AMERICAN TOWER CORP quarterly report, Q1 FY2012

American Tower Corporation — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012; financial statements are unaudited. American Tower owns, operates and develops wireless and broadcast communications sites across the U.S. and eight international markets. It began operating as a REIT for federal tax purposes on January 1, 2012. Its portfolio included 47,047 communications sites at quarter-end; rental and management generated approximately 98% of revenue.

Financial results and liquidity

Metric	Q1 2012	Q1 2011	Change
Total revenue	$696.5 million	$562.7 million	+24%
Operating income	$274.4 million	$218.3 million	+26%
Net income attributable to American Tower	$221.3 million	$91.8 million	+141%
Diluted EPS	$0.56	$0.23	+$0.33
Adjusted EBITDA	$462.5 million	$377.1 million	+23%
Cash from operations	$402.0 million	$283.8 million	+$118.2 million

Operating margin was approximately 39.4%, versus 38.8% a year earlier. Net income attributable to the company was approximately 31.8% of revenue, versus 16.3%.
Domestic rental and management revenue rose 17% to $487.1 million; international revenue rose 53% to $196.9 million. Network development services revenue fell 22% to $12.5 million.
Cash used in investing was $291.3 million, including $121.0 million for property, equipment and construction activities. Cash provided by financing was $27.4 million. Cash and equivalents ended the quarter at $471.3 million.
Total liquidity was approximately $1.84 billion, comprising cash and $1.37 billion of available borrowing capacity under revolving facilities. Current assets were $975.4 million and current liabilities $939.3 million.
Total debt was approximately $7.29 billion, including $127.3 million current. Interest expense was $95.1 million, up 28%; management attributed the increase to approximately $1.8 billion higher average debt, partly offset by a lower annualized weighted-average borrowing cost, 5.24% versus 5.41%.

Material changes and unusual items

Revenue growth reflected organic leasing gains and approximately 11,930 sites acquired or constructed since January 1, 2011. International growth was principally acquisition-related; international legacy-site revenue declined approximately 1%.
Q1 domestic revenue included $6.0 million from a tenant billing settlement and $9.6 million from a lease termination settlement. These nonrecurring items contributed to reported growth.
Other income included $55.8 million of unrealized foreign-exchange gains, compared with $16.2 million in Q1 2011. This volatile, noncash item materially supported reported earnings.
The effective tax rate fell to 11.5% from 43.7%, primarily reflecting the REIT conversion. The company remains subject to tax on taxable REIT subsidiary and foreign income.
Other operating expenses increased 87% to $21.8 million, primarily due to higher impairments, including a $10.7 million impairment charge for long-lived assets. An outdoor DAS network impairment followed a tenant lease termination.
The company issued $700 million of 4.70% senior notes due 2022 and used net proceeds to repay credit-facility borrowings. It also replaced and repaid prior revolving and term-loan arrangements. Quarter-end debt included $632 million drawn on the 2012 credit facility.
The first declared REIT distribution was $0.21 per share, approximately $82.9 million, paid April 25, 2012. The company repurchased 79,000 shares for $4.9 million during the quarter.

Outlook, risks and contingencies

Management expected 2012 capital expenditures of approximately $500–$600 million, including construction of approximately 1,800–2,200 new sites. No revenue or earnings guidance is provided in the supplied filing text.
Management stated that operating cash flow was expected to cover capital expenditures and cash debt service over the next 12 months, with revolving capacity available if signed acquisitions, investment or debt repayments exceed internally generated cash.
REIT status requires distribution of at least 90% of REIT taxable income, subject to tax rules and other constraints. The board determines future distributions; cash generated through taxable subsidiaries may be limited in its availability for distributions.
Debt totaled approximately $7.3 billion. Credit agreements impose leverage, interest-coverage and other covenants; the company reported compliance at quarter-end. Failure to comply could restrict borrowing or accelerate amounts due. A securitized portfolio also has debt-service coverage tests that can trap cash; its reported DSCR was 3.91x.
Key business risks include tenant concentration, carrier consolidation or network sharing, technology changes that reduce tower demand, competition, land-lease renewal and site-access risks, acquisition integration, foreign-exchange and international-market exposure, and the ability to maintain REIT qualification and fund distributions.
The SEC had subpoenaed company documents relating particularly to tax accounting and reporting; the company said it could not predict the investigation’s scope or outcome. A Mexico litigation matter had returned to trial court to determine damages; the carrier asserted approximately $7.9 million, and the company could not determine whether damages would be imposed on or enforceable against its subsidiary.
Unrecognized tax benefits were approximately $36.7 million at quarter-end; accrued tax-related interest and penalties were $34.0 million. The filing also disclosed contingent acquisition consideration and purchase-accounting estimates subject to change.

Important facts for investors to verify

How much of revenue and earnings growth persists after the $15.6 million of domestic settlements and the unusually large foreign-exchange gain?
Whether acquisition-driven international growth translates into sustained organic growth, margins and cash generation.
Debt maturities, refinancing needs, covenant headroom and the cost and availability of borrowing, particularly for near-term Colombian facilities.
The cash impact of REIT distributions alongside planned capital spending, acquisitions and share repurchases.
Developments in the SEC investigation, Mexico litigation, tax exposures, impairments and contingent acquisition payments.