Crown Castle Inc. (CCI) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Castle International Q4 2013 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, January 23, 2014. I will now turn the conference over to Ms. Fiona McKone, VP of Corporate Finance and Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thank you, all, for joining us as we review our fourth quarter and full year 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 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, January 23, 2014, 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. We had an excellent 2013. In addition to delivering very strong results throughout the year, we achieved several significant accomplishments. In December, we completed our $4.85 billion tower transaction with AT&T and have begun the integration process. We believe that this transaction will be accretive to our long-term growth rates and enhancing shareholder value. Further, this transaction solidifies our strategic objective of being the leader in shared wireless infrastructure in the U.S., which we believe is the largest, fastest-growing and most profitable wireless market in the world. Also during 2013, we completed the integration of the T-Mobile tower and NextG acquisitions that we closed in 2012. These expansions of our asset portfolio position us as the preeminent supplier of wireless infrastructure in the U.S., with the most towers and small cell networks. Further, the timing of these acquisitions provide us with a large portfolio of well-located assets, just as the network densification part of the LTE deployment cycle is accelerating, and the carriers are transitioning their focus from coverage to network quality. Additionally, in the past 2 years, we have completed more than $9 billion in financing activity. Also during 2013, we completed the necessary steps to convert to a REIT and announced our plan to initiate a quarterly dividend beginning in the first quarter of 2014. On January 1 of this year, we commenced operating at the REIT. In addition to these meaningful events, we consistently delivered strong results above our original expectations while maintaining financial flexibility to make opportunistic investments related to our core business that we believe will maximize long-term shareholder value. For the full year, as shown on Slide 3, we grew site rental revenue by 18%, adjusted EBITDA by 16% and adjusted funds from operations per share by 40%…

Thanks, Jay, and thanks to all of you for joining us on the call this morning. We obviously have a lot to cover at year end. And I want to add my thanks to Fiona for 7 years of great work in the IR role. And honestly, we'll miss that refined Irish accent on these calls. I want to take a couple minutes to reflect on the tremendous year we had on a number of fronts. We accomplished a number of milestones in 2013, exceeding our financial targets for the year while continuing to execute on our strategic objective of growing our leadership position in the U.S. market. I want to take this opportunity to acknowledge the significant accomplishments of our Crown Castle professionals as we successfully integrated the T-Mobile acquisition, expanded our Small Cell business, processed record application volumes associated with LTE upgrades and co-locations and gear [ph] our Services business by successfully meeting customer demand for installation and upgrade activities on our sites. Since April of 2012, we have invested approximately $9 billion in acquisitions that we believe significantly enhance our portfolio and our position as the premier shared wireless infrastructure provider in the U.S, with 40% more towers in the U.S. than our nearest competitor and the largest small cell operator in the U.S. Today, with approximately 40,000 towers and over 11,000 small cell nodes in the U.S. and a presence in all of the top 100 markets, we have unmatched capability to efficiently accommodate wireless carrier demands for more sites to improve and enhance wireless networks. We have enjoyed considerable success with past acquisitions and believe the result of our recent acquisitions will be no different. As shown on Slide 11, we have proven over the short and long term that we are able to transact,…

[Operator Instructions] Your first question will come from the line of Mr. Ric Prentiss from Raymond James. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: A couple of quick questions. One, Jay, on the SG&A in the quarter, it seemed to jump up quite a bit. Wondering if that had anything to do with the AT&T transaction either special charges, legal fees, et cetera, or is that kind of the new run rate we should expect going forward?

Yes. I think the movements you see -- part of it is that we staffed up for the AT&T tower transaction, as well as the integration process. Some of it also is related to the higher level of services that we're seeing, and I would expect that to be kind of our new run rate. I would point out, as I did in my prepared remarks, if you look at the total cost structure for 2014 over 2013, net of the direct expenses that we'll get from the AT&T tower transaction, that our total costs look like they're going up about 1% on a like-for-like basis, and that would include the additional G&A that we would expect it include. And I'm doing that on a cash basis and ignoring any stock-based comp that would be included in the G&A numbers. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: In the past, you've mentioned that certain percent of your SG&A is really related to the Services business. If the Services business drops down in some way, obviously, it's great today with it being so strong, remind us again how much of the SG&A could come out as Services business maybe comes down in, say, 1 or 2 years?

Yes. Ric, we think conservatively at least half. It may be more than that. As you can imagine in our business, most of the activity that we all work on has to do with the incremental activity rather than continuing to operate the base of leases that we've already put on the tower. So we think it's at least half, and it may be -- it might be more than that. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: And then on the M&A front, we noticed the transaction in January from CPS in Texas, I think. Is that included in your guidance? I think it was a $41 million transaction, and what other M&A opportunities might there be in the U.S. or is Europe of interest to you?

It was included in our outlook, and I'll let Ben kind of speak to more broadly internationally. It was included in our outlook, and from time to time, we do see some smaller opportunities. I talked about the financial flexibility that we think we have related to cash flow. We have about $1.5 billion of cash flow in 2014 that we would expect to have, about 1/3 of that being allocated to dividend, about 1/3 of it to CapEx activities that look similar to what we've done in past years, and that remaining 1/3 is open for us to invest in what we think maximizes long-term AFFO per share, which could include acquisitions, maybe some more land purchases, opportunities that we see around the small cell space or buying back our own stock.

Yes. In the AT&T transaction, as you saw how we paid for it, we were very deliberate in not taking ourselves out of the market going forward. We're pretty good at integrating assets. We feel like while it's a lot of work in 2014, we certainly wanted to be in the marketplace as other assets would present themselves that would meet our criteria of adding growth and cash flow against our fallback position always is buying our own securities. So, Ric, to your question, we will continue and have lots of balance sheet capacity to look at other opportunities wherever they are. You mentioned Western Europe. Certainly, that's something we would be interested in. As you've seen us over the years, we always look at it on a price versus sort of risk-reward basis and what the lease-up opportunity is against what we think is available in the U.S. market or even more simply in our own securities. So we have the capacity. That was sized that way on purpose so that we did not take ourselves out of play, and we feel very comfortable with where we are today.

And your next question will come from Jonathan Atkin from RBC Capital Markets.

Yes. I've got 2 questions. First, on spectrum, given some of the auctions that are upcoming this year and then T-Mobile's purchase of 700 megahertz licenses, how does that affect you in terms of potential incremental revenues, with those overlays or are a lot of those overlay activities already contemplated in -- under the terms of your various carrier agreement? And then on the topic of small cells, I was maybe interested in getting a sense of the opportunities that you see. Is it primarily outdoor? Is it venue? Is it indoor? Maybe just a little bit more color to where you're seeing the leasing interest and where your investments are going to be focused?

Sure, Jon. I'll take that. This is Ben. For the most part, the additional activities we would expect for deploying additional spectrum is going to be incremental amendment revenue to us. As we go forward, that will typically be the case as we've sort of run near the end of the scope of these presold agreements as Jay mentioned in his prepared remarks. So we would expect, over time, that would be an incremental source of revenue. It's hard to put too fine a point in that in terms of what's in the guidance and what's not, because it's an imperfect science. What I will tell you is as we sit here in the third week of January, we can see in our pipeline about half of 2014's leasing expectation, and that's already in the pipeline, and I would say that's about normal. So we feel good about where we are. We're starting off the year very strong. And again, I had a comment in the press release that we reiterated on this call, we expect 30% up on same-tower basis leasing '14 versus '13. So obviously, that's moving, and there's a lot going on in the marketplace. With small cells, we continue to see opportunities, both outdoor and in indoor venues. The venues, by definition, are going to be probably over time a smaller source of new incremental business for us. It's just a smaller addressable market and universe, but it is something we're pursuing. It's something we're having success with. But I would say the more significant opportunity where we're spending more capital today is on outdoor, which is in highly dense population bases, urban centers, where you're essentially doing an underlay build strategy where macro sites have sort of gotten to their capacity. And we're seeing, as we mentioned in our comments, very, very good take up there in the market as the reality becomes more and more clear that there's just a lot of these markets where the cell density has to get to a point where it's so small that these are basically street light and telephone pole-type installations just in very, very small cells where they're reusing the spectrum because of the capacity requirement in these markets. So we remain very bullish and I think there's certainly a market on both indoor and outdoor, but over time, it looks to us like the outdoor is going to be significantly bigger.

Your next question will come from the line of Mr. Philip Cusick from JPMorgan. Richard Yong Choe - JP Morgan Chase & Co, Research Division: This is Richard for Phil. Just wanted to follow up on the iDEN side of, in terms of the churn, if it doesn't materialize in the worst-case scenario, how should we think about guidance? Would it be more the bottom end of leasing revenue guidance coming up or could we see both the bottom and top end increase?

Now, Richard, I think in part that depends on the timing of when that were to occur. As I mentioned in my comments, these iDEN leases come to their contractual term end dates during 2014 and 2015 spread evenly, and so it's possible that ultimately, we don't get to a point where we see a full 3% churn. But that may occur in calendar year 2015, at which point it would have no impact on the outlook that we've given here. And during the first quarter, we saw an amount of churn that we -- that's in line with the outlook that we gave. And so I think at this point, I would just kind of leave it at that, and then we'll have to update you as we move through the course of the year and see where ultimately they come out because the timing is important in terms of how much impact it would have. Richard Yong Choe - JP Morgan Chase & Co, Research Division: Great. And in terms of the services revenue, I mean, that's a big number last year, and I think we're expecting some sort of falloff for this year. What kind of changed over the past few months that gives you confidence that it seems like it's a pretty flat number this year versus down in some significant way?

Well, we're just continuing to execute for customers, frankly, and we're continuing to increase our market share, the addressable opportunities around construction and preconstruction services in virtually every market area of the country that we operate in. And so we're continuing to capture more of what's out there. And as you know, for years, we've been conservative in how we guide and how we forecast that number. We've never seen ourselves generating $200 million of service margin, which is what we did almost in 2013. Jay mentioned in our guidance, we've haircut that $15 million. If we outperform, we'll outperform. But there's a big opportunity out there in the market, and we're -- we think it makes great strategic sense. Not only are we making money doing it, which is obviously a pretty good outcome, but it also gives us a very high-touch experience in interacting with customers and their vendors so that we're very engaged in what their deployment plans and needs are. It also gives us great control over the asset and what's going on at the asset. And since we're the permanent owner of these 40,000 sites, we are pretty interested in what's happening on the site, and that's the way we maximize the outcome and the opportunity of co-locations over time on these towers. So there's lots of great reasons for us to continue to do this, and we're very, very pleased with the outcome.

Your next question comes from the line of Kevin Smithen from Macquarie.

Based on the midpoint of your guidance, it appears that the net impact of prepaid rent increases by just $3.5 million in 2014. Given the increase we saw in Q4, why do you expect this to stabilize in 2014? Is it the AT&T MLA that's sort of phasing out? Or is it something else? And then what do you think this will look like in 2015?

Yes, Kevin, I think as we've talked about in the past, prepaid rent is a function of a couple of different things. It's a function of activity that we see around the network and how much investment is being made by the carriers. And secondly, it's based on how those carriers ultimately would like to structure their arrangements with us. We have been very successful over the last several years of passing nearly all of the CapEx that we incur as we upgrade sites to hold additional tenants, we've been able to pass that on to the carrier. And so there's a bit of a pricing question there and a bit of a question around activity. I think similar to Ben's comments that he made around Services, I think we will have been and will continue to be a bit conservative as we think about forecasting prepaid -- the prepaid rent that we receive. But thus far, we've done very well at that. And I would point out, we get a lot of questions, and it seems like this topic has been a bit of a hot one over the last couple of years as people have tried to figure out components of cash and noncash revenue. And when you look out total site rental revenue, our guide for 2014 is nearly $3 billion of site rental revenue. And the noncash component, after you work through all the puts and takes, is less than $10 million on a $3 billion revenue number. And so I think we're happy to talk about it. I think we've talked about it in great detail. At a really high level, the GAAP numbers, our reported numbers, are very similar to what we're seeing in terms of cash running through the income statement. And our focus has been, as we think about cash flow per share and the way that we operate the business, we're really focused on, what is the cash outcome? And so as we think about the relationships with the carriers, as well as how we operate the business, we drive it all the way down to the cash level. And today, as I look forward to 2014, the differences between sort of cash and noncash items and everything, by the time they all wash out is basically the same.

And just a quick follow-up. Your guidance assumes kind of, based on historical quarter-over-quarter growth, kind of a deceleration from Q1 to Q4. Is this just the impact of the iDEN churn phasing in or are you just being conservative here?

I think I mentioned a couple of the items that are impacting that sequential growth. It is the iDEN, a bit of it would be FX, and then another portion of it would be as we talk about the onetime items moving from quarter to quarter. And over the course of the year, I'm assuming as you think about the rest of the quarters throughout 2014, you have a similar dynamic at play as you look forward [indiscernible].

What are you seeing on Clearwire, the 2.5 build at this point from Sprint?

We're seeing a bunch of applications, service revenue opportunity, not a real significant revenue in terms of site rental recurring revenue for the most part, but very significant opportunity to facilitate their installation. And again, we're talking about on existing sites. We expect over time to have capacity upgrades and infill sites coming from Sprint and T-Mobile, for that matter. Right now, just to characterize the market for 2014, we're seeing a very significant amount of co-location activity with Verizon and AT&T as they've announced their desire to add sites to their network. Still in the process of the initial build, if you will, and finishing that up at the Sprint and T-Mobile level. But we fully expect over time to see more infill sites from Sprint and T-Mobile as their network demands require, but that's kind of [indiscernible].

So that's your upside case, is revenue recognition from Sprint and T-Mobile in '14?

I think so. As they move into the site sort of infill process that seems to run through the marketplace, that's likely where we see the next wave of demand coming. But I don't want any way to diminish what we see this year already. There's a big pipeline out there. It's not insignificant. To tell you guys, in January, we expect to do 30% more on a same-tower basis. That's movement around here.

Your next question will come from Michael Rollins from Citi.

Was wondering, the $180 million of new revenue that you're expecting for 2014, did that include the impact from the AT&T tower acquisition? And whether it does or doesn't, can you give us a sense of the contributions you're looking for in terms of growth from that portfolio during 2014?

Sure, Mike. On the $180 million, it includes the leasing that we would expect to happen on those AT&T sites, but it doesn't include any revenue that was on the sites when we acquired them. So it would be all organic growth during calendar year 2014, and it would be a combination of the brand-new, either leases that go on-site, the amendment to existing leases, as well as cash escalators. So it's a cash number that would be done on anything that's added to a site, it would not include anything that was acquired, if you will. In terms of our assumption on the AT&T sites relative to the rest of the portfolio, we assumed a similar level of leasing on those AT&T sites. Our assumption is that over time, as we've talked about, we think it will be growth enhancing to our site rental revenue growth rate, these new assets, because of the way they've been operated in the past. And Ben spoke about some of the early indications that we have in terms of customer desire. So we may do a little bit better than at a like level of leasing, but that was basically our assumption going into calendar year 2014. Obviously, it will take us a bit of time to get those assets completely integrated, to get them into all of our systems, to get all of the documents necessary in order to facilitate customers co-locating on these sites at the same rate at which we can typically do that on legacy Crown sites. I would tell you from past experiences, it takes us probably 6 to 8 months to kind of get most of the sites up and running to where we're operating at that level. And I'm sure there are a whole lot of our folks listening to this call this morning who are doing everything they can to make that happen faster than that, but that's the typical reality.

And just a point of clarification on that. I think in your guidance commentary, you described the effect of or your expectation for $2 million of less nonrecurring revenue in 1Q '14 over 4Q '13. Can you describe to us what the nonrecurring benefit was specifically in the fourth quarter of '13?

Sure. Typically, when we go into any -- typically, in any quarter, we have about $4 million to $5 million of items that relate to -- that are nonrecurring items that flow through site rental revenue. We have those in almost every quarter, and they relate to all kinds of things. A common example would be a tenant that had installed equipment on the site without notifying the tower operator, and that happens from time to time. So we end up collecting back rent that would be owed to us as a result of that. And so the sort of $4 million to $5 million that we always put into the expectation moving from quarter to quarter. And we had in the fourth quarter about $7 million. So we had about $2 million of, I would say, above the run rate. It's also something that we typically find after we do acquisitions. And so we might find a bit of that, but our working assumption for first quarter was we went back to kind of that normalized level. If we normalize that for the fourth quarter, maybe this is the follow-on question, if we normalize that for the fourth quarter, we kind of still came out at the high end or maybe slightly above the high end of our previously expected guide for the fourth quarter with regards to site rental revenue.

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

Just 2 if I could, guys. From time to time, you kind of give us a few mile markers on scoping out the size of the small cell opportunity. We've been talking about it being a strong grower, how the EBITDA has kind of doubled over the year. But if you could give us some kind of numbers to get a sense of how big a contributor it is now and kind of we can do the math on what is contributing at the margin, it would be super helpful. And then second, just, Jay, obviously, we're starting the dividend program now. There's obviously questions about how the NOLs are going to feather in through this process. You've talked about 15% dividend growth. But, on the other hand of it, I think earlier you also talked about how stock buybacks are also potentially a use of capital in your hierarchy of maximizing returns. So could you kind of put dividends now somewhere in that hierarchy? Are dividends a better way to return capital to investors or are you considering it a less good way and stock buybacks are the preferred method now?

Dave, I'll take the first on small cell. Today, it's about 5% of adjusted EBITDA, okay? Punching above its weight though. It's growing more than its proportional 5%, and that's what happens if you look at how did you grow double EBITDA, and adjusted EBITDA since April of 2012. So in less than 2 years, we've doubled it. We have a lot people working very hard on co-location and new builds on the small cell networks. And as we mentioned, the fiber is obviously the very valuable asset that we have there. We spent about $180 million or so last year on that, and we expect to spend somewhat more than that. I can't tell you exactly, it obviously depends on the pipeline and the pace at which it goes. About 1/3 of our prepaid rent or, if you will, is related to those, the construction activities around the small cell networks, that's what we've said before, and that continued in 2013. But, look, we're very pleased. This is -- it's absolutely the tower model in terms of a shared infrastructure. There's benefit to the carriers for going on the existing systems. It's a lot about speed and ease. And I hate to say ease, because these are complicated transactions to actually get constructed and built. But to the extent you've already got the dedicated fiber in the hubs, it's something where we can facilitate turning up capacity for a carrier much quicker than pretty much any other alternative in these major markets, and that's becoming quite an accepted fact. And so we're seeing the continued growth in that. And we're going to continue. We think this will continue for some time. It's a great way to add capacity in these markets, and we're very, very pleased with the business we acquired and have now grown and with the team we have dedicated to it.

Dave, on your second question around capital allocation, as we've talked about, there are merits of increasing the dividend at a rate faster than what we've talked about of increasing it by about 15% or at least 15% per annum as we go through the process of utilizing the full extent of our taxable -- our tax net operating losses. At a pace of about 15% growth in our net operating losses, growth in dividend and against the net operating losses that would, as I mentioned in my comments earlier, exhaust the net operating losses by 2020. And I think we'll just have to see what opportunities are in front of us at the dates ahead. And to the extent that we find opportunities, either to invest in the stock or buy other assets, we may stay on that pace of 15%. To the extent that we don't see opportunities that meet our risk-adjusted returns, then we might look to increase the dividend at a pace higher than that 15%. But I think it's impossible, as we sit here today, to make the judgment about what that will look like in the future. I think if we struck the -- thought about the various balances of beginning a dividend, we thought it was an appropriate amount of a dividend, about roughly $1.40 per share in the first year out of the gate of starting the dividend, making up about 1/3 of the cash flow, it gave us plenty of cash to continue to make opportunistic investments. We were smart, I think, about the way we thought about the capital structure and overall leverage, though as Ben mentioned earlier in his comments, we're able to continue to be competitive and look for assets that we think fit in the portfolio nicely and drive long-term returns. And at the same time, start a process of returning cash to shareholders in the form of dividends, which we believe gives us an opportunity to expand the investor base and start to build on a base of investors that ultimately will be a larger portion of our investor base in all likelihood. Long term, if we think about the cash flow in the business, it's likely that we'll be distributing, once the NOLs are completely exhausted, we'll likely be distributing 75% to 80% of the cash flow in the business. And obviously, that's an exciting day for us once that comes about. But in the short term, we certainly have a lot of cash and a lot of flexibility. And to the extent that there are investments there that meet the risk-adjusted returns, we're happy to make those. And if we don't see them, then we'll come back and look to return a greater percentage of the cash flow to shareholders in the form of dividend.

If I could just follow up real quick on just one thing on the services revenue. You guys have been very successful with that services revenue segment. The market seems to put -- view it as a less high-quality business, and I guess most businesses are less high quality than the tower business. But I think the market struggles to figure out whether this is a bubble in this business, and it's going to pop, and this is something we need to model going back down to rates that were more reflective of the market 3 or 4 years ago, or is this a business that has just simply grown? It's a bigger business today. It's going to stay a bigger business. Crown is a bigger player in this business. How do we think about this business as a business on a go-forward basis?

Yes. Dave, there's -- the business has certainly grown. I mean, obviously, with 4 carriers actively engaged in adding LTE and then further capacity, the business on the opportunity of the market has grown. I would quickly add, we have grown our capabilities dramatically in this area. We've added a number of resources, and we've, frankly, gotten a lot better at it, and we've expanded the scope of what we do over time. Everything from preconstruction work, zoning, permitting, all the way through managing the construction process at the end. I think each shareholder and analyst will need to come to their own conclusion about this. As we look at it, as management, strategically, it makes a lot of sense as I talked about earlier. From a valuation perspective, I think Ric's question at the beginning is very germane here. And if you want to think about it, it plateauing or even headed down over time, that's certainly everybody's purview to take a haircut if they want to and say, "Okay, what's kind of the recurring base run rate of that activity in a more normalized market?" I think that's certainly a logical approach. The only thing I would add to that is that it's important to then think about what's the sustaining level of G&A we would have to have, and that's somewhat of a mitigating factor as you go to start haircutting the gross margin contribution from that. Where to tell you to take that, I think I'm going to leave that for everybody to make their own best guess because obviously we're going 24/7 around here, working on the services business. We think it drives leasing and obviously control and protection of the asset. So we're going to keep doing it, and the market can do the best they can to put a value on it, with these caveats I've mentioned around, it's important to think about the G&A component.

Your next question will come from the line of Armintas Sinkevicius from Morgan Stanley.

I was hoping you could touch on the AT&T, T-Mobile acquisitions, in particular the reserve space on the towers. If these towers are 1.6, 1.7 tenants each, and then there's reserve space, how much upside is left there? And also is this driving some of the prepaid rent? And then the other question is, with press reports talking about the market going from 4 to 3 carriers, can you remind us some of the prior consolidations and the impact they had on your business?

Sure. I'll take the first part. As we go through the various transactions with the most 2 recent, you mentioned with T-Mobile and AT&T, and the reserve loading or reserve capacity that they have on those towers, the way to think about that in simplistic terms is they've essentially got the reserve capacity with limitations at the current RAD center that they're operating at today. And so the historical experience, which we would expect it to play out again in the future, is over a period of about 3 years, we shouldn't expect any additional amendment revenue associated with adding equipment from those anchored carriers in the case of T-Mobile and AT&T here that we're talking about on those existing RAD centers over a period of about 3 years. After that, it's been our experience and the carriers' experience, that they exhaust that reserve capacity and they're back asking for additional capacity, whether it be on the same RAD center or a different RAD center, which is not covered by the reserve capacity, which is obviously an additional revenue opportunity. And in both of those transactions, we provided, as part of the transaction, a rate card, if you will, pricing that additional capacity and what we would charge for that. So that's part and parcel of those transactions. And our historical experience is it's about 3 years before you see them come back -- that would result in additional revenue beyond that reserve capacity. But the most important take away is it's basically limited to that existing RAD center at that level. So it doesn't encumber our ability then to co-locate additional tenants on the site, and we've been obviously very good at that over the last 14 years, and we'd expect to continue to do that.

With regards to your second question, and I'm assuming you're referencing the recent rumors around Sprint combination with T-Mobile. We've released some of the statistics there. The overlap of those sites represent, if half of the equipment were to be removed, that would represent about 10% of our consolidated revenues today. Those leases have approximately 7 years remaining on them. So from today through when we would actually begin to see that if the combination were to happen and if sites were to begin to be taken down, we'd be about 7 years from now to that date. I think our typical experience has been and you can certainly rewind the clock and look at the timing of when Sprint acquired the Nextel network and the iDEN network, we're just now experiencing that many years later, well beyond the 7-year timeline. So a lot -- there's a lot of variables. I think our experience has been a relatively small amount of churn that we ultimately see in consolidation. And I think the broader point, which we have talked extensively about over the years about the consolidations is that the best thing for us as a tower company is to have carriers that have spectrum and have significant cash flow and strong financial position. And to the extent that they are able to deliver strong financial returns from incremental investment in capital and are not susceptible to changes in the market in order to raise that capital for investment, we do very well as a tower business. And Ben spoke to one of the earlier questions around spectrum and the long-term prospects of additional spectrum being in the hands of the operators and having carriers that are in a strong financial position, I think net-net, over the years, consolidation has been a very good thing for our industry. And while the churn conversation in the sites lost, we certainly have reconciled that on the positive side in terms of what it meant around revenue growth and additional revenues that we receive on sites today, that -- we believe that number far outweighs any of the downside that we've seen from the loss of some of the churn that has happened over time.

Your next question will come from the line of Michael Bowen from Pacific Crest.

A couple of questions. I wanted to get one point of clarification. With T-Mobile and Sprint builds, did you say you do have some of the 4G LTE builds for them built into the guidance or not? Second question around the EBITDA increase in '14 or the adjusted EBITDA increase in '14, sorry if I missed it, wanted to see where that was coming from. And then on small cells finally, do you view this activity as sustainable over the years or do you think this is a near-term spike over the next couple of years as the carriers densify their networks?

Yes. I think in terms of your first question around T-Mobile and Sprint build, our leasing activity assumes that we'll see good lease-up activity across the board from all of the carriers. If I'm understanding your question correctly, you're speaking to the lease-up and not necessarily the construction of new towers. We're building very few brand-new towers across the portfolio, but we are assuming that we'll see lease-up and additional leasing activity from T-Mobile, Sprint, Verizon and AT&T. And they make up the vast majority of our revenue growth expectation.

And real quickly with that, does that include the -- any assumptions for the 700 MHz A Block that T-Mobile [indiscernible]?

I think that to the extent something happens there, that will likely be beyond calendar year 2014 in terms of what we would see impacting our results. So I would say maybe you'd see some of that in terms of lease activity as we go towards the end of the year, but I don't think that would be a meaningful contributor to the site rental revenues in the calendar year. On the second question around adjusted EBITDA increase, we did increase our assumption by approximately $20 million. Most of that is coming from the services expectation, increasing our services expectation for 2014 from where we had previously issued the guidance. We did take up the low end of the range on site rental revenue and site rental gross margin. So there is $2 million to $3 million of higher contribution from the site rental revenue and site rental gross margin in terms of that increase in that $20 million increase in adjusted EBITDA. So it's about $17 million or so from services, and then the balance coming from site rental.

Your last question on the sustainability of the small cell network, we certainly believe it is sustainable. We're signing long-term agreements just as we are in the tower -- on the tower side, and we have a vast market out there of capacity challenged, high sort of urban dense-type markets. It's only continuing to get more and more challenged as we all put more devices on these networks. So we certainly think this is a very long-term phenomenon, and these are permanent installations.

And are those contract terms as long as the other contracts?

Yes. Yes. Looks very similar. We have time for one more, I think. Probably ran overtime a little bit today.

So your final question will come from the line of Colby Synesael from Cowen and Company.

Your guidance for site rental revenue implies about a $473 million increase off of the actuals in 2013. And when I go through the different components, I'm just having a little trouble figuring it out. So you're assuming $175 million to $185 million. I've got $180 million, about half of that for escalators, about half for new leases, which includes amendments. And then I think you've told us in the past that AT&T is going to generate about $400 million of revenue. So that's $580 million and then if I was to subtract out $50 million for the churn, I get back down to $530 million. So I'm just trying to figure out what the delta is between the $473 million and the $530 million. I think it has to do with GAAP versus cash revenue, but I was hoping you could give a little bit more color on that. And then I have one other question after that.

Sure. You have correctly identified the GAAP there. It is related to the -- how we book and are required to book under the accounting terms our lease portfolio. So most -- the vast majority of our tenant leases that are on our towers have fixed escalators. The rate is stated in terms of 3%, 4%, et cetera, and we straight line over the term of the lease, the revenue. So in a simple example, if a lease had -- was $100 and had a 5% escalator for a 2-year period of time. In the first year, cash would be $100, in the second year cash would be $105. So cash would have grown by 5 year-over-year. But from a presentation in our financial statement, it would look like site rental revenues of $102.5 for each of the 2 years. In the first year...

So of the $180 million, roughly $90 million for escalators, and the majority of the delta between the $470 million and the $530 million is in that aspect of the number?

That's exactly right, Colby. Almost all of the $90 million, almost all of the $90 million would already, in essence, already be straight-lined through the site rental revenue number.

Okay. And then you mentioned 30% new lease revenue growth, and you mentioned on the third quarter call and you called that out today. Is that simply to take the $90 million of new leases and I guess that was $70 million roughly in '13, and now it's $90 million, and that equates to roughly 30% growth. Is that, when you say 30% growth, the absolute numbers that you're referencing?

You're mostly there. The one thing I would add is that we're doing this on a same-tower basis. So you can't take the absolute nominal dollars, which we're going to benefit by owning nearly another 10,000 assets as a result of our AT&T tower transaction. So we're looking at it on a site-by-site basis and basically saying the amount of additional revenue we'll add from adding additional tenants to towers on a same-store basis or same-tower basis, that number is up 30% year-over-year.

Okay. And then just a quick follow-up -- my quick follow-up question was, you noted $18 million of revenue for the AT&T towers in the fourth quarter. That's roughly 15 days. And if I simply divide that out and then multiply that by 365, it actually implies on an annualized basis, that for those 18 days, the AT&T towers generated $438 million of revenue versus your guidance of roughly $400 million. Could you just explain to me why I might be off or why I shouldn't be assuming a much greater number for AT&T revenue in 2014?

Yes. It does imply, if you look at -- I would point you more towards the site rental gross margin, because there will be some impact in terms of, as we talked about it when we gave the guidance, we were referring to what the cash flow, cash benefit was from the AT&T towers. And it certainly appears based on our early review that we may have been a bit conservative as we underwrote the assets in terms of our assumption of what run rate cash flows coming off of those assets are. So we may have some -- we may have gained some benefit on that given our conservative assumptions as we underwrote the asset.

And does the guidance still assume that conservative assumption or if you have -- or have you adjusted that?

We have not adjusted that.

All right. I think we're going to wrap up. I appreciate everybody hanging with us a little long today as we did a full year wrap up and acquisition and quarter discussions, and look forward to having a great year in 2014 and reporting to you on more of our successes. So thanks, and we'll talk to you next quarter.

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