SBA COMMUNICATIONS CORP quarterly report, Q3 FY2017

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SBA Communications Corporation — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are unaudited.

Business context and reporting period

SBA owns and operates wireless communications towers, principally in the United States, with international operations including Brazil and other markets in the Americas. At quarter-end, it owned 26,764 towers and managed or leased approximately 5,300 additional actual or potential sites. Site leasing is the core business and generated 98.7% of segment operating profit in the first nine months of 2017.

Financial performance and position

  • Q3 revenue: $433.9 million, up 5.5% year over year. Site leasing revenue was $408.5 million; site development revenue was $25.4 million. Management reported 5.1% total revenue growth on a constant-currency basis.
  • Q3 earnings: Operating income was $117.0 million, versus $108.2 million; net income was $49.2 million, versus a $15.4 million net loss. Diluted EPS was $0.41, versus a $0.12 loss. GAAP operating margin was approximately 27.0%, compared with 26.3%.
  • Nine-month results: Revenue was $1.285 billion, up 5.6% reported and 4.2% on a constant-currency basis. Operating income was $339.4 million versus $279.9 million; net income was $96.0 million versus $71.0 million. Diluted EPS was $0.79 versus $0.56. Operating margin was approximately 26.4%, compared with 23.0%.
  • Adjusted EBITDA, a non-GAAP measure: $303.1 million in Q3, up from $283.2 million. Nine-month Adjusted EBITDA was $894.1 million versus $819.5 million; excluding the $16.5 million Oi reserve recorded in 2016, the comparative 2016 amount was $836.0 million.
  • Cash flow: Nine-month operating cash flow was $591.5 million, up from $527.2 million. Investing used $290.9 million, including $161.0 million for acquisitions and $106.3 million for capital expenditures. Financing used $317.6 million. Cash, cash equivalents and restricted cash totaled $172.5 million at period-end, including $139.7 million of unrestricted cash.
  • Debt and liquidity: Debt principal totaled $9.05 billion at September 30; carrying value was $8.96 billion. Current maturities were $773.3 million. The company had $430.0 million drawn on its $1.0 billion revolving facility at quarter-end and reported covenant compliance. It estimated $1.093 billion of debt service over the following 12 months, including anticipated 2018 repayment dates for two tower-security issues.
  • Balance sheet: Total assets were $7.30 billion and shareholders’ deficit was $2.26 billion at September 30. Current assets of $324.1 million were below current liabilities of $1.023 billion.

Material changes versus the prior comparable period

  • Q3 revenue growth reflected acquired and newly built towers, organic leasing growth from new leases, amendments and contractual escalators, and higher site development activity. Domestic and international site-leasing operating profit increased.
  • International site-leasing revenue growth included a material foreign-exchange contribution: management reported Q3 growth of 13.8% constant currency, and nine-month growth of 12.7% constant currency. Brazil accounted for about 13.4% of nine-month site-leasing revenue.
  • Q3 net income improved substantially from the prior-year loss, in part because 2016 included a $34.5 million debt-extinguishment loss and because intercompany-loan currency remeasurement shifted from a $3.2 million loss in Q3 2016 to an $18.4 million gain in Q3 2017. Nine-month 2017 net income growth was affected by a much smaller intercompany-loan gain than in 2016 ($11.6 million versus $89.0 million).
  • Nine-month SG&A declined $10.1 million, largely because the prior-year period included a $16.5 million reserve related to Oi, partly offset by higher compensation and support costs. Asset impairment and decommission costs were $25.9 million for nine months, compared with $23.2 million; prior-year results included a $9.0 million gain on fiber-asset sales.
  • The company repaid $610 million of 2012-1C Tower Securities using proceeds from a new $760 million tower-securities issuance. It also repriced its term loans in January 2017. Subsequent to quarter-end, it issued $750 million of 4.0% senior notes due 2022 and used $460 million of the proceeds to repay the revolver; as of the filing date, no revolver balance was outstanding.

Outlook, commentary, risks and unusual items

  • Management expected organic site-leasing revenue growth in domestic and international markets for the remainder of 2017 to be consistent with 2016 and the first nine months of 2017. It provided no specific revenue or earnings guidance.
  • For full-year 2017, including expenditures already made, the company expected $32.5–$37.5 million of non-discretionary cash capital expenditures and $395–$415 million of discretionary expenditures, plus potential acquisitions not yet under contract. Planned discretionary uses include acquisitions, new builds, tower upgrades and ground-lease purchases.
  • Management said cash on hand, revolver capacity and operating cash flow should be sufficient to service debt for the next 12 months. This assessment is subject to refinancing and operating risks; the filing highlights debt-service needs and the anticipated 2018 repayment dates for tower securities.
  • Key risks include wireless-carrier consolidation or reduced network spending, tenant non-renewals, foreign-exchange and political or economic risks in international markets, access to financing and covenant compliance, acquisition execution, tower construction and permitting, and the ability to retain land rights. A hypothetical 10% adverse move in the Brazilian real was estimated to reduce nine-month revenue by 1.1% and operating income by 2.8%; a 10% move in exchange rates affecting unsettled intercompany debt could produce approximately $43.8 million of unrealized gains or losses.
  • The company operates as a REIT and reported approximately $1.1 billion of federal NOLs at December 31, 2016; use of NOLs may reduce or eliminate required distributions, subject to REIT rules and other constraints. Adoption of the new lease standard was expected to materially increase balance-sheet assets and liabilities because of ground leases, with no material statement-of-operations impact expected.
  • Unusual items include foreign-currency remeasurement gains, prior-year Oi reserve and debt-extinguishment charges, impairments and decommission costs, and substantial share repurchases. The company repurchased 3.9 million shares during the first nine months of 2017 and 2.7 million in Q3.

Important facts for investors to verify

  1. Review the timing, refinancing plan and repayment terms for the $773.3 million of current maturities, particularly tower securities with April 2018 anticipated repayment dates, and reconcile them with the filing’s estimated $1.093 billion of next-12-month debt service.
  2. Assess leverage and liquidity using unrestricted cash, restricted securitization cash, post-quarter-end senior-note proceeds and the company’s ongoing capital-expenditure and repurchase plans.
  3. Separate recurring operating trends from currency remeasurement gains, the prior-year Oi reserve and debt-extinguishment loss, and other impairment or disposal items; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.
  4. Monitor Brazil and other international exposure, including currency movements, tenant credit and the concentration of site-leasing revenue among major wireless carriers.
  5. Confirm that expected tower acquisitions and discretionary capital expenditures remain consistent with cash generation, debt covenants and management’s stated leverage objectives.