SBA Communications Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. Amounts are in U.S. dollars unless stated otherwise.
Business context
SBA owns and operates wireless communications sites, principally multi-tenant towers, and also provides U.S. site-development services. At year-end it owned 26,197 towers (15,922 domestic and 10,275 international); site leasing generated 98.7% of segment operating profit. The company announced a conversion to REIT taxation beginning with tax year 2016 and completed a related merger on January 13, 2017.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $1,633.1 million | $1,638.5 million |
| Site-leasing revenue | $1,538.1 million | $1,480.6 million |
| Site-development revenue | $95.1 million | $157.8 million |
| Operating income | $387.3 million | $312.5 million |
| Net income (loss) | $76.2 million | $(175.7) million |
| Diluted earnings (loss) per share | $0.61 | $(1.37) |
| Cash from operating activities | $742.5 million | $723.0 million |
| Adjusted EBITDA (non-GAAP) | $1,106.5 million | $1,094.8 million |
Total revenue was nearly flat, down 0.3%. Site leasing grew while site development declined. Operating margin was approximately 23.7% and net margin approximately 4.7%. Management reported Adjusted EBITDA of $1,123.0 million excluding the $16.5 million Oi reserve; this is a non-GAAP measure.
Q4 2016: Revenue was $416.5 million versus $406.9 million in Q4 2015; operating income was $107.4 million versus $82.1 million; net income was $5.3 million versus $31.0 million. Q4 included $18.2 million of debt-extinguishment loss.
- Cash and liquidity: Cash and equivalents were $146.1 million; restricted cash was $39.9 million. The $1.0 billion revolving facility had $390.0 million drawn at year-end; $95.0 million was repaid after year-end. Management said cash, available revolver capacity and operating cash flow should cover debt service for the next 12 months.
- Debt: Principal debt was $8.875 billion at December 31, 2016, versus $8.555 billion a year earlier; balance-sheet carrying value was $8.776 billion. Shareholders’ deficit was $1.996 billion. Estimated debt service for 2017 was $943.8 million, including the anticipated repayment of $610.0 million of 2012-1C Tower Securities.
- Capital allocation: Operating cash flow funded $416.8 million of cash capital expenditures. The company repurchased 5.3 million shares for $545.7 million during 2016. It had not paid common dividends; available REIT net operating losses may reduce or defer required distributions.
Changes, outlook and material items
- Domestic site-leasing revenue rose 3.0%; international site-leasing revenue rose 8.3% as reported and 12.6% on a constant-currency basis. Growth reflected acquired and newly built towers, new leases, amendments and contractual rent escalators.
- Site-development revenue fell 39.8%, primarily due to lower work volume, particularly for Sprint. Site-leasing revenue growth was partly offset by this decline.
- Net income improved from a loss, but the comparison was materially affected by foreign-exchange remeasurement: a $90.0 million gain in 2016 versus a $178.9 million loss in 2015. The 2016 result also included $52.7 million of debt-extinguishment loss and a $16.5 million provision for Oi-related receivables. Constant-currency net income declined $16.5 million year over year, according to management.
- Management expected 2017 organic site-leasing revenue growth in both domestic and international segments to be consistent with 2016. It forecast $31–$41 million of non-discretionary cash capital expenditures and $200–$220 million of discretionary expenditures, excluding potential acquisitions not yet under contract.
- In 2016 the company issued $700 million of 2.877% secured tower securities and $1.1 billion of 4.875% senior notes, using proceeds and other funds to refinance older debt. On January 20, 2017, it repriced secured term loans, reducing the Eurodollar margin to 225 basis points with a zero floor.
Risks and contingencies
- Customer concentration is significant: AT&T, T-Mobile, Sprint and Verizon represented 74.0% of total revenue in 2016. Oi was 7.5% of site-leasing revenue and was in judicial reorganization in Brazil; the company recorded the $16.5 million reserve but reported receiving post-petition rents.
- Leverage is high and debt instruments impose restrictive covenants. A securitized-tower debt-service coverage ratio shortfall can trap excess cash; failure to meet thresholds may trigger reserve funding or amortization.
- Foreign exchange remains material. The Brazilian real affects reported results and the company’s intercompany loan; a 10% adverse currency move was estimated to affect the loan remeasurement by about $42 million.
- Other material risks include carrier consolidation and lease non-renewals, competition and alternative network technologies, acquisition and construction execution, zoning and permitting, international political and regulatory conditions, and maintaining rights to tower land. A Brazilian government concession underlying 2,113 towers expires in 2025.
- REIT qualification is subject to ongoing income, asset, ownership and distribution tests. The company had approximately $1.1 billion of federal NOLs attributed to the REIT, which may reduce required distributions; debt covenants may also constrain distributions.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially affect financial position, results or liquidity. The auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Confirm the timing and terms of REIT qualification, NOL utilization, and any future dividend policy or distributions.
- Track Oi’s reorganization, collection of pre-petition balances, and ongoing post-petition payments.
- Review refinancing and repayment plans for 2017 maturities, particularly the 2012-1C Tower Securities, and covenant headroom.
- Test whether site-leasing growth offsets declining site-development activity and customer concentration risks.
- Assess actual 2017 capital spending, acquisition returns, share repurchases, and foreign-exchange effects against management’s expectations.