American Tower Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results. American Tower is a global owner, operator and developer of multitenant communications sites; property leasing generated 99% of nine-month revenue.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.515 billion | $1.238 billion | $4.246 billion | $3.491 billion |
| Operating income | $479 million | $401 million | $1.364 billion | $1.211 billion |
| Net income attributable to common stockholders | $238 million | $76 million | $647 million | $389 million |
| Diluted EPS | $0.55 | $0.18 | $1.51 | $0.92 |
| Adjusted EBITDA | $915 million | $779 million | $2.617 billion | $2.265 billion |
| AFFO attributable to common stockholders | $612 million | $552 million | $1.769 billion | $1.577 billion |
Operating margin was approximately 31.6% in Q3 versus 32.4% a year earlier, and 32.1% for nine months versus 34.7%. Nine-month operating cash flow was $1.978 billion, up from $1.544 billion. Investing activities used $1.786 billion, versus $7.204 billion in 2015, which included substantial Verizon transaction spending. Financing activities provided $27 million, compared with $5.632 billion.
At September 30, cash and cash equivalents were $530 million; total current assets were $1.371 billion and current liabilities $1.520 billion. Reported long-term obligations, including current portion, totaled $18.679 billion, versus $17.119 billion at December 31, 2015. Total liquidity, including undrawn credit facilities, was $3.292 billion. Restricted cash was $151 million. Redeemable noncontrolling interests, largely related to Viom, were $1.100 billion.
Material changes and drivers
- Revenue rose 22% in both the quarter and nine-month period. The principal driver was the April 2016 acquisition of a 51% controlling interest in Viom Networks in India, now ATC TIPL, which added more than 42,000 towers and 200 indoor DAS networks. Asia revenue increased 338% in Q3 and 212% year to date; these comparisons include acquisition and pass-through revenue.
- U.S. property revenue grew 4% in Q3 and 8% year to date, supported by colocations and amendments, contractual escalations, and acquired or constructed sites. Latin America revenue increased 19% and 11%, respectively; EMEA increased 5% and 46%. Services revenue declined 33% in Q3 and 13% year to date, primarily because of fewer site acquisition, zoning and permitting projects.
- Common-stockholder net income increased substantially, aided by higher operating income, lower tax expense and smaller foreign-currency losses than in 2015. Comparability also reflects a $93 million one-time tax charge in 2015 and a prior-year debt-retirement loss. Interest expense increased by $40 million in Q3 and $85 million year to date, primarily due to higher average debt.
- Nine-month property gross margin increased 16%, while depreciation, amortization and accretion rose 22%, partly reflecting acquired and newly constructed sites. Foreign-currency translation reduced revenue growth in several international markets.
Outlook, risks and unusual items
- Management forecast 2016 capital expenditures of $685 million to $785 million, including expected ATC TIPL spending and construction of approximately 1,750 to 2,250 sites. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said operating cash flow and credit-facility capacity should be sufficient for distributions, capital expenditures, debt service and signed acquisitions. The company reported compliance with its credit-facility covenants at quarter-end.
- Management expects continued leasing demand from wireless data growth, network densification and technology upgrades. It reported nine-month property revenue churn of approximately 1.3% and more than $32 billion of expected non-cancellable tenant lease revenue, subject to the filing’s stated assumptions.
- The Viom acquisition added debt carrying interest rates generally around 9.9%–11.8%, as well as redeemable noncontrolling interests and put rights exercisable from 2018 through 2021. In October, ATC TIPL refinanced or repaid portions of assumed Viom debt.
- International exposure creates currency risk: 39% of nine-month revenue and 44% of operating expenses were denominated in foreign currencies. The filing estimates that a 10% adverse move in exchange rates on specified unsettled balances could produce $42 million of unrealized losses; a 10% increase in interest rates would add $6.3 million of interest expense for the nine-month period.
- Other significant obligations include approximately $5.0 billion of Verizon site purchase options and operating-lease commitments. Management said pending litigation was not expected to have a material adverse effect; no material changes to the 2015 Form 10-K risk factors were reported.
- After quarter-end, American Tower agreed to form a European joint venture with PGGM. PGGM was to acquire a 49% interest for €248.2 million, subject to adjustments; American Tower would retain operational control.
Most important facts for investors to verify
- How much of reported growth and future earnings reflects Viom and other acquisitions versus organic leasing, and how acquired-site costs and amortization affect margins.
- Debt maturities, interest costs and refinancing needs, particularly Viom’s higher-rate borrowings and near-term obligations; also review covenant headroom and restricted cash.
- Whether cash generation and AFFO can support planned capital spending and distributions. Adjusted EBITDA, FFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow.
- Exposure to currency movements, tenant concentration and the timing and economics of Verizon and other site purchase options.
- Viom shareholder put and call provisions, redeemable noncontrolling-interest valuation, and the closing terms and proceeds of the announced PGGM transaction.