Crown Castle International Corp. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2017; filed May 4, 2017. Crown Castle owns, operates and leases shared wireless infrastructure in the U.S. and Puerto Rico, including approximately 40,000 towers and 27,500 route miles of fiber supporting small-cell networks. The company operates as a REIT and reports Towers and Small Cells segments.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Site rental revenue | $856.9 million | $799.3 million | +7% |
| Network services and other revenue | $159.0 million | $135.1 million | +18% |
| Total revenue | $1,015.9 million | $934.4 million | +9% |
| Operating income | $256.5 million | $211.7 million | +21% |
| Net income attributable to common stockholders | $119.1 million | $36.8 million | +223% |
| Diluted EPS | $0.33 | $0.11 | +$0.22 |
| Adjusted EBITDA | $581.4 million | $539.1 million | +8% |
| Cash flow from operations | $446.1 million | $437.7 million | +2% |
- Derived operating margin was approximately 25.3%, compared with 22.7% in the prior-year quarter. Net margin attributable to common stockholders was approximately 11.7%, compared with 3.9% based on reported common-stockholder income.
- Small Cells site rental revenue increased 46% to $140.4 million, including $31.2 million contributed by the FiberNet acquisition. Towers site rental revenue increased 2% to $716.5 million.
- Site rental gross margin increased 8% to $591.9 million. Segment operating profit increased 3% for Towers and 68% for Small Cells.
- Total debt and other obligations were $13.5 billion at March 31, 2017, including $2.8 billion of variable-rate debt; 79% of debt was fixed rate. Fair value of debt was $14.0 billion.
- Cash and cash equivalents were $205.2 million, excluding restricted cash of approximately $120.1 million. The revolving credit facility had $2.2 billion of undrawn availability at quarter-end.
- Capital expenditures were $262.4 million, including $246.4 million of discretionary expenditures. The company paid $348.1 million of common dividends, or $0.95 per share, during the quarter.
Material changes versus the prior comparable period
- The January 2017 FiberNet acquisition, completed for approximately $1.5 billion, added approximately 11,500 route miles of fiber and contributed $31.9 million of first-quarter revenue. The preliminary allocation included $766.7 million of goodwill and $325.2 million of intangible assets.
- Investing cash outflows increased to $1.76 billion from $207.7 million, primarily because of the FiberNet acquisition and higher capital expenditures.
- Financing cash flow was $954.2 million, compared with an outflow of $345.6 million in Q1 2016, reflecting new debt and revolving-facility activity.
- Interest expense increased to $134.5 million from $126.4 million, primarily because of higher indebtedness. Losses on retirement of long-term obligations declined to $3.5 million from $30.6 million, materially benefiting net income.
- The 2016 Term Loan A and revolving credit facility were amended to add $500 million of term loans and extend maturities to January 2022. The company also issued $500 million of 4.0% senior notes in February 2017.
- Cash and cash equivalents declined by $362.4 million during the quarter, principally because acquisition and capital-investment outflows exceeded operating and financing inflows.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2017 site rental revenue growth to reflect tenant additions, the FiberNet acquisition, the proposed Wilcon acquisition and anticipated tenant-lease non-renewals associated primarily with decommissioning of acquired wireless networks.
- 2017 capital expenditures are expected to equal or exceed 2016 levels, with continued growth in new small-cell construction. Sustaining capital expenditures are expected to be approximately 2% of full-year revenue.
- The company expects annualized common dividends of approximately $3.80 per share, or about $1.4 billion, over the next 12 months, subject to board approval.
- On April 17, 2017, the company agreed to acquire Wilcon for approximately $600 million in cash, with expected closing in Q3 2017. Wilcon owns approximately 1,900 route miles of fiber in Los Angeles and San Diego.
- Subsequent to quarter-end, the company issued 4.75 million common shares for approximately $440 million of net proceeds and issued $350 million of 4.75% senior notes due 2047. Proceeds may fund Wilcon, other investments, general corporate purposes or debt repayment.
- Approximately 86% of site rental revenue was derived from AT&T, Sprint, T-Mobile and Verizon Wireless, creating customer-concentration exposure. Approximately 53% of towers are leased or managed under arrangements with AT&T, Sprint and T-Mobile.
- Management expects to refinance tower revenue notes on or before their anticipated repayment dates; failure to do so could increase interest rates by approximately 5% and trigger principal payments from excess cash flow.
- The company was in compliance with financial maintenance covenants and expected continued compliance. Management stated that ordinary-course legal claims and contingencies were not expected to have a material adverse effect.
- Key risks include wireless-carrier spending and consolidation, tenant non-renewals, execution and integration of acquisitions, refinancing and interest-rate risk, REIT qualification, dividend requirements, customer concentration and continued demand for small-cell infrastructure.
Important facts for investors to verify
- Reconcile reported Adjusted EBITDA of $581.4 million to GAAP net income and evaluate the impact of excluded interest, depreciation, stock compensation and other items.
- Assess leverage after the FiberNet acquisition, February financing transactions, May equity issuance, May senior notes and any financing for Wilcon.
- Verify the timing, funding and expected returns of the proposed $600 million Wilcon acquisition.
- Monitor tenant additions and lease non-renewals related to acquired-network decommissioning, particularly in the Towers segment.
- Review fixed-versus-floating-rate debt, upcoming amortization, tower revenue note refinancing requirements and sensitivity to higher interest rates.
- Evaluate whether operating cash flow can sustain approximately $1.4 billion of annualized dividends while funding expected capital expenditures and acquisitions.
- Confirm the preliminary FiberNet purchase-price allocation, including goodwill and intangible assets, as it remains subject to adjustment.