American Tower's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: American Tower (AMT)
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American Tower Corporation (NYSE:AMT) Q1 2014 Earnings Conference Call May 1, 2014 8:30 AM ET

Executives

Leah Stearns - Vice President, Investor Relations and Treasurer

Jim Taiclet - Chairman, President and Chief Executive Officer

Tom Bartlett - Executive Vice President and Chief Financial Officer

Analysts

Jonathan Atkin - RBC Capital

Batya Levi - UBS

Michael Bowen - Pacific Crest

Ric Prentiss - Raymond James

Richard Choe - JPMorgan

David Barden - Bank of America

Amir Rozwadowski - Barclays

Operator

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the American Tower First Quarter 2014 Earnings 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) Thank you.

I would now like to turn the call over to Ms. Leah Stearns, Vice President of Investor Relations and Treasurer. Please go ahead.

Leah Stearns - Vice President, Investor Relations and Treasurer

Thank you. Good morning and thank you for joining American Tower’s first quarter 2014 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab on our website.

Our agenda for this morning’s call will be as follows. First, I will provide a brief overview of our first quarter results, then Tom Bartlett, our Executive Vice President and CFO will review our financial and operational performance for the quarter, as well as our updated outlook for 2014, and finally, Jim Taiclet, our Chairman, President and CEO will provide closing remarks. After these comments, we will open up the call for your questions.

Before I begin, I would like to remind you that this call will contain certain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include those regarding our 2014 outlook and future operating performance, our expectation regarding future growth of our AFFO per share, industry trends and any other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning’s press release, those set forth in our Form 10-K for the year ended December 31, 2013, and in 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 subsequent events or circumstances.

And with that, please turn to Slide 4 of the presentation which provides a summary of our first quarter 2014 results. During the quarter, our rental and management business accounted for approximately 98% of our total revenues, which were generated primarily from leasing income producing real estate to investment grade corporate tenants. This revenue grew 23.5% to approximately $960 million from the first quarter of 2013. In addition, our adjusted EBITDA grew over 22% to approximately $640 million. Operating income increased 18% to approximately $354 million and net income attributable to American Tower Corporation was approximately $202 million or $0.51 per basic and diluted common shares.

And with that, I would like to turn the call over to Tom who will discuss the results in more detail.

Tom Bartlett - Executive Vice President and Chief Financial Officer

Thanks, Leah. Good morning everyone. As you can see from our press release, we kicked off 2014 with a very strong quarter from both the revenue growth and margin perspective. The network investment momentum that we saw built throughout 2013 in the U.S. continues and we are also seeing our customers in international markets aggressively investing in their networks. As a result, we are raising our full year 2014 outlook for all of our key metrics.

If you please turn to Slide 6, our total rental and management revenue in the quarter increased by over 23% to $960 million on a core growth basis, which we will reference throughout this presentation as reported results excluding the impacts of foreign exchange rate fluctuations, non-cash straight line lease accounting and significant one-time items, our total rental and management revenue growth was over 30%. Of our Q1 core growth, 11.5% was organic and was a result of a very strong quarter for commenced new business. In fact during the quarter, we experienced an increase of over 25% in commenced new business from the first quarter of 2013. The balance of our core growth nearly 19% was attributable to properties we have acquired since the beginning of 2013, including the GTP and NII portfolios we acquired late last year. We estimate that our top 10 global tenants will invest more than $40 billion in CapEx during 2014 into their wireless networks, which we expect will continue to drive strong new business commitments throughout the year.

Turning to Slide 7, our domestic rental and management revenue growth in the quarter was over 23% with core growth of around 26%. Domestic organic core growth was over 9%, which consisted of over 3% from escalations and more than 7% from existing site revenue growth netted just over 1% from tenant churn. This organic core growth reflects our tenants continued aggressive network investments in 4G. Overall in the U.S. roughly 60% of the commenced new business activity we saw the quarter outside of the holistic agreements was in the form of amendments compared to nearly 70% a year ago. Also our new business pipeline reflects a split of 55% amendments and 45% co-locations. This indicates to us that the shift towards densification from initial 4G coverage is well underway. Accordingly we have increased our outlook for our domestic organic core growth to over 9% for 2014, up more than 50 basis points versus our prior expectations. Domestic rental and management gross margin increased by more than 21% to over $514 million and grew by nearly 25% on a core basis.

Domestic organic gross margin core growth was 9.4% which reflects an 84% conversion rate for properties which we have owned since the beginning of 2013. Also during the quarter we purchased or extended the remaining term on over 350 of our ground leases and now have an average of over 24 years remaining on our U.S. land leases. Finally, we generated domestic rental and management operating profit growth of over 21% or about 25% on a core basis, which reflects our continuing commitment to property level cost controls and disciplined spending on SG&A expense. Our SG&A outperformance also included synergies above what we expected related to our acquisition of GTP.

Moving on to Slide 8, our international rental and management segment generated revenue growth of about 24% or over 38% on a core basis during the quarter. Of this core growth about 16% was organic with the balance driven by more than 8,000 new assets we have added since the beginning of 2013. As I mentioned earlier the new properties we acquired across our international markets over the past year are outperforming our original expectations. And as a result have boosted our total revenue growth.

Similar to the U.S. we continue to see a strong demand backdrop overseas as our tenants invest in various stages of their wireless network deployments. Telefonica, Airtel and Vodafone continued to be among the most aggressive carriers in building out their networks in our international markets. International rental and management gross margin in the quarter grew 19% to about $198 million, while core growth in gross margin was nearly 31%.

International organic gross margin core growth excluding pass through is about 14% which reflects an 87% gross margin conversion ratio. Our international reported gross margin percentage excluding pass through was 82%, which compares well to that gross margin percentage generated in our U.S. business. Our international rental and management segment operating profit margin grew almost 24% to $169 million, while the operating profit percentage was 52%. Excluding the effects of pass through revenue our international operating profit margin was nearly 70%.

Turning to Slide 9, our reported adjusted EBITDA growth in the quarter was over 22% with our adjusted EBITDA core growth at more than 28%. Similar to prior quarters, our adjusted EBITDA core growth was primarily attributable to our rental and management segment, which generally represents recurring run rate contributions to EBITDA as opposed to the project oriented non-run rate nature of EBITDA generated by our services business.

Our adjusted EBITDA margin was over 65% and nearly flat versus the prior year period. Despite the addition of nearly 14,000 new lower tenancy sites since the beginning of Q1 of 2013. Excluding the impact of international pass through revenue, our adjusted EBIT margin for the quarter was 71% and our adjusted EBITDA conversion rate was 69%. Cash SG&A as a percentage of total revenue in the quarter was about 9%. This strong EBITDA performance resulted in solid AFFO growth, which increased to $439 million or about $1.10 per share. AFFO and AFFO per share growth were both over 22%. Core AFFO growth was more than 28% reflecting significant organic new business growth coupled with the addition of a number of AFFO accretive acquisitions. Our adjusted EBITDA to AFFO conversion during the quarter was about 70%. As we said, we continue to target at least mid-teen core AFFO per share growth and believe that we are well-positioned to achieve our goals of doubling 2012 AFFO per share by 2017.

Turning to Slide 10, as in the past, we remained very disciplined with regards to our capital deployment strategy. Our goal is to simultaneously fund growth, return cash to our stockholders, and maintain the strong balance sheet. In the first quarter, we declared a dividend of $0.32 per share or approximately $127 million, spend about $214 million on CapEx and paid down roughly $160 million in debt. Subsequent to the end of the quarter, we acquired about 60 towers in the U.S., which are currently utilized mostly by radio and television broadcasters. This transaction accounts for much of the $450 million in total consideration that we have spent on acquisitions so far this year and includes the assumption of about $197 million in secured debt. We expect that our primary method of returning capital to stockholders for the rest of the year will be through our redistribution. The amounts and timing of our dividend payments are at the discretion of our board, but our goal continues to deliver annual dividend growth of over 20%.

Since the end of 2013, we have lowered our net leverage by nearly 0.5 turn to 5.5 times on an LQA basis. This result was driven by increased adjusted EBITDA and a debt repayment during the quarter. We continue to maintain a long-term target range of between 3 to 5 times, net debt to adjusted EBITDA and expect to be back around 5 times within the next year through a combination of continued debt repayment and adjusted EBITDA growth. We have maintained significant liquidity. And as of the end of the quarter had more than $300 million in cash on hand and about $2.8 billion in capacity under our credit facilities, with our average remaining term of debt at about 5.5 years and an average cost of approximately 4%, we remain committed to having a solid balance sheet.

Turning to Slide 11, based on the strong customer demand trends we are seeing across our footprint coupled with the recently closed U.S. Tower acquisition, we are raising our full year 2014 outlook for rental and management segment revenue by $70 million at the midpoint to $3.94 billion. About $7 million of the increase is attributable to organic revenue outperformance in our domestic business, with an additional $28 million or so driven by the recently closed U.S. acquisition. The balance of the increase is being driven by our international operations, including $6 million attributable to organic revenue outperformance, $10 million increase in past due revenue and an anticipated benefit of approximately $19 million from foreign currency relative to our prior outlook.

We are raising our domestic organic revenue core growth expectations for the year to over 9%, an increase of approximately 50 basis points from our prior outlook. In addition, we now expect our international organic revenue core growth to be around 13% for the year, an increase of 200 basis points from our prior outlook. The M&A transactions we have closed prior to 2013 are contributing meaningfully to this organic core outperformance. For example, assets we acquired from Telefonica in Mexico generated organic tenant revenue growth of nearly 39% in the first quarter. Similarly, assets acquired from Telefonica in Brazil generated organic tenant revenue growth of 26%.

So, our strategy of acquiring less mature higher growth assets in international markets continues to significantly boost our organic growth rates. In addition, the portfolios we have acquired over the last year are also outperforming expectations. Lease up on the U.S. GTP assets, for example, is coming in stronger than originally expected and in fact outpacing the growth we are seeing on the rest of our domestic towers. We are also increasing our outlook for adjusted EBITDA by $50 million at the midpoint. This includes an expected $20 million contribution from the recently acquired U.S. Tower portfolio and about $15 million from other domestic and corporate outperformance including greater than expected synergies from our GTP acquisition.

In addition, about $15 million of the increase is attributable to our international business including about $10 million due to foreign currency. On a consolidated basis we now expect core growth in adjusted EBITDA for the full year to be over 24%. Finally, we are raising our full year AFFO outlook ($10) reflecting the increase in core adjusted EBITDA partially offset by the incremental cash interest expense we have assumed with the recent acquisition. We now expect to generate AFFO growth of nearly 19% for the year or over 22% on a core basis.

So turning to Slide 12 and in summary we have started the year off strong. Organic core revenue growth in the U.S. continues to benefit as our tenants expand and densify their networks. Our international segment continues to generate organic core revenue growth rates several hundred basis points above the historically strong U.S. rates driven by tenants like Airtel, Vodafone and Telephonica who are making significant investments in their networks. We saw strong lease-up on our newly acquired GTP portfolio in the U.S. and have also been very pleased with the leasing momentum on our newly integrated NII assets in Brazil and Mexico.

We added more than 650 new assets during the quarter to our build to suit program and also picked up 60 high quality U.S. towers in early April to further cement our leading tall tower position in the U.S. We expect that these types of towers may also be a platform for fixed broadband wireless video in the future. We also maintained our strong track record of growing adjusted EBITDA and AFFO per share with both growing over 22%. In addition, we declared a dividend of $0.32 per share or about $127 million representing our ninth straight quarter of dividend increases and an increase of more than 23% as compared to the first quarter of 2013. And we were able to achieve these strong results while reducing our leverage ratio from 5.9 times to 5.5 times during the quarter keeping us on track to return to our target leverage ratio range in early 2015.

We believe we are well positioned to sustain this momentum and as a result are raising our 2014 outlook across all of our key metrics. Customer application levels for space on our towers are at record levels giving us tremendous visibility into new business growth on our existing assets throughout the rest of the year. At the same time we continue to actively evaluate incremental acquisition opportunities which we would fund in an essentially leverage neutral manner maintaining the integrity of our balance sheet.

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

Jim Taiclet - Chairman, President and Chief Executive Officer

Thanks Tom and good morning to everyone on the call today. I will continue our practice of focusing on a specific theme that provides a deeper perspective on the key aspects of our business. As you may recall during the fourth quarter call we provided an in dept update on our long-term strategic plan and key aspirational goals for the company over the five year period. Today, I will focus on the strong domestic wireless investment environment and the resultant performance of our U.S. operations. During our second quarter call later this year I will cover a similar update on our international segment. Then on the third quarter call our focus will turn to the fundamental trends in wireless technology which we believe will continue to drive network investment and ultimately long-term growth for the tower business.

So as of the first quarter of 2014 our U.S. leasing business comprised about two-thirds of our total revenue and nearly 75% of our total operating profit. With aggressive investments in domestic 4G deployments continuing, we remain focused on optimizing our high quality asset base and enhancing our strong customer contracts and relationships. These operational initiatives are designed to maximize the generation of consistent organic growth while we simultaneously continue to pursue AFFO accretive acquisitions and construction projects in the U.S.

So today I will specially cover how our domestic organic growth has historically correlated to U.S. wireless industry investments, how current to consumer technology and industry trends will continue to support continued robust wireless industry investments over the next decade, how American Tower is uniquely positioned to capitalize on these domestic trends because of our high quality portfolio and strategic approach to structuring our master lease agreement. And finally we’ll review the performance of our recently acquired GTP portfolio which is already as Tom said pacing ahead of our internal initial expectations. So, let’s start with underlying investment trends we’ve seen in the U.S. wireless industry and how our business is benefited from those.

Over the past several years of experience, a fairly strong correlation between domestic carriers, aggregate CapEx and our level of organic growth in American Tower. For example, from 2010 to 2012, we saw aggregate spend on wireless CapEx of about $25 billion to $30 billion supporting our organic core growth rates in the range of 7% to 8% during those years.

Beginning in 2013, we then saw wireless CapEx spending ramp-up to nearly $35 billion a year, and has since experienced elevated levels of organic leasing growth beyond our target range and the areas of 9%. In fact during the first quarter, our domestic segment once again outperformed their own expectations generating organic core growth in the quarter of 9.2%. This growth which was a 120 basis points above the high end of our long-term targeted range of 6% to 8% was driven by a combination of contractual escalators, co-locations, amendments and payments tied to our holistic master agreements, and all net of churn. This correlation is possible due to two key benefits associated with our holistic MLAs, churn mitigation and the preservation of incremental growth opportunity in cases where our tenants find the need to make additional investments to support network demand beyond what they had originally anticipated.

As a result of these two key factors, American Tower is uniquely protected against volatility in revenue growth. For example, since implementing these holistic agreements, we’ve reduced our annual domestic churn rate by an average of over 50 basis points and the contribution from our tenant enhanced equipment investments is steadily increased over recent quarters and added over 70 basis points to our organic growth during Q1.

As a result, we are uniquely positioned to capitalize on the investments that wireless carriers are making in their networks as a result of our holistic agreements. We believe that these investment trends will continue for at least the next several years since subscriber adoption of 4G devices and advanced wireless services is outpacing the capabilities of today’s wireless networks. And the industry is still in an early stage of 4G upgrade cycle.

According to reports from Cisco as of year-end 2013, 4G handset penetration in U.S. was still only 26% and it is projected increased to about 33% by the end of this year. Looking forward, the number of U.S. 4G smartphone connections is projected to then double to between 2013 and 2018 where 4G tablet connections expected to triple between those years.

Furthermore, additional devices such as 4G smart watches, Google Glass and other wearables are just beginning to hit the market. All told, device per capita are expected to double by year end 2018, and we think that will be a company with ongoing significant demand for leasing on our towers. Compounding the level of strain that accelerating subscribe adoption places on networks is a rapidly expanding network demand per device as consumers engaged in high bandwidth applications such as video, music, and gaming.

At year end 2012, average daily usage on smartphones was approximately 880 megabits a month, which then rose by almost 40% to more than 1.2 gigabits per month in 2013. Similarly, tablet data usage increased by over 50% to more than 2 gigabits per month from 2012 to 2013. Consequently, when you combined the additional devices and the additional usage per device, aggregate wireless network utilization is quickly increasing.

So the combination of the increasing numbers of high end smartphones and tablets significantly higher utilization per unit and a consumer focus on quality of service is intern requiring carriers to continuously augment their networks. As a result, carrier wireless capital spending in 2014 is once again expected to see historical ranges significantly at nearly $35 billion. In the American Tower, we are seeing first hand others ramp-up and carrier spending is translating and the significant leasing activity on our sites and our operations teams have been busier than ever processing application associated with these raising levels of new business. In fact as you heard, our domestic application volumes in the first quarter were up 51% versus the first quarter of 2013.

Now, one of the most critical challenges to wireless networks is the impacts, the ever increasing bandwidth requirements for mobile video provide. While in 2013 mobile video as a percentage of total data usage was 56%, by year end 2018 this is expected to rise nearly 70% or overall Cisco projects that mobile data usage will in turn grow by nearly ten-fold over this time period and that’s going place tremendous demands on the existing networks. Our analysis indicates that nearly 80% of this rise in traffic will be carried over the macro networks, which is primarily composed of towers, like the nearly 28,000 we have across the U.S. While we expect macro supplements such a small tech – small cell technology to help our tenants alleviate network burden in specific locations primarily in dense urban areas, it’s important to remember that 83% of the U.S. population resides in suburban or rural areas, which are almost exclusively served by tower based macro sites. We therefore anticipate that the classic cell tower will continue to serve as the core infrastructure to effectively deploy 4G services nationwide.

Today the macro tower portion of our business generates over 95% of our revenues, that we expect our towers to capture the lion share of the projected growth in mobile data. In addition, our nearly 300 distributing antenna systems in the U.S., which include approximately 9,000 active nodes as well as our other small cell initiatives allow us to provide those supplemental solutions in indoor and dense urban locations that require a highly targeted capacity and coverage augmentation. We anticipate that a number of additional drivers will further support strong domestic organic growth during our five year planning period.

For example, the deployment of Voice-over-LTE service or VoLTE is one of the technology trends that we have highlighted in the past. And we anticipate that this will result in continued strong demand for tower space. Verizon and AT&T are already planning their VoLTE rollouts with commercial launches expected to begin within the next 12 months. And our analysis to ensure the same quality of service, voice calls that travel via data packets over the internet necessitate greater cell site density compared to voice required to support classic circuit switch voice calls. It’s our belief that in order to rollout VoLTE effectively carriers will both eventually need to increase the density of their networks by up to 20% to 30% over time.

In addition to VoLTE, we expect that build out of the public safety network will generate incremental leasing opportunity on our sites over the five year period. With either dedicated network or with existing carriers deploying additional spectrum for the purposes of FirstNet, we can capture incremental revenue opportunities via this public safety network probably during the latter half of this decade. Similarly, we also anticipate a future rollout of (business) spectrum to be a revenue generating event for us over the long-term, whether it’s through collaboration with an existing carrier or through an independent build out as a new wireless entrant perhaps in league with another company such as Google or Microsoft.

Furthermore, phenomena such as multicast machine to machine technology are also expected to create additional sources of network demand for many years to come. Through multicasting data and video can be transmitted to multiple recipients more effectively, making it easier to send high bandwidth services such as streaming media through the airways. Additional applications are machine to machine wireless communications are also becoming more prevalent. Of the millions of machine to machine connections already that exist today, the vast majority of these are running on 2G and 3G network technology. Wireless contracts with users of these embedded M2M devices, for such applications like tracking shipping containers, managing package delivery fleets and monitoring utilities typically involves very long-term for multi-year service contracts.

Consequently, we anticipate that wireless carriers are going to have to extend the lifecycle of the legacy 2G or 3G technologies and the continued installation and operation of a substantial amount of legacy antenna and other hardware will remain on our sites. It’s also important to note own machine to machine technology is becoming increasingly complex with services like the connected car and eventually the autonomous vehicle in the pipeline the reliability and efficiency of the next generation of network will need to support these services and the additional use of these capabilities will generate – will be very significant. Our domestic tower portfolio and master lease agreements have been deliberately developed over the years to optimize long-term revenue growth or containing churn risk in controlling operational expenses and redevelopment CapEx.

For today, our domestic tower site have an average tendency of 2.5, average height of 210 feet and the structural capacity to hold on average between 4 to 5 visible tenants. Therefore, we have nearly half of our tower structural capacity and plenty of height available for new platforms and equipment. Over our existing domestic towers have virtually no reserve rates due to asset acquisition or lease – sublease contracts or equipments that will further limit this available capacity. We also own the land underneath, or have ground lease terms for at least 20 years associated with 60% of our properties and we have a goal of increasing this metric up to 80% within this next five years.

As I discussed in our first quarter call, our U.S. portfolio largely consist of assets build by America Tower or those we have strategically acquired from select sources which are primarily engineering driven companies such as AirTouch, Alltel, Nextel, SpectraSite and GTP. The properties we acquired from these major sources were built through accommodate the structural demands of anticipated additional equipment and we are therefore historically needed minimal CapEx to support additional revenue on our sites. In fact over the last four years, we’ve only spent average approximately $1,000 per site per year on redevelopment CapEx. Our ability to offer sites of existing capacity to our tenants as we have aggressively worked towards 4G upgrades has been a strength for the business. At American Tower, it’s our operational objective, they continue to serve our tenants with the best asset base we can, and to be the preferred provider of communication real-estate.

A crucial aspect of our ability to achieve this is our unique approach to structuring our master lease agreements. In 2010, we pioneered the first holistic MLA, and today we have three out of four of our major tenants operating under this type of contract. Through these arrangements, we are not only established a guaranteed increase in baseline of new business annually and benefited from an equipment rights requested by our customers on a substantial number of sites. We’ve also insulated the business from major churn events such as Sprint’s IND commissioning. By strategically mitigating this risk, we have been able to defend our baseline level of business and focus our efforts on the upside opportunities resolving from the strong 4G leasing activity. It’s our view that the American Tower is relatively higher portfolio of quality combined with our disciplined approach to structuring MLAs, has enabled us to achieve industry leading organic core growth in 2014.

We continue to supplement our solid organic leasing growth with disciplined investments in new sites is shown immediate accretion to AFFO. Our recent acquisitions of the GTP portfolio, is a prime example of how we’ve been successful through our selective M&A activity. Today, we are largely compete with integration of those assets in operations and GTP’s performance is already pacing ahead of our expectations. As we have previously discussed, the GTP sites are a strong complement to our legacy asset base including in top 10 markets such as LA, Atlanta, and Chicago, where our combined portfolio has it strongest presence. Together, the location characteristics and structural robustness of the sites we acquired from GTP which were originally built for co-location that already enable us to generate strong leasing activity and we believe the GTP assets will contribute meaningfully to our ability to generate substantial organic core growth for many years to come.

Now subsequent to the end of the first quarter, you heard from Tom that we also completed the acquisition of a marquee portfolio of 60 primarily broadcast communication sites from Richland Towers. This transaction not only reinforces our position as a leader in U.S. for tall towers, but it also enables us to begin aggressive marketing of the acquired properties to our wireless tenants. We believe that the growth potential on the wireless side is strong and because of the structural nature of the tall tower portfolio, minimal CapEx will be required to accommodate new tenants.

As a result, the Richland portfolio is not only immediately accretive to AFFO, but also provides us with significant opportunity for additional cash flow generation. As we look forward to the robust demand trends in U.S., we fully expect the newly acquired sites to drive incremental growth in AFFO per share for the company. So to summarize, the constant demand environment we are experiencing today in U.S. is one of the strongest we have seen. Numerous factors indicate that these favorable trends are poised to continue for many years to come as a result of the expansion of 4G mobile broadband. Over the coming years we believe that the resulting tower growth and tower leasing will be augmented by additional opportunities including VoLTE, the public safety network, multicasting and expanding machine to machine services.

We expect that in combination these strong demand drivers coupled with our quality U.S. portfolio and solid contractual arrangements will help us to continue generating at least 6% to 8% organic core growth in our domestic business during our current planning period. Our international segment continues to grow at an even faster pace. And during our second quarter call we will go into greater detail on what’s driving the growth in our markets outside the U.S. We expect our combined U.S. and international businesses will generate the consistent strong cash flow growth required to meet our aspirational goal of again doubling our 2012 AFFO per share by the year 2017.

And with that operator, let’s open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jonathan Atkin with RBC Capital.

Jonathan Atkin - RBC Capital

Yes, good morning. So I was interested in the increase in your domestic organic core growth guidance and what specifically are you seeing at the carriers and what types of projects are you seeing that are driving the higher outlook. And then on the international markets I wondered if you can maybe just kind of give the high point of what you are seeing in terms of leasing drivers on both legacy and newly acquired sites in Mexico, Brazil as well as in India? Thank you.

Jim Taiclet

Sure, Jonathan, it’s Jim. So, some of the major current drivers in the U.S. include Verizon transitioning from its coverage phase to its densification phase of its 4G LTE rollout. And we are seeing increasing co-location application from Verizon network converting to contracts during the current year at a greater pace that we have had in the past. So that’s one piece. AT&T is also continuing to build out across markets both on the amendment side and in some cases on the co-location side now. And we are also building a high number of towers is an example for AT&T as they fill another white space. So AT&T has also have been every accurate. And then Sprint, T-Mobile have contributed meaningfully to mainly on the amendment side, but also through some of the enhanced rights that you are asking for on specific sites to go over and above the holistic agreement.

So, it’s really across the board all four international carriers are active and contributing in the U.S. And then just turning to international just to give you a couple of highlights and for example Mexico this continued 3G rollout by Telefonica cells become more active and Nextel is of course continuing its network transition and very much on our sites of those projects. Brazil is similar with sort of every carrier out for 3G deployment and some initiating 4G as you know. We will really stepped up that’s the Telefonica subsidiary in Brazil and as try to I think really enhances pacing of 3G deployment. But at the same time Nextel is active and Telefonica Italia as well over the last quarter or so.

And then the entering India it’s really stabilizing as for as the regulatory environment and therefore, the major carriers have ramped up there build plans again so Bharti Airtel was one of our biggest customers in the first quarter, Idea, Vodafone, etcetera. So it’s the big encumbrance that are taking their new spectrum and understanding of how the market is going to play out and starting to reimburse more heavily in the network. So that’s kind of the major landscape all the countries in the business hit or exceeded the plans we have for them in the first quarter. So it’s really in Africa, it’s in Latin America, it’s in Asia carriers are stepping up and deploying 3G and networks.

Tom Bartlett

Jon. And then just on the U.S. we increased as I mentioned of our 50 basis points and it’s a function of just high levels of applications as we mentioned there up 50% versus what they were last year or so. Application volume this is very, very high. And it’s also the mix. It’s a little bit more quick mix than I originally thought in terms of moving to colos and amendments. And amendments, it’s a good solid revenue at kind of an average amendment in the U.S. in the 600 to 700 range, but it’s over three times that or roughly three times that on a co-location. So, it’s a function of both mix and just volume, which is driving the increase in the organic core growth.

Jonathan Atkin - RBC Capital

And if I could follow-up briefly on DAS, which you mentioned, are there particular regions and venues versus outdoor versus indoor that kind of strike you as having the most opportunity?

Jim Taiclet

Look, domestically in the U.S. it’s mainly indoor right now, Jonathan. There are upgrades going from 3G to 4G in a lot of the big properties like casinos and some of the major malls that’s driving a lot of it. AT&T and we are collaborating on new properties to try to figure out what’s the most attractive place to do build-outs and serve them in that way. So, it’s mainly the 3G to 4G upgrade in the indoor along with new properties that we are building out at this point in time.

Tom Bartlett

And Jonathan, just on that, just adding to what Jim has said, in the indoor side, we are seeing kind of north of two tenants per tower by closely to 2.4 tenants versus the outdoor, which are 1.4, 1.5. So, our focus on the indoor DAS is really where we want to be.

Jonathan Atkin - RBC Capital

Thank you very much.

Operator

Your next question comes from Batya Levi with UBS.

Batya Levi - UBS

Great, thanks. Just to follow-up on the level of activity you are seeing from Sprint and T-Mobile, are they spending beyond their holistic MLAs today? And does your guidance include any activity on T-Mobile’s 700 A Block, which would close soon and Sprint 2.5 deployment, which I believe they expect to pass $100 million props by year end? Thank you.

Jim Taiclet

There is what we call over and above activity standard request for traditional rights in both of those cases. Batya, T-Mobile has probably been a little more active. As you have heard us recently this morning and last night, they have had a lot of success in subscriber growth and therefore meeting that growth with more network investment, we are helping them with that. This part of 700 megahertz that’s probably going to be more of a 2015 active field deployment, if you will, so the planning is going on now, but lease commencements are likely to kick in more in the 2015 calendar year.

And then Sprint 2.5 is starting to rollout, but it’s again very complex project, it’s going on simultaneously with the not yet completed 1.9 original network vision project. So, it’s all incorporated, but the 2.5 gigahertz deployment will last for a number of years and really ramp up probably more next year. But one other point on the 2.5, we are estimating that in addition to 38,000 network vision sites that are kind of on the docket with Sprint, they probably need another 30,000 or 40,000 transmission locations ultimately to have 2.5 coverage match the 1.9 network at the end of the day. So, it should be a long-term as I said multiyear project to get that signal out there.

Batya Levi - UBS

Okay, great.

Operator

And your next question comes from Simon Flannery with Morgan Stanley.

Unidentified Analyst

Hello, this is (indiscernible) for Simon. Just wanting to get your take on future acquisitions and how you balance that with your leverage target, are you thinking of any new or existing markets to enter now the slides mentioned the strong M&A pipeline internationally? Thank you.

Jim Taiclet

We are continuing to seek new assets in all of our served markets and some that are adjacent in the territories in the regions as we have deployed, just like we had before. So, our deployed management teams in the regions are continuing to meet with counterparties and customers and get involved in due diligence and exploration of new assets. At the same time, we are cognitive of our leverage glide slope we like to be on. So, I will basically say from the strategic side, its business is usual at American Tower domestically and around the world and I will let Tom give a couple of comments on how we will manage to leverage through that.

Tom Bartlett

Yes. I mean, as I mentioned, we ended the quarter at 5.5 times net leverage on an LQA basis, down about half a turn from the 5.9 level as of the end of the year. Our goal is to be able to de-lever back down to that 5 times over the next 9 to 12 months or so through a combination as I mentioned of expected EBITDA growth and selected debt repayments. We continue to value our investment grade rating and balance sheet flexibility and overall believe that our balance sheet strength is clearly a competitive advantage. So to the extent that we are able to leverage our active deal pipeline to find accretive acquisition opportunities this year, we will fund them in a manner which will enable us to hit our year end in early 2015 leverage targets. And we have a number of different products that we can used to do that.

Unidentified Analyst

Thank you very much.

Operator

And your next question comes from Michael Bowen with Pacific Crest.

Michael Bowen - Pacific Crest

Okay. Good morning. Thank you. Question with regard to GTP portfolio you mentioned that lease up was stronger than anticipated I was wondering if you could give us any incremental detail around that and how much depending upon what detail you can give how much of the increasing organic core growth with international was a result of the GTP tower portfolio? Thanks.

Jim Taiclet

Yes. The international portfolio was not really I think we have Costa Rica and Panama but there was no real increase relative to that organic growth. On the U.S. please keep in mind that we know 5,000 towers that we are able to put in front of all of our customers. And so the 9.2% organic core growth that we saw in the U.S. but in the high 9s relative to GTP as I mentioned before outpacing the overall growth of legacy U.S. portfolio. So we remain – really excited about the portfolio. We also – I also mentioned that the synergy levels are higher than we originally thought and we originally had talked about a $10 million synergy number for 2014 and now we are looking upwards of $17 million to $18 million. So much of the SG&A outperformance that we see for the balance of the year is really due to the GTP incremental synergies, which is really driving to that 9% of SG&A. And keep in mind that our organic core growth doesn’t include any revenue contribution from sites that we have acquired in 2013. The way we calculate organic core growth are on those assets that we have owned for at least a year and so the GTP and the NII sites are largely going to be driven in the overall core growth metrics that we talked about.

Michael Bowen - Pacific Crest

Okay. And then quickly with regard to AT&T, you mentioned in our call that you are building towers for AT&T I think they said they had added about 1,000 macro towers, can you give us any feel for the relative benefit you are seeing from AT&T with regard to that tower build versus the other two tower companies?

Jim Taiclet

Well just overall as it’s important to point out, deployments for carriers are largely in the form of co-location, right. So if it’s 1000 per carrier that put out new cell sites the vast majority of those tend to be on existing towers in the industry. That is the first reminder. Secondly, we don’t really speak to specific volumes for a customer for what is build to suite co-location with them. But what the trend is, it’s important to remember here is carriers are needing to deploy sites to make their networks more dense because they need higher signals and noise ratio, higher signal strength in the network to deliver the new services and also the capacity is really kind of requiring additional sites and equipment for the transmission. So those are the few things to remember and for our specific customers we cannot speak to go the numbers related to each of those.

Michael Bowen - Pacific Crest

Okay, thank you.

Operator

And your next question comes from Ric Prentiss with Raymond James.

Ric Prentiss - Raymond James

Thanks guys. I will try to be brief it’s a busy earnings day. First very exciting organic growth, I appreciate you guys lying out all the details there. I wanted to touch a little further on the external or the M&A growth. On Richland can you tell us what the annualized effect would be I know you shared with us as far as the change in guidance, but don’t want to annualize it incorrectly if we don’t know the actual close day. Nextel you guys still have some maybe about 1000 towers also between Nextel Brazil you have not closed yet, do you still expect to close those. And then the final M&A question is as you look at balancing the risk, because very visible business FX had some volatility, how are you guys going balance that basket of international for future growth?

Jim Taiclet

A Rick, let me start off on that the purposes of Richland the total annual revenues is just under $40 million, I think $39 million of revenue and $30 million of TCF so that gives you a little bit of sense on that particular portfolio and with regard to – you’re right we had – we have about another 1000 or so sites that we have to close and their subject due diligence in customer closing condition so the timing on all of those is uncertain and that we obviously have not included any impact from potential subsequent closings in our current outlook numbers.

Tom Bartlett

So, right, there is things that look at sense and permits and other important aspects of individual sites we just got work away through them for the rest of the year.

Ric Prentiss - Raymond James

We still expect to close those by the end of the year though.

Jim Taiclet

We’re working towards that just typically not all sites in a portfolio end up closing take the majority of them do so I think that’s our best way to look at it. And then as far as the global risk balancing if you will, let me just start off Rick with the original numbers from the prepared remarks, which is the U.S., is our based business is two-thirds of the revenue line is by 70%, 75% of the non-pass through revenue line and a 75% of the operating profit so the U.S. is the base business and our international is meant to complement in the first slide, right, and what’s interesting about the way the math work over a 5 or 10 year time arrival is the U.S. will continue to grow robustly as we’ve kind of outlined today and on top of that we think at a faster growing albeit from a smaller base international business. So, remember the purpose of international is to accelerate growth diversified the sources and so it is inherently in our view of risk mitigating strategy.

Within international then we have further mitigating the risk within that segment by diversifying internally to the international a number of dimensions right so, we don’t put too many eggs in anyone basket whether it’s a continent, whether it’s a country, whether it’s a counterparty, whether it’s a technology and work technology cycle of timing. So, we’ve got for example activity in 2G in places like India and Uganda, we’ve got activity in 3G in Latin America, India, and throughout Africa. We’ve got activity in 4G in Germany and U.S. and now in India so, we diversified across technologies, we diversified across continents, we’re on five continents now and was really important is when we diversify across customers, those customers are in multiple countries. These are the multinational at Telefonica America Mobile, MTN, Alltel, those kinds of companies creates an interesting fabric if you will which is we try to pick countries which again we risk medicated and we take counterparties that we try to view across those countries to create a really strong fabric and that’s kind of the other concept of risk mitigation. So, those are the kind of the key dimensions that I would offer rate that if any each in every deal and build the suit inside or outside the U.S. to scrutinize substantially by both the regional team and here the executive team and if it’s size by the board. So, we feel we’ve got a lot of risk management applied to both frankly the domestic and the international business.

Tom Bartlett

Yes. And as Jim alluded to, we expect much higher rates of returns coming from these markets on a risk adjusted basis. So, we are looking for anywhere from the kind of the low double-digits teens in the LatAm up to some markets that we have in Africa up to 18% to 20%. So, we do risk adjust on these as you well know as well.

Ric Prentiss - Raymond James

That’s great. And I appreciate the way you guys are giving guidance this year, I like to see the Brazilian reais there around 2, 3, 5 in the guidance that’s seems to be nice and conservative still.

Tom Bartlett

Great, thanks, Rick.

Ric Prentiss - Raymond James

Thanks and good day.

Operator

Your next question comes from Phil Cusick with JPMorgan.

Richard Choe - JPMorgan

Hi, this is Richard for Phil. I want to get a sense I don’t know if you have it offhand, but overlap exposure you have now between Sprint and T-Mobile?

Jim Taiclet

Sure, it’s Jim. We have got 5% total revenue on our rental and management segment. Overlap on towers for T-Mobile and Sprint are both present. That’s now 5,000 sites. What’s important about that overlap is the remaining term, which averages between the two companies at seven years. So, we renegotiated holistic agreements as you will recall with both Sprint and T-Mobile over the last couple of years. Those had certain 9 to 10 year tails on them when we negotiated them and there is 7 years left. So, it’s a modest manageable and discuss in terms of time overlap. And just as a reminder as we have analyzed previous mergers in the industry whether this one is consummated or not we have real data on those that happen consummated at an all three cases, whether it was Sprint Nextel, Verizon Alltel or AT&T Wireless or Cingular are free deal revenue streams increased by on average 25% post merger. So, I need to further invest in the network and two parties oftentimes feel that they can do that more effectively together than apart. And so it’s usually constructive for the tower industry in the end.

Richard Choe - JPMorgan

And to clarify on earlier statement you made, I guess, there is 30,000 network vision sites to mesh the 1.9 with the 2.5 – are you saying Sprint needs an incremental 30,000 to 40,000 sites?

Jim Taiclet

Well, that’s a theoretical construct, whereas you wanted to have the same coverage on 2.5Gs you did on – as you do on 38,000 now our vision sites at 1.9. Then you are going to have to have an incremental 30,000 to 40,000 sites. So, it’s a theoretical construct, just wanted to have the same single strength and coverage as you do on network vision or technical assessment issue have to have significantly more sites, not sure Sprint is ever going to go that far, but if they wanted to, that’s the order of magnitude that might take.

Richard Choe - JPMorgan

Great, that should probably help drive you for a while. Thank you.

Operator

Your next question comes from David Barden with Bank of America.

David Barden - Bank of America

Hey, guys. Thanks for taking the questions. Just two if I could. First, I guess for you Tom, just on the Richland acquisition, could you kind of share what incremental kind of revenues/EBITDA contributions that contributed to the guidance change for the year? And then just second maybe Jim on your comments about, obviously the current strength in the business core business, which appears to be growing in the U.S. over 9%, some of the commentary you laid out about the drivers in the next couple of years, but then your kind of long-term growth of 6% to 8%. Could you kind of talk about how you see the current 9% plus growth in the current environment kind of stepping down to that 6% to 8% and over what timeframe and kind of what leads to that? Maybe it’s just law of large numbers over time, but it feels like all the drivers right now, would lead you to believe that maybe the next couple of years are higher than 6% to 8%, but I would love your perspective on that? Thanks.

Tom Bartlett

Hey, Dave, on the first question relative to the Richland acquisition, of the $70 million increase in our rental and management revenue, Richland represented $28 million of that and of the $50 million increase in EBITDA, Richland represented $20 million of that and is largely driving the incremental AFFO by $5 million, so, very accretive for us 2014.

Jim Taiclet

As I suggested in the prepared remarks regarding growth rates and industry CapEx, the aggregate industry CapEx that stays at $30 billion to $35 billion a year of level over the next few years, we think of course will support greater than 6% to 8% for organic revenue growth for us and so that’s our best parameter and we’re going to work closely with the carriers but in the end of the day they’re going to decide what the CapEx budgets and the rollout deployments plans are and again that’s another reason for diversification outside the U.S. is because if there ever is attenuation below the 9.5% or 9.2% the U.S. that will be about the time that 4G is taking in some of other markets so that would help to boost the total company growth rate whatever happen that way.

David Barden - Bank of America

Great, thanks. And then Tom if I could just do a quick follow-up, so I think the revenue for the first quarter seems to have come in maybe $10 million stronger than what people expected. So, rolling that through the year, that’s a $40 million revenue beat. And then this acquisition at Richland is $28 million, so we get to $70 million. We have got some foreign currency tailwinds on the new expectations, which even take us north of there. So, it kind of feels like based on the commentary that you are kind of teeing up fairly conservative revenue implications inside the guide for the second, third and fourth quarters or is there some other headwind that’s going to come into play here that we should think about?

Tom Bartlett

Yes, I mean, I have kind of walked you through, David, in terms of what the kind of four pieces were the FX being $19 million, pass-through of $9 million, Richland of $28 million and the outperformance of $14 million kind of $7 million in U.S. and roughly $7 million in the international markets. On the first quarter, we do have some escalation impacts from some of the holistic and some of those types of things. So, I think that right now is a fair kind of what we would see the year to be at and to the extent that we see any more activity obviously we will continue to update the guidance as we move throughout the year.

David Barden - Bank of America

Got it. Alright, great, thanks guys.

Operator

And our last question comes from Amir Rozwadowski with Barclays.

Amir Rozwadowski - Barclays

Thank you very much. And I was wondering if you could touch upon sort of the margin trajectory from your international business, I mean it does seem as though while you folks are looking at healthy other opportunities in those markets, a lot of the investment has gone into expanding the footprint in those market where you see the best opportunity. Looking at some inside in terms of how we should think about sort of the trajectory of that business as you start to build up additional co-location and some of the seeds that you planted and some of these markets begin to bear fruit?

Tom Bartlett

Yes, it’s really a function of our continued investment in those markets in the form of new acquisitions versus the kind of the growth of the legacy businesses, I mean, if in fact we just stopped investing in those markets, I think you will see the same kind of trajectory as you would see in our U.S. businesses, I mean the import organic core growth – gross margins without pass through is about 87%. So, we’re seeing really solid conversation rates in those legacy international markets consistent with what we would see in the U.S. which is in the kind of 85% level at the gross margin level. But we do continue investing in those markets. So, it’s the average tendency is about 1.5 versus the U.S., which is about 2.5 so, it’s the mix we like to be able to walk and chew gum at the same time in terms of driving the top-line growth rate as well as being able to create a real long-term sustainable path for our sales. But longer term, there is no reason that they shouldn’t be able to get to the kind – on the same kind of path is our U.S. operations.

Jim Taiclet

Amir, this is Jim. Just to put a point on that if you go back to the analogy of vintages of towers like fine wine, the older the tower the more leasing it’s going to have, the higher the margins they are going to be. Our return on invested capital in towers we have owned in say even Mexico for the past 10-year timeframe, those are north of 20% return on investments kinds of sites. And operating – the gross margins are going to be outside of pass-through in the 90% range. So, as Tom said basically, it becomes asymptotic to the U.S. level as the international markets grow and mature.

Amir Rozwadowski - Barclays

That’s very helpful. And if I may one quick follow-up switching back to the U.S. you folks in your prepared remarks spoke about some of the initiatives ongoing with the carrier such as VoLTE, which are seem to be driving some densification opportunities. In your discussions with those folks, how much of this is a priority for the carriers? And the reason I ask is it does sound like if there is an opportunity to free up voice spectrum to utilize for data, getting there sooner rather than later maybe opportune for them, given what we re seeing in terms of rising traffic? And I am wondering if that potentially could accelerate densification investments or how we should think about that?

Jim Taiclet

Yes, I think that logic tree is exactly what’s going on, Amir, whether the carriers are seeing sort of the burgeoning data demand coming through led by video and other applications that are high-bandwidth like music and games and things. And so they would like to move some of the voice dedicated spectrum with the 3G spectrum over to 4G, where it can be used for by LTE, it can be used for voice and for data in a very efficient way as you said. So, the tradeoffs then is what’s the densification of the infrastructure rate that I need to get the spectrum moved over and maintain my quality of service, both for data and for voice and to replace a circuit switch network, this traditional sort of single signal path from one voice user to another to replace that with an internet-based packet network, you just got to have higher signal-to-noise ratio in the early part of that call and to have that higher signal-to-noise ratio, you have to have sites closer to your handset and more dense therefore. Those are the equations that these guys are calculating and trying to figure out what the right rate of migration is going to be for each company.

Amir Rozwadowski - Barclays

Thank you for the incremental color.

Jim Taiclet

Yes.

Leah Stearns - Vice President, Investor Relations and Treasurer

Great. And with that, operator, we can end the call. Thank you everyone for joining.

Jim Taiclet - Chairman, President and Chief Executive Officer

Yes, thanks for joining everybody. Have a great week.

Operator

And that does conclude today’s conference call. You may now disconnect.

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