01—Abstract
Summary
Summary of the 10-K filed February 26, 2009. Cited figures are marked; the original filing is the authoritative source.
Crown Castle International Corp. (CCI) closed 2008 with 92% of consolidated revenues from site rental, generated by a portfolio of roughly 24,100 towers, 22,300 of them in the U.S. Revenue grew 10% to $1.53 billiona, Adjusted EBITDA rose to about $867 million, and operating income more than doubled to $292.5 million, though the company still posted a net loss of $48.9 million (about $69.7 million after preferred dividends).
Growth was driven by tenant additions on towers acquired in the 2007 Global Signal Merger, and the site rental gross margin expanded by $103 millionb. Management guided 2009 site rental revenue to $1.485–$1.5 billion, implying 6–7% growth. The central investor issue is balance sheet risk.
Total debt was about $6.1 billionc at year-end 2008 (roughly $6.8 billion as of February 17, 2009), and the company expects to refinance most of it within three years. Large tower revenue notes face anticipated repayment dates in June 2010 and November 2011, after which interest rises about 5% and excess cash flow sweeps principal. Interest rate swaps carried a settlement liability of roughly $520–616 million, and the Lehman Brothers counterparty filed for bankruptcy.
Management responded by issuing $900 milliond of 9% senior notes in January 2009 (net proceeds of $795.7 million, effective yield about 11.3%), reducing discretionary capex, and buying back debt, and it suspended share repurchases in favor of deleveraging. Operating momentum is solid, with the wireless industry showing resilience through the recession, but the equity story depends on successfully refinancing debt at acceptable rates in a stressed credit market. The stock fell from a $43.24 high in Q2 2008 to an $8.75 low in Q4 2008, and the 10-K flags higher refinancing costs, goodwill impairment risk, and a 7.6x consolidated debt-to-cash-flow ratio against a 7.0x threshold for certain senior notes covenants.
02—Key points
Key Highlights
- Site rental revenue of $1.40 billion (92% of total revenue) grew 9%, driven by tenant additions on a roughly 24,100-tower portfolio that is about 93% U.S. and Australian
- Operating income rose 194% to $292.5 million and Adjusted EBITDA increased about 14% to $867 million, reflecting high incremental margins on fixed tower costs
- Net loss of $48.9 million, including a $55.9 million FiberTower impairment, $37.9 million of swap losses, and a $74.9 million one-time tax benefit from an IRS exam
- Total debt of about $6.1 billion at year-end 2008 (about $6.8 billion by February 2009), with $3.45 billion of tower revenue notes facing anticipated repayment dates in 2010–2011
- Issued $900 million of 9% senior notes due 2015 in January 2009 (net proceeds $795.7 million) and bought back $134.8 million of mortgage debt in early 2009
- 2009 guidance calls for site rental revenue of $1.485–$1.50 billion (6–7% growth) and operating cash flow of roughly $500 million, with capex cut to about $150 million
- Interest rate swap settlement liability of about $520–616 million creates a significant cash obligation, and the Lehman Brothers counterparty exposure is unresolved
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 26, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $1.53B$1.39B | +10.2% |
| SG&A Expenses | $149.59M$142.85M | +4.7% |
| Operating Expenses | $1.23B$1.29B | −4.0% |
| Operating Income | $292.51M$99.53M | +193.9% |
| Interest Expense | $354.11M$350.26M | +1.1% |
| Net Income | -$48.86M-$222.81M | +78.1% |
05—Questions
Frequently Asked Questions
Is Crown Castle generating enough cash to service its debt?
Operating cash flow rose to $513 million in 2008 from $350 million in 2007, and management expects roughly $500 million in 2009 even with higher interest costs from the new 9% notes. Annual interest payments of roughly $400 million and scheduled debt maturities of about $252 million in 2009 are covered, but the company notes that $360.6 million of 2008 operating cash flow went to debt service, which leaves limited room for discretionary spending.
What are the biggest refinancing risks over the next three years?
The tower revenue notes ($1.9 billion due in June 2010 and $1.55 billion due in November 2011) are the largest near-term risk. If they are not repaid by their anticipated repayment dates, interest rises about 5% per year and excess cash flow is applied to principal. The $1.46 billion mortgage loan matures in February 2011, and the $246.5 million mortgage loan matures in December 2009. Management says it expects higher borrowing costs unless credit markets improve.
How concentrated is the customer base?
Four carriers (Sprint Nextel 23%, AT&T 19%, Verizon Wireless 18%, T-Mobile 12%) account for about 72% of consolidated 2008 revenue. The loss, merger, or financial distress of any one of them could materially reduce revenue. Verizon's acquisition of Alltel in January 2009 is not expected to cause material lease cancellations.
Why did the company report a net loss despite growing operating income?
Heavy interest expense of $354 million, a $55.9 million impairment on the FiberTower investment, and $37.9 million of interest rate swap losses drove the loss. Depreciation, amortization and accretion of $526 million also weighed on results. The $74.9 million tax benefit from the IRS exam offset part of these charges, and preferred dividends of $20.8 million further reduced earnings available to common stockholders.
What is the outlook for dividends and share repurchases?
Crown Castle has never paid cash dividends on common stock and is retaining cash to reduce debt and fund growth. It repurchased about $44.7 million of stock in 2008, compared with $729.8 million in 2007, and management has stated that it expects to limit discretionary investments, including buybacks, to prioritize debt reduction. The 6.25% convertible preferred stock dividend of about $19.9 million is paid in cash and is required to be redeemed in August 2012 for about $318 million.
06—Continue