Uniti Group Inc (Delaware) (UNIT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Communications Sales & Leasing second-quarter 2016 earnings conference call. My name is Michelle and I will be your operator for today. (Operator Instructions). As a reminder this conference is being recorded. I would 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 SEC.

Discussions during the 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 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.

Good morning and welcome to our second-quarter earnings call. We had another very active quarter in which we deployed or signed deals to deploy an additional $660 million of capital and mission-critical communications infrastructure.

In addition, we were highly active in the capital markets by helping facilitate the placement of over $750 million of our equity owned by Windstream and we also raised over $200 million of capital ourselves to help fuel future growth. We were very pleased with the execution of the placement of Windstream's entire 19.6% retained stake during the quarter.

We now have an established base of long-term shareholders led by Searchlight Capital. Searchlight is a reputable telecom investment firm who performed extensive due diligence on CSAL and, importantly, our largest customer, Windstream, and elected to invest $220 million in our equity.

We are also pleased to welcome two new Board members including Andrew Frey from Searchlight and Scott Bruce from Associated Partners. Scott and Andrew have already begun making introductions and expanding our opportunity set as expected.

Collectively our Board members and management now represent direct ownership of almost 10% of our Company's equity. Our shareholders should take comfort that we and our Board are making thoughtful decisions to help drive growth and value in complete alignment with our shareholders.

Now turning to our fiber infrastructure group. Our performance was in line with our expectations for the quarter and progress executing on our growth strategy continues. Highlights of organic growth include strong evidence of beginning to lease up our network with wholesale wins as well as near net backhaul wins.

On the wholesale front we had notable wins with three large national carriers and one state Department of Transportation. These wins, along with other bookings in the quarter, represent new total contractual revenue of nearly $40 million. In addition, we had numerous near net backhaul wins with attractive yields and margins including mostly dark fiber awards.

Notably during the quarter we announced our signed agreement to acquire Tower Cloud for the initial purchase price of $230 million. Tower Cloud is an established provider of two of the biggest growth areas in the industry today including dark fiber and small cells.

Tower Cloud is a proven and trusted provider for the national carriers and as a result 90% plus of its revenue is in the form of long-term contractual arrangements with these creditworthy customers. We think the core potential in the backhaul business is very strong, but there are also numerous opportunities to lease up the Tower Cloud network through wholesale and NAREIT initiatives similar to our PEG acquisition thesis.

Lastly, the fit with PEG is very strong, each with complementary skill sets and, as we've talked about previously, we expect there to be meaningful incremental cash synergies as we combine the businesses. Integration efforts are progressing well and on schedule and we expect to close the transaction in third quarter of 2016.

As part of the integration I am pleased to announce today that upon closing we will begin branding our fiber infrastructure business as Uniti Fiber. Ron Mudry, the current CEO of Tower Cloud, will be named President of Uniti Fiber and will be responsible for the day-to-day operations and growth of the business.

Mike Friloux, the current CEO of PEG, will be named Chief Technology Officer of all of CSAL. In addition to responsibility for future proofing our IT systems for future M&A and asset acquisitions, Mike will play a critical role in sourcing and diligencing assets as part of our underwriting efforts.

I'm excited about Mike and Ron's new roles, especially as they bring critical experience and relationships to help us manage the tremendous opportunities ahead of us and source new ones. Looking forward we expect to be very active on the M&A front in the remaining five months of 2016 and into 2017.

Our capital markets activity in the second quarter has positioned us to now be as aggressive acquirers as ever before by removing the sizable overhang on our stock and reloading our revolver. At the same time that our financing flexibility is primed our opportunity set in fiber towers and tower real estate, including [home] Company deals and sale lease backs has never been better.

Although, as always, we cannot predict and M&A transactions and we will remain disciplined, all signs point toward attractive activity in both the US and Latin American markets.

In closing, we remain very excited about a strategy of providing mission-critical communications infrastructure, and the industry trends and dynamics continue to reinforce that strategy. I will now turn it over to Mark to discuss our second-quarter results.

Thank you. As Kenny mentioned, we have been active on several fronts since our last quarterly call with the closing of PEG; our expected acquisition of Tower Cloud that should close in the next several weeks; disposition of Windstream's retained stake; and accessing both the debt and equity capital markets.

We are also pleased to report that operating results for the second quarter were in line with our expectations with consolidated revenues of $188.6 million and consolidated adjusted EBITDA of $171.6 million. This morning we reported AFFO of $0.66 per diluted common share and net loss attributable to common shares of $2.9 million or $0.02 per diluted share which is after transaction costs.

Leasing segment revenues were $169.1 million including $4.3 million of straight line rental income with adjusted EBITDA of $164.8 million. Our fiber infrastructure segment, which today represents our newly acquired PEG business, reported revenues of $13.8 million and adjusted EBITDA of $5.5 million from the period from the May 2 acquisition date to quarter end, both of which were consistent with our prior guidance. During that period, PEG incurred maintenance CapEx of just under $700,000 and invested $2.7 million in success-based CapEx.

Once again we benefited this quarter from $38 million of improvements to our network made by Windstream with their capital. On a cumulative basis since our spinoff we have benefited from nearly $140 million of [tenant] capital improvements related to network enhancements completed by Windstream.

Turning to our balance sheet, our liquidity and capital market access continues to be in great shape. In June we issued $150 million of senior secured notes followed by the issuance of 2.2 million shares of common stock in connection with Windstream's disposition of their retained stake. Aggregate net proceeds of just over $200 million from these offerings, along with excess cash on hand, were used to reduce borrowings under our revolving agreement.

Accordingly at quarter end we had $507 million of liquidity consisting of $49 million of cash and $458 million of undrawn borrowing capacity under our revolving credit facility. Our leverage ratio under our debt agreements at quarter end stands at 5.6 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 representing an annual dividend rate of $2.40 per share.

Regarding our current outlook for the full year 2016, we expect full-year AFFO to range between $2.58 and $2.60 per diluted common share. Our AFFO guidance reflects a $0.02 per share reduction associated with a capital market transaction that we executed in the second quarter. We continue to expect PEG to contribute $55 million of revenue and $21 million in adjusted EBITDA for the eight months following close.

Our current outlook for 2016 includes the following items. Leasing segment revenues are expected to be $676 million including $21 million of non-cash straight-line and deferred revenue amortization. We continue to expect consumer CLEC business revenues of between $21 million to $22 million with average adjusted EBITDA margins of between -- of approximately 21% for 2016.

SG&A cost should range between $35 million to $36 million including $5 million of stock-based compensation expense. We continue to expect maintenance CapEx related to PEG to be less than $3 million for the post-acquisition period. Success-based CapEx in the aggregate should range between $14 million and $18 million, including $1.5 million related to our tower build in Mexico.

We still expect $25 million of ground lease investments this year. Interest expense for the full year should range between $274 million to $276 million including $15 million related to debt, discount and financing cost amortization. And last, our guidance assumes weighted average common shares outstanding this year of 152 million, including in the 1 million shares we issued in connection with the PEG acquisition.

As a reminder our guidance for 2016 continues to be based on PEG's preliminary purchase price allocation adjustments which are subject to change. It does not include any impact from our expected acquisition of Tower Cloud, the impact of any future acquisitions, our capital market transactions or future transaction-related cost. We expect to provide updated guidance on our combined fiber infrastructure business now branded as Uniti Fiber following the closing of Tower Cloud.

In closing, let me say I am confident we are well-positioned to continue the momentum we have established this year. We have significant depth in our M&A pipeline with transactions that include both quality assets and strong [tenants].

Our fiber infrastructure group leadership is in place and ready to capitalize on an increasing number of organic opportunities. We have ample liquidity and capital market access to grow and diversify across multiple asset classes.

That concludes my prepared remarks. Operator, we will now open the call up for questions.

(Operator Instructions). Barry McCarver, Stephens.

Great quarter and thanks for taking my questions. I guess first off, on the new contracted revenue under the fiber segment of $40 million, can you give us an idea of the timing of that starting to hit the income statement?

Good morning, Barry, it is Kenny. We will give more clarity on this later this year, but I think some of it will actually start this year and then there will be some in 2017 and 2018.

All right. And then on that CapEx that you gave in the quarter, you said $2.7 million was to PEG and then I think you said about $700,000 was maintenance. What was the remainder of the CapEx spend there?

There was some on the Windstream tower acquisition as well, there was $3 million on that that we and did also about -- a little bit over $1 million of ground leases.

All right. And then I guess just lastly, you certainly continue to talk about the acquisition pipeline being pretty full. I know you don't want to get specific on the timing but sort of any change on I guess the temperament of looking at deals now that -- obviously your CSAL stock has performed really well, the balance sheet is coming together, plenty of liquidity. Are you seeing those discussions really starting to open up?

Yes, Barry, I would say we are definitely more active than we have ever been, as I mentioned in my comments. And I think part of that is for a couple of reasons that you mentioned, including the improvement in the cost of capital and just the general momentum that we have been showing.

And this is something that we foreshadowed starting last year, that we felt that once we started -- once we started showing progress and putting wins on the board that we would see building momentum not only in our conversations with the industry and potential counterparties, but also in our cost of capital, which would all help facilitate more deals and, importantly, better deals -- high-quality deals.

So, we are very excited about where we sit and our ability to transact has never been better. And frankly the opportunity set has never been better. So, we expect to -- we can't predict timing, as you mentioned, but all the leading indicators are there for more activity and we expect there to be some.

That is great to hear. Thanks a lot, guys.

Eric Pan, JPMorgan.

You mentioned integration work to be done between PEG and Tower Cloud. How should we think about the potential cost and the synergies there?

So this is Mark. So, in the synergies I think we are certainly on track. We actually may do a little bit better on the synergies than what we had mentioned on the last call. If you recall, we said that over -- we expected to get $3 million, be able to identify that and implement that within the first three years and $2 million within the first year. I think we are definitely on track to do that.

The integration teams have been working now for probably -- certainly in earnest here the last four weeks or so and we made really good progress on the organization and sort of identifying the synergies. I don't have kind of what the -- I don't really have a good estimate for you for the cost that will be incurred post-close, but we can update you on that later on.

But on the integration front I would say that we are in very good shape in terms of having the integration in a good place on closing date and then also to achieve the synergies that we had identified on the last call.

Got it. And then now that your share price is back to a more normal level, would you consider using more equity in future deals or is debt still the preferred method?

So, I think we continue to want to be prudent about and always be prudent about the use of equity. Our preference has always been to issue equity. Generally when there is a strategic reason to issue equity, either to counterparties in connection with an acquisition which we have done on both Tower Cloud and PEG, as well as in order to help facilitate the Windstream disposition.

So, I think we will continue to be prudent on our equity issuance. We definitely still think that our equity is undervalued. But as we acquire future -- make future acquisitions we will -- I certainly expect to tap the debt markets and have some equity issuance to fund those as well.

Got it.

Eric, I will just add to that that, despite our stock trading up, we continue to see very strong interest from counterparties, M&A counterparties, like Mark mentioned, and taking stock as consideration. So as Mark mentioned, I expect that to continue.

Right. Last one for me. Do you have to wait for the Tower Cloud deal to close before doing another one?

No.

Not at all.

Great, thank you.

Frank Louthan, Raymond James.

If you -- conceptually if you just keep running the business and what you have sort of announced, if you look out 12 months from now, where do you -- what sort of exposure do you expect to have to Windstream as a percentage of revenue, kind of all else equal? And what percentage of that revenue do you think the rating agencies and so forth start to look at you as being more diversified and possibly not count that against you in ratings and so forth?

And then could you be a little bit more specific on the capital markets activity? Could you characterize the deals you are looking at? Are they going to be more QRS-related, more asset type sales or are we moving more into a -- to operating company structures with these next deals?

So, Frank, good morning. With respect to the diversification from Windstream looking at 12 months, 18 months, we have not talked publicly about a target or an expectation and we will continue to avoid specifics. Although what I would encourage you to think about is in the short period of time, over the past call it six months of this year, how much progress we have made.

And when you consider that the momentum is building and it is at its peak from where we have been so far, that you could expect more activity than what you have seen. And so, you can sort of extrapolate out, but we expect to make continued progress on that front.

I would also say that it is very important to us that the Windstream overhang has been removed because it really frees us to think about larger transactions. And so, we are very pleased with the activity we have had so far and the size of the deals we have had so far. But I think now that the overhang is gone and we think about financings and accessing the various parts of the capital markets we feel more freed to look at larger transactions.

So, with respect to your question about the pipeline in the mix of the pipeline and the types of deals -- with respect to the assets the pipeline today is roughly 55% fiber related, 35% tower and tower real estate related and 10% ground -- I'm sorry, consumer broadband related.

And when you compare that to what it was the last quarter and before and when you look at the mix of sale-leasebacks, then you will conclude there is a little bit more consumer broadband and those are really a reflection of inbound interest that we are getting from some really high-quality potential counterparties that we are entertaining.

And when you look at the asset mix, the types of deals, I think there is a very heavy component of QRS activity in the pipeline versus TRS activity. So again, can't predict timing nor deals, but when you put all that together there is a very heavy component of QRS activity building.

All right, great. Just one quick follow-up if I can. What sort of potential upside -- I think you've got 25 towers or so you are working on in Mexico. Can you give us an idea of a potential upside there after this initial round of construction?

Yes, I think the best way to think about that, Frank, is as we talked about initially, the platform that we are establishing there and the core anchor customer that we have. And we have resisted naming that customer, but it is a core anchor customer, very high credit quality.

And we have an outstanding team and platform in place and expect to use that team to grow both organically, so I do think there are more build opportunities there, in fact we think there are substantial build opportunities. But there are also acquisition opportunities there that we are very excited about. So as I mentioned in my comments, I think you will see continued activity there in addition to the US.

Hey, Frank, this is Mark. Just to also follow up on your QRS question. Just keep in mind that really the only thing that needs to go into the TRS would be [lit] services. So, a lot of things that we talk about on these calls are dark fiber and small cell accelerating and those are definitely QRS eligible. And we will work on and are working on making sure that any dark fiber or small cell activity at PEG and Tower Cloud can either be transferred over to the QRS or can go into the QRS as it is initially built.

Okay, great. That is really helpful, thank you.

David Barden, Bank of America.

I guess my first one, Mark, would be following the Tower Cloud deal announcement I think you talked about it being an accretive deal. Obviously we took down the guide $0.02 for a lot of the financing that has been done, but we obviously haven't included the Tower Cloud financials.

So, could you kind of, I guess number one, just kind of revisit what the run rates of Tower Cloud are? And second, should we be expecting third-quarter guide to kind of come back up for the year now -- once Tower Cloud is in it?

Yes. So, the only thing that really affected our guidance that we gave was the capital market transactions that we did during the quarter. There was a little bit of a change on the purchase price allocation between real estate and non-real estate.

And just to mention also our guidance -- we talked earlier about synergies on Tower Cloud, we actually did take down a little bit of our expected G&A in the third and fourth quarter because we actually see some capabilities within Tower Cloud and PEG where we will not have to hire and incur some costs at CS&L because those activities that we had planned for can be absorbed by Uniti Fiber. So, we are actually starting to see some synergies.

What we had said previously in terms of Tower Cloud was the first quarter they had a little bit over $10 million in revenue. They had adjusted EBITDA of about $3.5 million for the quarter. And then I think what I said previously was that we are incurring about $10 million of net success based CapEx.

And I expect all those things are pretty consistent with what I would tell you today on success based CapEx and the maintenance CapEx on Tower Cloud -- pretty minimal. They incurred less than $0.5 million on maintenance CapEx on the first quarter and I don't really see that ticking up much over the balance of the year. So I think that will remain fairly steady.

I do think and what we had indicated at that as -- I do think in the fourth quarter going into 2017 you will start to see revenue turn up associated with additional broadband, our bandwidth being sold as well as the dark fiber sites turning over and revenue starting to be generated from that. That said, we are not -- don't really want to give guidance -- full-year guidance on PEG until after the closing. I'm sorry, until -- on Tower Cloud, sorry.

Okay, got it. And then just second, just to follow up on this question of kind of the use of equity. I appreciate that there is a strong kind of maybe strategic counterparty component to using it. But it is obviously your most expensive form of capital at this stage of the game. Is there a resistance to moving north of the 5.6 leverage or is there a willingness to do that as long as counterparties are willing to let you just pay cash?

Okay, so on the 5.6 leverage, I think what I have said kind of consistently is we are not trying to change our target leverage. I think the 5.6 overall leverage that we are at today we will -- as we draw down on the revolver I think leverage will go up intermittently.

The revolver is there primarily in order to take down acquisitions, possibly to fund some success based CapEx going forward but primarily for M&A activity. So as we draw down on the revolver the leverage will go up. But then I would expect as we put permanent capital structures in place over time that that leverage will come back down. So I think 5.6, I would say we are going to be right around there plus or minus going forward.

And then, David, I would say that most of the opportunities we are looking at are cash -- are all cash or very heavily -- very heavy cash-related. Even though counterparties may be interested in our equity we will continue to guard using it as consideration very carefully like we have in the past.

Got it. And then my last question relates to -- Kenny, you said that, quote, all signs point to attractive opportunities in US and Latin American markets. When you refer to the Latin American markets are you speaking specifically to Mexico or are you casting now a wider net further south?

Yes, David, I would say predominately Mexico, although there are other markets that are attractive. But we are predominantly focused on Mexico.

Great. All right, thanks, much.

Simon Flannery, Morgan Stanley.

Hi, it is Spencer for Simon, thanks for taking the question. Just a quick follow up on your QRS comments. Moving forward how should we think about the mix of deals between TRS and QRS? It sounds like at least in the near term you are more tilted towards the QRS. And I think, remind me if I am wrong, but current capacity under TRS is roughly $800 million or so.

And then finally, could you talk about the difference, if any, between the potential initial yields for deals in the TRS versus QRS? Thanks.

Yes, with respect to the mix of QRS versus TRS, I think we covered that a little bit with Barry's question. And it is hard to predict, but based upon what we are focused on today, what is in the pipeline, I think there is a heavy, heavy component of QRS activity. And as Mark mentioned, even though an opportunity or a transaction may initially go into the TRS, over time you will see a lot of that move into the QRS.

And so, TRS is almost a transient opportunity or situation with a lot of the acquisitions that we are looking at. So eventually you will see very heavy -- or you will continue to see heavy activity across the board, but eventually most of our opportunities will wind up in the QRS.

Yes, this is Mark. Just one more thing I would add on that. I think the important question on the TRS is also what is the taxpaying status of activities that are going on in the TRS. And as I mentioned before on PEG, we have a number of ways to shelter any revenue or income in the TRS.

So, on PEG we are getting a step up basis on the assets. And then, as I have talked about before, we also have put our Company notes in place in order to incur interest expense at the TRS and income at the QRS.

Tower Cloud is little bit different, we are not getting a step up in basis of the assets but what we are getting Tower Cloud is we are inheriting about $60 million of NOL carryforwards.

So again, I don't expect the TRS to be a taxpaying entity for quite some time. And so, just think about -- as a general rule think about the TRS is not going to be a taxpaying entity and the QRS is certainly not going to be a taxpaying entity.

Great, thanks. And then again, any difference in the initial yields between those two entities?

We don't really know. We don't really think about kind of there being a difference in the yields on what goes in the QRS versus TRS.

Okay great, thank you.

Brett Feldman, Goldman Sachs.

Just two questions and just still following up on the QRS theme here. Earlier I think you said something about some of those potential deals being consumer broadband. And I am wondering if what you meant is that some of the deals you may do in the QRS are similar to what you did with Windstream initially, meaning an operating company that you take over the network from and lease back from them. Or does it really seem like the initial deal with Windstream was very unique and not probably a structure we will see again?

Good morning, Brett. Yes, I think what you characterize is accurate with respect to the types of consumer broadband deals, so similar to that Windstream structure. And when I say similar I mean taking the underlying real estate -- we take the underlying real estate and lease it back to the operating business over a long period of time. So very similar to what we did with Windstream.

And the differences could be the type of asset. It may be copper or it may be coaxial or it may be fiber or it may be a combination. And it may or may not be for the entire network as we did for Windstream or the vast majority of Windstream's network. It could be for segments of it or for even new builds. So, and we have talked about all that in the past and those are the types of opportunities that we are looking at.

Got it. And then just to go back to a point you made, an important point you made earlier which is that a big chunk of what Windstream spends on CapEx ultimately becomes your property. And I would just assume that that is basically 100% fiber. Meaning a portion of the network you own that is copper is being upgraded to fiber by Windstream and because it is an upgrade of an existing piece of the network you take possession of it. So is it fair to say that this is a substantially copper to fiber enhancement in your network?

Yes, that is correct.

So my question to follow up on that is, does that actually help your secured borrowing capacity because the underlying quality of your asset is improving? Or does it give you better rates? I am just trying to think about how that can be a benefit to you beyond just having Windstream sort of handle all that work.

I don't think about it as improving the -- our secured borrowing capacity. What I think about it doing is continually -- it continues to upgrade the quality of the network. And so, even though we don't get additional -- and so this is primarily overbuilding the copper portion of our network with fiber. So, I think about it as continuing to improve the network -- the quality of the network that we own and we lease to Windstream.

Got it. All right thank you for taking the question.

Michael Rollins, Citi.

I was curious if you could just take a step back strategically. Can you talk about how you are viewing the wireless infrastructure side strategically in terms of the best place for capital for you?

And is it the best place to put capital given your cost of capital, such that as the market could give you a lower cost of capital over time, you might then diversify into other property arenas, other types of triple net [businesses]? Or do you view the wireless infrastructure business as just the best place to put capital regardless of what your cost of capital is? Thanks.

So, Michael, good morning. We don't look at anything independent of our cost of capital, so we always keep an eye on that. I think that the wireless infrastructure, broadband infrastructure is we think an outstanding area to put our capital to work. It is an area that has multiple asset classes, whether it is fiber or towers or ground leases, increasingly small cells which we think are predominantly fiber driven.

We think the assets are increasing in value versus depreciating. We think carriers are very interested in finding partners to help them finance those assets. And as a REIT we are very uniquely situated to do a lot of that, particularly given that many of the underlying contracts on these assets are very long-term, predictable, cash paying contracts with escalators or growth potential through lease up potential.

So, when you think about all those characteristics we think it is a fantastic place for us to put our capital to work. We are very focused on fiber, that continues to be the dominant asset for us and that is reflected in our pipeline and frankly in our activity so far. And I think that is going to continue. But these other assets do fit as well.

And with respect to triple net versus operating, I think a lot of these assets have both an operating component and a triple net opportunity. There are absolutely situations where we are and have been looking at assets that are in the wireless broadband arena that could be treated as triple net versus operating ground leases, for example, or an extremely passive asset.

And the ones that we have accumulated so far have been true triple net assets and we expect that to continue. So, Mark, I don't know if you want to add anything to that.

The only thing I would say, having talked with the rating agencies about asset types I would say that wireless infrastructure assets are viewed very favorably by the rating agencies.

Thanks very much.

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back over to Mr. Kenny Gunderman for any closing remarks.

Thank you. And thank you all for joining our second-quarter earnings call. We look forward to speaking to you all on our next call.

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