Crown Castle International Corp. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2014. Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers, small-cell networks and related land interests, in the United States, Puerto Rico and Australia. Effective January 1, 2014, the company began operating as a U.S. real estate investment trust (REIT).
The December 2013 acquisition of exclusive rights to AT&T towers materially affected the quarter. Approximately 89% of consolidated revenue came from AT&T, Sprint, T-Mobile and Verizon Wireless.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Site rental revenue | $747.2 million | $615.4 million | +21% |
| Network services and other revenue | $128.8 million | $124.6 million | +3% |
| Total revenue | $876.0 million | $740.1 million | +18% |
| Operating income | $251.6 million | $235.1 million | +7% |
| Net income | $102.8 million | $16.7 million | Significant increase |
| Net income attributable to common stockholders | $90.5 million | $15.5 million | Significant increase |
| Diluted earnings per share | $0.27 | $0.05 | Increase |
| Adjusted EBITDA | $527.0 million | $440.8 million | +20% |
| Cash flow from operations | $362.3 million | $286.6 million | +26% |
Operating margin was approximately 28.7%, compared with 31.8% in the prior-year quarter. Adjusted EBITDA margin was approximately 60.2%, compared with 59.6%. The lower operating margin primarily reflects higher depreciation, amortization and accretion following the AT&T acquisition.
Cash and cash equivalents were $200.5 million at March 31, 2014, excluding restricted cash of $164.0 million. Total debt and other obligations were $11.6 billion, including $3.9 billion of variable-rate debt. The company reported $1.1 billion of undrawn revolver availability at March 31 and stated that it had no financial covenant violations.
Material Changes Versus the Prior Comparable Period
- Site rental revenue growth primarily reflected the AT&T acquisition, new tenant additions and amendments, contractual cash escalations, and other business growth.
- Operating income increased only 7% despite 18% revenue growth because total operating expenses rose 24%; depreciation, amortization and accretion increased 34% to $250.2 million.
- Interest expense declined 11% to $146.4 million, while Q1 2013 included a $35.9 million loss on debt retirement that did not recur.
- The effective tax burden decreased substantially following the REIT conversion; Q1 2014 included a $0.2 million tax benefit versus a $17.7 million tax provision in Q1 2013.
- Operating cash flow increased $75.7 million, while capital expenditures rose to $142.9 million from $116.4 million. Acquisition spending was $62.2 million versus $12.8 million.
- Financing cash outflows were $174.5 million, including $116.8 million of common dividends, $11.4 million of preferred dividends and $21.4 million of share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2014 site rental growth to benefit substantially from the AT&T acquisition and higher tenant-installation activity.
- Management expected approximately 2% of 2014 site rental revenue to be affected by non-renewals, including approximately 1% related to typical activity and approximately 1% related to Sprint’s iDEN decommissioning. Approximately 3% of run-rate site rental revenue was expected to be affected by iDEN decommissioning over 2014 and 2015.
- Full-year sustaining capital expenditures were expected to be approximately 2% of revenue; total 2014 capital expenditures were expected to exceed $500 million.
- Management expected cash on hand, operating cash flow and revolver capacity to cover the next 12 months’ debt service, capital expenditures and dividends. It targeted leverage of approximately four to six times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA.
- In April 2014, the company issued $850 million of 4.875% senior notes due 2022. Proceeds were used to repay $300 million of tower revenue notes and redeem the outstanding 7.125% senior notes. The transactions resulted in reported losses of approximately $4 million and $41 million, respectively.
- REIT qualification, required distributions, taxes applicable to taxable REIT subsidiaries, the IRS ruling request concerning small-cell assets, and potential built-in-gain taxes remain relevant tax considerations.
- Customer concentration, Sprint’s network decommissioning, interest-rate exposure, refinancing requirements, foreign exchange movements affecting Australia, and dependence on wireless-carrier capital spending are material risks.
- The company reported ordinary-course litigation and guarantees but stated that these matters were not expected to have a material adverse effect. No material changes to the 2013 Form 10-K risk factors were reported.
Important Facts for Investors to Verify
- Confirm the final accounting and recurring revenue contribution from the AT&T tower-rights acquisition, since the purchase-price allocation remained preliminary.
- Assess leverage, variable-rate debt exposure and refinancing needs, including the effect of the April and May 2014 debt transactions.
- Track Sprint iDEN decommissioning, customer non-renewals and the resulting impact on site rental revenue.
- Evaluate whether cash flow can sustain approximately $117 million of quarterly common dividends, preferred dividends and more than $500 million of annual capital expenditures.
- Review REIT qualification, taxable REIT subsidiary income, required distributions and the pending IRS private letter ruling on small-cell assets.
- Consider the limitations of Adjusted EBITDA, which is a non-GAAP measure and excludes depreciation, interest and other significant expenses.