American Tower Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. American Tower is a global REIT focused on leasing communications-site space, with a smaller tower-services business. Property operations generated 98% of revenue.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $1.289 billion | $1.079 billion | +19% |
| Operating income | $451.9 million | $420.0 million | +8% |
| Operating margin | 35.0% | 38.9% | Down 3.9 percentage points |
| Net income | $281.3 million | $195.5 million | +44% |
| Net income attributable to common stockholders | $248.4 million | $183.5 million | +35% |
| Diluted EPS | $0.58 | $0.45 | +29% |
| Adjusted EBITDA | $833.1 million | $723.7 million | +15% |
| NAREIT FFO | $545.6 million | $411.0 million | +33% |
| AFFO | $602.5 million | $513.6 million | +17% |
| Operating cash flow | $563.5 million | $509.9 million | +10% |
| Capital expenditures | $159.1 million | Not clearly stated here | — |
Net income growth reflected higher segment operating profit and lower other expense. Other expense fell to $141.4 million from $200.6 million, principally because the period included foreign-currency gains versus losses a year earlier and no debt-retirement loss. Interest expense increased $11.9 million to $159.9 million, despite a 35-basis-point reduction in the annualized weighted-average borrowing cost, due to higher average debt outstanding. Depreciation, amortization and accretion rose 30% to $341.6 million, reflecting acquired, leased and constructed sites.
Property revenue growth was strongest in EMEA (+71%) and the U.S. (+19%); Latin America grew 6%, with reported growth weighed down by foreign-exchange translation. Management reported churn of approximately 1% of property revenue. The operating margin shown above is calculated from reported GAAP revenue and operating income. Adjusted EBITDA and FFO/AFFO are non-GAAP measures and are not substitutes for GAAP cash flow or earnings.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $336.4 million at March 31, 2016; restricted cash was $140.9 million.
- Total debt carrying value, including current maturities, was approximately $17.0 billion, versus $17.1 billion at year-end 2015. Current maturities were $137.9 million. Total liabilities were $20.1 billion.
- Reported liquidity was $3.214 billion: $2.878 billion available under credit facilities, net of letters of credit, plus cash and cash equivalents.
- Operating cash flow exceeded investing outflows of $185.5 million and financing outflows of $366.1 million; cash increased $15.7 million during the quarter.
- On January 12, the company issued $750 million of 3.30% notes due 2021 and $500 million of 4.40% notes due 2026. Net proceeds of approximately $1.237 billion were used primarily to repay revolving-credit borrowings and for general purposes.
- Common distributions declared were $0.51 per share, up from $0.42 in the year-earlier quarter. The company also has 5.25% Series A and 5.50% Series B mandatory convertible preferred stock outstanding.
Material changes and transactions
- Revenue increased $209.9 million year over year, led by acquired or constructed sites and tenant additions. U.S. growth included the Verizon site transaction; EMEA growth included Airtel-related sites. Acquisitions and site additions also increased direct operating costs and depreciation.
- Foreign-exchange effects materially affected reported results: Latin America revenue included a $66.3 million negative translation impact, while EMEA included a $13.1 million negative impact. Currency-related gains also contributed to the improvement in other expense. Foreign-currency translation adjustments added $226.3 million to other comprehensive income in Q1 2016, compared with a $433.0 million loss in Q1 2015.
- After quarter-end, on April 21, 2016, the company acquired a 51% controlling interest in India’s Viom for approximately $1.1 billion cash consideration and assumed approximately $0.8 billion of debt. It borrowed about $1.2 billion under its revolving facility, together with cash on hand, primarily to fund the acquisition. Viom’s assumed debt carries rates of 9.90%–13.50%.
- The company signed an agreement in March to acquire approximately 1,350 Airtel Tanzania towers for about $179 million, subject to customary conditions and regulatory approval; closing was expected in Q2 2016.
Outlook, commentary and risks
- Management expected 2016 capital expenditures, including anticipated Viom-related expenditures, of $700 million–$800 million; the plan includes approximately 2,500–3,000 new communications sites globally.
- Management said operating cash flow and available credit were expected to fund 2016 distributions, capital expenditures, debt service and signed acquisitions. It reported compliance with credit-facility covenants and expected to remain compliant over the next 12 months.
- The company cited growing wireless-data use, network densification, spectrum deployment and international network build-outs as demand drivers. It expects services revenue to remain a small share of total revenue. It disclosed approximately $31 billion of future non-cancellable tenant lease revenue based on leases in place and exchange rates at March 31, excluding straight-line accounting effects.
- Risks include foreign-exchange exposure (32% of revenue and 37% of operating expenses were foreign-currency denominated), interest-rate exposure, dependence on a relatively small number of significant tenants, and debt covenant or refinancing constraints. A 10% adverse currency move on specified unsettled balances was estimated to produce $42.4 million of unrealized losses; a 10% increase in current interest rates was estimated to add $2.2 million of quarterly interest expense.
- Management reported no pending litigation expected to materially affect financial position, results or liquidity, and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How the Viom acquisition, assumed high-interest debt and post-quarter borrowing affect leverage, interest expense and expected returns.
- Whether organic tenant additions and escalations sustain growth as acquisition-related contributions and currency movements change.
- Actual 2016 capital spending versus the $700 million–$800 million outlook, including the treatment of Viom expenditures.
- Liquidity available after acquisition funding, future distributions and debt maturities, and ongoing compliance with credit and securitization covenants.
- The durability of reported earnings growth: distinguish operating performance from foreign-exchange gains, translation effects and non-GAAP measures.