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AMERICAN TOWER CORP /MA/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements relating to our goals, beliefs, plans or current expectations and other statements that are not of historical facts. For example, when we use words such as "project," "believe," "anticipate," "expect," "forecast," "estimate," "intend," "should," "would," "could," "may" or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. Certain important factors may cause actual results to differ materially from those indicated by our forward-looking statements, including those set forth under the caption "Risk Factors" in Part II, Item 1A. of this Quarterly Report on Form 10-Q. Forward-looking statements represent management's current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements made by us. The discussion and analysis of our financial condition and results of operations that follow are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("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 condensed consolidated financial statements herein and the accompanying notes thereto, information set forth under the caption "Critical Accounting Policies and Estimates" of our Annual Report on Form 10-K for the year ended December 31, 2013, and in particular, the information set forth therein under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview We are a leading independent owner, operator and developer of wireless and broadcast communications real estate. Our primary business is the leasing of antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data and data providers, government agencies and municipalities and tenants in a number of other industries. We refer to this business as our rental and management operations, which accounted for approximately 97% of our total revenues for the nine months ended September 30, 2014. Through our network development services, 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, including in connection with provider network upgrades. We began operating as a real estate investment trust ("REIT") for federal income tax purposes effective January 1, 2012. Our communications real estate portfolio of 69,912 sites, as of September 30, 2014, includes wireless and broadcast communications towers and distributed antenna system ("DAS") networks, which provide seamless coverage solutions in certain in-building and outdoor wireless environments. Our portfolio primarily consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including, as of September 30, 2014, 28,394 towers domestically and 41,125 towers internationally. Our portfolio also includes 393 DAS networks. 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. In October 2013, we acquired MIP Tower Holdings LLC ("MIPT"), a private REIT and parent company to Global Tower Partners ("GTP"), an owner and operator of approximately 5,370 communications sites, through its various operating subsidiaries, in the United States, Costa Rica and Panama. GTP also manages rooftops and holds property interests that it leases to communications service providers and third-party tower operators. As a result of our acquisition of MIPT, we own an interest in a subsidiary REIT, and are currently evaluating the continued election of MIPT's private REIT status. In September 2014, we completed the sale of the operations in Panama. 38-------------------------------------------------------------------------------- Table of Contents The following table details the number of communications sites, excluding managed sites, we own or operate as of September 30, 2014: Number of Number of Country Owned Sites Operated Sites (1) United States 21,488 7,211 International: Brazil 6,826 155 Chile 1,160 - Colombia 2,850 706 Costa Rica 460 - Germany 2,031 - Ghana 2,033 - India 12,553 - Mexico 8,532 199 Peru 528 - South Africa 1,917 - Uganda 1,263 - (1) All of the communications sites we operate are held pursuant to long-term capital leases, including those subject to purchase options. Our continuing operations are reported in three segments: domestic rental and management, international rental and management and network development services. Among other factors, in evaluating operating performance in each business segment, management uses segment gross margin and segment operating profit. We define segment gross margin as segment revenue less segment operating expenses, excluding stock-based compensation expense 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 15 to our condensed consolidated financial statements included herein). These measures of segment gross margin and segment operating profit are also before Interest income, Interest expense, Gain (loss) on retirement of long-term obligations, Other income (expense), Net income (loss) attributable to noncontrolling interest, Income (loss) on equity method investments and Income tax benefit (provision). In the section that follows, we provide information regarding management's expectations of long-term drivers of demand for our communications sites, as well as our current results of operations, financial position and sources and uses of liquidity. In addition, we highlight key trends, which management believes provide valuable insight into our operating and financial resource allocation decisions. Revenue Growth. Due to our diversified communications site portfolio, our tenant lease rates vary considerably depending upon numerous factors, including but not limited to, tower location, amount and type of tenant equipment on the tower, ground space required by the tenant and remaining tower capacity. We measure the remaining tower capacity by assessing several factors, including tower height, tower type, environmental conditions, existing equipment on the tower and zoning and permitting regulations in effect in the jurisdiction where the tower is located. In many instances, tower capacity can be increased through tower augmentation. The primary factors affecting the revenue growth of our domestic and international rental and management segments are: • Recurring revenues from tenant leases attributable to sites that 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; 39 -------------------------------------------------------------------------------- Table of Contents • New revenue attributable to leasing additional space on our legacy sites; and • New revenue attributable to sites acquired or constructed since the beginning of the prior year period ("new sites"). 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. Accordingly, nearly all of the revenue generated by our rental and management operations during the nine months ended September 30, 2014 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 September 30, 2014, we expect to generate approximately $23 billion of non-cancellable tenant lease revenue over future periods, absent the impact of straight-line lease accounting. Most of our tenant leases have provisions that periodically increase the rent due under the lease, typically annually based on a fixed escalation (approximately 3% in the United States) or an inflationary index in our international markets, or a combination of both. Revenue lost from either cancellations of leases at the end of their terms or rent negotiations historically has not had a material adverse effect on the revenues generated by our rental and management operations. During the nine months ended September 30, 2014, loss of revenue from tenant lease cancellations or renegotiations represented approximately 1.5% of our rental and management operations revenues. Demand Drivers. 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 the corresponding incremental demand for our wireless real estate. By adding new tenants and new equipment for existing tenants on our sites, we are able to increase these sites' utilization and profitability. 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 existing networks, while also deploying 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 objectives. In a majority of our international markets, revenue also includes the reimbursement of direct costs such as ground rent or power and fuel costs. Based on industry research and projections, 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, we expect our tenants to continue deploying additional equipment across their existing networks. • Wireless service providers compete based on the quality of their existing wireless networks, which is driven by capacity and coverage. To maintain or improve their network performance as overall network usage increases, our tenants continue deploying additional equipment across their existing sites while also adding new cell sites. We anticipate increasing network densification over the next several years, as existing network infrastructure is anticipated to be insufficient to account for rapidly increasing levels of wireless data usage. • Wireless service providers are also investing in reinforcing their networks through incremental backhaul and the utilization of on-site generators, which typically results in additional equipment or space leased at the tower site, and incremental revenue. • Wireless service providers continue to acquire additional spectrum, and as a result are expected to add additional sites and equipment to their network as they seek to optimize their network configuration. As part of our international expansion initiatives, we have targeted markets in three stages of network development in order to diversify our international exposure and position us to benefit from a number of different wireless technology deployments over the long term. In addition, we have focused on building relationships with 40 -------------------------------------------------------------------------------- Table of Contents large multinational carriers such as MTN Group Limited, Telefónica S.A. and Vodafone Group PLC. We believe that consistent carrier investments in their networks across our international markets position us to generate meaningful organic revenue growth going forward. In emerging markets, such as Ghana, India and Uganda, wireless networks tend to be significantly less advanced than those in the United States, and initial voice networks continue to be deployed in underdeveloped areas. In more developed urban locations within these markets, early-stage data network deployments are underway. Carriers are focused on completing voice network build-outs while also investing in initial data networks as wireless data usage and smartphone penetration within their customer bases begin to accelerate. In markets with rapidly evolving network technology, such as South Africa and most of the countries in Latin America where we do business, initial voice networks, for the most part, have already been built out, and carriers are focused on third generation (3G) network build outs, with select investments in fourth generation (4G) technology. Recent spectrum auctions in these rapidly evolving markets have allowed incumbent carriers to accelerate their data network deployments and have also enabled new entrants to begin initial investments in data networks. Smartphone penetration and wireless data usage in these markets are growing rapidly, which mandates that carriers continue to invest in their networks in order to maintain and augment their quality of service. Finally, in markets with more mature network technology, such as Germany, carriers are focused on deploying 4G data networks to account for rapidly increasing wireless data usage. With a more mature customer base, higher smartphone penetration and significantly higher per capita data usage, carrier investment in networks is focused on 4G coverage and capacity. We believe that the network technology migration we have seen in the United States, which has led to significantly denser networks and meaningful new business commencements for us over a number of years, will ultimately be replicated in our less advanced international markets. As a result, we expect to be able to leverage our extensive international portfolio of over 41,000 communications sites and the relationships we have built with our carrier customers to drive sustainable, long-term growth. 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 and power and fuel costs, some of which may be passed through to our tenants, as well as property taxes, repairs and maintenance. 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 condensed 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, however, incur additional segment selling, general, administrative and development expenses as we increase our presence in geographic areas where we have 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. 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 small percentage of our total revenues. 41 -------------------------------------------------------------------------------- Table of Contents 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"), Funds From Operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT FFO") and Adjusted Funds From Operations ("AFFO"). We define Adjusted EBITDA as Net income before Income (loss) on discontinued operations, net; Income (loss) on equity method investments; Income tax benefit (provision); Other income (expense); Gain (loss) on retirement of long-term obligations; Interest expense; Interest income; Other operating income (expense); Depreciation, amortization and accretion; and stock-based compensation expense. NAREIT FFO is defined as net income before gains or losses from the sale or disposal of real estate, real estate related impairment charges, real estate related depreciation, amortization and accretion and dividends declared on preferred stock, and including adjustments for (i) unconsolidated affiliates and (ii) noncontrolling interest. We define AFFO as NAREIT FFO before (i) straight-line revenue and expense; (ii) stock-based compensation expense; (iii) the non-cash portion of our tax provision; (iv) non-real estate related depreciation, amortization and accretion; (v) amortization of deferred financing costs, capitalized interest, debt discounts and premiums and long-term deferred interest charges; (vi) other income (expense); (vii) gain (loss) on retirement of long-term obligations; (viii) other operating income (expense); and adjustments for (ix) unconsolidated affiliates and (x) noncontrolling interest, less cash payments related to capital improvements and cash payments related to corporate capital expenditures. Adjusted EBITDA, NAREIT FFO and AFFO are not intended to replace net income or any other performance measures determined in accordance with GAAP. Neither NAREIT FFO nor AFFO represent cash flows from operating activities in accordance with GAAP and, therefore, these measures should not be considered indicative of cash flows from operating activities as a measure of liquidity or of funds available to fund our cash needs, including our ability to make cash distributions. Rather, Adjusted EBITDA, NAREIT FFO and AFFO are presented as we believe each is a useful indicator of our current operating performance. We believe that these metrics are useful to an investor in evaluating our operating performance because (1) each is a key measure used by our management team for purposes of decision making and for evaluating the performance of our operating segments; (2) Adjusted EBITDA is a component of the calculation used by our lenders to determine compliance with certain debt covenants; (3) Adjusted EBITDA 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) each provides investors with a meaningful measure for evaluating our period-to-period operating performance by eliminating items that are not operational in nature; and (5) each provides investors with a measure for comparing our results of operations to those of other companies. Our measurement of Adjusted EBITDA, NAREIT FFO and AFFO may not, however, be fully comparable to similarly titled measures used by other companies. Reconciliations of Adjusted EBITDA, NAREIT FFO and AFFO to net income, the most directly comparable GAAP measure, have been included below. 42-------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended September 30, 2014 and 2013 (in thousands, except percentages) Revenue Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 663,570 $ 529,941 $ 133,629 25 % International 347,549 266,634 80,915 30 Total rental and management 1,011,119 796,575 214,544 27 Network development services 27,069 11,305 15,764 139 Total revenues $ 1,038,188 $ 807,880 $ 230,308 29 % Total revenues for the three months ended September 30, 2014 increased 29% to $1,038.2 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 13,825 new sites that we have constructed or acquired since July 1, 2013. Approximately $86.9 million of the increase was attributable to revenues generated by MIPT. Domestic rental and management segment revenue for the three months ended September 30, 2014 increased 25% to $663.6 million. This growth was comprised of: • Revenue growth of approximately 15% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites in connection with our acquisition of MIPT; • Revenue growth from legacy sites of approximately 8%, which includes approximately 7% primarily generated by new tenant leases and amendments to existing tenant leases and approximately 1% attributable to contractual rent escalations, net of tenant lease cancellations; • Revenue growth of approximately 3% from approximately 885 new sites, as well as land interests under third-party sites, constructed or acquired since July 1, 2013 (excluding MIPT); and • A decrease of approximately 1% from the impact of straight-line lease accounting. International rental and management segment revenue for the three months ended September 30, 2014 increased 30% to $347.5 million. This growth was comprised of: • Revenue growth of approximately 19% from approximately 8,080 new sites constructed or acquired since July 1, 2013 (including approximately 460 sites in Costa Rica in connection with our acquisition of MIPT); • Revenue growth from legacy sites of approximately 17%, which includes approximately 14% primarily generated by new tenant leases and amendments to existing tenant leases and approximately 3% attributable to contractual rent escalations, net of tenant lease cancellations; • Revenue growth of approximately 1% from the impact of straight-line lease accounting; and • A decrease of approximately 7% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 5% related to fluctuations in Ghanaian Cedi ("GHS") and approximately 1% related to fluctuations in each of South African Rand ("ZAR") and Mexican Pesos ("MXN"). 43 -------------------------------------------------------------------------------- Table of Contents Network development services segment revenue for the three months ended September 30, 2014 increased 139% to $27.1 million. The increase was primarily due to an increase in site acquisition, zoning and permitting services associated with certain tenants' next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT. Gross Margin Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 529,619 $ 434,709 $ 94,910 22 % International 212,150 169,705 42,445 25 Total rental and management 741,769 604,414 137,355 23 Network development services 15,323 6,528 8,795 135 % Domestic rental and management segment gross margin for the three months ended September 30, 2014 increased 22% to $529.6 million. This growth was comprised of: • Gross margin growth of approximately 14% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites, in connection with our acquisition of MIPT; • Gross margin growth from legacy sites of approximately 8%, primarily associated with the increase in revenue, as described above; • Gross margin growth from new sites (excluding MIPT) of approximately 3%, primarily associated with the increase in revenue, as described above; and • A decrease of approximately 3% from the impact of straight-line lease accounting. International rental and management segment gross margin for the three months ended September 30, 2014 increased 25% to $212.2 million. This growth was comprised of: • Gross margin growth from new sites (including MIPT) of approximately 14%, primarily associated with the increase in revenue, as described above; • Gross margin growth from legacy sites of approximately 16%, primarily associated with the increase in revenue, as described above; • Gross margin growth of approximately 1% from the impact of straight-line lease accounting; and • A decrease of approximately 6% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 5% related to fluctuations in GHS and approximately 1% related to fluctuations in each of ZAR and MXN. Network development services segment gross margin for the three months ended September 30, 2014 increased 135% to $15.3 million, primarily due to the increase in revenue as described above. 44-------------------------------------------------------------------------------- Table of Contents Selling, General, Administrative and Development Expense Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 30,955 $ 24,523 $ 6,432 26 % International 33,441 31,728 1,713 5 Total rental and management 64,396 56,251 8,145 14 Network development services 3,020 1,880 1,140 61 Other 41,493 39,650 1,843 5 Total selling, general, administrative and development expense $ 108,909 $ 97,781 $ 11,128 11 % Total selling, general, administrative and development expense ("SG&A") for the three months ended September 30, 2014 increased 11% to $108.9 million. Domestic rental and management segment SG&A for the three months ended September 30, 2014 increased 26% to $31.0 million. The increase was primarily driven by increased personnel costs to support our business, including additional costs associated with the acquisition of MIPT. International rental and management segment SG&A for the three months ended September 30, 2014 increased 5% to $33.4 million. The increase was primarily due to the impact of increased personnel costs to support our business, partially offset by the favorable impact of foreign currency fluctuations, as well as the reversal of bad debt expense for amounts previously reserved. Network development services segment SG&A for the three months ended September 30, 2014 increased 61% to $3.0 million. The increase was primarily due to higher personnel costs related to additional site acquisition, zoning and permitting services associated with certain tenants' next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT. Other SG&A for the three months ended September 30, 2014 increased 5% to $41.5 million, primarily due to an increase of $3.1 million related to stock-based compensation expense, partially offset by a $1.3 million decrease in corporate SG&A. The decrease in corporate SG&A was primarily related to a reduction in legal expenses of $2.3 million, partially offset by an increase in other personnel costs to support our business. Operating Profit Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 498,664 $ 410,186 $ 88,478 22 % International 178,709 137,977 40,732 30 Total rental and management 677,373 548,163 129,210 24 Network development services 12,303 4,648 7,655 165 % Domestic rental and management segment operating profit for the three months ended September 30, 2014 increased 22% to $498.7 million. The growth was primarily attributable to the increase in our domestic rental and management segment gross margin (22%) and was partially offset by an increase in our domestic rental and management segment SG&A (26%). 45-------------------------------------------------------------------------------- Table of Contents International rental and management segment operating profit for the three months ended September 30, 2014 increased 30% to $178.7 million. The growth was primarily attributable to the increase in our international rental and management segment gross margin (25%) and was partially offset by an increase in our international rental and management segment SG&A (5%). Network development services segment operating profit for the three months ended September 30, 2014 increased 165% to $12.3 million. The increase was primarily attributable to the increase in network development services segment gross margin (135%) and was partially offset by an increase in network development services segment SG&A (61%). Depreciation, Amortization and Accretion Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Depreciation, amortization and accretion $ 249,066 $ 184,922 $ 64,144 35 % Depreciation, amortization and accretion for the three months ended September 30, 2014 increased 35% to $249.1 million. The increase was primarily attributable to the depreciation, amortization and accretion associated with the acquisition or construction of approximately 13,825 sites since July 1, 2013, which resulted in an increase in property and equipment and intangible assets subject to amortization. Other Operating Expenses Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Other operating expenses $ 11,204 $ 15,469 $ (4,265 ) (28 )% Other operating expenses for the three months ended September 30, 2014 decreased 28% to $11.2 million. The decrease was primarily attributable to a $4.2 million decrease in losses from sale or disposal of assets and impairment charges for the three months ended September 30, 2014. Interest Expense Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Interest expense $ 143,212 106,335 $ 36,877 35 % Interest expense for the three months ended September 30, 2014 increased 35% to $143.2 million. The increase was primarily attributable to an increase of $4.6 billion in our average debt outstanding, partially offset by a decrease in our annualized weighted average cost of borrowing from 4.55% to 4.10%. The weighted average contractual interest rate was 4.09% at September 30, 2014. Gain on Retirement of Long-Term Obligations Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Gain on retirement of long-term obligations $ 2,969 $ - $ 2,969 N/A 46 -------------------------------------------------------------------------------- Table of Contents During the three months ended September 30, 2014, we repaid in full the aggregate principal amount outstanding of $250.0 million under the Series 2010-1 Class C Notes and the Series 2010-1 Class F Notes that we assumed in connection with our acquisition of MIPT (together, the "Series 2010-1 Notes") and wrote-off $3.0 million of the unamortized premium associated with the fair value adjustment, resulting in a gain on retirement of long-term obligations. Other Expense Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Other expense $ 34,019 $ 29,622 $ 4,397 15 % During the three months ended September 30, 2014, other expense was $34.0 million, which reflected $37.0 million of unrealized foreign currency losses, as compared to $30.9 million of unrealized foreign currency losses during the three months ended September 30, 2013. We record unrealized foreign currency gains or losses as a result of fluctuations in the foreign currency exchange rates primarily associated with our intercompany notes and similar unaffiliated balances denominated in a currency other than the subsidiaries' functional currencies. During the three months ended September 30, 2014, we recorded unrealized foreign currency losses of $207.1 million, of which $170.1 million was recorded in Accumulated other comprehensive income (loss) ("AOCI") and $37.0 million was recorded in Other expense (see note 1 to the condensed consolidated financial statements included herein). Income Tax Provision Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Income tax provision $ 10,426 15,586 $ (5,160 ) (33 )% Effective tax rate 4.8 % 8.7 % The income tax provision for the three months ended September 30, 2014 and 2013 was $10.4 million and $15.6 million, respectively. The effective tax rate ("ETR") for the three months ended September 30, 2014 decreased to 4.8% from 8.7% primarily due to the change in election of previously designated domestic taxable REIT subsidiaries ("TRSs") to be treated as qualified REIT subsidiaries or other disregarded entities of a REIT (collectively, "QRSs"). The ETR on income from continuing operations for the three months ended September 30, 2014 and 2013 differs from the federal statutory rate primarily due to our qualification for taxation as a REIT and adjustments for foreign items. As a REIT, we may deduct earnings distributed to stockholders against the income generated in our QRSs. In addition, we are able to offset income in both our TRSs and QRSs by utilizing our net operating losses ("NOLs"), subject to specified limitations. 47 -------------------------------------------------------------------------------- Table of Contents Net Income/Adjusted EBITDA Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Net income $ 206,630 $ 163,222 $ 43,408 27 % Income tax provision 10,426 15,586 (5,160 ) (33 ) Other expense 34,019 29,622 4,397 15 Gain on retirement of long-term obligations (2,969 ) - 2,969 N/A Interest expense 143,212 106,335 36,877 35 Interest income (3,850 ) (2,342 ) 1,508 64 Other operating expenses 11,204 15,469 (4,265 ) (28 ) Depreciation, amortization and accretion 249,066 184,922 64,144 35 Stock-based compensation expense 18,269 15,058 3,211 21 Adjusted EBITDA $ 666,007 $ 527,872 $ 138,135 26 % Net income for the three months ended September 30, 2014 increased 27% to $206.6 million primarily due to the increase in our operating profit, as described above. The increase in net income was partially offset by increases in depreciation, amortization and accretion expense and interest expense. Adjusted EBITDA for the three months ended September 30, 2014 increased 26% to $666.0 million. Adjusted EBITDA growth was primarily attributable to the increase in our gross margin, partially offset by an increase in SG&A of $8.0 million, excluding the impact of stock-based compensation expense. Net Income/NAREIT FFO/AFFO Three Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Net income $ 206,630 $ 163,222 $ 43,408 27 % Real estate related depreciation, amortization and accretion 219,977 160,976 59,001 37 Losses from sale or disposal of real estate and real estate related impairment charges 626 6,160 (5,534 ) (90 ) Dividends declared on preferred stock (7,700 ) - 7,700 N/A Adjustments for unconsolidated affiliates and noncontrolling interest (4,049 ) 10,516 (14,565 ) (139 ) NAREIT FFO $ 415,484 $ 340,874 $ 74,610 22 % Straight-line revenue (31,942 ) (37,286 ) (5,344 ) (14 ) Straight-line expense 12,364 6,293 6,071 96 Stock-based compensation expense 18,269 15,058 3,211 21 Non-cash portion of tax (benefit) provision (6,177 ) 9,567 15,744 165 Non-real estate related depreciation, amortization and accretion 29,089 23,946 5,143 21 Amortization of deferred financing costs, capitalized interest, debt discounts and premiums and long-term deferred interest charges (1,460 ) 7,127 (8,587 ) (120 ) Other expense (1) 34,019 29,622 4,397 15 Gain on retirement of long-term obligations (2,969 ) - 2,969 N/A Other operating expenses (2) 10,578 9,309 1,269 14 Capital improvement capital expenditures (15,845 ) (18,724 ) (2,879 ) (15 ) Corporate capital expenditures (5,661 ) (7,930 ) (2,269 ) (29 ) Adjustments for unconsolidated affiliates and noncontrolling interest 4,049 (10,516 ) (14,565 ) (139 ) AFFO $ 459,798 $ 367,340 $ 92,458 25 % (1) Primarily includes unrealized losses on foreign currency exchange rate fluctuations. (2) Primarily includes acquisition related costs, integration costs, losses from sale of assets and impairment charges. 48 -------------------------------------------------------------------------------- Table of Contents NAREIT FFO for the three months ended September 30, 2014 was $415.5 million as compared to NAREIT FFO of $340.9 million for the three months ended September 30, 2013. AFFO for the three months ended September 30, 2014 increased 25% to $459.8 million as compared to $367.3 million for the three months ended September 30, 2013. AFFO growth was primarily attributable to the increase in our operating profit and a decrease in capital improvement and corporate capital expenditures, partially offset by increases in cash paid for interest and taxes and dividends declared on preferred stock. Nine Months Ended September 30, 2014 and 2013 (in thousands, except percentages) Revenue Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 1,959,092 $ 1,566,660 $ 392,432 25 % International 1,017,908 796,547 221,361 28 Total rental and management 2,977,000 2,363,207 613,793 26 Network development services 76,734 56,231 20,503 36 Total revenues $ 3,053,734 $ 2,419,438 $ 634,296 26 % Total revenues for the nine months ended September 30, 2014 increased 26% to $3,053.7 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 15,770 new sites that we have constructed or acquired since January 1, 2013. Approximately $255.9 million of the increase was attributable to revenues generated by MIPT. Domestic rental and management segment revenue for the nine months ended September 30, 2014 increased 25% to $1,959.1 million. This growth was comprised of: • Revenue growth of approximately 15% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites in connection with our acquisition of MIPT; • Revenue growth from legacy sites of approximately 9%, including approximately 8% primarily generated by new tenant leases and amendments to existing tenant leases and approximately 1% attributable to contractual rent escalations, net of tenant lease cancellations; • Revenue growth of over 2% from approximately 1,090 new sites, as well as land interests under third-party sites, constructed or acquired since January 1, 2013 (excluding MIPT); and • A decrease of approximately 1% from the impact of straight-line lease accounting. International rental and management segment revenue for the nine months ended September 30, 2014 increased 28% to $1,017.9 million. This growth was comprised of: • Revenue growth of approximately 21% from approximately 9,820 new sites constructed or acquired since January 1, 2013 (including approximately 460 sites in Costa Rica in connection with our acquisition of MIPT); • Revenue growth from legacy sites of approximately 16%, which includes approximately 13% due to incremental revenue primarily generated from new tenant leases and amendments to existing tenant leases and approximately 3% attributable to contractual rent escalations, net of tenant lease cancellations; 49 -------------------------------------------------------------------------------- Table of Contents • Revenue growth of approximately 2% from the impact of straight-line lease accounting; and • A decrease of approximately 11% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 4% related to fluctuations in GHS, approximately 3% related to fluctuations in Brazilian Reais ("BRL") and approximately 1% related to fluctuations in Indian Rupees ("INR"). Network development services segment revenue for the nine months ended September 30, 2014 increased 36% to $76.7 million. The increase was primarily due to an increase in site acquisition, zoning and permitting services associated with certain tenants' next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT. Gross Margin Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 1,577,292 $ 1,284,387 $ 292,905 23 % International 622,311 504,779 117,532 23 Total rental and management 2,199,603 1,789,166 410,437 23 Network development services 46,205 33,832 12,373 37 % Domestic rental and management segment gross margin for the nine months ended September 30, 2014 increased 23% to $1,577.3 million. This growth was comprised of: • Gross margin growth of approximately 14% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites, in connection with our acquisition of MIPT; • Gross margin growth from legacy sites of approximately 9%, primarily associated with the increase in revenue, as described above; • Gross margin growth from new sites (excluding MIPT) of approximately 2%, primarily associated with the increase in revenue, as described above; and • A decrease of approximately 2% from the impact of straight-line lease accounting. International rental and management segment gross margin for the nine months ended September 30, 2014 increased 23% to $622.3 million. This growth was comprised of: • Gross margin growth from new sites (including MIPT) of approximately 16%, primarily associated with the increase in revenue, as described above; • Gross margin growth from legacy sites of approximately 14%, primarily associated with the increase in revenue, as described above; • Gross margin growth of approximately 3% from the impact of straight-line lease accounting; and • A decrease of approximately 10% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 4% related to fluctuations in GHS, approximately 3% related to fluctuations in BRL and approximately 1% related to fluctuations in INR. Network development services segment gross margin for the nine months ended September 30, 2014 increased 37% to $46.2 million, primarily due to the increase in revenue as described above. 50-------------------------------------------------------------------------------- Table of Contents Selling, General, Administrative and Development Expense Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 86,677 $ 71,664 $ 15,013 21 % International 97,129 93,753 3,376 4 Total rental and management 183,806 165,417 18,389 11 Network development services 7,876 7,105 771 11 Other 125,755 126,215 (460 ) - Total selling, general, administrative and development expense $ 317,437 $ 298,737 $ 18,700 6 % Total SG&A for the nine months ended September 30, 2014 increased 6% to $317.4 million. Domestic rental and management segment SG&A for the nine months ended September 30, 2014 increased 21% to $86.7 million. The increase was primarily driven by increasing personnel costs to support our business, including additional costs associated with the acquisition of MIPT. International rental and management segment SG&A for the nine months ended September 30, 2014 increased 4% to $97.1 million. The increase was primarily due to the impact of increased personnel costs to support our business, partially offset by the favorable impact of foreign currency fluctuations, as well as the reversal of bad debt expense for amounts previously reserved. Network development services segment SG&A for the nine months ended September 30, 2014 increased 11% to $7.9 million primarily due to higher personnel costs related to the additional site acquisition, zoning and permitting services associated with certain tenants' next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT. Other SG&A for the nine months ended September 30, 2014 remained constant at $125.8 million. During the nine months ended September 30, 2014, corporate SG&A decreased $8.8 million and was partially offset by an increase of $8.3 million related to stock-based compensation expense. The decrease in corporate SG&A was primarily related to a reduction in legal expenses of $12.5 million, including the recovery of expenses during the nine months ended September 30, 2014, and the reversal of a $2.8 million reserve associated with a non-recurring state tax item. The decrease in corporate SG&A was partially offset by an increase in personnel costs to support our business. Operating Profit Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Rental and management Domestic $ 1,490,615 $ 1,212,723 $ 277,892 23 % International 525,182 411,026 114,156 28 Total rental and management 2,015,797 1,623,749 392,048 24 Network development services 38,329 26,727 11,602 43 % Domestic rental and management segment operating profit for the nine months ended September 30, 2014 increased 23% to $1,490.6 million. The growth was primarily attributable to an increase in our domestic rental and management segment gross margin (23%) and was partially offset by an increase in our domestic rental and management segment SG&A (21%). 51-------------------------------------------------------------------------------- Table of Contents International rental and management segment operating profit for the nine months ended September 30, 2014 increased 28% to $525.2 million. The growth was primarily attributable to an increase in our international rental and management segment gross margin (23%) and was partially offset by an increase in our international rental and management segment SG&A (4%). Network development services segment operating profit for the nine months ended September 30, 2014 increased 43% to $38.3 million. The increase was primarily attributable to an increase in network development services segment gross margin (37%), partially offset by an increase in our network development services segment SG&A (11%). Depreciation, Amortization and Accretion Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Depreciation, amortization and accretion $ 740,256 $ 555,334 $ 184,922 33 % Depreciation, amortization and accretion for the nine months ended September 30, 2014 increased 33% to $740.3 million. The increase was primarily attributable to the depreciation, amortization and accretion associated with the acquisition or construction of approximately 15,770 sites since January 1, 2013, which resulted in an increase in property and equipment and intangible assets subject to amortization. Other Operating Expenses Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Other operating expenses $ 37,852 $ 35,686 $ 2,166 6 % Other operating expenses for the nine months ended September 30, 2014 increased 6% to $37.9 million. The increase was primarily attributable to a net increase of $3.8 million in integration and acquisition related costs and was partially offset by a net decrease of $0.5 million in losses from the sale or disposal of assets and impairment charges. Interest Expense Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Interest expense $ 432,753 $ 318,916 $ 113,837 36 % Interest expense for the nine months ended September 30, 2014 increased 36% to $432.8 million. The increase was primarily attributable to an increase of $5.2 billion in our average debt outstanding, partially offset by a decrease in our annualized weighted average cost of borrowing from 4.77% to 4.05%. Gain (Loss) on Retirement of Long-Term Obligations Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Gain (loss) on retirement of long-term obligations $ 1,447 $ (37,967 ) $ 39,414 104 % 52 -------------------------------------------------------------------------------- Table of Contents During the nine months ended September 30, 2014, we repaid in full the aggregate principal amount outstanding of the Series 2010-1 Notes and notes assumed in connection with the acquisition from Richland Properties LLC and other related entities ("Richland") and wrote-off $8.5 million of the unamortized premium associated with the fair value adjustments of the notes assumed. Accordingly, we recorded a gain on retirement of long-term obligations, which was partially offset by prepayment consideration paid. During the nine months ended September 30, 2013, we recorded a loss of $35.3 million as we repaid the $1.75 billion outstanding balance of the Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued in the securitization transaction completed in May 2007 and incurred prepayment consideration and recorded the acceleration of deferred financing costs. In addition, during the nine months ended September 30, 2013, we recorded a loss of $2.7 million related to the acceleration of the remaining deferred financing costs associated with our $1.0 billion revolving credit facility entered into in April 2011, which was terminated in June 2013. Other Expense Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Other expense $ 54,225 $ 148,991 $ (94,766 ) (64 )% During the nine months ended September 30, 2014, other expense was $54.2 million, which reflected $62.6 million of unrealized foreign currency losses, as compared to $151.7 million of unrealized foreign currency losses during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we recorded unrealized foreign currency losses of $275.8 million, of which $213.2 million was recorded in AOCI and $62.6 million was recorded in Other expense. Income Tax Provision Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Income tax provision $ 49,877 $ 23,361 $ 26,516 114 % Effective tax rate 7.4 % 5.4 % The income tax provision for the nine months ended September 30, 2014 and 2013 was $49.9 million and $23.4 million, respectively. The ETR for the nine months ended September 30, 2014 increased to 7.4% from 5.4%. This increase was primarily attributable to income tax benefits of certain unrealized foreign currency losses during the nine months ended September 30, 2013, as well as an increase in foreign tax expense from our foreign operations for nine months ended September 30, 2014. The ETR on income from continuing operations for the nine months ended September 30, 2014 and 2013 differs from the federal statutory rate primarily due to our qualification for taxation as a REIT and adjustments for foreign items. 53 -------------------------------------------------------------------------------- Table of Contents Net Income/Adjusted EBITDA Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Net income $ 621,602 $ 408,283 $ 213,319 52 % Income tax provision 49,877 23,361 26,516 114 Other expense 54,225 148,991 (94,766 ) (64 ) (Gain) loss on retirement of long-term obligations (1,447 ) 37,967 39,414 104 Interest expense 432,753 318,916 113,837 36 Interest income (8,149 ) (5,468 ) 2,681 49 Other operating expenses 37,852 35,686 2,166 6 Depreciation, amortization and accretion 740,256 555,334 184,922 33 Stock-based compensation expense 61,708 53,155 8,553 16 Adjusted EBITDA $ 1,988,677 $ 1,576,225 $ 412,452 26 % Net income for the nine months ended September 30, 2014 increased 52% to $621.6 million primarily due to the increase in our operating profit, as described above, as well as decreases in other expense and loss on retirement of long-term obligations. The increase in net income was partially offset by increases in depreciation, amortization and accretion expense, interest expense and income tax provision. Adjusted EBITDA for the nine months ended September 30, 2014 increased 26% to $1,988.7 million. Adjusted EBITDA growth was primarily attributable to the increase in our gross margin, as described above, and was partially offset by an increase in SG&A of $10.4 million, excluding the impact of stock-based compensation expense. Net Income/NAREIT FFO/AFFO Nine Months Ended Amount of Percent September 30, Increase Increase 2014 2013 (Decrease) (Decrease) Net income $ 621,602 $ 408,283 $ 213,319 52 % Real estate related depreciation, amortization and accretion 656,166 485,328 170,838 35 Losses from sale or disposal of real estate and real estate related impairment charges 2,855 8,830 (5,975 ) (68 ) Dividends declared on preferred stock (12,075 ) - 12,075 N/A Adjustments for unconsolidated affiliates and noncontrolling interest 5,362 22,159 (16,797 ) (76 ) NAREIT FFO $ 1,273,910 $ 924,600 $ 349,310 38 % Straight-line revenue (96,320 ) (105,968 ) (9,648 ) (9 ) Straight-line expense 29,714 21,319 8,395 39 Stock-based compensation expense 61,708 53,155 8,553 16 Non-cash portion of tax (benefit) provision (2,502 ) 189 2,691 1,424 Non-real estate related depreciation, amortization and accretion 84,090 70,006 14,084 20 Amortization of deferred financing costs, capitalized interest, debt discounts and premiums and long-term deferred interest charges 5,133 22,049 (16,916 ) (77 ) Other expense (1) 54,225 148,991 (94,766 ) (64 ) (Gain) loss on retirement of long-term obligations (1,447 ) 37,967 39,414 104 Other operating expenses (2) 34,997 26,856 8,141 30 Capital improvement capital expenditures (50,301 ) (61,048 ) (10,747 ) (18 ) Corporate capital expenditures (14,823 ) (24,605 ) (9,782 ) (40 ) Adjustments for unconsolidated affiliates and noncontrolling interest (5,362 ) (22,159 ) (16,797 ) (76 ) AFFO $ 1,373,022 $ 1,091,352 $ 281,670 26 % (1) Primarily includes unrealized losses on foreign currency exchange rate fluctuations. (2) Primarily includes acquisition related costs, integration costs, losses from sale of assets and impairment charges. 54 -------------------------------------------------------------------------------- Table of Contents NAREIT FFO for the nine months ended September 30, 2014 was $1,273.9 million as compared to NAREIT FFO of $924.6 million for the nine months ended September 30, 2013. AFFO for the nine months ended September 30, 2014 increased 26% to $1,373.0 million as compared to $1,091.4 million for the nine months ended September 30, 2013. AFFO growth was primarily attributable to the increase in our operating profit and a decrease in capital improvement and corporate capital expenditures, partially offset by increases in cash paid for interest and taxes and dividends declared on preferred stock. Liquidity and Capital Resources The information in this section updates as of September 30, 2014 the "Liquidity and Capital Resources" section of our Annual Report on Form 10-K for the year ended December 31, 2013 and should be read in conjunction with that report. 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 September 30, 2014, we had approximately $3.4 billion of total liquidity, comprised of approximately $0.3 billion in cash and cash equivalents and the ability to borrow up to $3.1 billion, net of outstanding letters of credit, under our $2.0 billion multi-currency senior unsecured revolving credit facility entered into in June 2013 (as amended, the "2013 Credit Facility") and our $1.5 billion senior unsecured revolving credit facility entered into in January 2012, as amended and restated in September 2014. Summary cash flow information for the nine months ended September 30, 2014 and 2013 is set forth below (in thousands). Nine months ended September 30, 2014 2013 Net cash provided by (used for): Operating activities $ 1,569,606 $ 1,144,443 Investing activities (1,103,410 ) (958,638 ) Financing activities (461,837 ) 3,494,759Net effect of changes in exchange rates on cash and cash equivalents (2,322 ) (8,829 ) Net increase in cash and cash equivalents $ 2,037 $ 3,671,735 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, including distributions of our REIT taxable income to maintain our REIT qualification under the Internal Revenue Code of 1986, as amended (the "Code"), and fund our stock repurchase program. We may also repurchase our existing indebtedness from time to time. We typically fund our international expansion efforts primarily through a combination of cash on hand, intercompany debt and equity contributions. As of September 30, 2014, we had total outstanding indebtedness of approximately $13.9 billion, with a current portion of $1.0 billion. During the nine months ended September 30, 2014, we generated sufficient cash flow from operations to fund our capital expenditures and debt service obligations, as well as our required REIT distributions. We believe the cash generated by operations during the next 12 months, together with our borrowing capacity under our credit facilities, will be sufficient to fund our REIT distribution requirements, 5.25% Mandatory Convertible Preferred Stock, Series A (the "Mandatory Convertible Preferred Stock") dividend payments, capital expenditures, debt service obligations (interest and principal repayments) and pending 55-------------------------------------------------------------------------------- Table of Contents acquisitions for the next 12 months. As of September 30, 2014, we had approximately $217.6 million of cash and cash equivalents held by our foreign subsidiaries, of which $52.5 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. Cash Flows from Operating Activities For the nine months ended September 30, 2014, cash provided by operating activities was $1,569.6 million, an increase of $425.2 million as compared to the nine months ended September 30, 2013. This increase was primarily due to an increase in the operating profit of our rental and management segments, cash provided by working capital and a decrease in restricted cash, partially offset by increases in cash paid for interest and taxes. Working capital was positively impacted by the receipt of capital contributions from tenants and a value added tax refund, partially offset by an increase in accounts receivable. Cash Flows from Investing Activities For the nine months ended September 30, 2014, cash used for investing activities was $1,103.4 million, an increase of $144.8 million as compared to the nine months ended September 30, 2013. Our significant investing transactions during the nine months ended September 30, 2014 included the following: • We spent $723.4 million for purchases of property and equipment and construction activities, including (i) $421.5 million of capital expenditures for discretionary capital projects, including for the construction of approximately 2,145 communications sites and the installation of approximately 505 shared generators domestically, (ii) $90.8 million to acquire land under our towers that was subject to ground agreements (including leases), (iii) $65.2 million of capital expenditures related to capital improvements primarily attributable to our communications sites and corporate capital expenditures primarily attributable to information technology improvements, (iv) $131.9 million for the redevelopment of existing communications sites to accommodate new tenant equipment and (v) $14.0 million of capital expenditures related to start-up capital projects primarily attributable to acquisitions and new market launches and costs that are contemplated in the business cases for these investments. • We spent $324.9 million for the acquisition of communications sites in Brazil, Ghana, Mexico, Uganda and the United States, as well as obligations related to sites acquired during the year ended December 31, 2013 in Brazil, South Africa and the United States. We plan to continue to allocate our available capital, after our REIT distribution requirements and Mandatory Convertible Preferred Stock dividend payments, among investment alternatives that meet our return on investment criteria. Accordingly, we expect to continue to deploy our capital through our annual capital expenditure program, including land purchases and new site construction, and through acquisitions. We expect that our 2014 total capital expenditures will be between approximately $950 million and $1.0 billion, including (i) between $95 million and $105 million for capital improvements and corporate capital expenditures, (ii) between $35 million and $45 million for start-up capital projects, (iii) between $190 million and $200 million for the redevelopment of existing communications sites, (iv) between $115 million and $125 million for ground lease purchases and (v) between $515 million and $525 million for other discretionary capital projects, including the construction of approximately 2,500 to 3,000 new communications sites. Cash Flows from Financing Activities For the nine months ended September 30, 2014, cash used for financing activities was $461.8 million, as compared to cash provided by financing activities of $3,494.8 million during the nine months ended September 30, 2013. 56-------------------------------------------------------------------------------- Table of Contents Our significant financing transactions during the nine months ended September 30, 2014 included (i) borrowings of $785.0 million under the 2013 Credit Facility, (ii) a registered public offering through a reopening of our 3.40% senior unsecured notes due 2019 (the "3.40% Notes"), in an aggregate principal amount of $250.0 million and 5.00% senior unsecured notes due 2024 (the "5.00% Notes"), in an aggregate principal amount of $500.0 million, (iii) a registered public offering of our 3.450% senior unsecured notes due 2021 (the "3.450% Notes"), in an aggregate principal amount of $650.0 million and (iv) a registered public offering of 6,000,000 shares of the Mandatory Convertible Preferred Stock, and the repayment of (a) $2.3 billion under our revolving credit facilities, (b) $250.0 million of secured indebtedness under the Series 2010-1 Notes, and (c) $196.5 million of secured indebtedness assumed in connection with the acquisition from Richland. Mandatory Convertible Preferred Stock Offering. On May 12, 2014, we completed a registered public offering of 6,000,000 shares of our Mandatory Convertible Preferred Stock. The net proceeds of the offering were $582.9 million after deducting commissions and estimated expenses. We used the net proceeds from this offering to fund acquisitions, including the acquisition from Richland, initially funded by indebtedness incurred under the 2013 Credit Facility. Unless converted earlier, each share of the Mandatory Convertible Preferred Stock will automatically convert on May 15, 2017, into between 0.9174 and 1.1468 shares of common stock, depending on the applicable market value of the common stock and subject to anti-dilution adjustments. Subject to certain restrictions, at any time prior to May 15, 2017, holders of the Mandatory Convertible Preferred Stock may elect to convert all or a portion of their shares into common stock at the minimum conversion rate then in effect. Dividends on shares of Mandatory Convertible Preferred Stock are payable on a cumulative basis when, as and if declared by our Board of Directors (or an authorized committee thereof) at an annual rate of 5.25% on the liquidation preference of $100.00 per share, on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2014 to, and including, May 15, 2017. We may pay dividends in cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. The terms of the Mandatory Convertible Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding Mandatory Convertible Preferred Stock for all prior dividend periods, no dividends may be declared or paid on our common stock. Mexican Loan. In connection with the acquisition of towers in Mexico from NII Holdings, Inc. ("NII") during the fourth quarter of 2013, one of our Mexican subsidiaries entered into a 5.2 billion MXN denominated unsecured bridge loan (the "Mexican Loan") and subsequently borrowed approximately 4.9 billion MXN (approximately $374.7 million at the date of borrowing). The Mexican subsidiary's ability to further draw under the Mexican Loan expired in February 2014. During the nine months ended September 30, 2014, the Mexican subsidiary repaid 1.1 billion MXN (approximately $80.4 million on the date of repayment) of the outstanding indebtedness using cash on hand. The Mexican Loan matures on May 1, 2015. As of September 30, 2014, we had 3.9 billion MXN (approximately $287.8 million) outstanding under the Mexican Loan. Colombian Bridge Loans. In connection with the acquisition of communications sites in Colombia, one of our Colombian subsidiaries entered into six Colombian Peso ("COP") denominated bridge loans for an aggregate principal amount of 108.0 billion COP (approximately $53.2 million). As of September 30, 2014, the interest rate was 7.84% and the maturity date of the loans was October 4, 2014. In October 2014, we repaid the bridge loans using proceeds from a new Colombian credit facility, as described below, and cash on hand. Costa Rica Loan. In connection with our acquisition of MIPT, we assumed $32.6 million of secured debt in Costa Rica (the "Costa Rica Loan"), which we repaid in full in February 2014. GTP Notes. In connection with our acquisition of MIPT, we assumed approximately $1.49 billion principal amount of indebtedness under six series, consisting of eleven separate classes, of Secured Tower Revenue Notes issued by certain subsidiaries of GTP in several securitization transactions (the "GTP Notes"). In August 2014, we repaid in full the aggregate principal amount outstanding of $250.0 million under the Series 2010-1 Notes. 57-------------------------------------------------------------------------------- Table of Contents Colombian Loan. In connection with the establishment of our joint venture with Millicom International Cellular SA ("Millicom") and the acquisition of certain communications sites in Colombia, ATC Colombia B.V., our majority owned subsidiary, 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. During the nine months ended September 30, 2014, the joint venture borrowed an additional $3.0 million under the Colombian Loan, which was subsequently converted from debt to equity. In July 2014, we purchased Millicom's interest in the joint venture and the Colombian Loan using proceeds from borrowings under our 2013 Credit Facility. Richland Notes. In connection with the acquisition from Richland, we assumed approximately $196.5 million of secured debt (the "Richland Notes"), which we repaid in full in June 2014. Short-Term Credit Facility. On September 20, 2013, we entered into a $1.0 billion senior unsecured revolving credit facility (the "Short-Term Credit Facility"), which matured on September 19, 2014. The Short-Term Credit Facility was undrawn at the time of maturity. 2014 Credit Facility. During the nine months ended September 30, 2014, we repaid $88.0 million of outstanding indebtedness under our $1.0 billion senior unsecured revolving credit facility (the "2012 Credit Facility") using net proceeds from the 3.40% Notes and 5.00% Notes. On September 19, 2014, we entered into an amendment and restatement of the 2012 Credit Facility (the "2014 Credit Facility"), which, among other things, (i) increased the commitments thereunder to $1.5 billion, including a $50.0 million sublimit for swingline loans and a $200.0 million sublimit for letters of credit, (ii) extended the maturity date to January 31, 2020, including up to two optional renewal periods, (iii) amended the limitation on indebtedness of, and guaranteed by, our subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2014 Credit Facility) on a consolidated basis as of the last day of the most recently completed fiscal quarter, (iv) permitted indebtedness owed by certain of our subsidiaries to our joint venture partners and (v) added an expansion feature, which allows us to request up to an aggregate of $500.0 million in additional commitments upon satisfaction of certain conditions. Amounts borrowed under the 2014 Credit Facility will bear interest, at our option, at a margin above the London Interbank Offered Rate ("LIBOR") or the Base Rate. For LIBOR based borrowings, interest rates will range from 1.125% to 2.000% above LIBOR. For Base Rate borrowings, interest rates will range from 0.125% to 1.000% above the Base Rate. In each case, the applicable margin is based upon our debt ratings. In addition, the 2014 Credit Facility requires a quarterly commitment fee on the undrawn portion of the commitments ranging from 0.125% to 0.400% per annum, based upon our debt ratings. The current margin over LIBOR that we would incur (should we choose LIBOR Advances) on borrowings is 1.250%, and the current commitment fee on the undrawn portion of the commitments is 0.150%. The 2014 Credit Facility does not require amortization of principal and may be paid prior to maturity in whole or in part at our option without penalty or premium. As of September 30, 2014, we had no amounts outstanding under the 2014 Credit Facility and $7.5 million of undrawn letters of credit. In October 2014, we borrowed $304.0 million under the 2014 Credit Facility, which we used to fund acquisitions and repay other existing indebtedness. We maintain the ability to draw down and repay amounts under the 2014 Credit Facility in the ordinary course. 2013 Credit Facility. During the nine months ended September 30, 2014, we repaid an aggregate of $2.2 billion of revolving indebtedness under the 2013 Credit Facility using (i) proceeds from the reopened 3.40% Notes and reopened 5.00% Notes, (ii) proceeds from the Mandatory Convertible Preferred Stock, (iii) proceeds from the 3.450% Notes and (iv) cash on hand. During the nine months ended September 30, 2014, we borrowed an additional $785.0 million under the 2013 Credit Facility, which was primarily used to (i) fund acquisitions, including the acquisition from Richland, (ii) repay the Richland Notes, (iii) repay the Series 2010-1 Notes and (iv) purchase Millicom's interest in the Colombian joint venture and the Colombian Loan. 58-------------------------------------------------------------------------------- Table of Contents The 2013 Credit Facility matures on June 28, 2018 and includes two optional one-year renewal periods. The 2013 Credit Facility includes an expansion option allowing us to request additional commitments of up to $750.0 million, including in the form of a term loan. The 2013 Credit Facility does not require amortization of principal and may be paid prior to maturity in whole or in part at our option without penalty or premium. The current margin over LIBOR that we incur on borrowings is 1.250%, and the current commitment fee on the undrawn portion of the 2013 Credit Facility is 0.150%. On September 19, 2014, we entered into an amendment agreement with respect to the 2013 Credit Facility, which (i) amended the limitation on indebtedness of, and guaranteed by, our subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2013 Credit Facility) on a consolidated basis as of the last day of the most recently completed fiscal quarter and (ii) permitted indebtedness owed by certain of our subsidiaries to our joint venture partners. As of September 30, 2014, we had $410.0 million outstanding under the 2013 Credit Facility and approximately $3.2 million of undrawn letters of credit. In October 2014, we repaid a net amount of $139.0 million under the 2013 Credit Facility with borrowings under the 2014 Credit Facility and cash on hand. We maintain the ability to draw down and repay amounts under the 2013 Credit Facility in the ordinary course. 2013 Term Loan. On October 29, 2013, we entered into a $1.5 billion unsecured term loan (as amended, the "2013 Term Loan"), which includes an expansion option allowing us to request additional commitments of up to $500.0 million. The 2013 Term Loan matures on January 3, 2019, and the current interest rate is LIBOR plus 1.250%. On September 19, 2014, we entered into an amendment agreement with respect to the 2013 Term Loan, which (i) amended the limitation on indebtedness of, and guaranteed by, our subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2013 Term Loan) on a consolidated basis as of the last day of the most recently completed fiscal quarter and (ii) permitted indebtedness owed by certain of our subsidiaries to our joint venture partners. Colombian Credit Facility. On October 14, 2014, one of our Colombian subsidiaries ("ATC Sitios") entered into a loan agreement for a new 200.0 billion COP (approximately $96.8 million at the date of borrowing) denominated long-term credit facility (the "Colombian Credit Facility"), which it used, together with cash on hand, to repay the previously existing COP denominated long-term credit facility entered into in October 2012, as well as to repay the Colombian bridge loans on October 24, 2014. Any outstanding principal and accrued but unpaid interest will be due and payable in full at maturity. The Colombian Credit Facility matures on April 24, 2021 and may be prepaid in whole or in part, subject to certain limitations and prepayment consideration, at any time. 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 4.00% above the three-month Inter-bank Rate ("IBR") in effect at the beginning of each Interest Period (as defined in the loan agreement), which results in an interest rate of 8.38% as of October 24, 2014. The loan agreement also requires that ATC Sitios manage exposure to variability in interest rates on certain of the amounts outstanding under the Colombian Credit Facility. Accordingly, ATC Sitios entered into an interest rate swap agreement with an aggregate notional value of 100.0 billion COP (approximately $48.4 million) with certain of the lenders under the Colombian Credit Facility on October 27, 2014. As of October 27, 2014, the interest rate, after giving effect to the interest rate swap agreements, is 9.06%. The Colombian 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. 59-------------------------------------------------------------------------------- Table of Contents 3.40% Senior Notes and 5.00% Senior Notes Offering. On January 10, 2014, we completed a registered public offering of reopened 3.40% Notes and reopened 5.00% Notes in aggregate principal amounts of $250.0 million and $500.0 million, respectively. The net proceeds from the offering were approximately $763.8 million, after deducting commissions and estimated expenses. As a result, the aggregate outstanding principal amount of each of the 3.40% Notes and the 5.00% Notes is $1.0 billion. We used a portion of the proceeds, together with cash on hand, to repay $88.0 million of outstanding indebtedness under the 2012 Credit Facility and $710.0 million of outstanding indebtedness under the 2013 Credit Facility. The reopened 3.40% Notes issued on January 10, 2014 have identical terms as, are fungible with and are part of a single series of senior debt securities with the 3.40% Notes issued on August 19, 2013. The reopened 5.00% Notes issued on January 10, 2014 have identical terms as, are fungible with and are part of a single series of senior debt securities with the 5.00% Notes issued on August 19, 2013. The 3.40% Notes mature on February 15, 2019 and bear interest at a rate of 3.40% per annum. The 5.00% Notes mature on February 15, 2024 and bear interest at a rate of 5.00% per annum. Accrued and unpaid interest on the 3.40% Notes and the 5.00% Notes is payable in U.S. Dollars semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2014. Interest on the 3.40% Notes and the 5.00% Notes accrues from August 19, 2013 and is computed on the basis of a 360-day year comprised of twelve 30-day months. 3.450% Senior Notes Offering. On August 7, 2014, we completed a registered public offering of the 3.450% Notes in an aggregate principal amount of $650.0 million. The net proceeds from the offering were approximately $641.1 million, after deducting commissions and estimated expenses. We used the proceeds to repay existing indebtedness under the 2013 Credit Facility. The 3.450% Notes mature on September 15, 2021 and bear interest at a rate of 3.450% per annum. Accrued and unpaid interest on the 3.450% Notes is payable in U.S. Dollars semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2015. Interest on the 3.450% Notes accrues from August 7, 2014 and is computed on the basis of a 360-day year comprised of twelve 30-day months. We may redeem the 3.40% Notes, the 5.00% Notes or the 3.450% Notes at any time at a redemption price equal to 100% of the principal amount of such notes, plus a make-whole premium, together with accrued interest to the redemption date. If we undergo a change of control and ratings decline, each as defined in the applicable supplemental indenture governing such notes, we may be required to repurchase all of the 3.40% Notes, the 5.00% Notes or the 3.450% Notes at a purchase price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest (including additional interest, if any), up to but not including the repurchase date. The 3.40% Notes, the 5.00% Notes and the 3.450% 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. Each of the applicable supplemental indentures for the 3.40% Notes, the 5.00% Notes and the 3.450% Notes 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 each of the supplemental indentures. Stock Repurchase Program. In March 2011, our Board of Directors approved a stock repurchase program, pursuant to which we are authorized to purchase up to $1.5 billion of common stock (the "2011 Buyback"). On September 6, 2013, we temporarily suspended repurchases in connection with our acquisition of MIPT. 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), which allows 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. 60 -------------------------------------------------------------------------------- Table of Contents We continue to manage the pacing of the remaining $1.1 billion under the 2011 Buyback in response to general market conditions and other relevant factors, including our financial policies. 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. During the nine months ended September 30, 2014, we received an aggregate of $47.9 million in proceeds upon exercises of stock options and from our employee stock purchase plan. 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 have distributed, and expect to continue to distribute, all or substantially all of our REIT taxable income after taking into consideration our utilization of NOLs. Since our conversion to a REIT in 2012, we have distributed an aggregate of approximately $1.2 billion to our stockholders, which is primarily taxed as ordinary 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 and equity 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. See Item 5 of our Annual Report on Form 10-K for the year ended December 31, 2013 under the caption "Dividends" for discussion of the factors considered. During the nine months ended September 30, 2014, we declared an aggregate of $403.9 million in regular cash distributions to our common stockholders, which included our third quarter distribution of $0.36 per share (approximately $142.7 million) to common stockholders of record at the close of business on September 23, 2014. During the nine months ended September 30, 2014, we declared an aggregate of $16.0 million in cash distributions to our preferred stockholders, which included our third quarter dividend of $1.3125 per share (approximately $7.9 million), payable on November 17, 2014 to preferred stockholders of record at the close of business on November 1, 2014. We accrue distributions on unvested restricted stock unit awards granted subsequent to January 1, 2012, which are payable upon vesting. As of September 30, 2014, the amount accrued for distributions payable related to unvested restricted stock units was $2.9 million. During the nine months ended September 30, 2014, we paid $0.7 million of distributions upon the vesting of restricted stock units. 61 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations. The following table summarizes our contractual obligations, reflecting discounts and premiums, as of September 30, 2014 (in thousands): Balance Indebtedness Outstanding Maturity Date American Tower subsidiary debt: Secured Tower Revenue Securities, Series 2013-1A (1) $ 500,000 March 15, 2018 Secured Tower Revenue Securities, Series 2013-2A (1) 1,300,000 March 15, 2023 GTP Notes (2) 1,268,643 Various Unison Notes, Series 2010-1 Class C, Series 2010-2 Class C and Series 2010-2 Class F notes (3) 204,121 Various Colombian bridge loans (4) 53,249 October 4, 2014 Mexican Loan (5) 287,753 May 1, 2015 Ghana loan (6) 158,327 May 4, 2016 Uganda loan (6) 69,004 June 29, 2019 South African facility (7) 78,507 March 31, 2020 Colombian long-term credit facility (8) 66,053 November 30, 2020 Indian working capital facility - - Other debt, including capital lease obligations 87,881 Various Total American Tower subsidiary debt 4,073,538 American Tower Corporation debt: 2013 Credit Facility 410,000 June 28, 2018 2013 Term Loan 1,500,000 January 3, 2019 2014 Credit Facility - January 31, 2020 4.625% senior notes 599,916 April 1, 2015 7.00% senior notes 500,000 October 15, 2017 4.50% senior notes 999,603 January 15, 2018 3.40% senior notes 1,005,824 February 15, 2019 7.25% senior notes 297,128 May 15, 2019 5.05% senior notes 699,475 September 1, 2020 3.450% senior notes 646,275 September 15, 2021 5.90% senior notes 499,459 November 1, 2021 4.70% senior notes 698,957 March 15, 2022 3.50% senior notes 993,050 January 31, 2023 5.00% senior notes 1,011,071 February 15, 2024 Total American Tower Corporation debt 9,860,758 Total $ 13,934,296 (1) Issued in our March 2013 securitization transaction (the "Securitization"). Maturity date reflects the anticipated repayment date. (2) Assumed by us in connection with the acquisition of MIPT. Anticipated repayment dates begin June 15, 2016. In August 2014, we repaid in full the aggregate principal amount outstanding of $250.0 million under the Series 2010-1 Notes. (3) Assumed by us in connection with the acquisition of certain legal entities holding a portfolio of property interests from Unison Holdings, LLC and Unison Site Management II, L.L.C. (the "Unison Acquisition"). Anticipated repayment dates begin April 15, 2017. (4) Denominated in COP. In October 2014, we repaid the bridge loans using proceeds from the Colombian Credit Facility and cash on hand. (5) Denominated in MXN. (6) Denominated in U.S. Dollars. (7) Denominated in ZAR and amortizes through March 31, 2020. (8) Denominated in COP and amortizes through November 30, 2020. In October 2014, we refinanced the Colombian long-term credit facility with borrowings under the Colombian Credit Facility. 62 -------------------------------------------------------------------------------- Table of Contents A description of our contractual debt obligations is set forth under the caption "Quantitative and Qualitative Disclosures about Market Risk" in Part I, Item 3 of this Quarterly Report on Form 10-Q. We classify uncertain tax positions as non-current income tax liabilities. We expect the unrecognized tax benefits to change over the next twelve 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 and have classified $33.1 million as Other non-current liabilities in the condensed consolidated balance sheet as of September 30, 2014. We also classified $34.0 million of accrued income tax related interest and penalties as Other non-current liabilities in the condensed consolidated balance sheet as of September 30, 2014. Factors Affecting Sources of Liquidity As discussed in the "Liquidity and Capital Resources" section of our Annual Report on Form 10-K for the year ended December 31, 2013, our liquidity is dependent on our ability to generate cash flow from operating activities, borrow funds under our credit facilities and maintain compliance with the contractual agreements governing our indebtedness. We believe that the debt agreements discussed below represent our material debt agreements that contain covenants, our compliance with which would be material to an investor's understanding of our financial results and the impact of those results on our liquidity. Restrictions Under Loan Agreements Relating to Our Credit Facilities. The loan agreements for the 2014 Credit Facility, the 2013 Credit Facility and the 2013 Term Loan contain certain financial and operating covenants and other restrictions applicable to us and 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 (i) total leverage, (ii) senior secured leverage and (iii) interest coverage, as set forth below. As of September 30, 2014, 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 6.50 to 1.00 through September 30, 2014, and of 6.00 to 1.00 thereafter. Based on our financial performance for the 12 months ended September 30, 2014, we could incur approximately $2.1 billion of additional indebtedness and still remain in compliance with the 6.00 to 1.00 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 $352 million and we would still remain in compliance with the 6.00 to 1.00 ratio. Consolidated Senior Secured Leverage Ratio: This ratio requires that we not exceed a ratio of Senior Secured Debt to Adjusted EBITDA (each as defined in the loan agreements) of 3.00 to 1.00. Based on our financial performance for the 12 months ended September 30, 2014, we could incur approximately $4.4 billion of additional Senior Secured Debt and still remain in compliance with the current ratio (effectively, however, this ratio would be limited to approximately $2.1 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 $1.5 billion and we would still remain in compliance with the current ratio. Interest Coverage Ratio: In the event our debt ratings fall below investment grade, we will be required to maintain a ratio of Adjusted EBITDA to Interest Expense (each 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 September 30, 2014, our interest expense, which was $543 million for that period, could increase by approximately $508 million and we would still remain in compliance with this ratio. In addition, if our expenses do not change materially from current levels, our revenues could decrease by approximately $1.3 billion and we would still remain in compliance with this ratio. 63-------------------------------------------------------------------------------- Table of Contents 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 may 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 these credit facilities and our ability to fund our debt service obligations. Based upon our current expectations, we believe our operating results during the next 12 months will be sufficient to comply with these covenants. Restrictions Under Agreements Relating to the Securitization and the GTP Notes. The First Amended and Restated Loan and Security Agreement related to the Securitization (the "Loan Agreement") and the indentures governing the GTP Notes (the "GTP Indentures") include certain financial ratios and operating covenants and other restrictions customary for transactions subject to rated securitizations. Among other things, American Tower Asset Sub, LLC and American Tower Asset Sub II, LLC (the "Borrowers"), and the issuers of the GTP Notes (the "GTP Issuers") are prohibited from incurring other indebtedness for borrowed money or further encumbering their assets subject to customary carve-outs for ordinary course trade payables and permitted encumbrances (as defined in the Loan Agreement or the applicable GTP Indenture). Under the terms of the agreements, amounts due will be paid from the cash flows generated by the assets securing the nonrecourse loan relating to the Securitization (the "Loan") or the GTP Notes (as applicable), which must be deposited, and thereafter distributed, solely pursuant to the terms of the applicable agreement. On a monthly basis, after payment of all required amounts under the applicable agreement, the excess cash flows generated from the operation of the assets securing the Loan or the GTP Notes are released to the Borrowers or the applicable GTP Issuer, which can then be distributed to, and used by, us. During the nine months ended September 30, 2014, the Borrowers distributed excess cash to us of $535.7 million and the GTP Issuers distributed excess cash to us of $130.5 million. In order to distribute this excess cash flow to us, the Borrowers and the GTP Issuers must maintain a specified debt service coverage ratio ("DSCR"), calculated as the ratio of the net cash flow (as defined in the Loan Agreement or the applicable GTP Indenture) to the amount of interest required to be paid over the succeeding twelve months on the principal amount of the Loan or the principal amount of the GTP Notes that will be outstanding on the payment date following such date of determination, plus the amount of the payable trustee and servicing fees. If the DSCR with respect to the Secured Tower Revenue Securities, Series 2013-1A and Series 2013-2A issued in our Securitization (the "Securities") or any series of GTP Notes issued by GTP Acquisition Partners I, LLC ("GTP Partners") is equal to or below 1.30x (the "Cash Trap DSCR") at the end of any calendar quarter and it continues for two consecutive calendar quarters, or if the DSCR with respect to any series of GTP Notes issued by GTP Cellular Sites, LLC ("GTP Cellular Sites") is equal to or below the Cash Trap DSCR at the end of any calendar month and it continues for two consecutive calendar months, then all cash flow in excess of amounts required to make debt service payments, fund required reserves, pay management fees and budgeted operating expenses and make other payments required with respect to the particular series of Securities or GTP Notes under the Loan Agreement or GTP Indentures, as applicable, will be deposited into reserve accounts instead of being released to the Borrowers or the GTP Issuers. The funds in the reserve accounts will not be released to the Borrowers or GTP Partners for distribution to us unless the DSCR with respect to such series of Securities or GTP Notes exceeds the Cash Trap DSCR for two consecutive calendar quarters. Likewise, the funds in the reserve account will not be released to GTP Cellular Sites for distribution to us unless the DSCR with respect to such series of GTP Notes exceeds the Cash Trap DSCR for two consecutive calendar months. 64-------------------------------------------------------------------------------- Table of Contents Additionally, an "amortization period," commences as of the end of any calendar quarter with respect to the Securities and the series of GTP Notes issued by GTP Partners, and as of the end of any calendar month with respect to the series of GTP Notes issued by GTP Cellular Sites, if the DSCR of such series equals or falls below 1.15x (the "Minimum DSCR"). The "amortization period" will continue to exist until the end of any calendar quarter with respect to the Securities and the series of GTP Notes issued by GTP Partners for which the DSCR exceeds the Minimum DSCR for two consecutive calendar quarters. Similarly, the "amortization period" will continue to exist until the end of any calendar month with respect to the series of GTP Notes issued by GTP Cellular Sites, for which the DSCR exceeds the Minimum DSCR for two consecutive calendar months. If on the anticipated repayment date, the outstanding principal amount with respect to any series of the GTP Notes or the component of the Loan corresponding to the applicable subclass of the Securities has not been paid in full, an "amortization period" will continue until such principal amount of the applicable series of GTP Notes or the component of the Loan corresponding to the applicable subclass of Securities is repaid in full. During an amortization period, all excess cash flow and any amounts then in the reserve accounts because the Cash Trap DSCR was not met would be applied to pay principal of the applicable subclass of Securities or series of GTP Notes on each monthly payment date, and so would not be available for distribution to us. Further, additional interest will begin to accrue with respect to any subclass of the Securities or series of GTP Notes from and after the anticipated repayment date at a per annum rate determined in accordance with the Loan Agreement or the GTP Indentures, as applicable. Consequently, a failure to meet the noted DSCR tests could prevent the Borrowers or GTP Issuers from distributing excess cash flow to us, which could affect our ability to fund our capital expenditures, including tower construction and acquisitions, meet REIT distribution requirements, make Mandatory Convertible Preferred Stock dividend payments and fund our stock repurchase program. If the Borrowers were to default on the Loan, the trustee could seek to foreclose upon or otherwise convert the ownership of the 5,194 wireless and broadcast communications towers that secure the Loan (the "Secured Towers"), in which case we could lose the Secured Towers and the revenue associated with those towers. In addition, upon occurrence and during an event of default, the trustee may, in its discretion or at direction of holders of more than 50% of the aggregate outstanding principal of any series of GTP Notes, declare such series of GTP Notes immediately due and payable, in which case any excess cash flow would need to be used to pay holders of such GTP Notes. Furthermore, if the GTP Issuers were to default on a series of the GTP Notes, the trustee may demand, collect, take possession of, receive, settle, compromise, adjust, sue for, foreclose or realize upon all or any portion of an aggregate of 2,813 sites and 1,265 property interests owned by subsidiaries of the GTP Issuers and other related assets that secure the GTP Notes (the "GTP Secured Towers") securing such series, in which case we could lose the GTP Secured Towers and the revenue associated with those assets. As of September 30, 2014, the Borrowers' DSCR was 10.11x. Based on the Borrowers' net cash flow for the calendar quarter ended September 30, 2014, and the amount of interest, servicing fees and trustee fees payable over the succeeding twelve months on the Loan, the Borrowers could endure a reduction of approximately $423.5 million in net cash flow before triggering the Cash Trap DSCR, and approximately $430.7 million in net cash flow before triggering the Minimum DSCR. As of September 30, 2014, the DSCR of GTP Partners and GTP Cellular Sites were 2.88x, and 2.49x, respectively. Based on the net cash flow of GTP Partners and GTP Cellular Sites for the calendar quarter ended September 30, 2014 and the amount of interest, servicing fees and trustee fees payable over the succeeding twelve months on the applicable series of GTP Notes, GTP Partners and GTP Cellular Sites could endure a reduction of approximately $68.7 million and $15.8 million, respectively, in net cash flow before triggering the Cash Trap DSCR, and approximately $75.2 million and $17.7 million, respectively, in net cash flow before triggering the Minimum DSCR. 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 65 -------------------------------------------------------------------------------- Table of Contents need to raise additional capital through financing activities. If we determine that it is desirable or necessary to 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, pay Mandatory Convertible Preferred Stock dividends, 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 II, Item 1A. of this Quarterly Report on Form 10-Q, 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. For more information regarding the terms of our outstanding indebtedness, please see note 8 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations are based upon our condensed 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, which we discussed in our Annual Report on Form 10-K for the year ended December 31, 2013. Management bases its estimates on historical experience and other various 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 nine months ended September 30, 2014. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013. Accounting Standards Update For a discussion of recent accounting standards updates, see note 1 to our condensed consolidated financial statements included in this Quarterly Report. 66 -------------------------------------------------------------------------------- Table of Contents |