Business Context and Reporting Period
Crown Castle International Corp. and subsidiaries filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company owns, operates and leases shared wireless infrastructure, primarily U.S. towers and small-cell networks, and provides related network services. Following the May 2015 sale of its Australian subsidiary, CCAL, the company reports one operating segment focused on U.S. operations. Crown Castle has operated as a REIT for U.S. federal income tax purposes since January 1, 2014.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenues | $918.1 million | $892.9 million | $2.718 billion | $2.613 billion |
| Site rental revenue | $764.6 million | $717.6 million | $2.233 billion | $2.143 billion |
| Operating income | $230.8 million | $239.1 million | $716.4 million | $695.4 million |
| Income from continuing operations | $104.3 million | $99.2 million | $382.6 million | $217.7 million |
| Net income attributable to common stockholders | $92.8 million | $95.9 million | $1.347 billion | $209.5 million |
| Adjusted EBITDA | $529.2 million | $513.6 million | $1.579 billion | $1.532 billion |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1.291 billion | $1.151 billion |
| Basic earnings per common share | $0.28 | $0.29 | $4.05 | $0.63 |
Q3 operating margin was approximately 25.1%, compared with 26.8% in the prior-year quarter. Adjusted EBITDA margin was approximately 57.6%, compared with 57.5%. For the first nine months, operating margin was approximately 26.4% and Adjusted EBITDA margin was approximately 58.1%.
- Cash and cash equivalents were $184.1 million at September 30, 2015, compared with $151.3 million at December 31, 2014; restricted cash was $116.7 million.
- Total debt and other obligations were $12.141 billion, including $102.2 million of current maturities. Approximately 68% of debt was fixed rate and $3.9 billion was floating rate.
- Undrawn availability under the revolving credit facility was approximately $1.215 billion. Management reported compliance with financial maintenance covenants.
- Nine-month capital expenditures were $658.2 million, including $582.8 million of discretionary spending and $75.4 million of sustaining spending.
- The company paid $821.1 million of common dividends and $33.0 million of preferred dividends during the first nine months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 3%, driven by 7% growth in site rental revenue, partly offset by a 12% decline in network services and other revenue.
- Nine-month revenue increased 4%; site rental revenue increased 4% and network services and other revenue increased 3%.
- Q3 operating income declined 3% despite higher revenue, primarily reflecting higher general and administrative expense, depreciation, amortization and accretion.
- Nine-month continuing-operations income increased substantially, while reported net income was affected by the $981.0 million after-tax gain on the sale of CCAL.
- General and administrative expense increased 18% in Q3 and 20% for the nine-month period, reflecting portfolio expansion, acquisitions and small-cell activities.
- Interest expense declined 8% in both the quarter and nine-month period, helped by refinancing activity and lower amortization of previously settled interest-rate swaps.
- On August 4, 2015, the company acquired Sunesys for approximately $1.0 billion, adding nearly 10,000 miles of U.S. fiber. The acquisition was funded with cash and approximately $835 million of revolving borrowings.
- In May 2015, the company issued $1.0 billion of Tower Revenue Notes and used the proceeds, together with CCAL sale proceeds, to repay or refinance debt.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 site rental growth to benefit from tenant additions and carrier network upgrades, partly offset by increased non-renewals, particularly from Sprint's decommissioning of its legacy iDEN network.
- For 2016, management anticipated similar tenant-addition levels but expected $80 million to $90 million of non-renewals, at least in part, from decommissioning of former Leap Wireless, MetroPCS and Clearwire networks.
- Sustaining capital expenditures were expected to be approximately 3% of 2015 revenue and approximately 2% of 2016 revenue. Total discretionary capital spending was expected to remain at or above current levels, with increased small-cell investment.
- The company increased its quarterly common dividend from $0.82 to $0.885 per share beginning in the fourth quarter of 2015, with expected common dividend payments of approximately $1.2 billion over the following 12 months, subject to board approval.
- The company expected liquidity sources to cover the next 12 months' anticipated uses, including debt principal payments of $102.2 million, common dividends of approximately $1.2 billion, preferred dividends of approximately $45 million and capital expenditures.
- The CCAL sale generated approximately $1.1 billion of net cash proceeds at closing and included an approximately $124 million installment payment due in January 2016, supported by an irrevocable letter of credit and hedged with a foreign-currency swap.
- REIT status, utilization of approximately $1.0 billion of net operating losses, and the possible inclusion of additional small-cell assets in the REIT structure materially affect taxes and distributions.
- Key risks include carrier concentration, lease non-renewals, wireless industry investment levels, high leverage and refinancing requirements, floating-rate exposure, REIT qualification, acquisition integration, capital-intensive small-cell expansion and regulatory or litigation matters. Management stated that there were no material changes to the risk factors in the 2014 Form 10-K.
Important Facts for Investors to Verify
- Reconcile recurring operating performance excluding the one-time CCAL disposal gain and discontinued operations.
- Assess the effect of Sprint, Leap Wireless, MetroPCS and Clearwire network decommissioning on future site rental revenue.
- Review Sunesys integration, preliminary purchase accounting and the expected returns from the nearly 10,000-mile fiber footprint.
- Evaluate leverage, refinancing assumptions for Tower Revenue Notes, covenant headroom and sensitivity to higher interest rates.
- Confirm the sustainability of the increased dividend against operating cash flow, capital expenditures and debt obligations.
- Monitor REIT qualification, NOL utilization, potential small-cell REIT treatment and the tax characterization of 2015 distributions.
- Consider the limitations of Adjusted EBITDA, which excludes depreciation, interest, taxes and other significant items and is not a GAAP measure.