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

Good morning, everyone. We're returning with the Wells Fargo TMT Summit. I am Eric Luebchow, Senior Analyst covering communications infrastructure and telecom services. We're very pleased this morning to be joined by executives from Uniti Fiber. So we have Mark Wallace, the CFO; and Bill DiTullio, VP of Finance and IR. So gentlemen, thank you for joining us this morning.

Eric, thank you very much for having us. It's good to be here, and hopefully, we can be in-person sometime soon.

I know that's -- we're all hoping that, my wife in particular. So I just wanted to start with a broader question. Could you maybe provide an overview of Uniti's business today? Now that Windstream has emerged from bankruptcy a little quicker than we anticipated from the outset, and your settlement agreement is in place. Maybe you could just give us an overview of the company today.

Sure. So let me start, and then Bill will add color in his comments as well. So I think you're right. So coming out of the Windstream bankruptcy and then having emerged, I think Uniti today is incredibly well positioned going forward. So let me just kind of go through it by each of our business units so you'll have a little bit of an overview what's happening there. So starting with Uniti Fiber. So Uniti Fiber, as you know, over the last few years, as we acquired a number of different entities, PEG Bandwidth, Tower Cloud Hunt and Southern Light, we've been involved in a number of major dark fiber and small cell builds, about 14 of them. Those are coming to completion at the end of this year. So we're -- at Uniti Fiber, it's really shifting a lot on its focuses and some of its resources from -- and bringing capital intensity down to really leasing up the assets that we've invested in, in the last several years. So our focus is really shifting a lot to lease up on the existing assets. It doesn't mean that we won't do any greenfield builds because we will in order to meet the needs of some of our customers, but it does mean that capital intensity will tend to come down and you will start to see more margin expansion as well as with some of the existing assets. As you know, typically on dark fiber assets, the initial yields to anchor build yields tend to be in the 5% to 7% range. In many cases, incremental -- our lease-up activities on those will tend to be in the -- can be up to 50% incremental yields. So as you add more and more tenants and more lease up in those markets, you can drive up the cumulative yield pretty quickly as well and clearly above double digits with this -- where we are with many of these projects today. So that's really the focus of Uniti Lease -- Uniti Fiber. Now on Uniti Leasing, it's something we've gotten a lot of questions about recently at both your conference and at other conferences as well. And I'd say Uniti Leasing maybe one of our largest growth opportunity as well for organic growth. And that really partly comes out of the Windstream settlement where we were able to acquire rights to lease up an additional and have lease-up price to the additional 2 million fiber strand miles. And so that increased our leasable fiber by about 90% from what we've had. And what we've been able to do is develop a pretty strong sales funnel to both lease up those assets with a variety of different structures, meaning typical IRU agreements, lease agreements, opco/propco transactions. And so we have a really -- and with a very diverse customer base as well. So traditional carriers, content providers, data centers, et cetera. So we have the pipeline today or the sales funnel at Windstream leasing today that represents about $57 million in annual revenue. It represents contract value. So revenue over the term of the agreement of over $1 billion. And so we're really excited about the opportunity that we have with Uniti Leasing. And I'll let Bill talk more about the recently announced transaction that we did with Everstream. That, I think, really demonstrated how we can take both Uniti -- Windstream acquired rights on fiber packing close together with existing operations as well as package of bundles with existing fiber that we already have and then do a very attractive, very solid economic transaction for us by bundling all those things together. And then the last thing I'll kind of cover on -- cover is really the Windstream transaction itself. We're very excited about the Windstream settlement agreement. Not only were we able to acquire the rights to lease extra 2 million strand miles of fiber, but then at the same time, we also -- Windstream is also a much healthier tenant now. They -- we have much stronger leases in place now with both the ILEC and the CLEC leases. And the GCI program allows us to continue to invest and upgrade our existing network on a pre-leased basis with those throw-ins. So I think that really will upgrade our network over time and be very attractive. And as you know, the Uniti Leasing business overall generally comes with very low working capital requirements, generally has 100% or near 100% EBITDA margins just because it's certainly a passive business as opposed to the Uniti Fiber, which is a very actively managed business. Then the last thing I'll end on here is also just M&A environment. Obviously, coming out of the Windstream bankruptcy or during it, we were limited somewhat on what M&A we could pursue. So I think we're looking forward now to be much more active in the M&A market as well. So I'll stop there and let Bill add any additional comment if he would like to.

Yes. Thanks, Mark. So Mark touched on a lot about Uniti Fiber and what we're doing there in terms of the lease-up. And if you look at the investor presentation that's out there on our website, we've showed how we've driven that 7% initial yield on the major wireless builds. And through lease-up to date on those builds, we've actually doubled that yield with T-Mobile to about 14%, and it goes back to what Mark was saying about the incremental opportunities having much more higher yields than the anchor builds themselves because you are leveraging that network. The other thing to point out is these -- all these opportunities, including the anchor builds and the add-on lease sell, which, again, at least, it was primarily going to be through nonwireless and an enterprise will sell -- selling to schools through the federally funded event program, health care and government type of customers. Those are all high-margin opportunities for us, so 80% on average. So between that lease-up with a high margin, lower CapEx intensity that Mark touched on, that's what's driving those incremental yields, and so we've seen that already play out. And on the lease-up that we've sold just year-to-date through September, that represents about $10 million of annualized revenue, and it's at the higher end, that incremental yield of 40% to 50% that we've seen, and we expect that to continue. When you look at our bookings activity the last several quarters, the majority of our bookings have been that nonwireless, and again, we expect that trend to continue as well. So we're really focused on executing on that lease-up, getting local enterprise salespeople led by Joe McCourt into those markets to really drive that incremental lease-up. And then at Uniti Leasing, and again, Mark touched on, we're leveraging those assets that we've acquired through CenturyLink and through the Windstream settlement and really driving lease-up there. And as Mark mentioned, the Everstream transaction was the most recent transaction that we announced where we are utilizing a good portion of that Windstream fiber. So as part of that transaction, we entered into 2 dark fiber -- 20-year dark fiber IRU leases with Everstream for about 220,000 strand miles of fiber. And of that 220,000 strand miles of fiber, about 165,000 strand miles of that came from the fiber that we got from the Windstream settlement. And so total upfront proceeds from that transaction, which is expected to close in the early second quarter, was about $135 million, of which $73 million was for the dark fiber use. And then the remaining upfront portion relates to the partial sale of our Northeast operations as well as certain dark fiber IRU contracts that we acquired from Windstream as part of that settlement as well. And so we think this is a great transaction. It reiterates the need for fiber and the demand that we're seeing. And as Mark touched on as well, the sales funnel is over $1 billion. That doubled from first quarter when it was $500 million in total contract value. And really, we saw that funnel double before we were even really actively marketing that fiber out to customers. Again, when we got this fiber back in September, and we started marketing it soon before -- a little before then because we wanted to make sure that we had the timing right because we actually didn't have the ownership of that fiber. But now that we do, we have been actively managing it. So we've seen even before September before we announced that we didn't finalize our settlement with Windstream that we were seeing healthy inbound inquiries from customers that were looking to lease that fiber. And so we feel really great about that asset set going forward, and believe we're going to be very successful in leasing it up.

Really helpful overview both. So one question we sometimes get is maybe you could provide some perspective on the quality of the fiber assets that you got as a result of the Windstream settlement. What kind of mix you have between more long-haul versus more metro fiber? And then also just on the lease-up opportunity, interesting to hear that it's mostly nonwireless. So maybe you could just dive a little deeper into some of the verticals that you're seeing success with, whether it's health care, education, E-Rate, maybe hyperscalers such as the large cloud companies that I know have a lot of networking needs to connect their data centers. So that would be helpful just to understand a little bit more about that Windstream fiber.

Yes. So in terms of the Windstream fiber, so it's fiber that spans Tier 1 through Tier 4 markets. So it crosses many different types of markets. And it's a healthy mix of both metro and long haul. So we just have the slide where we compared the Windstream fiber to the CenturyLink routes that we acquired. So a couple of years ago, if you recall, we acquired about 270,000 strand miles of fiber from CenturyLink. They were long-haul routes only. And so the way we've been leasing that is primarily through this 20-year dark fiber IRU contract contract. And in the 2 years that we've had those assets, we've generated upfront IRU fee of over $50 million. And so we've been very successful in leasing up that asset. When you compare that to the Windstream fiber, which again is 2.2 million strands of fiber, so almost 10x the amount of fiber that we got in CenturyLink, and it's a healthy mix of both metro and long haul. So not only can you sell those dark fiber IRU leases, but you can also potentially use that fiber in support of metro fiber and support of dark fiber, fiber-to-the-tower, small cell applications and continue to lease-up nonwireless at Uniti Fiber. Again, that's what gives us the confidence that we can be very successful in leasing that up. In terms of the lease-up at Uniti Fiber, and I talked about the nonwireless which again, I was referencing our Uniti Fiber lease-up, yes, the verticals you mentioned are the ones that we're going after. So it's local enterprises within that market, health care systems, government, education, both at the university and the secondary grade school level and throughout in between through our E-Rate capabilities. As you look at what we've done in the past couple of years, we've really bolstered up that E-Rate capabilities through the acquisition -- first, through the acquisition of Hunt and then we had it on ITS and then A&S afterwards and all through those acquisitions, each one of those companies bought a particular skill set for E-Rate. So we feel like we have a great team in place to really execute on that and really feel good about the opportunity to set up there as well. But again, it's really going to be just focused on driving -- it's a more localized approach to that lease-up nonwireless. You have to really know the markets, the customers in the market. And that's why we announced that we did restructure our sales team where led by Joe McCourt, he's got this enterprise sales team that's going to be more locally focused and really driving sales there. And then you look at our national strategic accounts, which is led by Greg Ortyl, they're focused more on the large wireless customers as well as other customers, national accounts, that would be supportive of our Uniti Leasing lease-up. And so there, in terms of we -- some of these customers, again, some of the wireless customers stand between Uniti Leasing and Fiber in terms of buying services from us, and so that's why we structured it that way. But at Uniti Leasing, outside of the carriers, there's also data content providers, web-scale providers, cable providers that we're selling to as well. So we have a really diverse mix of customers that you need to be leasing that we're leasing to fiber to as well.

Okay. Great. That's helpful color. So I guess related to the Uniti Fiber business, I believe you're winding down kind of the noncore construction business, hopefully, by the end of this year. So how should we think about the moving parts of the trajectory at Uniti Fiber kind of entering 2021 with some of the kind of lease-up opportunity that you have offset by maybe some of the exiting of some of these noncore businesses and the various moving parts as we enter 2021?

Yes. So in terms of the noncore, you're correct, we are winding down our noncore construction business. We mentioned that a couple of quarters ago, and we still expect that to be pretty much fully wound down by the end of this year. And so on our last call, our 2020 guidance that we gave, we said that, that noncore construction piece of our business represents about $13 million of annual revenue, which you should not expect to recur in 2021 as we wind that down. It's nonrecurring revenue, it's lumpy, it's very low margin, and in fact it's actually a slight drag on margin this year in 2020. And so going forward, again, we talked about this on our last call and investor calls, we're trying to simplify the story for 2021. And really the strategy, the core focus at Uniti Fiber is we're focused on high-margin recurring revenue. And so when you look at the core recurring part of the business, that continues to grow, and we expect to see continued growth in that business as we continue to execute on the lease-up strategy that I mentioned. Now as part -- I think Mark mentioned this earlier, is that in addition to lease-up, we will pursue greenfield builds. We're just not going to do 15 at a time that we had at one time going on because a lot of those projects were inherited when we did our prior acquisitions. But we will focus -- we'll pursue a handful at a time, and we'll be very particular about the ones that we undertake to make sure they have initial -- attractive initial yields as well as really good lease-up potential. And so we'll be focused on those types of projects as well as a lease up. And really, that's what's going to drive the growth. And as I mentioned earlier, there are high-margin types of opportunities as well. So when you look at our core recurring margins for 2020 based on what we said on our last call, the core margins are about 40% for the full year. And so I would expect to see continued improvement there as we continue to add on more dark fiber small cell projects and nonwireless which are all high-margin.

Sure. Sure. That all makes sense. I guess it's rather topical because it's a relatively recent announcement. So you have an announcement with DISH, not a lot of detail, I understand, but to kind of provide some fiber transport services. I understand they signed some agreements with some of your peers as well. So maybe you could just provide a little color on what that agreement entails and presumably DISH, who has been a little bit of a black box for us, it appears to be that at least we should take this wireless pull pretty seriously, given some of the agreements they've signed. So what are your expectations there?

Yes. So I'll try to give you a little bit more color. So we're very excited about the opportunity to work with DISH, to roll out 5G services. Again, you've seen some of the comments made to the FCC. they're looking to bring it out to about 70% of the population. And so I think based on that and the timing, they're looking to leverage existing networks wherever they can. And so I think that's where we can fit in when you look at our Southeast Uniti Fiber footprint, and we talked about the dark fiber and small cell builds that we've done there. Any orders that we get through DISH, we would expect to leverage that Southeast Uniti Fiber footprint in order to deliver those services. So we'll work closely with DISH to see which best markets geographies that we can work best together in. And again, I would expect any orders that we do receive from this agreement will probably start to flow in early to mid-next year and then all through 2022 as well. So again, we'll work diligently with DISH to figure out how we can best work with them and the types of solutions that they want to do to meet their time lines. So again, really excited about the opportunity, and I think it just adds a great -- another great customer to our wireless -- to our portfolio.

So interesting. Mark mentioned earlier that you would look a little more at some strategic M&A. So maybe what kind of assets do you think would kind of fit within Uniti's business that would make the most sense? Are you trying to maintain -- maybe you could talk about your leverage targets as well as you do these M&A transactions? Would they be sale leasebacks, acquisitions of portfolio companies, kind of what -- how should we think about that? And then as you look at the M&A environment as well, I know there's been a lot of private capital that has pushed up the multiples of a lot of strategic fiber assets. So to what degree does that inhibit your ability to do M&A that's accretive to your business?

Yes, sure. I'll start. Look, I think on Uniti Fiber to the extent that we do acquisitions that are whole company acquisitions that fit with our Uniti Fiber business, they are likely to be whole company acquisitions that are in the Southeast, either in our Southeast footprint or adjacent to our Southeast footprint. And so that would be what I would expect at Uniti Fiber. Now Uniti Leasing is more of a national footprint, more wholesale related. And so in that case, we are going to actually do a variety of different transactions and much more and much less geographically constrained because it is a passive business. But to your point on M&A, yes, we have the option to do a lot of different types of transactions now. And so a lot of people think about acquisitions in terms of whole company acquisitions, but we certainly have the ability to do opco/propco transactions like you've seen with Macquarie, where we bought the fiber assets and we hold the fiber assets. And then they bought the operations of the company, in that case, Bluebird. And we certainly have the opportunity with the Uniti Leasing to do sale-leaseback transactions, which we've done a number of. We're actually starting since we got the -- since we acquired the Windstream-related fiber that I mentioned earlier, starting to get a lot more inbound inquiries for transactions of that nature as well as just typical leasing IRU transactions as well. So our M&A pipeline is pretty strong right now. I'd say it's pretty active, and it's very diverse in terms of types of structures that people are interested in doing.

Okay. Great. That's good color. So maybe you can talk about some of the sales force changes. Bill, you alluded to this earlier, you formed the strategic accounts group. So what was the impetus to make those changes? And what kind of progress have you seen to date since you've kind of reshuffled the sales organization?

Yes. So really, the impetus for doing that was, again, you're seeing same customers, wireless customers, other customers that are buying both services at Uniti fiber under national strategic accounts level, buying services of both Uniti Fiber and Uniti Leasing. So we wanted to make sure our sales force was aligned to capture all that, and nothing was slipping through the cracks there. And so with the national strategic accounts team that's led by Greg Ortyl, we made sure we put the right sales people in place that can meet those needs of the customers and address those. And so we feel really good about the team we have there. And then really at the enterprise, again, it's in the wholesale market. Again, you have to know those markets because you're really dealing with customers that have a specific set of needs within those markets. And so we've structured the groups that way where we deployed several of these local enterprise salespeople. And now as we continue to densify and build out our networks, we may deploy -- we may put more salespeople into those markets to meet the need there. But it's really just to make sure that everybody was aligned there. And so we've seen great success, again, through do the lease-up already this year through nonwireless, primarily enterprise and all the verticals I talked about earlier, we generated on an annualized revenue basis over $10 million of revenue so far to date. And so we feel really good. We're still in the early stages of that, but we feel really good about the opportunity there. And then really at Uniti Leasing, again, with the strategic accounts team that's put in place there, still early earnings there with -- in regards to the Windstream assets because we've only had this for a few months. But again, we've already seen success through that to the Everstream transaction. We believe there's other transactions like that, that we can potentially do on our network as well as leasing out that fiber to other parties as well. And so we -- as of now, we think we have the right team in place to execute on that strategy.

Okay. Helpful color. So balance sheet related, how should we think about potentially looking at some M&A acquisitions, where do you want to keep leverage in the near term? And how should we think about the balance of debt versus equity? And then also, obviously, balancing that with your dividend payments as well over the next couple of years, just more broadly speaking, that would be helpful.

Sure. So we've said that we have an intermediate kind of range target for leverage to be in the 5.5 to 6 range on a net basis. We're at the high end of that range right now. I do expect us to bring that down over 2021. And we have a variety of ways we could achieve that and part of it will be through reduction of capital intensity, part of it will be through additional lease up of the assets, which provides additional cash flow, and then other -- through other opco/propco transactions like Everstream that we mentioned earlier that bring in a large upfront payment that's typically associated with IRU transactions. And there's other ways as well. So I'd say we expect to operate in that range and any acquisition that we do would likely keep us within that range as well. But from a capital structure standpoint, we -- I was -- we said over the last earnings call that we expect to address the revolver maturity this quarter, and I think we're still on track to do that. And then we certainly have our eye on the rest of the debt structure as well that lists a future amount that come due over the next couple of years, and we'll be looking to refinance that at the appropriate time. But I also want to do that in the context of making sure that as we go to refinance that debt that we end up -- once we've completed, that we end up with a debt profile that has the right attributes and characteristics, and that keeps our -- that optimizes our cost of capital. And by that, what I mean is the right mix of secured versus unsecured and the right mix of repriceable debt versus long-term fixed debt with breakage costs associated with it, which is the right way to stagger out the debt maturities. And all that in light of how we think our business is going to evolve and how we think what kind of M&A activities we think we might be doing this well. So we want to note in as we're doing individual transactions to address our recurring debt profile, we want to make sure we do it in context of what we actually want to achieve and be responsive to how we see our business evolving.

Okay. Thanks for that. I guess a kind of a broader question. Obviously, COVID-19 has had an impact on a lot of businesses, but it seems like you have been relatively immune to most of the challenges. I mean, are there any things that you see emerging next year with the vaccine coming that will be positive? Are there any permitting processes that have maybe been a little slower, customer installations that have been delayed on where you see an opportunity for certain parts of your business to positively benefit next year with this reopening trade? Or do you think it's more or less just business as usual? And the impact to Uniti hasn't really been that great.

Yes. As it relates to COVID, I mean, the impact has been minimal so far in our business, and we expect that to be minimal going forward. As we mentioned earlier -- we mentioned previously, early on during the pandemic, I mean we did see some delays in installs and bookings as customers had their physical locations closed and they kind of delayed buying decisions as they want to see how it played out. But we've worked through most of that. And in terms of permitting, we did see some delays there too as offices were closed. But one of the -- one of the benefits -- I mean, one of the highlights that came out of this was that I think it's put more -- it's made it that the permitting offices that do the small cell permitting and -- in particular will have to now adapt to doing it more virtually. And so paper submissions hopefully will go by the wayside, and they'll accept more digital and be more efficient in that process. So we think that, that process going forward will become much better. In terms of going into next year, I mean, I think one of the things we've seen is we've seen acceleration of the trends of people doing webcasting just like we are today with this conference and working from home and telemedicine and remote learning. And we think those trends were coming, but COVID kind of accelerated that. And so I think those will provide tailwinds for us, both directly and indirectly through our customers going forward. And so again, we haven't really seen much opportunity -- we haven't seen much disruption from the pandemic, and we're thankful for that. And we're thankful to be in an industry that has been able to weather the storm unlike many others. But we do believe that, that does provide a good opportunity for us going forward with these trends that we're seeing accelerated.

Okay. Another question I wanted to get to was around kind of the new administration. So a couple of things. First of all, we have the RDOF auction, a $20 billion program over 10 years that's just undergoing now. So maybe you could talk about the potential for more rural broadband subsidies to positively impact your business. How you see that playing out? And then under a new Biden administration, there's some, I guess, optimism that we could see an infrastructure bill with a focus on more rural broadband deployments. How do you think that could impact your business just more from a high level, that would be helpful.

Yes, maybe I'll start with the RDOF one, and maybe you want to mention about the Biden stuff -- Biden administration, Mark. But in terms of RDOF, I mean, we don't expect that Uniti will directly benefit from RDOF, because, again, we don't operate a residential broadband. But nonetheless, we do have customers, including Windstream, that could potentially benefit from RDOF and other customers as well. So indirectly, it would be a benefit to us. And in terms of administration, I mean, look, I think depending on how it goes either way, I don't think there's going to be much change to telecommunications. In fact, I think both parties would agree that you need to get more higher speeds out to more broadband for especially in rural broadband and increase the speeds out there. And so in terms of the FCC, obviously, we'll have to see what happens there in terms of who they appoint as their next Chairman of the FCC. And depending on that, it could have some regulatory impact on us, but we don't think it's going to impact us meaningfully. And Mark, I don't know if you had anything else you want to say.

Yes. So I would like to jump in. I agree with what Bill said. I think the communication infrastructure is probably going to be one of the things that both parties are going to agree upon. I think communication infrastructures is something that they both have an interest in and particularly in communication infrastructure in rural areas, Tier 2 and Tier 3 markets like we operate in will continue to be a focus. So I think the industry is in good shape from that standpoint. I have read -- I tried to read most of the tax policy proposals that we've seen. I have -- obviously, they've signaled, there will be tax policy changes or rate changes forthcoming. I have not seen anything yet that I think is adverse to communication REITs. And so I think from that standpoint, I don't really foresee anything that would adversely impact us. And to the extent that it impacts others it actually might be beneficial to reach a relative basis. But we'll see how that plays out. But from what I've read so far, I think communication infrastructure rate may change.

Okay. That's all very helpful. We're about out of time, so we will end it there. But Bill and Mark, really appreciate you both taking time to speak with us today. Look forward to speaking with you and stay safe and healthy, and have a great holiday season.

All right. Thank you, Eric.

All right. Thank you, both.

Bye-bye.