Uniti Group Inc.

Welcome to Unity Group's first quarter 2023 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. 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 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, we remain highly focused on our strategy of buying and building mission-critical fiber infrastructure, and this strategy has resulted in Unity becoming the second largest independent fiber operator in the country with 137,000 route mile network. We remain focused on disciplined growth and look to strike the right balance on our bookings and installs between anchor and lease-up and wholesale and non-wholesale. This balance, along with sub-100-day mean time to deliver and our industry-leading monthly churn of 0.2%, demonstrates the outstanding economics of shared fiber infrastructure. This discipline has led to yet another quarter of solid performance and reiterating our consolidated full year revenue and adjusted EBITDA outlook. Wholesale and enterprise recurring revenue were up 10% and 15% respectively in the first quarter, and dark fiber lease up at Unity Leasing was up 15% from the prior year. On an overall basis, we continue to target and deliver mid-single digit top line growth, increasing adjusted EBITDA, and declining capital intensity. In addition to the recent refinancing as we mentioned last quarter, we also extended the maturity on our revolver to 2027, ensuring Unity is positioned to patiently execute during these uncertain economic and credit market conditions. Combined with our organic growth runway and our steady performance, we now have a growth plan that is virtually fully funded. As slide four demonstrates, our substantially underutilized fiber network acquired largely through sale leasebacks versus complicated company acquisitions is helping drive our shared infrastructure economics. The anchor plus leaseup model is working, driving cumulative cash flow yields today of 23%, a more than threefold increase from the anchor yield of these projects. Slide five shows that the majority of our revenue is wholesale in nature. which comes with longer-term contracts, lower churn, and less required overhead for execution. As a result, our business and underlying performance are less susceptible to macroeconomic conditions. The vast majority of these wholesale customers are the large wireless providers, hyperscalers, and international and domestic carriers. These carriers are purchasing large pipes from Unity to connect towers, small cells, data centers, fiber to the home, and inner-city POPs. which further highlights that our business is diversified across numerous use cases. These use cases are all on-ramps that are driving traffic onto our core network. A growing number of our wholesale customers are fiber-to-the-home providers, including our sell-leaseback tenants. Overall trends of the fiber-to-the-home business remain highly attractive, given substantial investment from private capital sources, increasing valuations, and successful asset-backed securitizations. Unity is uniquely positioned as one of the largest wholesale providers to the fiber of the home space, and we believe our underlying network assets continue to appreciate and value as a result. Turning to slide six, scale matters in fiber, especially with a wholesale heavy business model like ours. Having an own national network is a meaningful competitive advantage for Unity, especially given 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 the unique low growth opportunity with minimal competition. Slide seven illustrates our balanced approach to bookings. Although the wholesale business will always be our focus, a disciplined and controlled enterprise strategy can drive enhanced profitability with minimal capex and low churn, especially if there are no legacy services. While greenfield bookings drive growth with anchor customers and expand the network in a cost-effective manner for new lease-up opportunities, the majority of new bookings continue to be lease-up in nature, which are substantially less capital-intensive. Wholesale bookings in the first quarter were impacted by a shift in timing. To be clear, our sales funnel remains strong and we're not seeing customers cancel orders. In fact, our wholesale bookings forecast for this year remains largely unchanged. It is also important to remember that wholesale bookings in the prior quarter included one of the largest customer contracts in Unity's history, resulting in the best quarter we've ever had for bookings. Turning to slide eight, our enterprise strategy is highly disciplined and regional in nature. As you can see from the map, we're only offering enterprise services in approximately 30 metros concentrated in the southeast. Our product set is simple. All sales are on our owned and controlled dense metro fiber network, and we have virtually no legacy services. The majority of operational expenses within fiber businesses are employees and off-net fiber purchases. Because we're selling largely on-net products and services and the majority of our employees, including sales, field ops, maintenance, construction, etc., are concentrated in a certain geographic area, we're able to maximize efficiency and therefore drive 50% plus cash yields on our enterprise lease-up sales. In addition, our local brand is substantially enhanced in this region and our enterprise monthly churn is industry-leading at around 0.7%. Although enterprise sales represent about 5% of our total revenue today and will likely always represent a minority percentage, it remains a critical element of our lease-up strategy. As a result of our consistently strong bookings activity, enterprise recurring revenue was up 15% during the quarter. Equally exciting, and as we mentioned before, we own Dark Metro Fiber in about 300 markets nationwide, which represents terrific capital and margin-efficient growth potential for enterprise, wireless backhaul, and even small sales. With that, I'll now turn the call over to Paul.

Thank you, Kenny, and good morning, everyone. I'd like to begin by reviewing our first quarter performance, followed by an overview of our updated 2023 outlook. We continue to execute well on our strategy of leasing up our existing fiber network of 137,000 route miles with high margin recurring revenue. This lease-up activity was reflected in the strong growth during the quarter. Also of note, We recently entered into an amendment on our revolving credit facility that extends the maturity of the facility to September 2027. Combined with our other recent refinancing activities, over 97% of our outstanding debt now matures in 2027 or later. As I will cover in more detail in just a bit, our 2023 outlook for consolidated revenue and adjusted EBITDA remains unchanged. However, we are slightly lowering our Unity Fiber adjusted EBITDA estimates. We are also increasing our ASFO per share for full year 2023 as a result of finalizing the accounting impact relating to our recent refinancings. Finally, I'll conclude with additional commentary on our current balance sheet and capital structure. Please turn to slide nine, and I'll start with comments on our first quarter. We reported consolidated revenues of $290 million, consolidated adjusted EBITDA of $231 million, AFFO attributed to common shareholders of $107 million, and AFFO for diluted common share of 39 cents. Net loss attributable to common shareholders for the quarter was approximately $19 million, or 8 cents for diluted share, which includes the write-off of $10 million of deferred financing costs and $52 million of costs related to the early repayment of our 7.78% secured notes due 2025. At Unity Leasing, we reported segment revenues of $211 million and adjusted EBITDA of $205 million, representing growth of 3% for each in the first quarter of 2023 compared to the prior year period. 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 eight years, our tenant has invested over $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. Collectively, these investments have resulted in 22,200 route miles of newly constructed fiber and 24% 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 program, we expect that nearly half of the legacy copper network will be overbuilt with fiber by 2030. During the first quarter, Unity Leasing deployed approximately $72 million toward growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added 1,200 route miles of fiber to Unity's network across several different markets. As of March 31st, Unity has invested approximately $612 million of capital to date under the GCI program with Windstream, adding around 16,600 route miles and 930,000 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 $49 million of annualized cash rent and increase the overall value of our network. At Unity Fiber, we turned over 197 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our southeast footprint during the first quarter. These installs add annualized revenues of approximately $2.2 million. We currently have around 1,125 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 $10 million of annualized revenues. At Unity Fiber, we reported revenues of $79 million and adjusted EBITDA of $34 million during the first quarter, achieving margins of 43%. Revenue and adjusted EBITDA growth during the quarter of 8% and 7%, respectively, from the prior year period was higher than expected, primarily due to the timing of non-recurring ETL fees relating to the early termination of legacy Sprint sites. Unity Fiber Net Success-Based CapEx was $36 million in the first quarter and was higher than originally anticipated due to the early receipt of equipment purchases as networking equipment delivery lead times continued to improve. We also incurred $2 million of maintenance CapEx during the quarter. Please turn to slide 11 and I'll now cover our updated 2023 guidance. We were revising our guidance for business unit level revisions, the finalized accounting impact from our recent convertible and secured note offerings and related redemptions, 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 2023 includes the following for each segment. Beginning with Unity Leasing, we continue to expect revenues and adjusted EBITDA to be $850 million and $825 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 97%. Revenue and adjusted EBITDA each include $33 million of cash rent associated with the GCI investments, and $21 million relating to the straight line rent associated with the Windstream master leases and GCI investments. We now expect to deploy $270 million of success-based CapEx at the midpoint of our guidance, of which $237 million relates to estimated Windstream GCI investments. The $10 million increase from our prior guidance is due to capital requirements associated with the lease up in our dark fiber leasing business. Turning to slide 12, we still expect UnityFiber to contribute $314 million of revenues at the midpoint. We now expect adjusted EBITDA of $123 million for full year 2023. The slight decrease in adjusted EBITDA from our prior outlook is due to lower than expected core recurring revenues as a result of the timing of bookings, as Kenny highlighted earlier, partially offset by higher than expected non-recurring equipment sales, which come with lower relative margins. Despite this, we still expect healthy core recurring revenue growth of 5% from the prior year. Slide 13 further emphasizes this point as we now expect our run rate monthly recurring revenue at UnityFiber to grow between 5% to 7% in 2023. This solid growth demonstrates our continued success in executing on our lease-up strategy that leverages our existing dense southeast fiber footprint. We still expect ETL fees in 2023 to be approximately $15 million compared to $24 million in 2022. Net success-based CapEx for UnityFiber this year is now expected to be $115 million at the midpoint of our guidance, a 14% decrease from levels in 2022, and $5 million lower than our prior guidance, primarily due to lower equipment purchases as a result of the bookings delays mentioned earlier. Turning to slide 14, For 2023, we expect full-year AFFO to range between $1.38 and $1.45 per diluted common share, with a midpoint of $1.41 per diluted share. As a reminder, AFFO in 2023 will be impacted by incremental interest and diluted shares relating to our recent convertible and secured note refinancings. On a consolidated basis, we still expect revenues to be $1.2 billion and adjusted EBITDA to be $925 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $517 million, which includes a $10 million write-off of deferred financing costs and $32 million of early repayment premium in the first quarter of this year related to the redemption of our 7.78% senior secured notes due 2025. Corporate SG&A, excluding amounts allocated to our business segments, is expected to be approximately $30 million, including $7 million of stock-based compensation expense. We are revising our weighted average diluted common shares outstanding for full year 2023 to be around 290 million shares, reflecting the full year impact of the incremental diluted shares relating to the accounting of the recently issued convertible notes using the if-converted method. 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. On March 21st, Unity repurchased approximately $15 million in principal of its 4% exchangeable notes due 2024 for total cash consideration of $13.7 million. The outstanding balance of these notes at quarter end is approximately $123 million. On March 24th, Unity entered into an amendment to its credit agreement that, upon receipt of routine regulatory approval, extends the maturity date of each lender's commitment under the company's senior secured revolving credit facility to September 24th, 2027. The amendment also transitions the $500 million revolving credit facility from LIBOR to SOFR. At quarter end, we had approximately $495 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at quarter end stood at 5.87 times based on net debt to last quarter annualized adjusted EBITDA. On May 2nd, our board declared a dividend of 15 cents per share to stockholders of record on June 16th, payable June 30th. With that, I'll now turn the call back over to Kenny.