Uniti Group Inc. Q4 FY2020 Earnings Call

Welcome to Uniti Group’s Fourth Quarter 2020 Conference Call. My name is Andrew, and I’ll be your operator for today. A webcast of this call will be available on the company’s website, www.uniti.com, beginning March 1, 2021, and will remain available for 14 days. At this time, all participants are in a listen-only mode. Participants on the call will have an opportunity to ask questions following the company’s prepared remarks. 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 afternoon will reference slides posted on its website, and you are encouraged to refer to those materials during this call. All financial results as of and for the three and 12 months ended December 31, 2020 are preliminary and reflect the company’s best estimates based on information available as of the date hereof. Results are subject to change as the company works to complete its financial results and its auditors work to complete their audit work. In addition, discussions during the call will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company’s current report on Form 8-K dated today. I would now like to turn the call over to Uniti Group’s Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thanks, Andrew. Good afternoon, everyone, and thank you for joining. Before I review Uniti’s operational performance, I’d first like to recap 2020 and refresh on our go-forward strategy. 2020 was a transformational year for Uniti that saw tremendous volatility to our stock and revealed our true value-accretive accomplishments that set up Uniti for future success. First, we successfully participated in a $4 billion deleveraging of our largest customer, while simultaneously entering a value-enhancing settlement that revalidated and strengthened our lease agreement. Secondly, we grew our national network by 90%, and within a few months have already demonstrated lease-up success of those assets by increasing our sales funnel by $0.5 billion and executing on $150 million of new revenues under contract. Next, we extended our debt maturities and significantly improved our liquidity profile. Lastly, we completed the divestiture of non-core operations from our real estate portfolio, which now positions us with 95% recurring high-margin revenue with industry-leading 0.2% monthly churn and a focus on fiber. In short, we had a terrific year operationally. Turning to slide four of our presentation. Fiber is the mission-critical connective tissue for virtually all current and future broadband delivery. As one of the largest independent wholesale providers in the country, we are agnostic to the on-ramps that feed traffic onto our network and are enabling a virtualization of our culture. 5G mobile broadband, fiber-to-the-home, fixed wireless, satellite, and other technologies are all enabling greater usage of video conferencing, e-learning, telemedicine, and remote work environments as well as a general continued explosion of broadband traffic. In the past four years, our network has seen a roughly 10 times increase in peak daily traffic from roughly 16 gigs to 160 gigs, and we expect that trajectory to only continue. As further proof of the durability of our model, the COVID-19 pandemic not only brought little disruption to our business but has actually accelerated many of the virtualization trends that have been critical to staying connected. Demand from industries such as healthcare, education, government, and wireless customers has been particularly elevated. Turning to slide five, Uniti is addressing these tremendous industry tailwinds with the eighth largest fiber network in the country and a growing portfolio of small cells, connected buildings, and homes. We’ve amassed this valuable and hard-to-replicate portfolio in only five years through our proprietary M&A efforts and unique sales strategy that provide us with anchor customer relationships to build new fiber economically. In the past three years alone, we’ve built 6,600 route miles and 674,000 strand miles of new fiber with stable long-term anchor economics and shared infrastructure lease-up possibilities. We’re seeing tremendous demand for access to our network and success of our strategy. Turning to slide six. At Uniti Leasing, as a national wholesale provider across 42 states, we’re driving highly profitable, passively-managed lease-up revenue on our long-haul and metro routes and opportunistically growing our portfolio through proprietary M&A. At Uniti Fiber, we’re targeting less competitive Tier 2 and 3 markets, largely in the Southeastern U.S., and providing actively managed fiber solutions, including to wireless customers and enterprise, schools, and government customers. Our strategy of targeting these underserved markets, along with our national scale and customer relationships, is driving unique demand. As an example, in our recently announced agreement with Dish, we were named as one of the four national fiber providers to provide solutions to Dish in its efforts to build out its 5G network across the United States. Within a few months of making these announcements, we’ve already begun leveraging our existing Dense Fiber infrastructure for Dish in our Southeastern markets, which has given us a speed to market and a cost advantage over our competitors. With restructuring volatility now behind us, our portfolio is more targeted and our strategy reaffirmed, Uniti is now positioned for tremendous success in 2021. Turning to slide seven. Our priorities for this year will be a continued focus on driving high-margin recurring revenue through lease-up while selectively expanding our network with attractive anchor economic-driven new builds. We will also continue to opportunistically look to expand our network reach and passive revenue base by executing on our proprietary M&A funnel. Lastly, we are committed to operating and growing our business in an environmentally and socially responsible manner. In the next few months, Uniti will be publishing its first ESG report that summarizes these efforts, including the true mission-critical nature of our network, our unrivaled ability to respond to natural disasters such as COVID-19 and hurricanes, and the essential nature of our world-class workforce. Turning now to our operational results, slide eight demonstrates the successful year we had in leasing up our Southeast fiber network in 2020. To date, we’ve sold incremental lease-up MRR of $5.5 million, which is three times the recurring revenue on the major wireless anchor builds that have been completed. In 2020 alone, we sold $1.2 million of lease-up MRR, or $14 million on an annualized basis, is expected to generate incremental cash flow yields of approximately 50%. Including the lease-up to date, we’ve sold since we began construction on our major wireless builds, we expect to generate a cumulative cash yield of 14% on these projects, doubling the initial anchor yield within a four-year timeframe. These relatively new networks remain highly underutilized, and the expected additional lease-up in the coming years will continue to increase our cumulative cash yield. The competitive dynamics and resulting growth trajectory in our Tier 2 and 3 markets are very strong. In fact, dark fiber and small cell revenue in the fourth quarter grew over 65% from the prior year, while enterprise revenue grew 10%. These results reinforce that our strategy is working and demonstrate that we are choosing good anchor markets to expand our network in a disciplined manner and that we are executing effectively on follow-on lease-up. Uniti Fiber sales bookings in the fourth quarter were approximately $0.5 million of MRR, and approximately 80% of our sales bookings came from non-wireless customers. For the full year, bookings totaled over $2 million of MRR, with non-wireless bookings increasing 14% from the prior year. Uniti Fiber installed $0.6 million of MRR during the fourth quarter with 61% of gross installs related to non-wireless opportunities, 33% related to wireless, and 6% related to bandwidth upgrades. For the full year, we installed $2.7 million of MRR with non-wireless installs, MRR up 30% from the prior year. Turning to slide nine. At Uniti Leasing, we continue to actively market over 3 million strand miles of fiber that is available to lease to third parties, making us one of the largest players in the wholesale fiber market. Our sales pipeline today represents approximately $1 billion of total contract value, reflecting the continued significant interest from our wholesale customers, as well as the strategic value of these fiber strands. Approximately 75% of the opportunities utilize fiber we acquired as part of our settlement with Windstream. We continue to be successful in monetizing our portfolio of assets, and today they have executed on opportunities that represent total remaining revenues under contract of $740 million, with an average contract term remaining of 15 years. Given the proprietary nature of our offerings at Uniti Leasing, we thought slide ten would be helpful to compare and contrast the different types of opportunities we’ve executed and are continuing to pursue. Traditional dark fiber IRUs and dark fiber leases have driven $60 million of upfront proceeds and $340 million of remaining revenues under contract, primarily on the fiber we acquired from Lumen and Windstream. These opportunities generate margins of over 90% with minimal to no CapEx required. Sale leasebacks are structures where we acquire new fiber to expand our network reach and then immediately enter a long-term lease with a tenant to provide anchor return economics. Our transactions with TPx, CableSouth, and others over the years are examples. OpCo/PropCo transactions are where we sell our existing actively managed lit services revenue at double-digit transaction multiples to an operating partner and then immediately lease access to the underlying fiber network, which we retain in the form of a 10-year or 20-year IRU. These transactions generate upfront proceeds, grow net contractual revenue, and extend the average term of revenue substantially. For example, we sold our Midwest fiber operations as part of our Bluebird transaction, and we recently sold our northeast operations as part of our Everstream transaction and simultaneously entered into long-term lease agreements with both operators. Lastly, we provide growth CapEx programs whereby we immediately acquire newly built fiber from anchor customers and then lease back access to that fiber at attractive yields to anchor customers, who are typically pre-existing sale leaseback partners. Over the past two years, we’ve generated total upfront proceeds of approximately $400 million from these various transaction structures. As I mentioned earlier, we currently have $740 million of remaining revenues under contract related to these transactions, which generate attractive initial yields of 8% to 10%, with fiber capacity available for substantial additional lease-up. Turning to slide 11, we invested approximately $85 million of capital in 2020 under the GCI Program with Windstream. These investments will be added to the master leases at an 8% initial yield subject to a 0.5% annual escalator and result in near 100% margin revenue. In 2021, we expect to deploy $200 million of capital relating to the GCI Program primarily within Windstream ILEC markets. Most of these markets are similar to our Tier 2 and 3 markets with little competition, providing Windstream with substantial growth opportunities over time. As a reminder, the investments Uniti has committed to making must meet certain underwriting criteria, including being long-term value creative fiber and having minimal return thresholds for our tenant. Each request made is thoroughly reviewed by Uniti to ensure it meets these criteria. On slide 12, when combining the lease-up we sold today on the major wireless anchor projects with lease-up we’ve generated at Uniti Leasing, Uniti has sold approximately $72 million of annualized lease-up revenue, resulting in more than doubling the initial anchor cash yield from approximately 7% to a cumulative yield of over 16%. With that, I will turn the call over to Mark.

Thanks. Good afternoon, everyone. The quarterly and full-year information I’ll review this afternoon reflects the company’s preliminary estimates and is based on information available as of today. We are working to fully complete our financial results and Form 10-K filing that our independent auditors are working to complete their audit work. We believe both will be completed shortly and expect to file our 10-K no later than March 8th. Actual results may differ from these estimates. With that, I’ll now give a brief review of our fourth quarter and full year 2020 performance. But I want to focus my comments primarily on our 2021 outlook. As Kenny mentioned, there are a number of actions that position Uniti to execute well this year from both a commercial and operational standpoint, as we continue to benefit from the long-term investment cycle in communication infrastructure. Please start with slide 13. I will start my comments on our fourth quarter results. We expect to report consolidated revenues at $275 million, consolidated adjusted EBITDA of $216 million, AFFO attributable to common shares of $106 million and AFFO per diluted common share of $0.42. Net loss attributable to common shares for the quarter is expected to be $47 million or $0.20 per diluted share, which includes an expected $71 million goodwill impairment charge related to our Uniti Fiber segment and $9 million of transaction-related and other costs. The goodwill impairment charge is a result of the annual assessment we’re required to perform under Generally Accepted Accounting Principles. At Uniti Leasing, we expect to report segment revenues of $194 million and adjusted EBITDA of $192 million, up approximately 5% each, respectively, from the prior year while achieving an expected adjusted EBITDA margin of 99%. The year-over-year growth reflects straight line revenue recognition under the Windstream MLAs and GCI investment subsequent to our settlement agreement, the dark fiber IRU contracts we acquired from Windstream, as well as annual lease escalators. During the quarter, Uniti Leasing deployed approximately $56 million towards growth capital investment initiatives, bringing full-year 2020 investments to $96 million, about $85 million of the full-year investment were related to the Windstream GCI program. These GCI investments were mostly ILEC-related and added approximately 2,575 route miles and 84,150 strand miles of valuable fiber to Uniti’s owned network across 12 different ILEC states. As you’ll recall, these investments are added to the cash rent payment under the master leases at an 8% initial yield on the one-year anniversary of Uniti making the investments, subject to a 0.5% annual escalator. The investments made during 2020 will ultimately generate $6.8 billion of annualized cash rent. At Uniti Fiber, we turned over 170 dark fiber and small cell sites for wireless carriers across our Southeast footprint during the fourth quarter, adding annualized revenues of $1.3 million. For the full year, we turned over 850 dark fiber and small cell sites, representing about $6 million of annualized revenue. We currently have approximately 620 dark fiber and small cell sites remaining in our backlog that we expect to deploy within the next two years, representing an incremental $3.5 billion of annualized revenue. Uniti Fiber revenues are estimated to be higher than expected for the quarter due to increased non-core recurring revenue. While adjusted EBITDA is expected to be slightly below expectations as a result of higher than expected losses within our non-core construction business, that business was substantially wound down by year-end. Excluding non-core construction, adjusted EBITDA should be in line at a margin of 40%. Uniti Fiber net success base CapEx was $41 million in the fourth quarter, approximately $26 million higher than expected, attributable to accelerated deployment of capital in support of key fiber build-out that were previously planned to occur in 2021 and the timing of upfront NRC payments. We also incurred $2 million of maintenance CapEx or about 3% of revenues. We completed the remaining deployment of our legacy major dark fiber and small cell builds during the quarter, achieving an aggregate initial anchor yield of 7%. As Kenny mentioned earlier, including lease-up we have sold to date on these projects; we have generated an aggregate cash yield of 14%, and continued lease-up will drive these yields even higher over time. Please turn to slide 14, and I’ll now cover our 2021 guidance. The 2021 outlook includes the previously announced OpCo/PropCo transaction with Everstream, which is expected to close early in the second quarter of this year and the impact of a 6.5% unsecured notes offering and related tender. Upon closing of the Everstream transaction, we expect to record a pretax book gain of approximately $25 million on the partial sale of our Uniti Fiber Northeast operations in fill of certain dark fiber IRU contracts that were required as part of the settlement with Windstream. These gains will be excluded from both adjusted EBITDA and AFFO. 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. A reconciliation of our 2021 outlook to preliminary full-year 2020 results is included in the presentation materials we posted on our website today. Our full-year outlook for 2021 includes the following for each segment. Beginning with Uniti Leasing, we expect revenues and adjusted EBITDA to be $784 million and $766 million, respectively, at the midpoint, representing adjusted EBITDA margins of 98%. The expected 5% year-over-year increase in revenues primarily reflects the full-year impact of straight line rent recognition under the Windstream MLAs and GCI investments. The full-year impact from the IRU contracts we acquired from Windstream and master lease escalators. Revenue and adjusted EBITDA each include $26 million related to the straight-line rent associated with the Windstream master leases and GCI investments. Outlook reflects $210 million of net success base CapEx at Uniti Leasing, of which $200 million relates to estimated Windstream/GCI investments. We expect most of these investments will support the rollout of Windstream’s kinetic high-speed internet offerings across multiple ILEC markets. Slide 15 highlights non-Windstream revenues and adjusted EBITDA continued to grow at a healthy pace and are expected to be $55 million and $42 million, respectively, up 27% and 17% from 2020 levels. This includes the assets and dark fiber IRU contracts we acquired for Windstream, where the revenue is diversified across multiple third parties and the dark fiber IRU leases that are part of the Everstream transaction. We are specifically targeting this area for significant growth over the next several years, given the strength of Uniti Leasing sales pipeline and available fiber inventory. For the full year of 2021, our guidance includes lease-up of our national fiber network, with several opportunities that are expected to generate $5.5 million of annualized revenues when fully deployed, with approximately 40% of the annualized revenue coming from opportunities that utilize fiber we acquired from Windstream. The bookings associated with this lease-up are expected to be more heavily weighted towards the back half of this year, given the typical sales cycle. Therefore, the full year revenue run rate impact is not expected to be realized until next year. While we continue to pursue sale leaseback and OpCo/PropCo transaction opportunities, we are not including any of these in our guidance for 2021 other than the Windstream transaction. Excuse me, the Everstream transaction. Turning to slide 16, we expect Uniti Fiber to contribute $305 million of revenue and $118 million of adjusted EBITDA, reflecting margin expansion from 36% last year to 39% this year at the midpoint of our guidance. Uniti Fiber's outlook is impacted by the sale of our northeast operations as part of the Everstream transaction and the winding down of our non-core construction business, which I noted earlier. Adjusting for the impact of these two items, revenue and adjusted EBITDA for 2021 at Uniti Fiber are expected to increase by 6% and 10%, respectively, from the prior year. Net success base CapEx for Uniti Fiber this year is expected to decline $22 million year-over-year to $125 million. We expect to deploy capital in support of lease-up in those markets where we have recently completed anchor builds, as well as continue to pursue a handful of additional greenfield wireless builds. Capital intensity this year is expected to be about 41%, down from 27% in 2020. We expect to continue to manage down our capital intensity over time to be within the mid-30% range. We expect maintenance CapEx for ’21 of approximately $6 million. Turning to slide 17, for 2021, we expect full-year AFFO to range between $1.61 per diluted common share and $1.65 per diluted common share with a midpoint of $1.63 per diluted common share. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $852 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $400 million, excluding deferred financing costs write-off and early tender premium payments. Reported interest expense in 2021 will include an additional $20 million write-off of deferred financing costs and $19 million of early tender premium payment in the first quarter of this year related to the tender of our 8.25% Senior Unsecured Notes due 2023. Corporate SG&A, excluding amounts allocated to our business segments, should be approximately $42 million, including $10 million of stock-based compensation expense. We expect weighted average diluted common shares outstanding for the full year 2021 to be approximately 263 million shares, compared to 234 million shares in 2020, reflecting the full-year impact of the 38.6 million shares we issued to certain creditors of Windstream as part of the settlement agreement. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. On slide 18, we have provided a tabular reconciliation of full year 2020 preliminary results to our 2021 outlook, which summarizes some of my comments this afternoon. Turning now to our capital structure. We continue to work to improve our financial flexibility and lower our borrowing costs. In December, we successfully entered into an amendment to a credit agreement that upsized commitments for new and existing lenders by 20% to $500 million, significantly improving our pricing and extending the maturity date to December 2024, subject to routine regulatory approvals. Certain limitations were also modified or removed, including restrictions related to debt incurrence, restricted payments, and permitted investments, providing Uniti greater flexibility in pursuing its strategic initiatives. On February 2nd, we closed an offering of $1.1 billion in 6.5% Senior Unsecured Notes due 2029. The net proceeds from the offering, together with cash on hand, were used to purchase approximately $1 billion or 95% of the outstanding 8.25% Senior Unsecured Notes due 2023. On February 16th, Uniti issued a notice that will redeem all remaining outstanding notes due 2023 at par plus accrued and unpaid interest on April 15th. Through the successful refinancing of our unsecured notes, we expect to realize annual interest cost savings of approximately $19 million and have extended the debt maturity by six years. At year-end, we had approximately $520 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at year-end stood at 5.72 times based on net debt to annualized adjusted EBITDA. Regarding our dividend outlook, for tax year 2021, under our debt agreement, dividends attributable to our capital stock are allowed to be approximately $144 million, including the dividend declared on February 25, 2021. This represents our estimate of 90% of taxable income this year, excluding capital gains. Accordingly, the Board has decided to maintain the dividend at recent levels, and on February 25th, declared a dividend of $0.15 per share to stockholders of record on April 1st, payable April 16th. At these levels, the annualized dividend represents a yield of about 5% based on recent trading levels, with a strong payout ratio of just under 40% based on the midpoint of our 2021 outlook. Both of these metrics compare favorably to REIT peers today and provide the Board flexibility to grow the dividend in the future should they decide that that is the appropriate capital allocation decision. As a reminder, we constantly monitor capital markets closely and may take advantage of attractive opportunities to continue to improve our cost of capital. Slide 19 highlights Uniti deployments I have made earlier, including that Uniti has unique and valuable assets that generate contractual high-margin recurring revenue through our ongoing lease-up efforts at both Uniti Leasing and Uniti Fiber. Lastly, we expect to file our annual report on 10-K by March 8th. We are filing an extension to give the company and our auditors more time to fully complete all of their work on the financial statements and internal control. Furthermore, several investors have asked about providing financial information regarding Windstream. Our annual report Form 10-K, when filed, will include preliminary unaudited fourth quarter and full year 2020 financial information on Windstream in the MD&A section of that report. We expect to file Windstream’s final audited financial statements for last year and a supplemental filing following its completion and receipt by Uniti of those audited statements. I will now turn the call back over to Kenny.

Thanks, Mark. Please turn to slide 20, when compared to other publicly traded communications infrastructure REITs, many of our fundamentals compare favorably and we believe that there’s still a substantial valuation discount applied to Uniti resulting from Windstream’s bankruptcy. As slide 21 highlights, Uniti is a unique opportunity in the communications infrastructure space. We’re in the early years of a multi-year investment cycle that will provide growth tailwinds for Uniti for the foreseeable future. We have a differentiated strategy and a unique hard-to-replicate restructure and portfolio of assets with attractive economics, including 95% recurring revenue, monthly churn of 0.2%, and $8 billion of revenues under contract with a nine-year average remaining term. We also have a proven track record of organic growth execution and a proprietary value-accretive M&A funnel. With that, Operator, we are now ready to take questions.

Thank you. Your first question comes from the line of Frank Louthan with Raymond James.

All right. Great. So just to be clear on the dividend, I guess this new declared dividend, can we assume that’s generally the stable rate that you are looking to have going forward? And then give us a little more detail on the sell-through on the fiber that you have with Windstream, where are you with that process, and now you’ve had a better look at what you think kind of the ultimate sort of revenue opportunity is with that? Thanks.

Frank, it’s Kenny. I’ll take both of those. On the dividend, we’ve got terrific options to use our capital, whether it be organic or M&A, or paying a dividend. And we also have a strong balance sheet and strong liquidity. And as Mark alluded, our AFFO payout ratio is low compared to the peer group, and so putting that together, there’s definitely conversations about raising the dividend, and those discussions continue. But we also balanced that against the higher yield, 5% yield, we think is just way too high. So when the Board looks at our various uses of capital, I think they should continue to err on the side of investing in the business with terrific organic opportunities. But for sure, the level that we’re currently paying is a stable level for the foreseeable future. With respect to the lease-up opportunities on our wholesale national network, we feel terrific about those. I mean, we talked about doubling the sales funnel from $0.5 billion to $1 billion within a few months, and I don’t think that gets enough focus because when you think about most wholesale sales teams, we have 10 or 11 sales reps that sell our national network, and that’s relatively comparable to our peers. Therefore, doubling that funnel to that extent just shows how much demand and opportunity there really is. But clearly, following through on that and showing real revenue in the door is critical, and $150 million of incremental revenue under contract within a few months of closing the settlement we think is just a strong early indication of success. So we feel great about it. Frankly, if I compare where I thought we would be with where we are, we’re way ahead of where I thought we’d be. So, I feel really good about it.

Okay. Great. That’s really helpful. Thanks very much.

Thank you, Frank.

Thank you. And our next question comes from the line of Tim Long with Barclays.

Thank you. Two, if I could as well. First, maybe just offer your perspectives on the wireless here, you mentioned Dish and started going there. But obviously, there’s been pretty healthy C-band auctions and a lot going on with 5G. So, maybe if you could just talk a little bit about appetite there given that there are going to be increased opportunities? And then second, could you talk a little bit about kind of the digital divide and potential government programs and the impacts you think that might have on Tier 2 and 3 markets where you might be participating? Thank you.

Demand from our wireless customers remains very strong. We did not experience any slowdown during the COVID months last year and have actually seen continued strength. Our approach has been consistent despite the ups and downs often discussed, particularly in our Tier 2 markets where demand has remained steady. We remain selective about the anchor builds we undertake, and we've always felt there was sufficient demand from our wireless carriers, which continues to be true. One trend to note is that we expect some churn due to the decommissioning of Sprint sites, which we anticipate will happen this year and next. However, we believe this will be more than compensated for by ETL revenue and new demand from Dish. This reflects a natural balance where one wireless carrier exits while another enters the market. We are optimistic about the opportunities presented by the new T-Mobile and their commitment to invest in rural areas in America. When the merger was first announced, we acknowledged some short-term volatility linked to site decommissioning, but we have confidence in the long-term potential with the new T-Mobile as a valuable customer, especially given our extensive national network that reaches into Tier 2, 3, and 4 markets. We view this as a significant opportunity. The capital expenditures from carriers due to the C-band auction and other initiatives should also generate increased demand for third-party providers to help them build fiber, as they need to balance their capital against other priorities. In terms of small cells, I noted a 65% increase in the fourth quarter compared to the same quarter last year, and we expect this growth trend to continue. While small cells currently represent a small segment of our business and are not the main focus of our fiber operations, we have always regarded them as a useful tool that could grow as carriers emphasize their use. We are starting to see that growth now. Regarding federal subsidies, we believe these are advantageous for us. Although we do not receive direct subsidies, our cell leaseback partners, including Windstream, do benefit from them. There has been strong bipartisan support for rural broadband that has persisted for many years, and we expect that to continue. The heightened focus on broadband and infrastructure, especially highlighted by the critical nature of connectivity during COVID, serves as an additional tailwind for our company.

Okay. Thank you.

Thank you. And our next question comes from the line of David Barden with Bank of America.

Thank you for taking the questions. Kenny, historically, we’ve provided a lot of information about our deals, including their size and nature, but we don't have that information for this quarter. Can you share your expectations for 2021? Also, Mark, thank you for mentioning that we will receive more disclosure regarding Windstream. Could you please describe your level of comfort with their performance relative to the plan and how investors should view your relationship with them at this point? Thank you.

Hi, David. So, yeah, the funnel is really strong. I’m trying to reference back to some of the pie charts we used to disclose, and I’ll try to use some of the same terminology. But still easily 90% plus of the funnel is proprietary. By that, I mean just direct conversations with a counterparty rather than participating in banker-run processes, right? So 90% plus, which in hindsight, over a five-year, six-year track record has been pretty consistent with what we’ve demonstrated in terms of actual deals that have been proprietary in nature. That continues to be what the funnel indicates for future activity. I would say, it’s probably about a third leasing related, a third bolt-on, and then a third just larger transformative deals. That’s consistent with what we’ve talked about in the past, and I would say continued focus on leasing deals where we’re acquiring fiber portfolios versus outright buying companies. In terms of Windstream, I don’t want to comment specifically on their results due to the complexity of that. But we do recognize the need to see results from our investors. As Mark mentioned in his prepared remarks, there’s going to be some disclosure coming, and there’s also some disclosure on the Windstream website that you can see. We’re pleased with the progress, particularly in their kinetic business, the ILEC. That’s where they’ve been investing in broadband. That’s really where we’re going to be investing with our GCI program and working to harden our own network over the next five to ten years. So we feel really good about that progress.

Hi, Dave. This is Mark. Let me just add on to Kenny’s comments. Windstream did publish some information recently on their website at investor.windstream.com. So investors can go and view the CEO letter and some other information that provides their perspective on their results. I encourage you to read that.

Thanks, Mark. And if I could just one follow up, this was like, with the 10-year having bounce and rates moving up, is this a good news opportunity for Uniti or a bad news opportunity? How do rising rates and the expectation of rates and inflation moving up affect your weighted average cost of capital and your ability to do deals?

Mark, do you want to start with that one?

Yeah. Sure. Look, I’d say there has been treasury rate volatility, particularly over the last couple of weeks. But I’ll say this, the high yield market has continued to be very strong. Spreads that move pretty minimally, and I haven’t had a chance to look today, but I would expect that those probably improved even today. In terms of us continuing to expect to be able to improve our cost of capital, certainly our cost of debt, I think, improving the cost of debt is a real opportunity for us going forward and so I continue to look forward to having more opportunities to execute on that. I don’t think the treasury rate volatility that we’ve seen recently, unless it starts to affect spreads materially, is going to impact us negatively.

All right. Great. Thanks guys. Appreciate it.

Thank you. And our next question comes from the line of Brett Feldman with Goldman Sachs.

Hi. Thanks for taking the question. So if I would go back to slide nine, where you have the leasing pipeline and highlight the $1 billion, I was curious if you could give us any insights into what the duration of those contracts could be. Because that would help us think through what the uplift to annualized revenues could be as you execute against it? And then also, with 75% of those opportunities, potentially utilizing the fiber you acquired from Windstream, I would imagine in a lot of those geographies it is quite literally the only fiber. So I was hoping you could give us some insights into how competitive this funnel is and your conviction around being able to convert a significant amount of it? And then just one last follow up, Mark, I heard you mentioned there was a one-time non-core non-recurring item in the quarter, and I think you’ve given the revenue impact. I wasn’t sure if you talked about EBITDA, if you could quickly revisit that, that’d be helpful?

Yeah. Brett, it’s Kenny. Good questions. The funnel is made up of hundreds of opportunities, and they range from very large ones to very small ones. So, it’s going to be weighted towards the bigger opportunities and those terms. But this is not a perfect answer. Most of these are going to be longer-term agreements. We’re selling passive access, wholesale nature, so five-year, 10-year, 20-year agreements, but weighted more heavily towards the 10-year to 20-year agreements. In terms of your question about the competitive nature, I think you’re correct directionally. There’s a lot of unique routes here. Anytime you get beyond the NFL cities, almost by definition, the routes are going to be less competitive and more unique. So, I believe you’re correct about that. What gives us more competitive advantage is when we intertwine this network with the ones we’ve acquired in the past, including the acquisition we made from CenturyLink, now known as Lumen. We also bought a quasi-national network from TPx. We’ve bought networks from CableSouth and from SFN and others, in addition to the almost 7,000 route miles of fiber we’ve built on our own. All of those networks intertwined create the opportunity for us to provide unique solutions to our carrier customers, and that’s really the trick on the wholesale side. That’s why we’re continuing to look to grow that portfolio with proprietary M&A because the more you grow the funnel, the more unique routes you have, the more tailored creative solutions you can provide to customers on a proprietary basis.

Yeah. Those were mostly equipment sales. It was about $10 million of equipment sales, which we classify as non-core revenue. Keep in mind also that those have very little effect on EBITDA because they’re lower margin.

Thank you.

Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley.

Great. Thank you. Good evening. Kenny, could you just talk again about the Windstream concentration? It’s good to see we’re getting some numbers there. The GCI was getting attractive returns but also continues to grow your revenue base with Windstream. How are you thinking now versus maybe in the past about how you want the business mix to look over time? I think in the past, you’ve talked about getting that below 50%. Looking at your pipeline of businesses, looking at the GCI, etc., how do you think that’s going to evolve? What’s in management incentives around that topic and any insight on the impact of the lease bifurcation; is that likely to make any difference here? Then, Mark, if you could just give us a little bit more color on the amount and timing of the Sprint churn, that’d be great?

Hey, Simon. Good questions. The Windstream core revenue grows at about a 0.5% escalator. And with the GCI added on top of that, obviously, that’s going to be a higher number. So to your point, we feel very confident in that revenue base and resulting cash flow just like we did before the bankruptcy and during it. There’s never been a disruption in it. We are very focused on growing the other parts of our business, talking about 6% growth at fiber and 27% growth in non-Windstream revenue at Uniti Leasing. By definition, you’re going to have diversification just through organic growth and just through executing on our strategy and growing our business over the next four or five years. When I look at our five-year plan, we make a lot of headway towards diversifying Windstream closer to that 50% target. I could tell you exactly when it happens, but I don’t want to go beyond just our one-year guidance. We feel great about it, just in terms of organic growth. When you overlay our M&A strategy and your comment about least bifurcation, I think those are almost like gravy to me in terms of diversification. We’re still focused on driving that number down, not because we’re concerned about the revenue and EBITDA number there, but because we think we have great growth opportunities in other areas of our business, and we’re going to continue to execute on those. Oh! Yeah. The Sprint churn. Over the next year, two years, maybe two and a half years, somewhere between $5 million to $7 million to $10 million of recurring revenue. Again, that’ll be more than offset by ETL revenue and the opportunity we have with Dish.

Thank you.

Thanks for taking the questions. First, going back to the leasing sales pipeline, could you provide some color on how you think internally about the breakdown of stages of deals as they actually move through the pipeline and if you could bracket the time it takes for that sales cycle from initial contract to revenue recognition? And then, secondly, you’ve mentioned in various forums that you’re exploring data centers. Can you just talk a little bit about what you’re exploring there in terms of retail or edge data centers? Are you looking to operate assets or sales leaseback?

Hey, Bora. The short answer to your question on the billion-dollar sales funnel in Uniti Leasing is those are longer sales cycles, so anywhere from six months to nine months to 12 months. The longer answer is that it obviously varies, and it certainly varies based upon whether it’s a new customer or an existing customer. Now we’ve got MLAs in place with some very large customers, names you’d recognize, who are buying virtually overnight or within days or weeks because we have the MLA in place and you know how that works. With new customers, new logos, six months, nine months, 12 months, again longer because these are bigger deals and because you’re putting together complicated solutions in many cases that traverse numerous states. With respect to data centers, we’ve looked at all manner of opportunities there. We get shown all types of opportunities. Back to my comment about the M&A environment, we’ve never found an opportunity to acquire data centers outright that is economical for us. Similar to towers, we never bought a tower portfolio. We decided that it was a better opportunity for us to enter that space organically by building towers. I feel the same way about data centers, because there is an opportunity for us to build edge data centers in some of our markets for some of our carrier customers, who really want those facilities on the edge, and the edge happens to be our fiber network that we’re leasing to them. We could certainly own those facilities and operate them to the extent we’re providing power and cooling and so forth. We are spending a lot of time looking at those opportunities with our good anchor customers, and we may have more to report on that in the coming quarters. Thank you.

Thank you. That is all the time we have today for Q&A. I would now like to turn the call back over to CEO, Kenny Gunderman for any closing remarks.

Thank you, Andrew. We appreciate all of your interest in Uniti Group and look forward to updating you further on future calls. Thank you all for joining us today.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.