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

Hey, guys, and thank you, everybody. Appreciate it. My name is David Barden, equity analyst with Bank of America. Thank you for joining us for our 2021 high-yield Leveraged Finance Conference with Uniti Group. We're very pleased to have with us the Chief Executive Officer of Uniti, Kenny Gunderman; and the President of Wholesale and Strategic Sales, Greg Ortyl. So thank you very much for joining us again this year.

Pleasure to be with you, David.

So first, I apologize for all the high-yield investors on the call that the equity analyst is doing this. We had a last minute reason apparently as a bank, but I don't know what it is. So I guess I kind of have to run the show. I'll try to ask the questions I think you guys want to know. And it's great that we have Kenny here. He was able to kind of reschedule to join us last minute.

And before we kind of get into the guts of the business, Kenny, obviously, there's been some reports in the media about the sponsors of Zayo inside Digital Bridge interested in recombining Windstream and Uniti. Is that a transaction that makes sense to you?

Yes. Thanks, David. It's good to be with you again and good to be on. Look, I think we can't comment directly on rumors. We tried not to anyway. But ultimately, we've been saying for some time that we own 2 very strategic assets, a scale fiber operating platform that's performing second to none right now. And we own a mission-critical consumer broadband network that completes a scaled national consumer broadband provider. And that network is protected by a super senior lease obligation of that tenant. So 2 very valuable assets. We've talked about our willingness to engage with the strategic market and the infrastructure buyers who we think are very interested in both assets. And so that's something that's a good thing for Uniti shareholders and Uniti constituents in general.

I'd agree. I think that -- so as you said, there's these 2 pieces, there's this fiber business, which we'll get into a little bit more with Greg in a bit. And then there's the sale-leaseback business, the preponderance of which is Windstream. And you're obviously -- in a kind of a strange twist in the not responding to rumors category, Windstream went under their way to publish a slide deck the other day, which purports to calculate the value of the lease that you have, which runs through 2030, there's a renewal period. I can't tell you -- I haven't said the word schedule [ Es ] many times in the last 10 years, as I have right now. So there's a formula in the master lease agreement that was public. Windstream has reported to signs of values in that slide deck to what they think the lease is worth. And one of the more assertive conclusions is that the monthly lease payment, which runs around $650 million in cash terms today could be as much as 70% lower at the renewal time. And let's talk a little bit about that. I'll stop at that and sort of hear what your thoughts are on that.

Yes, sure. And we saw the disclosure, I think that hear the script. I saw the disclosure and we've had some time to digest it. And I think we -- there's multiple ways to address it. I think one is in the context of the strategic discussion that you had or that you raised. But the other is just focusing on the disclosure itself, and I'll start with the latter. And to be clear, we think it was wrong and incomplete. We think that, first of all, the intent of the lease and the parties is that in 2030, the reset value of the lease payment will be a fair market value reset. And it clearly says that in the lease, and it also clearly says that in our public disclosures and Windstream's public disclosures in 10-Ks and 10-Qs that have to go through accountants and lawyers and so forth. So I think that's clearly the intent of the parties. So with respect to exhibit E and this framework that's in there, that framework is not meant to super see fair market value. It's meant to roughly replicate fair market value. And so if the outputs that Windstream is showing or anybody else is showing using that framework today, 10 years ahead of renewal, if those outputs don't seem right or they seem a little odd or seem counterintuitive relative to the trends in the business or relative to what's happening in the industry, you should question them and you should question, hey, is this really being used to try to replicate or market value? Or is it trying to sort of achieve some other goal? And so thinking about the outputs and the rent was originally said at $650 million in 2015, and then it was reset at the same number just last year, using 2 exhaustive valuation analyses. So within 5 years, the rent was reset despite the fact that there was very little growth investment made in the copper network. So it still held its value in 5 years. And what Windstream is implying that in the next 10 years, it's going to drop 70%. The rent is going to drop 70% despite the fact that we're going to invest billions of dollars in growth capital in the network and overbuild the copper with fiber. That sounds counterintuitive. And I think as a result, you should question the inputs. And so on some of the inputs, we don't know where some of the numbers came from, some of them were not footnoted, some of them were not sourced. But we do know that some of the numbers were referenced back to the 2015 valuation analysis when it should have been -- when we should be anchoring on the 2020 valuation analysis. So there was a disparity there. We noticed there were some -- we thought some errors in applying the framework. So for example, the residual value was not discounted, very simple math, just discounting the residual value. And I'm pointing that out because the outputs are very sensitive to the inputs. And on that particular issue, if you discount the residual directly correctly in our view, Windstream's implied 70% rent cut of going to $200 million would actually be more like -- the implied rent would be $500 million. So an almost 200% difference in the implied rent just based on that one single error in the assumptions. Another assumption, they're essentially taking out almost 90% of the value of the copper network in 10 years. We think that's completely wrong. The copper networks today are, I think, more valued than they have been in some time. They are the delivery mechanism for ILECs like Windstream and Frontier and Consolidated, Cincinnati Bell, et cetera, to build fiber to the home in a cost-efficient way. It's the advantage that these ILECs have over insurgent fiber builders. They're able to build at 400, 500 per home passed versus 1,200 because of these copper networks. And so to think that in this environment in the face of these trends that, that copper network should be discounted 90% defies logic. They used the lease rate of 8% and based it upon the lease rate we're getting in our GCI program, which is not how the lease rate will be set. It will be set based -- and was set based upon market comps, weighted average cost of capital, debt yields. And so we're not sure where the 8% came from. It's not -- I mean I know what they're referencing, but it's not consistent with the valuation framework. And again, the output is very sensitive to the input. So when you put all those things together, David, and you actually apply reasonable inputs and you reply -- you use logic. At the end of the day, I can't tell you what the rent is going to be in 10 years, but our view based upon consultation with our valuation experts and our own view of trends, the rent is going to be substantially -- we think substantially closer to where it is today than what Windstream implied. And I think logical people would come to similar conclusions. And so with respect to some of these data points, to help you sort of get to similar conclusions. Again, the output is very sensitive to the inputs. There's not going to be spot numbers. And very importantly, in 10 years, there's not going to be dueling formulas between Uniti and Windstream management teams. There's going to be professional, accredited, reputable appraisers hired by both companies and then a third appraiser hired by each of those to apply this framework in a way, a non-malicious way to help actually get to true fair market value using judgment and using what's actually going on at that time in 2030. So ultimately, for Uniti shareholders and constituents bondholders, lenders feel assured that this lease protects you the way it's written, the way it was renegotiated in 2020, and we feel highly confident that you're not only protected in the next 10 years, but you're also protected at renewal.

Well, okay. Kenny, that was pretty helpful to kind of get the rundown on kind of some of the -- point by point. I feel like I want to follow up a little bit on that. When you talk about the -- how it all kind of boils down if it's -- in 2030, the conversation between Windstream and Uniti have these 2 different positions, you guys hire 2 valuators and they hire a third. And then one of you 2 gets the outcome that you want. Is that how it's going to work?

Yes. The way it works is we each are our own appraiser and then they each come up with their independent valuations. And if those valuations are within a very small margin of error, I think you basically have the new lease rate. But if they're outside of a margin of error, I can't remember exactly what it is, but I think it's something like 10% or 15%...

10%.

Then those 2 -- that you have read exhibit E, then those 2 appraisers would agree to hire a third independent appraiser who would then come in and effectively break the tie. Again -- and so that's important to us. That's important to Uniti shareholders because you go through multiple layers of accredited, independent, reputable appraisers to apply this framework in a non-malicious way to come up with true fair market value. And I think that is kind of called the baseball...

Arbitration network.

Yes. Yes. And that's by design.

So Kenny, you think -- and again, thank you for all this. But -- so I think if you were an investor here, you would be forgiven for marveling a little bit at the public negotiation that's going on and kind of feel like the mere fact that we're having this conversation that Windstream has a deck out there that the CEO of Uniti is here explaining why certain of those assumptions are the wrong assumption, we might already be in that baseball arbitration. And what we're really trying to do is we've got a number that's come from the outside. And now Windstream and Uniti are fighting over who gets what part of that number at the margin. How does this end?

Well, I think -- I'm not sure how it ends, but I think it's going to -- I think where we are at this point is good for Uniti because I think that -- again, I can't comment on rumors. I don't know if Windstream is for sale or not. But hypothetically, if there is -- if there are strategic conversations going on and parties feel the need to make this public versus keeping it private. I think that you can read things into that, right, in terms of the mission-critical nature of our network, including the super senior priority of our lease. And ultimately, those things imply value to Uniti, imply value to our stakeholders. So I think the question of why it was disclosed and why it was disclosed publicly, are great questions to ask Windstream. And I think you should do that. I know I have a strong opinion on the answer to those questions, but I'm not comfortable talking about them broadly. But I think those are great questions to ask Windstream.

Well, and for all those who are tuned in, 3:45, I believe, is when the Windstream conference will be held I think so. I'm the guy who still will -- probably will be running that part of it. So I saw Greg flexing there earlier. And I know he's feeling good about the business overall. But -- so Greg, let's just shift a little bit to the core business or I guess part of the core business. I think one of the big questions people have had thinking about enterprise services, big strategic sales has been -- the pandemic is just slow decision-making to the point where people just aren't pulling the trigger at all. And obviously, we're facing potentially a new variant and a new maybe cycle that follows the way we do with the delta variant. And I guess, how good should we feel about business velocity and your ability to kind of get bookings and close the business?

Yes, Dave. So we've talked publicly about how the pandemic has impacted us. I think, in 2020, we certainly saw the enterprise side of the business have some delayed decision-making. But as far as 2021 goes, we've been incredibly successful closing deals in normal course, to be honest. So you got to remember where we were going back 12 months ago, right? Windstream was just exiting bankruptcy, Uniti was just getting access to win the assets to be able to start marketing them. And so all that falls under my group. And so that resulted in a bunch of training for all the sales directors, the sales engineers, the business development team and then going out and starting to talk to our customers about this new network. That network was over 30,000 route miles long. So that essentially more than doubled the Uniti Southeast footprint that my team was marketing up until that point. And then on top of that, we had the -- what we call sapphire assets, the Lumen fiber that we acquired several years ago when the DOJ mandated that they divest some of those long-haul routes. So we went from essentially a one person team marketing just the Lumen long-haul fiber routes to now a 12-person individual quota-bearing headcount, 12 of them, marketing the Uniti Southeast fiber footprint, the Windstream 30-plus thousand route mile fiber network and the Lumen 10,000, 12,000 route mile fiber network as well. And so I can tell you the demand has been beyond what our expectations were. We've been extremely successful marketing those assets to the content and hyperscale community. We were able to put together really unique solutions when we can combine that Lumen long-haul asset with the Wind fiber and then possibly, in some cases, even the Uniti Fiber footprint. And when you can piece together those segments into solution, you've got a unique opportunity that no one else has. And that's resonated extremely well with our customer base. And I would say also the surprise for me has been the success that we've had, frankly, with the smaller regional fiber providers. So we'd sell -- we've sold the Windstream and Sapphire, Lumen fiber to all the big guys, the large national infrastructure providers, the hyperscaler content, data center, the international segment that was all pretty much expected. But what we've really done a great job at is settling to the smaller regional fiber providers. So a fiber provider, for instance, that might have fiber in Ohio or only in Minnesota or Minnesota and Wisconsin or just Iowa and selling them segments that they've not been able to acquire in the past, connecting different islands of their network, providing a diverse route back to Chicago, perhaps to provide some IP diversity that they need. And that's really been above and beyond our expectations. But honestly -- and then our enterprise business has been blowing it out as well from a bookings perspective. We just came off a record month -- a record quarter, sorry, in Q3 for enterprise bookings. And that's only focused in our Southeast footprint, mind you. We have 26 enterprise markets there in the Southeast. So in '21, we've not seen any slowdown in decision-making related to COVID.

If I think about what people are interested in 2022, one of the big change agents that people see on the horizon is DISH. I know you guys have forged a relationship with them. I think people would be interested to kind of get a sense as to whether it could be a needle mover for you in 2022, the way it appears to have been press for the tower companies right now, especially in your services business.

Yes. Yes, that's one of the companies that we've been able to name since we did the press release jointly with them earlier this year, I guess it was. And yes, we've got a really great relationship with the DISH network team. We continue to receive new orders from them on a monthly basis, puts our operations team under quite the load to deliver all those sites, right? So getting the booking is one part of it, but the heavy lift, frankly, is getting that fiber and turning it up to the towers. And in some cases, DISH may not be ready to accept service. So the needle mover for us is really going to be next year as we start to turn up all those circuits that we've been booking throughout 2021. But that's not to say that the bookings are going to end in 2022. But we're going to continue to see bookings throughout the entire year of '22. They obviously have the deadline in June of '23 that they're trying to reach. And I can tell you that they are laser-focused on meeting that deadline, and we're going to do everything we can to help them meet that goal.

So I want to shift back maybe on this kind of topic to Kenny. And I keep asking you this question all the time. Greg pointed out a year ago, you were coming off of the Windstream bankruptcy and kind of settlement. And the -- I think the expectation was that the deal flow would accelerate. And I think you said that there's a lots of lots of conversations happening, but given what seems to be happening outside the deal pipeline strategically with the company, is that deal pipeline still the priority? Or is resolving this strategic situation the priority?

Yes, good question. They're actually one of the same. But I think the deal pipeline and the strategic conversations are the same thing. I mean we've -- over the past year, we've talked about our deal pipeline as being in 3 buckets. One, bolt-on acquisitions; two, sale leaseback or asset acquisitions; and three, big transformative transactions that move the needle dramatically. And I think the latter category, the third is sort of what you're seeing publicly, not confirming or denying but those types of things were what we were alluding to leaving the breadcrumbs out there for folks to try to come to those conclusions, including, by the way, giving the valuation framework that we talked about a couple of quarters ago. So you're starting to see the manifestation of that. So when I say we're very busy, very active, more active than we've been. You've heard me say that before but we really are. And so for our shareholders and bondholders, we tried to ask for patience. We've had that conversation many times before, too, patience, patience because we are -- I think we've proven to be good buyers and sellers. And as an old M&A guy, I know that you can never be forced to do a deal or you're going to do a bad deal. You need to be patient and do deals on your terms and do deals on your timeline in order to really maximize value for your shareholders.

I feel like as an equity guy, what I would really love to happen would be to have private equity come in and lever up the company and take you out at a huge equity valuation, which would reflect some of the numbers that you've put in your slide deck with respect to the mid- to high-teens valuations in the fiber business and some of the triple net yields that you think could apply to the sale-leaseback business. If I was a high-yield investor, I'd probably be pretty scared about that happening relative to my position in the business today. How do you -- how do we reconcile your interest in maximizing value across the capital structure?

Well, I think -- first of all, I appreciate your input. And ultimately, yes, we work for our shareholders, right? So we want to know what they think we're at. We're always asking them what they think. And a big part of our job is to make sure they're armed with all the facts and cutting through the rhetoric, for example, from a couple of weeks ago and getting a more balanced realistic point of view versus just noise and perception. So we want our shareholders and constituents to be armed with the fact so they can decide. This is their company, right? We work for them. And in the scenario that you described, I take pride at where there's a change in control and the value-maximizing transaction for our equity holders, our bondholders and lenders today get protected, right, because there's provisions in our various indentures and credit agreements where they're protected through change in control make holes and so forth. So I don't think they should be concerned about that particular scenario that you mentioned, David. And when we think about all the other scenarios that are available to us that we're evaluating. We're certainly thinking about every constituent from the top of the capital structure to the bottom. So we're going to make sure we keep everyone's interest in mind.

Perfect. I think we've time for one last question. And I guess, let's go back to Greg. What is the biggest opportunity that Uniti has in front of it for the bookings and 2022 outlook that we -- as investors maybe haven't been able to price into the stock yet.

Yes. Good question, David. So I love the question because it gives me a chance to talk about our funnel. So we did a press release a few weeks ago around what we call our Wave Lease product. So Wave Lease to us is it's a spectrum product where we are selling individual space, if you will, on dark fiber. We are providing a capacity solution to our customers across same fiber we were talking about earlier, the Lumen fiber, the Windstream fiber, the Uniti Fiber assets in the Southeast. What that is doing is lighting, essentially lighting our Lumen long-haul network and our Windstream network. It's a very capital-intensive solution. So we're going about it in a very disciplined way. So we need anchored customers to be able to justify lighting up these routes, but we've gotten tremendous feedback out in the marketplace. We are about to turn up our very first routes down in state of Florida, connecting Tampa down to Miami up the East Coast to Jacksonville and back down into Tampa for a nice ring. What we're able to do when we light up these routes with Spectrum is to sell multi-terabits, which is in the same amount of bandwidth 3.2 terabits 32 x 100 gigabits of bandwidth to a single customer. And what we believe we're going to be able to do with that product is take a customer base, the hyperscale content, data center, international, regional wholesale, cable co and take that customer base and we've been selling dark fiber to and sell them a lit service in addition and really diversify our product portfolio. And instead of just marketing long-haul dark fiber across the country, we'll eventually be offering this 10 gig, 100 gig spectrum multi-terabit services across our footprint. So that bodes well for our bookings growth here in the next several years and something that we're really excited about that you'll hear a lot more about in the coming year.

I think we've burned through our half hour, but thank you, Kenny, and thank you, Greg. I appreciate the conversation and the new information you shared. Thank you, everyone, for joining us at the 2021 high-yield conference on behalf of Ana Goshko, my high-yield counterpart. Thank you, everybody, for being part of this.

Thank you, David, and thanks to everyone for joining. Appreciate it. Bye.

Thanks, David.