American Tower Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. American Tower owns, operates and develops multitenant communications sites; its property operations generated 98% of first-half revenue, with a smaller U.S. tower-services business.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $1,780.9 million | $1,662.5 million | $3,522.7 million | $3,278.7 million |
| Operating income | $546.0 million | $576.9 million | $948.9 million | $1,108.3 million |
| Net income attributable to common stockholders | $306.7 million | $344.2 million | $582.5 million | $633.5 million |
| Diluted EPS | $0.69 | $0.80 | $1.32 | $1.47 |
| Adjusted EBITDA | $1,084.1 million | $1,020.8 million | $2,146.5 million | $2,018.4 million |
| AFFO attributable to common stockholders | $774.7 million | $681.2 million | $1,534.0 million | $1,361.7 million |
Revenue increased 7% in both periods, while operating income fell 5% in Q2 and 14% year to date. Calculated GAAP operating margin declined to 30.7% from 34.7% in Q2 and to 27.0% from 33.8% for the first half. Adjusted EBITDA rose 6% in both periods; first-half AFFO rose 13%. These are non-GAAP measures defined by the company and are not substitutes for GAAP results or operating cash flow.
First-half revenue growth reflected leasing and amendments, contractual escalations, and acquired sites. U.S. property revenue grew 6% year to date; Latin America grew 15%, EMEA 10%, and Asia 2%. Asia operating profit declined 15%, primarily from India churn, impairments and higher bad-debt expense. First-half distributions declared were $1.52 per common share, versus $1.26 a year earlier; Q2 declared distribution was $0.77 per share.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.732 billion, up from $1.473 billion. Investing used $1.843 billion, including $1.337 billion for acquisitions; financing provided $188 million. Cash, cash equivalents and restricted cash ended at $970.1 million.
- Cash capital expenditures were $434.5 million in the first half. Management estimated full-year 2018 capital expenditures of $850–$950 million, including construction of approximately 2,000–3,000 sites in discretionary projects.
- Long-term obligations, including current portion, totaled $21.1 billion carrying value; management reported $21.3 billion in total outstanding principal indebtedness, including $2.8 billion current. Cash and cash equivalents were $834.5 million.
- Reported liquidity was $3.970 billion: $3.135 billion available under credit facilities, net of letters of credit, plus cash and cash equivalents. The company said operating cash flow and borrowing capacity were expected to cover 2018 distributions, capital expenditures, debt service and signed acquisitions.
- A $1.5 billion term loan matures March 29, 2019; approximately $1.0 billion of 3.40% senior notes mature in February 2019. The company also issued €500 million of 1.950% notes due 2026 and completed a $500 million tower-revenue securitization during the period.
Material changes, outlook and risks
- India carrier consolidation: Churn reduced first-half consolidated property revenue by $62.1 million, including $22.1 million of pass-through revenue, and reduced gross margin and operating profit by $38.8 million. Management expected full-year 2018 effects of approximately $180 million on property revenue, including $60 million pass-through revenue, and $115 million on operating profit. Management anticipated elevated churn and margin pressure during the consolidation period.
- Impairments and tenant credit: Aircel filed for bankruptcy protection in February 2018. The company recorded $40.1 million of tower and network-asset impairment and $107.3 million for Aircel tenant-related intangibles; it also recorded $28.9 million of additional India tower and network impairments tied to other carrier-consolidation churn. India bad-debt expense increased $23.3 million year to date. The India reporting unit’s fair value exceeded carrying value by about $293 million, or 7%; management noted that reasonable changes in key assumptions could eliminate that headroom.
- Currency and financing effects: Q2 other expense included foreign-currency losses, versus gains in the prior-year quarter; higher average debt also increased interest expense. Foreign-currency translation reduced accumulated equity and contributed to a first-half comprehensive loss despite positive net income. A 10% adverse movement in exchange rates on unsettled foreign-currency balances was estimated to produce $97.1 million of unrealized losses for the first half. A 10% increase in current interest rates was estimated to add $9.0 million of first-half interest expense.
- Acquisitions and growth: The company acquired approximately 10,200 Vodafone India sites for $587.9 million and approximately 9,700 Idea sites for $635.5 million, and acquired other sites and assets. It signed an agreement to acquire up to 723 sites in Kenya, subject to closing conditions and regulatory approvals. Management cited wireless-data growth, network densification and new technology deployments as long-term leasing demand drivers; these are expectations, not guaranteed outcomes.
- Other matters: Adoption of the new revenue standard increased first-half revenue by $5.5 million and reduced opening distributions in excess of earnings by $38.4 million. Management expected the forthcoming lease-accounting standard to materially increase reported right-of-use assets and lease liabilities. The filing reported no pending litigation expected by management to materially affect financial position, results or liquidity; the company was in compliance with stated credit-facility covenants at June 30.
Key facts for investors to verify
- Whether India carrier churn, Aircel bankruptcy effects and additional impairments exceed management’s 2018 estimates; monitor the India reporting unit’s limited impairment headroom.
- How the 2019 term-loan and senior-note maturities will be refinanced or repaid, and the company’s leverage and interest-rate exposure.
- Whether acquisitions deliver expected leasing, cash flow and returns, while integration, structural upgrades and planned capital spending remain within expectations.
- How foreign-exchange movements affect reported earnings, accumulated equity and cash flows across international operations.
- Whether operating cash flow and available liquidity continue to support distributions, debt service and investment commitments; distributions remain subject to board discretion and REIT requirements.