AMERICAN TOWER CORP quarterly report, Q3 FY2018

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Business context and reporting period

American Tower Corporation (ATC), a REIT that owns, operates and develops multitenant communications infrastructure, filed this unaudited Form 10-Q for the quarter ended September 30, 2018. Property operations generated 98% of revenue for the first nine months; services operations primarily provide U.S. tower-related services. Results are compared with the same 2017 periods.

Financial performance and position

  • Revenue: Third-quarter revenue was $1,785.5 million, up 6%; nine-month revenue was $5,308.2 million, up 7%. Property revenue rose 6% and 7%, respectively. Services revenue increased 34% and 35%.
  • Profit: Third-quarter operating income was $567.2 million versus $561.1 million; net income attributable to common stockholders was $366.9 million versus $298.4 million. Diluted EPS was $0.83 versus $0.69. For nine months, operating income was $1,516.1 million versus $1,669.4 million, net income attributable to common stockholders was $949.4 million versus $931.9 million, and diluted EPS was $2.15 versus $2.16.
  • Margins and operating measures: Property and services segment gross margin totaled $1,230.4 million in Q3, up 6%, and $3,673.9 million for nine months, up 7%. Asia property gross margin fell 3% in Q3 and 4% year to date. Adjusted EBITDA, a non-GAAP measure, increased 5% to $1,095.3 million in Q3 and 6% to $3,241.8 million for nine months. AFFO attributable to common stockholders increased 11% to $779.6 million and 12% to $2,313.6 million, respectively.
  • Cash flow: Nine-month operating cash flow was $2,485.1 million, up from $2,136.6 million. Investing used $2,055.1 million, including $1,437.8 million for acquisitions; financing used $34.3 million. Cash and restricted cash increased $338.4 million to $1,293.3 million.
  • Liquidity and debt: Cash and cash equivalents were $1,026.5 million; reported total liquidity was $3,911.8 million, including $2,885.3 million available under credit facilities. Total outstanding principal debt was approximately $21.4 billion, including $2.8 billion classified as current. Total liabilities were $26,193.7 million.
  • Distributions: Common distributions declared were $2.31 per share for the first nine months, versus $1.92 in 2017. The quarterly distribution rose to $0.79 per share.

Material changes versus prior comparable period

  • Revenue growth reflected leasing activity, contractual escalations and acquisitions, partly offset by currency translation and elevated tenant churn in India. Nine-month revenue growth was 7%, while operating income declined 9%.
  • Nine-month net income declined 6%, principally due to higher impairment charges, depreciation and interest expense; the prior-year period also included a $69.9 million debt-retirement loss. Higher operating profit and a tax benefit partly offset these items.
  • Other operating expenses rose to $269.6 million for nine months, primarily reflecting India-related impairments and losses on asset sales or disposals. Stock-based compensation rose to $111.3 million from $86.4 million, including accelerated expense tied to award amendments.
  • Interest expense increased to $616.7 million for nine months from $559.5 million, in part due to higher average debt. Cash from operations increased, while acquisition spending rose materially year over year.
  • Foreign currency translation reduced equity: accumulated other comprehensive loss widened to $2,696.3 million from $1,978.3 million at year-end 2017. The nine-month foreign currency translation loss was $957.1 million.

Outlook, commentary, risks and unusual items

  • India churn and Tata settlement: For the first nine months, India carrier consolidation reduced consolidated property revenue by $109.8 million, including $40.5 million of pass-through revenue, and reduced gross margin and operating profit by $66.0 million. ATC estimated full-year 2018 India churn would reduce property revenue by about $200 million and operating profit by about $135 million. A subsequent Tata agreement provides for an approximately $320 million one-time payment; management estimated the settlement’s Q4 contribution at $300 million to property revenue, $300 million to Adjusted EBITDA and $250 million to AFFO, with no material net-income impact. Management estimated churn and settlement together would increase full-year 2018 property revenue by $120 million and operating profit by $185 million. A further approximately $100 million of settlement-related churn was expected in 2019. The agreement also entails an estimated 80% reduction in contracted tenant revenue from the terminated leases.
  • Impairments and asset sensitivity: Aircel’s bankruptcy and other India carrier churn led to $176.9 million of impairment charges in the nine-month period. India reporting-unit goodwill was $1,006.7 million; estimated fair value exceeded carrying value by only about $129.8 million, or 3%. Management said individually reasonable adverse changes in certain valuation assumptions could eliminate that excess.
  • Capital spending and acquisitions: ATC expected 2018 capital expenditures of $850–$950 million, including construction of approximately 2,000–3,000 sites. It acquired about 9,700 Idea sites and 10,200 Vodafone sites in India during 2018. The Kenya acquisition closed October 1 for $171.6 million; a Brazil fiber and pole transaction was expected to close in Q4 for approximately $138.9 million.
  • Debt and financing: A $1.5 billion term loan matures March 29, 2019, and $999.9 million of 3.40% senior notes mature in February 2019. ATC reported compliance with its debt covenants at September 30 and said it expected operating results to support compliance over the next 12 months. A 10% increase in interest rates was estimated to add $14.4 million of interest expense for the nine-month period. The company also reported foreign-currency exposure, including an estimated $116.3 million loss under a 10% adverse exchange-rate movement on unsettled intercompany and similar balances.
  • Other notable items: ATC adopted new revenue-recognition guidance on January 1, 2018; the cumulative opening-equity adjustment was a $38.4 million reduction. Argentina adopted highly inflationary accounting in Q3, with no material financial-statement impact. Management expected new lease accounting rules to materially increase balance-sheet assets and liabilities when adopted.
  • Risks and contingencies: Management said no pending litigation was expected to materially affect financial position, results or liquidity, and reported no material change to previously disclosed risk factors. Cash flows depend on a relatively small number of significant tenants; India carrier consolidation, tenant bankruptcies, currency movements, refinancing and covenant compliance remain relevant risks. Future distributions and buybacks remain subject to board discretion and available cash.

Key facts investors should verify

  1. Whether India tenant churn, Aircel-related exposures and the Tata settlement’s revenue, profit and cash impacts track management’s estimates, including the expected 2019 churn.
  2. Whether the India reporting unit’s narrow valuation cushion leads to further impairment or goodwill charges.
  3. How ATC refinances or repays the $1.5 billion March 2019 term loan and the $999.9 million notes due in February 2019, and whether liquidity and covenant headroom remain adequate.
  4. Whether acquisition integration, currency translation and higher interest expense affect expected operating cash flow and the $850–$950 million capital-spending plan.
  5. How the expected lease-accounting adoption changes reported assets, liabilities and related disclosures; the filing does not provide a clear quantified estimate of that impact.