Crown Castle International Corp. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2019, filed November 4, 2019. Crown Castle owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 75,000 route miles of fiber supporting small cells and fiber solutions. Operating segments are Towers and Fiber. The company operates as a REIT for U.S. federal income tax purposes.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Net revenues | $1.514 billion | $1.375 billion | +10% |
| Site rental revenues | $1.260 billion | $1.184 billion | +6% |
| Services and other revenues | $254 million | $191 million | +33% |
| Operating income | $453 million | $359 million | +26% |
| Net income attributable to common stockholders | $244 million | $136 million | +79% |
| Diluted EPS | $0.58 | $0.33 | +$0.25 |
| Adjusted EBITDA | $882 million | $793 million | +11% |
Q3 operating margin was approximately 30%, compared with 26% in the prior-year quarter; common-stockholder net margin was approximately 16%, compared with 10%. Towers site rental revenue increased 6% to $829 million, while Fiber site rental revenue increased 7% to $431 million. Towers operating profit rose 13% to $695 million and Fiber operating profit rose 7% to $243 million.
| Nine months ended September 30 | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $4.418 billion | $4.004 billion | +10% |
| Net income attributable to common stockholders | $644 million | $373 million | +73% |
| Diluted EPS | $1.54 | $0.90 | +$0.64 |
| Adjusted EBITDA | $2.561 billion | $2.324 billion | +10% |
| Cash flow from operations | $1.891 billion | $1.775 billion | +7% |
| Capital expenditures | $1.538 billion | $1.241 billion | +$297 million |
At September 30, 2019, cash and cash equivalents were $182 million and total cash, cash equivalents and restricted cash were $325 million. Total debt and other obligations were $17.850 billion, versus $16.682 billion at December 31, 2018. Undrawn 2016 Revolver availability was $4.590 billion. Total equity was $11.325 billion. The company reported a 3.9% weighted-average debt interest rate, approximately seven-year weighted-average maturity, and 85% fixed-rate debt.
Material changes versus the prior comparable period
- Revenue growth reflected tenant additions, contractual escalations and renewals, increased demand for small cells and fiber solutions, and higher carrier network-enhancement activity.
- Services and other gross margin increased 45% in Q3 and 48% for the nine-month period, although these revenues are variable and generally are not under long-term contracts.
- Interest expense increased 8% in Q3 and 7% year to date because of higher indebtedness used to finance discretionary capital expenditures.
- The prior-year periods included $32 million of Q3 and $106 million of year-to-date losses on retirement of long-term obligations; 2019 included no Q3 loss and a $2 million year-to-date loss.
- Capital expenditures increased substantially, primarily for construction of small cells and fiber. Sustaining capital expenditures represented approximately 2% of net revenues.
- ASC 842 lease accounting was adopted January 1, 2019, adding $6.112 billion of operating lease right-of-use assets and $5.776 billion of operating lease liabilities at September 30, 2019. Management stated that adoption did not materially affect operations or cash flows.
Guidance, outlook, commentary and risks
- Management expects 2019 and 2020 site rental revenue growth to benefit from tenant additions, supported by wireless network expansion, 5G initiatives, data usage and demand for fiber solutions.
- Discretionary capital expenditures for 2019 and 2020 are expected to exceed 2018 levels, while sustaining capital expenditures are expected to remain approximately 2% of net revenues. Certain small-cell and fiber construction projects may take 18 to 36 months.
- Management expects common dividends over the following 12 months to total at least $4.80 per share, or approximately $2.0 billion. The board declared a $1.20 per-share quarterly dividend payable December 31, 2019. Preferred dividends were expected to total approximately $85 million before mandatory conversion in August 2020.
- Management stated that expected liquidity sources should cover the next 12 months’ uses, despite expected uses exceeding net cash from operations. The company targets leverage of approximately five times Adjusted EBITDA and interest coverage of approximately three times, subject to business and capital-market conditions.
- In 2019, the company issued $1.0 billion of senior notes in February and $900 million in August, expanded Revolver commitments to $5.0 billion and extended maturity to June 2024. There were no commercial paper notes outstanding at September 30, 2019; as of November 1, 2019, $390 million was outstanding under the commercial paper program.
- Customer concentration is significant: for the nine months ended September 30, 2019, AT&T, T-Mobile, Verizon Wireless and Sprint accounted for 75% of site rental revenues. T-Mobile and Sprint represented approximately 21% and 13%, respectively. The proposed T-Mobile/Sprint combination and related network decommissioning could reduce demand or revenue; the filing identifies approximately 1% of site rental revenues as an expected impact from previously disclosed non-renewals.
- In September 2019, the company received an SEC subpoena seeking documents primarily related to capitalization and expense policies for tenant upgrades and installations from 2015 onward. The company is cooperating but cannot predict the timing, scope or outcome.
- The company faces substantial lease, debt, dividend and capital-spending obligations. Tower Revenue Notes may incur approximately 5% additional interest if not repaid by anticipated repayment dates, and principal payments would then commence from excess cash flow.
Important facts for investors to verify
- Reconcile reported growth in site rental revenues, Adjusted EBITDA and operating cash flow with the level and returns of increased small-cell and fiber capital expenditures.
- Assess customer concentration and the ultimate effect of the T-Mobile/Sprint transaction, network rationalization and non-renewals.
- Monitor the SEC investigation, any accounting-policy findings, potential restatements, penalties or related costs, none of which can be estimated clearly from the filing.
- Review debt maturities, refinancing assumptions for Tower Revenue Notes, floating-rate exposure and compliance with financial covenants.
- Evaluate dividend sustainability against operating cash flow after capital expenditures, debt service, preferred dividends and operating lease payments.
- Consider the approximately 14 million common-share equivalents associated with mandatory convertible preferred stock and the expected August 2020 conversion.