Uniti Group Inc. Q1 FY2022 Earnings Call

Welcome to Uniti Group's First Quarter 2022 Conference Call. My name is Jonathan, and I will be your operator for today. A webcast of this call will be available on the company's website at www.uniti.com beginning May 5th, 2022, and will remain available for 14 days. At this time, all participants are in listen-only mode. Participants on this call will have the opportunity to ask questions following the company prepared comments. 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 the call. Discussions during the call will also include certain financial measures that were not prepared in accordance with the Generally Accepted Accounting Principles. Reconciliation of these 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.

Thank you and good morning. Starting on slide three, we continue to see robust demand for our portfolio of mission-critical communications infrastructure. Our strong first quarter results exceeded our expectations and we're enthusiastic about the prospects for the balance of the year. In fact, we announced today we're raising our full year outlook, which Paul will cover shortly. Consolidated new sales bookings during the quarter were again a highlight, representing a 58% increase over the first quarter of 2021 and our fourth consecutive quarter of elevated bookings. These results also further demonstrate that the shared infrastructure benefits of fiber resulted in healthy adjusted EBITDA and AFFO growth. Fiber has never been more valuable, and the insatiable demand that we're seeing for these assets shows no signs of slowing. As the second largest independent fiber operator in the country, Uniti is uniquely positioned to benefit from these trends. Turning to slide four, Uniti continues to track well in the shared infrastructure economics. As a reminder, we believe that a healthy mix of anchor and lease-up bookings and installs represents the most effective way to drive profitable growth. Uniti 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 20%, an almost three-fold increase from the anchor yields. Slide five illustrates an important part of our healthy mix. We continue to show that the majority of new bookings are at lease-up in nature, and the business mix results in predictable cash flow with 0.2% monthly churn and an average remaining contract term of almost nine years. Our continued intentional focus of balancing wholesale, non-wholesale, and anchor lease-up opportunities has resulted in outsized margin enhancement and AFFO growth in a business that's relatively immune to swings in the economy. Turning to slide six, I'd like to dwell a bit on our national wholesale business, also known as Uniti Leasing. As I've previously stated, 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. High capacity long-haul routes are needed by all of our customers, including wireless carriers, hyperscalers, international carriers, MSOs, and large enterprises to connect their disparate markets, data centers, and PoPs. Today, Dark Fiber alone in North America is an approximately $1.5 billion annual market opportunity and is expected to grow about 10% annually over the next several years, reaching approximately $4 billion by 2030, with long-haul fiber contributing to the majority of these revenues. The continued broadband explosion fueled by 5G, metro fiber, small cells, fiber-to-the-tower, fiber-to-the-home, and even fixed wireless and satellite broadband, all provide on-ramps of demand into the long-haul market. A critical ingredient to being a successful provider for these customers is having a robust national fiber network, as most large customers require multi-route solutions. Having an owned network is a meaningful barrier to entry for competitors to Uniti, especially given that it would take billions of dollars and several years to build a new network. We estimate that there are only five truly owned national networks and two independent fiber providers with national networks in the U.S. today, with Uniti being one of them. Thus, we have a unique opportunity to capitalize on this growing demand in this segment of the fiber market with minimal competition. We've created our 129,000 route mile fiber network through proprietary acquisitions at attractive economics, including our acquisition of 30 national fiber routes from Lumen in 2018, and the fiber rights we acquired from Windstream as part of our settlement in 2020. We continue to grow that network and have built over 14,000 route miles of new fiber in the past four years. Our networks are intentionally constructed with high strand fiber in order to capitalize on highly creative lease-up opportunities. As a reminder, the economics of long-haul fiber are very attractive, with high margin passively managed revenue, little to no churn, long-term contracts that routinely have escalators built into them, and minimal CapEx spend requirements. Since most of our network is dark today, with approximately 3 million strand miles of fiber available to third parties, we also have a great opportunity to grow our business by lighting more of our network in a disciplined manner. We're beginning to do that when we find appropriate anchor customers. For example, we recently announced that our first private Wave Channel product went live in Florida, and that we delivered 3.6 terabits of bandwidth to a large national residential provider, our first customer on this Wave Channel system. This opportunity represents approximately $1 million in monthly recurring revenue with very high margins. But just as important, the Wave product brings substantially more lease-up potential on these routes with little to no additional investment. We'll also launch Wave capabilities on two new routes by the end of this year that will connect several key markets in the Southeast. Demand for these routes from our customers has been strong, and we expect future Wave product demand to grow. Our national wholesale network has the added benefit of providing terrific growth potential for Uniti fiber. As we expand our national lit network into new regions, the economics of adding lit local services, enterprise lease-up in particular, become more attractive. As I mentioned before, we're only offering lit services in approximately 20 metro markets today. However, we own and have access to metro fiber in nearly 300 markets nationwide, which represents terrific capital and margin efficient growth potential. Given the proven success of our anchor lease-up strategy, we continue to actively prioritize these markets for expansion in the future. We view these not only as organic growth opportunities, but also markets that could facilitate acquisitions outside our traditional southeast footprint to accelerate growth in these fallow metro markets. Our level of enterprise bookings remain strong, up over 30% during the quarter as compared to the prior year period. With that, I'll now turn the call over to Paul.

Thank you, Kenny. Good morning everyone. The communications infrastructure sector continues to undergo a robust growth cycle, primarily driven by the trends Kenny mentioned earlier. Our operational performance in the first quarter was strong, and we continue to successfully execute on our strategy of leasing up our existing fiber network with high margin recurring revenue opportunities, while at the same time, pursuing attractive new Greenfield builds. As a result, we are increasing the midpoint of our 2022 outlook for revenue, adjusted EBITDA, and AFFO. Please turn to slide seven and I'll start with comments on our first quarter. We reported consolidated revenues of $278 million, consolidated adjusted EBITDA of $225 million, AFFO attributed to common shares of $112 million, and AFFO per diluted common share of $0.43. Net income attributable to common shares for the quarter was approximately $52 million, or $0.21 per diluted share. At Uniti Leasing, we reported segment revenues of $205 million and adjusted EBITDA of $199 million, up 5% and 4% respectively from the prior year. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to slide eight, our growth capital investment program continues to perform well and provide positive results for Uniti. Over the past six years, our tenants have invested approximately $1 billion of tenant capital improvements in our network. Uniti continues to invest 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 14,400 route miles of newly constructed fiber and 21% of the legacy copper network being overbuilt with fiber. Both of these numbers continue to gradually increase each quarter and we expect they will increase materially over the coming years. During the first quarter, Uniti Leasing deployed approximately $53 million towards growth capital investment initiatives, with almost all of the investments relating to the Windstream GCI program. These GCI investments added around 1,500 route miles of fiber to Uniti's own network across several different markets. As of March 31st, Uniti has invested over $350 million of capital to date under the GCI program with Windstream adding around 9,500 route miles and 354,000 strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the one-year anniversary of Uniti making such investment. 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 $29 million of annualized cash rent. At Uniti Fiber, we turned over 140 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our southeast footprint during the first quarter. These installed add annualized revenues of approximately $1.4 million. We currently have around 1,700 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 $15 million of annualized revenues. At Uniti Fiber, we reported revenues of $73 million and adjusted EBITDA of $31 million during the first quarter. Both revenues and adjusted EBITDA were higher than expected due to the timing of early termination fees and lower costs. We achieved an adjusted EBITDA margin of 43% for the quarter, a 459 basis point improvement from the prior year period. Uniti Fiber net success-based CapEx was $37 million in the first quarter. We also incurred $2 million of maintenance CapEx or about 3% of revenues. Please turn to slide nine and I will now cover our updated 2022 guidance. We are revising our guidance for business unit level revisions, the impact of transaction-related and other costs incurred today, and changes in the estimates of interest expense, depreciation, and amortization, and weighted average diluted common shares outstanding. Our outlook excludes future acquisitions, capital market transactions, and future transaction-related and other costs not specifically mentioned here. Actual results could differ materially from these forward-looking statements. Our current full year outlook for 2022 includes the following for each segment. Beginning with Uniti Leasing, we still expect revenues and adjusted EBITDA to be $819 million and $797 million, respectively at the midpoint, representing adjusted EBITDA margins of approximately 97%. Revenue and adjusted EBITDA each include $14 million of cash rent associated with the GCI investments and $26 million relating to the straight-line rent associated with the Windstream master leases and GCI investments. We expect to deploy $275 million of success-based CapEx at the midpoint of our guidance, of which $250 million relates to estimated Windstream GCI investments. Most of these markets where we are making GCI investments are similar to our own Tier 2 and Tier 3 markets, providing Windstream with substantial growth opportunities over time. Turning to slide ten, given the strength we saw in the first quarter, we now expect Uniti Fiber to contribute $309 million of revenues at the midpoint and adjusted EBITDA of $121 million for the full year 2022. When adjusting for the Everstream transaction that occurred in May of 2021, the year-over-year revenue and adjusted EBITDA growth is 6% and 8% respectively. The strong revenue growth reflects our continued efforts to pursue and execute on lease-up that leverages our existing dense southeast fiber footprint. Further, it demonstrates our success and continuing to manage our cost structure and improve margins. Net success-based CapEx for Uniti Fiber this year is still expected to be $120 million at the midpoint of our guidance, a 12% decrease from levels in 2021. Turning to slide eleven, for 2022 we expect full year AFFO to range between $1.70 and $1.77 per diluted common share, with a midpoint of $1.74 per diluted share, a 4% increase from 2021. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $893 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $390 million. Corporate SG&A, excluding amounts allocated to our business segments, is expected to be approximately $33 million, including $8 million of stock-based compensation expense. We're revising our weighted average diluted common shares outstanding for the full year 2022 to be around 267 million 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. On April 24th, certain lender commitments under our senior revolving credit facility matured, these commitments totaled $60.5 million and were not extended as a part of our amended credit agreement dated December 10th, 2020. The aggregate size of our current senior revolving credit facility is $500 million and will mature on December 10th, 2024. We continue to monitor the capital markets and expect to be opportunistic as it relates to taking advantage of attractive opportunities to further improve our cost of capital. At quarter-end, we had approximately $387 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio stood at 5.74 times based on net debt to last quarter's annualized adjusted EBITDA. On May 3rd, our Board declared a dividend of $0.15 per share to stockholders of record on June 17th, payable July 1st. With that, I'll now turn the call back over to Kenny.

Thanks, Paul. Let me finish with a few comments about M&A. For several quarters now, we've been messaging our belief that a conglomerate discount is being applied to Uniti's share price. We've demonstrated a framework for valuing our non-Windstream fiber business in a range of 15 to 20 times cash flow and our Windstream business at approximately 10 times cash flow as a starting point. The range of values for our Fiber business is supported by numerous years of private market valuations applied to other Fiber businesses, and we believe Uniti is executing as a best-in-class operator commanding a premium value. The range of values for our Windstream business are supported by recent third-party appraisals, in addition to market-based comps. We've also been very transparent about our efforts to unlock business count by creating options to separate our assets in a value and tax-efficient manner. Last quarter, for instance, we confirmed our high confidence in the executability of this separation. Lastly, we've highlighted our prioritization of transformative transactions at this time in lieu of our typical sale-leaseback and bolt-on M&A strategy. These combined efforts have resulted in continued productive conversations with various strategic and financial parties. To be clear, our priorities in these conversations are to maximize value for our shareholders through customer diversification and growth of our fiber business, with a focus on wholesale. Consistent with past comments, we have a very strategic set of assets, and through patience, we're confident that the true value of those assets will be realized. In the meantime, we remain focused on executing our strategy with continued strong performance and favorable industry tailwinds, as well as a strong balance sheet and liquidity. With that operator, we're now ready to take questions.

Certainly. Our first question comes from Greg Williams from Cowen. Please go ahead with your question.

Great, thanks for taking my questions. First one is just on the M&A environment. You mentioned you're having productive conversations with various parties. Can you just talk about where multiples are public and private, given the rising rates we've seen? Second question is just on bookings. Again, you've got another strong quarter of $800,000 of MRR. It just seems like is this the new normal? Help us frame the mix of wholesale and enterprise? That slide is really helpful with the bar charts. Is that the right mix to see like, you know, in $500,000, wholesale, $300,000 enterprise? How should we think about the enterprise environment coming out of COVID, but then, of course, facing this challenging macro environment? Thanks.

Greg, those are excellent questions. I'm taking notes and will ensure we address them. Regarding multiples, we haven't observed any contraction. The current environment indicates that buyers are becoming more selective about asset quality. High-quality assets with owned networks and strong performance continue to command premium multiples, and we haven't encountered any issues in that regard. Many funds that were new to the space two or three years ago have become more knowledgeable and are now more diligent. They are being smarter about applying premium multiples to premium assets. As it pertains to Uniti, we are confident in the premium multiples that should be applied to our owned assets. However, this emphasizes the importance of the proprietary nature of our M&A pipeline. We have consistently executed the acquisition of assets at prices well below intrinsic value, even during periods when multiples were elevated. This remains consistent with our past performance. Regarding bookings, I’ll make a few remarks and then ask Paul to share his insights. I believe this is likely the new norm. We have experienced four consecutive quarters of similar activity, and I don’t anticipate changes based on our current funnel and activity levels. The elevated level of bookings appears to have come about six to nine months following the settlement with Windstream, which gave us access to significantly more fiber, especially on the national network. This has significantly boosted our wholesale business regarding new bookings. Moreover, as we have mentioned, the sales cycle for these kinds of deals typically ranges from six to twelve months. Therefore, we are likely in a new standard. Our bookings mix seems appropriate; we aim to maintain a healthy balance of anchor and lease-up deals. Anchor transactions generally generate more revenue, while lease-up deals tend to enhance profitability. We believe this balance is correct. We recognize that the enterprise environment remains challenging, particularly with the ongoing work-from-home trends, which we expect will continue. Nevertheless, these factors have not impacted our business, primarily because we continue to gain market share in the enterprise sector. This segment is growing at a rate of 10% to 15% annually, and we are expanding our presence in new markets with our owned fiber network, which has considerable lease-up potential. Our growth prospects in this area continue to be very promising. And Paul?

Yes, I would like to reinforce those comments, Kenny. The new normal regarding our level of bookings is a result of deliberate efforts on both the enterprise and leasing wholesale sides. We have developed teams focused on our fiber network, particularly the fibers we gained access to through the Windstream settlement, to capitalize on this opportunity. We have been purposeful in strengthening our enterprise business by building our teams and leadership to seize these opportunities, ensuring a consistent range of enterprise products across all our networks. I believe this will represent the new normal moving forward. The enterprise mix appears to be steadier, consisting mainly of smaller orders, while the wholesale mix can fluctuate a bit more due to larger, less predictable orders. However, I anticipate that the current mix will be reflective of what we can expect in the future as well.

Great. That's super helpful. Thank you.

Thank you. Our next question comes from the line of Frank Louthan from Raymond James. Your question please.

Thank you. Could you explain where you're finding traction, including the types of customers and sectors for Uniti fiber? Are there opportunities on the wholesale side or in assisting with Greenfield builds for private over builders that are currently deploying fiber? Thank you.

Hey, Frank, I'll start on that and Paul, you can jump in. But we are seeing some traction with the over builders and some of the upstarts who are getting the broadband stimulus money. We've sort of foreshadowed this, but we've kind of been conservative about it and I still don't want to put numbers around it. But our network tends to reach out into the Tier 2, 3-type markets. That's where a lot of this broadband stimulus has been deployed, right, underserved markets. That last-mile build is new fiber, but in order to connect those markets back to the core, you need metro and broadband, long-haul transport, and support, and that's where the opportunity is for us. We're getting what we call new logos; we're getting new calls from an increasing number of those parties, which is exciting for us. It's sort of indicative of just the overall environment. I mean, we're seeing demand from pockets of providers that we haven't seen for some time, including some of the regional RLACs with better balance sheets and better liquidity. We're building out their networks. We've seen the hyperscalers really demanding substantial amounts of fiber, connecting data centers, and connecting markets, and the wireless carriers, very actively looking at 10-Gig upgrades. So, we're very focused on that. The anchor build, Greenfield build opportunities are absolutely out there, and we continue to take on some of those opportunities, but we're very disciplined about it. As I've said many times, there is no shortage of demand in our industry. It's really a question of taking on profitable demand, and that's our focus. So, thus the focus on the right mix of bookings between wholesale and enterprise and anchor and lease-up, but no shortage of demand from really any of those pockets.

All right, great. Speaking of shortages, can you address kind of what you've done to stay ahead of supply chain challenges and getting network equipment for the builds?

Yes, sure Frank. Our team has been really successful over the last year managing a pretty difficult supply chain environment that continues to get increasingly difficult. We've done that through just the standard blocking and tackling and staying ahead of that demand, deep supplier relationships, diversified supplier relationships, staying ahead of the curve, and making sure we've got orders in place to get materials and equipment on time to deliver on time for our customers. Our teams have done a good job managing that. But it continues to be a difficult environment, and we continue to have to manage that actively going forward. We think we've got a good handle on that and we're well-positioned to continue to deliver for our customers and have the supplies on hand that we need to do that. But it's a challenging environment, and we've got to continue to manage it well and stay ahead of the curve.

All right, great. Thank you.

Thank you. Our next question comes from the line of Simon Flannery from Morgan Stanley. Your question, please.

Hi, this is Alexis on for Simon. Can you hear me okay?

Yes, we can.

Okay. Could you talk a little bit about the trends in the fiber business impacted 1Q for like a year-over-year and a quarter-over-quarter perspective? When do you think the impact of those mid-single-digit growth rates we talked about for the business? And then dividend, are there any updates around that look for that? I saw leverage fall a little bit in the quarter.

Sure, Alexis. I'll discuss the year-over-year trends. Our numbers show a solid growth rate of 5% to 6% in the leasing business, while we expect revenue and EBITDA growth between 6% and 8% year-over-year. However, it's important to adjust these figures to account for the Everstream transaction in May 2021, where we sold part of our Northeast network, in order to see the true underlying trends. We've previously mentioned strong bookings driving our revenue growth, which is balanced across both our wholesale and non-wholesale sectors. From a cost perspective, we've made good progress in increasing efficiency, partly due to our strategic focus on expanding our higher-margin lease-up business. We anticipate continuing this growth and improving margins as we move forward.

Thank you. Was there anything on the dividend outlook for that?

The outlook for the dividend is that we are currently limiting it to 90% of REIT taxable income, which is the minimum required for a REIT, and this limitation is imposed by our debt covenants. As shown in the leverage ratio we reported, we are getting closer to the 5.75 times leverage ratio on a trailing 12-month basis, which would permit the removal of that restrictive covenant. Once we reach that point and move past the covenant reversion level, we will have more flexibility regarding our dividend. However, this decision will ultimately be made by our Board, which will consider it alongside our other capital allocation priorities, and we will make that decision in the future when the Board is ready to do so.

Okay, great. Thank you.

Thank you. Our next question comes from the line of David Barden from Bank of America. Your question please.

Hey, guys, thanks for taking the question. I guess the first question, Kenny, would be in the current rate environment, where the Fed, we're expecting somewhere, depending on who you are, three to five incremental hikes this year, your weighted average cost of capital is going to get mark-to-market every day. I'm wondering how that affects your thinking about that 7% initial build yield? Because I imagine the customers that you're asking to pay that 7%, if that 7% becomes an 8% or 9%, are going to maybe balk at that, at least, in the short run. How is that risk lagging some of these conversations? How do you think about matching that yield ask for day one versus the mark-to-market of your weighted average cost of capital? Second, Paul, I think I heard you say in passing that the fiber business this quarter was impacted by some better than expected termination fees and things, some lower than expected costs, if you could kind of review that for us? My last question, I guess, going back to you, Kenny, obviously, we've been discussing this for months, I mean, in December, there was a bit out there reportedly at $15 a share, you and other parties went back and forth about maybe whether that was right or wrong. My question right now is that still out there? Or did that just come and go now? And we're back to being patient? Thanks.

David, that’s a great question regarding the impact of the current rate environment on our pricing models and our discussions with customers. There are several factors at play—not only the rate environment but also supply chain issues that could lead to higher costs reflected through our capital and operational expenditures, which we have factored into our models. We haven’t needed to shift our emphasis on initial yields in discussions with customers. While we don’t disclose our models or specific yields, our conversations primarily revolve around pricing on a site-by-site basis. This all fits into our overall framework that includes our cost of capital and expected return thresholds. Our main focus isn’t on initial yields, as we haven’t observed a softening in that area and anticipate that trend will continue, given the demand we are experiencing. However, we are particularly focused on maximizing lease-up opportunities, as we aim for yields above 10%, and ideally up to 20%, as demonstrated in our presentations. Achieving those targets requires confidence in the lease-up potential. While revenue generally stems from anchor awards, the real returns and profitability emerge from lease-up. Given the strength in our enterprise business and lease-up activities, we are confident we can maintain those returns, even in this rate environment. Paul, would you like to address the next question?

Yes, I can address your question about ETLs and costs. The ETL revenue we've been discussing for several quarters is linked to early termination liability revenues from contracts that are disconnected prematurely. Most of this activity is related to the Sprint T-Mobile merger and the efforts to consolidate that network, which we have previously highlighted regarding its future impact on our business. As this consolidation progresses, we anticipate seeing those ETL revenues. However, predicting the timing of these revenues is somewhat challenging since it depends on when the circuits are actually disconnected. We have included these ETLs in our plans moving forward, and we observed strong activity in the first quarter. Regarding overall costs, it's not tied to any specific area but rather stems from a variety of expense categories across the business, including both direct and operating expenses. As we strive for greater efficiency and focus on lease-up revenue, we're realizing cost efficiencies and reductions in third-party off-net costs while transitioning to on-net and near-net lease-up activities. Overall, our expense containment efforts are widespread throughout the business.

And David on M&A, I'm going to let our scripted remarks stand for our answer there and just generally say we continue to make very good progress on our priorities. So, feel very good about that. Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kenny Gunderman for any further remarks.

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.