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

Good afternoon, everyone, and welcome again to JPMorgan's High-Yield Conference. I'm Tom Egan, JPMorgan's analyst for telecommunications and technology. [Operator Instructions] So with that, it's my pleasure to introduce the folks from Uniti. Presenting today are Mark Wallace, Executive Vice President and Chief Financial Officer and Treasurer; and Bill DiTullio, the Vice President of Finance and Investor Relations. So Mark, are you going to kick this off? If so, take it away.

Sure, Tom. Thank you very much. Tom, I did want to introduce one other colleague we have on, which is Ron Mudry, who is our Chief Revenue Officer. You'll be hearing a lot today from Ron because he's going to talk about -- a lot about our lease-up strategy today. So he's on with us as well. So let me start by reminding everybody in our presentation deck that we do have forward-looking statements. I encourage you to read that as part of the presentation. So let me start with -- in saying that we're very excited at Uniti regarding the upcoming year, 2021. We think we're very well-positioned to execute on our strategy going into this year. And that's really been set up by a number of different things. As you know, last year, we participated in the $4 million -- $4 billion deleveraging of our largest customer, Windstream. We strengthened the master leases as part of that settlement agreement. We acquired some fiber coming out of the settlement, which increased and grew our national network by over [ 90 ] -- a pretty good lease-up on those assets. Since then, we've been able to improve our liquidity. We've been able to refinance some of our higher cost debt and lower our borrowing costs. And we've been able to divest ourselves of some of our noncore operations and really focus our operations on our 2 business units being Uniti Leasing and Uniti Fiber. And so I want to focus just on -- for those who don't know Uniti quite as well, I want to focus on those. So if you'll turn to Slide 3 in the presentation. The title is Uniti Company Overview. We really operate now with -- under 2 business units. They're complementary, but they are separated and have distinct characteristics. Uniti Fiber is the one that people are probably most familiar with. This is the business that is the aggregation of a number of acquisitions that we've made since our spin-off in 2015, including both Southern Light, Tower Cloud, Hunt Telecom and PEG Bandwidth. This is an actively managed fiber operating company. It both designs, constructs, deploys, and it operates both dark fiber and lit services for a full suite of customers, both carriers, enterprise, E-Rate, schools, government and in some cases, military as well. So in the Southeast footprint, we have about 37,000 route miles. We have 2.4 million fiber strand miles. From a financial standpoint, we have just over $300 million in revenues at Uniti Fiber, and we have adjusted EBITDA of about $120 million projected for 2021. Uniti Fiber is unique in that it is focused on both the Southeast, and it is focused on Tier 2 and Tier 3 markets. Those markets are less competitive. We've invested a lot of capital over the last couple of years in building out new fiber builds for anchor customers, namely the wireless carriers. And we're very focused now on leasing up those anchor builds and extracting the value that's embedded in those networks as we try to lease up to enterprise and other customers. Uniti Leasing, on the other hand, on the left side here, is more of a passively managed business. Uniti Leasing has been greatly expanded with some of the fiber that we acquired from Windstream as part of the settlement. It includes 86,000 fiber route miles and 4.5 million fiber strand miles. It is primarily focused on wholesale customers, and it is focused on a number of different transaction structures, meaning sale leasebacks, opco/propco transactions, bulk purchases of fiber and then subsequent lease-up to a variety of different tenants. It has revenues today of about $785 million, and it has adjusted EBITDA margins of 98% to 99%. Low -- very low working capital, absent the Windstream GCI program that we'll talk about separately. Very low CapEx requirements as well. So 2 complementary business units, both focused on fiber, but both with different characteristics and very good growth profiles going forward. So if you'll turn to the next slide, which is Slide 4, just to highlight some of our 2021 priorities. We went through these on our earnings call yesterday. But in brief, they are to continue to focus on driving high-margin recurring revenues through lease-up of our anchor builds at Uniti Fiber and through the fiber inventory that we have at Uniti Leasing. We are also focused on selectively expanding our network with attractive anchor where -- with attractive anchor builds that continue to have good economics in our markets. And then last, we are focused on taking advantage of opportunities both in the M&A market and in the capital markets, and you've seen us execute on some of those things already this year. So with that, I'll turn it over to Ron to go to Slide 5 and comment on our nationwide fiber network.

Good afternoon, everyone. So as you can see by the map on Page 5, we have a very robust fiber network that has a lot of deep dense coverage in Tier 2/Tier 3 markets, rural areas as well as long-haul connectivity across the country. Acquiring the Windstream settlement fiber really has substantially expanded our footprint of available dark fiber, what's unutilized and available for sales. As a matter of fact, it increased about 90%. And I think that the combination of the regional, metro fiber and the long-haul fiber that we acquired from Lumen, formerly CenturyLink, through that DOJ process a couple of years ago have really given us a good mix of fiber that we can put together unique solutions with. And in particular, the Tier 2/Tier 3 and rural presence is going to be a very big differentiator as we continue to go to market. If you move over to the next page on Slide 6, titled All Communication Infrastructure End Markets Rely on Fiber. If you think back 10, 15 years ago, fiber builds, fiber, it was all about long-haul fiber connecting different metro markets together, connecting central offices or building in the central business district. If you look now, fiber is pretty much everywhere. It's needed everywhere, at the core of all communications and compute. And this diagram here is a little bit busy. But if you look through it, you'll see that fiber really is at the core of a lot of the key things that are running the country. Of course, we got towers and macro towers and small cell densification on the left. On the right, now you've got hyperscalers that would need large fiber counts going out to data centers. Instead of these data centers being in cities, they're in rural areas. They're in low-power areas where power is low. So it's a different type of application that's requiring a very high amount of fiber compared to a year or 10 years ago or so. And as you continue on and you look at it, I mean, it's the movement to suburban fiber as opposed to the urban areas. The Tier 2/Tier 3 and rural are getting a lot of focus right now, especially underserved markets. And with work-from-home and schooling-from-home now, obviously, we've got to have much better connectivity out in those areas. That's why fiber-to-the-home is such a big build right now. Telemedicine, and then the movement to the edge. And of course, people talk about edge compute and movement to the edge, but there's different versions of the edge. And now we're talking about the far edge, which is even further out there, perhaps at a tower site. So from our view -- from our perspective as a neutral infrastructure provider, we just see a lot of growth opportunities that are very diversified, and we see continued growth coming from those in the years and decades to come. If you go on to Page 7, Slide 7 about the Uniti Leasing sales pipeline. You can see that it's a very well-diversified pipeline. We've got a good mix of regional carriers, international carriers, content, cable companies and so forth. And we've seen the sales funnel roughly double in contract value since we began marketing the Windstream settlement fiber. Remember, we just got access to that fiber a few months back, and so we're just starting to ramp up the sales efforts on that. And as a result of that, we're seeing the sales funnel grow. Dark fiber is a little bit longer sales cycle than Internet lit solutions because it is such an engineering planning cycle to get ready to light the fiber, migrate your traffic over there. It's a long-term commitment which is also why it takes a little longer to close the upfront sales. But the pipeline is working its way through. We've made some efforts as a result of having much larger fiber inventory that's attractive to a much larger national customer, that we reorganized our sales teams. So we've consolidated some of our teams together and formed a Strategic Accounts group, so we could really increase the focus on those very large customers that have large needs, recurring needs and need to be served with a very dedicated sales initiative. And we've also been adding salespeople because of the increased demand. And if you go on to Page 8. If you think about the types of transactions that we do within Uniti Leasing, there's really 4 main categories. The first one there, IRU and dark fiber lease-up, that's the standard lease-up sales that we're doing everyday. It can be transactional, singles and doubles, small deals, to help fill in a network or a particular need of a customer. It could be a large bulk sale, where a customer acquires a fair amount of fiber that they put in place -- that they take down and put in service over time. Or we have a program approach, where we actually provide all the details of our network and where they can access us and so forth to certain key partners. And then they use that in their own planning. So as they're looking to build out to a customer instead of doing their own build, they can see that we've got fiber there and we can be their middle-mile solution, and they can get their customer order in hand and place the order with us. So different ways of doing that, and we see a lot of strong activity there. The sale leaseback is really more of a long-term partnering approach where we're going to become a financial and operating -- or a financial and infrastructure partner to an existing business that wants to monetize its existing network. And so we can acquire that network and lease it back to them, either exclusively, so they can continue to work in their territory and supporting some other growth attributes. Or it could be nonexclusive, where we retain some of the fiber infrastructure, and we've done a number of deals like that where we'll retain certain strands, and then we can look to monetize that separately. The opco/propco has been a very good tool for us to work with other parties who are looking to either acquire or monetize operations. And what we've been able to do is combine -- contributing or selling some of our operations to another operator that's going to combine it together, but we retain the fiber infrastructure and lease it all to the operating entities. So we're the propco, the property company, leasing all the REIT-qualifying fiber infrastructure to the operator who's actually lighting it, deploying it, making sales and so forth. And the Everstream and Bluebird transactions with Macquarie and with Everstream's AMP Capital are examples of that. And in the Everstream transaction, we were able to also bundle in some lease-up of the Windstream settlement fiber that we got as well as sell some customers that were in that territory that we thought could be better served, with Everstream taking over that infrastructure from us up in the Northeast. So some sort of a combination of bundling together IRU lease-up along with the sale leaseback and combining some of our noncore operations if relevant. We'll continue to look at some of those. And then the last element there is the growth CapEx program or GCI program, of course, the largest with Windstream as part of the settlement, where we're essentially providing an ongoing program for expanding critical infrastructure and adding it on to the existing lease that we've already got with that party. Of course, a lot of focus on fiber-to-the-home in that sort of a program as well. And we can look at doing that with other parties. We've got a similar-type program with Bluebird available as well. And that's all I had on Page 8. And with that, I'll turn it back over to Bill to cover Page 9 and take us home.

Thanks, Ron. I appreciate it. So yes, if you could please turn to Slide 9, so we'll go in a little bit more detail about the growth capital investment program that Ron just highlighted. So as part of our settlement with Windstream, we now have this growth capital -- GCI program, where we have committed to investing up to $1.75 billion over the next 10 years. And those are primarily going to be for fiber and fiber-related assets. So this year, we've invested -- in 2020, we invested $85 million into the program. And just the way it works, I'll kind of highlight the specifics of how that works, is Windstream must first make the investment themselves. And so they'll invest it into their network, and primarily, like I said, it's going to be for fiber and fiber-related assets. Uniti will then review that to make sure it meets the criteria of the GCI program. So again, it needs to be fiber or fiber-related. It needs to meet certain return thresholds to qualify as real property under REITs. So if it meets all that criteria, we will then acquire that fiber from Windstream, fund the CapEx, reimburse them for the CapEx that they spent. And then on the 1-year anniversary of Uniti making that investment, it gets added to the master leases that we currently have with Windstream at an 8% initial yield, subject to a 0.5% annual escalator. So based on the investments we made in 2020, which I said was $85 million, we expect that, that will generate $7 million of annualized revenue. So of the investments we made in 2020, that added a little over 2,500 route miles, 84,000 strand miles of valuable fiber that Uniti owns and becomes part of our assets. For 2021, we expect to invest approximately $200 million in the GCI, which, based on historical cost-to-build on a per fiber route mile basis, we expect that will translate to a little over 6,000 route miles of additional fiber to be added. And like I said, Windstream must invest the capital first before we reimburse them. So based on the 2021, what we expect to invest there, we expect that, that will generate approximately $16 million of annualized revenue when complete. So again, the GCI program, we believe, helps facilitate future-proofing our network. If you could turn to Slide 10, we now talk about the lease-up we're seeing at Uniti Fiber. So over the last couple of years, what you've seen us do at Uniti Fiber is when we did the previous acquisitions of PEG Bandwidth, Tower Cloud, Southern Light, all those acquisitions -- those companies had their independent projects going on. There were these large dark fiber -- for the most part, large dark fiber or small cell builds. And through those acquisitions, we aggregated some of these projects and completed them and undertook our own projects as one company. And so at one point, if you go back a couple of years, we had approximately 14, 15 projects, these dark fiber, small cell wireless projects, undergoing at the same time. And if you looked at our capital intensity at that time, it was well above 50% as a percentage of Uniti Fiber's revenues. Over the course of 2019 and to the end of last year, we completed all of those legacy builds. And all those builds were secured with an anchor wireless tenant. So we don't do anything on speculation. It's all with an anchor wireless tenant secured. And when we underwrote those and we undertook those projects, we targeted initial yields of, say, between 5% and 7%. So almost 14, 15 projects that we've completed, the last of which were completed late last year, we saw that those projects have generated initial yields of about 7%. So that thesis has played out. So now we're [ trying to ] leasing up those networks, and we've been leasing them up all along as we've been building over the last 4 years. And it's really a focal point of ours. It was a focal point of ours as we ended 2020 and as we head into 2021. And so through that cumulative lease-up that we've generated to date, which these 2 pie charts show, is that we've generated over $5.5 million of [ MRR realization ], the lease-up. And you can see the bulk of that relates to nonwireless opportunities, so selling to enterprises, selling to schools, to the federally funded E-Rate program, health care, government, those types of customers within these markets. We've been able to already take that 7% yield. And when you layer on everything we sold to date, that cumulative yield is now -- we've generated a cumulative yield of approximately 14%. So we've doubled that initial yield in the span of a little over 4 years. And if you look at what we've sold just this year alone in 2020, that lease-up represents about $14 million of annualized revenues, with incremental yields of 50%-plus. So all of these opportunities that we're now focusing on, primarily again nonwireless, they're generating very high incremental returns because they are leveraging the existing network that we've already built. So again, when you look at our capital intensity, like I said before, when we were in the height of it, it was above 50%. We ended the year 2020 around 40%, and we expect our capital intensity to continue to trend towards the mid-30% range. As we will continue to focus on building out several greenfield projects, we'll just do a handful at a time. We'll be very particular about the ones we pursue to make sure they have attractive anchor yields as well as lease-up potential. But really, what's driving that capital intensity down is that we're leveraging the existing network with these lease-up opportunities that require substantially less CapEx than the anchor deals. And the last point I want to make is that all these opportunities, both these anchor wireless builds and the lease-up, all have a high-margin profile. So over time, we expect to see further improvement within our EBITDA margins at Uniti Fiber as we continue to bring more of this, opportunities on that. Moving to Slide 11. Now it kind of just shows you if we take that 14% cumulative view that I just talked about at Uniti Fiber and then you layer on the lease-up at Uniti Leasing, what Ron was talking about before, which is coming out of that $1 billion funnel, that takes our cumulative yield up to 16%. And again, we're still very -- in the early stages of that. A lot of that lease-up is being driven by the Windstream assets that we acquired, and we've only had those assets for a few months now. But again, we continue to see strong demand. So over time, between driving incremental lease-up at Uniti Fiber and leveraging that network and leveraging the assets we have today in our Uniti Leasing portfolio, we believe we can continue to meaningfully drive that cumulative yield over time. And again, the fiber that we acquired from Windstream just provides further upside to that number. Turning to Slide 12. This highlights our revenues under contract at Uniti Fiber. So today, we have about a little over $1 billion of revenues in the contract there, with an average term remaining of 4 years. If you look at -- we broke down the remaining life by segment. You can see that the wireless segment, especially in the backlog, has about 10 years remaining. So that's a lot of the small cell and dark fiber projects, again, that we're continuing to work on. If you look at the mix of our bookings, it's primarily been nonwireless over the last several quarters, 70%-plus, and that's, again, going back to the lease-up potential there. And those contracts tend to be a little bit shorter, anywhere between 3 to 5 years on them. We have a little bit over 5 years remaining on those in our backlog. And so again, it will be very important for us to continue to execute on that strategy of really ramping up our enterprise sales. Turning to Slide 13. This kind of just gives you an overview of a lot of the things we talked about today. So again, we have $8 billion of revenue under contract, split between $7 billion at Uniti Leasing, 1 -- a little over $1 billion at Uniti Fiber. We have 2,300 small cells either installed or in our backlog today. We're -- a little over $1 billion of revenue expected for this year. We got our leverage down on an LQA basis -- EBITDA -- [ LQA ] EBITDA basis down to 5.7x at year-end and net secured leverage of 3.3x. With the recent refinancing efforts, we don't have any really significant maturities due within the next year. We have 123,000 route miles of valuable fiber, very high margins when you look at our total leasing business and leasing business combined with our existing business. And outside of the spin-off from Windstream, we've invested over $2 billion -- about -- approximately $2 billion in investments we made today. So with that, I'll turn to the last slide here before I turn it back to Tom for Q&A, Slide 14. So we believe Uniti has a unique opportunity in the communications infrastructure space. We're still in the early years of the investment cycle, and it's a multiyear investment cycle. So between what we're seeing at Uniti Leasing in terms of that pipeline, a lot of -- some of those opportunities are going to be multiyear investments. With our wireless customers, we continue to see strong demand there as the rollout of 5G becomes more broadly rolled out in our markets. So we have a lot of significant tailwinds in our industry today. And again, we talked about the virtualization, the move -- how the COVID-19 pandemic has kind of accelerated that virtualization trend. We believed it was always coming, but we believe this pandemic has definitely accelerated that trend. And so when you look at education, you look at conferences like this, we're utilizing platforms like Zoom, that all requires dense fiber networks to make sure it works seamlessly. So we believe we have a differentiated strategy and a hard-to-replicate and unique REIT structure. We have a portfolio of very attractive assets, have attractive economics, with 95% of our revenue recurring. If you look at our company-wide churn, it's -- monthly churn, it's about 0.2%, which is, we believe, the best-in-class. And again, we have about $8 billion of revenues under contract remaining today, with an average term of 9 years. So a lot of term left there as well. And we really continue -- we have a proven strategy, and we have a proven track record of executing on that strategy and creating value for our stockholders. So with that, I'd like to turn the call back over to Tom, and we can start Q&A.

[Operator Instructions] Let me just throw out a few questions of my own. The first is -- this is actually my lead question that I think I gave to Bill probably 2 weeks ago. And somebody actually asked you this last night, but let me put a slightly different spin on it. The deal that you have with GCI investment in Windstream sort of links Uniti and Windstream together more than maybe ever. And so one of the questions is, does this affect your original strategy of trying to diversify your business away from Windstream? Because originally, the plan was, look, we're a REIT, if we can diversify our REIT basis, that gets us the kind of multiples that REITs that are diversified get. And this seems to be sort of going the other direction. Now I know last night, the answer was, "Well, we can still get down to 50% of revenue." But it almost looks like given what Windstream's looking to do over the next 3 to 5 years in terms of fiber-to-the-home, that you're going to grow your business pretty nicely. And because their revenue comes in almost, I mean, I'll call it, 90%, 95%, 85% of it goes straight to EBITDA, it almost looks like you have -- the diversification is something that's probably not going to happen for a few years. So is that something you even care about anymore? Or is that something that you still need to work toward?

Yes. Hey, Tom, this is Mark. Let me try to take that. So yes, I mean, diversification is certainly still a goal of Uniti's. I think on the GCI program that we have with them, just keep in mind, I mean, the way we think about it is that's a very mutually beneficial program to -- for both of us. It is essentially us investing money in our network. So we're continuing to build our network. We own the assets. But at the same time, it is pre-leased effectively to Windstream, such that it improves their competitive position. And to the extent that Uniti today, as you know, probably represents about 65% of our -- on our revenue basis, it is important that they do well and perform well. And to the extent that, that helps them perform better in their markets and increase their profitability and increase perhaps the ratings over time and their financial profile, that will be beneficial to us as well, in addition to the actual new fiber builds effectively, I'll use the expression, "future-proofing our network," because it really improves the quality of our network going forward as well. So those are very valuable assets, whether it's Windstream or anybody else using those. So I think that's -- but -- so you're right, but -- so -- but in addition to that, I do think that all that will help because that's beneficial for both us and them. It also helps bring down our -- starts to help us bring down our cost of capital as well. And you've seen that happen in the -- in our debt securities most recently. You've seen there's starting to be a pretty good spread between our coupon rates on our debt and our -- the yields on similar securities. And so it's helping us bring down [ debt ], among other things. It's helping to bring down our cost of debt, will help bring down our weighted average cost of capital. And that will make M&A opportunities even more attractive for us going forward. We're definitely still focused on diversification. And we still have a very robust, mostly proprietary M&A pipeline. And so I do think that all these things work together to make that -- to make -- to continue to make progress on that and come to fruition.

That's helpful. I have a question for -- I think this might be for Ron. Ron, I'm glad you're able to join us today. As each year passes, it's harder and harder to find somebody who has as much experience in the telecommunications industry as me, but you do. So let me throw this at you. There's -- with the fiber that you bought from Windstream, you were able to do a transaction nicely with Everstream right away. Are there other opportunities like that? And are there some fiber routes that you bought from Windstream that might be more difficult to sell than others? If you've got a sales force out there that's trying to combine it with, say, an Everstream or a Bluebird, that [ makes ] an enormous amount of sense. But the concern is that there's maybe a portfolio of Windstream fiber that they weren't able to sell very well and you might have as much difficulty selling it, too.

Yes. Well, there's a lot in that question there. So maybe we can start by taking the opco part of it with Everstream. But we think the Everstream deal is a great deal because it combines our opco/propco, sale-leaseback approach with leasing up other fiber, by bundling other fiber, [ and they even ] bundled some customers that we thought were more appropriate in that deal. And I think that there are other opportunities like that around. Now there, of course, we also divested our operations up there in the Northeast and transitioned that to -- or will be transitioning that to Everstream at the close. But we can do a similar-type transaction without divesting operations, too. And we actually have a number of discussions underway with other regional providers in how we would structure a transaction, kind of customizing a little bit to the partner's situation and what would be appropriate for both parties. That's what we did with Everstream and their strategy. We looked at their strategy and tried to put together a deal that would make sense for both parties. And so I think we will see other opportunities with regional providers to bundle in the Windstream lease-up fiber with some sort of a sale-leaseback or opco/propco deal. Your question about are some routes more difficult to monetize or sell than others. Obviously, some routes are more attractive than others, right? But you have to look for who would have demand for that type of fiber or market or something like that and think differently about it. And I think from our perspective, we're a neutral infrastructure provider. We want to engage broadly with the market in different segments. And so I think we will seek to find the right partner or the right customer for hard-to-monetize fiber, I guess. But we've got a broad sales force representing this now, and they're taking it to all of our customers. And we're seeing a lot more interest from different types of carriers and customers that weren't talking to us [ when we were ] just a small regional opportunity. Now that we're more of a nationwide opportunity and we've got deep Tier 2/Tier 3 coverage, it's attracting a lot more attention. So while every network has got more favorable and less favorable routes, we feel very confident in being able to lease up a lot of this fiber and being able to do it broadly.

We've only got a couple of minutes left, but let me share this question now because I don't think I've ever heard anyone ask this one. There's a number of private equity folks out there now that have their hands deep into the telco business. You've got Ziply, you've got Searchlight with Consolidated, you've got Zayo. Are there opportunities longer-term to be able to do transactions with those kinds of investors?

The private equities or the companies they are working with?

Yes. With their businesses, right? For them to do a potential sale leaseback, opco/propco or something similar in nature with you as their exit strategy?

Well, sure. Yes, sure. I mean that would be an opportunity. I mean it's not different than any other. But I think you see a lot of interest from private equity companies. I mean obviously, infrastructure funds and the demand for these kind of assets has really been going up. And we view that as a real positive. I mean we could see those types of entities having an interest in investing in fiber infrastructure through a direct investment with us. We could be partnering with them in a sale-leaseback transaction with one of their portfolio companies, like we did with Macquarie for Bluebird and AMP on the Everstream transaction. Or we could even look to go out and do an acquisition or build a new market with an operating partner being the local provider there and us more or less being the infrastructure partner or the property company in the same kind of opco/propco example. So I think there's a lot of different ways to structure that. And I think that having infrastructure funds and private equity owners involved is a good thing for us because we're very aligned in wanting to grow the profitability of the business. They're trying to grow for an exit. We're trying to grow to have a continuing strong customer that wants more demand. And I think that you'll see us trying to partner and target with certain regional providers to do something where they have a private equity sponsor.

That was not a pitch from my banking group, by the way. That was not a plant. Anyway, we're down to the end of our time. Gentlemen, thanks for participating in our conference today. Really appreciate it. And thanks to the folks who tuned in.

All right. Thank you.

Thank you, Tom.