Crown Castle International Corp. — Q3 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2020. Crown Castle owns, operates and leases approximately 40,000 U.S. towers and 80,000 route miles of fiber supporting small cells and fiber solutions. It operates through Towers and Fiber segments and is taxed as a REIT. Site rental revenues represented 90% of third-quarter revenue, with Towers contributing 65% and Fiber 35% of site rental revenue.
Approximately 76% of nine-month site rental revenue came from T-Mobile, including former Sprint revenue, AT&T and Verizon Wireless. The T-Mobile-Sprint merger closed April 1, 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net revenues | $1.486 billion | $1.482 billion | Flat |
| Site rental revenue | $1.339 billion | $1.287 billion | +4% |
| Operating income | $434 million | $423 million | +3% |
| Net income attributable to common stockholders | $163 million | $214 million | -24% |
| Adjusted EBITDA | $883 million | $853 million | +4% |
| Diluted earnings per share | $0.38 | $0.51 | -25% |
Q3 operating margin was approximately 29.2%, net margin approximately 11.0%, and Adjusted EBITDA margin approximately 59.4%. The $95 million loss on retirement of long-term obligations, primarily make-whole premiums from debt refinancing, materially reduced net income.
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Net revenues | $4.347 billion | $4.337 billion | Flat |
| Site rental revenue | $3.968 billion | $3.793 billion | +5% |
| Operating income | $1.181 billion | $1.180 billion | Flat |
| Net income attributable to common stockholders | $491 million | $567 million | -13% |
| Net cash from operating activities | $2.070 billion | $1.890 billion | +10% |
| Adjusted EBITDA | $2.527 billion | $2.483 billion | +2% |
| Diluted earnings per share | $1.17 | $1.36 | -14% |
Nine-month operating margin was approximately 27.2%, net margin approximately 11.3% based on net income attributable to common stockholders, and Adjusted EBITDA margin approximately 58.1%.
Cash flow, debt and liquidity
- Operating cash flow was $2.070 billion; capital expenditures were $1.238 billion, including $1.174 billion of discretionary capital expenditures and $64 million of sustaining capital expenditures.
- Investing cash outflow was $1.336 billion, including $86 million for acquisitions. Financing cash outflow was $651 million, primarily reflecting dividends and debt transactions.
- Cash, cash equivalents and restricted cash totaled $421 million at September 30, 2020.
- Total debt and other obligations were $19.304 billion, up from $18.121 billion at December 31, 2019. Total equity was $9.502 billion.
- Undrawn 2016 Revolver availability was $4.447 billion at September 30, 2020; the filing reported $5.0 billion of availability and no revolver borrowings as of October 23, 2020.
- Management reported a weighted-average debt interest rate of 3.4%, approximately nine years of weighted-average maturity using anticipated repayment dates for Tower Revenue Notes, and 85% fixed-rate debt.
- Common dividends paid during the first nine months totaled approximately $1.5 billion, or $1.20 per share in each quarter. The October 2020 dividend was increased to $1.33 per share, and management expected at least $5.32 per share of common dividends over the following 12 months.
Material changes versus the prior comparable period
- Site rental growth was driven by tenant additions, contractual escalations, renewals and increased demand for small cells and fiber solutions. Towers site rental revenue increased 2% in Q3 and 3% year to date; Fiber site rental revenue increased 7% in both periods.
- Services and other revenue declined to $147 million in Q3 from $195 million and to $379 million for the nine months from $544 million. Management attributed the decline to lower volume and changing mix of carrier network enhancement and installation work.
- Q3 and nine-month net income declined despite higher site rental revenue and Adjusted EBITDA, primarily due to the $95 million debt-retirement loss, lower services activity, higher depreciation and amortization, higher interest expense year to date, and higher SG&A.
- The company issued $1.25 billion of senior notes in April and $2.5 billion in June 2020. It used the proceeds to repay revolver borrowings and redeem $2.4 billion of senior notes, including notes due in 2021 and 2022.
- All approximately 2 million shares of mandatory convertible preferred stock converted into approximately 14 million common shares in July and August 2020. Preferred dividends were $57 million for the first nine months, compared with $85 million in the prior-year period.
- Prior-period financial statements were restated for revenue recognition related to tower installation services. A portion of installation consideration associated with permanent improvements was reclassified from services revenue to site rental revenue recognized over the related lease term.
Guidance, outlook, commentary and risks
- Management expected 2020 and 2021 site rental revenue to benefit from tenant additions driven by data demand, network expansion and 5G-related activity.
- Discretionary capital expenditures were expected to decline in 2020 and again in 2021 as large fiber expansion projects are completed and a greater proportion of investment shifts toward less capital-intensive small-cell additions. Sustaining capital expenditures were expected to be approximately 2% of net revenue in both years.
- Management stated that COVID-19 had not materially affected financial position, results of operations or cash flows through September 30, 2020, but warned that the pandemic could adversely affect demand, suppliers, permitting, operations, cost of capital and access to capital.
- The company expected available liquidity sources to cover anticipated uses over the next 12 months, including debt service, capital expenditures and at least $2.3 billion of common dividends. This expectation depends on operating cash flow, revolver capacity, commercial paper and potential equity-market access.
- Disclosure controls were deemed ineffective because of a material weakness in internal control over financial reporting related to accounting for tower installation services. Remediation was ongoing.
- The company was cooperating with an SEC investigation concerning historical capitalization and expense policies for tenant upgrades and installations. Shareholder and derivative litigation, lawsuits related to the 2019 Durham, North Carolina gas explosion, and potential New York fiber right-of-way fees remained unresolved, with losses not estimable based on the filing.
- Approximately 53% of towers were subject to master leases or similar arrangements with AT&T and T-Mobile, with purchase options at lease expiration. The company has no obligation to exercise those options.
Important facts for investors to verify
- Confirm the effect of the tower-installation-services restatement on historical revenue mix, deferred revenue, assets, liabilities and comparability.
- Monitor remediation of the material weakness and the effectiveness of disclosure and financial reporting controls.
- Assess leverage, refinancing requirements and the treatment of Tower Revenue Note anticipated repayment dates, including potential interest-rate increases if not refinanced.
- Evaluate whether site rental growth can offset continued weakness or volatility in lower-margin services revenue.
- Review concentration among T-Mobile, AT&T and Verizon and the potential effects of carrier consolidation, non-renewals and tenant credit risk.
- Track COVID-19 effects on permitting, construction activity, supply chains, tenant demand and financing access.
- Follow the SEC investigation, shareholder litigation, Durham lawsuits and potential New York right-of-way fees for developments that could create material costs or liabilities.