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

Bank of America, and this is our 2022 Leveraged Finance Conference. We're thrilled to be back in person in Bocaitan, and we're also thrilled to have Uniti Group with us this morning. We have Paul Bullington, the company's CFO and Treasurer; and Bill DiTullio, VP of Finance and Investor Relations. So Paul and Bill, thank you so much for being with us.

Thank you, Ana. We're delighted to be here. It's good to be back in person.

Okay. Great. So we're going to do all Q&A format. So let's just dive right into it. Okay. So new bookings trends and macro factors, I think that's a good place to start. Could you talk about what your bookings have been and in particular, break it out between wholesale and the nonwholesale portion?

Yes. Well, bookings have been exceptionally strong for us for the last several quarters. So this past quarter, we reported our kind of sixth straight quarter of what we've been referring to as elevated bookings. So prior to that, our bookings were more in the range of $500,000 to $700,000 in MRR a quarter. For the last 6 quarters, they've been more in the range of $800 million to $1 million of MRR per quarter. So this last quarter, we had another quarter of bookings in that range. So strong and elevated bookings and sustained bookings. So we think that level is... We kind of talked about it as being kind of the new normal, the new expectation at that higher level, which is not to say, bookings can go up and down from quarter-to-quarter. So it's not to say that we would necessarily achieve that every quarter, but that would be more of the norm than what it was prior. The reason that bookings have been higher is really a confluence of several factors across the board. One, we've had really strong bookings from really all of our key segments. So, you talked about wholesale, non-wholesale. The way we look at things, we talked about our segments in terms of Enterprise, wholesale, Wireless, and then leasing. So, the Wireless segment orders have been looking really strong. We actually had our record quarter for Wireless installs and bookings in quarter 2. That's right, Bill? I know it was in all bookings as well for wireless in the second quarter of this year. Wholesale bookings this year have so far exceeded our forecast for wholesale bookings and Enterprise bookings are up as well. Then on the leasing side, with the addition of the $2.2 million round mile of fibre that we got the right to market for third parties and lease-up from the Windstream settlement. We built the salesforce really around that opporunity and that funnel has grown from about $500 million in total contract value to around $1 billion in contract value. So, it really made us more of a national player on that scale pretty much overnight. So bookings have been really strong across the board.

Okay. Great. So I think we're planning to touch on a bunch of those end markets that you talked about. With regard to the strength you just talked about, how much of it is just the exogenous demand and how much of it is really your sales force peaking and improving? One of the topics that's been talked about is salesforce vacancies you've had. What is the status of that and how has that impacted bookings?

Yes, so it's hard to definitively say how much is demand and how much is salesforce. We have expanded at Uniti Fiber, we've expanded our sales team there. We've had consistent leadership in place now for 3 or 4 years on the Enterprise side. So I think the expand of salesforce and the consistent leadership there has certainly played a role. Also, what's played a role is the completion of the intergration of all the companies that we acquire that make up Uniti Fiber. So intergrating those networks, not all of those legacy companies had an enterprise salesforce, so, really building up that salesforce across all of those markets and all of those networks. The ones that did have an Enterprise salesforce didn't all have the same legacy products. So that's really helped to drive demand there. From a Wireless standpoint, we've seen really strong demand with deployment of (5:08), the additional macrotowers and upgrades to existing macrotowers. Of course, we've had the DISH factor come in as well, so that's certainly been helpful this year in terms of our bookings momentum. The DISH has been very active with us. We've see strong demand. You asked about macro trends and everybody wants to know if we've seen any weakness in the demand so far and I would say we really haven't. I think demand continues to be strong, the number of conversations, the size of the funnel one has been consistent. We haven't really seen a degradation or any kind of a signal that demand has waned at this point.

Okay. So quintessential, I think, issue for kind of any fiber business, but for Uniti Fiber as well, is sort of lease-up versus new builds and what that all means for capital intensity. So I think the company has highlighted in the past, a focus on lease-up of the existing assets and then being selective with new builds. You've also highlighted strong incremental cash yields from the lease-ups that you've been getting. Can you describe the types of lease-ups and the tenants you've been getting? Then even when you have lease-ups, they often do still require incremental CapEx. So what's the average capital intensity of a new lease up?

Yes. Okay. We definitely have shifted our focus from an install cadence that was very focused on several large greenfield anchor builds that we had a few years ago to really more trying to lease up existing markets. That's always been intentional part, that's been part of the strategy and the plan. So go out and get these large anchor builds that help you expand the fiber network in the new territories and then really drive return to those networks by sweating those assets and leasing those up. So what you're seeing is really the fruition of the strategy that's been there all along. We've gotten to the point now where we are more focused on the lease-up side than we are on the anchor build side. It's just a matter of focus. It's not one or the other. We still look at anchor deals. We still evaluate anchor deals. We still interested in anchor deals. That's a way to continue to expand the network into new areas. Just the volume of those acre deals in terms of the mix of our CapEx we expect to be smaller, it has been smaller this year and will continue to be smaller going forward. So that lowers capital intensity and is part of the trajectory of lowering capital intensity. So on our anchor builds, what we've traditionally said is those initial yields for that anchor customer for those anchor builds is in the mid-single digits, so sort of the 6% to 8% on average. So you've got an anchor customer on those deals that give you a positive return, but you're really relying on the lease-up over the long term to drive incremental return to those markets.

So can I ask you, what is the typical length of that ROI and the typical sort of cash-on-cash payback terms?

It's different for different anchor builds depending on the speed of lease-up. We show in our earnings materials that we released sort of a continuing story of how lease-up is going and how those economics are working on several wireless anchor builds. So you started with an initial yield of 8% and now as we've gone through several successive quarters, that cumulative yield for those markets after you add in lease-up has been growing. It was in the mid-teens and in the high teens and now we're in the low 20s on a cumulative yield process. So if you're getting a yield of north of 20%, then you're talking about a payback of that capital in the 4- to 5-year range, but continue to add additional lease up, so even shortening that. On lease up, the economics and lease-up are really exciting and really strong. We are, on average, getting yields from lease up of more than 50% on those lease-up deals. So those paybacks are 2 years or less in terms of capital deployment. So really strong returns for lease-up. So when you stack those kind of yields on top of those anchor yields over time, it really got a strong return profile and something we're excited about continuing to invest in the business there.

Okay. Sorry, I add one more thing to that. That's just the Uniti Fiber and then when you layer on the lease-up that we're doing at Uniti Leasing because that fiber is already in place and you're just really leasing the strands to the customer. That payback there is almost immediate because there's really no CapEx spend that's going out the door there. You're talking about margins that are 90% plus. So you start layering that on top of what we're doing at Uniti Fiber, that's why you've seen the cumulative yield triple.

That's a good point, Bill. The deals at Uniti Leasing, where they're leasing up dark fiber on our national network tend to be positive cash flow day 1 because there's very little CapEx and most of those come with large upfront fees. So those are one way that we're bringing in cash into the door on an upfront basis, adding that mix into the picture.

Okay. Then if we look at the fiber segment, so free cash flow and just define that as EBITDA less CapEx, it's not really running positive yet. How do you think about managing that? Are you running it for breakeven because it's really driving long-term growth? Or is there a goal to get that to positive?

Yes. No, we definitely want to continue to invest. At those sorts of yields, we think continuing to invest capital makes sense it's going to drive long-term return for the company and for investors in the business. So we want to continue to do that. There's no shortage of demand there. We could do more at lower returns, but we're being very selective and disciplined. We do want to get to free cash flow positive. We're right, if you look at Uniti Fiber business, we're pretty much right there. I mean EBITDA of $120 million and total CapEx, including maintenance CapEx of around $130 million on an annual basis. I don't know if that matches our guidance exactly, Bill, but it's pretty close to breakeven. So we're really at that inflection point because we're continuing to drive the capital intensity down. Of course, revenue continues to grow at Uniti Fiber. So I think we're really at that inflection point now.

Okay. Then just on the topic of the fiber growth installs and churn. Are you guys constrained at all by either supply chain or labor-related issues on the in-cell side?

Well, it's definitely an issue we've had to spend a lot of time and effort managing this year, much more so than in previous years. I think the good news is we've done, I think, a really excellent job. Our team on our procurement side has done a really excellent job of managing those supply chain issues. The way those have really kind of manifested themselves is mostly in terms of longer lead times for materials that are inputs to construction like fiber, but then also the networking equipment that we use to light networks. So through relationships with our suppliers, diversity of suppliers and then sort of changing our ordering patterns to order sooner so that we can account for those longer lead times to make sure we've got equipment on the shelf and we need to install. So far, we've been able to manage that well. We have not been missing installs because we don't have the equipment or the materials we need to deliver services to customers. So that's been the main thing for us is making sure we don't slow down the pace of installs because of supply chain issues, and we've been able to manage through that well. Q2 was a record install quarter for the company for its history. So we've been able to continue to install at a very high level even through some of those issues.

Okay. So 2 of the opportunities the company has highlighted has been Enterprise and Wavelength. So if we start with Enterprise, what is the scale of that business now? What are the plans to grow it and the opportunity?

So the Enterprise business, we talked a lot about it because it's a big piece of our strategy and particularly the lease-up strategy for Uniti Fiber. That's where a lot of the customers, when you get beyond the Wireless and wholesale opportunities, which are significant for our Uniti Fiber business, Enterprise adds a really nice layer on top of that as a big part of our strategy. Even so, Enterprise is still only about 5% of our total revenue. So it still makes up a small percent of our total revenue. The penetration of our Enterprise business in our markets is very low today. So we measure it at sort of a mid-single digits, so call it 5% on average across the 20-ish markets that we've got, Enterprise-ready where we're out there selling Enterprise services. So a lot of headroom to grow. We also measure penetration, I think, very conservatively as well. We're looking at the amount of the estimated addressable telecom spend in buildings that we pass within 1,000 feet from. So we're not looking at a total MSA, if we're in a market, we're not looking at total telecom spend, addressable telecom spend in a market and then measuring our percentage. We're only looking at the buildings we pass. As you said earlier, the lease-up typically requires a little new fiber build. So each time we extend the fiber to a new customer, we're theoretically passing more customers. So that addressable market continues to expand. Then one more point on that. We're only serving Enterprise needs in about 20 markets, but we've got metro-fiber with the Windstream settlement fiber in approximately 300 different metro markets. So over time, our first priority is continuing to invest in our existing markets because that's where we're getting the greatest return. We're also evaluating and looking at expansion into new markets where it's not totally greenfield because we've got fiber there, but we just haven't deployed the Enterprise layer over the top of it. So we're very excited about the enterprise opportunity I consider it to be a big piece of our strategy going forward, although it's only a small piece of our revenue today.

Okay. And then basically the same question on the Wavelength.

On Wavelengths, we have been offering Wavelengths in our Uniti Fiber Southeast footprint to our customers for years and years. So it's not a new service totally for us. So we have been offering those and selling those services for a while. What is new for us is on our national network that has been primarily dark, we have announced some strategic lighting of a few of those routes. 3 of those routes to date. One in South Florida and then Atlanta to Virginia and then Dallas to Atlanta as well. The way we're looking at that is that's an incremental product set that we can layer over the top of those networks where we see either excessive demand or lower competition where we think we can go in and enter those markets successfully with those products. It's not a high CapEx thing for us, the CapEx to light those networks is not huge because the fiber already exists. So it's kind of akin to an anchor type return with the initial deployment, and then we think we can continue to lease up wavelength on the top of that over the long term to give more of a lease-up sell.

So did you have indications of demand on those routes? It wasn't a light it and they will come?

Yes, yes, yes, absolutely. So we spend a lot of time talking to customers and working with them on their demand set. That absolutely went into the routes that we've chosen to light and that initial demand, the kind of anchor demand to allow us to have revenue sort of initially on those reps kind of day 1 on those.

Are there more routes to come?

Yes. I think we would like to expand what we're doing there. We're being selective and doing it in more of a success-based fashion as opposed to like you said, a build it and they will come. So it will be demand dependent. Yes.

Okay. So let's switch to the Windstream side of things now. I mean, it's still a big portion of the revenue, bigger portion of the EBITDA and free cash flow in particular. So Uniti discloses Windstream's financial results. How do you view it financial performance with regard to its ability to sustain the current lease payment?

No. We think we're comfortable with Windstream, where they are and the progress of the business. We think that they've got the right strategy going forward. We think that their business coming out of bankruptcy, your balance sheet stronger than it was before. We think they're in a good position to continue to make that payment. We think our strategy is the right strategy. We're investing heavily in their network and their transition from copper services to fiber-to-the-home through the GCI program, which we think is beneficial both for our network that they operate and their business and the health of that business going forward. So we think that program is going well, the cadence of deployment, the capital efficiency of that deployment. We think all of that is going well. So we're pleased with what we're seeing from Windstream.

Okay. Then let me just ask this question now, and I can double back on some other topics. It is the Windstream lease. So I think it's the requisite question. So Uniti and Windstream have a material disagreement on the rate at which the existing lease is going to be re-rated at the renewal date, which is 2030. I think Windstream, or I know Windstream has publicized a valuation that would reduce the payment by about 70%. So annualized, the lease right now is running at $670 million currently. I think that increases as you're making those GCI payments. As of today, it's about $670 million or the last quarter. So Windstream is saying that they believe it would be rerated to only about $200 million a year, Uniti disagrees. Where do the discussions on the lease fee rates stand right now between the 2 companies?

es. So first of all, I think the concept that the fair market value of the rent on the lease, which held firm from 2015 to 2020 when it was reaffirmed and reappraised in 2020 without really much investment in that network at all. To say that the fair market value of that rent, which held firm for those 5 years and 2030 is going to fall off a cliff just doesn't hold water for us in terms of the way we think the trends are going in the industry, the value of the network, the investments that we're making in that network, the overbuild of the copper network with fiber. So we don't think that's consistent with the market, and we also don't think it's consistent with the process that's laid out in the fact of how that renewal rent will be set for 2030. I mean there's really no negotiation going on right now. In 2020, we reaffirmed the process that will take place starting in 27 through 28 and leading up to 2030 in renewal. There's a process in place for that. So there's really no need for us to negotiate or certainly not publicly varying views of what the fair market rent might be in 2030 right now. I don't know that that public debate really serves either of us very well. What we did put out, which I think is informative with regard to our position on renewal rent. I mean, I can't sit here and tell you what fair market rent is going to be on that network in 2030. I can't tell you what the value of my house is going to be in 2030. What it might be appraised for. We can look at it and have a pretty good idea. We think the best indicator is the appraisal that was done at settlement, big 4 accounting firm, appraisers that appraised fiber networks and know this very, very well. In their appraisal where they reaffirmed the value at $650 million in 2020. They also put out an estimate of where they thought renewal rent would be if Windstream used only a portion of the GCI going into 2020, and they set that number at $750 million. Windstream looks like they're going to use, we think probably the full amount of the GCI. So that would imply a higher rent even than that. One of the important things about that is the lease specifically says that the appraisers, if we do go to arbitration, if we can't mutually agree in the time frame set in 2027, then it does go to arbitration, those appraisers have the performance for phase that is in the words of the lease, consistent with the 2020 appraisal. So that appraisal certainly, we think is very informative and much more informative than some of the other numbers that have been put out in terms of where that lease rate may get reset. So we do have a very fundamental disagreement about the fair market value of what that lease will be a few years from now.

Okay. Well, it's definitely agreed to disagree right now, and it looks like you may just end up in arbitration.

Yes. I mean I think it's possible we could in and since 2015, the lease is, I think, very much anticipated that, that could happen. So we've set out a very specific process for how that arbitration would play out. It completely involves third-party independent third-party appraisers. So it's not a dualing negotiation at that point between our view and their view. It's the view of licensed appraisers that come in and take a look at it.

Okay. So because it's a debt conference, I definitely want to address some topics on the debt stack. So you've got a 24 revolver maturity and 25 bond maturity. What's the current plan and timing with regards to addressing those?

Yes. So, that 25 maturity is a pretty large one for us, $2.25 billion. So it's definitely something that's very much on the top of our minds. I think our intention as we move into 2023. We do have some time. It doesn't mature until 2025, but our intention is to be very proactive with regard to looking to refinance that as well as the revolver that matures at the end of '24. So we've got a little time on both of those.

They're both secured?

Yes, they're both secured.

So like for like refi is what you'd be looking at?

I think that's a very likely case, yes.

Got it. Okay. Then finally, just strategic outcomes. So Uniti has said that you've done work on a plan to separate the business because you believe there's a conglomerate discount on the stock and that it's also way down in part because of the Windstream business and maybe some of the controversy surrounding that lease. So operationally and financially, can you discuss what the 2 pieces would look like?

Yes. So we have talked about a separation of the outset for that very reason. Just the fact that we think that there's a there's continuing issues and overhang associated with the Windstream lease and the Windstream cash flows and whether it's the Windstream bankruptcy or renewal rent disagreements or all those sorts of things. We think there's an overhang there and it's not being valued really appropriately. So that leads us to think, how can we unlock some of that value? The separation could be one path to unlock those values. I will say that a separation of the asset and the way we've been thinking about it is tied to some sort of a transactional advantage.

A third-party involvement?

Not necessarily, but I think all of the things that we've really been considering do involve third parties. So I can't say with 100% certainty that what we might come upon in the future would be. I think it's much more likely than not that it would involve third parties counterparties to come into. So it's not a separation of the assets, the way we think about it just for the sake of separating them. It's part of a strategic transformational event that we would most likely separate those assets. Does that make sense?

Okay. Then with regard to the planning of the separation, like how far down the road are you? Can it be done in a tax-efficient manner?

Yes. So we did say, we're looking at evaluating if it can be done tax efficiently and then I think we came out and said we have determined that there are paths to do it tax efficiently. I think that's the message to the market is to our investors is that its separation of the assets makes sense because there's a transactional event that would unlock value. It's very possible. So I think that's the message that we've put out there is that there is a path to doing that if it makes sense, and it's not an inevitable path, but it is, we think, a possible path to unlocking value and something that we're interested in having discussions around.

Okay. Well, we are absolutely out of time. I had a bunch of more questions we didn't even get to, but thank you for being at the conference. I think you'll have a chance to meet with investors and do a lot of follow-ups here. Thank you, Bill and Paul. Thanks so much.