Uniti Group Inc. (UNIT) Q1 2022 Earnings Call Transcript

Uniti Group Inc. (UNIT 8.10%)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Uniti Group's first quarter 2022 conference call. My name is Jonathan 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 May 5, 2022, 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 will reference slides posted on the website, and you are encouraged to refer to these materials during the call. Discussions during this 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 8-K dated today.

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

Kenny Gunderman -- Chief Executive Officer

Thank you and good morning. Starting on Slide 3, we continue to see robust demand for our portfolio of mission-critical communications infrastructure. Our strong first quarter results exceeded our expectations and we're enthusiastic about the prospects for the balance of the year. In fact, and we announced today we're raising our full year outlook, which Paul will cover shortly.

Consolidating new sales bookings during the quarter were again a highlight, representing a 58% increase over the first quarter of 2021 and our fourth consecutive quarter of elevated bookings. These results also further demonstrate that the shared infrastructure benefits of fiber result in healthy adjusted EBITDA and AFFO growth. Fiber has never been more valuable, and the insatiable demand that we're seeing for these assets shows no signs of slowing. As the second largest independent fiber operator in the country, Uniti is uniquely positioned to benefit from these trends.

Turning to Slide 4, Uniti continues to track well in these shared infrastructure and economics. As a reminder, we believe that a healthy mix of anchor and lease-up bookings and installs represents the most effective way to drive profitable growth. 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, resulting in a cumulative cash flow yield today of approximately 20% and almost threefold increase from the anchor yields.Slide 5 illustrates an important part of our healthy mix.

We continue to show that the majority of new bookings are lease-up in nature and the business mix results in predictable cash flow with 0.2% monthly churn and average remaining contract term of almost nine years. Our continued intentional focus of balancing wholesale, non-wholesale and anchor lease-up opportunities has resulted in outsized margin enhancement and AFFO growth in a business that's relatively immune to swings in the economy. Turning to Slide 6, I'd like to dwell a bit on our national wholesale business, also known as Uniti Leasing. As I previously stated, 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. 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 pumps. Today, dark fiber alone 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, reaching approximately $4 billion by 2030, with long haul fiber contributing to the majority of these revenues. The continued broadband explosion fueled by 5G, metro fiber, small cells, fiber-to-the-tower, fiber-to-the-home, and even fixed wireless, and satellite broadband all provide on ramps of demand into the long haul market.

A critical ingredient to being a successful provider for these customers is having a robust national fiber network, as most large customers require multi-route solutions. Having an owned network is a meaningful barrier to entry for competitors to Uniti, especially given that it would take billions of dollars and several years to build a new network. We estimate that there are only five truly owned national networks and two independent fiber providers with national networks in the U.S. today with Uniti being one of them.

Thus, we have a unique opportunity to capitalize on this growing demand in this segment of the fiber market with minimal competition. We've created our 129,000 route mile fiber network through proprietary acquisitions at attractive economics, including our acquisition of 30 national fiber routes from Lumen in 2018 and the fiber rights we acquired from Windstream as part of our settlement in 2020. We continue to grow that network and have built over 14,000 route miles of new fiber in the past four years. And our networks are intentionally constructed with high strand fiber in order to capitalize on highly accretive lease-up opportunities.

As a reminder, the economics of long haul fiber are very attractive with high margin, passively managed revenue, little to no churn, long-term contracts that routinely have escalators built into them, and minimal capex spend requirements. Since most of our network is dark today with approximately 3 million strand miles of fiber available to third parties, we also have a great opportunity to grow our business by lighting more of our network in a disciplined manner. We're beginning to do that when we find appropriate anchor customers. For example, we recently announced that our first private wave channel product went live in Florida and that we delivered 3.6 terabits of bandwidth to a large national residential provider, our first customer on this wave channel system.

This opportunity represents approximately $1,000,000 of MRR with very high margins. But just as important, the wave product brings substantially more lease-up potential on these routes with little to no additional investment. We'll also launch wave capabilities on two new routes by the end of this year that will connect several key markets in the Southeast. Demand for these routes from our customers has been strong and we expect future wave product demand to grow.

Our national wholesale network has the added benefit of providing terrific growth potential for Uniti Fiber. As we expand our national network into new regions, the economics of adding local services, enterprise lease-up in particular, become more attractive. As I mentioned before, we're only offering Lit services in approximately 20 metro markets today. However, we own and have access to metro fiber in nearly 300 markets nationwide, which represents terrific capital and margin efficient growth potential.

Given the proven success of our anchor lease-up strategy, we continue to actively prioritize these markets for expansion in 2020 and beyond. We view these not only as organic growth opportunities, but also markets that could facilitate acquisitions outside our traditional Southeast footprint to accelerate growth in these fiber metro markets. Our level of enterprise bookings remain strong, up over 30% during the quarter as compared to the prior year period. With that, I'll now turn the call over to Paul.

Paul Bullington -- Chief Financial Officer and Treasurer

Thank you, Kenny, and good morning, everyone. The communications infrastructure sector continues to undergo a robust growth cycle, primarily driven by the trends Kenny mentioned earlier. Our operational performance in the first quarter was strong and we continued to successfully execute on our strategy of leasing up our existing fiber network with high margin recurring revenue opportunities while at the same time pursuing attractive new greenfield builds. As a result, we are increasing the midpoint of our 2022 outlook for revenue, adjusted EBITDA, and AFFO.

Please turn to Slide 7 and I'll start with comments on our first quarter. We reported consolidated revenues of $278 million, consolidated adjusted EBITDA of $225 million, AFFO attributed to common shares of $112 million, and AFFO per diluted common share of $0.43. Net income attributable to common shares for the quarter was approximately $52 million or $0.21 per diluted share. At Uniti Leasing, we reported segment revenues of $205 million and adjusted EBITDA of $199 million, up 5% and 4%, respectively, from the prior year.

Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to Slide 8, our growth capital investment program continues to perform well and provide positive results for Uniti. Over the past six years, our tenant has invested approximately $1 billion of tenant capital improvements in our network. Uniti continues to invest its own capital in 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 14,400 route miles of newly constructed fiber and 21% of the legacy copper network being overbuilt with fiber. Both of these numbers continue to gradually increase each quarter, and we expect they will increase materially over the coming years. During the first quarter, Uniti Leasing deployed approximately $53 million toward growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program. These GCI investments added around 1,500 route miles of fiber to Uniti's own network across several different markets.

As of March 31st, Uniti has invested over $350 million of capital to date under the GCI program, with Windstream, adding around 9,500 miles and 354,000 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 investment. They are subject to a 0.5% annual escalator and result in nearly 100% margin. The investments we have made today will ultimately generate approximately $29 million of annualized cash rent.

At Uniti Fiber, we turned over 140 Lit backhaul, dark fiber, and small cell sites for our wireless carriers across our Southeast footprint during the first quarter. These installed at annualized revenues of approximately $1.4 million. We currently have around 1,700 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 $15 million of annualized revenues.

At Uniti Fiber, we reported revenues of $73 million and adjusted EBITDA of $31 million during the first quarter. Both revenues and adjusted EBITDA were higher than expected due to the timing of early termination fees and lower costs. We achieved an adjusted EBITDA margin of 43% for the quarter, a 459-basis-point improvement from the prior period -- prior year period. Uniti Fiber net success base capex was $37 million in the first quarter.

We also incurred $2 million of maintenance capex or about 3% of revenues. Please turn to Slide 9 and I will now cover our updated 2022 guidance. We are revising our guidance for business unit level revisions, the impact of transaction related and other costs incurred today, and changes in the estimates of interest expense, depreciation and amortization, and weighted average diluted common shares outstanding. 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 Uniti Leasing, we still expect revenues and adjusted EBITDA to be $819 million and $797 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 $26 million relating to the straight line rent associated with the Windstream master leases and GCI Investments. We 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.

Most of these markets, where we are making GCI investments, are similar to our own Tier 2, Tier 3 markets, providing Windstream with substantial growth opportunities over time. Turning to Slide 10. Given the strength we saw in the first quarter, we now expect Uniti Fiber to contribute $309 million of revenues at the midpoint and adjusted EBITDA of $121 million for full year 2022. When adjusting for the Everstream transaction that occurred in May of 2021, the year-over-year revenue and adjusted EBITDA growth is 6% and 8%, respectively.

The strong revenue growth reflects our continued efforts to pursue and execute on lease-up that leverages our existing dense southeast fiber footprint. Further, it demonstrates our success in continuing to manage our cost structure and improve margins. Net success-based capex for Uniti Fiber this year is still expected to be $120 million at the midpoint of our guidance, a 12% decrease from levels in 2021. Turning to Slide 11.

For 2022, we 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 $893 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 $33 million, including $8 million of stock-based compensation expense.

We are revising 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. On April 24th, certain lender commitments under our senior revolving credit facility matured.

These commitments totaled $60.5 million and were not extended as a part of our amended credit agreement dated December 10, 2020. The aggregate size of our current senior revolving credit facility is $500 million and will mature on December 10, 2024. We continue to monitor the capital markets and expect to be opportunistic as it relates to taking advantage of attractive opportunities to further improve our cost of capital. At quarter end, we had approximately $387 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity.

Our leverage ratio stood at 5.74 times based on net debt to last quarter annualized adjusted EBITDA. On May 3rd, our board declared a dividend of $0.15 per share to stockholders of record on June 17th, payable July 1st. With that, I'll now turn the call back over to Kenny.

Kenny Gunderman -- Chief Executive Officer

Thanks, Paul. Let me finish with a few comments about M&A. For several quarters now, we've been messaging our belief that a conglomerate discount is being applied to Uniti share price. We've demonstrated a framework for valuing our non-Windstream fiber business in a range of 15 to 20 times cash flow and our Windstream business at approximately ten times cash flow as a starting point.

The range of values for our fiber business is supported by numerous years of private market valuations applied to other fiber businesses. And we believe Uniti is executing as a best-in-class operator, commanding a premium value. The range of values for a Windstream business are supported by recent third-party appraisals, an addition to market-based comps. We've also been very transparent about our efforts to unlock this discount by creating options to separate our assets in a value and tax efficient manner.

Last quarter, for instance, we confirmed our high confidence in the executability of this separation. Lastly, we've highlighted our prioritization of transformative transactions at this time in lieu of our typical sale leaseback and bolt-on M&A strategy. These combined efforts have resulted in continued productive conversations with various strategic and financial parties. To be clear, our priorities in these conversations are to maximize value for our shareholders through customer diversification and growth of our fiber business with a focus on wholesale.

Consistent with past comments, we have a very strategic set of assets. And through patience, we're confident that the true value of those assets will be realized. In the meantime, we remain focused on executing our strategy with continued strong performance and favorable industry tailwinds, as well as a strong balance sheet and liquidity. With that, operator, we're now ready to take questions.

Questions & Answers:

Operator

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

Greg Williams -- Cowen and Company -- Analyst

Great. Thanks for taking my questions. First one is just on the M&A environment. You mentioned you're having productive conversations with various parties.

Can you just talk about where multiples are, public and private, given the rising rates we've seen? Second question just on bookings, again, you've got another strong quarter, 800,000 of MRR. It just seems like is this the new normal? And help us frame the mix of wholesale and enterprise. That slide is really helpful with the bar charts. Is that the right mix to see like on 500,000 wholesale, 300,000 enterprise? And how should we think about the enterprise environment coming out of COVID, but then, of course, facing this challenging macro environment? Thanks.

Kenny Gunderman -- Chief Executive Officer

Yeah. Greg, all good questions. Writing them down to make sure we hit them. On multiples, we haven't seen any multiple contraction.

I think that the environment is such that we think buyers are being more discerning about asset quality. So good assets with owned networks and performing -- high performing businesses are still commanding premium multiples, and we haven't seen any issues there. But I think more and more of the of the funds two or three years ago were new funds to the space. They're now more knowledgeable of the space and so they're smarter on their diligence.

And so I think they're being smarter about about placing premium multiples on premium assets. So as that relates to Uniti, I think with the assets we own, we feel very confident about the premium multiples that should be applied to those. But as a buyer, it places a greater importance upon the proprietary nature of our M&A funnel. We've always talked about our ability to execute on buying assets at really below intrinsic value prices.

And I think we've repeatedly executed on that historically through environments where multiples have been elevated. So it continues to be similar to the past net, net. With respect to bookings, I'll make a few comments then ask Paul to comment, too. But yeah, I do think this is probably the new norm.

We've now seen four quarters of this type of activity and frankly, I don't see that changing just based upon the funnel and based upon the level of activity. I think it's not an accident or that that elevated level of bookings happened about six to nine months after the settlement with Windstream because we really then got access to substantially more fiber, especially the national network. And that's been a real boost to our wholesale business in particular in terms of new bookings. And so and as we always said, the sales cycle on those types of deals is kind of six to nine months, 12 months.

So I think we're sort of in a new norm. That mix of bookings is about right. We really like to keep a good healthy mix of anchor and lease-up. Anchor deals tend to drive more revenue, but the lease-up tends to drive the profitability.

And so we think that mix is right. And I we know it's a challenging enterprise environment, broadly speaking, especially given the the work from home trends are continuing and we expect those to continue, but we haven't seen an impact to our business. I think it's largely because we're still a share taker in the enterprise space. That business is growing at 10%, 15% a year and we're taking share in new markets with an owned fiber network with substantial lease-up potential.

So I think the runway for growth for us there continues to be very strong. And Paul?

Paul Bullington -- Chief Financial Officer and Treasurer

Yeah, I would just echo those comments, Kenny. I think that this new normal of level of bookings that you see that we've been producing is a very intentional effort on both the enterprise side and the leasing wholesale side, where we've built the teams around the fiber network that we have, particularly around the the Windstream settlement fibers that we now have access to, to take advantage of that opportunity. And we've been very intentional about the enterprise part of our business as well, building those teams, building the leadership up to take advantage of that opportunity and to have a consistent set of enterprise products across all of our networks -- our enterprise network. And so I think this is the new normal that you'll continue to see going forward.

And the mix on enterprise, I think is probably steadier. It's made up of a lot of smaller orders. The mix on the wholesale can be up and down a little bit because those tend to be larger orders. They can be a little lumpier but I think I think the mix that you're seeing now is about what I would continue to expect going forward as well.

Greg Williams -- Cowen and Company -- Analyst

Great. That's super helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Frank Louthan from Raymond James. Your question, please.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. So walk us through where you're getting some of the traction, some of the types of customers and verticals Uniti Fiber. And are you seeing any opportunity there on the wholesale side or helping with greenfield builds with some of the private overbuilders that are that are run in fiber today? Thanks.

Kenny Gunderman -- Chief Executive Officer

Hey, Frank, I'll start on that and, Paul, you can jump in. But we are seeing some traction, Frank, with the overbuilders and some of the upstarts, who are getting the broadband stimulus money. And we've -- we sort of foreshadowed this, but we've kind of been conservative about it and I still don't want to put numbers around it. But our network tends to reach out into the nether lands in terms of Tier 3 or 3-ish type markets.

And so that's where a lot of this broadband stimulus is being deployed for, right, underserved markets. And so that last mile build is new fiber. But in order to connect those markets back to the core, you need metro and broad -- a long haul transport and support, and that's where the opportunity is for us. And so we're getting what we call new logos.

We're getting new calls from an increasing number of those parties, which is exciting for us and is sort of indicative of just the overall environment. I mean, we're seeing demand from pockets of providers that we haven't seen for some time, including some of the regional are RLACS with better balance sheets and better liquidity, who are building out their networks. We've seen the hyperscalers really demanding substantial amounts of fiber, connecting data centers, and connecting markets. And the wireless carriers very actively looking at 10 gig upgrades.

So we're very, very focused on that. And anchor build, greenfield build opportunities are absolutely out there and we continue to take on some of those opportunities but we're very disciplined about it. As I've said many times, there's no shortage of demand in our industry. It's really a question of taking on profitable demand, and that's our focus.

So thus, the focus on the right mix of bookings between wholesale and enterprise and anchor and lease-up, but no shortage of demand from really any of those pockets.

Frank Louthan -- Raymond James -- Analyst

All right. Great. And speaking of shortages, can you address kind of what you've done to stay ahead of supply chain challenges on getting network equipment, and so forth for the builds?

Kenny Gunderman -- Chief Executive Officer

Yeah, sure, Frank. Now, our team has been really successful over the last year at managing a pretty difficult supply chain environment that continues to, I think, to get increasingly difficult. And we've done that through just the standard blocking and tackling and staying ahead of that demand, deep supplier relationships, diversified supplier relationships, staying ahead of the of the curve, making sure we've got orders in place to get materials and equipment on time to deliver on time for our customers. So I think our teams have done a really good job of managing that, but it continues to be a difficult environment and we continue to have to very actively manage that going forward.

So we've been doing things, pulling forward orders for materials for our equipment, given the elongating lead times for that sort of thing in order to manage that well. So we think we've got a good handle on that. We think we're well positioned to continue to deliver for our customers and have the supplies on hand that we need to do that. But it's a challenging environment and we've got to continue to manage it well and stay ahead of the curve.

Frank Louthan -- Raymond James -- Analyst

All right. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Simon Flannery from Morgan Stanley. Your question, please.

Unknown speaker -- Morgan Stanley -- Analyst

Hi. This is Alexis on for Simon. Can you hear me OK?

Kenny Gunderman -- Chief Executive Officer

Yes, we can.

Unknown speaker -- Morgan Stanley -- Analyst

OK. Could you talk a little bit about the trends in the fiber business? What impacted 1Q from like a year over year and a quarter over quarter perspective? And when do you think we get back to kind of those mid-single digit growth rates you talked about for the business? And then on the dividend, are there any updates around the outlook for that? I saw leverage fall a little bit in the quarter.

Paul Bullington -- Chief Financial Officer and Treasurer

Yeah. Alexis, I'll take a stab at the trend sort of year over year. When you look at our numbers year over year, I mean, we're experiencing really solid growth, 5% to 6% for the leasing business. And we talked about 6% to 8% growth and revenue and EBITDA, respectively, year over year as well in our comments and remarks.

To get there, though, you've got to remember you've got to adjust for the Everstream transaction that we had in May of 2021, where we sold a portion of our Northeast network. So you need to to adjust the numbers to reflect for that transaction in order to kind of really see the real trend underlying it. And I think those trends are just what we've already sort of alluded to, solid bookings leading to solid revenue growth. And that revenue growth is coming from all sectors, really.

It's pretty evenly spread across wholesale and non-wholesale business. And then from a from a cost standpoint, we've done, I think, a really solid job of continuing to get more efficient from a cost standpoint. And part of that is our intentional strategy of doing more and more lease-up business. And that that lease-up business was a higher margin business for us going forward.

So I think you we expect to continue to see that level of growth and improving margins as we go forward into the future.

Unknown speaker -- Morgan Stanley -- Analyst

Thank you. And was there anything on the dividend outlook for that?

Kenny Gunderman -- Chief Executive Officer

The outlook for the dividend? Currently we are still restricted dividend to the 90% of retaxable income, the statutory minimum for a read and we're restricted to that by our [Inaudible]. Sorry about that. So from a business standpoint, we're our hands are a bit tied by that reversion covenant that we got from our debt covenants. But as you can see from the leverage that we reported, leverage ratio we reported, we're edging closer and closer to that 5.75 times on a trailing 12-month basis leverage ratio that would allow us to have that covenant, that restrictive covenant removed from us going forward.

So once we get there and get through that covenant reversion level in the future, then we'll have a little bit more flexibility with regard to our dividend going forward. But that remains a board decision, something our board is going to have to look at with regard to our other capital allocation priorities. And we'll make that decision going forward when they've got that ability to do so.

Unknown speaker -- Morgan Stanley -- Analyst

OK. Great. Thank you.

Operator

Thank you. Our next question comes in the line of David Barden from Bank of America. Your question, please.

David Barden -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking the questions. I guess the first question, Kenny, would be in the current rate environment, where the Fed were expecting somewhere depending on who you are, 3 to 5 incremental hikes this year. Your weighted average cost of capital is going to get mark to market every day.

And I'm wondering how that affects you're thinking about that 7% initial build yield, because I imagine the customers that you're asking to pay that 7%, if that 7% becomes an 8% or 9%, are going to maybe balk at that, at least in the short run and how that -- does that risk lagging some of these conversations? And how do you think about matching that yield ask for day one versus the mark to market of your weighted average cost of capital? Second up, Paul, I think I heard you say in passing that the fiber business this quarter was impacted by some better than expected termination fees and things and some lower than expected costs. If you could kind of review that for us? And then I guess, I'm sorry. My last question, I guess, going back to you, Kenny, obviously, we've been talking about this for months. I mean in December, there was a bid out there reportedly at $15 a share.

You and other parties went back and forth about maybe whether that was right or wrong. And I guess my question right now is that bid still out there or did that just come and go now and we're back to being patient? Thanks.

Kenny Gunderman -- Chief Executive Officer

David, great question on the rate environment and that the impact of that on our pricing models and our dialog with customers. We have not -- and there's a there's multiple elements of that. There's not just the rate environment, but there's also the supply chain implications to higher potentially higher costs that get reflected through capex or opex for us. And I think that that's definitely factored into our modeling.

We have not had any need to change our focus on those starting yields with -- in customer conversations. As you can imagine, we're not sharing our models and talking about specific yields with customers. It's really just more of a pricing conversation on a per site basis. And so it all kind of factors into an overall model for us that we're looking at that includes our cost of capital and includes our threshold expected returns.

I think where the real focus for us is not on those initial yields because we haven't seen that any sort of softening in that and we don't think we will just based on the demand we're seeing. But it puts a real focus on the lease-up opportunity after that because we're not content to get a 6% or 7% or 8% yield. What we really want is 10%-plus, getting up to 20%, which we show you in our slide shows. And so in order to get to that level, you've got to be confident that the lease-up potential is there because as I said earlier, the revenue tends to come from the anchor awards but the return and the profitability comes from lease up.

And so with that and the strength that we're seeing in our enterprise business and just lease up in general, we feel confident that we're going to continue to be able to hit those hit those returns, including through this rate environment. Paul, you want to take the second one?

Paul Bullington -- Chief Financial Officer and Treasurer

Yeah, I can take that question, David, on ETLs and costs. So the ETL revenue that we've been talking about for several quarters is that's the early termination liability revenues associated with contracts that that disconnect early. The large majority of that activity is connected to the Sprint T-Mobile consolidation and that activity to consolidate that that network. And we've talked about that before in terms of its impact on our business going forward.

So as that does that happens, we'll see those ETL revenues come in. And the timing of those revenues is a little hard to predict because it's dependent on the actual disconnect of those circuits, but we've got those ETLs as a part of our plan going forward. And so you see that activity was strong in the first quarter. In terms of overall costs, I think it's not attributable really any one area specifically.

I think it's coming from a broad number of expense categories across the business, both direct expense categories and operating expense categories as we continue to just become more efficient and drive more toward lease-up types of revenues. So we're seeing costs, cost efficiency and things like third-party off net cost as we drive more toward revenue on net and near net lease-up activity, things like that. But it's pretty broad based in terms of expense containment across the business.

Kenny Gunderman -- Chief Executive Officer

And, David, on M&A, I'm going to let our scripted remarks stand for our answer there and just generally say we continue to make very good progress on our priorities. So we feel very good about that.

David Barden -- Bank of America Merrill Lynch -- Analyst

All right. I'll let that stand, Kenny. Thanks, man.

Kenny Gunderman -- Chief Executive Officer

Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kenny Gunderman for any further remarks.

Kenny Gunderman -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 40 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

Unknown speaker -- Morgan Stanley -- Analyst

David Barden -- Bank of America Merrill Lynch -- Analyst

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