Crown Castle International Corp. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers, small-cell networks and related land interests. The company operates through CCUSA, its U.S. business, and CCAL, its 77.6%-owned Australian subsidiary. The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014.
The company has operated as a U.S. REIT since January 1, 2014. Approximately 82% of first-quarter 2015 revenue was site rental revenue, and approximately 87% of site rental revenue came from AT&T, Sprint, T-Mobile and Verizon Wireless.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Site rental revenue | $767.6 million | $747.2 million | 3% |
| Network services and other revenue | $173.4 million | $128.8 million | 35% |
| Total revenue | $941.0 million | $876.0 million | 7% |
| Operating income | $263.0 million | $251.6 million | 5% |
| Net income | $125.1 million | $102.8 million | 22% |
| Net income attributable to common stockholders | $111.8 million | $90.5 million | 24% |
| Diluted earnings per share | $0.34 | $0.27 | 26% |
| Adjusted EBITDA | $554.3 million | $527.0 million | 5% |
| Cash flow from operations | $460.8 million | $362.3 million | 27% |
| Capital expenditures | $204.8 million | $142.9 million | 43% |
Calculated total revenue operating margin was approximately 27.9%, compared with 28.7% in the prior-year quarter. Adjusted EBITDA margin was approximately 58.9%, compared with 60.2%. Net income attributable to common stockholders represented approximately 11.9% of revenue, compared with 10.3%.
At March 31, 2015, cash and cash equivalents were $240.2 million, excluding $137.0 million of current restricted cash. Total debt and other obligations were $12.1 billion, including $4.3 billion of variable-rate debt and $7.7 billion of fixed-rate debt. Undrawn availability under the revolving credit facility was approximately $1.4 billion, and the facility's total commitment was approximately $2.2 billion. Total equity was $6.6 billion.
The company declared common dividends of $0.82 per share during the quarter and paid approximately $273.7 million of common dividends. It also paid $11.0 million of preferred dividends and repurchased approximately 0.3 million shares for $29.4 million, primarily to satisfy withholding taxes on restricted stock vesting.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 35% increase in network services and other revenue, reflecting higher carrier network-enhancement activity, LTE upgrades and the expanded infrastructure portfolio.
- Site rental revenue increased 3%. Management attributed the change, excluding straight-line accounting, to approximately 6% growth from new leasing activity and 3% growth from cash escalations, partly offset by an approximately 4% decline from tenant lease non-renewals.
- Operating expenses increased 9%, including higher site rental costs, network services costs and general and administrative expenses. General and administrative expense rose 23%, partly reflecting portfolio expansion, small-cell activity and network-services growth.
- Interest expense and amortization of deferred financing costs declined 8%, or $12.0 million, primarily because of lower interest-rate-swap amortization and refinancing activity.
- Operating cash flow increased $98.5 million, while capital expenditures increased $61.8 million, principally because of tower improvements, new tenant additions and small-cell network construction.
- Foreign currency translation produced a $16.3 million loss in Q1 2015 versus a $12.1 million gain in Q1 2014, primarily reflecting Australian-dollar movements.
Guidance, outlook, commentary and risks
- Management expected 2015 site rental revenue growth to benefit from tenant additions at levels similar to 2014, partially offset by increased non-renewals related to Sprint's legacy Nextel iDEN network and the former Leap Wireless, MetroPCS and Clearwire networks. These non-renewals were expected to occur primarily from 2015 through 2018.
- Management expected 2015 sustaining capital expenditures of approximately 2% of revenue and expected total capital expenditures over the next 12 months to be at least at current levels. Discretionary capital expenditures were $187.8 million in Q1 2015.
- The company expected 2015 common dividends of approximately $1.1 billion, or $3.28 per share, subject to board approval, plus approximately $45 million of preferred dividends.
- Management stated that cash on hand, operating cash flow and revolver availability should be sufficient for expected debt service, dividends and capital expenditures over the next 12 months.
- On April 30, 2015, the company agreed to acquire Sunesys for approximately $1.0 billion in cash. Sunesys owns or controls nearly 10,000 miles of U.S. fiber, and closing was expected by year-end 2015.
- On May 1, 2015, the company priced $1.0 billion of 2015 Tower Revenue Notes at stated rates of 3.222% and 3.663%. Proceeds were expected to repay $250.0 million of August 2010 Tower Revenue Notes, fund offering-related costs and support general corporate purposes.
- The company was in compliance with its financial maintenance covenants. However, it had $504.3 million of debt with anticipated repayment dates during 2015 that management expected to refinance. Failure to refinance certain tower revenue notes could result in increased interest rates and accelerated principal amortization.
- The company expects to remain subject to taxes on taxable REIT subsidiaries, foreign operations and certain other activities. It was evaluating actions to include at least part of its small-cell operations within the REIT following a favorable IRS private letter ruling.
- Management reported no material change to the risk factors in the 2014 Form 10-K. Ordinary-course legal proceedings and contingencies were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether tenant non-renewals from Sprint and the acquired networks accelerate and offset new leasing activity and contractual escalators.
- The closing, financing and integration of the proposed $1.0 billion Sunesys acquisition.
- The closing and final use of proceeds from the $1.0 billion 2015 Tower Revenue Notes offering.
- Refinancing progress for debt with 2015 anticipated repayment dates and the resulting interest expense and leverage.
- The sustainability of dividends and capital expenditures relative to operating cash flow, particularly after the Sunesys acquisition.
- The impact of including some small-cell operations in the REIT, including any deferred-tax liability derecognition and ongoing TRS taxes.
- Adjusted EBITDA trends and reconciliation to GAAP results, recognizing that Adjusted EBITDA is a non-GAAP measure and may not be comparable with other companies.