SBA Communications Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial figures are unaudited. SBA owns and operates wireless communications sites, with site leasing as its principal business. At quarter-end, it owned 30,904 towers; site leasing generated 97.5% of segment operating profit for the first nine months.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $507.5 million | $467.2 million | $1,501.0 million | $1,381.8 million |
| Operating income | $153.8 million | $138.0 million | $429.6 million | $393.8 million |
| Net income (loss) attributable to SBA | $21.7 million | $16.1 million | $79.6 million | $(9.7) million |
| Diluted EPS | $0.19 | $0.14 | $0.69 | $(0.08) |
| Adjusted EBITDA (non-GAAP) | $355.4 million | $328.1 million | $1,048.2 million | $965.8 million |
| Cash from operating activities | — | $705.0 million | $624.1 million |
Q3 revenue grew 8.6% year over year; nine-month revenue grew 8.6%. Operating margin was approximately 30.3% for Q3 and 28.6% for the first nine months, versus 29.5% and 28.5% in the comparable 2018 periods. Adjusted EBITDA increased 8.4% in Q3 and 9.5% year to date. Nine-month operating cash flow increased approximately $80.8 million.
Site leasing revenue was $468.6 million in Q3 and $1,379.8 million for nine months. Site development revenue was $39.0 million and $121.2 million, respectively. Nine-month site development revenue rose 40.7%, reflecting higher carrier project activity, particularly work associated with Sprint and T-Mobile.
At September 30, cash and cash equivalents were $128.8 million, restricted cash was $27.5 million, and total current assets were $329.3 million against current liabilities of $510.2 million. Restricted cash is not freely available for general purposes. Debt principal totaled $9.93 billion; carrying value was $9.85 billion. The $1.25 billion revolving facility had no amount outstanding, and the company reported compliance with its debt covenants. Management said cash, operating cash flow, and available revolver capacity should cover debt service for the next 12 months; estimated debt service for that period was $410.3 million.
Material changes and notable items
- Domestic site leasing grew through acquired and newly built towers, lease amendments, new leases, and contractual escalators. International site leasing also grew, although currency movements reduced reported growth; on a constant-currency basis, nine-month international leasing revenue increased 13.7%.
- SG&A rose 39.9% year to date, primarily due to higher non-cash compensation and personnel-related costs. Non-cash compensation was $60.6 million versus $32.1 million in the prior-year period. Management also cited a $2.3 million partial recovery of the Oi reserve.
- Net income improved year to date from a loss to profit, helped by higher operating income and substantially lower intercompany-loan remeasurement losses than in 2018. These gains were partly offset by higher interest expense and income tax provision. Q3 other expense included a $31.9 million loss on remeasurement of U.S.-dollar-denominated intercompany loans.
- In September, SBA issued $1.165 billion of 2019-1C tower securities at a fixed 2.836% coupon, primarily refinancing $920 million of 2014-1C securities and repaying revolver borrowings. A majority of the $2.37 billion 2018 Term Loan was covered by two four-year interest-rate swaps.
- The company adopted lease accounting Topic 842 on January 1, 2019. It recognized $2.6 billion of right-of-use assets and $2.4 billion of lease liabilities at adoption; this materially changed balance-sheet presentation but did not materially affect earnings, liquidity, or covenant compliance. Comparative 2018 periods were not adjusted.
- SBA consolidated its South African Atlas Tower South Africa joint venture after acquiring an additional interest; a 6% redeemable noncontrolling interest was recorded at $14.1 million. The holder’s put option and SBA’s call option are exercisable on or after August 30, 2020.
Outlook, risks, and contingencies
Management expected organic site leasing revenue in both domestic and international markets to increase during the remainder of 2019, citing carrier deployment of unused spectrum. It also described long-term growth drivers including network expansion, data usage, additional tenants, and lease amendments. For 2019, projected cash capital expenditures were $31–37 million for non-discretionary items and $468–478 million for discretionary items, including acquisitions, construction, augmentations, and ground-lease purchases. These are expectations, not reported results.
Capital allocation includes portfolio investment, share repurchases, and a quarterly dividend. A new $1.0 billion repurchase authorization was approved in July; $824.3 million remained as of the filing. SBA paid a $0.37-per-share dividend in September and declared another $0.37 dividend payable in December, subject to board approval and applicable conditions.
Key risks identified include carrier consolidation and its effect on leasing, customer non-renewals, foreign exchange and political or economic risks, acquisition and construction execution, land rights, refinancing and interest-rate exposure, and continued REIT qualification. A hypothetical 10% adverse Brazilian real movement was estimated to reduce nine-month revenue by about 1.0% and operating income by 0.6%; a 10% move in exchange rates affecting unsettled intercompany debt could result in approximately $37.8 million of gains or losses. The filing also reports tower impairment and decommission costs of $23.6 million year to date and maximum unrecorded acquisition earnout obligations of $28.9 million.
The company reported that disclosure controls and procedures were effective as of September 30, 2019. The filing does not provide a clear quantified GAAP free-cash-flow measure.
Important facts for investors to verify
- Whether site leasing growth, organic leasing, and carrier activity meet management’s expectations, particularly amid customer consolidation and non-renewals.
- Debt maturities and anticipated repayment dates for tower securities, access to refinancing, and continued covenant compliance.
- Cash availability after planned discretionary capital spending, dividends, and the remaining share repurchase authorization.
- Foreign-currency effects, especially Brazilian exposure and remeasurement of intercompany loans.
- Execution and returns on acquisitions, tower construction, ground-lease purchases, and the Atlas South Africa put/call arrangement.
- The effect of Topic 842 and elevated lease obligations when comparing 2019 balance-sheet figures with prior periods.