Uniti Group Inc (Delaware) (UNIT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the fourth-quarter and year-end 2015 financial results CS&L earnings conference call. My name is Bridget and I will be the operator assisting you with your call today. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to Mark Wallace, the Company's Executive Vice President, chief Financial Officer and Treasurer, for opening remarks. Please go ahead, Mr. Wallace.

Thank you and good morning, everyone. 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 filings with the Securities and Exchange Commission.

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 measures can be found in our current report on Form 8-K dated today. I will now turn the call over to Kenny Gunderman, our President and Chief Executive Officer.

Thank you, Mark, and good morning, everyone, and thank you for joining us. As we approach our first year anniversary of being a public Company, I thought we would begin with a brief review of our strategy, an update of our progress and our outlook for 2016.

We believe we are the only REIT focused on acquiring or building mission-critical infrastructure in all key telecom real estate asset classes. We also believe we are the only telecom infrastructure Company with the ability to operate these assets or own them in a passive way in order to best serve our customers' needs.

We have based our strategy and the direction of our Company around these significant advantages. Essentially our goal is to become the first diversified communications infrastructure REIT, and we expect to make continued substantial progress towards that goal this year.

We continue to see service providers and content providers increasingly prioritizing their capital towards new technology and service offerings and away from owning telecom infrastructure. We believe that as a REIT we are uniquely positioned to be a long time capital partner to these customers to provide telecom infrastructure in a carrier neutral tailored fashion.

And as we build a diversified portfolio of communications infrastructure assets and diversify our contractual lease arrangements with creditworthy customers, we will not only deliver a predictable growing dividend, but the value of our underlying assets and enterprise will appreciate as well.

On January 7 of this year we announced the acquisition of PEG Bandwidth, which fits squarely within our strategy. PEG is a provider of fiber to the tower, which is not only critical infrastructure, but there is a convergence of these assets with other of our targeted asset classes such as towers and tower real estate.

In addition, we will be directly serving three of the large wireless carriers through long-term contracts, which provide anchor relationships that we believe are scalable. The fiber to the tower business model is success based driven, which is another key pillar of our strategy, and we are very excited about the pipeline of organic opportunities that the PEG business brings us.

Our new business efforts remain robust and we continue to actively pursue both organic and inorganic growth including sale-leasebacks and Company acquisitions. Given that we are unique and likely the only REIT of our kind for the foreseeable future, we believe our opportunity set is tremendous. To that end we now have prioritized our top targets and are engaged in active discussions with motivated counterparties.

Good strategic transactions take time and discipline to negotiate and we'll be appropriately prudent in this current capital markets environment. With that said, based upon our activity level, we are confident that by the end of this year we will own assets in all of our targeted asset classes and we will also have expanded our relationships with other high-quality customers.

Over the course of the coming months and quarters we expect to have more to say publicly about our organic growth opportunities and our corporate development pipeline. With that I will turn it over to Mark for a review of our financials.

Thanks, Kenny. This morning we reported FFO before transaction cost of $0.65 per diluted common share for the fourth quarter and AFFO of $0.65 per diluted common share. Net income attributable to common shares was $6.8 million or $0.05 per diluted share. Consolidated revenues were $173.9 million with consolidated adjusted EBITDA of $166 million. Leasing segment revenues were $167.5 million including $4.3 million of straight line rental income.

Revenues from Talk America were $6.4 million with adjusted EBITDA of $1.6 million. G&A expense for the quarter was $3.8 million including $800,000 of non-cash stock-based compensation expense. Interest expense was $66.5 million, cash interest expense with $62.8 million.

Late in the fourth quarter we funded $43 million of capital expenditures for Windstream under a previous commitment to fund up to $50 million in 2015. The lease rate on that investment is 8 1/8 and that investment will generate about $3.5 million in annual cash rent going forward.

We continued to have substantial liquidity at quarter end with $142.5 million of unrestricted cash and cash equivalents and $500 million of undrawn borrowing capacity under our revolving credit facility. Our leverage ratio was 5.5 times based on debt to annualized adjusted EBITDA and 5.3 times based on net debt to analyzed adjusted EBITDA.

Earlier this week we announced that our Board of Directors declared a regular quarterly cash dividend of $0.60 per share payable April 15, 2016 to stockholders of record on March 31, 2016. This represents an annual dividend rate of $2.40 per share.

Turning now to our guidance for 2016, we expect FFO per diluted common share to range between $2.56 to $2.58 and AFFO per diluted common share to range between $2.57 and $2.59. Let me give you some of the components of our 2016 guidance.

First, starting with leasing segment, we expect leasing segment revenues in 2016 of approximately $673.5 million comprised of the following: first, rental income of $667 million for our Windstream lease, including $650 million of cash rents and $17 million of non-cash straight-line rent amortization income. Second, $3.5 million of annual rent from the fourth-quarter funding of $43 million to Windstream that I previously mentioned. And third, deferred revenue amortization of $3 million resulting from $69 million of network build outs constructed by Windstream in 2015 with Windstream capital, but which became our assets under the terms of the master lease as they predominantly represent overbuilds of copper with fiber.

Next, we expect consumer CLEC business revenues of between $21 million to $22 million with average adjusted EBITDA margins of 20% during 2016. I expect G&A expense to range between $22 million to $23 million, including $3.5 million of stock-based compensation expense. Expected G&A costs in 2016 reflect personnel additions in late 2015 and anticipated new hires in early 2016. Interest expense -- I expect interest expense in 2016 of $265 million including $15 million of debt discount and financing cost amortization. And last, our guidance assumes weighted average common shares outstanding of 150 million shares.

As a reminder, our guidance does not include the impact of the expected closing of PEG or any future acquisitions, capital market transactions or transaction-related cost. We continue to expect the PEG acquisition to close in April. That concludes my prepared remarks and, operator, we would now like to open the call up for questions.

(Operator Instructions). David Barden, Bank of America.

Pretty straightforward quarter as expected. I guess maybe, Kenny, I wanted to kind of revisit one aspect of the PEG transaction which was the ongoing direct equity stake and then convertible preferred stake that Associated Partners is assuming in CSAL, which I guess is convertible $35 a share. Two pieces to the question.

Part number one is my understanding is that this investment that Associated Partners made into PEG was originally a portfolio investment that they were making on behalf of KKR. And so, I was wondering if you could kind of describe any relationship that there may exist now via Associated Partners with KKR.

And the second would be -- as this negotiating process went along and Associated Partners was deciding to take this equity position, what kind of look under the hood were they allowed to get? Did they just take this at face value or did they come in and kind of really tear apart the CSAL books in the pipeline and say, look, I want to buy into that as well? If you could give some color around that that would be super helpful, thanks.

Sure. And good morning, David; thank you for the questions. But with respect to the first question, actually KKR was a minority investor with Associated Partners. So they were an investor in Associated Partners funds and various portfolio companies. So Associated was really the lead investor here.

Secondly, and to your question about Associated's look under the hood, they got a very substantial look under the hood. So a substantial amount of due diligence, substantial amount of interaction with our management team, even with our Board. And so, they certainly didn't take the investment at face value at all.

And in fact, I think -- I know we have said this publicly before, but when you think about the consideration that we are paying for PEG, the cash portion is actually being used to retire debt and other obligations. The amount of consideration going to Associated is all in the form of CSAL equity or the preferred. So they're actually -- based upon their look under the hood I think they are taking a big bet on us given that they are taking all their consideration in equity essentially.

And can you remind us the lockups on the two different pieces?

The lockup on the common is two years and then on the preferred there is a three-year non-call period.

Got it. All right, guys, thanks much.

Barry McCarver, Stephens Inc.

I guess first off on PEG, do you expect to update your guidance for the year once that deal does close? And then in addition to that, just -- I wonder if you could give a little more color on what you think the organic opportunities there might be this year just in terms of CapEx?

Barry, this is Mark. So, yes, we definitely intend to update the guidance once the transaction closes. I can't give you the exact date or time or format yet, but we will be updating the guidance once the transaction closes. And anything to do with CapEx requirements regarding PEG going forward, we will do that at that time.

Okay, fair enough. And then just in terms of any CapEx you might be providing to Windstream in 2016, do you anticipate any of the potential $50 million going in their direction?

No, so we haven't had any additional requests from Windstream to provide capital. As you know, we don't have any commitments outstanding to provide capital to Windstream in 2016 and we have had no request.

All right. And then I guess my last one is just for Kenny. You talked about the robust pipeline. Any change in kind of the activity that you see today versus maybe before you did the PEG deal or last year or companies or partners starting to loosen up, any at all?

Yes, Barry, good morning. I would say the activity level is higher than it was last year. I would say more important, however, the quality of the opportunities in the pipeline has never been better.

And I think from our perspective we focused less and less up on how many opportunities are in there versus really focusing on prioritizing the opportunities that are a good fit from an asset perspective with our strategy, and a good fit from the standpoint of the quality of the counterparty, and a good fit from the standpoint of action ability.

And so, to your question about activity, I would say we are more focused on execution than we are on adding new opportunities. I really think one of the great misconceptions about us is that we struggle to find good actionable opportunities and that is really not the case at all. I think we are -- we have no problems getting opportunities into our sales funnel.

There is a huge opportunity out there and a huge number of interested counterparties. But one of the things that most excites us about where we are today is that I feel like we have a good sense of the opportunity set and we are very focused on the opportunities that we think fit the best from our standpoint from the standpoint of asset fit, quality of the counterparty and action ability.

And, Kenny, not to put too fine a point on it, but just your comments about the quality of the deals in the pipeline. Are those deals that you didn't have last year or you didn't have at some period in the past that are new? Or do you think the quality is better just because you have narrowed the pool and focused more on specific deals?

Yes, Barry, I would say it is both. Some of the opportunities are ones that we started working on last year. And when you consider that the types of conversations that we are having are very strategic in some cases, opportunities take time to nurture along and get to the finish line.

And so some of them started last year but, frankly, some of them did start after the PEG announcement. I think that did help shine a light on our strategy with a lot of folks in telecom and I think it did help accelerate some of the opportunities.

That is very helpful. Thanks a lot, guys.

Eric Pan, JPMorgan.

Maybe a little more color on PEG. Maybe you can help us think about the growth rate or potential growth rate there. Is it growing in the high-double-digits, low-double-digits, single-digits? And then how long do you think it will take before you can transition most of the revenue at PEG from lit to dark so that they become readable?

Yes, I think, Eric, on your second question there will be -- we will have more to say on that in the coming months with specifics. But I will tell you that one of our rationales for acquiring PEG is that we do see a transition in the industry towards more dark fiber versus lit services. And I think that that, from what we've seen so far, we haven't been surprised. We have been encouraged by the trends that we're seeing so there will be more to talk about there.

I will say that although that trend is as expected, if not maybe accelerating, we are not opposed to lit services. We have plenty of capacity in our TRS for lit services and, as you know, there is a trade-off between lit services and dark fiber, longer-term contracts versus higher returns potentially. So we are certainly not opposed to lit services.

With respect to your first question, I think that we definitely believe that there is opportunity for growth at PEG. We have talked about what their historical growth rates have been. But we also believe that we are planning to make investments in the business in the near-term to set the business up for growth longer-term.

And so, we will have more to say about that once the deal closes. We are trying not to be too presumptuous, but we will have a lot more to say about all of that once the deal closes.

Got it. And then the acquisition only diversified your revenues by about 10% due to the relatively high multiple that was paid. If your ultimate goal is revenue diversification, are you now looking more at deals with lower multiples that allows for greater diversification with lower capital outlay?

Yes, I think, Eric, there is a lot of different things that we are looking at. If you look at just PEG alone, first of all on the multiple, we really think we paid a low multiple relative to where some of the other private market transactions have occurred. But we don't view PEG as just a one-shot thing; there is going to be organic growth opportunities to grow PEG with some of these key anchor customers.

And when you look at the returns on those organic investments, if you were to translate those to a multiple or to a cap rate, they would be substantially better than, for example, the multiple that we paid for the enterprise itself. So that is one.

Two, those types of opportunities exist outside of PEG, so those types -- the opportunities to build network for other operators, service providers exist and exist at attractive returns. And when we look at some of the opportunities in our pipeline, they are not all buying companies or one single sale-leaseback. Many of the opportunities are deploying some capital initially but that capital grows over time with a potential service provider. And so, you look at the returns over a longer period of time as opposed to just upfront.

But then lastly, as it relates to businesses and businesses in the asset classes that we are targeting, the multiples are double-digits plus. And so, there are those types of opportunities in the pipeline that we are looking at and we will continue to look at.

Got you. So with roughly $200 million to $300 million of liquidity left on your revolver and cash position, how much more firepower do you think you have before you need to start looking at the capital markets again?

So, this is Mark. So you are right, so we have got $640 million today, post PEG we will have liquidity of about $320 million remaining between cash on our balance sheet and our revolver.

Look, I mean I think the capital markets have clearly been volatile and we want to be prudent given the recent volatility that has been experienced. And I think I would say that we're in a fortunate position today of having -- still having substantial liquidity and not needing to return to the capital markets in the near-term.

That said I think we've had a very good reception to the PEG transaction. I think -- I do continue to believe our cost of capital will improve over time as we execute against our pipeline and announce future transactions. And so, I think it is just -- it is going to be -- it will be dependent upon what we announce in the future and how the capital markets play out.

Got you. Thank you.

Frank Louthan, Raymond James.

Just a little bit more on the pipeline. Has there been an evolution of the type of assets that have come to you and anything particularly different than maybe the initial inquiries you saw right after the spin?

And then there are quite of few data center assets out in the market, in particular some that might be sort of one-off that may be less attractive to larger players. Those kind of things, one or two isolated locations, is that -- just to be clear, is that the kind of thing that is on your radar?

Good morning, Frank. Yes, so there has been an evolution. I think initially there was a lot of focus from the marketplace and from counterparties on ILEC-related assets, more consumer broadband type headsets for us, just simply the fact that we are spun out of Windstream and we own a lot of those assets initially, there was just a lot of focus on that.

But from our perspective, our focus has been on the assets that we are focusing on now. And I think it has taken some time for the industry to realize that. But that has happened. And so today, if you look at it what is in our pipeline and look at where we are spending the vast, vast majority of our time, it is on the assets that we are talking about as opposed to consumer broadband.

So that it's been a very good thing. It has taken some time, and it took the summer of 2015 for us to do that, but it has now happened and we are very excited about it. And it is one of the reasons we are so bullish on the opportunity set today. As it relates to -- what was your second question, Frank?

Well, just on sort of single location data centers and so forth, is that kind of in the wheelhouse as well?

Yes, data centers are on the list, we are looking at data centers. I will tell you it is less of a focus. Many of the data centers that we see are either part of a broader process where there is a lot of parties looking at those and that is not ideal for us.

I think as we have talked about, 90% plus of our conversations are more bilateral in nature and that is a better fit for our model. And secondly, data center valuations are -- seem high from our perspective. So it has been -- those assets have been less of a focus recently.

Okay. And just one follow-up on the ILEC type assets. With your conversations with folks in that world, how much of that process is being delayed or those sort of decisions being delayed until the ultrahigh cost fund gets settled out and the CAF II money gets settled out before they make decisions? Do you think that could be a catalyst potentially for some sellers once the winners and losers are kind of identified through that process?

Yes, Frank, good question. And honestly I don't know the answer to that question, other than to say the delay is -- I would say the delay is probably more from our perspective than it is from the counterparty's perspective, if that makes sense.

That is great, okay, that is very helpful. Thank you.

James Moorman, D.A. Davidson.

First on the PEG Bandwidth. Do you feel like the growth that you feel you can add through doing additional deals, do think this is something that because they might have been capital constrained or is there other things that you bring that enable you to kind of unlock that growth?

And then in terms of the deal pipeline, do you feel while doing the PEG Bandwidth has brought you more attention, do you think it has also potentially brought you anymore competition from people that may not have taken you seriously on what you were going to be doing and now are like, all right, we have somebody here that is really going to look to acquire companies? Thanks.

James, I think on the first question, I think there is a lot of different benefits that PEG brings to us and that we bring to PEG, frankly, that are not necessarily quantifiable in a growth number. Because I think it is very critical to remember that the business brings three very large customers and an anchor relationship with those customers that we think is scalable, well beyond where they are today, not just within PEG but beyond. And so, I think that is a big benefit to us.

A second benefit to us is going forward having a platform to make incremental acquisitions and eventually benefit from M&A type synergies will be very beneficial. But I do think, directly to your question, we are a sizable Company with a substantial amount of capital and I think the scalability of PEG in a vacuum beyond what they have had historically is likely there. And that was definitely one of our considerations. So I would say, yes.

And then just on the other one, do you feel that while it is bringing you more deals doing the PEG Bandwidth deal, do you feel it has kind of made some parties -- maybe it has increased maybe the competition for deals?

Oh, I am sorry, I can't say for sure because don't -- can't put ourselves in other's minds. But I will say, James, that our mix of bilateral conversations versus auction type situations hasn't changed. The dialogues that we were in before PEG, many of them have continued and we've continued to add new sort of proprietary bilateral type discussions into our mix.

Great, thanks a lot.

Arun Seshadri, Credit Suisse.

Thank you for taking my questions, just a couple. First, I just wanted to ask as far as the percentages you usually give out in terms of the pipeline and sale-leaseback versus whole Company and CapEx. I don't know -- are you willing to do the -- give that same sort of color this time?

Sure, Arun. In terms of the asset mix, it is roughly -- and again, this is a living, breathing number. But today it is roughly 60% fiber, roughly 40% towers and tower-related real estate. And with respect to the mix of the type of opportunities, it is roughly 50% sale-leasebacks, about 40% whole Company opportunities, and then 10% other, which is sort of CapEx and CapEx-related programs.

Okay, great, thank you for that. And then is there any way you can sort of talk about the next sort of couple of deals -- sort of whether you can characterize them whether they would be eligible for the qualified REIT subsidiary versus taxable REIT subsidiary?

Yes, it is hard to say, Eric (sic), but I think the vast majority of what we are looking at are fits for the QRS versus the TRS -- longer-term. And for some of the opportunities there may be a temporary stop in the TRS, but that doesn't mean that over time the assets won't be transitioned into the QRS. I think we are focused on the assets that we are focused on because they are all generally REIT-able assets. And, Mark, I don't know if you want to add to that at all.

As we tried to explain with the PEG transaction as well kind of the way we can use the TRS by putting on security intercompany mortgage notes, in many cases that gives us a lot of the benefits of having the assets that we -- in the TRS that we would have realized in the QRS as well. So, assets that go into the TRS can also be relatively tax efficient as well.

Got it, that is helpful. Thank you. And then finally, as far as the headcount, I think you talked about the areas that -- you talked generally that you're continuing to expand headcount. I just want to get a sense for what areas you are sort of -- what type of -- how many people are you hiring and sort of what type of skill sets? Thanks.

Yes, good question, Arun. So the vast majority of the people that we are looking to bring on are deal-related. So corporate development predominantly and then other areas that support the deal function for us.

Great, thanks.

I am not showing any further questions in the queue. I will now turn the call back over to Kenny Gunderman for closing remarks.

Thank you and thank you for joining us this morning. We very much appreciate your interest in CS&L and I look forward to talking with you throughout the year. I would also like to thank our employees for their dedication and hard work this past year and look forward to the PEG team joining our Company in a few weeks. Thank you.

Ladies and gentlemen, this does conclude the program. You may now disconnect. And everyone have a great day.