Crown Castle International Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 4, 2018. Crown Castle owns, operates and leases approximately 40,000 U.S. towers and 60,000 route miles of fiber supporting small cells and fiber solutions. Its operating segments are Towers and Fiber, and it operates as a REIT for U.S. federal income tax purposes.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $1.299 billion | $1.016 billion | +28% |
| Site rental revenues | $1.153 billion | $857 million | +35% |
| Network services and other revenues | $146 million | $159 million | -8% |
| Operating income | $349 million | $255 million | +37% |
| Net income attributable to CCIC stockholders | $114 million | $119 million | -4% |
| Net income attributable to common stockholders | $86 million | $119 million | -28% |
| Adjusted EBITDA | $763 million | $581 million | +31% |
| Net cash provided by operating activities | $452 million | $442 million | +$10 million |
- Operating margin was approximately 26.9%, compared with 25.1% in Q1 2017. Adjusted EBITDA margin was approximately 58.7%, compared with 57.2%.
- Towers site rental revenue increased 7% to $764 million; Fiber site rental revenue increased 178% to $389 million. The Fiber increase included $216 million attributable to the November 2017 Lightower acquisition and continued demand for small cells and fiber solutions.
- Segment operating profit increased 8% for Towers to $587 million and 192% for Fiber to $222 million.
- Capital expenditures were $370 million, including $342 million of discretionary expenditures. Investing cash outflows were $384 million, compared with $1.763 billion in Q1 2017, when the company made the approximately $1.5 billion FiberNet acquisition.
- Cash, cash equivalents and restricted cash totaled $345 million at March 31, 2018, including $220 million of cash and cash equivalents. Revolver availability was approximately $3.4 billion.
- Total debt and other obligations were $15.746 billion, versus $16.159 billion at December 31, 2017. Approximately 84% of debt had fixed-rate coupons; the weighted-average interest rate was 3.9%, and weighted-average maturity exceeded six years based on anticipated repayment dates.
- Common dividends paid were approximately $443 million, or $1.05 per share. Preferred dividends paid were $28 million. The company declared common dividends of $1.05 per share and expected at least $4.20 per common share over the next 12 months, subject to board approval.
Material changes versus the prior comparable period
- Revenue growth was primarily driven by the Lightower acquisition, tenant additions, customer network enhancements, contractual escalations and demand for data-related infrastructure.
- General and administrative expense increased 33% to $134 million, primarily reflecting the expansion of the Fiber business and the 2017 acquisitions.
- Depreciation, amortization and accretion increased 29% to $374 million, while interest expense and amortization of deferred financing costs increased to $160 million from $134 million.
- The company recorded a $71 million loss on retirement of long-term obligations, compared with a $4 million loss in Q1 2017, following debt refinancing and repayment activity. This item, together with higher interest expense, reduced reported net income despite strong operating growth.
- In January 2018, the company issued $1.75 billion of senior notes and used proceeds to repay the January 2010 Tower Revenue Notes and reduce revolver borrowings. In March 2018, it issued 8 million common shares for approximately $840 million of net proceeds, used for general corporate purposes including debt repayment.
- Revenue recognition guidance under ASC 606 was adopted using the modified retrospective method on January 1, 2018, with no opening equity adjustment and no material change to the revenue recognition pattern.
Outlook, commentary and risks
- Management expects continued demand for towers, small cells and fiber solutions as wireless carriers expand network capacity and organizations increase use of bandwidth-intensive applications.
- Full-year 2018 site rental revenue is expected to benefit from the 2017 acquisitions and a healthy tenant-addition environment. Discretionary capital expenditures are expected to exceed 2017 levels, particularly for new small cells and fiber; sustaining capital expenditures are expected to approximate 2% of net revenues.
- Management expects liquidity sources, including operating cash flow, cash on hand, revolver availability and potential equity issuance, to cover expected uses over the next 12 months. Expected uses include at least $1.7 billion of common dividends, approximately $113 million of preferred dividends, $130 million of scheduled principal payments and higher capital expenditures.
- The company established a new $750 million at-the-market equity program in April 2018; no shares had been sold under the program as of the filing.
- A proposed T-Mobile/Sprint merger could reduce or delay demand for Crown Castle infrastructure because of network integration and overlapping assets, potentially reducing revenue or cash flow and triggering impairment reviews.
- Approximately 74% of site rental revenue was derived from AT&T, T-Mobile, Verizon Wireless and Sprint, creating customer concentration risk. Approximately 53% of towers are leased, subleased or managed under agreements with AT&T, Sprint and T-Mobile.
- The company expects to refinance certain Tower Revenue Notes on or before their anticipated repayment dates. Failure to repay could increase applicable interest rates by approximately 5 percentage points and initiate principal payments from excess cash flow.
- Ordinary-course claims, lawsuits, guarantees and other contingencies were disclosed; management did not expect their resolution to have a material adverse effect on consolidated financial position or results of operations.
Important facts for investors to verify
- Reconcile the strong revenue and Adjusted EBITDA growth with the decline in common-stockholder earnings and the $71 million debt-retirement loss.
- Assess the sustainability and return profile of higher discretionary capital expenditures for small cells and fiber.
- Monitor leverage, revolver usage, refinancing requirements and sensitivity to variable interest rates; a 0.125 percentage-point rate increase was estimated to raise annual interest expense by approximately $3 million.
- Evaluate customer concentration and the potential effects of the proposed T-Mobile/Sprint merger on tenancy, renewals and overlapping network assets.
- Confirm that operating cash flow and financing capacity remain sufficient to fund expected dividends, preferred distributions, debt service and capital expenditures.
- Review the eventual balance-sheet impact of the new lease accounting standard, effective for the company January 1, 2019; management expects material increases in right-of-use assets and lease liabilities.