SBA Communications Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016 unless otherwise noted. Amounts are in U.S. dollars. SBA owns and operates wireless communications sites, with site leasing as its principal business; it reported 26,284 owned towers at quarter-end. The company elected REIT status beginning in 2016.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $423.4 million | $399.8 million; up 5.9% reported and 3.3% on a constant-currency basis |
| Site leasing revenue | $397.6 million | $374.5 million; up 6.2% |
| Site development revenue | $25.8 million | $25.3 million; up 2.0% |
| Operating income | $107.8 million; 25.5% of revenue | $97.6 million; 24.4% of revenue |
| Net income / diluted EPS | $37.6 million / $0.31 | $53.6 million / $0.43 |
| Adjusted EBITDA (non-GAAP) | $292.2 million | $274.7 million; up 6.4% reported and 4.1% on a constant-currency basis |
| Cash from operations | $172.3 million | $144.6 million |
| Cash used in investing / financing | $84.3 million / $112.3 million | $132.3 million / $33.3 million |
Margins and segments: Operating margin was approximately 25.5%, compared with 24.4%. Site leasing generated 98.6% of total segment operating profit. Domestic site leasing revenue was $321.1 million; international site leasing revenue was $76.4 million, including a reported $10.4 million foreign-currency benefit. Site development segment operating profit fell to $4.2 million from $5.5 million, which management attributed primarily to work mix.
Liquidity and debt: At March 31, cash and cash equivalents were $132.2 million, restricted cash was $30.7 million, and current assets were $301.3 million. Total debt principal was $8.76 billion; the balance-sheet carrying value was approximately $8.67 billion. Long-term debt net of current maturities was $8.65 billion. Shareholders’ deficit was $1.92 billion. The company had $280 million drawn on its $1.0 billion revolving facility at quarter-end and reported covenant compliance. After quarter-end, it repaid another $190 million, leaving $90 million drawn as of the filing date. Management said cash, operating cash flow, and available revolver capacity were expected to cover debt service over the next 12 months.
Material changes and notable items
- Revenue growth was driven by acquired and newly built towers and organic leasing activity, including new leases, equipment amendments, and contractual rent escalators. International site leasing growth included higher pass-through reimbursements.
- Net income declined by $16.0 million year over year, despite improved operating income and lower interest expense. The main comparison effect was a smaller foreign-exchange remeasurement gain on intercompany loans: $13.7 million in Q1 2017 versus $44.8 million in Q1 2016. On a constant-currency basis, net income increased $14.0 million.
- Interest expense declined to $77.6 million from $83.8 million, primarily reflecting lower weighted-average borrowing rates and prior-year debt repayments, partly offset by higher average debt outstanding. The January 2017 term-loan repricing reduced the Eurodollar margin from 250 to 225 basis points.
- Asset impairment and decommission costs rose to $8.4 million from $6.2 million, including $3.0 million of impairment charges for towers whose expected cash flows were insufficient to recover carrying value.
- Operating cash flow increased, while acquisition spending declined to $42.7 million from $91.8 million. Cash capital expenditures were $78.4 million, compared with $127.9 million.
- On April 17, 2017, SBA issued $760 million of 2017-1C tower securities at 3.168% and used proceeds to repay the $610 million 2012-1C securities, with remaining proceeds for general corporate purposes. The company also reported $2.0 million of deferred financing fees expensed in connection with the repayment.
Outlook, risks, and contingencies
- Management expected 2017 organic site leasing revenue growth in both domestic and international segments to be consistent with 2016. No specific total revenue or earnings guidance was provided in the filing text.
- For full-year 2017, expected cash capital expenditures were $31–$41 million for non-discretionary maintenance and general corporate needs, plus $310–$330 million of discretionary spending for acquisitions, new tower construction, augmentations, and ground-lease purchases. Additional acquisitions not yet under contract could increase spending. Funding sources were expected to include cash, operating cash flow, and borrowings or new financings.
- The company’s capital allocation approach prioritizes qualifying portfolio investments, followed by share repurchases when management considers the stock undervalued, while maintaining target leverage and meeting REIT distribution requirements. A new $1.0 billion repurchase authorization was in place; the filing reported the full authorization remaining as of its date.
- REIT status generally reduces U.S. federal corporate tax on income distributed to shareholders, but taxable REIT subsidiaries and international operations may remain subject to taxes. SBA cited approximately $1.1 billion of federal NOLs at December 31, 2016; their use may reduce or defer required distributions. Future distributions depend on NOL availability, financial condition, earnings, debt covenants, and investment needs.
- Key risks include wireless-carrier consolidation and reduced network spending, tenant retention and leasing demand, acquisition execution and valuation, international political, tax and currency risks, refinancing and floating-rate exposure, access to land and permits, and REIT qualification and compliance.
- Foreign-currency exposure is material: approximately 13.4% of Q1 revenue and 15.7% of operating expenses were denominated in foreign currencies. Management estimated that a hypothetical 10% adverse Brazilian real movement would reduce quarterly revenue by about 1.1% and operating income by about 2.9%. A 10% move in rates underlying unsettled intercompany debt could produce approximately $43.7 million of unrealized gain or loss.
- The filing said adoption of the new lease accounting standard was expected to materially increase balance-sheet assets and liabilities; the company was still assessing other effects. The revenue recognition standard, effective for SBA in Q1 2018, was not expected to have a material impact, as it principally affects the site development segment.
Important facts for investors to verify
- Reconcile the reported decline in GAAP net income with the larger prior-year intercompany-loan foreign-exchange gain; review the company’s constant-currency and non-GAAP reconciliations.
- Review debt maturities and refinancing needs, particularly tower securities’ anticipated repayment dates, and confirm the impact of the April 2017 refinancing on liquidity and debt service.
- Track the execution and funding of the stated $310–$330 million discretionary capital expenditure plan alongside leverage and acquisition returns.
- Assess whether organic site leasing growth, including international growth, is keeping pace with management’s expectations and whether carrier consolidation affects renewals and tenant demand.
- Monitor REIT qualification, NOL utilization, future distribution requirements, and the effect of the lease accounting standard on reported balance-sheet measures.