Crown Castle International Corp. — 2Q 2018 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2018, filed August 6, 2018. Crown Castle owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 60,000 route miles of fiber supporting small-cell networks and fiber solutions. Operating segments are Towers and Fiber. The company operates as a REIT for U.S. federal income tax purposes.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net revenues | $1.330 billion, up 28% | $2.630 billion, up 28% |
| Site rental revenue | $1.169 billion, up 35% | $2.323 billion, up 35% |
| Operating income | $345 million | $694 million |
| Net income attributable to CCIC stockholders | $180 million, versus $112 million | $294 million, versus $231 million |
| Net income attributable to common stockholders | $152 million; diluted EPS $0.36 | $237 million; diluted EPS $0.57 |
| Adjusted EBITDA | $769 million, up 31% | $1.532 billion, up 31% |
| Cash flow from operating activities | — | $1.111 billion, up 19% |
| Capital expenditures | — | $763 million |
Second-quarter site rental revenue comprised approximately 66% Towers and 34% Fiber. Towers site rental revenue increased 7% to $771 million, while Fiber site rental revenue increased 164% to $398 million, primarily reflecting the Lightower and Wilcon acquisitions and increased demand for small cells and fiber solutions.
At June 30, 2018, cash and cash equivalents were $206 million, restricted cash was $130 million, total assets were $32.374 billion, and total debt and other obligations were $15.956 billion, including $15.844 billion of non-current debt. Undrawn availability under the revolving credit facility was approximately $3.9 billion. Total equity was $12.566 billion.
Common dividends were $1.05 per share in each quarter, totaling approximately $879 million during the first six months. Preferred dividends totaled $57 million. The company had approximately 415 million common shares outstanding at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the Lightower acquisition, the Wilcon acquisition, tenant additions, contractual escalations and demand for small cells and fiber solutions.
- Adjusted EBITDA increased 31% in both the quarter and six-month period, with Fiber operating profit increasing 170% in the quarter and 179% year to date.
- General and administrative expense increased 41% in the quarter and 37% year to date, primarily due to growth in the Fiber business and acquired operations.
- Depreciation, amortization and accretion increased 28% in the quarter and 29% year to date due to acquisitions and higher property and intangible assets.
- Interest expense increased 11% in the quarter and 15% year to date due to higher debt associated with acquisition financing.
- The company recorded $74 million of losses on retirement of long-term obligations during the first six months, compared with $4 million in the prior-year period.
- Operating cash flow increased $180 million, while investing cash usage declined to $778 million from $2.675 billion because the prior-year period included significant acquisition spending.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 site rental revenue growth to benefit from the 2017 acquisitions and continued tenant additions. Discretionary capital expenditures are expected to exceed 2017 levels, with increased construction of small cells and fiber; sustaining capital expenditures are expected to be approximately 2% of net revenues.
- The company expects common dividends over the following 12 months to total at least $4.20 per share, or approximately $1.7 billion, subject to board approval. Expected preferred dividends were approximately $113 million.
- In July 2018, the company issued $1.0 billion of Tower Revenue Notes and used the proceeds and cash on hand to repay the Series 2010-6 Tower Revenue Notes. The company expects an approximately $33 million loss on retirement of debt in the third quarter of 2018.
- After the July financing, management reported 83% of debt at fixed rates, a weighted-average interest rate of 3.9% and a weighted-average maturity exceeding six years, assuming anticipated repayment dates.
- Liquidity uses are expected to exceed operating cash flow over the next 12 months, but management expects cash on hand, operating cash flow, revolver capacity and potential equity issuance to be sufficient.
- The potential T-Mobile and Sprint merger could reduce or delay infrastructure demand because of network integration and overlapping sites, potentially reducing revenue and cash flow or triggering asset-impairment reviews.
- Approximately 75% of site rental revenue came from AT&T, T-Mobile, Verizon Wireless and Sprint, creating customer-concentration exposure. Approximately 53% of towers are leased or managed under arrangements with AT&T, Sprint and T-Mobile.
- The company expects the new lease accounting standard, effective January 1, 2019, to materially increase reported assets and liabilities, although it does not currently expect a material impact on Towers operating results or cash flows.
- Routine claims, litigation and performance guarantees are disclosed; management does not expect them to have a material adverse effect.
Most Important Facts to Verify
- Whether Fiber growth and margins are sustainable after the Lightower and Wilcon acquisition comparisons normalize.
- Actual 2018 discretionary capital expenditures, returns on small-cell and fiber investments, and resulting cash-flow growth.
- Progress and regulatory outcome of the T-Mobile-Sprint transaction and any resulting site cancellations, non-renewals or impairment charges.
- Debt refinancing requirements, floating-rate exposure, covenant compliance and the approximately $33 million third-quarter 2018 debt-retirement loss.
- Ability to fund expected dividends and capital expenditures while maintaining targeted leverage of approximately five times Adjusted EBITDA.
- Effects of the January 2019 lease-accounting adoption on the balance sheet and Fiber segment reporting.