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

Hi. Thanks for joining us. My name is Phil Cusick. I follow the comm services and infrastructure space as well as media here at JPMorgan. I'm joined today by Kenny Gunderman, CEO of Uniti. Kenny, thanks for joining us.

Phil, thanks for having us.

I have plenty of questions for Kenny, but feel free to interject with questions on your own or follow-ups. Anybody in the room, just raise your hand, I'd be happy to come to you. So to start off, what are your strategic priorities for this year for both the fiber and the leasing segments?

Yes, real simple. We -- Phil, as you know, we've made a transition from being a largely construction greenfield-build focused fiber business now to being very focused on lease-up. So we have our 130,000 route mile national network really in place, and we're very focused on executing on leasing up that network. So that will continue to be a big focus this year. And then secondly, on the strategic front, M&A is always a big part of our story. And so actually trying to realize some of the intrinsic value that we have versus just talking about it theoretically is also an important focus of ours.

No news?

No news.

All right. Well, that's okay. Let's dig into that M& a little bit because I think that's what everybody is sort of waiting for. Start first with the back and forth between you and Windstream on the long-term value of the contract. Just take us back over this last, what's it been 6 months and how this sort of came up and where we are now?

Yes. So I'll go back even further. So the -- our MLAs with Windstream have fair market value resets in 2030, which is very common for MLAs for REITs. In fact, it's actually a requirement to get a true lease opinion to have a fair market value reset in 10 years. So our MLAs are no different from that. Secondly, we reset our MLAs with Windstream in 2020, as you know. So that was the original deal in 2015, and then we reset those MLAs in 2020 when Windstream went bankrupt, and we recut those deals in a mutually beneficial renegotiation. And so our disclosure on what we think the fair market value reset is going to be in 2030 actually stems from that reset in 2020. So we had an appraiser come in and assess the fair market value of the rent, and we also had them assess what they thought the renewal rent would be estimated to be in 2030. And what we disclosed a couple of quarters ago was just that. We just basically took the disclosure from that appraiser and showed that to our investors at least the outputs of it. That's important because that report predated the past 6 months of back and forth. And so we actually think that gives it a little more credibility. And when you look at that estimate, it really -- there's a lot of moving pieces in an appraisal of this type. But really, probably the biggest assumption is, hey, copper is a depreciating asset. I think everyone recognizes that. But how quickly will it depreciate? And more importantly, how much will the fiber investment that we're making in that network overcome the depreciation of that copper? In our view and the appraiser's view is, it will more than overcome the depreciation of the copper it, which makes sense intuitively. Copper is kind of a 5x valued asset, 5.5x valued asset. Fiber these days is valued at 15x to 20x. And so we think with the investment that's being made in the network, that in 10 years, our estimate of rent is roughly flat compared to where we think it would be pre-renewal. And so again, we can't predict with certainty, but that based upon the appraisal that was done back in 2020 versus our view of the trends in the business, we think rent is going to be roughly flat.

Is that increasing value or mix of fiber, is that based only on the GIC investment? Or is it predicated on Windstream investing some of their own money on top of your footprint?

It's really predicated only upon our GCI investment of fiber plus Windstream's TCI investment, which is tenant capital improvements of just maintaining the network. So there may be some road moves here and there that are fiber-based or just general maintenance of the network, which we estimate to be roughly another $0.5 billion of capital maybe over the next 10 years in addition to our $1.750 billion of GCI.

So you're not looking for them to invest sort of proactively in the network? It's more their maintenance of it will -- in theory, they should be investing in modern equipment when they do it. And so that would increase the value and extend it over time?

Correct. The maintenance, by definition, maintains the value versus -- in addition to our proactive success-based GCI investment, which is fiber and largely fiber-to-the-home investment overbuilding copper.

Okay. And is there any point in discussing the differences between your view and their view with Windstream? I think it's 8 years from now, where this is actually going to...

No, I think the answer is no because in reality, this is not going to be a negotiation. There's a framework to follow to set the renewal, and it's prescribed in the 2020 MLA. And so that was what we were putting out there. I think the real question in 2030 will be what are the inputs? And those inputs aren't going to be known until you get there. What is the current market for fiber? What's the current market for copper? What are the various moving pieces on cost of capital that go into a rent -- an actual rent reset? So the real question is why are we discussing this now, especially if it's not a negotiation in 7 or 8 years? And that's a question, I think, for Windstream because we are being responsive to disclosures that have been presented to us as opposed to us proactively making closures.

I mean what many of us think is that somebody wants to buy both of you and splitting the value in 1 direction or another is very much predicated on this. Does that make sense?

I think that's a theory. And I think if that theory were true, it would make sense that there could be parties who are interested in causing this debate and forcing me to have this Q&A in front of this room.

Right. Yes. So are the businesses worth more together? Is there more flexibility at Windstream or at Uniti if the 2 are together?

That's a great question. Look, and I've said before, our MLAs with Windstream are not designed to create equity value at Windstream. Our MLAs are designed to make sure our rent gets paid at Uniti and to make sure that the renewal of the MLAs in 10 years are done on good terms. In other words, our network gets invested in, both from a maintenance point of view and where there's proactive over investment -- our investment of fiber to overbuild copper, that's great. So our MLAs as we've always said, are super senior obligations, practical and now technical priorities of Windstream, and that's what we expect. We expect those to be treated in that fashion. That doesn't mean they're designed to help create equity value at Windstream. So if there are parties both external or internal who want to create more equity value at Windstream or try to create more equity value at Windstream, theoretically, I could see where unwinding those MLAs may make sense.

Okay. And for your own strategic efforts, whether that's big deals or small deals, how impaired are you by this whole discussion that if I were sitting on the outside, wondering whether I should take your equity or not, would just flabbergast me?

We feel that, obviously, I think that's part of the reason for this public debate to be honest. I think that the -- and as a result, as we've said publicly, we are prioritizing these conversations to try to bring them to a point of either failure or success so that we can do what's right for our shareholders, which is assess the options that we think can create a lot of shareholder value potentially if they -- if there's a point of success. But if not, we need to move on and focus on growing the business organically, which we are executing on. And secondly, going back to the bolt-on M&A that we were doing previous to prioritizing transformative opportunities. So we recognize we're in sort of a period of what may appear to be neutral activity, but it's really us working hard behind the scenes to assess and evaluate and to advance as far as we can, again, to the point of either failure or success. And once we think we've reached that point, there will either be something to talk about or we'll move back to what our priorities were before.

When you talk about prioritizing transformative M&A, which was something you said on your conference call, is that very specific to Windstream or parties around it? Or are there other transformative things that you're working on as well?

Yes and no. I mean, look, historically, for us, M&A has been bolt-on M&A. So $400 million to $500 million to $600 million acquisitions, whether it be companies or sale leasebacks, great part of our business, we've been able to develop a fiber platform as a result that's growing nicely in a national network that's second -- the second largest independent network in the country. . So we think that's been a great strategy of ours, but it moves the needle in a small incremental way, each deal versus transformative could mean mergers of equal or it could mean selling parts of our business that transform us. We've talked about our Windstream business, and we've talked about our non-Windstream business. So if you just think very simply about those 2, we could sell 1 or the other. Or obviously, there have been rumors about interest in buying all of Uniti. That's clearly transformative. So when we talk about prioritizing transformative, it's those latter couple of categories that we're talking about. And we think that prioritizing those make sense because they have the greatest likelihood of moving the needle in a big way and therefore, crystallizing shareholder value. But also, by definition, we're prioritizing because we think there's a better-than-not chance that something could happen in that vein in the relative near term.

So it's either transformative as in split the company, sell 1 piece or another or sell the whole thing in some kind of combination with Windstream, those are the priorities right now.

I think that's a fair way to put it.

And is there like a -- our glass on your desk with the sand running down, you're sort of running the time out? Or is there some other way that you're saying, "Okay, this is what I'm going to do until X date? And then I'm going to move on because I can't take forever here."

We -- you mean from -- with your questioning or...

Yes, I can talk -- I have been.

We -- no, it's a great question. It's a fair question. It's the 1 our shareholders should be asking. We've heard that question many times today, and the answer is, yes. We have a timeline in mind. We also have a preferred outcome, a preferred structure in mind in terms of the different priorities. But with respect to communicating that too publicly, we don't want to do that because, obviously, we have a duty to be transparent with our shareholders. But also, there are numerous other interested parties listening to what we say. And so we want to be very mindful of that. At the end of the day, we're focused on this now because we think there's a better than likely not chance that something could happen. But at the end of the day, there's an opportunity cost to prioritizing these conversations as well. So...

Is it a month like rhymes with August?

It's a good question, but I'll leave it at that.

Yes. Okay. No, that's fair. And in the meantime, are you keeping other things sort of warm? Like is there a list of deals that are sort of bubbling on the side waiting for you to...

We are. I mean we also happen to be running the business, which is doing really well right now. We're very happy with our performance. I think that is not in -- cannot be detached from the strategic conversations, by the way, because I do think 1 thing that shareholders should be mindful of is that I think we're creating value every day. I think that we're performing as a fiber operating company in a way that fiber companies in the past have not necessarily performed in a public setting. And so I think we're really performing. I think we're demonstrating economics on the anchor lease-up model that validate the true shared infrastructure benefits of fiber, but nobody is really paying attention to that right now, given all the other things going on. But I do think that's important for us to execute and to continue demonstrating that business and to also demonstrate good liquidity and a good balance sheet, which gives us the opportunity and the ability to be patient in these conversations. And so that's a critically important part of what we're focused on, but we are also mindful of fact that some of these transformative conversations may not materialize and therefore, that would put us back to focusing on bolt-on M&A. So yes, as a result of that, we're very much keeping opportunities warm.

And are those opportunities sort of to get picked off here, they get picked off there? Or has it been fairly steady of what makes sense if the...

I'd say, pretty steady. You know we try to focus on proprietary opportunities. And so if a banker is hired to run a process to sell something and they reach out to 50 parties, that's not exactly our cup of tea. So yes, those types of opportunities we're not being aggressive there, but we weren't being aggressive there anyway. And so the more proprietary type opportunities, we're still very focused on.

Okay. So talk to me about the -- you mentioned that sort of anchor lease-up model and nothing against older public fiber companies. But they would say things like, oh, these are 40% return on capital projects and people would say, oh, 40%. And the lease-up never came. So how do you get confidence in not just the anchor tenant and the commitment there, but the lease up that's going to come when you write those new deals?

Yes, that's a great question. And we've been showing those economics. It's usually the first or second slide of all of our Investor Relations material, where we literally show the past 8 or 9 large fiber builds that we've done, so those anchor builds that usually start at 5%, 6%, 7% cash flow yields and then the fact that over the past 2 or 3 years, we've actually executed on leasing up those bills. And so those all-in cash flow yields are now approaching 20%. So if you think about that, that's the equivalent of adding a second or third or fourth tenant on those networks. So -- and then the question is who are those tenants? Well, they're additional wireless carriers. They're additional hyperscalers. It may be enterprise. It may be E-Rate. So we're actually showing those economics, but then they actually are being, I think, being reflected in our headline numbers like revenue, EBITDA and AFFO. And EBITDA and AFFO in particular, because we believe in good steady top line growth, which is kind of 4%, 5%, 6%. But really more focused on EBITDA and AFFO growth, and we've seen some really nice improvement in those over the past couple of years, and we expect to continue seeing that while at the same time, capital intensity is coming down. So those are all indicators of the fact that we are actually executing on the anchor plus lease-up.

How are the conversations on pricing and your own return on capital change in the last 6 months as rates and inflation have really become a very different scenario?

The rate environment has not yet changed conversations, although we're mindful of it because we've got 5.5x, 6x leverage, and we're always thinking about ways to optimize the balance sheet. But probably -- and we're always trying to assess, is this the new norm? Or are things going to correct later this year or next year, that sort of thing? So we're always thinking about that. I think more relevant is just the supply chain and the labor market, those costs have continued to rise steadily. And so we've been reflecting those in our return models and so arguably passing a lot of that across to customers, but not entirely. So -- but I think at least at this point, it hasn't materially changed our thinking on returns.

And on the GCI program, that initial 8% -- and I think it's a 50 basis point annual escalator, that was set when inflation was essentially 0. Is there any recourse to go back and rethink those escalators?

There's not. We'd love to. But I think in reality, that's set. And it's also -- it's relative to our normal anchor yields of 5%, 6%, 7%, it's on the high end. And so we think it's -- we think we're well protected there. But more importantly, that investment, I think where we really get the return on that investment is future proofing the network. So going back to our conversation about renewal risk, if we weren't making that investment then the renewal risk would be substantially higher, right, because you're basically investing in the network to overbuild the copper with fiber. And so that value transfer away from the depreciating copper to appreciating fiber is where we get the real benefit of that GCI investment.

Remind me where they are in fiber -- I think most of that is going into fiber-to-the-home. Where are they in fiber home mix? And where do you expect it to be at the end of this 10 years?

So we can't disclose everything. But I think what we -- I know what we have disclosed is that roughly 20% of the network is built with fiber at this point and obviously, we expect that number to go up materially by the time of renewal.

Okay. You recently mentioned that regional RLEC building fiber as well as hyperscalers, our new customers sort of connecting them. Tell me what you're seeing in your markets overall? And let's talk about leasing up those big fiber assets that you have?

Yes. So as you know, a lot of the more recent federal stimulus for fiber-to-the-home builds was awarded last year. And so a lot of those carriers are now starting to put that capital towards...

It's the yard off.

Yard-off money. That's right. And so -- and many of these carriers are building in more remote areas, obviously, where there's no fiber today. And so arguably, that last mile build is not business to us because these are markets where we have -- may have no network. But where we do have an opportunity and we're seeing this more and more is those carriers need to backhaul that traffic back to their core networks or their core markets. And that's where we're seeing a lot of opportunity because our network is, again, 130,000 route miles around the country, but it tends to be in the more Tier 2, Tier 3 markets. And so we're sort of out in these regions where these carriers are deploying. And so we're getting a nice steady level of demand for backhaul from these carriers.

Okay. Wasn't there a mid-mile stimulus program?

There is. And some of that is being built, and that's also feeding traffic back into our core. And we've even evaluated maybe tapping into some of that subsidy ourselves since building some middle mile, but nothing to report there.

Nothing there. Okay. I mean you've seen -- you mentioned DISH as well continues to ramp up. I think that was a sort of high-profile award that you got. What do you have with them? And how has it been progressing?

Yes. We were 1 of the 4 fiber companies that DISH initially identified as 1 of their anchor fiber providers. I guess that was a year or so ago, maybe a little longer. Since then, we've been actively at work with them. They recently, I think, disclosed their top 15 markets to deploy by June of 2015. Most of those markets are Tier 1 markets. I think all of them are actually. And as you know, that's not really where we operate. So as a result, we have not expected any material revenue install activity from DISH in the first part of this year. But getting past that first threshold of 15 markets, you then start to get into a lot of the markets that we have been working on with DISH, which are more Tier 2-ish and 3-ish. And so the second half of this year, we expect to see a ramp in installs on our DISH business.

What other kinds of customers are coming in for that fiber that's available for lease? You bought a big chunk of this from -- I think, it was from Lumen and the spinoff.

Yes. We bought 30 national routes from Lumen when they -- when CenturyLink merged with Level 3 back in 2018. So we effectively got a national network then. And we kind of quadruple down on that when we got the rights to the network from Windstream in 2020. And so since then, we've been really leasing up that network, and it's -- the demand is really across the board. I mean, it's wireless carriers, it's hyperscalers, it's international carriers developing a backbone in the U.S. It's the MSOs, more and more connecting markets. It's other fiber providers. There's always a balance of trade among fiber companies. It's regional RLECs some of whom now have better balance sheets post restructurings buying a lot of capacity. So it's -- we don't use the term arms dealer, but we are a wholesaler. We're -- we stay out of the last mile business. For the most part, we want to be a wholesaler, 90-plus percent of our business is wholesaler. So we don't really care where the demand comes from. So we're agnostic to fiber-to-the-home or fixed wireless or mobile broadband or even satellite, all of that are effectively -- we consider those on-ramps onto our network and those are all things that are driving traffic onto our network.

Okay. You mentioned international carriers. We've heard of NTT building a sort of national fiber route network. What's going on with that?

So I won't comment on them specifically. But usually, when you hear of a national -- of an international carrier building a U.S. network. What that means is they're buying it from Uniti.

And they're leasing routes here and there?

Correct. And so there is a lot -- and again, I'm not commenting on NTT specifically, but there is a lot of that going on today, where the international carriers want to be in the U.S. They know they need to be here. But rather than come in and try to build a multibillion-dollar owned fiber network, we're getting rights of way and getting labor and getting parts supplies to do that would take literally years and years to do. They are coming to people like Uniti who have a national network already, and they're leasing 10-gig, 100-gig, 400-gig waves or just capacity in order to have a national network.

Okay. Let me open it up to the room. Any sort of questions here? That's okay. So I wanted to sort of finish up with balance sheet and I imagine you can't return capital because you are in the middle of all these discussions. If you get to the point where this transformative M&A is not going to happen, is there potential to return capital to shareholders to buy back stock?

There will be. I think there will be a potential to return capital through a higher dividend. We're prohibited from buying back stock under our indentures, but we're currently prohibited from paying a higher dividend. But there's a covenant reversion date probably approaching soon where that restriction will also be removed. So I think when that time comes, that will, of course, be a Board-level decision. But in this environment where we're yielding 5% or 6%, we still think that's a very high yield relative to where we should be. And we also think that we've got a lot of great opportunities to invest in the business. So back to our model and how we're executing on that model. And also, we think bolt-on M&A, if that time comes, will be an opportunity for us. So any sort of higher dividend will be assessed relative to other priorities and options that are equally attractive, we think.

Okay. Let me try one more time with this timeline, and I know you shouldn't answer this question. But we've been sort of talking about this for a year. Is there something you can give us an insight into as to why is this so hard, right? I know that everybody -- there's a lot of money at stake and everybody's got different opinions, but you wouldn't think those would change that much. So are the things that have to happen that will sort of like knock down Domino's to get to that point of, all right, this is going to happen or it's not?

We have a point of view on that, which I won't express publicly. But yes, it's hard. It's complicated. M&A is hard and complicated in general. And most M&A conversations don't happen. It's -- you could ask any of your bankers, they'll tell you that 9 out of 10 conversations don't materialize into a deal. Our story is unique in that M&A has been such a big part of our story from the beginning that we talk about it very openly and freely, and we do that because we know investors want to know. But it's also challenging and difficult to communicate about it publicly because there are other parties listening and interested in what we may have to say. And we have to be very careful, and we also have to not set arbitrary deadlines that can be used against us. And so as a result, I won't set any arbitrary deadlines other than to say we're very focused on moving expeditiously. And if we don't reach to the point of failure or success or when we reach the point of failure of success, we'll reprioritize and move on.

All right. I think that's a good place to leave it. Thank you very much.

Thank you, Phil.

Thanks, everybody.

Thank you.

Good to see you.

Good to see you. Good luck getting home.