Q3 2021 Uniti Group Inc Earnings Call
Welcome to the Uni groups third quarter 2021 conference call. My name is Stephanie and I will be your operator for today.
A webcast of this call will be available on the company's website www dot Uni.
Dot Com beginning November 4th 2021, and will remain available for 14 days at this time, all participants or in a listen only mode participants on this call will have the opportunity to ask questions. Following the company's prepared remarks.
The company would like to remind you that today's <unk> marks include forward looking statements and actual results could differ materially from those projected in the statement. The factors that could cause actual results to differ are discussed in the company's filings with the S. E C.
The companies remarks, this morning or reference slides posted on the website and you were encouraged to refer to those materials. During this call.
Discussions during the call will also include certain financial measures that we're not prepared in accordance with the generally accepted accounting principles Reconciliate Asian of those non-GAAP financial measures to most directly comparable GAAP financial measures can be found in the company's current report on form 8-K, David.
A day.
I would now like to turn the call over to Uni groups, Chief Executive Officer can eat Gunderman. Please go ahead Mr. Gunderman.
Thank you.
Morning, everyone.
Continue to perform exceptionally well.
Continue.
Communications.
Industry and strong demand for fiber infrastructure.
M as evidenced by the second consecutive quarter.
Approximately 1 million and M. R R.
[noise] bookings.
Turning to slide for Unity has the eighth largest fiber network in the country and we're the third largest independent operator.
[noise] portfolio small cells connected buildings macro towers and homes past continues to grow each quarter driven by the need for more investment and five G networks 10 gig upgrades ceram small silver milk deployments.
These investments provide the entity with a unique opportunity to expand our networks with anchor economics setting the foundation for attractive future Lisa further validating the shared infrastructure benefits of fiber.
There's evidence on slide five entity is demonstrating the economics of an attractive sure infrastructure model that continues to drive meaningful returns.
We believe that a healthy mix of anchor and Lisa bookings and installs represents the most effective way to drive optimal economics.
Acquires or bills.
[noise] fiber largely for our wireless customers with attractive longterm anchor casually.
Hi single digits.
Within successfully adding additional tennis with very high margins and minimal capex, resulting in a cumulative casual yield today are approximately 19%.
Almost three fold increase from the anchor meal and all within the past five years.
It's five six is further proof of the southeast business makes.
As I mentioned earlier, we had our second consecutive quarter of consolidated.
Bookings of approximately 1 million of them are are.
90 per cent increase from the third quarter of 2020.
The amount of new bookings itself. However is only part of the positive story.
Can also see that not only is their steady growth of both wholesale and non wholesale bookings.
But there's also a very healthy and gradually growing mix of new bookings that are least up in nature.
On a good balance of wholesale not wholesale and anchor at least up is intentional on our part and as a result of an outsize margin enhancement.
Growth.
And we expect to continue this focus.
Turning specifically the unity five ourselves bookings in the third quarter $4.8 million.
An increase of over 90%.
Of 2020 at our second consecutive quarter of bookings at this level.
In fact, we had our highest level of enterprise bookings ever for a quarter.
In terms of mix, 60% of ourselves bookings came from Lisa of our major world.
We continue to ramp up our lease up efforts within our southeast Marcus with approximately 65% of the lease up there are so over the past four quarters occurring in the second and third quarters Goodbye.
Turning to slide seven.
Leasing we continue to actively market over $3 million treadmills, Barbara is available to police the third parties.
That's one of the largest players and the national wholesale fiber market.
Our nonwireless carrier customer such as the same group of National Msos continued to be active as they expand their cloud services.
For example, recently announced a 20 year contract with a large international hyperscale cause her to provide high strand count fiber along a new dark fiber route that connects to data centers in Pittsburgh and Ashburn, Virginia demonstrated the robust demand, we're continuing to see for long Ralph's.
To be clear, although we report unity fiber immunity leasing separately.
Businesses are marketed to our customers as one consolidated fiber business.
An increasing number of customers and network solutions are a mix of unity leasing in unity fiber networks, and we fully expect and encouraged that trend to continue.
With that I will now turn the call over to Paul.
Thank you kidding.
Good morning, everyone.
We continue to execute well at both unity fiber annuity leasing as evidenced by our robust bookings activity and our progress and driving higher margin recurring revenue and lower than anticipated operational costs. As a result, we are increasing the midpoint of our full year 2021 outlook from our prior outlook for adjusted EBITDA.
And <unk> per diluted common share, which I will cover in more detail shortly.
We are maintaining the previous mid point of 2021 outlook for revenue there remains the possibility that some core non-recurring contractual revenue could slip into the first quarter of 2022.
Please turn to slide eight and I'll start with comments on our third quarter.
We reported consolidated revenues of $267 million consolidated adjusted EBITDA of $217 million SSO attributed to common shares of $110 million and <unk> for diluted common share of 43 cents.
Income attributable to common shares for the quarter was $43 million or 17 cents per diluted share.
At Unity leasing, we reported segment revenues of $199 million and adjusted EBITDA of $194 million of 9% and 7% respectively from the prior year.
Accordingly, unity leasing achieve an adjusted EBITDA margin of 97% for the quarter.
The year over year growth reflects the dark fiber argue contract we acquired from Windstream. The straight line rent recognition under the Windstream Mla's and GCI investments subsequent to our settlement agreement the impact of the ever stream transactions as well as annual lease escalators.
The slide nine.
Our growth capital investment program continues to yield positive results as a reminder, or tenant has invested approximately $1 billion of tenant capital improvements in our network over the past six years and that investment is expected to continue.
Unity has now begun investing its own capital in long term value accretive fiber largely focused on highly valuable last mile fiber, including fiber in commercial parks and fiber to the home.
Collectively these investments have resulted in over 10000 route miles of newly constructed.
And around 20% of the legacy copper network being overbuilt fiber.
Both of these numbers continue to gradually increase each quarter and we expect that they will increase materially over the coming years as we continue to invest in our networks.
During the third quarter unity leasing deployed approximately $62 million towards growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program. These.
These GCI investments added around 1300 route miles a valuable fiber to unities owned network across 13 different states.
As of September 30th Unity has invested $237 million of capital of the date under the GCI program with Windstream, adding around 6200 route miles 217000 strand miles of fiber to our network.
These investments will be added to the master leases at 8% initial yield at the one year anniversary of unity, making such investments.
They are subject to a 45% annual escalator and result in nearly 100% margin.
The investments we have made to date will ultimately generate approximately $19 million of annualized cash rent.
At unity fibre, we turned over 335 lit backhaul dark fiber in small cell sites for our wireless carriers across our southeast footprint during the third quarter.
These installed at annualized revenues of approximately $1.6 million.
We currently have around 1400 lit backhaul dark fiber in small cell sites remaining in our backlog that we expect to deploy within the next few years.
This wireless backlog represents an incremental $11 million of annualized revenues.
At Unity fiber, we reported revenues of $67 million during the quarter, while core recurring revenue was in line with our expectations core nonrecurring revenue was below expectations due to the timing of equipment sales and early termination fees ajar.
Adjusted EBITDA $28 million during the quarter was consistent with our expectations adjusted EBITDA margin for the quarter was 41% representing a 770 basis point improvement from the prior year due to lower operational costs and our continued emphasis on higher margin recurring revenue.
Judy Fibernet success based Capex was $31 million in the third quarter in line with our expectations. We also encourage $2 million of maintenance Capex are about 3% of revenues.
Please turn to slide 10, and I will now cover are updated guidance.
We're revising our prior guidance primarily for the impact of the recent issuance of our 6% unsecured notes and related redemption lower than expected operational costs and the impact of transaction related and other costs incurred the date.
Our current outlook excludes future acquisitions capital market transactions and future transaction related and other cough, not specifically mentioned here in.
Actual results could differ materially from these forward looking statements.
Our current full year outlook for 2021 includes the following for each segment.
Beginning with unity leasing we continue to expect revenues and adjusted EBITDA to be $784 million and $766 million, respectively at the midpoint, representing adjusted EBITDA margins of approximately 98%.
Revenue and adjusted EBITDA each include $26 million relating to the straight line rent associated with a windstream master leases and GCI investments.
Our outlook now reflects $230 million of net success based capex that unity leasing at the midpoint of our guidance of which $225 million relates to estimated windstream GCI investments most.
Most of these markets are similar to our own tier two tier three markets, providing windstream was substantial growth opportunities over time.
A slide 11 highlights non windstream revenues and adjusted EBITDA continue to grow at a healthy pace and are expected to be $55 million $42 million, respectively up 27% and 17% from 2020 levels. This.
This includes the assets and dark fiber argue contracts required for Windstream, where the revenue is diversified across multiple third parties.
In the dark fiber argue leases that are part of the ever strange transaction.
Turning to slide 12, we.
We still expect the entity fiber to contribute $305 million of revenue at the midpoint. However, we now expect adjusted EBITDA of $120 million for full year 2021, representing a margin of 39%. This year at the mid point of our guidance, which is a 360 basis point improvement from last year.
Light increase in industrial adjusted EBITDA compared to our prior outlook is primarily due to lower than expected operational costs as we pointed out on our earnings call last quarter unity outlook is impacted by the sale of our northeast operation as part of the ever stream transaction and the winding down of our non core construction business.
Adjusting for the impact of these two items revenue and adjusted EBITDA for 2021 at unity fiber on now expected to increase by 6% and 12% respectively from the prior year.
Net success based Capex for unity fiber. This year is still expected to be $125 million at the mid point of our guidance.
Turning to slide 13.
For 2021, we now expect full year ASF to range between $1.64 cents and one dollar and 68 cents per diluted common share with a mid point of $1.66 per diluted share due to lower than expected operational costs on consolidated basis, we expect revenues to be $1.1 billion.
Adjusted EBITDA to be $860 million at the midpoint.
Our guidance contemplates consolidated interest expense so the full year of approximately $398 billion, excluding any deferred financing costs write offs and premiums paid relating to early repayment of our debt ripped.
Reported interest expense in 2021 will include an additional $58 million relating to the right off of deferred financing costs and premiums paid on the early repayment of are 8.25% senior unsecured notes do 2023, 6% senior notes secure.
6% senior secured notes do 2023, and seven and 8% senior unsecured notes do 2024.
Corporate SG&A, excluding amounts allocated to our business segment is now expect it to be approximately $36 million, including $10 million of stock based compensation expense.
We continue to expect weighted average diluted common shares outstanding for full year 2021 to be around 263 million shares.
As a reminder guidance ranges for key components of our outlook are included in the appendix to our presentation.
Turning now to our capital structure.
Through the successful that refinancings, we have executed so far this year, we have significantly improved our financial flexibility lowered our borrowing costs substantially with over $25 million, an expected annual interest cost savings and extended our debt maturities by several years.
On October 13th we successfully closed on the issuance of $700 million of senior unsecured notes do January 2030.
These notes will bear interest at 6% or issue that par most of the proceeds from the offering will be used to redeem in full the outstanding seven and an 8% senior unsecured notes do 2024, plus any accrued and unpaid interest on December 15th 2021.
On October 14th 2021, the company use the remaining portion of the proceeds from the note issuance together with cash on hand to prepay. The next four settlement obligations payments that were do under the settlement agreement unity entered into with Windstream. Upon us emerges from bankruptcy, resulting in savings of approximately $5 million.
As of today, we have approximately $270 million of installment settlement payments remaining to be paid.
Going forward, we expect to be opportunistic and prepaying, the remaining settlement payments, while managing our balance sheet at the same time.
A quarter and we had approximately $450 million, a combined unrestricted cash and cash equivalents and undrawn revolver capacity or leverage ratios stood at five 706 times based on net debt to annualize adjusted EBITDA.
This morning are bored declared a dividend of 15 per share the stockholders of record on December 17th payable January 3rd.
I will now turn the call back over to Kenny.
Thanks, Paul.
Please turn to slide 14.
I'd like to take a moment and discuss our non windstream business in our continuing effort to highlight the value disconnected, we believe still exists.
Two columns of the table represent the last two years of performance of unity fiber plus are non windstream unity leasing business with the third column also including the sea like fiber at least payment we received from Windstream.
Our fiber platform, including unique fiber in unity leasing operate as one holistic business Ah represents the eighth largest fiber network in the country and one of the largest independent fiber operators.
Our strategy is unique in that we're targeting tier two and three markets off a full service fiber, where we have a competitive advantage a will develop brand and boots on the ground.
At a national level, However, we're like touch passive wholesale provider.
Shooting very well on this collective strategy as evidenced by 4% top line growth, 6% adjusted EBITDA growth.
Continued strong bookings industry, leading churn and service delivery animals.
90% of our business is wholesale with an average term remaining of nine years, making our cash flows stable and relatively immune to swings in the economy.
Which has been evidenced by a relatively unknown uninterrupted progress during the height of the Covid pandemic.
Are Lisa business, including enterprise sales and other additional tenants is growing at 10% plus a year with attractive incremental casual deals.
We're very selective about which markets to offer enterprise services and today, we are operating in only about 20 markets, we estimate our market share in less than 5% and most of our existing metro markets and flying material growth potential without adding any new markets.
Having said that we also dense fiber in approximately 275 additional metro markets around the country.
This late in fiber provide substantial capital efficient and margin friendly growth potential for many years to come.
Lastly, we're also building as much new fiber is anyone in the industry and growing to reach and density of our network every day.
We believe this combined business a sizeable enough and has the characteristics to be a standalone entity.
Trying to slide 15 I'd.
I'd like to comment briefly on M&A, especially given recent market rumors.
Since the Windstream settlement, we've consistently said our in our M&A efforts were focused on three categories bolt on acquisitions sale leaseback asset sales and large transformative transactions.
That M&A strategy has not changed is we continue to look at acquisitions to complement and grow our business and organically.
We realize that our investors want us to do more acquisitions and do them more quickly and we remain very active on that front.
However, we're also being very disciplined that our approach, which hopefully our investors have come to appreciate.
We're spending time with our board evaluating and refining analysis that would allow us to separate our assets in attacks in value efficient manner.
We'll also.
And will also help highlight the value disconnect that exists.
For example, we've been vocal about our ILEC network and lease in particular undervalued, especially given the mission critical nature of the network and the senior placement of beliefs.
Lastly, we have consistently said in the past few years that we have that we have a very strategic set of assets and that we are evaluating large transport of transactions.
There's a disconnect between how public investors seem to value our assets and fiber businesses in general versus how private funds or value them.
Are ongoing discussions continued to reinforce these things.
To be clear, we are focused on executing our strategy of growing our business organically and executing on bolt on M&A, but.
But we've proven to be smart buyers and sellers and are open minded to all pads that maximize shareholder value.
With that operator, we're now ready to take questions.
At this time, if you would like to ask you. A question. Please press Star then the number one on your telephone keypad at Star. One. Your first question comes from the line of Greg Williams with Cowan.
[laughter].
Great. Thanks for taking my questions Kenny if we're to believe the reports and the last few weeks.
A deal that maybe has an impasse in the past is really around did ask and you articulate devaluation case here on slight the team.
Some of the pushback on the valuation is perhaps the 2030 renewal and do you think about the Windstream Emily stream.
It does that.
Whether it remains at $700 million plus the escalators or does it get cut any MLA exhibit he discusses the renewal and it seems more formulaic so.
Can you just give us your latest thoughts on the 22 30 renewal and what's your calculus in your self valuation. Thanks.
Yeah, Thanks, Greg first of all the.
Going back to the original lease it was set at around 8% cap a little over 8% cap right and then we just renegotiated lease.
Holistically last year as you know and the rent was essentially reaffirmed.
With third party evaluation reports and so forth so.
And that was five years into the deal and really with not a lot of new fiber investment made in the network and that five or six year period.
So we feel good about the asset holding it's value during that period.
And when you look out 10 years from now.
There's going to be based on current plans at least a substantial amount of new investment in the network not just of investment to maintain its value, but investment to enhance the value through our <unk> program and otherwise so and look if you believe in the fiber to the home trend, which we certainly do and I think the industry.
Certainly is revealing that.
As we see earnings and we see progress from from from around the industry, including with our tenant.
We feel really good about the trajectory.
So we don't we don't see.
The value of our network declining and dropping off precipitously by any means in fact in fact, we believe it's going to enhance value and certainly oldest value.
But look it's there's no formulaic calculation the fair market value.
The the.
Reset in 10 years will be fair market value. So.
I think but I think the trends are looking positive.
For unity.
Okay. Thank you.
Your next question comes from Frank Laughing with Raymond James.
Great. Thank you and can you walk us do a couple of the lease protections you had in the MLA in particular do you still have the rights to buy certain elements of Windscreens networks allow you to operate the ILEC.
In the event that there wasn't a lease renewal in 2030, and then I've got a follow up.
Frank Frank are you are you referring to what happens in 2030, if there's if if there's not windstream chooses not to renew beliefs.
Yeah. Thank you had some some clauses in the master leaf that allows you to purchase an element that began in cases of nonrenewal.
Still in place with the new agreement or was it or has that changed it.
It hasn't changed Frank it's in sorry, a little foggy on it.
10 years is a long way away, but we do think about it and that didn't change from the original lease and it does there are protections and I think generally I am looking at up my General counsel, but I think generally if windstream chose not to renew the lease we would have the right to acquire the operations and then.
Operated ourselves or have someone else step in and operated so there's there's there's not a risk that those operations go away from the leaves.
Hey, Frank.
Yeah and here. So you Miss your investing some fiber you mentioned commercial parts in some fiber to the home is that fiber to the home outside of the Windstream territory or are you building for some some other providers are building some some of your own resident for broadband business.
No that's all.
Then the GCI program and four Windstream fiber to the home bills are.
Okay, Alright got it alright, thank you very much.
Sure.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from Simon Flannery with Morgan Stanley.
Great Good morning.
I Wonder if we could focus on the fiber business, just a little bit I haven't seen the queue, yet, but I think you mentioned that the the revenues, which are a little bit below our estimate was primarily due to lower non-recurring, but maybe you could just comment on what we're seeing in let backhaul enterprise and wholesale and erase and government, whereas the pressure there and.
The outlook on them as we think about 22 and some of the new signings to bookings you've had.
It's capital intensity going to be similar to 21 levels and the earliest thoughts on that thank you.
It all started pork and Jeff.
Like that but yeah. The core recurring business is doing great.
Fiber.
If you if you look at our disclosure, we've always bifurcated revenue fiber between core recurring in core nonrecurring.
We said, we have something like $50 million of core non-recurring this year that's.
That's the part that is below plan for this quarter. So thats equipment sales in detail revenue, which are just harder to predict from a timing perspective, but we've reiterated revenue guidance from the year and so for the year and so I think you can infer that we think we're going to make that up in the fourth quarter, just from a timing perspective, but the core business itself.
Is doing terrific and strong booking strong installs minimal church.
And very very good.
Service delivery.
Eric's all implied.
Really really good growth on the core core recurring business.
With respect to capital intensity, Yeah, I think we are not ready to give any any guidance for 2022, but I don't expect any changes.
Any material changes I think the general trajectory of.
Margin margin enhancement.
Capital intensity kind of simmering at existing levels, if not a little little below is kind of what we're still thinking.
Great and I guess, the Opex, what's a good surprise there can you give us any color on what was going on there because I think elsewhere people are just worried about inflationary pressures on costs, but it's not something that's also sustainable.
Yes, I think so.
It's a combination of really three things.
Simon one we've just been particularly cost conscious past couple of years.
Yeah, I think that's just a general good thing to do but to.
We've been pretty vocal about exiting low margin non-recurring businesses that are not part of our business. So just like one off construction projects for example.
Those businesses are pretty much.
Round down and they are no longer in the numbers and so you're seeing some benefit from that but then thirdly, we've really focused on Lisa and bringing on these higher.
Higher higher margin higher cash flow.
A business.
I'm showing you the component parts of that right that slide where we should show you. The anchor economics, and then the Lisa but that stuff starts to really impact margin. When you do it at scale and you're really seeing that so so ultimately going forward. Yeah. That's exactly what we expect to continue focusing on.
Thank you.
At this time there are no additional questions I would like to turn it back over to you Mr. Gunderman for your closing remarks.
Thank you. Thank you all for your interest annuity and we look forward to having our next conversation in a few months.
Thank you. This concludes today's conference call you may now disconnect.
[music].
[music].
[music].