Crown Castle International Corp. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Crown Castle owns, operates and leases shared communications infrastructure in the United States, including approximately 40,000 towers and 80,000 route miles of fiber supporting small cells and fiber solutions. Its operating segments are Towers and Fiber. The company operates as a REIT and derives most revenue from long-term tenant contracts with wireless carriers and fiber customers.
This filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Approximately 90% of third-quarter revenue was site rental revenue, and approximately 74% of nine-month site rental revenue came from T-Mobile, AT&T and Verizon Wireless.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenues | $1.618 billion | $1.486 billion | $4.686 billion | $4.347 billion |
| Site rental revenues | $1.451 billion | $1.339 billion | $4.245 billion | $3.968 billion |
| Operating income | $526 million | $434 million | $1.478 billion | $1.181 billion |
| Income from continuing operations | $351 million | $163 million | $805 million | $548 million |
| Net income attributable to common stockholders | $351 million | $163 million | $743 million | $491 million |
| Adjusted EBITDA | $976 million | $883 million | $2.831 billion | $2.527 billion |
| Cash flow from operating activities | Not separately provided | Not separately provided | $2.055 billion | $2.070 billion |
Q3 revenue increased 8%, operating income increased 21%, net income attributable to common stockholders increased 115%, and Adjusted EBITDA increased 11%. Nine-month revenue increased 8%, operating income increased 25%, income from continuing operations increased 47%, and Adjusted EBITDA increased 12%.
Calculated Q3 margins were approximately 32.5% for operating income, 21.7% for net income attributable to common stockholders and 60.3% for Adjusted EBITDA. Nine-month margins were approximately 31.5%, 15.9% and 60.4%, respectively. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Segment Performance and Material Changes
- Towers: Q3 site rental revenue increased 11% to $972 million; segment operating profit increased 15% to $772 million. Nine-month site rental revenue increased 8% to $2.819 billion, and segment operating profit increased 14% to $2.224 billion.
- Fiber: Q3 site rental revenue increased 4% to $479 million, while segment operating profit decreased 1% to $273 million. Nine-month site rental revenue increased 5% to $1.426 billion, and segment operating profit increased 5% to $812 million.
- Growth was attributed primarily to tenant additions, network capacity and quality initiatives, contractual escalations, renewals and demand for small cells and fiber solutions.
- Third-quarter Towers services and other gross margin increased 74% to $54 million. Nine-month Towers services and other gross margin increased 154% to $142 million; these services are variable and are not generally supported by long-term contracts.
- Interest expense declined 3% in Q3 and 5% for the nine-month period due primarily to refinancing activities and lower weighted-average borrowing costs.
- Nine-month results included a $145 million loss on retirement of long-term obligations and a $62 million after-tax loss from discontinued operations related to settlement of an Australian tax matter. The ATO settlement payment was approximately $62 million.
Cash Flow, Capital Expenditures, Debt and Liquidity
- Cash flow from operating activities was $2.055 billion for the first nine months, compared with $2.070 billion in 2020.
- Capital expenditures were $892 million, down from $1.238 billion. Discretionary capital expenditures were $836 million, primarily for communications infrastructure improvements, construction and land interests; sustaining capital expenditures were $56 million.
- Cash used in investing activities was $911 million, compared with $1.336 billion in the prior-year period. Cash used in financing activities was $921 million, compared with $651 million.
- Cash, cash equivalents and restricted cash totaled $542 million at September 30, 2021, including $357 million of cash and cash equivalents.
- Total debt and other obligations were $20.365 billion, compared with $19.280 billion at December 31, 2020. The company reported a weighted-average interest rate of 3.1%, approximately nine years of weighted-average maturity and 91% fixed-rate debt.
- Undrawn availability under the revolving credit facility was approximately $5.0 billion, or $4.966 billion as presented in the liquidity table. Commercial paper outstanding was $665 million at September 30 and $455 million as of November 2, 2021.
- The company stated that it was in compliance with applicable debt covenants. It targets leverage of approximately five times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA to interest expense.
- Common dividends paid during the first nine months totaled approximately $1.7 billion, or $1.33 per share in each quarter. The board subsequently declared a $1.47 per-share quarterly dividend payable December 31, 2021.
Guidance, Outlook, Commentary and Risks
- Management expects 2021 and 2022 site rental revenue to benefit from tenant additions associated with increasing data demand, wireless network expansion, 5G initiatives, small cells and fiber solutions.
- Discretionary capital expenditures are expected to decline in both 2021 and 2022 compared with 2020, primarily because of lower expected small-cell deployment levels. Sustaining capital expenditures are expected to be approximately 2% of annual net revenue.
- Management expects common dividends over the following 12 months to total at least $5.88 per share, or approximately $2.5 billion in aggregate, subject to board approval.
- Management expects available liquidity sources to cover anticipated uses over the next 12 months, including approximately $737 million of debt obligations, dividends and capital expenditures.
- COVID-19 did not have a material impact on financial results through September 30, 2021, according to management. However, risks include supply-chain disruption, reduced tenant demand, permitting delays, higher capital costs and labor constraints. More than 96% of the workforce was fully vaccinated or qualified for an exemption.
- Material contingencies include lawsuits related to the 2019 Durham, North Carolina, gas-leak explosion and potential New York State Department of Transportation fees for previously deployed fiber lines. The company stated that it could not determine the likelihood or estimate the potential losses or fees.
- Other shareholder and derivative litigation disclosed in the filing was dismissed without prejudice in June and July 2021.
Investor Verification Checklist
- Verify whether tenant additions and carrier spending remain sufficient to support projected Towers and Fiber revenue growth.
- Assess the sustainability of the dividend relative to operating cash flow, capital expenditures, debt maturities and refinancing needs.
- Review debt maturity exposure, commercial paper refinancing requirements, floating-rate debt and sensitivity to higher interest rates.
- Track discretionary capital expenditures, particularly small-cell and fiber deployment levels, expected returns and project completion timing.
- Monitor the Durham litigation and potential NYSDOT right-of-way fees, for which the filing provides no clear loss estimate.
- Reconcile Adjusted EBITDA and segment measures to GAAP results and consider the effects of the $145 million debt retirement loss and $62 million Australian tax settlement.
- Confirm continued REIT qualification, required distributions, NOL utilization and the tax treatment of future dividends.