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

Well, for the last session today, we have Uniti. And from the Uniti, we have the President and CEO, Kenneth Gunderman. My name is Michael Elias. I am the Data Centers and Content Delivery Networks analyst at Cowen, turning in for my colleague, Greg Williams. So Ken, thank you very much for being here. We really appreciate it.

It's great to be here, Michael. Thanks for having us.

Of course. So let's kick things off and talk a little bit about M&A. You've noted a number of opportunities outdates for the lease Uniti's intrinsic value, whether that is splitting off the Windstream assets or something more transformative for the company. You noted conversations were yielding a validation of the value of the company and its piece part. First, what do you mean by that? And then also, any updates to share on constructive conversations.

Yes. So Michael, our stock trades based on M&A speculation and has for some time. And that's largely because we built our business based upon M&A. But as a result of that, we've gotten to a place where I think there's a conglomerate discount in our stock because it's quarter-to-quarter play by play, are you going to do M&A or not as opposed to focusing on the real fundamentals of our business. And we think the fundamentals of our business are extremely strong, and we've tried to focus investors more upon that, including looking at our piece parts. So for example, we own a really well-performing -- high performing, I think, fiber business that is largely wholesale, executing with long-term contracts, predictable revenue, very low churn, we think industry-leading churn with terrific customers, credit quality customers. In those businesses, we think, especially in the private markets, command very high premium multiples, high teens, low 20x EBITDA multiples. And that business is not getting the focus, we think, it deserves from shareholders. And also, if you look at the other part of our business, which is our MLA with Windstream that network is a critical network to a fiber-to-the-home provider. And today, fiber to the home is more valuable than it ever has been. And we think there's good reason for that. There's a lot of capital being invested in that part of the industry. There's a lot of success being shown by carriers on executing on fiber to the home for the first time. And so -- and that network is protected by a super senior lease obligation that we have. And so we think that part of our business is particularly undervalued. And what we've tried to focus people on is that we don't have to do M&A. We like to do M&A. That's my background and history. That's the history of the company. But at the same time, I've learned the hard way that if you have to do M&A as a buyer or as a seller, you typically do a bad deal. And so it's better to be patient, it's better to have the ability to be patient. And so from our perspective, we're executing on the business. We're using the cash flow from our cash-rich MLAs that we think are valued in the market by 6 to 7x EBITDA. And we're deploying that cash into our business, and we're turning it into cash flow that's worth 20x plus EBITDA. And so we've got a long runway of growth potential in the business to continue doing that. And so that's our focus. And when M&A makes sense for us to do, we'll do it, but until then, we're just going to keep executing.

All right. Well, to that point, on the call last week, you noted that you'll take a wait-and-see approach. But at the same time, there have been a number of recent fiber deals going for greater than 20x EBITDA. Can you help us make sense of the overall M&A environment?

I can't really. But yes, we said that last week, we're aware of a couple of fiber deals that were announced during the quarter, high-quality businesses. We know both of them well and think our business is just as good or better, forgive me for saying that. And yes, the multiples were close to 25x EBITDA. And so the capital is out there, the willingness is out there for buyers to transact on these companies despite a challenging credit market, frankly. And the couple of buyers that we're aware of are relative new entrants to the industry a year ago, I wasn't aware of either 1 of them, for example. So there's a lot of capital out there, especially infrastructure capital. There's a lot of interest in these assets and particularly assets that own the network and are performing on the network. And that's really what we're doing. We've got a terrific runway for growth -- organic growth in the future.

All right. Is there a point in time or a milestone perhaps in which you would say you're moving on from a transformational deal? I mean any color there would be helpful.

Yes. What I'd like to say is we can walk and chew gum at the same time. So we're going to continue to execute on business and at the same time, field interest in transformational transactions, but we're not going to chase anything. We've proven to be I think both good buyers and sellers of assets in our history, I'm very proud of that. And so with respect to any M&A deals, whether it be bolt-on or transformational, we're just going to be patient.

Okay. Now what types of assets or geographies perhaps would you be most interested in to augment the business or would augment the business the most? What would be on your wish list?

Yes. We're in a place now where there's really no must-have assets for us. I think we've got a great network that pretty much covers the vast majority of the country. And so we've got a good platform to grow organically on our own, and building versus buying is very attractive right now from an economic point of view. But with that said, we're constantly looking for assets that are complementary to our footprint geographically. And frankly, those assets don't have to be revenue generating. I mean we're happy to just add raw assets. We -- probably 1 of the best deals we've ever done economically was when we bought the Lumen 30 long-haul routes around the country a few years ago, and there was no revenue on those initially. And now we've leased those up dramatically just because they were a good fit for our network geographically. So we're really looking for things that expand the network, largely help us densify in existing areas. And the only additional thing I'd say is we have a lot of networks, especially in the Northeast and the Midwest that's very underutilized right now. We're not actively managing network there. It's much, much dark. It's much more passive dark fiber. And so any opportunities or assets that give us the ability to have a platform in that -- those parts of the country would be a great add-on for us.

So as we talk about valuations, I mean private multiples seem to be holding up well, especially versus public multiples. Do you suspect some softening given rising rates in a more challenging environment? Or is private capital still going to flow into the sector.

I definitely think it's slowing, and it feels like it is. The credit markets are a challenge, they gapped out 200, 300 basis points. But as a gentleman on the panel before me just said, that's not going to make or break a deal. That's not going to make or break a business. But I think what does tend to slow down M&A, especially larger M&A is just the volatility in the credit markets because today, for example, we hear that banks are not writing large financing commitments. And so that puts a damper on large M&A because you do need a debt commitment to help finance those type deals. But that corrects itself fairly quickly win stability to the market returns. So for example, when is inflation going to be, what's the Fed going to do? Are we going to go into a recession or not? When those types of big existential questions get answered, then stability comes back to the credit markets and even bigger M&A deals get done. But with all that said, the fundamentals of our industry, the fundamentals of the fiber business aren't declining, they're improving. And so as a result, I think there's a ton of capital on the sidelines, whether it be debt or equity capital that wants to invest in these types of assets that give those good, steady returns over a long period of time. I mean these are 50-year lived assets, and we're generally putting 10-, 20-year contracts in place on top of those assets. So I know I said it many times before, but the economics related to wholesale fiber is very analogous to towers. And so that's, I think, more and more infrastructure funds and investors are figuring that out.

I want to touch a little bit on sale leasebacks. I mean mid-rise interest costs, inflationary pressures. Are you seeing more opportunity for sale leaseback and opco/propco transactions. And as part of that, I mean, how does your -- has your pipeline look for that?

Yes. We don't view sale-leasebacks as an arbitrage on the cost of capital. We -- there's a place for those, but that's not how Uniti reviews it. So we much -- we view sale leasebacks much more strategically. So we did a sale leaseback in the Northeast, for example, where we turned and actively lit fiber network into a passively managed dark fiber network, and we did the same in the Midwest. So 2 strategic deals for us that we think were good for our partners and for us. We have a sale-leaseback customer, a rural cable provider that got a lot of art of funding. They're building fiber to the home. They want to bring in equity capital to help them fund it. They came to us and said they needed some changes made to the lease to help facilitate that equity capital. And we said, "sure, we're happy to do that. But in return, we got access to more of the fiber that we are leasing to them. So it was a strategic transaction for both of us. So those are just some examples of how we view the sell leaseback product much more strategically, and we really get return from those products through either long-term contracts that you lock in with a lot of predictability or you get access to fiber that you can go lease up and get share shared infrastructure economics. So from that point of view, the credit markets and what's happening with interest rates really doesn't affect that product for us at all, frankly.

Okay. let's talk a bit about convergence. I mean with the remaining tower sale to Harmoni Towers, so closing last week. You've come full circle in building towers, converged offerings and now selling towers. Can you help us with this evolution? And do you endorse the convergence within comment?

We definitely believe in convergence. We sold towers mostly because of the attractive economics from selling them. I wish we still had a bigger tower portfolio purely from a strategic point of view. I mean we built that tower business from scratch, and we -- I think a lot of folks were questioning doing that in the beginning, but we built it, we build it up to a scale platform, and it was attractive to a number of different infrastructure funds and buyers. And so the economics that we were able to get on selling that tower business were too hard to turn down, frankly. So we sold it, and we locked in a great return for our shareholders as a result. But we very much believe in conversions. I think -- and we're still in the tower business. We just have a smaller portfolio. We definitely have a portfolio of small cells, and we think there's a lot of analogies among towers, small cells and fiber, and it includes -- I mean, they're similar business models, similar economics. It takes a similar management team to run those businesses. There's a lot of shared services across those businesses and the customers are largely the same. And so there's a lot of cross-selling opportunities, which are probably not as empirically measurable as so much as it is subjective in the sense that it gives you a different seat at the table with a large carrier. But yes, we believe in convergence and think there's a lot of value in having multiple products in your portfolio.

Okay. Let's transition and talk a bit about the fundamentals. And last week, Uniti again showed solid momentum with near $1 million of MR bookings consistently for the last few quarters. Can you help us understand the demand outlook? And I guess as part of that, where you're seeing the demand?

Yes. So we -- again, our business is largely wholesale. So 90-plus percent of our business is wholesale, which we really like that model for a lot of reasons. But again, predictability of cash flow, longer-term contracts. But it also allows us to benefit from the different pockets of demand. So we don't care who's going to win, fixed wireless or fiber to the home or 5G because, frankly, all of that stuff gets backhauled on to fiber. And so from our perspective, the demand is coming from the wireless carriers who are spending at a furious rate. It's coming from hyperscalers who are connecting markets and data centers across different geographies. It's coming from international carriers, many of whom don't have a presence here in the U.S. today, but one. It's coming from fiber-to-the-home providers in a way like we've never seen before because you now have capital whether it be from subsidy or from new equity coming in to fund businesses that in the past may have had challenged balance sheets. And so a lot of capital is being spent to connect markets, a lot of capital is being spent to help them get out into the other regions of the country. So lots of different pockets of demand, and I've said it many times, but we don't have a demand problem in our business. It's all a matter of taking on good profitable demand so that you can get good return, keep capital intensity where you want it to be and disciplined about that growth.

All right. We'd love to talk a little bit about your sales funnel. How is the funnel changed, if at all, over the last 6 months given now we're seeing broader macro concerns? I would love to get your thoughts.

It hasn't changed too much. We try to -- we talk about this publicly because we try to keep a healthy balance in the funnel of anchor opportunities versus lease-up and then wholesale opportunities versus non wholesale, and the funnel is the leading indicator of bookings, right? That's -- if you've got a good funnel and then you've got good follow-through, then that tends to be a good indicator of what bookings are going to split out. And we really like to have 25% to 30% of our bookings as anchor and the rest lease-up. And we really want to keep the majority of our bookings as wholesale. And so you get a leading indication of what that's going to look like by focusing on the funnel. And with all that said, the sales guys are -- they're out doing their thing. And so a lot of times, you have to correct along the way. But again, it's more a function of managing to what you want the endpoint to be as opposed to just being a victim to what's being sold or what's out there because right now, we just have a plethora of opportunity.

All right. Last week, you noted that your business is being fairly recession resistant. The wireless side seems more recession proof, but earnings season was not kind to enterprise. Could you see enterprise weakness if we face the downturn?

I definitely think across the industry, I mean that's the area of the industry that's getting hit and will get -- continue to get hit in an economic downturn, especially the retail component of enterprise and bringing that to our business. Enterprise is one of the fastest-growing parts of our business. It's growing 15% a year revenue-wise, 10% to 15% a year revenue-wise. So we're a share taker. We're very low market share in many of our markets, sub-5% in most of the markets, so we're taking share. So -- and I said this during COVID because we got similar questions. But the reality is, during COVID, our business was growing at 10% or 12%. And I said, well, it probably would grow at 15% to 20%, if it weren't for COVID, and I feel the same way now. I can probably just grow faster if it weren't for an economic downturn. But I don't think -- because enterprise is a small percentage of our revenue, it's 5%, 10% of our total revenue. Even if we get hit a little bit, you won't see it in our results. It will just be less growth than what we would have had before. So that's really why we're confident in saying that our business is -- we don't say recession-proof, but we think it's recession-resistant, at least with respect to the revenue side.

So management has noted having a presence in just 25 of its around 300 markets with fiber, is there an opportunity to accelerate that expansion inorganically?

There definitely is. We're doing a lot of work planning for that expansion. We think we have a ton of opportunity in our existing markets. I said, if you've got 5% market share and you think your fair share should be 20% to 25%, that's 2 or 3 years' worth of growth in just an existing market. And that growth comes with very -- I mean not a lot of CapEx because you're already there with the network in place, and you've already got people on the ground, selling and you've got people servicing that. So it's hard to say "hey, I want to go expand to another 20% or 25% markets because there's so much low-hanging fruit in the 20% to 25% that you're already in. But when you start to think about 2, 3, 5, 7 years out, you want to start building into the markets so that when you start to get to a steady state of 20% to 25% market share in your existing markets, you've got new markets where you're a share taker. And so we're starting to think that way. And we've said this before, but that doesn't mean our capital intensity is going to go crazy. We're going to continue to keep it in that 30% to 35% range. And because our capital efficiency is improving in all of our existing markets, we're going to use that incremental capacity to grow into those new markets.

I mean that ties into my next question, which is how do you think about balancing expansion with desire to moderate CapEx to the mid-30% level?

I think -- I mean, look, I think -- you also have to overlay the dividend and how much of the dividend we want to pay and how much debt paydown we want to do. But I think for where we are right now, we like being in the 30% to 35% capital intensity range. And again, when we go back and postmortem on our capital spending and look at the yields that we're getting relative to what we expected, the yields are consistently better than what we expected. And so it makes you feel better about spending more next year expecting that you'll get more return on it. And so I think we're just in a good place right now from an industry point of view with the tailwinds on demand and the fact that we have a lot of network in the ground that's not being utilized today. So we're just in a good place to deploy capital pretty efficiently.

Right. I want to transition, talk a little bit about wireless. The carriers are feverishly at the point 5G now likely entering your Tier 2 and 3 markets. Are you seeing increasing wireless activity? And if so, could you help us with some examples?