anywhere between $7 and $10.5 million depending on the line item. As you look at that guidance, what's kind of baked into it as far as your thoughts on the backlog turning into actual leases? What's baked into it as far as any kind of movement on 4G build-out from Sprint and Clearwire?
John P. Kelly
Yes, I think what we're characteristically kind of consistent on; Rick is that we will look at our outlook based on what we have high degrees in confidence in. And so what we're looking at is the level of activity that we see coming out of the first quarter, applications that are building in our backlog, additional dialogue with our customers relative to budget that is there beyond what they might have already applied for. And on items like the WiMAX activity, clearly it's a little difficult to embed that into the outlook for the year by virtue of some of the questions that are still being asked concerning that deployment.
And so notwithstanding the fact that we work closely with the companies that are involved in that initiative and can see what that could be, we are hesitant to increase our view on outlook by an amount that would include a lot of activity in that regard because we simply don't know any more than we do today as to whether that is going to be practical from a deployment perspective given the various different questions that are being asked about it in the community.
And so therefore I would say that there is not, consistent with our first quarter - with our call in the first quarter there is not any large increase in activity stemming from WiMAX that's built into the outlook.
Richard Prentiss - Raymond James
And I guess we're all watching to see what the latest rumor is, how will they get funding. My guess also, even if they were to announce funding, probably a lot of that, from turning it into leases with you guys would maybe be in '09 anyway.
John P. Kelly
Well, not necessarily in that the companies that are engaged in that initiative, Rick, are in fact working with ourselves and we would venture other tower companies to ensure that the engineering and planning relative to specific sites, up to and including the application process on those sites, is being handled real time.
And so the big issue that will ultimately be the question is do they go from application to revenue-generating leases, and that can be much quicker if you've been spending the time working on it - and these companies have - or, at the point in time the capital funding has become clear, do you at that juncture start your planning? And that's not the case at this juncture.
And so it wouldn't necessarily be an '09 impact from the standpoint of application to revenue-generating leasing, but depending upon what time it starts this year, clearly as the months pass an effect of a lease in the third quarter or beginning of the first quarter is not going to be that great on the financial results for the year and will have a much greater impact on '09 financially.
But we'll have visibility as to it sooner than that if, in fact, the capital funding questions are resolved.
Richard Prentiss - Raymond James
One of the key takeaways for us at CTIA meetings about a month ago now was that backhaul is becoming more critical to kind of your comments on data becoming bigger and just the amount of speed hitting the cell sites. Your FiberTower comments notwithstanding, it seems like a lot of other carriers are looking at maybe starting to look to build their own backhaul, what Clearwire's been doing. What kind of revenue ability could there be from you guys as far as if somebody puts a backhaul dish, say a 4 point microwave drum, out there? What kind of revenue amendments do you see from that kind of business, and are you seeing people starting to look to design their own backhaul networks?
John P. Kelly
The answer's yes. I think that the need is so critical that the carriers are otherwise looking at all available options and that includes building it themselves. I think they look at FiberTower clearly as an acceptable option, but there are limits to what FiberTower can do in terms of serving every single demand point out there. And so we are seeing self-build going on by just about every one of the wireless carriers in some way, shape or form.
And it is, from the revenue perspective on our side, it's about $250 for a dish of the size you're otherwise describing. It can be a little less than that if it's a small pizza box size kind of dish. It can be larger than that. Anywhere in the range of about $200, $250 up to about $500 if you're talking about bigger dishes that are used for longer distance paths.
And many times, if it's not an end site, you're seeing two times that number, Rick, because it is - there's a dish that's being used to receive a signal from some far-end site and than it's another dish that's being used to transmit that to the next site down the chain.
So in essence that is another revenue opportunity, and we are seeing that activity.
Richard Prentiss - Raymond James
Ben, on the M&A front, where are you seeing prices these days as far as kind of multiples on tower cash flow for the 10 that you guys bought and the ones that you're looking at? Are seller expectations maybe coming down given what the capital markets are doing as far as difficulty to access them?
And then on the land program, how able are you guys to kind of continue that $25 to maybe $30 million a quarter worth of land program given the disparate number of owners out there?
Rick, on the acquisition front, the multiples really vary all over the map, as you would expect, based upon occupancy and sort of maturity of the sites from lows in the low teens up to north of 20, at least asking prices. That's not a very specific answer, but that's a fact. It's all over the map. And so we do our best to assess the value of the long-term lease up activity against the price versus our current trading in the market. You know you've heard us say that many times before, that's the balance we try to strike around the allocation of the dollars.
And I would say that perhaps the capital markets are bringing that into clear focus for some sellers, but at the same time there's still a lot of capital out pursuing tower acquisitions. It's an attractive recurring cash flow business, and so I wouldn't say that it's been a material change.
On the land front, we do feel pretty good about our ability to continue to operate at these levels. It's something we think is strategic and financial. It's got sort of a lot of benefits to the company, and we're going to continue to do it. And I would expect we may even grow it over time, but we'll do those as we can. The run rate we're on today is I guess last year we spent about $130 million on it as a company - and our run rate would suggest we're probably on that track this year.
Our next question's from the Brett Feldman with Lehman Brothers.
Brett Feldman - Lehman Brothers
It was interesting to see you guys deleverage this a little bit in the quarter. You're now closer to 7 than, say, 8, which is the higher end of your range. I know you were touching on this topic a little bit earlier. I'm just curious. The deleveraging that you had in the first quarter is that simply a function of the immediate limits on your liquidity in terms of what's available under the revolver, et cetera, or are you in fact skewing a bit conservative this year in your view towards leverage and reinvestment in the business?
It's definitely the former. We're not getting more conservative, and I want to make that point very clear. It goes back to the 2 times interest coverage metric that we talked about, and that's still our belief based upon the long-term contractual and predictable nature of this business with minimal capital requirements on a run rate basis. Again, most of the capital we spend, virtually all of it is discretionary.
So, Brett, it's not a matter of conservatism. It's a matter of trying to pick your spots wisely in the capital markets, and as we all observed, it hasn't been a lot of fun out there in the last quarter and so we've decided to sort of take a holiday from being in the market. And I think that's the right approach.
We are watching it weekly. I think there's an opportunity maybe - capital maybe - to get into the securitization market and top up just the triple A levels, which may be in the range of 200 over LIBOR. Astounding spreads, I grant you, for triple A, but at the same time LIBOR has come way down, so that's in and around 5% to 5.5%. That topping up at the triple A level could yield us potentially as much as $300 million if we chose to go down that road this summer.
We have access to the institutional bank market. It looks to us like in the 300 to 325 range over LIBOR. Again, much higher than where we've borrowed before, in the 150 area, but available and, you know, in and around 6% 6.5%.
So not the end of the world. We're just trying to be precise in our thinking here so that we don't do something that we're then immediately going to regret by the end of the year if the markets ultimately tighten up and we're faced with wanting to refinance something or pay a [inaudible].
And so we're watching it very carefully, and you should expect that's what we'll continue to do.
Brett Feldman - Lehman Brothers
The increase in your outlook for this year, if I remember correctly your prior guidance, you had indicated that you'd a lot of conservatism in terms of what you were expecting for the second half of 2008. You were waiting to see what happened with the auction and whether that might change the pattern of spending at your customers this year. You seemed to have gone ahead and pulled the trigger in taking your range up. Does that reflect an expectation that you think it's going to be a little bit more of an even year than you anticipated or is there a little more color that you can provide on that? That'll be great.
Well, it's a little more even year. Looking at run rates, where we come out of - frankly, where we come out of the fourth quarter and in the first quarter. It's also just sort of seeing the activity levels in the customers and rolling up the numbers and you get to $7 million up in EBITDA. We didn't take the full EBITDA up through the range of gross margin up of 10 because we're being a little conservative around the services business in the second half of the year. Not exactly sure how that comes in, you know that’s volatile. And so we weren't going to sort of take the bait and run the 10 all the way through to the EBITDA line because at this stage in April we didn't think that was quite called for.
I would also highlight, as I said in the prepared remarks upfront, we don't forecast acquisitions. We are working on some. We expect to close some, and so as we close them, they will come into the numbers as well. I wouldn't venture a guess on size or amount, but it's enough to change the numbers. And then the same is true if we were in the market buying shares. We don't forecast that.
So there are potentially some things coming the latter half of the year that will be additive and we'll tell you about them as we do them.
Our next question's from the line of Richard Choe with Bear Stearns.
Richard Choe - Bear Stearns
I just wanted to follow up a little bit on the revenue-generating Capex spend. Is the first quarter kind of what we should see as a run rate, knowing that it's choppy from a quarter-to-quarter basis but it seems like the activity level from your existing carriers and maybe the environment out there is pointing in a certain direction? Should we see kind of this level of spend going on throughout the year, and if you can give us a little more color on that.
Richard, I think that's probably a good run rate. In the range of $60 to $70 million is what we would expect to spend on what I'll call augmentation Capex around existing sites and that always comes with additional revenue associated with the site.
And so if you think about it in one simple respect, we're adding about $60 million of brand-new organic revenue per year in terms of brand-new licenses coming on the towers, and that's about a one-year payback on that capital spend.
Again, the remaining revenue growth comes from escalators. That's the delta there. But $60 million of organic revenue. It's about a one-year payback on that capital, and we think that's a very good investment and probably a pretty good run rate.
Our next question comes from the line of David Barden with Banc of America.
David Barden - Banc of America Securities
Number one, Ben, with the credit markets for the moment closed - and obviously that depends on where you go with revisiting the CMBS market - you obviously have been making choices about the $60 million in total Capex and the $40 million of stock buybacks. Could you give us a hint, if the credit markets or you decided to not readjust the credit markets over the rest of the year, is that kind of split for capital expenditures in total versus buybacks appropriate as a baseline to kind of think about the model on a go forward basis?
And then, secondly, just because it kind of comes up time and again, if the CMBS market were to remain closed or at least no more open than it remains today and you look down towards the refinancings in '09, a couple hundred million and than a larger amount in '10, what is your kind of baseline game plan for refinancing and what would the cost be and the implications for cash flow?
First of all, on the cash split, I wouldn't really venture a guess on the split between share purchases and acquisitions, but I would tell you that the $120 million a quarter or so that we're generating this year we expect to fully deploy in earning activities. And so that's a lot of money, even if we don't borrow any money, as a percentage of contribution to our overall growth rate. And again, I guess you could say the $70 million - to Richard's previous question - the $70 million is sort of already sort of implied in that organic growth in the business.
But that still leaves $410 million to then invest full year, four quarters, in other gainful activities, and that'll take the form of land, acquisitions, builds, and stock. And so I can't tell you how that's going to shake out, but I can tell you we're going to spend every dollar of it and that's our objective, and to put it to work in the highest and best use we can. Then we'll continue to evaluate the credit markets and see what the right approach is.
To your second question on the balance sheet and the refinancing activity in 2010, the big one being 2010, which is May of 2010, our first large CMBS transaction, which comes up for its anticipated refinancing of $1.9 billion, a couple of ways we think about that.
Number one, if the market were not to improve at all from here for two more years, that entity not re-levered on itself would be down in the range of probably 5 to 5.5 times debt to EBITDA. That would suggest even at today's tranchings that we believe are out there in the market, we could get 80% to 90% of that refinanced all triple A, okay? So that would be the conservative view that says okay, we're just going to let it delever on itself over time through EBITDA growth, not re-lever the entity because we haven't seen any appreciable improvement in the market, and then that way we've best positioned ourselves when we refinance it to mitigate any increase in cost, i.e., spread, against that.
So today, triple A levels - some of my banker friends will probably [inaudible] at this - I think we're seeing triple A levels in and around 200 over. It changes a lot. That's up dramatically. Remember, we issued 27 over most of this stuff, so it's up hugely from there. But LIBOR is also much lower as well.
So that's the doomsday approach, you know, what happens if things don't get better - you're 5, 5.5 times leveraged in the entity.
And I'll draw one other distinction for you, if you're still with me. That doesn't necessarily mean you wouldn't relever at the parent because you're in two different markets and two different views. So within our overall leverage levels of targets we've suggested for ourselves, you might be back in institutional market and levering at the corporate parent level at, you know, reasonable rates, but then letting the entities continue to delever where the towers are for that eventuality that the market doesn't get any better and so you've absolutely mitigated any step up in cost when you refinanced that.
And to venture a guess on that today, I just couldn't. We're two years out. But we're watching it very carefully and thinking about all those eventualities.
David Barden - Banc of America Securities
And Ben, just a quick follow up. So in looking out two years, you think that the tranching would skew to 90%, 95% triple A versus how it got structured in '05?
Just for point of fact, about 4.5 turns were triple A on our deals when we did them, and we're being told without a formal rating process that maybe it doesn't change very much. A lot of things have improved about the business since then, so at those levels, maybe 80% to 90% are triple A if you take that scenario we just walked through where you're [sort of] 5.5 times on the refinancing.
David Barden - Banc of America Securities
So you'd only have, say, 20% of the $1.8 billion that would be in that kind of quote-unquote, Alt-A tier?
Yes, it would all be double A.
David Barden - Banc of America Securities
Yes. And then you could go into the bank market or whatever to refinance that piece?
You could do that if you wish or issue double A paper as well.
David Barden - Banc of America Securities
Right. And double A spreads you think are where right now?
About 300 over, it looks like.
Our next question's from the line of Michael Rollins with Citi Investment Research.
Michael Rollins - Citigroup
Just maybe, I don't mean to belabor the point, but just maybe to bring it back to just maybe the 30,000 foot view, does it just mean that if your interest cost goes up - you look at interest coverage - if you interest cost goes up, that could dilute recurring cash flow growth at some level? And is there a sensitivity that you've done to say, relative to your total interest costs for the company today - just take the whole thing - if it goes up maybe 100 bips or 50 bips, X is the headwind on recurring cash flow growth for the three to five years to follow? Is that maybe a way that we could try to conceptualize how to think about your debt costs over the next, I guess, couple of years as you approach that refinancing?
And then just a second separate question is can you give us an update on where you are with your tax status in terms of your net operating loss balance, when you would expect to go cash tax pay. And if you would consider to go to a REIT status at some point, does that date correspond with the trigger point to REIT status, or would that actually come sooner?
The question on speculating, purely speculating and modeling around what does it cost to refinance the balance sheet is obviously complicated depending upon the market and what level of leverage you assume we are at when we get there, but it's easy to quantify if you just want to run sensitivity. So there's $5.3 billion of securitized paper, most of which rolls over in 2011. The beginnings in 2010 and the last piece in 2012. You know, 100 basis points on that is $53 million. So stagger it in, you know, layer it in as those maturities would occur, and yes, you're absolutely right, Mike, based upon the way we do our math, that would affect RCF because RCF, in our view, the best measure to value the firm is EBITDA less interest expense plus sustaining capital, meaning cash available to management to discretionarily employ.
So you're exactly right. Over that period of time, if you were to make that assumption, just pick a number of 1%, if would layer in $53 million of additional run rate costs.
However, I would go back and remind everyone if we had it to do over again we'd do exactly what we did before, which is lever the company appropriately and spend the proceeds on things we think enhance long-term growth. And in this case that was stock - big-time, to over $2 billion - and the Global Signal assets, being very judicious as to how we issued shares into that transaction - remember, doubling the tower count with only a 40% increase in net share count.
So even if you were to say okay, well we can see how you normally grow RCF maybe $100 million a year, but then you're going to sort of take a little bit of a haircut in sort of the '09, '10, '11 periods as you roll over the balance sheet, we can live with that. We're quite happy with how we've capitalized the business and 23,500 towers pushing 280 million shares is math we like all day long.
Michael Rollins - Citigroup
And the tax situation?
NOLs, we're about $2 billion on NOLs and would expect, without giving you absolute guidance, you know, probably in '09 turn net income positive, unless we buy something else, in which case you roll depreciation up again and maybe push it out further. So maybe you start being a tax - start net income positive in 2009 and it gets consumed over the next sort of five year timeframe. So it really doesn't seem to us to be a topic that's significant until we become a cash taxpayer, at which point the REIT status would definitely be appealing just for the single taxation.
And so we think that's several years out. I'll be that specific. It's a number of years out.
Michael Rollins - Citigroup
And just to clarify, sometimes the REIT books differ from the tax books versus the accrual books, so I guess you introduce another set of books into the whole equation. And so do they tend, though, for your business to correspond where the point at which you're reaching cash taxes, if you just look at the NOLs and try to think about your income over time that would be the point at which from a REIT perspective it would also be optimal to switch over?
I think that's the case, yes, somewhere in that timeframe, about the same. And that's so far out - obviously, we've thought about it, but about to the extent of this conversation because it's absolutely clear today that it doesn't make sense, since there's not a tax issue, and our view is that the dividend model - while appropriate, probably, at some point in time - is clearly not appropriate today.
Our next question's from the line of [Ben Stritch] with McCleary Capital.
Ben Stritch - McCleary Capital
Firstly, if I look at where you spent your money in the quarter - $42 million on your stock and $27 million on land versus building 9 towers and acquiring 10 - you're sending a pretty clear message in terms of where you continue to see that the [inaudible] on an IRR basis, so I guess my question is, firstly, what can you tell us about what you're seeing in terms of cost and political pressures for new tower builds from the various inputs into that process?
And secondly, if I can sort of draw out on Rick's question just to focus on the small tower [portfolio] that are out there, does your Board feel that those smaller domestic mom and pop business models are generally tilting down a little? I mean, you'd expect their [inaudible] for this small, sort of less-diversified portfolio is to have gone up, so is that following through to a contraction in asking prices or are they just holding on there for the moment?
Ben, the first answer I'd give you is don't necessarily draw too much into the first quarter results and the mix of how we spent the money. There's a lot that goes into that. The tower builds, for example, are long dated and challenging to do so it takes awhile to ramp that up. But we're probably going to be at a run rate in and around 100 to 150 this year, give, or take, in terms of completed sites.
The acquisitions, same thing. They're lumpy. I would expect we will have substantially more to talk about over the next three quarters than we certainly had this quarter, which was de minimus. And then land is sort of an ongoing process.
So again, I wouldn't really ask you to draw much conclusion out of this. This is within the limits of the cash flow we're generating. I think we're going to work hard to put it all to work, and we'll do the best we can, as we have been, to allocate that. But again, this mix this quarter is probably not representative of where we're going to see it going forward.
On the roll ups, you know, it's a funny thing. I've observed, at least for now - and maybe this is changing here rapidly in the last couple of weeks - there's been more access to capital in the small middle market companies than there has been in the institutional market. And it's been a paradox we've talked about a lot internally how small mom and pop firms and a regional bank can borrow money less than folks that are out in the institutional market. I'm not sure that holds. It's not logical that will hold. So I don't think there's been really the scarcity of capital in that market yet - that may ultimately come true - that ultimately has the influence on the prices.
So I can't sit here and tell you that the prices have changed materially. I mean, of course there's maybe some downward bias based upon reading the newspaper every day and what that just does to your normal psyche if you're a seller, but not materially at this point.
Our next question is from the line of Gray Powell with Wachovia.
Gray Powell - Wachovia Securities
Historically you guys have talked about 1.25 tenants per tower of additional demand longer term, and I know that excludes WiMAX and LTE, just data services in general. Have you ever tried to quantify what the longer-term upside to leasing demand could be with data services?
John P. Kelly
Yes, Gray, we're doing that as we speak this year, and that should be a number that will be updated a little later this year because, to your point, the 1.25 does not include those kinds of very real activities. Clearly, we got better sense of what at least one of the majors is thinking about doing from the standpoint of LTE during the CTIA show, and with the results that AT&T announced a couple of days ago, it isn't anymore a question of it wireless data takes off. It is taking off now, 21.5% of their wireless service revenues. And so what is that impact on our 1.25 current estimated demand since that number does not include that.
So we'll be refreshing that to better predict what additional leasing will come from that, and we'll be advising you a little later this year on how that number looks.
Gray Powell - Wachovia Securities
And then I know you touched on this before but just in terms of like 2008 leasing demand, if I - and the math is a little complicated - but if I look at the incremental revenue that your towers are generating and I exclude onetime items and acquisitions, based on your guidance I get to about $87 million in incremental revenue in 2008 versus call it $78 million in 2007. So now it appears that your guidance reflects just a higher level of leasing demand in your assumptions in 2008 versus 2007. Can you just talk about generally what you're seeing year-to-date that's changed, that gives you more confidence?
It's modestly up, as we said earlier. It's modestly up and a little bit ahead on run rate. And as you certainly know, Gray, as you get ahead on run rate in this business, you track ahead for the full year.
So as we look at full year '07 results and now our guidance and internal forecasts for '08, I'd say modestly ahead and some of that has to do with just activity front end loaded in run rates for the year.
John P. Kelly
Gray, it's just, I mean, in terms of the what is different this year than last, as I was mentioning, it is the ability for those wireless companies with AWS spectrum to be able to deploy that more easily this year than they were last because of some of the frequency clearing issues that they ran into. And so that and, depending upon the company, that is front end loaded certainly in terms of the deployment of the 3G network is kind of a very accelerated front end loaded activity that's occurring.
And then, quite frankly, as you listen to the other large carriers - certainly AT&T had their call earlier this week they're absolutely committed to ensuring that they have built out third generation to secondary and tertiary markets. We're seeing that, and that clearly was not something going on in 2007. So that's taking place, and that's where you're seeing the increment over the steady stately thing that we see in any given year. These are the additional kinds of catalysts that we're seeing for this year that takes up the number modestly.
And then other initiatives, as I had answered earlier, I think, to Rick's question, are not embedded in it, things like a full scale WiMAX deployment simply because that's too much of a question still at this point.
Gray Powell - Wachovia Securities
Okay. And then just one final question, it's more housekeeping than anything else, but if I just look at the Q1 results, compare Q1 '08 to Q1 '07, and back out the one-time items from both quarters, I get to almost a 10% internal revenue growth rate versus the 8% to 8.5% run rates of 2007. Can you just tell me if I'm doing that math right or if I'm missing something there?
No, that's correct. That's right.
And our final question comes from the line of Jonathan Schildcrout with Jefferies & Company.
Jonathan Schildcrout - Jefferies & Company
I was wondering if you could give us a little color on where the lease-up activity is occurring, where you're seeing most of it - whether it's in your top 100 BTAs or whether you're seeing it spread kind of evenly across markets or alternatively whether it's kind of occurring outside of the top 100 BTAs.
Jonathan, we do track that every quarter and it's been interesting. We track all 100 markets and we have for the last eight years, and it is occurring disproportionately in the top 100 markets, as you would expect logically, around the AWS build-out, the 3G overlays, the new entrants in the market. Everything that's going on is clearly focused generally on those top 100 markets at least first.
We are seeing secondary markets getting in-fill sort of phase two, if you will, or increasing 3G deployments sort of in the second phase for some, but it generally always skews towards the top 100 markets. But it's why we've been fixated on that metric as a key driver for our business going forward because we can actually see that result in our history. It has made a difference over time - obviously it's a location-based business - and one where that one of the attractions we saw in the Global Signal transaction was their high percentage of sites in the top 100 markets.
John P. Kelly
I'd like to thank all of you again for taking time out of your day to join us this morning, and we look forward to reporting on our second quarter results some time in the summer timeframe. And with that, we'll conclude the call.
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