American Tower Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results. American Tower owns, operates and develops communications sites; recurring tower leasing generated about 98% of revenue for the nine-month period. The company operated 57,389 communications sites at quarter-end. Its October 1, 2013 acquisition of MIP Tower Holdings (MIPT) is not included in reported results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $807.9 million | $713.3 million | $2,419.4 million | $2,107.6 million |
| Operating income | $308.9 million | $295.6 million | $921.4 million | $840.5 million |
| GAAP net income | $163.2 million | $231.8 million | $408.3 million | $475.9 million |
| Net income attributable to American Tower | $180.1 million | $232.1 million | $451.4 million | $501.6 million |
| Diluted EPS attributable to American Tower | $0.45 | $0.58 | $1.13 | $1.26 |
| Adjusted EBITDA | $527.9 million | $463.6 million | $1,576.2 million | $1,391.8 million |
| NAREIT FFO | $340.9 million | $350.3 million | $924.6 million | $901.9 million |
| AFFO | $367.3 million | $295.3 million | $1,091.4 million | $927.3 million |
- Revenue grew 13% in Q3 and 15% year to date, mainly from organic leasing growth and sites acquired or built. Rental and management revenue rose 14% in Q3; domestic revenue grew 10% and international 23%. International growth was reduced by unfavorable currency translation.
- GAAP operating margin was approximately 38.2% in Q3 versus 41.4% a year earlier, and 38.1% year to date versus 39.9%. Higher depreciation, amortization and accretion, SG&A and other expenses contributed to the margin decline.
- Adjusted EBITDA increased 14% in Q3 and 13% year to date; AFFO rose 24% and 18%, respectively. Q3 NAREIT FFO declined 3%, while year-to-date FFO increased 3%.
- GAAP net income declined 30% in Q3 and 14% year to date. The filing attributes the declines principally to foreign-currency losses, higher depreciation and amortization, and, year to date, debt-retirement charges. Q3 2013 included a $30.9 million unrealized currency loss, versus a $46.2 million gain in Q3 2012. Year-to-date unrealized currency losses were $151.7 million versus $12.8 million in 2012.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $1,144.4 million, compared with $1,116.5 million. Investing activities used $958.6 million, including $448.2 million for property, equipment and construction and $365.7 million for acquisitions. Financing activities provided $3,494.8 million.
- Cash and cash equivalents were $4,040.4 million at September 30, 2013, up from $368.6 million at year-end 2012; restricted cash was $132.0 million. Reported total liquidity was approximately $5.2 billion, including about $1.2 billion of available credit-facility capacity.
- Total outstanding debt was approximately $12.6 billion at quarter-end; long-term obligations, including current portion, had a $12.6 billion carrying value and $12.7 billion estimated fair value. Average borrowing costs declined year to date to 4.77% from 5.45%; Q3 weighted average cost was 4.55% versus 5.35%.
- Debt financing included $1.8 billion of tower revenue securities issued in March, which refinanced $1.75 billion of older securitized debt, and $1.25 billion of senior notes issued in August. Debt-retirement losses were $38.0 million year to date, including $35.3 million related to the securitization refinancing.
- Subsequent to quarter-end, MIPT was acquired for approximately $4.8 billion: about $3.3 billion cash consideration, funded partly with $2.8 billion of credit-facility borrowings, plus assumption of approximately $1.5 billion of debt. On October 29, the company entered a $1.5 billion term loan and used proceeds and cash to repay its $750 million 2012 Term Loan and $800 million under the 2012 Credit Facility. Management said these October actions reduced total liquidity by $2.6 billion.
- The company declared distributions of $0.81 per share for the first nine months, totaling approximately $320 million. It repurchased $145 million of stock year to date, then temporarily suspended repurchases on September 6 after signing the MIPT acquisition agreement.
Material changes and outlook
- Management cited legacy-site leasing and contractual escalators, together with portfolio additions, as the key growth drivers. New tenant leases and amendments drove much of legacy-site growth; management noted that lease cancellations and renegotiations represented about 1.5% of rental and management revenue year to date.
- International revenue growth was offset by currency translation: approximately 9% of Q3 international revenue growth and 6% of year-to-date growth were lost to currency effects. About 33% of consolidated revenue was denominated in foreign currencies during the nine months.
- Management expected 2013 capital expenditures of approximately $625–$675 million, including construction of approximately 1,900–2,100 new sites. It said operating cash was expected to cover near-term distributions, capital expenditures and debt service, with credit capacity available if needed. The filing provides no specific earnings or revenue guidance.
- The MIPT acquisition expanded the company into Costa Rica and Panama and added more than 5,000 U.S. sites, approximately 500 sites in Costa Rica and approximately 50 in Panama. Management identified integration execution, costs, systems and personnel retention as risks; anticipated synergies and savings may not be realized on the expected timetable or at all.
Risks, contingencies and unusual items
- Foreign exchange exposure is significant. Management estimated that a hypothetical 10% adverse currency move could change revenue, operating results and cash flows by about 3%; an adverse 10% move on unsettled foreign-currency intercompany balances would have produced approximately $233.6 million of unrealized gains or losses for the nine-month period.
- Debt covenants, including leverage and interest-coverage tests, restrict additional debt and other actions. The company reported compliance at September 30; stated covenant capacity excludes the MIPT acquisition. Tower securitizations can trap cash or redirect excess cash to principal if debt-service coverage falls, and default could lead to foreclosure on secured sites.
- Key business risks include reliance on a limited number of tenants, changes in wireless technology or carrier spending, tenant consolidation and site sharing, competition, ground-lease renewals, international political/regulatory and currency risks, and maintaining REIT qualification and required distributions.
- Contingencies include ongoing TriStar litigation; management said no other pending matters were expected to materially affect financial position, results or liquidity. Indian tax authorities notified the company of a potential challenge concerning pre-acquisition transfer pricing; no formal assessment had been issued, and the company recorded no potential liability, citing its view that the position would be sustained and the seller’s indemnification obligation.
- Other notable items included $25.8 million of acquisition and merger expenses year to date, higher stock-based compensation (including $7.5 million from accelerated recognition for retirement-eligible employees), and a $2.0 million asset impairment charge year to date.
Important facts for investors to verify
- Post-MIPT debt, available liquidity, leverage covenant headroom and whether the October refinancing changed borrowing costs or maturities.
- MIPT integration progress, actual synergies and costs, and the effect of acquired sites and assumed securitized debt on future results and cash distributions.
- Whether organic leasing growth continues to offset foreign-exchange headwinds, tenant cancellations and any carrier consolidation or network-sharing activity.
- Cash-trap and minimum debt-service coverage ratios for both the company’s securitization and the acquired GTP securitization, and any limits on cash upstreaming.
- Foreign-currency exposures and movements in tax contingencies, including the Indian tax matter and REIT qualification requirements.