Crown Castle International Corp. — FY2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, and was filed February 22, 2017. Crown Castle owns, operates and leases shared wireless infrastructure in the United States and Puerto Rico, including approximately 40,000 towers and, after the FiberNet acquisition, approximately 26,500 route miles of fiber supporting small-cell networks. The company operates as a real estate investment trust (REIT).
Effective in the first quarter of 2016, the company changed its operating segments to towers and small cells and recast prior-period information accordingly. Towers generated 88% of 2016 site-rental revenue and small cells generated 12%. AT&T, T-Mobile, Verizon Wireless and Sprint collectively represented 90% of site-rental revenue.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | $3.921 billion | $3.664 billion | 7% |
| Site-rental revenue | $3.233 billion | $3.018 billion | 7% |
| Network services and other revenue | $687.9 million | $645.4 million | 7% |
| Operating income | $949.2 million | $946.2 million | Flat |
| Net income attributable to common stockholders | $324.0 million | $1.477 billion | Down 78% |
| Adjusted EBITDA | $2.228 billion | $2.119 billion | Up 5% |
| Cash flow from operating activities | $1.782 billion | $1.794 billion | Down 1% |
| Capital expenditures | $873.9 million | $908.9 million | Down 4% |
Site-rental revenue represented 82% of consolidated revenue, while site-rental gross margin represented 89% of consolidated gross margin. Total site-rental gross margin was $2.246 billion, up 8%. Network-services gross margin declined 5% to $278.5 million, reflecting lower tower network-services activity and mix.
Towers site-rental revenue increased 4% to $2.831 billion. Small-cells site-rental revenue increased 42% to $402.6 million, primarily due to the Sunesys acquisition and newly constructed small cells. Towers operating profit increased 3% to $2.157 billion, while small-cells operating profit increased 43% to $213.8 million.
Operating margin was approximately 24.2% in 2016 versus 25.8% in 2015. Adjusted EBITDA margin was approximately 56.8% versus 57.8% in 2015. The filing does not present a separately defined GAAP gross margin percentage for the consolidated company.
Reported 2016 net income was materially affected by comparison with 2015, when the company recorded a $979.4 million after-tax gain from the sale of discontinued Australian operations, CCAL. There were no discontinued-operation earnings in 2016.
Balance sheet, debt and liquidity
- Cash and cash equivalents at December 31, 2016 were $567.6 million; restricted cash was $124.5 million.
- Total debt and other long-term obligations were $12.171 billion on the GAAP balance sheet. After giving effect to the FiberNet acquisition and 2017 refinancing transactions, management presented debt and other long-term obligations of $13.241 billion.
- The company reported $2.412 billion of undrawn revolving-credit availability after giving effect to subsequent financing activity.
- Approximately 81% of debt had fixed-rate coupons after the 2017 refinancing transactions; approximately 19% was floating-rate debt.
- Debt covenant ratios at December 31, 2016 included total net leverage of 5.2x against a maximum of 6.50x and senior secured leverage of 2.0x against a maximum of 3.50x. Management reported compliance with applicable covenants.
- Contractual obligations totaled $33.699 billion, including $13.339 billion of debt obligations, $9.727 billion of debt interest and $10.633 billion of lease obligations. These amounts exclude approximately $1.2 billion of undiscounted future asset-retirement obligations.
Management expected liquidity sources, including cash on hand, operating cash flow, revolver availability and potential ATM equity issuance, to cover the next 12 months of anticipated uses. Expected uses included approximately $101.7 million of principal payments, at least $1.3 billion of common-stock dividends and capital expenditures at or above 2016 levels.
Material changes versus the prior comparable period
- Net revenue increased 7%, driven by 7% site-rental growth and strong small-cell expansion.
- Small-cell site-rental revenue increased 42%, while tower site-rental revenue increased 4%.
- Adjusted EBITDA rose 5%, but operating income was essentially unchanged because of higher depreciation, amortization and accretion, general and administrative expenses and other costs.
- General and administrative expense increased 19% to $371.0 million, primarily reflecting growth in the small-cell business and higher stock-based compensation.
- Interest expense declined 2% to $515.0 million, while losses on retirement of long-term obligations increased to $52.3 million from $4.2 million due to debt refinancing and repayment activity.
- Cash flow from operations was broadly stable, while investing cash outflows declined to $1.410 billion from $1.960 billion in 2015.
- The company issued $3.2 billion of senior notes during 2016, repaid or redeemed approximately $4.0 billion of debt, and issued common stock in connection with the ATM program, preferred-stock conversion and a November equity offering.
- The quarterly common-stock dividend increased from $0.885 to $0.95 per share beginning in the fourth quarter, raising the annualized dividend to $3.80 per share.
Guidance, outlook, commentary and unusual items
- Management expected 2017 site-rental revenue growth to benefit from carrier network upgrades, the FiberNet acquisition and continued tenant additions, but to be reduced by anticipated non-renewals related to decommissioning the former Leap Wireless, MetroPCS and Clearwire networks.
- Management estimated 2017 site-rental revenue impact from those non-renewals at approximately $50 million to $60 million, with the majority expected through the end of 2018. The acquired networks represented approximately 9% of 2016 net revenue.
- Management expected 2017 total capital expenditures to equal or exceed 2016 levels, with continued growth in new small-cell construction. Sustaining capital expenditures were expected to remain approximately 2% of net revenue.
- On January 17, 2017, the company completed the approximately $1.5 billion FiberNet acquisition, adding approximately 11,500 route miles of fiber in Florida and Texas. The transaction was funded with November 2016 equity proceeds and revolver borrowings.
- In February 2017, the company issued $500 million of 4.0% senior notes, added $500 million of term loans and extended the revolver and Term Loan A maturities to January 2022.
- The business remains highly dependent on wireless-carrier demand, customer network investment and continued adoption of towers and small cells. Customer consolidation, network sharing, alternative technologies, carrier financial weakness and lease non-renewals could reduce revenue and cash flow.
- Additional risks include substantial leverage and refinancing needs, interest-rate exposure, regulatory and zoning constraints, loss of land or tower rights, environmental liabilities, cybersecurity incidents, small-cell execution risk and possible loss of REIT qualification.
- The company had no material unresolved legal proceedings identified by management and reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the $12.171 billion GAAP debt balance with the $13.241 billion post-transaction liquidity presentation and confirm the effect of the 2017 refinancing transactions.
- Assess whether small-cell growth and the FiberNet acquisition offset the expected $50 million to $60 million of 2017 non-renewal impacts.
- Evaluate customer concentration: the four largest carriers accounted for 88% of consolidated revenue and 90% of site-rental revenue.
- Review the sustainability of at least $1.3 billion of expected annual dividends against operating cash flow, capital expenditures and debt obligations.
- Examine the timing and cost of refinancing tower revenue notes, including the potential approximately 5% additional interest rate if they are not repaid by anticipated repayment dates.
- Monitor compliance with debt covenants, leverage targets, REIT distribution requirements and the company’s ability to use its federal NOLs.
- Verify tenant lease expirations, renewal assumptions and the approximately $19.2 billion of contractual tenant cash payments, which exclude tenant renewal options.