Uniti Group Inc (Delaware) (UNIT) 2017 Q1 法說會逐字稿

Welcome to the Uniti Group's First Quarter 2017 Conference Call. My name is Janine, and I will be your operator for today. A webcast of this call will be available on the company's website, www.uniti.com, beginning May 5, 2017, and will remain available for 14 days. (Operator Instructions) 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.

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 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.

Good afternoon, everyone, and thank you for joining. Last week, we passed the 2-year anniversary of our spinoff into an independent publicly traded communications REIT. After a quiet start to develop our strategy and funnel, we rapidly evolved the company over the last 15 months from primarily a single tenant, 1 property landlord to servicing nearly 15,000 customer connections through 3 diverse but complementary business segments. We've invested over $1.5 billion in 7 acquisitions to grow pro forma adjusted EBITDA by $120 million or 18%. Top line growth revenue has grown 35% to over $950 million on a pro forma basis, and we have diversified our revenues from non-Windstream customers from 2% to 30%. With almost $10 billion in revenues under contract and an average remaining contract term of 12 years, with high-quality creditworthy customers, we have excellent visibility into our future cash flows. After spending a few days on the road marketing our recent equity financing, we are pleased that more and more investors are embracing our strategy and our recent progress. All of these bodes well for growing an exciting start for our third year of business.

Let me now provide an update on our recent acquisitions. Both Southern Light and Hunt continue to execute well on their 2017 operating plans. Both companies had a successful E-Rate season that typically ends in April. Hunt won a multiyear contract with one of the larger school districts in Louisiana to add to their leading market share in the K-12 education segment. Southern Light added 7 new school districts and 41 new school locations. Hunt and Southern Light each sold multiple year, multi-dollar contracts to connect over 100 combined locations for 2 Fortune 500 companies, with a potential for follow-on sales. Hunt also recently completed a new unique diverse fiber route into New Orleans for a national carrier, while Southern Light won 2 small set of awards for over 300 nodes. The Uniti Fiber route into New Orleans and the small cell deals have significant lease up potential as well. Finally, integration planning has started with both companies, so we can get a head start, and hit the ground running when each deal closes.

Despite using our most expensive sources of capital to fund these acquisitions, we are very pleased with the Hunt and Southern Light businesses, and expect they will become accretive once they are closed and we begin realizing the $12.5 million of cost savings. Our core businesses have also performed well. Uniti Fiber started the year with strong sales, with 88% of the bookings for small cell awards. All 4 of the national carriers are requesting proposals for small cells, and we are in the early innings of this new wireless network architecture. We expect demand for small cells will grow exponentially in future years, as the wireless carriers roll out 5G technology. This fiber infrastructure is the critical component to meet small cell demand, and we think we are well-positioned to win our share of this growing business. Uniti Fiber is also benefiting from an increase in wireless data usage, as all 4 national carriers are now offering an unlimited data plan. We've received bandwidth upgrade orders, totaling 175,000 of incremental MRR during the beginning of the year. Lastly, the integration of the PEG and Tower Cloud businesses is going well and ahead of schedule. We exited the first quarter with $6.1 million of annual run rate cost savings, achieving our $6 million target more than 2 years earlier than previously guided.

Turning to our tower business. Upon closing of the NMS acquisition, we were almost immediately able to execute an MLA with a new public-private partnership Red Compartida in Mexico, which should drive lease-up potential on our new towers. In the U.S., we continue to have fruitful holistic infrastructure interactions with wireless carriers that we believe drive deeper relationships with our customers and greater opportunities for our fiber business. Although we are very focused on closing and advancing pre-closing integration plans with Southern Light and Hunt, we continue to develop our pipeline for M&A and sale leaseback transactions. We are very encouraged by the quality of the discussions and the assets we are targeting, including specifically fiber and fiber-enabled consumer broadband. We feel very bullish about future M&A prospects, and although not included in our guidance, we are increasingly optimistic that there will be accretive M&A and sale leaseback activity during the balance of the year. With these opportunities in mind, we pre-funded the Hunt and Southern Light acquisitions with our most expensive sources of capital, while creating maximum financial flexibility for M&A during the balance of the year, including potentially larger, more strategic transactions.

With that, I will now turn the call over to Mark.

Thanks, Kenny. It was another busy quarter for Uniti Group, so let me get right -- let me get to the numbers right away, and then we'll get to your questions. Our consolidated operating results for the first quarter were again in line with our expectations with the consolidated revenues are $211.5 million and consolidated adjusted EBITDA of $177 million. AFFO for the quarter was $0.65 per diluted common share. Net loss attributable to common shares for the quarter after transaction-related costs was $21.8 million or $0.14 per diluted share. The net loss this quarter includes an $11 million noncash charge for a change in the fair value of contingent consideration related to Tower Cloud. The change in contingent consideration relates to the achievement of certain small cell deployment milestones. As Kenny mentioned, Uniti Fiber has made significant progress in both the deployment and winning of new small cell awards, which was part of our original investment thesis, and we continue to see strong order activity across-the-board from the major wireless carriers. Our leasing segment continues to provide reliable and predictable cash flows, with virtually no CapEx or working capital requirements and over 99% adjusted EBITDA margins. Leasing segment revenues were $170.3 million, with adjusted EBITDA of $170.1 million for the first quarter 2017. Our leasing segment benefited in the first quarter from nearly $34 million of improvements to our network made by Windstream with their capital. On a cumulative basis since our spinoff, we have benefited from almost $260 million of tenant capital improvements completed by Windstream. Uniti Fiber reported revenues of $34.8 million and adjusted EBITDA of $11.6 million this quarter.

These results were in line with our previous guidance and include over $1.2 million of realized cost savings during the quarter. Maintenance CapEx for the quarter was $0.5 million or 2% of revenues and net success-based CapEx was $11.7 million. Adjusted EBITDA margins for Uniti Fiber of 33% this quarter reflect some timing items such as a higher mix of construction revenues related to a state -- Department of Transportation project. However, for the full year, we continue to expect adjusted EBITDA margins for Uniti Fiber to average 38%, consistent with our previous guidance.

Uniti Fiber ended the quarter with $740 million of revenues under contract with a duration of nearly 6 years. As you will recall, we closed on an NMS acquisition at the end of January for initial consideration of $62.6 million. At closing, the NMS portfolio included 366 operating towers on 105 towers under development, all of which we expected to be completed in 2017. We completed and closed on 24 of the development towers during the first quarter of this year for $2.1 million. At quarter-end, we had approximately 90 towers under development, and nearly 500 towers completed and in service across our entire towers portfolio.

Turning to our capital markets activity. In April, we executed 2 transactions to pre-fund the announced acquisitions of Hunt and Southern Light. First, we issued 19.5 million shares of common stock at $26.50 per share for net proceeds of about $500 million. We had excellent demand on equity offering and continued to broaden our shareholder base with dedicated REIT funds, PMT infrastructure and many other long-only investors. Subsequently, we priced $200 million to 7 1/8 senior unsecured notes, due 2024, at 100.5% at par. Net proceeds are expected to be used to fund the cash portion of the purchase price of Southern Light. The bonds are required to be redeemed at 100% of the issue price if Southern Light does not close by October 14, 2017. In connection with our capital market transactions, we also increased our revolving credit agreement borrowing capacity from $500 million to $715 million. The increase in the commitment was effective last week. As a reminder, our revolver is priced at LIBOR plus 225 basis points or better, depending on our secured leverage ratio with no LIBOR floor. Accordingly, our liquidity and capital market access is in great shape. At quarter end, we had $68.7 million of unrestricted cash, and our revolving credit facility was completely undrawn. Our leverage ratio under our debt agreements at quarter-end was 5.9x based on net debt to annualized adjusted EBITDA. On a pro forma basis, adjusting for the aforementioned capital market transactions and announced acquisitions, our net debt to annualized adjusted EBITDA would have been 5.6x, and our secured debt ratio would have been 3.5x. Our regular quarterly dividend of $0.60 per share was declared earlier this week, representing an annual dividend rate of $2.40 per share.

Turning now to our 2017 guidance. Our outlook for 2017 is unchanged from our prior guidance, except for the impact of the recently announced capital market transactions and inclusion of our acquisitions of Hunt and Southern Light. While we'd normally do not include the effect of acquisitions in our outlook until they close, we thought it was appropriate to do so today, given our recent equity and debt offerings that effectively pre-funded these transactions. While the exact close dates may vary, we have estimated for guidance purposes that Hunt closes on June 1 and Southern Light closes on August 1. Accordingly, our outlook assumes the results of operations of Hunt are consolidated for 7 months in 2017 and Southern Light is consolidated for 5 months this year. On a consolidated basis, we expect reported revenues to range between $902 million and $910 million, and adjusted EBITDA to range between $743 million and $749 million.

During 2017, Hunt is expected to contribute $22 million of revenue and $10 million of adjusted EBITDA. Southern Light is expected to contribute $38 million of revenue and $21.5 million of adjusted EBITDA. Our expected results for Southern Light and Hunt include aggregate synergies in the post-close period in 2017 of $2.5 million. Accordingly, Uniti Fiber is expected to report consolidated revenues this year of approximately $198 million, and adjusted EBITDA of $84 million at the midpoint of our guidance range.

Moving to the corporate items. As a result of our recent unsecured notes offering, we now expect interest expense this year to be approximately $306 million, including approximately $23 million related to amortization of debt discount and financing cost amortization. We now expect weighted average common shares outstanding during 2017 to range between 169 million to 170 million shares, with the increase being attributable to the 19.5 million shares we issued in late April. Accordingly, we expect full year reported AFFO to range between $2.48 and $2.52 per diluted common share, with a midpoint of $2.50 per diluted share. The impact of pre-funding Hunt and Southern Light acquisitions was approximately $0.10 on an AFFO per diluted share basis. Excluding the pre-funding impact, our midpoint AFFO guidance would have been $2.60 per share. As a reminder, our outlook includes assumptions regarding the timing of the close of both Hunt and Southern Light transactions, and is subject to change based on the actual closing date for these acquisitions as well as the finalization of purchase price allocation adjustments. The full range and components of our guidance is included in our earnings release issued this afternoon.

In closing, let me say that we are incredibly optimistic about Uniti Fiber's progress and future prospects as well as the progress we've made on diversifying our business since our spinoff 2 years ago. Our operating structure should be implemented within the next week, and we have ample liquidity and excellent capital market access to continue to execute our M&A for M&A opportunities.

That concludes my prepared remarks, and we'll now take your questions.

(Operator Instructions) And our first question comes from Simon Flannery with Morgan Stanley.

Kenny, in your prepared remarks on the press release, you say, industry dynamics are creating more opportunities. Could you just elaborate on what you're referring to with that industry dynamics? And in terms of the small cell business, maybe you can -- (inaudible) has done a good job of helping us understand the base returns on capital, and then the lease opportunities of capital. What are you underwriting when you're doing these sort of deals as your base, and then the opportunity to lease that up to multiple tenants over time?

Sure, Simon. In terms of the industry dynamics, I would say that we think this is the busiest time in telecom M&A that we've seen since we were spun out, not just among ourselves but also among others in the industry, both large and small, buyers and sellers, merger partners. And we're very pleased to be in the middle of a lot of those discussions, again, both with smaller parties and with very large parties. I think it's a result of our last couple years of pipeline development. But as we've always talked about, given our unique structure, there's a lot of different ways we can participate in the M&A trends, and just given the activity level, as a result, there's a lot of different -- a lot of incremental activity in our pipeline that we're extremely excited about.

And -- particularly fiber and consumer -- both fiber and consumer broadband, is that where you're seeing the tick up?

Yes. I would say the vast majority of it is fiber-related, and that area continues to grow a tremendous amount of interest and excitement around fiber, and then fiber-enabled consumer broadband, but I would say the vast majority is just pure fiber.

Simon, this is Mark. On your question about underwriting, so we underwrite the initial yield. It's pretty consistent with what is -- we've talked about before, so kind of mid-single-digit for the initial anchored tenants, so 5% to 7% initial yields. Obviously, then, we also look at the lease-up potential, so you quickly get up into 15% range. And then if you look at unleveraged IRRs towards the kind of the life of the initial contract, you're generally 20% plus.

And do you have any kind of early indications that -- of the ability to lease up? You're getting multiple nodes or new tenants coming on as quickly as you expected.

So Simon, we do have 1 deployment, where we now have the second carrier. So 2 of the large wireless carriers, and we're excited about that. So at this early stage, to have that second wireless carrier on a small cell deployment, I think, is encouraging to us, particularly when you consider we're in the tier 2 markets, which many people consider to be less likely to be small cell deployments, and where people have expressed some issues about there being small cell deployments, and we've always said we don't think that's the case. We think there's -- we think these are -- many of these metro areas are actually ripe for small cell deployments, and we're seeing that. With respect to leasing up those networks to non-wireless carriers, we haven't started to see that yet. But we fully expect that we will once those networks are more fully built. We think there'll be opportunities for enterprise lease up, E-Rate lease up and wholesale lease up. You just need to have the networks more fully built out before you can access those customers, and we're still early enough in the cycle that we haven't seen that yet.

Our next question is from David Barden with Bank of America.

A couple of questions, if I could. Just first, Mark, a housekeeping item. Are the contemplated unit issuances related to the deals included in the AFFO per share calculations? I know you mentioned the equity issuance just completed was, but I wasn't sure if those units were as well in the denominator. The second question was, maybe Kenny, if you could elaborate a little. I know a lot of the deals and the hope for deals that you guys were negotiating mostly on the fiber side presumably were going to be privately negotiated. And obviously, we've seen some pretty heated public auction types of environments. And I was wondering if you can talk about valuation creep into some of those private conversations. And if you still see similar opportunities on return basis out there in the market. And then I guess, the last one would be if you could talk a little bit, just revisit this EarthLink conversation. Obviously, it could conceivably be pretty easy to generate an AFFO accretive deal working with your partner, Windstream. But I see a lot of downsides to potentially reversing out of a lot of the diversification you've achieved, and locking up capital in kind of a less dynamic framework than some of the growth in the things you're investing in. If you can kind of revisit your thinking on where that might rank in the list of opportunities out there, would be great.

Dave, this is Mark. Let me go first. On the OP unit question is yes, the dilutive effect of the OP unit is included in the AFFO per diluted common share number that I gave out earlier. So just so you know, the way the OP units are handled is they actually -- it will show up in the income statement as a deduction from net income. So they show up as noncontrolling interest. And so when you -- we report AFFO per diluted share, so they are a deduction before we arrive at AFFO per diluted common share. So they are not in the 169 to 170 range that I gave on the weighted average common shares, but they are included as dilutive effect because the effect is -- are the income allocated within this is deducted before we get to that number.

And David, with respect to your question about value creep, I think the short answer is, we've definitely seen that in pockets of the industry, but we haven't seen it really impact our pipeline. So the longer answer is these kind of 17 to 18, 20x multiples really started almost 2 years ago, maybe a little longer actually. And with the most recent one being, I guess, a few weeks ago maybe a month or so ago. And during that period of time, we've managed to acquire 4 very high-quality fiber companies at valuations less than that. In some cases, substantially less than that. And so we're very pleased with that, especially when you consider the fit of those assets and the fact that we really targeted all 4, and we're able to really secure the ones we wanted for the most part in proprietary discussions. So we're very pleased with that despite the value creep that you're seeing in some pockets of the industry. And I would just point out that our strategy is different from others' strategy with respect to assets that we're targeting. And by that, I mean, we are not specifically targeting the top 10 or 15 or 20 markets in the country. We are targeting tier 2, largely tier 2 markets, and we're focused on building out geographies or regions, which in a nutshell, and we're also not just targeting small cells. We're targeting good fiber companies that have anchor relationships, whether it be wireless carriers or E-Rate, but then with a plan to lease up those businesses to enterprise and wholesale, some more of a holistic fiber strategy. So when you consider the difference in our strategy versus others that are paying somewhat higher multiples, the conclusion of that is we're really not looking at the same assets. We're looking at different ones. And so as we continue to prospect for acquisitions, we definitely continued to see very high percentage of our discussions are proprietary one-on-one type conversations, and we also continue to see the valuations in the same ranges of our historical acquisitions.

And then just following up on Earthlink?

Yes, I'm sorry, David. So on Earththink, look, I think the way you phrased the question is appropriate in terms of we have stated very clearly repeatedly that our mission is to diversify. We're very, very focused on that. And so anything that counteracts that diversification requires a high bar for all us to cross in order to transact, and so you start with that, and that hasn't changed. Secondly, I think we've said that if there's a discussion to be had with Windstream on EarthLink, we're happy to have it. But we're coming at it from a position of the transaction needing to be a positive transaction for us, not only financially, but also on market lease terms and also a transaction that has a strategic element to it in addition to just having the financial benefits of being immediately AFFO accretive, like you mentioned. And look, as we've also pointed out across-the-board in our sale leaseback transactions, there are many creative interesting ways for us to add strategic elements to those transactions that bring benefit, not only to our leasing business, but to Uniti Fiber, the operating business. So there are some raw materials there for an opportunity for us that could be attractive, but at the same time, the bar is high.

And our next questioner is Frank Louthan with Raymond James.

I apologize, I had not seen it's the release there. But can you just tell us where you are as far as towers either under development or are currently active? And any thoughts on opportunities with build-to-suit maybe in the U.S. that you may see over the next 12 months?

So Frank, I'll start. So what we said earlier was that we have about 90 towers currently under development, which means, today, we have about 500 towers in service and completed across our entire portfolio.

Do you have anything else, Mark? And Frank, on the second part of your question, nothing new to report. We continue to have good discussions, and continue to think there could be opportunities for us on the build to suit side in the U.S. I think, just to reiterate what I've said before, we view that opportunity as very opportunistic. It's not something we have to do. It's not something that is critical to driving the business, but we view it as synergistic with our customer relationships. We view it as synergistic with our -- frankly, with our Uniti Fiber business, and we do think that there could be situations, where we have a competitive advantage relative to others. And as a result would find economically attractive deals for us, and so we continue to focus there. And when we have an opportunity that's material enough to talk about, we'll bring that to the -- bring that to your attention.

Okay, great. And then I guess as far as back to sort of to David's question, one thing we hear from investors, so you guys maybe at a competitive disadvantage as far as bidding for things, and clearly, you are winning your share of deals. Maybe walk us through what are they looking at a little differently in partnering with you versus some of the other transaction that we see closing?

Yes, I think, Frank, again, we're focusing on markets that are geographic -- or businesses that are in our regions, geographically contiguous to our network. And so you immediately start with a strategic, logical fit with our business. So if you have a seller who can see the strategic fit and merit, I think they immediately view there as being a good opportunity to drive value, not only for us, but for themselves as selling shareholders. Secondly, and as it relates to the first point, in all of our deals, the selling shareholders have taken equity, either equity or OP units. And so I think part of our appeal is the opportunity to have shared -- upside shared interest post-closing and related to that with our structure, we've been -- in our past 2 transactions, in particular, we've used the OP units as a tax efficient, tax deferral mechanism that's appealing to sellers, particularly, private sellers, particularly, family sellers, which has been the case in most of our deals, most of our -- most of the counter parties that we've been talking to have been private family owned companies. So I think all of that is unique. And lastly, I would say we are still a new company. I mean, we've just crossed the threshold of being 2 years old. And what that means is that when we're out talking to management teams, and certainly, family-owned businesses, we are able to make the case that we are still building out our management team, still filling in, looking for good talented people to add to the team. And so every transaction that we've done has not always been about the assets and the fit, but it's also been about management and bringing in good talent. And when you can make all of those points together, you tend to -- those tend to lead to proprietary discussions.

And our next question is from Jennifer Fritzsche with Wells Fargo.

I wanted to explore towers a bit more. I think, in the past, you all have said that what you were hearing from carriers is the need for 20,000 towers over 5 years. I guess, somewhat, where you stand now, would you still agree with that pipeline? And then secondly, if I could, you check many boxes for the wireless carriers, fiber, small cell, macro. Are you noticing that the carriers themselves are more inclined to work with the kind of jack-of-all-trades, for lack of a better word, that you seem to offer?

Jennifer, so I think the short answer to both of your questions is yes. And on the first one, we not only see that number or sort of come to that number based on our own conversations, but also what we see in some outlook research and other sources, and so still think that is an appropriate number. And when you think about the -- just the magnitude of that opportunity set, you can see why just in the vacuum it make sense for us to have it as a focus area as part of our portfolio, particularly when you consider that all of those towers need to be enabled with fiber. And that, of course, will require substantial investment from the carriers, which leads to your second question. And we absolutely believe that being able to have conversations across those different asset classes that you mentioned is critical to us. And we see the growing significance of that every day. And I think that, again, is also why we continue to have macro tower discussions, in addition to, clearly, fiber and small cells, and frankly, other things, including M&A.

Got it. And Kenny, if I may, just one more question. On the last call, you had mentioned, without naming, which I appreciate, one carrier kind of pulling back. There is one carrier doing more of a self-performed fiber push. Is that -- is your sense that, that is going to kind of increase the urgency of the other fiber -- other incumbents to maybe spend ahead of that?

Yes, and so with respect to that unnamed carrier, I think I know what we said before was we have seen that pull back in pockets, but we haven't seen it impact our business, and that continues to be the case. We've seen the press releases, as we understand, we see what they're doing in some markets. But in our markets, we actually continue to see good, good flow, and frankly, as good as we've ever seen, I would say. And with respect to how that has impacted other carriers and their mindsets, it would be hard for me to say, other than we continue to see very good flow from all the other carriers. I think that's probably as good as I can say.

And our next questioner is Michael Rollins with Citi.

Just curious, if you unpack the AFFO guidance, is there a way to think about that, if you remove the combination of pre-funding, which you noted in the release and you look at the acquisition on a full year contribution basis, what the AFFO per share might look like? And then can you give us a sense for the non-Windstream revenue, the totality of the towers and the fiber? How much AFFO can that contribute on an annual basis as you start looking at what's in your pipeline and what you've already booked in terms of future projects

Yes. So I'll take your first question. I think the 260 number that we have is actually pretty representative. So I mean, you can look at the acquisitions on both based on estimated closing days, taking out the pre-funding effect, which we did. You can also look at the acquisitions on a pro forma full year basis. Frankly, I think that probably the most -- maybe the most helpful thing to do is to look at it on a -- if you look at it on a fourth quarter 2017 pro forma basis kind of run rate basis, we'd be around -- in that case, we'd be around kind of the 260 to 262 range, putting all the assumptions you made. We've got pro rata synergies, and then if you had full run rate synergies, you'd be a little bit higher than that. Because obviously, the full run rate synergies, what we've said is that will take about 2 years to get the full run rate synergies, but on the PEG and tower cost synergies, we actually accomplished those quite a bit ahead time, maybe 2 years ahead of time, and there's always the opportunity for us to do that on the Hunt and Southern Light synergies as well.

And I would now like to turn the call back to Mr. Gunderman for any final remarks.

Thanks, everyone, for joining our call today, and a special thanks to our Uniti employees for their hard work and dedication, especially during this especially busy first quarter. I look forward to updating you next quarter when we hope to also welcome the Hunt and Southern Light employees to the group, Uniti Group. Thank you all for joining.

And again, thank you all for joining us today. This concludes our program, and you may now disconnect.