SBA Communications Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Unless otherwise indicated, amounts are U.S. dollars. The filing was signed March 1, 2018.
Business context
SBA owns and operates wireless communications towers and leases antenna space, primarily to wireless carriers. It owned 27,909 towers at year-end: 15,979 in the U.S. and its territories and 11,930 internationally. Site leasing generated 98.7% of segment operating profit; U.S. operations accounted for 80.6% of site-leasing revenue. Site development is a smaller, more cyclical business.
Key financial results
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $1,727.7 million | $1,633.1 million | Up 5.8% |
| Site-leasing revenue | $1,623.2 million | $1,538.1 million | Up 5.5% |
| Site-development revenue | $104.5 million | $95.1 million | Up 9.9%; remains below 2015’s $157.8 million |
| Operating income | $458.5 million | $387.3 million | Up 18.4%; operating margin approximately 26.5%, versus 23.7% |
| Net income | $103.7 million | $76.2 million | Up 35.9%; diluted EPS was $0.86 versus $0.61 |
| Adjusted EBITDA (non-GAAP) | $1,204.1 million | $1,106.5 million | Up $81.1 million excluding the prior-year Oi reserve; up $71.6 million on a constant-currency basis |
| Cash from operating activities | $818.5 million | $742.5 million | Up 10.2% |
| Cash used in investing activities | $605.1 million | $428.2 million | Higher acquisition spending |
| Cash capital expenditures | $588.6 million | $416.8 million | Includes $392.9 million for tower acquisitions |
| Cash, including restricted cash | $104.3 million | $186.0 million | Unrestricted cash was $68.8 million at year-end |
| Debt principal | $9,405.0 million | $8,875.0 million | Increased $530 million; balance-sheet carrying value was $9,310.7 million |
The reported net-income comparison is affected by foreign-exchange remeasurement: 2017 included an $8.8 million loss on Brazilian intercompany loans, while 2016 included a $90.0 million gain. Management’s constant-currency measures remove exchange-rate effects, including these loan remeasurements. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Changes and capital allocation
- Domestic site-leasing revenue rose 2.7% on a constant-currency basis, helped by acquired and built towers, lease amendments, new leases and contractual escalators. Non-renewals, primarily associated with MetroPCS, Clearwire and Cricket, partly offset growth.
- International site-leasing revenue increased 12.5% on a constant-currency basis, reflecting acquisitions, new builds, organic leasing and pass-through expenses. Foreign exchange also lifted reported international revenue.
- The company acquired 1,425 towers in 2017 and built additional towers. It spent $850 million repurchasing 5.8 million shares; repurchased shares were retired. A new $1.0 billion repurchase authorization was approved in February 2018.
- SBA had never paid a common-stock dividend. It reported $956.7 million of federal NOLs attributed to the REIT and expected available NOLs to reduce or eliminate required distributions for a period, subject to applicable rules and limitations.
Outlook, liquidity and notable items
- Management expected 2018 organic site-leasing revenue in both domestic and international segments to exceed 2017, citing carrier deployment of unused and recently auctioned spectrum. This is an expectation, not a quantified revenue forecast.
- For 2018, management estimated $34–44 million of non-discretionary cash capital expenditures and $530–550 million of discretionary spending for acquisitions, new builds, tower augmentations and ground-lease purchases, excluding potential acquisitions not yet under contract.
- Management believed cash on hand, operating cash flow and revolver capacity would be sufficient to service debt for the next 12 months. At year-end, $40 million was drawn on the $1.0 billion revolving facility; $75 million was drawn as of the filing date.
- Management planned to issue $640 million of 2018-1C tower securities, then expected to close March 9, 2018, and combine proceeds with revolver borrowings to repay $755 million of 2013 tower securities approaching their anticipated repayment dates. The filing estimated 2018 debt service of $1.112 billion based on year-end debt, including those securities.
- Debt is substantial. Credit-agreement covenants include a maximum debt-to-annualized-borrower-EBITDA ratio of 6.5x and a minimum interest-coverage ratio of 2.0x; the company reported compliance at year-end. Floating-rate debt, refinancing needs and restrictions on distributions and other actions remain risks.
- The Tax Cuts and Jobs Act resulted in a provisional $52.4 million transition-tax income inclusion and a $31.5 million one-time reduction to deferred tax assets with an offsetting valuation allowance. The company said its analysis was incomplete pending further guidance; estimates could change.
- Oi, a major Brazilian customer in judicial reorganization, represented approximately 7.5% of total site-leasing revenue. Its reorganization plan was approved by Brazilian courts in January 2018; management expected pre-petition obligations to be resolved under the plan. Separately, land concessions underlying 2,113 Brazilian towers expire in 2025 and could affect co-location revenue if not renewed.
- Other key risks include carrier consolidation and customer concentration (AT&T, T-Mobile, Verizon and Sprint together contributed 71.8% of total revenue), foreign-currency volatility, land rights and ground-lease costs, permitting constraints, competition, alternative network technologies, and REIT qualification and distribution requirements.
Important facts for investors to verify
- Separate recurring organic leasing growth from growth due to acquisitions, new builds, pass-through charges and currency movements.
- Track major-carrier lease renewals, network investment and consolidation, and Oi’s compliance with its reorganization plan.
- Confirm completion and terms of the planned 2018 tower-securities refinancing, and assess upcoming maturities, interest-rate exposure and covenant headroom.
- Compare planned 2018 capital spending with actual cash generation, debt levels and returns on tower acquisitions and repurchases.
- Monitor final Tax Act accounting, NOL availability, ongoing REIT compliance and the board’s decisions on future distributions.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective as of year-end. The company stated that ordinary-course legal proceedings were not expected to have a material adverse effect.