Crown Castle International Corp. 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, with quarterly information for the fourth quarter. The registrant is Crown Castle International Corp., a U.S.-focused communications infrastructure REIT operating approximately 40,000 towers and 60,000 route miles of fiber. Its operating segments are Towers and Fiber; Fiber represented 21% of 2017 site rental revenue, up from 12% in 2016.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenues | $4.356 billion | $3.921 billion | +11% |
| Site rental revenue | $3.669 billion | $3.233 billion | +13% |
| Network services and other revenue | $686.4 million | $687.9 million | Flat |
| Operating income | $1.044 billion | $949.2 million | +10% |
| Net income | $444.6 million | $357.0 million | +25% |
| Net income attributable to common stockholders | $386.3 million | $324.0 million | +19% |
| Adjusted EBITDA | $2.482 billion | $2.228 billion | +11% |
| Cash flow from operating activities | $2.044 billion | $1.782 billion | +15% |
| Capital expenditures | $1.228 billion | $873.9 million | +41% |
| Debt and other obligations at year-end | $16.160 billion | $12.171 billion | +33% |
Calculated margins were approximately 24.0% for operating income, 57.0% for Adjusted EBITDA, and 10.2% for net income attributable to CCIC stockholders. Site rental revenue comprised 84% of consolidated revenue and was predominantly recurring under long-term contracts. The weighted-average remaining tenant contract term was approximately five years, excluding renewal options, representing approximately $22 billion of expected future cash inflows.
Year-end cash and cash equivalents were $314.1 million, with restricted cash of $121.1 million. After giving effect to the January 2018 notes issuance, management reported approximately $316.6 million of cash, $2.911 billion of undrawn revolving credit availability, and $16.234 billion of debt and other long-term obligations. The company reported compliance with its debt covenants; the total net leverage ratio was 5.5x versus a maximum covenant of 6.50x.
Material changes versus the prior comparable period
- Fiber site rental revenue increased 91% to $769.6 million, primarily due to the FiberNet, Wilcon and Lightower acquisitions and higher demand for small cells and fiber solutions.
- Towers site rental revenue increased 2% to $2.900 billion, supported by tenant additions, contract escalations, renewals and extensions.
- Adjusted EBITDA increased 11%, while general and administrative expense rose 15% to $426.7 million, principally because of Fiber growth and acquisitions.
- Interest expense increased 15% to $590.7 million, reflecting higher debt used to finance acquisitions. Depreciation, amortization and accretion increased 12% to $1.242 billion.
- The company completed the $1.5 billion FiberNet acquisition, the approximately $600 million Wilcon acquisition and the approximately $7.1 billion Lightower acquisition. The 2017 acquisitions contributed $314.1 million of consolidated revenue during the ownership periods in 2017.
- Capital expenditures increased to $1.228 billion, including $1.1 billion of discretionary spending. Sustaining capital expenditures were approximately 2% of revenue.
- The common dividend increased from $0.95 to $1.05 per share beginning in the fourth quarter, an 11% increase. Total common dividends paid in 2017 were approximately $1.5 billion.
- The company issued approximately $4.2 billion of common equity proceeds and $1.6 billion of 6.875% mandatory convertible preferred stock proceeds, primarily to fund the Lightower acquisition and related expenses.
Guidance, outlook, risks and unusual items
Management expects 2018 site rental revenue growth to benefit from the 2017 acquisitions and continued tenant additions. Discretionary capital expenditures are expected to exceed 2017 levels, particularly for new small cells and fiber; sustaining capital expenditures are expected to remain approximately 2% of revenue. Expected common dividend payments over the next 12 months were at least $1.7 billion, and preferred dividend payments were expected to be approximately $113 million.
Management expects to remain qualified as a REIT and to pay minimal cash income taxes, supported by REIT treatment and available net operating losses. The Tax Cuts and Jobs Act resulted in a $14.6 million non-cash tax provision in 2017; management did not expect the law to materially affect the company.
Key risks include substantial customer concentration, with AT&T, T-Mobile, Verizon Wireless and Sprint accounting for 86% of consolidated revenue and 83% of site rental revenue; customer consolidation or reduced network investment; execution and integration risks related to Lightower and the other acquisitions; the relatively less mature Fiber business; high leverage and refinancing requirements; interest-rate exposure; dependence on rights-of-way, ground leases and regulatory approvals; technology substitution; cybersecurity; and continued qualification as a REIT.
Unusual or non-recurring items included $61.4 million of acquisition and integration costs, $17.3 million of asset write-down charges, and $3.5 million of losses on retirement of long-term obligations. The 2015 gain from the sale of the Australian business remained classified as discontinued operations and did not affect 2017 revenue or earnings.
Most important facts for investors to verify
- Reconcile reported 2017 growth with pro forma results, particularly because the acquisitions were completed at different times and contributed only $314.1 million of reported revenue in 2017.
- Assess whether Fiber leasing growth and expected returns justify higher discretionary capital expenditures and the acquisition-related goodwill balance of $10.0 billion.
- Review debt maturities, refinancing assumptions for tower revenue notes, covenant headroom and the effect of higher interest rates on approximately $3.0 billion of floating-rate debt.
- Evaluate dividend coverage after common dividends of at least $1.7 billion, preferred dividends, debt service and elevated capital expenditures.
- Monitor customer concentration, renewal and non-renewal trends, including the historical average non-renewal rate of approximately 2.5% of Towers site rental revenue.
- Review the potential dilution from 1.65 million mandatory convertible preferred shares, which are scheduled to convert automatically on August 1, 2020, subject to the stated conversion terms.
- Verify the effect of the January 2018 issuance of $1.75 billion of senior notes and its use to repay the January 2010 Tower Revenue Notes and borrowings under the revolving facility.