Crown Castle Inc. (CCI) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Castle International Q2 2013 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, July 25, 2013. I will now turn the conference over to Fiona McKone, VP of Corporate Finance and Investor Relations. Please go ahead, ma'am.

Thanks, Angel. Good morning, everyone, and thank you, all, for joining us as we review our second quarter 2013 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer; and Jay Brown, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com, which we will discuss throughout the call this morning. This conference call will contain forward-looking statements and information based on management's current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about the potential factors that could affect the company's financial results is available in the press release and in the Risk Factors sections of the company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. Our statements are made as of today, July 25, 2013, and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, funds from operations, funds from operations per share, adjusted funds from operations and adjusted funds from operations per share. Tables reconciling such non-GAAP financial measures are available under the Investors section of the company's website at crowncastle.com. With that, I'll turn the call over to Jay.

Thanks, Fiona, and good morning, everyone. Let me start with a few summary comments as outlined on Slide 3, and then I'll go through our results and outlook in greater detail. As you've seen from our press release, we had an excellent second quarter, exceeding the high end of our previously-issued guidance for site rental gross margin, adjusted EBITDA, AFFO and AFFO per share. We continue to make good progress integrating the T-Mobile towers and are substantially complete with the integration of the said [ph] acquisition. The strong year-to-date results and our expectations for the second half of the year allow us to meaningfully increase our 2013 outlook for site rental gross margin, adjusted EBITDA and AFFO. Turning to Slide 4. During the second quarter, we generated site rental revenue of $617 million, up 19% from the second quarter of 2012. Site rental gross margin, defined as site rental revenues less the cost of operations, was $438 million, up 13% from the second quarter of 2012. Further, our network services significantly exceeded our expectations, contributing $48 million in gross margin compared to the $28 million in the second quarter of 2012, reflecting the continued level of network upgrade activity in the market. Adjusted EBITDA for the second quarter of 2013 was $444 million, up 17% from the second quarter of 2012. AFFO was $304 million, up 41% from the second quarter of 2012, and adjusted funds from operations per share was $1.04, up 41% from the second quarter of 2012. We significantly exceeded AFFO in the second quarter compared to our outlook issued in April 2013, primarily due to approximately $12 million more contributions from services than expected, approximately $2 million of nonrecurring items in site rental revenue and higher-than-expected contributions related to reimbursements for wireless infrastructure expenditures necessary to accommodate carrier equipment, which is directly related to the increase in leasing activity, which I will elaborate upon in a few minutes. Turning to Slide 5. During the second quarter, we invested $228 million in activities related to our core business. We spent $138 million on capital expenditures. These capital expenditures included $27 million on our land lease purchase program. Since we began this important effort, we have completed over 14,000 individual land transactions. As of today, we own or control, for more than 20 years, the land beneath towers, representing approximately 77% of our gross margin. We believe this activity is a core competency of Crown Castle, and we continue to enjoy significant success with this program, as evidenced by the fact that, today, 36% of our site rental gross margin is generated from towers on land that we own, up from less than 15% in January of 2007. Further, the average term remaining on our ground leases is approximately 33 years. We continue to focus a significant amount of effort and capital on purchasing land beneath our towers and extending our ground leases. Of the remaining capital expenditures, we spent $10 million on sustaining capital expenditures and $101 million on revenue-generating capital expenditures. Our revenue-generating capital expenditures consisted of $66 million on existing sites and $35 million on the construction of new sites, primarily the construction of small-cell networks. Additionally, we spent $15 million on acquisitions during the second quarter. Also during the second quarter, we purchased approximately 1.1 million of our common shares for $75 million or at an average price of approximately $70 per share. Since 2003, we have spent $2.8 billion to purchase approximately 102 million of our common shares and potential shares at an average price of $27.45 per share. Without this significant investment in our shares, our existing share count would be more than 1/3 higher our current shares outstanding. Importantly, during the same period of time, we have more than tripled the size of our tower portfolio and developed a significant number of small-cell networks. Additionally, during the second quarter, we refinanced the existing $1.58 billion Term Loan B and effectively lowered the rate on the loan by 75 basis points, saving approximately $12 million in annual interest expense. We ended the second quarter of 2013 with total net debt to last quarter annualized adjusted EBITDA of 6x, down from approximately 6.3x at the time of the T-Mobile tower acquisition in November of 2012. As of June, adjusted EBITDA to cash interest expense was 3.7x. Moving to the outlook for full year 2013 on Slide 6. We have meaningfully increased full year 2013 outlook from what we provided in April, increasing adjusted EBITDA by $28 million and AFFO by $61 million, primarily based on our year-to-date results. I'm delighted with the performance of our business and our increased expectations for the balance of 2013. We now expect 2013 year-over-year site rental revenue growth of 17%, adjusted EBITDA growth of 13% and AFFO per share growth of 34%. We expect to augment our AFFO growth through opportunistic investments and activities such as share repurchases, tower acquisitions, new site construction and land purchases. Consistent with our past practice, our outlook does not include the benefit from these expected investments. As we noted in the press release, based on currency movements, we decreased our expected contribution from our Australian operations for full year 2013 outlook by approximately $8 million for site rental revenue and by $6 million for adjusted EBITDA and AFFO. As shown on Slide 7, for 2013, we expect to generate approximately $1.2 billion of AFFO and invest approximately $500 million on capital expenditures related to the purchases of land beneath our towers, the addition of tenants to our towers and the construction of new sites, including small-cell networks. Ignoring our borrowing capacity, the portion of our AFFO after expected capital expenditures represents $175 million per quarter of cash flow that we could invest in activities related to our core business, including share repurchases, tower acquisitions, new site constructions and land purchases. As such, we remain focused on investing our cash in activities we believe will maximize long-term AFFO per share. I believe that this level of capital investments can add between 3% and 5% to our organic AFFO per share growth rate on an annual basis. In summary, we had an excellent second quarter as we continued to execute around our core business, and we're very excited about the balance of 2013. Additionally, during the second quarter, we stepped up our preparations for our anticipated future REIT conversion and have engaged accounting and legal advisors to assist us in this effort. Currently, we have approximately $2.7 billion of net operating losses, and I expect we'll convert to a REIT no later than the exhaustion of these NOLs. Based on our internal models, I believe we'll consume the entirety of our NOLs by late 2016 or early 2017. Before I turn the call over to Ben, I would like provide some additional color on prepaid rent, which has been a popular topic of discussion with investors since our first quarter earnings. In our press release yesterday, we provided additional disclosure regarding prepaid rent related to our site rental revenues, which details the amount of prepaid rent and amortization included in AFFO. By way of example, on Slide 8, we show a single lease we added this quarter to a tower just north of Phoenix, Arizona, and the associated prepaid rent we received in connection with the addition of this tenant to our tower. Our tenant leases typically have 2 rental components: a monthly rent and a prepaid rent. The prepaid rent reflects a carrier's contribution towards the capital expenditure necessary to modify the tower to accommodate the additional carrier equipment associated with the new lease. This contribution can either be made as prepaid rent or incorporated into the recurring monthly rent we receive from the carrier. Since the very early days of our business, our customers have contributed to the required tower modification as they install additional equipment on our towers. We would expect this pricing construct to continue as long as carriers are adding equipment to our towers. Consistent with GAAP accounting standards, both rental components, regardless of when cash payments are received, are straight-lined over the term of the lease, as reflected on Slide 8 and shown in the GAAP revenue line on the graph. As the chart indicates in this example, the GAAP revenue, shown by the orange line, is flat for each of the years over the 10-year term of the lease, and is calculated as the average of the prepaid rent and all contracted future rent payments. The cash received, shown by the blue bars, reflects the prepaid rent in year 1, along with the monthly rent payments, with contracted escalators in future years. As such, our AFFO metric reflects the impact of the cash bar shown on the chart, while our adjusted EBITDA metric reflects the impact of the solid line on the graph. Moving back to a high level on Slide 9. As you can see from our press release, our current amount of site rental revenues on a GAAP basis are greater than the cash amounts we are currently receiving for site rental revenues, inclusive of prepaid rent. As we have shown in the past, we have graphed all of our existing tenant leases for years 2013 through 2022, showing the expected reported amounts for GAAP purposes, and their respective cash receipts. Similar to the single lease example, we have shown we expected GAAP site rental revenue as a solid line and the expected cash receipts as bars. As you can see from the graph, we expect that, beginning in about 2017, our cash receipts from tenant leases will exceed the amount of reported site rental revenue. This is, as you would expect, given the average life of the leases across the entire portfolio, currently approximately 8 years, suggesting the crossover should be in approximately 4 years or 2017, as the graph illustrates. I should note that the graph only shows existing contracted revenue stream, and prepaid rent is not included in this analysis for years 2014 and beyond, as it is associated with new leasing activities. However, prepaid rent could accelerate the timing of when cash receipts will actually exceed reported site rental revenue, as illustrated by the impact of prepaid rent in 2013. We continue to think it is helpful to include prepaid rent in our AFFO metric, as we believe that it helps investors understand the timing of the cash generated by our business. The nominal amount of prepaid rent has increased over the last couple of years, as we have significantly increased the number of assets that we own and we have seen a meaningful increase in leasing activities, both from new leases and amendments to existing leases. In 2013, our outlook suggests that prepaid rent, net of amortization, will be approximately 9% of our 2013 AFFO, which is the same percentage of contribution we saw in 2012. I hope you find this additional disclosure and extended explanation helpful. Back to the big picture and in summary, we had a terrific second quarter, and I'm very excited about the balance of 2013 as we continue to execute around our core business and make investments we believe will maximize long-term AFFO per share. And with that, I'm pleased to turn the call over to Ben.

Thank you, Jay, and thanks again to everybody joining us on the call. As Jay just mentioned, we had an excellent second quarter, exceeding our outlook for site rental gross margin, adjusted EBITDA and AFFO. And we are excited about our business as we look to the balance of the year. As you know, there's a significant amount of activity in our industry currently, as all 4 major U.S. wireless carriers are engaged in major network upgrades simultaneously, and we're enjoying a significant ramping of leasing activity, as reflected in our increased 2013 guidance. As we've noted in the press release, we saw new revenue from tenant additions almost double in the second quarter of 2013 compared to the second quarter of 2012. In fact, an important component of these new tenant additions, first time installs or co-locations, are up 2.5x for the first half of 2013 compared to the first half of 2012, reflecting the shift in activity towards inflow sites. This densification activity is the expected second wave of the LTE network deployment and provides us with a longer runway of expected future growth as carriers strive to improve network quality and to add capacity through cell splitting in the face of continued growth in mobile technology demand. Given the urban concentration of our sites, there's 74% of our sites in the top 100 markets, where we expect the majority of network densification to occur. We are very excited about our prospects as this next wave of leasing materializes. From a macro perspective, the trends underlying the phenomenal growth in wireless data continue unabated, and carrier capital spending plans reflect that reality. In the first quarter of 2013, U.S. mobile data revenues grew 14% year-over-year to reach $21 billion, and are expected to reach $90 billion for the full year 2013. Recent carrier contract terms that bring forward the ability of consumers to switch handsets earlier is expected to result in even faster adoption of the newest smartphones and other connected devices, which typically offer greater breadth of applications and faster connectivity, leading to even more consumption of data. Research from Google shows that smartphones continue to drive consumers' wireless purchases, with 35% of respondents in a new survey saying that they purchased their phone to obtain the latest and greatest device, up from 25% last year. Smartphone adoption continues to fuel the growth in mobile data, with mobile data consumption at some operators averaging over 1 gigabyte per month, already bumping up against established data tiers, with some devices averaging close to 2 to 3 gigabytes per month. In fact, in Verizon's recent results, they noted that 33% of their postpaid subscriber base is on their LTE network and already consumes 59% of their total data traffic. As CTIA recently reported, for the last 6 months of 2012, data traffic was up 59%, and for the full year 2012, data traffic was up 69% compared to 2011. And Cisco continues to estimate that U.S. mobile data traffic will grow nine-fold from 2012 to 2017. Further, the expanding LTE networks are expected to accelerate the growth of computing devices, including smartphones and tablets, over the next several years, as well as countless machine-to-machine applications, including connected automobiles. Increasing wireless capacity and broadband speeds driving more data usage and applications built for a mobile environment is a continuing reality. Before I turn the call over for questions, I want to spend just a minute on LTE and where we think we are in the cycle. To help provide a framework for LTE build-out and our expectations for the longer runway of growth that we see, it is useful to compare how 4G LTE subscriptions are trending versus 3G subscriptions in the early days of that technology's rollout. For the initial 8 quarters, beginning in the fourth quarter of 2010 through the third quarter of 2012, LTE subscriptions significantly outpaced the initial 8 quarters of 3G, which began in the first quarter of 2003, both in terms of growth rate and absolute numbers. Estimates are that total LTE subscribers could exceed 180 million by the end of this year and 260 million by 200 -- 2017, with the total number of LTE customers representing 70% of all U.S. mobile subscriptions by 2017. Further, as each of the carriers have discussed publicly, the process of building LTE coverage and capacity is a multiyear commitment. We are very pleased to be playing an integral part in each of the big 4 U.S. carriers' LTE deployment plans and network densification needs for the long term. We have a unique portfolio of sites and capabilities that we are bringing to bear every day to assist carriers in realizing their plans. Further, the network densification needs of the carriers will be accomplished by both macro cells and small cells. Indeed, small cells are an integral part of the LTE operators' network strategy. As the leader in small-cell networks, we are seeing tremendous growth in this part of our business, with organic leasing growth on small cells tracking well above our expectations. And we're excited to be investing for growth in this area. While small cells represent a small percentage of our overall site rental revenue, we expect and are seeing growth from small cells contribute significantly more than their relative size, as we've talked about on previous calls. So to wrap up, our strategy remains unchanged. We're the largest wireless infrastructure provider in the U.S. with an urban-centric portfolio, where leasing activity and demand for mobile technology is the highest. We remain focused on the U.S. market, the largest and fastest-growing wireless market in the world, where the ability of the wireless carriers to make profitable investments is most apparent and barriers to entry remain high. As consistently demonstrated in our results, we believe our well-located tower portfolio and the ability to execute for customers allows us to drive the opportunity in the U.S. market. Leveraging our experienced management team, customer relationships and services offerings across our unrivaled tower footprint, together with our leadership in small-cell networks, positions us to be the provider of choice, as carriers continue to enhance their network to meet ever-increasing wireless demand. We believe providing carriers with access to our 30,000 sites, extensive small cells and fiber resources through a shared infrastructure model, remains the most efficient means of delivering mobile technology to consumers. I'm excited about the significant growth we are experiencing in our business and how we are positioned for the runway of growth we anticipate in the future. So in closing, we had an excellent second quarter and look forward to the balance of the year and beyond. And with that, operator, we're pleased to turn the call over for questions.

[Operator Instructions] And your first question will come from the line of Mr. Jonathan Atkin from RBC Capital Markets.

I was interested in the small cell aspect of the business. And as you expand that platform, how much of that is leveraging your existing fiber footprint versus requiring the additional expansion, not just of fiber laterals but the fiber backbone itself? And then, secondly, I was interested in the T-Mobile, Metro PCS integration and what you're seeing on that in your -- on your tower asset.

Sure, Jon. Thanks for the question. On the small cell side, we're seeing a significant uptake in co-location, if you will, on existing fiber plant and networks through systems that we have. As we've talked about before, it's a long runway to build new. We are working on that and actively engaged in a very significant build effort to add additional capacity and additional networks. But a very significant component of what we're seeing is, as we would affectionately call it in the tower business, co-location. It's not quite that simple in small cells, because it can either be in that same box or it can be next pullover [ph], as we've talked about and demonstrated with many of you in the past. But the financial reality is the same. And so we're seeing a very significant amount of co-locations on the small-cell networks and are very excited about what we see there. Again, having that plant, if you will, of embedded fiber in the networks up and running is very key to being able to deliver, really, any kind of speed to market to satisfy a need for a customer in an urban area, so that's proving to be very valuable. Next, with respect to T-Mobile and Metro PCS, I think they're just beginning to sort of get their heads around what they have. We certainly anticipate, on the small-cell side, that's continuing, upgrading for the different additional frequencies that are required there. But we expect that's going to continue as it has in the past, with additional opportunity on the T-Mobile side. On the tower side, I think we've disclosed -- Jay, we've gone through sort of what the overlap is. You might want to refresh everybody on that.

Total exposure to Metro is about 4% of our consolidated revenues, and the overlap is somewhere in the neighborhood of about 3%. And term remaining, we still have several years on those leases. So as Ben mentioned, Jon, it's probably too early for us to have any view as to do we see them renew the equipment in the overlap site. We'll just -- we'll have to see how it goes. But at least, Jon, you have the bookends then you can model it as you think appropriate.

And given the term of those remaining Metro leases and the pace at which we're adding equipment and additional RAD centers, on occasion, for carriers, we'll just have to wait and see what that ultimately looks like when we get to the end of those leases.

Okay. Finally, as Sprint starts to wrap its arms around the 2.5 frequencies from Clearwire and then build that out, can you remind us, given the natural [indiscernible] that you have in place, to what extent that triggers extra revenue for you?

With the 2.5, it depends on what's up on the site. But generally, I would say it's a relatively minor revenue event, given their Network Vision equipment and the compatibility of that spectrum built in. Again, we think it is some incremental, but probably not of the magnitude you'd see on a typical amendment cycle, because that equipment is compatible with that 2.5 already. We do expect we'll see that the Clearwire sites that are built for LTE that there were some coordination there with Sprint, as you would expect. We anticipate that those sites continue. And then, again, the overlap sites, we'll have to see, over time, how that plays out when we reach the natural end of the Clearwire licenses. I believe that's, again, about 1% of overlap in the company.

And your next question comes from the line of Mr. Simon Flannery.

Just continuing on the Sprint situation, I think you'd said in the past, you expected about 3% of the impact from the iDEN decommissioning next year. Have you had any sort of further color from Sprint, as certainly the network is a big focus? Or are you -- they going to take those sites down, might they repurpose them or might it be delayed? And secondly, Jay, on the REIT conversion. You talked in the past about leverage. Your leverage is down to 6x. Do you still want to get that down to around 5x before you convert?

Sure, on the first question, the exposure that we currently have to iDEN is -- makes up approximately 3% of revenues, which we think is the bookend impact of the agreement that we struck with Sprint several years ago. They have the ability, over calendar years 2014 and 2015, to remove that on a ratable basis. And we -- at this stage, we don't really have perfect clarity on what they're going to do there. They may decide ultimately to renew some of those installations or they may decide to remove the equipment, as they have the contractual right to do. And I think we'll have to get into those years to really understand where it's going to come out. But that's -- that could be the impact over the next 2 years on a consolidated basis. With regards to REIT conversion, as we did note in the press release and I alluded to in my comments, we certainly stepped up the amount of effort that we've made on that front, and we're working diligently towards taking the steps that will be necessary for us to make the REIT conversion over the next couple of years. And with regards to how we think about that, relative to leverage, I think we've been pretty clear in the past that we think there's value in being, at the corporate level, an investment-grade rated credit. We think that gives us access to capital and ultimately, has a positive benefit on the cost of equity. So I wouldn't describe it as necessarily a bright line or something that we have to do or need to do prior to REIT conversion. And I think, longer term, we think it's appropriate and helpful to the cost of equity to bring that down, if we achieve that investment-grade credit rating. So I think it could be something where we get there prior to REIT conversion. It could be also something that, as we're converting into a REIT, we have a plan of deleveraging to get down to that level. Now I -- whenever we talk about this subject about target level of leverage and how we deploy leverage, it's always, I think, a bit of a relative measure against what are the opportunities in front of us and what is the cost of the debt. We obviously went above -- our long-term targeted level of leverage has been 4 to 6x for a number of years. We went above that level in order to acquire the T-Mobile assets, but that was the right decision. We were able to acquire another 7,000 towers and didn't issue any shares associated with that acquisition. We're able to do it with a very low cost of debt and long-dated maturities on the debt. And so I would say it's a target for us, but it's always relative to what is the opportunity. And historically, we've used our leverage capacity to both buy assets and to buy stock, based on what the prices of our stock and assets were, as well as managing the balance sheet. So it's -- I wouldn't draw any bright lines, but I think the targeted range is where you have seen us operate, and probably in the years forward, as we convert to a REIT, it moves us towards the lower end of the range so that we are able to accomplish getting an investment-grade credit rating.

Your next question comes from the line of Mr. David Barden.

I guess 2. So first, Jay, obviously, I think that there's a lot of excitement about what's going on in the wireless industry. There's a lot of energy going on into network builds. And I think the stock price today is reacting a little bit to a sense that there's a lack of that energy being realized on Crown's part in the revenue -- at the site rental revenue numbers. Kind of hitting the midpoint of the guidance is good, but it doesn't seem to necessarily reflect how much activity there is going on in the market. I guess, taking out one-timers, first quarter was $611.4 million, 2Q was $614.8 million, so that's only $3.5 million. But then, as I look at the end of the year, you've got -- doing the math on your full year guidance, you're looking at something like $11 million or $12 million of sequential revenue growth in 4Q. So can you kind of map out a little bit for us what's happening in these numbers, why the growth looks anemic now and kind of really ramps up in the back part of the year? And then the second part is kind of following up on the leverage and the capacity question. There is a sense that there are several big deals to be done, not just overseas, but also domestically, potentially AT&T, as well as maybe some large private companies. What is your capacity to do a deal size-wise right now, and your comfort level on leverage?

Sure. Dave, thanks for the questions. On the first question about sequential growth, I think it's pretty typical in our industry to see activity during the course of the year ramp, and that's certainly the case as we look at our 2013 expectations. We are seeing more leasing activity in the second quarter than what we saw in the first quarter and expect more activity in the back half of the year than what we saw in the first half of the year. So it's a term that's thrown around a lot in our industry, that the year has become back-end loaded with regards to sequential growth. And it's certainly a period, as you've pointed out from the numbers, that, that's going to be the case again this year. The GAAP numbers, and you've adjusted them as you talked about them, but certainly, as you look at our sequential growth, you have to adjust for the FX, I think, to get to normalized growth, which you did in your comments. And I think you can see in the back half of the year, the growth that we've been talking about, both in terms of leasing activity and applications and new installations that are going on the towers. So I think you've correctly identified it, and it's a function of how the carriers deploy their network in the early part of the year, both their budgets and what they're planning on doing in the year, and then you'd see more activity in the back half of the year than maybe in the first half of the year. And so sequential growth in revenues and EBITDA follow that trend line.

Let me just -- before I get to your second question, the -- also, if you recall on the first quarter call, we talked about new revenue leasing picking up dramatically over last year. That is continuing to happen, as we've mentioned in our comments, but that really started from January. And so really, it's a ramping effect that you see throughout the year. And based on our pipeline, we put out the guidance that we did, which implies significant growth. David, you mentioned about some acquisitions, and basically, what I would say on the acquisition front is, just as we've always done, we are constantly evaluating, from a capital allocation perspective, the ability to acquire assets and provide additional growth in AFFO per share against buying our own shares. And so it's always a relative tradeoff. And as you've seen over time, as Jay mentioned in his comments, we've taken 1/3 of the share count out of the company in the last few years. At the same time, we've tripled the size of the portfolio. So we're very comfortable doing both. But we will look very carefully at what maximizes long-term growth rates, and act accordingly. And that's how we've acted for a number of years and certainly, would expect that's how we'll act going forward.

And your next question comes from the line of Mr. Rick Prentiss from Raymond James. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: Just one quick follow-up on the REIT topic. You mentioned how in earnest it's been stepping up the pace. As you think about paying a dividend and converting to a REIT, any thoughts on when the accumulated earnings and profitability would have to be paid out or possibly paying a dividend before turning into a REIT?

I would separate the REIT conversion from the capital allocation decision around whether we pay dividends or buy back stock. And so I think as we talk about it, you should view our comments as those are 2 separate decisions that we would make. On the REIT conversion and how we think about it, I would anticipate -- when we talk about converting, about exhausting the net operating losses in late 2016 or early 2017, I would expect that we'll convert to a REIT prior to accumulating a significant amount of operating or taxable income that we would need to distribute upon conversion. And so I don't think there will be a date upon which we're making a significant payout of accumulated earning in order to convert to a REIT. On the second part of the question around capital allocation and paying a dividend, we could certainly do that as a C Corp today. We have -- as you know, Rick, had a lot of conversations about this and talked a lot about it. When you look at the growth rates achieved in this business, and I think no matter how you want to look at cash flow metric on a per-share basis, our business is growing at about 30% year-over-year. And we think buying back the shares is a phenomenal investment relative to the alternatives. And so we have continued to stay on that and have done it for a number of years consistently. And I think at this point, we think that's the best path to go. But there will come a day when we're paying a dividend and ultimately, be in a REIT structure, and we'll look forward to that day as well. And between now and any time when we do pay a dividend, the aim is to get cash flow per share as high as we possibly can to maximize what that dividend will be. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: Okay. And the second question is on Slide 9 of the presentation, where you showed kind of existing U.S. tenant leases. Your guidance, I think, for leasing revenue for this year is around $2.475 billion. Looking at that slide, the expected reported revenue from existing tenant leases, obviously, they're not full scale there, looks to be noticeably lower than that. Is that kind of tying back to David's question about are we expecting some ramp-up in the second half of the year? And then also, looking into 2014 and '15, just trying to think through what that graph is showing us.

Sure. We're showing you just our U.S. business, because the vast majority of prepaid rent comes from our U.S. business. And so the numbers that are shown there would be our U.S. tenant leases. If you were to include Australia, then it would match up to our consolidated numbers and obviously, be considerably higher. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: That makes sense. And then one follow-up on Jonathan's question. On the Sprint, Softbank, Clearwire item, if Softbank does do the $8 billion spending a year at Sprint, this year, and does another $8 billion next year, it's sounds like they want to deploy a lot more 2.5 gigahertz sites. Then, in your answer to the previous question, are you assuming that you will not get much benefits to that? Or was that a different answer?

No, no, that's a different answer. I mean, I'm talking about if they go back to the Network Vision overlay and add 2.5, many of those sites configured for that today, so that would not be a significant revenue event. I, like you, continue to expect that they are going to continue to add capacity and build that network to compete. And so we would fully expect -- in our comments around network densification, you're going to see Sprint right in there with everybody else, adding additional sites that they're not previously on. And so this runway, we talked about extended future growth around co-location, absolutely extends to Sprint and our expectations for what that brings in the future. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: Right. That's beyond the terms of the existing MLA. That's [indiscernible] nice revenue, too. So if they do start spending that significant CapEx, the lag time is maybe late this year, but more likely some nice benefit in '14?

Yes. In fact, you mentioned our presold agreements. If you -- as we look at this year versus last year and current run rates, we were down by about half on the amount of new applications that are attributed to existing presold MLAs. So that is tailing off, as we would expect, as we reach the end of those sort of initial LTE overlays. And then the new revenue items, whether it be a new co-lo or an amendment on a site that's outside the scope of those MLAs, those are ramping dramatically, and those are what we talked about doubling year-over-year. So that mix is changing in a very material way in our company, such that the overall activity is up as well. But certainly, from a revenue side, the new revenue items, both co-los and amendments outside the scope of the existing presold MLAs, are ramping very significantly. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: I think it's a key point for the market to understand as far as what you're seeing in your guidance revenue versus what could be coming shortly.

Right, right.

And the next question comes from the line of Mr. Brett Feldman from Deutsche Bank.

I was hoping we can maybe just dial in a bit to where you see the highest potential returns on the use of your cash right now. And there are 2 things I'm interested in getting a little more color on. The first is you've talked a lot about network densification, and so I'm wondering whether you're seeing a renewed opportunity to increase the rate at which you develop new towers to take advantage of that, because historically, you've generated your highest returns off of new tower development. And then secondarily, your stock, obviously, has underperformed in the market. Are you thinking that maybe now is the time to step on the gas with buybacks?

Yes, Brett, let me take a crack at that. With the co-location activity in the market that we're talking about and the expected multiyear runway that we think that entails for all 4 major carriers in the U.S., building towers is certainly something we are revisiting. We have really come out of that business in a significant way over the last 3 years for obvious reasons, because most of the activity, borderlining on all of the activity, has been around amendments, around LTE. I would tell you that it's certainly on the table. It's something we're looking at. I would not be surprised if we even see us building some sites in the U.S. in the future, again to capture that new co-location densification we see going forward. Other than that, high-returning activities, we're quite pleased with our stock purchases over the years. We think we've done extremely well on, obviously, evaluating the growth opportunity in the business, discounting that against the market view, and then acting accordingly. But at the same time, we are constantly looking at acquisitions and opportunities to grow the business because we are still very bullish on the long-term growth aspects of our current assets and many that we could potentially acquire. That was true with NextG in the small-cell business. And we have been very pleased with what we've seen to date tracking originally -- above our original business plan. Co-location activity on an existing asset, whether it be a small-cell network or the towers, is, obviously, probably the highest-returning activity there is in the industry. And we are very gratified to see that happening on the small-cell side, as well as towers, as we've talked about. So it's really going to be more the same. We are constantly running sort of a dynamic comparison around where are we currently valued based on our best estimates for our own future growth against other assets maybe in the marketplace. And we expect to act accordingly, and we expect to do that in size, given the fact that we're generating, as Jay alluded to, about $700 million of excess cash flow, beyond what I would call sort of normal CapEx that we're doing on land purchases and tower augmentations and small-cell builds, as we mentioned. So we've got a lot of money to put to work. And as you can tell, that's a very significant component of our overall growth over time. And back to Rick's question, I certainly don't want to trade that flexibility to be opportunistic for a dividend prematurely. There's certainly a time coming when we'll pay a very significant dividend, we expect, based on the lack of tax shield, because the depreciation will be exhausted. And so that's just the reality. But in this interim period, as Jay was alluding to, I think we have an opportunity to grow AFFO per share either through shrinking the denominator or adding to the numerator, and we're going to continue to focus on that.

Your next question comes from the line of Amir of Barclays.

One of the topics that you folks have mentioned that you're benefiting from right now is this sort of network densification. As you're building out sort of additional capacity to support traffic for carriers, I was wondering if you could highlight sort of the tradeoff with the small-cell choice versus sort of cell splitting or augmenting the macro network. It seems as though there's a bit of debate going on in the industry as to whether or not small-cell capacity would offset some of the macro cell capacity. And I was wondering if you could give us some color with your experience on what you're seeing in the market today.

Yes, the vast majority of what we're seeing around the small-cell augmentation or densification that's happening where small-cell networks are, so co-location, as we've referred to it, on a small-cell basis, is occurring in places where macro sites really are too large or unavailable. So your -- the purpose is to repurpose the spectrum in a smaller cell, if you will, in an urban environment, where the usage patterns are very, very significant and capacity is continuing to be challenged. Where there's an existing small-cell network available, that's a very efficient way to add it and continue to get the maximum resource out of that spectrum, because you're reusing it in very small cells, if you will. In many places, though, where that's the need, there is not a small-cell network available. And absolutely, adding additional sites, if it's an urban setting, potentially a rooftop or adding to macro sites is a preferred approach. It's the quickest approach. But Amir, it's really both. I mean, it really depends on what the availability of the infrastructure is in the locations there. And small cells, while we've got a nice business that's growing, it's still very small relative to the overall geography that the carriers are trying to deal with. And so the macro sites, in terms of bang for the buck, it's always more efficient to split a macro site. But I appreciate that in an urban setting, often that's not a choice, or those sites are, in fact, too big, and they need to reuse that spectrum in a smaller cell, which is, in fact, what we ultimately do with a small-cell deployment. So it's really both. And I certainly wouldn't suggest one is cannibalizing the other. It's, frankly, 2 separate issues and 2 tools that they're using to add capacity to the networks.

And so just a follow-up there. I mean it does sound like, based on what you're seeing in the marketplace, that not only is one not cannibalizing the other, but really, this is much more of an incremental opportunity for both you folks and for the carriers to extend their capacity.

Exactly. And again, what's most important is having that existing asset available, whether it be a tower portfolio well-located in markets where that growth is needed, where that capacity enhancement is needed, or having embedded fiber with an existing network, where you can relatively easily add an additional tenant across that existing fiber plant. So the major thing we bring is, obviously, the assets, the portfolios where they need them, and the ability to execute for customers on a timely basis. And that's, in fact, what we're seeing this year significantly ramping.

You could -- and the last thing I'd say is you can certainly see that -- I know most of you listen to our carrier customers' earnings calls, and you can certainly hear that in their tone as well.

And your next question comes from the line of Philip Cusick from JPMorgan. Philip Cusick - JP Morgan Chase & Co, Research Division: I guess, first, maybe this was addressed, but I don't think it was. Can you talk about what the sort of gross prepaid rent was the last few years? Is 2013 really out of line? Or is this just a little bit bigger than normal?

Sure. It grew meaningfully in 2012, and it's grown, to a lesser extent, from '12 to '13, as the activity that we've been talking about, both in terms of amendment activity for LTE and then as new leasing has begun to pick up. It's been a part of the business, as I mentioned in my comments, since the beginning. So if you go back and look well back into history and you were to adjust for the number of towers that we own and then the leasing activity, what you would see is a graph that ebbs and flows. In some years it's higher, in some years it's lower, related to what leasing activity is going on. And so any period of time, like what we've been in, where there's an increase in activity, you're going to see that prepaid rent number increase. Philip Cusick - JP Morgan Chase & Co, Research Division: And as we think about the driver of that, is it more just activity overall or do new tenants sort of drive a higher level of prepaid rents than amendments?

Well, it would be a combination of both. Typically speaking, if there's new leases going on the tower, there is going to be more equipment, and therefore, the structure is going to need -- likely to have greater reinforcing. So I think, generally speaking, you're going to have higher prepaid amounts on new leasing activities, so that would certainly factor into it. The other thing, if you're doing a comparison to history, that would also be true. We talked about the fact that about 75% of the prepaid rent activity is related to towers and 25% is related to small cell. So if we've been building the small-cell business, that wouldn't have been there. If you look back and look at it, say, you were trying to compare it to another high period of activity in the mid-2000s, 2005, 2006, that activity wouldn't have been there. So that would have been another reason why it would be higher today than what it would have been if you're looking back 4 or 5 years ago. Philip Cusick - JP Morgan Chase & Co, Research Division: And the tower activity was up from '11 to '12, as well as the addition of the small-cell business?

Yes. Activity increased on towers from -- going into calendar year 2012 and then again, into calendar year 2013. And then, obviously, given the timing of our 2 acquisitions into that space, as well the things that we've built outside of those acquisitions, our exposure to small cells and the size of that business has increased significantly since 2010. Philip Cusick - JP Morgan Chase & Co, Research Division: Okay. And then separately, on the services business, I think I ask this question every quarter. But strong again, a little less strong than last quarter. Should we think about that as being indicative of activity overall? Or does that just sort of -- varies pretty widely?

It does vary, but it's mostly been varying on the upside for a number of quarters, as you can see. A lot of people working very hard on that. Phil, it's been growing. We've been doing additional scope of work on a per-app basis, such as preconstruction, zoning work, all the way through the installs. We've done a very nice job of capturing more of that opportunity within the company as carriers are touching our sites. There's obviously a revenue and margin opportunity that we're capturing. There's also an asset control and sort of high-touch approach that we take to our assets that we think makes being in the service business important for us. And so we are continuing to seek out and gain those opportunities, and it's continuing to grow as it relates to the level of activity going on in the marketplace today. And so we certainly expect that to continue as we see continued leasing.

And your next question comes from the line of Kevin Smithen from Macquarie.

Tower improvement and construction CapEx has been elevated over the last few quarters versus historical absolute and relative to sales levels. I know there's a number of projects, including DAS. How long is this going to last? And when should we start to see -- or is this your normalized sort of CapEx-to-sales ratio? And/or when will we return back to sort of 2011 and early 2012 levels?

Function of leasing.

Yes. Kevin, I was going to say, it's a function of leasing, and it's a combination of 2 things. If you look at our historical results and you go back to 2011 and look at the 6-year period of time from then, we've tripled the number of towers that we own. So even if activity were constant, the level of improvement, I would expect, would be triple today what it would have been on a historical basis, if you were to look back over time. On top of that, what we're seeing is a significant increase, as we've talked about it, it's in -- depending on how you want to measure it, more than double of activity from 2012 to 2013 when we look at new leases that are going on, on the asset. So it's a combination of growth in assets and a significant increase in leasing activity. As we look forward, the answer has kind of stayed the same, the level of assets stays constant, we would assume, at least, for modeling purposes that you're looking for. And then how much CapEx we spend is going to be a function of what's the leasing activity. And today, we're not here to provide guidance beyond calendar year 2013, but we'd expect that the level of spend would be matched with whatever the activity level is. Obviously, when you compare the whole of it, we do fantastic investments. If you look at -- an average tenant that goes on our tower is paying us in the neighborhood of $2,000 a month to go on an asset. To the extent that we make a capital improvement to hold that asset, and as we've shown, we reinvest it through a significant portion of that capital expenditure. This is a fantastic investment that we have in our business, and we're happy to spend the money and make the sites ready for these additional tenants. It's the highest investment of capital we have on the business.

And then your -- on the construction side, that's dominated -- at least for now, dominated by small-cell network builds that we've talked about. And as I alluded to, we even make it back in the tower-building business as well, depending upon the opportunity we see there. But for now, that number is primarily around the small-cell business, Kevin.

Your next question comes from the line of Tim Horan from Oppenheimer. Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: So just a clarification. Ben, do you think -- the services revenue here, is this kind of the new normal? I mean, you used to be around $50 million per quarter. Do you think you've built up the infrastructure and you have the customer base so this can kind of stay at this level or grow from here? And I just had another question on LTE also.

I can't represent to you that. I honestly -- we're doing the best we can. We're capturing a lot of opportunities and it's continuing to grow every quarter. But it is completely dependent on application volume and leasing opportunities, and so it's a function of that. And so we see a long runway towards leasing. We've come through a period where we've had all 4 major carriers building out LTE. That mix is going to now shift to augmentation in terms of new cell splitting and new co-locations, as some of the carriers finish their coverage build, their initial coverage build on LTE. So we'll just have to see. We're continuing to look for ways, successfully I should say, to expand the scope of what we're doing with carriers. And so maybe we can manage to see that stay relatively at these levels, even if app volume were to taper off a little bit over time, because we're doing more scope within each application. But it's something we're looking at carefully. And we're managing this, and frankly, going about as fast as we can go right now, given the opportunity out there. Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: And so with the LTE build, candidly [ph], I would say a lot of the equipment is going on existing leases that were modified. Are we basically done with that process at the end of the year and the new LTE builds and cell splitting will be just absolutely incremental revenue for next year and beyond?

I'd say substantially done this year with AT&T and Verizon, as they have confirmed. And then, we would -- and then we certainly anticipate, as we're continuing to see the pipeline build for them in terms of cell splitting, both on -- both for macro sites, as well as opportunities on the small-cell networks, to augment capacity around LTE as their sort of second wave. And then, as you look into Sprint and T-Mobile talk about their LTE build with Network Vision and their network modernization plan, a little bit further behind, but obviously very committed to delivering that same product for consumers. And so you can just sort of follow down through the Big 4 and see this wave coming, and that's exactly what we've seen. Verizon announcing that they've basically hit $300 million tops, their coverage build is initially complete, and then they're going to come right back and add capacity for all the purposes and reasons that they stated. We anticipate that times 4 because you're going to see that right behind what's happening with AT&T, Sprint and then T-Mobile. And so that mix change, over time, back to your first question about what was augmentation on an existing site, we think that -- we can see it in our numbers. Absolutely, that's tailing off. A lot of that was pre-contracted, if you remember, presold. That's tailing off and then the revenue-generating activity is more than making up for that tail-off.

Your next question comes from the line of Jonathan Schildkraut from Evercore.

Two, if I may. First, in terms of the prepaid, you've given kind of detail already. But one of the things you noted was that it was -- the breakdown was maybe 25% DAS and 75% towers. And it doesn't seem like DAS is 25% of your revenues. So just understanding if there is a larger component of upfront prepaids associated with DAS relative to the revenue stream versus towers? And then secondly, in terms of activity, again, you've given us a lot of color on the new cell site activity. And I'm wondering if you're seeing amendment spend, the activity there, slow or that activity has kind of been steady and the new cell site activity has been incremental? And then I guess, if you could give us the breakdown of new cell sites versus amendment activity in the quarter, it'd be helpful.

Sure, on your prepaid rent question, 25% of it is DAS related. And while, if you counted the number of assets that we have, we obviously have a much larger portfolio of towers than DAS, we're building and deploying a significant number of small cells. And so we've talked about the fact that while it represents less than 5% of the business, it could be in the neighborhood of about 20% of our growth in calendar year 2014. And we're seeing a very similar thing in terms of the prepaid rent, as it would match where the activity goes. So it's -- while it's a smaller portion of the overall assets, it's a meaningful amount and meaningful contribution to the growth rate that we're seeing in the business.

Jonathan, the only thing that's tailing off on the leasing side is what I mentioned before, which is amendments related to MLA terms that were presold, which would have been the initial wave of LTE upgrades, typically. And so we're continuing to see applications around amendments that are outside the scope of that, microwave dishes and new co-locations grow very significantly. As I mentioned, co-los standalone comparison up 2.5x year-over-year. Total new revenue-generating activity, up sort of double year-over-year. And the only thing tailing off in our activity levels are what was presold, if you will, as we sort of reach -- again, my guess is we're probably 60% or 70% through that presold commitment, if you will, as it tails off.

And your next question comes from the line of Batya Levi from UBS.

We saw another increase to expectations for gross margins in this quarter and also G&A, as a percent of sales, improved. Can we expect these trends to continue from here? And can you also talk a little bit about the drivers of that improvement?

Sure. The gross margin improvements are related to revenue growth, and the cost structure is relatively stable, particularly with regards to towers. As we build and deploy additional small-cell networks, the initial margins of those networks would be lower than our legacy portfolio, so it has a bit of a drag effect. But we've seen great growth there, and the margins are increasing significantly and that obviously helped the overall margins. On the G&A side, as we've ramped the services business and seen the additional activity, we've certainly added additional people in the business to manage that activity. And so I would point you to the fact that it's -- those 2 items are correlated, and we'd expect the G&A line will move to some degree in proportion with what we see from the services business over time.

Okay, great. And one other question on public safety. We've been reading some news that there is some activity on a regional basis. Have you had any discussions with public safety network builds?

Yes, would be the short answer. As you can imagine, we're in the middle of that dialogue, wouldn't elaborate a whole lot yet. And it's certainly not in our leasing, existing or future. But it's nice to see an opportunity out there like that where, with our portfolio that we've assembled, I think we can bring a lot to the table to help them there. And you can assume that we're in the middle of those conversations.

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

I wanted to get back to Sprint a little bit. By my numbers, it looks like your revenue is the most exposed to Sprint, and I wanted to find out if you're seeing any pickup of activity over there, given the recent closures of their deals. And I guess, correlated with that, did you see some slowdown in the first half and particularly, in the second quarter? And then I guess, the same thing could be said for T-Mobile and PCS. If you could give us an update on build activity there.

Yes, Michael, we always -- we're a little careful about letting the carriers speak for themselves around specific activity. But let me just say that for the last 2 years, we have been going flat out with Sprint on their Network Vision upgrade, and I would not say there's been any slowdown that we can perceive. We've got a very significant amount of amendment activity work from Network Vision, and we've done a lot of services work there as well. I would anticipate, with the Softbank closing -- obviously, it's early days, but with what they've said publicly, we can anticipate a network build that looks a lot like what you're seeing from others. And so as they get the initial coverage build done on LTE, we'll see significant densification and additional sites added. Again, that sort of needs to finish the first path on coverage build first, but we haven't seen a slowdown. It's been very active. And with T-Mobile, with Metro PCS, obviously, they're going through an integration phase there. We've seen a lot of activity around their network modernization program, and we certainly expect that they're going to make the significant investment required. And we'll see that same sort of movie all over again with T-Mobile.

And then one last question, if I could. Obviously, there's been a lot of speculation out there with regard to the large portfolio towers at AT&T, probably less so at Verizon, but I guess, the question is the same for both. If you could talk to us a little bit about what type of towers and whether those towers are attractive, not just to you, but to the tower industry in general? Can you talk about maybe some of the puts and takes there with regard to some of those towers in both their portfolios that they still own?

Sure. What's attractive -- and you can most recently see this in our T-Mobile example and the towers we acquired from T-Mobile. What's attractive is having a portfolio that's available for co-location, obviously, in the locations where you need the assets, where the densification is going to occur, and that's urban sites, that's top 100 cities, and that's been our focus for the last 10 years. And that's how we've ended up with a portfolio that looks like -- looks as it does. And so our evaluation of really any opportunity, whether -- you mentioned a couple, would always center around the location of the assets and the opportunity that it represents to solve additional needs for other carriers through the occupancy of those sites. And as equipment gets smaller and more creative and the lines even begin to blur between a full macro site and a small cell, I think you'll see the industry getting more creative over time as to what you put on a tower that ultimately solves the carriers' needs, all against the backdrop of the benefit of the shared economics and the sharing of the site, which, again, we think is sort of the compelling thing that we bring to the market. The ability to get carriers on the air and also give them the benefit of sharing the economics of the site, we think, is sort of what makes our industry. And that's how we'll evaluate portfolios in the future.

And your next question comes from the line of Colby Synesael from Cowen and Company.

Two, if I may. The first one, a lot of talk about rising interest rates the last few months, and just curious how you may have seen that impact your business. And I guess, more specifically, as rates were rising, did you see that impact deal valuation? And maybe did that actually impact how you are valuing potential tower acquisitions? And then the second question, I know this had been talked about already, but as it relates to cell splitting, can you just remind us what the impact is of that on GAAP? And I guess with you calling out [Audio Gap] I'm just trying to understand the impact to the income statement.

Sure. On the first question, the direct impact to our interest expense is relatively minor from rises in interest rates. The vast majority of our existing debt is financed for a long period of time, and it's fixed rate. We do have some exposure to floating-rate debt. Most of that floating-rate debt already has the LIBOR floor, and current LIBOR rates are well below the floor, so we've not seen anything there. Obviously, as you think about buying assets or buying back stock, the cost of the capital is a factor in how we think about that. And so we would adjust, as we go along, how we think about the relative value of assets and stock and purchases of land or building towers. On your second question around the impact of new leases, we have not done any presell agreements related to -- in our GAAP revenue numbers, related to brand-new leases. So the activity that we presold, which we talked about, that we think we've gone through -- gotten through most of that activity, thus far, that we're going to see, related to what was presold, that activity was all amendment-related. So to the extent that a tenant wants to go on a tower they're not currently located on, that would be additive to our growth rate. And my prior comments, I think you could see this in the numbers, the sequential growth in revenues, if you adjust for the onetime items that we've noted for you and adjust for the FX headwind that we're facing in the back half of the year, is meaningful in the back half of the year. And if you look at our leasing, as we look at the numbers, there's significantly more leasing in the back half of the year on a net basis than what we saw in the first half of the year. And so the sequential growth in steps will be -- we would expect to be larger in the back half of the year. As is typically the case in the tower business, that revenue growth is back-end loaded in the calendar year.

Okay, great. Listen, I appreciate everybody hanging with us today. We went a little bit long, about 70 minutes. We have a lot of runway, a lot to get accomplished this year, very much excited about the balance of the year. And thanks for your attention this morning. We'll talk to you on the next call.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.