Crown Castle International Corp. 2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018; it is an annual Form 10-K rather than a standalone fourth-quarter filing. Crown Castle International Corp. owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 65,000 route miles of fiber supporting small cells and fiber solutions. The company operates as a real estate investment trust (REIT) and reports two segments: Towers and Fiber.
Site rental revenue is generally recurring and supported by long-term tenant contracts. AT&T, T-Mobile, Verizon Wireless and Sprint represented 73% of 2018 site rental revenue. The company reported approximately $23.4 billion of contracted site rental amounts, with a weighted-average remaining contract term of approximately five years excluding tenant renewal options.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $5.423 billion | $4.356 billion | +25% |
| Site rental revenues | $4.716 billion | $3.669 billion | +29% |
| Services and other revenues | $707 million | $687 million | +3% |
| Operating income | $1.432 billion | $1.046 billion | +37% |
| Net income attributable to CCIC stockholders | $671 million | $445 million | +51% |
| Net income attributable to common stockholders | $558 million | $387 million | +44% |
| Adjusted EBITDA | $3.141 billion | $2.482 billion | +27% |
| Net cash provided by operating activities | $2.502 billion | $2.043 billion | +22% |
- Approximate 2018 margins were 26.4% for operating income, 57.9% for Adjusted EBITDA, and 10.3% for net income attributable to common stockholders. Site rental gross margin was approximately 70.9%.
- Towers site rental revenue increased 7% to $3.116 billion; Fiber site rental revenue increased 108% to $1.600 billion, primarily reflecting the 2017 FiberNet, Wilcon and Lightower acquisitions and increased demand for small cells and fiber solutions.
- Capital expenditures were $1.741 billion, including approximately $1.6 billion of discretionary capital expenditures. Sustaining capital expenditures were approximately 2% of net revenues.
- Cash and cash equivalents were $277 million at year-end. Including restricted cash, cash, cash equivalents and restricted cash totaled $413 million.
- Total debt and other long-term obligations were $16.682 billion, compared with $16.159 billion at year-end 2017. After the February 2019 notes offering, management reported an approximately 4.0% weighted-average interest rate, approximately seven-year weighted-average maturity and 85% fixed-rate debt.
- The company paid approximately $1.8 billion in common dividends and $113 million in preferred dividends during 2018. The quarterly common dividend increased from $1.05 to $1.125 per share in the fourth quarter.
Material changes versus the prior comparable period
- Growth accelerated substantially in Fiber, with Fiber site rental revenue rising 108% and Fiber operating profit rising 112% to $901 million.
- Consolidated revenue and cash flow benefited from the full-year contribution of the 2017 acquisitions, particularly Lightower and Wilcon.
- Interest expense increased 9% to $642 million because of debt raised to finance acquisitions and capital expenditures.
- The company recorded $106 million of losses on the retirement of long-term obligations, compared with $4 million in 2017, primarily from refinancing and repaying certain debt.
- During 2018, the company issued $1.75 billion of senior unsecured notes, $1.0 billion of senior secured tower revenue notes and approximately $841 million of net common-stock proceeds. It also expanded its revolving credit facility to $4.25 billion and extended its maturity to June 2023.
- Revenue recognition under ASC 606 was adopted effective January 1, 2018, with no material change to the revenue-recognition pattern or opening equity. New lease accounting guidance was adopted effective January 1, 2019; management expected a March 31, 2019 lease liability of approximately $5 billion to $7 billion with no material income-statement or cash-flow impact.
Guidance, outlook, commentary and risks
- Management expected 2019 site rental revenue growth to benefit from higher tenant additions driven by wireless network expansion, data demand, 5G initiatives and fiber solutions.
- 2019 discretionary capital expenditures were expected to exceed 2018 levels, with continued investment in new small cells and fiber. Sustaining capital expenditures were expected to remain approximately 2% of net revenues.
- Management expected common dividends over the following 12 months to total at least $4.50 per share, or approximately $1.9 billion, subject to board approval and other constraints.
- Liquidity sources included operating cash flow, cash on hand, revolving-credit availability and the $750 million remaining capacity under the 2018 at-the-market equity program. Expected uses included approximately $107 million of principal payments, at least $1.9 billion of common dividends, approximately $113 million of preferred dividends and higher capital expenditures.
- The company was in compliance with its debt covenants. At December 31, 2018, the reported total net leverage ratio was 5.2x versus a covenant limit of 6.50x, and senior secured leverage was 1.0x versus a 3.50x limit.
- Key risks include high tenant concentration, potential effects from the proposed T-Mobile/Sprint combination, slower wireless or data demand, rapid expansion and execution risk in Fiber, competition and technology substitution, substantial leverage and refinancing risk, interest-rate and LIBOR exposure, loss of tower land or fiber rights-of-way, regulatory and environmental requirements, cyber incidents, and the need to maintain REIT qualification.
- T-Mobile and Sprint represented approximately 19% and 14%, respectively, of consolidated site rental revenue. The company disclosed that each carrier generated approximately 6% of consolidated site rental revenue from infrastructure where both carriers currently reside, creating potential overlap and decommissioning risk.
- Contractual obligations totaled approximately $36.5 billion, including $16.8 billion of debt and other long-term obligations, $8.4 billion of debt interest, $11.2 billion of lease obligations and $167 million of access agreement obligations. Estimated undiscounted asset-retirement obligations were approximately $1.1 billion, with a $192 million present-value liability.
Important facts for investors to verify
- Reconcile 2019 tenant-addition assumptions and Fiber construction spending with realized revenue growth, returns and free cash flow.
- Assess the financial and operational effects of T-Mobile/Sprint network integration, including overlapping sites, contract non-renewals and impairment exposure.
- Review debt maturities, anticipated repayment dates for tower revenue notes, refinancing needs and covenant headroom.
- Compare expected dividends and capital expenditures with operating cash flow and potential reliance on debt or equity financing.
- Evaluate Fiber segment scalability, construction execution, competition, customer concentration and rights-of-way requirements.
- Confirm the company’s continued REIT qualification, dividend distribution requirements and the potential utilization or expiration of approximately $1.5 billion of U.S. federal NOLs.
- Consider the dilution implications of the 6.875% mandatory convertible preferred stock, which was scheduled to convert automatically on August 1, 2020, subject to its terms.