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

All right. Thank you, everyone, for joining us for our noon session with Kenny Gunderman, CEO of Uniti. My name is David Barden, Head of Telecommunications Services and Comm Infrastructure Research for Bank of America, and I'm really pleased to be here at Nareit 2020, hosting Uniti for this session. [Operator Instructions] If you want to type in a question that we might try to put in front of Kenny as we go, please feel free to do so. I apologize in advance if we can't get there. I think we only have about 30 minutes to kind of talk about all the things that Uniti is working on. For those of you that aren't familiar with Uniti, maybe Kenny, I'll ask if you could give us just maybe a brief background on who Uniti is and what they do. And then we'll talk about kind of the future for Uniti going forward.

Sure. Good afternoon, everyone, or good morning. David, it's nice to be on with you again, and we're always pleased to be here at Nareit. Uniti is a mission-critical communications infrastructure REIT. So our strategy is to acquire or build mission-critical infrastructure, predominantly fiber, focused on fiber. We believe fiber is the key to all future network investments in the communications infrastructure world. It underpins wireless. It underpins fiber-to-the-home. It underpins fiber to enterprises. It's really what's a critical ingredient to broadband over the coming years. We think we're in the early innings of a very long investment cycle, 5- to 10-year investment cycle. And so we're very pleased to be focused in this part of the infrastructure ecosystem. Today, we have a very valuable portfolio of real estate, 125,000 route miles of fiber around the country in 42 states, almost 7 million strand miles of fiber. That network is very under capacity, I would say. So we're using roughly 10% to 20% of it. So there's a substantial amount of lease-up capacity on that network. We have a portfolio of small cells that we're developing. It's a relatively small portfolio, but we think that there's a tremendous growth potential over time. And we also have a portfolio of wireless towers and we had a larger portfolio of wireless towers, but we recently sold that portfolio at an industry-leading multiple. But small cells and towers are important to the strategy as they are feeders into the fiber network and are natural extension of the fiber network. We really believe in anchor economics and shared economics beyond that. So our strategy is to focus on anchor customers like the big wireless customers, AT&T, Verizon and T-Mobile, to build wireless networks for them at generally 5% to 6%, 7% yields -- cash flow yields and then lease up those networks beyond those initial anchors to drive 10% plus cash flow yields on a blended basis, so very much believe in the shared economic model. As a result, our economics reflect that. So we've got about 97% to 98% recurring revenue, very low churn, 0.3% monthly churn, 80% plus EBITDA margins, roughly 30% capital intensity across the whole business, and an average contract term of about 9 years. So those are very attractive, we think, appealing economics that are conducive to mission-critical infrastructure REIT. We've built our portfolio largely on M&A. So we were spun out of a major carrier called Windstream 5 years ago. They spun out the real estate underlying their network, which we now own. And so initially, when we were spun out 5 years ago, we had 1 customer, Windstream, and 30 or 40 employees. And since then, we have grown our portfolio substantially to where Windstream is now less than 70% -- almost 60%, 65% of our revenue. So we've really grown that revenue base materially, and we've grown the portfolio of real estate materially over the past 5 years through M&A. So that's been a big part of our strategy and will be going forward. Over the past 2 years, there's been a lot of volatility in our stock and in our story because that large customer, Windstream, our largest tenant, went through bankruptcy. And so as a result, there was a lot of volatility. But we said at the beginning of the bankruptcy that we felt very confident that our mission-critical infrastructure was important to Windstream's business. And so as a result, our lease would remain intact. And as a result, we are now beyond the bankruptcy and beyond our settlement agreement with Windstream. And our lease did, in fact, remain intact. Our rent payment was never disrupted and continues to be at the same level as it was before bankruptcy. So we're very, very excited about that. And so as a result, we feel like there's a new beginning for Uniti. The Windstream just emerged from bankruptcy a month or so ago. Our settlement was just finalized a month or so ago. So a lot of things -- positive things have been happening in our business, and we're really excited about 2021 and the setup for 2021 for Uniti 2.0. So I'm very excited to be here to talk to you about all that today. And David, I'll throw it back to you with any questions.

No worries. That's great, Kenny. So I remember when Windstream was spun out about 5 years ago, there was so much anticipation about would there be a deal, was there a deal to be done, when will it be happening. And then it did take a little bit but you got deal #1 done and then you've got #2 and #3 and kind of the flywheel began to grow. And I think you're right. I think that now that the Windstream bankruptcy is behind us, they've restructured. They're a stronger tenant. There's a 2.0 story. So I think that there is a level of anticipation about how and when does this flywheel start again now that you've kind of moved past this. Can you kind of give us some color as to the magnitude of the opportunity and the cadence with which you think you can execute on it?

Yes. And again, just as a reminder, we started out as an M&A story and built the portfolio from scratch. And we did it through M&A and also did it during a period of time when there were many other buyers of these types of assets, including fiber and towers and small cells. I mean these are very, very valuable assets that many other buyers, both strategic and financial buyers, private buyers, have been trying to buy for years and have been buying for years. And one of the key things that we always said was that we had a proprietary M&A funnel that gave us an opportunity to buy assets at less than market prices. And so we were able to execute despite the competition and able to execute at attractive valuations despite the competition. And you're right, David. Initially, there was a lot of focus on that. And when is that first deal going to happen? But we told people repeatedly, be patient. Once we get started, the flywheel is going to be turning, and we're really going to -- we're going to really build a portfolio. And within 2, 2.5 years, we did that. We executed on exactly what we said we were going to do, and we were really rolling to a point where we put over $2 billion of capital to work in this M&A strategy to build up this very valuable portfolio of assets that I just talked about. And 90 plus percent of the transactions that we did were of a proprietary nature. So despite all the competition and the frenzy from other buyers to accumulate these assets, we were able to do it in a proprietary fashion. So we -- over the past couple of years, 1.5 years, during the Windstream bankruptcy, we really toggled down that M&A strategy. We had a conscious -- we took a conscious approach of not targeting larger deals, focusing on smaller deals and deals that didn't overextend the capital structure because of all the volatility with our cost of capital. But we also said that we were staying engaged with the M&A market. We were staying engaged with the various counterparties that we were in discussions with so that when the time came for there to be clear skies, so to speak, that we would be able to get back to work quickly. So a long-winded way of saying -- to answer your question. I think once we get into 2021 with clear skies, I think we're going to be able to get back to work pretty quickly on our M&A strategy. We've stayed engaged with the funnel. We've stayed engaged with counterparties. We haven't talked about this, but I'd still say 80% to 90% of our opportunities are of a proprietary nature. And so over the past couple of years, we haven't lost any opportunities that were interesting to us or strategic to us. And so the opportunity set is still there, and we're excited about getting back to work very quickly.

Awesome. And so I think that for those that are interested, there's a slide deck specific to the Nareit meeting, has a lot of information from the third quarter slide deck on your website. But one of the things that you talk about is that the leasing -- sales leasing pipeline has about 130 different opportunities across a range of different kinds of customers. Could you kind of maybe bucket those in terms of size? Is that 130 million -- little deals? Or is it 5 really big deals and 125 little deals? How does that break down? Like what are the kind of elephants that you're hunting out there?

Yes. So that's for the sales funnel as opposed to an M&A deal funnel. But your question is still spot-on, David. I mean that's a funnel of opportunities that really are lease-up opportunities on our network. And that $1.2 billion opportunity set really doubled within about 4 or 5 months after announcing our settlement with Windstream because part of our settlement with Windstream gave us access to substantially more fiber than we had previously. And within a very short period of time of that being public, we were able -- our sales force, relatively small sales force, were able to go out and double the sales opportunity and the sales funnel through marketing those assets. And so -- and I would also say that's a very static -- that number continues to grow and evolve over time. And as more time passes between now and settlement, I think that we're going to see even more opportunity. But today, I would say the 80/20 rule applies, right? 20% of the deals represent probably 80% of the value in that funnel. So there are definitely some elephants in that funnel that move the needle in a big way with both carriers and West Coast data-centric providers, names of which you would be very familiar, that drive -- that are big deals that drive a big part of what makes up that funnel, customers who might want to take large swaths of the network, large numbers of the markets. And so the opportunity there is sizable. The sales cycle on these larger deals tends to be longer because you're dealing with sophisticated customers and you're putting -- piecing together network solutions as opposed to just selling a route here and there. So there are those large elephants in there. And then there's a whole host of smaller transactions. And so I think what you're likely to see in terms of us monetizing this funnel is a handful of larger deals periodically, hard to predict when. I could give an answer but I'd rather not and just say that there's a large -- there's those larger deals in there that we're going to monetize periodically and then just a steady drip of smaller deals along the way. And for those investors who know us -- and David, you'll remember, we bought a similar national portfolio of assets from CenturyLink a few years ago. And we monetized that network and through lease-up in a very similar way as I'm talking about here, just a handful of larger deals with name brand carrier customers and then just a steady drip of lease-up. And I think that's exactly what we're going to see here, but the opportunity set here is literally about 10x what it was post that CenturyLink transaction several years ago. So very excited about it, a lot of work to do to monetize this opportunity, but we're set up to do it and [ look forward to ].

And is there a -- and maybe this is a weird question, but is there a budget like -- in kind of 2 ways, is there an amount of money that you think is practical to spend? Or would you rather just spend as much money as you possibly can as quickly as you can? And how do you choose between investing in a sale-leaseback versus an M&A transaction?

Yes. So for a lot of our sale-leasebacks and the deals that we're showing in this particular funnel, many of these deals actually bring cash into our business as opposed to require cash from Uniti. So that's one of the beauties of our business. It's a very cash-accretive -- that's a very cash-accretive part of our business. So -- and in many ways, that lease-up opportunity helps fund our business, which I'm sure we'll talk more about later in the discussion. So I think your question is more pertinent for M&A transactions where we're acquiring new portfolios or acquiring companies. And in that case, we definitely don't view it as there's an unlimited amount of capital for us to do that. We do tend to fund our acquisitions in the capital markets. So as a REIT, we pay out a lot of our cash flow. We don't accumulate cash. We never have. And so the forced discipline of using the capital markets to finance new acquisitions, I think, is a good thing because we know that in order for us to be able to finance deals at attractive rates, we need to be able to convince our investors that it's a good investment and it's consistent with the strategy that we've always talked about. And so over the past 5 years, when we've done acquisitions that require financing, we've been very pleased with the capital market reaction to those transactions, which is why I think our investors generally really want us to get back to M&A because we've done a good job of that. So I don't think we've ever had an issue with capital, David. I don't think we will going forward, especially in this environment where there's so much capital really chasing these infrastructure assets, including private capital, infrastructure funds, private equity, et cetera. So it's really more about our ability to execute on the pipeline, the right cadence so that we're not overextending ourselves. Although many of these assets don't require a tremendous amount of operational complexity or overhead, there is still integration required. And so we want to be very thoughtful and disciplined about bringing new assets into the portfolio. So that sort of cadence is more important than the capital, I would say.

Got it. And so you've got this inorganic growth opportunity in M&A, kind of a pseudo-inorganic growth opportunity through sale-leaseback program. You have an organic business, your fiber sales business. Could you kind of elaborate a little bit on what fiber business you're in? Are you selling to enterprises? It's not fiber-to-the-home. Are -- you mentioned small cells to a certain degree. Kind of what are the -- what is the composition of the fiber business? And what are the growth drivers today?

Yes. So our fiber strategy is really bifurcated into 2 parts. We've got a national infrastructure business, where we -- like I said, we have 125,000 route miles in 42 states. And then the vast majority of that geography, we're really just selling wholesale. We're selling dark fiber. We're selling long-term IRUs. We're selling dark fiber leases, where we're really just selling capacity on a network to customers for 10 and -- for 10- to 20-year contracts, very, very low churn, very high margins, 80%, 90% margins with little capital required on our part. And so that's what we call Uniti Leasing. The business that we call Uniti Fiber is a fiber business where we're very actively managing the fiber network. So -- and for us, we don't want to be actively managing a fiber network on a national basis. We want to be managing a fiber network on a regional basis where we can pick our spot and we can pick the competitive dynamics in markets that we find very favorable and really go deep in a fewer number of markets as opposed to wide across a large number of markets. And so in Uniti Fiber, we're selling everywhere -- everything from dark fiber all the way up to stack, to lit services and, in some cases, to even managed services. And we're generally starting with an anchor customer. We always have at least an anchor. We never build fiber with the expectation of customers to come. We always build fiber with at least an anchor customer. And that anchor customer is generally a wireless provider, where we're building for fiber to the cell or a small cell network, and we're locking in a 10- or 20-year agreement. And generally, the economics there are in the 5% to 10% cash flow range. And then after that, we come in and we're selling generally lit services or dark fiber to enterprise customers, wholesale customers, schools, government entities, military bases. And those -- that lease-up revenue comes at substantially higher yields that drive the blended yield of that investment well above 10% on a cash flow basis, so 10% plus cash flow yields. So anchor customers are generally wireless, and then the lease-up is generally to enterprise and wholesale in those types of customers.

And what is driving business growth now in fiber?