SBA Communications Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial amounts below are in U.S. dollars; millions unless noted. The filing was signed August 6, 2018.
Business context
SBA owns and operates wireless communications sites, primarily multi-tenant towers, and also provides site development services. At June 30, it owned 28,604 towers and managed or leased approximately 9,500 sites, about 500 of which were revenue-producing. Site leasing generated 94% of revenue and 98.4% of segment operating profit in the first half.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $456.3 | $427.3 | $914.6 | $850.7 |
| Operating income | $125.9 | $114.6 | $255.8 | $222.4 |
| Net income (loss) | $(57.4) | $9.2 | $(25.8) | $46.8 |
| Diluted EPS | $(0.50) | $0.08 | $(0.22) | $0.38 |
| Adjusted EBITDA | $318.9 | $298.8 | $637.7 | $591.0 |
Revenue grew 6.8% in Q2 and 7.5% in the first half. Operating margin was approximately 27.6% in Q2 versus 26.8% a year earlier, and 28.0% for the first half versus 26.1%. Adjusted EBITDA increased 7.9% and 8.7%, respectively, on a constant-currency basis. These are non-GAAP measures.
- First-half operating cash flow was $425.1, up from $404.2. Investing cash outflow was $370.2, including $285.4 of acquisitions and $68.6 of capital expenditures. Financing provided $26.7; cash, cash equivalents and restricted cash ended at $176.4.
- At June 30, cash and cash equivalents were $134.7; current assets were $326.9 and current liabilities $277.8. Restricted cash was $24.8 and is not generally available for unrestricted use.
- Total debt principal was $9.8 billion, compared with $9.405 billion at year-end 2017; carrying value of long-term debt was $9.676 billion. Shareholders’ deficit was $3.042 billion.
- First-half cash interest paid was $182.0. Estimated debt service for the 12 months through June 30, 2019 was $403.7. The company reported compliance with applicable credit and tower-securities covenants.
Changes versus prior period
- Growth reflected acquisitions and new tower builds, organic leasing from new tenants, lease amendments and contractual escalators, and increased site-development carrier activity. The company acquired 558 completed towers in the first half.
- Domestic site leasing revenue rose 6.5% in the first half; international site leasing revenue rose 17.0% on a constant-currency basis. Foreign exchange reduced reported international revenue growth.
- Net results turned to a loss largely because of an $87.3 million first-half loss remeasuring U.S.-dollar intercompany loans with a Brazilian subsidiary, higher interest expense, and a $14.4 million debt-extinguishment loss. Q2 included an $88.9 million intercompany-loan remeasurement loss. Operating income and Adjusted EBITDA nevertheless increased.
- Interest expense increased to $182.6 for the first half from $156.1, attributed to higher average debt and interest rates. Foreign-currency translation adjustments reduced first-half comprehensive income by $121.5.
- The company repurchased 2.1 million shares for $345.5 in the first half at an average $163.23 per share. A new $1.0 billion authorization was approved in February; $654.5 remained available at filing.
Outlook, risks and unusual items
- Management expected organic site-leasing revenue added per tower in both domestic and international segments to exceed 2017 levels during the remainder of 2018, partly due to carriers deploying spectrum. This is directional commentary, not full-year financial guidance.
- For 2018, estimated non-discretionary maintenance and general corporate capital expenditures were $31.5–$41.5; discretionary capital expenditures were $560–$580, including acquisitions, construction, augmentation and ground-lease purchases. Funding was expected from cash, operating cash flow and borrowings or new financings.
- Management said cash on hand, revolver capacity and operating cash flow were expected to cover debt service over the next 12 months. The amended revolver commitment was $1.25 billion, with $85 million drawn at quarter-end; $90 million was outstanding at filing.
- On April 11, the company refinanced prior term loans with a $2.4 billion secured term loan due 2025 and extended and expanded its revolver. The new term loan carried a 4.10% rate at quarter-end. The refinancing generated debt-extinguishment charges.
- Key risks include foreign exchange and Brazilian operations, interest rates and refinancing, wireless-carrier consolidation and lease churn, acquisition execution, tower demand, land and permitting, and maintaining REIT qualification and covenant compliance. A 10% adverse Brazilian real movement would have reduced first-half revenue and operating income by approximately 1.1% and 0.6%, respectively; a 10% move in exchange rates on unsettled intercompany debt could produce about $57.6 million of unrealized gain or loss.
- The company expected the lease-accounting standard effective in 2019 to materially increase balance-sheet assets and liabilities for ground leases, but not materially affect earnings or liquidity; it expected no impact on current debt-covenant compliance. Adoption of ASC 606 for site-development revenue had no material financial effect.
Important facts for investors to verify
- Whether organic leasing growth and carrier spectrum deployment translated into sustained tenant additions and amendments, and how carrier consolidation affects renewals and churn.
- How much of reported growth and earnings volatility is attributable to foreign exchange, particularly the Brazilian intercompany-loan remeasurement and related tax effects.
- Debt-service capacity, borrowing costs, covenant headroom and the use of the expanded revolver, especially alongside planned capital spending and repurchases.
- Execution and returns on acquired towers and the planned $560–$580 million of discretionary capital expenditures.
- Whether management’s 2018 outlook assumptions, REIT status and tax-related estimates—including use of approximately $1.0 billion of federal NOLs—remain supportable.