Crown Castle International Corp. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2018. Crown Castle owns, operates and leases shared communications infrastructure in the U.S., including approximately 40,000 towers and 65,000 route miles of fiber supporting small cells and fiber solutions. The company operates as a REIT and reports Towers and Fiber segments. Approximately 86% of third-quarter revenue was site rental revenue, generally generated under long-term contracts.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenue | $1,375 million | $1,063 million | $4,004 million | $3,118 million |
| Site rental revenue | $1,184 million | $893 million | $3,507 million | $2,619 million |
| Operating income | $359 million | $261 million | $1,051 million | $776 million |
| Net income attributable to common stockholders | $136 million | $85 million | $373 million | $316 million |
| Adjusted EBITDA | $793 million | $605 million | $2,324 million | $1,775 million |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $1,775 million | $1,413 million |
- Q3 site rental revenue increased 33%; Towers increased 8% to $782 million and Fiber increased 139% to $402 million. For the first nine months, site rental revenue increased 34%, led by 158% Fiber growth.
- Q3 Adjusted EBITDA increased 31% and common-stockholder net income increased 60%. Nine-month Adjusted EBITDA increased 31% and common-stockholder net income increased 18%.
- Q3 operating margin was approximately 26.1%, compared with 24.6% in the prior-year quarter. Nine-month operating margin was approximately 26.2%, compared with 24.9% in the prior-year period.
- Q3 net margin attributable to common stockholders was approximately 9.9%, compared with 8.0%; nine-month margin was approximately 9.3%, compared with 10.1%. The nine-month comparison was affected by higher interest expense and debt-retirement losses.
- Capital expenditures were $478 million in Q3 and $1,241 million for the nine months, compared with $289 million and $852 million, respectively, in the prior-year periods. Discretionary spending primarily supported small-cell and fiber construction.
- Cash, cash equivalents and restricted cash totaled $453 million at September 30, 2018, including $323 million of cash and cash equivalents. Undrawn revolver availability was $3.426 billion.
- Total debt and other obligations were $16.424 billion, including $16.313 billion of non-current debt. Approximately 81% of debt had fixed-rate coupons, with a weighted-average interest rate of 3.9% and weighted-average maturity exceeding six years based on anticipated repayment dates.
Material changes versus the prior comparable period
- The November 2017 Lightower acquisition substantially expanded the Fiber segment and was the principal driver of Fiber revenue and profit growth. The company also cited the June 2017 Wilcon acquisition in the nine-month comparison.
- SG&A increased 45% in Q3 and 39% for the nine months, primarily because of Fiber-business growth and the acquired operations.
- Depreciation, amortization and accretion increased 30% in Q3 and 29% for the nine months, reflecting higher property, equipment and intangible assets from acquisitions and capital investment.
- Interest expense increased 4% in Q3 and 11% for the nine months because of higher debt levels. Losses on retirement of long-term obligations were $32 million in Q3 and $106 million for the nine months, versus none and $4 million, respectively, in the prior-year periods.
- Operating cash flow increased 26% to $1.775 billion for the first nine months, while investing cash outflows declined to $1.281 billion from $2.971 billion because the prior-year period included major acquisitions. Financing cash flow was an outflow of $480 million versus an inflow of $7.699 billion in 2017, when substantial acquisition-related financing occurred.
- Common dividends were $1.05 per share in each of the first three quarters. In October 2018, the board declared a $1.125 per-share quarterly dividend, a 7% increase.
Guidance, outlook, commentary and risks
- Management expects full-year 2018 site rental revenue growth to benefit from the 2017 acquisitions, tenant additions and continued demand from wireless carriers and fiber-solution customers.
- Discretionary capital expenditures are expected to exceed 2017 levels, with continued investment in small cells and fiber. Sustaining capital expenditures are expected to be approximately 2% of full-year net revenue.
- Management expects common dividends over the following 12 months to total at least $4.50 per share, or approximately $1.9 billion, and preferred dividends to total approximately $113 million. Future dividends remain subject to board approval.
- Management targets leverage of approximately five times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA, while noting that actual levels may vary based on capital availability and investment returns. The company stated that it was in compliance with debt covenants.
- Liquidity uses over the next 12 months are expected to exceed net operating cash flow and include dividends, debt service and increased capital expenditures. Management believes cash on hand, operating cash flow, revolver availability and potential equity issuance are sufficient to fund expected uses.
- The proposed T-Mobile/Sprint merger could reduce or delay demand because of network integration and overlapping infrastructure, potentially reducing revenue or cash flow and triggering impairment reviews. Approximately three-fourths of site rental revenue was derived from AT&T, T-Mobile, Verizon Wireless and Sprint.
- The company expects the new lease accounting standard, effective January 1, 2019, to materially increase balance-sheet assets and liabilities for right-of-use assets and lease obligations, but does not expect a material income-statement or cash-flow impact.
- Other risks include interest-rate exposure on approximately $3.2 billion of floating-rate debt, refinancing risk, customer concentration, execution and return risk on small-cell and fiber investments, REIT qualification requirements, and ordinary-course litigation and contingencies. Management stated that current legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the contribution, integration costs and returns of the Lightower and other 2017 acquisitions to Fiber growth.
- Track tenant additions, customer network spending and any effects from the proposed T-Mobile/Sprint combination.
- Assess whether planned small-cell and fiber capital expenditures produce expected cash-flow returns and whether spending remains above prior-year levels.
- Monitor leverage, covenant headroom, revolver usage, refinancing plans and exposure to floating interest rates.
- Reconcile Adjusted EBITDA and segment operating profit to GAAP results and account for the $106 million nine-month debt-retirement loss.
- Verify the sustainability of the increased $1.125 quarterly common dividend against operating cash flow, capital expenditures and preferred dividends.
- Evaluate the balance-sheet impact of adopting the lease standard on January 1, 2019.