Business context and reporting period
American Tower Corporation (ATC), a REIT and global owner and operator of multitenant communications sites, filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Rental and management operations generated approximately 98% of quarterly revenue. On March 27, ATC completed the Verizon transaction, obtaining rights to lease, acquire or manage 11,448 U.S. communications sites for approximately $5.05 billion.
Financial results and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $1.079 billion | $984.1 million |
| Operating income | $420.0 million | $353.6 million |
| Net income | $195.5 million | $193.3 million |
| Net income attributable to common stockholders | $183.5 million | $202.5 million |
| Diluted EPS | $0.45 | $0.51 |
| Operating cash flow | $509.9 million | $476.6 million |
| Adjusted EBITDA | $723.7 million | $640.5 million |
| NAREIT FFO | $411.0 million | $414.4 million |
| AFFO | $513.6 million | $439.3 million |
- Operating margin was approximately 38.9%, compared with 35.9% a year earlier. Net margin was approximately 18.1%, versus 19.6%.
- Total assets were $25.93 billion at March 31, up from $21.33 billion at year-end, largely reflecting the Verizon transaction. Cash and cash equivalents were $323.4 million.
- Total debt, including current maturities, was approximately $15.72 billion; current debt was $789.2 million. Debt fair value was reported as $16.3 billion.
- Management reported approximately $2.7 billion of liquidity at quarter-end, including cash and available revolving-credit capacity net of letters of credit. It borrowed an additional $1.6 billion under a credit facility in April.
- Investing cash outflow was $5.25 billion, principally the $5.06 billion Verizon payment; financing cash inflow was $4.76 billion. Common distributions declared were $0.42 per share, up from $0.32.
Material changes versus the prior comparable period
- Revenue rose 10% year over year. Domestic rental and management revenue increased 13%; international revenue increased 6%, including a 16% adverse currency translation impact. Network development services revenue declined 29%.
- Management attributed domestic growth to legacy-site revenue growth of approximately 9% and growth from new sites of approximately 4%. International legacy sites grew approximately 10%, while new sites contributed approximately 12%, offset by currency headwinds.
- Operating income rose 19%, and Adjusted EBITDA increased 13%. Net income increased 1%, but common-stockholder income fell 9% and diluted EPS declined from $0.51 to $0.45, reflecting preferred dividends, share-count growth and other expense.
- Other expense increased to $54.5 million, primarily due to $55.5 million of unrealized foreign-currency losses, compared with $3.7 million of other expense in Q1 2014. Currency translation also drove a $433.5 million other comprehensive loss.
- Debt and equity financing supported the Verizon acquisition: ATC raised approximately $2.44 billion net from common stock and $1.34 billion net from Series B mandatory convertible preferred stock. Long-term obligations increased from year-end.
Outlook, risks, contingencies and unusual items
- Management expected 2015 capital expenditures of $850 million to $950 million, including construction of approximately 2,750 to 3,250 new sites. It stated that expected 2015 operating cash flow and expanded borrowing capacity should cover distributions, capital spending, debt service and signed acquisitions.
- Management cited continued wireless-data growth, network upgrades, densification and additional equipment on existing sites as demand drivers. It reported approximately $29 billion of expected future non-cancellable tenant lease revenue, before straight-line lease accounting.
- The Verizon sites included approximately $3.0 billion of estimated future minimum rental receipts under Verizon and existing tenant leases. ATC also assumed approximately $2.2 billion of future minimum ground-lease payments. The leased and subleased sites carry an aggregate purchase option price of approximately $5.0 billion.
- ATC reported compliance with credit-facility covenants at March 31. The permitted total-debt-to-Adjusted-EBITDA ceiling was temporarily 7.25x for Q1 and Q2 2015, stepping down to 7.00x for Q3 and Q4 and 6.00x thereafter. Management warned that covenant breaches could restrict borrowing or accelerate repayment.
- Foreign-exchange exposure is significant: 32% of revenue and 39% of operating expenses were foreign-currency denominated. A hypothetical 10% adverse currency move was estimated to affect revenue, operating results and cash flows by approximately 3%.
- ATC redeemed its 4.625% notes in February, recording a $3.7 million loss. After quarter-end, it redeemed the 7.000% notes for approximately $571.7 million and expected a further $74.3 million retirement loss. It also acquired 4,176 TIM sites in Brazil in April for approximately $644.3 million.
- An Indian tax assessment of approximately $369 million was challenged; the tax tribunal ruled in ATC’s favor on April 15, 2015, but the tax authority could appeal. Management said pending litigation was not expected to materially affect financial position, results or liquidity. The filing reported no material change in risk factors.
Most important facts for investors to verify
- Whether the Verizon sites deliver the expected tenant revenue and returns relative to the $5.05 billion outlay, continuing ground-lease costs and future purchase options.
- Post-acquisition leverage, available liquidity and compliance with the stepped-down debt covenants, particularly after April borrowings and the TIM acquisition.
- Underlying organic revenue and margin trends after separating acquisitions and foreign-currency effects; also assess the quality of reported growth in Adjusted EBITDA and AFFO, which are non-GAAP measures.
- The effects of Series B preferred dividends and potential conversion-related dilution on common-stockholder earnings and per-share results.
- Developments in the Indian tax dispute, foreign-currency exposure and the expected $74.3 million loss from the post-quarter 7.000% note redemption.