Crown Castle International Corp. 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2014. Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers and small-cell networks, and provides related network services in the United States, Puerto Rico and Australia. The company began operating as a U.S. REIT effective January 1, 2014.
The December 2013 AT&T tower acquisition materially affects year-over-year comparisons. Approximately 54% of the company’s towers are subject to master leases or similar arrangements with Sprint, T-Mobile and AT&T.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Net revenues | $916.3 million | $734.9 million | $1.792 billion | $1.475 billion |
| Operating income | $230.2 million | $230.0 million | $481.8 million | $465.0 million |
| Operating margin | 25.1% | 31.3% | 26.9% | 31.5% |
| Net income | $35.4 million | $53.4 million | $138.2 million | $70.1 million |
| Net income attributable to common stockholders | $23.0 million | $52.4 million | $113.5 million | $67.8 million |
| Adjusted EBITDA | $530.6 million | $444.4 million | $1.058 billion | $885.2 million |
| Adjusted EBITDA margin | 57.9% | 60.5% | 59.0% | 60.0% |
| Diluted EPS | $0.07 | $0.18 | $0.34 | $0.23 |
Site rental revenue increased 21% in both the quarter and first half, while network services and other revenue increased 44% in the quarter and 23% year to date. Net cash provided by operating activities was $763.7 million, up from $560.0 million in the prior-year first half. Capital expenditures were $309.7 million, including $24.1 million of sustaining capital expenditures. Cash and cash equivalents were $227.5 million at June 30, 2014.
Total debt and other obligations were $11.570 billion, including $3.838 billion of variable-rate debt and approximately 67% fixed-rate debt. Undrawn availability under the 2012 revolving credit facility was approximately $1.166 billion at June 30. Total equity was $6.879 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by the AT&T acquisition, new tenant additions, contract amendments, escalations and increased carrier network activity.
- First-half Adjusted EBITDA increased 20% to $1.058 billion, while depreciation, amortization and accretion increased 34% because of assets and intangibles recorded in the AT&T acquisition.
- Quarterly operating income was essentially flat despite 25% revenue growth because operating expenses increased 36%, including higher depreciation, network-service costs and acquisition and integration costs.
- Quarterly net income attributable to common stockholders declined to $23.0 million from $52.4 million, primarily because of $44.6 million of losses on debt retirement and preferred-stock dividends.
- First-half net income attributable to common stockholders increased to $113.5 million from $67.8 million, helped by the REIT-related tax benefit and lower interest expense.
- The company issued $850 million of 4.875% senior notes, used $300 million to repay January 2010 Tower Revenue Notes and redeemed all outstanding 7.125% senior notes. The refinancing lowered the cost and extended the maturity profile of the debt.
- Common dividends of $0.35 per share were declared for each quarter, totaling approximately $234 million for the first half. Management expected 2014 common-dividend payments of approximately $470 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2014 site-rental growth to benefit substantially from the AT&T acquisition and anticipated increased tenant-installation activity from carrier network expansion and LTE upgrades.
- Customer non-renewals were expected to reduce 2014 site-rental revenue by approximately 2%. Sprint’s legacy iDEN decommissioning was expected to affect approximately $30 million of revenue in 2014 and $60 million to $70 million in 2015.
- Sustaining capital expenditures were expected to be approximately 2% of full-year net revenue; total 2014 capital expenditures were expected to exceed $500 million.
- Over the next 12 months, management expected cash on hand, operating cash flow and revolver capacity to cover principal payments of $105.6 million, more than $500 million of capital expenditures, approximately $45 million of preferred dividends and common dividends of approximately $117 million per quarter.
- The company targeted leverage of approximately four to six times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA, and stated that it was in compliance with its debt covenants.
- Key risks include customer concentration, carrier consolidation, Sprint’s iDEN shutdown, non-renewals, interest-rate and refinancing risk, foreign-exchange exposure, REIT qualification and taxation risk, and execution risk related to acquisitions and small-cell investments.
- The four largest customers accounted for 89% of first-half consolidated revenue: Sprint 26%, AT&T 26%, T-Mobile 21% and Verizon Wireless 16%.
- The company reported ordinary-course claims and contingencies but stated that it did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company’s private-letter-ruling request concerning whether certain small-cell assets and rents qualify as REIT real property remained under evaluation.
Investor Verification Checklist
- Verify the sustainability of revenue and Adjusted EBITDA growth excluding the AT&T acquisition contribution.
- Review customer concentration and quantify the effect of Sprint iDEN lease expirations in 2014 and 2015.
- Assess leverage, floating-rate exposure, debt maturities and the refinancing assumptions for tower revenue notes and WCP securitized notes.
- Reconcile GAAP earnings with Adjusted EBITDA and consider the impact of higher depreciation, amortization, acquisition costs and debt-retirement losses.
- Confirm the company’s ability to fund dividends, more than $500 million of annual capital expenditures and other discretionary investments from operating cash flow.
- Monitor REIT qualification, taxable REIT subsidiaries, the IRS small-cell ruling request and potential taxes on undistributed or built-in gains.
- Evaluate the effect of Australian-dollar movements on CCAL results and the company’s consolidated financial statements.