Uniti Group Inc.

Welcome to the Uni Group's third quarter 2021 conference call. My name is Stephanie, and I will be your operator for today. A webcast of this call will be available on the company's website, www.uni.com, beginning November 4, 2021, and will remain available for 14 days. At this time, all participants are in a listen-only mode. Participants on this call will have the opportunity to ask questions following the company's prepared remarks. The company would like to remind you that today's remarks include forward-looking statements and actual results could differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in the company's filings with the SEC. The company's remarks this morning will reference slides posted on the 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 the generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to 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 Unigroup's Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thank you. Good morning, everyone. Both our Unity leasing and Unity fiber businesses continue to perform exceptionally well, fueled by continued tailwinds within the communications infrastructure industry and strong demand for our fiber infrastructure. This demand was evidenced by the second consecutive quarter of consolidated new sales bookings of approximately one million in MRR, representing again one of the highest quarters ever for consolidated bookings. Turning to slide four, Unity has the eighth largest fiber network in the country and we're the third largest independent operator. Our portfolio of small cells, connected buildings, macro towers, and homes past continues to grow each quarter, driven by the need for more investment in 5G networks, 10-gig upgrades, and CRAN small cell deployments. These investments provide Unity with the unique opportunity to expand our networks with anchor economics, setting the foundation for attractive future LISA, and further validating the shared infrastructure benefits of fiber. As evidenced on slide 5, Unity is demonstrating the economics of an attractive shared infrastructure model that continues to drive meaningful returns. We believe that a healthy mix of anchor and lease-up bookings and installs represents the most effective way to drive optimal economics. Unity acquires or builds new fiber largely for our wireless customers with attractive long-term anchor cash flow yields in the mid to high single digits. We're then successfully adding additional tenants with very high margins and minimal capex, resulting in a cumulative cash flow yield today of approximately 19%, an almost three-fold increase from the anchor yield, and all within the past five years. Slide six is further proof of this healthy business mix. As I mentioned earlier, we had our second consecutive quarter of consolidated sales bookings of approximately $1 million in MRR, a 90% increase from the third quarter of 2020. The amount of new bookings itself, however, is only part of the positive story. You can also see that not only is there steady growth of both wholesale and non-wholesale bookings, but there's also a very healthy and gradually growing mix of new bookings that are leased up in nature. This focus on a good balance of wholesale, non-wholesale, and anchor lease-up is intentional on our part and has resulted in outsized margin enhancement and AFFO growth, and we expect to continue this focus. Turning specifically to Unity Fiber, sales bookings in the third quarter were 0.8 million MRR, an increase of over 90% in the third quarter of 2020, and our second consecutive quarter of bookings at this level. In fact, we had our highest level of enterprise bookings ever for a quarter. In terms of mix, 60% of our sales bookings came from lease-up of our major wireless anchor builds. We continue to ramp up our lease-up efforts within our southeast markets with approximately 65% of the lease-up MRR sold over the past four quarters, occurring in the second and third quarters combined. 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, making us one of the largest players in the national wholesale fiber market. Our non-wireless carrier customers, such as the FANG Group and National MSOs, continue to be active as they expand their cloud-based services. For example, we recently announced a 20-year contract with a large international hyperscale customer to provide high strand count fiber along a new dark fiber route that connects key data centers in Pittsburgh and Ashburn, Virginia, demonstrating the robust demand we are continuing to see for long-haul routes. To be clear, although we report Unity Fiber and Unity 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 Unity Leasing and Unity Fiber networks, and we fully expect and encourage that trend to continue. With that, I'll now turn the call over to Paul.

Thank you, Kenny. Good morning, everyone. We continue to execute well at both Unity Fiber and Unity Leasing as evidenced by our robust bookings activity and our progress in driving higher margin recurring revenue and lower than anticipated operational costs. As a result, we are increasing the midpoint of our full year 2021 outlook from our prior outlook for adjusted EBITDA and AFFO per dilute common share, which I will cover in more detail shortly. We are maintaining the previous midpoint of our 2021 outlook for revenue, as there remains the possibility that some core non-recurring contractual revenue could slip into the first quarter of 2022. Please turn to slide eight, and I'll start with comments on our third quarter. We reported consolidated revenues of $267 million, consolidated adjusted EBITDA of $217 million, ASFO attributed to common shares of $110 million, and ASFO for diluted common share of 43 cents. Net income attributable to common shares for the quarter was $43 million, or 17 cents per diluted share. At Unity Leasing, we reported segment revenues of $199 million and adjusted EBITDA of $194 million, of 9% and 7%, respectively, from the prior year. Accordingly, Unity Leasing achieved an adjusted EBITDA margin of 97% for the quarter. The year-over-year growth reflects the dark fiber IRU contracts we acquired from Windstream, the straight-line rent recognition under the Windstream MLAs, and GCI investments subsequent to our settlement agreements. the impact of the EverStream transaction, as well as annual lease escalators. Turning to slide nine, our growth capital investment program continues to yield positive results. As a reminder, our tenant has invested approximately $1 billion 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-accretive fiber, largely focused on highly valuable mile fiber, including fiber in commercial parks and fiber to the home. Collectively, these investments have resulted in over 10,000 route miles of newly constructed fiber and around 20 percent of the legacy copper network being overbuilt with fiber. Both of these numbers continue to gradually increase each quarter, and we expect that they will increase materially over the coming years as we continue to invest in our networks. During the third quarter, Unity Leasing deployed approximately $62 million towards growth capital investment initiatives, with almost all of the investments relating to the Windstream GCI program. These GCI investments added around 1,300 route miles of valuable fiber to Unity's owned network across 13 different states. As of September 30th, Unity has invested $237 million of capital to date under the GCI program with Windstream. adding around 6,200 route miles and 217,000 strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the one-year anniversary of Unity making such investments. They are subject to a 0.5% annual escalator and result in nearly 100% margin. The investments we have made to date will ultimately generate approximately $19 million of annualized cash rent. At Unity Fiber, we turned over 335 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our southeast footprint during the third quarter. These installs add annualized revenues of approximately $1.6 million. We currently have around 1,400 lit backhaul, dark fiber, and small cell sites remaining in our backlog that we expect to deploy within the next few years. This wireless backlog represents an incremental $11 million of annualized revenues. At Unity Fiber, we reported revenues of $67 million during the quarter. While core recurring revenue was in line with our expectations, core non-recurring revenue was below expectations due to the timing of equipment sales and early termination fees. Adjusted EBITDA of $28 million during the quarter was consistent with our expectations. Adjusted EBITDA margin for the quarter was 41%, representing a 770 basis point improvement from the prior year due to lower operational costs and our continued emphasis on higher margin recurring revenue. Unity FiberNet success-based CapEx was $31 million in the third quarter, in line 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 guidance. We are revising our prior guidance primarily for the impact of the recent issuance of our 6% unsecured notes and related redemption, lower than expected operational costs, and the impact of transaction related and other costs incurred to date. Our current outlook excludes future acquisitions, capital market transactions, and future transaction related and other costs not specifically mentioned herein. Actual results could differ materially from these forward-looking statements. Our current full-year outlook for 2021 includes the following for each segment. Beginning with Unity Leasing, we continue to expect revenues in 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 now reflects $230 million of net success-based CapEx at Unity Leasing at the midpoint of our guidance, of which $225 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 $55 million and $42 million respectively, up 27 percent and 17 percent 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 still expect UnityFiber to contribute $305 million of revenue at the midpoint. However, we now expect adjusted EBITDA of $120 million for full year 2021, representing a margin of 39% this year at the midpoint of our guidance, which is a 360 basis point improvement from last year. The slight increase in adjusted EBITDA compared to our prior outlook is primarily due to lower than expected operational costs. As we pointed out on our earnings call last quarter, 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 now expected to increase by 6% and 12% 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 now expect full-year ASFO to range between $1.64 and $1.68 per diluted common share with a midpoint of $1.66 per diluted share due to lower than expected operational costs. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $860 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $398 million, excluding any deferred financing cost write-offs and premiums paid relating to early repayment of our debt. Reported interest expense in 2021 will include an additional $58 million relating to the write-off of deferred financing costs and premiums paid on the early repayment of our 8.25% senior unsecured notes due 2023, 6% senior secured notes due 2023, and 7.8% senior unsecured notes due 2024. Corporate SG&A excluding amounts allocated to our business segments is now expected to be approximately $36 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. Through the successful debt refinancings we have executed so far this year, we have significantly improved our financial flexibility, lowered our borrowing costs substantially with over $25 million in expected annual interest cost savings, and extended our debt maturities by several years. On October 13th, we successfully closed on the issuance of $700 million of senior unsecured notes due January 2030. These notes will bear interest at 6% and were issued at par, Most of the proceeds from the offering will be used to redeem in full the outstanding seven and an eighth percent senior unsecured notes due 2024, plus any accrued and unpaid interest on December 15th, 2021. On October 14th, 2021, the company used the remaining portion of the proceeds from the note issuance together with cash on hand to prepay the next four settlement obligations and settlement payments that were due under the settlement agreement Unity entered into with Windstream upon its emergence from bankruptcy, resulting in savings of approximately $5 million. As of today, we have approximately $270 million of installment settlement payments remaining to be paid. Going forward, we expect to be opportunistic in prepaying the remaining settlement payments while managing our balance sheet at the same time. At quarter end, we had approximately $450 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratios stood at 5.76 times based on net debt to annualize adjusted EBITDA. This morning, our board declared a dividend of 15 cents per share to stockholders of record on December 17th, payable January 3rd. I'll now turn the call back over to Kenny.

Thanks, Paul. Please turn to slide 14. I'd like to take a moment and discuss our non-WinStream business and our continuing effort to highlight the value disconnect we believe still exists. The first two columns of the table represent the last two years of performance of Unity Fiber plus our non-WinStream Unity Leasing business, with the third column also including the SEA-like fiber lease payment we received from WinStream. Our fiber platform, including Unity Fiber and Unity Leasing, operate as one holistic business. It represents the eighth largest fiber network in the country and one of the largest independent fiber operators. Our strategy is unique in that we are targeting Tier 2 and 3 markets off of full-service fiber where we have a competitive advantage, a well-developed brand, and boots on the ground. At a national level, however, we're a light-touch, passive wholesale provider. We're executing very well on this collective strategy as evidenced by 4% top-line growth and 6% adjusted EBITDA growth, continued strong bookings, industry-leading churn, and service delivery intervals. 90% of our business is wholesale with an average term remaining of nine years, making our cash flows stable and relatively immune to swings in the economy, which has been evidenced by our relatively uninterrupted progress during the height of the COVID pandemic. Our lease-up business, including enterprise sales and other additional tenants, is growing at 10% plus a year with attractive incremental cash flow yields. We're very selective about which markets to offer enterprise services, and today we're operating in only about 20 markets. We estimate our market share at less than 5% in most of our existing metro markets, implying material growth potential without adding any new markets. Having said that, we also own dense fiber and approximately 275 additional metro markets around the country. This latent fiber provides substantial capital efficient and margin-friendly growth potential for many years to come. Lastly, we're also building as much new fiber as anyone in the industry and growing the reach and density of our network every day. We believe this combined business is sizable enough and has the characteristics to be a standalone entity. Turning to slide 15, I'd like to comment briefly on M&A, especially given recent market rumors. Since the Windstream settlement, we've consistently said our M&A efforts were focused on three categories, bolt-on acquisitions, sale-leaseback asset sales, and large transformative transactions. That M&A strategy has not changed as we continue to look at acquisitions to complement and grow our business and organically. We realize that our investors want us to do more acquisitions and do them more quickly, and we remain very active on that front. However, we're also being very disciplined in our approach, which hopefully our investors have come to appreciate. We're spending time with our board evaluating and refining analysis that would allow us to separate our assets in a tax and value efficient manner, and will also help highlight the value disconnect that exists. For example, we've been vocal about how our ILEC network and lease in particular are undervalued, especially given the mission critical nature of the network and the senior placement of the lease. Lastly, we've consistently said in the past year that we have a very strategic set of assets and that we are evaluating large transformative transactions. There's a disconnect between how public investors seem to value our assets and fiber businesses in general versus how private funds are valuing them. Our ongoing discussions continue to reinforce these themes. To be clear, we are focused on executing our strategy of growing our business organically and executing on bolt-on M&A, but we've proven to be smart buyers and sellers and are open-minded to all paths that maximize shareholder value. With that, operator, we're now ready to take questions.

At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. That's star 1. Your first question comes from the line of Greg Williams with Cowen.

Great. Thanks for taking my questions. Kenny, if we're to believe the reports in the last few weeks, there's a deal that maybe has an impasse, and the impasse is really around bid-ask. And you articulated the valuation case here on slide 15. Some of the pushback on the valuation is perhaps the 2030 renewal, as you think about the Windstream MLA stream. Does that, you know, whether it remains at $700 million plus the escalators, or does it get cut? In the MLA, Exhibit E discusses the renewal, and it seems more formulaic, so can you just give us your latest thoughts on the 2030 renewal, and what's your calculus in your self-valuation? Thanks.

Yeah, thanks, Greg. Yeah, first of all, going back to the original lease, it was set at around an 8% cap rate, a little over an 8% cap rate, and then we just renegotiated the lease holistically last year, as you know, and the rent was essentially reaffirmed with third-party valuation reports and so forth. And that was five years into the deal and really with not a lot of new fiber investment made in the network in that five or six-year period. So we feel good about the asset holding its value during that period. And when you look out 10 years from now, there's going to be, based on current plans at least, a substantial amount of new investment in the network. Not just investment to maintain its value, but investment to enhance the value through our GCI program and otherwise. And look, if you believe in the fiber of the home trend, which we certainly do, and I think the industry certainly is revealing that as we see earnings and we see progress from around the industry, including with our tenant, we feel really good about the trajectory. And so we don't see the value of our network declining and dropping off precipitously by any means. In fact, we believe it's going to enhance value and certainly hold its value. But look, it's There's no formulaic calculation. The fair market value, the rent reset in 10 years will be fair market value. But I think the trends are looking positive for Unity.

Okay, thank you.

Your next question comes from Frank Lawton with Raymond James.

Great, thank you. Can you walk us through a couple of the lease protections you had in the MLA? In particular, do you still have the rights to buy certain elements of Windstream's network to allow you to operate the ILAC in the event that there wasn't a lease renewal in 2030? And then I've got a follow-up.

Yeah, Frank, are you referring to what happens in 2030 if there's not, if Windstream chooses not to renew the lease?

Yeah, I think you had some clauses in the master lease that allowed you to purchase some elements in case of a non-renewal. Are those still in place with the new agreement or has that changed?

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

Hey, Frank, are you there? I'm sorry. I'm here. So you mentioned you're investing some fiber. You mentioned commercial parks and some fiber to the home. Is that fiber to the home outside of the Windstream territory? Are you building for some other providers or building some of your own residential broadband business?

No, that's all within the GCI program and for Windstream. The fiber to the home builds are.

Okay. All right. Got it. All right. Thank you very much. Sure.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Simon Flannery with Morgan Stanley.

Great. Good morning. I wonder if we could focus on the fiber business just a little bit. I haven't seen the queue yet, but I think you mentioned that the revenues, which were a little bit below our estimate, was primarily due to lower non-recurring. But maybe you could just comment on what we're seeing in lit back hole, enterprise and wholesale, and E-rate sales. And government, where's the pressure there and the outlook? And then as we think about 22 and some of the new signings, the bookings you've had, is capital intensity going to be similar to 21 levels? Any early thoughts on that? Thank you.

Simon, I'll start, and Paul can jump in if you'd like to add. But, yeah, the core recurring business is doing great at Fiverr. If you look at our disclosure, we've always bifurcated revenue at UnityFiber between core recurring and core non-recurring. I think we said we have something like 50 million of core non-recurring this year. That's the part that is below plan for this quarter. So that's equipment sales and ETL revenue, which are just harder to predict from a timing perspective. But we've reiterated revenue guidance for the year, and so I think you can infer that we think we're going to make that up in the fourth quarter just from a timing perspective. But the core business itself is doing terrific, and strong bookings, strong installs, minimal churn, and very good service delivery. metrics all implied really good growth on the core recurring business. With respect to capital intensity, yeah, I think we're not ready to give any guidance for 2022, but I don't expect any changes, any material changes. I think the general trajectory of margin enhancement and capital intensity kind of simmering at existing levels, if not a little below, is kind of what we're still thinking.

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

Yeah, I think so. It's a combination of really three things, Simon. One, we've just been particularly cost-conscious the past couple of years. I think that's just a general good thing to do. But two, We've been pretty vocal about exiting low margin, non-recurring businesses that are not core to our business. So just like one-off construction projects, for example. So those businesses have pretty much wound down and they're no longer in the numbers. And so you're seeing some benefit from that. But then thirdly, we've really focused on lease up and bringing on the higher margin, higher cash flow, business. You know, we've been showing you the component parts of that, right, that slide where we show you the anchor economics and then the lease up, but that stuff starts to really impact margin when you do it at scale, and you're really seeing that. So, ultimately, going forward, yeah, that's exactly what we expect to continue focusing on. Great.

Thank you.

At this time, there are no additional questions. I would like to turn it back over to Mr. Gunderman for your closing remarks.

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

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