Ladies and gentlemen, thank you for standing by, and welcome to the SBA Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions. Instructions will be given at that time. If you should require assistance during the call, you may press star and then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mark DeRussy, Vice President of Finance. Please go ahead.
Good evening, and thank you for joining us for SBA's Third Quarter 2022 Earnings Conference Call. Here with me today are Jeff Stoops, our President and Chief Executive Officer, and Brendan Cavanagh, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2020 and beyond. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, October 31st, and we have no obligation to update any forward-looking statement we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics.
The reconciliation of GAAP and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our investor relations website. With that, I will now turn it over to Brendan to discuss our third quarter results.
Thank you, Mark. Good evening. We continued our very strong 2022 with another outstanding quarter. Our third quarter results were well ahead of our internal expectations and have allowed us to again increase our outlook for our full year results. Total GAAP site leasing revenues for the third quarter were $587.3 million, and cash site leasing revenues were $575.6 million. Foreign exchange rates represented a benefit of approximately $600,000 when compared with our previously forecasted FX rate estimates for the quarter, but they were a headwind on comparisons to the third quarter of 2021, negatively impacting revenues by $3.3 million on a year-over-year basis.
same tower recurring cash leasing revenue growth for the third quarter, which is calculated on a constant currency basis, was 4.9% over the third quarter of 2021, including the impact of 4.2% of churn. On a gross basis, same tower growth was 9.1%. Domestic same tower recurring cash leasing revenue growth over the third quarter of last year was 8% on a gross basis and 4.8% on a net basis, including 3.2% of churn. Domestic operational leasing activity or bookings representing new revenue placed under contract during the third quarter was very solid again, with meaningful contributions from each of our largest customers.
The combination of our strong third quarter leasing activity level and faster than anticipated commencements of new amendments have allowed us to increase for the second consecutive quarter our outlook for new 2022 domestic site leasing revenue from organic lease up. During the third quarter, amendment activity represented 58% of our domestic bookings, with 42% coming from new leases. The Big Four carriers of AT&T, T-Mobile and Verizon , and Dish represented over 94% of total incremental domestic leasing revenue signed up during the quarter. Domestically, we also experienced less churn than we had projected due to timing of merger-related decommissioning being later than we had previously estimated. Our reduced 2022 domestic churn amounts are expected to shift to 2023.
Internationally, on a constant currency basis, same tower cash leasing revenue growth was 5.4% net, including 8.4% of churn, or 13.8% on a gross basis. International leasing activity was very good again as we had our best quarter of the year in terms of new revenue signed up. In addition to strong customer activity levels across many of our markets, we continue to see healthy contributions from inflation-based escalators. In Brazil, our largest international market, we had another very strong quarter. Same tower organic growth in Brazil was 13.6% on a constant currency basis. As anticipated, international churn remained elevated in the quarter due primarily to carrier consolidations and Digicel's previously announced exit from Panama. During the third quarter, 81.1% of consolidated cash site leasing revenue was denominated in U.S. dollars.
The majority of non-U.S. dollar denominated revenue was from Brazil, with Brazil representing 12.5% of consolidated cash site leasing revenues during the quarter and 9.2% of cash site leasing revenue excluding revenues from pass-through expenses. Tower cash flow for the third quarter was $464.1 million. Our tower cash flow margins remain very strong as well, with a third quarter domestic tower cash flow margin of 84.8% and an international tower cash flow margin of 67.3% or 91.3% excluding the impact of pass-through reimbursable expenses. Adjusted EBITDA in the third quarter was $446.8 million. The Adjusted EBITDA margin was 67.3% in the quarter, impacted slightly by outsized services revenue.
Excluding the impact of revenues from pass-through expenses, Adjusted EBITDA margin was 72.2%. Approximately 95% of our total Adjusted EBITDA was attributable to our tower leasing business in the third quarter. During the third quarter, our services business again produced new record level results with $88.3 million in revenue and $22.8 million of segment operating profit. We also continued to replenish and build even higher our services backlogs, finishing the quarter once again at a higher level than the prior quarter, notwithstanding our record third quarter results. Based on this backlog, our strong third quarter and the continuing high activity levels by our customers, we have raised our outlook for full year site development revenue by $26 million. Adjusted funds from operations or AFFO in the third quarter was $339.4 million.
AFFO per share was $3.10, an increase of 15.1% on a constant currency basis over the third quarter of 2021. During the third quarter, we continued to expand our portfolio, acquiring 131 communication sites for total cash consideration of $54.9 million. We also built 113 new sites in the quarter. Subsequent to quarter end, on October 11, we closed on the previously announced acquisition from Grupo TorreSur, adding 2,632 sites in Brazil for cash consideration of $725 million. In addition, subsequent to quarter end, we have purchased or are under agreement to purchase 34 sites in our existing markets for an aggregate price of $28.5 million.
We anticipate closing on these sites under contract by the end of the first quarter of next year. In addition to new tower and other assets, we also continue to invest in the land under our sites. During the quarter, we spent an aggregate of $9.1 million to buy land and easements and to extend ground lease terms. At the end of the quarter, we owned or controlled for more than 20 years the land underneath approximately 72% of our towers. The average remaining life under our ground leases, including renewal options under our control, is approximately 36 years. Based on results and activities during and subsequent to the third quarter, we have updated our outlook for full year 2022.
We have increased our outlook across all of our key metrics due to outperformance in the third quarter, lower churn expectations as a result of timing, and the earlier closing of the GTS acquisition. These items were partially offset by higher interest costs and higher estimated cash taxes from the outlook previously provided with our prior quarter earnings release. We are very pleased with our third quarter and year- to- date performance and excited for a strong finish to 2022. With that, I will now turn things over to Mark, who will provide an update on our balance sheet.
Thanks, Brendan. We ended the quarter with $12.4 billion of total debt and $12.1 billion of net debt. Our net debt to annualized Adjusted EBITDA leverage ratio was 6.8x below the low end of our target range. Our third quarter net cash interest coverage ratio of Adjusted EBITDA to net cash interest expense was 5.3x, equaling the last two quarters all-time high. Subsequent to quarter end, we used cash on hand in borrowings under our revolving credit facility to fund the GTS acquisition closing. As a result, as of today, we have $995 million outstanding under our $1.5 billion revolver. The current weighted average interest rate of our total outstanding debt is 2.9%, with a weighted average maturity of approximately four years.
The interest rate on 90% of our current outstanding debt is fixed. During the third quarter, we did not purchase any shares of our common stock as we allocated capital for the closing of the Brazilian acquisition. We currently have $504.7 million of repurchase authorization remaining under our $1.0 billion stock repurchase plan. The company shares outstanding at September 30th, 2022, were 108 million, compared to 109.5 million at September 30th, 2021, a reduction of 1.4%. In addition, during the quarter, we declared and paid a cash dividend of $76.7 million or $0.71 per share.
Today we announced that our board of directors declared a fourth quarter dividend of $0.71 a share, payable on December 15th, 2022, to our shareholders of record as of the close of business on November 17th, 2022. With that, I'll turn the call over to Jeff.
Thanks, Mark, and good evening, everyone. As is appropriate on Halloween, we are pleased to present a treat of an earnings report. The third quarter exceeded almost all expectations and benefited from the significant level of wireless deployment activity by our carrier customers. Notwithstanding the broader challenging macroeconomic environment, our business was extremely busy, and we were able to again increase our full year outlook across all key metrics. We raised our full year outlook for total revenue by $49 million, after raising it by $64 million last quarter. Domestic organic contributions to leasing revenue growth in the third quarter were the highest of the year, and our outlook implies an even higher contribution in the fourth quarter. Our services business produced the highest quarterly contribution of revenue and gross profit in our history, and we again grew our services backlog.
Our rate of return on invested capital was 10.6% for the quarter, the highest in at least 10 years. It really was a remarkable quarter. In the U.S., each of our carrier customers remained busy during the quarter as they have throughout the year, building out their networks through the deployment of new spectrum bands. T-Mobile was our most active customer during the quarter, continuing their nationwide deployment of 2.5 GHz and 600 MHz spectrum. Verizon, AT&T, and Dish were again very active in the quarter with 5G related new lease and amendment signings.
Site leasing revenue growth from domestic new leases and amendments has been strong this year, growing throughout the course of the year. We expect the contribution to revenue growth from domestic leases and amendments to be good again next year as well based on the strength of the organic leasing activity during 2022. Internationally, we had our best organic leasing quarter of the year. During the third quarter, we saw more of a shift toward upgrades at existing sites, with 63% of new business signed up in the quarter coming from amendments to existing leases and 37% coming through new leases. International leasing activity was again led by strong contributions from Brazil and South Africa, our two largest markets. Brazil has performed very well this year.
Not only has lease-up been above our internal expectations for the year, but we have also had larger contributions from CPI-based escalators while maintaining a relatively stable foreign exchange rate. In addition, we closed on the previously disclosed GTS acquisition of over 2,600 sites earlier in October. The integration of these sites has only recently begun, but is proceeding smoothly and ahead of plan. As a reminder, these sites have 2.1 tenants per tower, and we believe there are opportunities for growth, particularly with recent 5G spectrum auctions in Brazil as a driver. These sites do contain some legacy Oi leases, but a smaller percentage than the rest of our portfolio. With regard to Oi, we have begun conversations with some of the carriers that are absorbing the Oi wireless business to discuss potential mutually beneficial and efficient arrangements around the integration of these networks.
We still anticipate total churn of approximately $20 million-$30 million associated with the Oi merger on our legacy sites, plus an additional estimate of approximately $3 million associated with the GTS or Grupo TorreSur sites. These numbers do not include any potential impact to pass through reimbursements as those items would be neutral to Tower Cash Flow. We also continue to produce revenue from tenancies associated with Oi's wireline business, which is unaffected by these mergers. We have a strong relationship with our Brazilian customers and look forward to working with them through this process. With respect to our balance sheet, due to early refinancings completed over the last few years and some well-placed interest rate swaps, we have positioned ourselves well to address more challenging debt markets.
We ended the third quarter with a net debt to annualized Adjusted EBITDA leverage ratio of 6.8x, below our target range at our lowest level in years. Even with our large fourth quarter Brazilian tower acquisition, we expect to be at or below 7x at year-end. We have only one $160 million debt instrument maturing between now and October 2024, representing approximately 5% of our debt outstanding. That instrument matures in March 2023. While interest rates are certainly higher today, we still have great access to incremental and refinancing debt capital, given the strength of our cash flows. We expect to refinance our pending first quarter maturity during the next several months.
During periods with an elevated cost of capital and increased interest rates, it is even more imperative to continue our disciplined and opportunistic approach to investing capital. We are fortunate to be in a strong industry benefiting from the continued growth in wireless, but also having the strength of significant free cash flow generation, largely fixed costs and scaled operations. It's during times like these that we really appreciate the strength of our underlying business. We're very pleased with the third quarter performance. As indicated by our updated outlook, we are also well positioned to finish out 2022 on a high note. We will be providing our initial 2023 outlook on our next quarterly earnings call. Based on this year's organic leasing activity and the significant network projects ahead of our customers, we anticipate our leasing results to continue to be strong into next year.
We will continue to be disciplined in our approach to capital allocation, focused on maximizing returns for our shareholders. I want to thank our customers and team members for their support and contributions to our success, and we look forward to a strong finish to the year. With that, Carolyn, we are now ready for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question on today's call, you may press one and then 0 on your phone. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you do have a question on today's call, you may press one and then 0 at this time. Our first question comes from the line of John Atkin from RBC Capital Markets. Your line is open. Please go ahead.
Good afternoon. Was interested in two topics. One is what you might be seeing in terms of seller expectations or just general observations about domestic M&A and what's going on with the TCF multiples. Secondly, in your conversations with your U.S. customers interested in or to what degree infill or densification or cell splitting starting to come up as opposed to overlays, which I think has been driving, you know, the majority of the growth ex-Dish so far. Thanks.
Yeah. I'll take the last one first, Jonathan. We're still, at least with respect to SBA and its assets in the capacity stage and the overlay and the initial deployment of mid-band spectrum. While we fully expect densification to come, capacity for us continues to be the current driver. Now, we take that as a good thing because that really just lengthens out the extent of the activity timeline for us. In terms of seller expectations, you know, they're changing some. They have not fully reset to the degree that the, you know, the public company multiples have compressed. What that means for SBA is, you know, there'll be a lot of things that we take a pass on unless the price is right. We loved what we did in Tanzania. We loved what we did in GTS.
There's a lot of things that we passed on because those expectations. There's still a gap in those seller expectations. They have started to move actually down.
Lastly, just on international M&A and tuck-in opportunities, build-to-suits, what's your appetite for that at the moment?
We like build-to-suits, provided they're the right terms. Tuck-in acquisitions and for that matter, new markets would all fall into kind of the same comment I made about finding things that are right for us. We're only gonna do things if we believe that it's right for us from a price and a growth perspective. You know, if we do things, great. If we don't, you'll see what happened in the third quarter, which is that we de-lever pretty quickly until we do see those right capital allocation opportunities.
Excellent. Thanks very much.
Our next question comes from the line of Michael Rollins from Citi. Please go ahead.
Thanks, and good afternoon. I'm curious if you could just share a little bit more details of the backlog. Are you still seeing an extended book-to-bill where it's just taking longer for that backlog to get into the actual revenue numbers? Separately, on just data centers and edge opportunities, any updates on how you're looking at the opportunities? How some of your tests are coming along? Thank you.
Yeah, I don't know. Brendan, correct me if I'm wrong, but I don't know that we've had any changes in the book-to-bill timeline.
Nothing material. I will say that actually if you noticed in our bridge for domestic contributions from new leases and amendments, that we bumped up that contribution for 2022. It was 66 last quarter and 67 now. That change is really largely due to a slight acceleration in timing, and that's mostly around amendments that just kicked in a little bit quicker than we had projected. It's a pretty small change relative to the big picture. I don't think there's been any material move in that you would point out.
On the edge business, Mike, we've actually seen some great progress, but it's still. It's great from where we started, which was, of course, at 0. But it's not really material. I would say we probably have either in operation or under construction 30-40 of these facilities. The primary demand for them has been edge computing and fiber and cable regeneration. But what we found to be the key to success in this area is really the state and the location of the tower site. Because where it's ready to go and it's close to or on top of existing fiber makes all that much more attractive. So on an absolute basis, yes, we've seen a lot of growth.
On a financial basis, it's still, you know, of course, very small, but we're encouraged by what we've seen.
Within that context, is there a base expectation of the value enhancement? You look at what these 30-40 sites could do from an incremental cash flow, incremental value perspective. Is there a number that we all should be keeping in mind as the opportunity set?
No, because it's still small. What I will tell you, though, is that we're really happy with the incremental return on invested capital for these projects. At its core, that's what I think you have hired us to do. We're very happy with that. As long as we can make that return on invested capital, albeit small, perhaps for at least a little while, we're gonna keep doing it.
Thank you.
Our next question comes from the line of Ric Prentiss from Raymond James. Your line is open.
Yes. Good afternoon, everybody.
Hey, Ric.
Hey. It certainly is nice to get treats versus tRics tonight, so thanks, Jeff. First question I would like to get into is, there's been a lot of debate out there, when you look at the U.S. business, sounds like you have good visibility still. The leading indicator of services business sounds strong with record backlog. We get the questions of, aren't the carriers trimming CapEx budget if you look at 2023 versus 2022? Not a perfect indicator, CapEx. Potential for a recession in the U.S. Interest rates are high. Does anybody need to go borrow to pay their CapEx? Help us understand how you're feeling, what sounds quite positive, Jeff, as far as looking exiting 2022 strong and then looking into 2023 strong.
Well, keep in mind, because of the nature of the business, where you sign things up today, but you don't begin to recognize revenue until later, that we're today already shaping next year's financial results. That's a point of confidence. The other thing I would say is that we track to the tower, which of our customers have upgraded, you know, their mid-band spectrum on our sites. The number is actually fairly low across the board for us at this point.
You know, our customers will do what they will do, but knowing what this means for them in terms of the amount of money, frankly, for first of all that they spent on the spectrum, the at least as reported, competitive differences between some of them from a spectrum perspective and others, where they are on our towers, and the fact that, you know, the CapEx numbers that you get from them are extremely broad. We feel next year is gonna be pretty good.
Okay. Other question, obviously closed Grupo TorreSur, how should we think about the funding for that business in this environment? As we look into 2023, how much more interest expense should we be kind of already starting to think about from our side, even though you haven't given guidance yet, but thinking about what that headwind might be, and do stock buybacks come back on the radar as we get into this year or next year?
Yeah. Well, Grupo TorreSur is funded. I mean, think about the funding, that's already funded. That got funded from cash on hand and our revolver. The next thing we're looking at is the refinancing of the $640 million ABS instrument in March, where, you know, we've got that teed up, ready to go. I don't wanna speculate too much on the interest increase. There will be, of course, an interest increase. I mean, Brendan, what's that instrument bearing today?
The one that's getting paid off is just below 3.5%, so you should expect that will be, you know, significantly higher.
Well, let's put a little parameters around that.
Yeah.
I mean, we're thinking it's gonna have a six handle on it, Ric.
Okay.
But then-
But so-
Keep in mind, we're gonna be producing over $1 billion of AFFO. We don't have another debt instrument due until October 2024. We're gonna be in great shape. We're gonna have capital to invest, and we're either gonna see value in portfolio acquisitions, based on my earlier comments, we may or may not. We're gonna continue to be opportunistic around stock repurchases. Or third, and I would say this is somewhat unlikely given the first two, you're gonna see a big decline in our leverage ratio.
Okay. That helps a lot. Everybody stay well.
Our next question comes from the line of Simon Flannery from Morgan Stanley. Your line is open.
Hi. This is Landon on for Simon. Thanks for taking the question. I was wondering if you could expand on, you know, any specifics domestically, from what you're seeing from Dish or any of the other carriers in terms of where you think they're at in their deployments.
Yeah. I don't wanna get too granular. All of the... Well, let's say T-Mobile, Verizon, and AT&T all still have work to do with us based on our analysis of where they are with their mid-band spectrum. Some of those are further ahead than others, and I think the answer to that question has been well reported. Dish has really got a lot of business signed up, and their focus right now is getting all that on air to meet the June 2023 requirements, which, you know, based on everything we can tell, they're in a very good position to do. Then, you know, we expect them to come back and begin to work on the 2025 requirements.
While it's varied, Landon, in terms of which of those are busiest, and I, you know, I don't think they want me actually commenting on that, I will tell you that there is a high level of busyness from all of them, and they all, at least based on our analysis, still have a lot of work left to do on our portfolio.
Thanks for that color, Jeff. Then just one follow-up on the edge deployment commentary. Can you maybe describe, you know, what these sites look like, the 30-40 that are in operation or under construction and, you know, build costs, size of the facilities, and maybe what percent of your sites do you think are, you know, potentially eligible over time to have such deployments?
Yeah. I think they're mostly 6% by 12% or 10% by 20% foot shelters that look like the traditional wireless shelter that certain carriers have used historically. They've got air conditioning. They've got, you know, a lot of logistics to check temperatures and alarms and things like that. They basically are for racks of equipment, and they start out with two or three rack capacity and can be expanded beyond that. Brendan, what's our average cost on those?
Well, it depends on the size and the scale, obviously. The deployment there, for something along the lines of what Jeff described, you're looking at somewhere in the $100,000 range. If we do a bigger, more fulsome, you know, edge compute, a true data center where it's a bigger operation, it can be as much as $400,000-$500,000.
How much power would you have going to those facilities?
Yeah, they're not. At that size, they're not being sold on a traditional data center power basis.
Okay.
A lot of the uses today are for regeneration of signal for cable and fiber companies. That's not really how that's priced and sold.
Okay. Thanks very much for the color.
Mm-hmm.
Our next question comes from the line of Walter Piecyk from LightShed. Please go ahead.
Thanks. Jeff, just going back to Ric's question, can you give us or define what low means in terms of the number of cell sites that have mid-band? Are you talking, like, sub-10%, sub-20%, something in the ballpark?
Their satisfaction rate on our towers would be in the 50%-ish range, and others are below that.
Got it. You know, Comcast has this radio from Samsung that does 2.5 and, it has low band in there. I guess first part of the question is, have you had any type of meaningful dialogue with Comcast and Charter about, helping them with their offload strategy? More importantly, I guess, when that inevitability does happen, if you, if you look at, like, three scenarios, one where they just said, "Hey, we have a radio that just does CBRS," and the antenna that goes along with that. Scenario two is we're doing low band and CBRS, so that's probably a different type of antenna, maybe larger. The third alternative is the low band that they have is deeper.
Meaning, like, rather than 5 MHz, in Comcast's case, they go out and they lease some additional low band, and they're using 10 MHz of spectrum. Would the leases differ between those three scenarios? 'Cause I seem to recall over the past many years that you would argue that, like, "Hey, when someone put on spectrum, we'd get more money." For a new lessor or a new tenant, would it be the same way where if they came to you with one of those three alternatives, that there would be different pricing?
Just based on the nature of the spectrum that's being transmitted?
Yeah.
Probably.
nature.
Probably not.
Yeah.
Yeah, probably not. Probably it's all gonna be based on the way the equipment looks. Based on your description of the third alternative, the lower band, deeper lower band, I mean, as you're describing it, I'm envisioning that's gonna be the most intensive on the equipment side. So it would be based on that, Walt, as opposed to the fact that they're transmitting their own. I mean, even though CBRS is shared and not necessarily owned, we wouldn't differentiate somebody's use of CBRS versus their use of their own spectrum, I don't believe. I don't think we ever have-
Okay
put it that way.
Has there been any meaningful discussions up to this point?
We're always in discussions with Charter and Comcast. I would say that those scenarios that you lay out. In my personal opinion, I think they're still somewhat in the future.
Got it.
If they occur.
Thank you.
If they occur at all. Yeah.
Yep, I understand. They will, I believe. We'll see.
Our next question comes from the line of Batya Levi from UBS. Your line is open.
Great. Thank you. Can you remind us the overall financial impact of the GTS side? If there are any changes to the original expectation, and how much revenue was pulled forward? Network services, you mentioned the strengths, and you added more to the backlog. Could we expect a similar performance next year on that segment? Thank you.
Yeah, GTS, the numbers aren't any different than what we gave last quarter. The total revenue on an annualized basis is expected to be approximately $72 million. The impact from the pull forward of closing a little bit early was about $3 million.
Yeah, in terms of services, I mean, we have a backlog that supports a fourth quarter performance, you know, similar to what we enjoyed in the third quarter. That's not what we've guided to because we exceeded our expectations so greatly in Q3, and Q4 has some holidays and all that. In terms of next year, we really wouldn't hazard a guess until we have the benefit of the next four or five months prior to when we give out full year 2023 guidance.
Great. Thank you.
Our next question comes from the line of Nick Del Deo from MoffettNathanson. Your line is open.
Hey, good evening, guys. Thanks for taking my questions. You know, first, just looking at the change in guidance, what's the jump in other revenue in the U.S. coming from? Is that decommissioning fees or something similar? How much of that was in Q3 versus what you expect in Q4?
Yeah. It was almost all of the jump is related to Q3, I would say. It is related largely. It's a variety of things, but cash basis revenues, a portion of that, a big chunk of that is related to. You know, what we might call holdover fees, extra fees that are paid for somebody staying on the tower that's coming off, but they stay longer than they should. It also includes international payments from Digicel. You know, we mentioned Digicel is a big contributor to the churn number internationally, which they are, but they've actually continued to make a number of payments. Those payments are showing up basically in other now.
Okay. Okay, that's great. I guess I also wanted to ask about expense trends that you're observing in the U.S. You know, obviously, the majority of your OpEx is ground rent. The escalators on that are fixed, so that takes a lot of risk off the table. You know, what are you seeing and expecting as it relates to the rest of your expense base? You know, like corporate, field operations, you know, and so on.
You know, we are seeing definitely some inflationary pressure there, Nick. I mean, we're gonna be giving out average compensation increases next year at a higher rate than, you know, we've given in the last couple years. When you look at, I think our SG&A is only, like, 6% of cash.
Of cash SG&A.
Cash SG&A, 6% of revenue. I mean, it just really doesn't matter on the overall financial numbers. You know, we'd be lying to you if we said that we were immune to that kind of stuff. For us, it's just so much smaller of a percentage than it is for a lot of other companies.
Okay, that's great. You know, if I can squeeze in one last quick one. You know, obviously, as we look at the growth overseas, you know, the value of the CPI-linked escalators are really showing their value in the current environment. Are there any caps on major contracts that we should be cognizant of, or are you guys, you know, uncapped on that front and hence, you know, essentially totally protected?
We're largely uncapped, Nick. I'm trying to think if there are any. There may be one or two somewhere out there, but for the most part, it's not capped.
Okay. Okay, terrific. Thank you.
Our next question comes from the line of Greg Williams from Cowen. Your line is open.
Great. Thanks for taking my questions. I just have two, if I may. Can we talk about your Latin American churn? If I look at your guidance, it should be still up here on these 8% levels. I'm just trying to figure out how much of that spills over into 2023. Do we remain at these 8% levels for the next few quarters, given the Oi cadence and the consolidation churn in Digicel, et cetera? Second question is just on the service revenue, actually the service margins profile. How do you expect that to pan out? Are you shifting from maybe permitting to more construction? You know, I think you hit a margin close to 26% and wanted to see, you know, where that shakes out over the next few quarters. Thanks.
Yeah, I mean, I'll take the latter question first, and Brendan, you can do the American churn. You know, we're executing very well, Greg, on both the traditional permitting and zoning side of the business as well as the construction side. The margin differential that you saw years ago between those two lines of our services business, those, they're not exactly the same, but the gap has closed tremendously. We still get a better margin on the zoning and the permitting side of things than we do on the construction. The mix of that will impact the margins. I mean, I don't think it's gonna be a hugely different margin next year.
I think, you know, based on the way the work will flow and how we expect things to come in for business I mean, the first business that we typically see for any kind of new interest is gonna be on the zoning and permitting side. I think it's not gonna change a whole lot.
Yeah. Then Greg, on the international churn piece, I would expect that the next couple of quarters, few quarters probably, will be in a similar range in terms of that percentage that you're looking at because of the timing of when some of this stuff started. The one thing I'd also caveat about next year is just, you know, this obviously only takes into account what's happened now, and there's the one big thing that's out there that we're in the midst of conversations about is related to the Oi consolidation in Brazil. As of today, you know, there's nothing to report on that. As we continue to have conversations, depending on where those end up, you know, that may influence what next year's numbers look like.
Got it. Thank you.
Our next question comes from the line of David Barden from Bank of America. Your line is open.
Hey, guys. Thanks so much for taking the questions. I got a bunch, Jeff, for you. I think the first most important is, what are you going as for tRic-or-treating tonight with your kids? The second-
I'm going as a grandfather.
I'm still interested in the consensus. The second question is, you know, you highlighted the leverage being below the target. You know, there was a time when you guys implemented your dividend that you thought maybe a lower leverage target would be the right target. I wondered if you would wanna have a little bit of a conversation about how you're thinking about target leverage. You know, given that there's not a ton to do on acquisitions and you didn't do stock buybacks, even though the stock's been pulling back, whether there's been some sort of change there. The third-
There really hasn't been a change there. I mean, clearly, we've maintained our target, but have operated almost entirely at the low end now for some time. You know, I think that's gonna continue to be the case if not dropping below. The dropping below, if that happens, is gonna be more a function of our dissatisfaction with poor capital allocation opportunities and some financial theoretical belief that this is the optimum, you know, leverage level given our access to capital. One other thing, you may be driving at this, Dave. We're not gonna turn into, you know, a high dividend relative to AFFO company. We just don't think that's the right thing to do. We will grow our dividend probably as fast or faster than.
Well, certainly our peers and maybe anybody else in the REIT industry as we have the last couple years. It's still gonna be lower as a percentage of AFFO because we like the flexibility that it provides.
The second question I had was, you know, one of the things that's distinguished you guys from peers has been a pivot to fixed rate debt. Obviously, that changed a little bit with GTS. I think someone asked earlier about the plan for the GTS debt, and you guys talked about the refinancing of the ABS, but what is the plan for the variable rate debt in the portfolio? I guess this is one for Mark. Are you gonna lock in higher fixed rates, or are you gonna try to ride it out in the meantime?
It'll be a mix of both. We have, as you probably have noticed from our prior ABS financings, where we have the opportunity to raise more than the amount to be re-refinanced. We have been rated for an issuance well above $640. We're trying to figure out exactly how far above that we go. There'll be some reduction in the revolver from that, and then the rest of it's gonna occur pretty quickly from cash flow.
Perfect. Okay. Good. Thank you. Then my last question, if I could please, Jeff, is I've always considered you a little bit of a Brazilian policy wonk. Now that the election is over, what do you think is next in terms of implications for the telecom industry, currency, et cetera? Thank you.
We all know that Lula is left of Bolsonaro, but he has gotten elected by, you know, a coalition of not only the more leftist, but also some more centrist populations as well. At the same time that Lula got elected president, the Congress down there got actually more to the right. You're gonna have a classic draw between the president and Congress, and Congress has a lot of power in Brazil. I think for us, it's gonna continue to be kind of a good business environment without a lot of policy changes.
I don't know that he would've proposed anything, but assuming, for hypothetical purposes, that Lula proposed some things that would be, you know, very much to the left and detrimental to business, I don't think that's gonna happen because of the Congress.
Okay. Thank you, guys. I really appreciate it.
Sure.
Our next question comes from the line of David Guarino from Green Street. Your line is open.
Hey. Hey, Jeff. I wanted to make sure I'm understanding your enthusiasm for domestic new leasing activity next year, especially compared to one of your peers that gave 2023 guidance that implies a step down for macro tower new leasing activity. I guess the question is really, you know, your 2022 guide this year for $67 million in new leasing activity, do you think we're gonna look back on that as a high watermark, or do you think that there's actually room for that to grow going forward?
I'm glad you asked that question because when we're conveying good feelings about next year, it's exactly around that number for 2022, that same calculation and that same thing that we will be posting, you know, when we start our bridge for next year, next earnings release. That's really what we're speaking to. I think I just answered your question.
All right. I can read through that. Thanks. A second one then, switching gears on it, given the volatility and the pretty rapid change we've seen this year in a lot of foreign currencies, maybe not the experience in Brazil, but certainly a lot of other markets, have you reconsidered how you underwrite the risk for international investments relative to what you might have been doing at the start of the year?
Not really because the rate of currency movement has largely been matched off by the CPIs in those countries. All of our revenues in those countries are, you know, escalated based on CPI.
All right. You know, thank you-
I know there'll be some minor exceptions to that plus or minus, but in general, that relationship has held.
Thanks.
Our next question comes from the line of Brendan Lynch from Barclays. Your line is open.
Great. Thanks for taking my question. Maybe on the debt again. Given the macro environment, has your ability to tap into the secured debt market changed recently? Do you think that will continue to remain a primary source of funding going forward?
Yeah, Brendan, we do think that it will remain a primary source of funding for us. Our ability to tap into it has not really been impacted. It's really just a question of cost. That's the only question mark. The access to capital and having plenty of capital available to us in those markets still remains very strong.
Okay. Great. Just one other question. It looks like your discretionary CapEx guidance came down by about $35 million for the year. Is that related to labor availability or supply chain constraints or other rising costs that might be leading to a slowdown in development projects?
No. It's mostly just timing of some smaller acquisitions and when we think they're gonna close.
Okay. Very good. Thank you.
Our next question comes from the line of Brandon Nispel from KeyBanc. Your line is open.
Great. Thanks for taking the questions. Two if I could. Jeff, you guys talked about commencements coming in a little bit quicker than expected, but could you update us on the backlog of unsigned lease applications? Where do you stand today relative to a year ago and last quarter? For Brendan, obviously international CPIs have been high but have come down a little bit, at least in Brazil. I guess if we put estimates aside today, if inflation stayed where it's at, what should we be looking for that escalator next year? Thanks.
Yeah. In terms of our backlog, for leases, new leases and amendments, we are just a tad off of where we were at the end of second quarter, which was one of the highest that we've had in many years. We're still looking at a very, very strong backlog, which is, you know, underlies a lot of our optimism going forward. Brendan, I'm gonna let you handle the second question.
Yeah. I mean, you're asking me to predict the CPI for next year in Brazil, which it's hard to do with certainty, especially given the recent elections and all that. We have to kind of see how that all settles out. You know, I think high single digits is a reasonable assumption today. Perhaps it could be higher than that. I would target somewhere in that 8%-10% range.
Well, I mean, there's gonna be a forward curve out there. I mean, when we-
Yeah. For sure.
When we do planning around those things, because nobody has an accurate crystal ball on that, we rely on the published consensus forward curve.
Yeah. I mean, the big thing though, Brandon, for us is, you know, some of it comes down to timing. Obviously, we have concentrated periods at which our leases escalate. You know, depending on where things are during those windows of time, it has either a greater or lesser impact on our specific numbers.
Great. Thank you.
There are no further questions in the queue at this time.
Great. Thanks, Carolyn. Thank you all for joining us. We look forward to our next release in February, where we will talk about 2023. Happy Halloween.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing services. You may now disconnect.