Uniti Group Inc.

Welcome to Unity Group's second quarter 2022 conference call. My name is Daniel and I will be your operator for today. A webcast of this call will be available on the company's website, www.unity.com, beginning today and will remain available for 14 days. At this time, all participants are in a 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 SEC. The company's remarks this morning will reference slides posted on its website, and you're 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. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's current report on Form 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 morning, everyone, and thank you for joining. Starting on slide three, the demand for our mission-critical fiber infrastructure continues to accelerate across virtually all of our customer segments. Our results for the second quarter exceeded our expectations, and we continue to be enthusiastic about our prospects for the second half of the year. As a result, we announced today that we're once again raising our full year outlook. We achieved our fifth consecutive quarter of elevated consolidated new sales bookings, while also realizing our highest level of gross install activity since 2017. As the second largest independent fiber operator in the country with 133,000 route mile network, Unity is successfully enabling broadband connectivity for our customers, from local businesses to large national carriers. We remain uniquely positioned to benefit from the favorable trends within our industry, and our strategy also further demonstrates that the shared infrastructure benefits of fiber result in healthy adjusted EBITDA and AFFO growth. Turning to slide four, Unity continues to track well in the shared infrastructure economics. As a result, we believe that a healthy mix of anchor and lease-up bookings and installs represents the most effective way to drive profitable growth. 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 21%, a three-fold increase from the anchor yield of these projects. Slide 5 illustrates an important part of our healthy business mix. We continue to show that the majority of new bookings are lease-up in nature, and the business mix results in predictable cash flow with industry-leading monthly churn of 0.3% and an average remaining contract churn of over eight years. Our continued intentional focus on balancing wholesale, non-wholesale, and anchor lease-up opportunities has resulted in outsized margin enhancement and AFFO growth. and a business that is relatively immune to swings in the economy, which I will elaborate more later in the call. Turning to slide six, as I've previously stated, 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. High-capacity long-haul routes are needed by all of our customers, including carriers, hyperscalers, international carriers, MSOs, and large enterprises to connect their disparate markets, data centers, and POPs. Today, dark fiber in North America is an approximately $1.5 billion annual market opportunity and is expected to grow about 10% annually over the next several years, reaching approximately $4 billion by 2030, with long-haul fiber contributing to the majority of these revenues. The continued broadband explosion fueled by 5G, metro fiber, small cells, fiber to the tower, fiber to the home, and even fixed wireless and satellite broadband all provide on-ramps of demand into the long-haul market. A critical ingredient to being a successful provider for these customers is having a robust national network that, as most large customers, require multi-route solutions. Having an own national network is a meaningful barrier to entry for competitors to Unity, especially given that it would take billions of dollars and many years to build a new national network. We estimate there are only five truly owned national networks and two independent fiber providers with national networks in the U.S. today, with Unity being one of them. Thus, we have a unique opportunity to capitalize on this growing demand in the fiber market. We've created a 133,000 route mile network through proprietary acquisitions at Attractive Economics, with approximately 3 million strand miles of fiber available to lease to third parties. We continue to grow that network and have built over 16,000 route miles of new fiber in the past four years. And our networks are intentionally constructed with high strand fiber in order to capitalize on highly accretive lease up opportunities. As a reminder, the economics of long haul fiber are very attractive with high margin passively managed revenue, little to no churn, long-term contracts that routinely have escalators built into them, and minimal capex requirements. Since most of our network is dark today, we also have a great opportunity to grow our business by lighting more of our network in a disciplined manner. Our national wholesale network has the added benefit of providing terrific growth potential for UnityFiber. As we expand our national lit network into new regions, the economics of adding lit metro services, enterprise lease-up in particular, become more achievable. Turning to slide seven, although enterprise sales represent less than 5% of our total revenue today and will likely always represent a minority percentage, it remains a critical element of our leasehold strategy. Enterprise new sales bookings and install activity during the second quarter were both the highest levels we have ever achieved in company history. And we expect these strong trends to continue as we further capture market share and deploy fiber-based lit services to our customers in our existing and new markets. As a result of our consistent, strong bookings activity, enterprise recurring revenue was up 11% in the second quarter from the prior year. As I've mentioned before, we're only offering lit services in approximately 25 metro markets today, with an average market share of only approximately 5%, providing us with a long runway to increase our market share substantially over the next several years. Even more exciting, As you can see from the map, we own Metro Fiber in nearly 300 markets nationwide, which represents terrific capital and margin-efficient growth potential for enterprise, wireless backhaul, and even small sales. We only recently acquired access to these markets in our 2020 settlement with Windstream, so we're just beginning to capitalize on the opportunity. Given the proven success of our anchor lease-up strategy and the attractive economics of these enterprise opportunities, With payback periods of about half the initial contract term and cash yields of 50% plus, we continue to actively prioritize these metro markets for expansion in both 2023 and beyond. In looking at our national wholesale network and our 300 metro markets combined, we estimate that less than 5% of our total 7.8 million strand miles of fiber are actually lit. This virtual blank canvas provides us with a terrific runway for disciplined growth without the burden of legacy declining products. With that, I'll now turn the call over to Paul.

Thank you, Kenny. Good morning, everyone. Both our Unity Leasing and Unity Fiber businesses continue to perform well, and this performance is reflected in our better than expected second quarter results. Despite increased economic uncertainty and volatility within the capital markets, Unity remains well positioned given our robust level of long-term revenues under contract, our declining capital intensity, along with the work we have done to strengthen our balance sheet and push out our debt maturities. As a result of the strength of the quarter and our continued confidence in our ability to execute in the second half of the year, we are once again increasing the midpoint of our 2022 outlook for revenue and adjusted EBITDA. Please turn to slide eight and I'll start with comments on our second quarter. We reported consolidated revenues of $284 million, consolidated adjusted EBITDA of $227 million, AFFO attributed to common shares of $115 million, and AFFO per diluted common share of 44 cents. Net income attributable to common shares for the quarter was approximately $53 million, or 21 cents per diluted share. At Unity Leasing, we reported segment revenues of $206 million and adjusted EBITDA of $200 million, up 5% and 4% respectively from the prior year. Accordingly, Unity Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to slide 9, our Growth Capital Investment Program continues to make progress and provide positive results for Unity. Over the past six years, our tenant has invested approximately $1 billion of tenant capital improvements in our network. Unity continues to invest its own capital in long-term value-accreted fiber, largely focused on highly valuable last mile fiber, including fiber in commercial parks and fiber to the home. Collectively, these investments have resulted in 16,400 route miles of newly constructed fiber and 22% of the legacy copper network being overbuilt with fiber. Both of these numbers continue to gradually increase each quarter, and we expect they will increase materially over the coming years. During the second quarter, Unity Leasing deployed approximately $53 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added around 1,700 route miles of fiber to Unity's own network across several different markets. As of June 30th, Unity has invested approximately $400 million of capital to date under the GCI program with Windstream, adding around 11,200 route miles and 594,000 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 nearly 100% margin. The investments we have made to date will ultimately generate approximately $32 million of annualized cash rent. During the quarter, we sold our remaining investment interest in Harmony Towers to Palastar Capital, formerly known as Melody Investment Advisors, for total cash consideration of $32.5 million, or approximately 35 times our ownership interest in annualized run rate cash flows. This transaction generated a gain on sale of approximately $8 million, excluding related tax expense of $7 million. We had previously sold 90% of our U.S. tower business to Palastar in June of 2020. The net effects of this transaction are included within our leasing segment. At Unity Fiber, we turned over 459 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our southeast footprint during the second quarter. These installs add annualized revenues of approximately $4.9 million and represent the highest level of wireless gross installs ever for Unity. 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 $12 million of annualized revenues. At Unity Fiber, we reported revenues of $78 million and adjusted EBITDA of $34 million during the second quarter. Both revenues and adjusted EBITDA were higher than expected, largely due to the timing of equipment sales and early termination fees and lower costs. We achieved an adjusted EBITDA margin of 43% for the quarter, a 200 basis point improvement from the prior year period. Unity Fiber net success-based CapEx was $30 million in the second quarter. We also incurred $2 million of maintenance CapEx, or about 3% of revenues. Please turn to slide 10 and I'll now cover our updated 2022 guidance. We're revising our guidance primarily for business unit level revisions and the impact of transaction related and other costs incurred to date. Our 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 2022 includes the following for each segment. Beginning with Unity Leasing, based on better than expected lease-up success, we now expect revenues and adjusted EBITDA to be $822 million and $800 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 97%. Revenue and adjusted EBITDA each include $14 million of cash rent associated with the GCI investments. and $26 million relating to the straight line rent associated with the Windstream master leases and GCI investments. We expect to deploy $275 million of success-based CapEx at the midpoint of our guidance, of which $250 million relates to estimated Windstream GCI investments. Turning to slide 11, we continue to expect UnityFiber to contribute $309 million of revenues at the midpoint and adjusted EBITDA of $121 million for full year 2022. When adjusting for the EverStream transaction that occurred in May of 2021, the year-over-year revenue and adjusted EBITDA growth is 6% and 8%, respectively. This strong growth demonstrates our continued success in managing our cost structure and improving margins while executing on lease-up that leverages our existing dense southeast fiber footprint. As I previously mentioned, we still expect 2022 to be the peak year for Sprint-related churns. which means higher than normal one-time ETL fees related to legacy Sprint sites being disconnected as part of the T-Mobile merger. As we turn to 2023, we still expect to realize some ETL fees, but most likely $12 to $13 million less than in 2022. We do still expect that our core recurring revenue at UnityFiber will increase by a mid-single digits percentage rate for full year 2023 when compared to 2022. Net success-based CapEx for Unity Fiber this year is still expected to be $120 million at the midpoint of our guidance, a 12% decrease from levels in 2021. Turning to slide 12, for 2022, we expect full-year AFSO to range between $1.70 and $1.77 per diluted common share, with a midpoint of $1.74 per diluted share, a 4% increase from 2021. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $896 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $390 million. Corporate SG&A, excluding amounts allocated to our business segments, is expected to be approximately $33 million, including $8 million of stock-based compensation expense. We still expect our weighted average diluted common shares outstanding for full year 2022 to be around 267 million shares. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. Turning now to our capital structure. With the work we have done over the past couple of years to push out our debt maturities and strengthen our balance sheet and liquidity position, we do not have a need to access external capital through the end of 2023. As such, we continue to be opportunistic in our approach to managing our capital structure over the near term. At quarter end, we had approximately $360 million of combined unrestricted cash and cash equivalents in undrawn revolver capacity. Our leverage ratios stood at 5.64 times based on net debt to last quarter annualized adjusted EBITDA. Our consolidated net leverage ratio at quarter end as defined in the indenture governing our seven and seven eighths senior secured notes stood at 5.71 times, which is below the 5.75 times threshold imposed by the indenture that had restricted our ability to distribute dividends in excess of 90% of taxable REIT income. In light of this milestone, our board will continue to evaluate our dividend policy and the optimal capital allocation strategy going forward. On July 29th, our board declared a dividend of 15 cents per share to stockholders of record on September 9th, payable September 23rd. With that, I'll now turn the call back over to Kenny.