SBA Communications Corp. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports quarterly results, including the fourth quarter. Amounts below are U.S. dollars unless noted.
Business context and reporting period
SBA owns and operates wireless communications towers and leases antenna space to wireless carriers. At year-end it owned 29,578 towers (16,263 domestic and 13,315 international). Site leasing generated 98% of segment operating profit and is the core business; site development provides network construction and related services. SBA has operated as a REIT for federal tax purposes since 2016.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1.866 billion | $1.728 billion |
| Site leasing revenue | $1.740 billion | $1.623 billion |
| Site development revenue | $125.3 million | $104.5 million |
| Operating income | $544.2 million | $458.5 million |
| Operating margin | 29.2% | 26.5% |
| Net income | $47.5 million | $103.7 million |
| Diluted EPS | $0.41 | $0.86 |
| Adjusted EBITDA (non-GAAP) | $1.305 billion | $1.204 billion |
| Cash from operating activities | $850.6 million | $818.5 million |
| Cash and cash equivalents at year-end | $143.4 million | $68.8 million |
| Principal debt at year-end | $10.028 billion | $9.405 billion |
Cash used in investing activities was $618.3 million and cash used in financing activities was $148.5 million. Cash capital expenditures were $601.6 million, including $406.7 million for tower acquisitions and related intangible assets. The company repurchased 5.0 million shares for $795.5 million during 2018. Shareholders’ deficit was $3.377 billion at year-end.
Fourth-quarter results
Q4 2018 revenue was $483.8 million, versus $443.1 million in Q4 2017. Operating income was $150.3 million, versus $119.1 million. Net income was $57.2 million, versus $7.7 million; diluted EPS was $0.50, versus $0.06. Q4 2018 was the strongest quarterly revenue and operating-income period of the year, while net income varied substantially during the year, including a $57.4 million net loss in Q2.
Material changes versus the prior year
- Total revenue increased 8.0%; management’s constant-currency comparison showed 9.8% growth. Domestic site leasing revenue rose 7.0%; international site leasing revenue rose 18.1% on a constant-currency basis, but reported growth was reduced by foreign exchange.
- Operating income increased 18.7%, reflecting higher site leasing profit and lower impairment and decommission costs, partly offset by higher depreciation and SG&A.
- Net income declined by $56.2 million despite higher operating income. Key drags included an $89.1 million loss on remeasurement of U.S.-dollar intercompany loans with a Brazilian subsidiary, higher interest expense, and a $14.4 million debt-extinguishment loss. Interest expense was $376.2 million, up from $323.7 million.
- Adjusted EBITDA increased 8.4% as reported and 9.9% on a constant-currency basis. It is a non-GAAP measure and should be considered alongside GAAP results.
- Principal debt rose $623 million. SBA refinanced term loans with a $2.4 billion secured term loan and issued $640 million of 2018 tower revenue securities, among other debt transactions.
Outlook, risks, contingencies, and unusual items
- Management outlook: SBA expected organic site leasing revenue in both domestic and international segments to increase in 2019, partly as carriers deploy unused spectrum. It cited spectrum deployment and 5G as potential demand drivers, not guaranteed outcomes.
- 2019 spending: Expected non-discretionary cash capital expenditures were $32–42 million; discretionary cash capital expenditures were $225–245 million, based on current acquisition obligations, planned builds, augmentations, and ground-lease purchases.
- Liquidity and debt service: Management expected cash on hand, revolver capacity, and operating cash flow to be sufficient for the next 12 months. Estimated debt service for 2019 was $1.338 billion, including $920 million of 2014-1C Tower Securities scheduled for anticipated repayment in October 2019. At year-end, $325 million was drawn on the $1.25 billion revolver; SBA later reported $205 million outstanding after a $120 million repayment. The company reported compliance with its credit agreement covenants at year-end.
- Interest and currency exposure: Floating-rate debt was approximately $2.7 billion at year-end. In February 2019, SBA entered into a four-year swap fixing the rate on $1.2 billion of the term loan at 4.495%. A 10% adverse move in the Brazilian real, under the company’s sensitivity analysis, would have reduced 2018 revenue by approximately 1.1% and operating income by 0.5%; a 10% change in exchange rates on unsettled intercompany debt could have resulted in approximately $53.6 million of unrealized gains or losses.
- Customer and market concentration: AT&T, Sprint, T-Mobile, and Verizon together represented 72.9% of 2018 total revenue. The proposed T-Mobile/Sprint merger was pending regulatory approval; network overlap could lead to lease non-renewals. Oi, SBA’s largest Brazilian customer, had emerged from judicial reorganization, with pre-petition obligations expected to be resolved under its plan.
- REIT and distributions: SBA had never paid a common-stock dividend. It reported $755.4 million of federal NOLs attributable to the REIT, which may reduce or eliminate required distributions while available; future distributions are not assured.
- Accounting and other items: Lease accounting adopted January 1, 2019 was expected to add approximately $2.3–2.7 billion of ground-lease liabilities to the balance sheet, without material expected effects on earnings, liquidity, or current debt-covenant compliance. The filing reported ordinary-course legal proceedings that management did not expect to have a material adverse effect.
Important facts for investors to verify
- How the proposed T-Mobile/Sprint combination and other carrier consolidation affect lease renewals, overlapping sites, and future leasing growth.
- The funding and refinancing plan for the $920 million anticipated repayment of 2014-1C Tower Securities in October 2019, and compliance with debt covenants.
- Whether 2019 organic leasing growth, acquisition returns, and planned capital expenditures track management’s expectations.
- The sensitivity of reported earnings and shareholders’ equity to Brazilian currency movements and the intercompany loan balance.
- The assumptions behind Adjusted EBITDA and constant-currency results, and the difference between those measures and GAAP net income.
- The effect of REIT NOL utilization, tax rules, and debt restrictions on future distributions and capital allocation.