Crown Castle International Corp. 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2020, filed May 1, 2020. Crown Castle owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 80,000 route miles of fiber supporting small cells and fiber solutions. The company operates as a REIT and reports Towers and Fiber segments.
Site rental revenue represented 92% of consolidated revenue. Towers and Fiber contributed 66% and 34%, respectively, of site rental revenue. Approximately 74% of site rental revenue came from T-Mobile, AT&T, Verizon Wireless and Sprint.
Key financial metrics
| Metric | Q1 2020 | Q1 2019, restated | Change |
|---|---|---|---|
| Net revenue | $1.421 billion | $1.408 billion | +1% |
| Site rental revenue | $1.310 billion | $1.242 billion | +5% |
| Services and other revenue | $111 million | $166 million | -33% |
| Operating income | $364 million | $367 million | -1% |
| Net income attributable to CCIC stockholders | $185 million | $193 million | -4% |
| Net income attributable to common stockholders | $157 million | $165 million | -5% |
| Diluted EPS | $0.38 | $0.40 | -5% |
| Adjusted EBITDA | $814 million | $804 million | +1% |
| Cash flow from operating activities | $653 million | $512 million | +28% |
| Capital expenditures | $447 million | $480 million | -7% |
Calculated consolidated operating margin was approximately 25.6%, compared with 26.1% in the prior-year period. Net margin attributable to CCIC stockholders was approximately 13.0%, compared with 13.7%. Adjusted EBITDA margin was approximately 57.3%, compared with 57.1%.
Site rental growth reflected a 5% increase in Towers revenue to $867 million and a 7% increase in Fiber revenue to $443 million. Segment site rental gross margin increased 6% in both Towers and Fiber. Towers services and other gross margin fell 69% to $13 million because of lower and less favorable carrier network-enhancement activity.
At March 31, 2020, total debt and other obligations were $18.695 billion, including $949 million classified as current. Cash, cash equivalents and restricted cash totaled $472 million. Revolver availability was $3.7 billion at quarter-end and $5.0 billion as of April 29, 2020, after subsequent financing activity. The company reported $10.121 billion of total equity.
In April 2020, the company issued $1.25 billion of senior unsecured notes, consisting of $750 million due 2030 at 3.300% and $500 million due 2050 at 4.150%, using the proceeds to repay borrowings under the 2016 Revolver. After this transaction, management reported a weighted-average debt interest rate of 3.7%, approximately 88% fixed-rate debt and a weighted-average maturity of approximately seven years, assuming anticipated repayment dates for Tower Revenue Notes.
Material changes versus the prior comparable period
- Core site rental revenue increased $68 million, or 5%, driven by tenant additions, contractual escalations, renewals and demand for small cells and fiber solutions.
- Services and other revenue declined $55 million, or 33%, and related gross margin declined $29 million, primarily reflecting lower carrier network-enhancement activity and changes in the volume and mix of services.
- Operating income declined modestly despite revenue growth, while interest expense increased $7 million to $175 million because of higher outstanding debt used to finance discretionary capital expenditures.
- Operating cash flow increased $141 million, primarily from core business growth and favorable working-capital changes, including a $102 million decrease in receivables.
- Capital expenditures declined to $447 million from $480 million. Discretionary capital expenditures were $426 million, primarily for small-cell and fiber construction and infrastructure improvements.
- Common dividends declared increased to $1.20 per share from $1.125 per share. The company paid approximately $513 million of common dividends and $28 million of preferred dividends during the quarter.
- The March 31, 2019 financial statements were restated for revenue-recognition errors involving tower installation services. Permanent improvements were reclassified as a lease component and recognized as site rental revenue over the estimated lease term.
Guidance, outlook, commentary and risks
Management expects 2020 site rental revenue growth to benefit from higher tenant additions as wireless carriers and fiber-solution tenants respond to increasing data demand. The company expects continued meaningful discretionary investment in small cells and fiber and expects sustaining capital expenditures to be approximately 2% of full-year 2020 net revenue.
Management expects common dividends over the following 12 months to total at least $4.80 per share, or approximately $2.0 billion in aggregate. Preferred dividends were expected to total approximately $28 million before the mandatory conversion of the 6.875% Mandatory Convertible Preferred Stock in August 2020. Future dividends remain subject to board declaration.
The company stated that COVID-19 had not materially affected first-quarter 2020 results but warned that the pandemic could materially affect future financial position, results, cash flows, tenant demand, permitting, suppliers, operating costs and access to capital. The company continued operating because telecommunications infrastructure was designated critical infrastructure.
Management expects liquidity sources, including operating cash flow, cash on hand, revolver capacity, commercial paper and potential ATM equity issuance, to cover expected uses over the next 12 months. Expected uses include $949 million of principal payments, approximately $2.0 billion of common dividends, preferred dividends and capital expenditures.
The company disclosed an SEC investigation concerning capitalization and expense policies for tenant upgrades and installations. It also disclosed putative securities class actions and a stockholder derivative lawsuit. Management stated that it cannot predict the outcomes or estimate potential losses for these matters.
Disclosure controls were deemed ineffective because of a material weakness in internal controls over accounting for tower installation services. Management began remediation through revised accounting policies, enhanced processes and controls, training and evaluation of additional resources.
The T-Mobile and Sprint merger closed on April 1, 2020. The company identified customer concentration and the effects of the combined carrier as matters requiring monitoring. Tower Revenue Notes also carry additional interest of approximately 5% per year if not repaid by their anticipated repayment dates, and management expects to refinance them on or before those dates.
Most important facts for investors to verify
- Reconcile reported growth in recurring site rental revenue with the sharp decline in variable services revenue and assess the sustainability of tenant additions.
- Review the impact and scope of the restatement and confirm completion of remediation for the material internal-control weakness.
- Monitor COVID-19 effects on tenant demand, construction schedules, permitting, supply chains, collections and financing markets.
- Assess leverage, upcoming 2021-2024 maturities, revolver utilization and refinancing requirements, including Tower Revenue Note anticipated repayment dates.
- Verify the sustainability of the planned common dividend relative to operating cash flow, capital expenditures and debt service.
- Evaluate the effects of the T-Mobile-Sprint merger and broader wireless-carrier concentration on renewals, non-renewals and future tenant additions.
- Track developments in the SEC investigation, shareholder litigation and any resulting financial, governance or disclosure consequences.