Crown Castle International Corp. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Crown Castle International Corp. owns, operates and leases shared communications infrastructure in the U.S., including approximately 40,000 towers and 75,000 route miles of fiber supporting small cells and fiber solutions. Its operating segments are Towers and Fiber. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited.
The company operates as a REIT for U.S. federal income tax purposes. Site rental revenue represented 84% of second-quarter consolidated revenue, with Towers contributing 66% and Fiber 34% of site rental revenue.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net revenue | $1,478 million | $1,330 million | +11% |
| Site rental revenue | $1,238 million | $1,169 million | +6% |
| Services and other revenue | $240 million | $161 million | +49% |
| Operating income | $419 million | $345 million | +21% |
| Operating margin | 28.4% | 25.9% | +2.5 percentage points |
| Net income attributable to common stockholders | $218 million | $152 million | +43% |
| Diluted earnings per share | $0.52 | $0.36 | +44% |
| Adjusted EBITDA | $857 million | $769 million | +11% |
For the six months ended June 30, 2019, revenue was $2,904 million versus $2,630 million in the prior-year period; operating income was $803 million versus $694 million; net income attributable to common stockholders was $399 million versus $237 million; diluted EPS was $0.95 versus $0.57; and Adjusted EBITDA was $1,679 million versus $1,532 million.
- Six-month net cash provided by operating activities was $1,227 million, up from $1,111 million.
- Capital expenditures were $998 million, including $941 million of discretionary capital expenditures, versus $763 million in the prior-year period.
- Cash used in investing activities was $1,010 million; cash used in financing activities was $201 million.
- Cash, cash equivalents and restricted cash ended at $429 million, compared with $413 million at December 31, 2018.
- Total debt and other obligations were $17,569 million, compared with $16,682 million at December 31, 2018. The company reported a weighted-average interest rate of 3.9%, approximately 84% fixed-rate debt and a weighted-average maturity of approximately six years using anticipated repayment dates.
- Undrawn availability under the revolving credit facility was $4,495 million at June 30, 2019. Total equity was $11,523 million.
- Common dividends paid during the first six months totaled approximately $944 million, or $2.25 per share. Preferred dividends paid totaled $57 million.
Material changes versus the prior comparable period
- Towers and Fiber site rental revenue each increased 6% in the second quarter and first six months, driven by tenant additions, contract escalations, renewals and demand for network capacity, small cells and fiber solutions.
- Services and other revenue increased 49% in the second quarter and 46% for the six months, while Towers services and other gross margin increased 61% and 50%, respectively, reflecting carrier network-enhancement activity and changes in service volume and mix.
- Adjusted EBITDA increased 11% in the second quarter and 10% for the six months. Segment operating profit increased 14% for Towers and 5% for Fiber in the second quarter.
- Interest expense increased 7% in the second quarter and 6% for the six months because of higher indebtedness used to finance discretionary capital expenditures.
- Losses on retirement of long-term obligations fell to $2 million for the six months from $74 million in the prior-year period, benefiting net income.
- Effective January 1, 2019, the company adopted ASC 842 lease accounting. Operating lease right-of-use assets of $6,053 million and operating lease liabilities of $5,716 million were recognized, materially increasing reported assets and liabilities without a material impact on operating results or cash flows.
- In February 2019, the company issued $1.0 billion of senior unsecured notes. In April, it established a commercial paper program with capacity of up to $1.0 billion. In June, it increased revolver commitments by $750 million to $5.0 billion and extended the facility maturity to June 2024.
Guidance, outlook, commentary and risks
- Management expects 2019 site rental revenue growth versus 2018 to benefit from tenant additions and continued demand from wireless carriers and fiber solutions customers.
- 2019 discretionary capital expenditures are expected to exceed 2018 levels, primarily because of new small-cell and fiber construction. Sustaining capital expenditures are expected to remain approximately 2% of net revenue.
- 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 declaration.
- Expected liquidity uses over the next 12 months include $98 million of principal payments, dividends and capital expenditures expected to exceed current levels. Management expects cash on hand, operating cash flow, revolver capacity, commercial paper and potential ATM equity issuance to be sufficient.
- Growth depends on wireless data demand, 5G and network-capacity investment, small-cell deployments, fiber demand and tenant additions. Services revenue is more variable and is not generally supported by long-term contracts.
- Customer concentration is material: for the six months ended June 30, 2019, T-Mobile and Sprint represented approximately 20% and 14%, respectively, of consolidated site rental revenue. The proposed T-Mobile/Sprint combination could create tenant consolidation, non-renewals or reduced demand.
- Approximately 75% of site rental revenue came from AT&T, T-Mobile, Verizon Wireless and Sprint. The company also faces interest-rate, refinancing, leverage, construction execution, lease renewal and REIT-qualification risks.
- The company states that ordinary-course legal proceedings, commitments and performance guarantees are not expected to have a material adverse effect, although outcomes remain uncertain. It also expects to refinance Tower Revenue Notes on or before their anticipated repayment dates; failure to do so could trigger higher interest and cash-flow-based principal payments.
Most important facts for investors to verify
- Reconcile reported debt, commercial paper, revolver borrowings and operating lease liabilities when assessing leverage and liquidity.
- Evaluate whether tenant additions and 5G, small-cell and fiber demand offset non-renewals and any effects from T-Mobile/Sprint consolidation.
- Compare capital expenditures and dividend commitments with operating cash flow and the company’s stated reliance on external financing.
- Review the maturity and anticipated repayment schedules for Tower Revenue Notes and other debt, including the potential 5% additional interest if applicable notes are not repaid on time.
- Assess Adjusted EBITDA alongside GAAP operating income, net income and cash flow because Adjusted EBITDA excludes depreciation, interest, taxes and other significant items.
- Confirm the timing and potential dilution associated with the 6.875% mandatory convertible preferred stock, which is scheduled to convert automatically on August 1, 2020 unless converted earlier.
- Review the full 2018 Form 10-K risk factors and lease disclosures, including renewal assumptions, variable lease payments and the company’s continued REIT qualification.