American Tower Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for context. Amounts are in U.S. dollars unless stated otherwise.
Business context
American Tower owns, operates and develops communications real estate, primarily leasing tower space to wireless carriers. Rental and management operations generated approximately 98% of 2014 revenue. At year-end, the company reported 75,594 communications sites, including 28,566 U.S. towers, 46,598 international towers and 430 DAS networks. It operates as a REIT.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $4.100 billion | $3.361 billion | +22% |
| Operating income | $1.487 billion | $1.214 billion | +22% |
| Net income | $803.2 million | $482.2 million | +67% |
| Net income attributable to common stockholders | $801.0 million | $551.3 million | +45% |
| Operating cash flow | $2.135 billion | $1.599 billion | +33% |
| Adjusted EBITDA (non-GAAP) | $2.650 billion | $2.176 billion | +22% |
| NAREIT FFO (non-GAAP) | $1.674 billion | $1.257 billion | +33% |
| AFFO (non-GAAP) | $1.815 billion | $1.470 billion | +23% |
Operating margin was approximately 36.3%, versus 36.1% in 2013. Growth reflected legacy-site leasing and escalations, acquired and constructed sites, and the contribution from MIPT, acquired in October 2013. International rental revenue rose 25%, but foreign-currency translation reduced its reported growth by approximately 11 percentage points. The company reported $49.3 million of unrealized foreign-currency losses in earnings; a further $419.3 million translation loss was recorded in other comprehensive income.
Fourth-quarter 2014 revenue was $1.046 billion, operating income $346.0 million and net income $181.6 million. Full-year capital expenditures were $974.4 million; acquisitions used approximately $1.011 billion. Cash used in investing activities was $1.950 billion.
Year-end total debt was $14.609 billion, including $897.6 million classified as current, compared with $14.478 billion total debt at year-end 2013. Cash and cash equivalents were $313.5 million; an additional $160.2 million was restricted. Management reported approximately $2.7 billion of available liquidity, including borrowing capacity under credit facilities. Interest expense was $580.2 million, up 27%, mainly because average debt outstanding increased; the weighted-average contractual interest rate at year-end was 4.02%.
Material changes and capital allocation
- Revenue growth included the acquisition of BR Towers in Brazil and the full-year effect of the 2013 MIPT acquisition. The company added approximately 8,450 sites during 2014, including build-to-suit construction.
- The company issued $1.4 billion of senior notes and $582.9 million of net proceeds from mandatory convertible preferred stock, and amended its revolving credit facility, increasing commitments to $1.5 billion and extending maturity to 2020.
- Common distributions declared increased to $1.40 per share from $1.10 in 2013. The company also declared $23.9 million of preferred distributions. The preferred shares carry a 5.25% dividend rate and are scheduled to convert in May 2017, subject to their terms.
- Post-year-end, American Tower agreed to acquire rights to approximately 11,324 Verizon towers and purchase approximately 165 additional towers for $5.056 billion in cash, subject to closing conditions. The agreement provides for a weighted average lease term of approximately 28 years; Verizon is to lease space on the towers under a minimum 10-year arrangement.
- Other pending acquisitions included approximately 6,480 towers in Brazil under the TIM agreement and more than 4,800 towers in Nigeria under the Airtel agreement, both subject to conditions. The filing also reports a potential TIM breakup fee of approximately 260 million BRL if specified conditions apply.
Outlook, risks and unusual items
Management cited wireless data growth, network densification and carrier investment in 4G as sources of continued leasing demand, with international markets at differing stages of network development. The filing provides 2015 capital-expenditure guidance of approximately $800 million to $900 million, including construction of approximately 2,750 to 3,250 new sites. It does not provide a clear quantified 2015 revenue or earnings forecast.
- Leverage and financing: Debt service, refinancing needs and covenant restrictions remain significant. Amendments made in February 2015 temporarily raise the permitted total-debt-to-Adjusted-EBITDA ratio to 7.25x for the first two quarters after a Verizon closing, then 7.00x for two quarters, before returning to 6.00x. The Verizon transaction financing includes a bridge commitment reduced to $3.3 billion after additional bank commitments.
- Tenant concentration: Four tenants accounted for approximately 56% of revenue. AT&T Mobility represented 20%, Sprint 15%, Verizon Wireless 11% and T-Mobile 10%. Carrier consolidation, sharing, credit deterioration or lower network spending could affect revenue and site utilization.
- Foreign exposure: Approximately 33% of revenue was denominated in foreign currencies. Currency weakness, political or regulatory changes, inflation, taxation and repatriation limits may affect results and cash flows.
- Acquisition execution: Integrating recent and pending portfolios entails costs and operational risks. Goodwill and other intangible assets are substantial; management reported no potential goodwill impairment in its 2014 annual test.
- Tax and legal matters: An Indian tax authority assessed approximately 22.6 billion INR (about $369 million at the assessment-date exchange rate) relating to pre-acquisition transactions. The company contests the assessment, cites seller indemnification, and recorded no liability. Management stated that other pending legal matters were not expected to materially affect financial position, results or liquidity.
- Other exposures: Ground-lease renewals, zoning and environmental regulation, natural disasters, cyber incidents, and changes in wireless technology could affect operations. The company estimated approximately $1.8 billion of undiscounted future asset-retirement cash outlays.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. Non-GAAP measures such as Adjusted EBITDA, FFO and AFFO are not substitutes for GAAP results or operating cash flow.
Important facts for investors to verify
- Whether the Verizon, TIM and Airtel transactions closed, their final purchase economics, financing mix and expected returns.
- Debt maturities, interest costs, covenant headroom and leverage after subsequent financing and acquisitions.
- Organic leasing growth and churn, separating legacy-site performance from acquisitions and foreign-currency effects.
- Tenant concentration and the exposure to carrier consolidation, sharing arrangements and changes in network investment.
- Developments in the Indian tax assessment and any other tax, regulatory or contingent-payment exposures.
- Progress against 2015 capital-expenditure plans and the resulting cash available for debt reduction and distributions.