CCI: Q3 2023 The Real Numbers Behind Guidance
Executive Summary
Low guidance looks bad. We adjusted the figures for accounting in revenue and AFFO. Guidance was actually pretty good.
Capital expenditures look too high.
Relocating employees is bad. Work-from-home would be good.
Article Starts
Crown Castle International (CCI) had a rough third quarter. Guidance came in a bit lower than expected. However, I believe most investors are misreading the figures.
One of the things that surprised me when I initially looked at the numbers was the reduction in property revenue. Simply put, it was a bigger decline than I had projected. I went back to the sheets to organize the data and run through it.
Shares
Shares outstanding are barely changing. It’s a rounding error. Consequently, I’m showing total values rather than values per share.
Ignore Services Revenue
We don’t really care about service revenue. Management only provides guidance based on “services margin”. For all past periods, we have revenues and expenses for services. In guidance, we only have “services margin” (revenue minus expenses). I’d like to be able to calculate it in advance from guidance, but I haven’t found a way.
Property Revenue
This is the metric in CCI’s guidance.
From 2023 to 2024, management projected a 2.17% decline in property revenue. That sounds terrible!
Quick question. Who remembers what non-cash and non-recurring values get stuck inside “property revenue”?
There are 3 of them:
Lease Termination Fees (non-recurring)
Amortization of Prepaid Rent (non-cash in that period)
Straight Line Rents (non-cash in that period)
Why do they distort rent?
Lease termination fees only happen once. They increase rent today, but decrease rent tomorrow. That’s not a recurring source of cash flow.
Amortization of Prepaid Rent represents deals where tenants agree to prepay a portion of the rent. Conceptually, this can be a bit hard. Why are they agreeing to do that? I see this as an incentive for development. CCI’s management talks about their development capital expenditures net of prepaid rent contributions.
CCI gets the cash upfront. CCI uses it to develop assets. Under GAAP, it is still part of rent, but I think of it is as the tenant paying part of development costs.Straight-line rent is one of the annoying GAAP requirements. It serves a purpose by making fraud more difficult. It prevents a bad manager from signing a 20-year lease with all the revenue in the first 2 years and using “revenue” to pump up the share price. We don’t need the adjustment though, because we’re not dealing with that.
Adjusting Property Revenue
What would happen if we were to control “Property Revenue” for each of those 3 items?
We can do precisely that. I’ve prepared the table from 2021 through 2024: