SBA Communications Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. SBA owns and operates wireless communications towers, with site leasing as its principal business; site leasing generated 98.6% of six-month segment operating profit. The company reported as a REIT beginning with tax year 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $427.3 million | $405.5 million | $850.7 million | $805.3 million |
| Operating income | $114.6 million | $74.1 million | $222.4 million | $171.7 million |
| Net income | $9.2 million | $32.7 million | $46.8 million | $86.3 million |
| Diluted EPS | $0.08 | $0.26 | $0.38 | $0.69 |
| Operating cash flow | Not separately reported | Not separately reported | $404.2 million | $354.7 million |
Q2 revenue rose 5.4%; operating margin was 26.8%, compared with 18.3% a year earlier. Six-month revenue increased 5.6% and operating margin was 26.1%, versus 21.3%. The operating-income comparisons benefited from lower SG&A and impairment costs, including the absence of the $16.5 million Oi bad-debt reserve recorded in Q2 2016.
Net income fell despite higher operating income, chiefly because other income/expense included a $20.4 million loss on intercompany-loan remeasurement in Q2 2017, versus a $47.4 million gain in Q2 2016. For the first half, the respective remeasurement amounts were a $6.8 million loss and a $92.1 million gain. Adjusted EBITDA excluding the prior-year Oi reserve was $298.8 million in Q2 (versus $278.1 million) and $591.0 million for six months (versus $552.8 million); these are non-GAAP measures.
Cash, debt and liquidity
- At June 30, cash and equivalents were $164.5 million and restricted cash was $30.1 million. Total current assets were $336.5 million against current liabilities of $1.046 billion.
- Six-month cash from operations was $404.2 million; investing activities used $168.6 million and financing activities used $224.1 million. Cash capital expenditures were $151.6 million, including acquisitions; cash acquisitions were $82.2 million.
- Total debt principal was $8.775 billion ($8.679 billion carrying value), including $772.5 million classified as current. The company had $150 million drawn on its $1.0 billion revolving facility at quarter-end; an additional $65 million was borrowed after quarter-end.
- In April, SBA issued $760 million of 2017-1C Tower Securities at 3.168% and used proceeds in part to repay $610 million of 2012-1C securities. The company also repriced its term loans in January; both term loans carried a 3.48% rate at June 30.
- Management estimated $1.090 billion of debt service over the twelve months ending June 30, 2018, and said cash, operating cash flow and available revolving capacity should be sufficient. The company reported compliance with applicable debt covenants at June 30.
Material changes, outlook and risks
- Domestic site-leasing growth reflected acquisitions, new builds, lease amendments, new leases and contractual escalators; international growth also reflected acquired and constructed towers, organic leasing and reimbursable expenses. Foreign exchange contributed materially to reported international revenue growth.
- Management expected 2017 organic site-leasing revenue growth in domestic and international segments to be consistent with 2016. Full-year 2017 cash-capex expectations were $29–39 million for non-discretionary items and $385–405 million for discretionary items, including acquisitions, builds, upgrades and ground-lease purchases; amounts include spending through June 30.
- The company repurchased 1.2 million shares during the first half for approximately $155 million, with $750 million of authorization remaining at filing. After quarter-end it repurchased a further 0.7 million shares for $95 million.
- Foreign-currency movements are a significant earnings risk: a 10% adverse Brazilian real movement was estimated to reduce six-month revenue by 1.1% and operating income by 2.9%. A 10% move in exchange rates on unsettled intercompany debt could produce approximately $43.5 million of gains or losses. The outstanding intercompany-loan balance was $433.3 million.
- Other disclosed risks include wireless-carrier consolidation and reduced leasing demand, refinancing and floating-rate exposure, international operating and currency risks, acquisition and construction execution, land-lease rights, and maintaining REIT qualification. The company had approximately $1.1 billion of federal NOLs at December 31, 2016; these may reduce or defer required REIT distributions.
- The company expected adoption of the new lease standard to materially increase balance-sheet assets and liabilities, mainly from ground leases; it did not expect a material income-statement impact. Adoption was scheduled for periods beginning after December 15, 2018.
Important facts for investors to verify
- Whether organic leasing growth, tenant additions and contractual escalators continue to offset lease non-renewals and carrier consolidation.
- How much of the earnings decline reflects volatile intercompany-loan currency remeasurement, and how that exposure is managed.
- Refinancing plans for near-term anticipated repayments, including 2013 tower securities due in 2018, and the company’s ability to maintain covenant compliance and liquidity.
- Execution and funding of the substantial 2017 discretionary-capex plan alongside debt service and share repurchases.
- Whether REIT qualification, NOL utilization and future distribution decisions proceed as management expects.