Uniti Group Inc.

Welcome to Unity Group's second quarter 2021 conference call. My name is Carmen and I will be your operator for today. A webcast of this call will be available on the company's website at www.unity.com beginning August 5th, 2021 and will remain available for 14 days. At this time, all participants are in listen-only mode. Participants on the call will have the opportunity to ask questions following the company's 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 HCC. 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. Discussions during the call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations 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 8K, dated today. I would now like to turn the call over to Unity Group's Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thank you. Good afternoon, everyone. Joining me on the call today is Paul Bollington, our interim CFO. Unity reported another strong quarter of results at both Unity Leasing and Unity Fiber. Demand for our fiber infrastructure remains very strong, fueled by growing tailwinds within the communications infrastructure industry. This demand was evidenced by consolidated new sales bookings of approximately $1 million in MRR, representing a sequential increase of over 80% from the first quarter of this year, and one of the highest quarters ever for consolidated bookings at Unity. As slide four of our presentation illustrates, fiber is the mission-critical connective tissue for virtually all current and future broadband delivery. We're seeing an acceleration of the virtualization of our society with 5G, mobile broadband, fiber to the home, fixed wireless, satellite, and other technologies enabling greater usage of video conferencing, e-learning, telemedicine, and remote work environments, all resulting in an overall continued surge in broadband traffic. Turning to slide five, Unity is one of the largest independent wholesale fiber providers in the country, and our dense, world-class fiber network is at the nexus of each of these trends. In fact, 90% plus of all the business we're generating today, including lease-up, is wholesale in nature, and we expect that to continue in the future. We have a growing portfolio of small cells, connected buildings, macro towers, and homes past. And the need for more investment by our customers in 5G networks and other technologies is also growing. For example, our wireless carrier customers are particularly active in an effort to keep their underlying infrastructure ahead of the explosive growth in mobile broadband. These carriers are increasingly looking for 10-gig upgrades on our macro tower backhaul circuits, while simultaneously continuing the push for backhaul to new macro towers and CRAM small cell deployments in our metro markets. These investments provide Unity with the unique opportunity to expand our networks with anchor economics, setting the foundation for attractive future lease-up and further validating the shared infrastructure benefits of Fibra. Our non-wireless carrier customers, such as the FANG Group and national MSOs, are also active as they expand their cloud-based services. Their insatiable demand for high-capacity long-haul routes, in particular, continues to accelerate. Our residential and enterprise-focused carrier customers continue to be active in driving broadband to more and more consumers. Our dense metro networks today pass 250,000 buildings, and we're aggressively building deeper into commercial parks and neighborhoods through fiber to the home and fixed wireless builds. Over the past three years, we've built almost 10,000 route miles of new fiber, and we expect that number could increase significantly over the next three years. We've amassed this valuable and hard-to-replicate portfolio in only six years through our proprietary M&A efforts and organic sales strategy, and our portfolio is growing every day. As evidenced on slide six, Unity is demonstrating the economics of an attractive shared infrastructure model that continues to drive meaningful returns. As a reminder, Unity believes that a healthy mix of wireless and non-wireless bookings and installs represents the most effective way to drive optimal, profitable economics. Unity acquires or builds new fiber largely for our wireless customers with attractive long-term anchor cash flow yields in the mid to high single digits. We're also successfully adding additional tenants with very high margins and minimal capex, resulting in a cumulative cash flow yield today of approximately 18% and almost three-fold increase from the anchor yield and all within the past five years. Turning to UnityFiber during the quarter, small-cell revenues grew 27% from the prior year, while enterprise revenue grew 16%, demonstrating that we're choosing good anchor markets to expand our network in a disciplined manner and that we're executing well on follow-on lease-up. UnityFiber sales bookings in the second quarter were approximately 0.8 million of MRR, an increase of almost 70% from the first quarter, and our highest level of bookings in over a year. In terms of mix, 65% of our sales bookings came from non-wireless customers. Almost 40% of the lease-up of MRR sold over the past 12 months occurred in the second quarter alone, as we continue to ramp up our lease-up efforts within our southeast markets. Unifiber installed 0.6 million of MRR during the second quarter, with 75% of gross installs related to non-wireless opportunities, 20% related to wireless, and 5% related to bandwidth upgrades. Importantly, for the first time in Unity's history, our time to install new circuits has dropped below 90 days. This is a terrific accomplishment that really helps improve customer satisfaction as well as profitability for the company, and is a result of largely selling on-net services to our customers. Turning to slide 7, at Unity Leasing, we continue to actively market over 3 million strand miles of fiber that is available to lease to third parties. Our sales pipeline today stands at a little over $1 billion of total contract value, which translates to about $65 million of potential annual recurring revenue, reflecting the continued significant interest from our wholesale customers. Over 70% of the deals utilize fiber we acquired as part of the settlement with Windstream, and our success is the result of less than one year of actively marketing this fiber. We continue to be successful in monetizing our portfolio of assets and to date have executed on opportunities that represent total remaining revenues under contract of $805 million, with an average contract term remaining of over 14 years and incremental cash flow yields of approximately 11%. Turning to slide eight, our growth capital investment program continues to yield positive results. As a reminder, our tenant has invested over almost a billion dollars of tenant capital improvements in our network over the past six years, and that investment is expected to continue. Unity has now begun investing its own capital in long-term value-accreted fiber, largely focused on building highly valuable last-mile fiber, including in commercial parks and fiber to the home. Collectively, these investments It resulted in around 20% of the legacy copper network being overbuilt with fiber and almost 10,000 route miles of new fiber constructed. Both of those numbers are expected to increase materially in the coming years. We believe our GCI program is an attractive investment for our stockholders, providing a secure near-term cash flow yield while simultaneously future-proofing our network for renewal. With that, I'll now turn the call over to Paul.

Thanks, Kenny. Good afternoon, everyone. As Kenny mentioned earlier, we delivered another strong quarter of results at both Unity Fiber and Unity Leasing. Our guidance remains mostly in line with prior outlook. However, we are tracking ahead of plan year to date, and we now expect adjusted EBITDA and ASFO per diluted common share for full year 2021 to be closer to the high end of our guidance range, due to the strength of our second quarter and the expectation that strength will continue into the second half of 2021. However, we are not adjusting the midpoint of our 2021 outlook as there remains the possibility that some contractual revenue could slip into the first quarter of 2022. During the quarter, we closed our strategic OPCO-PROPCO transaction with Everstream. As part of the transaction, we recorded a pre-tax book gain of $28 million relating to the partial sale of our Northeast operations and the sale of certain dark fiber IRU contracts. The gain is excluded from both adjusted EBITDA and AFFO. Please turn to slide nine, and I'll start with comments on our second quarter. We reported consolidated revenues of $268 million. consolidated adjusted EBITDA of $216 million, AFFO attributed to common shares of $103 million, and AFFO per diluted common share of 41 cents. Net income attributable to common shares for the quarter was $49 million, or 20 cents per diluted share, and includes the $28 million pretax gain on sale I mentioned earlier related to the EverStream transaction. At Unity Leasing, we reported segment revenues of $196 million and adjusted EBITDA of $192 million, up 6% and 5%, respectively, from the prior year. Accordingly, Unity Leasing achieved an adjusted EBITDA margin of 98% for the quarter. The year-over-year growth reflects straight-line rent recognition under the Windstream MLAs and GCI investments subsequent to our settlement agreements. the dark fiber IRU contracts we acquired from Windstream, as well as annual lease escalators. During the second quarter, Unity Leasing deployed approximately $50 million towards growth capital investment initiatives, with almost all of the investments relating to the Windstream GCI program. These GCI investments added around 1,600 route miles and 56,000 strand miles of valuable fiber to Unity's own network across 13 different states. As of June 30th, Unity has invested $177 million of capital to date under the GCI program with Windstream, adding around 5,000 route miles and 178,000 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 Unity making such investment. They are subject to a 0.5% annual escalator and result in near 100% margins. The investments we have made today will ultimately generate approximately $14 million of annualized cash rent. At Unity Fiber, we turned over 150 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our southeast footprint during the second quarter. These installs added annualized revenues of approximately $1 million. We currently have around 1,200 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 $10 million of annualized revenues. Unity fiber revenues of $72 million during the quarter were in line with our expectations. As I mentioned earlier, we closed the AeroStream transaction on May 28th, and the results from our Unity fiber Northeast operations that were sold as a part of the transaction will no longer be included in our financials from that date. The impact in the second quarter from the sale of the Northeast operations was approximately $2 million in revenue and $1 million in adjusted EBITDA. Adjusted EBITDA of $29 million during the quarter was higher than expected due to lower operational and maintenance costs. Adjusted EBITDA margin for the quarter was 41%, representing a 480 basis point improvement from the prior year due to the lower cost I just mentioned and our continued emphasis on higher margin recurring revenue. Unity Fiber net success base CapEx was $37 million in the second quarter, consistent with our expectations. We also incurred $2 million of maintenance CapEx, or about 3% of revenues. Please turn to slide 10, and I will now cover our updated 2021 guidance. We are revising our prior guidance primarily for the impact of the gain on sale of operations and income tax expense related to the EverStream transaction, the impact of transaction-related and other costs incurred to date, and revised estimates of interest expense. Our current outlook excludes future acquisitions, capital market transactions, and future transaction-related and other costs not specifically mentioned herein. Actual results could differ materially from these forward-looking statements. Our current full-year outlook for 2021 includes the following for each segment. Beginning with Unity Leasing, we continue to expect revenues and adjusted EBITDA to be $784 million and $766 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 98%. Revenue and adjusted EBITDA each include $26 million relating to the straight-line rent associated with the Windstream Master Leases and GCI investments. Our outlook reflects $210 million of net success-based CapEx at Unity Leasing at the midpoint of our guidance, of which $200 million relates to estimated Windstream GCI investments. Most of these markets are similar to our own Tier 2, Tier 3 markets, providing Windstream with substantial growth opportunities over time. As slide 11 highlights, non-Windstream revenues and adjusted EBITDA continue to grow at a healthy pace. and are expected to be about $55 million and $42 million, respectively, up 27% and 17% from 2020 levels. This includes the assets and dark fiber IRU contracts we acquired from Windstream, where the revenue is diversified across multiple third parties, and the dark fiber IRU leases that are part of the EverStream transaction. Turning to slide 12, we expect Unity Fiber to contribute $305 million of revenue and $118 million of adjusted EBITDA representing a margin of 39% this year at the midpoint of our guidance, which is 300 basis point improvement from last year. As we pointed out in our earnings call last quarter, UnityFiber'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. Adjusting for the impact of these two items, revenue and adjusted EBITDA for 2021 at UnityFiber are expected to increase by 6% and 10%, respectively, from the prior year. Net success-based CapEx for UnityFiber this year is still expected to be $125 million at the midpoint of our guidance. Turning to slide 13. For 2021, we continue to expect full-year AFFO to range between $1.61 and $1.65 per diluted common share, with a midpoint of $1.63 per diluted 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 $397 million. excluding any deferred financing costs write-offs and premiums paid relating to early repayment of our debt. Reported interest expense in 2021 will include an additional $44 million relating to the write-off of deferred financing costs and premiums paid on the early repayment of our 8.25% senior unsecured notes and 6% senior secured notes due 2023. Corporate SG&A, excluding amounts allocated to our business segments, is still expected to be approximately $42 million, including $10 million of stock-based compensation expense. We continue to expect weighted average diluted common shares outstanding for full year 2021 to be around 263 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. At quarter end, we had approximately $574 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio stood at 5.65 times based on net debt to annualize adjusted EBITDA. On August 3rd, our board declared a dividend of 15 cents per share to stockholders of record on September 17th, payable October 1st, which is our current estimate of the maximum amount allowed under our current debt agreements. I'll now turn the call back over to Kenny.