Uniti Group Inc (Delaware) (UNIT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 CS&L earnings conference call. My name is Kaylee, and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Rob Clancy, the Company's Vice President of Investor Relations, for opening remarks. Please go ahead, Mr. Clancy.

Thank you, Kaylee. Before we start, I'd like to remind you that our discussions during this conference call will 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 our registration statements on Form S-11 and Form S-4 we recently filed with the SEC and in our reports on Forms 10-Q and 8-K.

Discussions during the call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measure can be found in our current report on Form 8-K dated today.

Participating in our call this morning are Kenny Gunderman, President and Chief Executive Officer, and Mark Wallace, Chief Financial Officer and Treasurer. I will now turn the call over to Kenny.

Thank you, Rob, and good morning. Let me welcome everyone to our inaugural conference call following our spinoff from Windstream. This morning, I will discuss our business strategy and pipeline efforts to date, and Mark will review our financial results for the second quarter.

For those who may not be familiar with CS&L, we are the first communications REIT that owns a network of fiber and copper distribution systems across the United States. As you may know, Windstream, our sole customer and former parent, received a private letter ruling from the IRS last year which for the first time deemed copper and fiber as real property. About 80% of our shares were spun out on April 24, 2015 to Windstream shareholders, and we have been a stand-alone public company for about four months.

Our strategy is to diversify our assets by owning mission-critical communications network assets, including additional fiber and copper, but also data centers, coaxial towers and other related assets. We also plan to diversify our customer base by leasing these mission-critical assets to credit-worthy customers over long periods of time.

Our network today encompasses 3.5 million strand miles of fiber and 235,000 route miles of copper. Although these assets are leased exclusively to Windstream, our network serves over 3 million carrier, enterprise and consumer customers.

We estimate that there are well over 2,000 communications, technology, utilities and other companies who own or are constructing mission-critical network assets, and all represent our target universe. These companies are both large and small and publicly and privately held.

Further, based upon various estimates of just the fiber and copper addressable markets alone, we believe we have less than 1% market share. This does not include the other asset classes I mentioned, nor does it include the billions of dollars of new assets being constructed each year. Needless to say, we believe our opportunity set is tremendous.

Let me talk for a few minutes about our transaction pipeline. Given that we are a first of our kind REIT, since our spinout, we have been focused on meeting with many of our target universe of companies, explaining our story and more importantly, explaining what we can do for them.

We have a unique strategic offering that includes tailoring our services to individuals, companies, businesses and capital needs. Specifically, we have the ability to acquire existing real assets, finance asset builds, partner on M&A and even acquire entire operating companies using our taxable REIT subsidiary.

Because of the strategic nature of our offering, our sales cycle is very analogous to an M&A sales cycle including the confidentiality and the time required. Having said that, I can tell you that since our spinoff, we have built a robust pipeline of over 100 opportunities with approximately 50% of those opportunities in fiber assets, 35% in a combination of fiber and copper and 15% in data centers and other assets. Approximately 40% of those opportunities are sale lease backs, 30% are partnering in M&A, and the remaining 30% represents either acquiring entire companies or capital programs.

Although we can't predict timing of announcing transactions, we're in subsequent discussions including with engaged advisors, doing due diligence and negotiating on a number of opportunities and are very encouraged by our momentum. It goes without saying that we have been and will continue to be diligent in pursuing opportunities and are focused on transactions that are accretive and provide meaningful diversification benefits.

In summary, we've received a very positive reception among our target universe, and we remain confident that we are well positioned to execute on our pipeline and our strategy of diversifying our Company. And now, I'd like to turn the call over to Mark.

Thanks, Kenny. Good morning everyone. Let me start with a couple of explanations. First, for reporting purposes, we are presenting our results in two business segments: our real estate leasing, our REIT segment and our Talk America, our consumer CLEC business.

Also, keep in mind that our second quarter only includes 68 calendar days post-spinoff from April 24 to quarter-end June 30. So all references to our second quarter only include that 68-day period.

For the quarter, we reported FFO and AFFO of $0.48 per diluted share. Net income attributable to common shares was $8 million or $0.05 per diluted share. Weighted average common shares outstanding during the period was 149.8 million shares.

Consolidated revenues were $128.7 million, with consolidated adjusted EBITDA of $122.2 million. Leasing revenues were $124.2 million including $3.2 million of straight-line rental income. Revenues from Talk America were $4.6 million with adjusted EBITDA of $800,000.

G&A expense was $3.2 million and included $300,000 of non-cash stock-based compensation expense. Reported G&A is exclusively related to our leasing segment, as all costs related to Talk America are included in our CLEC operating expense.

Interest expense was $48.8 million including the effect of the interest-rate swaps we executed after the spinoff that converted our floating-rate term loan B to a fixed rate of approximately 6.1%. Cash interest expense was $46.2 million for the period.

Turning to our balance sheet, at quarter end we had $154 million of unrestricted cash and cash equivalents and $500 million of undrawn borrowing capacity under our revolving credit facility. Our leverage ratio was 5.6 times based on debt-to-annualize adjusted EBITDA and 5.3 times based on net debt-to-annualized adjusted EBITDA.

Earlier this week, our Board of Directors declared a regular quarterly cash dividend of $0.60 per share payable October 15 to stockholders of record on September 30. This represents an annual dividend rate of $2.40 per share.

Turning to our guidance for 2015, we expect FFO per diluted common share for the period from our spin-off to year end to range between $1.71 to $1.73 and AFFO for the same period to range between $1.73 and $1.75 per diluted share. Our guidance does not include the impact of any acquisitions, capital market or other transaction activity.

And finally, components of our non-GAAP measures are included in our earnings release this morning, and we expect to file our 10-Q by the close of business today.

That concludes my prepared remarks, and I will now turn the call over to the operator for questions.

(Operator Instructions)

David Barden with BofA Merrill Lynch.

The questions are predictable, I guess. Kenny, can you, as you look at this pipeline, give us a sense as to whether we're weeks, months or quarters away from coming to some conclusion on at least the first couple deals?

Then, second, as you -- thank you for that sizing out of the pipeline. If we were looking at these different types of deals, fiber or data center or sale leaseback versus partnering, which are the deals that are nearest in the pipeline, easiest to do versus the ones that are further out?

The third question would be, just with respect to the capital structure implications, we've seen the bonds widen out, we've seen the stock go down which raises the cost of equity. Is there anything about the size of the deals and where the cap structure is that's limiting in terms of your conversations or what you're able to accomplish? Thanks.

Good morning, David. It's Kenny. I'm going to ask Mark to take your third question. I will take the first two.

In terms of whether we're weeks, months or quarters out, we're definitely not quarters out. I think that as I said in my prepared remarks, we are very encouraged by the pipeline, the progress, the M&A sales cycle reference is very real. So, the confidentiality of these discussions are very paramount in our minds.

And the timing is somewhat unpredictable. But, given that we've -- in the short period of time that we've been public, we've had opportunities that we've already passed on, and we're very engaged on actionable opportunities right now, including things that are generally prerequisites to announced transactions like signed NDAs, engaging advises, exchanging information, doing due diligence, negotiating terms.

All of those things lead us to believe that we're getting close to actionable, announceable opportunities. So, I can't say when, specifically. I don't think it's quarters out, but we feel very, very encouraged by the pipeline.

With respect to your question, David, about the types of deals that you might see sooner, I think, as I've mentioned before, and will certainly emphasize today, one of the things that's very appealing about our business is we have a multitude of ways that we can work with customers. And we have a multitude of assets that fit our model. As we press forward on the pipeline, I think you're going to continue to see a good diversity of assets, a good diversity of structures in the pipeline.

And, in terms of timing, sequencing -- it's hard to say because we feel good about many of those and it's across different asset classes and different structures. So, with that, I will turn it over to Mark to the third part of your question.

David, in terms of our capital structure, as you probably know, we still have -- we have access to over -- excess of over $100 million of cash on our balance sheet today to put to use. We have $500 million of capacity under our revolver which is priced at LIFOR plus 200 today. We can take our total debt up to 6.5 times under our existing debt agreement, so we have additional debt capacity.

I'd also say on the debt side, we also have alternative financing sources available to us. In certain transactions, that might be acquisition level, portfolio level, property level debt financing that is very attractive as well for some transactions in our pipeline. Lastly, on the equity side, I'd say that we certainly expect that our cost of capital across the entire stack is likely to improve over time as we execute on the opportunities in our pipeline.

If I could just have a quick follow-up on that. In terms of the terms and conditions around the deals, as we sit here and think about how to model out the rates of return you're getting on potential new deals versus the cost of capital that you have, the only reference point we have is the Windstream reference point, which is a good reference point, but at the same time, it feels like it was negotiated in a friends and family way and that maybe the opportunities for economic returns and commercially negotiated deals might be more attractive.

Is that a fair statement? Or is the market that you're operating in gravitating to the Windstream deal also as the benchmark transaction?

David, I think the first part of what you said is closer to accurate. It's hard to say definitively because we're looking at a lot of different structures, and many of those structures, types of transactions, are not directly analogous to what we did with Windstream.

But, I do think directionally, the first part of your comment is more accurate than the latter. We're looking at transactions that are cash flow accretive. And, we have a multitude of those in our pipeline.

Great. Thanks, guys.

Brett Feldman with Goldman Sachs.

Just a few questions. You made an interesting comment during your prepared remarks about looking to take over entire operations of businesses and putting it into your taxable REIT subsidiary. I was hoping, maybe, you could just expand on that a little bit.

Then, just a question about your straight-lining. I just want to be clear. At this point, are you straight-lining the Windstream lease based on the 15-year lease term? If so, where are you making decisions to potentially extend that through a larger capital commitment?

The answer on the straight-line question is yes, currently, we are calculating the straight-line lease amount based on the initial term of 15 years. Then, we would extend it whenever there is an event that, such as Windstream, asking for that optimal $250 million. And that is the event that it would be extended for five years and we would recalculate straight-line rent at that time. But right now, it is on the initial 15-year period.

Great.

Brett, on the first part of your question, as we've said all along, we absolutely would entertain acquiring entire companies and using our taxable REIT subsidiary, which as a REIT allows us to have up to 25% of our assets in non-REITable assets. Given our size as a public company out of the gate, that basket is quite sizable for us, and it's not being used at all today.

We look at that as a great tool to help further our strategy of diversification, whether it be warehousing operations for short period of time, so essentially acquiring a company and warehousing the operations and perhaps selling them later. Or developing a platform operating business within our overall structure that we use synergistically going forward to look at other acquisitions.

So, there are many other variations. But, those are two general ways we're looking at it, and we're very excited about the opportunities that presents for us.

So, just to summarize, it sounds like it would mostly be a tool or a strategy to expand around the asset side of the business? Is that the right way to think about it?

I think that's right. Our stated strategy is to remain asset heavy, operations light, and that will continue to be the case.

Is Talk America in your TRS right now, or is it actually included within the REIT?

It's in the TRS.

Okay. Thank you for taking the questions.

Barry McCarver with Stephens.

First off on the alternative financing sources, can you give us an idea of what you think your maximum funding level would be under some of those sources? Secondly, it sounds like there was no CapEx in the quarter related to Windstream given your straight-line lease comments. Has there been any decision on funding any in the third quarter or the fourth quarter of this year?

On your first question, in terms of the limit, we could do the alternative financing structures. It's probably about $450 million under our debt agreements. That would be the limit.

My guess would be at the rate depending on the nature of the assets would be at similar to what our secured -- what our term loan Bs would trade at on a yield basis or better. On those type -- again, it's asset dependent. I'm sorry, Barry, what was the second part of your question?

In regards to putting CapEx to the Windstream master lease agreement, the $50 million annually, any decision on potentially spending some CapEx in the third quarter or the fourth quarter of this year?

Right. We do have the $50 million commitment to provide that to Windstream as projects are completed. I don't have, in our guidance -- I haven't included anything -- any income related to that $50 million commitment solely because there's some variability around the timing, when that will actually be funded, given that it would likely be late in the year and likely to not have a material impact on the earnings this year.

All right. Lastly for housekeeping purposes, for the consumer CLEC revenue, do you have a pro forma -- 2Q over 1Q what the revenue decline looked like there?

2Q -- I don't have -- I do not have that in front of me. I'd say before, but what I can tell you is for the full year, the revenue on consumer CLEC is probably going to be between $60.5 million to $70.5 million for 2015 post-spin-off.

Great. That's very helpful. Thanks, guys.

Simon Flannery with Morgan Stanley.

Kenny, you started to touch on the criteria, financial criteria for the deals. Perhaps you could expand on that. How are you thinking -- when you say cash flow accretive, what exactly does that mean? Is that AFFO per-share? What rate return on investment are you looking for?

How, also, are you thinking about term escalator, some of these other things? And related to that, are we going to see 10 small deals or three large deals? What would your preference be in terms of how you position this? 100 deals is presumably -- goes beyond your financial capacity at the moment they all converted.

And then for Mark, we've obviously had a very big change in it the type investors who might be interested in the Company. How far through the flowback and that adjustment from a traditional RLEC investor to more of a REIT or infrastructure investor do you think we are?

I know they're just coming out, but any sense of have you got your new shareholder base in place now? Thanks.

I will try to make sure I hit all of your first few questions. If I miss some, let me know.

In terms of the metrics, as we're looking at opportunities, we are looking at several different baskets of criteria that are important to us. First of all, we are looking at the credit quality of our customer, of our future tenant and their variety of different metrics within that basket.

We are looking at the business plan of the customer, the tenant, what does it look like going forward, what are the capital requirements, the cash flow, coming from that business plan and therefore, the lease coverage levels. We are looking at the lease terms, the various important data points within the lease, you mentioned some of them.

Clearly, we like longer terms, 15 to 20 years. That's generally what we're talking about in most of our discussions. We're also generally talking about more common escalators as we would call it, in the 1%, 2%, 3% range. We like that.

Another basket is the assets themselves. We've mentioned the assets that we like. But, clearly, the underlying asset is very important and, so, we are considering that very heavily.

When you put all of that together and probability weight those things, the ultimate performance, the ultimate financial metric for us, that we're focused on are clearly AFFO per share, FFO per share and of course, impact to the balance sheet. In terms of levels of those -- levels of accretion of AFFO and FFO, it differs based upon the project. We're looking at positive accretion in all those cases.

With respect to your question about the number of deals, I think if you looked at our pipeline of over 100, we don't expect to do 100 deals. We don't expect all of those deals to materialize into actionable opportunities, not in the near-term, at least. But, I think it's very important to have a pipeline of critical mass, so that we can have actionable opportunities on a regular basis.

That was really the point of the reference to 100 opportunities. I think you should expect to see over time some small deals, some midsize deals and some larger deals, and that's a conscious decision on our part and I think that's how it's going to materialize over the coming months.

This is Mark. On your question with regard to shareholder value, as you've said, the reports are just coming in, so I really don't have good information on that until all the reports come in. Clearly, me and Kenny and Rob have met with a number of REIT investors over the last couple of months.

So I do expect the shareholder base to migrate toward and pick up more and more REIT investors over time. Until the reports come in, I just don't have good information to give you on that right now.

Okay. Great. Thank you.

Eric Pan with JPMorgan.

As you talk to the rating agencies, how much revenue diversification or tenant diversification do you think you need to lower your cast of capital for the industry level?

I would say in our conversations with them, they did not give us a numeric answer to that question. They couched it in terms of it needs to be significant.

I would say it needs to be something -- probably between 25% to 50%, somewhere in that range. They don't really give -- they haven't given us a numeric number, a numeric answer.

Got it. Assuming you get the first few out of the way, going forward, how long do you think it would take, typically, to consummate the average deal from initial discussions through the due diligence to the final deal announcement?

Eric, it's hard to say for sure. I'm sorry I keep saying that. It's dependent upon the situation.

As we've gotten further into this, I think that there are situations where we are presented with opportunities, and I think going from start to finish could be, really, a matter of weeks. Certainly, not quarters and 30, 45, 60 days in some situations.

So, others are longer gestation periods given the complexity of the potential transaction or opportunity, particularly, those in which we are talking about partnering in M&A, for example. But, in other cases it can go much quicker than that.

Got it. Lastly, are you restricted from looking only at telecom assets? Or, can you look at other REITable assets from other sectors?

We can definitely look at all REITable assets, but we are very, very focused on telecom assets.

Got it. Thank you.

Our final question is from James Moorman with D.A. Davidson.

You talked about potentially leasing out assets. If you did something like data centers and towers, I'm guessing it could be structured so you could run it like a typical model where you can lease up the towers or lease up the data centers for the margin? Also, could you give a number of customers at the end of the quarter for the CLEC business?

On the first part, on the first part of your question, I think we're really more focused on triple net opportunities around towers and data centers. But, there are options to leaseouts that we are considering.

So, it could be either one, but we're leaning more heavily toward tripping that opportunity. With respect to the second part of the question, --

CLEC customers are, I would say, about 50,000.

Great. Thanks.

I'm showing no further questions at this time. I'd like to turn the call back to Kenny Gunderman for closing remarks.

Thank you, and again, in closing, I want to again express my appreciation to our lenders and investors as well as the dedicated team we have here at CS&L, both in Little Rock and in Richmond at Talk America. Our team has put forth extraordinary efforts over the last several months to launch CS&L and put us on a solid foundation for success. Thank you all again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.