Uniti Group - Q3 2021

Transcript

Speaker 0

Welcome to the Unigroup's Third Quarter 2021 Conference Call. My name is Stephanie, and I will be your operator for today. A webcast of this call will be available on the company's website, www.uni .combeginning November 4, 2021, and will remain available for 14 days. The company would like to remind you that today's remarks Include forward looking statements and actual results could differ materially from those projected in these statements. The factors that could cause actual results To differ are discussed in the company's filings with the SEC.

The company's remarks this morning will reference slides posted on the website, and you are encouraged to refer to those materials during this call. Discussings during the call will also include certain financial measures that were not prepared in accordance with the generally accepted accounting principles. Reconciliation of those non GAAP financial measures The most directly comparable GAAP financial measures can be found in the company's current report on Form 8 ks dated today. I would now like to turn the call over to Unigroup's Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr.

Gunderman.

Speaker 1

Thank you. Good morning, everyone. Both our Uniti Leasing and Uniti Fiber businesses continue to perform exceptionally well, Fueled by continued tailwinds within the communications infrastructure industry and strong demand for our fiber infrastructure. This demand was evidenced by the 2nd consecutive quarter of Consolidated new sales bookings of approximately $1,000,000 in MRR representing again one of the highest quarters ever for consolidated bookings. Turning to Slide 4.

Uniti has the 8th largest fiber network in the country, and we're the 3rd largest independent operator. Our portfolio of small cells, connected buildings, macro towers and homes passed continues to grow each quarter, Driven by the need for more investment in 5 gs Networks, 10 gig upgrades and CRAM small cell deployments. These investments provide Uniti with the unique opportunity to expand our networks with anchor economics, setting the foundation for attractive future lease up And further validating the shared infrastructure benefits of fiber. As evidenced on Slide 5, Unity is demonstrating the economics of an attractive shared We believe that a healthy mix of anchor and lease up bookings and installs That's the most effective way to drive optimal economics. Unity acquires or builds new fiber largely for our wireless customers With attractive long term anchor cash flow yields in the mid to high single digits, we're then successfully adding additional tenants with very high margins and minimal CapEx, Resulting in a cumulative cash flow yield today of approximately 19%, an almost threefold increase from the anchor yield and all within the past 5 years.

Slide 6 is further proof of this healthy business mix. As I mentioned earlier, we had our 2nd consecutive quarter of consolidated sales bookings Approximately $1,000,000 in MRR, a 90% increase from the Q3 of 2020. The amount of new bookings itself, however, is only part of the positive story. You can also see that not only is there steady growth of both wholesale and non wholesale bookings, but there's also a very healthy and gradually growing mix New bookings that are lease up in nature. This focus on a good balance of wholesale, non wholesale and anchor lease up is intentional on our part and has resulted in outsized Fiber sales bookings in the Q3 were $800,000 of MRR, an increase of over 90% in the Q3 of 2020 and our 2nd consecutive quarter of bookings at In fact, we had our highest level of enterprise bookings ever for a quarter.

In terms of mix, 60% of our sales bookings This came from lease up of our major wireless anchor builds. We continue to ramp up our lease up efforts within our Southeast markets with approximately 65% of lease up MRR sold over the past 4 quarters occurring in the 2nd and third quarters combined. Turning to Slide 7. At Uniti Leasing, we continue to actively market over 3,000,000 strand miles of fiber that is available to lease to third parties, making us one of the largest players in the national wholesale fiber market. Our non wireless carrier customers such as the same group and national MSOs continue to be active as they expand their cloud based services.

For example, we recently announced a 20 year contract with a large international hyperscale customer to provide high strand count fiber along a new Dark fiber route that connects key data centers in Pittsburgh and Ashburn, Virginia demonstrating the robust demand we are continuing to see for long haul routes. To be clear, although we report Uniti Fiber and Uniti Leasing separately, both businesses are marketed to our customers as one consolidated fiber business. An increasing number of customers and network solutions are a mix of Uniti Leasing and Uniti Fiber Networks, And we fully expect and encourage that trend to continue. With that, I'll now turn the call over to Paul. Thank you, Kenny.

Good morning, everyone. We continue to execute well at both Uniti Fiber and Uniti Leasing as evidenced By our robust bookings activity and our progress in driving higher margin recurring revenue and lower than anticipated operational costs. As a result, we are increasing the midpoint of our full year 2021 outlook from our prior outlook for adjusted EBITDA and AFFO per diluted common share, which I will cover in more detail shortly. We are maintaining the previous midpoint of our 2021 outlook for revenue As there remains the possibility that some core non recurring contractual revenue could slip into the Q1 of 2022. Please turn to Slide 8 and I'll start with comments on our Q3.

We reported consolidated revenues of $267,000,000 Consolidated adjusted EBITDA of $217,000,000 AFFO attributed to common shares of $110,000,000 And AFFO per diluted common share of $0.43 Net income attributable to common shares for the quarter was $43,000,000 or $0.17 per diluted share. At Uniti Leasing, we reported segment revenues of $199,000,000 And adjusted EBITDA of $194,000,000 up 9% and 7% respectively from the prior year. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. The year over year growth reflects the dark fiber IRU contracts we acquired from Windstream, The straight line rent recognition under the Windstream MLAs and GCI investments subsequent to our settlement agreement, The impact of the Everstream transaction as well as annual lease escalators. Turning to Slide 9.

Our growth capital investment program continues to yield positive results. As a reminder, our tenant has invested Approximately $1,000,000,000 of tenant capital improvements in our network over the past 6 years and that investment is expected to continue. Unity has now begun investing its own capital in long term value accretive fiber, largely focused on highly valuable last mile fiber, Including fiber in commercial parks and fiber to the home. Collectively, these investments have resulted in over 10,000 route miles of newly constructed fiber And around 20% of the legacy copper network being overbuilt with fiber. Both of these numbers continue to gradually increase each quarter And we expect that they will increase materially over the coming years as we continue to invest in our networks.

During the Q3, Uniti Leasing deployed approximately $62,000,000 towards growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program. These GCI investments added These GCI investments added around 1300 route miles of valuable fiber to Uniti's owned Network across 13 different states. As of September 30, Uniti has invested $237,000,000 of capital to date Under the GCI program with Windstream, adding around 6,200 route miles and 217,000 strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the 1 year anniversary of Uniti making such investments. They are subject to a 0.5% annual escalator and result in nearly 100% margin.

The investments we have made to date will ultimately generate approximately $19,000,000 of annualized cash rent. During the Q3, these installs add annualized revenues of approximately $1,600,000 We currently have around 1400 lit backhaul, dark fiber and small cell sites remaining in our backlog That we expect to deploy within the next few years. This wireless backlog represents an incremental $11,000,000 of annualized revenues. At Uniti Fiber, we reported revenues of $67,000,000 during the quarter. While core recurring revenue was in line with our expectations, Core non recurring revenue was below expectations due to the timing of equipment sales and early termination fees.

Adjusted EBITDA of $28,000,000 during the quarter was consistent with our expectations. Adjusted EBITDA margin for the quarter was 41%, Representing a 770 basis point improvement from the prior year due to lower operational costs and our continued emphasis on higher margin recurring revenue. Uniti Fiber net success based CapEx was $31,000,000 in the 3rd quarter, in line with our expectations. We also incurred $2,000,000 of maintenance CapEx or about 3% of revenues. Please turn to Slide 10 and I will now cover our updated guidance.

We are revising our prior guidance primarily for the impact of the recent issuance of our 6% unsecured notes And related redemption, lower than expected operational costs and the impact of transaction related and other costs incurred to date. Our current outlook excludes future acquisitions, capital market transactions and future transaction related and other costs not specifically mentioned herein. Actual results could differ materially from these forward looking statements. Our current full year outlook for 2021 includes the following for each segment. Beginning with Uniti Leasing, we continue to expect revenues and adjusted EBITDA to be $784,000,000 7 $66,000,000 respectively at the midpoint, representing adjusted EBITDA margins of approximately 98%.

Revenue and adjusted EBITDA each include $26,000,000 relating to the straight line rent associated with the Windstream master leases and GCI investments. Our outlook now reflects $230,000,000 of net success based CapEx at Uniti Leasing at the midpoint of our guidance, Of which $225,000,000 relates to estimated Windstream GCI investments. Most of these markets Are similar to our own Tier 2, Tier 3 markets, providing Windstream with substantial growth opportunities over time. Slide 11 highlights, non Windstream revenues and adjusted EBITDA continue to grow at a healthy pace and are expected to be $55,000,000 $42,000,000 respectively, up 27% and 17% from 2020 levels. This includes the assets in dark fiber IRU contracts we acquired from Windstream where the revenue is diversified across multiple third parties And the Dark Fiber IRU leases that are part of the Everstream transaction.

Turning to Slide 12, We still expect Uniti Fiber to contribute $305,000,000 of revenue at the midpoint. However, we now expect adjusted EBITDA of $120,000,000 Full year 2021, representing a margin of 39% this year at the midpoint of our guidance, which is a 360 basis point improvement from last year. The slight increase in adjusted EBITDA compared to our prior outlook is primarily due to lower than expected operational costs. As we pointed out on our earnings call last quarter, Uniti Fiber's outlook is impacted by the sale of our Northeast operation as part of the Everstream transaction And the winding down of our non core construction business. Adjusting for the impact of these two items, revenue and adjusted EBITDA for 21 at Uniti Fiber are now expected to increase by 6% and 12% respectively from the prior year.

Net success based CapEx for Uniti Fiber this year is still expected to be $125,000,000 at the midpoint of our guidance. Turning to Slide 13. For 2021, we now expect full year AFFO to range between $1.64 And $1.68 per diluted common share with a midpoint of $1.66 per diluted share due to lower than expected operational costs. On a consolidated basis, we expect revenues to be $1,100,000,000 and adjusted EBITDA to be $860,000,000 at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $398,000,000 Excluding any deferred financing cost write offs and premiums paid relating to early repayment of our debt, reported interest expense in 2021 We'll include an additional $58,000,000 relating to the write off of deferred financing costs and premiums paid on the early repayment Of our 8.25 percent senior unsecured notes due 2023, 6% senior secured notes due 2023 and 7.8% senior unsecured notes due 2024.

Corporate SG and A excluding amounts allocated to our business segments is now expected to be approximately $36,000,000 Including $10,000,000 of stock based compensation expense. We continue to expect weighted average diluted common shares outstanding for full year 2021 To be around 263,000,000 shares. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. Turning now to our capital structure. Through the successful debt refinancings we have executed so far this year, We have significantly improved our financial flexibility, lowered our borrowing costs substantially with over $25,000,000 in expected annual interest cost savings And extended our debt maturities by several years.

On October 13, we successfully closed on the issuance of $700,000,000 of senior unsecured notes Due January 2030. These notes will bear interest at 6% and were issued at par. Most of the proceeds from the offering will be used to redeem in full the outstanding 7% and an 8% senior unsecured notes due 2024, Plus any accrued and unpaid interest on December 15, 2021. On October 14, 2021, the Company used the remaining portion of the proceeds from the note issuance together with cash on hand to prepay the next 4 settlement obligations settlement payments That were due under the settlement agreement Uniti entered into with Windstream upon its emergence from bankruptcy, resulting in savings of approximately $5,000,000 As of today, we have approximately $270,000,000 of installment settlement payments remaining to be paid. Going forward, we To be opportunistic in prepaying the remaining settlement payments while managing our balance sheet at the same time.

At quarter end, we had approximately $450,000,000 of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratios stood at 5.76 times based on net debt to annualized adjusted EBITDA. This morning, Our Board declared a dividend of $0.15 per share to stockholders of record on December 17, payable January 3. I'll now turn the call back over to Kenny. Thanks, Paul.

Please turn to Slide 14. I'd like to take a moment and discuss our non Windstream business and our continuing effort to highlight the value disconnect, which we believe still exists. The first two columns of the table represent the last 2 years of performance of Uniti Fiber Plus, our non Windstream Uniti Leasing business, With the 3rd column also including the CLEC fiber lease payment we received from Windstream. Our fiber platform, including Uniti Fiber and Uniti Leasing, Our strategy is unique in that we are targeting Tier 2 and 3 markets to offer full service fiber where we have a competitive advantage, A well developed brand and boots on the ground. At a national level, however, we're a light touch passive wholesale provider.

We're executing very well on this collective strategy as evidenced by 4% top line growth and 6% adjusted EBITDA growth, continued strong bookings, Industry leading churn and service delivery intervals. 90% of our business is wholesale with an average term remaining of 9 years making our cash flows Stable and relatively immune to swings in the economy, which has been evidenced by our relatively uninterrupted progress during the height of the COVID pandemic. Our lease up business including enterprise sales and other additional tenants is growing at 10% plus a year with attractive incremental cash flow yields. We're very selective about which markets to offer enterprise services and today we're operating in only about 20 markets. We estimate our market share at less than 5% in most of our existing metro markets implying material growth potential without adding any new markets.

Having said that, we also own dense fiber in approximately 275 additional metro markets around the country. This latent fiber provides substantial capital efficient and margin friendly growth potential for many years to come. Lastly, we're also building as much new fiber as anyone in the industry and growing the reach and density of our network every day. We believe this combined business is sizable enough and has the characteristics to be a standalone entity. Turning to Slide 15.

I'd like to comment briefly on M and A, especially given recent market rumors. Since the Windstream settlement, we've consistently said Our M and A efforts were focused on 3 categories: bolt on acquisitions, sale leaseback asset sales and large transformative transactions. That M and A strategy has not changed as we continue to look at acquisitions to complement and grow our business and organically. We realized that our investors want us to do more acquisitions and do them more quickly, and we remain very active on that front. However, we're also being very disciplined in our approach, which hopefully our investors have come to appreciate.

We're spending time with our Forward evaluating and refining analysis that would allow us to separate our assets in a tax and value efficient manner And we'll also help highlight the value disconnect that exists. For example, we've been vocal about our ILEC network and lease, in particular, undervalued, especially given the mission Lastly, we've consistently said in the past year That we have a very strategic set of assets and that we are evaluating large transformative transactions. There's a disconnect between how public investors Seem to value our assets and fiber businesses in general versus how private funds are valuing them. Our ongoing discussions continue to reinforce these things. To be clear, we are focused on executing our strategy of growing our business organically and executing on bolt on M and A.

But we've proven to be smart buyers and sellers and are open minded to all paths that maximize shareholder value. With that, operator, we're now ready to take questions.

Speaker 0

Your first question comes from the line of Greg Williams with Cowen.

Speaker 2

Great. Thanks for taking my questions. Kenny, if we're to believe the reports in the last few weeks, There's a deal that maybe has an impasse and the impasse is really around bid ask and you articulated the valuation case here on Slide 15. Some of the pushback on the valuation is perhaps the 2,030 renewal as you think about the Windstream MLA stream. Does that whether it remains at $700,000,000 plus the escalators or does it get cut?

In the MLA, Exhibit E discusses the renewal, and it seems more formulaic. So, can you just give us your latest thoughts on the 2030 renewal and what's your calculus in your self valuation? Thanks.

Speaker 1

Yes. Thanks, Greg. Yes. First of all, going back to the original lease, it was set at around an 8% A little over an 8% cap rate and then we just renegotiated the lease holistically last year as you know and the rent was reaffirmed with 3rd party valuation reports and so forth. So and that was 5 years into the deal and really with Not a lot of new fiber investment made in the network in that 5 or 6 year period.

So we feel good about The asset holding its value during that period and when you look out 10 years from now, There's going to be based on current plans at least a substantial amount of new investment in the network, not just Investment to maintain its value, but investment to enhance the value through our GCI program and otherwise. So and look, if you believe in the fiber to the home trend, which we certainly do and I think the industry certainly This is revealing that as we see earnings and we see progress from around the industry including with our tenant. We feel really good about the trajectory. And so we don't see the value of our network Declining and dropping off precipitously by any means. In fact, we believe it's going to enhance value and certainly hold this value.

But look, it's there's no formulaic calculation, the fair market value, The rent reset in 10 years will be fair market value. So, I think but I think the trends are looking positive for Uniti.

Speaker 2

Got it. Thank you.

Speaker 0

Your next question comes from Frank Louthan with Raymond James.

Speaker 3

Great. Thank you. Can you walk us through a couple of the lease protections you had in the MLA, in particular, do you still have the rights to buy certain elements of Windstream's Networks allow you to operate the ILEC in the event that there wasn't a lease renewal in 2,030? And then I've got a follow-up.

Speaker 1

Yes. Frank, are you referring to what happens in 2,030 If there's not if Windstream chooses not to renew the lease?

Speaker 3

Yes. I think you had some clauses in the master lease that allowed you to Purchase some elements in case of non renewal. Are those still in place with the new agreement or is that changed?

Speaker 1

It hasn't changed, Frank. It's in and sorry, I'm a little foggy on it. 10 years is a long way away, but we do think about it and that didn't change from the original lease And it does there are protections and I think generally I'm looking at my general counsel, but I think generally if Windstream chose not to Renew the lease, we would have the right to acquire the operations and then operate it ourselves or have someone else step in and operate it. So There's not a risk that those operations go away from the lease. Hey, Frank, are

Speaker 3

you there? I was on mute. Yes, I'm sorry, I'm here. So you mentioned you're investing in some fiber, You mentioned commercial parts and some fiber to the home. Is that fiber to the home outside of the Windstream territory?

Are you building for Some other providers are building some of your own residential broadband business?

Speaker 1

No, that's all within the GCI program and for Windstream

Speaker 0

Your next question comes from Simon Flannery with Morgan Stanley.

Speaker 4

Great. Good morning. I wonder if we Focus on the fiber business just a little bit. I haven't seen the queue yet, but I think you mentioned that the revenues, which were a little bit below our estimate, was Primarily due to lower nonrecurring, but maybe you could just comment on what we're seeing in lit backhaul, enterprise and wholesale and e rate And government, where is the pressure there and the outlook? And then as we think about 2022 and some of the new signings, the bookings you've had, Is capital intensity going to be similar to 2021 levels?

Any early thoughts on that? Thank you.

Speaker 1

Simon, I'll start and Paul can jump in if you'd like to add. But yes, the core recurring business is doing great At fiber, if you look at our disclosure, we've always bifurcated revenue at Uniti Fiber between core recurring and core non recurring. I think we said we have something like $50,000,000 of core non recurring this year. That's the part that is below plan for this quarter. So that's equipment sales and ETL revenue, which are just harder to predict from a timing perspective.

But we've reiterated revenue guidance from the year and so For the year, and so I think you can infer that we think we're going to make that up in the Q4 just from a timing perspective. But the core business itself is doing terrific And strong bookings, strong installs, minimal churn and very good Service delivery metrics all implied really good growth on the core recurring business. With respect to capital intensity, yes, I think we're not ready to give any guidance for 2022, but I don't expect any changes Any material changes, I think the general trajectory of margin enhancement and capital intensity kind of simmering at existing levels, if not a little below is kind of what we're still thinking. Great.

Speaker 4

And I guess the OpEx was a good surprise there. Can you give us any color on what was going on there? Because I think elsewhere, people are just worried about inflationary pressures On costs, but is that something that's also sustainable?

Speaker 1

Yes, I think so. We've it's a combination of really Three things, Simon. 1, we've just been particularly cost conscious past couple of years. I I think that's just a general good thing to do. But 2, we've been pretty vocal about exiting low margin non recurring Businesses that are not corridor business, so just like one off construction projects, for example.

So those businesses have pretty much Wound down and they're no longer in the numbers. And so you're seeing some benefit from that. But then thirdly, we've really focused on lease up And bringing on these the higher margin, higher cash flow business. We've been showing you the component parts of that, right, that slide where we show you the anchor economics and then the lease up, but that stuff starts To really impact margin when you do it at scale and you're really seeing that. So ultimately going forward, yes, that's exactly what we

Speaker 3

At this time, there are no additional questions. I would like Turn it

Speaker 0

back over to Mr. Gunderman for your closing remarks.

Speaker 1

Thank you. Thank you all for your interest in Uniti and we look forward to having our next conversation in a few months.

Speaker 0

Thank you. This concludes today's conference call. You may now disconnect.