SBA Communications Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars, except per-share amounts and percentages. SBA owns and operates wireless communications sites; recurring site leasing is its primary business.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $507.2 | $500.1 | $1,024.3 | $993.4 |
| Operating income | $157.1 | $136.5 | $308.3 | $275.7 |
| Operating margin | 31.0% | 27.3% | 30.1% | 27.8% |
| Net income (loss) attributable to SBA | $22.8 | $32.0 | $(104.2) | $58.0 |
| Diluted earnings (loss) per share | $0.20 | $0.28 | $(0.93) | $0.51 |
| Adjusted EBITDA (non-GAAP) | $368.8 | $347.2 | $738.7 | $692.8 |
| Cash provided by operating activities | — | $592.4 | $466.1 |
- Revenue mix: Q2 site leasing revenue was $482.4 million, up from $459.0 million; site development revenue was $24.8 million, down from $41.1 million. First-half site leasing revenue rose to $974.8 million from $911.2 million, while site development fell to $49.5 million from $82.3 million.
- Margins and earnings: Operating income rose 15.1% in Q2 and 11.8% for the first half. Q2 operating margin was approximately 31.0%, versus 27.3%. Adjusted EBITDA increased 6.2% in Q2 and 6.6% for the first half on reported figures; management cited constant-currency growth of 10.1% and 9.7%, respectively.
- Cash flow and investment: First-half operating cash flow was $592.4 million. Investing activities used $414.0 million, including $119.0 million for acquisitions and $67.0 million for capital expenditures; financing activities used $52.1 million. Cash, cash equivalents and restricted cash totaled $251.6 million at June 30.
- Debt and liquidity: Debt principal was $10.662 billion; carrying value was $10.580 billion. The $1.25 billion revolving credit facility had no balance outstanding at June 30, and the company reported covenant compliance. Cash and cash equivalents were $207.5 million, with $225.9 million in short-term investments. Management said cash on hand, revolver availability and operating cash flow were expected to cover debt service for the next 12 months.
- Balance sheet: Total assets were $9.391 billion. Long-term lease liabilities were $2.114 billion, in addition to debt. Shareholders’ deficit was $4.305 billion.
Material changes and unusual items
- Domestic and international site leasing growth reflected acquired and newly built towers, organic leasing, amendments, and contractual rent escalators. For the first half, constant-currency international site leasing revenue increased 30.5% year over year.
- Site development revenue and segment operating profit declined, primarily because of lower carrier activity associated with T-Mobile and Sprint. T-Mobile, following its merger with Sprint, represented 40.4% of Q2 domestic site leasing revenue and 53.0% of site development revenue.
- First-half results included a $261.3 million loss on remeasurement of U.S.-dollar-denominated intercompany loans, recorded in other expense. The filing identifies foreign-exchange movements as a principal reason net income shifted to a loss. The first half also included a $16.9 million loss on extinguishment of debt, including a call premium and write-off of financing costs.
- The company issued $1.5 billion of 3.875% senior notes during the first half, principally to redeem $750 million of 2014 senior notes, repay revolver borrowings and fund general corporate purposes. On July 14, after quarter-end, it issued $1.35 billion of tower securities at a blended 2.081% rate and used proceeds to repay the 2015-1C and 2016-1C tower securities.
- Quarter-end debt service estimates included $504.6 million for the 2015-1C tower securities due at their anticipated repayment date in October 2020. The subsequent July refinancing repaid that issuance and the 2016-1C securities; the original estimate therefore does not reflect that refinancing.
- On August 6, after quarter-end, the company terminated an interest-rate swap for $176.2 million and entered into a replacement swap on $1.95 billion of notional principal at a fixed rate of 0.1239% through the term-loan maturity.
Outlook, capital allocation and risks
- Management expected organic site leasing revenue in both domestic and international segments during the remainder of 2020 to exceed 2019 levels, in part as carriers deploy unused spectrum. This is an expectation, not a quantified revenue forecast.
- For 2020, the company estimated non-discretionary cash capital expenditures of $31–$41 million and discretionary cash capital expenditures of $325–$345 million. It expected to fund these from cash, operating cash flow and borrowings or other financing.
- The company paid two quarterly dividends of $0.465 per share during the first half and declared another $0.465 per share dividend after quarter-end. Future dividends and repurchases remain subject to board decisions, financial conditions and other factors.
- Management reported minimal COVID-19 impact through June 30, but noted that the future effects were uncertain. Disclosed risks include carrier consolidation and spending, international currency and economic exposure, refinancing and interest-rate risk, acquisition execution, and the effect of COVID-19 on customers, operations and capital markets. The company also noted uncertainty related to the potential discontinuation of LIBOR.
- Foreign exchange movements had a substantial effect on reported earnings and equity: first-half foreign currency translation adjustments were a loss of $184.2 million, in addition to the intercompany-loan remeasurement loss. Management said disclosure controls and procedures were effective as of June 30, 2020.
Investor verification priorities
- Assess the sustainability of site leasing growth against lower site development activity and the concentration of revenue tied to T-Mobile.
- Review the drivers and sensitivity of the $261.3 million intercompany-loan remeasurement loss, foreign currency exposures and related tax effects.
- Reconcile the debt and debt-service profile after the July tower-securities refinancing and August swap replacement; confirm covenant headroom and refinancing assumptions.
- Compare planned 2020 discretionary capital expenditures with actual acquisition, construction and ground-lease spending, and evaluate funding alongside dividends and repurchases.
- Monitor COVID-19 effects on carrier capital spending, lease payments, permits, operations and foreign exchange, as well as LIBOR transition and interest-rate risks.