Uniti Group Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Welcome to Unity Group's third quarter 2022 conference call. My name is Gigi, and I'll 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. Forward-looking statement disclaimer. 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 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. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's current report on Form 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. Starting on slide three, our results for the third quarter were once again strong as the demand for our mission-critical fiber infrastructure continues to grow. We achieved our sixth consecutive quarter of elevated new sales bookings, which we now consider the new norm. As importantly, we also had another strong quarter of gross install activity with a mean time to deliver of less than 100 days. Consistent bookings balanced between anchor and lease up along with installs that can be turned up quickly and our industry-leading monthly churn of 0.2% demonstrate that our strategy is sound and that we're executing on it well. To reiterate, our strategy continues to focus on buying and building mission-critical fiber infrastructure and then leasing infrastructure to anchor customers in the 5% to 10% cash yield range and additional lease up customers driving cumulative cash yields above 10%. This strategy has resulted in Unity becoming the second largest independent fiber operator in the country, with 134,000 route miles and a long runway for profitable growth. As slide four demonstrates, Unity continues to track well on these shared infrastructure economics. We're building new fiber largely for our wireless customers and then successfully adding additional tenants with very high margins and minimal capex, resulting in a cumulative cash flow yield today of 22%. a more than three-fold increase from the anchor yield on these projects. Slide five illustrates that the majority of new bookings continue to be lease-up in nature, and along with our intentional focus of balancing wholesale, non-wholesale, and anchor lease-up opportunities, has resulted in outsized margin enhancement, AFFO growth, and a business that remains relatively immune to swings in the economy. Turning to slide six, High-capacity long-haul routes are needed by all of our customers, including wireless carriers, hyperscalers, international carriers, MSOs, and large enterprises, to connect their disparate markets, data centers, and POPs. Today, dark fiber 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. A growing component of our wholesale strategy is wavelength services. which represent a $2 billion annual revenue opportunity today in North America and is expected to grow approximately 7% over the next several years. We're selectively lighting more long-haul routes to provide wave services and capitalize on growing demand, while maintaining the same discipline on anchor and lease-up economics. For example, we recently announced two new long-haul routes that will offer wavelength services and multiple terabit spectrum services to key markets in our southeast footprint. This is in addition to our previously announced Miami to Tampa route. The anchor cash yields are approximately 10%, and we have a clear line of sight to a combined cash yield of low to mid-teens once leased up over the next few years. Having an own national network is a meaningful competitive advantage for 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, our ability to deploy dark fiber and wave services present Unity with a unique growth opportunity with minimal competition. The resulting economics of our national wholesale business are very attractive with high margin, passively managed revenue, virtually no churn, long-term contracts that routinely have escalators built into them, and minimal capex requirements. Before turning to our enterprise business, I'd like to comment briefly on lit wireless backhaul. Lit backhaul is a terrific way to lease up existing network or build new network with attractive yields for wireless carriers. However, the contract links are typically shorter than that of dark fiber, and there's some pricing pressure on returns. As such, Unity has always considered managing return risk as a strategic imperative, and we manage that risk by offsetting return discounts with lease-up on the networks, additional business from the wireless carriers, and upselling bandwidth. As an example of this focus, Today, we're announcing that we recently re-termed approximately 1,100 lit backhaul sites with one of our major wireless customers, resulting in a net price increase of approximately 20% as we upgrade these sites to 10 gig. And we're extending the contract term from a blended two and a half years remaining to eight years remaining. We're actively working with another of our major wireless carriers to re-term an additional 1,200 lit backhaul sites. Together these two agreements represent over 60% of our existing lent backhaul portfolio and provide stability and increased visibility for our earnings going forward. Now 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 lease up strategy. Enterprise new sales bookings and install activity during the third quarter were again both very strong. and expect these trends to continue as we further capture market share in our existing and new metro markets. As a result of our consistently strong bookings activity, enterprise recurring revenue was up 16% during the quarter. Slide 8 is an example of how we're executing to increase market share in markets with existing fiber and where we're currently offering lit services. Birmingham is the largest metro area in Alabama and the 50th largest metropolitan statistical area in the U.S. It's a very attractive Tier 2 market, which we originally entered in 2017 with a large Greenfield build. Today, we have an extensive fiber network there with almost 27,000 strand miles of dense fiber. And despite our growth over the years, our enterprise market share is still only approximately 5%. Homewood is an affluent neighborhood of Birmingham. And for less than a million dollars of capital, we can expand our already robust network to reach an additional 600 attractive enterprise customers. These investments not only expand our market share, but will result in very attractive economics for Unity, resulting in cumulative cash yields of approximately 50% and IRRs of 30%. These type investments are only available to providers like Unity with an extensive network already in place. Equally exciting, and as we've mentioned before, 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 most of these markets on our 2020 settlement with Windstream, so we're just beginning to capitalize on the opportunity. Given the proven success of our anchor and lease-up strategies and the attractive economics of these enterprise opportunities, With payback periods of almost 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 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, and good morning, everyone. We are once again pleased with how our business has performed during the quarter, with robust booking and install levels driving in-line consolidated revenue and better than expected adjusted EBITDA. While non-recurring revenue at Unity Fiber was lower than expected during the quarter, recurring revenue both at Unity Fiber and Unity Leasing was strong. Unity remains well positioned to weather current macroeconomic conditions, given our robust level of long-term revenues under contract, our declining capital intensity, and 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 expectations for the fourth quarter, we are increasing the midpoint of our 2022 outlook for consolidated revenue and adjusted EBITDA. Please turn to slide nine and I'll start with comments on our third quarter. We reported consolidated revenues of $283 million consolidated adjusted EBITDA of $225 million, AFFO attributed to common shares of $112 million, and AFFO per diluted common share of 43 cents. Net loss attributable to common shares for the quarter was approximately $156 million, or 66 cents per diluted share, which includes a $216 million goodwill impairment charge related to our Unity Fiber segment that was driven by an increase in the macro interest rate environment. At Unity Leasing, we reported segment revenues of $209 million and adjusted EBITDA of $203 million, both of which were up 5% from the prior year. Accordingly, Unity Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to slide 10, our growth capital investment program continues to 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-accretive fiber, largely focused on highly valuable last-mile fiber, including fiber in commercial parks and fiber to the home. Collectively, these investments have resulted in 18,800 route miles of newly constructed fiber and 23% of the legacy copper network being overbuilt with fiber. Based on the investments made to date and our expectation that Windstream will utilize most, if not all, of the GCI programs, we expect that nearly half of the legacy copper network will be overbuilt with fiber by 2030. During the third quarter, Unity Leasing deployed approximately $72 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added 2,250 route miles of fiber to Unity's own network across several different markets. As of September 30th, Unity has invested approximately $460 million of capital to date under the GCI program with Windstream, adding around 13,500 route miles and 731,000 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 $38 million of annualized cash rent and increase the overall value of our network. At Unity Fiber, we turned over almost 300 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 $3 million. We currently have around 1,200 lit backhaul dark fiber and small cell sites remaining in our backlog that we expect to deploy over the next few years. This wireless backlog represents an incremental $11.5 million of annualized revenues. At Unity Fiber, we reported revenues of $74 million and adjusted EBITDA of $29 million during the third quarter. Revenues were lower than expected due to lower non-recurring equipment sales and installs resulting from several factors, including the timing of those sales, a modest impact from delivery delays, and key employee turnover within our E-rate group. However, adjusted EBITDA was slightly higher than expected given the low margin nature of the equipment sales combined with lower than expected costs. Unity Fiber net success base CapEx was $26 million in the third quarter. We also incur $2 million of maintenance capex, or about 3% of revenues. Please turn to slide 11 and I will now cover our updated 2022 guidance. We are 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 our continued strong lease-up success, we now expect revenues and adjusted EBITDA to be $827 million and $805 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 $25 million related to the straight line rent associated with the Windstream master leases and GCI investments. We still 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 12. We now expect Unity Fiber to contribute $305 million of revenues at the midpoint given the factors I mentioned earlier that are impacting our non-recurring revenue. However, we are increasing the midpoint of our full-year recurring revenue outlook on the strong bookings and install activity we continue to see. Our full-year outlook for adjusted EBITDA remains $121 million with a lower non-recurring revenue offset by higher recurring revenue and lower costs. When adjusting for the EverStream transaction that occurred in May of 2021, the year-over-year revenue and adjusted EBITDA growth is 5% 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 mentioned last quarter, we expect 2022 to be the peak year for Sprint-related churn, As a reminder, as we turn to 2023, we still expect to realize some ETL fees, but most likely $12 to $13 million less than what we recognized in 2022. We also 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 UnityFiber this year is expected to be $120 million at the midpoint of our guidance, a 12% decrease from levels in 2021. Turning to slide 13, for 2022, we still expect full-year AFFO to range between $1.70 and $1.77 per diluted common share, with a midpoint of $1.74 per diluted share, a 4% increase from 2021. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $900 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 $34 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, given the current macroeconomic and interest rate environment, we will continue to be opportunistic in our approach to managing our capital structure over the near term. At quarter end, we had approximately $270 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio stood at 5.80 times based on net debt to last quarter annualized adjusted EBITDA. On November 1st, our board declared a dividend of 15 cents per share to stockholders of record on December 16th, payable December 30th. With that, I'll now turn the call back over to Kenny. Thanks, Paul.