American Tower Corporation — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the same 2014 periods. American Tower is a global owner and operator of multitenant communications sites and a REIT. At quarter-end, it reported 99,600 sites, including 40,066 domestic towers, 59,069 international towers and 465 DAS networks. Rental and management accounted for about 98% of nine-month revenue.
Financial performance and position
Unless otherwise stated, amounts below are U.S. dollars.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,237.9m | $1,038.2m | $3,491.5m | $3,053.7m |
| Operating income | $400.9m | $384.8m | $1,210.7m | $1,140.9m |
| Net income | $97.7m | $206.6m | $450.4m | $621.6m |
| Net income attributable to common stockholders | $76.2m | $199.9m | $389.0m | $632.4m |
| Diluted EPS | $0.18 | $0.50 | $0.92 | $1.58 |
| Adjusted EBITDA (non-GAAP) | $779.0m | $666.0m | $2,265.0m | $1,988.7m |
| NAREIT FFO (non-GAAP) | $370.2m | $415.5m | $1,203.7m | $1,273.9m |
| AFFO (non-GAAP; before MIPT one-time cash tax charge) | $558.1m | $459.8m | $1,608.6m | $1,373.0m |
- Revenue and operating trends: Q3 revenue rose 19%; nine-month revenue rose 14%. Rental and management revenue increased 20% and 15%, respectively. Network development services revenue fell 7% and 19%. Q3 domestic and international rental revenue grew 22% and 16%; nine-month growth was 19% and 8%.
- Margins and expenses: Rental and management segment gross margin increased 16% in Q3 and 14% year to date. Consolidated operating income increased, but depreciation, amortization and accretion rose 37% in Q3 and 26% year to date, reflecting acquired and newly developed sites. Interest expense increased 5% in Q3 and 3% year to date.
- Cash flow: Nine-month operating cash flow was $1,543.6m versus $1,569.6m. Investing used $7,204.3m, principally for Verizon, acquisitions and capital spending; financing provided $5,632.4m. Cash and equivalents were $287.4m at September 30, down from $313.5m at year-end 2014.
- Debt and liquidity: Total debt was approximately $17.0bn, including $45.9m current maturities. Cash, plus net available capacity under credit facilities, totaled $1,966.7m. The company reported compliance with debt covenants; the total leverage covenant limit was 7.0x through year-end 2015 and 6.0x thereafter.
- Other balance-sheet items: Total assets were $26.9bn versus $21.3bn at December 31, 2014; total equity was $6.7bn versus $4.1bn. Restricted cash was $137.9m. Common distributions declared were $0.46 per share for Q3, versus $0.36 a year earlier.
Material changes versus the prior comparable period
- The Verizon transaction added rights to lease, acquire or manage 11,448 U.S. sites for approximately $5.053bn; it contributed an estimated $97.4m of Q3 revenue and $198.3m of nine-month revenue growth. Verizon tenant leases had an initial ten-year non-cancellable term.
- The company acquired 4,699 sites in Nigeria from Airtel in July for approximately $1.109bn, and acquired 5,301 sites from TIM in Brazil in two closings for approximately $775.2m total. Acquisitions and the Verizon transaction materially enlarged the asset base and increased depreciation and amortization.
- International revenue growth was substantially offset by currency translation: the reported impact was approximately negative 31% in Q3 and negative 23% year to date for international rental revenue. Q3 also included $69.1m of foreign-currency losses in other expense; nine-month losses there were $121.9m. Foreign currency translation reduced other comprehensive income by $1,077.8m year to date.
- Net income declined 53% in Q3 and 28% year to date, despite higher revenue and Adjusted EBITDA. The company cited higher depreciation and amortization, taxes, foreign-exchange and other expenses, preferred dividends, and, year to date, a $78.8m loss on debt retirements.
Outlook, commentary and risks
- Management expects continued wireless-data growth, network densification, spectrum deployment and carrier upgrades to support leasing demand. It cited contractual escalators and new tenant additions as sources of organic growth. Lease cancellations and renegotiations represented about 2% of rental and management revenue year to date.
- Management estimated approximately $30bn of future non-cancellable tenant lease revenue based on exchange rates and leases in place at September 30, 2015. This is not a revenue forecast and excludes the impact of straight-line lease accounting.
- 2015 capital expenditures were expected to total $750m–$800m, including construction of approximately 2,750–3,250 sites. Management believed operating cash generation and credit availability would be sufficient for distributions, capital expenditures and debt service.
- Q3 income taxes included a one-time $93.0m cash tax charge and a $5.4m deferred tax benefit following an election ending MIPT’s separate REIT status. The company’s reported effective tax rate was 49.1% for Q3 versus 4.8% a year earlier.
- On October 21, 2015, the company agreed to acquire a controlling 51% interest in Viom Networks in India for approximately INR 76bn (estimated $1.157bn), subject to conditions including regulatory approval; closing was expected in mid-2016. On October 28, it extended maturities on its revolving facilities and term loan.
- Key exposures include foreign-exchange movements, variable interest rates, reliance on a relatively small number of tenants, leverage and refinancing needs, and restrictions on cash flows from securitized sites. A 10% adverse currency move was estimated to affect revenue, operating results and cash flows by about 3%; a 10% adverse rate movement was estimated to add $6.8m of interest expense for the nine-month period.
- The company disclosed an Indian tax assessment of INR 22.6bn (about $369m at the assessment date); an appellate tribunal ruled in the company’s favor in April 2015. Management stated that pending litigation was not expected to materially affect financial position, results or liquidity. The filing also discusses the risk of losing REIT qualification and potential tax consequences related to open years for MIPT.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to Verizon and other acquisitions, and how currency movements affect international results.
- Acquisition integration, site-level performance and remaining purchase-price obligations, including the Airtel amount due by January 15, 2016.
- Debt levels, covenant headroom, refinancing needs and whether cash generation supports distributions and the stated capital-spending plan.
- The recurring impact of the MIPT tax election, the unresolved tax matters and continued REIT qualification.
- The expected funding, regulatory approval and dilution implications of the proposed Viom transaction and mandatory convertible preferred stock.
- Reconciliations and assumptions underlying Adjusted EBITDA, NAREIT FFO and AFFO, which are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.