Uniti Group Inc. (UNIT) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. We love to have breaking news at this conference. And certainly Uniti's given us a lot to talk about this afternoon. So Mark and Bill, we're delighted to have you here today, welcome to the conference. Before we get started, please note that all important disclosures, including personal holdings disclosures and the Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. So I'm very glad that we don't start with, I'm unable to comment on what might happen relating to mediation, et cetera.

So why don't you start with just a quick summary of where we are and what the kind of the outlines of the agreement with Windstream are?

Sure. So let me start with thank you very much for inviting us. We're always happy to be at Morgan Stanley conferences. And glad we can make it, it has been a busy few weeks for us, but glad we make it down for this conference. I'll give our disclaimer as well that we did post some investor relations materials on our website this morning. So be sure to read those and along with the forward-looking statements therein. So I'll start with my kind of overall comments so we can dive into some details. But for those who maybe haven't been following as closely as others. So we did -- we were able to announce on Monday that we had reached an agreement in principle with Windstream on a settlement as part of their bankruptcy process. It's been ongoing. I would say that we are very enthusiastic about the agreement that we've been able to reach with Windstream and their creditors. I think it creates a very good long-term partnership for us going forward with Windstream. I think the agreement that we've reached could be a real game changer for both companies going forward. And before I go too far into my remarks, I do want to personally say thank you to Windstream, to Tony Thomas, the Windstream Board for negotiating this with us. And look forward to it being agreed and court approved and Windstream emerging on an expedited basis. And we think, as I said, we think it creates a very good, strong partnership for both companies going forward. But we've always said that we want to try to achieve out of this -- out of the bankruptcy process, it was a mutually beneficial deal for both companies. And I think this deal represents that. And we can talk about that more going forward. I do think there are a lot of favorable aspects of the deal from Uniti. But probably the most important as anything, it gives us clarity on a path forward with getting this resolved, and we look forward to taking a lot of the M&A strategy that previously has been paused and reengaging on some of those M&A discussions. Certainly, I think that you'll see us continue to be active in the capital markets going forward. And I think all that -- certainly look forward to good solid business performance as well from all of our units, which is really the foundation of our company. I do think that we do need to keep our eye on the ball here and make sure that we stay focused. This is an agreement in principle. We certainly have to get it through the court approval process. Windstream need to emerge from bankruptcy. And we need to keep our eye on the ball as our top priority in making sure that we see it through completion and get the ball across the finish line. But it does give us a clear path forward, and we're very happy about where we are today.

Great. Perhaps on the agreement in principle, just help us understand, what the next steps, be it the timing or what we should be looking forward to, to see getting this over the finish line?

So the agreement, I'll outline it. There's a lot of twists and turns things can take at bankruptcy. But generally, the agreement in principle will be presented to the court for what's called a 9019 settlement. So it will be presented. There'll be a number of days after that. The court will consider it, probably hear arguments pro and con. I would expect that after, say, roughly 30 days or probably early April might be -- would probably be the opportunity for that agreement to be approved by the court. And then after that, and actually starting now and continuing after the approval, we'll need to -- there will be a number of things that need to get done. So definitive documents will need to get done. So as you know, as part of the process, the current leases, it's being bifurcated into 2 leases, the ILEC lease and the CLEC lease. Those documents would need to get drafted. There'll need to be evaluation work done on the underlying network assets. There'll need to be [ true league's ] opinions, there'll need to be -- there's assets outside of the current lease properties that are being transferred. And so asset purchase agreements will need to get drafted. So there'll be a lot of documentation that needs to get negotiated and drafted and then executed for our settlement agreement to actually be finalized. And so I would say, kind of, roughly -- rough time frames, plus and minus, that could all happen in maybe the May time frame. And then kind of baseline maybe Windstream could emerge sometime plus or minus in the August time frame. I do understand from Windstream's comments that they intend to try to make all this happen on an expedited basis. And the sooner it could happen from our standpoint, the better.

Great. And you talked about bifurcating the lease. I think that's something that, in the slides you published, you did talk about the opportunity maybe for Windstream to sell the CLEC business and diversify your revenue streams further. So just help us understand: what was the genesis behind that concept? It obviously wasn't something you originally set up, but now you're adopting it. So how should we think about this is?

Yes. So I think bifurcation of the lease is designed to give Windstream optionality. So if they desire to, say, made a decision to sell, for example, in the future and certainly not suggesting that they [Audio Gap] that's up to them. But if they did decide that or did decide to do that in the future, then that lease -- those leases already have been separated. So effectively it's prewired. So absent some successor tenant provisions, they could sell -- that we have in our lease, that lease could be sold, or the business could be sold to a third party, the lease could travel to the third party. And that would be a benefit to them and certainly would create a benefit for us in terms of giving us additional tenant diversification.

But presumably, you have a right of, kind of, approval do you over...

Sure. In terms of the successor tenant provisions. And so what we outlined in the Investor Relations deck is what that would mean. So as part of the transaction, we're getting dark fiber IRUs as part of the entire transaction. We're getting dark fiber IRU agreements that generate about $30 million annually of EBITDA from third parties, not Windstream-related. So that's third-party additional revenue that we've been getting. And so in the slide deck, where we actually had showed on kind of a pro forma basis, is that, with those additional dark fiber contracts coming into our revenue mix. And if Windstream decides to dispose -- sell CLEC business in the future to a third-party tenant, well, those 2 things, in and of themselves, would diversify our revenue such that Windstream would represent less than 50% of our revenues. And if you recall, before Windstream went into bankruptcy, we had set a target to try to get to 50% revenue diversification. Now because of the bankruptcy process, we had to put that on hold. But we had set that to a target. So this transaction in and of itself doesn't get it there, but it does present the flexibility for us to get there should Windstream decide to take any action on that business.

So what percent of the lease will be CLEC versus ILEC of their, kind of, and monthly or payments?

Yes. So we don't know precisely. In the IR deck that we presented or posted this morning, we put in what we think is a representative, an indicative amount what we think the rent will be...

Like 1/3 or something?

Yes, so it's about $150 million annually is what we think it represents. Now ultimately, the final amount will be determined by the true lease process and the evaluations that will be done by third parties, but that's our best estimate right now.

Okay. So you're making a number of payments, both upfront and also over time for capital improvements for some of these assets that you're getting. There's an equity raise with the -- some of the Windstream creditors. So talk us through the funds flow here and your financing plans, if this goes through.

Sure. So the largest component of the transaction and kind of the foundational component is really what's referred to as a growth capital improvement, okay? So that is -- so -- again, what we've committed to is to invest in growth capital improvements, $1.75 billion over the next 10 years. The amount varies slightly by year, but essentially, what that is, that is us investing our capital into new fiber builds that we will own and that we will lease to Windstream. We will lease those to Windstream, and we will generate an 8% initial lease rates -- sorry, initial yield on those growth capital improvements. That lease -- like the -- those lease payments, like the existing lease payments, will be subject to a 0.5% escalator per year. And so -- and then those markets -- then the -- so that's what we're doing. So we're investing capital in new fiber builds, those new fiber builds are designed to be built in markets that will be beneficial to Windstream to improve speeds, to improve their competitive position and ultimately improve their margins and cash flows over time. So when we talked about early on and today about doing something that -- doing a transaction that's mutually beneficial to both parties, I think that's a key cornerstone of what we tried to achieve. We're investing in fiber. We're improving our fiber network -- our network with additional fiber investments. I think that will also should make -- makes our network more valuable, it makes it more valued to Windstream at renewal. It should make it more valued to any successor tenant as well, should Windstream not renew. But I do think that it will make it much more valued for them or more likely that they do renew. At the same time, those are going to be in markets that are beneficial, are designed to be -- and those investments will be made in markets that are designed to be beneficial to Windstream and help their financial profile and help their growth. So that's really the cornerstone of what we're doing. Now, there's a lot of additional details, but that's really a -- one of the -- foundational elements of the transaction.

Okay. And the funding of that?

Yes. So the other thing that I didn't say, it needs to be beneficial to Windstream, it needs to be a deal needed to be beneficial to us and the last -- the third component is it needed to represent an attractive investment thesis. So I do expect on some of the growth capital that we're going to go pull into those fiber builds that we will raise some of that money into capital markets. And so we needed to make sure that we had an attractive investment thesis when we went to market. Now since some of the closing disclosures have gone -- have become public over the last several months, I certainly have talked to a lot of investors about those investments and what the yield should be, how they think about investing proceeds in any capital raises in those assets, so I'm very confident that we'll be able to raise the funds because I've got a lot of good feedback. I don't know whether or not we would raise any capital needs in public markets or private markets. As you know, over the last couple of years, we have developed a lot of relationships with private capital sources, infrastructure funds, private equity, some sovereign wealth funds, many of them have an interest in investing in infrastructure assets. In some cases, they were reluctant to invest in Uniti prior to a resolution on the Windstream situation. Now that we have that in hand or close to an end, some of those -- we're starting those discussions again. In fact, some had reached out to me as early or as recently as last week to start to explore that. So I think there's -- we will certainly raise capital for part of that. I would say, don't forget that over the last year or so we've also been active in recycling capital. So you've seen us sell our Latin American business. You saw us sell our ground lease portfolio. You saw us in the Macquarie-Bluebird transaction. We sold our Midwest assets to Macquarie and Bluebird. And so that's also another revenue that we have available to us as well. So we don't have everything, we're still evaluating with the right strategies there, but we have plenty of sources. So I have no doubt that we'll be able to fund those efficiently.

And if I could add one more thing. I think another aspect of the GCI funding program is we have the option to joint build in certain CLEC fiber territories, too, where we would share the cost with Windstream 50-50. So we would build alongside them and then we would retain any excess strand beyond what Windstream needs. So I think that's another key aspect of the deal that's beneficial to Uniti as well.

Yes, that's a very good point that Bill made. That's a very key thing for us as well is that, everything that we currently have under the existing leases is leased to Windstream exclusive use. The growth capital improvements that we make for Windstream are also designed to be exclusive use. However, we also do have a provision that allows us, if we also want, strands deployed in those markets along those routes that we're building, where we're building, where new fiber is being built for Windstream that we also have the opportunity to lay some additional strands for Uniti's use. And in the case, the arrangements is we would split the cost of those builds.

A lot of moving parts, but where does the dividend shake out in all of this? What was the implications on distributable net income, et cetera?

Sure. So the -- we tried to answer that question by going ahead and issuing our dividend declaration, yesterday. So the dividend declaration was $0.15 per share that we've set for the last dividend. Now keep in mind on the dividend, we're still under the dividend restrictions that were imposed originally by our -- the fourth amendment to our credit agreement last year. And those restrictions only permit us to pay what the minimum is that we're required to pay based on the REIT rules. So it's 90% of taxable income. That $0.15 lever -- level that we declared it's at pro rata, but -- pro rata based on that amount. It is slightly below that amount. So right now, because of those restrictions, I think people should assume that for this year, until we're out front of those restrictions, we have to meet certain tests. But for this year, it's at that level. And so what would happen, all else being equal, is that we would pay the $0.15 for the next few quarters, and then we would probably, like we did this year or like we did last year, we would pay a higher dividend. The declaration of the fourth quarter dividend would be higher in order to kind of make up for any difference between that and what the 90% requirement is.

And your goal is to get your leverage down below 6x?

Yes. So I think the -- I think one of the things when I say it provides the Windstream resolution or at least the agreement in principle provides clarity on our path forward, I do think that kind of near term, intermediate term, we do want to get -- bring leverage down. And if you saw in the recent senior secured notes offering that we issued, that we took those covenants that we had in the fourth agreement -- our fourth amendment to the credit facility and did include those in our recent notes issuance, with one additional caveat, and that is also that those covenant limitations are lifted once we get leverage down to 5.75. And so that was going to be -- so that's kind of an intermediate target. And that's -- certainly, you should take that as signaling that that's our goal, is to get it down to 5.75 and have those -- and have all limitations lifted.

Great. So I do want to spend a little bit of time on the current business. Obviously, there's a whole lot going on here, but you filed a notice you're releasing earnings next week, but you did file some summary numbers, including revenues, et cetera. So you just -- what can you tell us so far about how the year ended up?

Yes. So we'll give more detail -- you're correct. So let me -- if anybody missed it, let me just say that we did -- we were -- because of the Windstream situation, we have been somewhat delayed in getting -- announcing our earnings date. So we did announce it. The earnings date will now be on March 12. So we're looking forward to that and giving guidance for 2020. The results for this year, I can't really say a whole lot more at this than what was in the filing, but they're pretty consistent with what the guidance that we had given previously. When you have the earnings on the 12, we'll obviously go through how each one of the business units performed. But I'd say the businesses are generally performing in line, in fact, I think with the guidance that we've given. In fact, I think that if you remember, one of our goals for 2019 as we went through the bankruptcy process was to make sure that we -- while some of us were focused -- had focused a lot of our time on the bankruptcy process, we wanted to make sure that the businesses that we own continue to perform. And that -- and so I think that was a real goal to make sure we had solid operating performance. And I think we've achieved that for last year and certainly plan to continue to achieve that this year. And I'll let -- I think it might be worthwhile maybe if we talk a little bit about what we see going on in each one of the business units as well.

Absolutely. Yes.

So I'll let Bill talk about that.

Yes. So we'll start with fiber. So as you may recall, we've been talking about these large dark fiber, small cell projects that we've been building. So at one time, we had 14 of these projects ongoing. These were all anchor builds with wireless carriers, mostly in our Southeast footprint. And a lot of these deals -- these builds were acquired when we did the prior acquisitions of PEG Bandwidth, Tower Cloud and Southern Light. So we've completed the majority of those. We completed majority of those in 2019, and so there's a handful of projects that will be completed -- we expect to be completed by the end of this year. So I think a real focus of ours. And again, we'll talk more about this on our earnings call, but our real focus for 2020 is going to be leasing up these anchor builds. So leveraging the network we've built to lease up, not only with additional wireless customers, but predominantly, it's going to come from nonwireless opportunities. So the last couple of quarters, we've been talking about our mix of bookings and how that looks, and it's been primarily coming from nonwireless. So it's going to be selling to enterprise customers, local enterprise customers, wholesale, selling to schools through the federally funded E-Rate program and other businesses in those markets. So I think that's really going to be a focus of ours going forward in 2020.

And the capital intensity...

Yes, I was about to say, the capital intensity, we talked about that. We expect that to come down and should trend by the end of this year into that 30%, 35% range. And part of it's a function of just wrapping up these large dark fiber projects, but also it's a function of we're going to continue to do greenfield builds. We're not going to just -- we're probably not going to do 14 at a time. We're going to do a handful at a time. So we'll be able to set the cadence better, but also it's a factor of the incremental CapEx you need to spend on the lease-up is substantially less than the anchor builds themselves because, obviously, you're leveraging the network for the most part, you may just have to build a small lateral here and there to connect to some customers. So capital intensity at Uniti Fiber should be coming down by the end of this year. And then on leasing, it's really -- absent any potential M&A we may do there, it's really just focusing on leveraging -- leasing up the existing networks that we have. So as you recall, last year in 2018, we did several sale-leaseback transactions. We acquired the CenturyLink Fiber outright, and we've been pretty successful in leasing that up. So we'll continue to focus on that. And then early 2019, we announced our first opco/propco transaction with Bluebird/Macquarie, where we acquired the fiber network of Bluebird, and Macquarie runs and owns the operations of Bluebird. And so we lease the fiber back to them. So as you may recall, a big part of that deal is the rent was fixed for the initial year and then it moves to a variable fixed component, with the variable components tied to growth at Bluebird. So there's upside to that initial yield there. And another part of that deal was we have the right to fund future growth CapEx. So to the extent that we do that that would get added to the rent at the cap rate as well. So there's significant multiple drivers there that can drive incremental yield with that deal. And so again, to the extent we did potential M&A there, I think, it would be in the sale-leaseback opco/propco transaction, trying to replicate those deals. And then on towers, we've talked about in the past about our target is to build anywhere between 200 and 300 towers per year. Historically, we talked about -- at prior guidance, we talked about building 240 towers in 2019. And so CapEx should still be around -- if we continue to build the 200 to 300 towers annually, you could probably expect CapEx to be in the range that we previously gave out, which is in the $90 million, $100 million range.

And what about the lease-up of the towers?

Yes. So again -- yes, the focus there would be to add additional tenants there as well. So it's no secret that today, we're primarily building towers for AT&T. But we do have MLAs in place with 3 of the other 4 major wireless carriers. So there is opportunity to lease-up the towers.

Okay. And are you seeing Sprint-T-Mobile, DISH, it's still early days on seeing that activity?

Yes. So Sprint-T-Mobile, I mean we see that as a net long-term positive for Uniti. I mean there may be some noise in the near term because there is some overlap between. Then but there isn't that much overlap between the 2 customers. So there could be some sites that potentially fall out there on the fiber side, but nothing material, we don't expect anything material there. But net positive, on the long term, we believe a combined Sprint-T-Mobile has more capital to deploy than separately. And then secondly, I think if you look to some of the prior comments about investing in rural broadband when they were talking about the merger, I think that bodes well for us because we primarily operate in Tier 2, Tier 3 markets that are mostly rural and suburban in nature. So I think that can be a significant tailwind for us as we look to deploy capital. And then DISH, I think it is still early days. I mean I think there is potential to do something there with them, both potentially on the fiber and tower side, but it's still kind of early days there.

And in terms of maybe kind of monetizing some of the assets. Is there -- are there any sacred cows here? Or is there anything available? We've obviously seen tower multiples at record levels before this recent correction.

But I wouldn't say that there's any sacred cows. We get proposed and evaluate a lot of different things. I would say this that Uniti intends to be a long-term owner of fiber infrastructure assets or a long-term owner of communication assets. What form that takes over time, it probably said, we have a lot of different proposals on that. But we intend to be long-term owners of communication infrastructure assets. And so I wouldn't expect to see us deviate from that.

Okay. And if we look at your pipeline of potential deals, which categories do they tend to concentrate in?

Yes, good question. On the M&A pipeline, I would say that there -- they continue to be fiber based -- they're predominantly fiber-based acquisitions. Now some of those would fall into Uniti Fiber, which would primarily be, if you remember the criteria, it's primarily Southeast-based, it would be primarily bolt-on acquisitions in those -- in the Southeast market, where we already have -- where we're trying to densify network or maybe expand at the edges. Now you will continue to hear more and more about Uniti Leasing. And we continue to think that Uniti Leasing is a very attractive business line. It is a propriety. I don't know if anybody else is doing sale-leaseback in opco/propco transactions, but I think sale-leaseback transactions are certainly in our pipeline. The Macquarie/Bluebird transaction was kind of a template to do additional opco/propco transactions. I certainly think you'll see us do more of those over time. The bulk -- some of the bulk fiber purchases that we've done have worked out very well for us. And then I would say -- and don't forget that as part of the Windstream transaction, Windstream is also relinquishing 1.8 million strand miles that are currently part of the lease that they're relinquishing that. So we will get those back, those strands will be unencumbered now by the lease with a full ownership. And Ron Mudry, who heads up Uniti Leasing, will be having his host team start to lease up those assets as well. So I think that we'll continue to deploy capital and to continue leasing because it has very attractive economics. It's proprietary and its really national in scope as well. So I think all of our business units, I just want to say this, again, all of our business units, I think, have a very good future. The people that head each of our business units: Lawrence Gleason in Towers; Andy Newton for Uniti Fiber; and Ron Mudry, Uniti Leasing have done an excellent job. And I think now with the Windstream getting close to full resolution here, I think we have a really good future.

Okay. Well, we do have a couple of minutes left if there are any questions in the audience? Okay. One thing the FCC's keyed up for later this year is the rural digital opportunity fund auction. Does that create opportunities for Windstream or for you or both of you to take advantage of that funding?

Yes. So I think from Uniti's perspective, I wouldn't expect Uniti to directly benefit from that. But to your point, I think some of our customers in Windstream would directly benefit. So I think there's an indirect benefit to Uniti from those programs that they can -- to the extent that our customers can qualify for that funding, I think it could lead to more -- potential more business with Uniti. So I will leave it at that. And there are other federal-funded programs that Uniti can benefit directly from. So for instance, there's U.S. Department of Agriculture has a rural fund that helps farmers bring broadband to farmers. So in some of our markets where we are able to participate in that, we can directly benefit. But we view that as a positive, and I think Uniti has a potential to indirectly benefit from that through our customers.

Great. Well, covered a lot of ground. I really appreciate into this really busy time for you taking the time to come out here and join us. Thanks so much.

Thank you very much.

Thank you.