Uniti Group Inc.

Hello, and welcome to Unity Group's second quarter 2023 conference call. My name is Tawanda, 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 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 were 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 the 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, sir.

Thank you. Good morning, everyone, and thank you for joining. Starting on slide three, Unity posted another quarter of solid operating performance, and as a result, we're reiterating our consolidated full year 2023 revenue adjusted EBITDA and AFFO outlook. Our consolidated core recurring revenue grew 4% during the second quarter from the prior year, while our Unity fiber core recurring revenue grew 5%. Our lease-up revenue categories continue to reap terrific results with non-wireless wholesale, enterprise, and dark fiber lease-up revenue growing at 7%, 15%, and 25% respectively during the quarter. We also signed a new 10-gig upgrade agreement with one of our major wireless carriers during the quarter. The agreement covers approximately 1,100 lit backhaul sites and extends the contract term from a blended term remaining of less than a year to now seven years. As you will recall, we signed a similar agreement with another of our major wireless carriers in the third quarter of 2022, which also covered approximately 1,100 sites and locked in 10 gig pricing for eight years. On a combined basis, these two agreements have resulted in a slight overall net price increase. Including the returns I just mentioned, the approximate average remaining term of our entire lit backhaul portfolio is an impressive approximately five years. Our scaled national network and exceptional network performance allows us to negotiate bespoke agreements with our wireless carriers, providing steady returns and minimizing churn. With our industry-leading 0.2% churn and no legacy services weighing us down, we believe our runway for mid-single-digit growth is long. As slide 4 demonstrates, this growth will be disciplined and, we believe, profitable. Our substantially underutilized fiber network acquired largely through sale leasebacks versus complicated company acquisitions is helping drive our shared infrastructure economics. Our anchor plus lease up model is working, driving cumulative cash flow yields today of 24% and more than threefold increase from the anchor yield on these projects. Turning to slide five, we continue to grow our 138,000 route mile network, and we added approximately 1,700 route miles during the quarter. Only approximately 20% of our available network is lit today, and as we've 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 small cells. We continue to believe that the wireless carriers will eventually need to densify these non-tier one markets, and Unity is well positioned for that growth in the future. Slide six 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, and we're diversified across numerous use cases for fiber and customer segments. As an example, even though wireless carriers are spending less this year than last year as a group, that decline is more than offset by buyers such as hyperscalers, internet providers, and fiber-the-home providers. Turning to slide seven, scale matters in fiber, especially with a wholesale-heavy business like ours. Having an own national network is a meaningful competitive advantage for Unity, and our ability to deploy dark fiber and wave services present Unity with a unique low risk growth opportunity with minimal competition. As an example, we recently announced that we signed a 20 year long haul dark fiber IRU agreement with a global internet provider who is an existing customer. The total contract value of this deal is $35 million and utilizes approximately 1800 route miles of existing owned fiber. We believe we had minimal competition for this deal given our unique robust network. We expect these routes will be delivered to our customer throughout the second half of 2023 and into 2024. Slide 8 illustrates our balanced approach to bookings between Anchor and LeaseUp. Consolidated bookings were up 20% in the second quarter when compared to the prior quarter, while wholesale bookings were up over 50%. The interest in our network has never been higher as our sales funnel remains very strong and underscores the growing demand for fiber. But as a reminder, wholesale bookings can appear lumpy given these deals are typically larger and fewer in quantity. For example, the 20-year dark fiber deal I mentioned earlier represented over 30% of wholesale bookings in the quarter. It is not uncommon for one wholesale deal to materially impact bookings in a single quarter from a timing perspective. Turning to slide 9, 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, which has very favorable demographics. In fact, the southeast has accounted for more than two-thirds of all job growth across the U.S. since early 2020, almost doubling its share prior to the pandemic, and is home to 10 of the 15 fastest growing American large cities. Our local brand is very strong in this region, helping to contribute industry-leading enterprise churn of 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. With no significant debt maturities until 2027 and given our organic growth runway and continued steady performance, Unity is positioned to patiently execute during these uncertain economic and credit market conditions, while providing a virtually fully funded growth plan aside from future debt refinancings. With that, I'll now turn the call over to Paul.

Thank you, Kenny. Good morning, everyone. I'd like to begin by reviewing our second quarter performance, followed by an overview of our current 2023 outlook. We had another solid quarter at both Unity Fiber and Unity Leasing, highlighted by 4% consolidated recurring revenue growth during the quarter when compared to the prior year. As I'll cover in more detail in just a bit, our 2023 outlook for consolidated revenue, adjusted EBITDA, and AFFO remains unchanged as we expect to end the year within the previous guidance ranges provided. Finally, I'll conclude with additional commentary on our current balance sheet and capital structure. Please turn to slide 10, and I'll start with comments on our second quarter. We reported consolidated revenues of $284 million, consolidated adjusted EBITDA of $228 million, AFFO attributed to common shareholders of $91 million, and AFFO per diluted common share of 34 cents. Net income attributed with common shareholders for the quarter was approximately $25 million, or 11 cents per diluted share. At Unity Leasing, We reported segment revenues of $212 million and adjusted EBITDA of $207 million, representing growth of 3% for each in the second 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 11, our Growth Capital Investment Program continues to provide positive results for Unity. Over the past eight and a half 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 24,000 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 second quarter, Unity Leasing deployed approximately $96 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added 1,600 route miles of fiber to Unity's own network across several different markets. As of June 30th, Unity has invested approximately $700 million of capital to date under the GCI program with Windstream, adding around 18,200 route miles and over 1 million 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 $57 million of annualized cash rent and increase the overall value of our network. At Unity Fiber, we turned over 363 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 $3.4 million, an over 50% increase from the prior quarter. We currently have around 890 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 $8 million of annualized revenues. At Unity Fiber, we reported revenues of $71 million and adjusted EBITDA of $25 million during the second quarter, with core recurring revenue up approximately 5% from the prior year period. Both revenue and adjusted EBITDA during the quarter were impacted by lower than expected non-recurring equipment sales and installs and ETL fees. As we have mentioned before, the exact timing of our non-recurring revenue can be difficult to predict and thus can fluctuate from quarter to quarter. Unity Fiber net success base CapEx was $31 million in the second quarter. We also incurred $2 million of maintenance CapEx during the quarter. Please turn to slide 12 and I'll now cover our updated 2023 guidance. We're revising our guidance primarily for 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 $32 million of cash rent associated with the GCI investments and $23 million relating to the straight line rent associated with the Windstream Master Leases and GCI investments. We now expect to deploy $288 million of success-based CapEx at the midpoint of our guidance, of which $250 million relates to estimated Windstream GCI investments. The $18 million increase from our prior guidance is due to higher GCI investments and accelerated capital requirements associated with the lease-up in our dark fiber leasing business. As a reminder, the $250 million of GCI is the maximum annual amount we would be responsible to fund. Turning to slide 13, We still expect Unity Fiber to contribute $314 million of revenues and adjusted EBITDA of $123 million at the midpoint for full year 2023. We continue to expect core recurring revenue growth of 5% from the prior year. However, even though our sales funnel remains extremely strong, we are seeing some delayed buying decisions from certain wholesale and enterprise customers, which could slightly impact our recurring revenue growth estimate for the year. We also expect revenue and adjusted EBITDA at Unity Fiber for the remainder of the year to be more heavily weighted in the fourth quarter versus the third quarter. To be clear, we still expect consolidated revenue to be at or above the midpoint of our current outlook. We also still expect ETL fees in 2023 to be approximately $15 million compared to $24 million in 2022. Net success-based CapEx for Unity Fiber this year is still expected to be $115 million at the midpoint of our guidance. Turning to slide 14, for 2023, we continue to 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 seven and seven eighths 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. Our weighted average diluted common shares outstanding for full year 2023 is expected 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. At quarter end, we had approximately $452 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at quarter end stood at 6.0 times based on net debt to last quarter annualized adjusted EBITDA. On July 28th, our board declared a dividend of 15 cents per share to stockholders of record on September 8th, payable September 22nd. With that, I'll now turn the call back over to Kenny.