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

Hi. Thanks for joining us. My name is Phil Cusick. I follow the com services and infrastructure space here at JPMorgan. I want to introduce Kenny Gunderman, President and CEO of Uniti Group. Thanks for your time, Kenny.

Phil, it's great to be with you. Thanks for having us.

I'm asking most companies about what they see as we come out of COVID, but your business really wasn't substantially affected by that. Maybe it makes more sense to start with an update on the funnel of potential deals now that we're past the Windstream bankruptcy. And just whether those are outright acquisitions, opco/propco deals, how does that funnel look?

Yes, you're right about COVID. We haven't seen any negative effects, mostly positive, frankly. But yes, on the funnel, a lot of activity in a lot of different areas. When we started back in 2016, we really only had one avenue of growth, and that was through M&A. And so we made a conscious choice to buy outright acquisitions, operating companies to build an operating platform, which we thought would create optionality for us. And when you -- look, within 1 year, 1.5 years, we were able to move the diversification needle from 0 to about 30% within 1.5 years through our strategy. And we had to pause it somewhat during the Windstream restructure, but now we're ready to get back to work on M&A. And we have created a lot of optionality for us. And to your question, we've got a platform that can grow organically, but it also feeds M&A opportunities into the funnel. So it gives us the ability to pursue opco/propco structures, the ability to pursue sale leasebacks like buying the CenturyLink network a couple of years ago as a sale leaseback. We couldn't have done that without an operating platform. We couldn't have done the Everstream deal earlier this year without a -- which was an opco structure without an operating platform. And so there's a big component of those types of deals in our funnel now in addition to outright acquisitions. And so I'd say it's roughly 1/3 of opco/propco type acquisitions and sale leasebacks, 1/3 of just outright acquisitions of companies that fit on to our platform, and then thirdly, just larger, more transformative-type transactions that move the needle in a really big way.

Okay. So you just presented that -- you started sort of interesting there. There was an interesting question on your conference call that went to that as well. I remember when Uniti was spun out of CS&L from Windstream, it was sort of pitched as a triple net REIT that should trade at a high multiple. And now you've got these 3 different platforms. And speaking to somebody recently, he said, you don't check a box. You're not a fiber company. You're not a triple net REIT company. And so how do you need to evolve the business you think to get credit in the equity market for the assets that you have?

Yes, it's a good question. I think -- and we thought a lot about that question after earnings. I think a big part of it is we need to be clear in our messaging. Because the reality is that the different structures that we talk about, the different types of deals that we talk about, add confusion. In reality, those are all just means to an end. And the end point is we are like a triple net REIT. We've got 90% of our revenues wholesale, 80% EBITDA margins, 0.3% churn, 95% recurring revenue, 30% capital intensity that we can toggle up and down. And so all of these different structures that we pursue, whether it be through selling dark fiber in an IRU or a sale leaseback where you lock in a customer for a long-term or an opco where you're selling lit services and return for dark fiber revenue, you're really in the same place, which is a customer leasing fiber over a long period of time at 5% to 10% initial yields. And then we have the opportunity to lease that fiber up to the second or third or fourth tenant, which are all very analogous to the tower industry, but with fiber. And of course, we love that model. And I think the different structures add confusion, but ultimately, get us to the same place, which is a triple net type economics.

Okay. The other thing I wanted to hit and sort of to your point is fiber assets in the public market have always kind of struggled to achieve the multiples that you see in the private markets. I think it's because they're inherently high capital intensity and often sort of low-growth models. Do you think that this is an appropriate business for public market? What advantages do you get being a public company rather than selling to or having a sort of management buyout and just going private?

Yes, it's particularly -- it's a good question and particularly relevant today because there's so much private capital from nontraditional sources, whether it be infrastructure funds or pension funds, that are investing directly in our asset class, and they never have in the past. And they are paying multiples that are very different and higher than where a lot of companies -- fiber companies have traded historically. I think a big part of it, Phil, is that companies who've been private in the past have not executed as well, and other companies like us -- as being public, and other companies like us have not always been clear in our messaging, and some of our messaging has been clouded by things like restructuring of our largest customers. So -- but I think when you look at the economics, when you peel back the onion and look at the economics, if you can demonstrate very basic economics, so anchor yields of 5% to 10% with lease-up that drive those yields to 10% plus, then you can demonstrate that investing that capital that you mentioned actually does result in good returns. And the phenomenon that you mentioned, high capital intensity with minimal growth is analogous to the tower industry in the early years when people were building out towers and they were building out towers with only anchor economics and over time, you begin to lease-up those towers and drive the economics. And I think if you can demonstrate a single tower or a single market with fiber, where those anchor yields lead to higher yields over time, that capital intensity begins to make sense. The public market hasn't bought into that yet. But I think the private market has, and you see that every day when fiber companies are being sold for 15 to 20x cash flow. And so I do think there's an appreciation for it. We just -- we and others just have to do a better job communicating that publicly.

Do you think it -- being a public company puts you at a disadvantage? How do you talk to people who you say, "Hey, I want to buy your company and I want to buy it in stock?" Is it a disadvantage for you to have a low multiple equity? Or is it something that people look at as an opportunity?

We've said before that we're not interested in issuing our equity at these prices because we do think we're undervalued. And so we're not going to do an M&A deal and then come on -- come back after the fact and issue equity at these prices to finance it. But what we've done in the past with our equity is we've used it as consideration in a transaction. And when I think -- and when you do -- and so you can look at our history, we've done that in a lot of our M&A deals versus issuing equity in a primary offering. And when you do that, when you fold the equity into an acquisition, you work it into the overall value soup, so to speak. And when we do that, you not only align interest with the seller, but you also can convince them of the upside of the equity at these prices. And so I do think from that point of view, it's an advantage to us, and it's also an advantage to us when we're looking at larger opportunities. The infrastructure capital, the private capital that's interested in our space looks at where we are today as an opportunity to invest to help us grow and move the needle from a diversification point of view. So it's almost like a pro forma financing type analysis and for smart capital out there, it's a constructive conversation.

Okay. Has that improved dramatically since the Windstream bankruptcy was [ lit ] and they started filing again?

Substantially improved during the -- both before, for the several months leading up to and then certainly during that restructuring, there was just a tremendous amount of uncertainty. And no amount of column speaking and, hey, it's going to be okay from us worked, right? I mean, everybody wanted to see how things are going to play out. And now that, that's in our rearview mirror and a lot of what we said before the restructuring has actually materialized or turned out to be true, that's helped us. But it requires a conversation. I mean, it was a complicated situation. It still is. And so it requires engagement. And once we've had a chance to do that, we're able to reassure folks.

You mentioned earlier, this is sort of like a tower model, right? You start with maybe a 5% to 10%. And then as you lease something up, the returns go higher. The issue we've always had in that model is that a tower is effectively a local monopoly. And as much as I might want to overbuild the tower, I'm probably not able to. Do you think that, that same dynamic exists in fiber? Or is it just that -- it's just not economical for someone to overbuild you in fiber because there's so much to do out there, and you'd be happy to lease to them?

It's a great question. And I think this is a perception versus reality point. In the -- so we're in the tower business. As you know, we have a small tower portfolio. And the way we got into the tower business was by doing exactly what you just said. We were overbuilding existing towers and we were building new towers that were connected to our fiber network. And it was because some of the bigger wireless carriers wanted to create competition to the big 3 tower companies. So we were able to do that successfully. And the ability to go build a single tower is actually pretty easy. You get the permit. You spend $200,000 or $300,000, and you have a tower and you're in the tower business. The challenge on the tower business -- and doesn't take much to manage a tower company, a smaller one anyway. And that's no criticism of the really big companies, and just smaller tower companies are relatively easy to manage. But the challenge with the tower business is in order to get to scale to the 10,000 to 20,000 type towers that the tower guys are at today, it's a real challenge. On the fiber side, you really need to have an interconnected [indiscernible] in market for it to be successful economically. And I do think overbuilding markets of fiber are a lot more challenging than just building -- over building 1 or 2 or 10 towers. So I think that is one of the differences between the 2 industries. But ultimately, I think getting into the fiber business in a big way is a lot harder, actually, given that you need to have interconnected networks across multiple markets.

So you would argue that -- maybe I would argue that overbuilding a single route is not hard. But overbuilding an interconnected network of metro, for example, across a city, that's a lot more complicated.

That's exactly right. And look, from our perspective, it's underappreciated about us, but we have 125,000 route mile fiber network in the country. I mean that's I think either on par or bigger than Zayo's network. It's bigger from a route mile perspective than Crown Castle's network. It's hard to go -- for someone to go and build and replicate 125,000 route mile national network today. That's a lot of capital, a lot of time, that's years and billions of dollars of capital. So that is hard to replicate. 1 or 2 or 3 or 10 routes around the country is a different matter, but an entire network is very hard to replicate.

Okay. Okay. You started to talk a little bit about the funnel, and I want to go back to that. Some of the transformative deals that you mentioned, can you give us a little bit of a preview on something that might be attractive in that category?

Yes. We never want to give too specific on M&A. That's always a challenge. But what I would say is, I mean -- and you've touched on it from the very beginning of your questioning, there is a disconnect between the public and private valuation. And I think there's a lot of capital in terms of -- there's a lot of capital focusing on the infrastructure industry. And at the end of the day, regardless of who our customers are and what those customers do, we are a fiber business, 125,000 route mile network. We're in 40 states. We're one of the larger independent fiber operating platforms in the country. And so it creates a lot of strategic optionality for us.

Do you want to retain control in a process like that? Or do you need to retain control to keep your sort of tax advantage?

Yes. Our REIT structure -- we're big fans of the REIT structure. We generate 80% EBITDA margin. So we generate a lot of cash flow. And I think that there's a big advantage to us to being a REIT in addition to a lot of the optionality that it creates for us in M&A, whether it's an opco or a sale leaseback or using our up-REIT structure. So we are big fans of that. And there are many ways to structure REITs with disparate ownership from an ownership perspective. So that's never been an obstacle for us.

Okay. Does that REIT status still hold an advantage for your over -- because it seems like there are more potential buyers of assets in some kind of tax-free structure than there were when you were spun out a few years ago?

I think there are. I think there definitely are more buyers who position themselves as long-term holders of assets, whether they're tax-advantaged or not, that sort of pitch as being a long-term holder of an asset. Whether it be an infrastructure fund or a rig, many more of those types of buyers are -- that are focusing on our industry, including fiber and obviously, towers and data centers, small cells. So I think you're right, but I don't think that crowds us out, and I don't think it undermines the value of our structure. I think it reinforces it actually. So I think it's still an advantage for us.

Okay. And in terms of multiple, I imagine that no fiber owner or business owner is ignorant of the chase that there are for assets like this. What have you seen as you've gone over the last year in terms of multiples that people expect? And are there deals that looked attractive a year ago that just have completely gotten out of hand?

Yes. Good question. I'm smiling a little bit because we've gotten that question for many years now, actually and is particularly a good true and a good question now because I think there's probably never been a point in time when there's been as much capital focused on this industry for all the reasons we already talked about. So there are definitely opportunities out there where companies are -- they've engaged the banker, and they're running a process, and they're going out to 50 or 100 of their closest friends to see where they can get the highest value, those have never been the types of situations that we've pursued from an M&A point of view. We do look at those opportunities. But really, the opportunities for us are much more bespoke in nature. We've always talked about the proprietary nature of our funnel. We've always bragged about that 90% plus of the opportunities are proprietary. And when you look at what we've actually executed on in the past 5 or 6 years, it's proven to be 90% of those. Roughly 90% of those were bespoke deals. And the advantage there, obviously, is that we don't pay those types of multiples. And I think the proof is also in our history. So some of the big strategics were acquiring companies going back to 2014, 2015 in the fiber space, paying those bigger multiples. So we've had this dynamic of other buyers willing to pay the 15 to 20x multiples. But during that period of time, we were still -- we, Uniti, were still able to execute on acquisitions, growing our fiber portfolio really from nothing to 125,000 route miles by paying more reasonable valuations. And I think part of that is just being disciplined in our approach, but also being a REIT and being willing to use all the tools and the tool chest and some of these more complicated structures like the opcos and the sale leasebacks have allowed us to execute in a way that I think others have not. So all that to say, as a fiber company and as an open-minded buyer or seller, we don't mind the higher multiples. When it's time for us to execute on our M&A platform, we're going to continue to be very disciplined.

On the -- again, on the call recently, somebody said, Windstream has been out of bankruptcy for a while now and nothing's happened. Typical of people in my seat. But can you give us an idea of where things are in the funnel? Are there deals that you think are within 2 months, 3 months, 6 months, 9 months, a couple of years away? Where unless something goes wrong, we could really see an accelerating pipeline of announcements?

Yes. It's hard to comment on timing specifically for a lot of reasons. We try not to set deadlines on M&A because that causes you to lose your discipline. And I'm sort of smiling again because this harkens back to 2015 and 2016 when there was a lot of pressure on us to do those first couple of deals. And it -- you'll remember, Phil, because you've been around the industry in our story, but it took us about a year after we were spun out to do our first deal. And once we did, within about a year from then, we were from 0% to 30% diversification. So we haven't quite gotten in a year past the Windstream bankruptcy. So from our perspective, it feels like a long time, I know, to people in your seat and others. But from our perspective, we're just going to stay disciplined to keep executing on the organic business and work on the M&A funnel in a disciplined matter.

So by September? Got it. Speaking of Windstream, can you help us think about how investors should value that relationship? You've got a nice revenue stream from them, but most of it goes right back into the capital that you have to lay out for them. So how do I value something where your cash generation is very low for a really long period of time?

Yes. I actually -- so I disagree with that. I think our cash flow generation from the Windstream relationship is substantial, right? So $650 million plus rent payment at 90 -- virtually 99% margin, and that's offset by roughly $200 million per year of the GCI investment. So that's $400-plus million of cash flow. And that's before getting into the benefits of the lease-up opportunity from the network assets that we have. So -- again, I keep saying the 125,000 route mile network, but most of that is network that we also lease to Windstream. And a lot of the lease-up over the past few months and before that have led to upfront IRU payments and will lead to ongoing O&M payments. Almost $80 million of the proceeds from the Everstream transaction, for example, are related to that network. There's a lot of cash flow being generated from that relationship in addition to off-net, on-net benefits in the rest of our business. So I think it's a cash flow-generative part of our business that we're using to invest in the rest of our business. And the benefits of those investments are really hard to quantify. But I think every dollar that we're spending to invest in fiber is worth a multiple of that in the private markets the next day. But Phil, where you started with that question? How do you value that relationship? How do you value that cash flow stream? I think that is the single biggest challenge that investors have about our story. I think if you take the non-Windstream part of our business, you've got a fiber operating platform, and you can put a multiple on that and value it. But the Windstream cash flow stream, I think, you challenged with it. In the end, it's a triple net revenue stream that we think should be valued like triple net REITs with perhaps some discount because of the lack of diversification, and we recognize that. But we also look at it and say, look, we survived the worst-case scenario of a bankruptcy in our lease, and our revenue stream from that relationship came through unimpacted, both during and afterwards. So we think that revenue stream has been revalidated.

Okay. And the GCI CapEx, you mentioned a couple of hundred million a year. What's the point at which you're going to need incremental funding to support that? You said you don't need it this year. If nothing else changes, will you next year?

No. We only said this year because I think that was part of our 1-year forward guidance. But the reality is, I don't -- we don't need liquidity for the foreseeable future. And even then, it would be debt financing, not equity. This gets back to our discussion earlier about the cash-generative part of our business. I mean, right now, we're generating a lot of cash. Now there's clearly -- we've got 30% capital intensity. That's about where we think it ought to be. But our leverage is right in the midpoint of the targeted range of 5.5 to 6.x that we've always commented on. We have no near-term maturities. So we're very comfortable with our liquidity and our balance sheet. And over time, we're naturally deleveraging just through the growth in EBITDA. So we feel very good about where we are.

Okay. Let's go into the sort of fiber and small cell side of the business for the few minutes we have left. I think you talked about a pipeline of $60 million in annualized revenues, which is a pretty good increase over your current run rate. Can you talk about that and break that up into stages of where we are in the sales cycle?

Yes, sure. So that -- a big part of that funnel is a result of the settlement and a result of the network that we effectively acquired in that settlement. Our wholesale leasing funnel double almost overnight after the settlement because with access to this much larger network. And so I say that because that's still the result of only about 6 months of -- or a little over 6, almost 8 months of sales work on that new network, right? So we're still in the very early stages of monetizing that network. And as a result, a lot of those deals are still in the early stages. I mean, the sales cycle on larger network solutions tends to be 6 to 9 months. And so we're -- as a result, we're just now starting to see some of those deals be announced and materialized. The Everstream transaction was announced almost immediately upon the settlement announcement, but we had started on that in anticipation of the settlement many months in advance. But when you look at our current sales activity, our April bookings, for example, was, I think, the largest month of the wholesale sales we've ever had. So we're starting to now see that sales activity materialize, and we're very pleased with it.

Okay. Okay. Let me make sure I understand that. So Windstream came out late summer of bankruptcy. Did you put those -- that fiber into your systems at that point and start selling it, maybe not to Everstream, but on a general basis then? Or really, was it months of integration and getting everything together before you could start to put your salespeople to work?

A little bit of both. So we started with a handful of rifle shot-targeted conversations earlier in the year when we felt confident that the settlement was going to happen and felt confident when they were going to emerge from bankruptcy. So strategic transactions like the Everstream transaction and a handful of others, we started earlier, so back in early 2020. But we really didn't start marketing that network to the entire universe. We didn't make the KMZs and the maps available broadly until late fall. So that was sort of beginning of -- end of third quarter, beginning of fourth quarter.

Okay. Okay. And then I think in terms of small cells and sort of finishing out here, you added 160, I think, in the last quarter in the southeast markets. Help us think about what's driving that business now because we went through a period where Verizon was doing a lot of densification. They talked about Tier 1 markets, but there's a lot of markets out there that have small cells in them. What do you see from carriers now? And where that goes in the next few years?

Yes. So most of our footprint is in Tier 2 and Tier 3 markets. That's our focus. We try to stay in those markets because there's just less competition. And we've always been very active with the wireless customers in those markets, but it's mostly been traditional backhaul, so backhaul to macro towers. So very active. And a lot of those markets those are markets where the wireless carriers tend to not self-perform. They're building more in the big markets where they're building their own fiber, if they're building in at all, or if they happen to be the highway or the incumbent. So we've always had an opportunity in those Tier 2 markets. We've also always said that small cells were going to come to the smaller markets later, so -- that we're going to focus on densification in the NFL cities first and then there would be a wave of small cells in the Tier 2 and 3 markets. We're starting to see that now. So small cells have never been a big focus of ours, but we've always -- when they come to our markets, we're going to be there and ready, and there's going to be a nice opportunity. And so our portfolio of 2,000-plus small cells is small, but quarter-over-quarter, our revenue there grew 30% with dark fiber, fourth quarter over fourth quarter. And when we look at RFP activity, it's 5 to 6 to 7x the number of macro sites that we have in our existing markets. So there's a big opportunity on small cells. It's going to play out over years, not months. And it's going to be a nice steady stream for us in the coming months as they densify in those markets.

You mentioned how it's tough to overbuild a fiber network, but I think it's even more complicated to build and support a small cell network on top of that fiber. Is there anyone who would do this besides you in these markets?

It's -- you're spot on, Phil, and it's also a time to deploy questions. So if you're already there with a network, you can turn up a small cell or a macro substantially faster than if someone's going to come in and greenfield build you. And in this environment where the wireless industry is increasingly competitive with DISH coming in, these guys don't have 18 months to wait for a market to get turned up. So the fact that we're already there is a big advantage to us. As long as we don't lose our discipline on value and price and we don't try to overreach, we're going to have a big opportunity. So the competition for us in a lot of these markets is a greenfield build or it's a local [ eye-like ] or a local cable provider. And I think that's the competitive advantage that we've talked about for many years now coming to fruition.

Okay. You mentioned DISH. I would imagine that your -- most of the conversation when you talked to DISH was a fiber conversation, not a cell site and small cell conversation. Is that fair?

That's fair. Yes. And really, I think eventually that will evolve into other things. But for now, it's certainly more macro in nature.

Okay. What else can you tell us about that deal? Anything in terms of timing or how important it could be to you over time?

We try not to talk about our customers too much. But in this case, DISH did announce this as 1 of their 4 fiber providers, initial providers at least. And so we go a little further here, but very active. They've got a world-class wireless team that they put in place, both on the network side and the operations side. They're very active. We have a lot of markets that are on their list, so to speak, near-term hit list, so to speak, and we've got existing network in place. And so there's an opportunity for us to really get moving with them in the near term.

Should we think of that as sort of a typical fiber backhaul deal or with their cloud implementation? Is that a different architecture than you would typically deploy for a carrier?

For us, it's very typical. We've got very similar relationships with the other wireless carriers. Again, I think it can evolve over time. But today -- I mean there's -- each of them has their own bells and whistles, as you can imagine. But for the most part, it's fairly typical to what we've seen with the other carriers.

Good. Good. Let's finish it up by going back to where we kind of started, which is how you position this company for investors. What would you leave us with if you want people to continue to work on this?

I think when you look at our economics, you set aside our customer, single cost for our diversification and just look at the economics, the core fundamentals, 90% plus recurring revenue, 80% EBITDA margins, 30% capital intensity, 1% or 2% maintenance CapEx, a lot of flex on CapEx, 0.3% churn, average contract length of 9 years, growing backlog with wireless carriers, the FANG customer base, 125,000 route mile fiber network with a growing portfolio of small cells. It's really that right in the middle of the bullseye of a communications infrastructure REIT, and our core fundamentals are improving every day. And so when you look at our equity at a 5.5%, 6% yield relative to even a discount to other communications infrastructure REITs, we're way to heavily discounted relative to those other infrastructure companies. I think the private market appreciates that. And as we get out and continue to tell our story, we think the public markets will start to appreciate it substantially better.

Good. That's a good place to drop it. Kenny, thanks very much for your time. Nice to see you.

Phil, thank you. Good luck with the rest of the conference.

Appreciate it.