SBA Communications Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. SBA owns and operates wireless communications sites, with site leasing as its principal business. It reported 29,687 towers at quarter-end; site leasing generated 97.3% of segment operating profit.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $493.3 million | $458.3 million | +7.6% reported; +9.7% constant currency |
| Operating income | $139.3 million | $130.0 million | +7.2% |
| Operating margin | 28.2% | 28.4% | Calculated from reported figures |
| Net income | $26.0 million | $31.5 million | -17.6% |
| Diluted EPS | $0.23 | $0.27 | Lower year over year |
| Adjusted EBITDA | $345.6 million | $318.8 million | +8.4% reported; +10.3% constant currency |
| Cash from operations | $222.7 million | $178.6 million | +24.6% |
| Cash, cash equivalents and restricted cash, period-end | $143.9 million | $164.8 million | Down from $178.3 million at 2018 year-end |
Amounts are in U.S. dollars. Adjusted EBITDA and constant-currency comparisons are non-GAAP measures. Q1 2019 site leasing revenue was $452.2 million; site development revenue was $41.1 million. Domestic site leasing revenue rose 6.2%; international site leasing increased 11.2% on a constant-currency basis; site development revenue rose 48.1%.
Balance sheet, debt and liquidity
- Total assets were $9.31 billion and shareholders’ deficit was $3.30 billion at March 31, 2019.
- Debt principal totaled $9.807 billion ($9.723 billion carrying value), versus $10.028 billion principal at December 31, 2018. Cash and cash equivalents were $117.6 million; an additional $23.9 million was restricted.
- The revolving facility had $110 million outstanding at quarter-end against a $1.25 billion commitment. SBA reported repaying a further $60 million after quarter-end, leaving $50 million outstanding as of the filing date. The company reported compliance with financial covenants.
- Approximately $920 million principal of 2014-1C Tower Securities has an anticipated repayment date of October 8, 2019. Estimated debt service for the 12 months through March 31, 2020 was $1.322 billion, including this repayment. Management said cash, revolving capacity and operating cash flow should be sufficient to service debt over the next 12 months.
- Cash paid for interest was $112.4 million, up from $104.0 million. Interest expense recognized in the income statement was $98.7 million, versus $88.9 million.
Material changes and notable items
- Operating income increased, but net income fell as interest expense rose $9.7 million and income tax expense increased; currency effects also weighed on results. A $2.1 million loss on remeasurement of Brazilian intercompany loans compared with a $1.6 million gain in Q1 2018.
- SG&A rose $14.9 million to $51.0 million, principally reflecting higher non-cash compensation and personnel and support costs. A $2.3 million partial recovery of Oi prepetition obligations partly offset expenses.
- On January 1, 2019, SBA adopted the new lease accounting standard. It recognized $2.6 billion of right-of-use assets and $2.5 billion of lease liabilities; adoption reduced accumulated deficit by approximately $21.0 million, net of tax. Management said adoption did not materially affect operations, liquidity or covenant compliance; prior-year balance-sheet figures were not restated.
- The company entered a four-year, $1.2 billion notional interest-rate swap on part of its 2018 Term Loan, paying a fixed 4.495% rate to reduce exposure to floating rates. The swap had a $15.3 million liability fair value at quarter-end.
- Q1 cash capital expenditures were $91.7 million, including acquisitions, construction, tower upgrades, land purchases and maintenance. Cash provided by investing activities also reflected $150.1 million of investment purchases and $150.6 million of sale proceeds.
Outlook, commentary and risks
- For 2019, management expected organic site leasing revenue in both domestic and international segments to increase over 2018, partly from carriers deploying unused spectrum. It cited network expansion by Sprint and T-Mobile as a driver of increased site development activity.
- Management forecast 2019 non-discretionary cash capital expenditures of $31–$41 million and discretionary expenditures of $325–$345 million, funded by cash on hand, operating cash flow and borrowings or new financing.
- Key risks include wireless-carrier consolidation—particularly the proposed Sprint–T-Mobile merger—changes in carrier network spending or technology, foreign exchange and political/economic exposure, interest rates and refinancing, acquisition integration and valuation, tower permitting and construction, and maintaining REIT qualification.
- Brazil represented 28.8% of the tower portfolio. A hypothetical 10% adverse move in the Brazilian real was estimated to reduce quarterly revenue by about 1.0% and operating income by about 0.7%; a 10% exchange-rate change on unsettled intercompany debt could produce approximately $48.2 million of unrealized gains or losses.
- Operating lease commitments totaled $4.488 billion in undiscounted minimum payments; contractual minimum tenant tower lease income was $7.264 billion. These commitments are not direct measures of future cash flow.
Investor verification priorities
- Confirm the refinancing or repayment plan for the $920 million 2014-1C Tower Securities anticipated in October 2019.
- Track debt costs, floating-rate exposure and covenant headroom, including the effect and terms of the interest-rate swap.
- Assess whether carrier activity and organic leasing growth support management’s outlook, especially amid potential Sprint–T-Mobile consolidation.
- Reconcile the forecast $325–$345 million discretionary 2019 capital spending with acquisition returns, leverage targets and cash generation.
- Review Brazil-related currency exposure and the collectability of Oi obligations; distinguish reported results from constant-currency and other non-GAAP measures.