American Tower Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with the three months ended March 31, 2013. American Tower owns, operates and develops wireless and broadcast communications sites and qualifies as a U.S. REIT. Rental and management operations generated about 98% of quarterly revenue. The portfolio included 68,074 sites at quarter-end.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $984.1 million | $802.7 million | +23% |
| Operating income | $353.6 million | $299.7 million | +18% |
| Net income | $193.3 million | $160.9 million | +20% |
| Net income attributable to American Tower | $202.5 million | $171.4 million | +18% |
| Diluted earnings per share | $0.51 | $0.43 | +$0.08 |
| Cash provided by operating activities | $476.6 million | $394.0 million | +$82.5 million |
| Adjusted EBITDA | $640.5 million | $524.4 million | +22% |
| NAREIT FFO | $414.4 million | $327.8 million | +26% |
| AFFO | $439.3 million | $357.8 million | +23% |
Operating margin was approximately 35.9%, versus 37.3% a year earlier. The increase in operating income was less than revenue growth, in part as operating expenses rose 25% and depreciation, amortization and accretion rose 32% to $245.8 million. Interest expense increased 28% to $143.3 million. These non-GAAP measures are defined by the company and should not be treated as substitutes for GAAP results or cash flow.
Cash, debt and liquidity
- Cash and cash equivalents were $333.4 million at March 31, compared with $293.6 million at December 31, 2013. Total assets were $20.4 billion.
- Total debt was approximately $14.3 billion. Long-term obligations, including the current portion, had a $14.3 billion carrying value and $14.7 billion estimated fair value.
- Management reported approximately $3.2 billion of liquidity, including cash and $2.8 billion of available capacity under revolving credit facilities, net of letters of credit. The 2013 Credit Facility had $1.1 billion drawn; the 2012 and short-term facilities had no borrowings at quarter-end.
- Current assets of $1.04 billion were below current liabilities of $1.28 billion. Current liabilities included $325.2 million of current long-term obligations.
- Investing activities used $291.1 million, including $213.9 million for property, equipment and construction and $62.8 million for acquisitions. Financing activities used $152.9 million. Cash increased by $39.9 million during the quarter.
- In January, the company issued $750 million of reopened senior notes: $250 million of 3.40% notes due 2019 and $500 million of 5.00% notes due 2024. Proceeds and cash were used principally to repay revolving-credit borrowings.
Changes and drivers versus prior year
- Rental and management revenue increased 23% domestically and 24% internationally. Growth reflected legacy-site leasing and rent escalations, acquired and constructed sites, and the 2013 MIPT acquisition. About $85 million of the revenue increase was attributable to MIPT.
- Legacy-site revenue growth was approximately 9% domestic and 16% international. International revenue growth was reduced by an approximately 15% adverse foreign-currency translation effect.
- Network development services revenue decreased 5% to $24.0 million, primarily due to fewer zoning, permitting and site-acquisition projects for a major customer.
- Adjusted EBITDA, NAREIT FFO and AFFO increased, while cash interest paid rose to $154.5 million from $95.3 million. The prior-year comparison included a $35.3 million loss on retirement of debt; Q1 2014 recorded $0.2 million.
Outlook, risks and notable items
- Management expects 2014 capital expenditures of approximately $850 million to $950 million, including construction of roughly 2,250 to 2,750 new sites. It stated that expected operating cash flow should cover distributions, capital expenditures and debt service for the next 12 months; additional borrowing capacity may be used if needed.
- The company reported approximately $23 billion of future non-cancellable tenant lease revenue based on leases in place and then-current exchange rates, excluding the effect of straight-line lease accounting. It cited wireless data growth, network densification and carrier equipment upgrades as demand drivers.
- Foreign exchange remains material: translation reduced international revenue growth, and the company recorded $2.0 million of unrealized FX losses in earnings, versus $22.1 million of unrealized FX gains in Q1 2013. Management’s sensitivity analysis estimated that a hypothetical 10% adverse currency move would cause revenue, operating results and cash flows to fluctuate by approximately 3%.
- Tenant concentration is significant: four tenants represented about 85% of domestic rental and management revenue, and five represented about 58% of international segment revenue. NII-related subsidiaries represented 6% of consolidated revenue; the filing notes NII’s going-concern opinion.
- A tax authority in India assessed 22.6 billion rupees, approximately $369 million at the assessment date, relating to pre-acquisition transactions of ETIPL. The company disputes the assessment, cites a seller indemnity, and recorded no liability.
- TriStar litigation continues: a court allowed both parties’ misrepresentation claims to proceed to trial and dismissed certain other claims. The company also identifies leverage, covenant compliance, currency exposure, REIT qualification, tenant credit, regulation, competition, land rights, acquisition integration and technology changes as material risks.
- After quarter-end, the company acquired a U.S. portfolio of 60 communications sites and four property interests for approximately $385.9 million, including assumed debt. It also disclosed a $165 million credit-facility draw on April 1 to fund a U.S. acquisition.
- The company was in compliance with its credit-facility financial covenants at quarter-end. It reported a 10.11x debt-service coverage ratio for the securitized borrowers; specified lower ratios could trap cash or trigger amortization, reducing funds available to the parent.
Important facts for investors to verify
- How much of reported growth reflects MIPT and other acquired sites versus organic leasing, and how foreign exchange affects comparable international performance.
- Debt maturities and refinancing needs, including the Colombian bridge loans due June 22, 2014, the short-term facility’s September 2014 maturity, and anticipated repayments of acquired securitized debt.
- Whether operating cash flow and available facilities remain sufficient for the stated capital-spending plan, debt service and REIT distributions.
- Developments in the disputed Indian tax assessment and TriStar litigation, and any changes to contingent consideration or acquisition accounting.
- Tenant concentration, NII credit exposure, foreign-exchange sensitivity and securitization coverage ratios that could restrict cash distributions from subsidiaries.