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AMERICAN TOWER CORP /MA/ - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The discussion and analysis of our financial condition and results of operations
that follow are based upon our consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of our financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities at the date of our financial
statements. Actual results may differ significantly from these estimates under
different assumptions or conditions. This discussion should be read in
conjunction with our consolidated financial statements herein and the
accompanying notes thereto, and the information set forth under the caption
"Critical Accounting Policies and Estimates" below.
Our continuing operations are reported in three segments, domestic rental and
management, international rental and management and network and development
services. Among other factors, management uses segment gross margin and segment
operating profit in its assessment of operating performance in each business
segment. We define segment gross margin as segment revenue less segment
operating expenses, excluding stock-based compensation recorded in costs of
operations; depreciation, amortization and accretion; selling, general,
administrative and development expense; and other operating expense. We define
segment operating profit as segment gross margin less selling, general,
administrative and development expense attributable to the segment, excluding
stock-based compensation expense and corporate expenses. Segment gross margin
and segment operating profit for the international rental and management segment
also include interest income, TV Azteca, net (see note 20 to our consolidated
financial statements included herein). These measures of segment gross margin
and segment operating profit are also before interest income, interest expense,
loss on retirement of long-term obligations, other income (expense), net income
(loss) attributable to noncontrolling interest, income (loss) on equity method
investments, income taxes and discontinued operations.
Executive Overview
Our primary business is leasing antenna space on multi-tenant communications
sites to wireless service providers, radio and television broadcast companies,
wireless data providers, government agencies and municipalities and tenants in a
number of other industries. In addition to the communications sites in our
portfolio, we manage rooftop and tower sites for property owners under various
contractual arrangements. We also hold property interests that we lease to
communications service providers and third-party tower operators. We refer to
this business as our rental and management operations, which accounted for
approximately 97% of our total revenues for the year ended December 31, 2012 and
includes our domestic rental and management segment and our international rental
and management segment. Through our network development services segment, we
offer tower-related services domestically, including site acquisition, zoning
and permitting services and structural analysis services, which primarily
support our site leasing business and the addition of new tenants and equipment
on our sites. We began operating as a REIT for federal income tax purposes
effective January 1, 2012.
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The following table details the number of communications sites we own or operate
in the countries in which we operate as of December 31, 2012:
Number of Number of
Country Owned Sites Operated Sites(1)
United States 16,378 6,421
International:
Brazil 4,193 155
Chile 1,181 -
Colombia 2,298 706
Germany 2,031 -
Ghana 1,931 -
India 10,383 -
Mexico 5,581 199
Peru 500 -
South Africa 1,604 -
Uganda 1,043 -
(1) All of the sites we operate are held pursuant to long-term capital leases,
including those subject to purchase options.
The majority of our tenant leases with wireless carriers are typically for an
initial non-cancellable term of five to ten years, with multiple five-year
renewal terms thereafter. Accordingly, nearly all of the revenue generated by
our rental and management operations during the year ended December 31, 2012 is
recurring revenue that we should continue to receive in future periods. Based
upon foreign currency exchange rates and the tenant leases in place as of
December 31, 2012, we expect to generate approximately $20 billion of
non-cancellable tenant lease revenue over future periods, excluding the impact
of straight-line lease accounting. In addition, most of our tenant leases have
provisions that periodically increase the rent due under the lease, typically
annually based on a fixed percentage (on average approximately 3.5% in the
United States), inflation, or inflation with a fixed minimum or maximum
escalation for the year. Revenue generated by rent increases based on fixed
escalation clauses is recognized on a straight line basis over the
non-cancellable term of the applicable agreement. We also routinely seek to
extend our leases with our tenants, which increases the non-cancellable term of
the lease and creates incremental growth in our revenues.
The revenues generated by our rental and management operations may also be
affected by cancellations of existing tenant leases. As discussed above, most of
our tenant leases with wireless carriers and broadcasters are multi-year
contracts, which typically are non-cancellable; however in some instances, a
lease may be cancelled upon the payment of a termination fee.
Revenue lost from either cancellations of leases at the end of their terms or
rent negotiations historically have not had a material adverse effect on the
revenues generated by our rental and management operations. During the year
ended December 31, 2012, loss of annual revenue from tenant lease cancellations
or renegotiations represented less than 1.3% of our rental and management
operations revenues.
Rental and Management Operations Revenue Growth. The primary factors affecting
the revenue growth for our domestic and international rental and management
segments are:
• Recurring revenues from tenant leases generated from sites which existed
in our portfolio as of the beginning of the prior year period ("legacy
sites");
• Contractual rent escalations on existing tenant leases, net of
cancellations;
• New revenue generated from leasing additional space on our legacy sites; and
• New revenue generated from new sites acquired or constructed since the
beginning of the prior year period ("new sites").
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We continue to believe that our site leasing revenue is likely to increase due
to the growing use of wireless communications services and our ability to meet
that demand by adding new tenants and new equipment for existing tenants on our
legacy sites, which increases the utilization and profitability of our sites. In
addition, we believe the majority of our site leasing activity will continue to
come from wireless service providers. Our legacy site portfolio and our
established tenant base provide us with new business opportunities, which have
historically resulted in consistent and predictable organic revenue growth as
wireless carriers seek to increase the coverage and capacity of their networks
as well as roll out next generation wireless technologies. In addition, we
intend to continue to supplement the organic growth on our legacy sites by
selectively developing or acquiring new sites in our existing and new markets
where we can achieve our risk adjusted return on investment criteria.
Rental and Management Operations Organic Revenue Growth. Consistent with our
strategy to increase the utilization and return on investment of our legacy
sites, our objective is to add new tenants and new equipment for existing
tenants through collocation. Our ability to lease additional space on our sites
is primarily a function of the rate at which wireless carriers deploy capital to
improve and expand their wireless networks. This rate, in turn, is influenced by
the growth of wireless communications services and related infrastructure needs,
the financial performance of our tenants and their access to capital, and
general economic conditions. The following key trends within each market that we
serve provide opportunities for organic revenue growth:
• Domestic. As a result of the rapid subscriber adoption of wireless data
applications, wireless service providers in the United States continue to
invest in their wireless networks by adding new cell sites as well as
additional equipment to their existing cell sites. This level of wireless
communications services growth has driven wireless providers in the United
States to deploy consistent levels of annual wireless capital investment
and as a result, we have experienced strong demand for our communications
sites.
We expect the following key industry trends will result in incremental revenue
opportunities for us:
• The deployment of advanced wireless technology across existing
wireless networks will provide higher speed data services and enable
fixed broadband substitution. As a result, our tenantscontinue to
deploy additional equipment across their existing networks.
• Wireless service providers compete based on the overall capacity and coverage of their existing wireless networks. To maintain or improve
their network performance as overall network usage increases, our
tenants continue to deploy additional equipment across their existing
sites as well as add new cell sites.
• Wireless service providers are also investing in reinforcing their
networks through incremental backhaul and the utilization of on-site
generators, which results in additional equipment leased at the tower
site.
• Wireless service providers continue to acquire additional spectrum,
and as a result are expected to add additional equipment to their
network as they seek to optimize their network configuration.
We signed holistic master lease agreements with three of our four major tenants
in the United States, which provide for consistent, long-term revenue growth and
a reduction in the potential impact of churn. Typically, these agreements
include built-in annual escalators, fixed annual charges which permit our
tenants to place a pre-determined amount of equipment on our sites and
provisions for incremental lease payments if the equipment levels are exceeded.
Our holistic master lease agreements build and foster strong strategic
partnerships with our tenants and have significantly reduced collocation cycle
times, thereby providing our tenants with the ability to rapidly deploy
technology on our sites.
• International. Most of our international markets are less advanced with
respect to the current technologies deployed for wireless services. As a
result, demand for our communications sites is predominantly driven by
continued voice network investments, new market entrants and initial third
generation ("3G") data network deployments. For example, in India,
nationwide voice networks
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continue to be deployed as wireless service providers are beginning their
investments in 3G data networks. Similarly, in Ghana and Uganda, wireless
service providers continue to build out their voice and data networks in
order to satisfy increasing demand for wireless services. In South Africa,
where voice networks are in a more advanced stage of development, carriers
are beginning to deploy 3G data networks across spectrum acquired in
recent spectrum auctions. In Mexico and Brazil, where nationwide voice
networks have also been deployed, some incumbent wireless service
providers continue to invest in their 3G data networks, and recent spectrum auctions have enabled other incumbent wireless service providers
to begin their initial investments in 3G data networks. In markets such as
Chile, Peru and Colombia, recent or anticipated spectrum auctions are
expected to drive investment in nationwide voice and 3G data networks. In
Germany, our most mature international wireless market, demand is
currently being driven by a government-mandated rural fourth generation
network build-out, as well as other tenant initiatives to deploy next
generation wireless services. We believe incremental demand for our tower
sites will continue in our international markets as wireless service
providers seek to remain competitive by increasing the coverage of their
networks while also investing in next generation data networks.
Rental and Management Operations New Site Revenue Growth. During the year ended
December 31, 2012, we grew our portfolio of communications real estate through
acquisitions and construction activities, including the acquisition and
construction of approximately 8,810 sites. In a majority of our international
markets, the acquisition or construction of new sites results in increased
pass-through revenues and expenses. We continue to evaluate opportunities to
acquire larger communications real estate portfolios, both domestically and
internationally, to determine whether they meet our risk adjusted hurdle rates
and whether we believe we can effectively integrate them into our existing
portfolio.
New Sites (Acquired or Constructed) 2012 2011 2010
Domestic 960 470 950
International(1) 7,850 10,000 6,870
(1) The majority of sites acquired or constructed in 2012 were in Brazil,
Germany, India and Uganda; in 2011 were in Brazil, Colombia, Ghana, India,
Mexico and South Africa; and in 2010 were in Chile, Colombia, India and Peru.
Network Development Services Segment Revenue Growth. As we continue to focus on
growing our rental and management operations, we anticipate that our network
development services revenue will continue to represent a relatively small
percentage of our total revenues. Through our network development services
segment, we offer tower-related services, including site acquisition, zoning and
permitting services and structural analysis services, which primarily support
our site leasing business and the addition of new tenants and equipment on our
sites, including in connection with provider network upgrades.
Rental and Management Operations Expenses. Direct operating expenses incurred by
our domestic and international rental and management segments include direct
site level expenses and consist primarily of ground rent, property taxes,
repairs and maintenance, security and power and fuel costs, some of which may be
passed through to our tenants. These segment direct operating expenses exclude
all segment and corporate selling, general, administrative and development
expenses, which are aggregated into one line item entitled selling, general,
administrative and development expense in our consolidated statements of
operations. In general, our domestic and international rental and management
segments selling, general, administrative and development expenses do not
significantly increase as a result of adding incremental tenants to our legacy
sites and typically increase only modestly year-over-year. As a result, leasing
additional space to new tenants on our legacy sites provides significant
incremental cash flow. We may incur additional segment selling, general,
administrative and development expenses as we increase our presence in
geographic areas where we have recently launched operations or are focused on
expanding our portfolio. Our profit margin growth is therefore positively
impacted by the addition of new tenants to our legacy sites and can be
temporarily diluted by our development activities.
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REIT Conversion. We began operating as a REIT effective January 1, 2012. The
REIT tax rules require that we derive most of our income, other than income
generated by a TRS, from investments in real estate, which for us primarily
consists of income from the leasing of our communications sites. Under the Code,
maintaining REIT status generally requires that no more than 25% of the value of
the REIT's assets be represented by securities of one or more TRSs and other
non-qualifying assets.
A REIT must annually distribute to its stockholders an amount equal to at least
90% of its REIT taxable income (determined before the deduction for distributed
earnings and excluding any net capital gain). During the year ended December 31,
2012, we paid an aggregate of approximately $355.6 million in regular cash
distributions to our stockholders. We intend to continue paying regular
distributions in 2013. The amount, timing and frequency of future distributions
will be at the sole discretion of our Board of Directors and will be declared
based upon various factors, a number of which may be beyond our control,
including our financial condition and operating cash flows, the amount required
to maintain REIT status and reduce any income and excise taxes that we otherwise
would be required to pay, limitations on distributions in our existing and
future debt instruments, our ability to utilize NOLs to offset, in whole or in
part, our distribution requirements, limitations on our ability to fund
distributions using cash generated through our TRSs and other factors that our
Board of Directors may deem relevant.
For more information on the requirements to qualify as a REIT, see Item 1 of
this Annual Report under the caption "Business-Overview," and Item 1A of this
Annual Report under the caption "Risk Factors-If we fail to qualify as a REIT or
fail to remain qualified as a REIT, we would be subject to tax at corporate
income tax rates, which would substantially reduce funds otherwise available"
and "-Certain of our business activities may be subject to corporate level
income tax and foreign taxes, which reduce our cash flows, and may have deferred
and contingent tax liabilities."
Non-GAAP Financial Measures
Included in our analysis of our results of operations are discussions regarding
earnings before interest, taxes, depreciation, amortization and accretion, as
adjusted ("Adjusted EBITDA"). We define Adjusted EBITDA as net income before:
income (loss) on discontinued operations, net; income (loss) from equity method
investments; income tax provision (benefit); other income (expense); loss on
retirement of long-term obligations; interest expense; interest income; other
operating expenses; depreciation, amortization and accretion; and stock-based
compensation expense.
Adjusted EBITDA is not intended to replace net income or any other performance
measures determined in accordance with GAAP. Rather, Adjusted EBITDA is
presented as we believe it is a useful indicator of our current operating
performance. We believe that Adjusted EBITDA is useful to an investor in
evaluating our operating performance because (1) it is a key measure used by our
management team for purposes of decision making and for evaluating the
performance of our operating segments; (2) it is a component of the calculation
used by our lenders to determine compliance with certain debt covenants; (3) it
is widely used in the tower industry to measure operating performance as
depreciation, amortization and accretion may vary significantly among companies
depending upon accounting methods and useful lives, particularly where
acquisitions and non-operating factors are involved; (4) it provides investors
with a meaningful measure for evaluating our period to period operating
performance by eliminating items which are not operational in nature; and (5) it
provides investors with a measure for comparing our results of operations to
those of different companies by excluding the impact of long-term strategic
decisions which can differ significantly from company to company, such as
decisions with respect to capital structure, capital investments and the tax
jurisdictions in which companies operate.
Our measurement of Adjusted EBITDA may not be comparable to similarly titled
measures used by other companies. A reconciliation of Adjusted EBITDA to net
income, the most directly comparable GAAP measure, has been included below.
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Results of Operations
Years Ended December 31, 2012 and 2011
(in thousands, except percentages)
Revenue
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Rental and management
Domestic $ 1,940,689 $ 1,744,260 $ 196,429 11 %
International 862,801 641,925 220,876 34
Total rental and management 2,803,490 2,386,185 417,305 17
Network development services 72,470 57,347 15,123 26
Total revenues $ 2,875,960 $ 2,443,532 $ 432,428 18 %
Total revenues for the year ended December 31, 2012 increased 18% to $2,876.0
million. The increase was primarily attributable to an increase in both of our
rental and management segments, including organic revenue growth attributable to
our legacy sites and revenue growth attributable to the approximately 19,280 new
sites that we have constructed or acquired since January 1, 2011.
Domestic rental and management segment revenue for the year ended December 31,
2012 increased 11% to $1,940.7 million. This growth was comprised of:
• Revenue growth from legacy sites of approximately 8%, which includes
approximately 2% attributable to contractual rent escalations, net of
tenant lease cancellations, and approximately 6% due to incremental
revenue primarily generated from new tenant leases and amendments to
existing tenant leases on our legacy sites, which includes the positive
impact of approximately 1% due to customer settlements during the first
quarter of 2012;
• Revenue growth from new sites of approximately 2%, resulting from the
construction or acquisition of approximately 1,430 new sites, as well as
land interests under third-party sites since January 1, 2011; and
• An increase of over 1% from the impact of straight-line lease accounting.
International rental and management segment revenue for the year ended
December 31, 2012 increased 34% to $862.8 million. This growth was comprised of:
• Revenue growth from new sites of approximately 38%, resulting from the
construction or acquisition of approximately 17,850 new sites since
January 1, 2011;
• Revenue growth from legacy sites of approximately 10%, which includes
approximately 7% due to incremental revenue primarily generated from new
tenant leases and amendments to existing tenant leases on our legacy
sites, approximately 2% attributable to contractual rent escalations, net
of tenant lease cancellations, and approximately 1% for the reversal of
revenue reserves; and
• A decline of over 14% attributable to the negative impact from foreign currency translation.
Network development services segment revenue for the year ended December 31,
2012 increased 26% to $72.5 million. The growth was comprised of:
• Revenue growth of 32% primarily attributable to an increase in structural
engineering services as a result of an increase in customer lease
applications which are primarily associated with our tenants' next
generation technology network upgrades during the year ended December 31,
2012; and
• A decline of 6% resulting from a favorable one-time item recognized in
connection with the reversal of amounts previously reserved during the
year ended December 31, 2011.
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Gross Margin
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Rental and management
Domestic $ 1,583,134 $ 1,390,802 $ 192,332 14 %
International 548,726 420,430 128,296 31
Total rental and management 2,131,860 1,811,232 320,628 18
Network development services 37,640 27,887 9,753 35
Domestic rental and management segment gross margin for the year ended
December 31, 2012 increased 14% to $1,583.1 million, which was comprised of:
• Gross margin growth from legacy sites of approximately 11%, primarily
associated with the increase in revenue, as described above, which was
partially offset by an increase in direct operating costs primarily from
increased straight-line rent expense and an increase in repairs and
maintenance activity; and
• Gross margin growth from new sites of approximately 3%, resulting from the
construction or acquisition of approximately 1,430 new sites, as well as
land interests under third-party sites since January 1, 2011.
International rental and management segment gross margin for the year ended
December 31, 2012 increased 31% to $548.7 million, which was comprised of:
• Gross margin growth from new sites of approximately 37%, resulting from
the construction or acquisition of approximately 17,850 new sites since
January 1, 2011;
• Gross margin growth from legacy sites of approximately 8%, primarily
associated with the increase in revenue, as described above; and
• A decline of approximately 14% attributable to the negative impact from
foreign currency translation.
Network development services segment gross margin for the year ended
December 31, 2012 increased 35% to $37.6 million. The increase was primarily
attributable to the increase in revenue described above.
Selling, General, Administrative and Development Expense
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Rental and management
Domestic $ 85,663 $ 77,041 $ 8,622 11 %
International 95,579 82,106 13,473 16
Total rental and management 181,242 159,147 22,095 14
Network development services 6,744 7,864 (1,120 ) (14 )
Other 139,315 121,813 17,502 14
Total selling, general,
administrative and development
expense $ 327,301 $ 288,824 $ 38,477 13 %
Total selling, general, administrative and development expense ("SG&A") for the
year ended December 31, 2012 increased 13% to $327.3 million. The increase was
attributable to an increase in both of our rental and management segments, as
well as an increase in our Other SG&A.
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Domestic rental and management segment SG&A for the year ended December 31, 2012
increased 11% to $85.7 million. The increase was primarily attributable to the
impact of initiatives that we launched during 2011, designed to drive growth and
to support a growing portfolio, including increased staffing in field
operations, sales and finance and other functions supporting the expansion of
our business.
International rental and management segment SG&A for the year ended December 31,
2012 increased 16% to $95.6 million. The increase was primarily attributable to
the launch of operations in our new markets as well as our continued investments
in international expansion initiatives in foreign operations, partially offset
by the reversal of approximately $3.8 million of bad debt expense in Mexico for
amounts previously reserved.
Network development services segment SG&A for the year ended December 31, 2012
decreased 14% to $6.7 million. The decrease was primarily attributable to the
reversal of bad debt expense upon the receipt of a customer payment for amounts
previously reserved, partially offset by higher personnel related costs.
Other SG&A for the year ended December 31, 2012 increased 14% to $139.3 million.
The increase was primarily due to a $12.4 million increase in corporate expenses
and a $5.1 million increase in SG&A related stock-based compensation expense.
The increase in corporate expenses was primarily attributable to incremental
employee costs of approximately $8.7 million associated with supporting a
growing global organization and a $3.7 million non-recurring state tax expense.
Operating Profit
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Rental and management
Domestic $ 1,497,471 $ 1,313,761 $ 183,710 14 %
International 453,147 338,324 114,823 34
Total rental and management 1,950,618 1,652,085 298,533 18
Network development services 30,896 20,023 10,873 54
Domestic rental and management segment operating profit for the year ended
December 31, 2012 increased 14% to $1,497.5 million. The growth was primarily
attributable to the increase in our domestic rental and management segment gross
margin (14%) as described above, and was partially offset by increases in our
domestic rental and management segment SG&A (11%), as described above.
International rental and management segment operating profit for the year ended
December 31, 2012 increased 34% to $453.1 million. The growth was primarily
attributable to the increase in our international rental and management segment
gross margin (31%) as described above, and was partially offset by increases in
our international rental and management segment SG&A (16%), as described above.
Network development services segment operating profit for the year ended
December 31, 2012 increased 54% to $30.9 million. The growth was primarily
attributable to the increase in network development services segment gross
margin and the decrease in SG&A, as described above.
Depreciation, Amortization and Accretion
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Depreciation, amortization and accretion $ 644,276 $ 555,517 $ 88,759 16 %
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Depreciation, amortization and accretion for the year ended December 31, 2012
increased 16% to $644.3 million. The increase was primarily attributable to the
depreciation, amortization and accretion associated with the acquisition or
construction of approximately 19,280 sites since January 1, 2011, which resulted
in an increase in property and equipment.
Other Operating Expenses
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease) Other operating expenses $ 62,185 $ 58,103 $ 4,082
7 %
Other operating expenses for the year ended December 31, 2012 increased 7% to
$62.2 million. This change was primarily attributable to an increase of
approximately $17.0 million in impairment charges and loss on disposal of
assets, which included an impairment charge of $10.8 million of one of our
outdoor DAS networks, upon the termination of a tenant lease during the year
ended December 31, 2012. This increase was partially offset by a decrease of
approximately $12.9 million in acquisition related costs and non-recurring
consulting and legal costs incurred in 2011 associated with our REIT Conversion.
Interest Expense
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Interest expense $ 401,665 $ 311,854 $ 89,811 29 %
Interest expense for the year ended December 31, 2012 increased 29% to $401.7
million. The increase was primarily attributable to an increase in our average
debt outstanding of approximately $1,617.3 million, which was primarily used to
fund our recent acquisitions, and an increase in our annualized weighted average
cost of borrowing from 5.32% to 5.37%.
Other Expense
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Other expense $ 38,300 $ 122,975 $ (84,675 ) (69 )%
Other expense for the year ended December 31, 2012 decreased 69% to $38.3
million. The decrease was primarily a result of a decline in unrealized currency
losses of $96.8 million. During the year ended December 31, 2012, we recorded
unrealized foreign currency losses of approximately $34.3 million resulting
primarily from fluctuations in the foreign currency exchange rates associated
with our intercompany notes and similar unaffiliated balances denominated in a
currency other than the subsidiaries' functional currencies and other expenses
of approximately $4.0 million. During the year ended December 31, 2011, we
recorded unrealized foreign currency losses of approximately $131.1 million and
other miscellaneous income of $8.1 million.
Income Tax Provision
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Income tax provision $ 107,304 $ 125,080 $ (17,776 ) (14 )%
Effective tax rate 15.3 % 24.7 %
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The income tax provision for the year ended December 31, 2012 decreased 14% to
$107.3 million. The effective tax rate ("ETR") for the year ended December 31,
2012 decreased to 15.3% from 24.7%. This decrease was primarily attributable to
our dividend paid deduction and decreased state taxes during the year ended
December 31, 2012, partially offset by an increase in foreign taxes and
valuation allowance on certain deferred tax assets. The deferred tax assets
arose primarily as a result of purchase accounting and existing NOLs, which were
generated partly from interest on intercompany debt.
As a REIT, we may deduct earnings distributed to stockholders against the income
generated in our QRSs and, in addition, we are able to offset income in both our
TRSs and QRSs by utilizing our NOLs, subject to specified limitations.
The ETR on income from continuing operations for the years ended December 31,
2012 and 2011 differs from the federal statutory rate primarily due to our
expected qualification for taxation as a REIT effective as of January 1, 2012
and to adjustments for foreign items.
Net Income/Adjusted EBITDA
Year Ended December 31, Amount of Percent
Increase Increase
2012 2011 (Decrease) (Decrease)
Net income $ 594,025 $ 381,840 $ 212,185 56 %
Income on equity method investments (35 ) (25 ) 10 40
Income tax provision 107,304 125,080 (17,776 ) (14 )
Other expense 38,300 122,975 (84,675 ) (69 )
Loss on retirement of long-term
obligations 398 - 398 N/A
Interest expense 401,665 311,854 89,811 29
Interest income (7,680 ) (7,378 ) 302 4
Other operating expenses 62,185 58,103 4,082 7
Depreciation, amortization and
accretion 644,276 555,517 88,759 16
Stock-based compensation expense 51,983 47,437 4,546 10
Adjusted EBITDA $ 1,892,421 $ 1,595,403 $ 297,018 19 %
Net income for the year ended December 31, 2012 increased 56% to $594.0 million.
The increase was primarily attributable to an increase in our rental and
management segments operating profit, as described above, as well as decreases
in unrealized foreign currency losses and income tax provision, partially offset
by increases in depreciation, amortization and accretion and interest expense.
Adjusted EBITDA for the year ended December 31, 2012 increased 19% to $1,892.4
million. Adjusted EBITDA growth was primarily attributable to the increase in
our rental and management segments gross margin, and was partially offset by an
increase in SG&A.
Years Ended December 31, 2011 and 2010 (in thousands, except percentages)
Revenue
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)Rental and management
Domestic $ 1,744,260 $ 1,565,474 $ 178,786 11 %
International 641,925 370,899 271,026 73
Total rental and management 2,386,185 1,936,373 449,812 23
Network development services 57,347 48,962 8,385 17
Total revenues $ 2,443,532 $ 1,985,335 $ 458,197 23 %
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Total revenues for the year ended December 31, 2011 increased 23% to $2,443.5
million. The increase was primarily attributable to an increase in both of our
rental and management segments, including organic revenue growth attributable to
our legacy sites and revenue growth attributable to the approximately 18,290 new
communications sites, and property interests that we lease to communications
service providers and third-party tower operators under approximately 1,810
communications sites, acquired since January 1, 2010.
Domestic rental and management segment revenue for the year ended December 31,
2011 increased 11% to $1,744.3 million. This growth was comprised of:
• Approximately 9% from organic revenue growth, which was due to the
incremental revenue generated from adding new tenants to legacy sites,
existing tenants adding more equipment to legacy sites, contractual rent
escalations, and a positive impact from straight-line lease accounting due
to extending thousands of leases with one of our major tenants, partially
offset by tenant lease cancellations; and
• Revenue growth of approximately 2%, which was a result of the construction
or acquisition of approximately 1,420 new domestic communications sites
and the acquisition of property interests that we lease to communications
service providers and third-party tower operators under approximately
1,810 communications sites since January 1, 2010.
International rental and management segment revenue for the year ended
December 31, 2011 increased 73% to $641.9 million. This growth was comprised of:
• Approximately 9% from organic revenue growth, which was due to the incremental revenue generated from adding new tenants to legacy sites,
existing tenants adding more equipment to legacy sites, contractual rent
escalations, a decrease in revenue reserves, the positive impact of
foreign currency translation and the positive impact from straight-line
lease accounting, and was partially offset by tenant lease cancellations;
and
• Revenue growth from new sites of approximately 64%, which was a result of the construction or acquisition of approximately 16,870 new international
sites since January 1, 2010.
Network development services segment revenue for the year ended December 31,
2011 increased 17% to $57.3 million. The increase was primarily attributable to
a number of favorable one-time items.
Gross Margin
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Rental and management
Domestic $ 1,390,802 $ 1,240,114 $ 150,688 12 %
International 420,430 262,842 157,588 60
Total rental and management 1,811,232 1,502,956 308,276 21
Network development services 27,887 22,005 5,882 27
Domestic rental and management segment gross margin for the year ended
December 31, 2011 increased 12% to $1,390.8 million. The growth was primarily
attributable to the increase in revenue as described above, and was partially
offset by a 9% increase in direct operating costs, of which 6% was attributable
to expense increases on our legacy domestic sites and 3% was attributable to the
incremental direct operating costs associated with the addition of approximately
1,420 new domestic sites since January 1, 2010.
International rental and management segment gross margin for the year ended
December 31, 2011 increased 60% to $420.4 million. The growth was primarily
attributable to the increase in revenue as described above, and was partially
offset by a 93% increase in direct operating costs, including pass-through
expenses, of which 9% was attributable to expense increases on our legacy
international sites and changes in foreign currency exchange
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rates, and 84% was attributable to the incremental direct operating costs
associated with the addition of approximately 16,870 new international sites
since January 1, 2010.
Network development services segment gross margin for the year ended
December 31, 2011 increased 27% to $27.9 million. The increase was primarily
attributable to the increase in nonrecurring revenue described above.
Selling, General, Administrative and Development Expense
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Rental and management
Domestic $ 77,041 $ 62,295 $ 14,746 24 %
International 82,106 45,877 36,229 79
Total rental and management 159,147 108,172 50,975 47
Network development services 7,864 6,312 1,552 25
Other 121,813 115,285 6,528 6
Total selling, general,
administrative and development
expense $ 288,824 $ 229,769 $ 59,055 26 %
Total SG&A for the year ended December 31, 2011 increased 26% to $288.8 million.
The increase was primarily attributable to an increase in both of our rental and
management segments.
Domestic rental and management segment SG&A for the year ended December 31, 2011
increased 24% to $77.0 million. The increase was primarily attributable to
initiatives designed to drive growth and to support a growing portfolio,
including increased staffing in field operations, sales and finance, and other
functions supporting the expansion of our business.
International rental and management segment SG&A for the year ended December 31,
2011 increased 79% to $82.1 million. The increase was primarily attributable to
our increased international expansion initiatives in our foreign operations.
Network development services segment SG&A for the year ended December 31, 2011
increased 25% to $7.9 million. The increase was primarily attributable to costs
incurred to support our new tower development and our site acquisition, zoning
and permitting services.
Other SG&A for the year ended December 31, 2011 increased 6% to $121.8 million.
The increase was primarily due to a $14.0 million increase in corporate
expenses, which was partially offset by a $7.4 million decrease in SG&A related
stock-based compensation expense. The increase in corporate expenses was
primarily attributable to incremental employee and increased information
technology costs associated with supporting a growing global organization. The
decrease in stock-based compensation expense was primarily attributable to the
capitalization of approximately $3.1 million, which is now included in property
and equipment as part of our cost to construct tower assets, and the recognition
of approximately $2.3 million in costs of operations during the year ended
December 31, 2011.
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Operating Profit
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Rental and management
Domestic $ 1,313,761 $ 1,177,819 $ 135,942 12 %
International 338,324 216,965 121,359 56
Total rental and management 1,652,085 1,394,784 257,301 18
Network development services 20,023 15,693 4,330 28
Domestic rental and management segment operating profit for the year ended
December 31, 2011 increased 12% to $1,313.8 million. The growth was primarily
attributable to the increase in our domestic rental and management segment gross
margin (12%) as described above, and was partially offset by increases in our
domestic rental and management segment SG&A (24%), as described above.
International rental and management segment operating profit for the year ended
December 31, 2011 increased 56% to $338.3 million. The growth was primarily
attributable to the increase in our international rental and management segment
gross margin (60%) as described above, and was partially offset by increases in
our international rental and management segment SG&A (79%), as described above.
Network development services segment operating profit for the year ended
December 31, 2011 increased 28% to $20.0 million. The growth was primarily
attributable to the increase in gross margin as described above.
Depreciation, Amortization and Accretion
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Depreciation, amortization and
accretion $ 555,517 $ 460,726 $ 94,791 21 %
Depreciation, amortization and accretion for the year ended December 31, 2011
increased 21% to $555.5 million. The increase was primarily attributable to the
depreciation, amortization and accretion associated with the acquisition or
construction of approximately 18,290 sites since January 1, 2010, which resulted
in an increase in property and equipment.
Other Operating Expenses
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)Other operating expenses $ 58,103 $ 35,876 $ 22,227
62 %
Other operating expenses for the year ended December 31, 2011 increased 62% to
$58.1 million. The increase was primarily attributable to an increase of
approximately $21.5 million in acquisition related costs, including contingent
consideration, and consulting and legal costs associated with our REIT
Conversion that are non-recurring in nature.
Interest Expense
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Interest expense $ 311,854 $ 246,018 $ 65,836 27 %
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Interest expense for the year ended December 31, 2011 increased 27% to $311.9
million. The increase was primarily attributable to an increase in average debt
outstanding of approximately $1.4 billion, primarily attributable to our recent
acquisitions, partially offset by a reduction in our annualized weighted average
cost of borrowing from 5.52% to 5.32%.
Other (Expense) Income
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Other (expense) income $ (122,975 ) $ 315 $ (123,290 ) N/A
During the year ended December 31, 2011, we recorded unrealized foreign currency
losses resulting primarily from fluctuations in the foreign currency exchange
rates associated with our intercompany notes and similar unaffiliated balances
denominated in a currency other than the subsidiaries' functional currencies of
approximately $131.1 million and other miscellaneous income of $8.1 million.
During the year ended December 31, 2010, we recorded unrealized foreign currency
gains of approximately $4.8 million and other miscellaneous expense of $4.5
million.
Income Tax Provision
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Income tax provision $ 125,080 $ 182,489 $ (57,409 ) (31 )%
Effective tax rate 24.7 % 32.8 %
The income tax provision for the year ended December 31, 2011 decreased 31% to
$125.1 million. The ETR for the year ended December 31, 2011 decreased to 24.7%
from 32.8%. The decrease in ETR during the year ended December 31, 2011 is
primarily attributable to the impact of our reversal of deferred tax assets and
liabilities for assets and liabilities no longer subject to income taxes at the
REIT level of $121 million, which was partially offset by an increase in the
income tax provision from continuing operations.
The ETRs on income from continuing operations for the years ended December 31,
2011 and 2010 differ from the federal statutory rate primarily attributable to
adjustments for foreign items, non-deductible stock-based compensation expense,
tax reserves and state taxes.
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Net Income/Adjusted EBITDA
Year Ended December 31, Amount of Percent
Increase Increase
2011 2010 (Decrease) (Decrease)
Net income $ 381,840 $ 373,606 $ 8,234 2 %
Income from discontinued operations,
net - (30 ) (30 ) (100 )
Income from continuing operations 381,840 373,576 8,264 2
Income on equity method investments (25 ) (40 ) (15 ) (38 )
Income tax provision 125,080 182,489 (57,409 ) (31 )
Other expense (income) 122,975 (315 ) (123,290 ) N/A
Loss on retirement of long-term
obligations - 1,886 (1,886 ) (100 )
Interest expense 311,854 246,018 65,836 27
Interest income (7,378 ) (5,024 ) 2,354 47
Other operating expenses 58,103 35,876 22,227 62
Depreciation, amortization and
accretion 555,517 460,726 94,791 21
Stock-based compensation expense 47,437 52,555 (5,118 ) (10 )
Adjusted EBITDA $ 1,595,403 $ 1,347,747 $ 247,656 18 %
Net income for the year ended December 31, 2011 increased 2% to $381.8 million.
The increase was primarily attributable to increases in our rental and
management and network development services segment operating profit, as
described above, partially offset by an increase in other expense (income),
depreciation, amortization and accretion and interest expense.
Adjusted EBITDA for the year ended December 31, 2011 increased 18% to $1,595.4
million. Adjusted EBITDA growth was primarily attributable to the increase in
our rental and management segments gross margin and network development services
segment gross margin, and was partially offset by an increase in selling,
general, administrative and development expenses, excluding stock-based
compensation expense.
Liquidity and Capital Resources
Overview
As a holding company, our cash flows are derived primarily from the operations
of, and distributions from, our operating subsidiaries or funds raised through
borrowings under our credit facilities and debt offerings. As of December 31,
2012, we had approximately $1,103.2 million of total liquidity, comprised of
$368.6 million in cash and cash equivalents and the ability to borrow up to
$734.6 million, net of any outstanding letters of credit, under our $1.0 billion
unsecured credit facility entered into in April 2011 (the "2011 Credit
Facility") and our $1.0 billion unsecured credit facility entered into in
January 2012 (the "2012 Credit Facility"). In January 2013, we completed a
registered public offering of $1.0 billion aggregate principal amount of 3.50%
senior unsecured notes due 2023 ("3.50% Notes") and used the net proceeds to
partially repay amounts outstanding under the 2011 Credit Facility and 2012
Credit Facility, which increased our total liquidity by $1.0 billion. Summary
cash flow information for the years ended December 31, 2012, 2011 and 2010 is
set forth below (in thousands).
Year Ended December 31,
2012 2011 2010
Net cash provided by (used for):
Operating activities $ 1,414,391 $ 1,165,942 $ 1,020,977
Investing activities (2,558,385 ) (2,790,812 ) (1,300,902 )
Financing activities 1,170,366 1,086,095 910,330
Net effect of changes in exchange rates
on cash and cash equivalents 12,055 (14,997 ) 6,265
Net increase (decrease) in cash and cash
equivalents $ 38,427 $ (553,772 ) $ 636,670
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We use our cash flows to fund our operations and investments in our business,
including tower maintenance and improvements, communications site construction
and managed network installations, and tower and land acquisitions.
Additionally, we use our cash flows to make distributions of our REIT taxable
income in order to maintain our REIT qualification under the Code and fund our
stock repurchase program. Our significant financing transactions in 2012
included the following:
• We increased our borrowing capacity by entering into the 2012 Credit
Facility and a $750.0 million unsecured term loan (the "2012 Term Loan").
• We completed a registered public offering of $700.0 million aggregate
principal amount of 4.70% senior notes due 2022 (the "4.70% Notes").
• We repurchased 872,005 shares of our common stock for an aggregate purchase price of $62.7 million, including commissions and fees, pursuant
to our stock repurchase program.
As of December 31, 2012, we had total outstanding indebtedness of approximately
$8.8 billion. During the year ended December 31, 2012, we generated sufficient
cash flow from operations to fund our capital expenditures and debt service
obligations, as well as our required REIT distributions in 2012. We believe cash
generated by our operations for the year ending December 31, 2013 will also be
sufficient to fund our capital expenditures, our debt service (interest and
principal repayments) obligations and REIT distribution requirements for 2013.
If our pending acquisitions, capital expenditures or debt repayments exceed the
cash generated by operations, we believe we have sufficient borrowing capacity
under our credit facilities to fund our activities. As of December 31, 2012, we
had approximately $156.8 million of cash and cash equivalents held by our
foreign subsidiaries, of which $63.6 million was held by our joint ventures.
Historically, it has not been our practice to repatriate cash from our foreign
subsidiaries primarily due to our ongoing expansion efforts and related capital
needs. However, in the event that we do repatriate any funds, we may be required
to accrue and pay taxes.
As a REIT, we are subject to a number of organizational and operational
requirements, including a requirement that we annually distribute to our
stockholders an amount equal to at least 90% of our REIT taxable income
(determined before the deduction for distributed earnings and excluding any net
capital gain). Generally, we expect to distribute all or substantially all of
our REIT taxable income so as not to be subject to the income or excise tax on
undistributed REIT taxable income. In 2012, we declared aggregate distributions
of $0.90 per share and made total distributions of $355.6 million to our
stockholders. We intend to continue paying regular distributions in 2013. The
amount, timing and frequency of distributions will be at the sole discretion of
our Board of Directors and will be based upon various factors. See Item 5 of
this Annual Report under the caption "Dividends" for a discussion of those
factors considered.
For more information regarding our financing transactions in 2012, see "-Cash
Flows from Financing Activities" below.
Cash Flows from Operating Activities
For the year ended December 31, 2012, cash provided by operating activities was
$1,414.4 million, an increase of $248.4 million as compared to the year ended
December 31, 2011. This increase was primarily due to an increase in the
operating profit of our rental and management segments and an increase in cash
provided by working capital. This increase was partially offset by an increase
in cash paid for interest and income taxes during the year ended December 31,
2012.
For the year ended December 31, 2011, cash provided by operating activities was
$1,165.9 million, an increase of $145.0 million as compared to the year ended
December 31, 2010. This increase was primarily comprised of an increase in the
operating profit of our rental and management segments and our network
development services segment, partially offset by an increase in cash paid for
interest and income taxes.
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Cash Flows from Investing Activities
For the year ended December 31, 2012, cash used for investing activities was
$2,558.4 million, a decrease of approximately $232.4 million, as compared to the
year ended December 31, 2011. This decrease was primarily attributable to a
decrease in acquisition-related activity during the year ended December 31,
2012.
During the year ended December 31, 2012, payments for purchases of property and
equipment and construction activities totaled $568.0 million, including $279.0
million of capital expenditures for discretionary capital projects, such as
completion of the construction of approximately 2,360 communications sites and
the installation of approximately 600 shared generators domestically, $82.3
million spent to acquire land under our towers that was subject to ground
agreements (including leases), $120.0 million of capital expenditures related to
capital improvements and corporate capital expenditures primarily attributable
to information technology improvements and $86.7 million for the redevelopment
of existing sites to accommodate new tenant equipment. In addition, during the
year ended December 31, 2012, we spent $1,998.0 million to acquire approximately
6,450 communications sites in our served markets, approximately 24 property
interests under third-party communications sites in the United States and for
the payment of amounts previously recognized in accounts payable or accrued
expenses in the consolidated balance sheets for communications sites we acquired
in Chile, Colombia, Ghana and South Africa during the year ended December 31,
2011.
For the year ended December 31, 2011, cash used for investing activities was
$2,790.8 million, an increase of approximately $1,489.9 million, as compared to
the year ended December 31, 2010. This increase was primarily comprised of
increased spending for acquisitions during the year ended December 31, 2011.
During the year ended December 31, 2011, payments for purchases of property and
equipment and construction activities totaled $523.0 million, including $296.9
million of capital expenditures for discretionary capital projects, such as
completion of the construction of approximately 1,850 communications sites,
$91.3 million spent to acquire land under our towers that was subject to ground
agreements (including leases), $79.5 million of capital expenditures related to
capital improvements and corporate capital expenditures primarily attributable
to information technology improvements and $55.3 million for the redevelopment
of existing sites to accommodate new tenant equipment. In addition, during the
year ended December 31, 2011, we spent $2,320.7 million to acquire approximately
8,620 communications sites in the United States, Brazil, Chile, Colombia, Ghana,
Mexico and South Africa and approximately 2,150 property interests under
communications sites in the United States.
We plan to continue to allocate our available capital after our REIT
distribution requirements among investment alternatives that meet our return on
investment criteria. Accordingly, we expect to continue to deploy our
discretionary capital through our annual discretionary capital expenditure
program, including land purchases and new site construction and through
acquisitions. We expect that our 2013 total capital expenditures will be between
approximately $550 million and $650 million, including between $130 million and
$140 million for capital improvements and corporate capital expenditures,
between $95 and $105 million for the redevelopment of existing communications
sites, between $85 million and $105 million for ground lease purchases and
between $240 million and $300 million for other discretionary capital projects
including the construction of approximately 2,250 to 2,750 new communications
sites.
Cash Flows from Financing Activities
For the year ended December 31, 2012, cash provided by financing activities was
$1,170.4 million, as compared to $1,086.1 million during the year ended
December 31, 2011.
Cash provided by financing activities during the year ended December 31, 2012
was primarily due to (i) borrowings under the 2011 Credit Facility of $890.0
million, (ii) borrowings under the 2012 Credit Facility of $1,692.0 million,
(iii) net proceeds from our 2012 Term Loan of $746.4 million, (iv) net proceeds
from our registered offering of 4.70% Notes of $693.0 million, (v) proceeds from
other long-term borrowings of $177.3 million, (vi) proceeds of $55.4 million
from the exercise of stock options and (vii) net contributions from
non-controlling interest holders of $52.8 million.
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These borrowings were partially offset by repayment of (i) $1.0 billion under
our $1.25 billion senior unsecured revolving credit facility (the "Revolving
Credit Facility"), (ii) $700.0 million under the 2012 Credit Facility,
(iii) $625.0 million under the 2011 Credit Facility (iv) $325.0 million of term
loan commitments (the "2008 Term Loan"), and (v) net short-term borrowings of
$55.3 million. In addition, we made distributions to our stockholders in the
aggregate of $355.6 million and we paid $62.7 million for the repurchase of our
common stock under our stock repurchase program.
For the year ended December 31, 2011, cash provided by financing activities was
$1,086.1 million, as compared to cash provided by financing activities of
approximately $910.3 million for the year ended December 31, 2010. The $1,086.1
million of cash provided by financing activities during the year ended
December 31, 2011 partially relates to borrowings under our Revolving Credit
Facility of $925.0 million, net proceeds from our registered offering of the
5.90% senior notes due 2021 (the "5.90% Notes") of $495.2 million, proceeds from
other long-term borrowings of $212.8 million, proceeds from short-term
borrowings of $128.1 million, proceeds from stock options, warrants and stock
purchase plans of $85.6 million and borrowings under our other credit facilities
of $80.0 million. These borrowings were partially offset by payments for the
repurchase of our common stock of $437.4 million, which consisted of $426.1
million of stock repurchases under our stock repurchase programs ($423.9
million, including commissions and fees, and a decrease in accrued treasury
stock of $2.2 million) and $11.2 million of amounts surrendered for the
satisfaction of employee tax obligations in connection with the vesting of
restricted stock units, repayment of notes payable, amounts outstanding under
our credit facilities and capital leases of $395.4 million and distributions to
stockholders of $137.8 million in connection with the one-time special cash
distribution to our stockholders in December 2011.
Revolving Credit Facility and 2008 Term Loan. On January 31, 2012, we repaid and
terminated the Revolving Credit Facility and repaid the 2008 Term Loan with
proceeds from borrowings under the 2011 Credit Facility and the 2012 Credit
Facility.
2011 Credit Facility. As of December 31, 2012, we had $265.0 million outstanding
under the 2011 Credit Facility and had approximately $5.7 million of undrawn
letters of credit. On January 8, 2013, we repaid the amount outstanding with net
proceeds received from the offering of the 3.50% Notes. We continue to maintain
the ability to draw down and repay amounts under the 2011 Credit Facility in the
ordinary course.
The 2011 Credit Facility has a term of five years and matures on April 8, 2016.
The current margin over London Interbank Offered Rate ("LIBOR") that we would
incur on borrowings is 1.850% and the current commitment fee on the undrawn
portion of the 2011 Credit Facility is 0.350%.
As of February 11, 2013, there were no amounts outstanding under the 2011 Credit
Facility.
2012 Credit Facility. On January 31, 2012, we entered into the 2012 Credit
Facility. The 2012 Credit Facility has a term of five years and matures on
January 31, 2017. Any outstanding principal and accrued but unpaid interest will
be due and payable in full at maturity. The 2012 Credit Facility may be paid
prior to maturity in whole or in part at our option without penalty or premium.
We have the option of choosing either a defined base rate or LIBOR as the
applicable base rate for borrowings under the 2012 Credit Facility. The interest
rate ranges between 1.075% to 2.400% above LIBOR for LIBOR based borrowings or
between 0.075% to 1.400% above the defined base rate for base rate borrowings,
in each case based upon our debt ratings. A quarterly commitment fee on the
undrawn portion of the 2012 Credit Facility is required, ranging from 0.125% to
0.450% per annum, based upon our debt ratings. The current margin over LIBOR
that we would incur on borrowings is 1.625%, and the current commitment fee on
the undrawn portion of the 2012 Credit Facility is 0.225%.
The loan agreement contains certain reporting, information, financial and
operating covenants and other restrictions (including limitations on additional
debt, guaranties, sales of assets and liens) with which we must comply. Any
failure to comply with the financial and operating covenants of the loan
agreement would not only
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prevent us from being able to borrow additional funds, but would constitute a
default, which could result in, among other things, the amounts outstanding,
including all accrued interest and unpaid fees, becoming immediately due and
payable.
As of December 31, 2012, we had $992.0 million outstanding under the 2012 Credit
Facility and had approximately $2.7 million of undrawn letters of credit. On
January 8, 2013, we repaid $719.0 million of the amount outstanding with net
proceeds received from the offering of the 3.50% Notes and cash on hand. We
continue to maintain the ability to draw down and repay amounts under the 2012
Credit Facility in the ordinary course.
As of February 11, 2013, we had $422.0 million drawn under the 2012 Credit
Facility.
2012 Term Loan. On June 29, 2012, we entered into the 2012 Term Loan. We
received net proceeds of approximately $746.4 million, of which $632.0 million
were used to repay certain existing indebtedness under the 2012 Credit Facility.
The 2012 Term Loan has a term of five years and matures on June 29, 2017. Any
outstanding principal and accrued but unpaid interest will be due and payable in
full at maturity. The 2012 Term Loan may be paid prior to maturity in whole or
in part at our option without penalty or premium.
We have the option of choosing either a defined base rate or LIBOR as the
applicable base rate. The interest rate ranges between 1.25% to 2.50% above
LIBOR for LIBOR based borrowings or between 0.25% to 1.50% above the defined
base rate for base rate borrowings, in each case based upon our debt ratings. As
of December 31, 2012, the interest rate under the 2012 Term Loan is LIBOR plus
1.75%.
The loan agreement contains certain reporting, information, financial and
operating covenants and other restrictions (including limitations on additional
debt, guaranties, sales of assets and liens) with which we must comply. Any
failure to comply with the financial and operating covenants of the loan
agreement would constitute a default, which could result in, among other things,
the amounts outstanding, including all accrued interest and unpaid fees,
becoming immediately due and payable.
As of December 31, 2012, we had $750.0 million outstanding under the 2012 Term
Loan.
Colombian Short-Term Credit Facility. The 141.1 billion Colombian Peso ("COP")
denominated short-term credit facility (the "Colombian Short-Term Credit
Facility") was executed by one of our Colombian subsidiaries ("ATC Sitios"), on
July 25, 2011, to refinance the credit facility entered into in connection with
the purchase of the exclusive use rights for towers from Telefónica S.A.'s
Colombian subsidiary, Colombia Telecomunicaciones S.A. E.S.P. On November 30,
2012, the Colombian Short-Term Credit Facility was repaid in full with proceeds
from the Colombian Long-Term Credit Facility, described below.
Colombian Long-Term Credit Facility. On October 19, 2012, ATC Sitios entered
into a loan agreement for a COP denominated long-term credit facility (the
"Colombian Long-Term Credit Facility"), which it used to refinance the Colombian
Short-Term Credit Facility on November 30, 2012.
The Colombian Long-Term Credit Facility generally matures on November 30, 2020,
subject to earlier maturity as a result of any mandatory prepayments. Any
outstanding principal and accrued but unpaid interest will be due and payable in
full at maturity. The Colombian Long-Term Credit Facility may be prepaid in
whole or in part, subject to certain limitations and prepayment consideration,
at any time.
Under the terms of the Colombian Long-Term Credit Facility, ATC Sitios paid the
lenders a one-time structuring fee and upfront fee of 2.9 billion COP
(approximately $1.6 million), including value added tax. Principal and interest
are payable quarterly in arrears with principal due in accordance with the
repayment schedule included in the loan agreement. Interest accrues at a per
annum rate equal to 5% above the quarterly advanced Inter-bank Rate ("IBR") in
effect at the beginning of each Interest Period (as defined in the loan
agreement). The interest rate in effect at December 31, 2012 was 9.10%.
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The Colombian Long-Term Credit Facility is secured by, among other things, liens
on towers owned by ATC Sitios. The loan agreement contains certain reporting,
information, financial ratios and operating covenants. Failure to comply with
certain of the financial and operating covenants would constitute a default,
which could result in, among other things, the amounts outstanding, including
all accrued interest and unpaid fees, becoming immediately due and payable. The
loan agreement also requires that ATC Sitios manage exposure to variability in
interest rates on at least fifty percent of the amounts outstanding under the
Colombian Long-Term Credit Facility for the first four years of the loan, and
seventy-five percent thereafter. Accordingly, ATC Sitios entered into interest
rate swap agreements with an aggregate notional value of 101.3 billion COP
(approximately $57.3 million) with certain of the lenders under the Colombian
Long-Term Credit Facility on December 5, 2012.
As of December 31, 2012, 135.0 billion COP (approximately $76.3 million) were
outstanding under the Colombian Long-Term Credit Facility. As of December 31,
2012, the interest rate, after giving effect to the interest rate swap
agreements, was 10.36%.
Colombian Bridge Loans. In connection with the acquisition of communications
sites from Colombia Movil S.A. E.S.P., another of our Colombian subsidiaries
entered into five COP denominated bridge loans. As of December 31, 2012, the
aggregate principal amount outstanding under these bridge loans was 94.0 billion
COP (approximately $53.2 million). As of December 31, 2012, the bridge loans had
an interest rate of 7.99% and mature on June 22, 2013.
Colombian Loan. In connection with the establishment of our joint venture with
Millicom International Cellular S.A. ("Millicom") and the acquisition of certain
communications sites in Colombia, ATC Colombia B.V., a 60% owned subsidiary of
American Tower, entered into a U.S. Dollar-denominated shareholder loan
agreement (the "Colombian Loan"), as the borrower, with our wholly owned
subsidiary (the "ATC Colombian Subsidiary"), and a wholly owned subsidiary of
Millicom (the "Millicom Subsidiary"), as the lenders. The Colombian Loan accrues
interest at 8.30% and matures on February 22, 2022. The portion of the Colombian
Loan made by the ATC Colombian Subsidiary is eliminated in consolidation, and
the portion of the Colombian Loan made by the Millicom Subsidiary is reported as
outstanding debt of American Tower. As of December 31, 2012, an aggregate of
$19.2 million was payable to the Millicom Subsidiary.
South African Facility. Our 1.2 billion South African Rand ("ZAR") denominated
credit facility ("South African Facility") was executed in November 2011 to
refinance the bridge loan entered into in connection with the acquisition of
communications sites from Cell C (Pty) Limited by our local South African
subsidiaries ("SA Borrower"). The South African Facility is secured by, among
other things, liens on towers owned by one of our South African subsidiaries. On
August 8, 2012 and September 14, 2012, we borrowed an additional 123.0 million
ZAR (approximately $15.1 million) and 24.2 million ZAR (approximately $2.9
million), respectively. The South African Facility generally matures on
March 31, 2020, subject to earlier maturity resulting from repayment increases
tied either to SA Borrower's excess cash flows or permitted distributions to SA
Borrower's parent. Principal and interest are payable quarterly in arrears with
principal due in accordance with the repayment schedule included in the loan
agreement. Interest accrues at a rate equal to 3.75% per annum, plus the three
month Johannesburg Interbank Agreed Rate ("JIBAR"). The interest rate in effect
at December 31, 2012 was 8.88%. We entered into interest rate swap agreements to
manage our exposure to variability in interest rates. As of December 31, 2012,
834.3 million ZAR (approximately $98.5 million) was outstanding under the South
African Facility, and after giving effect to the interest rate swap agreements,
the facility accrues interest at a weighted average rate of 9.84%.
Ghana Loan. In connection with the establishment of our joint venture with MTN
Group Limited ("MTN Group") and acquisitions of communications sites in Ghana,
Ghana Tower Interco B.V., a 51% owned subsidiary of American Tower, entered into
a U.S. Dollar-denominated shareholder loan agreement ("Ghana Loan"), as the
borrower, with our wholly owned subsidiary ("ATC Ghana Subsidiary") and Mobile
Telephone Networks (Netherlands) B.V., a wholly owned subsidiary of MTN Group
(the "MTN Ghana Subsidiary"), as the lenders. Pursuant to the terms of the Ghana
Loan, loans were made to the joint venture in connection with the acquisition of
communications sites from MTN Ghana. The Ghana Loan accrues interest at 9.0% and
matures on May 4,
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2016. The portion of the loans made by the ATC Ghana Subsidiary is eliminated in
consolidation and the portion of the loans made by the MTN Ghana Subsidiary is
reported as outstanding debt of American Tower. As of December 31, 2012, an
aggregate of $131.0 million was payable to the MTN Ghana Subsidiary.
Uganda Loan. In connection with the establishment of our joint venture with MTN
Group and acquisitions of communications sites in Uganda, Uganda Tower Interco
B.V., a 51% owned subsidiary of American Tower, entered into a
U.S. Dollar-denominated shareholder loan agreement (the "Uganda Loan"), as the
borrower, with our wholly owned subsidiary (the "ATC Uganda Subsidiary"), and a
wholly owned subsidiary of MTN Group (the "MTN Uganda Subsidiary"), as the
lenders. The Uganda Loan matures on June 29, 2019 and accrues interest at 5.30%
above LIBOR, reset annually, which as of December 31, 2012 was 6.368%. The
portion of the Uganda Loan made by the ATC Uganda Subsidiary is eliminated in
consolidation, and the portion of the Uganda Loan made by the MTN Uganda
Subsidiary is reported as outstanding debt of American Tower. As of December 31,
2012, an aggregate of $61.0 million was payable to the MTN Uganda Subsidiary.
Senior Notes Offerings. On March 12, 2012, we completed a registered public
offering of $700.0 million aggregate principal amount of our 4.70% Notes. The
net proceeds to us from the offering were approximately $693.0 million, after
deducting commissions and expenses. We used the net proceeds to repay a portion
of the outstanding indebtedness incurred under the 2011 Credit Facility and the
2012 Credit Facility, which had been used to fund recent acquisitions.
On January 8, 2013, we completed a registered public offering of $1.0 billion
aggregate principal amount of our 3.50% Notes. The net proceeds to us from the
offering were approximately $983.4 million, after deducting commissions and
expenses. We used $265.0 million of the net proceeds to repay the outstanding
indebtedness under the 2011 Credit Facility and $718.4 million to partially
repay a portion of the outstanding indebtedness under the 2012 Credit Facility.
The 4.70% Notes mature on March 15, 2022, and interest is payable semi-annually
in arrears on March 15 and September 15. We began making interest payments on
the 4.70% Notes on September 15, 2012. The 3.50% Notes mature on January 31,
2023, and interest is payable semi-annually in arrears on January 31 and July 31
of each year. We will begin making interest payments on the 3.50% Notes on
July 31, 2013. We may redeem the 4.70% Notes or the 3.50% Notes at any time at a
redemption price equal to 100% of the principal amount, plus a make-whole
premium, together with accrued interest to the redemption date. Interest on the
4.70% Notes began to accrue on March 12, 2012 and interest on the 3.50% Notes
began to accrue on January 8, 2013, and each is computed on the basis of a
360-day year comprised of twelve 30-day months.
If we undergo a change of control and ratings decline (each as defined in the
indentures governing the 4.70% Notes and the 3.50% Notes), we will be required
to offer to repurchase all of the 4.70% Notes and 3.50% Notes at a purchase
price equal to 101% of the principal amount, plus accrued and unpaid interest up
to but not including the repurchase date. Each of the 4.70% Notes and the 3.50%
Notes rank equally with all of our other senior unsecured debt and are
structurally subordinated to all existing and future indebtedness and other
obligations of our subsidiaries. The indentures contain certain covenants that
restrict our ability to merge, consolidate or sell assets and our (together with
our subsidiaries') ability to incur liens. These covenants are subject to a
number of exceptions, including that we and our subsidiaries may incur certain
liens on assets, mortgages or other liens securing indebtedness, if the
aggregate amount of such liens does not exceed 3.5x Adjusted EBITDA, as defined
in the indentures.
Stock Repurchase Program. In March 2011, our Board of Directors approved the
2011 Buyback, pursuant to which we are authorized to purchase up to $1.5 billion
of common stock.
During the year ended December 31, 2012, we repurchased 872,005 shares of our
common stock for an aggregate of $62.7 million, including commissions and fees,
pursuant to the 2011 Buyback. As of December 31, 2012, we had repurchased a
total of approximately 4.3 million shares of our common stock under the 2011
Buyback for an aggregate of $243.9 million, including commissions and fees.
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Between January 1, 2013 and January 21, 2013, we repurchased an additional
15,790 shares of our common stock for an aggregate of $1.2 million, including
commissions and fees, pursuant to the 2011 Buyback. As of January 21, 2013, we
had repurchased a total of approximately 4.3 million shares of our common stock
under the 2011 Buyback for an aggregate of $245.2 million, including commissions
and fees.
Under the 2011 Buyback, we are authorized to purchase shares from time to time
through open market purchases or privately negotiated transactions at prevailing
prices in accordance with securities laws and other legal requirements, and
subject to market conditions and other factors. To facilitate repurchases, we
make purchases pursuant to trading plans under Rule 10b5-1 of the Exchange Act,
which allow us to repurchase shares during periods when we otherwise might be
prevented from doing so under insider trading laws or because of self-imposed
trading blackout periods.
We expect to continue to manage the pacing of the remaining $1.3 billion under
the 2011 Buyback in response to general market conditions and other relevant
factors. In the near term, we expect to fund any further repurchases of our
common stock through a combination of cash on hand, cash generated by operations
and borrowings under our credit facilities. Purchases under the 2011 Buyback are
subject to us having available cash to fund repurchases.
Sales of Equity Securities. We receive proceeds from sales of our equity
securities pursuant to our employee stock purchase plan and upon exercise of
stock options granted under our equity incentive plans. For the year ended
December 31, 2012, we received an aggregate of $55.4 million in proceeds from
sales of shares pursuant to our employee stock purchase plan and upon exercises
of stock options.
Distributions. As a REIT, we must annually distribute to our stockholders an
amount equal to at least 90% of our REIT taxable income (determined before the
deduction for distributed earnings and excluding any net capital gain).
Generally, we expect to distribute all or substantially all of our REIT taxable
income so as to not be subject to income tax or excise tax on undistributed REIT
taxable income. The amount, timing and frequency of future distributions,
however, will be at the sole discretion of our Board of Directors and will be
declared based upon various factors, a number of which may be beyond our
control, including our financial condition and operating cash flows, the amount
required to maintain REIT status and reduce any income and excise taxes that we
otherwise would be required to pay, limitations on distributions in our existing
and future debt instruments, our ability to utilize NOLs to offset our
distribution requirements, limitations on our ability to fund distributions
using cash generated through our TRSs and other factors that our Board of
Directors may deem relevant.
During the year ended December 31, 2012, we paid an aggregate of $355.6 million
in regular cash distributions to our stockholders, which included our fourth
quarter distribution of approximately $94.8 million to stockholders of record at
the close of business on December 17, 2012. For detail on the other regular cash
distributions paid to our stockholders during 2012, see Item 5 of this Annual
Report under the caption "Dividends."
We will accrue distributions on unvested restricted stock unit awards granted
subsequent to January 1, 2012, which will be payable upon vesting. As of
December 31, 2012, we had accrued $0.7 million of distributions payable upon the
vesting of restricted stock units.
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Contractual Obligations. Our contractual obligations relate primarily to the
Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued in our May
2007 securitization transaction (the "Securitization"), borrowings under our
credit facilities, our outstanding notes and our operating leases related to the
ground under our towers. The following table sets forth information relating to
our contractual obligations payable in cash as of December 31, 2012 (in
thousands):
Contractual Obligations 2013 2014 2015 2016 2017 Thereafter Total
Commercial Mortgage Pass-Through
Certificates, Series 2007-1(1) $ - $ 1,750,000 $ - $ - $ - $ - $ 1,750,000
2011 Credit Facility(2) - - - 265,000 - - 265,000
2012 Credit Facility(2) - - - - 992,000 - 992,000
2012 Term Loan - - - - 750,000 - 750,000
Unison Notes, Series 2010-1 Class
C, Series 2010-2 Class C and
Series 2010-2 Class F notes(3) - - - - 67,000 129,000 196,000
Colombian Long-Term Credit
Facility(4) - 763 3,054 10,689 12,216 49,625 76,347
Colombian Bridge Loans(5) 53,169 - - - - - 53,169
Colombian Loan(6) - - - - - 19,176 19,176
South African Facility(7) 2,461 5,957 11,322 15,753 17,722 45,241 98,456
Ghana Loan(6) - - - 130,951 - - 130,951
Uganda Loan(6) - - - - - 61,023 61,023
4.625% senior notes - - 600,000 - - - 600,000
7.00% senior notes - - - - 500,000 - 500,000
4.50% senior notes - - - - - 1,000,000 1,000,000
7.25% senior notes - - - - - 300,000 300,000
5.05% senior notes - - - - - 700,000 700,000
5.90% senior notes - - - - - 500,000 500,000
4.70% senior notes - - - - - 700,000 700,000
Long-term obligations, excluding
capital leases 55,630 1,756,720 614,376 422,393 2,338,938 3,504,065 8,692,122
Cash interest expense
398,000 342,000 295,000 284,000 214,000 448,000 1,981,000
Capital lease payments (including
interest)
8,242 7,316 5,377 5,485 4,897 164,520 195,837
Total debt service obligations 461,872 2,106,036 914,753 711,878 2,557,835 4,116,585 10,868,959
Operating lease
payments(8) 364,427 352,624 343,478 328,826 317,533 2,878,866 4,585,754
Other non-current
liabilities(9)(10) 506 21,895 4,967 18,690 1,632 1,541,956 1,589,646
Total $ 826,805 $ 2,480,555 $ 1,263,198 $ 1,059,394 $ 2,877,000 $ 8,537,407 $ 17,044,359
(1) Anticipated repayment date; final legal maturity date is April 2037.
(2) On January 8, 2013, we repaid $265.0 million outstanding under our 2011
Credit Facility and $719.0 million outstanding under our 2012 Credit Facility
with proceeds from the 3.50% Notes and cash on hand.
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(3) The Unison Notes, Series 2010-1 Class C, Series 2010-2 Class C and Series
2010-2 Class F notes were assumed by us in connection with the Unison
Acquisition, and have anticipated repayment dates of April 15,
2017, April 15, 2020 and April 15, 2020, respectively, and a final maturity
date of April 15, 2040.
(4) The Colombian Long-Term Credit Facility is denominated in Colombian Pesos.
(5) The Colombian Bridge Loans are denominated in Colombian Pesos. The maturity
dates may be extended from time to time.
(6) Denominated in U.S. Dollars.
(7) The South African Facility is denominated in South African Rand.
(8) Operating lease payments include payments to be made under non-cancellable
initial terms, as well as payments for certain renewal periods at our option
because failure to renew could result in a loss of the applicable
communications sites and related revenues from tenant leases, thereby making
it reasonably assured that we will renew the lease.
(9) Primarily represents our asset retirement obligations and excludes certain
other non-current liabilities included in our consolidated balance sheet,
primarily our straight-line rent liability for which cash payments are
included in operating lease payments and unearned revenue that is not payable
in cash.
(10) Other non-current liabilities exclude $34.3 million of liabilities for
unrecognized tax positions and $28.7 million of accrued income tax related
interest and penalties included in our consolidated balance sheet as we are
uncertain as to when and if the amounts may be settled. Settlement of such
amounts could require the use of cash flows generated from operations. We
expect the unrecognized tax benefits to change over the next 12 months if
certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe. However, based on the status of these
items and the amount of uncertainty associated with the outcome and timing
of audit settlements, we are currently unable to estimate the impact of the
amount of such changes, if any, to previously recorded uncertain tax
positions.
Off-Balance Sheet Arrangements. We have no material off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Interest Rate Swap Agreements. As of December 31, 2012, we held ten interest
rate swap agreements, all of which have been designated as cash flow hedges, and
which had an aggregate notional amount of $107.3 million, interest rates ranging
from 5.78% to 7.25% and expiration dates through November 2020.
Factors Affecting Sources of Liquidity
Internally Generated Funds. Because the majority of our tenant leases are
multi-year contracts, a significant majority of the revenues generated by our
rental and management operations as of the end of 2012 is recurring revenue that
we should continue to receive in future periods. Accordingly, a key factor
affecting our ability to generate cash flow from operating activities is to
maintain this recurring revenue and to convert it into operating profit by
minimizing operating costs and fully achieving our operating efficiencies. In
addition, our ability to increase cash flow from operating activities is
dependent upon the demand for our communications sites and our related services
and our ability to increase the utilization of our existing communications
sites.
Restrictions Under Loan Agreements Relating to the 2011 Credit Facility, the
2012 Credit Facility and the 2012 Term Loan. The loan agreements for the 2011
Credit Facility, the 2012 Credit Facility and the 2012 Term Loan contain certain
financial and operating covenants and other restrictions applicable to us and
all of our subsidiaries that are not designated as unrestricted subsidiaries on
a consolidated basis. These include limitations on additional debt,
distributions and dividends, guaranties, sales of assets and liens. The loan
agreements also contain covenants that establish three financial tests with
which we and our restricted subsidiaries must comply related to total leverage,
senior secured leverage and interest coverage, as set forth below. Where we
designate
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certain of our subsidiaries as unrestricted subsidiaries in accordance with the
respective agreements, those subsidiaries are excluded for purposes of the
covenant calculations. As of December 31, 2012, we were in compliance with each
of these covenants.
• Consolidated Total Leverage Ratio: This ratio requires that we not exceed
a ratio of Total Debt to Adjusted EBITDA (each as defined in the loan
agreements) of 6.00 to 1.00. Based on our financial performance for the 12
months ended December 31, 2012, we could incur approximately $2.5 billion
of additional indebtedness and still remain in compliance with this ratio.
In addition, if we maintain our existing debt levels and our expenses do
not change materially from current levels, our revenues could decrease by
approximately $412 million and we would still remain in compliance with
this ratio.
• Consolidated Senior Secured Leverage Ratio: This ratio requires that we
not exceed a ratio of Senior Secured Debt (as defined in the loan
agreements) to Adjusted EBITDA of 3.00 to 1.00. Based on our financial
performance for the 12 months ended December 31, 2012, we could incur
approximately $3.4 billion of additional Senior Secured Debt and still
remain in compliance with this ratio, (effectively, however, this ratio
would be limited to $2.5 billion to remain in compliance with other covenants). In addition, if we maintain our existing Senior Secured Debt
levels and our expenses do not change materially from current levels, our
revenues could decrease by approximately $1.1 billion and we would still
remain in compliance with this ratio.
• Interest Coverage Ratio: This ratio requires that we maintain a ratio of
Adjusted EBITDA to Interest Expense (as defined in the loan agreements) of
not less than 2.50 to 1.00. Based on our financial performance for the 12
months ended December 31, 2012, our interest expense, which was $391
million for that period, could increase by approximately $356 million and
we would still remain in compliance with this ratio. In addition, if our
interest expense does not change materially from current levels, our
revenues could decrease by approximately $891 million and we would still
remain in compliance with this ratio.
The loan agreements for our credit facilities also contain reporting and
information covenants that require us to provide financial and operating
information within certain time periods. If we are unable to provide the
required information on a timely basis, we would be in breach of these
covenants.
Any failure to comply with the financial maintenance tests and operating
covenants of the loan agreements for our credit facilities would not only
prevent us from being able to borrow additional funds under these credit
facilities, but would constitute a default under these credit facilities, which
could result in, among other things, the amounts outstanding, including all
accrued interest and unpaid fees, becoming immediately due and payable. If this
were to occur, we would not have sufficient cash on hand to repay such
indebtedness. The key factors affecting our ability to comply with the debt
covenants described above are our financial performance relative to the
financial maintenance tests defined in the loan agreements for the credit
facilities and our ability to fund our debt service obligations. Based upon our
current expectations, we believe our operating results during the next twelve
months will be sufficient to comply with these covenants.
Restrictions Under Loan Agreement Relating to the Securitization. The loan
agreement related to the Securitization involves assets related to 5,295
broadcast and wireless communications towers owned by two special purpose
subsidiaries of the Company (the "Borrowers"), through a private offering of
$1.75 billion of Commercial Mortgage Pass-Through Certificates, Series 2007-1
(the "Certificates"). As of December 31, 2012, 5,278 broadcast and wireless
communications towers are owned by the two special purpose subsidiaries.
The Securitization loan agreement includes certain financial ratios and
operating covenants and other restrictions customary for loans subject to rated
securitizations. Among other things, the Borrowers are prohibited from incurring
other indebtedness for borrowed money or further encumbering their assets. The
Borrowers' organizational documents contain provisions consistent with rating
agency securitization criteria for special purpose entities, including the
requirement that the Borrowers maintain at least two independent
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directors. The Securitization loan agreement also contains certain covenants
that require the Borrowers to provide the trustee with regular financial reports
and operating budgets, promptly notify the trustee of events of default and
material breaches under the Securitization loan agreement and other agreements
related to the towers subject to the Securitization, and allow the trustee
reasonable access to the towers, including the right to conduct site
investigations.
Under the terms of the Securitization loan agreement, the loan will be paid
solely from the cash flows generated by the towers subject to the
Securitization, which must be deposited, and thereafter distributed, solely
pursuant to the terms of the Securitization loan. The Borrowers are required to
make monthly payments of interest on the Securitization loan. On a monthly
basis, all cash flow in excess of amounts required to make debt service
payments, to fund required reserves, to pay management fees and budgeted
operating expenses and to make other payments required under the Securitization
loan, referred to as excess cash flow, is to be released to the Borrowers for
distribution to us. During the year ended December 31, 2012, the Borrowers
distributed excess cash to us of approximately $576.8 million.
In order to distribute this excess cash flow to us, the Borrowers must maintain
several specified ratios with respect to their debt service coverage ("DSCR").
For this purpose, DSCR is tested as of the last day of each calendar quarter and
is generally defined as four times the Borrowers' net cash flow for that quarter
divided by the amount of interest, servicing fees and trustee fees that the
Borrowers must pay over the succeeding 12 months on the Securitization loan.
Pursuant to one such test, if the DSCR as of the end of any calendar quarter
were 1.75x or less (the "Cash Trap DSCR"), then all excess cash flow would be
placed in a reserve account and would not be released to the Borrowers for
distribution to us until the DSCR exceeded the Cash Trap DSCR for two
consecutive calendar quarters.
Additionally, while the anticipated repayment date is not until April 2014,
excess cash flow would be applied to principal during an "Amortization Period"
under the Securitization loan until April 2014. An "Amortization Period" would
commence under the Securitization loan if the DSCR as of the end of any calendar
quarter fell below 1.45x (the "Minimum DSCR").
In such a case, all excess cash flow and any amounts then in the reserve account
because the Cash Trap DSCR was not met would be applied to pay principal of the
Securitization loan on each monthly payment date until the DSCR exceeded the
Minimum DSCR for two consecutive calendar quarters, and so would not be
available for distribution to us.
Consequently, a failure to comply with the covenants in the Securitization loan
agreement could prevent the Borrowers from taking certain actions with respect
to the towers. Additionally, a failure to meet the noted DSCR tests could
prevent the Borrowers from distributing excess cash flow to us, which could
affect our ability to fund our discretionary expenditures, including tower
construction and acquisitions, pay REIT distribution requirements and fund our
stock repurchase program. In addition, if the Borrowers were to default on the
loan related to the Securitization, the trustee could seek to foreclose upon or
otherwise convert the ownership of the towers subject to the Securitization, in
which case we could lose the towers and the revenue associated with the towers.
As of December 31, 2012, the Borrowers' DSCR was 3.89x. Based on the Borrowers'
net cash flow for the calendar quarter ended December 31, 2012 and the amount of
interest, servicing fees and trustee fees payable over the succeeding 12 months
on the Securitization loan, the Borrowers could endure a reduction of
approximately $211.3 million in net cash flow before triggering a Cash Trap
DSCR, and approximately $240.9 million in net cash flow before triggering an
Amortization Period.
As discussed above, we use our available liquidity and seek new sources of
liquidity to refinance and repurchase our outstanding indebtedness. In addition,
in order to fund capital expenditures, future growth and expansion initiatives,
satisfy our REIT distribution requirements and fund our stock repurchase
program, we may need to raise additional capital through financing
activities. If we determine that it is desirable or necessary to
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raise additional capital, we may be unable to do so, or such additional
financing may be prohibitively expensive or restricted by the terms of our
outstanding indebtedness. If we are unable to raise capital when our needs
arise, we may not be able to fund capital expenditures, future growth and
expansion initiatives, satisfy our REIT distribution requirements, refinance our
existing indebtedness or fund our stock repurchase program.
In addition, our liquidity depends on our ability to generate cash flow from
operating activities. As set forth under the caption "Risk Factors" in Part I,
Item 1A of this Annual Report on Form 10-K, we derive a substantial portion of
our revenues from a small number of tenants and, consequently, a failure by a
significant tenant to perform its contractual obligations to us could adversely
affect our cash flow and liquidity.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as related disclosures of
contingent assets and liabilities. We evaluate our policies and estimates on an
ongoing basis, including those related to impairment of assets, asset retirement
obligations, accounting for acquisitions, revenue recognition, rent expense,
stock-based compensation and income taxes. Management bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We have reviewed our policies and estimates to determine our critical accounting
policies for the year ended December 31, 2012. We have identified the following
policies as critical to an understanding of our results of operations and
financial condition. This is not a comprehensive list of our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP, with no need for management's judgment in its
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result.
• Impairment of Assets-Assets Subject to Depreciation and Amortization: We
review long-lived assets, including intangibles, for impairment at least
annually or whenever events, changes in circumstances or other indicators
or evidence indicate that the carrying amount of our assets may not be
recoverable. We review our tower portfolio and network location intangible
assets for indications of impairment at the lowest level of identifiable
cash flows, typically at an individual tower basis. Possible indicators
include a tower not having current tenant leases or having expenses in
excess of revenues. A cash flow modeling approach is utilized to assess
recoverability and incorporates, among other items, the tower location,
the tower location demographics, the timing of additions of new tenants,
lease rates and estimated length of tenancy and ongoing cash requirements.
To the extent that cash flows generated under this approach are not
sufficient to recover the carrying value of the towers, an impairment
charge is recognized for the towers and network location intangible
assets. We record any related impairment charge in the period in which we
identify such impairment.
We monitor our customer-related intangible assets on a customer by customer
basis for indications of impairment, such as high levels of turnover or
attrition, non-renewal of a significant number of contracts, or the cancellation
or termination of a relationship. We assess recoverability by determining
whether the carrying value of the customer-related intangible assets will be
recovered through projected undiscounted cash flows. If we determine that the
carrying value of the customer-related intangible asset may not be recoverable,
we measure any impairment based on the fair value of the asset as determined by
the projected future discounted cash flows to be provided from the asset, as
compared to the asset's carrying value. We record any related impairment charge
in the period in which we identify such impairment.
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• Impairment of Assets-Goodwill: We review goodwill for impairment at least
annually (as of December 31) or whenever events or circumstances indicate
the carrying value of an asset may not be recoverable.
Goodwill is recorded in our domestic and international rental and management
segments and network development services segment. We utilize the two step
impairment test when testing goodwill for impairment. When conducting this test,
we employ a discounted cash flow analysis. The key assumptions utilized in the
discounted cash flow analysis include current operating performance, terminal
sales growth rate, management's expectations of future operating results and
cash requirements, the current weighted average cost of capital and an expected
tax rate. Under the first step of this test, we compare the fair value of the
reporting unit, as calculated under an income approach using future discounted
cash flows, to the carrying value of the applicable reporting unit. If the
carrying value exceeds the fair value, we conduct the second step of this test,
in which the implied fair value of the applicable reporting unit's goodwill is
compared to the carrying amount of that goodwill. If the carrying amount of
goodwill exceeds its implied fair value, an impairment loss would be recognized.
During the year ended December 31, 2012, no potential impairment was identified
under the first step of the test. The fair value of each of our reporting units
was in excess of its carrying value and passed with a substantial margin; except
for two reporting units, whose fair value exceed the carrying value by
approximately $87.2 million. For these two reporting units, we performed a
sensitivity analysis on our significant assumptions and determined that none of
the following negative changes in our assumptions individually, which we
determined to be reasonable, would impact our conclusions:
• A 5% reduction in projected net income, or a 110 basis point increase
in the weighted average cost of capital, or a 15% reduction in
terminal sales growth rate.
The goodwill recorded in these two reporting units approximated $41.9 million as
of December 31, 2012, and is the result of recently completed acquisitions.
Accordingly, the sensitivity of projections to changes in the various
assumptions is due, in part, to the timing of the underlying acquisitions(s),
current levels of cash flows and amounts of cash flows generated in excess of
the planned amounts. Due to the proximity of the acquisition date to the
measurement date, the fair value of intangible assets and goodwill used to test
for impairment is in line with the fair value used to initially measure the
business.
• Asset Retirement Obligations: We recognize asset retirement obligations
associated with our obligation to retire tangible long-lived assets and
the related asset retirement costs, which are principally obligations to
remediate leased land on which certain of our tower assets are located, in
the period in which they are incurred, if a reasonable estimate of a fair
value can be made, and we accrete such liability through the obligation's
estimated settlement date. The associated retirement costs are capitalized
as part of the carrying amount of the related tower assets and depreciated
over their estimated useful lives or captured as a component of purchase
accounting.
We updated our assumptions used in estimating our aggregate asset retirement
obligation, which resulted in a net increase in the estimated obligation of $6.6
million during the year ended December 31, 2012. The change in 2012 primarily
resulted from changes in timing of certain settlement date and cost assumptions.
Fair value estimates of liabilities for asset retirement obligations generally
involve discounted future cash flows, and periodic accretion of such liabilities
due to the passage of time is recorded as an operating expense. The significant
assumptions used in estimating our aggregate asset retirement obligation are:
timing of tower removals; cost of tower removals; timing and number of land
lease renewals; expected inflation rates; and credit-adjusted risk-free interest
rates that approximate our incremental borrowing rate. While we feel the
assumptions are appropriate, there can be no assurances that actual costs and
the probability of incurring obligations will not differ from these estimates.
We will continue to review these assumptions periodically and we may need to
adjust them as necessary.
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• Acquisitions: For those acquisitions that meet the definition of a
business combination, we allocate the purchase price, including any contingent consideration, to the assets acquired and the liabilities
assumed at their estimated fair values as of the date of the acquisition
with any excess of the purchase price paid over the estimated fair value
of net assets acquired recorded as goodwill. For those transactions that
do not meet the definition of a business combination, we allocate the
purchase price to property and equipment for the fair value of the towers and to identifiable intangible assets (primarily acquired customer-related
and network location intangibles). The fair value of the assets acquired
and liabilities assumed is typically determined by using either estimates
of replacement costs or discounted cash flow valuation methods. When
determining the fair value of tangible assets acquired, we must estimate
the cost to replace the asset with a new asset taking into consideration
such factors as age, condition and the economic useful life of the asset.
When determining the fair value of intangible assets acquired, we must
estimate the applicable discount rate and the timing and amount of future customer cash flows, including rate and terms of renewal and attrition.
The determination of the final purchase price and acquisition-date fair
values of the identifiable assets acquired and liabilities assumed may
extend over more than one period and result in adjustments to the
preliminary estimate recognized.
• Revenue Recognition: Rental and management revenues are recognized on a
monthly basis under lease or management agreements when earned and when
collectability is reasonably assured, regardless of whether the payments
from the tenants are received in equal monthly amounts. Fixed escalation
clauses present in non-cancellable lease agreements, excluding those tied
to the Consumer Price Index or other inflation-based indices, and other
incentives present in lease agreements with our tenants are recognized on
a straight-line basis over the fixed, non-cancellable terms of the
applicable leases. Total rental and management straight-line revenues for
the years ended December 31, 2012, 2011 and 2010 approximated $165.8
million, $144.0 million and $105.2 million, respectively. Amounts billed up-front for certain services provided in connection with the execution of
lease agreements are initially deferred and recognized as revenue over the
terms of the applicable leases. Amounts billed or received prior to being
earned are deferred and reflected in unearned revenue in the consolidated
balance sheets until the criteria for recognition has been met.
We derive the largest portion of our revenues, corresponding trade receivables
and the related deferred rent asset from a small number of tenants in the
telecommunications industry, and approximately 51% of our revenues are derived
from four tenants in the industry. In addition, we have concentrations of credit
risk in certain geographic areas. We mitigate the concentrations of credit risk
with respect to notes and trade receivables by actively monitoring the credit
worthiness of our borrowers and tenants. In recognizing customer revenue we must
assess the collectibility of both the amounts billed and the portion recognized
on a straight-line basis. This assessment takes tenant credit risk and business
and industry conditions into consideration to ultimately determine the
collectability of the amounts billed. To the extent the amounts, based on
management's estimates, may not be collectible, recognition is deferred until
such point as the uncertainty is resolved. Any amounts that were previously
recognized as revenue and subsequently determined to be uncollectible are
charged to bad debt expense. Accounts receivable are reported net of allowances
for doubtful accounts related to estimated losses resulting from a tenant's
inability to make required payments and allowances for amounts invoiced whose
collectibility is not reasonably assured.
• Rent Expense: Many of the leases underlying our tower sites have fixed
rent escalations, which provide for periodic increases in the amount of
ground rent payable over time. We calculate straight-line ground rent
expense for these leases based on the fixed non-cancellable term of the
underlying ground lease plus all periods, if any, for which failure to
renew the lease imposes an economic penalty to us such that renewal
appears to be reasonably assured. Certain of our tenant leases require us
to exercise available renewal options pursuant to the underlying ground
lease, if the tenant exercises its renewal option. For towers with these
types of tenant leases at the inception of the ground lease, we calculate
our straight-line ground rent over the term of the ground lease, including
all renewal options required
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to fulfill the tenant lease obligation. In addition to the straight-line
ground rent expense recorded, we also record an associated straight-line
rent liability in other non-current liabilities in the accompanying
consolidated balance sheets. Leases may contain complex terms that often
are subject to interpretation.
• Stock-Based Compensation: We measure stock-based compensation cost at the
accounting measurement date based on the fair value of the award and the
fair value is recognized as an expense over the service period, which
generally represents the vesting period. The expense recognized over the
service period is required to include an estimate of the awards that will
not fully vest and be forfeited. The fair value of a stock option is
determined using a Black-Scholes option-pricing model that takes into
account a number of assumptions at the accounting measurement date
including the stock price, the exercise price, the expected life of the
option, the volatility of the underlying stock, the expected
distributions, and the risk-free interest rate over the expected life of
the option. These assumptions are highly subjective and could significantly impact the value of the option and hence the compensation
expense. The fair value of restricted stock units is based on the fair
value of our common stock on the grant date. We recognize stock-based
compensation in either selling, general, administrative and development
expense, costs of operations or as part of the costs associated with the
construction of our tower assets.
• Income Taxes: We will elect to be taxed as a REIT under the Code effective January 1, 2012, and will generally not be subject to federal and state
income taxes on our QRSs' taxable income that we distribute to our
stockholders provided we meet certain organization and operating
requirements. However, even as a REIT, we will remain obligated to pay
income taxes on earnings from our TRS assets. In addition, our international assets and operations continue to be subject to taxation in
the foreign jurisdictions where those assets are held or those operations
are conducted.
Accounting for income taxes requires us to estimate the timing and impact of
amounts recorded in our financial statements that may be recognized differently
for tax purposes. To the extent that the timing of amounts recognized for book
purposes differs from the timing of recognition for tax purposes, deferred tax
assets or liabilities are required to be recorded. Deferred tax assets and
liabilities are measured based on the rate at which we expect these items to be
reflected in our tax returns, which may differ from the current rate. At
December 31, 2011, we reversed deferred tax assets and liabilities related to
our REIT activities as a result of a reduction of the expected tax rate. As a
REIT, we will not pay federal income tax on our QRSs, because a dividends paid
deduction will be available to offset our taxable income. Additionally, we will
be permitted to use NOLs to offset our REIT taxable income. We do not expect to
pay federal taxes on our REIT taxable income.
We periodically review our deferred tax assets, and we record a valuation
allowance to reduce our net deferred tax asset to the amount that management
believes is more likely than not to be realized. As of December 31, 2012, we
have provided a valuation allowance of approximately $95.6 million on deferred
tax assets for certain of our subsidiaries, which primarily relates to foreign
NOLs. We have not provided a valuation allowance for the remaining deferred tax
asset, primarily our foreign and federal NOLs related to other TRS entities, as
we believe that we will have sufficient taxable income to realize these NOLs
during the applicable carryforward period. Valuation allowances may be reversed
if related deferred tax assets are deemed realizable based on changes in facts
and circumstances relevant to the assets' recoverability.
The recoverability of our U.S. federal net deferred tax asset has been assessed
utilizing projections based on our current operations. Accordingly, the
recoverability of our net deferred tax asset is not dependent on material asset
sales or other non-routine transactions. Based on our current outlook of future
taxable income during the carryforward period, management believes that our net
deferred tax asset will be realized. If we are unable to generate sufficient
taxable income in the future, we will be required to reassess our deferred tax
assets and consider an adjustment to our valuation allowances.
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Changes in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. Management is not aware of any such changes that
would have a material effect on our consolidated results of operations, cash
flows or financial position.
We recognize the benefit of uncertain tax positions when, in management's
judgment, it is more likely than not that positions we have taken in our tax
returns will be sustained upon examination, which are measured at the largest
amount that is greater than 50% likely of being realized upon settlement. We
adjust our tax liabilities when our judgment changes as a result of the
evaluation of new information or information not previously available. Due to
the complexity of some of these uncertainties, the ultimate resolution may
result in a payment that is materially different from our current estimate of
the tax liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which additional information is
available or the position is ultimately settled under audit.
We expect the unrecognized tax benefits to change over the next 12 months if
certain tax matters ultimately settle with the applicable taxing jurisdiction
during this timeframe, or if the applicable statute of limitations lapses. We
believe that the amount of the change could range from zero to $1.3 million. As
of December 31, 2012, we have classified approximately $34.3 million of reserves
for uncertain tax positions as other non-current liabilities in the consolidated
balance sheet. We also classified approximately $28.7 million of accrued income
tax-related interest and penalties as other non-current liabilities in the
consolidated balance sheet as of December 31, 2012.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws, regulations and administrative practices in
a multitude of jurisdictions across our operations.
From time to time, we are subject to examination by various tax authorities in
jurisdictions in which we have significant business operations, and we regularly
assess the likelihood of additional assessments in each of the tax jurisdictions
resulting from these examinations. We believe that adequate provisions have been
made for income taxes for all periods through December 31, 2012.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely
invested outside the United States on the basis of estimates that future
domestic cash generation will be sufficient to meet future domestic cash needs.
We have not recorded a deferred tax liability related to the U.S. federal and
state income taxes and foreign withholding taxes on approximately $101 million
of undistributed earnings of foreign subsidiaries indefinitely invested outside
of the United States. Should we decide to repatriate the foreign earnings, we
may have to adjust the income tax provision in the period we determined that the
earnings will no longer be indefinitely invested outside of the United States.
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