Uniti Group Inc. Q1 FY2024 Earnings Call

Good morning, and welcome to today's conference call to discuss the Uniti and Windstream merger announcement, as well as Uniti's first quarter 2024 earnings results. My name is Michelle, and I will be your operator for today. This call is being recorded, and a webcast will be available on the company's Investor Relations website, investor.unity.com, starting today and accessible for 365 days. It is now my pleasure to introduce Bill DiTullio, Unity's Vice President of Investor Relations and Treasury. Please begin.

Good morning, everyone, and thank you for joining today's conference call to discuss the merger between Uniti and Windstream as well as Uniti's first quarter 2024 results. Speaking on the call today will be Kenny Gunderman, our CEO; and Paul Bullington, Uniti's CFO. Slide numbers referenced on today's call refer to the Uniti and Windstream merger investor presentation. Before we get started, I would like to quickly cover our safe harbor. Please note that today's remarks may contain forward-looking statements. These statements include, but are not limited to, statements about the benefits of the proposed transaction between Uniti and Windstream, including future financial and operating results, statements related to the expected timing of the completion of the transaction and combined company plans and other statements that are not historical facts. Any forward-looking statements contained in today's discussion and materials speak only as of the particular date or dates indicated in the materials. Uniti does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause actual results to differ materially from those described in the forward-looking statements. For more information on those factors, please see the section titled Forward-Looking Statements in the presentation and the Risk Factors section of the proxy statement that we will file in due course with the SEC. Please also note that Uniti and Windstream will file a Form S-4 registration statement with the SEC that includes a proxy statement and prospectus regarding the transaction. Investors are urged to read the proxy statement and prospectus, when it becomes available because it will contain important information about the transaction. In addition, Uniti and Windstream and their directors and officers may be deemed to be participating in the solicitation of proxies in favor of the transaction. You may find information about Unity directors and executive officers in the company's most recent proxy statement. You may obtain a copy of the merger proxy statement and prospectus, when it becomes available through the SEC website, Uniti's and Windstream's websites or by requesting a copy from either company's Investor Relations website. More information on how to request these documents is available in the investor presentation that accompanies this call. With that, I would now like to turn the call over to Kenny.

Thanks, Bill. Good morning, everyone, and thank you for joining. We're excited to announce that we've signed a definitive agreement to combine Uniti and Windstream in what we believe will be a transformative transaction for both Uniti and the digital infrastructure industry. On today's call, Paul and I will walk you through the details and strategic rationale for the transaction before turning to Q&A. Starting on Slide 5 of the merger presentation. The combination of Uniti and Windstream will create a premier insurgent fiber provider in the United States, serving more than 1.1 million customers with a particularly strong presence in the Midwest and Southeast. There's no other company in our industry besides Uniti that will have the mission-critical fiber reach, especially in less competitive Tier 2 and 3 markets, positioning Uniti for growth well into the future. With an enhanced balance sheet and free cash flow profile, we'll accelerate fiber-to-the-home deployments with the option to expand builds by up to 1 million additional households. Importantly, the combination will also remove several dis-synergies that exist in the current landlord-tenant structure while aligning the two companies' capital allocation objectives. Additional value creation opportunities will result from meaningful annual synergies and greatly enhanced strategic optionality. Turning to Slide 6. Under the terms of the agreement, Uniti shareholders will receive approximately 62% of the outstanding common equity of the combined company. Windstream shareholders will receive $425 million of cash, $575 million of preferred equity and common shares representing approximately 38% of the outstanding common. Certain of Windstream's largest shareholders, including Elliott, which is also a current holder of Uniti's equity and debt, will be rolling substantially all of their investment value in Windstream into the combined company. The implied valuation we're paying for Windstream using our unaffected share price from February 16, the price prior to press reports on the rumored transaction results in an attractive 5.3x EBITDA multiple and 4.7 multiple on a synergy-adjusted basis. Upon closing, both companies' debt silos will initially remain in place and the combined company will become a taxable C corporation. Though Uniti will no longer maintain corporate REIT status following the closing of the transaction, the REIT structure has served Uniti well historically. As we've said before, it has had many financial and strategic benefits. For example, with this transaction, Uniti's REIT status has permitted us to structure this merger in a way that is intended to achieve a substantial tax basis step-up. Although we don't expect to maintain corporate REIT status upon closing and the combined company will not be taxed as a REIT, we may restructure certain of our subsidiaries to qualify as REITs, thus potentially providing additional tax savings, while preserving strategic optionality. The combined company will retain the Uniti name with our corporate headquarters remaining in Little Rock. I'll continue as CEO of the combined organization and Paul Bullington will continue in his role as CFO. We're also pleased that certain key members of Windstream's management team will remain with the combined company. In fact, Drew Smith, Windstream's CFO, is with us today to participate in Q&A. Drew will also participate with us in various upcoming investor conferences. The new combined company will be well supported by a deep bench of commercial and residential fiber expertise from both companies. The 5-person Uniti Board will remain in place and Elliott will have the right to select two new Board members. Two additional new board members will be jointly selected by Uniti and Elliott, resulting in a new non-person board. Including the dividend we declared yesterday, we will have distributed dividends totaling $0.45 per share for the 2024 tax year, which is more than our current estimated minimum required distribution. As a result, and given that the new business will have substantial value-accretive internal uses for our capital, we'll be suspending our common dividend going forward. However, we will consider reinstating a common dividend in the future as appropriate. Please turn to Slide 7. We believe that having an owned scaled fiber network has material competitive and financial advantages. This is particularly true, when you're a first mover into Tier 2 and 3 markets by building and operating fiber with a true insurgent go-to-market approach. We've proven this consistently with our predictable mid-single-digit growth in our Uniti Fiber and leasing businesses over the past few years. By combining our fully owned 57,000 route mile Kinetic network with the Kinetic OpCo business targeting 4.3 million households, we're now expanding the successful strategy into fiber-to-the-home. Importantly, we expect that the combined company's current operating plan will be fully funded and that we will have the ability to expand the fiber-to-the-home build by up to 1 million additional households in our existing markets. Windstream's wholesale fiber business fits very strategically with Uniti Leasing and Uniti Fiber. With a combined 217,000 fiber route mile network, the business will be a leader in both reach and technology, while offering unique routes that differentiate us from competitors. Our Southeastern-focused Uniti Fiber business will also have greater growth potential, given the more expansive coverage that the Windstream field resources will bring to bear. I'll talk more later about the managed services business known as Windstream Enterprise. But while it is not core to our fiber infrastructure strategy, there are many value-accretive options that we intend to pursue with that business. Turning to Slide 8. Before going deeper into the business, let's zoom out for a moment and talk about why Uniti is doubling down on fiber. We've been saying for some time that fiber is the mission-critical asset in communications infrastructure acting as the connective tissue for all current and future broadband delivery. There are currently more use cases for fiber than ever before, driving bandwidth usage exponentially higher. Today and in the future, fiber-to-the-home will be one of the most robust use cases, and this transaction will make Uniti a direct and material player in this space. The digital transformation era over the last several years was the first time high-bandwidth-consuming applications and uses were available on a broad scale to both consumers and businesses. Said differently, millions of users were finally armed with connections that could deliver 1-gig speeds, driving enormous amounts of traffic onto fiber networks. Importantly, the digital transformation era was also the first time that broadband was truly revealed to be a mission-critical asset. During the pandemic, had it not been for things like remote work, telemedicine, and the ability to stay virtually connected socially, our society simply would not have functioned. Looking ahead to the next few years, as we now enter the generative AI era, all of these trends will be compounded with the advent of things like autonomous vehicles, robotics, the metaverse, and many others. Slide 9 showcases the reach of our insurgent fiber network extending into unique and highly defensible areas, a strategic advantage that positions Uniti to meet the surging demand for high-speed broadband, including connected buildings, fiber-to-the-tower and small cell connections, connected POPs and data centers and the 4.3 million total homes within Kinetic's current footprint, Uniti will have the potential to reach over 5 million connected on-ramps, each driving increasing amounts of bandwidth onto our owned wholesale network. Despite these millions of connections, we're agnostic as to which use cases are ultimately the winners because as a national wholesale provider, we benefit even if we don't own the last mile connection. Turning to Slide 10. For those of you who aren't as familiar with Kinetic, I'd like to explain why there's such a unique fiber-to-the-home platform that we're excited to own outright so our shareholders can benefit from the tremendous upside potential. First, fiber-to-home is indisputably a superior product from a latency and reliability perspective and will be for our lifetimes and beyond. Secondly, we believe, after having reviewed many fiber-to-the-home business models over the years, including overbuilders, open-access and others, incumbent providers have a big advantage when providing fiber to the home. Specifically, incumbents have an embedded network benefiting from years of investment that allows for a faster fiber deployment at lower costs. Ironically, incumbents are now share takers with fiber-to-the-home after many years of playing defense against wireless and cable. The key to an incumbent's success going forward is shedding old brands and the utility mentality and replacing that with a true insurgent go-to-market approach with a focus on quality and customer service, both of which are core to Uniti's success and the current share taker in Enterprise and Wholesale and kinetics in residential. Thirdly, Kinetic's footprint is diverse and spread across 18 states, with over 50% of those households located in the Southeast. We believe the Southeast is a terrific place to invest from a competitive and demographic point of view as evidenced by our success at Uniti Fiber. Just as importantly, 75% of Kinetic's footprint has 20,000 or fewer households, reinforcing another core tenant of Uniti's focus on Tier 2 and 3 markets. Next, Kinetic is also building fiber passings at what we believe to be an industry-leading cost of approximately $650 per passing. It's important to dwell on this for a moment. Prior to starting its fiber-to-the-home expansion with Uniti's GCI program in 2019, Kinetic invested close to $500 million building fiber to the DSLAM. This investment not only provided Kinetic the ability to provide a highly competitive DSL product with 100-meg speeds to over 40% of households, but it has also given Kinetic a head start or a jumping off point to build distribution fiber and drops as part of the final fiber-to-the-home build. This investment not only highlights the cost and time to deploy benefits at Kinetic, but is also a good reminder of another strategic advantage of bringing together the two companies. Uniti will not only own the fiber-to-the-home connection, but also the middle mile and ultimately the backhaul network. Having a fully owned and operated network will not only provide superior customer service but will also help us competitively. As we've highlighted in the past few quarters, some of our largest wholesale customers recently have been fiber-to-the-home providers spending substantial dollars procuring backhaul. Kinetic will be able to avoid substantial backhaul costs, which we believe equate to roughly 20% of the total cost of building fiber-to-the-home for others. Owning the backhaul network will also be a tool to disincentivize overbuilders from entering our markets. As in many cases, our backhaul market is the only one available. This helps segue into the final point to highlight on Kinetic. Only 15% of the footprint today has a true overbuilder, and that has held relatively constant for the last 5 years. We certainly don't expect this number to grow in the future, given we're increasing our presence in an offensive posture on a combined basis. If you pick the right markets, build fiber first, you can enjoy the benefits of favorable competitive dynamics for many years to come. Moving to Slide 11. You can see the numbers behind why Kinetic's fiber-to-the-home business has such significant upside potential. Kinetic has been demonstrating strong success in the past few years. Initial penetration levels on early cohorts have consistently averaged between 15% and 18% in the first year, increasing to above 25% on average by the second year. Recent cohorts have been demonstrating initial penetration rates of up to almost 30% as Kinetic has really ramped up a more customer-focused, digitally enhanced local go-to-market strategy. As I said earlier and as Kinetic is beginning to demonstrate an insurgent mentality, it really matters and can move the needle on penetration and churn. The predictable results from initial market builds and subsequent penetration levels are right in line with Uniti's anchor lease-up economics and another reason why we're excited to be entering this space. Kinetic is currently targeting building fiber to 1.9 million homes by 2027, which would result in over 40% of the footprint being overbuilt with fiber. Given the very rural nature of this footprint, achieving over 40% coverage with a disciplined and profitable model in Kinetic will be a significant achievement. With that said, we believe, on a combined basis, Uniti and Kinetic can expand this build by up to 1 million additional households achieving fiber coverage of over 60%. There are a number of reasons for this, but it's primarily driven by having true owner’s economics, especially being on the precipice of the BEAD program launching. Over the next 12 months, we'll spend more time refining the new build plan and we'll report more on that as closing approaches. Slide 12 highlights that another exciting aspect of this transaction is combining our Uniti Leasing business with Windstream's wholesale business. The backhaul network I mentioned earlier that will be important to Kinetic's success has terrific shared infrastructure potential. There's an excellent growth opportunity in national wholesale, fueled by the use cases I referenced earlier, including and especially generative AI. Today, Uniti sells mostly dark fiber, and we're beginning to light more and more intercity routes to become a player in the growing waves market. Windstream wholesale is already a meaningful share taker in the Waves market and has a national network that is highly complementary to Uniti's existing network. Thus, on a combined basis, this transaction accelerates our national wholesale strategy by approximately four years, and it also enhances our relationships with the increasingly important hyperscalers. Uniti's consolidated bookings during the first quarter were $0.6 million of Monthly Recurring Revenue (MRR). However, not included in our bookings number is the dark fiber lease revenue from two large deals that closed in the first quarter with one of our hyperscaler customers. These deals represent approximately $20 million in total contract value and will greatly expand our network in one of our key metro markets in the Southeast, providing Uniti with substantial new network assets it can lease up to other customers. These 20-year contracts include approximately $16 million of upfront lease revenue that under GAAP accounting rules will be recognized upfront at the time of delivery, which is likely late 2025, early 2026. As a result, there were substantial new sales in the quarter that are not reflected in our bookings number. Going forward, we plan to specifically call out deals of this nature that largely get excluded from our traditional bookings metric as the hyperscalers in particular often desire to structure their transactions in this fashion for their internal purposes. To be clear, the underlying attractive shared infrastructure economics to Uniti are no different than a traditional booking. As I foreshadowed on our last earnings call, we've seen multiple sizable new contract wins from hyperscalers, including the one I just covered. Some of those wins have continued into the second quarter. As a result, consolidated bookings for April are shaping up to be one of the largest months on record for Uniti with close to $500,000 of MRR expected in April alone. Going forward, the combined company will have many distinct Tier 2 and 3 intercity routes, which we think will be particularly appealing to the hyperscalers. This consistent strategy of building and lighting fiber on Tier 2 and 3 routes and in Tier 2 and 3 markets across wholesale, enterprise and now residential positions Uniti as a share taker for years to come. With that, I'll now turn the call over to Paul.

Thank you, Kenny. I'll start with some commentary on Uniti's go-forward business post combination and then briefly review Uniti's updated 2024 guidance. Turning to Slide 14. This combination is attractive for a number of reasons, most notably because it creates a true fiber powerhouse with unmatched fiber assets that are poised to deliver long-term returns and unlock significant value for shareholders. Upon closing this transaction, we will retain the Uniti name and expect to report our business segments as Kinetic, fiber infrastructure and managed services. Our fiber-to-the-home platform will continue to be branded as Kinetic, fiber infrastructure will include our current Uniti Fiber and Uniti Leasing segments, along with the Windstream Wholesale segment, all of which are highly complementary and will combine to create a premier fiber infrastructure company with both national and deep regional capabilities as well as a fiber network that is predominantly wholly-owned and operated. In fact, over 95% of Kinetic and fiber infrastructure generated revenue will be on owned network and almost 40% of combined revenue will be derived from highly predictable fiber-to-the-home and wholesale customers. Importantly, only a small fraction of our combined revenue will be legacy in nature. While the recombination of the Kinetic business will garner more attention, the reunification of the Windstream wholesale business with Uniti's national fiber network will be powerful in and of itself, eliminating a number of operational and strategic inefficiencies and creating a predominantly on-net national fiber infrastructure company, particularly when combined with the Uniti Fiber deep regional fiber business. Turning to Slide 15. The combination will also serve to strengthen our balance sheet. For starters, it will remove the overhang and uncertainty of the master lease renewals surrounding both companies. At closing, the current capital structures from each company will initially remain intact and will be siloed under one new corporate umbrella. This structure will allow us to preserve the current capital stack of both companies, much of which is fixed at attractive rates with distant maturities and greatly simplifies the path to a combination. As Kenny mentioned, Windstream shareholders will be receiving $425 million of cash at closing. Uniti expects to fund that cash consideration from operations, revolver borrowings, and our future capital market transactions between sign and close. To that end, Uniti has entered into a bridge funding commitment with certain banks in the amount of $300 million. Beyond this $300 million commitment, Uniti may look to further access the capital markets prior to closing on an opportunistic basis to further strengthen our position. For instance, our recently announced Asset-Backed Securities (ABS) financing plan may provide the opportunity to expand beyond the current $350 million ABS loan commitment. Net leverage for the combined company as of prior year-end was 4.8x, including the incremental $425 million of cash consideration at closing. Although leverage may tick up above this level as we complete the bulk of our fiber-to-the-home build, we expect that our long-term leverage target will be between 4 and 4.5x. Once the current Kinetic fiber-to-the-home investment plan winds down around 2027, we expect the positive free cash flow profile of the combined business will be conducive to the goal of reducing total leverage. Slide 16 provides an overview of the synergy opportunity, which will further enhance cash flows and returns to shareholders. Operational Expense (OpEx) synergies are expected to ramp to up to $100 million annually within the first three years. Most of these synergies will come from corporate functions, IT software and systems, and from off-net expense reduction in the fiber infrastructure business. In addition, we are expecting annual Capital Expenditure (CapEx) synergies of $20 million to $30 million per year. We believe this combination will also allow us to realize significant incremental upside from things like enhanced sales, the acceleration of Uniti Fiber's metro growth opportunity, and cost of capital improvements. While we believe in our ability to realize these incremental benefits, we have not included them in our accretion calculations. Turning now to Uniti's updated 2024 outlook. We are revising our guidance for business unit level revisions and the impact of transaction-related and other costs incurred to date. Our outlook excludes the impact from the expected merger with Windstream, 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 2024 outlook for consolidated revenue and adjusted EBITDA remains unchanged. However, we are slightly increasing our Uniti Leasing revenue and EBITDA to reflect higher-than-expected lease-up activity primarily driven by the increased hyperscale activity we have been seeing. While slightly lowering our Uniti Fiber revenue and adjusted EBITDA estimate due to the timing of enterprise sales. We are also slightly lowering our Adjusted Funds From Operations (AFFO) estimate for the full year 2024, primarily due to higher interest expense. At Uniti Leasing, we still expect to deploy $260 million of success-based CapEx at the midpoint of our guidance, of which $230 million relates to Windstream GCI investments that will predominantly be weighted in the first half of 2024 versus the second half. Net success-based CapEx for Uniti Fiber this year is still expected to be $105 million at the midpoint of our guidance, an 11% decrease from levels in 2023 and represents a capital intensity of 36%, down from 40% in 2023. We expect full year AFFO to range between $1.36 and $1.43 per diluted common share with a midpoint of $1.40 per diluted share. We expect our weighted average diluted common shares outstanding for the full year 2024 to be around 285 million shares. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our earnings presentation. At quarter end, we had approximately $470 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at quarter end was 6.07x based on net debt to first quarter 2024 annualized adjusted EBITDA excluding the debt and adjusted EBITDA impact from the ABS loan facility. On May 2, our Board declared a dividend of $0.15 per share to stockholders of record on June 14, payable June 28. With that, I'll now turn the call back over to Kenny.

Thanks, Paul. Slide 17 highlights the exciting strategic options this combination unlocks. As I've already discussed, Uniti will prioritize expanding the fiber-to-the-home build and continue investing in our Uniti Fiber and leasing businesses as we have historically. We will also be very focused in the near term on executing an integration plan and realizing our synergy goals. In addition, owners' economics are vitally important in the fiber business, and excluding the Managed Services business, over 90% of Uniti will be on owned infrastructure, driving greater efficiencies that are not fully reflected in the synergy numbers. We also believe that there are opportunities to expand the ABS program using Kinetic assets, and we expect that to be an even more significant value-accretive tool to fund our business. Lastly, M&A has always been an important tool for Uniti to realize shareholder value, and we fully expect to be active in the future. Given the more simplified structure going forward, we believe the options available for the combined company will be substantially greater than in the past in a number of respects, including possible divestitures of non-core assets and separation of the businesses. With that, let me end by reiterating our excitement about this fantastic combination and the future prospects for Uniti. This combination will create a premier insurgent fiber provider in the U.S. with a scaled platform for growth and a differentiated position in Tier 2 and 3 markets. Our enhanced balance sheet and cash flow generation will support growth, increasing our ability to expand fiber-to-the-home build-outs. Looking ahead, the combination will also deliver additional value-accretive opportunities through meaningful synergies and M&A optionality. With that, we'd be happy to take your questions.

The first question comes from David Barden with Bank of America.

Kenny, Andrew. I guess the first thing I have to say would be that, rumor has it, Windstream reported results yesterday, they were apparently good. But people like me don't know that because we don't have access to those financials. And what's going to be happening this morning is that there's a universe of people that know what Windstream reported yesterday that will be trading Uniti stock today, and there's a universe of people that don't know what reported yesterday that are going to be on the other side of those trades. So I guess the first thing would be, I think it's important that if this is going to go ahead, we need to have full access to those financials immediately and not kind of the additive versions that we get a few weeks after Windstream reports. Is that something you guys can deliver?

Yes, we plan to be more transparent and provide more information going forward. We understand its importance and recognize that it has always been essential, but it's even more critical now. That's one of the reasons Drew is here with us this morning to emphasize this point. We will also participate together in investor conferences moving forward. We fully expect to meet investors' information needs. Some will require more information than others, and we will adapt to that, but that is definitely our intention.

Okay. Great. Kenny, my next question is about the pro forma deal leverage, which is projected to be at 4.8 times. This figure appears to factor in the $425 million of new issuance but excludes the $575 million of preferreds. It also includes the $100 million in synergies, which won't materialize until a year from now. What would the leverage look like for someone investing in Uniti today on a pro forma basis if we included the equity raise and the preferreds, but excluded the $100 million in synergies?

Yes, Dave, this is Paul. I'll take that. The numbers we have shared indicate a pro forma leverage of 4.8x, which incorporates the $425 million of cash needed at closing. I think you stated that correctly. We do anticipate leverage to increase. The preferred instrument is expected to receive equity treatment, meaning it won't factor into our leverage calculations moving forward. Therefore, we have not included it in any of our pro forma figures. However, we expect leverage to rise slightly above the 4.8x as we finish the fiber-to-the-home build by 2027. After the fiber build, cash flow is projected to become positive and significantly accretive over time. We believe this will help us reduce leverage to a target range of 4 to 4.5x, which we consider a more suitable level for long-term business management.

Got it. And just to clarify, in order for those preferred instruments to qualify as non-debt, they would need to be convertible preferred instruments with a maturity of less than three years. Is that correct, Paul?

They are redeemable at any time by the issuer in cash or in stock, which is a key aspect. Additionally, there is a put option for holders of those notes that extends beyond a 10-year time frame, and those options can also be exercised in stock or cash at Uniti's discretion. These factors are essential for the equity treatment we anticipate. Although we still need to evaluate this further, we expect to receive equity treatment moving forward.

The next question comes from Greg Williams with Cowen.

Great. Congrats on the deal. There's been talk of this merger for the past 1.5 years. I'm just wondering what's changed to get the deal done now and move forward? And then the second question is Kenny, you mentioned a couple of times that you could restructure certain portions of the deal. You become a C Corp now. So is there an idea that you could spin off the long-haul and enterprise fiber business and make that a REIT. I'm thinking assuming crown cells for a solid multiple in their fiber business gets you a good value marker, you'd spin that up. Or with the synergy between fiber-to-the-home and enterprise fiber be too good for such a spin-off?

Thank you for your comments and questions, Greg. To address your first question about what comes next, we've been strategically evaluating our position since 2020. For a significant part of that time, Uniti was mostly reacting to ideas, concepts, and transactions because our main focus was on maintaining liquidity in our balance sheet, and we were transparent about this with the market. However, around midyear last year, after we completed much of our financing work and secured a period with no significant maturities and sufficient liquidity, we shifted to a more proactive approach regarding mergers and acquisitions. We clearly communicated this shift at the time. We determined that pursuing this deal was the right decision. We explored many options and concluded that merging our fiber business with Windstream Wholesale makes strong industrial sense, aligning with our established wholesale strategy. Additionally, we recognized that if we could find a reasonable valuation to recombine Kinetic OpCo and Propco, it would greatly benefit our shareholders. We examined various possibilities where others attempted that combination, and from our point of view, the rationale for recombining these two entities remains strong. We have communicated this as well. Ultimately, we felt it was important to pursue this opportunity to maximize value for our shareholders, and the fact that we're discussing this today indicates that Windstream shareholders agree. After we initiated discussions in the latter half of last year, we successfully gained traction and alignment of interest, which brings us to where we are now. Regarding your second question about the REIT status, you're correct, Greg. We are restructuring the corporate structure to eliminate REIT status. Interestingly, this change is expected to save us more in taxes compared to maintaining the REIT status because of the step-up benefit and possible additional corporate tax savings. This restructuring will largely eliminate corporate taxes moving forward without the REIT structure in place. However, there may be benefits to retaining REIT status at some subsidiary levels, and we believe we can achieve this, although there is work to be done. One advantage of maintaining REIT status has been the strategic options it provides, particularly because obtaining REIT status is challenging for fiber companies. Looking ahead, if separating the businesses becomes a viable option, having that flexibility would be valuable. There are significant synergies in combining the wholesale middle mile transport network with Kinetic, both financially and competitively. Importantly, one of the key benefits of this transaction is the strategic flexibility the combined company will have compared to the two entities operating separately. Therefore, we will certainly explore further M&A opportunities.

The next question comes from Frank Louthan with Raymond James.

And congratulations on the deal. Two quick clarifications and a question. for the additional 1 million homes, the target to have that done is also by 2027. I just want to verify. And then when you said the ABS structure can include some other thing. I would assume that, that was done with the attention to the throw-in maybe at its subs heavy to clarifications. And then as you look at the competitive nature of the Kinetic market, can you give us an idea of kind of what the cable overlap is, refreshes on that and a little rusty on Windstream. And what percentage of their subs are ACP customers?

Okay. Frank, I'll begin with the Kinetic questions and then ask Drew to provide his insights, followed by Paul addressing the ABS question. Regarding the expanded build, we are currently considering that it may extend beyond 2027 in our base case. Drew will elaborate on this, but part of the expanded build is linked to the BEAD program and its implications. It's worth noting that the cash flow generated by the business primarily supports the build in the later years. As I mentioned earlier, over the next 6 to 12 months, we expect to refine the timing and pacing of that build. One of the key synergies we mentioned is that having the owner’s economics for the entire Kinetic footprint is significant. Historically, Windstream has been open about lacking motivation to invest in Uniti-owned Kinetic markets beyond the GCI program. With that incentive now removed, we have the opportunity to reassess priorities across the footprint, which is especially timely with the BEAD program approaching. I will now turn it over to Drew for his comments on this and the competitive landscape, after which we will address your ABS question.

Yes. Thank you, Kenny. Frank. Yes, on the build, we definitely see the long-term opportunity to expand to build. But to touch on the current. So today, we cover around 1.5 million households in our footprint, so that's about 35% coverage with fiber today. We've been growing that really over the last 5 years, really with the GCI program enabling a lot of that. Over the next couple of years, we'll be focused on completing our Art off and public-private partnership builds, which is around $300,000, and ultimately, that will get us to around 1.9 million households around that 2027 time frame. But as Kenny mentioned, as we work with the team here, we'll be evaluating how we can expand that with the ownership economics that this transaction provides us. A little bit deeper on the Kinetic market overlap when you think about competition. At the highest level, I would say we overlap with Charter in about 40% of our households. And then with Comcast in about 15% to 20%, and then around several regional cable companies of about another 20%. And then about the final 20% really have no wireline overlap, and we'd be competing against predominantly a fixed wireless play. And then lastly, your question on ACP. So today, Kinetic serves around 100,000 ACP customers. We definitely have been watching the policy decisions there and expect that the funding for ACP to go away in mid-May. From a strategy perspective, we plan to provide our customers a credit to retain them. We think that's the best solution for us. We looked at a lot of different variables of what we could do with our customer base, but we felt like retaining them and providing a credit for a period of time was the right solution to retain that 100,000 customer base.

This is Paul. I'll address the ABS part of your question. ABS is a financing market that Uniti is enthusiastic about. We have recently integrated it into our capital structure and believe there are many advantages to continuing and possibly expanding it in the future. The cost of capital from ABS and the leverage arbitrage are beneficial to our capital structure moving forward. The ABS we have launched focuses on the Uniti Fiber assets, which we think the market will welcome as we transition from the current bridge structure to a more complete ABS takeout. When considering ABS and Windstream, Drew is welcome to share his thoughts as well. The market has clearly shown receptiveness to securitizing fiber-to-the-home markets, so this is an avenue we plan to explore further. Currently, ABS presents challenges for the Kinetic assets due to the separation between operations and asset ownership, which doesn't facilitate securitization well. However, by reuniting those assets, we believe this would enhance the possibility of securitization over time. The markets would need to be fiberized and show some cash flow maturity. Windstream's Kinetics fiber-to-the-home build plan is progressing well, with fiber coverage already established in several markets. Therefore, we anticipate many opportunities moving forward. It seems likely that this would be a different program from the Uniti Fiber program due to the varying asset types and geographic regions. Nonetheless, as Uniti begins to engage with the ABS market and familiarize itself with creditors, this will enhance our capacity to expand further in the combined business.

The next question comes from Ana Goshko with Bank of America.

I have a few more questions regarding the debt structure. First, regarding the $300 million bridge loan, what exactly is it bridging to? Where do you anticipate raising the new funding? Would this be at a more consolidated level?

Yes, Ana, this is Paul. Thank you for the question. The $300 million bridge commitment we’re announcing as part of this deal is essentially a temporary financing arrangement that leads to an additional securities offering in the market. This would likely be a high-yield securities offering, either as an add-on to an existing issuance or as a new stand-alone issuance. Our intention is to use this bridge to facilitate that type of security.

Okay. But the question was, would it be one of the silos? Or would it be at the consolidated level?

Yes. It would be within the existing Uniti silo today. Our intention is to keep the silos separate and independent, with the debt at closing residing in one of those silos to maintain their integrity. Therefore, any new securities offering we pursue in connection with that bridge would fall under the existing Uniti silo.

Okay. And then so is the kind of master plan on the evolution of the structure would be that over time, the Uniti silo would be the one that survives. And over time, you would sort of unwind the Windstream silo?

I think that's a distinct possibility. And I think there are a number of ways that we could manage the capital structure in the silos going forward. Keeping the silos in place is the right structure to combine the company at closing. It preserves existing debt, a lot of which, as I mentioned before, is fixed at attractive rates with just the maturities. I mean, we definitely view debt with coupons at 4.75%, 6%, 6.5% with maturities in 28, 29, 30 as assets of the company. But managing two silos is going to be complex. And so our philosophy is going to be to look opportunistically at simplifying and collapsing those silos as soon as it as soon as it's prudent to do so. But we've got time. We don't have to be in a hurry. And so we can afford to be opportunistic in doing that. So I'd say that we're going to do what makes economic sense and what preserves or enhances the quality of the credit.

Okay. And then initially, in order to preserve the two silos, is the master lease going to remain in place because I think that's a key component of what supports the community credit silo right now?

Yes. So the master lease will be an important part of preserving those silos and will stay in place. I don't know, Kenny, if you want to comment on that any more than that?

No, that's correct, Ana. The arrangement will remain intact, and there will be a clear boundary between the two entities. We are well-equipped to manage both responsibly. However, as Paul mentioned, we aim to simplify our debt structure as soon as possible. Paul, you might not have noted it, but Windstream's debt maturities include a significant portion that is due sooner than ours in 2027. Additionally, I believe there is a bond maturing later that is callable in 2026 or 2027, which Drew can elaborate on.

That's correct. Ana, regarding Windstream's debt structure, our term loans are due in 2027, as Kenny mentioned, and the bond is due in 2028, but it may be callable if an opportunity arises.

Okay. Great. And then final question, if I may. What is the rate on the preferred? Will it be paid in kind or as a cash pay instrument?

Yes, Ana. This is Paul. The initial rate on that is 11%, and it increases in later years, capped at 16% over time. We have the choice to pay in cash or in kind, and we plan to manage that carefully moving forward. I don’t want to commit to one specific method of settlement over time, but we have the flexibility to choose either option.

The next question comes from Bora Lee with RBC Capital Markets.

So FTTH was discussed a fair bit on the call for the combined company. How are you thinking about the relative CapEx emphasis on that versus wholesale on a go-forward basis?

I think the capital spend at our fiber business combined with Windstream Wholesale will be consistent with what we've been spending historically. So we're not planning to reduce any of the spend. We're planning to continue investing heavily in that business. But with that said, we do expect capital intensity to continue coming down. And I think that's primarily a reflection of the continued focus on lease-up and our view that particularly on a combined basis, I think the Windstream Wholesale business is going to fit very nicely with our existing network. There's a lot of overlap, as you would expect. And so I think we're going to be able to continue bringing that capital intensity down. But we're not going to change the investment philosophy there. It's going to continue as it currently is. And with Kinetic, as Drew mentioned and as we agree, I think the investment plan is continuing unaltered. Other than we might be expanding it. We're certainly going to be expanding it for the expanded build, and we'll report more on that when it's more refined. But I think that's going to be an important focus over the next few years in particular. And then after that 3- or 4-year period, you'll start to see capital intensity come down there as well.

On the hyperscale demand that you're seeing, can you talk about if these are existing routes or new builds and touch on if it's being driven by AI to each end user or to connect data centers any sense that you might have there?

Yes, we're experiencing new builds and lease-up on existing infrastructure, which includes dark fiber and waves. As we've mentioned, the hyperscalers are valuable partners in facilitating these builds at mutually beneficial economics. A couple of deals in the first quarter were indeed new builds, and while we haven't engaged much in intercity routes for a while, we're beginning to do more of it in response to demand and anticipate this trend will continue. Regarding the connection of data centers, that is a key focus for us. We're particularly enthusiastic about the Tier 2 and 3 routes within our unique network in partnership with Windstream Wholesale. Many of these data centers are being established in unique markets, partly due to the need to access less burdened areas of the grid from a power perspective. Consequently, we foresee significant opportunities in connecting these data centers and unique Tier 2 and 3 routes, especially as we work together.

Great. One last one, if I could. Can you remind us what approvals you would need? And if there are particular jurisdictions that may be the long pole in the tent, I'm thinking maybe particular states?

Yes. I think we said, Bora, to expect closing in the second half of 2025. We're going to need federal and state PUC approvals. We have a point of view on, who the long pole might be. We'll reserve calling that out, particularly some of the states, in particular. But I think we'll leave it at just targeting that second half of 2025 from a closing point of view.

And our last question comes from Jeff Harlib with Barclays.

Congratulations on the merger. So I'm just wondering, you've talked about the ABS financing at Uniti and potentially at Kinetic. When you think about down the road as you fund your increased fiber build, I think you previously was talking Windstream's CapEx would come down, and clearly, there's going to be more funding for additional passing. Do you see that coming potentially from these ABS transactions? Or do you see yourselves putting in additional credit facilities to fund this CapEx as well as for additional liquidity for the combined company?

Jeff, this is Paul. I'll begin and Kenny can certainly add if he wishes. Regarding the deal, particularly the $300 million commitment we've discussed, this is a fully funded plan, and we've aligned our balance sheet and liquidity to support it completely. Kenny mentioned the timing for additional households. As the current Kinetic build plan concludes around 2027, the business's free cash flow will enable us to invest in more homes, approaching the million household target that Kenny and Drew mentioned earlier. There’s an opportunity to finance that increased build-out from future cash flows, assuming we schedule it accordingly. If we aim to accelerate this process, we have plenty of options for financing. However, we will assess that carefully to ensure it’s sensible and beneficial for the company. It all hinges on our chosen strategy moving forward. BEAD will certainly play a role in our future plans regarding network expansion and its timing. We still have work to do in determining the optimal timing and investment level, but there are significant opportunities to exceed our existing plans using the company’s free cash flow. Yes. I think that's something we're going to evaluate. I don't think we're quite ready to comment on timing of that. But I definitely think it's like we said before, an opportunity that could allow us to potentially accelerate some of those builds.

I would now like to turn the call back over to Kenny for closing remarks.

Thank you. Thank you again for joining us on today's call. As you heard this morning, we're very excited about this combination, which we believe will deliver significant value for shareholders as well as for employees, customers, and on a broader scale, our communities. I look forward to providing you with additional updates in the coming months. Thank you for joining.

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