American Tower Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. American Tower is a global REIT whose primary business is leasing multitenant communications sites; figures below are unaudited and in U.S. dollars unless noted.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,741.8 million | $1,616.2 million | +8% |
| Operating income | $402.9 million | $531.4 million | -24% |
| Operating margin | 23.1% | 32.9% | Down 9.8 percentage points |
| Net income | $280.3 million | $307.4 million | -9% |
| Net income attributable to common stockholders | $275.8 million | $289.3 million | -5% |
| Diluted earnings per share | $0.63 | $0.67 | -6% |
| Adjusted EBITDA (non-GAAP) | $1,062.4 million | $997.6 million | +6% |
| Nareit FFO attributable to common stockholders (non-GAAP) | $747.6 million | $634.3 million | +18% |
| AFFO attributable to common stockholders (non-GAAP) | $759.3 million | $680.5 million | +12% |
Property revenue was $1,710.4 million, up 7%; services revenue was $31.4 million, up 42%. Regional property revenue changes were U.S. +4%, Asia -1%, EMEA +16%, and Latin America +20%. Revenue growth reflected leasing activity, escalations, acquisitions, and currency effects; India carrier consolidation and churn weighed on Asia.
Operating cash flow was $791.8 million, versus $678.2 million. Investing used $1,280.6 million, including $673.4 million for acquisitions; financing provided $817.3 million. Cash, cash equivalents and restricted cash totaled $1,278.9 million at quarter-end, up from $954.9 million at year-end. Cash and cash equivalents alone were $1,125.4 million.
Long-term obligations totaled $21.4 billion, including $2.8 billion classified as current; year-end obligations were $20.2 billion. The current amount primarily includes a $1.5 billion term loan due March 2019, India debt, and $999.9 million of senior notes due 2019. Available liquidity was $3.62 billion, comprising $2.50 billion available under credit facilities and $1.13 billion cash and cash equivalents. The company reported compliance with its debt covenants.
Common distributions declared were $0.75 per share for the quarter, compared with $0.62 in Q1 2017. The Series B mandatory convertible preferred stock converted into approximately 12.0 million common shares during the quarter.
Material changes and unusual items
- Other operating expenses rose to $167.8 million from $6.2 million, principally reflecting $147.4 million of Aircel-related impairment charges in India: $40.1 million for tower and network assets and $107.3 million for tenant-related intangibles. The prior-year quarter included a $21.5 million refund of acquisition costs.
- Asia segment operating profit fell 33% to $70.9 million, reflecting churn, lower gross margin, and higher SG&A. Asia SG&A included a $23.0 million increase in bad-debt expense, including reserves related to Aircel.
- Interest expense increased 9% to $199.6 million, partly due to higher average debt. This was more than offset in total other expense by the absence of the prior-year $55.4 million debt-retirement loss.
- The income tax line was a $31.1 million benefit, versus a $26.8 million provision, reflecting the tax effect of impairment charges and a one-time Asia merger-related benefit.
- Adoption of the new revenue standard increased Q1 revenue by $2.6 million and reduced opening retained earnings by $38.4 million; prior-year results were not restated.
Outlook, risks and commitments
- Management expects 2018 India carrier consolidation-driven churn to reduce consolidated property revenue by approximately $190 million, including $70 million of pass-through revenue, and operating profit by approximately $115 million. In Q1, the estimated impacts were $19.8 million on property revenue and $14.4 million on gross margin and operating profit.
- Management expects 2018 capital expenditures of $850 million to $950 million, including construction of approximately 2,500 to 3,500 communications sites. It stated that operating cash flow and credit availability should be sufficient for distributions, capital expenditures, debt service, and signed acquisitions.
- No full-year revenue or earnings guidance is stated in the provided filing text. Management cites wireless data growth, network expansion and densification, and tenant colocations as longer-term demand drivers, while warning of elevated near-term India churn.
- India goodwill was $1,073.1 million. The India reporting unit’s estimated fair value exceeded carrying value by only about $156.5 million, or 4%; management said a 7% revenue reduction, 35-basis-point WACC increase, or 16% terminal growth reduction, individually, would eliminate that headroom.
- Aircel’s bankruptcy outcome remained uncertain. Tata Teleservices’ planned exit was being monitored; its tenant-related intangible asset had a $417.0 million carrying value, with no impairment recorded in Q1.
- Variable-rate debt and foreign-currency exposure remain risks. The company estimated that a 10% increase in current interest rates would add $4.8 million of quarterly interest expense; a 10% adverse currency move on specified unsettled balances could cause $90.2 million of unrealized losses for the quarter.
- Future minimum tenant lease receipts were approximately $32 billion. The Verizon transaction includes an approximately $5.0 billion aggregate purchase option for leased and subleased sites. Management reported no pending litigation expected to materially affect financial position, results, or liquidity.
- A planned acquisition of approximately 9,900 Idea Cellular sites in India, for cash consideration of about $611 million at signing, remained subject to regulatory approval and was expected to close in Q2 2018. A Kenya agreement for up to 723 sites was signed after quarter-end and was expected to close in the second half of 2018, subject to conditions.
Important facts for investors to verify
- Track India carrier consolidation, tenant churn, collections and further impairment exposure against management’s 2018 estimates.
- Review refinancing and repayment plans for the $1.5 billion March 2019 term loan and the $999.9 million 2019 senior notes, as well as total debt and interest-rate exposure.
- Compare actual capital spending, acquisition closings and funding needs with the $850 million–$950 million capex outlook and stated liquidity.
- Assess the assumptions behind India reporting-unit valuation and the sensitivity of goodwill to revenue, discount-rate and terminal-growth changes.
- Consider the impact of the Series B conversion on common-share count and per-share measures, alongside the declared $0.75 distribution.