Crown Castle International Corp. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Crown Castle owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 70,000 route miles of fiber supporting small cells and fiber solutions. The company operates through Towers and Fiber segments and is taxed as a REIT. This unaudited filing covers the three months ended March 31, 2019, compared with the same period in 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $1.426 billion | $1.299 billion | +10% |
| Site rental revenues | $1.219 billion | $1.153 billion | +6% |
| Operating income | $384 million | $349 million | +10% |
| Net income attributable to CCIC stockholders | $210 million | $114 million | +84% |
| Net income attributable to common stockholders | $182 million | $86 million | +112% |
| Diluted earnings per share | $0.44 | $0.21 | +$0.23 |
| Adjusted EBITDA | $821 million | $763 million | +8% |
| Net cash provided by operating activities | $512 million | $452 million | +13% |
| Capital expenditures | $480 million | $370 million | +$110 million |
Operating margin was approximately 27.0% in both periods. Site rental gross margin was approximately 71.2% in Q1 2019 versus 70.8% in Q1 2018. Adjusted EBITDA margin was approximately 57.6% versus 58.7%, reflecting revenue growth alongside higher expenses.
- Towers site rental revenue increased 5% to $805 million; Fiber site rental revenue increased 6% to $414 million.
- Services and other revenue increased 42% to $207 million, principally reflecting carrier network enhancement activity.
- Interest expense increased to $168 million from $160 million due primarily to higher outstanding indebtedness.
- Cash, cash equivalents and restricted cash totaled $408 million at March 31, 2019, including $245 million of cash and cash equivalents.
- Total debt and other obligations were $17.216 billion, compared with $16.682 billion at December 31, 2018. The company reported a weighted-average interest rate of 4.0%, approximately six years of weighted-average maturity using anticipated repayment dates, and 83% fixed-rate debt.
- Undrawn availability under the 2016 Revolver was $3.586 billion at March 31, 2019. At May 1, 2019, the company reported $85 million outstanding and $4.1 billion of availability.
- Common dividends paid were approximately $477 million, or $1.125 per share; preferred dividends paid were $28 million, or $17.1875 per preferred share.
Material changes versus the prior comparable period
- Revenue growth was driven by tenant additions, contractual escalations and increased demand for small cells and fiber solutions. Towers operating profit increased 11% to $650 million, while Fiber operating profit increased 2% to $227 million.
- Net income benefited from the absence of the $71 million loss on retirement of long-term obligations recorded in Q1 2018.
- Capital expenditures increased 30%, primarily due to construction of small cells and fiber. Discretionary capital expenditures were $457 million.
- Effective January 1, 2019, the company adopted ASC 842 lease accounting. Operating lease right-of-use assets of $5.969 billion and operating lease liabilities of $5.625 billion were recognized. Management stated that the adoption materially affected the balance sheet but did not materially affect operations, cash flows, operating practices or debt covenants.
- In February 2019, the company issued $1.0 billion of senior unsecured notes, consisting of $600 million due 2029 at 4.300% and $400 million due 2049 at 5.200%; proceeds were used to repay part of the Revolver borrowings.
Outlook, management commentary, risks and unusual items
- Management expects 2019 site rental revenue growth to benefit from higher tenant additions as wireless carriers and fiber solutions customers respond to increasing data demand.
- 2019 discretionary capital expenditures are expected to exceed 2018 levels, with continued investment in small cells and fiber. Sustaining capital expenditures are expected to remain approximately 2% of net revenues for the full year.
- Management expects common dividends over the next 12 months to total at least $4.50 per share, or approximately $1.9 billion, and preferred dividends to total approximately $113 million. Future dividends remain subject to board approval.
- Management expects liquidity sources, including operating cash flow, cash on hand, Revolver availability, the commercial paper program and potential equity issuance, to cover expected uses. Expected uses include $96 million of principal payments, dividends and increased capital expenditures.
- In April 2019, the company established a $1.0 billion unsecured commercial paper program. At May 1, 2019, $500 million was outstanding under the program.
- Key risks include substantial leverage and refinancing requirements, exposure to floating interest rates, dependence on major wireless carriers, tenant non-renewals, execution and returns from small-cell and fiber construction, REIT qualification requirements, regulatory and permitting matters, and potential asset impairments. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
- The company is involved in ordinary-course claims and proceedings; management does not expect their resolution to materially affect financial position or results of operations.
Important facts for investors to verify
- Reconcile Adjusted EBITDA and other non-GAAP measures to GAAP results and assess the effect of rising depreciation, interest and capital expenditures.
- Evaluate whether tenant additions and demand for small cells and fiber support the planned increase in discretionary capital spending and expected returns.
- Review debt maturities, anticipated repayment dates for Tower Revenue Notes, Revolver and commercial paper usage, covenant headroom, and refinancing conditions.
- Assess dividend sustainability relative to operating cash flow after capital expenditures, debt service and preferred dividends.
- Consider the balance-sheet impact of ASC 842, including approximately $5.6 billion of operating lease liabilities and future lease payments.
- Monitor customer concentration: AT&T, T-Mobile, Verizon Wireless and Sprint represented 74% of site rental revenue, while 53% of towers were leased or managed under arrangements with AT&T, Sprint and T-Mobile.