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

Hi. My name is Phil Cusick. I cover the comm services and equipment space here at JPMorgan. I want to introduce Mark Wallace, CFO and Treasurer of Uniti Group; Greg Ortyl, SVP of Leasing Strategy; and Bill DiTullio, VP of Finance and Investor Relations. Mark, Greg and Bill, thanks for joining us.

Given these unprecedented times, maybe we can start by talking about what Uniti Group is doing to address the pandemic with customers and employees. And then we'll dig more into the business. Mark?

Phil, thanks for hosting us this morning, and thanks, everybody, for joining us this morning as well. So I do have 2 of my colleagues that you've mentioned, Bill DiTullio and then Greg Ortyl, this morning. Greg is the President -- actually, President of Strategic Accounts for Uniti Group. Greg has a new title so I want to make sure I got that out there. And so I'll let Greg kick us off with your question about how we're responding to the COVID-19 pandemic. Greg?

Thanks, Mark. Thanks, Phil. Appreciate you guys having us. Obviously, first and foremost, Uniti is most focused on the safety and health of all of our employees, customers and vendors. We're following all the federal and state and local guidelines in our particular markets or where we have offices. Right now, about 70% of our employees are working from home. The remaining employees are out designated as first responder status, taking care of the network, making sure it stays live, repairing, installing, et cetera. The network continues to perform really well. In fact, we've actually seen a decrease in IP traffic due to stay-at-home orders. So remember, we're selling to enterprises and large businesses, so when those businesses are not staffed and people are at home, but they're moving off of our network. Meanwhile, we do serve all the large wireless carriers, and we've seen that traffic increase approximately 20% since the COVID-19 pandemic kind of blew up a few weeks ago. To date, we've not had any cancellations, order cancellations due to COVID. We have had some negligible delays with installs, be it, for instance, some of the enterprise customer locations perhaps being closed. We've had some permitting delays with offices closed, but it's only been about $50,000 of MRR that we've seen delayed so far related to COVID. We also have a potential of somewhere in the ballpark of $50,000 to $70,000 of MRR that could be delayed with new bookings. This would all be focused on the enterprise sector of our business. Again, without folks being in their office buildings, being in their places of work, they've decided to kind of push off ordering new services from us for -- until things calm down a little bit. For what it's worth, small and medium-sized business market for Uniti only accounts for 1% of our overall revenue, so keep that in mind. But as far as some of the critical industries, health care, communications infrastructure, telemedicine, wireless carriers, we have seen a modest increase in bandwidth, several upgrades to support wireless traffic, as I mentioned before, and we expect that trend to continue. And I think that was -- that covers it, Phil, from a COVID update.

Okay. Mark, let's continue by talking for a few minutes about your relationship with Windstream. Bankruptcy court approval received last Friday. Within what you can say, can you update us on where the agreement stands today and what we should watch for in the coming months?

Sure, Phil. So we're very enthusiastic about the agreement that we reached with Windstream. We think we achieved what we had set out to achieve from the beginning, which was a mutually beneficial transaction here. The court did approve the settlement agreement last Friday. There's a -- and then the key focus now is Windstream emerging from bankruptcy. There's a few milestones along the way. Windstream pointed out some of these on their earnings call yesterday, but I'll go through them as well. The key -- kind of key dates would be on June 15. There's a confirmation hearing on the plan of reorganization that Windstream has put forth. On the outside date, there's true lease and REIT opinions that need to be delivered by us, and I'm very confident that we'll be able to deliver those on time, on schedule. Windstream obviously needs to get regulatory approval, and they've also said on their call yesterday, they expect to be able to emerge in, I believe, they said late August, early September. And we certainly look forward to them achieving that target date. So we're looking forward to -- we're certainly very enthusiastic about the agreement and certainly even more enthusiastic about Windstream emerging from bankruptcy here over the next few months.

Okay. What's a good -- well, you've said with the tower sale, you don't need additional funding this year. Over time, do you expect to need to raise capital to satisfy the funding of that Windstream agreement?

I think over time, we will. We don't have any need to raise capital this year in order to satisfy any of the funding that we might have this year under the Windstream agreement. But I think over time, we will need to raise capital. We've always been, as you know, kind of disciplined about the capital that we've raised. We've been very disciplined, in particular, about any equity capital that we've raised, but I suspect we will. Now we've a lot of options for raising capital. People traditionally think of public access in the public markets over time, and we've mentioned this before that we've had a lot of interest from private investors, infrastructure funds, PE funds that would have had an interest over time in making an investment in Uniti Group. So now that we've got the settlement agreement reached, and then it looks like we have clarity as to the time frame for Windstream to emerge from bankruptcy, I'm sure that those conversations will pick up as well. And so we'll see where those go over time. And then we've -- obviously, as you've noted over the past couple of years, have been very active recycling capital as well. And you've seen us do that with both the tower portfolio, ground leases. We also sold the Midwest assets to Macquarie as part of the Bluebird transactions. So there's always noncore assets that we're looking to monetize and recycle that capital when attractive opportunities present themselves. And then the last thing I'd say is we also can have additional capital coming to the company through the leasing -- lease-up of the Windstream assets as well. So typically, on dark fiber contracts, as you know, there's a -- they're typically 20-year dark fiber IRU contracts. And often in an IRU contract, you get a fairly substantial upfront payment. We've seen that on the CenturyLink contracts and we hope to see and be able to monetize some of the Windstream fiber strands as well, similar to what we've done on CenturyLink.

Okay. There's a lot I want to get into there, but first, just the bifurcation of Windstream's lease into ILEC and CLEC provides optionality for an asset sale. You know that asset better than anyone. Are there financial or strategic buyers out there who you think are interested in stepping in for one or the other?

Well, yes. So definitely, there are and I cannot speak to Windstream's plans. So I don't know if they intend to sell or when they might intend to monetize one of those assets. I would suspect that they would be more likely to monetize the CLEC assets. And so yes, I do think that there are both financial and strategic buyers that would be interested in those assets. In fact, we have had some reverse inquiries ourselves. And to the extent that we get those, that we certainly are willing to share those with Windstream as well. But it certainly was something that we wanted to have accomplished. It's something that Windstream was interested in doing in terms of getting the leases bifurcated to allow some of their assets to transfer to a third party. And as we've noted in our presentation today, as well, if they sold the CLEC business, for example, it would result in immediate diversification benefits to Windstream as well as additional liquidity and cash flow coming into the Windstream estate. And so we think it would be -- if they did do that, we'd be fully supportive and we would -- and we look forward to that happening, if they choose to do so.

Do you have any veto right on who that asset was sold to?

We do have successor tenant provisions as would be typical in the lease, and those would speak kind of go to the credit quality of the tenant, the size of the tenant, things like that. So pretty typical successor tenant provisions that we have.

Okay. And remind us how much of your revenue is coming from the CLEC versus the ILEC side?

Bill, I'll ask you to jump in here. I believe it's about 2/3 ILEC, 1/3 CLEC, is that right?

Yes. That's directionally correct, Mark.

Okay. Greg, let's dig back into the other parts. How big is the opportunity to accelerate growth at Uniti, excluding Windstream? What do you see in the pipeline for more deals here?

Yes. I think it's a huge opportunity. We are laser-focused on-net, near-net and leasing up existing assets. Again, you asked separate from Windstream. We're trying to take advantage of our southeast network in particular. We have really an unparalleled network in the southeastern United States from our various acquisitions, roll-ups over the years. We're seeing some increased activity, 5G densification activity from the wireless carriers in our markets. So over the previous, call it, 3 or 4 years, we've seen a lot of 5G activity in the likes of New York City, Chicago, L.A., but we're finally starting to see some of those RFPs come out for markets that are more in line with our markets, Tier 2, Tier 3, think Jackson, Mississippi; think Baton Rouge, Louisiana; Panama City, Florida. We're finally seeing some of that 5G densification kind of trickle down, if you will, to those markets, and we're going to be as well positioned as anybody to take advantage of that activity. E-Rate, had a great E-Rate season. It's not completely done yet. I think Kenny had talked about announcing the results here on the next quarterly call. But same thing, we're well positioned in the southeast to take advantage of some of the E-Rate activity. And then on the other wireless front, we are seeing some of the large wireless carriers slow some of their own fiber builds, which is creating new opportunities for us to take over some of those metro fiber builds and bring dark fiber to macros, dark fiber to more small cells, again in our southeast footprint.

That's interesting. You've seen a backing off on fiber builds in some of your cities from some of the big wireless carriers?

Yes, yes. So we've seen -- I think it's been well-publicized of some of the large wireless carriers deciding to build some of their own fiber. But over the last few months, we've seen some of the lower-tier markets where perhaps, there's not the justification to build their own fiber going out and doing what they've traditionally done, which is leverage some partner fibers such as ours and let us spend the capital and build out for them.

That's interesting. And they had a plan to overbuild you before?

Yes, there was a plan in select markets where instead of leasing, they were electing to build typically in Tier 1 markets, but there were a couple Tier 2, Tier 3 markets that had gotten on their radar that have since fallen off, and we'll be able to take advantage of that.

Yes. So I think what Greg is trying to say is that, we're seeing some of the carriers build out as more in the Tier 1 markets. But as you recall, we operate more in the Tier 2, Tier 3 and more of roles of suburban markets. So I think what Greg is trying to say is like when you see that wireless carriers and then I thought initially that they could overbuild, but when they look at the cost and the economic sense, it made more sense to partner with us and utilize our fiber and have us deliver that fiber for them.

So that's interesting because you -- I wanted to dig into the dark fiber and small cell deals that you have in process right now. Greg, maybe you can -- or Mark, talk about that a little bit, the 3 that remain. And then what you're saying sounds like there's a better prospect for a pipeline down the road than maybe it was a few months ago.

Yes. Bill, you want to talk about the builds that we still have going on?

Yes. So yes, Phil, as you recall, we've always talked about we had these 14 large dark fiber small cell projects and we completed the majority of those at the end of 2019. So for 2020, yes, as you said, we have 3 projects remaining. One of them should be completed in the first half of this year and the remaining 2 should be completed by the second half. And so what we said is once all 14 of those projects are complete, they'll represent about a $20 million annual run rate of MRR. And we've always said that we've targeted initial anchor yields on those projects of between 5% and 7%. And we've seen that play out and we expect that once all 14 projects are complete, we'll come within that range. So then the focus going forward will be leveraging those anchor builds and leasing them up. Now primarily, that lease-up is most likely to come through nonwireless opportunities. If you looked at our bookings activity over the last several quarters, nonwireless has made up the majority of those bookings in most of those quarters. Now from time to time, we may win a greenfield build. And last quarter, you saw that reflected in our bookings, where we did win a pretty sizable deal in our southeast footprint, that would deliver 800 macro and small -- macro and small cell sites combined. So going forward, we will continue to build on greenfield fiber builds where it makes sense, probably most likely within our southeast footprint, where we're either densifying our existing networks or expanding out from our existing footprint. And when you look at the capital intensity of the business today, it's around the 40 -- mid-40% range. And what we said is we expect this year to be in that 30 -- mid-30% range. The back half of 2020 will be lower than the front first half of 2020, just given the timing of the builds. But going forward, we still expect our capital intensity to come down and stay in that 30% to 35% range. Because again, we will pursue a handful of greenfield builds. We're not probably going to do 14 at a time like we have been doing, because a lot of those projects were acquired or where we got those projects when we did our acquisitions of PEG Bandwidth, Tower Cloud and Southern Light. But going forward, we'll do a handful at a time, but most -- again, the CapEx will also be spent on the lease-up. It will just be significantly less than what we were spending on the anchor builds themselves.

Okay. Maybe talk about the synergies of having fiber small cell and leasing under one roof. Do you want to be able to have as many options for customers as you can? Or are there other benefits to offering all these products?

Yes. I'll start, and Greg, you can feel free to add as well. But no, they obviously are synergies, and what you're seeing is, and Greg can elaborate more on this, is that with the same customer, you may be selling several different products. So for a large wireless customer, you could build small cells, dark fiber. You can sell them wholesale, either lit wholesale circuits or we can even lease them fiber on a long-haul routes on our leasing network, if they want to connect to different data centers or endpoints. And so even with the large content providers and web scale providers that we have these customers too in our leasing segment, we can cross-sell them with some fiber opportunities if they want to buy waves or other wholesale type of products from us. So we believe there are obviously synergies. We feel like Uniti is uniquely positioned, given that we do have different service that we can offer our customers, but also in the markets that we're in. So when you look at the Tier 2 and Tier 3 markets that we currently are in, especially in the southeast, there isn't a lot of competition in those markets. Most of the time, we're going against a local regional fiber provider or the ILEC in that area. So we believe our network, especially in the density and we believe it's a first-in-class network, gives us a competitive advantage in most of our markets. But yes, to answer your question, I think there's definitely synergies in having that. We don't want to be everything to everyone, but where we have a competitive advantage and where we feel like we have strengths, we do kind of offer multiple services. And Greg, I don't know if you have anything else to add to that.

Yes. Right. I mean it gives us some opportunities, too. I mean we're dealing with all of the largest telecom carriers out there, cable companies, hyperscalers, gives us some unique opportunities to look at opco/propco with some folks. So selling bulk dark fiber metro markets, whether it's in our traditional Uniti Fiber segment or, as you said, in the leasing where this Windstream fiber will be setting. So I think there is some significant optionality with all these large carriers from transactional all the way up to strategic, more opco/propco type opportunities.

Okay. Talk maybe about the mix of revenue between leasing lit and dark fiber, where we are now? And how do you expect the business to shift over time?

Yes. So when you look at Uniti Fiber's revenues today from a billing standpoint, about half of our -- half of our revenue is from wireless, with the majority of that still lit, about 40% of total Uniti Fiber's revenue is wireless -- sorry, 40% of the total Uniti Fiber's revenue is from lit, remaining 10% is from dark small cell. And then the other half is coming from enterprise wholesale and E-Rate opportunities. So when you look at the backlog that we have today, lit is a much smaller component of that. And most of our backlog is from nonwireless and dark fiber small cell. And to the degree that we continue to pursue greenfield builds most of the time, not all the time because customers have different needs, they most likely will be dark fiber small cells. So I think as we go along, the shift you'll see is you'll see the enterprise wholesale segment become larger, E-Rate hopefully becomes larger. Dark fiber small cells should become a bigger piece of the pie as we continue to get more of these projects on, especially some of the larger projects we're going to be finishing this year. And then I think you'll see lit will still be a representative pie -- piece of our fiber of our revenue, but a smaller part than it is today.

Greg, anything to add there?

Yes. I mean we have seen a trend toward dark fiber certainly in the last few years. We look at that generally as a good thing for us. We can generally get longer contract terms with dark fiber. Our margins are higher on dark fiber. We -- but we have to have that flexibility with all the carriers to be able to offer a full portfolio, Ethernet, wave, dark fiber. And so we're, for instance, on the wireless carriers today, you'll have one wireless carrier that will not buy any dark fiber and swears by lit services. And we can support that, no problem. And we'll have another wireless carrier that is aggressively moving to dark fiber, but still has a lot of legacy lit. And Uniti Fiber is somebody that they can go to for lit and transition to dark over time. So we kind of provide both options for our customers.

Okay. Can you talk about the monetization of unused fiber? You've discussed helping the market unused strands of Windstream's fiber to customers. Now what are you seeing so far in terms of interest there? And do you think that improves as Windstream comes out of bankruptcy?

Yes, I can take this one. So from a Uniti Fiber perspective, as I said at the top, our focus is going to be on leasing up the existing network. So that means leveraging unused capacity, selling unused fibers. We have -- just so you get a perspective here, we have almost 11,000 buildings on-net in our Uniti Fiber footprint, set aside Windstream for a moment. That's just Uniti Fiber, almost 11,000 on-net buildings. Further, we have just over 105,000 near-net buildings. So the way we define near-net would be 1,000 feet from an existing splice point. So if we created a new splice point or we went to 1,200 feet off of that splice point, that would grow even more. But we try to keep it rather conservative when we share this data with some of the large carriers who put these on-net, near-net locations in their database so that when their enterprise groups get opportunities, they know that Uniti Fiber is a service provider. It's nearby that can provide a quote. So that's what is a huge part of my team's focus is selling that on-net, near-net business as much as possible. When you look at the Windstream fiber, we get really excited about that. There's heavy strand count in many of those routes that we'll be able to leverage. We -- and I touched on this a little bit earlier, but we see the opportunity to sell bulk markets, say, if the full metro market in some of their Tier 1 markets, for example, where they have a couple hundred route miles, but then 48-count, 96-count strands available throughout that particular market. We believe we'll have some success with the hyperscalers providing some diversity on long-haul routes, connecting data centers. We feel that small cell is a big opportunity for us. In fact, we're already mapping some small cell opportunities that we have in hand today over that fiber. Obviously wouldn't be able to execute on those until Windstream exits bankruptcy. But there is demand. We're getting inbound calls on that Windstream fiber that we're actively evaluating and premarketing those assets and really excited about the lease-up potential of that network.

Yes. And just to add real quickly, we've -- through lease-up of our leading leasing network structure. I mean we've been able to generate an additional $90 million of proceeds through opco/propco structure and IRU transactions we've done. So we expect to have similar success with the Windstream lease, the network that we're going to be getting the rights to acquire. The other thing is when you look at the CenturyLink assets that we've acquired, we've been very successful in leasing those as well. So we've generated, in less than 2 years, $50 million of upfront IRUs and $10 million in annual recurring revenue there. So again, that's on 270,000 fiber strand miles. When you look at the $2.2 million that we're getting with Windstream, I think there really is no one opportunity to drive meaningful lease-up there as well.

Okay. There's a good question from the line, and I neglected to say at the beginning, if you have questions and you want to put them up, at least put them in your sort of Q&A chat feature and I can take a look. But before I go on, are there new forms of value creation like services or solutions that you might consider to sell to existing clients to improve revenue? Or do you mostly want to remain an infrastructure business?

Greg, do you want to take that one?

Yes. Yes, I can take that one. So one of the main products that we're focused on leveraging on top of our enterprise customer base is managed services. So we have a fairly substantial enterprise base of customers. And through some smaller bolt-on acquisitions over the last 24 months, we've been able to acquire some further expertise on the managed services side, which allows us to take an existing customer where we already sell IP, for example, and come in and provide managed services on top of that Internet pipe. In a very similar way, we rolled out a voice product within the last 12 months, where same thing, we can go back to all of our existing customers where we've, to that point, had only sold them IP traffic and can come back and sell them the voice on top of it. So those are very high-margin, low CapEx, quick payback type revenue opportunities that drop to the bottom line. And that's been a big focus here in our enterprise rollout in the last 24 months or so.

Okay. Mark, anything to add there?

No, not from my perspective. I think Greg covered it well.

Okay. Well, let's switch to the opco/propco structure at Windstream -- or at Uniti. Talk about your competitive advantage there. And what do conversations with potential partners look like now?

Right. So we'll be reengaging on those conversations more. As you know, during the Windstream bankruptcy, we kind of really focused on smaller transactions in order to conserve capital during the bankruptcy process. The opco/propco structure that we did with Macquarie has worked out exceedingly well. Macquarie has been a great partner. We now kind of have us fully built out and negotiated sort of documents as well with -- negotiated with a very sophisticated partner in Macquarie in that transaction. So there clearly is additional interest in opco/propcos that we'll be discussing with people. And frankly, what I'd say is a little bit broader just on Uniti Leasing itself. I mean Uniti Leasing itself is really pretty much a proprietary business. I don't know if anybody else that engages in kind of bulk fiber leasing, opco/propco sale-leaseback transactions. So I think that's a very unique business for us. We again, as I've kind of articulated before, we intend to deploy a substantial amount of capital over the next several years into that business. It has very good returns, very little working capital, very low CapEx, so low CapEx intensity. And I think it's one where similar on the Macquarie transaction, we can build multiple growth drivers into those -- into leases as well. So whether it's the initial yield, you can also have escalators. We can build in revenue sharing provisions. We can build in joint marketing programs. There's just a lot of ways to customize opco/propco structures that can make it very effective and very economical for both the landlord and the tenant.

And maybe just for people who are relatively new, you have a competitive advantage in that sort of structure. Can you talk about that a little bit?

Sure. So on the opco/propco in the Uniti Leasing, as I said earlier, to try to distinguish it from Uniti Fiber, so Uniti Fiber is an operating business with building, operating, sales, marketing functions pretty much across the full suite of products and services. So it's a very active business. Uniti Leasing, on the other hand, is pretty much a passive business where we own the fiber, lease it to a tenant, and they -- for a very -- for the duration of the lease, including renewal periods, they have full control of the assets and then we retain the fiber in pretty much. But one thing that we do as well is we also offer a CapEx programs as we have with Macquarie on Bluebird transactions, not totally dissimilar to what we have with the Windstream transaction or with the Windstream settlement agreement. So we also offer CapEx programs. So then it gives us a way to fund additional builds on the network and to participate in the growth as the tenant operator continues to build out their platform.

But the -- what, in many cases, is business distress in this pandemic, are you seeing incoming interest accelerate? You said you want to reengage there. Have you seen a lot of new interest over the last few weeks?

I won't say that we've seen a lot of new interest. So keep in mind that what I said, most of our transaction pipeline is proprietary. So we can pause transactions, but we don't -- we've never really disengaged, so we can't. But we have paused a transaction just because, as I said, we wanted to try to conserve capital and focus as our -- as the market has been volatile, both on the COVID-19 pandemic but also during the Windstream process as well, given the impact on our securities. But now that the Windstream settlement and now that as you can see from our results that the COVID-19 really hasn't had any significant effect and we don't expect it to, then we are going to start kind of reengaging on some of those discussions. And I think we will have good interest in opco/propco structures. We always have, we have maintained a very wide range of relationships with infrastructure funds and PE funds and other participants in the marketplace.

Do you think we could see something there before Windstream officially exits bankruptcy or does it have to get done first?

No. I think we need to see Windstream exit bankruptcy. But again, if they hold to their time line that they articulated yesterday, that could happen as early as late August, early September. So not too far away.

And last question, dividend reductions under the credit agreement are still in place. Can we see a return to a normalized payout ratio [ fab ] after the Windstream exits bankruptcy? Or do you think it takes some time after that?

I think -- sure. I mean, I think we will return to a normalized. Now it depends a little bit about how you define normalized. So I think as soon as Windstream exit bankruptcy, I think the Board will reconsider what the right dividend level is. And I think that's going to be consistent with how our business evolves. As -- I wouldn't say we have kind of several things just to point out. I would say that, as we've mentioned, the capital intensity on Uniti Fiber is decreasing. I do think that we'll deploy a substantial amount of capital over the next few years into the Uniti Leasing business. That is a very low capital intensity business and very low working capital as well. So I think the dividend will be consistent with how we see the business evolving. So a couple of things I'd say about the dividend. I think kind of a few things I'd say is that I do think that given the capital deployment of Uniti Leasing, the managing down capital intensity on Uniti Fiber, focusing on lease-up at both Uniti Fiber and Uniti Leasing, I do think our leverage cash flow profile will continue to improve over time. And I think the Board will want to set the dividend at a level that is both sustainable and that we can see grow over time as we continue to grow AFFO.

Good. Well, it's a good time to wrap it up. Thanks very much, Greg, Mark and Bill. Have a great day. Thanks everyone joining.