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Crown Castle International Corp. (NYSE:CCI)

Q2 2008 Earnings Call

July 25, 2008 10:00 am ET

Executives

Fiona McKone - Vice President, Finance

Jay Brown - Chief Financial Officer, Senior Vice President

W. Benjamin Moreland - President, Chief Executive Officer, Director

John P. Kelly - Executive Vice Chairman of the Board

Analysts

Richard Prentiss - Raymond James

Jason Armstrong - Goldman Sachs

David Barden - Banc of America Securities

Simon Flannery - Analyst

Michael Rollins - Citigroup

Bret Feldman - Analyst

Analyst for Jonathan Shetalcro - Analyst

Brad Quartz - Analyst

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Crown Castle International Corp. second quarter 2008 earnings conference. (Operator Instructions) I would now like to turn the conference over to Miss Fiona McKone, VP of Finance. Please go ahead, Madam.

Fiona McKone

Thank you. Good morning, everyone and thank you for joining us as we review our second quarter 2008 results. With me on the call this morning are Ben Moreland, Crown Castle's CEO; Jay Brown, Crown Castle's CFO; and John Kelly, Crown Castle's Executive Vice Chairman.

This conference call will contain 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 factors that could affect the company’s financial results are available in the press release and in the risk factors sections of the company’s filings with the SEC.

Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.

In addition, today’s call includes discussion 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 investors section of the company’s website at crowncastle.com.

With that, I will turn the call over to Jay.

Jay Brown

Thanks, Fiona and good morning, everyone. As you’ve seen in the press release, we reported another excellent quarter of results. During the second quarter, we generated revenues of $379.5 million. Site rental revenue increased $26.2 million to $348.5 million, or up approximately 8% from the second quarter 2007, in line with our target. Substantially all of this growth was achieved organically across the assets that we owned as of the second quarter 2007.

Service revenue was $31 million, up approximately 50% from the same period last year. Gross margin was site revenue rental defined as tower revenues less the cost of operations was $234.8 million, an increase of $24.6 million, or up 12% from $210 million for the second quarter 2007.

Adjusted EBITDA for the second quarter 2008 was $213 million, an increase of $26.6 million, or up 14% from the second quarter 2007, ahead of our expectation. As a result of diligently managing our direct tower expenses in G&A, in the second quarter we were able to convert 100% of our year-over-year growth in site rental revenue into adjusted EBITDA.

Recurring cash flow defined as adjusted EBITDA less interest expense, less sustaining capital expenditures increased 31% to $119.2 million from $90.9 million in the second quarter 2007.

We significantly exceeded our targeted annual growth rate of 20% to 25% growth in recurring cash flow per share by achieving 34% growth from the second quarter of 2007. Our continued strategy of investing cash to maximize long-term cash flow per share, coupled with the strong operating performance of our towers has enabled us to deliver results above our target. I believe our operating results demonstrate our ability to consistently growth revenues and cash flow even in challenging economic times.

During the quarter, capital expenditures were $140.7 million. Sustaining capital expenditures totaled approximately $5 million. Revenue generating capital expenditures were $135.7 million. This was comprised of $73.5 million for land purchases, $18.4 million of CapEx for revenue enhancing activities on existing sites, and $43.8 million on the acquisition and construction of new sites.

Turning to the balance sheet as of June 30, 2008, at quarter end we had approximately $98.8 million of cash, excluding restricted cash. Total debt to adjusted EBITDA as of June 30, 2008 was 7.2 times, and interest coverage, or adjusted EBITDA to interest expense was 2.4 times. Securitized tower revenue notes totaled $5.3 billion and other debt totaled approximately $856 million, for total debt at the end of the quarter of $6.1 billion. The other debt was comprised of $792 million under our corporate credit facility, and $63.7 million of our 4% convertible notes. We also had $314.3 million of our 6.25 convertible preferred stock outstanding as of June 30, 2008. Lastly, we had $100 million of availability under our revolving credit facility.

Moving to our outlook for the third quarter 2008, we expect site rental revenue for the third quarter of between $351 million and $356 million. We expect site rental gross margin for the third quarter of between $235 million and $240 million. We expect adjusted EBITDA for the third quarter of between $214 million and $219 million, an interest expense of between $88 million and $91 million.

We expect sustaining capital expenditures to be between $8 million and $10 million, and recurring cash flow is expected to be between $116 million and $121 million.

As you’ve seen in the press release, we also updated our full year 2008 outlook, increasing site rental revenue, site rental gross margin, and adjusted EBITDA by approximately $5 million, largely based on the strong performance of our business during the first half of 2008. As reflected in our full year 2008 outlook and due to the efficiency of our capital structure, we expect to translate the 9% growth in revenue into 14% growth in EBITDA and 26% growth in recurring cash flow per share, again above our target. Taking into account our full year 2008 outlook, our compounded annual growth rate and recurring cash flow per share over the four-year period ending in 2008 is projected to be 26%.

Given the state of the credit markets, I’d like to make just a few comments on our capital structure. We are in an excellent position relative to the current dislocation of the capital markets, as virtually all of our interest expense is fixed and we have no significant refinancings before June 2010. Importantly, there is no current requirement for the company to access the capital markets, as we are producing nearly $0.5 billion of annualized cash flow. Projected recurring cash flow is sufficient to fund our contemplated capital spending around improving existing sites, the acquisition and construction of new sites, and land purchases.

I am comfortable with our current level of indebtedness, as it represents less than 40% loan to value, which is very conservative relative to other real estate or infrastructure assets. We also benefit from having the majority of our site rental revenue from investment grade rated tenants under long-term leases with historically low churn rates. I would also point out that given the anticipated growth rates in our business, we tend to delever quickly as soon over the last six quarters. Since we acquired the global signal assets, we have reduced the total debt leverage from 9.25 times to 7.2 times, largely through organic growth in adjusted EBITDA.

With regard to current borrowing rates and while there is no guarantee about the all-in cost of incremental debt offerings, I believe we would be an issue today in the CMBS market at approximately 6.5% at the triple A level, or in the high yield market at approximately 8% to 9%, assuming our current level of leverage. Though we have not issued any incremental debt in 2008, I continue to believe that our long-term expected equity returns are enhanced by a prudent level of leverage. Obviously the cost of any incremental debt must be weighed against the risk adjusted returns of the investments made with the proceeds. Certainly the volatility of the credit markets may affect both the timing and pricing of future borrowings. We will continue to diligently manage our capital structure, balancing the benefits of utilizing debt to enhance our long-term recurring cash flow per share growth while not compromising our ability to refinance our existing indebtedness at reasonable terms and costs.

Again, I am very pleased with the results this quarter and continue to believe that the assets we own have considerable growth potential, and due to the efficiency of our capital structure, we expect to be able to translate 9% revenue growth in 2008 into 26% growth in recurring cash flow per share.

With that, I will turn the call over to Ben.

W. Benjamin Moreland

Thanks, Jay, and I want to welcome you and Fiona onto this call going forward, and thanks to all of you for joining us on this call this morning. As Jay reported, we had another very good quarter, as we exceeded our outlook for adjusted EBITDA, recurring cash flow, recurring cash flow per share, and increased our full year 2008 outlook, based on the activity we’ve enjoyed in the first half of the year.

As reported in our press release, for the first six months of 2008, we have experienced an 11% increase in leasing activity and associated revenue in the U.S., compared to the same period in 2007. I remain excited about the long-term growth prospects for site rental revenue from the continued deployment of wireless, voice, and data services, and the migration from wireline to wireless telecommunications we are all witnessing.

Before we turn the call over for questions, I would like to make a few comments about our expectations for Crown Castle for 2008 and beyond, driven by the strong industry fundamentals characterized by rapidly growing minutes of use with an increasing demand for wireless data.

While wireless penetration is now at about 84% of the population, recent moves by wireless carriers to unlimited plans have led people to spend more time on their wireless devices. Subsequently, minutes of use have grown more than 20-fold since 1999. Even with penetration exceeding 80% in the U.S., wireless minutes of use has grown 18% in the last year and exceeds $2 billion billable minutes annually.

It is interesting to note that in a recent CTIA report, U.S. households with wireless only service increased to 16% at the end of 2007, from just 8% at the end of 2005. Further, the increased availability of smartphones and 3G devices is contributing to accelerated growth of wireless data traffic and revenue.

As we have stated in the past, the combination of rapidly growing minutes of use and increasing demand for wireless data means that network quality remains a key factor in the retention of subscribers, resulting in carriers spending on their networks to ensure coverage and capacity to meet customer needs. This growth in minutes of use and data services is resulting in increased revenues for our customers. In fact, wireless industry revenues for the six months ended December 2007 was up over 9%, and for the full year ending December 2007, revenues were over $141 billion.

Carrier revenues from mobile data services were $23 billion in 2007, representing a 53% increase year over year. Over the next three years, mobile data revenues are expected to exceed $70 billion annually, representing a 30% compound annual growth rate. Notably, AT&T in their release earlier this week commented that only 18% of their subscribers currently have an integrated device, but that’s up from 8% last year, and on average these subscribers have an ARPU roughly double the company average.

With the rapid launch and adoption of 3G devices and the rising demand for wireless data, wireless carriers are aggressively upgrading to 3G to capture the significantly higher ARPU than that of the traditional 2G subscribers. Smartphones have been the fastest growing segment of handsets globally, with that trend continuing well into the future. ABI research has said that 10% of the 1.1 billion mobile phones sold last year were smartphones and forecast as many as one-third of new phones sold in 2013 will be smartphones.

This summer, the launch of several high profile 3G phones has received a lot of attention. Apple sold 1 million 3G iPhones in 21 countries during the first weekend of its launch, more than four times the number of units it sold with it launched the 2G handset last year. Also, Verizon and Sprint have both launched competing smartphones with great success.

The relevance of these statistics for us is that it’s becoming clear that as user friendly devices become more widely available for access data services, usage and ARPU accelerate markedly. As next generation data enabled devices penetrate the market, wireless carriers are leasing more of our sites in order to support the growth in demand for wireless voice and data services that they are seeing.

Specific to Crown Castle, on the leasing front we continue to be excited by our leasing in 2008. As I mentioned earlier, in the first six months of 2008, we’ve experienced an 11% increase in leasing activity across the board and associated revenue in the U.S., compared with the same period of 2007. As a result, we’ve increased the full year outlook based on the activity we’ve seen in the first half of the year.

Our full year forecast for leasing from our customers continues to be conservative relative to the deployment of the WiMAX network. As Clearwire completes its announced transaction, we fully expect to see significant amounts of leasing activity from the new Clearwire as they deploy their WiMAX network.

We forecast aggregate leasing activity from all other customers to exceed 2007 levels.

I believe we are best position in the tower industry to translate the revenue growth opportunity that I have discussed into recurring cash flow per share growth for the following reasons: first, we have the best located assets in the industry, with 72% of our sites in the top 100 BTAs, with approximately 3800 more sites in the top 100 markets than our next closest competitor.

Secondly, we are the industry leader in customer service. After only five quarters following the closing of the Global Signal acquisition, customer satisfaction scores from our surveys now exceed pre-Global Signal levels.

And finally, we have the fewest shares outstanding per site of any publicly traded tower company. Depending on the company, anywhere from 25% to 50% fewer shares outstanding per site. This simply means that as we add revenue, this revenue will be divided among fewer shares than our peers, which translates into higher recurring cash flow per share.

So in closing, the tremendous results we have delivered in the quarter are not surprising to me. We are a significant beneficiary in the continued migration of communications services from a wired platform to a wireless platform. We are wonderfully positioned for growth going forward because of the trends I’ve spoken of this morning, and they are not abating but rather accelerating as more communication activities are taking place across wireless networks than ever before.

I believe that our growth going forward is positively impacted by three things: first, the industry dynamics I’ve spoken of; second, the way we capture demand and execute for our customers; and third and perhaps most importantly, the way we have deliberately capitalized our company to leverage this demand into shareholder returns, which we believe is unique among our peers.

And with that, Operator, I will turn the call over for questions, and thank you.

Question-and-Answer Session

 

Operator

(Operator Instructions) Our first question comes from Rick Prentiss.

Richard Prentiss - Raymond James

Good morning, guys. You know analysts always ask one question with about 25 parts here -- the first question I want to ask you guys has to do with what Jay was talking about with the capital structure and the debt markets. No stock buy-backs in the quarter but significant land program purchases in the quarter. Walk us through a little bit about how you think about using your cash, your available undrawn, maybe approaching the markets and how you would prioritize, given where your stock is at versus what you just shared with us about your excitement about the company -- how do you prioritize stock buy-backs, land programs, leverage levels, capital markets being open or now, how much cash you want to keep on the balance. So a pretty long-winded multi-point question to say how should we think about how you are going to put the balance sheet to work under those things?

Jay Brown

I’ll hit a couple of those and then let Ben handle the stock question. On the land purchase side, we’re doing all we can and would hope to continue to do more of that. We look at the land purchases as really refinancing the long-term operating leases that we have off balance sheet at a lower cost by bringing them on balance sheet, so the returns that we are getting on those are really a form of debt refinancing and we are doing that at very attractive rates.

And strategically, we think it’s valuable to control the land underneath our towers, as it really eases our ability to lease up the assets.

With regard to your other comments about the capital structure, again I’d point out we really don’t have any significant refinancings before June 2010 and we have $100 million of availability under our revolver. And if you look at what we are spending, we are really spending the cash flow coming off of the business on the activities that you mentioned in your question, so we have plenty of cash to continue those activities and we have historically spent most of the cash flow on activities related to sort of our core tower business, whether that was acquisitions, land purchases, or the construction of other sites.

W. Benjamin Moreland

Just a couple of other things to add to that, Rick. As Jay said, we typically spend generally all of the cash flow we create, recurring cash flow around the business, including some acquisitions, smaller roll-up type acquisitions and then typically would borrow historically to buy back stock or do larger acquisitions.

As we look today, and an obvious question I think as you raised is we haven’t bought any stock back here in the last quarter, and the honest answer to that is we’ve been engaged in some M&A activity that frankly at the prices we were proceeding or participating in would have required us to go to debt markets to finance, and at the prices we were bidding, we thought they were very compelling opportunities and we needed to sort of wait and see how those fell before we proceeded.

I would also note that the valuation frankly sort of fell off here at the end of the quarter and into July, but the fact isn’t lost on us that we’ve grown recurring cash flow per share over the last eight quarters 44% and the stock price is basically flat over the last eight quarters. So another to even say it more simply, we’ve had 40% multiple compression on that metric, which makes the value of the stock pretty compelling, even in the face of a more challenging credit environment and what you might have to pay for that incremental dollar of debt. So I’d say stay tuned on that front. We continue to evaluate acquisitions against the stock and it’s a dynamic exercise.

Richard Prentiss - Raymond James

Obviously a big flurry of activity this week maybe leads to a perfect setup for question two -- $1.3 billion in tower M&A this week. You did not do it. Are there other ones in the wings that would keep you back from stock buy-backs? And the second part to that question is remind us again of what multiple you pay for Global Signal? And as you look at acquisitions, where is your walk away point where you say wow, that’s just getting too big for us?

W. Benjamin Moreland

Well, size is -- we can do pretty much anything we want to do, obviously, in terms of raising capital. I won’t probably comment much about what’s still out in the wings. We’re always working on various things of any size. You didn’t see us participate in all the flurry of activity this week and I think you can draw certain conclusions around that. Nevertheless, at the prices we were proceeding with on those, on certain of those, we would have had -- we would have felt like that was an appropriate allocation of capital, even against purchasing stock. That didn’t fall our direction, as you can tell, and so as we look at where we sit today, we will continue to evaluate how we access the credit markets to continue to take the share count out or look at additional acquisitions and opportunities that come up.

It’s going to be a continuation of what we’ve done. While we haven’t borrowed anything significantly this year, at 7.2 times leverage and over - comfortably over two times interest coverage, as Jay mentioned, we have capacity, we have access in a number of markets, and we are going to continue to do what we’ve been doing.

Richard Prentiss - Raymond James

One final quick question, I guess -- Southpoint project, you guys did mention kind of latent demand that you felt was out there but you were going to be updating that project, looking at data and all the items you talked about. Any update as far as when we might get some thoughts from you guys on an updated Southpoint projection?

John P. Kelly

It’s one of the primary focuses that I have right now in my new role, quite frankly, is really focusing on the whole question of what is the true latent demand for tower space on our towers. We’ve talked to all of you about 1.25 tenants per tower of indicated need and quite frankly, just using that number and if you estimate that occurs over some five years, you’ll find that that drives a growth profile that quite frankly is quite significant.

Notwithstanding that statement, we’ve also told you that we think the 1.25 is conservative, by virtue of the fact that it doesn’t include a number of the new technologies that are being announced.

And so the update for that, Rick, it will be going -- that work that the team, myself are working on is going to be going on over the next six months. I would venture that as we start to wrap up the year here, we are going to be able to give you a much better sense of that.

A big issue and the reason for otherwise taking that time is to truly understand what some of the 4G technologies, be they WiMAX or LTE, are going to require in terms of cell site density and in terms of the actual antenna and line installation activity, and so we want to make certain we’ve got that right. We know it’s additive but we want to make certain we got it right and then we’ll go ahead and update you and the rest of the street on what we see that number growing from 1.25 to.

Richard Prentiss - Raymond James

Great, appreciate it -- look forward to that number and good luck, guys.

Operator

Thank you. Our next question comes from Jason Armstrong.

Jason Armstrong - Goldman Sachs

Good morning. A couple of questions for you, maybe first on the guidance -- if you sort of pick it apart, the revenue hike seems to reflect really just kind of the beat in the quarter and then a change in currency assumptions. So I’m just wondering, the fundamentals of the business obviously look really strong. There’s very bullish commentary on the call. It seems to support a bit more of a raise, so can you help us sort of sift through how you are thinking about the guidance and what keeps you from a little bit more of a raise at this point?

And then second question, just back to the land repurchases, we talked about that a little bit, big pick-up but can you offer some color behind what provided that type of opportunity to allocate capital there in the quarter? Is this just generally there’s more available for purchase or have the terms gotten more favorable to you? Just maybe some color there. Thanks.

Jay Brown

Sure, Jason, thanks. On the guidance, as you mentioned we did increase the guidance across the board at the revenue line and at the EBITDA line. Most of the steps that’s notable in the release if you look at it and squeeze out what the fourth quarter is implied to be from our full-year guidance and our third quarter guidance.

As we’ve approached the fourth quarter, we have a little bit more clarity around our services business and it looks like the demand for installation of new tenants on our towers going into the fourth quarter is strong, and so we’ve increased our expectation for the margin from that business going into the fourth quarter, which creates that step in EBITDA.

And the step in revenue is muted a little bit by the fact that we’ve lowered our FX expectation for the third and the fourth quarter, relative to what we’ve performed out in the first -- what we saw in the first two quarters of the year. That’s typically been our practice. We’ve generally backed off a little bit and the currency will fall where it falls, and so to the extent that the currency stays at levels that we’ve seen over the first half of the year, that would suggest we’d be at the high -- towards the high-end of the revenue range that we’ve given.

With regard to the land purchase program and what we are seeing, this has been something we’ve talked about obviously in the past that we are focused on and believe it’s for all the right reasons an activity worth undertaking, and I don’t know that I would tell you that the market has changed that much. We’re certainly probably getting better at it as we are maturing and perfecting how we explain it to our landowners, as well as how we perfect that sales pitch.

So I think we’re getting better at it. We haven’t seen a lot of change in the market in terms of multiples or price required to be paid and I think this probably just reflects our focus internally, as well as getting a little better at it.

Jason Armstrong - Goldman Sachs

That’s really helpful, Jay. Can we just go back to the currency question? Could you refresh our memory as to what the built-in assumption was before, what it is now, and sort of what that translates into in dollar terms?

Jay Brown

Sure. In the first half of the year, and I don’t have the -- let me give you sort of our expectation that we included there in the outlook section. I think we assumed about 0.94 for the balance of the year for the second half of the year, and the first half of the year was at the high-end of that, so we’re about 0.96 or so. So it represents a couple of million dollars at least in the back half of the year at the revenue line.

Jason Armstrong - Goldman Sachs

Okay, great. Thanks.

Operator

Year to year. Our next question comes from David Barden.

David Barden - Banc of America Securities

Thanks, and welcome to all your new roles this quarter. Just a couple of questions, if I could; I just want to kind of clarify, just because it seems to be the big topic right now -- so the reason why you didn’t buy stock back in 2Q was not because you couldn’t go out in the market, borrow at rates you felt would be accretive to the equity, and buy stock in a positive or net positive way, but it was because you were keeping your powder dry to do M&A? I just want to make that clear.

And then the second piece of that question is maybe could you walk us through, Jay or Ben, whoever, on the math behind how borrowing at say 9% today and buying back stock would compare with maybe even just a year ago where you thought you could go borrow at 6% and buy back stock? And do you need to be borrowing even more to get the same amount accomplished in terms of value creation for stockholders?

And then, if I could, just the last piece, again because we continue to talk about recurring cash flow and then -- but it turns out that we’re spending all of what’s left on growing the business, which is kind of what many other industries do. They just spend money to grow the business and they don’t divide it between recurring and non-recurring. So I guess the question would be you talked about 14% cash flow growth. If you didn’t spend all this money on growth CapEx, what would your growth be and how would we value your company if that cash was coming back to stockholders instead of going back into the business? Thanks a lot.

W. Benjamin Moreland

Let me take a couple of those --- your final question, the 14%, I might have misspoken. I think we talked about 44% over the last eight quarters in my remarks to Rick’s question. EBITDA growth rate is about 14%, so an unlevered enterprise value growth rate is about 14%, and not -- you know, it is augmented a little bit by acquisitions but our acquisitions have been very small and so it’s not -- it’s almost all entirely organic. Obviously you don’t get EBITDA growth from buying stock.

On the land side, you get some EBITDA pick-up but you also get substantially higher [ground rent] expense because of the straight-lining on all of the lease extensions that we are doing, so they largely wash. You’re not seeing a big EBITDA pick-up in the ground rent activities that Jay was describing. We only talk about the financial impacts, which is the purchases; understand there’s a whole other activity going on where we are extending a bunch of leases, which have a negative impact on lease expense because of the new straight-lining requirements. So just to be clear about that.

Let me go back to the M&A versus stock question though for just a minute, because it’s something we’ve talked about for years and I want to reiterate something. We look at M&A and stock purchases as one and the same transaction and ongoing in a relative value equation. We don’t think about buying stock as returning cash to shareholders, nor do we think about it as a catalyst where someone should be anticipated we’re going to buy back stock and that will drive the stock price. It’s our view -- it’s actually the opposite. To us, it is exactly an M&A activity -- one is simply investing internally to own more of the sites we currently own for those shareholders that remain; the other is an external activity which is just simply to add more towers among the current shareholders.

We constantly are looking at that relative value equation, and so this last quarter, against for the quarter what was a substantially higher price than we’re sitting at today against M&A opportunities that we were participating in, I might add on a disciplined level, and we did not prevail, as you can see from the announcements of the week. We thought at the levels we were bidding against the relative value equation of the stock for most of the quarter, had we prevailed, those would have been very attractive transactions. That’s a constant that we look at all the time and going forward, we are not bashful at all about -- in fact, we certainly would have been borrowing to consummate any of those transactions that we were looking at and we would think this exact same way about stock purchases going forward.

I’ll ask Jay to comment on the relative value trade between the incremental cost of debt and the cost of the stock.

Jay Brown

Dave, your question about that, and it’s a good one -- if you look back over the last several years where we’ve been borrowing in and around the 6% level, we’ve been buying back shares on a free cash flow or an RCF yield basis of about 4%, so our stock’s been trading somewhere between 3.5%, 4% over that period of time when we were borrowing, and we were borrowing at a cost of debt of about 6%.

Given the growth rate in the business, of growing that yield or the cash flow per share at about 20% to 25% per year, it was about three years to break even from the date that we invested the debt proceeds, took on the additional interest expense until that investment would be accretive at the RCF per share line. We’ve spent a significant amount of time articulating over the last several years why we’ve made those decisions to, if you will, bring down or dilute the RCF per share because of the benefit of the long-term value of buying in shares at what we thought were relatively attractive prices.

That equation has changed slightly today and today, as you mentioned, the borrowing cost is approaching 8% to 9% if we were to enter the corporate bond market. And the yield on the equity, or the yield on the recurring cash flow per share is about 5%. The trade there is about the same as what we’ve seen over the last three years. It’s about three years to the break-even point. So for the first three years of making that investment, it would dilute or lower RCF per share, but we still believe that long-term it is enhancing to RCF per share.

And as you’ve watched us over your time, you’ve seen us be more than willing to make that trade of suffering a little bit of short-term dilution in order to increase or enhance our long-term growth rates and recurring cash flow per share.

As we talk about 20% to 25% per year for the long-term, that assumes that we continue to keep the balance sheet levered and invest that cash flow and borrowing capacity to buy in either assets or buy-back stock.

W. Benjamin Moreland

One final point -- in my remarks, David, I mentioned the result of this over the last few years has gotten to be a situation where we’ve tried to come up with the most simplest way to speak about the dynamic around growth that we can come up with, and it frankly is as simple as shares per site outstanding, shares outstanding per site. And so as the result of all this continued purchases over time, today as I mentioned we are, on a shares outstanding per site level, 25% to 50% less than our public competitors. Why is that important? It’s real simple. As we talk about capturing the growth, the demand that is out there in this industry, you share that with your fellow shareholders per site. In our case, it will be shared with many fewer than in our peers, and it’s frankly just that simple.

The irony here is that if we stopped doing this, the growth rate actually increases in the short-term, as you can appreciate, because you are not diluting yourself either through purchases of shares or acquisitions. Long-term, obviously you’ve compromised some growth opportunity and what we are trying to do is thread the needle and be opportunistic about how we invest, either in acquisitions or purchase shares against an incremental cost of debt.

So longwinded answer to your question, but it’s pretty fundamental to understanding our story.

David Barden - Banc of America Securities

Thanks, guys.

Operator

And our next question comes from Simon Flannery.

Simon Flannery - Analyst

Thanks a lot. Good morning. You talked about the leasing activity being up 11%. Perhaps you could provide a little bit more color about that. Has that been fairly even across carriers, compared to say Q1 or what you were expecting? Or has it been quite lumpy? And what are your expectations for the second half in terms of distribution amongst the major carriers?

And any thoughts in terms -- you mentioned WiMAX briefly and I think what you were trying -- I want to make sure I understood it right, that you really don’t have WiMAX in your numbers for this year, but LTE timing, there’s a lot of numbers thrown around, 2009, 2012, you know, what your thoughts are at this point on when we start to see those networks deployed? Thanks.

W. Benjamin Moreland

Sure, Simon. On the carrier leasing, it’s been pretty broad-based really this year, across virtually everyone with a couple of exceptions we won’t go into. But across the board, we’ve been very pleased and up in most cases, sometimes modestly, sometimes quite healthily from comparisons for last year. And you’re right in your assumption -- we really don’t have anything for WiMAX in our expectations for the rest of the year but we have high expectations, optimism about the new Clearwire entity closing their transaction and we have a number of applications in the queue ready to go for them as soon as they are ready to roll.

And then I’ll ask John to comment, maybe on the LTE time?

John P. Kelly

I think with respect to LTE, our perspective on the timing is that you would start to see some markets being upgraded to LTE fourth generation technology in the back half of 2010. We don’t see something as early as 2009. There’s just -- there’s quite a bit of work that has to be done before that actually is commercially viable. And so the second half of 2010 and then in earnest, moving into 2011. And I think that’s still quite exciting from a consumer’s perspective because it is clearly on the near-term horizon. But until that technology is available commercially, I think it is both WiMAX, as that funding picture/the combination of the various different companies is realized towards the end of this year, and then the continuing upgrades of the 3G networks that the wireless carriers have been working on to date, including the launch of a new 3G network by T-Mobile and the continuing expansion of the current 3G networks that the Verizons and AT&Ts have deployed previously and are continuing to expand into other markets. So I think that’s what you are going to see as a primary driver until the fourth generation technology LTE is available sometime in the second half of 2010.

Simon Flannery - Analyst

That’s very helpful. Thank you.

Operator

Our next question comes from Michael Rollins.

Michael Rollins - Citigroup

Good morning. Just a couple of quick questions; one question, and sorry if I continue to focus on the balance sheet, but over the last few years it’s been my impression that you guys have been working to get better credit ratings for the leverage that you have, and is there something to read in terms of a change in your strategy with respect to either investments or cash repatriation with the recent down -- I think it was a downgrade by one of the rating agencies, and so is there any change in your strategy for how you are approaching balance sheet management that investors should be thinking about?

And then the second question I had for you was how should we be thinking about some of the upgrades as carriers are putting new frequencies into the sites? I know we’ve touched on it a little bit, talking around the technology, but do you see significant upgrade activity and revenue benefits for you when carriers put on another spectrum band to what they are doing, or does that sort of get now lumped into the cabinets and the antennas that are on the existing sites? Thanks.

Jay Brown

I’ll take your first question there, Mike, on the balance sheet. We did have a recent downgrade on our corporate credit facility and our corporate rating from S&P. That really does not affect our refinancing plans or the way we manage the balance sheet. The vast majority of our debt is in the structured notes and the ratings on those notes was unaffected by what you’ve seen recently from the rating agencies. And really that’s -- again, that’s the vast majority of the capital structure and where we’ve focused.

I would tell you that the tower paper, corporate bonds and bank facilities have historically traded well inside of the ratings from the rating agencies, so we’ll continue to work there but I don’t think that really affects kind of how we think about refinancing the balance sheet over time.

Michael Rollins - Citigroup

Just to follow-up on the real quick, separate from the refinancing though, was there something about your strategy for cash flow that changed, that maybe prompted the change or was it just a decision that was completely independent of the way you are approaching the business in your financials?

Jay Brown

I think it was completely independent, Mike. You know, we’ve had our stated target of trying to balance, to maintain about six to eight times leverage. That’s been a consistent theme of our story for the last three or four years, and we haven’t changed that. So I think this is just the way the rating agencies are viewing that, maybe in this climate relative to past days but no change in our strategy or deployment of cash or the way we manage the balance sheet.

W. Benjamin Moreland

The last thing I would add is it’s continuing -- it’s a little puzzling to try to reconcile the corporate side of the ratings with how what is historically a real estate or infrastructure type ratings process that goes on in the structured finance side of the house. And so frankly, we’ve been at this a long time and can’t reconcile that, so we’ve frankly moved on.

On the upgrade question, Mike, you asked about -- as carriers add spectrum bands, what’s happening on our sites? By and large what’s happening when they are adding spectrum they’ve purchased is it’s coming with new services they are offering to customers, so in the case of the 3G overlays that we are seeing, it’s a very significant component of our leasing over time and has been for the last two or three years and it’s continuing this year, probably most significantly around T-Mobile’s 3G build as we talked about, as John mentioned.

So generally what’s happening is as they advance, they are adding additional services and those are typically in the order of about one-third of the full install. It depends on what they are doing but in the order of sort of $400 to $600 a month, and depending upon if they are putting up microwave dishes, it can be a little bit more. And that’s by far on average what we are seeing.

It can be that they add bands to existing services without increasing any of the capacity on the site but that’s not generally the norm.

Michael Rollins - Citigroup

Thank you.

Operator

Our next question comes from Bret Feldman.

Bret Feldman - Analyst

Thanks for taking the question. If I remember correctly, back when Global Signal originally acquired the towers from Sprint, there was a decent amount of revenue share in those assets. Since then, there’s been a lot of land acquisitions. Maybe you could just give us an update as to what percentage of your portfolio right now has a revenue share on the land?

W. Benjamin Moreland

We have about 15% of our assets that have some level of revenue share on them, and certainly that is a long-term benefit, even apart from the financing, the refinancing benefit that we get from refinancing the off-balance sheet debt on balance sheet. There’s certainly some benefit long-term as we add additional tenants to those assets of not incurring additional revenue share.

But I would point out that’s pretty small, and even the revenue share that we saw from the Global Signal assets, there was only about a percentage point higher in that overall portfolio relative to what we had in the crown portfolio, and you can see our incremental margins on a quarter-over-quarter basis have largely not been affected by that over time as we’ve really maintained sort of 85% to 90% at least incremental margins.

Bret Feldman - Analyst

Okay, and a separate question; one of the transactions that was announced this week involved a company that had DAS business. You guys have been sort of involved in the DAS space for a while. Maybe you could just give us an update -- are you seeing a pick-up in demand there? And is this an area of your business you might be putting more investment into going forward?

W. Benjamin Moreland

We’ve been at this really under John’s leadership for about four years actively, and today have five systems up and operating and we continue to pursue it. It’s not a large component of our business. Our business is obviously pretty large at this point on the tower side, so it’s hard to really move the needle, but we are excited about certain opportunities we see. We’re getting a little bit smarter I think about how we are proceeding and pursuing these. We’re finding there are common characteristics of systems that seem to make them perform better and attract the co-location to ultimately get the kind of yields you want, and I would say across our systems we have built today, we are very pleased with the returns that we have today.

But it is possible to build one and only have one tenant on them, and so you’ve got to be careful. It kind of depends on the maturity of the market and where are carriers rolling out versus where other coverage already exists in a market, so we’re getting I think pretty thoughtful about the kinds of systems we want to pursue and we’re going to continue to do that.

Bret Feldman - Analyst

Are you finding that DAS is becoming more competitive with your towers? There was just a big market launch in the Northeast and that was done making heavy of DAS. Was that an area where maybe traditionally would have gotten more business on your towers if the DAS opportunity hadn’t been there?

John P. Kelly

No, quite the contrary. I think what you are seeing is there are locations in which a DAS network is the best alternative but I will tell you that the first priority that wireless carriers look at are existing towers. And what you are mentioning in the Northeast, that tended to be more of an urban core, the same thing in Southern California. And the fact of the matter is, the alternative to the DAS network was going to be a lot of rooftop locations as opposed to going on the distributed antenna system, so it didn’t have any impact on tower leasing because quite frankly what was occurring was the DAS network was somewhat designed around the tower locations. So in other words, when they were looking at the engineering, they looked at where are their towers? Okay, that’s great, we’re going to go there first, and where aren’t their towers, where we’re then going to have to worry about getting rooftop leases and things of that sort? Well, maybe a DAS network is better than the rooftop lease.

And so that’s what you are seeing in some of these urban centers, and then clearly there are other closed communities, be they college campuses or theme parks or private communities that are otherwise interested in perhaps the low profile nature of the distributed antenna system and so you see some of those that are being built as well.

But this is not in markets by far -- this is not an alternative to towers. It’s tending to be an alternative to rooftops in certain specific urban locations.

Bret Feldman - Analyst

Thank you for taking the questions.

Operator

Our next question comes from Dave Coleman.

Dave Coleman - RBC Capital Markets

Thank you. Just a question on the 2Q results -- it looked like the incremental tower cash flow margins were in the low 60% range. I thought that would have been a lot higher than that. I’m just wondering if there’s some one-time events that impacted 2Q.

And then as far as the assumptions in your full-year ’08 guidance. I’m just trying to understand what your second half leasing activity assumptions are versus the first half. And then going back to an earlier question on frequency clauses and leases, just wondering if the carrier redeploys from let’s say 1900 to 850, using the same technology if there’s any potential benefit to you? Thanks.

Jay Brown

On the first question, as we enter the warmer months of the year, generally we incur a little bit higher R&M expense, and so you’ll see in the second and the third quarters often that there are incremental margins, if you’re just looking quarter over quarter, will be impacted slightly. And then as you look at the guidance that we’ve provided for the fourth quarter, you see there’s a big step in EBITDA. That’s in part because we are not assuming as much R&M expense in the fourth quarter as we would be in the second and the third quarter. So I think that’s what I’d point out there.

Again, looking at it year over year where you’re comparing the like quarters, I think that gets you to sort of the right incremental returns and you can see that there. It will also be slightly impacted over time as we acquire assets to the extent, even though its’ relatively small, to the extent that we acquire assets that have lower levels of tenancy and therefore lower gross margins, those will impact our incremental margins as you look at them quarter over quarter.

Do you want to take the second question?

W. Benjamin Moreland

On leasing, Dave, our sort of back half of the year is pretty similar to the front half. I mean, that’s sort of where we’ve ended up. It’s a little bit hard to tell even completely for the end of the year, even as we sit here in July, but we look at sort of -- we’ve outpaced sort of our run-rate, as we mentioned, for the first half and we’ve used that and followed that, basically flown that through the rest of the numbers of for the year. And as you know, we are characteristically always a little bit conservative about how that ultimately turns up at the end of the year but don’t see any real material change and frankly are real excited about some of the things we’re seeing going on with customers and they are sort of redoubling their efforts to build out capacity for the data services we talked about and there’s a lot of activity going on.

And then your last question, forgive me, I think I’ve forgotten it.

Dave Coleman - RBC Capital Markets

Just whether there’s any frequency clauses in your leases, if a carrier redeploys an existing technology at a different frequency, whether there’s an opportunity to charge him.

John P. Kelly

The leases tend to be very specific to what is being installed, and so it certainly is situation by situation, but the leases are very specific as to the number of, the type of antennas, the number of and type of lines, ground space, generator space, as well as frequencies that are being deployed at that particular site. And so without commenting on any specific customer contracts, I would suggest to you that like all real estate transactions, there is specificity in what it is that is being leased for a certain rate.

W. Benjamin Moreland

What threw me is you said redeploy -- I guess we think of it mostly as overbuilds, so you are adding frequencies. Because as we were answering a prior question, typically adding frequencies and capacity on a site and almost always that comes with additional lines and antennas.

Dave Coleman - RBC Capital Markets

Great. Thank you.

Operator

Our next question comes from Jonathan [Shetalcro].

Analyst for Jonathan Shetalcro - Analyst

This is [inaudible] for Jon Shetalcro. I just had a quick question about the back-haul; in terms of some of the [inaudible] you saw in the second quarter, did you see anymore? Did it accelerate from the first quarter? And are you seeing it more from carriers or would you say you are seeing it more from kind of the third-party wireless back-haul providers? Thanks.

W. Benjamin Moreland

I’d say on the back-haul front, I’m not sure I could give you a specific percentage answer, but it is an increasing opportunity for us on the leasing front. Back-haul continues to be a very critical point, a sort of choke point for the carriers and delivering the services that they are desiring to deliver. And there’s a number of solutions, some of it self-provided as we are leasing space for carriers to install their own microwave dishes, some of it from companies like Fiber Tower that are doing it on a third-party basis in a share construct. But from our perspective, we’re happy to take all comers and we do see it as an increasing opportunity over time and I would actually add in Australia, it has actually been kind of a business initiative of ours to test the waters and see if we couldn’t make a business initiative out of specifically engineering back-haul links for carriers. But we don’t own the electronics but we come up with a turn-key solution for them across our sites, and we’ve had some early success there and it’s something we’re certainly going to look at proceeding with here in the States.

Analyst for Jonathan Shetalcro - Analyst

Great. Thank you.

Operator

Our next question comes from Brad [Quartz].

Brad Quartz - Analyst

Thanks for taking the question. I just have a couple of quick ones here; on the Sprint WiMAX rollout, I know it’s not in your guidance but at this point, are you pretty much saying that it’s more of an ’09 event, or is there an opportunity to get some revenues in ’08 on that?

And then secondly on your guidance, just digging down, it looks like you raised the guidance for maintenance capital a little bit and this could have resulted in the narrowing of the recurring cash flow guidance. I’m just wondering if there’s anything in there that we should be thinking about, something that you’re doing to the towers. Because I didn’t see a percentage, the same increase in the tower counts, so I’m just kind of wondering what’s going on there. Thank you.

W. Benjamin Moreland

I’ll take the first one. On Sprint WiMAX with Clearwire, that JV going forward, obviously as we mentioned earlier, we’re very excited about what they are doing and the launch of the product and the capitalization that they have secured to fund that. We don’t have a lot of expectation that that’s really -- that’s an ’09 event. That’s really not going to impact the numbers this year.

Jay.

Jay Brown

On your second question, we’re spending about $700 per tower per year on maintenance CapEx. That number is not really changing in the back half of this year for the full year. We’re going through the process of updating our IT systems, doing a technology refresh, so that’s affecting the numbers. We run through all of our corporate maintenance activities -- IT, vehicles, those kinds of things, through that sustaining line, so it’s not tower related but more corporate related.

Brad Quartz - Analyst

Okay. Thank you.

Operator

(Operator Instructions) At this time, there are no further questions. Please continue.

W. Benjamin Moreland

Okay, great. Well, I think we’ll wrap up with that on a Friday morning. We appreciate everybody joining us on a Friday in late July and appreciate your interest and we look forward to seeing you on the next call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the Crown Castle International Corporation second quarter 2008 earnings conference call. We thank you for your participation and you may now disconnect and thank you for using ACT teleconferencing.

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