American Tower Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the same periods in 2013. American Tower owns, operates and develops wireless and broadcast communications sites across the U.S. and international markets; recurring site leasing generated approximately 98% of first-half revenue. The company reported 69,200 sites, including 28,203 domestic and 40,619 international towers, plus 378 DAS networks. It operates as a REIT for U.S. federal tax purposes.
Financial performance and position
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1,031.5 | $808.8 | $2,015.5 | $1,611.6 |
| Operating income | $402.5 | $312.8 | $756.1 | $612.5 |
| Net income | $221.7 | $84.1 | $415.0 | $245.1 |
| Net income attributable to common stockholders | $230.1 | $99.8 | $432.6 | $271.2 |
| Diluted EPS | $0.58 | $0.25 | $1.08 | $0.68 |
| Adjusted EBITDA (non-GAAP) | $682.2 | $524.0 | $1,322.7 | $1,048.4 |
| NAREIT FFO (non-GAAP) | $444.0 | $255.9 | $858.4 | $583.7 |
| AFFO (non-GAAP) | $473.9 | $366.2 | $913.2 | $724.0 |
- Growth and margins: Q2 revenue increased 28% and first-half revenue 25%. Operating margin was approximately 39.0% in Q2 2014 versus 38.7% in Q2 2013; net margin was approximately 21.5% versus 10.4%. First-half operating margin was approximately 37.5% versus 38.0%; net margin was approximately 20.6% versus 15.2%.
- Drivers: Growth reflected organic leasing on existing sites and acquisitions, particularly MIPT, acquired in October 2013. Management attributed approximately $84 million of Q2 revenue growth and $169 million of first-half growth to MIPT. Domestic and international rental and management revenue grew 27% and 29% in Q2, respectively. International growth was reduced by currency translation, which lowered reported international revenue growth by approximately 11 percentage points in Q2 and 13 points in the first half.
- Cash flow: First-half operating cash flow was $1,072.4 million, versus $784.5 million. Investing cash outflow was $836.8 million, including $466.2 million for property, equipment and construction and $315.5 million for acquisitions. Financing cash outflow was $249.2 million. Cash and cash equivalents ended at $283.0 million, down from $293.6 million at year-end 2013.
- Debt and liquidity: Debt totaled approximately $14.0 billion at June 30, including $1.2 billion classified as current. Cash plus available borrowing capacity under revolving facilities totaled approximately $3.5 billion. Management reported covenant compliance. The annualized weighted average cost of borrowing declined to 3.99% in the first half from 4.70%; Q2 interest expense nevertheless rose 45% to $146.2 million as average debt increased to fund acquisitions. The company’s stated weighted average contractual interest rate was 4.07% at quarter-end.
- Distributions and equity: Common distributions declared were $0.34 per share for Q2, compared with $0.27 a year earlier. In May, the company issued 6 million shares of 5.25% mandatory convertible preferred stock, raising net proceeds of $582.9 million. The preferred shares are scheduled to convert in May 2017 into 0.9174–1.1468 common shares each, subject to terms; cumulative dividends must be paid or reserved before common dividends can be paid.
Material changes versus the prior comparable period
- Revenue, operating income and adjusted EBITDA increased substantially, reflecting acquisitions and continued leasing growth. Segment operating profit rose 26% in domestic rental and management and 30% internationally in Q2.
- Q2 net income more than doubled, helped by lower foreign-currency losses in earnings than in Q2 2013. Other expense was $16.5 million versus $141.7 million, including unrealized foreign-currency losses of $23.6 million versus $142.9 million. First-half other expense was $20.2 million versus $119.4 million.
- Interest expense and depreciation, amortization and accretion rose as the enlarged site portfolio and acquisition-related debt affected results. First-half depreciation, amortization and accretion increased 33% to $491.2 million.
- First-half capital spending and construction payments increased to $466.2 million from $280.6 million. The company completed the $385.9 million Richland acquisition and made other U.S. and international site acquisitions.
Outlook, risks, contingencies and unusual items
- Outlook: Management expects 2014 total capital expenditures of approximately $925 million–$1.025 billion, including construction of approximately 2,250–2,750 new sites. It cited approximately $23 billion of future non-cancellable tenant lease revenue based on leases in place and current exchange rates, before straight-line lease accounting. Management said operating cash and credit availability should fund distributions, preferred dividends, capital expenditures, debt service and pending acquisitions for the next 12 months. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Growth commentary: Management expects wireless data use, network densification, technology upgrades and new equipment on existing sites to support demand. It also noted that international growth is exposed to currency movements and market-specific conditions. Tenant cancellations and renegotiations represented less than 1.5% of rental and management revenue in the first half.
- Acquisitions and dispositions: The company agreed to acquire Brazilian tower operator BR Towers for approximately $990 million, subject to customary adjustments, and deposited $59 million in escrow. In July 2014, it agreed to acquire 154 U.S. sites for approximately $132.5 million. Panama operations and the third-party structural analysis business were classified as held-for-sale; the structural analysis business was sold in July. The Panama assets’ carrying value was $15.1 million, with no impairment recorded; a $4.1 million impairment was recorded for the structural analysis business.
- Legal and tax matters: TriStar litigation was settled in July 2014, with all pending actions dismissed with prejudice and no damages paid. The company received an Indian tax assessment of 22.6 billion rupees, approximately $369 million at the assessment date, related to pre-acquisition transactions. It contests the assessment, cites a seller indemnity, and recorded no liability. Unrecognized tax benefits that could affect the effective tax rate were approximately $37.7 million at June 30.
- Other risks: Key exposures include approximately $14 billion of debt and refinancing needs, tenant and carrier concentration, foreign exchange and political/regulatory risks, acquisition integration, REIT qualification and distribution requirements, ground-lease renewals, and competition or technology shifts that could reduce tower demand. Four tenants represented approximately 84% of domestic rental and management revenue; five represented approximately 58% internationally. NII’s parent had received a going-concern opinion; related subsidiaries accounted for 6% of consolidated revenue in the first half.
Important facts for investors to verify
- Debt maturities and refinancing: the filing classified $1.2 billion as current, including $600 million of 4.625% notes due April 2015 and GTP notes with anticipated repayment dates beginning February 2015. Confirm subsequent refinancing or repayment developments.
- Execution, funding and returns for the BR Towers and other announced acquisitions, as well as MIPT integration and related operating controls.
- Currency exposure: approximately 33% of first-half revenue and 40% of operating expenses were denominated in foreign currencies; management estimated a 10% adverse currency move could affect revenue, operating results and cash flows by approximately 3%.
- Status and potential outcome of the disputed Indian tax assessment, including the scope and enforceability of the seller indemnity.
- Preferred-stock dividend obligations and eventual conversion dilution, together with the company’s capacity to sustain common distributions while funding its investment program.
- Whether tenant concentration, securitization cash-trap tests and credit-facility covenants remain manageable as debt service, acquisitions and capital spending evolve.