American Tower Corp. (NYSE:AMT) Q4 2008 Earnings Call February 26, 2009 8:00 AM ET
Jean Bua - Interim Chief Financial Officer
Jim Taiclet - Chairman, President, and Chief Executive Officer
Michael Powell - Vice President of Investor Relations
Jason Armstrong - Goldman Sachs
Jonathan Atkin - RBC Capital
David Barden - Banc of America
Mike McCormick - J.P. Morgan
Michael Rollins - Citigroup
Simon Flannery - Morgan Stanley
Ric Prentiss - Raymond James
Batya Levi - UBS
Good morning. I will be your conference operator today. At this time, I’d like to welcome everyone to the American Tower Fourth Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Michael Powell, VP of Investor Relations. Sir, you may begin.
Thank you, Terra. Good morning everyone and thank you for joining American Tower’s conference call regarding our fourth quarter and full year 2008 financial results. We’ll begin with comments from Jean Bua, our Interim Chief Financial Officer who will turn things over to Jim Taiclet, our Chairman, President, and Chief Executive Officer. After these comments, we will of course open up the call for your questions.
In order to maximize the participation during the Q&A portion of the call, we kindly ask that you show courtesy to the other participants and you limit your questions to no more than two parts. If you do have more than two parts or if you think of additional questions throughout the call, feel free to line up in the queue again and we’ll answer as many questions as possible in the allotted time.
Before I turn things over to Jean, I’d like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include statements regarding our 2009 outlook, our stock repurchase program, foreign currency exchange rates and any other statements regarding matters that are not historical facts.
You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set fourth in this mornings press release and those set fourth in our Form 10-Q for the quarter ended September 30, 2008, and our other filings with the SEC.
We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequently occurring events or circumstances. And with that I’d like to turn things over to Jean.
Thank you, Michael and good morning everyone. American Tower continued its track record of consistently delivering strong revenue, adjusted EBITDA and free cash flow growth as our fourth quarter business performance indicates. Today, I will talk about our fourth quarter business results, our share repurchase program, liquidity position and our outlook for our business performance for 2009.
Turning first to our fourth quarter results, our core Tower division reported revenues of over $394 million reflecting a 6% growth rate. Please note that fourth quarter growth was impacted by the continued strengthening of the U.S. dollar against the Mexico peso and Brazil real along with the effect of straight line leased accounting.
Excluding the effect of foreign currency exchange rate fluctuations and straight line leased accounting, the fourth quarters’ Tower revenue growth would be approximately 10% as compared to the fourth quarter of 2007. Our level of organic new business continued to be strong, with annualized levels of signed new business of approximately $97 million during the fourth quarter. Signed new business for the fourth quarter was at comparable levels to the third quarter and was across all of our markets.
Our total selling, general, administrative and development expense was $45 million, which includes $12 million of stock based compensation expense. Fourth quarter SG&A is down from the same period in 2007, principally due to reduced stock option review costs.
Adjusted EBITDA increased approximately 11% to over $280 million and our adjusted EBITDA margin was 69%. Excluding the effect of foreign currency exchange rate fluctuations and straight line leased accounting, adjusted EBITDA for the fourth quarter of 2008 grew 15% as compared to the fourth quarter of 2007.
Our operating income for the quarter increased approximately $52 million from the fourth quarter of 2007 to $153 million. Of the increase, approximately $30 million was attributable to the change in our estimated useful lives of our Towers and related intangible assets that we instituted at the beginning of 2008.
Our net income for the fourth quarter was approximately $86 million or $0.22 per basic and $0.21 per diluted common share. Our capital expenditures totaled $78 million during the quarter and we completed the construction of 378 new sites.
New build activity increased in the second half of 2008, which was consistent with our previous forecast. We continue to see robust pipelines for new site development in all of our markets. Additionally, we added 12 new Towers through acquisitions during the fourth quarter. The average un-levered day one return of the new sites that we acquired and built in the quarter was over 11%. These Towers have strong prospects for additional tenants further increasing our future returns on invested capital.
We also had higher than historic levels of redevelopment CapEx during the quarter due to an incremental investment related to one of our international customers. We are nearing the completion of this agreement and anticipate redevelopment spending to return to normalized levels in 2009.
Under our Land Management program, capital spending on land acquisitions totaled approximately $11 million in the quarter and we also spent approximately $2 million to extend and prepay long-term ground leases. Please note, that the prepayment of ground leases, even the prepayment of 99 year leases is not treated as capital spending in our financials. It instead flows through as a reduction of cash provided by operating activities.
Our strong operating performance produced approximately $109 million of free cash flow for the quarter. We define free cash flow as cash provided by operating activities less all capital expenditures. I would point out that our free cash flow includes approximately $53 million of discretionary capital spending on new site construction, land acquisitions and the prepayment of long-term ground leases, as well as $16 million for the redevelopment of existing sites.
Turning to our share repurchase activity, during the fourth quarter, we significantly reduced our repurchases due to the disruptions in the Capital Markets and overall downturn in the economy.
During the quarter, we repurchased approximately 2.8 million shares for $79 million. As of February 13, 2009, we had purchased approximately 534 million under our $1.5 billion stock repurchase program that we announced in March 2008. The 534 million of share repurchases includes less than 1 million purchased subsequent to the end of the fourth quarter.
We have adjusted the pacing of the program in the past and expect that we will continue to manage it in the future in response to general market conditions and other factors. Our financial position remains very solid with the lowest leverage of our publicly traded peers supported by stable, growing operations that generate substantial free cash flow.
As of December 31, 2008, we had approximately $4.3 billion of long-term debt and we ended the quarter with net leverage equal to 3.7 times annualized adjusted EBITDA. Additionally, from a combination of cash on hand and availability under our revolving credit facility, we have approximately $640 million of available liquidity.
Due to current credit market conditions, we expect our leverage will likely remain at or below the low end of our target range of 4-6 times net debt to adjusted EBITDA for the near term. Due to our lack of near-term maturities and our substantial free cash flow and available liquidity, we do not need to access the capital markets; however we continue to monitor the credit market should any need arise for incremental capital.
We are in the position of remaining patient, which is a valuable benefit given the current credit and capital markets condition. As we look to 2009, we continue to expect strong new business and core revenue growth. We are forecasting similar levels of commenced new business as compared to 2008.
Our 2009 commenced new business outlook does not include any significant activity related to a large scale WiMAX deployment. For 2009, we anticipate full year Tower revenue of $1.64 billion to $1.665 billion or approximately 7% growth at the mid point.
This represents increased revenue of approximately $93 million to $118 million. Excluding the impact of straight line revenue and foreign currency exchange rate fluctuations, we expect core growth for Tower revenues of approximately 9% at the mid point from 2008.
With respect to SG&A, our outlook for 2009 reflects cost increases related to the full year effect of the increased scale of our Brazil operations as well as the first full year of operations for India. Also as disclosed in our second quarter results, 2008 SG&A benefited from a one-time expense accrual reduction of approximately $3.1 million.
Normalized for these items we expect SG&A in 2009 to increase less than 3% at the mid point of our outlook. Our conversion ratio of incremental Tower revenue to adjusted EBITDA for 2009 is expected to be in the mid 80’s after excluding the impact of straight line and the one-time benefit to SG&A in 2008 that I noted.
This reflects our typically high conversion ratio of organic growth offset by the naturally lower conversion ratio of growth from adding new assets, which have associated expenses such as land rent, property taxes and utilities. Compared to 2008, we anticipate 2009 adjusted EBITDA of $1.161 billion to $1.185 billion or approximately 7.5% growth at the mid point.
Excluding the impact of straight line accounting and unfavorable foreign currency exchange rate fluctuations, we expect adjusted EBITDA to increase nearly 10% at the mid point from 2008. Our outlook for Capital Expenditures in 2009 reflects costs associated with the construction of 700-900 new sites, which assumes that we will build new Towers at comparable levels as we achieved in 2008.
In addition, we expect redevelopment CapEx to normalize to historic levels. Also in 2009, we expect to spend $25 million to $30 million on land purchases and $10 million on ground lease prepayments. In total, we anticipate capital spending between $200 million and $230 million for 2009.
We expect free cash flow at the mid point to increase over 20% to approximately $640 million in 2009. This reflects an increase in cash provided by operations of approximately $84 million as well as a reduction in capital expenditures of approximately $28 million from 2008.
So in summary, we experienced consistent strong growth in revenue, adjusted EBITDA and free cash flow in the fourth quarter and we continue to expect strong revenue, adjusted EBITDA and free cash flow growth in 2009.
Our financial position remains strong with a relatively low levered balance sheet and approximately $640 million of available liquidity and no material debt maturities until 2012. With that I’ll turn things over to Jim.
Thanks, Jean and welcome to everyone that’s joined us for the call. Today, we are in the midst of uncertain economic times, and in times like these, strength and confidence are important when evaluating companies and assessing investments. Here at American Tower, we firmly believe in the strength of a number of attributes of our business and maintain high confidence that these strengths will prevail even through difficult economic and capital markets environments that are around us.
First and foremost, we are a leading provider of essential infrastructure for the wireless communications industry. Wireless is clearly emerged as the preferred mode of voice communications, rapidly displacing wireline service.
Analysts estimate that U.S. wireless minutes of use in 2008 totaled over 2 trillion minutes, as wireline minutes of use continued to decline. Additionally, analysts estimate that the U.S. added approximately 16 million wireless net new subscribers in 2008 as consumers continued to substitute wireless for fixed line services.
This phenomenon is even more prevalent in our international Markets of Mexico, Brazil, and India. So wireless voice, the foundation of our Tower leasing revenue base, is in a strong position and we’re confident in our wireless carrier customers sustaining the primacy of mobile voice service going forward.
Moreover, we believe that 2008 was the year that wireless broadband data services turned the corner in the United States market, gaining true traction with consumers and establishing wireless data as the next growth engine for the wireless industry. In 2008, a critical mass of elements came together that launched wireless data service as a widespread, mainstream consumer product that’s now on the road to some day soon being as ubiquitous and highly penetrated as wireless voice service is today.
In 2008, years of deliberate, well planned investments from our customers resulted in three national 3G networks robust enough to support literally millions of new broadband data users. Simultaneously, hand-held devises have evolved to the point where an enjoyable internet browsing or other broadband data experience is now possible.
Improved chip sets, screen technologies, software and applications have all come together to create a compelling mobile user experience. The trend toward rapid adoption of wireless data services is strong and one that we are confident can be sustained even in uncertain economic environment, due to the relatively low cost of both handsets and monthly service pricing, as compared to the increasing utility of this mobile data experience.
In 2008, smart phone sales in the U.S. grew by 68% as compared to sales in 2007. Apple’s innovative 3G iPhone was launched selling over 4 million units in the U.S. and vaulting the iPhone into the number one sales position among all wireless handsets. Many of the iPhones innovative features such as the touch screen and online application store were soon replicated by additional device manufacturers offering consumers even more choices for user friendly mobile broadband.
The national wireless service providers in the U.S. are deriving a substantial portion of their revenue now from data services. Year-over-year data service growth in the fourth quarter of ‘08 was over 40% each for AT&T mobility, Verizon Wireless and Sprint Nextel.
Industry-wide in 2008, total voice and data wireless service revenues grew by an estimated $8.5 billion or 6%. This revenue growth supported industry CapEx in the U.S. of approximately $21 billion last year or 13% of total wireless carriers’ revenue, a level that we feel is both reasonable and supportive going into the future.
Leading carriers are currently in the midst of multi-year plans to further upgrade their networks to support additional 3G subscribers while laying the ground work for even more capable 4G networks. AT&T continues to expand its 3G geographic coverage while consistently investing in overall network quality and capacity.
Verizon Wireless has announced three long-term evolution trial Markets and has accelerated its commercial deployment schedule for this 4G technology. T-Mobile USA continues to rollout its 3G network using the AWS spectrum it acquired in Auction 66 and Sprint has widespread coverage already with its 3G CDMA EVDO network and through its investment in Clear Wire, Sprint Nextel is launching a 4G migration solution using WiMAX technology.
So our view is that over the next few years, in response to consumer demand, wireless carriers will further expand their networks to enable wireless broadband data to become nearly as ubiquitously available as voice services today, with continually greater penetration and with even higher data rate speeds. So then, how does each of these factors affect the Tower industry?
Well, as with previous iterations of wireless technology, 3G and 4G data are initially deployed in high population density areas and then methodically rolled out to cover larger and larger territories and more and more people.
With each additional geography that’s covered, be it, second tier cities, major transportation corridors, smaller towns and eventually more rural areas, incremental equipment overlays on existing cell sites are needed fueling demand for Tower space.
Then in each of these given geographies as penetration of the service increases and further consumer adoption of data services load up the network, capacity must be augmented to handle the load.
The capacity burden from additional broadband data users can be substantial and it drives additional equipment overlays and then cell splitting to bolster available capacity to meet even higher peak traffic needs. In this Phase II period, we anticipate a mix of existing contract augmentations with associated rent increases and brand new cell-site contracts will also occur.
Moreover, as data rates further increase and more capacity is required, the effective transmission radius of the cell site itself shrinks. This effect can result in weak areas in the network where data transmission rates have diminished reducing the quality of the subscribers’ mobile broadband experience. Simply stated, as data throughput rates increase, the density of required cell sites increases also, and that leads to more additional demand on Tower space.
So to summarize, the wireless carrier customer base that we serve in the U.S. and abroad is advancing its technology and thereby successfully growing its revenues even in a difficult economy. Based on its growth, and competitive and technical factors, the wireless industry’s appetite for additional Tower space has remained strong and we’re confident that this is sustainable and supportable for years to come.
While the whole wireless infrastructure segment will benefit from these trends, American Tower and its investors are uniquely positioned to capitalize on these opportunities over the coming years. At its foundation, American Tower has the most sizable and stable revenue base in the Tower industry.
Both our total Tower revenue guidance for 2009 of $1.65 billion at the mid point and 2008 revenue for Tower of over $65,000 per Tower are clearly number one in our industry. Our non-cancelable revenue backlog is over $9 billion, which also leads the industry. In addition, the backlog is further reinforced by historically low churn rates that we’ve experienced of approximately 1.5% to 2% per annum.
Not only is our revenue base stable and founded on long-term contracts, it’s growing. We’re projecting strong core revenue growth at the mid point of our outlook of 9% in 2009 as Jean said which excludes accounting adjustments for straight line tenant and ground leases and currency fluctuations.
Much of this growth is already contractually obligated. Of our approximately $105 million net new Tower revenue at the mid point of our guidance, nearly two-thirds of that is already contractually committed through a combination of escalators and existing contracts and signed new business that commenced at the end of 2008 or will commence in 2009 and then we offset that with known churn.
So two-thirds of our net new Tower revenue is already contractually committed. Of our total expected revenue of $1.65 billion, approximately 98% is already billing under contract, will be covered in the annual escalator, or assigned and scheduled to commence in 2009. Again, offset with known churn for this year. So we’ve got 98% of our 2009 expected revenue already booked.
Consequently, we have a very strong revenue base and prospects for growth that we’re confident in achieving our revenue goals. We are sustaining American Towers’ industry leadership in EBITDA margin too which reached 69% in 2008. We’re also maintaining our disciplined approach to cost control and we project our incremental revenue to incremental EBITDA conversion rate will be approximately 80% in 2009 as Jean has mentioned.
The stability of our revenue stream and our resulting confidence in achieving our financial objectives even in today’s difficult economy is a key theme of today’s call. The other key theme is the financial strength of American Tower.
During the past few years, our management team and Board have been dedicated to making American Tower a Company that’s built to last. We purposely avoided both overleveraging and avoided concentrating our balance sheet on one type of financial instrument or exclusively on a near-term maturity date.
Consequently, we have no material maturities until 2012 and if we should so choose, we believe we could retire all of our debt that comes due in 2012 with the free cash flow that we expect to generate from the business between now and then. In fact, we have the anticipated ability to retire our entire balance sheet as we reach maturities of our financial instruments with free cash flow expected to be generated by the business.
We’re therefore the only publicly traded Tower company in the U.S. with such limited financial risk and such a high degree of financial capacity and flexibility. American Tower’s financial strength then provides for strategic and operational flexibility that’s unique among our peer group.
One source of potential competitive advantage in this phase of the business cycle for us is the possibility to acquire high quality assets at attractive prices. Given our strong free cash flow growth generation and solid balance sheet, we can remain active in seeking beneficial asset acquisition opportunities.
In doing this though, we continue to apply our disciplined approach to evaluating potential investments and in fact, we’ve raised our internal hurdle rates given the current state of capital markets. We are patient negotiators and have no qualms about walking away from a deal, but it’s an opportune time to have the financial wherewithal to be in the market for potentially attractive transactions.
We also stand ready to invest on behalf of our customers through our planned CapEx program for 2009. Our CapEx guidance of $215 million at the mid point is of a similar magnitude as our capital expenditures from last year. The substantial majority of our projected 2009 CapEx investment is for revenue generating activities on behalf of our customers, including Tower augmentations, Tower construction, and distributing antenna system installations.
Our customers know that we can continue to invest in these types of projects even in a difficult capital market, thereby further growing our business with them and being an even more reliable partner in their network expansion plans as they move forward.
In closing, I’d like to take a moment to recognize the hard working people of American Tower who are, like many of those on this call also shareholders in the Company. Here are just a couple of great accomplishments our team has achieved in 2008.
In the U.S, we outperformed our stretch goal of completing over 90% of our co-location applications for our customers in 60 days or less of processing cycle time. This requires excellent execution among our sales lease processing, structural engineering and field operations teams and they all did a great job.
In Mexico, we far exceeded our goals for a new co-location business in 2008 by implementing an innovative and complex program to help a major customer redesign its network architecture and in Brazil, our sales and development teams generated substantial build to suit activity that enable us to grow our Tower count by over 50% in 2008.
In India, our team launched service with multiple customers and got our Tower build program off to a great start in its very first year. We’re looking forward to more operational accomplishments like these in 2009 and have confidence in the strength of our business, our growth prospects and the advantaged position that our solid financial state provides for us.
So thanks again for joining us on today’s call and we’ll be now happy to take your questions. Operator, you can open up the call.
(Operator Instructions) Your first question comes from Jason Armstrong - Goldman Sachs
Jason Armstrong - Goldman Sachs
Just a question on the outlook and maybe two parts to the question. First Crown yesterday issued guidance for the first quarter that really implies a strong pick up in 1Q trend rates based on activity that they saw last fall. Just wondering if you guys are seeing same thing in your business. And then the second part of the question, just on the incremental revenue stat you gave us, two-thirds of net new Tower revenue for ‘09 already contractually committed at this point. If you take us back to last year, the same point in time, was that two-thirds higher or lower versus what it is this year? Thanks.
Jason. It’s Jim. Let me just get the second one out of the way first. Those orders of magnitude are pretty similar. In a typical year, we’re expecting $95 million or so gross new business, $55 million to $60 million of escalations, and then this year as an example, $25 million or so from new sites.
We net the churn out, which is about $35 million and so very little of what we need to make our revenue target is in the sort of to be sold, signed and then commenced category and so you are going to see similar trends, two-thirds, and one-third, probably year-over-year roughly.
On the first quarter trend rates, we don’t necessarily provide quarterly guidance. Of course, we do update the annual each quarter with you, but I think that the notion that we’ve got a strong pipeline that carried from Q4 into Q1 is appropriate. There is a typical sort of lull period in January almost every year where wireless carriers are getting their budgets settled and defined and rolled out to their regions.
We’ll probably sprint to that again this year, but it will be modest as far as impacting the positive trend that’s going on out there and as Jean already said, we expect 2009 new business levels to be about the same as 2008 and I’ve said in the past that if some of the things come together that we don’t have in the guidance like any business from Sprint to Clearwire, it could be a little bit of upside if everything else happens too.
Jason Armstrong - Goldman Sachs
And then the decision to leave the year-end guidance rather than formally adjust for the FX headwinds, just wondering, is your best estimate at this point just one minus the other, i.e. would take your official guidance and subtract out the FX headwinds that you stated in the release in terms of what the impact would be? Or, I guess I’m wondering here if, what you’re implying by leaving the guidance where it is, is sort of a calculated decision that some sort of combination of fundamental improvements in the business and maybe some relief on the FX side later in the year may be enough to offset some of the early FX headwinds?
I think it’s a very fair summary, Jason. We do see operational strength and confidence in the businesses I said in the remarks and along with that we’re only six or seven weeks into the New Year here. FX rates have been moving around. We haven’t really seen reliable forecasters of those rates even though we do sample quite a few of those and so we just think it’s too early in the year to try to chase FX rates that no one seems to be able to accurately forecast so early in 2009.
So we feel that our guidance is appropriate where it is today, and if we get to the middle of the year and spot rate stays where it’s at, we may look at that again but at this point only six or seven weeks into the year, we feel good about where the guidance is and we feel good about the operation.
Your next question comes from Jonathan Atkin - RBC Capital.
Jonathan Atkin - RBC Capital
I wonder if you can give us a flavor for what you’re seeing in Latin America, Brazil and Mexico that sort of underlies your 2009 outlook as well as maybe a little bit more of an update on India?
In Latin America, Mexico had a very strong year last year as I mentioned earlier in the call. We worked on a very substantial program with one of our customers to help recast their network architecture and it was a positive event for us as far as new business. That project is wrapping up so we will probably see a little bit less of a contribution from Mexico, but we’re going to build probably more Towers there, so that will offset and make that contribution in total about the same.
There’s sort of a run rate of co-location business that we are confident in Mexico from quite a few carriers. We serve everybody including Telcel, Telefonica, Nextel, the combined Iusacell, UniPhone, and Axtel. So, we’ve got a really broad base of customers in Mexico and we feel good about the level of new business we expect there.
In Brazil, it’s still a very active wireless market. We’re going to invest again, we hope in upwards of 300 new Towers in Brazil, similar to what we did last year to build the business down there, because there’s a lot going on.
There are some new carriers that have licenses in territories they didn’t have before. Those continue to build-out through ‘09 and there’s quite a competitive scenario down in that country among again five or six wireless carriers all of whom that we serve so it’s a really great place for us to be at this point.
India, as many of you know, we’ve taken a “build it” approach, because we thought asset prices were too high as we entered the market. We’re at upwards of about 200 Towers. We just got a briefing from our India market leader yesterday that the lease up rate is trending nicely there, so the business model of co-location that we’re introducing and others are getting a better understanding of in India is getting traction, so we’re bullish on India too, but we’re going to be very cautious about the rate that we enter the market, buying versus building and the price of assets that we may think of acquiring.
Jonathan Atkin - RBC Capital Markets
Just as a follow-up, anybody in Mexico that’s disproportionately driving some of your expectations for ‘09? And then on the topic of outdoor distributed antenna systems, there have been some leasing to major U.S. cities launched by emerging carriers that leveraged that approach. Wondered if you participated in that or if you’re ramping up your efforts in that field?
Sure, John. In Mexico, I’d say it’s a fairly broad spread of new business across all the carriers I talked about this year. Last year it was different. There was one that really did spike and help us advance even further down the field than we anticipated in Mexico, but this year it’s much more level loaded across the customer base.
On the outdoor dash-front, we’ve got three projects that we’re starting, one in New England, one in the Midwest and one in California. So, as you can tell by that we’re getting the licenses and the clearances to do outdoor [inaudible] in some key states, and we’re going to continue to market our capability, we’re the leading indoor [dash] provider and those technologies are very similar and we’re off to the races in doing that, but again just getting started in the measurable, reasonable way where we can get good returns.
Your next question comes from David Barden - Banc of America.
David Barden - Banc of America
Jim, I guess one of the things I’d like to understand better is there was a time when American Tower stock was in the 30s or touching $40 and you guys were buying it everyday, and now American Tower stock is in the low or mid 20s and you don’t want do buy it anymore and the reason apparently is that you can accumulate your cash and you’re kind of what appears to be gambling that there’s going to be an acquisition opportunity or a series of opportunities that’s going to be even more accretive than your ability to buy your own stock in the open market and I’m trying to understand why is this a more conservative approach to cash management than simply going out and buying a stock that’s half as expensive as it was rather than putting your cash in 2% yielding bank account and waiting for the maybe possibility that there might be an opportunity, but if there isn’t, then the window of opportunity to buy your stock at $20 goes away?
And I contrast that to maybe your point that you don’t have debt but other companies that do have debt are buying that debt out in the open market at $0.70 on the $1 or $0.90 on the $1 and putting their cash to work at reasonably attractive yields right now. Could you kind of make the argument why waiting to do something and waiting for things to appear rather than taking action today is the more conservative approach?
I’ll just lay out our consistent strategy, literally over the years, David, which has been we’re at Tower leasing business, to have a growing Tower leasing business you want to get co-locations on your sites and you also want to add assets over time and if you could add those assets at the lowest possible acquisition prices, you’ll have great returns and our return on invested capital at ATC here is about 10.5%, our peer group I think is down at 7, 7.5%, so patience pays off for long term returns, so that’s how we run the business.
So, our first order of use for our cash from operations that we generate and it is substantial is to keep reinvesting in that business and growing it and getting that great return to continue, because that’s something that we know how to do. We know how to operate a Tower business and get good returns from it, so we’ve got $215 million of CapEx at mid point, which we’re going to spend this year where others can’t spend it and we’re going to serve our customers and build Towers for them and gas systems and augment our sites when we need to so that’s our first call on our cash and always has been so it’s continues to be a consistent first priority.
Our second priority has always been to look at acquisitions large and small, but only make those acquisitions when we can hit our return hurdle rates and have the discipline not to jump and buy things that may not hit the hurdle rate. That requires patience.
We have patience and we have money and so we’re going to continue to keep our second priority exactly that, which is to use this time period where acquisitions over the next year or two may come available, they may not but they may come available at really attractive prices and we want to have the ability to act without having to access capital markets, which in that period of time may or may not be open or may or may not be open at prices that we would find attractive to do the aforementioned acquisition. That’s always been our second priority. It still is.
The third priority is when we had excess cash, meaning we did all of our CapEx, we looked at the acquisition water front and for the foreseeable future didn’t see a need for the cash we had on hand. We’ve been returning it to shareholders. The vehicle we’ve been doing for that has been the share repurchase. Others could argue you could use a dividend for something like that. So the purpose of our share repurchase program has not been to try to time the market and invest and get spreads to work in our favor. It’s been simply to return cash to shareholders.
So that’s the priority, that’s the decision process, the tree that we use and it’s going to continue to be, and the most important thing for us is to make sure we can act, acquire assets or build them at the right time and place and when we have a view that the opportunities aren’t as robust as we would like or we have so much cash on hand that we can do both, return cash to shareholders and do what we would like to do then you’ll see us back in returning cash to shareholders.
David Barden - Banc of America
And on that front, Jim, with respect to the waterfront as you paint it, the fact that you were out there buying Towers at 11% un-levered return, that’s obviously more attractive than we’ve seen in the past. Is the tide still going out so to speak? Do you sense that there is a rising number of more desperate sellers or is things kind of shut down for the time being and we’ll have to kind of wait for those potential sales kind of maybe the future if things get worse before they get better?
So just a quick clarification, the 11% day one returns are on built assets that we did in the fourth quarter of 2008. So those are part of our CapEx program, but we like to see double digit returns on acquisitions too, as point of fact, and the sellers are varying in their appetites to sell at prices that provide us those returns today.
Some that have strong balance sheets like us or prefer to have the ongoing cash flow versus an up front payment are holding on to the assets and those that may have another issue in their Company or their fund or their, if there’s an individual owner that their personal situation, then they may be more willing to deal and so we’re talking to everybody right now and they know the disciplined approach we use and we sort of convey the pricing that we’re willing to pay and there will be some cases where the sellers got a need and they are going to move and there will be others where they opt not to, so it’s a range actually.
Your next question comes from Mike McCormick - J.P. Morgan.
Mike McCormick - J.P. Morgan
Just a couple things. First, on your discussions and talks with carriers with respect to 4G build-out to LTD, any update on how serious they are on timing for those builds particularly given the current environment? And then secondly, just a house cleaning on co-location versus amendments ratio for the current quarter and your outlook for ‘09 on that?
Sure. 4G projects, we can only speak to in the realm of the public statements made by our customers, and you guys have seen or read those just as we have, but to summarize quickly, Verizon is taking 4G quite seriously. They are in three trial markets I believe at this point, building and their commercial launch is now scheduled for the first half of 2010, so they’ve accelerated that.
As to AT&T, their announcement is 2011 as to when they expect to have commercial launch of 4G and they are still working hard as is Verizon on having a great 3G coverage platform. And then as we’ve talked about earlier on the call, in a way Sprint Nextel, you might say is JVd or outsourced its 4G deployment to Clearwire, which will start this year so it’s happening, it’s real, there is significant investment moneys being earmarked as we understand it for all these projects and we’re looking forward to working with our customers on this next cycle of technology growth.
On the new site to amendment split, it’s a 75-25 for the fourth quarter. We don’t really project that out, because we would rather experience what we do see with our customers and then report it back to you, so the ranges have been I think between 65 and 85 over the past couple of years and we’re sort of right in the middle of that at 75 in the fourth quarter.
Your next question comes from Michael Rollins - Citigroup.
Michael Rollins - Citigroup
I was wondering if you could talk a little bit more about the balance sheet, if you talk about the current capital market conditions and whether things are improving to a point where you might be interested just getting a little bit more cash flexibility on the balance sheet?
Mike, just like Jean said, we’ve got over $600 million of liquidity right now. We’ve got some things we would like to do with the business, but we don’t have a need for additional capital at this point, given the pricing that we’re sort of told is out there for a really solid BB plus like us, we’ve opted not so far to tap the market even though we may well be able to.
So I think unless you see us have a need for capital at this point, we’re generating so much free cash flow even given again some of the things we would like to do with the business that we’re comfortable not jumping out there at this particular time.
Michael Rollins - Citigroup
And then as you look at some of the new business initiatives that you’re pursuing, any progress on some of the efforts around whether it’s battery back up or the dash deployments that you’ve been looking at? Any updates that you can provide for us on those fronts?
Yes sure Mike, on the dash we have the first three projects under our belt. We’re working on those now. The generator business we’ve actually launched, we’ve got contracts with customers. We hope to be putting out a few hundred generators on shared sites this year and again similar to India, really just organically crank up that business, it will probably take a couple years to get it to material kinds of numbers for a revenue base as big as ours, but we’re looking forward to making that over the next few years, are really nicely contributing part of our U.S. operation.
Your next question comes from Simon Flannery - Morgan Stanley.
Simon Flannery - Morgan Stanley
Could you touch a little bit on the management changes you announced today and are you sort of charging people with any sort of new priorities or is this really fairly a smooth handover? And on the M&A front, should we be focused on a particular area, is it more international than domestic? Is it more India than Latin America? It’s certainly been mentioned in newspaper articles out in India and what about land leases? Presumably there’s some better opportunities to buy some of those at more reasonable ROI given the market environment.
Our management changes have been long planned and are very much normal course, and really nothing changing there. We’ve just changed roles and responsibilities among some of our most senior people.
On the M&A front, as I said, we’ve really, I think been the only company that’s looked across this entire waterfront of options which is U.S. midsized acquisitions down to the smallest possible one or two Tower buys that we could be doing, and across as you said Latin America, Asia, we actually got a team based in London looking at parts of Europe, Africa, Middle East region, which we haven’t secured anything there yet, but we’re looking around the world at selected markets.
So we’re not looking at every country, but I’d say in each region of the world we’ve probably got two or three high priority countries that we will actively have our people go visit, talk to customers, other counterparties and figure out is there a high quality and high return way for American Tower to enter. So it really is comprehensive I’d say, Simon, and once we nail something down as we did with India, we’ll definitely announce it with you all.
On the land lease side, again, when you combine the land purchase with the long capital lease extensions it’s probably about $40 million all in the guidance this year for land acquisition if you will. That’s similar to last year, and if we see sellers sort of reduce their price expectations. Could that trend up a little bit? Yes, but I don’t think it’s going to overwhelmingly change.
Your next question comes from Ric Prentiss - Raymond James.
Ric Prentiss - Raymond James
A couple questions for you. First on your guidance, service business was pretty good in the fourth quarter, probably a seasonal item there but as you look into ‘09 what are your thoughts on the services business? And I think Jim, you mentioned that Clearwire is still not in your guidance although Sprint, Nextel joint venture clearly is starting. Any thoughts on when you would put Clearwire into your guidance?
Yes, the services business sort of year-to-year will be about the same order of magnitude, Ric. It’s like 2% of our revenue. It’s going to be that same magnitude in 2009, and then as far as Clearwire, we’re absolutely working with their teams and with their management on everything from the master lease agreement down to individual sort of site evaluation, but much of that new leasing we expect could be brought forward, but we expect will happen in the back half of the year as far as commencing contracts and then when you sort of schedule those through the remaining months of 2009, there may be some revenue there but it will not be material enough we can see at this point to make us confident enough to sort of include it or raise our guidance based on that.
Ric Prentiss - Raymond James
Okay, and then on the M&A you mentioned U.S. mid-size to small. Can you give us a thought of where the sellers’ heads are at as far as what they are looking for on a Tower cash flow multiple, is it mid-teens? Does it drop below mid-teens? Are you still holding out to high-teens, which is kind of hard obviously in this environment. Just kind of a thought about what the bid versus [inaudible] might be looking at that you’re seeing?
Well Ric, I think it varies across all three categories you suggested there and again it has to do with we think with other issues or not in the portfolio of the potential sellers. So sellers could be hedge funds, they could be private equity, they could be individuals and based on their other circumstances, they may or may not wish to meet the price level that we would be willing to pay, which is pretty consistent.
So if we’ve got something material to say on that it will be in the future, we don’t have it today, we have made a few acquisitions this year but nothing of great size.
Ric Prentiss - Raymond James
And then one quick one. Barden was talking about how other guys have been buying their debt. Your debt tranches, it is not really probably approachable in the open market to buy it at discounts is it or have you seen it traded at any kind of discounts to par?
If you recollect in the end of Q3, and the beginning of Q4, we did buyback some of the converts. People had approached us and they were trading at fairly very good returns for us. Subsequent to that, even in the tight credit markets we have seen that our bonds really trade very well, at 7.25, 7 1/8 to 7 ½ and the 7 are either trading at par or only at a slight discount, which doesn’t really make sense for us at this point to buy any of those back.
Your final question comes from Batya Levi - UBS.
Batya Levi - UBS
I have one quick question on M&A. I’m wondering if you’d be interested in taking a minority stake in any international company or would you want to control the assets? And on the results, you stated that the discretionary spend was up more than 75% in 2008. Can you give us a sense of how much revenue growth do you think drives in the following year? And one other question on the 4Q results.
When adjusting for the FX headwind in 4Q and backing out incremental revenues from new sites, it looks like incremental cash revenues and existing Towers slowed from the trend seen in the last few years. Can you talk about the drivers for that slowdown?
Boy, that’s a lot in one question, so let me try to go up to the top. Your M&A question, can you sort of refine that a little bit what you’re trying to get to there?
Batya Levi - UBS
Past reports have suggested that you might want to take a minority stake in Reliance Infotel for example, are you after controlling the assets or would you be interested the minority stake as well?
I want to reiterate on this call specifically, anything in the press that comes out of India that is not reflected in a public statement by American Tower should not be relied upon. Now, more broadly, our goal has always been operational control of Tower assets and we’ve never gone into a situation where we’ve taken some sort of a minority financial investment position of 5% or 10%.
We’re not financial investors. We’re owners and Operators so you would, never say never, but our stated strategy and our track record over the years has been to own and operate assets. There may be special cases where whether it’s a 50/50 joint venture, something we may think about it, but being just a pure financial investor in a very small stake in a company run by somebody else is probably not our first priority.
And then on discretionary CapEx, I’ll turn it over to Jean.
Just to answer your last two questions, the discretionary CapEx that we spent in 2008, we expect to see about a 15% growth in that discretionary CapEx in 2009. I’m sorry, 1.5% growth in 2009 and the very last question had to do with our conversion ratio. In 2008, we built a lot of Towers and that doesn’t have a naturally higher conversion ratio as when you just add incremental revenue. So, as I made in my comments, we have new land leases and new utilities or property taxes, which just makes the flow through on the initial tenant lower than our normal high conversion ratios.
Batya Levi - UBS
Just to follow-up on the last part. If you look at just the incremental cash revenues on existing Towers and adjusting for the FX headwind you had, was it, was that flattish with the recent trend that we’ve seen?
Yes, it’s about 90% plus.
All right, I think we’ll wrap up, everybody. Thanks again for joining us on the call. Have a great day and the rest of the week and we appreciate your participation today. Bye now.
Thank you for your participation in the American Tower fourth quarter 2008 earnings conference call. You may now disconnect.
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