Crown Castle International Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2016. Crown Castle owns, operates and leases approximately 40,000 U.S. towers and small-cell networks supported by approximately 16,500 miles of fiber. The company operates as a U.S. REIT and reports towers and small cells as its operating segments. Prior-period segment information was recast to conform to the new presentation.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $934.4 million | $900.5 million | +4% |
| Site rental revenue | $799.3 million | $731.4 million | +9% |
| Network services and other revenue | $135.1 million | $169.1 million | -20% |
| Operating income | $211.7 million | $244.9 million | -14% |
| Net income attributable to common stockholders | $36.8 million | $111.8 million | -67% |
| Diluted EPS | $0.11 | $0.34 | -$0.23 |
| Adjusted EBITDA | $539.1 million | $529.3 million | +2% |
| Operating cash flow | $437.7 million | $453.1 million | -3% |
| Capital expenditures | $193.5 million | $201.7 million | -4% |
Site rental gross margin increased to $546.7 million from $499.2 million, while network services and other gross margin declined to $54.1 million from $82.2 million. Approximate consolidated operating margin was 22.7%, versus 27.2% in the prior-year quarter; Adjusted EBITDA margin was approximately 57.7%, versus 58.8%.
At March 31, 2016, cash and cash equivalents were $175.7 million, restricted cash was $129.4 million, total debt and other obligations were $11.9 billion, and total equity was $7.2 billion. The company reported $2.3 billion of undrawn 2016 Revolver availability before subsequent events. Debt fair value was $12.5 billion versus a carrying amount of $11.9 billion.
Material changes versus the prior comparable period
- Site rental revenue increased primarily from tenant additions, contractual escalations, acquisitions and lease renewals, partially offset by non-renewals associated with customer decommissioning of acquired networks.
- Small-cell site rental revenue rose 71% to $96.5 million, driven primarily by the 2015 Sunesys acquisition and small-cell construction. Small-cell operating profit increased 44% to $45.5 million.
- Towers site rental revenue increased 4%, but towers network services and other revenue declined 20%, causing towers segment operating profit to increase by less than 1%.
- General and administrative expense increased 32% to $97.6 million, including higher stock-based compensation and costs associated with business growth.
- Net income declined substantially because of a $30.5 million loss on retirement of debt, higher depreciation, amortization and accretion, and the absence of $13.4 million of prior-year discontinued-operation income.
- Operating cash flow decreased $15.4 million, primarily because of lower network services activity and working-capital changes.
Debt, liquidity and capital allocation
- In January 2016, the company entered a new credit facility comprising a $2.5 billion revolver, a $2.0 billion Term Loan A and a previously outstanding $1.0 billion 364-day facility. The new facility was used to refinance the former 2012 credit facility.
- In February 2016, the company issued $1.5 billion of senior notes, using proceeds and cash on hand to repay the 364-day facility and $500 million of revolver borrowings.
- The company sold 3.8 million common shares through its ATM program for $323.8 million of net proceeds and paid approximately $299.1 million of common dividends during the quarter.
- Management expected 2016 common dividends of approximately $1.2 billion, or $3.54 per share, subject to board approval. Preferred dividends were expected to total approximately $33 million before anticipated conversion in November 2016.
- After the quarter, the company acquired approximately 330 towers for about $461 million and issued $1.0 billion of additional senior notes intended to refinance certain tower revenue notes and repay revolver borrowings.
Guidance, outlook, risks and unusual items
- Management expected 2016 site rental growth to benefit from tenant additions at levels similar to 2015, partially offset by non-renewals related to customer network decommissioning.
- 2016 capital expenditures were expected to equal or exceed 2015 levels, with increased investment in small-cell construction. Sustaining capital expenditures were expected to be approximately 2% of full-year revenue.
- Management stated that liquidity sources should cover expected needs over the following 12 months, including debt service, dividends, preferred dividends and capital expenditures.
- Approximately 89% of site rental revenue was derived from AT&T, Sprint, T-Mobile and Verizon Wireless, creating customer concentration risk. The weighted-average remaining lease term was approximately six years, excluding tenant renewal options.
- The business remains exposed to carrier consolidation, network decommissioning, tenant non-renewals, interest-rate movements, refinancing risk, capital spending requirements and execution risk in the growing small-cell business.
- Approximately 19% of debt was floating-rate after giving effect to subsequent refinancing activities. A hypothetical 0.125 percentage-point increase in rates was estimated to raise annual interest expense by approximately $3 million.
- The company reported compliance with its financial maintenance covenants. Ordinary-course legal claims and guarantees were not expected by management to have a material adverse effect.
- The company adopted debt issuance cost presentation guidance retrospectively. A new lease accounting standard, effective in 2019, is expected to have a material financial-statement impact, although the amount was not yet determined.
Important facts for investors to verify
- Reconcile Adjusted EBITDA to GAAP earnings and evaluate the effect of debt retirement losses and other adjustments.
- Monitor tower lease non-renewals related to acquired-network decommissioning and the concentration of revenue among four major carriers.
- Assess whether small-cell revenue and operating profit growth justifies planned capital expenditures and acquisition spending.
- Review leverage, floating-rate exposure, covenant headroom and refinancing requirements, including the subsequent May 2016 refinancing.
- Verify the sustainability of the planned $3.54-per-share annual common dividend relative to operating cash flow, capital expenditures and debt obligations.
- Consider dilution from the mandatory conversion of approximately 9.8 million preferred shares expected in November 2016 and the ATM equity issuance program.