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

We've got Paul Bullington, the company's Chief Financial Officer and Treasurer. So Paul, thank you so much for being with us.

Thank you, Ana. It's great to be back.

Okay. Great. So do you have any opening comments you want to make for the audience or just jump into Q&A?

Let's just dive in, yes.

Okay. Great. Okay. So I'm just going to start out, for anyone in the audience who just needs a refresher, so recap of Uniti as it stands today. So one, you've got a leasing business under triple net leases, the vast majority of that's Windstream. The run rate adjusted EBITDA is about $825 million, and that is really high margin. So that's a 97% margin, which is the nature of triple net leases. And then two, you've got Uniti Fiber. So that's right now about $120 million adjusted EBITDA run rate, and that's at about 39% EBITDA margin. So does that sound about right?

Yes. I think those are the highlights.

Okay. Great. Okay. So that's what we're starting with. And so I thought we'd focus first on the non-Windstream, so on the fiber business. So that margin, as I just mentioned, 39%, but the capital intensity is also 39% of revenue. So your EBITDA less CapEx is -- right now, unlevered free cash flow is 0. The recurring revenue, I think you've said, is growing at about 5% annually.

That's about right, yes.

And then on the earnings call, you had a slide that showed that that basically equates to about $15 million of recurring revenue growth this year. So the question really is on that level of capital intensity and on the ROI. So $120 million of CapEx, $15 million of recurring revenue growth. Can you explain the rationale for the level of CapEx and the ROI that you expect out of that business?

Yes, sure. So we do expect capital intensity to -- it's been coming down. We did -- if you go back about 2 or 3 years ago in the Uniti Fiber business, we were much heavily -- more heavily weighted towards what we refer to as anchor builds. So those are builds, kind of more greenfield in nature, for an anchor customer, like a wireless backhaul deal or something like that. And those anchor-type deals are sort of mid- to high single-digit returns. And then we come in and we layer the lease up of all of the rest of our business, so the rest of our wholesale and our enterprise business, on top of that to generate returns over time. And we've really shifted our capital spending more towards the lease-up side of the business now as we've been able to complete a lot of these larger greenfield builds. And so that's had our capital intensity come down at Uniti Fiber from where it was, north of 50%, to now about 39% like you said. And we expect that to continue to come down over time as we've shifted more towards the leasing business and continue to kind of grow the top line. So -- but the rationale for that level of CapEx, the deals that we're bringing in in that business now, particularly on the lease-up side, are really fantastic return profile. So on average, this year, we're averaging 50% to 60% type yields on those deals. So a payback of about 2 years on the capital from those types of deals. So really fantastic returns we're seeing in the lease-up side of that market. Now the growth in the recurring revenue, obviously we've got some churn that we replace along the way. One of the headwinds for us for the last couple of years has been the T-Mobile/Sprint consolidation. So that's been a headwind in terms of recurring revenue growth. So we've had to replace some of that. A lot of that has been replaced now with things like DISH coming on and all, but it takes capital to bring that in. But the returns that we're getting there are really good, and we want to continue to keep investing. But we think we're investing about the right level in that business, so that kind of $110 million to $130 million of capital investments into that business, we think, is about the right level for the opportunities that we see there.

Okay. Great. So you hit on a bunch of my follow-on questions, but so as we move into 2024, we should expect the EBITDA margin to continue to increase because you've got sort of this kind of very high incremental margin lease-up business coming on and that business should be ramping.

Yes, I think that's exactly the thesis of what we're seeing play out. I mean, there are puts and takes. And one of the things that you'll see kind of baked into our margin profile over the last couple of years, again, is the Sprint/T-Mobile consolidation, and really the effect it had is if they turn down towers, it's a headwind to recurring revenue on a go-forward basis. But when they terminate a tower, we get an ETL payment. So that's an early termination liability, which basically pulls forward the remaining contract value for the recurring revenue. So last year, we had about $25 million of ETL revenue associated with that consolidation. This year, it's about a $15 million number. And that's extremely high-margin revenue, it kind of falls basically to the bottom line there. So that has been a boost -- sort of a short-term artificial boost to our margins. So as you see, our kind of margin profile has been hovering around that sort of high 30s, 40%. But as that washes through a little bit, I think we'll be a little bit more on an upward trajectory for [indiscernible].

Okay. So that aside, you should start growing into some unlevered free cash flow, with EBITDA growth and basically sort of a static $120 million of CapEx. Okay. And then you talked about the demand for lease-ups. So first of all, like who is -- like who or where are you seeing the greatest demand for lease-ups? And is there any macroeconomic headwind that's impacting any of that?

So the demand is really broad-based. So when we talk about lease-up, we talk about it in both our fiber business, which -- where we layer on sort of the full breadth of our services, so that's wholesale dark fiber, wholesale wavelength lit services, and then also we have a really solid book of enterprise business in that. And then lease-up on -- at Uniti Fiber is largely on our national network. So those are consumers of really high bandwidth services between major markets, so national carriers, international carriers and the hyperscalers. And we're seeing strong demand really across those groups. We've talked about it's been a down year for wireless demand, but we're replacing a lot of that demand this year in terms of our bookings and our demand set with demand from other areas. So that national wholesale has been strong for us this year, the hyperscaler and content provider side of the business has been exceptionally strong. Part of that is the demand that's going on there in that business. We see some prep for AI and some other things that are driving demand. But another piece of that is we're really sort of a new entrant into that business in large part. In 2020, we got access to 2.2 million strand miles of the Windstream national network, which we owned before but was reserved exclusive to Windstream prior to 2020. And then in that 2020 settlement, we got access to begin to sell and market those unused fibers to third parties. And so we've really kind of stood up that national wholesale business over the last couple of years. And it takes a little time to get that in place. So part of what we're seeing from a demand set is that we're developing relationships with more and more logos in terms of that side of the business. So it's both the demand and its access to new customers, and that is helping drive demand. From an enterprise standpoint, we're continuing to see really strong demand there as well. That recurring revenue is growing about 15% year-over-year to kind of mid-teens in terms of year-over-year growth. And we continue to see strong demand for that as we've boosted the sales force there, increased the number of salespeople on the street and really kind of consolidated our ability to go after that market in a unified way across all of our metro markets. And so we're seeing strong demand there. The other part of your question is the macro environment. I mean, we are seeing some elongation of decision-making in terms of sales, both in the enterprise and the wholesale space, so we've got a large number of opportunities still coming into the funnel, but a little slower to get those to signature and orders. But that -- the funnel activity there continues to give us confidence that that demand level is -- remains strong across those businesses.

Okay. So you and, I think, Kenny Gunderman, CEO, have really indicated that you believe that the fiber business is worth a lot, right? So I think you've had some presentations, including potentially, I think, most recently at Nareit, and you talk about the fiber business being valued at 15x to 20x EBITDA. And when you put that all together, I think you've also mentioned kind of a non-Windstream EBITDA of $177 million. But -- so we've got $120 million of the fiber. So where is the other $57 million coming from?

Yes. So the other $57 million is coming from the non-Windstream portion of our leasing business. So those are sale-leaseback, other sales -- non-Windstream sale-leaseback transact, and then the lease-up of that national network to just those kind of customers I was talking about, the hyperscalers and national and international telecommunications providers. So that's the non-Windstream portion of our Uniti Leasing business.

The $57 million?

Yes. Yes.

Okay. So are there any precedents or indications of interest that kind of support that 15x to 20x valuation?

Yes. We think there are a number of precedents. I mean, a lot of them are private transactions, but I mean I think for the better part of the last decade, strong, high-quality, dense fiber assets have been trading in that sort of mid-teens to 20x multiples. In loftier times, I think you get more closer to 20x. I think today, certainly, there's some pressure on multiples with interest rates and macro uncertainty. So maybe we're more in the mid-teens sort of range. But I think there's a lot of precedent. I mean, the most recent transaction in the market, the Shentel/Horizon deal, I think, was a really good deal in terms of multiple comparisons, a little bit of kind of a 20x pre-synergy number there. So I think there's [ been ] A lot of precedents over the last 5 to 10 years with regard to that valuation.

Okay. So on the most recent earnings call, so Kenny Gunderman made some, I think, very emphatic comments about the potential to monetize the fiber business either in an ABS transaction or in a sale. And in either case, he said the value would be well north of $1 billion. So starting first with the ABS topic, how advanced are you in preparations? I mean, that can really be quite a lot of work to get like a securitization like that done?

Yes. Well, so just -- let me just start by talking about Kenny's comment there. I think his initial comment was really sort of on the pipeline of deals. And M&A and those sorts of transactions have really been in our DNA from the very beginning. So I think, over time, we have been smart buyers and sellers of assets. So nothing -- not really a new comment, just a reiteration of what we've been doing all along, which is staying active in terms of discussions and around M&A transaction opportunities. And the pipeline of those sorts of opportunities is well north of $1 billion when you kind of aggregate that together. Now our fiber business is certainly worth more than $1 billion. And ABS transaction, like Kenny said, could be north of $1 billion. But I don't think we want to necessarily indicate that transactions would be necessarily at that level, we would consider smaller nonstrategic types of asset sales and other things, similar to what we've done in the past as well. So we're not focusing on -- I just want to make those comments -- we're not necessarily focusing on large deals only. We're talking about there could be smaller deals that we're talking about, like...

Okay. So you're saying there's active dialogue for a whole range of potential sort of asset sales?

Yes. I think, in keeping with what we've always done, we're always sort of looking for opportunities to either add businesses through acquisitions that are accretive to our current business or to sell assets that we either find nonstrategic or that are valued more highly by others than we do and it's the right move for our shareholder base to realize that value.

Okay. So I do want to get back to the ABS topic. But he did, I think, also say -- I think he was quite proactive about this -- said that the company expects to explore M&A in the coming quarters. So is there like a formal process, or is it just this kind of normal course of business that you're always kind of in discussions?

Yes. I think it's more normal course is what I would say. Now I mean we have indicated continued interest in transformative types of transactions. So I think we're -- we have been interested in and open to exploring sort of that full gamut of small sort of nonstrategic accretive transactions but also transformative type deals. So I think it is in that context that he was really making his comments.

Okay. And then on the ABS comments, again, have you done a lot of work on it, or is it just kind of more mention of a potential given that there just seems to be a lot of interest around it in the market?

Yes, sure. So we have done a considerable amount of work on it. We've had -- and I think we mentioned on our last earnings call that we've had conversations with other parties, including rating agencies, about in particular our non-Windstream business and those assets. There's been a lot of activity in the fiber space around ABS that I think has been attractive-type cost of capital and interesting leverage profiles associated with ABS types of transactions. So it's something we wanted to kind of -- to look at with regard to our non-Windstream assets and to kind of get a feel for how the market would look at an ABS transaction backed by some of those assets. And we've gotten very favorable feedback. A lot of the deals that have been done so far have been either fiber-to-the-home focused or maybe more sort of wholesale dark fiber focus, and our fiber assets are, as I've mentioned already, are a broad spectrum of both lit and dark wholesale and enterprise types of revenue streams. And we thought that that would lend itself well to an ABS-type securitization type of a deal. And I think that's what we've found as we've explored the market. Now just because the market would receive it well, just because it's possible to do it, doesn't mean necessarily it's the right move for us. But we think it could make some sense if done properly. It does take a lot of time to set up an ABS transaction. There's a lot of upfront work that goes in. So it's not a quick transaction necessarily to do that. But we have done a lot of work to explore the potential.

Okay. So to be clear, it's not necessarily taking the whole Uniti Fiber and putting -- it would be either select contracts or could you somehow carve out a region? Or how would...

Yes. I think we would want to be thoughtful and size an ABS transaction appropriately given how it would fit into our full capital structure. We're not going to finance our entire capital structure with an ABS deal. But I think if done right, it's enhancing to our capital structure access to another -- to other pockets of financing, attractive cost of capital relative to where the high-yield market maybe is today, and then attractive leverage ratios. But I think with ABS, you do a lot of work on the front end to set up the vehicle and then you can add to it over time. So I think we would most likely, if we were to do an ABS, come in with something smaller, select assets and then look to build on that over time if it was the right market, but in keeping with our continued access to the high-yield market and other markets that we access today.

Okay. We have a burning question from the audience. Dave?

Okay. So obviously Frontier had some success [Technical Difficulty] fiber-to-the-home ABS that they did. Yes. I mean, it's fun to talk about that multiple. But you don't have any real maturity until 2027. What would you do with the money if you went and did it? Like why bother, other than to maybe just demonstrate a proof of concept?

Yes. So we would definitely want to size -- that's another reason to size an ABS appropriately. We want to size it to our current needs and have it fit into our existing capital structure. But I think -- so there are some current uses that we could use for funds from an ABS transaction in terms of funding some of the capital growth that Ana and I've already talked about, we could use for some of that. But I think a lot of what we would be doing with an ABS of any size would be paying down debt from other silos. So we would -- for us, and I guess another way to say it, Dave, is, for us, an ABS wouldn't be a leverage increasing type of transaction. We would look -- we're in our ideal leverage range right now. So we wouldn't be looking to ABS to necessarily increase overall leverage, but maybe shift some of that leverage over into another market if we went that way. So we would use proceeds of any size to pay down existing debt.

Can I ask a follow-up? So just in other news this week, Elliott, who is the controlling shareholder of your biggest customer, is out there agitating at Crown Castle to see if there's a better way to monetize their fiber business. If I had to maybe pick one of the businesses that got assembled that looks a little bit like what your business looks like, it's the Crown Castle fiber business. Are you excited or worried about the outcome of that process?

Excited or worried? I don't think I've had either really -- either one of those emotions. I think, looking at that fiber business and the way Crown Castle has their strategy around fiber and how it fits into their larger tower business and all, I think it's -- the business is similar in a lot of respects, that fiber business, but the situation, I think, is very different in terms of the context of their fiber business. I think Crown is really focused on the wireless piece of the fiber business, which -- we've built a lot of our fiber business on that opportunity as well. But small cell and lit backhaul is only a portion of what we do. We think you've got to really be successful at layering the other customer segments and the other opportunities for lease-up on top of the wireless backhaul and the small cell opportunities in order to really have the long-term return on capital that we want to achieve in the fiber business. So I think what we're doing in the fiber business is sort of a broader focus around the lease-up and layering over that whole set of customers on top of the fiber business. And I think that would be -- I think that's affirming to our strategy and what we're doing, that you've got to have a broader strategy to really be successful in the fiber business.

Okay. I'm watching the clock. Our time always -- really moves fast. Yes. So I'm going to -- so the next group of questions I was going to ask is about the company's kind of bridge and plan to getting to free cash flow positive. But I'm going to put that one aside because I do want to touch upon just the whole Windstream lease situation, because we always have to ask this question, right? So obviously, Windstream Uniti has had a material disagreement on the rate at which the existing lease between the 2 should be re-rated at the renewal date, which is in 2030. But I think sort of negotiations potentially start in 2027. And then you really sort of have to get it figured out by 2028. So there's been kind of a highly public dispute already on the valuation, and Windstream has said that they believe that payment should be reduced by 70%. You guys obviously disagree. But there's been a recent CEO change at Windstream. So Paul Sunu has now taken over from Tony Thomas. So does the Windstream CEO change have any implications for the lease discussions?

Yes. Well, I think -- so Paul is an industry -- long-time industry veteran. We're excited to see him come into that role. I think he's a longtime friend of Kenny's, and the company helped to grow, Southern Light, we did business with Paul Sunu, one of his former companies, Madison River, going back 20 years ago. So I mean, he's a seasoned, experienced leader, and we're excited to work with Paul going forward, and we think we can be successful working with Paul for sure. And we wish Tony well. We hope -- we wish the best for him and his next endeavor as well. But we're excited to see Paul in that role for sure.

Okay. Are you having active discussions on the lease re-rate now? Like where does that process stand?

I think -- I don't want to comment on any type of active discussions on that. But there's -- like you said, there's a definite process in the master leases in terms of how that would play out over the years of kind of '27 and '28. And if -- it doesn't require management to come to a negotiated agreement on the lease rate at renewal if we're a long way apart. I mean, it goes into an arbitration process where independent third party appraisers come in and do the work to appraise the value. And we're confident, as we've said many times, in that appraisal process. So doesn't require us to get to any kind of agreement between management ahead of that. But I don't want to comment on any particular negotiations or anything on an ongoing basis.

Okay. And then I think you did talk about you continue to be focused on potential transformative sort of outcome. So where do you guys stand right now in the potential for a recombination with Windstream?

Again, I don't want to comment. I don't want to speculate publicly on the timing or nature of any kind of recombination. But I think I just will reiterate what we've said before, which is that we're interested in conversations around that. We're open to conversations around that. And we do think that there's a lot of industrial logic to potentially recombining those businesses.

Okay. So just a few minutes to go, I do want to touch on the free cash flow. So I think -- so you've got this quarterly settlement payment of $25 million that you're paying to Windstream. So LTM, if we kind of normalize for that before the dividend, I think the free cash flow, and this also includes the GCI payments, obviously, that you're making to help Windstream fund CapEx, and those do kind of gradually decline as well, so I think you've had LTM free cash flows about negative $236 million. And then you -- the dividend payment has been about $143 million. So spend burn about negative $380 million. But you do have guidance of turning free cash flow positive after the dividend in 2025. So if we kind of talk about the bridge, so the settlement payments are going to go away mid-2025. So you save $100 million there, right? And then the GCI payments, those actually declined by about $100 million as well. So we've just basically found like $200 million, right? So -- but -- so where does the rest of that free cash flow growth come from? And in order to achieve that free cash flow positive after the dividend, is a dividend cut potentially on the table to help you get there?

Yes. So first, let me talk about the free cash flow. So I mean, depending on what period you're looking at in GCI investment, it could be higher or lower. The free cash flow burn rate right now, the run rate is about $300 million for the current year. And so I mean, your math is right. It's about $100 million -- that path to free cash flow positive is about $100 million in settlement payments that go away in mid-2025, step-down of $100 million in GCI. And so that leaves another $100 million is my math on that. And so between now and the end of 2025, GCI rent is up about $50 million to $60 million of cash rent on an annual basis. So that leaves kind of $40 million to $50 million coming from the non-Windstream portion of our business, the contribution there. We talked about before, CapEx kind of staying flat in that $110 million to $130 million. We're kind of on the higher end of that, so we may -- there may be a little bit to come from CapEx there in terms of that bridge. But then a lot of that we have coming from that final sort of $30 million to $40 million in terms of free cash flow growth coming out of the non-Windstream portions of our business, so the leasing business and the fiber business.

Okay. So that actually could work.

Yes, it works.

Okay. Good job. Okay. Well, thank you, Paul, so much. We're out of time. It's been a pleasure, and thank you for attending the conference and spending time with the investors.

Thank you, Ana. Thanks, everybody.

Okay. Great. Thanks.