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| SBAC > SEC Filings for SBAC > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-2012
Quarterly Report
We are a leading independent owner and operator of wireless communications towers. Our principal operations are in the United States and its territories. As of September 30, 2012, we also owned towers in Canada, Costa Rica, El Salvador, Guatemala, Nicaragua and Panama. Our primary business line is our site leasing business, which contributed approximately 97.5% of our total segment operating profit for the year-to-date period ended September 30, 2012. In our site leasing business, we lease antenna space to wireless service providers on towers and other structures that we own, manage or lease from others. The towers that we own have been constructed by us at the request of a wireless service provider, constructed based on our own initiative or acquired. As of September 30, 2012, we owned 13,257 tower sites, the substantial majority of which have been built by us or built by other tower owners or operators who, like us, have built such towers to lease space to multiple wireless service providers. As adjusted for our acquisition of 3,256 towers in the TowerCo acquisition on October 1, 2012, we would have had 16,513 towers as of September 30, 2012. We also managed or leased approximately 4,900 actual or potential additional communications sites, approximately 500 of which were revenue producing as of September 30, 2012. Our other business line is our site development business, through which we assist wireless service providers in developing and maintaining their own wireless service networks.
Site Leasing Services
Our primary focus is the leasing of antenna space on our multi-tenant towers to a variety of wireless service providers under long-term lease contracts. Site leasing revenues are received primarily from wireless service provider tenants, including AT&T, Sprint, Verizon Wireless and T-Mobile. Wireless service providers enter into numerous different tenant leases with us, each of which relates to the lease or use of space at an individual tower site. Tenant leases are generally for an initial term of five to ten years with five 5-year renewal periods at the option of the tenant. These tenant leases typically contain specific rent escalators, which average 3-4% per year, including the renewal option periods. Tenant leases are generally paid on a monthly basis and revenue from site leasing is recorded monthly on a straight-line basis over the current term of the related lease agreements. Rental amounts received in advance are recorded in deferred revenue.
Cost of site leasing revenue primarily consists of:
• Rental payments on ground and other underlying property leases;
• Straight-line rent adjustment for the difference between rental payments made and the expense recorded as if the payments had been made evenly throughout the minimum lease term (which may include renewal terms) of the underlying property leases;
• Property taxes;
• Site maintenance and monitoring costs (exclusive of employee related costs);
• Utilities;
• Property insurance; and
• Deferred lease origination cost amortization.
Ground leases are generally for an initial term of five years or more with multiple renewal terms of five year periods at our option and provide for rent escalators which typically average 3-4% annually or provide for term
escalators of approximately 15%. Of the 13,257 tower sites we owned as of September 30, 2012, approximately 72% were located on parcels of land that we own, land subject to perpetual easements, or parcels of land in which we have a leasehold interest that extends beyond 20 years. For any given tower, costs are relatively fixed over a monthly or an annual time period. As such, operating costs for owned towers do not generally increase as a result of adding additional customers to the tower. The amount of direct costs associated with operating a tower varies from site to site depending on the taxing jurisdiction and the height and age of the tower. The ongoing maintenance requirements are typically minimal and include replacing lighting systems, painting a tower or upgrading or repairing an access road or fencing.
As indicated in the table below, our site leasing business generates a significant portion of our total revenues. For information regarding our operating segments, please see Note 14 of our Condensed Notes to Consolidated Financial Statements included in this quarterly report.
Revenues
For the three months For the nine months
ended September 30, ended September 30,
2012 2011 2012 2011
(dollars in thousands)
Site leasing revenue $ 208,828 $ 154,514 $ 585,332 $ 451,171
Total revenues $ 238,606 $ 175,549 $ 660,243 $ 514,351
Site leasing revenue percentage of total
revenues 87.5 % 88.0 % 88.7 % 87.7 %
Segment Operating Profit
For the three months For the nine months
ended September 30, ended September 30,
2012 2011 2012 2011
(dollars in thousands)
Site leasing segment operating profit
(1) $ 162,207 $ 120,582 $ 458,545 $ 353,140
Total segment operating profit (1) $ 166,923 $ 123,702 $ 470,162 $ 361,693
Site leasing segment operating profit
percentage of total segment operating
profit (1) 97.2 % 97.5 % 97.5 % 97.6 %
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(1) Site leasing segment operating profit and total segment operating profit are non-GAAP financial measures. We reconcile these measures and other Regulation G disclosures in this quarterly report in the section entitled Non-GAAP Financial Measures.
We believe that over the long-term, site leasing revenues will continue to grow as wireless service providers lease additional antenna space on our towers due to increasing minutes of network use and data transfer, network expansion and network coverage requirements. We believe our site leasing business is characterized by stable and long-term recurring revenues, predictable operating costs and minimal non-discretionary capital expenditures. Due to the relatively young age and mix of our tower portfolio, we expect future expenditures required to maintain these towers to be minimal. Consequently, we expect to grow our cash flows by (1) adding tenants to our towers at minimal incremental costs by using existing tower capacity or requiring wireless service providers to bear all or a portion of the cost of tower modifications and (2) executing monetary amendments as wireless service providers upgrade their equipment. Furthermore, because our towers are strategically positioned and our customers typically do not relocate, we have historically experienced low tenant lease terminations as a percentage of revenue.
The following rollforward summarizes the activity in our consolidated tower portfolio from December 31, 2011 to September 30, 2012:
Number of Towers
Towers owned at December 31, 2011 10,524
Purchased towers 78
Constructed towers 63
Towers reclassified/disposed (1) (4 )
Towers owned at March 31, 2012 10,661
Purchased towers 2,381
Constructed towers 90
Towers reclassified/disposed (1) (10 )
Towers owned at June 30, 2012 13,122
Purchased towers 37
Constructed towers 99
Towers reclassified/disposed (1) (1 )
Towers owned at September 30, 2012 13,257
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(1) Reclassifications reflect the combination for reporting purposes of multiple tower structures on a single parcel of real estate, which we market and customers view as a single location, into a single tower site. Dispositions reflect the decommissioning, sale, conveyance or legal transfer of owned tower sites.
Site Development Services
Our site development business is complementary to our site leasing business and provides us the ability to keep in close contact with the wireless service providers who generate substantially all of our site leasing revenue and to capture ancillary revenues that are generated by our site leasing activities, such as antenna and equipment installation at our tower locations. Site development services revenues are received primarily from providing a full range of end to end services to wireless service providers or companies providing development or project management services to wireless service providers. We principally perform services for third parties in our core, historical areas of wireless expertise, specifically, site acquisition, zoning, technical services and construction. Our site development business consists of two segments, site development consulting and site development construction.
Our site development customers engage us on a project-by-project basis and a customer can generally terminate an assignment at any time without penalty. Site development projects, both consulting and construction, include contracts on a time and materials basis or a fixed price basis. The majority of our site development services are billed on a fixed price basis. Time and materials based site development contracts are billed and revenue is recognized at contractual rates as the services are rendered. Our site development projects generally take from three to twelve months to complete. For those site development consulting contracts in which we perform work on a fixed price basis, we recognize revenue based on the completion of agreed upon phases of the project on a per site basis.
Our revenue from site development construction contracts is recognized on the percentage-of-completion method of accounting, determined by the percentage of cost incurred to date compared to management's estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. These amounts are based on estimates, and the uncertainty inherent in the estimates initially is reduced as work on the contracts nears completion. Revenue from our site development construction business may fluctuate from period to period depending on construction activities, which are a function of the timing and amount of our clients' capital expenditures, the number and significance of active customer engagements during a period, weather and other factors.
Cost of site development consulting revenue and construction revenue includes all costs of materials, salaries and labor costs, including payroll taxes, subcontract labor, vehicle expense and other costs directly and indirectly related to the projects. All costs related to site development consulting contracts and construction contracts are recognized as incurred.
The table below provides the percentage of total revenues contributed by site development consulting services and site development construction services for the three and nine months ended September 30, 2012 and 2011. For information regarding our operating segments, see Note 14 of our Condensed Notes to Consolidated Financial Statements included in this quarterly report.
Revenues
For the three months For the nine months
ended September 30, ended September 30,
2012 2011 2012 2011
(dollars in thousands)
Site development consulting $ 10,588 $ 4,399 $ 24,188 $ 13,262
Site development construction $ 19,190 $ 16,636 $ 50,723 $ 49,918
Total revenues $ 238,606 $ 175,549 $ 660,243 $ 514,351
Site development consulting 4.4 % 2.5 % 3.7 % 2.6 %
Site development construction 8.0 % 9.5 % 7.7 % 9.7 %
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International Operations
As of September 30, 2012, we had operations in Canada, Costa Rica, El Salvador, Guatemala, Nicaragua and Panama. Our operations in these countries are solely in the site leasing business, and we expect to expand operations through new builds and acquisitions. Tenant leases in the Canadian market typically have similar terms and conditions as those in the United States, with an initial term of five years, and specific rent escalators. Tenant leases in Central America typically have a ten year initial term with similar renewal terms and rent escalators as those in the United States and Canada.
In our Central American markets, significantly all of our revenue, expenses, and
capital expenditures arising from our new build activities are denominated in
U.S. dollars. Specifically, our ground leases, our tenant leases and most of our
tower related expenses are due, and paid, in U.S. dollars. In our Central
American markets, our local currency obligations are principally limited to
(1) permitting and other local fees, (2) utilities and (3) taxes. In our
Canadian operations, significantly all of our revenue, expenses and capital
expenditures, including tenant leases, ground leases and other tower-related
expenses, are denominated in Canadian dollars.
Recent Developments
On September 14, 2012, we reached an agreement with T-Mobile USA ("T-Mobile") to extend the remaining term on approximately 2,800 existing leases to an average of approximately 7 years, and granted T-Mobile rights to upgrade certain towers with radio equipment in connection with its network modernization plan. The terms of the agreement will result in recognizing an increase in non-cash site rental revenue and increased annual cash escalations.
On September 6, 2012, we sold certain DAS networks located in New York, Chicago and Las Vegas, to ExteNet Systems, Inc. for approximately $94.3 million in cash and $25 million in the form of a promissory note. On October 23, 2012, an additional DAS network in Auburn, Alabama was sold to ExteNet for cash consideration of $5.7 million.
On October 1, 2012, we completed our previously announced acquisition of TowerCo II Holdings LLC, which owned 3,256 tower sites in 47 states across the U.S. and Puerto Rico. As consideration for the acquisition, we paid $1.2 billion in cash and issued 4.6 million shares of our Class A common stock.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year ended December 31, 2011 and Note 2 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.
KEY PERFORMANCE INDICATORS
Non-GAAP Financial Measures
This report contains certain non-GAAP measures, including Segment operating profit and Adjusted EBITDA information. We have provided below a description of such non-GAAP measures, a reconciliation of such non-GAAP measures to their most directly comparable GAAP measures and an explanation as to why management utilizes these measures.
Segment Operating Profit:
We believe that Segment operating profit is an indicator of the operating performance of our site leasing and site development segments and is used to provide management with the ability to monitor the operating results and margin of each segment, while excluding the impact of depreciation, accretion and amortization, which is largely fixed and non-cash in nature. Segment operating profit is not intended to be an alternative measure of revenue or segment gross profit as determined in accordance with GAAP.
Site leasing segment
For the three months For the nine months
ended September 30, Dollar ended September 30, Dollar
2012 2011 Change 2012 2011 Change
(in thousands)
Segment revenue $ 208,828 $ 154,514 $ 54,314 $ 585,332 $ 451,171 $ 134,161
Segment cost of revenues
(excluding depreciation,
accretion and amortization) (46,621 ) (33,932 ) (12,689 ) (126,787 ) (98,031 ) (28,756 )
Segment operating profit $ 162,207 $ 120,582 $ 41,625 $ 458,545 $ 353,140 $ 105,405
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Site development consulting segment
For the three months For the nine months
ended September 30, Dollar ended September 30, Dollar
2012 2011 Change 2012 2011 Change
(in thousands)
Segment revenue $ 10,588 $ 4,399 $ 6,189 $ 24,188 $ 13,262 $ 10,926
Segment cost of revenues
(excluding depreciation, accretion
and amortization) (6,925 ) (3,171 ) (3,754 ) (16,268 ) (9,938 ) (6,330 )
Segment operating profit $ 3,663 $ 1,228 $ 2,435 $ 7,920 $ 3,324 $ 4,596
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Site development construction segment
For the three months For the nine months
ended September 30, Dollar ended September 30, Dollar
2012 2011 Change 2012 2011 Change
(in thousands)
Segment revenue $ 19,190 $ 16,636 $ 2,554 $ 50,723 $ 49,918 $ 805
Segment cost of revenues
(excluding depreciation, accretion
and amortization) (18,137 ) (14,744 ) (3,393 ) (47,026 ) (44,689 ) (2,337 )
Segment operating profit $ 1,053 $ 1,892 $ (839 ) $ 3,697 $ 5,229 $ (1,532 )
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Site leasing segment operating profit increased $105.4 million for the nine months ended September 30, 2012, as compared to the same period in the prior year, primarily due to additional profit generated by the towers that we acquired and partially from towers constructed subsequent to September 30, 2011, organic site leasing growth from new leases, contractual rent escalators, lease amendments with current tenants which increased the related rent to reflect additional equipment added to our towers, and increased straight-line leasing revenue associated with the Sprint Network Vision Agreement entered into in the fourth quarter of 2011 and the Mobilitie acquisition completed in the second quarter of 2012.
Adjusted EBITDA:
We define Adjusted EBITDA as net loss excluding the impact of net interest expenses, provision for taxes, depreciation, accretion and amortization, asset impairment and other charges, non-cash compensation, net loss from extinguishment of debt, other income and expenses, acquisition related expenses, non-cash straight-line leasing revenue, non-cash straight-line ground lease expense and income from discontinued operations.
We believe that Adjusted EBITDA is an indicator of the financial performance of our core businesses. Adjusted EBITDA is a component of the calculation that has been used by our lenders to determine compliance with certain covenants under our Senior Credit Agreement, 8.25% Notes, 5.625% Notes and 5.75% Notes. Adjusted EBITDA is not intended to be an alternative measure of operating income or gross profit margin as determined in accordance with GAAP.
The reconciliation of Adjusted EBITDA is as follows:
For the three months For the nine months
ended September 30, Dollar ended September 30, Dollar
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands)
Net loss $ (52,699 ) $ (33,437 ) $ (19,262 ) $ (128,804 ) $ (97,723 ) $ (31,081 )
Interest income (335 ) (38 ) (297 ) (419 ) (97 ) (322 )
Total interest expense(1) 71,651 60,777 10,874 198,302 172,492 25,810
Depreciation, accretion and
amortization 101,012 78,136 22,876 277,110 229,705 47,405
Asset impairment 1,560 1,106 454 2,555 1,402 1,153
Provision for taxes(2) 900 808 92 5,422 3,257 2,165
Loss from extinguishment of
debt, net 22,643 - 22,643 49,792 1,696 48,096
Non-cash compensation 3,679 2,773 906 10,586 8,695 1,891
Non-cash straight-line leasing
revenue (12,245 ) (2,173 ) (10,072 ) (31,909 ) (6,059 ) (25,850 )
Non-cash straight-line ground
lease expense 5,899 3,191 2,708 13,999 8,873 5,126
Acquisition related costs 5,715 1,474 4,241 21,875 4,876 16,999
Other income/expense (249 ) (122 ) (127 ) (5,233 ) 527 (5,760 )
Income from discontinued
operations (969 ) - (969 ) (2,349 ) - (2,349 )
Adjusted EBITDA $ 146,562 $ 112,495 $ 34,067 $ 410,927 $ 327,644 $ 83,283
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(1) Total interest expense includes cash interest expense, non-cash interest expense and amortization of deferred financing fees.
(2) Includes $(129) and $613 of franchise taxes for the three and nine months ended September 30, 2012, respectively, and $417 and $1,473 in the same periods from prior year, respectively, as reflected in the Consolidated Statement of Operations in selling, general and administrative expenses.
Adjusted EBITDA increased $83.3 million for the nine months ended September 30, 2012, as compared to the same period in the prior year, primarily due to increased site leasing segment operating profit offset by an increase in selling, general and administrative costs.
RESULTS OF OPERATIONS
Three months ended September 30, 2012 Compared to Three months ended
September 30, 2011
For the three months Percentage
ended September 30, Dollar Increase
2012 2011 Change (Decrease)
(in thousands)
Revenues:
Site leasing $ 208,828 $ 154,514 $ 54,314 35.2 %
Site development 29,778 21,035 8,743 41.6 %
Total revenues 238,606 175,549 63,057 35.9 %
Operating expenses:
Cost of revenues (exclusive of
depreciation, accretion and
amortization shown below):
Cost of site leasing 46,621 33,932 12,689 37.4 %
Cost of site development 25,062 17,915 7,147 39.9 %
Selling, general and administrative 17,565 15,415 2,150 13.9 %
. . .
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