Crown Castle International Corp. — 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015. Crown Castle owns, operates and leases shared wireless infrastructure, primarily approximately 40,000 U.S. towers and 16,000 fiber miles supporting small-cell networks. The company began operating as a REIT effective January 1, 2014, and following the May 2015 sale of its Australian subsidiary, CCAL, its continuing operations are focused primarily on the United States.
Revenue is principally generated from long-term site-rental leases with wireless carriers. AT&T, T-Mobile, Verizon Wireless and Sprint accounted for approximately 89% of consolidated revenue and 90% of site-rental revenue in 2015. Site-rental leases had a weighted-average remaining term of approximately six years, excluding tenant renewal options, and represented approximately $20.1 billion of contractual future cash inflows.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Site-rental revenue | $3.018 billion | $2.867 billion | 5% |
| Network services and other revenue | $645.4 million | $672.1 million | (4%) |
| Total revenue | $3.664 billion | $3.539 billion | 4% |
| Operating income | $946.2 million | $940.7 million | 1% |
| Adjusted EBITDA | $2.119 billion | $2.051 billion | 3% |
| Income from continuing operations | $525.3 million | $346.3 million | 52% |
| Net income attributable to common stockholders | $1.477 billion | $346.5 million | Substantial increase |
| Net cash provided by operating activities | $1.794 billion | $1.600 billion | 12% |
- Site-rental revenue represented 82% of consolidated revenue and site-rental gross margin represented 88% of consolidated gross margin.
- Approximate 2015 margins were 68.1% for site-rental gross margin, 25.8% for operating income and 57.9% for Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and is not comparable across companies without reviewing definitions.
- Basic and diluted net income from continuing operations per share was $1.45 and $1.44, respectively. Basic and diluted total net income per share was $4.44 and $4.42, respectively.
- Net income benefited materially from a $979.4 million after-tax gain on the sale of CCAL. Continuing-operations results provide a better view of the ongoing U.S. business.
- Cash flow from investing activities was an outflow of $1.960 billion, including $1.102 billion for acquisitions and $908.9 million of capital expenditures. Discretionary capital expenditures were $804.0 million; sustaining capital expenditures were approximately 3% of revenue.
- At December 31, 2015, cash and cash equivalents were $178.8 million, restricted cash was $130.7 million, total debt and other long-term obligations were $12.249 billion, and total equity was $7.089 billion.
- 2015 interest expense and amortization of deferred financing costs was $527.1 million. The company reported a 1.6x ratio of earnings to fixed charges.
Material changes versus the prior comparable period
- Site-rental revenue increased $151.8 million, driven by tenant additions, contractual escalators, renewals and acquisitions. Management described approximately 6% growth from new leasing activity and approximately 3% from cash escalations, partly offset by approximately 4% from tenant non-renewals, principally Sprint’s legacy Nextel iDEN decommissioning.
- Network services and other revenue declined $26.7 million, although related gross margin increased $16.2 million, reflecting changes in the volume and mix of work.
- General and administrative expense increased 21% to $310.9 million, primarily reflecting business growth, acquisitions and expansion of the small-cell portfolio.
- Interest expense declined 8%, largely because of lower amortization of previously settled interest-rate swaps. Losses on retirement of debt declined to $4.2 million from $44.6 million.
- CCAL was sold on May 28, 2015, for net proceeds of approximately $1.1 billion. Its results were reclassified to discontinued operations, and the sale represented a strategic shift toward U.S. operations.
- In August 2015, Crown Castle acquired Sunesys for approximately $1.0 billion, adding nearly 10,000 fiber miles. Sunesys contributed $41.4 million of 2015 revenue after acquisition.
- The quarterly common-stock dividend increased from $0.82 to $0.885 per share beginning in the fourth quarter. Dividends declared per share for the year were $3.35, compared with $1.87 in 2014.
- During the fourth quarter, the company completed steps to include certain small cells previously held in taxable REIT subsidiaries in the REIT effective January 2016, producing a $33.8 million non-cash income-tax benefit.
Guidance, outlook, commentary and risks
- For 2016, management expected site-rental growth from tenant additions at levels similar to 2015, partly offset by higher non-renewals from the decommissioning of the former Leap Wireless, MetroPCS and Clearwire networks.
- Management expected 2016 total capital expenditures to equal or exceed 2015 levels, with continued growth in new small-cell construction, and sustaining capital expenditures of approximately 2% of revenue.
- The company expected annual common-stock dividend cash payments of approximately $1.2 billion over the following 12 months, subject to board approval, plus approximately $45 million of preferred-stock dividends.
- Management stated that expected liquidity sources should cover anticipated uses over the following 12 months. As adjusted for post-year-end financing and the CCAL installment, available revolving-credit capacity was approximately $2.145 billion and cash was approximately $119.8 million.
- Post-year-end, Crown Castle completed a $5.5 billion senior unsecured credit facility and issued $1.5 billion of senior unsecured notes. As of February 15, 2016, approximately $2.1 billion was available under the 2016 Revolver, and the company reported approximately $12.1 billion of debt.
- After giving effect to the 2016 refinancing, 81% of debt carried fixed-rate coupons and approximately 19% was floating-rate debt. A 0.125 percentage-point increase in interest rates would have increased annual interest expense by approximately $2.9 million based on the disclosed floating-rate exposure.
- Key risks include dependence on a concentrated group of wireless carriers; carrier consolidation, network sharing or reduced capital spending; technology substitution; small-cell deployment and right-of-way risks; competition; substantial leverage and refinancing requirements; restrictive debt covenants; REIT qualification and distribution requirements; ground-lease and tower purchase-option obligations; regulatory and environmental matters; cybersecurity; and volatility in network-services demand.
- Expected non-renewals from the Acquired Networks were estimated at $70 million to $80 million of 2016 site-rental revenue, with approximately 60% of the related current run-rate site-rental revenue potentially subject to non-renewal, primarily during 2016–2018.
- Contractual obligations totaled approximately $33.5 billion, including $12.1 billion of debt, $10.8 billion of debt interest and $10.5 billion of lease obligations. Estimated undiscounted asset-retirement cash outlays were approximately $1.1 billion, with a recorded present value of $132.1 million.
Important facts for investors to verify
- Separate recurring U.S. site-rental performance from the one-time CCAL disposal gain when assessing earnings quality.
- Track actual tenant additions, churn and non-renewals associated with the former Leap, MetroPCS and Clearwire networks against management’s $70 million–$80 million 2016 estimate.
- Reconcile Adjusted EBITDA and leverage calculations to GAAP results and review the company’s specific non-GAAP adjustments.
- Review debt maturities, refinancing assumptions for tower revenue notes, covenant headroom and the effect of floating interest rates.
- Assess whether operating cash flow can support approximately $1.2 billion of common dividends, preferred dividends, capital expenditures and debt service while funding growth.
- Evaluate the potential dilution from the 9.775 million mandatory convertible preferred shares, which were scheduled to convert automatically on November 1, 2016, at a stated conversion range of approximately 1.1538 to 1.4421 common shares per preferred share.
- Monitor REIT qualification, the 90% distribution requirement, NOL utilization and the tax treatment of REIT and taxable-REIT-subsidiary operations.
- Review customer concentration, ground-lease renewal exposure, tower purchase options and the continued integration and returns from the Sunesys fiber acquisition.