Uniti Group Inc. (NASDAQ:UNIT) Q3 2023 Earnings Call Transcript

Uniti Group Inc. (NASDAQ:UNIT) Q3 2023 Earnings Call Transcript November 2, 2023

Uniti Group Inc. misses on earnings expectations. Reported EPS is $-0.34 EPS, expectations were $0.33.

Operator: Welcome to Uniti Group’s Third Quarter 2023 Conference Call. My name is Howard, 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 today and will remain available for 14 days. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the Company’s prepared comments. The Company would like to remind you that today’s remarks include forward-looking statements and actual results could differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in the Company’s filings with the SEC. The Company’s remarks this morning were reference slides posted on its website and you are encouraged to refer to those materials during this call.

Discussions during the call will also include certain financial measures that were not prepared in accordance with the Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the Company’s current report on Form 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. Gunderman.

Kenny Gunderman: Thank you. Good morning, and thank you for joining. Starting on Slide 3. Uniti delivered another solid quarter of performance, and as a result, we are once again reiterating our consolidated full-year 2023 revenue, adjusted EBITDA and AFFO outlook. Our consolidated core recurring revenue grew 3% during the third quarter from the prior year. Our lease-up revenue categories continue to perform exceptionally well with non-wireless wholesale, enterprise and dark fiber lease-up revenue growing at 7%, 16% and 20%, respectively, during the quarter when compared to the same period last year. With our industry-leading 0.3% churn and no legacy services weighing us down, we believe our runway for mid single-digit growth continues to be long.

Our scaled national network and exceptional network performance allows us to negotiate bespoke agreements with our wireless carriers, providing steady returns and minimizing churn. As Slide 4 demonstrates, this growth will be disciplined and we believe profitable. Our substantially underutilized fiber network acquired largely through sale leasebacks is helping drive our shared infrastructure economics. Our anchor plus lease-up model is working, driving cumulative cash flow yields today of 24%, a more than threefold increase from the anchor yields on these projects. Turning to Slide 5. We continue to grow our 139,000 route miles network and we added approximately 1,000 route miles during the quarter. Only about 20% of our available network is lit today, and as we’ve mentioned before, we own dark metro fiber in about 300 markets nationwide, which represents terrific capital and margin-efficient growth potential for enterprise, wireless backhaul and small cells.

We continue to believe the wireless carriers will eventually need to densify these non-NFL markets and Uniti is well positioned for that growth in the future. Slide 6 shows that the majority of our revenue is wholesale in nature, which comes with longer term contracts, lower churn, and less required overhead for execution. As a result, our business and underlying performance are less susceptible to macroeconomic conditions and we are diversified across numerous use cases for fiber and customer segments. As an example, even though wireless carriers are spending less this year than last as a group, the decline is offset by other buyers such as hyperscalers, Internet providers and fiber-to-the-home providers. We are also starting to see more use cases relating to artificial intelligence.

Turning to Slide 7, scale matters in fiber, especially with a wholesale heavy business model like ours. Having an own national network is a meaningful competitive advantage for Uniti and our ability to deploy dark fiber and wave services present Uniti with unique low-risk growth opportunity with minimal competition. Slide 8 illustrates our balanced approach to bookings between anchor and lease-up. Consolidated bookings were essentially in line during the third quarter when compared to the prior quarter. The interest in our network has never been higher as our sales funnel remains very strong and underscores the growing demand for fiber. As a result, wholesale bookings can appear lumpy given these deals are typically larger and fewer in quantity.

It is not uncommon for one wholesale deal to materially impact bookings in a single quarter from a timing perspective. Turning to Slide 9. Our enterprise strategy is highly disciplined and regional in nature. As you can see from the map, we are only offering enterprise services in approximately 30 metros concentrated in the Southeast, which has very favorable demographics. In fact, the Southeast has accounted for more than two-thirds of all job growth across the U.S. since early 2020, almost doubling its share prior to the pandemic and is home to 10 of the 15 fastest-growing American large cities. Our local brand is very strong in this region, helping to contribute industry-leading enterprise churn of around 0.7%. Although enterprise sales represent about 5% of our total revenue today and will likely always represent a minority percentage, it remains a critical element of our lease-up strategy.

With no significant debt maturities until 2027, minimal floating rate debt, and given our organic growth runway and continued steady performance, which is backed by nearly $7 billion of revenue under contract with an average remaining term of seven years, Uniti is positioned to patiently execute during these uncertain economic and credit market conditions. With that, I’ll now turn the call over to Paul.

Paul Bullington: Thank you, Kenny, and good morning, everyone. I’d like to begin by reviewing our third quarter performance, followed by an overview of our current 2023 outlook. Overall results at both Uniti Fiber and Uniti Leasing during the quarter were in line to higher than expected with consolidated recurring revenue growth of 3% during the quarter when compared to the prior year. As a result, our 2023 outlook for consolidated revenue, adjusted EBITDA and AFFO remains unchanged as we expect to end the year within the previous guidance ranges provided. Please turn to Slide 10 and I’ll start with comments on our third quarter. We reported consolidated revenues of $291 million, consolidated adjusted EBITDA of $233 million, AFFO attributed to common shareholders of $95 million and AFFO per diluted common share of $0.35.

Net loss attributable to common shareholders for the quarter was approximately $81 million or $0.34 per diluted share and includes a $153 million goodwill impairment charge related to our Uniti Fiber segment that was driven by an increase in the macro interest rate environment. At Uniti Leasing, we reported segment revenues of $215 million and adjusted EBITDA of $209 million, representing growth of approximately 3% for each in the third quarter of 2023 compared to the prior year period. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to Slide 11. Our growth capital investment program continues to provide positive results for Uniti. Over the past nine years, our tenant has invested over $1 billion of tenant capital improvements in our network.

Uniti continues to invest its own capital and long-term value-accretive fiber largely focused on highly valuable last-mile fiber. Collectively, these investments have resulted in 25,000 route miles of newly constructed fiber and 24% of the legacy copper network being overbuilt with fiber. Based on the investments made to date, and our expectation that Windstream will utilize most, if not all, of the GCI program, we expect that nearly half of the legacy copper network will be overbuilt with fiber by 2030. During the third quarter, Uniti Leasing deployed approximately $86 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added about 1,000 route miles of fiber to Uniti’s own network across several different markets.

As of September 30, Uniti has invested approximately $780 million of capital to date under the GCI program with Windstream, adding around 19,200 route miles and 1.1 million strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the one-year anniversary of Uniti making such investment. They are subject to a 0.5% annual escalator and result in nearly 100% margin. The investments we have made to date will ultimately generate approximately $63 million of annualized cash rent and increase the overall value of our network. Year-to-date, we’ve turned over 659 lit backhaul, dark fiber and small cell sites for our wireless carriers across our Southeast footprint at Uniti Fiber. These installs add annualized revenues of approximately $6.5 million.

We currently have around 775 lit backhaul, dark fiber and small cell sites remaining in our backlog that we expect to deploy over the next few years. This wireless backlog represents an incremental $7 million of annualized revenues. At Uniti Fiber, we reported revenues of $76 million and adjusted EBITDA of $30 million during the third quarter, achieving margins of 39%. Revenue was in line with our expectations while adjusted EBITDA was slightly better than expected due to the mix of non-recurring higher margin ETL fees versus lower margin equipment sales. As a reminder, the exact timing of our nonrecurring revenue and related margins can be difficult to predict and thus can fluctuate from quarter-to-quarter. Uniti Fiber net success-based CapEx was $30 million in the third quarter, which was about $5 million higher than expected due to the acceleration of certain projects.

We also incurred about $2 million of maintenance CapEx during the quarter. Please turn to Slide 12 and I’ll now cover our updated 2023 guidance. We are revising our guidance primarily for business unit level revisions and the impact of transaction-related and other costs incurred to date. Our outlook excludes future acquisitions, capital market transactions and future transaction-related and other costs, not specifically mentioned herein. Actual results could differ materially from these forward-looking statements. Our current full-year outlook for 2023 includes the following for each segment. Beginning with Uniti Leasing, we expect revenues and adjusted EBITDA to be $853 million and $828 million respectively at the midpoint, representing adjusted EBITDA margins of approximately 97%.

The $3 million increase in our outlook reflects the acceleration of GCI investments during the quarter. We now expect to deploy $285 million of success-based CapEx at the midpoint of our guidance, of which $250 million relates to Windstream GCI investments. In October, we funded $16.5 million of GCI, which brought us to the maximum annual amount we would be responsible to fund this year. Turning to Slide 13. We expect Uniti Fiber to contribute $311 million of revenues and adjusted EBITDA of $120 million at the midpoint for full-year 2023. We now expect core recurring revenue growth of 4% from the prior year. This is slightly lower than our previous outlook due to delayed buying decisions from certain wholesale and enterprise customers that we highlighted as a possibility last quarter.

However, our sales funnel remains extremely strong and we are not seeing any significant outright cancellations of orders from our customers. We still expect ETL fees in 2023 to be approximately $15 million compared to $24 million in 2022. Net success-based CapEx for Uniti Fiber this year is expected to be $120 million at the midpoint of our guidance, reflecting the acceleration of deployed capital during the third quarter that I mentioned earlier. Turning to Slide 14. For 2023, we continue to expect full-year AFFO to range between a $1.38 and $1.45 per diluted common share with a midpoint of $1.41 per diluted share. As a reminder, AFFO in 2023 will be impacted by incremental interest and diluted shares relating to our convertible and secured note refinancings over the past year.

On a consolidated basis, we still expect revenues to be $1.2 billion and adjusted EBITDA to be $925 million at the midpoint. Our guidance contemplates consolidated interest expense for the full-year of approximately $514 million, which includes a $10 million write-off of deferred financing costs and $32 million of early repayment premium in the first quarter of this year related to the redemption of our [7.875%] senior secured notes due 2025. Corporate SG&A, excluding amounts allocated to our business segments, is expected to be approximately $30 million, including $7 million of stock-based compensation expense. Our weighted average diluted common shares outstanding for full-year 2023 is expected to be around 290 million shares, reflecting the full-year impact of the incremental diluted shares relating to the accounting of the convertible notes issued late last year using the if-converted method.

As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. Finally, our Board declared a dividend yesterday of $0.15 per share to stockholders of record on December 15, payable January 4. With that, I’ll now turn the call back over to Kenny.

Kenny Gunderman: Thanks, Paul. As I mentioned earlier, we continue to focused on driving high-margin recurring revenue while targeting disciplined mid single-digit topline growth. Slide 15 demonstrates the investments we are making in our fiber network will lead to a more sizable and valuable fiber business over the next several years. We also expect the end of 2025 to be the inflection point where we become free cash flow positive after dividends and we expect to generate cumulative free cash flow of over $1 billion during the five-year period ending in 2030, if we maintain our current dividend and approximate level of annual capital investment. This trajectory, along with our predictable organic growth outlook would lead to a substantial deleveraging, resulting in net leverage between 4x to 5x and roughly doubling the size of our fiber business by 2030.

Before opening the call to questions, I’d like to briefly comment on some recent trends in the industry that are directly impacting Uniti. First, asset-backed securitizations, also known as ABS financings, have become more prevalent in the fiber space after many years of application in both the tower and data center spaces. This trend not only confirms that fiber is analogous to towers and data centers as being stable, mission critical communications infrastructure, but just as importantly provides a new attractive form of financing. To that end, Uniti has had substantial conversations with several parties regarding ABS, including various rating agencies and our advisors, and as a result of these conversations, we believe ABS is a viable, attractive financing source for us.

Secondly, there have been a number of recent M&A transactions or investments validating attractive fiber-to-the-home and commercial fiber valuations. These investments have come from strategic buyers and public and private capital sources, indicating the breadth of interest in these assets. As an asset rich company, with one of the largest fiber portfolios in the country, Uniti is uniquely positioned to benefit from both of these trends. As a reminder, over the past five years, Uniti has sold or monetized up to a $1 billion of assets at premium multiples. Our dashboard of opportunities today inclusive of ABS and asset sales far exceeds $1 billion, and we expect to explore these alternatives and M&A in coming quarters. With that, operator, we’re now ready to take questions.

Operator: [Operator Instructions] Our first question or comment comes from the line of Frank Louthan from Raymond James. Mr. Louthan, your line is now open.

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Q&A Session

Frank Louthan: Thank you. Kenny, can you just follow-up on that last comment? Looking at ABS or asset sales, how are you thinking about that from a mix? Is this just more of a pure refinancing opportunity that you look at – you’re looking at going forward? Or are there dark fiber sales or others or maybe kind of, you said greater than 1 billion? Give us an idea of kind of what the different buckets are of opportunity you have there? Thanks.

Kenny Gunderman: Sure, Frank. I think from an ABS perspective, the opportunity there in and of itself is probably well north of 1 billion. If we choose to go down that path, I think on the asset sales and opportunities there, I’d say that’s also probably in and of itself, well north of 1 billion. And with respect to how we look at it from a use of proceeds perspective, I think it certainly could be used for refinancing opportunities could also just be part of our normal course, right. I mean, part of the reason we mentioned that the fact that we’ve done close to 1 billion, up to 1 billion over the past four or five years is, is sort of what we do. And we’ve got a big portfolio of real estate, historically towers, ground leases, certainly fiber and we’ve used the market appetite for digital infrastructure to realize value for our shareholders along the way, whether it be through selling business segments like towers and ground leases, looking to transition lit portfolios into dark portfolios like we did with the Everstream transition, selling sizable higher use especially with out of territory dark fiber that we’re not currently lighting, monetizing joint ventures, monetizing sale leasebacks or portions of sale leasebacks.

So when you aggregate these different things, we just consistently have that portfolio of opportunities and we felt it worth mentioning just given that there is a substantial amount of capital on the sidelines, especially equity capital, looking to be put to work within digital infrastructure. And we’re in the thick of those conversations. So I would think about it both from the standpoint of refinancing opportunities and just general realization of intrinsic value for our shareholders.

Frank Louthan: Okay. And just to follow-up, I mean the pool of capital chasing digital infrastructure has been around for a while. Is there anything in particular that’s changed a new set of demand or have you seen some movement on multiples that are more interesting to you? What’s kind of changed that you’re highlighting this now?

Kenny Gunderman: Yes. I’d say two things, Frank for us. I mean, one, I mean, so – yes, there’s always the macro backdrop and then there’s Uniti specific. As we talked about a quarter or so ago, we were very focused on refinancing the balance sheet and pushing out maturities and prioritizing that over M&A and now that’s behind us – largely behind us, we’re more focused now on M&A, so we’ve just been more focused on these opportunities over the past several quarters. The macro backdrop is also I think changing. We’ve consistently talked about the debt markets as being an impediment when there’s a lot of volatility in the debt markets in particular. And although interest rates are still elevated, I do think there’s a bit more stability because there’s an increasing view that we’re going to be higher for longer.

That’s the phrase these days, and so some of that volatility – and certainly the volatility is still there, but I think there’s a view about where interest rates are leveling out for the next 12, 24 months, if you will. And so that gives both buyers and sellers a better view of what their cost capital’s going to be, right? And so I think that helps lubricate opportunity and activity. And if you look at the past – this quarter, there’s been several deals in the fiber-to-the-home and commercial fiber space. I mean, consolidated [got their take] private done at an attractive near double-digit multiple, horizon, another combination ILEC, CLEC is being sold for a 20x multiple. Cable South, one of our large sale leaseback customers is bringing in a substantial equity investment and all of these are deals that are either done by strategics or private or quasi-public capital sources and all that very attractive multiples.

And in some cases, no external debt is being used to help finance the deals. So it demonstrates creativity on use of capital being put to work, a minimal amount of new debt being used, but also very attractive multiples that are validating the valuations in this collective space that Uniti plays at.

Frank Louthan: All right. Great. Thanks, Kenny. It’s really helpful.

Kenny Gunderman: Thanks, Frank.

Operator: Thank you. Our next question or comment comes from the line of Greg Williams from TD Cowen. Mr. Williams, your line is now open.

Gregory Williams: Kenny, I want to go back to the ABS debt comments as well. Is this more on commercial fiber, or would you be carving out the fiber-to-the-home Windstream fiber on the ladder? I mean, how does that work? You own the A in the ABS, so to speak, with the underlying fiber-to-the-home, but Windstream owns customer receivables. I’m curious to see the complication there and how that could work out. Second question is just on AI. You mentioned it both on your scripted remarks and in the [presser] and trying to understand the opportunity for Uniti. Is this really waves and dark fiber tying to the new training data centers at this point and maybe move eventually to inference and interconnect over time? And what is the growth opportunity there? Is this more confidence in the mid single-digit growth for fiber, or does this possibly move the needle higher single-digit growth? Thanks.

Paul Bullington: Greg – hey, this is Paul. I’ll take the first question and then turn it back to Kenny to answer your second question there on AI. With regard to ABS, most of the work that we’ve done is really concentrated on our non-Windstream assets. In particular, our Uniti Fiber assets, we think lend themselves very well to an ABS transaction and would be well received by that market, just given the density of those markets, the stability of that cash flow, the diversity of the customers, and the longer term contracts that we have with those customers and that. Most of the work we’ve done has been around those assets as opposed to the Windstream assets. The Windstream assets, I think are, we do own those assets like you said, but I think it’s more challenging with regard to an ABS financing just given the separation of the operations there and the concentration of our revenues into just the master leases that we have with Windstream.

So we think it’s probably more likely that we would do something on the non-Windstream side of the house with regard to ABS in the near-term.

Kenny Gunderman: Hey, Greg. On your AI question, well, first of all, we’re looking at it both from a internal perspective and external, what it means for our customers. For us internally, we are doing work on, how we can use it to make our work processes more efficient, more cost efficient, more capital efficient, more human capital efficient. And I think we’ll have more to say on that in the coming quarters, but I think that’s something that all companies probably are looking at, we certainly are. And think that there is some opportunities there to use it. With respect to our customers, yes, I think the demand – broadband demand being generated by AI is tremendous, and it’s going to grow exponentially over time. And as per usual, when that future growth is real and relatively near-term, our customers need to start buying network capacity to get ready for it.

They’ve got to stay ahead of the curve. And we’re seeing that not so much on mobile broadband. The wireless carriers have been down this year, so I haven’t really seen it that much there. Although we think next year is going to be different. But really when it comes to the hyperscalers in particular, we’ve just seen a lot of activity there, tremendous activity. And to your question, yes, I think it manifests itself not only in waves, but dark fiber and even conduit sales and building new network, connecting unique data centers, connecting nodes that maybe otherwise connected or not. And so for us to build new fiber, where we’re effectively getting paid by our customer to build it, and they take a portion of the capacity and we leave the rest of it for ourselves for lease-up, those are really attractive deals for us and for our customers.