Uniti Group Inc. (UNIT) Q3 2021 Earnings Call Transcript

Uniti Group Inc. (UNIT)
Q3 2021 Earnings Call
Nov 04, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Uniti Group's third quarter 2021 conference call. My name is Stephanie, and I will be your operator for today. A webcast of this call will be available on the company's website, www.uniti.com, beginning November 4, 2021, and will remain available for 14 days. [Operator instructions] 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 or reference slides are posted on the 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 most directly comparable GAAP financial measures can be found in the company's current report on Form 8-K dated today.

I would now like to turn the call over to Uni Group's chief executive officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Kenny Gunderman -- Chief Executive Officer

Thank you. Good morning, everyone. Both our Uniti Leasing and Uniti Fiber businesses continue to perform exceptionally well, fueled by continued tailwinds within the communications infrastructure industry and strong demand for our fiber infrastructure. This demand was evidenced by the second consecutive quarter of consolidated new sales bookings of approximately $1 million in MRR, representing again one of the highest quarters ever for consolidated bookings.

Turning to Slide 4, Uniti has the eighth largest fiber network in the country, and we're the third largest independent operator. Our portfolio of small cells, connected buildings, macro towers, and homes passed continues to grow each quarter driven by the need for more investment in 5G networks, 10-gig upgrades, and C-RAN small cell deployments. These investments provide Uniti with the unique opportunity to expand our networks with anchor economics, setting the foundation for attractive future lease-up and further validating the share infrastructure benefits of fiber. As evidenced on Slide 5, Uniti is demonstrating the economics of an attractive shared infrastructure model that continues to drive meaningful returns.

We believe that a healthy mix of anchor and lease-up bookings and installs represents the most effective way to drive optimal economics. Uniti 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. And resulting in a cumulative cash flow yield today of approximately 19%, an almost threefold increase from the anchor yield and all within the past five years.

Slide 6 is further proof of this healthy business mix. As I mentioned earlier, we had our second consecutive quarter of consolidated sales bookings of approximately $1 million in MRR, a 90% increase from the third quarter of 2020. The amount of new bookings itself, however, is only part of the positive of story. You can also see that not only is there a steady growth of both wholesale and non-wholesale bookings, but there's also a very healthy and gradually growing mix of new bookings that are leased up in nature.

This focus on a good balance of wholesale, nonwholesale, and anchor lease-up is intentional on our part and as a result an outsized margin enhancement and AFFO growth, and we expect to continue this focus. Turning specifically to Uniti Fiber. Sales bookings in the third quarter were $0.8 million of MRR, an increase of over 90% in the third quarter of 2020 and our second consecutive quarter of bookings at this level. In fact, we had our highest level of enterprise bookings ever for a quarter.

In terms of mix, 60% of our sales bookings came from lease-up of our major wireless anchor builds. We continue to ramp up our lease-up efforts within our Southeast markets with approximately 65% of lease-up MRR sold over the past four quarters occurring in the second and third quarters combined. Turning to Slide 7. At Uniti Leasing, we continue to actively market over 3 million strand miles of fiber that is available to lease to third parties, making us one of the largest players in the national wholesale fiber market.

Our nonwireless carrier customers, such as the same group and national MSOs, continue to be active as they expand their cloud-based services. For example, we recently announced a 20-year contract with a large international hyperscale customer to provide high-strand count fiber along a new dark fiber route that connects key data centers in Pittsburgh and Ashburn, Virginia demonstrating the robust demand we are continuing to see for long-haul routes. To be clear, although we report Uniti Fiber and Uniti 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 Uniti Leasing and Uniti Fiber networks and we fully expect and encourage that trend to continue.

With that, I'll now turn the call over to Paul. 

Paul Bullington -- Chief Financial Officer and Treasurer

Thank you, Kenny. Good morning, everyone. We continue to execute well at both Uniti Fiber and Uniti Leasing as evidenced by our robust bookings activity and our progress in driving higher-margin recurring revenue and lower-than-anticipated operational costs. As a result, we are increasing the midpoint of our full year 2021 outlook from our prior outlook for adjusted EBITDA and AFFO per diluted common share, which I will cover in more detail shortly.

We are maintaining the previous midpoint of our 2021 outlook for revenue as there remains the possibility that some core nonrecurring contractual revenue could slip into the first quarter of 2022. Please turn to Slide 8, and I'll start with comments on our third quarter. We reported consolidated revenues of $267 million, consolidated adjusted EBITDA of $217 million, AFFO attributed to common shares of $110 million, and AFFO per diluted common share of $0.43. Net income attributable to common shares for the quarter was $43 million or $0.17 per diluted share.

At Uniti Leasing, we reported segment revenues of $199 million and adjusted EBITDA of $194 million, up 9% and 7%, respectively, from the prior year. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. The year-over-year growth reflects the dark fiber IRU contracts we acquired from Windstream, the straight-line rent recognition under the Windstream MLAs, and GCI investments subsequent to our settlement agreement, the impact of the Everstream transaction, as well as annual lease escalators. Turning to Slide 9.

Our growth capital investment program continues to yield positive results. As a reminder, our tenant has invested approximately $1 billion of tenant capital improvements in our network over the past six years, and that investment is expected to continue. Unity has now begun investing its own capital and long-term value-accretive fiber largely focused on highly valuable last-mile fiber, including fiber and commercial parks and fiber-to-the-home. Collectively, these investments have resulted in over 10,000 route miles of newly constructed fiber and around 20% of the legacy copper network being overbuilt with fiber.

Both of these numbers continue to gradually increase each quarter and we expect that they will increase materially over the coming years as we continue to invest in our networks. During the third quarter, Uniti Leasing deployed approximately $62 million toward growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program. These GCI investments added around 1,300 route miles of valuable fiber to Uniti's-owned network across 13 different states. As of September 30, Uniti has invested $237 million of capital to date under the GCI program with Windstream, adding around 6,200 route miles and 217,000 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 Uniti making such investments. 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 $19 million of annualized cash rent. At Uniti Fiber, we turned over 335 lit backhaul, dark fiber, and small cell sites for our wireless carriers across our Southeast footprint during the third question.

These installs add annualized revenues of approximately $1.6 million. 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 $11 million of annualized revenues. At Uniti Fiber, we reported revenues of $67 million during the quarter, while core recurring revenue was in line with our expectations, core nonrecurring revenue was below expectations due to the timing of equipment sales and early termination fees.

Adjusted EBITDA of $28 million during the quarter was consistent with our expectations. Adjusted EBITDA margin for the quarter was 41%, representing a 770-basis-point improvement from the prior year due to lower operational costs and our continued emphasis on higher-margin recurring revenue. Uniti Fiber net success-based capex was $31 million in the third quarter, in line with our expectations. We also incurred $2 million of maintenance capex or about 3% of revenues.

Please turn to Slide 10, and I will now cover our updated guidance. We are revising our prior guidance primarily for the impact of the recent issuance of our 6% unsecured notes and related redemption, lower-than-expected operational costs, and the impact of transaction-related and other costs incurred to date. Our current 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 2021 includes the following for each segment. Beginning with Uniti Leasing, we continue to expect revenues and adjusted EBITDA to be $784 million and $766 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 98%. Revenue and adjusted EBITDA each include $26 million relating to the straight-line rent associated with the Windstream master leases and GCI investments. Our outlook now reflects $230 million of net success-based capex at Uniti Leasing at the midpoint of our guidance, of which $225 million relates to estimated Windstream GCI investments.

Most of these markets are similar to our own tier 2, tier 3 markets, providing Windstream with substantial growth opportunities over time. Slide 11 highlights. Non-Windstream revenues and adjusted EBITDA continued to grow at a healthy pace and are expected to be $55 million and $42 million, respectively, up 27% and 17% from 2020 levels. This includes the assets and dark fiber IRU contracts we acquired from Windstream, where the revenue is diversified across multiple third parties, and the dark fiber IRU leases that are part of the Everstream transaction.

Turning to Slide 12. We still expect Uniti Fiber to contribute $305 million of revenue at the midpoint. However, we now expect adjusted EBITDA of $120 million for full year 2021, representing a margin of 39% this year at the midpoint of our guidance, which is a 360-basis-point improvement from last year. The slight increase in adjusted EBITDA compared to our prior outlook is primarily due to lower-than-expected operational costs.

As we pointed out on our earnings call last quarter, Uniti Fiber's outlook is impacted by the sale of our Northeast operations as part of the Everstream transaction and the winding down of our noncore construction business. Adjusting for the impact of these two items, revenue and adjusted EBITDA for 2021 at Uniti Fiber are now expected to increase by 6% and 12%, respectively, from the prior year. Net success-based capex for Uniti Fiber this year is still expected to be $125 million at the midpoint of our guidance. Turning to Slide 13.

For 2021, we now expect full year AFFO to range between $1.64 and $1.68 per diluted common share with a midpoint of $1.66 per diluted share due to lower-than-expected operational costs. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $860 million at the mid point. Our guidance contemplates consolidated interest expense for the full year of approximately $398 million, excluding any deferred financing cost write-offs and premiums paid relating to early repayment of our debt. Reported interest expense in 2021 will include an additional $58 million relating to the write-off of deferred financing costs and premiums paid on the early repayment of our 8.25% senior unsecured notes due 2023, 6% senior notes secured -- 6% senior secured notes due 2023 and 7% and 8% senior unsecured notes due 2024.

Corporate SG&A, excluding amounts allocated to our business segments, is now expected to be approximately $36 million, including $10 million of stock-based compensation expense. We continue to expect weighted average diluted common shares outstanding for full year 2021 to be around 263 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.

Through the successful debt refinancings we have executed so far this year, we have significantly improved our financial flexibility, lowered our borrowing costs substantially with over $25 million in expected annual interest cost savings, and extended our debt maturities by several years. On October 13, we successfully closed on the issuance of $700 million of senior unsecured notes due January 2030. These notes will bear interest at 6% and were issued at par. Most of the proceeds from the offering will be used to redeem in full the outstanding 7% and 8% senior unsecured notes due 2024, plus any accrued and unpaid interest on December 15, 2021.

On October 14, 2021, the company used the remaining portion of the proceeds from the note issuance together with cash on hand, to prepay the next four settlement obligation and settlement payments that were due under the settlement agreement, Unity entered into with Windstream of units emergence from bankruptcy, resulting in savings of approximately $5 million. As of today, we have approximately $270 million of installment settlement payments remaining to be paid. Going forward, we expect to be opportunistic in prepaying the remaining settlement payments while managing our balance sheet at the same time. At quarter end, we had approximately $450 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity.

Our leverage ratio stood at 5.76 times based on net debt to annualized adjusted EBITDA. This morning, our board declared a dividend of $0.15 per share to stockholders of record on December 17 and payable January 3. I'll now turn the call back over to Kenny. 

Kenny Gunderman -- Chief Executive Officer

Thanks, Paul. Please turn to Slide 14. I'd like to take a moment and discuss our non-Windstream business and our continuing effort to highlight the value disconnect we believe still exists. The first two columns of the table represent the last two years of performance of Uniti Fiber plus our non-Windstream Uniti leasing business with the third problem also including the CLEC fiber lease payment we received from Windstream.

Our fiber platform, including Uniti Fiber and Uniti Leasing, operate as one holistic business. It represents the eighth largest fiber network in the country and one of the largest independent fiber operators. Our strategy is unique in that we are targeting tier 2 and 3 markets offer full-service fiber where we have a competitive advantage, a well-developed brand, and boots on the ground. At a national level, however, were a light-touch passive wholesale provider.

We're executing very well on this collective strategy as evidenced by 4% top-line growth and 6% adjusted EBITDA growth, continued strong bookings, industry-leading churn, and service delivery intervals. 90% of our business is wholesale with an average term remaining of nine years, making our cash flows stable and relatively immune to swings in the economy, which has been evidenced by our relatively uninterrupted progress during the height of the COVID pandemic. Our lease-up business, including enterprise sales and other additional tenants, is growing at 10% plus a year with attractive incremental cash flow yields. We're very selective about which markets to offer enterprise services, and today, we're operating in only about 20 markets.

We estimate our market share at less than 5% in most of our existing metro markets, implying material growth potential without adding any new markets. Having said that, we also own dense fiber and approximately 275 additional metro markets around the country. This latent fiber provides substantial capital-efficient and margin-friendly growth potential for many years to come. Lastly, we're also building as much new fiber as anyone in the industry and growing the reach and density of our network every day.

We believe this combined business is sizable enough and has the characteristics to be a stand-alone entity. Turning to Slide 15. I'd like to comment briefly on M&A, especially given recent market rumors. Since the Windstream settlement, we've consistently set our M&A efforts were focused on three categories: bolt-on acquisitions; sale-leaseback asset sales; and large, transformative transactions.

That M&A strategy has not changed as we continue to look at acquisitions to complement and grow our business inorganically. We realize that our investors want us to do more acquisitions and do them more quickly, and we remain very active on that front. However, we're also being very disciplined in our approach, which hopefully our investors have come to appreciate. We're spending time with our board evaluating and refining analysis that would allow us to separate our assets in a tax and value-efficient manner.

We'll also -- and will also help highlight the value disconnect that exists. For example, we've been vocal about our ILEC network and lease in particular, undervalued, especially given the mission-critical nature of the network and the senior placement of the lease. Lastly, we've consistently said in the past year that we have a very strategic set of assets and that we are evaluating large transformative transactions. There's a disconnect between how public investors seem to value our assets and fiber businesses in general versus how private funds are valued them.

Our ongoing discussions continue to reinforce these themes. To be clear, we are focused on executing our strategy of growing our business organically and executing on bolt-on M&A, but we've proven to be smart buyers and sellers and are open-minded to all paths that maximize shareholder value. With that, operator, we're now ready to take questions. 

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Greg Williams with Cowen.

Greg Williams -- Cowen and Company -- Analyst

Great. Thanks for taking my questions. Kenny, if we're to believe the reports in the last few weeks, there's a deal that maybe has an impact. And the impact is really around bid-ask and you articulated the valuation case here on Slide 15.

Some of the pushback on the valuation is perhaps the 2030 renewal as you think about the Windstream MLA stream. Does that -- whether it remains at $700 million, plus the escalators. Or does it get cut? And in the MLA Exhibit E discusses the renewal, and it seems more formulaic. So can you just give us your latest thoughts on the 2030 renewal? And what's your calculus in your self-valuation?

Kenny Gunderman -- Chief Executive Officer

Yeah. Thanks, Greg. Yeah, first of all, the -- going back to the original lease, it was set at around 8% cap rate, a little over an 8% cap rate, and then we just renegotiated the lease holistically last year, as you know, and the rent was essentially reaffirmed with third-party valuation reports and so forth. So -- and that was five years into the deal and really with not a lot of new fiber investment made in the network in that five- or six-year period. So we feel good about the asset holding its value during that period.

And when you look out 10 years from now, there's going to be based on current plans, at least a substantial amount of new investment in the network, not just investment to maintain its value but investment to enhance the value through our GCI program and otherwise. So -- and look, if you believe in the fiber-to-the-home trend, which we certainly do, and I think the industry certainly is revealing that as we see earnings and we see progress from around the industry, including with our tenant, we feel really good about the trajectory. And so we don't see the value of our network declining and dropping off precipitously by any means. In fact, we believe it's going to enhance value and certainly hold its value.

But look, it's -- there's no formulaic calculation, the fair market value, the rent reset in 10 years will be fair market value. So I think -- but I think the trends are looking positive for Uniti.

Greg Williams -- Cowen and Company -- Analyst

Got it. Thank you. 

Operator

Your next question comes from Frank Louthan with Raymond James.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Can you walk us through a couple of the lease protections you had in the MLA? In particular, do you still have the rights to buy certain elements of Windstream's network to allow you to operate the ILEC in the event that there wasn't a lease renewal in 2030? And then I've got a follow-up.

Kenny Gunderman -- Chief Executive Officer

Yeah. Frank, are you referring to what happens in 2030 if there's not -- if Windstream chooses not to renew the lease?

Frank Louthan -- Raymond James -- Analyst

Yeah. I think you had some pauses in the master lease that allows you to purchase some elements in case of nonrenewal. Are those still in place with the new agreement? Or has that changed?

Kenny Gunderman -- Chief Executive Officer

It hasn't changed, Frank. It's -- and sorry, I'm a little foggy on it. 10 years is a long way away, but we do think about it. And that didn't change from the original lease, and it does -- there are protections.

And I think generally, I'm looking at my General Counsel, but I think generally, if Windstream chose not to renew the lease, we would have the right to acquire the operations and then operate it ourselves or have someone else step in and operate it. So there's not a risk that those operations go away from the lease. Hey, Frank, are you there?

Frank Louthan -- Raymond James -- Analyst

I was on mute. Yeah. I'm sorry. I'm here.

So you mentioned you're investments in fiber. You mentioned the commercial parts and some fiber-to-the-home. Is that fiber to the home outside of the Windstream territory? Are you building for some other providers or building some of your own residential broadband business?

Kenny Gunderman -- Chief Executive Officer

No, that's all within the GCI program and for Windstream, the fiber-to-the-home builds are.

Frank Louthan -- Raymond James -- Analyst

OK. All right. Got it. All right.

Thank you very much.

Kenny Gunderman -- Chief Executive Officer

Sure.

Operator

[Operator instructions] Your next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Good morning. I wonder if you could focus on the fiber business just a little bit. I haven't seen the Q yet, but I think you mentioned that the revenues, which were a little bit below our estimate was primarily due to lower nonrecurring.

But maybe you could just comment on what we're seeing in the backhaul, enterprise and wholesale, and E-Rate and government. Where is the pressure there and the outlook? And then as we think about '22 and some of the new signings, the bookings you've had, is capital intensity going to be similar to '21 levels? Any early thoughts on that? Thank you.

Kenny Gunderman -- Chief Executive Officer

Simon, I'll start, and Paul can jump in if he'd like to add. But yeah, the core recurring business is doing great at fiber. If you look at our disclosure, we've always bifurcated revenue at Uniti Fiber between core recurring and core nonrecurring. And I think we said we have something like $50 million of core nonrecurring this year.

That's the part that is below plan for this quarter. So that's equipment sales and ETL revenue, which are just harder to predict from a timing perspective. But we've reiterated revenue guidance from the year and so -- or for the year, and so I think you can infer that we think we're going to make that up in the fourth quarter just from a timing perspective. But the core business itself is doing terrific and strong bookings, strong installs, minimal churn and very, very good service delivery metrics all implied a really good growth on the core recurring business.

With respect to capital intensity, yes, I think we're not ready to give any guidance for 2022, but I don't expect any changes -- any material changes. I think the general trajectory of margin enhancement and capital intensity kind of simmering at existing levels, if not a little below is kind of what we're still thinking.

Simon Flannery -- Morgan Stanley -- Analyst

Great. And I guess the opex was a good surprise there. Can you give us any color on what was going on there? Because I think elsewhere, people are just worried about inflationary pressures on costs, but is that something that's also sustainable?

Kenny Gunderman -- Chief Executive Officer

Yeah. I think so. We -- it's a combination of really three things, Simon. One, we've just been particularly cost-conscious in the past couple of years.

I think that's just a general good thing to do. But two, we've been pretty vocal about exiting low-margin nonrecurring businesses that are not core to our business. So just like one-off construction projects, for example . So those businesses have pretty much wound down and they're no longer in the numbers.

And so you're seeing some benefit from that. But then thirdly, we've really focused on lease-up and bringing on these -- the higher-margin, higher cash flow business. We're showing you the component parts of that, right, that slide where we show you the anchor economics and then the lease-up. But that stuff starts to really impact margin when you do it at scale and you're really seeing that.

So ultimately, going forward, yes, that's exactly what we expect to continue focusing on.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thank you. 

Operator

At this time, there are no additional questions. I would like to turn it back over to Mr. Gunderman for your closing remarks.

Kenny Gunderman -- Chief Executive Officer

Thank you. Thank you, all, for your interest in Uniti, and we look forward to having our next conversation in a few months.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Kenny Gunderman -- Chief Executive Officer

Paul Bullington -- Chief Financial Officer and Treasurer

Greg Williams -- Cowen and Company -- Analyst

Frank Louthan -- Raymond James -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

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