American Tower Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. American Tower is a global owner, operator and developer of multitenant communications real estate, with rental and management operations in the U.S. and international markets and a smaller network development services business. Rental and management represented approximately 98% of first-half revenue. At June 30, the portfolio included 92,729 communications sites, including 454 DAS networks. The company operates as a REIT.
Key financial results
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $1,174.4 | $1,031.5 | $2,253.6 | $2,015.5 |
| Operating income | $389.8 | $402.5 | $809.7 | $756.1 |
| Net income | $157.2 | $221.7 | $352.7 | $415.0 |
| Net income attributable to common stockholders | $129.3 | $230.1 | $312.8 | $432.6 |
| Diluted EPS | $0.30 | $0.58 | $0.75 | $1.08 |
| Adjusted EBITDA (non-GAAP) | $762.3 | $682.2 | $1,486.0 | $1,322.7 |
| NAREIT FFO (non-GAAP) | $422.5 | $444.0 | $833.5 | $858.4 |
| AFFO (non-GAAP) | $536.8 | $473.9 | $1,050.5 | $913.2 |
- Revenue increased 14% in Q2 and 12% in the first half. Rental and management revenue rose 15% and 13%, respectively; network development services revenue fell 22% and 25%.
- Operating income grew 7% in the first half but declined 3% in Q2. Approximate operating margins were 33.2% in Q2 2015 versus 39.0% in Q2 2014, and 35.9% for the first half versus 37.5%.
- Common-stockholder net income and diluted EPS declined substantially, reflecting higher depreciation and amortization, debt-retirement losses, higher SG&A and, for the first half, higher other expense. New preferred stock dividends also reduced income attributable to common holders.
- Adjusted EBITDA increased 12% in both periods; AFFO rose 13% in Q2 and 15% in the first half. NAREIT FFO declined 5% and 3%, respectively. These are company-defined non-GAAP measures and are not substitutes for GAAP cash flow or earnings.
- First-half operating cash flow was $1,036.5, down from $1,072.4. The filing attributes the decline principally to working-capital items and higher cash interest, including the nonrecurrence of a $60.3 VAT refund and $20.8 higher cash interest payments. Cash paid for interest was $291.1.
Financial position, liquidity and capital
- At June 30, cash and cash equivalents were $274.7; restricted cash was $135.1. Total debt obligations, including current maturities, were approximately $16.2 billion, versus approximately $14.6 billion at year-end 2014. The weighted-average contractual interest rate was 3.48%.
- Reported liquidity was $2.784 billion: $2.509 billion available under credit facilities, net of letters of credit, plus $274.7 million cash. The company reported compliance with its credit-facility financial covenants at June 30.
- First-half investing cash outflow was $6.079 billion, led by $5.060 billion for the Verizon transaction and approximately $644 million for the TIM site acquisition. Financing cash inflow was $4.990 billion, including common and preferred share offerings, debt issuance and borrowings.
- The company issued $2.44 billion net from common stock and $1.34 billion net from Series B mandatory convertible preferred stock to help fund the Verizon transaction. The preferred stock carries a 5.50% dividend and is scheduled to convert in February 2018, subject to its terms.
- Common distributions declared were $0.44 per share for Q2, compared with $0.34 in Q2 2014. First-half distributions declared were $0.86 per share, versus $0.66.
Material changes and transactions
- On March 27, 2015, American Tower obtained rights to lease, acquire or manage 11,448 Verizon sites for approximately $5.053 billion. The transaction contributed approximately $96.7 million to Q2 revenue and $100.9 million to first-half revenue increases. Verizon leases space at the sites under an initial ten-year term with renewal options.
- The company acquired 4,176 sites from TIM in Brazil in April for approximately $644 million. On July 1, after quarter-end, it acquired 4,699 Airtel sites in Nigeria for approximately $1.087 billion; this is a subsequent event, not part of June 30 results.
- International rental revenue grew 2% in Q2 and 4% in the first half, despite growth from new and legacy sites, principally because foreign-currency translation reduced reported revenue by approximately 24% and 20%, respectively. First-half foreign-currency translation losses were $477.0 million in other comprehensive loss.
- The company redeemed its 4.625% notes due 2015 and 7.000% notes due 2017 and recorded $78.8 million of first-half losses on retirement of long-term obligations, including $74.3 million related to the 7.000% notes. It issued $750 million each of 2.800% notes due 2020 and 4.000% notes due 2025.
Outlook, risks and contingencies
- Management expected 2015 capital expenditures of $770–$870 million, including $275–$315 million for discretionary projects and construction of approximately 2,750–3,250 sites. It stated that operating cash flow and borrowing capacity were expected to cover distributions, capex, debt service and signed acquisitions.
- The company expected a one-time cash tax charge of approximately $92.5 million in the second half of 2015 related to an election ending MIP Tower Holdings’ separate REIT status. This is an estimate based on preliminary calculations.
- Management cited continued wireless-data growth, network densification and carrier technology upgrades as demand drivers. It also noted that tenant cancellations or renegotiations represented approximately 2% of rental and management revenue in the first half.
- Key risks include exposure to a limited number of significant tenants, foreign-exchange movements, substantial debt and refinancing needs, covenant compliance, and securitization provisions that can trap cash or redirect excess cash to principal payments if debt-service coverage falls below specified thresholds. A 10% adverse currency movement was estimated to affect revenue, operating results and cash flows by approximately 3%; the company also disclosed potential earnings exposure from unsettled foreign-currency intercompany balances.
- The company reported no pending legal matters expected by management to materially affect its financial position, results or liquidity. An Indian tax assessment of 22.6 billion rupees (approximately $369 million at the assessment date) received a favorable tribunal decision in April 2015; the tax authority may appeal. Management reported no material changes to the prior annual report’s risk factors.
Investor facts to verify
- How much of reported revenue and growth is attributable to Verizon and other acquisitions versus legacy-site leasing, and how will those transactions affect future margins and depreciation?
- Reconcile the increase in debt and financing costs with the expected cash contribution and returns from the Verizon, TIM and Nigeria site portfolios.
- Track the $92.5 million expected tax payment, and confirm the final amount and timing.
- Monitor foreign-exchange effects, tenant concentration, securitization DSCR thresholds, and the tightening leverage covenant limits described in the filing.
- Assess the effect of Series B preferred dividends and eventual conversion on common-stockholder earnings and share dilution.