Uniti Group Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Welcome to Uniti Group’s Fourth Quarter 2020 Conference Call. My name is Andrew, and I’ll be your operator for today. A webcast of this call will be available on the company’s website, www.uniti.com, beginning March 1, 2021, and will remain available for 14 days. At this time, all participants are in a listen-only mode. Participants on the call will have 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 afternoon will reference slides posted on its website, and you are encouraged to refer to those materials during this call.

[Kenny Gunderman:]

Thanks, Andrew. Good afternoon, everyone, and thank you for joining. Before I review Uniti’s operational performance, I’d first like to recap 2020 and refresh on our go-forward strategy. 2020 was a transformational year for Uniti that saw tremendous volatility to our stock and our true value-accretive accomplishments that set up Uniti for future success. First, we successfully participated in a $4 billion deleveraging of our largest customer, while simultaneously entering a value enhancing settlement, which revalidated and strengthened our lease agreement. Secondly, we grew our national network by 90%, and within a few months have already demonstrated lease-up success of those assets by increasing our sales funnel by $0.5 billion and executing on $150 million of new revenues under contract. Next, we extended our debt maturities and significantly improved our liquidity profile. Lastly, we completed the divestiture of non-core operations from our real estate portfolio, that now position us with 95% recurring high margin revenue with industry-leading 0.2% monthly churn and a focus on fiber. In short, we had a terrific year operationally. Turning to slide four of our presentation. Fiber is the mission critical connective tissue for virtually all current and future broadband delivery. As one of the largest independent wholesale providers in the country, we are agnostic to the on ramps that feed traffic onto our network and are enabling a virtualization of our culture. 5G mobile broadband, fiber-to-the-home, fixed wireless, satellite, and other technologies are all enabling greater usage of video conferencing, e-learning, telemedicine, and remote work environments as well as a general continued explosion of broadband traffic.

[Mark Wallace:]

Thanks. Good afternoon, everyone. The quarterly and full year information I’ll review this afternoon reflects the company’s preliminary estimates and is based on information available as of today. We are working to fully complete our financial results and Form 10-K filing that are independent auditors are working to complete their audit work. We believe both will be completed shortly and expect to file our 10-K no later than March 8th. Actual results may differ from these estimates. With that, I’ll now give a brief review of our fourth quarter and full year 2020 performance. But I want to focus my comments primarily on our 2021 outlook. As Kenny -- number of actions that position Uniti to execute well this year from both a commercial and operational standpoint, as we continue to benefit from the long-term investment cycle in communication infrastructure. I’ll wrap up today with thoughts on our balance sheet, dividends and capital structure. Please start with slide 13. I will start my comment on our fourth quarter results. We expect to report consolidated revenues at $275 million, consolidated adjusted EBITDA of $216 million, AFFO attributable to common shares of $106 million and AFFO per diluted common share of $0.42. Net loss attributable to common share for the quarter is expected to be $47 million or $0.20 per diluted share, which includes an expected $71 million goodwill impairment charge related to our Uniti Fiber segment and $9 million of transaction related and other costs. The goodwill impairment charge is a result of the annual assessment we’re required to perform under Generally Accepted Accounting Principles.

[Kenny Gunderman:]

Thanks, Mark. Please turn to slide 20, when compared to other publicly traded communications infrastructure REITs many of our fundamentals compare favorably and we believe that there’s still a substantial valuation discount applied to Uniti resulting from Windstream’s bankruptcy. As slide 21 highlights Uniti is a unique opportunity in the communications infrastructure space. We’re in the early years of a multiyear investment cycle that will provide growth tailwinds for Uniti for the foreseeable future. We have a differentiated strategy and a unique hard to replicate restructure and portfolio of assets with attractive economics, including 95% recurring revenue, monthly churn of 0.2% and $8 billion of revenues under contract with a nine years of average remaining term. We also have a proven track record of organic growth execution and a proprietary value accretive M&A funnel. With that, Operator, we are now ready to take questions.

[Operator:]

Thank you. Your first question comes from the line of Frank Louthan with Raymond James.

[Frank Louthan:]

All right. Great. So just to be clear on the dividend, I guess this new declared dividend, can we assume that’s generally the stable rate that you are looking to have going forward? And then give us a little more detail on the sell-through on the fiber that you have with Windstream, where are you are with that process, and now you’ve had a better look at what you think kind of the ultimate sort of revenue opportunity is with that? Thanks.

[Kenny Gunderman:]

Frank, it’s Kenny. I’ll take both of those. Yeah. I think the -- on the dividend, we’ve got terrific options to use our capital, whether it be organic or M&A, or paying a dividend. And we also have strong balance sheet, strong liquidity. And as Mark alluded, our AFFO payout ratio is low compared to the peer group, and so putting all those -- putting that together, I think there’s, as he mentioned in his prepared remarks, there’s definitely conversations about raising the dividend and those discussions continue. But we also balanced that against the higher yield, 5% yield, we think is just way too high, and so when the Board looks at our various uses of capital, I think they should continue to err on the side of investing in the business with terrific organic opportunities that we have. But for sure, the level that we’re currently paying is a stable level for the foreseeable future. With respect to the lease-up opportunities on our wholesale national network, we feel terrific about those. I mean, we talked about doubling the sales funnel from $0.5 billion to $1 billion within a few months, and I don’t think that gets enough focus, because when you think about most wholesale sales teams, we have 10 or 11 sales reps that sell our national network and that’s relatively comparable to our peers. And so, doubling that funnel to that extent just shows how much demand and opportunity there really is. But clearly following through on that and showing real revenue in the door is critical and $150 million of incremental revenue under contract within a few months of closing the settlement, we think is just really, really strong early indication of success, and so we feel great about it. Frankly, if I compare where I thought we would be with where we are, we’re way ahead of where I thought we’d be. So, I feel really good about it.

[Frank Louthan:]

Okay. Great. That’s really helpful. Thanks very much.

[Kenny Gunderman:]

Thank you, Frank.

[Operator:]

Thank you. And our next question comes from the line of Tim Long with Barclays.

[Tim Long:]

Thank you. Two, if I could as well. First, maybe just offer your perspectives on the wireless here, you mentioned Dish and started going there. But obviously, there’s been pretty healthy C-band auctions and a lot going on with 5G. So, maybe if you could just talk a little bit about appetite there given there’s going to be increased opportunities? And then second, could you talk a little bit about kind of digital divide and potential government programs and the impacts you think that might have on Tier 2 and 3 markets where you might be participating? Thank you.

[Kenny Gunderman:]

Hey, Tim. Yeah. Demand from our wireless customers is very, very strong. We saw it -- definitely did not see any slowdown during the COVID months, the heightened COVID months last year and really saw continued strength. And that’s kind of been our MO , I mean, we -- I know, people talk about the ebbs and flows, but in our markets, Tier 2 markets, we’ve seen a really steady amount of demand. And certainly for us, we’re selective about the anchor builds we take on. So we’ve never -- and I’ve said this before, we’ve never felt a lack of demand to pursue from our wireless carriers and that continues to be the case. A couple of trends, one, like others and not unexpected, we’re going to see some churn from Sprint sites being decommissioned. We expect to see that this year and next year. That’ll be more than offset by ETL revenue, and we think it will certainly be more than offset by the demand coming from Dish. And there’s an intuitive symmetry there, right, one wireless carrier going away, and another one coming into the market. And we feel really great about the opportunity there and we feel great about the new T-Mobile and their commitments to invest in more rural parts of America, and we said this a couple years ago, and when the merger was first announced that there would be a little near-term volatility related to decommissioning sites, but over the longer term felt really good about the new T-Mobile being a good customer, especially with our expansive national network that reaches into more Tier 2, 3, and 4 markets. So, we think there’s a really nice opportunity. And with the amount of capital that the carriers are going to be spending on the C-band auction and others, I definitely think that for us, that means more demand from them, because they need third -- we believe more third-party providers to help them build fiber to offset the capital that they need for other priorities. So net-net, we see strong demand, steady demand. Small cells, I’ve referenced it in my prepared remarks that 65% increase in fourth quarter over the same quarter last year. I think that trajectory is going to continue. And again, it’s a small part of our business today. It’s not the central core focus of our fiber business. We’ve always talked about small cells as a tool in the chest as opposed to the entire chest, but we’ve also talked about it as a product that would eventually really start growing in our markets as carriers started to prioritize -- started to get deeper into the prioritization of their markets and we’re really starting to see that. So, I feel great about it. With respect to federal subsidies, I definitely think those are a net positive for us. We don’t get direct subsidies, but our various cell leaseback partners do. Of course, Windstream does and some of the other sale leaseback partners, and I think there’s just a general -- as many of you know, there’s just a general continued bipartisan support for rural broadband. That’s been the case for many, many decades in telecom, and we think that’s going to continue. And so the focus on broadband and broadband infrastructure and revalidated by the mission critical nature of connectivity during COVID, we think is going to -- is just one more of the multiple -- multitude of tailwinds for Uniti.

[Tim Long:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of David Barden with Bank of America.

[David Barden:]

Hey, guys. Thanks for taking the questions. Hey, Kenny, I guess, historically, we’ve had a lot of disclosure around the funnel regarding deals, both in terms of size and nature, which we don’t have here this quarter. I was wondering if you could kind of give us a picture as to what you kind of think 2021 is going to look like. And then, Mark, with respect to Windstream, obviously, thank you for sharing you will -- we will get more disclosure later. But could you characterize your, I don’t know, comfort level satisfaction with how they’re performing relative to plan and how investors should feel about your relationship with them at this stage. Thank you.

[Kenny Gunderman:]

Hi, David. So, yeah, the fellows really strong and I’ll -- I’m trying to reference back to some of the pie charts we used to disclose and so I’ll try to use some of the same terminology. But still easily 90% plus of the funnel is proprietary. And of course, by that, I mean, just direct conversations with a counterparty as opposed to participating in banker run processes, right? So 90% plus, which, in hindsight, over a five-year, six-year track record, that’s pretty much what we’ve demonstrated in terms of actual deals, 90% plus of our deals have been proprietary in nature. So that continues to be what the funnel indicates for future activity. I would say, it’s probably about a third leasing related, a third bolt-on and then a third just larger transformative deals. And again, that’s consistent with what we’ve talked about in the past, and I would say, continued focus on leasing deals where we’re really acquiring fiber portfolios versus buying companies outright. So that’s the funnel. I would just tell you that the amount of capital, including private capital, infrastructure capital, focused on our space continues to be at a fever pitch, including focusing on fiber, enterprise fiber, wireless driven fiber, fiber-to-the-home, small cells, and of course, macro towers. And with our portfolio, we bring all those things together and so there’s a tremendous amount of interest in partnering with Uniti in a variety of creative ways, especially since over the past several years, we’ve actually demonstrated a willingness to work with these unique apples horses. So very excited about our about our opportunities there and I think you’ll continue to see some activity over the coming quarters. David, I’m going to take your Windstream question too and Mark can add on. But we don’t want to comment specifically on their results. You can imagine some of the complexity of us doing that. But we do recognize the need and the desire of our investors to see results. So as Mark mentioned in his result -- in his in his prepared remarks, there’s going to be some disclosure coming and there’s also some disclosure on Windstream websites that you can see. We’re pleased with the progress. We’re particularly pleased with the progress in the kinetic business. That’s the ILEC. That’s where they’ve been investing in the broadband business. And that’s really where we’re going to be investing with our GCI program and really working to harden our own network over the next five years, 10 years. So we feel really good about that progress.

[Mark Wallace:]

Okay. Hi, Dave. This is Mark. Let me just add on to Kenny’s comments. So Windstream did publish some information recently on their website and it’s investor.windstream.com. So investors can go about windstream.com includes the CEO letter and some other information that provides their perspective on their results. So I encourage you to read that.

[David Barden:]

Thanks, Mark. And if I could just one follow up, this was like, with the 10-year kind of having bounce and rates moving up, is this a good news opportunity for Uniti or a bad news opportunity? How do rising rates and the expectation of rates and inflation moving up affect kind of your weighted average cost of capital and your ability to do deals?

[Kenny Gunderman:]

Mark, do you want to start with that one.

[Mark Wallace:]

Yeah. Sure. So, look, I’d say there has -- there clearly has been a treasury rate volatility, particularly over the last couple of weeks. But I’ll say this, I’d say that, the high yield market has continued to be very strong. Spreads that move pretty minimally and I haven’t looked to had a chance to look today, but I would expect that those, they probably improved even today. So in terms of us continuing to expect to be able to improve our cost of capital, certainly our cost of debt, I think improving the cost of debt is a real opportunity for us going forward and so I continue to look forward to having more opportunities to execute on that. I don’t think the treasury on rate volatility that we’ve seen recently until it really starts to affect how you spread materially, I don’t think that’s going to -- I think we still going to have that opportunity.

[David Barden:]

All right. Great. Thanks guys. Appreciate it.

[Operator:]

Thank you. And our next question comes from the line of Brett Feldman with Goldman Sachs.

[Brett Feldman:]

Hi. Thanks for taking the question. So if I would go back to slide nine, where you have the leasing pipeline and you highlight the $1 billion. I was curious if you give us any insights to what the duration of those contracts could be. Because that would help us think through what the uplift to annualized revenues could be as you execute against it? And then also with 75% of those opportunities, potentially utilizing the fiber you acquired from Windstream. I would imagine in a lot of those geographies it is quite literally the only fiber. So I was hoping you could give us some insights as to how competitive this funnel is and your conviction around being able to convert a significant amount of it? And then just one last follow up, Mark, I heard you mentioned there was a one-time non-core non-recurring item in the quarter and I think you’ve given the revenue impact. I wasn’t sure if you talked about EBITDA, if you could quickly revisit that, that’d be helpful? Thank you.

[Kenny Gunderman:]

Yeah. Brett, it’s Kenny. Good questions. Yeah. The -- so as you can imagine, funnel is made up of hundreds of opportunities and they range from very large ones to very small ones. And so if you think about the number, it’s going to be weighted towards the bigger opportunities that -- and those terms. But so this is not -- in other words, it’s not a perfect answer. But most of these are going to be longer term agreements, right? We’re selling passive, access, wholesale nature, so five-year, 10-year, 20-year agreements, but weight -- more heavily weighted towards the 10-year to 20-year agreements. In terms of your question about the competitive nature, I think you’re right directionally. So you’re -- there’s a lot of unique routes here. Anytime you get beyond the NFL cities, almost by definition the routes are going to be less competitive and more unique. So I think you’re correct about that. What’s more -- what gives us I think more of a competitive advantage is when we intertwine this network with ones we’ve acquired in the past, including the acquisition we made from CenturyLink, a couple of years ago, also now known as Lumen. We also bought a quasi national network from TPx. We’ve bought networks from CableSouth and from SFN and others, in addition to the almost 7,000 route miles of fiber we’ve built on our own. So all of those networks intertwined to create the opportunity for us to provide unique solutions to our carrier customers and that’s really the trick on the wholesale side. And that’s why we’re continuing to look to grow that portfolio with proprietary M&A, because the more you grow the funnel, the more unique route you have, the more tailored creative solutions you can provide to customers on a proprietary basis.

[Brett Feldman:]

Got it. And on the one-time item.

[Mark Wallace:]

Yeah. Those were mostly equipment sale. It was about -- we had about $10 million of equipment sales, which we classify as non-core revenue. But keep in mind also that those have very little effect on EBITDA, because they’re lower margin.

[Brett Feldman:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley.

[Simon Flannery:]

Great. Thank you. Good evening. Kenny, could you just talk again about the Windstream concentration. It’s good to see we’re getting some of the numbers there. But the GCI was getting attractive returns also continues to grow your revenue base with Windstream. So, how are you thinking now versus maybe in the past about how you want the business mix to look over time? I think in the past, you’ve talked about getting that below 50%, looking at your pipeline of businesses, looking at the GCI, et cetera. How do you think that’s going to evolve? What’s in management incentives around that topic and any insight on the impact of the least bifurcation, is that likely to make any difference here? And then, Mark, if you could just give us a little bit more color on the amount and timing of the Sprint churn, that’d be great?

[Kenny Gunderman:]

Hey, Simon. Good questions. Yeah. We’re -- the Windstream -- the core Windstream revenue grows at about a 0.5% escalator and with the GCI added on top of that, obviously, that’s going to be a higher number. So to your point that that is increasing. We feel very confident in that revenue base and resulting cash flow just like we did before the bankruptcy and during the bankruptcy. There’s never been a disruption in it. So just to reinforce, we feel very good about that. With that said, we are very focused on growing the other parts of our business and talking about 6% growth at fiber and 27% growth in non-Windstream revenue at Uniti Leasing. By definition, you’re going to have diversification just through organic growth and just through executing on our strategy and growing our business over the next four years or five years. When I look at our five-year plan, we make a lot of headway towards diversifying Windstream closer to that 50% target that you mentioned. And I could tell you exactly when it happens, but I obviously don’t want to go beyond just our one-year of guidance. But feel great about it, just in terms of organic growth. And then when you overlay our M&A strategy and your comment about least diverse -- least bifurcation, I think, they’re -- those are almost like gravy to me in terms of diversification. So we’re still very focused on driving that number down, not because we’re concerned about the revenue and EBITDA number there, but because we think we’ve got great growth opportunities in other areas of our business and we’re going to continue to execute on those.

[Simon Flannery:]

Okay. Thank you.

[Kenny Gunderman:]

Simon, I am sorry.

[Simon Flannery:]

Yeah. On the Sprint churn, just given -- just how much revenue you have there that you expect to churn and these specific timings?

[Kenny Gunderman:]

Oh! Yeah. The sprint churn. So, yeah, I think, over the next year, two years, maybe two and a half years, somewhere between $5 million to $7 million to $10 million of recurring revenue. And again, that’ll be more than offset by ETL revenue and also the, I think, the opportunity that we have with Dish.

[Simon Flannery:]

Thanks.

[Operator:]

Thank you. Your next question comes from the line of Bora Lee with RBC Capital Markets.

[Bora Lee:]

Thanks for taking the questions. First, going back to the leasing sales pipeline, could you provide some color on how you think internally about the breakdown of stages of deals as they actually move through the pipeline and if you could bracket the time it takes for that sales cycle from initial contract to revenue recognition? And then, secondly, you’ve mentioned in various forums that you’re exploring data centers. Can you just talk a little bit about what you’re exploring there in terms of retail or edge data centers, are you looking to actually operate assets or sales leaseback?

[Kenny Gunderman:]

Hey, Bora. The short answer to your question on the billion dollar sales funnel Uniti Leasing is, those are longer sales cycles, so anywhere from six-month to nine-month to 12-month sell cycles. And the longer answer is that it obviously varies and it certainly varies based upon whether it’s a new customer or an existing customer. So, for example, now we’ve got MLAs in place with some very large customers names you’d recognize, who are buying virtually overnight or within days or weeks, because we’ve got the MLA in place and you know how that works. But with new customers, new logos, six months, nine months, 12 months, again longer because these are bigger deals and because you’re putting together complicated solutions in many cases that that traverse numerous states in many cases. With respect to data centers, we’ve looked at all manner of opportunities there. We get shown all types of opportunities. And back to my comment about the M&A environment, we’ve never found an opportunity to acquire data centers outright, that is economical for us. Similar to towers, we never bought a tower portfolio. We decided that it was a better opportunity for us to enter that space organically by building towers. And I think, at this moment in time, I feel the same way about data centers, because there is an opportunity for us to build edge data centers in some of our markets for some of our carrier customers, who really want those facilities on the edge and the edge happens to be our fiber network that we’re leasing to them. And so that’s -- and with respect to whether we would certainly own those facilities and we would operate them to the extent you’re providing power and cooling and so forth, and also leasing up those facilities to others. So we are spending a lot of time looking at those opportunities with our good anchor customers and we may have more to report on that in the coming quarters.

[Bora Lee:]

Thank you.

[Operator:]

Thank you. And that is all the time we have today for Q&A. I would now like to turn the call back over to CEO, Kenny Gunderman for any closing remarks.

[Kenny Gunderman:]

Thank you, Andrew. We appreciate all of your interest in Uniti Group and look forward to updating you further on future calls. Thank you all for joining us today.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.