SBA Communications Corporation (SBAC) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the SBA Second Quarter Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Director of Finance, Mr. Mike -- Mark DeRussy. Please go ahead.

Good morning, and thank you for joining us for SBA's second quarter 2013 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer; and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2013 and beyond. These forward-looking statements may be affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in last night's press release and our SEC filings, which documents are publicly available. These factors and others have affected historical results, may affect future results and may cause future results to differ materially from those expressed in any forward-looking statement we may make. Our statements are as of today, August 2, 2013, and we have no obligation to update any forward-looking statement we may make. Our comments will include non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and the other information required by Regulation G, has been posted on our website, sbasite.com. With that, I will turn it over to Brendan to comment on our second quarter results.

Thank you, Mark. Good morning. As you saw from our press release last night, we had another great quarter on all fronts. We were at the high end of our guidance for leasing revenue and exceeded the high end of our guidance for services revenue, tower cash flow, adjusted EBITDA and AFFO. Total revenues were $324.3 million, up 41.6% over the year-earlier period. Site leasing revenues for the second quarter were $279.5 million, or a 37.4% increase over the second quarter of 2012. Our leasing revenue growth was driven by organic growth and portfolio growth, including the impact of the TowerCo acquisition, which closed during the fourth quarter of 2012, and our Brazil acquisition, which closed at the end of 2012. The vast majority of our site leasing revenue continues to come from the U.S. and its territories, with approximately 7% of total leasing revenue in the quarter coming from international operations. Site leasing segment operating profit was $211.7 million, or an increase of 33.3% over the second quarter of 2012. Notwithstanding our record services quarter, site leasing still contributed substantially all, 96%, of our total segment operating profit. Tower cash flow for the second quarter of 2013 was $203.9 million for a 33.8% increase over the year-earlier period. Tower cash flow margin was 77.6% compared to 79.3% in the year-earlier period. As expected, year-over-year margins were slightly impacted by the addition of the less mature TowerCo and Brazil portfolios, but they are moving in the right direction. Sequentially, tower cash flow margin increased 80 basis points from the first quarter of 2013. We continue to experience strong leasing demand, both domestically and internationally. Amendments continue to be numerous and contributed the majority of U.S. leasing revenue added in the quarter, although we are seeing an increasing contribution from new leases for macro sites. Most of these amendments were LTE-related. The big 4 U.S. carriers contributed approximately 87% of our consolidated incremental leasing activity in the quarter. We have a solid leasing backlog and expect that the third quarter will be another strong one in terms of customer activity. Our services revenues were $44.8 million compared to $25.6 million in the year-earlier period, reflecting generally higher activity levels and work mandated to us by our Sprint Network Vision contract and T-Mobile 4G agreement. Services segment operating profit was $8.9 million in the second quarter compared to $4.1 million in the second quarter of 2012. Services segment operating profit margin was 19.8% compared to 16.1% in the year-earlier period. SG&A expenses for the second quarter were $21.5 million, including noncash compensation charges of $4.9 million. SG&A expenses were $17.7 million in the year-earlier period, including noncash compensation charges of $3.8 million. Our overhead efficiency continues to improve as we grow. As a percentage of revenue, SG&A expenses were 6.6%, a decline of 110 basis points compared to the second quarter of 2012. Adjusted EBITDA was $196.4 million, or a 37.5% increase over the year-earlier period. Adjusted EBITDA margin was 63.9% in the second quarter of 2013 compared to 65.6% in the year-earlier period. Strong organic margin expansion from our leasing segment was slightly offset by the inclusion of the less mature TowerCo and Brazil towers and an increase in our lower margin services revenue. Approximately 96% of our total adjusted EBITDA is attributable to our tower leasing business. AFFO increased 35.9% to $129.5 million compared to $95.3 million in the second quarter of 2012. AFFO per share increased 28.2% to $1 compared to $0.78 in the second quarter of 2012. AFFO for the second quarter includes a nonrecurring benefit of $500,000 for coupon interest expense not required to be paid upon conversion of our 1 7/8 convertible notes. AFFO for the first quarter of 2013 included a similar benefit in the amount of $3.6 million. Net loss attributable to SBA Communications Corporation during the second quarter was $35.9 million compared to a net loss of $53.5 million in the year earlier period. Net loss per share for the second quarter was $0.28 compared to $0.44 per share in the year-earlier period. Quarter end shares outstanding were $127.8 million. During the quarter, the U.S. dollar strengthened against the Canadian dollar and the Brazilian real, slightly more than what was anticipated in our guidance. This negatively impacted our leasing revenue, tower cash flow and EBITDA by approximately $300,000, $150,000 and $100,000, respectively. In the second quarter, we acquired 44 tower sites and the rights to 6 additional communication sites for $36.4 million in cash. SBA also built 80 towers during the second quarter. We ended the quarter with 17,587 owned towers. 14,903 of these towers are in the U.S. and its territories, and 2,684 are in international markets. Total cash capital expenditures for the second quarter of 2013 were $81 million, consisting of $3.9 million of nondiscretionary cash capital expenditures such as tower maintenance and general corporate CapEx and $77.1 million of discretionary cash capital expenditures. Discretionary cash CapEx for the second quarter includes $36.4 million incurred in connection with tower acquisitions, excluding working capital adjustments and paid earn-outs. Discretionary cash CapEx also included $18 million in new tower construction, including construction in progress, and $11.8 million for gross augmentations and tower upgrades. Of the $11.8 million augmentation figure, approximately $10.6 million, or 90%, were simultaneously reimbursed by our customers, resulting in net augmentation cash expenditures to us of $1.2 million. These reimbursed amounts are treated as deferred revenue and amortized into site leasing revenue and, therefore, AFFO over the initial lease term. The amortization benefit in the second quarter from these reimbursed amounts was $3.1 million. With respect to the land underneath our towers, we spent an aggregate of $14.6 million to buy land and easements and to extend ground lease terms. Our investments in land are both strategically beneficial and almost always immediately accretive. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 72% of all of our towers. At the end of the quarter, the average remaining life under our ground leases, including renewal options under our control, is approximately 30 years. On July 15, we announced we had entered into a definitive agreement with Oi, under which we will have exclusive use rights for 2,113 towers in Brazil. The purchase price is payable in Brazilian reais and is approximately BRL 687 million. We have hedged the conversion of the U.S. dollars to fund the transaction at an exchange rate of BRL 2.29 to USD 1. We anticipate the transaction to close at year end 2013. For the full year 2014, we anticipate these towers will generate revenue and tower cash flow of BRL 73.5 million and BRL 67.3 million, respectively. At this point, I'll turn things over to Mark, who will provide an update on our liquidity position and balance sheet.

Thanks, Brendan. SBA ended the second quarter with $5.7 billion of total debt. We had cash and cash equivalents, short-term restricted cash and short-term investments of $231 million. Our net debt to annualized adjusted EBITDA leverage ratio was 7x, and our long-term leverage target remains 7x to 7.5x. Our second quarter net cash interest coverage ratio of adjusted EBITDA to net cash interest expense was 3.1x. In April, we issued several tranches of Secured Tower Revenue Securities through our existing SBA Tower Trust, generating a total of $1.33 billion in gross proceeds. The offering had a weighted average coupon of 3.22% and a weighted average maturity of 7.2 years. Net proceeds from the offering were used primarily to: repay the $100 million outstanding balance under our revolver; to repay $500 million on a pro rata basis across our 2 outstanding term loan Bs; and to retire our 1 7/8 convertible notes. At the end of the second quarter, the weighted average coupon of our outstanding debt is 4.3%, and our weighted average maturity is 5 years. 8% of our debt is floating rate, and the remaining 92% is fixed rate. We currently have no outstanding balance under our revolver, and the full $770 million in commitments is available to us. During the second quarter, we spent $23.6 million in cash to early settle a portion of the outstanding warrants scheduled to mature during the third and fourth quarters of this year, which were related to our 1 7/8 convertible notes. There were approximately 2.7 million shares underlying the settled warrants, or approximately 20% of the total outstanding warrants. We did not purchase any shares of our common stock during the quarter and currently have $150 million remaining under our existing $300 million authorization. With that, I'll turn the call over to Jeff.

Thanks, Mark, and good morning, everyone. Our second quarter results were very strong and therefore, we are once again able to increase our 2013 outlook in a number of key metrics. The driver behind much of this increase is the organic strength of our business, which contributed to a much greater degree than portfolio growth in the first half. We are expecting greater portfolio growth in the second half of 2013, which we believe may contribute minimally to our fourth quarter financial results, but more importantly, set us up for a very strong 2014. Domestically, our leasing and services businesses continue to be driven by the big 4 U.S. carriers, all of whom are once again very busy in the second quarter with LTE deployments. While amendment activity remains strong, we are seeing an increasing number of leases for new macro sites, up from Q1, and our new lease backlog is at an all-time high. AT&T was once again our largest customer in terms of incremental revenue added, with nationwide activity consisting of both amendments and leases for new macro sites. Verizon stayed active as well, and among other things, is deploying its AWS spectrum to add LTE capacity and adding new macro sites. Sprint remains engaged in the Network Vision project and is readying for the deployment of the 2.5 gig spectrum. T-Mobile has also ramped up its LTE deployment. All in all, it's a very busy time around our tower sites. Current activity levels with the big 4 U.S. carriers remain high, and our backlogs remain solid. Because of our second quarter success, we are increasing our full year 2013 outlook for site leasing revenue, notwithstanding that we have begun to experience a loss of iDEN revenue. As expected, Sprint has exercised its permitted number of iDEN terminations for the third quarter. We expect the same for Q4, and our outlook reflects that. Sequentially, the iDEN terminations represent a site leasing revenue loss of slightly less than $2 million in Q3 compared to Q2, which is less than the worst-case scenario we modeled. In anticipation of the iDEN terminations, we have initiated a new focus on culling from our portfolio those towers with current or expected future negative tower cash flow. In the second quarter, under this effort, we decommissioned 76 towers. While this activity obviously decreases tower count, it increases tower cash flow. We had a record services quarter, generating almost $45 million in revenue, which reflects how busy our domestic customers are on network projects. Services activity in general is up, plus we have certain work mandated to us through our Sprint Network Vision and T-Mobile 4G agreements. We are expecting our busiest services year ever this year, and we have materially increased our full year services outlook as a result of those expectations. I expect this increased level of activity to spill over well into 2014, primarily as a result of the limited human resources in the industry relative to the aggregate demands and plans for additional network upgrades and expansions. Internationally, we continue to see good levels of activity in all of our markets. Activity is still primarily basic 3G rollout, with some, but still not much, 4G activity yet. We expect the high levels of customer activity we are currently experiencing in the U.S. will be recognized in our Latin American markets in years to come. We are well ahead of expectations in our international markets with both higher revenue and lower expense compared to expectations. Our international business is growing faster than our U.S. business, as you would expect, given the relative size of each. We built and acquired towers in a number of our international markets in the second quarter and ended the year with solid backlogs -- or the quarter, excuse me, with solid backlogs in all markets. We are very pleased with the returns to date on our international investments. Our international growth and contribution to our business will be accelerated with our recently announced transaction to acquire use rights for the 2,113 towers from Oi in Brazil. Upon closing this transaction and others we have under contract in Brazil, we will own or control over 3,000 towers in Brazil, firmly establishing SBA as one of the top 4 independent tower owners in the country. We believe we will acquire the Oi towers on very attractive terms, which we have provided some certainty around by entering into the currency conversion hedge that Brendan mentioned earlier. The Oi towers are spread throughout Brazil, tend to be predominantly located in the more populous areas and are of good capacity given their origins as wireline towers. They have already demonstrated good suitability for wireless use as they currently have 1.15 tenants per tower, with additional wireless demand pending. Going forward, all of our Brazilian revenue and most of our Brazilian expense will escalate based on Brazilian CPI. We believe this structure, long term, will largely mitigate unfavorable changes in the exchange rate, although we do expect some short-term reporting volatility due to changes in the exchange rate. For the foreseeable future, we intend to retain excess cash flows in Brazil to continue to grow our Brazilian business. We expect that future wireless network development in Brazil will look a lot like what we have already experienced in the U.S., and we have well positioned SBA to participate in that growth. Age demographics, population growth, current wireless absorption, wireless technologies deployed, the current state of wireless infrastructure and the relative lack of a wireline infrastructure all bode very favorably for our business in Brazil for years to come. On top of that, you have 4 large competitive nationwide carriers and a pro-development regulator. Beyond wireless, Brazil has abundant natural resources, they export more than they import, and they have a better ratio of government debt to GDP than we do here in the U.S. We believe it is a good time to invest U.S. dollars in Brazil. We like Brazil a lot and believe that its prospects over the next 10 years will come closer to rivaling our U.S. experience and success than any other market we have explored. With the anticipated closing of the Oi transaction at the end of this year, we will have once again exceeded our portfolio growth goal of 5% to 10% per year. We remain interested in further portfolio growth opportunities that meet our investment criteria, and we typically are constantly evaluating a number of opportunities in that regard. We have a strong balance sheet and access to additional capital with which to pursue additional portfolio growth. We expect that portfolio growth will remain a material contributor to our growth story. Before we open it up for questions, I want to recognize the contributions of our employees and customers to our success. We've been very busy these last 3 months, and I'm proud of our efforts. Our employees work really hard to achieve the goals of our customers. Our customers are, and we think will remain, extremely busy improving and expanding their wireless networks. Our employees do a great job. Our customers recognize that. And as a result, we are a preferred provider for our customers' network needs. We look forward to continued success as we move through 2013. And with that, Tom, we're ready for questions.

[Operator Instructions] Our first question today comes from the line of Michael Rollins representing Citi Investment Research.

I was wondering if you guys could talk a little bit more about the subject of prepaid rent in terms of what you guys are seeing on activity cash-in, what the noncash amortization in revenue looks like, and how you guys are approaching the definition of AFFO with regards to this operating practice that you and your competitors participate in?

Yes. For the quarter, Mike, we had $11-ish million of gross augmentation expense, of which 90% of that was reimbursed to our -- by our customers. GAAP requires that those reimbursements be treated as deferred revenue and spread out and amortized into site leasing revenue over the remaining term of the lease, which is typically 5 years. And as we mentioned, our amortization benefit in Q3 was $3.1 million. But if you take a step back, I mean, the bigger picture, at least from SBA's perspective, is we work hard to try and minimize augmentation dollars. Because what an augmentation really means is that you have to create additional capacity to satisfy tenant demand. We actually prefer to have capacity and buy towers and build towers so that over time, you don't have to spend money to do that. So the augmentation area is one that we worked hard to minimize, whether the amounts are reimbursed or not. And in terms of our AFFO definition, we basically have taken our GAAP net income and backed off from there. So because the amortized amounts, in this case in Q2, $3.1 million, was included in our site leasing revenue. That becomes part of our AFFO definition. We think it's an appropriate way to go. Obviously, everyone needs to understand that. It actually spreads the amount of that deferred revenue out over a long period of time. So it smooths things out. And from a cash perspective, you have already received the cash. So the 90% of the reimbursements we do have in the bank. So actually, we are amortizing into revenue, currently, amounts well below the cash we have received from our customers for reimbursement. Brendan, do you have anything you want to add to that?

No, that's a good summary.

And Jeff, I'll just follow-up with one other quick question. With the recent move in interest rates, how's that affecting the pipeline of transactions in terms of the bid-ask spread? And are you seeing the move in interest rates help lower some of the valuations that you're looking at within the pipeline of potential acquisitions?

That was my question.

The -- yes. We are starting to see the impact of interest rate sum. It's certainly more on top of mind for us than I think some of the sellers would like, which isn't unusual. I mean, there's always that traditional lag as market dynamics change between the current state of affairs and sellers' expectations and buyers' desires. But we're obviously very mindful of what our cost of capital is, and we grow the company because, and only if, we believe it's going to be better for AFFO per share in the future than not doing a particular deal. So we do take into account all of that, Mike. But as with any other business, I would suspect that market changes, it takes a little bit of time to work itself through both buyer and seller expectations.

Our next question comes from the line of David Barden representing Bank of America.

First, Brendan, with respect to the guidance and the expectation setting for the back part of the year, I think that you basically called out that the big transactions that you have announced are going to be kind of closing towards the end of the fourth quarter. Could you kind of give us a rough sense as to the quantification of what those things are going to be contributing to the fourth quarter expectation? And then second, could we go back and kind of review the iDEN relationship? I guess, we've known about the expectation that's going to be feathering into the revenue in 2014 and for a couple years beyond that for some time now, but I think that the portfolio grooming aspect is somewhat new. Could you kind of tell us kind of how this is all working?

Yes, David. With regards to the M&A, as we mentioned in the press release and on the call, the substantial majority of what we have under contract is not actually contributing anything to our second half of the year guidance. In fact, the M&A contribution to EBITDA for the second half of the year is less than $0.5 million. So when you look at deals like Oi, for instance, which is obviously the biggest thing that we have under contract, there's no operational contribution from Oi to any of our guidance number -- numbers, with the exception, obviously, of the CapEx number. With regard to the iDEN impact, we had previously been assuming the worst-case scenario in terms of what it would do to our second half of the year guidance. As we've gotten some actual notifications from Sprint as to which leases they'd be terminating, those numbers are a little bit better than that. Basically, for the second half of the year, we're picking up approximately $1 million or so improvement versus what we had previously guided to, based on the actual leases that they're terminating versus the ones we had assumed.

In terms of the decommissioning, David, that is something that we actually began to plan around when we did the TowerCo acquisition. As we kind of thought through maximizing the portfolio, we did a lot of engineering work, a lot of our F-engineering [ph] work. And with a certain number of those towers that were single-tenant, iDEN-only towers, we concluded that we were better off, and it was our goal to actually decommission those towers, save the expenses. In some cases, there were -- particularly in a couple of spots in Southern California and other high land-cost areas, you had some very expensive ground rents. So this really was the -- this has been in the works in terms of planning for a while and is actually a big part of the underwriting of the TowerCo transaction. It also, of course, has application to our own towers. So -- I mean, I think you ought to look at it like -- there's 15,000 towers, the substantial majority of which are all very good and leasing up. Some are not. And if you have concluded, based on years of experience, that those are not, you think, going to lease up, you go ahead and cut your expenses and improve your tower cash flow.

Next, we'll go to the line of Phil Cusick with JPMorgan. Richard Yong Choe - JP Morgan Chase & Co, Research Division: This is Richard for Phil. I just wanted to clarify a little bit on the iDEN side. Are you expecting another $2 million down sequentially for the iDEN? Or is that just the $2 million for the year?

Yes. We are expecting -- each quarter, Sprint has the right to terminate up to 180 leases, and we would expect that they will terminate another 180 in the fourth quarter, which would represent approximately $1.5 million sequentially down.

Compared to the prior quarter.

Compared to the prior quarter. Right. Richard Yong Choe - JP Morgan Chase & Co, Research Division: Okay, great. And then shifting back to, I guess, the Brazil towers, there's not much this year, but obviously, it will be added next year. Is there anything that we should be expecting in SG&A at the end of the year? Or are you already staffed enough there at the end of the year?

Yes. We'll have some SG&A pickup, but it will be relatively immaterial, certainly in relation to the amount of revenue and tower cash flow being added. Richard Yong Choe - JP Morgan Chase & Co, Research Division: And I guess, kind of finally, is the business case around those towers just the mobile aspect of it because DirecTV and, I guess, others are looking at fixed wireless in the region? Can -- is that playing into it at all?

The business case is primarily underwritten on wireless. But just like in the U.S., we will seek to serve and court any potential user of those towers.

Our next question comes from the line of Rick Prentiss with Raymond James. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: A couple of questions. First, I think one of the big questions out there is MLA versus not-MLA. You guys had done an MLA with a couple of carriers, not with some other carriers. Talk to us a little bit about what the difference is in between an MLA and not-an-MLA as we look at amendment activity moving to new collocation?

Well, there would be nothing covered under any MLA that we have on new collocations. The 2 MLAs that we have, 1 with Sprint and 1 with T-Mobile, deal with amendments; or in Sprint's case, the wholesale change-out of their CDMA into their Network Vision project. And it's an amount of activity that is specified by its -- limited in scope to the amount of equipment that both those companies can add in exchange for an increase in rents. And our historical position on MLAs really hasn't changed. If we can quantify and limit the amount of additional equipment that a customer would like to have subject to an MLA and we could price it appropriately, we're fine with that and as evidenced by what we did with Sprint and T-Mobile. The types of MLAs that we have avoided, and I think we'll continue to avoid, are those that are unlimited in the amount of additional equipment that may be added at a particular mounting height. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: And no stock buybacks in the quarter, but obviously, the tower stocks have been a bit sluggish of late. How do you guys think about buying back stock versus the M&A portfolio growth that you're looking at, and then also how that ties back to leverage?

Yes. I think as we had done a couple of years ago, when we didn't see relatively attractive M&A opportunities relative to our own stock price, we bought back a lot of stock. In 2011, I believe that was -- maybe '10. And we'll do the same, Rick, I mean, it's kind of a constant balance of where the stock price is versus where we think we can deploy additional capital for portfolio growth at what prices. So it's a constant mix. I think we will want to stay fully invested to our target leverage amounts. We will continue to evaluate those, if, in fact, we reach the conclusion, which we have come nowhere close to reaching, that our future investment is primarily stock repurchases versus portfolio growth. But I think we're a long way away from that. I think it's safe to assume, while we won't top off the capital structure, the desired capital structure every quarter, I think you should expect that over time, we will stay in that 7 to 7.5 turns of leverage, and we're going to do it, hopefully, first through buying good towers and building good towers, but if not, through stock repurchases. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: One quick follow-on. On the decommissioning program, the pruning, if you will, what happens? Do you have to make it -- take it back to original condition? Is there money spent to actually remove the structure? And how does that flow through the CapEx?

It's a combination of things. I mean, a lot of it is -- sometimes, you just hand it over to the landowner, at which event, there is no cost. Sometimes, you take it down to the foundation. In a few cases, you have to take it actually a little bit into the ground, and it's all very situation-specific. But in general, all those costs are run through our asset impairment line, which you see in Q2 was much bigger than it was a year ago.

And just to be clear on that, Rick, that line, which is actually labeled Asset Impairment and Decommissioning Costs, so you can see that clearly, is not only the actual cash cost of taking down towers to the extent that we need to do that, but it includes the write-off of any carrying value associated with those towers on the books. So some of that is just a book write-off as opposed to a...

Noncash. It's not...

Noncash. Noncash, right

Right. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: A lot of flag poles could be out there too, though?

A lot of flag poles? Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: Give people the American flag and just leave the tower up there.

Oh, yes. Sure. There should be all kind of uses for them, I'm sure.

Our next question comes from the line of Jonathan Schildkraut representing Evercore.

First, if you could, Jeff, maybe give us a color on where we are in terms of the amendment process -- or pardon me, the upgrade process on LTE, by carrier? In the past, you've given us some color. And then secondly, as you start to see new cell site applications come in, and then I guess we'll start to see those roll into revenue towards the end of the year and next, could you give us a sense as to whether or how that could impact your growth or the economics of the business as we look into 2014?

Yes. I think on a carrier-by-carrier basis, Jonathan, we are probably about -- well, on the aggregate, we're about at the 50% mark with, I would say, Verizon being ahead of that; AT&T being -- I'm just speaking, of course, on our towers only, I'm not speaking to where they are in terms of their entire network. I don't know that. But on our towers, it would be -- Verizon would be higher than that. AT&T would be about at those levels. Sprint's probably about at that now. They've done a lot on Network Vision over the last 2 quarters, and T-Mobile would be behind that. So we still have a ways to go. Although in terms of incremental revenue added, if you just take the amount of new revenue that came from amendments and leases, you add it together, the -- while the percentage is still on the majority side for amendments, it actually grew 10% in Q2, more for leases. So leases are starting to close the gap in terms of their revenue contribution, in terms of new activity added, which is good. I mean, that's really what we were expecting. It was a big driver, of course, behind our 2 big deals last year, that we believe that cell splitting would be the next phase of activity, and we are seeing tangible real evidence of that now. In terms of the future, I think you don't have to obviously do as many leases as you do amendments to produce the same amount of revenue growth. I kind of think about it as it will be a elongation and a perpetuation of the good leasing growth that we've had over the last several years. You'll see strong, I think, revenue adds organically from this activity. You'll start to see tenants per tower grow, which you haven't seen a lot in this primarily LTE amendment world that we've lived in now for the last couple of years. And I think that the unit economics will continue to rise on the lease side, because what we are seeing is that our customers are adding -- they're coming to us and requesting more equipment for new macro sites than we have ever seen before.

Awesome. What is your current tenants per tower?

It's about 2.0, 2.1, and that will be diluted somewhat by the Oi transaction. But that's where we are today.

Next we'll go to the line of Simon Flannery representing Morgan Stanley.

Brendan, you went through the rates that you've achieved on your debt, and fixed rate in most cases. Also, the term has been pushed out to 5 years. But I think there is still a real concern amongst some investors about the impact of rising rates now and in the future. Is 5 years the right term? Do you think that there's maybe a benefit to sort of trading or paying a slightly higher rate but getting some 7-year, 10-year-type maturity on your debt here? How do you think about that given the sort of long lives on the asset side of things?

Yes, sure. I mean, there is certainly -- potentially some benefit at the right trade-off. If you look at the most recent financing that we just did in April, the average life on the securities that we issued was over 7 years, I believe, or 7.2 years for fixed rate debt at a cost of about 3.25% fixed. So we did, in fact, think about that when we did that issuance. There was some 10-year paper issued there. And so we will continue to look at balancing tenure with rates and try to make the best decision possible when trading that off.

I think, Simon, the -- your point is we accept it more at the unsecured level in the high-yield market. In the CMBS market, we've done a lot -- we've been active in that over the years and done a lot of historical analysis. And to stay in that market in a succession of 5-year -- basically refinancings, the long rates would have to move tremendously given the big difference between 5- and 10-year rates in that market for it to have ever made sense to go entirely long in that market. But I think that, that reflects the secured kind of highly-rated nature of that market versus the high-yield market.

And we'll go to the line of Jason Armstrong with Goldman Sachs.

First question. You talked about macro sites and obviously that being a little bit stronger. Maybe you can help us think through. It seems like one of the biggest sources of potential here is a Sprint network up at 2.5 gigahertz and a really sort of robust nationwide network. How do you think about what that means for macro cell site potential in your network? And then second question, just on -- service margins obviously have been, both revenues and margins, trending higher. I think you talked about sort of contributors to that and how that probably extends for at least the near term. And maybe help us think through the margin profile as well. Would you expect that to continue to be elevated?

Yes. On the 2.5G rollout, Jason, the -- a lot of it will depend on where Sprint is on our particular towers with -- in terms of their permitted Network Vision load. And in some cases, they've used up their permitted load, which will result in additional leasing revenue to us for the addition of the 2.5G equipment. And where they can squeeze it in to their existing load it won't, because it's all kind of -- it's all dictated around the prescribed equipment levels that are in our deal with Sprint. Now what was said the other day by the Sprint folks was that they not only will hit all of their Network Vision sites, but go well beyond that, given the propagation characteristics of the 2.5G. Now obviously, that's a brand-new lease. I would imagine that -- well, I don't know. But it would make sense for Sprint to -- if they're going to deploy 2.5G on more sites, that they would add the full complement of equipment to handle voice and make the most out of that cell site. So it could have some great revenue opportunities for us beyond what we've already kind of agreed to with Sprint on the Network Vision side. On the services side, it will have a very big benefit because that will also be work that comes to us on the services side on our towers. So that's going to be a big contributor, we think, in 2014. In terms of the services margins, I mean, I don't know that they're going to keep going up. They've kind of been pleasantly surprising to us for over the last couple of quarters. But we do have enough work backlog mandated to us that I think you should expect for a very healthy second half of the year in services. And given the work that will spill over and this 2.5G work that I don't believe will really even -- it may hit some in the fourth quarter, but it will be primarily a 2014 event. Yes, I think we're looking at some sustained period of time where we have some very, very good services contributions.

Our next question comes from the line of Brett Feldman representing Deutsche Bank.

I was hoping I can ask a little bit more about the Oi deal. It has some terminology that I don't think we've seen before, this concept of a fixed wireline concession. I'm wondering, based on the history of the towers, is there anything structurally different about them? And then also, the margins are ridiculously high. Could you help us understand why they're so profitable and if that has implications for incremental margins as you add new tenants?

They are beefy towers that are spread throughout the country, Brett. There are a lot of microwave. They were built for a lot of microwave, so they're good, strong beefy structures. I think they'll be very little -- certainly, within our expected lease-up, to hit our investment goals, we see very little incremental capital required to support that kind of demand. And I'm sorry, your second question?

It's the margins are very high based on the numbers you broke out.

That's because Oi continues to pay the ground rents.

So is there any revenue sharing or -- will incremental margins be as high as you typically see?

No. I mean, everything that we would add to these towers, you would -- you're going to see the typical 90%-plus drop-down to tower cash flow.

And do you lose rights to the towers or anything at any point in time?

There is a -- Oi -- the towers are tied to Oi's wireline concession, which is up for renewal in 2025.

Our next question comes from the line of Michael Bowen with Pacific Crest.

I guess with AT&T and Leap's combination, can you talk a little bit about -- I know you guys put out a release a couple of weeks ago, but talk about any impact that you contemplate for 2014? And then I guess secondly, compared to the other 2 tower companies, your tone for the second half is decidedly more positive than the other tower cos, and I know you probably won't want to speak for their businesses, but what is leading you to be this much more positive in the second half comparatively to your competitors?

Well, I'll speak to the last issue first. I listened to both calls. I thought they were positive about the second half. I think, from an activity level, I heard some very positive things from my peers, which we echo and see things the same way. Now how they actually book that business and how it gets accounted for, I can't speak to. But in terms of operational activity, I think I -- we're all talking about high levels of activity, is my take on the calls. Brendan, on Leap?

Yes, we don't -- we really don't expect any impact from an AT&T/Leap merger to our 2014 numbers. We obviously haven't given any 2014 guidance, and we can cover that when we do. But given that, that deal is not happening, given the fact that the overlap exposure is approximately 75 basis points of our total rent leasing revenue associated with Leap on sites where they overlap with AT&T, any impact would be very immaterial.

Very quickly, I didn't hear much update on small cells. If you could talk to that a little bit within your business context, that'd be great.

Yes. We continue to see and field a lot of inquiries from our customers as to small cell deployments on our existing towers and rooftops. There has not been a lot of activity yet. I believe there's a lot of issues that are still being worked out in terms of equipment, backhaul power connections, but it is a topic that is having a lot of time spent on it by our customers. And I think it will be a contributor to our business in years to come. But in terms of its contribution so far this year, there really has not been any.

Our next question is from the line of Jonathan Chaplin with New Street Research.

This is Spencer in for Jonathan. AT&T and Sprint have spoken about network expansion of about 20,000 sites between the 2 of them. Can you talk about how much of this has been factored into your guidance for this year?

None, really. None. We haven't taken into account anything beyond the base Network Vision deal that we got 1.5 years ago. So all that, Jonathan, to the extent it comes to pass, will be upside. I mean, we haven't -- and I'm not -- while we will get our fair share, I'm not sure, even if we knew it today specifically, that it would be a 2013 item. But to answer the question, none -- to the answer to your question, none of that is in our 2013 number.

And you also talked about customers requesting to put up more equipment than ever before on your sites. Does that imply that amendments, rates have been increasing for you? If you could talk about how they've been tracking over the last few quarters and relative to your expectations, that'd be helpful.

Yes. Amendment rates have been ticking up, reflecting greater equipment requests and loads from our customers. And compared to where we thought things would be several years ago, there -- particularly when some of these master agreements were being discussed, they're well above those levels. Currently, they're well above those levels.

And we'll go to the line of Amir Rozwadowski with Barclays.

One other commentary -- some of the commentary that came out of your prepared remarks was that there does seem to be some level of capacity constraints by personnel issues, in terms of being able to meet some of the demand out there. I was wondering if you could provide some color around that and if you see any easing going into the back half of the year, where you do expect to see sort of improved demand.

It's primarily around tower climbers. There is a shortage today relative to the work that's available today of tower climbers. So what it does is it generally pushes projects back. I mean, we've factored all that into our outlook, so I don't think that our outlook is at risk because of that condition. But I do think it will cause activity levels on both the leasing and the services side to spill over into 2014, which is one of the factors that drives our optimism around the future as well.

Okay. Yes, yes, yes. I just wanted to get a little bit of color in terms of -- it seems like this does provide a fair bit of visibility in terms of the projects that should roll into 2014, which I suspect supports your strong growth expectations.

Yes.

Okay. And then in terms of portfolio growth, I know you had mentioned that there is some impact relative to interest rates in some of the valuations for some of the assets that you folks are looking at. I was also wondering how you guys consider sort of fluctuations in currency at the moment. We've clearly seen some volatile markets, and one could argue that, that could provide an attractive entry point for you folks when looking at some of these assets abroad. I'd love to hear sort of your thought process around that.

Well, we agree with you. And we find ourself in that position today in Brazil with our Oi transaction. We think our entry point on a converted U.S. dollar to Brazilian reai basis is very attractive today. From an ongoing perspective, our plans are to keep the cash in Brazil for the foreseeable future to grow the business. Now the real issue will be what point in time and when do we want to convert those reais back into U.S. dollars, and where will the exchange rate be at that time? That, I suspect, will be many years off and will be a topic of continued analysis and planning here. But it's a very good time, I think, given the long-term prospects of Brazil and some of the short-term pressures that I think are causing exchange rates to be what they are today, to be an investor of U.S. dollars into Brazil. So we're very pleased to have that opportunity.

Could we see a pickup in momentum given sort of the favorable exchange rate from an M&A perspective for you folks?

Well, we're always looking. We like to hear -- we like to meet our annual 5% to 10% portfolio goal. We'll do it again this year, and we'll be looking to do it again next year.

Next we'll go to the line of Kevin Smithen with Macquarie.

Great. Maybe as a big-picture follow-up to that. There's been a lot of discussion among certainly REIT investors, about how to value the international assets and what kind of ROIC premium you, as a buyer, place on international? What does that mean in terms of higher required site revenue growth. And how you view sort of initial ROIC dilution from prospective transactions that may need some CapEx, or single-tenant tower portfolios that may not be generating the same kind of AFFO that a U.S. portfolio would? Maybe if you could give a little specific color on your criteria and thought process, in general, on international. And then also, do you look at aggregate risk by carrier, or country risk. Does that kind of stuff play in? Or are you just very happy with Brazil and the opportunity for cheap valuations now?

Well, I think the latter is definitely true, Kevin. If you look at the -- I mean, some of the risks and the negatives you mentioned, I mean, none of them are present with the Oi transaction. If you looked at what we're paying and the revenues and the tower cash flows to be generated, that's a -- on a standalone basis, that's a hugely accretive transaction to us immediately. So we really think that's a very good example of buying right and taking advantage of current exchange rates. But having said that, we do generally apply a 500-basis-point increased return requirement for our Latin American investments. And we believe that, that is an appropriate spread to U.S. investing, to take into account the risks of international investing, at least in the markets that we're focused on.

And does that translate into a higher site revenue growth expectation of 200, 300, 400 basis points? Or it's hard to generalize?

It either has to do that, or you have to buy it at a lower price.

Our final question today will come from the line of Colby Synesael with Cowen.

Just wanted to follow up on the Oi transaction. When you made the acquisition of the 800 towers in Brazil back in the fourth quarter, you paid about 17x tower cash flow. And it looks like for Oi, based on the numbers you've provided, it's about 9x tower cash flow. So I'm just trying to understand what the delta is? Is it just the FX that you just alluded to? Or is it just the rights ownership structure of what's happening with Oi? Also, just tied to that, when you look at your discretionary CapEx for the year of north of $800 million, it looks like your cash position could be a little low as we move into the end of this year. Are you expecting to raise additional debt or drawdown on the credit facility? And then the last question, just a point of clarification, did you mention then that for Sprint tied to iDEN, that the 76 towers that you decommissioned in the second quarter, that, that's the end of it? There's no more to be had? Or should we expect additional decommissions as we move into the back half?

A lot of questions there. We will have some more decommissionings going forward. Not sure how many and exactly when, but there will be some more as we continue to analyze and make appropriate culls to the portfolio. On the Oi transaction, the difference between Vivo and Oi is largely the rights structure. We don't really see any difference in the revenue growth on those towers. And -- that was 2. I know there were a couple of other questions in there. I apologize.

Just wanted to get a sense of your balance sheet. It looks like your cash position could be low moving into the end of the year with all these transactions.

Yes. We -- I mean, at this point, we have plenty of liquidity between the cash on hand and the availability under the revolver. The full revolver is available to us. So the largest outflow that we have ahead of us is for the Oi transaction, and we may have to dip into the revolver to handle that. But between cash flow from operations, cash on hand and the revolver, we do not have to do another financing.

Great. Well, listen. We appreciate everyone's time and attention this morning, and we look forward to reporting our third quarter results in the future. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.