American Tower Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. American Tower owns, operates and develops wireless and broadcast communications sites. Its portfolio comprised 56,506 sites, including towers and distributed antenna system networks. Rental and management generated approximately 97% of first-half revenue. The company has operated as a REIT since January 1, 2012.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $808.8 | $697.7 | $1,611.6 | $1,394.3 |
| Operating income | $312.8 | $270.5 | $612.5 | $544.9 |
| Net income | $84.1 | $33.7 | $245.1 | $244.0 |
| Net income attributable to American Tower | $99.8 | $48.2 | $271.2 | $269.5 |
| Diluted EPS attributable to American Tower | $0.25 | $0.12 | $0.68 | $0.68 |
| Adjusted EBITDA | $524.0 | $465.6 | $1,048.4 | $928.2 |
| NAREIT FFO | $255.9 | $197.9 | $583.7 | $551.6 |
| AFFO | $366.2 | $306.5 | $724.0 | $632.0 |
Net income attributable to American Tower exceeds consolidated net income because the statements add back losses attributable to noncontrolling interests. Adjusted EBITDA, NAREIT FFO and AFFO are non-GAAP measures.
- Q2 revenue growth: 16%, led by rental and management revenue growth of 16% overall: domestic up 10% and international up 28%. New sites, legacy-site leasing and escalations contributed; foreign currency translation reduced international growth.
- First-half revenue growth: 16%; domestic rental and management rose 8%, international rose 31%, and network development services rose 60%. Management attributed much of the increase to organic growth and sites acquired or constructed since the prior-year period.
- Operating profitability: Operating income increased 16% in Q2 and 12% in the first half. Q2 operating margin was approximately 38.7%, versus 38.8% a year earlier. Adjusted EBITDA grew 13% in both periods; first-half AFFO rose 15% and NAREIT FFO rose 6%.
- Cash flow: First-half operating cash flow was $784.5, versus $762.9. Investing activities used $601.8, including $280.6 for property, equipment and construction and $311.2 for acquisitions. Financing activities used $94.9; cash increased $79.8 to $448.4.
- Liquidity and debt: Total debt was approximately $8.9 billion at June 30; cash was $448.4 and reported borrowing availability under credit facilities was approximately $2.17 billion, net of letters of credit. Current assets were $946.1 and current liabilities $781.0. Long-term obligations had an estimated fair value of $9.1 billion versus a carrying value of $8.9 billion.
- Margins and costs: Q2 rental and management segment gross margin rose 14% overall (domestic 11%, international 25%). SG&A increased 30% in Q2 and 28% in the first half, including growth-related, international expansion and stock-compensation costs. Depreciation, amortization and accretion increased 15% in the first half.
- Distributions and repurchases: First-half distributions declared were $0.53 per share, approximately $209.5 million. The company repurchased $74.6 million of shares in the first half.
Material changes, outlook and key commentary
- Refinancing: In March, the company issued $1.8 billion of secured tower revenue securities at an effective weighted-average rate of 2.648%, using proceeds to repay $1.75 billion of older securitized debt. The refinancing generated a $35.3 million early-retirement loss. It also issued $1.0 billion of 3.50% senior notes due 2023. In June, it replaced the 2011 revolving facility with a $1.5 billion facility due 2018, with two optional one-year extensions.
- Subsequent facility repayment: After quarter-end, the company borrowed $322 million under the new facility to repay the outstanding balance on the 2012 credit facility. At June 30, $322 million remained outstanding on the 2012 facility; the new facility was undrawn at that date.
- Acquisitions and investment: First-half acquisitions included 883 Axtel sites in Mexico for $248.5 million, plus other international and U.S. sites. Management expected 2013 capital expenditures of approximately $525–$625 million, including construction of approximately 1,750–2,250 new sites.
- Management outlook: Management expected operating cash flow over the next 12 months to fund REIT distributions, capital expenditures and debt service; it stated that credit-facility capacity could support needs if cash flow proved insufficient. The filing provides no specific earnings or revenue guidance.
- Foreign exchange and unusual items: Other expense included unrealized foreign-currency losses of $142.9 million in Q2 and $120.8 million in the first half, mainly on intercompany and other balances. First-half other comprehensive loss included a $95.9 million foreign-currency translation loss. These effects materially influenced reported earnings and equity. A one-time tax refund and a change in the tax classification of Mexican operations were also noted.
- Debt restrictions: Credit agreements impose leverage, coverage and other covenants; the company reported compliance at June 30. The securitized towers’ cash flows are subject to reserve and debt-service coverage tests. A sustained DSCR at or below 1.30x may trap excess cash; at or below 1.15x, excess cash may be applied to principal. DSCR was 8.60x at June 30.
- Risks and contingencies: Key risks include reliance on a limited number of tenants, foreign currency and country exposures, leverage and refinancing needs, REIT qualification and distribution requirements, technology or network-sharing changes, ground-lease rights, and regulation. The company disclosed ongoing TriStar litigation seeking injunctive relief and unspecified damages; management said other pending matters were not expected to be material. An Indian tax authority notice relating to pre-acquisition transfer pricing had not resulted in a formal assessment; the seller has an indemnification obligation.
Important facts for investors to verify
- How much reported growth reflects recurring legacy-site leasing versus acquisitions, new sites and foreign-exchange movements.
- The effect of large unrealized currency losses on reported earnings, and the company’s exposure to intercompany balances denominated in foreign currencies.
- Debt maturities, borrowing availability and covenant headroom, including securitization cash-trap and amortization triggers.
- Whether projected capital spending and distributions can be funded while maintaining liquidity and REIT compliance.
- Tenant concentration, lease renewal and cancellation trends, and developments in the TriStar litigation and tax matters.