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

All right. Good afternoon, everybody. Welcome to day 4 and our final day of our Cowen [Audio Gap] This is Greg Williams. I am the cable, satellite and telco services analyst here at Cowen. I'm delighted to be joined with Mark Wallace, the Chief Financial Officer; and Bill DiTullio, the Director of IR and FP&A at Uniti. The format of this meeting will be 30 minutes of fireside chat. There is an opportunity to ask questions. Down below, you'll see you can pop in a question and -- in the text below. I have a separate screen off to my right to see the questions that are anonymous, and I'll try to relay them into the dialogue as I see fit. So with that, let's get started. Mark, Bill, thank you very much for joining us.

Greg, thank you for inviting us. We very much appreciate everybody's interest in Uniti Group. Just to let everybody know, we did post a presentation on our website in advance of this meeting. So I encourage everybody to read that and of course, read the forward-looking statements that go along with that presentation. So that -- but with that, happy to jump right into your questions.

Sure. Well, let's bring up the big topic, and that's Windstream. You guys recently had a settlement with Windstream over the MLA dispute. Sounds like a good sign. Uniti can finally focus on being Uniti again. But can you give us an update on the agreement and your milestones and priorities as Windstream prepares to emerge from bankruptcy?

Sure. We're very enthusiastic about the agreement and about having a clear path forward now that we've got the settlement approved. So just to cover where we stand on this -- on the process, the settlement agreement has been approved by the court. Windstream announced on their last earnings call that they expect to emerge from bankruptcy late August, early September. And I believe that's still on track. I don't have any reason to not -- to think that anything has changed there. Between now and the -- and Windstream's emergence from bankruptcy, there would be plan -- there will be a planned confirmation hearing by the court. I believe that's scheduled for June 24. And then Windstream will need to go through the regulatory approval process. And those are really the key issues between now and the emergence date. So look, we look forward. The settlement agreement has been approved by the court. It will be effective upon Windstream's emergence from bankruptcy, and we look forward to that happening relatively soon. In terms of the substance of the agreement that we've reached with Windstream, I think it's a really good outcome for both parties. I mean from our standpoint, we'll -- the agreement provides for a much stronger lease than what we had previously. It provides for a much healthier tenant than what we had previously. We are acquiring very attractive assets, over 2 million additional fiber strands from Windstream as part of the agreement, which we have a lot of creative uses for. And I think the long-term investments that we're making under the capital -- growth capital commitments that we're making to Windstream, I think those will be both good for us in terms of enhancing our network value and giving us sort of a good return on those assets. And I think those assets being leased to Windstream will certainly position them better strategically and help to improve their financial profile over time. So I think we -- I think what we achieved was what we set out to achieve. We always refer to it as a mutually beneficial solution to it. And I think that's what we've got for both parties. I think it really resets our relationship with Windstream, and we look forward to working together as partners going forward.

So what are your priorities sort of near term and midterm now that the lease is consummated?

Sure. Well, from -- on the -- in terms of Windstream and the settlement agreement itself, one of our priorities obviously is to look at the assets that we're acquiring from Windstream. And we are doing a lot -- giving a lot of thought to how we best monetize those assets. So on the Windstream fiber that we're acquiring, there are a variety of different use cases for those assets. Some of the fiber strands we will probably sell in terms of sell IRUs. So we will lease it to other parties. In some cases, we may combine it with other assets that we may have in some of those markets and market it as an opco/propco opportunity, similar to what we have with Macquarie and the Bluebird situation. In some cases, there's also opportunities as well to use some of those routes internally for -- to bring some of our off-net, on-net. And so I think there actually will be some synergies as well. So there's a lot of different things that we can do with the assets we're acquiring from Windstream, and we're looking at a lot of different options now. We'll have more to talk about that in the future.

Got it. And I definitely want to talk about those fiber assets. But before I do, one of the highlights of the call from your earnings was noting that you don't need additional capital for the remainder of the year. Your stock performed pretty well thereafter partially on that comment possibly. And as I think about the $1.75 billion of growth capital improvement that's committed over the next 10 years, how should we think about the way you plan to fund that buildout?

Sure. We have a lot of different options. So to your point, we certainly do not -- with the sale of the tower business, we certainly do not need to raise any capital this year to fund the growth capital improvements or for any other reasons. Now going forward, we certainly have access to the public markets, both in public equity and debt markets. We've continued to have and maintain relationships with infrastructure funds and other private investors as well. So that's always an option. But keep in mind, one of the things that I also said is we may be able to monetize some of those assets through lease-up. So when you sell an IRU, oftentimes -- and we've seen this on the CenturyLink assets that we acquired a couple of years ago, is that you often get a large upfront payment as part of an IRU. So you get upfront cash on IRU contracts on dark fiber. And then also, we certainly may be able to monetize some of those either individually or with other assets that we currently own, similar to what we did with the Midwest assets on the Bluebird transaction. So there's a lot of different ways that we can use those -- monetize the assets that we're receiving from Windstream. There's also the -- we've also continued to have discussions about recycling other x kind of noncore, nonstrategic assets as well that we may have outside of our Southeast Uniti Fiber footprint. And so there's a number of different moves that we have. I can't tell you exactly how, but it will probably, in the end, be some combination of everything that I mentioned.

Got it. I think I got 5 things there, access to debt and equity markets, infrastructure funds, you can lease them up, you can do a deal like you did Bluebird or you can recycle additional capital. So let's take some of those, starting with the first one on accessing the equity and debt markets. In the past, you felt like you would use equity in terms of funding, whether it's deals or raising cash. How do you feel about weighing raising equity and tapping equity markets versus tapping into the debt market?

Yes. So I think right now, what we're mostly focused on is internal, so recycling capital, leasing up and even monetizing existing assets that we're going to be getting from Windstream. That's kind of our current focus right now. And that's for -- and the primary reason for that or one of the reasons for that is, one, we think we can generate attractive values that way, but at the same time, we also want to give our cost of capital time to improve. And I think over the next several months, there'll be a lot of favorable events happening. Some of those will be on the Windstream side. So I think a lot of uncertainty on the Windstream side that has weighed on our cost of capital over the last year will start to be alleviated more and more. So I think as the plan -- as I said earlier, as Windstream gets the -- as the court approves the Windstream's plan of reorganization, as they get regulatory approvals, as -- from our standpoint, we have to deliver truly some REIT opinions, which I'm confident we'll be able to do, as different things probably get checked off the box in terms of Windstream emerging from bankruptcy and their exit financing gets in place. And then the last thing I'd say that has to happen also is Windstream eventually will need to go through a credit rating process as well. And so I think as all those things happen, I think there'll be more and more uncertainty taken off the table, and I would expect our cost of capital to improve over time.

Got it. And you mentioned infrastructure funds. Would you consider infrastructure funds to help directly build or fund the build through the GCI? Or would you do the GCI yourself and then the infrastructure funds are funding for other mechanism, like in the Uniti Fiber side?

Well, it's very interesting. It's an interesting question. Historically, we've had a lot of pretty wide rating discussions with different private investors, including infrastructure funds. Some of those discussions have involved then their desire to make an investment at one of our business units, so directly into Uniti Leasing or Uniti Fiber; in some cases, making investments into -- at the holding company level, so near the group level. We've also continued to have discussions regarding opco/propco structures on some of our assets. But in terms of funding the GCI builds, I haven't had discussions directly, but I would say that we have had some exploratory conversations about whether or not GCI builds could be done in a joint venture format with other partners partially funding and kind of what the economics and structure of those early on. I don't want to say that that's something that's probable, but it is something -- it was brought to us by some other parties to look at, and we are looking at it. And it's fairly something new that's on our plate over the last few weeks.

Right. And it does seem like the fiber-to-the-home interest from infrastructure fund does seem to pick up. So this could be one way in which to do that if you're an infrastructure fund looking for fiber to the home, correct?

I think that's exactly correct.

Got it. And then you talked about recycling capital. Where do you see opportunity to monetize some of your assets? I remember we spoke at NAREIT last year, and you guys talked about possibly selling your fiber business, that it could go for north of $2 billion. And then on the most recent earnings call, maybe I'm reading too much into it, but it seems like you had that aspect to be put in the back burner. I mean Kenny Gunderman, your CEO, is saying, "We love our fiber assets, their strategic value." So how should I think about your ability or your inclination to sell fiber assets, whether it's partial or the entire business outright?

Yes. So I think it is -- our focus is owning mission-critical communication and infrastructure assets, primarily fiber. And so I would dissuade you from the belief that you're going to see us sell the Uniti Fiber business division, fiber or something like -- or sell Uniti Leasing, something like that. That's not really what we -- that we're really, really focused on. What we're focused on is, if you look at the map that was included in our Investor Relations presentation that we posted today, we own a very significant amount of very, very valuable fiber routes, and we own almost 7 million strand miles of fiber across the United States. We have 2 different businesses that are really -- that are beginning to overlap more and more but that really have a lot of different attributes to them. So Uniti Fiber being an operating company, it develops -- builds, develops, designs, operates fiber networks, whereas Uniti -- so it's a very active business with a footprint in the southeast. And then we have Uniti Leasing that's nationwide, more of a passive business, sale-leasebacks, opco/propco structures, IRU monetization. So what we're really focused on is operating those 2 businesses and those 2 businesses performing very well. In fact, actually, on the last conference I was at, we actually announced that Greg Ortyl -- we've actually made some changes in the sales force as well. Greg Ortyl is going to be taking over as the Chief -- position as a Senior Vice President of Strategic Accounts. And the reason for that is because there's becoming more and more overlap between those 2 business units. So I'd say we're really focused on operating -- the performance of those. And then also recycling assets, it's really more of a noncore, nonstrategic assets that fall on the perimeter of some of these -- some of our networks.

Okay. Because when you say noncore, like some of the towers in your CLEC business, but they're sort of already being shed. So now noncore means maybe some fiber that's not contiguous or fiber that's not really near your core network, that sort of thing?

Yes. Maybe out on the edge of our network or something like Midwest fiber like we did on Bluebird that we used to have.

Got it. And then you talked about the assets you acquired from Windstream, and they were good assets, you said. Can you help us understand what kind of assets you got from Windstream? What kind of fiber was it? Is it retail fiber? Is it laterals in the buildings, metro rings? Help us understand what fiber you did acquire.

It's a little bit of all of the above, but I'll let Bill, if you want to jump in and kind of talk a little bit more about the assets we're getting.

Yes. So I think Mark mentioned before, as part of the Windstream settlement agreement, we're getting rights to 2.2 fiber strand miles -- 2.2 million, excuse me, fiber strand miles. So 1.8 million of that is Uniti-owned Windstream-leased fiber today, but it's being exclusively leased to -- it was being exclusively leased to Windstream. Windstream was not utilizing those strands, so now Uniti will have the right to lease that to other parties -- third parties. And then we also are acquiring 400,000 fiber strand miles that was Windstream owned and built fiber that we will now -- Uniti will own. So there's a good mix of metro and nonmetro fiber, nonmetro being more kind of the long-haul routes. But we do -- the part that's metro, there's a good significant part that is metro. A lot of that part of the metro network is in some top 25 metro markets. So when you look at the map, that's, again in our investor presentation, cities like in and around the Chicago area, Milwaukee, New York City area, Philadelphia, D.C., Northern Virginia. So there are markets where we will have available strands that we'll be able to lease to third parties. And adding these 2.2 million fiber strand miles to our portfolio increases our leasable capacity to third parties by over 90%. So well, if you look again at our Investor Relations deck that's out there, we compared the strands that we're getting to the CenturyLink deal. So if you call recall the CenturyLink deal, we acquired 270,000 fiber strand miles from CenturyLink, and that was about 2 years ago. And most of those routes were long-haul only, so we're not able to sell really small cell, dark fiber, lit services, local enterprise on those routes. They're mostly we're just leasing fiber to third parties on long-haul routes. But in those 2 years, just on those long-haul routes, those 270,000 strand miles, we have been able to generate upfront IRU payments from customers of $50 million that represents about $10 million of annualized revenue. So when you compare that to the 2.2 million fiber strand miles that we're getting that -- it's the mix of long haul but also has a good portion of it that's in metro markets, and we'll be able to sell more services on that, that's why we believe we can have at least similar success with these routes. And so again, a little too early to tell exactly what we believe the lease-up potential is on there, but we continue to evaluate. We get more information on those routes every day, and we have people in the field locking those up. So we feel really good about the opportunity there.

Got it. It's interesting then if Windstream has so much underutilized metro fiber and you're saying you can upsell it, they just were not upselling it. I guess it wasn't really their core competency or they were obviously distracted quite a bit. I'm just trying to understand like, what are you doing differently that Windstream couldn't do to upsell that underutilized fiber? I mean it sounds like it might be as simple as just focusing on it.

Yes. I don't want to speak for Windstream on their behalf. I mean they may have not been actively marketing that. But I can tell you that even -- again, we don't have the rights to that fiber today. That will become effective upon the effect of the settlement agreement. But I can tell you that Ron Mudry, who's our Chief Revenue Officer, who's constantly in front of customers with Greg Ortyl and others on the sales team that are showing them the routes we do have available today that we can lease, that we have, in the past, gotten interest from certain parties that, "Hey, if you ever got rights to this fiber in these markets, we would definitely be interested in that." And I think when you look at our map, you can see we've put different color codes for the different types of fibers that we have. And when you look at the fiber that we're acquiring as part of the settlement agreement, in some cases, it does connect some parts of our leasing or fiber network, our Uniti Fiber network. So I think we can leverage that fiber better to serve more customers, sell more services than if you didn't have the other network there as well.

Got it. And when I think about the GCI and the fiber-to-the-home builds, Windstream put out a couple of different plans. But when I just ran simple math, and it could be wrong, and $1.75 billion of funding, and they said they want to get about 50% of their homes on fiber, that's about 1.5 million homes, so that comes to about $1,200 a home passed. I think pretty low for a rural environment. Is my math wrong? Am I missing something? And that's probably a question for Windstream, but you guys are so close in situation and might be shopping with the JV. So I thought maybe you can chime in on if my math is correct.

Yes. So I think -- again, I don't want to speak for Windstream directly. But if you look at the cleansing disclosure -- back in February, they put out some cleansing disclosure. In that cleansing disclosure, they had their business plan. And as part of that business plan, they expected to pass 50% of the homes with 1 gig or kinetic service by 2028. And when you look at that, I think we've got sort of like 2.3 million households by that. So when you look at what they said they were going to invest in that about $1.2 billion to reach those 2.3 billion households, that works out to about $530 per household, and that's according to the data they put out there in their business plans. So yes, I think the $1,200 is about double what they expect that they'll be spending per household.

So it's even lower. They can get to at least 1 gig speed at $530 a home passed.

Yes. According to their latest business plan that was part of that cleansing disclosure, they worked it out to about $530. So from our perspective, we'll -- the $1.75 billion that we've committed to invest over 10 years, with -- our expectation as a good portion of that, most likely -- again, it's going to go for fiber, mostly fiber builds and related assets. So there is part of that can go towards building into buildings, laterals, conduits, pools, things like that. But most of the investments that we're making are going to be fiber investments that are either going to be overbuilding copper or building Uniti Fiber. And our understanding is, most likely, a lot of that investment is going to be made in the ILEC territory to serve as kinetic 1 gig expansion project. So from our perspective, we're looking to make fiber-rich investments is what we're doing, and that's what we've committed to do. And so it has to meet certain criteria. Just for those not familiar with how the GCI program works, we make the investment, basically reimburse Windstream for their capital spent. And there's a schedule over 10 years how much we can spend up to how much they can ask for every year. And then on the 1-year anniversary date of us, of Uniti making that investment, it gets added to the lease at an 8% initial yield subject to a 0.5% annual escalator. The other interesting thing about this program, that if there are routes or segments that Windstream wants to build fiber and they appeal to Uniti where we think we can -- maybe we want to use some of those strands to lease to third parties, we have the option to joint-build some of these segments with Windstream. And if we choose to do so, then we would split the cost to build that segment 50-50 with Windstream, and Uniti would retain any excess strands beyond what Windstream's initial needs are. So there is potential for us to continue to add on to the 2.2 million fiber strand miles that we're getting today in certain markets where we believe we have the opportunity to lease and monetize those assets.

Got it. Another interesting aspect that you alluded to earlier about the MLA now is that you can bifurcate it between the ILEC and the CLEC, meaning you can sell the CLEC portion of the lease. Obviously, that would be great in terms of diversifying your revenue stream. So first off, I assume you have to approve the buyer of that CLEC part of the lease, correct? They can't just sell to anybody. You want to sell to somebody with really good creditworthiness or you might be back in the same situation. And I guess the second question is, who would you be looking to sell there?

Well, keep in mind, it's actually Windstream's decision, and I don't want to speak for them. I'm not sure that they've made the decision to sell the CLEC business. As far as I know, they haven't made that decision yet. However, we certainly think it would be -- it's a big opportunity for them. And I think that was the main purpose behind splitting the lease between the ILEC and CLEC. Look, I think there's a lot of potential CLEC buyers whenever Windstream decides to pursue that. And wireline companies, fiber companies, [indiscernible] cable, managed services providers and some of these partners with infrastructure funds as well, so I think there will be a pretty broad suite of potential buyers. And so we certainly would find that -- encourage Windstream to do that. And it certainly would be very helpful for us as well. From a diversification standpoint, it would be very meaningful for us. It would take our revenue concentration with Windstream from 65% today down to above 50%. It would help -- certainly help diversify us. And I think it would be a good transaction for them. But again, it's up to them to decide when to do it and when to take it to market if they decide to do so.

Got it. And if Windstream would want to sell it, in my opinion, not Windstream or yours, and then you would want them to sell it, could you help them in that process? I mean you guys are -- part of your business is wheeling and dealing. And could you actually find a buyer on behalf of this transaction?

Sure. I mean there's -- we may actually have some people that we do business with today that actually might be -- may be interested in that business. I don't want to put names or call out names. But we may have some people that we're partnering with today in other transactions that might be interested in it. And anything that we can do to be helpful to Windstream to execute on that, we'll certainly try to do so.

Got it. And the last question on MLA and just on Windstream covenants. Per the agreement, Windstream has a max leverage covenant at 3.5x. Just remind me, what happens if they violate those covenants?

Yes. So Greg, first off, at the time of emergence, they actually need to achieve a 3x leverage ratio at times of emergence. But to your point, yes, there are -- there's different current and maintenance aspects. If they go above 3.5, they're no longer able -- my understanding is they're no longer able to borrow any additional funds or draw down on the revolver or pursue some -- certain types of transactions. If they were to be in breach of those covenants, then Uniti would no longer be required to fund the growth -- the GCI investment program, is my understanding.

Okay. And we can finally talk fundamental talk. Can you just provide us an impact from COVID-19, permitting delays, install delays? You seemed rather bullish on the call. There's only about $50,000 of bookings at risk. And then you sort of added another $50,000 to $75,000 of potential booking delays, and you mentioned that was a conservative estimate. Is that still a conservative estimate?

Yes. I'd say that's still pretty conservative. So first and foremost, we're focused on the safety and health of our employees, and they're working with customers. So the majority of our employee base continues to work from home, but we continue to be very productive. And in some cases, we have been able to accelerate installs with certain customers, such as schools that are closed, but they're willing to allow us to go in. Other customers, the physical locations have closed, and so there's been somewhat of a delay in those installs. That's what we called out on our last earnings call, $50,000. So -- and on the bookings, again, so there could be a potential for another $50,000 to $75,000 delay there. But the keyword is delay. We haven't seen any cancellations to date. And when you looked at the installs and the bookings activity in the first quarter, they were pretty strong. And I would say that trend is -- so far, going into the second quarter, we've seen that trend continue. So we feel good about our business and being able to continue, really haven't seen any significant or material impact from COVID-19 yet.

Got it. So that's good to hear that the bookings momentum continues. And to that point, I mean usually around $500,000 of MRR bookings. Does that still equate to about 8% organic growth when I think about what -- how do I make use of that $500,000 number?

Yes. So bookings obviously plays into our organic growth, but it's also a function of the rate of work we're able to install, and also churn comes into play as well, right? So I think what you've seen historically back in 2019 and based on our outlook for 2020, our growth, that fiber organic growth is somewhat slightly below that 8%. And we've called out some factors that have impacted that. So for one, back in last year, we called out permitting delays that we saw on small cells. And so that factor -- that the rate we could get some of these dark fiber and small cell projects complete. Now the good news is we have worked through most of those projects, and we have a handful. Now with COVID, there has been some impact with permitting still because a lot of these permitting agencies are -- their physical offices are closed, and they're still operating on a paper -- manual paper submission process. Now I think the good news going forward for us in the industry is that this pandemic will get people to rethink their different processes. So we expect that going forward, most of these permitting offices will go more to a digital submission, which would help streamline, create a more efficient process. So that's one factor that's impacted our rate of installs in the past. And then on the churn side, there, we have talked about the services that have disconnected and some of our -- we'll call nonstrategic, noncore markets. So these are markets that we -- that were part of when we acquired some of the regional Uniti Fiber investments we made like, for instance, PEG and Tower Cloud. And so these markets were maybe Tier 1 cities where we're using some partner fiber to provide this lit solution to the customer. So when those sites come up for renewal, we were losing those to the other party that was already in that market with the fiber. And we kind of expected that because we just wanted to get a little pricing on a competitive basis. So we've worked through most of that, but that did impact our churn levels last year and into 2020. The other piece is you're seeing customers convert from lit solutions to dark fiber solutions. So although there is the step down on a per circuit basis when you go from a lit solution to a dark fiber solution, the -- we actually prefer that because then the customer is trading a 5-year term for, most cases, a 10-, 20-year term. So when you look at the incremental total contract value that you're going to get off the renewal where they're converting from lit to dark, that more than offsets the step down in the MLR that -- when they're going from the services. So again, short-term impact on churn but a long-term positive from a total contract value. And so -- and then we've had some first-generation re-rate churn as well where, again, sites were awarded 5, 7 years ago. When you have that first generation of re-rate, it's usually a significant step down. So those are things that have impacted our growth rates historically plus just with the -- with some of the overhangs, other overhangs that happen here with Windstream and such that can play into our part as well. So I think going forward, we still want to target that 8%, and we think that's achievable. And there's a pathway to get that 8% through our lease-up strategy. Now that we've finished most of these anchor builds, our focus now turns to leasing up those builds, leveraging that existing network and driving those high incremental returns with high-margin business.

Got it. And last 30 seconds, so I wanted to sneak in a dividend policy question. You previously noted that the dividend could return to normalized levels following the Windstream bankruptcy, but how should we think about that? You guys have always been high dividend payers, higher than the allowable rate levels, part of the reason to keep your stock strong for maybe equitizing deals. How should I think about the dividend policy once Windstream emerges from bankruptcy and then in 2021 and then and beyond?

Yes. So as you know, we're still under the restrictions under our credit agreement that we can only pay out 90% of taxable income. I think it's reasonable to assume that once we're outside of those restrictions, which could happen as early as this year or maybe -- I'm sorry, later part of this year or early part of next year, I think it's reasonable to assume that we want to pay out at least 100% of taxable income. I think it's reasonable to assume that we want to be able to pay out any capital gains that we might generate on future transactions. Beyond that, I probably can't kind of say too much. It would be kind of the Board hasn't made any decisions as to what the dividend policy will be. But I would say, I do think there's a couple of important things. We certainly would be looking at peer groups within the communication infrastructure space both in terms of yield, both in terms of payout ratio. I think for us, it's important to set it appropriately so that it can grow as AFFO grows and as we continue to grow the company. And also, I think it's important that we set it at a level that is also sustainable over time so that people have certainty of the dividend stream as well as have the growth component of the dividend going forward as well.

All right. We went a little bit over, but it was a great chat. I hope to see you guys in person next time. And for everybody listening on the call as well as Mark and Bill, thank you. And be safe and be well, and have a great weekend.

All right. Good to see you. Thank you very much.

Thanks, Greg.