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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a leading independent owner and operator of wireless communications infrastructure, including tower structures, rooftops and other structures that support antennas used for wireless communications, which we collectively refer to as "towers" or "sites." Our principal operations are in the United States and its territories. In addition, we own and operate towers in South America, Central America, Canada, and South Africa. Our primary business line is our site leasing business, which contributed 98.8% of our total segment operating profit for the six months ended June 30, 2020. In our site leasing business, we (1) lease antenna space to wireless service providers on towers that we own or operate and (2) manage rooftop and tower sites for property owners under various contractual arrangements. As of June 30, 2020, we owned 32,610 towers, a substantial portion of which have been built by us or built by other tower owners or operators who, like us, have built such towers to lease space to multiple wireless service providers. Our other business line is our site development business, through which we assist wireless service providers in developing and maintaining their own wireless service networks.

Site Leasing

Our primary focus is the leasing of antenna space on our multi-tenant towers to a variety of wireless service providers under long-term lease contracts in the United States, South America, Central America, Canada, and South Africa. As of June 30, 2020, (1) no U.S. state or territory accounted for more than 10% of our total tower portfolio by tower count, and (2) no U.S. state or territory accounted for more than 10% of our total revenues for the six months ended June 30, 2020. In addition, as of June 30, 2020, approximately 30.4% of our total towers are located in Brazil and less than 4% of our total towers are located in any of our other international markets (each country is considered a market). We derive site leasing revenues primarily from wireless service provider tenants, including T-Mobile, AT&T, Verizon Wireless, Oi S.A., Telefonica, Claro, and TIM. Wireless service providers enter into tenant leases with us, each of which relates to the lease or use of space at an individual site. In the United States and Canada, our tenant leases are generally for an initial term of five years to 10 years with multiple five year renewal periods at the option of the tenant. These tenant leases typically contain specific rent escalators, which average 3-4% per year, including the renewal option periods. Tenant leases in South Africa and our Central and South American markets typically have an initial term of 10 years with multiple five year renewal periods. In Central America, we have similar rent escalators to that of leases in the United States and Canada while our leases in South America and South Africa escalate in accordance with a standard cost of living index. Site leases in South America typically provide for a fixed rental amount and a pass through charge for the underlying rent related to ground leases and other property interests.

Cost of site leasing revenue primarily consists of:

?Cash and non-cash rental expense on ground leases and other underlying property interests;

?Property taxes;

?Site maintenance and monitoring costs (exclusive of employee related costs);

?Utilities;

?Property insurance; and

?Lease initial direct cost amortization.

In the United States and our international markets, ground leases and other property interests are generally for an initial term of five years to 10 years with multiple renewal periods, at our option, and provide for rent escalators which typically average 2-3% annually, or in our South American markets and South Africa, adjust in accordance with a standard cost of living index. As of June 30, 2020, approximately 71% of our tower structures were located on parcels of land that we own, land subject to perpetual easements, or parcels of land in which we have a leasehold interest that extends beyond 20 years. For any given tower, costs are relatively fixed over a monthly or an annual time period. As such, operating costs for owned towers do not generally increase as a result of adding additional customers to the tower. The amount of property taxes varies from site to site depending on the taxing jurisdiction and the height and age of the tower. The ongoing maintenance requirements are typically minimal and include replacing lighting systems, painting a tower, or upgrading or repairing an access road or fencing.

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In our Central American markets and Ecuador, significantly all of our revenue, expenses, and capital expenditures arising from our new build activities are denominated in U.S. dollars. Specifically, most of our ground leases and other property interests, tenant leases, and tower-related expenses are paid in U.S. dollars. In our Central American markets, our local currency obligations are principally limited to (1) permitting and other local fees, (2) utilities, and

As indicated in the table below, our site leasing business generates substantially all of our total segment operating profit. For information regarding our operating segments, see Note 14 of our condensed notes to consolidated financial statements included in this quarterly report.







                                            For the three months
                                                    ended             For the six months ended
                                                  June 30,                    June 30,
        Segment operating profit as a
        percentage of total                   2020         2019          2020           2019
        Domestic site leasing                   81.9%        80.8%          81.1%          80.7%
        International site leasing              16.9%        16.5%          17.7%          16.6%
        Total site leasing                      98.8%        97.3%          98.8%          97.3%
        


We believe that the site leasing business continues to be attractive due to its long-term contracts, built-in rent escalators, high operating margins, and low customer churn (which refers to when a customer does not renew its lease or cancels its lease prior to the end of its term) other than in connection with customer consolidation or cessation of a particular technology. We believe that over the long-term, site leasing revenues will continue to grow as wireless service providers lease additional antenna space on our towers due to increasing minutes of network use and data transfer, network expansion and network coverage requirements. During the remainder of 2020, we expect organic site leasing revenue in both our domestic and international segments to increase over 2019 levels due in part to wireless carriers deploying unused spectrum. We believe our site leasing business is characterized by stable and long-term recurring revenues, predictable operating costs and minimal non-discretionary capital expenditures. Due to the relatively young age and mix of our tower portfolio, we expect future expenditures required to maintain these towers to be minimal. Consequently, we expect to grow our cash flows by (1) adding tenants to our towers at minimal incremental costs by using existing tower capacity or requiring wireless service providers to bear all or a portion of the cost of tower modifications and (2) executing monetary amendments as wireless service providers add or upgrade their equipment. Furthermore, because our towers are strategically positioned, we have historically experienced low tenant lease terminations as a percentage of revenue other than in connection with customer consolidation or cessations of a specific technology.

Site Development

Our site development business, which is conducted in the United States only, is complementary to our site leasing business and provides us the ability to keep in close contact with the wireless service providers who generate substantially all of our site leasing revenue and to capture ancillary revenues that are generated by our site leasing activities, such as antenna and equipment installation at our tower locations. Site development revenues are earned primarily from providing a full range of end to end services to wireless service providers or companies providing development or project management services to wireless service providers. Our services include: (1) network pre-design;

For information regarding our operating segments, see Note 14 of our condensed notes to consolidated financial statements in this quarterly report.

Customers

We lease tower space to and perform site development services for all of the large U.S. wireless service providers. In both our site leasing and site development businesses, we work with large national providers and smaller regional, local, or private operators. Internationally, we lease tower space to all major service providers in South America, Central America, Canada, and South Africa.

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On April 1, 2020, T-Mobile finalized a merger with Sprint and now operates as T-Mobile. For the three months ended June 30, 2020, T-Mobile represented 40.4% of our total domestic site leasing revenue and 53.0% of our site development revenue. For the six months ended June 30, 2020, T-Mobile represented 40.8% of our total domestic site leasing revenue and 53.8% of our site development revenue.

Capital Allocation Strategy

Our capital allocation strategy is aimed at increasing shareholder value through investment in quality assets that meet our return criteria, stock repurchases when we believe our stock price is below its intrinsic value and by returning cash generated by our operations in the form of cash dividends. While the addition of a cash dividend to our capital allocation strategy has provided us with a new tool to return value to our shareholders, we will also continue to make investments focused on increasing Adjusted Funds From Operations per share. To achieve this, we expect to continue to deploy capital to portfolio growth and stock repurchases, subject to compliance with REIT distribution requirements, available funds and market conditions, while maintaining our target leverage levels. Key elements of our capital allocation strategy include:

Portfolio Growth. We intend to continue to grow our asset portfolio, domestically and internationally, primarily through tower acquisitions and the construction of new towers that meet our internal return on invested capital criteria.

Stock Repurchase Program. We currently utilize stock repurchases as part of our capital allocation policy when we believe our share price is below its intrinsic value. We believe that share repurchases, when purchased at the right price, will facilitate our goal of increasing our Adjusted Funds From Operations per share.

Dividend. In 2019, we added dividends as an additional component of our strategy of returning value to shareholders. We do not expect our dividend to require any changes in our leverage and, we believe, it will allow us to continue to focus on building and buying quality assets and opportunistically buying back our stock. While the timing and amount of future dividends will be subject to approval by our Board of Directors, we believe that our future cash flow generation will permit us to grow our cash dividend in the future.

COVID-19 Update

During the six months ended June 30, 2020, we experienced minimal impact to our business or results of operations from the coronavirus (COVID-19) pandemic. The extent to which COVID-19 could adversely affect our future business operations will depend on future developments such as the duration of the outbreak, new information on the severity of COVID-19, and methods taken to contain or treat the outbreak of COVID-19. While the full impact of COVID-19 is not yet known, we will continue to monitor this recent outbreak and the potential effects on our business.

Critical Accounting Policies and Estimates

We have identified the policies and significant estimation processes listed in the Annual Report on Form 10-K as critical to our business operations and the understanding of our results of operations. The listing is not intended to be a comprehensive list. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact and any associated risks related to these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019. Our preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

RESULTS OF OPERATIONS

This report presents our financial results and other financial metrics after eliminating the impact of changes in foreign currency exchange rates. We believe that providing these financial results and metrics on a constant currency basis, which are non-GAAP measures, gives management and investors the ability to evaluate the performance of our business without the impact of foreign currency exchange rate fluctuations. We eliminate the impact of changes in foreign currency exchange rates by dividing the

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current period's financial results by the average monthly exchange rates of the prior year period, as well as by eliminating the impact of the remeasurement of our intercompany loans.







        Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
        Revenues and Segment Operating Profit:
                                       For the three months ended                                Constant
                                                June 30,               Foreign      Constant     Currency
                                                                      Currency      Currency
                                            2020           2019        Impact        Change      % Change
        Revenues                                           (in thousands)
        Domestic site leasing          $       388,018   $ 369,180   $         -   $    18,838        5.1%
        International site leasing              94,385      89,823      (21,411)        25,973       28.9%
        Site development                        24,823      41,144             -      (16,321)     (39.7%)
        Total                          $       507,226   $ 500,147   $  (21,411)   $    28,490        5.7%
        Cost of Revenues
        Domestic site leasing          $        64,093   $  65,576   $         -   $   (1,483)      (2.3%)
        International site leasing              27,505      27,884       (6,880)         6,501       23.3%
        Site development                        19,904      30,988             -      (11,084)     (35.8%)
        Total                          $       111,502   $ 124,448   $   (6,880)   $   (6,066)      (4.9%)
        Operating Profit
        Domestic site leasing          $       323,925   $ 303,604   $         -   $    20,321        6.7%
        International site leasing              66,880      61,939      (14,531)        19,472       31.4%
        Site development                         4,919      10,156             -       (5,237)     (51.6%)
        


Revenues

Domestic site leasing revenues increased $18.8 million for the three months ended June 30, 2020, as compared to the prior year, primarily due to (1) revenues from 180 towers acquired and 28 towers built since April 1, 2019 and

International site leasing revenues increased $4.6 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, international site leasing revenues increased $26.0 million. These changes were primarily due to (1) revenues from 2,294 towers acquired and 451 towers built since April 1, 2019 and (2) organic site leasing growth from new leases, amendments, and contractual escalators. Site leasing revenue in Brazil represented 10.8% of total site leasing revenue for the period. No other individual international market represented more than 4% of our total site leasing revenue.

Site development revenues decreased $16.3 million for the three months ended June 30, 2020, as compared to prior year, as a result of decreased carrier activity driven primarily by T-Mobile and Sprint.

Operating Profit

Domestic site leasing segment operating profit increased $20.3 million for the three months ended June 30, 2020, as compared to the prior year, primarily due to additional profit generated by (1) towers acquired and built since April 1, 2019 and organic site leasing growth as noted above, (2) continued control of our site leasing cost of revenue, and (3) the positive impact of our ground lease purchase program.

International site leasing segment operating profit increased $4.9 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, international site leasing segment operating profit increased $19.5 million. These changes were primarily due to additional profit generated by (1) towers acquired and built since April 1, 2019 and organic site leasing growth as noted above, (2) continued control of our site leasing cost of revenue, and (3) the positive impact of our ground lease purchase program.

Site development segment operating profit decreased $5.2 million for the three months ended June 30, 2020, as compared to the prior year, as a result of decreased carrier activity driven primarily by T-Mobile and Sprint.

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        Selling, General, and Administrative Expenses:
                                       For the three months ended                                Constant
                                                June 30,               Foreign      Constant     Currency
                                                                      Currency      Currency
                                            2020           2019        Impact        Change      % Change
                                                           (in thousands)
        Domestic site leasing          $        25,233   $  27,193   $         -   $   (1,960)      (7.2%)
        International site leasing               9,035       8,310       (1,451)         2,176       26.2%
        Total site leasing             $        34,268   $  35,503   $   (1,451)   $       216        0.6%
        Site development                         4,494       6,885             -       (2,391)     (34.7%)
        Other                                   10,326      13,136             -       (2,810)     (21.4%)
        Total                          $        49,088   $  55,524   $   (1,451)   $   (4,985)      (9.0%)
        


Selling, general, and administrative expenses decreased $6.4 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, selling, general, and administrative expenses decreased $5.0 million. These changes were primarily as a result of decreases in noncash compensation due to the acceleration of unrecognized stock compensation expense in the prior year related to the adoption of the retirement plan, back-office operating expenses, and travel related expenses. These decreases were partially offset by increases in personnel and other support related costs due in part to our continued international expansion and charitable contributions related to COVID-19 relief.







        Acquisition and New Business Initiatives Related Adjustments and Expenses:
                                       For the three months ended                                             Constant
                                                June 30,                  Foreign            Constant         Currency
                                            2020           2019       Currency Impact     Currency Change     % Change
                                                                 (in thousands)
        Domestic site leasing          $         3,004   $   1,272   $               -   $           1,732       136.2%
        International site leasing               1,630       1,267               (249)                 612        48.3%
        Total                          $         4,634   $   2,539   $           (249)   $           2,344        92.3%
        


Acquisition and new business initiatives related adjustments and expenses increased $2.1 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, acquisition and new business initiatives related adjustments and expenses increased $2.3 million. These changes were primarily as a result of incremental costs incurred in support of new business initiatives.







        Asset Impairment and Decommission Costs:
                                       For the three months ended                                      Constant
                                                June 30,                  Foreign         Constant     Currency
                                                                                          Currency
                                            2020           2019       Currency Impact      Change      % Change
                                                              (in thousands)
        Domestic site leasing          $         5,342   $   8,815   $               -   $   (3,473)     (39.4%)
        International site leasing                 900         805               (282)           377       46.8%
        Total                          $         6,242   $   9,620   $           (282)   $   (3,096)     (32.2%)
        


Asset impairment and decommission costs decreased $3.4 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, asset impairment and decommission costs decreased $3.1 million. These changes were primarily as a result of a $4.5 million decrease in the impairment charge recorded due to sites decommissioned in the second quarter of 2020 compared to the prior year period, partially offset by a $1.1 million increase in impairment charges resulting from our regular analysis of whether the future cash flows from certain towers are adequate to recover the carrying value of the investment in those towers.

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        Depreciation, Accretion, and Amortization Expense:
                                       For the three months ended                                      Constant
                                                June 30,               Foreign         Constant        Currency
                                                                      Currency
                                            2020           2019        Impact       Currency Change    % Change
                                                              (in thousands)
        Domestic site leasing          $       134,569   $ 131,413   $         -   $           3,156        2.4%
        International site leasing              42,011      38,194       (9,548)              13,365       35.0%
        Total site leasing             $       176,580   $ 169,607   $   (9,548)   $          16,521        9.7%
        Site development                           597         678             -                (81)     (11.9%)
        Other                                    1,529       1,279             -                 250       19.5%
        Total                          $       178,706   $ 171,564   $   (9,548)   $          16,690        9.7%
        


Depreciation, accretion, and amortization expense increased $7.1 million for the three months ended June 30, 2020, as compared to the prior year. On a constant currency basis, depreciation, accretion, and amortization expense increased $16.7 million. These changes were primarily due to an increase in the number of towers we acquired and built since April 1, 2019, partially offset by the impact of assets that became fully depreciated since the prior year period.







        Operating Income (Expense):
                                        For the three months ended                                 Constant
                                                 June 30,               Foreign      Constant      Currency
                                                                       Currency      Currency
                                            2020            2019        Impact        Change       % Change
                                                            (in thousands)
        Domestic site leasing          $       155,777   $  134,911   $         -   $    20,866        15.5%
        International site leasing              13,304       13,363       (3,001)         2,942        22.0%
        Total site leasing             $       169,081   $  148,274   $   (3,001)   $    23,808        16.1%
        Site development                         (172)        2,593             -       (2,765)     (106.6%)
        Other                                 (11,855)     (14,415)             -         2,560      (17.8%)
        Total                          $       157,054   $  136,452   $   (3,001)   $    23,603        17.3%
        


Domestic site leasing operating income increased $20.9 million for the three months ended June 30, 2020, as compared to the prior year, primarily due to higher segment operating profit and decreases in asset impairment and decommission costs and selling, general, and administrative expenses, partially offset by increases in depreciation, accretion, and amortization expense and acquisition and new business initiatives related adjustments and expenses.

. . .

Aug 06, 2020

COMTEX_368983309/2041/2020-08-06T12:55:58

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