Q1 2022 Uniti Group Inc Earnings Call

May 5, 2022

[music].

Okay.

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 at www Dot <unk> Dot com beginning may five 2022 and will remain available for 14 days at this time all participants are in a listen.

Only mode participants on this call will have the opportunity to ask questions. Following the company's prepared comments the.

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 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 reference.

Two these 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. Gunderman.

Thank you and good morning.

Starting on slide three 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, we announced today, we are raising our full year outlook, which Paul will cover shortly.

Consolidated new sales bookings during the quarter were again to 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 <unk> growth.

Fiber has never been more valuable than 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.

<unk> is uniquely positioned to benefit from these trends.

Turning to slide four.

<unk> continues to track well on these shared infrastructure excellent 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.

You already acquired or builds new fiber largely for our wireless customers with attractive long term anchor cash flow yield in the mid to high single digits.

We then successfully adding additional tenants very high margins and minimal capex.

Resulting in a cumulative cash flow yield today of approximately 20% and almost three fold increase from the anchor yields.

Slide five illustrates an important part of our healthy mix.

We continue to show that the majority of new bookings or lease up in nature and the business mix results in predictable cash flow with 2% monthly churn and average remaining contract term of almost nine years.

Our continued intentional focus of balancing wholesale non wholesale at anchor lease up opportunities as resulted in outsized margin enhancement and <unk> growth.

In a business that is relatively immune to swings in the economy.

Turning to slide six 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, hyperscale or international carriers, Msos and large enterprises to connect their disparate markets Datacenters and pumps.

Today dark fiber alone in North America is an approximately $1 $5 billion annual market opportunity is expected to grow about 10% annually over the next several years, reaching approximately $4 billion by 2030 with.

With long haul fiber contributing to the majority of these revenues.

The continued broadband explosion fueled by <unk> metro fiber small cells fiber to the tower fiber to the home and even fixed wireless and satellite broadband I'll 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 as a meaningful barrier to entry for competitors to unity, especially given that it would take billions of dollars in several years to build a new network.

We estimate that there are only five truly old national networks, and two independent fiber providers with national networks in the U S today with unity 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 129000 route mile fiber network through proprietary acquisitions at attractive economics.

Including our acquisition of 30 national fiber routes from Illumina in 2018, and the fiber rights, we acquired from Windstream as part of our settlement in 2020.

We continue to grow that network and it is built over 14000 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 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 three six terabits of bandwidth to a large national residential provider our first customer on this wave channel system.

This opportunity represents approximately $1 million of MRI with very high margins, but just as important the way product brings substantially more lease up potential on these routes with little to no additional investment.

We will 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 unity fiber.

As we expand our national network into new regions, the economics of adding lit local services enterprise lease up in particular become more attractive.

As I mentioned before we're only offering lit services and approximately 20 metro markets today.

However, we own and have access to metro fiber and 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 of our traditional southeast footprint to accelerate growth in these fallow metro markets are.

Our level of enterprise bookings remained 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.

Thank you Kenny and good morning, everyone.

The communications infrastructure sector continues to undergo a robust 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 <unk>.

Please turn to slide seven and I'll start with comments on our first quarter.

We reported consolidated revenues of $278 million consolidated adjusted EBITDA of $225 million <unk>.

<unk> attributed to common shares of $112 million and <unk> <unk> per diluted common share of <unk> 43.

Net income attributable to common shares for the quarter was approximately $52 million or 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 eight.

Our growth capital investment program continues to perform well and provide positive results for unity.

Over the past six years, our tenant has invested approximately $1 billion of tenant capital improvements in our network.

The entity continues to invest its own capital and long term value accretive fiber largely focused on highly valuable last mile fiber, including fiber and commercial parks and fiber to the home.

Collectively these investments have resulted in 14400 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 towards growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program.

These GCI investments added around 500 route miles of fiber to entities owned network across several different markets.

As of March 31 community has invested over $350 million of capital to date under the GCI program with Windstream, adding around 9500 route miles and 354000 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 units, making such investments they are subject to a 5% annual escalator and result in nearly 100% margin.

The investments we have made to date 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.

These installed at annualized revenues of approximately $1 $4 million. We currently have around 1700 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 based 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 nine 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 to date 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 $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 it 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 two tier three markets, providing windstream was the substantial growth opportunity.

These over time.

Turning to slide 10, given.

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 <unk> stream transaction that occurred in May of 2021, the year over year revenue and adjusted EBITDA growth of 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 demonstrates our success in continuing to manage our cost structure and improve margins net.

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 <unk> 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 $65 million and we're not extended as a part of our amended credit agreement dated December 2020, the aggregate size of our current senior revolving credit facility is $500 million and will mature on December 10th.

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.

On May 3rd our board declared a dividend of <unk> 15 per share to stockholders of record on June 17th payable July one.

With that I'll now turn the call back over to Kenny.

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 discounts being applied to unit 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 and approximately 10 times cash flow as a starting point.

The range of values for our fiber business as supported by numerous years of private market valuations applied to other fiber businesses.

And we believe unity is executing as a best in class operator, commanding a premium value.

The range of values for our Western business are supported by recent third party appraisals. In addition to market based comps.

We've also been very transparent about our efforts to unlock business account by creating options to separate our assets and the value and tax efficient manner.

Last quarter for instance, we confirmed our high confidence in the Executability of the 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 and 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 patients. 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 tailwind.

As well as a strong balance sheet and liquidity.

With that operator, we're now ready to take questions.

Ladies and gentlemen, if you have any questions at this time. Please press Star then one on you touched on telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

First question comes from the line of Greg Williams from Cowen Your question. Please.

Great. Thanks for taking my questions.

First one is just on the M&A environment. You mentioned you are having productive conversations with various parties can you just talk about where multiples are public and private given.

Given the rising rates we've seen.

Second question just on bookings again, you've got another strong quarter of 800000 of MLR.

It seems like you're just the new normal and help us frame the mix of wholesale and enterprise.

Next slide is really helpful.

With the bar charts is that the right mix to see like 500000 wholesale 300000 enterprise and how should we think about the enterprise environment coming out of Covid, but then of course facing this challenging macro environment.

Greg all good questions, writing them down to make sure we hit them.

Multiples.

We haven't seen any multiple contraction.

<unk> that.

<unk>.

Environment is such that.

We think buyers are being more discerning about asset quality.

So good.

Good assets with owned networks and performing high performing businesses are still commanding premium multiples.

And we haven't seen any any any.

Any issues there.

But I think more and more of the funds.

Two or three years ago, where new funds to the space, they're now more knowledgeable of the space.

Smart or on their diligence and so I think they're being smarter about about placing placing premium multiples on premium assets.

As that relates to unity 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 our buying assets at really below intrinsic value prices.

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 debt.

With respect to bookings I will make a few comments then ask Paul to comment too, but yes, I do think this is probably the new norm now.

Seen four quarters of this type of activity and frankly don't see that changing just based upon the funnel and based upon the level of activity.

I think it's not an accident.

Sure.

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 in terms of new bookings and so.

As we always said the sales cycle on those types of deals is kind of six to nine months 12 months.

I think we're sort of at 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.

We think that mix is right.

Yes.

<unk>.

We know, it's a challenging enterprise environment broadly speaking, especially given 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.

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 to be very strong.

Paul.

Yes, I would just echo those comments, Kenny I think that the.

This new normal of the level of bookings that that that.

You see that we've been producing as a very intentional effort on both the enterprise side and the leasing wholesale side, where we build the teams around the fiber network that we have particularly around the.

The Windstream settlement fibers that we.

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 a leadership up to take advantage of that opportunity.

And two.

Have a.

Consistent set of enterprise products across all of our networks.

Our enterprise networks and so I think this is the new normal that Youll continue to see going forward in the mix on enterprise I think it is.

Probably steadier.

It's made up of a lot of smaller orders the mix on the wholesale can can be up and down a little bit because those tend to be larger larger orders that 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.

Great that's super helpful. Thank you.

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

Great. Thank you so walk us through where you are getting some of the traction some of the types of customers and verticals and unity fiber and are you seeing any opportunity either on the wholesale side are helping with greenfield builds with some of the private overbuild or is that a better running fiber today. Thanks.

Hey, Frank I'll start on that and Paul you can jump in but we are seeing some traction Frank.

With the over builders and some of the upstart who are getting the broadband stimulus money.

And.

We sort of foreshadowed this but we've kind of been conservative about it.

Still don't want to put numbers around it but our network tends to reach out into the Nether lands.

In terms of.

Tier two three ish type markets and so that's where a lot of this broadband stimulus is being deployed right underserved markets.

And so that last mile build as new fiber, but in order to connect those markets back to the core you need metro and broad.

Long haul transport and support and that's where the opportunity is for us and so we're getting.

What we call new logos were getting new calls from 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 from pockets of providers that we haven't seen for some time, including some of the regional.

Our legs with better balance sheets, and better liquidity or building out their networks we've seen.

The Hyperscale is really demanding substantial amounts of fiber connecting data centers in connecting markets.

And the wireless carriers very actively looking at 10 gig upgrades. So we're very very focused on that end.

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 is there is no shortage of demand in our industry. It's really a question of taking on.

Profitable demand and Thats, our focus so thus the focus on the right mix of bookings between the wholesale and enterprise and anchor and lease up but.

No shortage of demand from really any of those pockets.

Alright, 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 to the builds.

Sure Frank.

Yeah.

Our team has been Ben.

Sure.

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.

Standard blocking and tackling and staying ahead of.

Of that demand.

Deep supplier relationships diversified supplier relationships.

Staying ahead of the curve, making sure we've got orders in place too 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.

Forward orders for materials equipment given the.

Elongated 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.

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.

Alright, great. Thank you.

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

Hi, This is Alexis on for Simon can you hear me okay.

Yes, we can.

Okay could.

Could you talk a little bit of that product.

Perfect.

One <unk>.

<unk> for like a year over year quarter over quarter perspective.

And when do you think.

Mid single digit correctly, you talked about the digital dividend.

Okay.

Now let's.

Paul.

Following the quarter.

Yes electric.

Take a stab at that.

Trends sort of sort of year over year, when you look at our numbers.

Year over year, I mean, we're experiencing really solid.

Really solid growth.

Sure.

5% to 6%.

For the leasing business.

We talked about 6% to 8%.

Growth in revenue and EBITDA, respectively.

Year over year as well in our in our comments and remarks to get there, though you've got to remember.

You've got to adjust for the upper stream 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 we've already sort of alluded to.

Solid bookings leading to solid revenue growth.

And that revenue growth is coming from all sectors really.

Pretty evenly spread across.

Wholesale and non wholesale.

And then from a from a cost standpoint, we've done I think a really.

Solid job.

<unk>.

Genuine to get more efficient from a cost standpoint, and part of that is our is our intentional strategy of doing more and more lease up business in that lease up business is a higher margin business.

Business for us going forward. So I think we expect to continue to see.

That level of growth and improving margins as we go forward into the future.

Thank you was there anything on the dividend outlook.

Outlook for that.

The outlook for the dividend cut.

Currently.

We are still restrict that.

Dividend through the 90%.

Of REIT taxable income the statutory minimum for a REIT and we are restricted to that by our old dogs come a daddy.

Come on all pumps.

Frank I think you may want to go back on mute.

Yes.

Sorry about that so from a dividend standpoint, where our hands are a bit tied by that.

<unk>.

Reversion covenant that we got from our from our debt.

Debt covenants, but as you can see from the leverage that we reported leverage ratio we reported.

Edging closer and closer to that 575 times on a trailing 12 month basis.

Leverage ratio that would allow us to to have that covenant that restrictive covenant removed from us going forward. So once we get there and get through that that covenant reversion level.

In the future then we will have a little bit more flexibility with regard to our dividend going forward, but that remains a board decision. It's something our board is going to have to look at with regard to our other capital.

Allocation prior priorities.

And we will make that decision going forward.

When <unk> got that ability to do so.

Okay, great. Thank you.

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

Hey, guys. Thanks for taking the questions.

I guess the first question Kenny.

Would be in the current rate environment, where the fed we're expecting somewhere depending on who you are three to five 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 your thinking about that 7% initial.

Initial build yield because I imagine the customers that you are asking to pay that 7% if that 7% becomes an 8% or 9%.

Are going to maybe bucket 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.

Thank you ask for day, one versus the Mark to market of your weighted average cost of capital.

Sure.

Paul.

I think I heard you say in passing that the fiber business this quarter was.

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.

In December there was a bid out there reportedly at 15 Bucks a share.

<unk> and other parties went back and forth about maybe whether that was right or wrong.

And I guess, Mike My question right now is that still out there.

Or did that just come and go now.

And we're back to being patient.

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 is multiple elements to that there is not just the rate environment, but there's also the.

The supply chain implications too.

Essentially higher cost that get reflected through capex or opex for us.

I think.

Definitely factored into our modeling.

We have not had any.

Need to change our focus on those starting yields with.

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 the overall model for us that we're looking at that includes our cost of capital and includes our thresholds expected returns I think 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 after that because we're not content to get a six or 7% or 8% yield what we really want is 10% plus getting up to 20%, which we.

So you're in are Slideshows, 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 with the return and the profitability comes from from lease up.

And so.

With that and the strength that we're seeing in our 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 including through this rate environment.

Paul you want to take the second one yes, I can take that question, David on Etfs and costs.

The <unk> revenue that we've been talking about for for several quarters is.

That's the early termination liability revenues associated with.

Contracts that that disc.

<unk> disconnect early.

The large majority of that activity is.

Connected to the sprint T mobile.

Consolidation in that activity to.

Consolidated that network and we've talked about that before in terms of its impact on our business going forward. So as that as that happens we will see those ETF revenues come in and the timing of those revenues is a little hard to predict.

Because it's dependent on the actual disconnect of of those circuits, but.

We've got those Etfs as a part of our plan going forward and so you see that activity was strong in the in.

In the first quarter in terms of overall cost I think it's.

Attributable to really any one area, specifically I think it's coming from abroad.

Our broad number of <unk>.

Expense categories across the business, both direct expense category as an operating expense categories. As we continue to become more efficient and drive more towards lease up types of.

Revenue, so we're seeing costs cost efficiency in things like third party off net cost as we as we drive more towards 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.

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 feel very good about that.

Alright, I'll, let that stand Kenny Thanks man.

Thank you.

This concludes the question and answer session of today's program I'd like to hand, the program back to Kenny Gunderman for any further remarks.

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.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Yes.

[music].

<unk> are in a listen only mode participants on this 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 will reference slides post.

It on the website and you are encouraged to reference.

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.

Thank you and good morning.

Starting on slide three 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, we announced today, we are raising our full year outlook, which Paul will cover shortly.

Consolidated new sales bookings during the quarter were again, a highlight representing a 58% increase over the first quarter of 2021 at 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 <unk> growth.

Fiber has never been more valuable than 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.

<unk> is uniquely positioned to benefit from these trends.

Turning to slide four.

Unity continues to track well on these shared infrastructure excellent 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.

You already acquired or builds new fiber largely for our wireless customers with attractive long term anchor cash flow yield in the mid to high single digits.

We 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 three fold increase from the anchor yields.

Slide five 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 2% monthly churn and average remaining contract term of almost nine years.

Our continued intentional focus of balancing wholesale non wholesale at anchor lease up opportunities has resulted in outsized margin enhancement and <unk> growth.

In a business that is relatively immune to swings in the economy.

Turning to slide six 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 that encourage that trend to continue.

High capacity long haul routes are needed by all of our customers, including wireless carriers hyper scaler international carriers, Msos and large enterprises to connect their disparate markets Datacenters and Pops.

Today dark fiber alone in North America is an approximately one $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.

With long haul fiber contributing to the majority of these revenues.

The continued broadband explosion fueled by five G metro fiber small cells fiber to the tower fiber to the home and even fixed wireless and satellite broadband I'll 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 as a meaningful barrier to entry for competitors to unity, especially given that it would take billions of dollars in 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 unity 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 129000 route mile fiber network through proprietary acquisitions at attractive economics.

Including our acquisition of 30 national fiber routes from looming 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 14000 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.

We're beginning to do that when we find appropriate anchor customers.

This opportunity represents approximately $1 million of MRI 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 will 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 let local services enterprise lease up in particular become more attractive.

As I mentioned before we're only offering lit services and approximately 20 metro markets today.

However, we own and have access to metro fiber and 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 can facilitate acquisitions outside our traditional southeast footprint to accelerate growth in these fallow metro markets are.

Our level of enterprise bookings remained 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.

Thank you Kenny and good morning, everyone.

The communications infrastructure sector continues to undergo a robust robust growth cycle, primarily driven by the trends Kenny mentioned earlier.

As a result, we are increasing the midpoint of our 2022 outlook for revenue adjusted EBITDA and <unk>.

Please turn to slide seven and I'll start with comments on our first quarter.

We reported consolidated revenues of $278 million consolidated adjusted EBITDA of $225 million <unk> attributed to common shares of $112 million and <unk> <unk> per diluted common share of <unk> 43.

Net income attributable to common shares for the quarter was approximately $52 million or 21 per diluted share.

Turning to slide eight.

Our growth capital investment program continues to perform well and provide positive results for unity.

Over the past six years, our tenant has invested approximately $1 billion of tenant capital improvements in our network.

The entity continues to invest its own capital and long term value accretive fiber largely focused on highly valuable last mile fiber, including fiber and commercial parks and fiber to the home.

Collectively these investments have resulted in $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 towards growth capital investment initiatives with almost all of the investments relating to the Windstream GCI program.

These GCI investments added around 500 route miles of fiber to entities own network across several different markets.

As of March 31 community has invested over $350 million of capital to date under the GCI program with Windstream, adding around 9500 route miles and 354000 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 unity, making such investments they are subject to a 5% annual escalator and result in nearly 100% margin.

The investments we've made to date 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.

These install that annualized revenues of approximately $1 $4 million. We currently have around 1700 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.

Prior year period.

Uniti fiber net success based 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 nine and I will now cover our updated 2022 guidance.

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 $797 million, respectively at the midpoint, representing adjusted EBITDA margins of approximately 97%.

We expected 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 two tier three markets, providing windstream was substantial growth.

These over time.

Turning to slide 10, given.

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 ever stream 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.

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 <unk> 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.

Turning now to our capital structure.

On April 24th certain lender commitments under our senior revolving credit facility matured. These commitments totaled $65 million and we're 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 10th.

2024.

Times based on net debt to last quarter annualized adjusted EBITDA on.

On May 3rd our board declared a dividend of <unk> 15 per share to stockholders of record on June 17th payable July one.

With that I'll now turn the call back over to Kenny.

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 discounts being applied to unity share price.

The range of values for our fiber business as supported by numerous years of private market valuations applied to other fiber businesses.

We believe unity is executing as a best in class operator, commanding a premium value.

The range of values for our Windstream business are supported by recent third party appraisals. In addition to market based comps.

We've also been very transparent about our efforts to unlock business account by creating options to separate our assets and the 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 and 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 patients. 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 tailwind.

As well as a strong balance sheet and liquidity.

With that operator, we're now ready to take questions.

Great. Thanks for taking my questions.

First one is just on the.

The M&A environment, you mentioned, Jerry 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 800000 of MRI.

It seems like you're just the new normal and help us frame the mix of wholesale and enterprise.

Next slide is really helpful.

The bar charts is that the right mix to see like 500000 wholesale 300000 enterprise and how should we think about the enterprise environment coming out of Covid, but then of course facing this challenging macro environment.

Greg all good questions, writing them down to make sure we hit them.

On multiples.

We haven't seen any multiple contraction.

<unk> that.

<unk>.

Environment is such that.

We think buyers are being more discerning about asset quality.

So good.

Good assets with owned networks and performing.

Performing high performing businesses are still commanding premium multiples.

And we haven't seen any any any.

Any issues there.

But I think more and more of the funds.

Two or three years ago, where new funds to the space, they're now more knowledgeable of the space.

Smart or on their diligence and so I think they are being smarter about about.

<unk>, placing premium multiples on premium assets.

So as that relates to unity 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 our buying assets at it really below intrinsic value prices.

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 debt.

With respect to bookings I'll make a few comments and then ask Paul to comment too, but yes, I do think this is probably the new norm.

Now.

Seen four quarters of this type of activity and frankly 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.

And thats been a real boost to our wholesale business in particular in terms of in terms of new bookings and so.

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 at a new norm.

We think that mix is right.

<unk>.

We know, it's a challenging enterprise environment broadly speaking, especially given 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.

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 to be very strong.

Paul.

Yes, I would just echo those comments, Kenny I think that.

This new normal of the level of bookings that debt that.

The Windstream settlement fibers that we.

We have 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 a leadership up to take advantage of that opportunity.

And two.

Have a.

Consistent set of enterprise products across all of our networks.

Our enterprise networks and so I think this is the new normal that Youll continue to see going forward in the mix on enterprise I think it is it's probably steadier.

Great that's super helpful. Thank you.

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

Great. Thank you so walk us through where you are getting some of the traction some of the types of customers and verticals and unity fiber I mean are you seeing any opportunity either on the wholesale side are helping with greenfield builds with some of the private overbuild or is that a better running fiber today. Thanks.

Hey, Frank I'll start on that and Paul you can jump in but we are seeing some traction Frank.

With the over builders and some of the upstart who are getting the broadband stimulus money.

And we.

We sort of foreshadowed this but we've kind of been conservative about it.

Still don't want to put numbers around it but our network tends to reach out into the Nether lands.

In terms of.

Tier two three ish type markets and so that's where a lot of this broadband stimulus is being deployed right underserved markets.

So that last mile billed as new fiber, but in order to connect those markets back to the core you need metro and broad.

Long haul transport and support and that's where the opportunity is for us and so we're getting.

What we call new logos were getting new calls from from an increasing number of those parties.

Is exciting for us and is sort of indicative of just the overall environment. I mean, we're seeing demand from from pockets of providers that we haven't seen for some time, including some of the regional.

Our legs with better balance sheets, and better liquidity or building out their networks we've seen.

The Hyperscale is.

Really <unk>.

<unk> substantial amounts of fiber connecting data centers in connecting markets.

And the wireless carriers.

Are you actively looking at 10 gig upgrades. So we're very very focused on that and <unk>.

Banker 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 is there is no shortage of demand in our industry. It's really a question of taking on.

Profitable demand and Thats, our focus so thus the focus on the right mix of bookings between the wholesale and enterprise an anchor lease up but.

No shortage of demand from really any of those pockets.

Alright, 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.

Sure Frank.

Yeah.

Our team has been Ben.

Really successful over the last year.

Managing a pretty difficult supply chain environment that continues to I think to get increasingly difficult.

And we've done that through.

Yeah.

Standard blocking and tackling and staying ahead of.

Of that demand.

Deep supplier relationships diversified supplier relationships.

To very actively manage that going forward. So we've been doing things pulling forward orders for materials.

Shipment given the ILG.

Elongated 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.

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.

Alright, great. Thank you.

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

Hi, this is <unk>.

Last quick one for Simon can you hear me okay.

Yes, we can.

Okay could.

Could you talk a little bit of that product.

Perfect.

Got it.

One can you frame like a year over year and quarter over quarter perspective.

And when do you think.

Mid single digit growth rate you talked about.

And then is it.

And are there any.

Okay.

Outlets.

Hello Rich.

I hope that in the quarter.

Yes electric.

I'll take a stab at that.

Trends sort of sort of year over year, when you look at our numbers.

Year over year, I mean, we're we're experiencing really solid.

Really solid growth.

5% to 6%.

For the leasing business and.

We've talked about 6% to 8%.

Growth in revenue and EBITDA, respectively.

Year over year as well in our in our comments and remarks to get there, though you've got to remember.

You've got to adjust for the <unk> stream 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 we've already sort of alluded to.

Solid bookings leading to solid revenue growth.

That revenue growth is coming from all sectors really.

It's pretty evenly spread across our wholesale and non wholesale.

Business and then from a from a cost standpoint, we've done I think a really solid job.

Continuing to get more efficient from a cost standpoint, and part of that is our is our intentional strategy of doing more and more lease up business in that lease up business is a higher margin.

For us going forward. So I think we expect to continue to see.

That level of growth and improving margins as we go forward into the future.

Thank you was there anything on the overall outlook.

<unk>.

The outlook for the dividend cut.

Currently.

<unk>.

We are still restrict Glen added.

Dividend to the 90%.

Of REIT taxable income the statutory minimum for a REIT and we are restricted to that by our old dogs come a daddy.

Come on all pumps.

Frank I think you may want to go back on mute.

Yes.

Sorry about that.

So from a dividend standpoint, where our hands are a bit tied by that.

That.

Reversion covenant that we got from our from our debt.

Our debt covenants, but as you can see from the leverage that we reported leverage ratio we reported.

Hedging closer and closer to that 575 times on a trailing 12 month basis.

Leverage ratio that would allow us to to have that covenant that restrictive covenant removed from us going forward. So once we get there and get through that that covenant reversion level.

And we'll make that decision going forward.

When <unk> got that ability to do so.

Okay, great. Thank you.

Thank you. Our next question comes from line of David Barden from Bank of America. Your question. Please.

Hey, guys. Thanks for taking the questions.

I guess the first question Kenny.

Would be in the current rate environment, where the fed we're expecting somewhere depending on who you are three to five 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 your thinking about that 7% initial.

Initial build yield because I imagine the customers that you are asking to pay that 7% if that 7% becomes an 8% or 9%.

Aren't going to maybe bucket 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.

That yield ask for day, one versus the mark to market of your weighted average cost of capital.

Sure.

Paul.

I think I heard you say in passing that the fiber business this quarter was.

It's 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.

In December there was a bid out there reportedly 15 bucks a share.

You and other parties to point back and forth about maybe whether that was right or wrong.

And I guess, Mike My question right now is that still out there.

Or did that just come and go now.

And we're back to being patient.

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 is multiple elements of that there's not just the rate environment, but there's also the.

The supply chain implications.

Essentially higher cost that get reflected through capex or opex for us.

I think that.

Definitely factored into our modeling.

We have not had any.

Need to change our focus on those starting yields with.

Customer conversations as you can imagine.

We're not sharing our models and talking about specific yields with customers. It's really just more.

Pricing conversation on a per site basis, and so it all kind of factors into the overall model for us that we're looking at that includes our cost of capital and includes our thresholds expected returns I think I think where the real.

Focus for US is not on those initial yields because we haven't seen that.

We really want is 10% plus getting up to 20%, which we show you in our Slideshows 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 with the return and the profitability comes from from <unk>.

Lisa.

And so.

With that and the strength that we're seeing in our 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 including through this rate environment.

Bobby you want to take the second one yes, I can take that question, David on Etfs and costs.

The <unk> revenue that we've been talking about for several quarters is.

That's the early termination liability revenues associated with.

Contracts that debt.

Disconnect early.

A large majority of that activity is.

Connected to the sprint T mobile.

Consolidation in that activity to.

Because it's dependent on the actual disconnect of of those circuits, but we've got those etfs as a part of our plan going forward and so you see that activity was strong in the.

In the first quarter in terms of overall cost I think it's.

Not attributable to really any one area, specifically I think it's coming from abroad.

Abroad, it number of <unk>.

Expense categories across the business, both direct expense category as an operating expense categories. As we continue to just become more efficient and drive more towards lease up types of.

Expense containment across the business.

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 feel very good about that.

Alright, I'll, let that stand Kenny Thanks man.

Thank you.

This concludes the question and answer session of today's program I'd like to hand, the program back to Kenny Gunderman for any further remarks.

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.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Q1 2022 Uniti Group Inc Earnings Call

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