Uniti Group Inc. (NASDAQ:UNIT) Cowen 2020 Technology, Media & Telecom Conference May 29, 2020 1:50 PM ET
Mark Wallace – Chief Financial Officer
Bill DiTullio – Vice President, Finance & Investor Relations
Conference Call Participants
Greg Williams – Cowen
Let’s get started. Mark, Bill, thank you very much for joining us.
Greg, thank you for inviting us. We very much appreciate everybody’s interested in Uniti Group. Just to let everybody know, we did post a presentation on our website in advance of this meeting. So, I encourage everybody to read the forward-looking statements that go along with that presentation, but with that, happy to jump right into your questions.
Q – Greg Williams
Sure. Well, let’s bring up the big topic, and that’s Windstream. You guys recently had a settlement with Windstream over the MLA dispute. Sounds like a good time, Uniti can finally focus on being Uniti again. But can you give us an update on the agreement, and your milestones and priorities as Windstream prepares to emerge from bankruptcy?
Sure. We’re very enthusiastic about the agreement about having a clear path forward, now that we’ve got the settlement approved. So, just to cover, where we stand on this, on the process, the settlement agreement has been approved by the court.
Windstream announced on their last earnings call that they expect to emerge from bankruptcy late August, early September and I believe that’s still on track. Don’t have any reason to not think anything has changed there.
Between now and the Windstream’s emergence from bankruptcy, there will be a planned — there’ll be a plan confirmation hearing by the court. I believe that’s schedule for June, 24th, and then Windstream will need to go through the regulatory approval process and those are really the key issues between now and any the urgent state.
So, look, we look forward the settlement agreement has been approved by the court, it will be effective upon when Windstream emerge from bankruptcy, and we look forward to that happening relatively soon.
In terms of the substance of the agreement that we’ve reached with Windstream, I think it’s a really good outcome for both parties. I mean from our standpoint, will the agreement provides for a much stronger lease than what we had previously. It provides for a much healthier tenant than what we had previously. We are acquiring very attractive assets over 2 million additional fiber strands from Windstream as part of the agreement, which we have a lot of creative uses for.
And I think the long-term investments that we’re making under the capital — growth capital commitments that we’re making to Windstream, I think those will be both good for us in terms of enhancing our network value and giving us sort of good return on those assets. I think those assets, being leased to Windstream will certainly positioned them better strategically and help to improve their financial profile over time.
So, I think what we achieved or what we set out to achieve, we always refer to it as a mutually beneficial solution to it and I think that’s what we’ve got from both parties. I think it really resets our relationship with Windstream and we look forward to working together as partners going forward.
So what are your priorities sort of near-term and mid-term now that the lease is consummated?
Sure. Well, from wind on the – in terms of Windstream and the settlement agreement and so one of our priorities, obviously, is to look at the assets that were acquired from Windstream, and we are doing a lot of – getting a lot of thought to how we best monetize those assets.
So, on the Windstream fiber that we’re – that we’re acquiring, there are a variety of different use cases for those assets. Some of the fiber streams, we will – we will probably sell – in terms of sell higher use. So we will lease it to other parties. In some cases, we may combine it with other assets that we may have in some of those markets and marketed as opco/propco opportunities similar to what we have with the Macquarie in the Bluebird situation.
In some cases, there’s also opportunities as well to use some of those routes internally for to bring some of our off-net, on-net. And so I think there were actually will be some synergies as well. So there’s a lot of different things that we can do with the assets we’re acquiring from Windstream, and we’re looking at a lot of different options now, we’ll have more to talk about that in the future.
Got it. And I definitely want to talk about those fiber assets, but before I do. One of the highlights of the call from your earnings was, noting that you don’t need additional capital for the remainder of the year, your stock performed pretty well thereafter, partially on that comment possibly. As I think about the $1.75 billion of growth capital improvements, that’s committed over the next 10 years. How should we think about the ways you plan to fund that build out?
Sure. We have a lot of different options. So to your point, we certainly do not with the some of the tower business. We certainly do not need to raise in the capital this year to fund the growth capital improvements or for any other reasons.
Now, going forward, we certainly have access to the public markets, both the public equity and debt markets. We’ve continued to have and maintained relationships with infrastructure funds and other private investors as well, so that’s always an option – always an option.
But keep in mind, one of the things that I also said is, we maybe able to monetize some of those assets through lease up. So when you sell an IRU oftentimes, and we’ve seen this on the CenturyLink assets that we acquired, a couple years ago, is that you often get a large upfront payment as part of an IRU, so you get upfront cash on IRU contracts or dark fiber.
And then also, certainly maybe able to monetize some of those either individually or with other assets that we currently own similar to what we did with Midwest assets on the Bluebird transaction.
So there’s a lot of different ways that we can use those – monetize the assets that we’re receiving for Windstream. There’s also the – we’ve also you know, continued to have discussions about recycling other x kind of non-core, non-strategic assets as well that we may have – may have outside of our Southeast Uniti Fiber footprint. And so there’s a number of different avenues that we have, I can’t tell you exactly how, but it will probably in the end it would be some combination of everything that I mentioned.
Got it. I think I got five things there, asset – access to debt and equity market, infrastructure fund, you can lease them up, you can do a deal like you did in Bluebird, where you can recycle additional capital, so let’s take some of those. Starting with the first one on accessing the equity and debt market, in the past, you felt like you would use equity in terms of funding, whether it was deals, or raising cash. How do you feel about weighing raising equity is happening every month, especially tapping into debt market?
Yeah. So, I think right now what we’re mostly focused on is internal. So recycling capital, leasing up and monetizing existing assets that we’re going to be getting from Windstream that’s kind of our current focus right now. And that’s, you know, for — the primary reason for that or one of the reasons for that is one, we think we could generate attractive values that way.
But at the same time, we also want to give our cost to capital time to improve. And I think, over the next several months there’ll be a lot of favorable events happening. Some of those will be on the Windstream side. So I think a lot of uncertainty on the Windstream side that has weighed on our cost of capital over the last year will start to be alleviated more and more.
So I think as the plan — as I said earlier, as Windstream gets the — as the court approves the Windstreams plan of reorganization, as they get regulatory approvals, as from our standpoint we have to deliver truly some re-opinions, which I’m confident we’ll be able to do. As different things, I could check — checked off the box in terms of Windstream emerging from bankruptcy, and their exit financing gets in place.
And then the last thing I’d say that has to happen also is Windstream eventually will need to go through a credit rating process as well. And so I think as all those things happen, I think there’ll be more and more uncertainty taken off the table. I would expect our cost of capital to improve over time.
Got it. And you mentioned infrastructure fund, would you consider infrastructure directly build or fund the build for the GCI or would you do GCI yourself? And then infrastructure funds are — funding for other mechanisms like Uniti Fiber site?
Well, it’s very interesting that — it’s an interesting question. Historically, we’ve had a lot of pretty wide ranging discussions with different private investors, including infrastructure funds. Some of those discussions have been — has been their desire to make an investment at one of our business units, so directly into Uniti Leasing or Uniti Fiber, in some cases, making investments into at holding company level, so nearly group level. We’ve also and continued to have discussions regarding ACO/PACO structures on some of our assets.
But in terms of funding that GCI build, I haven’t had discussions directly, but I would say that we have had some exploratory conversations about whether or not GCI builds could be done in a joint venture format with other partners partially funding, and kind of what the economics and structure of those early on, I don’t want to say that that’s something that’s probable, but it is something. It was brought to us by some of the parties to look at, and we are looking at it, and it’s a fairly, something new that we are playing with last or last few weeks.
Right. It does seem like the fiber-to-the-home interest from infrastructure fund does seem to pick-up. So this could be one way, unless you do that. If you’re an infrastructure firm looking for fiber-to-the-home, correct?
I think that’s exactly correct.
And then, you talk about recycling capital. Where do you see opportunity to monetize some of your assets? I remember we spoke, maybe last year and you got to talk about possibly selling your fiber business and it could go for north of $2 billion. And then on the most recent earnings call, maybe I’m reading too much into it, but seems like it was that aspect you could put in the back, I mean, Kenny Gunderman, you CEO was saying, we love our fiber assets, they are strategic value. So, how should I think about your ability, your inclination to sell fiber assets, whether it’s partial or the entire business outright?
Yeah, so I think it is — Our focus is owning mission-critical communication infrastructure assets, primarily fiber. And so, I – so I would dissuade you from the way that you’re going to see us sell the Uniti Fiber business — Uniti Fiber or something like or sell or lease something like that. That’s not really what we talk — that we’re overly very focused on.
What we’re focused on is, if you look at the map that was included our Investor Relations presentation that we posted today. We own a very significant amount of very, very valuable fiber routes. And we own almost 7 million strand miles of fiber across the United States.
We have two different businesses that are really – that are beginning to overlap more and more, but that are really have a lot of different attributes to them. So Uniti Fiber being an operating company, who develops, builds, develops, designs, operates fiber networks, whereas Uniti Lease. So it’s a very active business with a footprint in the southeast.
Now we have Uniti Leasing, that’s nationwide more of a passive business. So leasebacks opco/propco structures, IRU monetization. So, what we’re really focused on is operating those two businesses and those two businesses performing very well. In fact, actually on the last conference that we actually announced that Greg Ortyl, we’ve actually made some changes in the sales force as well. Greg Ortyl is going to be taking over as the – position — as a Senior Vice President of Strategic Accounts. And the reason for that is because they’re becoming more and more overlap between those two business units.
So I’d say, we’re really focused on operating the performance of those, and then also recycling assets, it’s really more of a non-core or non-strategic assets that by far fall on the perimeter of some of these – some of our network.
Okay. Because when you say non-core, some of the powers in assets like business, but they’re sort of already being shed, so now non-core I mean maybe some fiber that’s not contiguous or fiber that’s not really near your core network that sort of thing?
Yes. Maybe on the edge of our network or something like Midwest fiber likely did look on Bluebird exhibit today.
Got it. And then you talked about the assets you acquired from Windstream and they were good assets you said. Can you help us understand what kind of assets you got from Windstream? What kind of fiber was it? Is it regional fiber? Is it laterals in the building, metro rings? Help us understand what have you did acquire?
It’s a little bit of all of the above, but I’ll let Bill, if you want to jump in and kind of talk a little bit more about the assets we’re getting.
Yeah, so I think Mark mentioned before, as part of the Windstream settlement agreement. We’re getting rights to 2.2 fiber strand miles — 2.2 million fiber strand miles. So, 1.8 million of that is Uniti owned Windstream leased fiber today, but it’s being exclusively leased to — was being exclusively leased to Windstream, Windstream would not utilizing those strands, so now Uniti will have the right to lease that to other parties, third-parties.
And then we’re also acquiring 400,000 fiber strand miles that was Windstream owned and built fiber that we will now, Uniti, will own. So, there’s a good mix of metro and non-metro fiber. Non-metro being kind of the long haul routes, look, we do — the part that’s metro, there’s a good significant part that is metro. A lot of that – good part of the metro network is in some top 25 metro markets. So when you look at the map that’s, again in our [indiscernible] cities like in the Chicago area Milwaukee, New York City area, Philadelphia, DC, Northern Virginia. So, there are markets, where we will have available strands — we have at lease their parties and, you know, adding these 2.2 million fiber strand miles to our portfolio increases our leasable capacity and third party to over 90%.
So, well if we look again at our Investor Relations deck that’s out there, we compared the strands that we’re getting to the CenturyLink deals. If you’re calling the CenturyLink deal, we acquired 270,000 fiber strand miles at CenturyLink. And that was about two years ago. And most of those routes were long haul only, so we’re not able to sell really small style dark fiber lit services, local enterprise on those routes, they’re mostly we’re just leasing fiber to third parties among holdouts. But in those two years just on those long haul routes, those 270,000 strand miles, we have been able to generate upfront IRU payments from customers of $50 million that represents about 10 million of annual lives revenue.
So when we compare that to the 2.2 million fiber strand miles we’re getting that, yes, it’s a mix of long haul, but also has a good portion of it that’s in Metro markets, and we’ll be able to sell more services on that that’s what we believe to have at least similar success with these routes. And so, again a little too early to tell exactly what we believe the [indiscernible] potential is on that, but we continue to evaluate, we get more information on those routes every day. And we have people in the field blocking those routes. So, we feel really good about the opportunity there.
Yeah, it’s interesting then, if once you have so much underutilized metro fiber and you’re saying you can upsell it. They just will not upselling it, I guess it wasn’t really their core competency or they were obviously distracted quite a bit. I’m just trying to understand like, what are you doing differently that we couldn’t do to upsell that underutilized fiber? I mean it sounds like it might be as simple as just focusing on it?
Yeah, I don’t want to speak for wisdom on behalf. I mean, they may have not been actively marketing that, but I can tell you that you know even — again, we don’t have a right to that fiber today that will become effective upon the effective of the settlement agreement. But I can tell you that, Ron Mudry, who is our Chief Revenue Officer who’s constantly in front of customers with Greg Ortyl and others on the sales team that are showing them the routes, we do have available today that we can lease that we have in the past gun interest from certain parties that, hey, if you ever got rights to this fiber in these markets, we would definitely be interested in that.
And I think when you look at our map, you can see, we put different color codes for the different types of fiber that we have. And when you look at the fiber that we’re putting as part of the settlement agreement, in some cases, it does connect some parts of our leasing or fiber network or community fiber network. I think, we can leverage that fiber, better to serve more customers, so more services than if you didn’t have the other network there as well.
Got it. And when I think about the GCI and the fiber to the home built, once you put out a couple of different plans, but when I just ran simple math and it could be wrong and it’s 1.75 billion in funding and they said they want to get about 50% of the homes of fiber. That’s about 1.5 million home. So, that comes about 1,200 dollars a homepath. I think its pretty low for rural environments. Is my math wrong? Am I missing something and there’s probably a question for Windstream, but you guys are so close to the situation, and might be shopping with a JV, so I thought maybe you can chime in on you know, what if my math is correct.
Yeah, so I think you’re going to — I don’t want to speak for Windstream directly, but if you look at the cleansing disclosure back in February, they put out some cleansing disclosure and that cleansing disclosure they had their business plan. And as part of that business plan, they expected to pass, 50% of the homes with one gig, their kinetic service by 2028. And when you look at that, I think we’re going to serve like 2.3 million households by that. So when you look at what they said that we’re going to invest in that about 1.2 billion to reach those 2.3 billion households, that works out to about $530 per household and that’s according to the data they put out there in their business plans. So I think the 1,200 is about double what they expect that they’ll be spending per household.
So it’s even lower, they can get to fiber at least 1-gig speeds at $530 a home path?
Yeah, according to their latest business plan that was probably like fiber disclosure they worked it out to about $530. So, from our perspective, we’ll – the 1.75 billion that we’ve committed to invest over 10 years, our expectation as a good portion of that most likely – again, it’s going to go for fiber, mostly fiber builds related assets.
So there is part of that can go towards building into buildings, laterals, conduits, poles things like that. But most of the investments that we’re making are going to be fiber investments that are either going to be overbuilding copper or building Uniti Fiber. And our understanding is most likely a lot of the investments can be made in the ILEC territory to serve as kinetic 1-gig expansion project.
So, from our perspective, we’re looking to make fiber rich investments, is what we’re doing and that’s what we’ve committed to do and so it has to meet certain criteria. Just for those you know, for hire the GCI program works, we make the investment basically reimburse Windstream for their capital spent, and there’s a schedule over 10 years how much we can spend up to, how much they can ask for every year. And then on the one year anniversary data us of Uniti [ph] making that investment, it gets added to the lease and an 8% initial yield, subject to a 0.5% annual escalator.
The other interesting thing about this program that if there are routes or segments that Windstream wants to build a fiber, and they appeal to Uniti, where we think we could maybe we want to use some of those trends to lease up third parties. We have the option to joint build some of these segments with Windstream.
And if we choose to do so, then we would split the cost to build that segment 50-50 with Windstream and Uniti would retain any extra strands beyond what Windstream initial needs are. So there’s potential for us to continue to add on to the 2.2 million fiber strand miles that we’re getting today in certain markets, where we believe we have the opportunity to lease or monetize those assets.
Got it. Another interesting aspect that you alluded to earlier is about the MLA now is that you can bifurcate it between the ILEC and the CLEC, meaning you can sell the CLEC portion of the lease, obviously, that’d be great in terms of diversifying your revenue stream. So, first off, I assume you have to approve the buyer of that CLEC part of the lease, correct? They can’t just sell to anybody, you want to sell to somebody really good creditworthy, so you might be back in the same situation? And I guess the second question is, who would you be looking to sell to?
Well keep in mind, it’s actually Windstream’s decision, and I don’t want to speak for them. I’m not sure that they’ve made the decision themselves, but they like business, as far as I know they haven’t made that decision yet. However, we certainly think it would be – it’s a good opportunity for them. And I think that was the main purpose behind spreading the lease between the ILEC and CLEC.
Look, I think there’s a lot of potential CLEC buyers, whenever Windstream’s decides to pursue that. And wireline companies, fiber companies, including cable managed services providers, and some of these partnered with infrastructure funds as well.
I think there would be a pretty broad suite of potential buyers and so we certainly would find it – encourage Windstream to do that. And it will certainly would be very helpful for us as well from a diversification standpoint would be very meaningful to us as we take our revenue concentration with Windstream from 65% today, down 2% [ph]. So it helps, certainly help diversify us. And I think it’d be a good transaction for them. But again, it’s up to them to decide when to do it and when to take it to market.
Got it. And it seems like Windstream would want to sell it, in my opinion, not Windstream or yours. I mean, you would want them to sell it. Could you help them in that process? I mean, you guys are part of your business is wheeling and dealing, and could you actually find a buyer on behalf of this transaction?
Sure. I mean if there’s — we may actually have some people that we do business with today that actually might be interested in that business. I don’t want to put names or call out names. So we may have some people that we’re partnering with today in other transactions that might be interested in it, and anything that we can do to be helpful to Windstream to execute on that, we’ll certainly try to do so.
Got it. And last question on the MLA, just on, Windstream covenant, per the agreement Windstream has an max leverage covenant in that time. Could you just remind me, what’s happens if they violate those covenants?
Yeah. So Greg, the first off, at time of emergence, they actually need to achieve a three times leverage ratio, at times of emergence. But to your point, yeah, there are — there’s different, currents and maintenance tests, that go above 3.5, they’re no longer able — my understanding is they’re no longer able to borrow any additional funds or draw down on the revolver or pursue some — certain types of transactions. If they were to be in breach of those covenants, then you would no longer be required to fund the growth, the GCI investment program is my understanding.
Okay. And we can finally talk fundamental, Mark. Can you just provide us an impact, from COVID-19, permitting delays, install delays, you seemed rather bullish on the call. There’s only about $50,000 of booking that risk. And then you, sort of, padded another $50,000 to $75,000 of potential booking delays. And you mentioned that was a conservative estimate. Is that still a conservative estimate?
Yeah, I’d say that’s still pretty conservative. So, first and foremost, we’re focused on the safety and health of our employees. And they’re working with customers. So, the majority of our employee base continues to work-from-home. But we continue to be very productive. And in some cases we’ve been able to accelerate installs with certain customers, such as schools that are closed, but they’re willing to allow us to go ahead, other customers, the physical locations have closed. And so there’s been somewhat of a delay on those ends. So that’s what we call that on our last earnings call, 50,000.
So — and on the bookings again, so — there could be a potential for another 50,000 to 75,000 delay there. But the key word is delay. We haven’t seen any cancellations, today. And when you looked at the installs and the bookings activity in the first quarter, they were pretty strong. And I would say that trend is — so far going into second quarter we’ve seen that trend continue. So, we feel good about our business and being able to continue really haven’t seen any significant or material impact from COVID-19 yet.
Got it. So that’s good to hear that the booking element continues. And to that point, I mean, usually around $500,000 MRR booking, does that still equate to about 8% organic growth when I think about what — how do I make use of that $500,000 number?
Yeah. So, booking, obviously, plays into our organic growth. But it’s also a function of the rate of what we’re able to install. And also churn comes into play as well, right? So I think what you’ve seen historically back in 2019 and based on our outlook for 2020, our growth at fiber organic growth is somewhat slightly below that 8% and we’ve called out some factors that have impacted that, so for one back in last year, we called out, permitting delays that we saw in small cells.
And so that factored that the rate we could get some of these dark fiber and small cell projects completed. Now the good news is we’ve worked through most of those projects and we have a handful.
Now, with COVID, there has been some impact with permitting still, because a lot of these permitting agencies — their physical offices are closed and they’re still operating on paper — manual paper submission process.
Now, I think the good news is going forward for us in the industry is that, this pandemic will — will get people to rethink their different processes, so we expect that going forward, most of these permitting offices will go more to digital submission, which would help streamline create a more efficient process. So, that’s one factor that’s impacted our rate of installs in the past.
And then on the churn side, there we have talked about the services that have disconnected and some of them are called non-strategic non-core markets, so these are markets that we — that were part of when we required, some of the regional Uniti Fiber investments they made for instance PEG and Tower Cloud. And so these markets were maybe Tier 1 cities, where we’re using some partner fiber to provide this solution to the customer.
So, when those sites come up for renewal, we were losing those to the other party that was already in that market with a fiber, and we kind of expected that, because we just weren’t going to price it in a competitive basis. So, we’ve worked through most of that, but that did impact our churn levels last year and into 2020.
The other piece is you’re seeing customers convert from lit solutions to dark fiber solutions, so although there was a stepped out on a per circuit basis when you go from a lit solution to a dark fiber solution. The work actually prefer that because then the customer is treating a five year term for most cases a 10, 20 year term.
So, when you look at the incremental total contract value that you’re going to get off the renewal where they’re converting from lit to dark, that more than offsets the step down, and the MLR that when they’re going from the services. So, again, short-term impact on churn, but a long-term positive from a from a total contract value.
And so — and then we’ve had some first generation re-rate churn as well where again sites will order five seven years ago, when we have that first generation of re-rate, it usually a significant step down.
So, those are things that have impacted our growth rates, historically plus, with just with the — with some of the overhangs — other overhangs that happened with Windstream and such, that can play into it, as well.
So, I think going forward, we still want to target that 8% and we think that’s achievable, there’s a pathway to get that 8% through our lease up strategy now that we’ve finished most of these anchor builds, our focus now turns to leasing up those leveraging that existing network and driving those high incremental returns with high margin business.
Got it. I got last 30 seconds I wanted to speak in a dividend policy question. You previously noted that the dividend could return to normalized levels following the Windstream bankruptcy. But, how should we think about that? You guys have always been high dividend payers, higher than the allowable lead levels, part of the reason to keep your stock strong for maybe equitizing deals. How should I think about the dividend policy once Windstream emerges some bankruptcy and then in 2021 and beyond?
Yes. So, as you know we’re still under the restrictions under our credit agreement that we can only pay out 90% of taxable income. I think it’s reasonable to assume that once we’re outside of those restrictions, which could happen as early as this year, maybe — I’m sorry later part of this year or early part of next year. I think it’s reasonable to assume that we’d want to pay out at least 100% of taxable income. I think it’s reasonable to assume that we want to be able to pay out any capital gains that we might generate on our future transactions.
Beyond that, I probably can’t kind of say too much. It would be kind of, the board hasn’t made any decisions as to what your dividend policy will be. But I would say, I do think there’s a couple important things we certainly would be looking at: peer groups within the communication infrastructure space, both in terms of yield, both in terms of payout ratio.
I think for us it’s important to set it appropriately so that it can grow as AFFO grows, and as we continue to grow the company. And also I think it’s important that we know that we set it at a level that is also sustainable over time, so that people have certainty of the pivot stream [ph], as well as have a growth component [indiscernible] as well.
All right. We went a little bit over, but it’s a great chat. I hope to see you guys in person next time, and for everybody listening on the call, as well as Mark and Bill, thank you and be safe and you all have a great weekend.
All right. Good to see you. Thank you very much.