American Tower Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; compared with the same 2013 periods. Financial statement amounts below are in U.S. dollars. The company is a global owner, operator and developer of wireless and broadcast communications sites, and has operated as a U.S. REIT since 2012.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total operating revenue | $1,038.2 million | $807.9 million | $3,053.7 million | $2,419.4 million |
| Operating income | $384.8 million | $308.9 million | $1,140.9 million | $921.4 million |
| Net income | $206.6 million | $163.2 million | $621.6 million | $408.3 million |
| Net income attributable to common stockholders | $199.9 million | $180.1 million | $632.4 million | $451.4 million |
| Diluted earnings per common share | $0.50 | $0.45 | $1.58 | $1.13 |
| Adjusted EBITDA (non-GAAP) | $666.0 million | $527.9 million | $1,988.7 million | $1,576.2 million |
| NAREIT FFO (non-GAAP) | $415.5 million | $340.9 million | $1,273.9 million | $924.6 million |
| AFFO (non-GAAP) | $459.8 million | $367.3 million | $1,373.0 million | $1,091.4 million |
- Q3 revenue increased 29%; nine-month revenue increased 26%. Rental and management represented approximately 97% of nine-month revenue.
- Calculated GAAP operating margin was approximately 37.1% in Q3 2014 versus 38.2% in Q3 2013, and 37.4% for the first nine months of 2014 versus 38.1% in 2013.
- Cash provided by operating activities was $1,569.6 million for the first nine months, up from $1,144.4 million. Investing activities used $1,103.4 million, including $723.4 million for property, equipment and construction and $324.9 million for acquisitions. Financing activities used $461.8 million.
- At September 30, cash and cash equivalents were $295.6 million; restricted cash was $135.2 million. Total debt obligations, including current maturities, were approximately $13.9 billion, with approximately $1.0 billion current. Total equity was $4.2 billion.
- Reported total liquidity was approximately $3.4 billion, comprising $0.3 billion of cash and borrowing capacity of approximately $3.1 billion, net of letters of credit. Management stated operating cash flow and credit capacity should cover expected distributions, preferred dividends, capital spending, debt service and pending acquisitions over the next 12 months.
- Interest expense rose 35% in Q3 and 36% for the nine-month period, mainly because average debt increased; lower borrowing costs partly offset the increase. The weighted-average contractual interest rate was 4.09% at quarter-end.
Changes versus the prior comparable period
- Growth reflected both organic leasing and acquisitions. Management attributed approximately $86.9 million of Q3 revenue growth and $255.9 million of nine-month revenue growth to MIPT, acquired in October 2013. The company reported approximately 13,825 sites constructed or acquired since July 2013 and approximately 15,770 since January 2013.
- Legacy-site revenue grew approximately 8% in domestic operations and 17% internationally in Q3; nine-month growth was approximately 9% and 16%, respectively. New tenant leases and amendments were the main organic drivers.
- International revenue growth was reduced by foreign currency translation: approximately 7% in Q3 and 11% for the nine-month period. Nine-month operating results also reflected $62.6 million of unrealized foreign-currency losses in other expense, versus $151.7 million in 2013.
- Depreciation, amortization and accretion increased 35% in Q3 and 33% year to date, primarily due to acquired and constructed sites. Nine-month interest expense increased despite lower average borrowing costs.
- Common distributions declared increased to $0.36 per share in Q3 from $0.28 a year earlier. The company also issued $582.9 million net proceeds of 5.25% mandatory convertible preferred stock in May 2014.
Outlook, commentary and material risks
- Capital spending: Management expected 2014 total capital expenditures of approximately $950 million to $1.0 billion, including construction of approximately 2,500–3,000 new sites. The filing also describes continued selective acquisitions, site construction and land purchases as capital allocation priorities.
- Business outlook: Management cited rising wireless data usage, network densification, technology upgrades and tenant additions as potential demand drivers. It reported approximately $23 billion of future non-cancellable tenant lease revenue based on leases in place and exchange rates at September 30, excluding straight-line accounting effects. This is not earnings guidance.
- Debt and refinancing: A $1.5 billion revolving credit facility was amended and extended to January 2020; the separate $2.0 billion multi-currency facility matures in 2018. The $600 million 4.625% notes and approximately $287.8 million Mexican Loan mature in 2015. The company reported compliance with credit-facility covenants at quarter-end. October 2014 refinancing and borrowing activity occurred after the reporting date.
- Acquisitions: The company signed an agreement to acquire Brazil’s BR Towers for an estimated 2.18 billion reais (approximately $889.9 million at the September 30 exchange rate), subject to customary adjustments and regulatory approval. The filing also describes a U.S. site acquisition completed in October.
- Currency exposure: Approximately 33% of nine-month revenue was denominated in foreign currencies. The company recorded $234.9 million of foreign-currency translation loss in other comprehensive loss for the nine months. Management’s sensitivity analysis estimated that a 10% adverse currency movement would change revenue, operating results and cash flows by approximately 3%.
- Contingencies: An Indian tax assessment of 22.6 billion rupees (approximately $369 million at assessment) related to pre-acquisition transactions at ETIPL is being challenged. The company recorded no liability, citing its view that the assessment is unenforceable and the seller’s indemnification obligation. Potential acquisition-related contingent consideration was estimated at up to $39 million.
- Other notable items: NII, the parent of certain operating subsidiaries in Brazil, Chile and Mexico, filed for Chapter 11; those subsidiaries were not included in the filing and represented approximately 6% of company revenue for the nine months. The company reported no impairment indicators for its exposure. The TriStar litigation was settled and dismissed without damages. No long-lived-asset impairment charges were recorded in the nine months; a $2.2 million net impairment charge was recorded on asset sales.
- Principal risks: Tenant concentration and tenant financial health; carrier consolidation, network sharing and technology changes; high leverage, refinancing and covenant constraints; foreign currency, political and regulatory risks; REIT qualification and distribution requirements; integration and execution of acquisitions; and land rights, environmental matters and natural disasters.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to MIPT and other acquired or newly built sites, and how foreign-exchange movements affect underlying trends.
- The 2015 maturities, refinancing completed after quarter-end, and current borrowing availability and covenant headroom.
- The terms and potential dilution from mandatory conversion of the 5.25% preferred stock, along with preferred dividend obligations and common distribution policy.
- BR Towers transaction approval, final purchase price and funding; also integration progress and returns on recent acquisitions.
- Developments in the Indian tax assessment and indemnification, NII-related tenant exposure, and other contingent liabilities.
- Tenant concentration: four tenants generated approximately 84% of domestic rental and management revenue, and five generated approximately 57% of international segment revenue for the nine months.
Adjusted EBITDA, NAREIT FFO and AFFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.