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

[Presentation] [Audio Gap] Citi's 2021 Virtual Property CEO Conference. I'm Bryan Quinn with Citi Sales, and I'm pleased to have with us today, Uniti, and their CEO, Kenny Gunderman. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today to ask management any questions, simply type them into the question box, and they will come directly to me. And I'll do my best to answer them during the session.

Kenny, before I turn it over to you to introduce your company, we're asking every company this question. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are 3 reasons why they should invest in Uniti?

First, Bryan, it's great to be with you again and appreciate Citi having us at the conference. And we at Uniti appreciate the virtual aspect of that since we're enabling the broadband connection. So number one, we're undervalued. 5% dividend yield relative to our peer group, we think, is too high, especially given that, number two, the fundamentals in our business have never been stronger, 95% recurring revenue, 0.2% monthly churn, 8-year average contract term. So it's really strong fundamentals in our business. And number three, the tailwinds in our business are really, really strong. So just broadband growth, 5G network investments, all of the tailwinds behind Uniti and communications infrastructure, in general, are just very, very strong.

Let's start the presentation. Well, we just started it, but let's go to -- hopefully, you can tell me the key strategic and operating priorities for Uniti over the next year.

Yes. First of all, number one, in our Uniti Fiber business -- we have 2 segments, Uniti Fiber and Uniti Leasing. They're both fiber companies. But one is more of a regionally focused, actively managed fiber business, that's Uniti Fiber, where we're actually building a lot of new fiber. And we're generally building fiber for wireless customers. And so one priority will be to continue to opportunistically find new good anchor builds with our wireless customers that are usually in the 7% to 8% cash flow-yielding range; secondly, continue to execute on leasing up those networks to the second, third and fourth tenants who may be wireless customers or may be enterprises or governments or schools. And so we've proven very successful. We've proven our strategy on executing on lease-up very well over the past few years, driving our blended yields at Uniti Fiber to roughly 14% all-in. So we're going to continue to focus on that. At Uniti Leasing, that's more of our national wholesale network. So 123,000 route miles, almost 7 million strand miles of fiber, the eighth largest fiber network in the country. It traverses about 40 different states. We're going to continue to focus on leasing up that network as well. So adding new customers there generally come in at about -- at around 100% margins, so pretty attractive, not a lot of capital required. And we've got a tremendous amount of excess fiber available for capacity lease-up. And then lastly, and related to that, in Uniti Leasing, we're not building a lot of new fiber, but we're acquiring fiber. So we've been very active in the M&A market, acquiring new fiber through sale leasebacks and also through acquiring companies. And that's going to be a big part of our strategy, has been a big part of our strategy and will continue to be a big part of our strategy going forward.

Great. Kenny, in the past, you've said that your business hasn't really been impacted by COVID-19. Do you expect that to continue? And maybe a follow-on, have you seen any different use cases of fiber emerge as a result of the pandemic?

Yes, it hasn't been negatively impacted but it's been positively impacted. And I would say that somewhat sheepishly because none of us would ever wish for a global pandemic. But on the negative side, we've had some delays on our ability to install new service because in order to do that, we need to get out to a customer's location. And in some cases, our customers have been working from home and unwilling to allow access to provide that service -- or to provide that install. And in some cases, we've had some customers who are less willing to move to a new provider. They're just not in the office, and they don't want to prioritize moving away from their existing service provider. But I would characterize those impacts as very small and timing-related only. The real impact has been a tremendous increase in demand. And when you think about what we are doing, we are providing fiber networks on a wholesale basis to connect customers to allow virtual connectivity, so mobile broadband, distributed work environments, e-learning, telemedicine, all of those things that we are all doing in a -- we were doing pre-COVID, but during COVID, these are the things that are really keeping us all connected. And so our demand has increased tremendously from industries like the wireless providers who need to be able to beef up their networks to allow greater connectivity, from hospitals, enabling telemedicine, for example; schools, who are enabling e-learning; and other critical industries. So all of the need for investment in telecom infrastructure, in fiber, in particular, has really been accelerated. And so to your last question about use cases from COVID, I don't think there's been new use cases. All of the things I just mentioned are not new, but I definitely believe that those trends have been accelerated. So whereas some of these trends, like distributed work environments and telemedicine, were going to happen over a period of 2 or 3 or 4 years, they've now been pulled in to the current time, and I don't think we're ever going to go back to the way things were before. And ultimately, in order to enable that, you got to have good, robust fiber networks, and that's our core business.

Yes. Maybe we can touch on the opportunity that you have with the fiber that you acquired from Windstream and maybe just some comments on the demand that you've seen for that fiber.

Yes. Sure. And for those who don't know us, we just signed an agreement with Windstream last fall, which gave us access to a substantial amount of new fiber around the country. So back to my earlier theme of being acquisitive at Uniti Leasing, this was one of the transactions that gave us a substantial amount of new fiber to lease up. In fact, it increased our leasable capacity by 90% from what it was previously. And that's what really has made us the eighth largest fiber network in the country. And when I say eighth largest, I'm comparing to Verizon and AT&T and Charter and Zayo, so some of the really big fiber networks. And so we're really up there nationally. So it's put us on a different level with respect to our ability to participate in the wholesale market. Our sales funnel doubled within a few months after announcing that transaction and even really before we made that fiber available to our sales team to start quoting customers. And once we did that, we started to turn that funnel into revenue. So at Uniti Leasing, our sales funnel went from $0.5 billion to $1 billion, and our contractual revenue went from roughly $600 million to almost $750 million in a very short period of time. So we've been able to demonstrate a lot of early success that has materialized into real cash flow and real revenue. And most importantly, we're still in the very early innings of that. And I think the opportunity is going to be tremendous for us over the coming years.

So demand has been strong. It's -- what kind of -- I guess what kind of enterprises are you seeing that demand, that increased demand for this from?

Well, that's a good question. And I think one of the things that is particularly encouraging about the success to me is it's a diverse set of customers from which we're getting that demand. It includes the wireless carriers. It includes the West Coast data-centric providers, the FANG universe. It includes large enterprises. We're now, for the first time, participating in nationwide RFPs for Fortune 10, Fortune 50 enterprises that we haven't in the past and then just other national MSOs and large enterprise -- or I'm sorry, large carrier providers around the country, so -- and in some cases, even international carriers. So it's a really good mix, diverse set of opportunities.

Okay. DISH is one that was -- that recently kind of was in the news, and they named you as 1 of their 4 preferred providers of fiber services as they roll out wireless. Can you just describe the opportunity that, that could be for Uniti over the coming years?

Sure. So 90%-plus of our revenue is wholesale, which means we're in -- either selling dark fiber or we're selling long-term lit contracts to providers who have been interfaced with the end users. So we like being a wholesale provider. And a big segment of our demand comes from the wireless carriers. We're selling fiber-to-the-tower backhaul. And we're selling fiber to connect small cells, which is a new and important trend in our industry that really, in a sense, is enabling 5G network rollout. And in some cases, we're just providing long-haul dark fiber routes to wireless carriers. But there's a tremendous amount of demand, and I mentioned COVID as one of the catalysts. But even before COVID, there -- as we all know, we all have smartphones, we all have tablets, we're all using that mobile broadband at increasing levels. And so for a fiber provider like us, we track our network traffic every day. And 5 years ago, 4 years ago, our average peak traffic was 16 gigabits, which is a boatload of traffic. I mean I can put that in terms of Library of Congress and other things. But I can tell you, that's just a lot. Today, just 4 years later, it's 160 gigabits, so 10x increase, and we think that trajectory is only going to continue. And so with respect to DISH, today, there's 3 wireless carriers. There's Verizon, there's AT&T, and there's T-Mobile, which recently acquired Sprint. All of those are big customers of ours. They each have their own national network. And so as you can imagine, they have pockets of demand all over the country. DISH is a brand-new entrant into this segment, and they have aspirations and commitments to the FCC to roll out a national network. So in a sense, this is a greenfield national network that they're rolling out, which is like heaven for infrastructure providers like Uniti and the tower providers and others. And last -- late last year, DISH named Uniti as 1 of 4 core fiber providers to help them roll out that national network. And so it's a terrific -- we think a terrific complement to Uniti, to the fact that we have the scale and the ability to deliver. And ultimately, we think it's going to be a tremendous opportunity as we work with our new wireless partner to roll out their network. So we're very excited about it.

Great. What kind of time frame does that rollout look like? I mean it has to be a multiyear kind of -- but like how should we think about that kind of that revenue opportunity and the growth and duration of that?

We've begun work in earnest. I think -- we think probably revenue will start flowing later this year, certainly into 2022. And in terms of the time line, this is not a one-and-done thing, it's going -- it's something that's going to continue over the coming 5, 10 years. And it won't just be to roll out the initial network. It will be to continue to augment, supplement, densify that network in the coming years to remain competitive with the other wireless carriers. So it's a multiyear investment cycle, and we're in at the ground level.

Good stuff. So changing up a little bit, you -- obviously, 5G is a big driver, and you've mentioned that earlier. As you roll out 5G or as 5G rolls out into more of your Tier 2 and Tier 3 markets, can you just talk about that opportunity for Uniti and what the pipeline looks like there?

Yes, sure. So our strategy at Uniti Fiber, so again, we have the national footprint and then we have Uniti Fiber, which is where we really focus on one particular region, which, for us, is the Southeast. It's Texas to Florida. And we've picked that region for a lot of reasons, right? There's less competition from third-party fiber providers. We think the growth potential in those -- in that region is really good demographically. And we also think that the wireless carriers need network and need network densification. And what that really means is there's a lot of what we call Tier 2 and Tier 3 markets, so not New York City, not Chicago, but Tallahassee, Florida and Mobile, Alabama and Shreveport, Louisiana or Little Rock, Arkansas, et cetera. And so a big part of our strategy is to target those markets that have less competition, where wireless carriers tend to not have as much network. We partner with those carriers, go into those markets and build networks at spec for them with anchor economics that are usually 5%, 6%, 7% initial yields, with 10- or 20-year contracts that give us nice, steady economics, but then also give us a tremendous amount of excess fiber for lease-up to other customers. And those other customers is where 5G comes in. So these networks enable a wireless carrier to get into that market and start deploying towers and start deploying small cells. And then from there, we add additional towers and additional small cells to help those carriers densify as 5G rolls out, and we're also selling the network to enterprises, to schools, to health care campuses or to college campuses, government institutions. And if we pick the right markets, these are markets where we can really have a growth trajectory for the next 10 years, 15 years. 5G, in particular, has really been focused mostly on the bigger markets, in the Tier 1 markets. That's where the carriers have focused first. But our strategy was to get into these other markets and wait for that trend. So once it comes, we will have been there with our networks in place, and that's exactly what we're starting to see. So the real growth trajectory on small cells is just beginning in our markets. And at our last quarterly call, we communicated that our fourth quarter 2020 over fourth quarter 2019 small cell and dark fiber growth was 65%. So -- and we're growing off a small base, but that's a huge growth number. And so we're starting to see the early, early, early indications of the growth potential of 5G and small cells in our markets.

Okay. Maybe you can talk about what the broader bookings environment looks like at Uniti Fiber and maybe the competitive environment there as well.

Yes. Strong bookings. I think we're forecasting 15%, 16% growth in bookings over -- year-over-year in 2021. That's a good mix of wireless, enterprise, E-rate and just general wholesale. So we like a good mix of all of those, like I was saying earlier. And we're showing good, good steady growth in each of those. And that's indicative of the growth potential in our markets. And again, we like to go into markets where we know we're going to be able to lease-up our networks through these different -- from all these different customer bases. And generally, what that means is that we're the insurgent provider in these markets. And so if you look at our general market share, and measured in different ways, so if you look at our general market share in these markets, it's very low, 5%, 6%, 7% in some cases, or even lower, which just demonstrates that we've got a tremendous amount of opportunity to continue leasing up those networks and growing in those markets. So we feel really good about our bookings target. Wireless bookings are lumpy. They come in cycles. But we've got a good steady quarterly and monthly amount of nonwireless bookings that continue to track at 70%, 80% of total bookings, and that's exactly where we wanted to be. So we feel really good about the opportunity there.

Great. So kind of moving on to M&A a little bit. What does your M&A funnel look like? And are there any areas or opportunities that you would be most likely to pursue?

Yes. So M&A has been a really big part of our history. We've done almost 2 dozen deals in the past 5 years, 6 years, buying and selling, optimizing our portfolio, mostly acquiring. And that's really what has gotten us to the eighth largest fiber network in the country. And I say that because we were able to execute on that during a period of time when there were a lot of other buyers for these assets. And there's a -- in our industry, infrastructure funds, private equity and other strategics have been actively looking to acquire assets in our space. And we've managed to accumulate 123,000 route miles of fiber in 5 years largely through executing on a proprietary M&A funnel. And our acquisition multiples have ranged from 10 to 11 to 12x when other -- and the private market assets like ours have gone for 15 to 20x cash flow. So we've been able to execute on a proprietary funnel at a multiple discount, which is great for our shareholders. And so we also -- so we get a lot of questions about our M&A because I think folks like what we've done in the past, they want us to do more of it, and we want to do more of it and we're going to do more of it. And so I would say roughly 1/3 of our funnel is what we call sale leasebacks, which is really just acquiring assets as opposed to companies with an anchor customer. Secondly, we've got probably 1/3 of the funnel is bolt-on opportunities, so whole company acquisitions that fit really nicely into our existing portfolio, where we can get not only revenue synergies but also cash flow synergies through integration. And then thirdly, we always have a good, healthy number of much larger transformative-type transactions that can really move the needle for us. And so we're continuing to pursue those. So M&A is a critically important part of our strategy.

Great. How do you anticipate funding M&A going forward?

Yes. So in the -- yes, good question. You got to pay for it. So in the past, we have funded M&A in the capital markets largely. So we're not accumulating cash. I mean we're obviously paying out the majority of our cash and dividends. And so we're not accumulating cash. And we -- so we financed our acquisitions in the capital markets through a combination of debt and equity. We've issued very little equity to fund our core business, but we have issued equity to fund M&A in the past, and we like that, we like to be able to use equity to get alignment of interest with sellers and counterparties. So I think in the future, if we have sizable acquisitions, we would fund it in a similar way, a combination of debt and equity. But I think for the smaller transactions like sale leasebacks and bolt-ons, I think we would largely probably fund those with debt.

Good. Which brings me to my next question, the balance sheet. Good. Just maybe a few words on the balance sheet today, kind of how it's progressed and maybe a little bit on your leverage targets going forward as well.

Sure. So we've always talked about our leverage target being in the 5.5 to 6x range. That's where we were comfortable. In the past year or so, that has spiked above 6x, and that was during -- and one of our largest customer was -- went through a restructuring. And so during that period of time, there's a lot of volatility with our cost of capital. And so we didn't want to raise money. And so our leverage spiked a little bit above 6x. But we're now down to 5.7x. So we're right around the midpoint of our targeted range. So we feel good about that. And that targeted range will be -- that's what we think it will be for the foreseeable future. Strong liquidity. We've got a really good runway of liquidity. I think we communicated publicly that we don't need to raise capital to fund the business. We may raise capital opportunistically to refinance debt and get some interest savings like we did earlier in January. We refinanced one of our unsecured debt at a much lower rate. And I think we're saving close to $20 million of interest expense a year as a result. So we're going to continue to optimize the balance sheet through refinancings. But in terms of liquidity, we're in a really strong position and don't need to raise new capital for the foreseeable future.

Great. In addition to M&A, what are your other capital allocation priorities?

Yes. So we're -- strong balance sheet and liquidity right now. Our AFFO payout ratio was below 40%, which compares very favorably to our peer group. We're paying out about 90% of taxable income. We're limited on increasing that right now based upon one of our debt indentures, which we're working to relieve that. But with all that said, I think there's a -- we certainly have conversations about raising the dividend as one capital allocation opportunity as we have the flexibility to do that with that debt covenant restriction notwithstanding. But at the same time, and as I mentioned at the very beginning, we don't like our 5% yield. We think it's too high, and so that always gets factored in when the Board considers a higher dividend. And that's especially true when you consider -- we have terrific investment opportunities organically. So I mentioned our ability to build wireless -- fiber networks with wireless customers as anchors. We have a terrific opportunity and funnel there. And so we're spending $300 million a year, $320 million a year building new fiber. And we could easily ramp that number up if we wanted. And I think every dollar that we put in the ground is worth a multiple of that the next day for our shareholders. So we have a great opportunity. And thirdly, as I mentioned, we've got really nice M&A opportunities to continue pursuing. And so when you consider our capital allocation opportunities, we've got a really good balanced mix of dividend, organic growth and M&A growth, and that's where we want to be. We want to have good options for our shareholders.

You mentioned being a 40% payout of AFFO. What do you think is the -- is kind of the right target for your company?

That's a good question. We haven't communicated the target on that in the past. So I probably shouldn't go down that path. But I do think our payout is lower than our communications infrastructure peer group today, I'll put it that way.

Not to kind of focus too much on M&A, but kind of when you look at the geographies you're in within the United States, so are there any areas that you would like to be that you're not today? And would you consider anything outside the U.S.?

Yes. Good question. We've looked outside the U.S. before. In fact, we had a fiber -- sorry, a tower portfolio in Mexico for a period of time. We were growing with our customer there, AT&T, and we sold that at a really nice multiple, gosh, 2 years ago. So since then, we have not looked outside the U.S., and we currently are not. We're very focused on the opportunity we have here, which we think is terrific. And like I said, we don't have a demand problem at all. And in terms of new markets, I think if you look at our map, you can see that the West Coast, generally out West, is less covered. So I think from a national wholesale perspective, I think that would be a nice fill-in for us. But really -- and so that's on the list of considerations. But really, if you look at our Southeast, so Texas to Florida, we have a very good dense network there, strong coverage. But when you really get down into some of these areas, there are tremendous number of market opportunities that we have not touched yet. And so I think there's a lot of growth potential within that region going into new markets that we're still in the early innings on.

Okay. Before we get to the rapid fire questions, which may or may not be so rapid fire, are there any parts of the Uniti story that you think are misunderstood by investors today that you would like to touch on?

I think the biggest one among the REIT community, for sure, especially investors who are less knowledgeable of telecom, is a view that the fiber business is complex. And obviously, all businesses have their complexity. But the reality is, our business is fairly simple, and it's very analogous to towers. We focus on anchor economics, usually a wireless carrier, same as towers, with starting cap rates and yields that are actually better than you would see in the tower industry. And our lease-up potential is driving that second, third, fourth, fifth tenant to cash flow yields that are 10%-plus. That's our model. That's very analogous to towers. And so the core economics of our business are not nearly as complicated as people think, and we have really strong fundamentals. And you line us up against other infrastructure REITs, and you'll see 95% recurring revenue, 0.2% monthly churn, 5% EBITDA and AFFO year-over-year growth, really low AFFO payout ratios, 1% maintenance CapEx, 30% all-in capital intensity. So I think our metrics line up very well against other infrastructure REITS. And I think if folks could just get past a perception of the fiber business being complex and really focus on the fundamentals, I think they would see that.

I think you just made the case to trade at a tower multiple. So good job.

What we started with, yes.

So ESG has been a big focus on everyone's mind. Can you just share your top 3 priorities to improve your ESG score over the next year?

Yes. ESG is really important to us. We're not a trailblazer on ESG. We want to be a fast follower of big companies that are setting the trends on ESG. So we've been following very closely what big companies are doing and what investors -- big investors are saying that they want to see. But -- and so a big part of that is disclosure. So we have not, in the past, made a comprehensive disclosure about our ESG strategy, and I'm excited to say that in the coming weeks, we're going to publish our first annual Uniti ESG report. And of course, we're going to do that annually. And I think that disclosure in and of itself is going to really help our ESG score because we just haven't tooted our own horn. Secondly, our -- what we do everyday is mission-critical to connectivity. Our workforce is an essential workforce definitionally. We have first responders. So we respond to natural disasters, including COVID, as an example. So we have that designation, and we're out every day responding to national disasters and keeping our customers connected when connectivity and communication is really critical. So really just continuing to execute on our core business is something we're going to do. And then thirdly, we're going to incorporate an ESG metric into our management comp incentive package so that we're incented to focus on this everyday.

Great. And now the rapid fire. We have just under a minute, so keep them quick. When we are physically sitting together in Florida a year from today, what will be the one thing that will have surprised people most about your business over the prior 12 months?

I think people will be surprised that our name will be associated with some transformative M&A.

Great. What do you think your corporate travel budget will be in 2022 as a rough percentage of what you spent in 2019?

I think it will be pretty flat. As I've said earlier, I think these virtualization trends that we've talked about are going to continue. So more and more virtual workforces, more and more virtual meetings like this, virtual conferences. So I don't think our travel budget is going to explode, and I don't think many others will either.

Okay. And I'm going to skip the same-store NOI growth because it doesn't really fit for you guys. Last one, what will the 10-year treasury yield be a year from today?

I think it will be flat to what it is today.

Good stuff. Thanks a lot, Kenny.

Bryan, thank you. And thank you, Citigroup.

Okay.