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

Good morning, everyone. Thank you for joining Uniti's presentation at NAREIT's 2020 REITweek Investor Conference. My name is Bill DiTullio, and I'm the Vice President of Finance and Investor Relations for Uniti. Before we get started, I would like to mention that we have posted an investor presentation on our website in advance of today's discussion. I would encourage everyone to view the presentation and the safe harbor statement that accompanies it. With that, I would like to turn the call over to Dave Barden of Bank of America Merrill Lynch who will moderate our fireside chat today with Kenny Gunderman, President and CEO of Uniti Group. Dave, thanks again for hosting us this year.

Thank you very much, Bill. Thank you, Mark, and thank you, Kenny, and thank you to everyone who's joining us. It's a pleasure to welcome you as moderator for this Uniti presentation with the CEO and the CFO. And I'm Dave Barden, I head up telecom services and communications infrastructure research for Bank of America based here in New York. And I think we've got a diverse audience. I know we have limited time, and we've got really the 2 guys that know the story the best. And so what I maybe wanted to start off with was maybe, Kenny, could you guys just give us, to start, a starting point, an overview of kind of the core business and how you think your company and your business approach is unique within the real estate industry today.

Sure. David, this is Kenny, I'll take that. And thank you, again, for hosting us here at NAREIT. This has become a nice tradition for us, and so thank you for that. And welcome to all of you on the phone. I'm going to assume some of you know our story and some of you maybe don't. So we'll try to speak to both. But -- so David, our strategy is to acquire or build mission-critical communications infrastructure with a real focus on fiber predominantly and all of those elements of infrastructure that are critical to fiber. We really believe fiber is the next important mission-critical element of network investment, analogous to towers over the past decade or so. But when you think about all the different types of communication that are important today, whether it be wireless mobility, fiber to the home, fiber to enterprise buildings, long-haul fiber, all of those things are enabled by fiber. And even wireless communications, roughly 90% of the investment required to enable wireless communications comes back to fiber. So we think our focus on that is -- has tremendous tailwinds for us from a growth perspective. We're certainly the one REIT in the industry that focuses on fiber that has that as the majority of our business. And we think we're in the early innings of a very long investment cycle where fiber will continue to be the focus. And when you talk to all the customers and the different participants in the telecom industry, they'll tell you that there's really not a competing technology for fiber. So when it comes to enabling these different modes of communications, particularly virtual communication, fiber is here to stay, and it's going to be critical to these networks for many, many years to come. Our portfolio is quite robust. So we've got about 125,000 route miles of fiber. That's comparable to Zayo's 130,000, 133,000. Crown Castle has about 80,000. So we've got a very large, robust portfolio of fiber across the country. We've got about 2,500 small cells. So that's still a growing part of our business, but it's a critically important part that will continue to grow over time. And we -- as of yesterday, we had a macro tower business. But this morning, we announced that we closed the sale of that macro tower business. And so we're now an equity holder of one of the largest -- or actually one of the fastest-growing macro tower businesses, and we'll continue to work with that business in a collaborative way to offer holistic solutions to our customers. And so we're also one of the few companies that provide both fiber, macro towers and small cells as holistic solutions to our customers. And we focus on Tier 2, Tier 3 markets. So we're -- we like those markets, especially if we pick the right ones, because they're fast-growing markets, but they're also a lot less competitive. And so we're generally one of the, if not the only, insurgent fiber provider, we're one of the few fiber providers in those markets. And so we think there's a lot of defensibility on -- when we think about those markets on a go-forward basis. The economics of our business are attractive. It's very much a shared infrastructure model and -- where we're putting anchor customers on our network. We don't build anything, hoping the customers come. Everything we build has an initial anchor customer generally with a 5%, 10% yield initially, with future customers all coming at very high lease-up margins. And so our revenue today is roughly 97% recurring, very low churn. We've got less than 0.3% monthly churn, close to $10 billion contractual backlog of revenue with an average term of about 9 years and about an 80% EBITDA margin. So very attractive underlying economics in our business. M&A is an important part of what we do. So over the past few years, we've -- since our spin out in 2015, when we were created, we've more than doubled the size of our fiber portfolio. We got into the small cell business and the tower business from scratch. So we've really been successful at inorganic growth through M&A. And David, I know we're going to talk more about that later on, but I'll flag that as something very important to us. And our REIT structure gives us a lot of unique tools, both sale-leasebacks, opco/propcos, our UPREIT structure gives us a lot of unique proprietary tools for that M&A effort on our part. Our business is extremely durable. And we're going to talk about COVID, I'm sure, today, David. But again, I mentioned the very low churn in our business, the recurring nature of our business that's been reinforced in spades recently during this health care crisis and even during some of the other crises that we've been -- that Uniti has been living through, including the Windstream bankruptcy. So over the past 5 years, we've grown revenue 11% on a CAGR basis; EBITDA, 6%. And again, we've doubled the size of our fiber portfolio. So despite some of the crisis that we've worked -- lived through, we've been able to grow our business relatively consistently and think there's a tremendous amount of growth potential ahead of us going forward, given our unique structure and where we are in the industry.

All right. That's a great overview, Kenny. Thanks for that. Well, look, as long as you brought it up, it obviously is very topical to try to kind of ascertain kind of what business exposures you have to kind of COVID fallout. As we've been talking to the communications infrastructure and telecom industry, it seems like there's a couple of different vectors. One is, is your workforce able to work effectively? Number two is kind of what is your exposure to the small, medium business because that seems to be where a lot of the fallout is going to hit? And then can you kind of continue to grow the business when muni permitting things and everything else has kind of dumbed up in the short term? Can you kind of address how those things are affecting Uniti and how you're grappling with them?

Yes. Those are all -- yes, all great questions. So first of all, like a lot of companies, probably the majority of our employees are working from home. They are working virtually. So about 60% of our employees are working from home. And frankly, from our perspective, we haven't seen any drop-off in productivity as a result. I think our employees are very well equipped to work virtually. And I think a lot of people are these days, and I'll come back to that question, but we're working well remotely. But importantly, roughly 40% of our employees are still out servicing our network, lighting up new customers on our network and providing the essential services needed to keep our network running. We are deemed as an essential industry, and our people who are out providing those services in the field are deemed as first responders. And so we've got an important designation, particularly during this crisis. So we're very focused on safety, and we're very focused on keeping our employees and our customers and our vendors as safe as we possibly can, and we've had no issues with COVID among our employee group, knock on wood, but we are out there working and staying active. And I think when you look at the impact on our business from this crisis, it's been very, very small. And in fact, I'd say, on a net basis, there's probably been a positive effect on our business as a result of the crisis. But the negative effects are -- and David, we mentioned this on our last earnings call, that there was roughly $50,000 of MRR that we thought was delayed because of permitting or installs from customers not wanting us to come out and turn up new services. That number has now actually come down to roughly $20,000. So we've actually worked through that peak of $50,000. Now it's down to a much smaller number. So although permitting, to your point, has been slowed to an extent, we've found ways to be productive. We've found ways to work virtually with permitting offices. And we've found ways to work virtually with customers, who, even though there were some delays on timing, they still want this service. They still want their network turned up so they can keep the communications going. And we talked about maybe some delays on bookings as a result, because our sales force is largely not out making physical sales calls, but in reality, we haven't actually seen a diminution in bookings. I mean we just haven't seen it yet. So there may be, but so far, we haven't. And we haven't seen any churn related to this. So no direct disconnects from customers. And to your point, David, our exposure to the small business element of the economy is very small. So it's probably about -- it's about 1% of total revenue. So very, very small. We have a very wholesale-focused business. And so our exposure to the small business community will always be small. So the things that I just walked through, those are all related to small businesses, so small numbers and timing-related. Inversely, we've definitely seen an uptick in demand from other essential industries like health care and schools, providing virtual learning, our government customers, the Department of Defense, the military bases that we serve, and certainly our wireless customers. And so a lot of us, I'm sure most of the people the phone, are working remotely, you're working from home, you're using your cellular service or you're using home broadband. So our big wireless customers like Verizon and AT&T and T-Mobile, their networks are really getting stressed, but in a good way, and we are ultimately the network provider for a lot of these guys in a lot of these markets, and so we're seeing an uptick in demand as a result. And ultimately, I continue to think, David, that a lot of this virtual communication, kind of the virtual economy, virtual learning, telemedicine, videoconferencing is going to persist even once we get past this crisis. And so a lot of these trends that we're seeing, I think, are going to be good long-term trends for our business. And actually, it's probably just an acceleration of what was coming anyway. And I think it will be interesting to see how that plays out.

Right. So let me dig in just that piece of it a little bit more which is, you obviously have had a lot of success growing the fiber business inorganically. I think the last couple of quarters, we've seen some slippage on quarterly EBITDA from the fiber business. If we kind of step away from the shorter-term collection and permitting issues that are going on today, what is -- what has to happen to turn that fiber business into like a real growth business?

Yes. So part of it -- that's a good question. So part of it is -- a big part of it is, like I said, the shared infrastructure model. So in the past year, 1.5 years, actually, almost 3 years, we've had about 15 really large fiber projects that we're building for customers, anchor customers. These were small cell projects and fiber-to-the-tower projects for our wireless customers building in new markets where we're getting those initial 5%, 6%, 7%, 8% yields and locking in 10-, 20-year contracts. Those projects generally come with longer-term contracts but lower margins and then the lease-up comes later. And that lease-up generally comes at the 70%, 80%, 90% margins. So we've talked publicly, but those projects are really coming to an end. So by the end of this year, almost all of those projects, actually I think all of those projects will be completed. And so as a result, over the past year or so and certainly going forward, we're going to be very focused on leasing up those networks and adding second, third, fourth, fifth customers to those networks that come with higher margins. And so you're going to start to see the benefit of the lease-up shared infrastructure model. And I think another thing, David, and you mentioned it, particularly over the past couple or 3 quarters, we made a conscious decision to start exiting a few noncore businesses during the Windstream bankruptcy when we were very internally focused. And so we've actually divested ourself of some noncore businesses that has had a dampening effect on both revenue and EBITDA, but longer term, it's a good thing for us. And so when you look at the numbers, you see some volatility, but some of that is because of a conscious decision to actually exit businesses. I think as you -- we get towards the end of this year and certainly into next year, when those onetime items start to normalize and you start to see the lease-up of our business going forward, you're going to really see some growth coming back in EBITDA and consistent with what we've talked about in the past. We're in some great markets in Uniti Fiber. So like I said, Tier 2 markets, less competitive, high-growth demographics. We've never seen a diminution in bookings and we've also always had very low churn, in my view, industry-leading churn. And so the issue on growth, even top line growth, has always been an installs issue. So how fast can we get things turned up? We've some -- we've at times had some issues with permitting, which is not within our control. But even permitting, I think, in our installed engine is really going well right now. And I would say the underlying fundamentals of our fiber business have never been better. And I'm very excited about both top line and EBITDA growth towards the end of this year and into next.

Great. Okay. So that's a, I think, maybe a good segue kind of reaching an inflection in the fiber business to the upside. I think we've relatively recently kind of reached an inflection to the upside in your relationship with Windstream. I believe most people know that Windstream is your largest tenant. They went through a bankruptcy filing. There was some tension between Uniti and Windstream, I believe, around the relationship in the form of the master lease agreement, but I think that you guys have come to an agreement, which is supposed to become effective when Windstream exits bankruptcy, which should be later this summer. Could you kind of tell us a little bit about what's happened on that front? And how much better you feel now about that relationship than maybe you did a year ago?

Yes. So I think everything you just said is right, David. So we spent -- Windstream filed for bankruptcy in, I guess, February of 2019. And not long after that, we engaged in -- started engaging in mediation negotiations with Windstream and their creditors on a new commercial relationship. And frankly, it was something that we were excited to do because, David, as you know, we've been talking about making changes to our commercial relationship with Windstream for many, many years preceding bankruptcy and trying to do that. And so you never hope for a bankruptcy, but it actually -- one of the silver linings was that it actually got us to the table to finally formalize a lot of the discussions that we've been having historically. So we're very excited about it. And we reached an agreement with Windstream that was announced at the beginning of this year and it was recently approved by the bankruptcy judge, so we're very happy about that. And we're now on a glide path to that settlement becoming effective, we think, later this year. So Windstream has said publicly that they expect to emerge from bankruptcy in August or September, and we have no reason to think that won't happen. And we also think our settlement should become effective around that same time. So we're getting telecom regulatory approval on some elements of our deal and all of it should hopefully become effective later this year. And we're very excited about it. I think this is -- it's a good transaction for Windstream that adds real value to Windstream as a customer. So all of our capital is being used to support Windstream. It's not being used to bail out Windstream creditors. That was a really important part of the negotiation for us. And -- but it's not a value transfer from Uniti to Windstream, and this is very important. We've always talked about this not being a zero-sum negotiation at being a commercial negotiation. And so when you unpack the elements of the deal, we're investing our capital to upgrade our network and Windstream will get the benefit of the use of that network, and they'll pay us an incremental market rate on that capital during the period of time that we're making those investments. And every dollar that's going in the ground is hardening our network value and derisking the renewal in 10 years. The other element of the deal, a big element of the deal, is we're acquiring about 40,000 route miles of additional fiber and another $25 million to $30 million of on-net fiber EBITDA that -- again, very valuable right on strategy with what we've done historically. And both of these elements of the transaction are really good for Uniti, but they're good for Windstream because we really are probably the only industry participant who could provide this level of support to them as our -- as the landlord for our tenant. And so it's a good deal. And ultimately, to your question about the relationship, as we've done in the past when we've executed on M&A transactions, we've always used cash and equity as part of the consideration, and that's what we're doing here. And we're issuing about 36 million shares to the Windstream creditors who will then -- that cash will then go into Windstream. But ultimately, the new owners of Windstream, the first lien Windstream creditors who will be the new owners of Windstream, are going to ultimately own about 20% of our equity on a go-forward basis. And so again, as we've done in the past, we're aligning interest with our counterparty on a go-forward basis, and I think that's going to really help our relationship, landlord-tenant relationship. And many of these investors, creditors are parties that we know and parties who've been investors with Uniti in the past. And so the dialogue is already constructive, and we're looking forward to that on a go-forward basis.

So I guess...

Sorry, David, that's a little long-winded.

Yes. No, it's a complex topic. And I think it's important -- it's very important to the total story. So a couple of follow-ups on that. So just a quick housekeeping item. Is there a lockup in the equity for the bondholders who are getting this over at Windstream?

There is. So -- and the -- one of the largest creditors will be getting roughly 10% of -- I'm sorry, roughly half of the new equity, so about 10% of Uniti's equity on a pro forma basis. That will be locked up for a year. And then the rest will be dispersed among a lot of smaller holders, and there will be no lockup on that part. But on the largest part of it, there will be a 1-year lockup.

Got it. Got it. And then you talked about funding kind of this investment that you're really kind of making in Windstream, alongside Windstream, partly through this equity and then obviously, partly through other means. Could you kind of talk about what those other means are? How open are markets to you to go raise the money that you need? And how much money do you think that would look like maybe this year and next?

Yes. Good question and it's another long-winded answer, but I'll try to get through it fast, David. But -- so look, what are the outlays? So the outlays are roughly $400 million of cash for the assets that I mentioned over 5 years -- to be paid over 5 years and then about $1.750 billion of capital invested in the network over 10 years. So the outlays are not immediate. They're actually over 5 years and over 10 years, and that's important because there's no huge immediate financing need, number one. Number two, there are immediate offsets from the deal itself. So for example, I mentioned the market rate that Windstream would be paying on the capital that we're investing. That equates to roughly $700 million of additional rent over that 10-year period. And about $150 million of the $1.750 billion is actually a loan that will be repaid. And so that's about $850 million to offset the outlays over the 10-year period. And then like I said, we're acquiring about $25 million or 30 -- $25 million to $30 million of EBITDA -- recurring EBITDA over the next 5, 10 years. And so collectively, without doing anything else, there's going to be about a $1 billion offset from our capital outlays over the next 5, 10 years. Then you get into the fiber that we're acquiring, David. So we're dramatically increasing the amount of fiber that we're going to have to lease -- able to lease to third parties. We've said we're increasing it by about 90%. And this fiber is, in some cases, long haul, but it's -- there's a lot of metro fiber, a lot of last-mile fiber that we can use in our fiber business to get off-net savings, off-net, on-net savings, we can use for turning up small cells, turning up fiber to the tower business. We can eventually use some of these markets to launch new enterprise markets. We certainly will have the ability to issue -- to sell dark fiber and IRUs and pursue other opco/propco opportunities like we did with Bluebird and in other cases. And as you know, those -- a lot of the deals that I'm mentioning, a lot of things I'm mentioning are cash intensive in the sense that they bring cash into Uniti. And so with respect to -- to helping finance the deal, we think the lease-up potential on this new fiber that we're getting is going to add a lot of cash over the coming quarters and years to help us offset. So we're very excited about that, locking in not only cash, but upfront capital. And we've also, over the past couple of years, shown, I think, a propensity for monetizing either noncore assets or even strategic assets like our tower business, where that's a very strategic business to us, but we were able to sell it at 34x cash flow and pursue macro towers in a different way as an equity holder as opposed to spending capital ourselves. So there are other ways for us to do that on a go-forward basis that we'll continue to do in addition to the fact that the organic trends in our business are towards a less capital fiber -- less capital-intensive fiber business, so CapEx is actually coming down organically. So when you work through all those things, David, you -- there's a lot of financing capability organically that will help fund these requirements, which is why we've said publicly that we don't have a need to raise external capital for the next 12-plus months, if then. And so we're not concerned about the financing needs. We've got a good plan in place to deal with all that.

So I know we only have, like, 2 minutes left, Kenny, but maybe just kind of thinking about all the things we've talked about, which is the one thing that you're kind of most excited about for the business? Is it getting to that cotenancy fiber margin expansion point in the curve? Is it kind of coming back to talk to the market about doing more deals because of the lower cost of capital? Or is it kind of onboarding all these new assets and getting to work on selling them? What is the thing that's most interesting to you right now?

It's a great question. I think what I'm most excited about is being able to get investors refocused on the core fundamentals of our business and the opportunity there as opposed to talking about Windstream and the Windstream bankruptcy. And I think this settlement is going to get us back to us focusing on what we do best, which is buying and building mission-critical communications infrastructure at attractive valuations and then -- and locking in anchor economics and then leasing up those assets at attractive yields. It's a real simple business. And although we've had, like everyone, we've had a hiccup here and there over the past couple of 3 years, when you look at the trajectory of our business, we've grown revenue at an 11% CAGR over 5 years, we've grown EBITDA at a 6% CAGR over 5 years and we've doubled the size of our real estate portfolio -- more than doubled the size of our real estate portfolio. So we've executed from a fundamental perspective over the long term, and we've got great opportunity to continue doing that on an accelerated basis, and I'm really looking forward to getting back to doing that and talking to investors about it as opposed to all the exogenous noise.

That's great. I think that's a great place to leave it. Kenny, Mark and Bill, thank you for letting me moderate this. Thank you, everyone, for joining, and thank you to NAREIT for hosting us. We all appreciate it.

David, thank you, as always, and thanks to everyone else.