Uniti Group Inc (Delaware) (UNIT) 2017 Q4 法說會逐字稿

Welcome to Uniti Group's Fourth Quarter 2017 Conference Call. My name is Michelle, 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 March 1, 2018, and will remain available for 14 days. (Operator Instructions)

The company would like to remind you that today's remarks 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 the company's filings with the SEC. Our remarks this afternoon will reference slides posted on our website, and we encourage you to refer to those materials during the call.

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. The company will not be responding to questions regarding Windstream's current litigation during this conference call, as Uniti Group is not a party to that litigation.

I would now like to turn the call over to Uniti Group's Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thank you. Good afternoon, everyone, and thank you for joining. As we exit 2017 and begin a new year, I'd like to briefly reflect on industry trends and how our strategies are positioning us well to have sustained success. I'll begin my remarks focused on Slide 4 of our website presentation.

First, demand for fiber infrastructure continues to be the top telecom theme. Wireless carriers have intensified their densification plans, and we expect the first 5G fixed wireless and mobility network deployments to be launched in select markets in 2018. We expect the market level trials and deployments will quickly lead to wireless carriers to a national 5G rollout, similar to the pattern for 2G, 3G and 4G technology changes. 5G require small cells and small cells require fiber, and Uniti owns 1.1 million fiber strand miles of leasable inventory as we enter the year, and expect inventory levels to grow organically and through acquisitions throughout the coming year.

Second, the recent tax reform legislation, the elimination of the Sprint-T-Mobile merger overhang and Sprint's recent announcement to increase investment in their network have generated a positive tailwind for wireless carrier capital spending that we expect will benefit both our fiber infrastructure and tower operating businesses, and create opportunities for bundled offerings.

Third, the continued expansion of the Red Compartida wholesale wireless network in Mexico and the 2018 groundbreaking of the FirstNet network in the U.S. will create lease-up and build-to-suit opportunities on both sides of the border for tower space and new towers. Our strong relationships with the national wireless carriers of both Mexico and the U.S. should position us well to capitalize.

Lastly, the telecom industry is embracing the idea of shared fiber infrastructure, including now through innovative sale-leaseback transactions. Our announcement today of the sale-leaseback transaction of a fiber network that will allow us to lease fiber to TPx as our anchor customer and eventually to other carriers is further proof that existing fiber can be more efficiently owned in a shared infrastructure model. I will have more details to share on the TPx transaction later in this call.

All in all, our vision to create a real estate investment trust focused solely on communications assets with fiber as its future asset is coming into focus. And we are bullish on our future prospects across all 3 of our fiber, tower and now leasing business segments. I will provide an update on our operational results for the fourth quarter now.

Uniti Fiber's sales bookings were $3.2 million pro forma for Southern Light and Hunt for the full year 2017. 38% of our sales bookings during the fourth quarter came from the 4 national wireless carriers, 30% from wholesale and 32% from local enterprises, government and K–12 schools. Wireless sales bookings for the quarter were primarily for leasing dark fiber to the tower for backhaul.

Recently, we're seeing very active RFP activity for small cells and backhaul from all the carriers in our markets. Wholesale and enterprise bookings were very diverse and spread over 250 different customers, reflecting the sprawling reach of the 32,000 route miles with the Uniti Fiber network.

Uniti Fiber installed 0.9 million of MRR and MAR during the fourth quarter of 2017, with 30% related to bandwidth upgrades driven by the unlimited data plans of the wireless carriers and 16% relating to dark fiber backhaul projects. Small cell installs were relatively small, as expected, during the fourth quarter, but we did see a pickup in permitting activity that we expect will set the stage for a strong second half of the year for small cell installations.

Total churn for the quarter was 0.5 million, resulting in a 0.8% monthly churn rate driven by the lit backhaul disconnects in the Dallas and Atlanta markets that were awarded to another carrier as part of a dark fiber conversion that predates our acquisitions of PEG and Tower Cloud. We expect monthly churn to increase in the first quarter as the remaining 260 disconnects are completed before returning to the 0.6% range in the following quarters.

Uniti Fiber continues to make very good progress on integration. We recently approved 2 high-rate-of-return integration projects in the Southeast markets that will add a local sales force in 5 legacy Uniti Fiber markets and reduce off-net lit service expenses by further integrating our networks. The local sales expansion will add 8 new sales reps focused on selling to near-net enterprises, school districts and government offices following the go-to-market approach successfully used in the past by Southern Light and Hunt.

The project capital cost is expected to be less than $1 million, and we expect the expansion to be about $1 million dilutive to adjusted EBITDA in 2018, as it will take a few quarters for the new sales force to ramp up sales. We anticipate these new local markets to be generating approximately $10 million of revenue and $6 million of adjusted EBITDA by 2022.

In addition, we started a project to reduce off-net circuit costs in the Southeast markets by further interconnecting the legacy fiber networks of PEG, Tower Cloud, Southern Light and Hunt. We expect to save over $6 million in annual expenses above and beyond our original synergy target of $12.5 million when complete in early 2020. The project will require a $17 million capital investment with a payback of 2.6 years. We are pleased with the operational performance of Uniti Fiber, and our integration efforts has positioned us with one of the best fiber operating platforms in the industry.

Turning to towers. We continue to see excellent lease-up activity on our tower portfolio in Mexico. We added 22 colocation tenants in the fourth quarter and now have an additional 30 colocation leases that we expect to be added to existing towers in the coming quarters. We're also excited about the investment opportunity to construct new build-to-suit towers.

Recent market research forecasts approximately 25,000 new towers will be built in the U.S. over the coming 5 years, and we anticipate we can capture at least 5% of this growth. Our investment thesis is to create a flexible tower lease option for our wireless customers while earning yields ranging from 5% to 12% on the anchor tenant. We expect the second tenant will increase the yields to 13% to 25%.

Constructing BTS towers adds to our wireless carrier product suite of small cells and lit and dark fiber backhaul solutions, and allows us to leverage our current customer relationships to cross-sell and bundle with our fiber products. We began building towers in the U.S. in 2017. Although the sample size is small, we've already received colocation applications from second tenants and orders to build fiber backhaul for the anchor tenant for a handful of towers.

We believe we are the first in the industry to bundle traditional backhaul with owned macro towers, and we expect this trend to continue. We further believe owning fiber to our own towers enhances the value of the tower real estate, including by making customers stickier, enhancing the lease-up potential and providing greater optionality for treating the tower real estate as distributed architecture in the future.

We expect the BTS tower investments could add approximately $50 million of revenue by 2022. We have strong momentum in the tower segment and expect Uniti Towers will be a key component of our revenue growth and diversification in future years.

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

Thanks, Kenny, and good afternoon, everyone. Please turn to Slide 5 in the presentation. I'll start with a review of our results for last year. Our consolidated operating performance for the fourth quarter was again in line with our expectations, with consolidated revenues of $246 million, consolidated adjusted EBITDA of $198 million, AFFO attributable to common shares of $112 million and AFFO per diluted common share of $0.64.

Net income attributable to common shares for the quarter after transaction and integration-related costs was $20.5 million or $0.12 per diluted share. Net income for the quarter included several noncash items which are excluded from both AFFO and adjusted EBITDA. These fourth quarter noncash items included $1.6 million of noncash expense for the change in fair value of contingent consideration agreements and $28 million of noncash income tax benefits.

The tax benefits included a $10 million release of deferred tax valuation allowances resulting from an internal reorganization of our Uniti Fiber entities into a combined structure, and about $18 million of noncash unit income from the impact of tax reform that allowed us to remeasure our TRS net deferred tax liabilities at the new lower rates.

Our Leasing segment revenues were $172.2 million with adjusted EBITDA of $171.8 million for the fourth quarter of 2017. Windstream made nearly $62 million of improvements during the quarter to our network with their capital. On a cumulative basis since our spin-off, we have benefited from over $450 million of tenant capital improvements completed by Windstream.

Uniti Fiber reported revenues of $66.6 million and adjusted EBITDA of $31.5 million, achieving adjusted EBITDA margins of just over 47% for the quarter, consistent with our prior guidance. These results include $2.5 million of realized cost savings during the quarter, and we exited 2017 with annualized run rate cost savings attributable to the Hunt and Southern Light acquisitions of $10 million.

Maintenance CapEx for the quarter was $1 million or 1.5% of revenues. Net success-based CapEx was $39 million, of which about 40% was directed towards our major dark fiber and small cell deployment projects. Our fourth quarter net success-based CapEx at Uniti Fiber was about $17 million higher than our prior guides due to the timing of some upfront customer NRC payments that we now expect to be received in early 2018.

Uniti Towers completed and closed on the acquisition of 7 NMS development towers during the fourth quarter, bringing total 2017 completions to 50 development towers. CapEx was $14.6 million for the quarter, including $7.9 million of ground lease investments. At year-end, Uniti Towers had 227 completed and in-service towers in the U.S. and 440 towers in Latin America, for a total of 667 towers in service. Uniti Towers reported revenues of $3.4 million with slightly above breakeven adjusted EBITDA for the fourth quarter.

Please turn to Slide 6 now, as I'll cover our 2018 guidance. Let me preface our 2018 outlook by noting that it does not include any future M&A or capital market activities and does not include the TPx transaction that remains subject to closing conditions.

Our current outlook includes the following for each segment: We expect Uniti Fiber to contribute $281 million to $289 million of revenues and $126 million to $132 million of adjusted EBITDA for 2018. At the midpoint of our guidance range, our revenue forecast of $285 million represents a growth rate of 8% over full year pro forma 2017 levels. Our annualized 4Q '17 to annualized 4Q '18 revenue growth rate would be about 10%, which is consistent with our expectation for core fiber revenues long term.

Adjusted EBITDA margins should be approximately 45% for the full year. We expect adjusted EBITDA margins to be slightly lower early in 2018 -- slightly lower in early 2018 than the average for the full year and then improve throughout 2018 to approximately 48% by the fourth quarter. That trend reflects the front-loading at certain disconnects, investments in market expansions that Kenny discussed earlier, the timing of cost savings realizations and other factors.

I want to spend a couple minutes to update you on our integration cost savings initiatives. We initially announced that the Southern Light and Hunt combinations were expected to result in run rate cost synergies of $10 million in year 1 and $12.5 million of run rate cost synergies within 24 month of closing. We are increasing those estimates today by $6 million and now expect to ultimately achieve $18.5 million of annual savings by 2020.

The increased synergies primarily relate to off-net savings as we interconnect the legacy networks in the Southeast. As Kenny already noted, we expect to invest about $17 million of integration CapEx over the next 3 years, including the $11 million reflected on this slide in 2018 in order to achieve those benefits.

During 2018, we expect to realize aggregate cost savings of $12.5 million and will exit 2018 with annual run rate cost savings of $14.5 million. We expect maintenance CapEx related to Uniti Fiber to be about $8 million or 3% of revenues, at the midpoint of our 2018 guidance range.

Net success-based CapEx for Uniti Fiber in 2018 should range between $144 million to $164 million, or $154 million at the midpoint, of which about 40% will be directed to dark fiber and small cell projects. We currently have 7 major greenfield dark fiber projects underway. All of these projects will be completed this year except for the North Florida and Gulf Coast projects, which are scheduled to be completed in 2019. We have 6 major small cell projects being deployed this year, of which one should be completed by year end and the balance in 2019. We expect Uniti Fiber's capital intensity to approach normal levels once these projects are completed.

Turning to Slide 7. We have good visibility into core revenues that we expect will drive 12% growth of MRR and MAR during 2018. We expect to install about $52 million of annualized MRR and MAR during the year, including $19 million for dark fiber and small cell connections, $28 million for lit services and $5 million for bandwidth upgrades.

Monthly churn for 2018 is forecast to be 0.7%. The disconnect churn is expected to be front-loaded into the first quarter of the year due to the anticipated timing of the Dallas and Atlanta lit backhaul disconnects. As you know, one of the attractive characteristics of Uniti Fiber in this business is the long-term customer contracts that provide good line of sight into revenues. Uniti Fiber entered 2018 with $1.3 billion of revenues under contract, including nearly $500 million of backlog expected to be activated over the next 3 years. Over 42% of revenues under contract and 82% of backlog are for dark fiber and future small cell deployments with wireless carriers as anchor tenants.

Turning to Slide 8. We expect Uniti Tower's revenues in 2018 to range between $14.5 million to $15.5 million, with adjusted EBITDA margins of about -- with adjusted EBITDA of about $2 million. We expect 27 NMS development towers to be completed and acquired early in 2018. We expect Uniti Towers to win additional opportunities for build-to-suit towers in both Mexico and the U.S. this year. Our Uniti Tower's 2018 capital spend guidance is $90 million to $95 million, with the expectation that we construct approximately 300 towers this year.

Turning now to Slide 9. Leasing segment revenues are expected to be $690 million, including $34 million of noncash revenues. On a cash basis, the 1.5% escalator in the Windstream lease goes into effect on May 1 of this year and increases our annual rent by $3.3 million. Adjusted EBITDA for our Leasing segment should be approximately $688 million. On a full year pro forma basis, assuming the TPx transaction closed on January 1 of this year, revenue and adjusted EBITDA would increase by $9.8 million, which includes $8.8 million of cash rent and $1 million of straight-line noncash revenue.

Turning now to Slide 10. For 2018, we expect full year AFFO to range between $2.52 and $2.57 per diluted common share, with a midpoint of $2.55 per diluted share. On a consolidated basis, we expect revenues to be just over $1 billion and adjusted EBITDA to range between $796 million and $805 million, or $800 million at the midpoint of our outlook.

Assuming the TPx transaction closed on January 1, 2018, our pro forma consolidated revenue and adjusted EBITDA would have increased by $10 million, and AFFO would have increased by $6 million or $0.03 per share to $2.58 per diluted share. We expect our Consumer CLEC business revenues should approximate $13 million to $14 million with average adjusted EBITDA margins of approximately 21%, consistent with prior trends.

Corporate SG&A, excluding amounts allocated to our business segments, should be approximately $28 million, including $6 million in stock-based compensation expense. Consolidated interest expense for the full year should be $320 million, including $25 million related debt discount and financing cost amortization. Our guidance assumes a weighted average common shares outstanding during the year of 176 million shares.

As a reminder, our 2018 outlook does not include any future acquisitions, capital market transactions, or future transaction and integration-related costs.

Before I turn the call back over to Kenny, let me discuss our balance sheet for a moment. While liquidity continues to be in good shape, at quarter end, we had nearly $60 million of unrestricted cash and cash equivalents, and $470 million of undrawn capacity under our revolving credit agreement. Our leverage ratio under our debt agreements at quarter end stands at 5.8x based on net debt to annualized adjusted EBITDA.

As we head into 2018, our priority continues to be driving diversification through organic growth and M&A. As we've previously mentioned, we are in active discussions with several private capital sources on a range of transaction opportunities and a variety of different structures. While these discussions are ongoing and we can't prejudge the outcome, we may execute on one or more of these opportunities in 2018.

I'll now turn the call back over to Kenny to discuss TPx in more depth.

Thanks, Mark. Turning to Slide 11. I'd like to review the sale-leaseback transaction we announced this afternoon. TPx is a privately held managed service provider with fiber networks and data centers in California, Nevada, Texas and Massachusetts. Over the last few years, TPx has made a strategic shift from a facilities-based CLEC to an enhanced managed services provider.

As a result, they were interested in selling their fiber network to unlock the value of the excess fiber capacity and improve their leverage and credit profile. We acquired 45,100 strand miles of fiber for $95 million and simultaneously entered into a 15-year triple net master lease that will pay Uniti $8.8 million in annual rent plus a 1.5% annual escalator.

We are well protected, with a minimum rent coverage test and maximum leverage ratio covenants embedded in the lease, and view TPx as a strong, creditworthy tenant in the fast-growing data center and managed services provider segment. This investment will generate cash yields starting at 9.3% and growing to over 10% over the initial lease term. The triple net lease structure will create adjusted EBITDA and unlevered free cash flow margins of 99%.

Uniti has exclusive access to use at our Uniti Fiber business or right to lease 7,000 strand miles of unused fiber in 5 Texas market -- 5 Texas metro markets that are adjacent to our Southern Uniti Fiber network. In addition, Uniti has entered into a nonexclusive marketing agreement to sublease up to 22,000 unused fiber strands in California and Massachusetts on behalf of TPx, with revenues being shared. The combined impact of these provisions is to add approximately 29,000 fiber strand miles of inventory for future sales and leasing. The TPx transactions will be accretive immediately and add $0.03 per share of AFFO during the first full year.

Turning to Slide 12. The transaction is expected to close in 2 tranches: the non-California assets are expected to close in the second quarter of 2018; and the California assets are expected to close in third quarter of 2018. As I mentioned in my opening remarks, we're very excited about this deal and how the telecom industry is gaining traction with the concept of shared fiber infrastructure.

Our growth and diversification strategy remains on track to achieve 50% revenue diversification by the summer of 2019. The 2018 guidance Mark provided adds 2% and the TPx deal will add 1% to take us to 33% of non-Windstream revenue by year-end 2018 and before any further 2018 M&A. We remain focused on acquiring both adjacent fiber businesses and sale-leaseback transactions on fiber network assets. Valuation multiples for assets in Tier 2 and 3 markets are relatively unchanged from our last call. Corporate development activity remains high, and we are confident there are more actual deals in the coming 18 months.

Turning to Slide 13. We now own a unique portfolio of communication assets in some of the fastest-growing segments in telecommunications. Our wireless product suite of macro towers, small cell nodes and fiber backhaul to the tower have low tenancy ratios with significant leasable capacity on the current sites, plus additional potential sites within a short distance of our Uniti Fiber network.

With only 22% of the Uniti Fiber network utilized today and the unused fiber from the pending TPx deal, we now have over 1.1 million strand miles of fiber for future sales and leasing that can be monetized in all customer verticals that we actively sell. The incremental costs to add a new tenant is relatively small, which drives attractive incremental yields across all of the asset classes. We expect these strategic assets will position us well for sustained organic growth for many years.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from Philip Cusick of JPMorgan.

A couple of things. First, I wonder if you can say again what's that -- I think you said 50% revenue diversification by summer of '19?

Yes. That's right, Phil.

And right now, it's 30% on the done deal count?

By the end of the year with the deal, it'll be 33%.

Okay. So that's a pretty huge acceleration from what we've seen for last couple of years. What's happening in the pipeline that gives you that kind of confidence?

Yes, I don't think it's a huge acceleration, Phil. I mean, I think -- we didn't really have any deal activity in 2015. We were developing the pipeline, putting the company together essentially, and really in 2016 and 2017. So 18 months effectively, we moved the needle pretty dramatically to 30%. And so we're really, this year alone, we're already at 33% just through organic growth and the deal we've announced. And so I think over the next 18 months, we still feel that just based upon the regular pipeline work that we've developed and what's in the pipeline and how we think it's going to play out, we still feel good about that target.

Good. And then if you can talk more about your tower business, talk about the funnel of business. You said 25,000 in the next 5 years. You could even take 5%. What does that sort of funnel look like right now?

Yes. It's -- what I would say -- so I think the CapEx guidance for the year is probably a pretty good proxy for that. I think if you consider that towers cost anywhere from $300,000 to $350,000 to build, you can back into the number that Mark mentioned, roughly 300 towers this year. I think we actually feel very confident that we could rent that number up fairly dramatically if we chose to, based upon the dialogue that we're having with our customers. So I think the number that we're targeting for this year is reflective of what we're comfortable with in terms of prioritizing capital. But in terms of the 5% number over the next several years, I feel very confident based upon customer dialogue that we could achieve that number if we chose to.

Okay. And one last one on the Windstream side. You talked about the covers that you have and the guarantees. What about some of level of negotiation where they just sort of handed you assets and the right to market those assets? Is that something that sounds more feasible? Or is the current lease something that really stands in stone and you wouldn't want to be able to change that -- or be willing to change that?

Phil, I'm not sure if I'm completely following your question. Do you -- are you talking about some of the unused fiber that exists?

Yes. I apologize. I'm trying to think of -- what we hear from investors is whether there's creative ways that we can bring down the current lease pricing. And I'm wondering whether you'd be willing to do that in exchange for assets or something like that? Or does the current revenue for you coming in from all of these, is that so important that you wouldn't be willing to reduce that?

Yes. Thank you for clarifying. So we're not interested in reducing the lease payment. We've said that before and continue to believe that, say that. But there are definitely ways that we and Windstream could work together to effectively monetize some of the unused fiber at Uniti Leasing that could benefit both companies. So there's absolutely some opportunities there that we will continue to pursue over time.

Our next question comes from David Barden of Bank of America.

Just a few, I guess. First, I mean, Kenny or Mark, with respect to the TPx transaction, I guess, 2 questions. One would be, there seemed to be 3 parts to it: one is the sale-leaseback, one is the acquisition of the fiber and one is the marketing rights. I was wondering how you kind of thought about allocating value within that $95 million with -- among those parts? The second question is, is this deal accretive to AFFO day 1? And if so, what is the capital structure that you think supports that calculation? I guess, I get about 9.2% yield on the lease part of it. And then, I guess, 2 more questions if I could, sorry. The third question was just, over the last 6 months or so while Windstream's been struggling, I think that there's been a recognition your capital structure has been under undue pressure. And I think, Mark, you've talked about how maybe deferring some capital raises and waiting for this to resolve itself might be the better course of action. But now that we're in this kind of rate hike environment, LIBOR spiking, T-bonds are spiking, I was wondering if you could kind of revisit how you think about the trade-off between waiting for the Windstream resolution and dealing with the rate environment in terms of the pacing of coming to terms under these deals. And sorry, the last question is just on the fiber business. I just want to make sure I understood. So fourth quarter fiber business was $31.5 million revenues. If it's going to grow at 10%, that means it has to end next year at about $34.5 million in the fourth quarter. If I ratably grow it, the guidance would be, for the year, somewhere closer to the -- sorry, EBITDA, closer to the mid- to high 130s. You're guiding to 129. And I'm wondering if that's because of all of these upfront kind of churn and investment things you were talking about. If you could kind of walk us through that cadence, it would be helpful.

David, it's Kenny. I'll start with your first question and we'll try to get the rest of your questions, but keep us honest if we miss one. With respect to the TPx deal, I think you're right. There's relative -- roughly 3 components: the acquisition of the fiber; the lease back to TPx; and then, effectively, the ability to monetize the rest of the lease ourselves, whether it's exclusively for the fiber in Texas or jointly with the fiber outside of Texas. We -- no surprise, we looked at it as a combination. We looked at all those factors when we looked at the valuation and what we paid and also the lease rate. It was a combination of those things plus our comfort in the credit of the company, the management of the company, the trajectory of the company. And ultimately, we think -- the vast majority of the value is what we're paying for the fiber itself. We think this is valuable fiber. It's in attractive metro areas. And the lease rate, while attractive on its own, we think can definitely be improved over time with lease-up or using some of the fiber in these Texas markets. So it was a combination of all those things. We didn't attribute value specifically to the 3 buckets, but I'd say it was predominantly related to the fiber network itself.

Yes. So I'll take your question on the TPx financing. So on the 3% accretion that we -- or the $0.03 accretion that we showed, that's based on financing the TPx transaction on our revolver. And so as you know, as I outlined on the outlook, our outlook assumes that there aren't any additional M&A transactions or any additional capital market transactions either. And as you know, that's due to the uncertainty in predicting when you'll have successful outcomes and timing on deals as well as capital market conditions. So our outlook kind of inherently assumes that transactions, including TPx, are financed on our revolver. That said, I'd expect any additional capital market transactions or any equity issuance in the future to be done in connection with future M&A or other strategic transactions. And those transactions, at the time, will be designed for us to continue to be -- to meet our long-term leverage targets, which is to be -- to maintain our leverage about where it is today. So I expect -- I do expect us to maintain leverage at existing levels today. However, as I've said previously, leverage will fluctuate as we take down transactions like TPx on our line and then put the permanent capital in place at the appropriate time.

And then, Mark, just on the kind of trade-offs between waiting for the Windstream situation to resolve itself versus kind of what's happening in the capital markets generally?

Yes. So I think we want to be very -- we're, obviously, very conscious about our cost of capital and we want to be very disciplined about accessing the markets when we think the litigation, that there's an overhang in terms of our security prices relative to some of the litigation at Windstream. So we don't -- we're not in a position to -- that we need to go to the capital markets anytime soon. I think -- so I think we'll just be patient and prudent when we go in the future based on market conditions.

And then just on the cadence and pacing of the fiber business, kind of thinking about that $31.5 million EBITDA on the fourth quarter growing 10% by 4Q next year. The guide would imply only 129 versus a ratable, maybe closer to 136 or so. And that's -- is that kind of talking about the pressures you're going to be having in the first half, maybe more of a flattish EBITDA in the fiber business and then kind of growing in the second half?

Yes. So that's exactly right. In the -- relative to the kind of the first half and the second half, so the EBITDA margins, as I mentioned, for the full year are 45% versus what we had, 47% in the fourth quarter of 2017. And part of that is because we've had some of the elevated churn that we mentioned earlier in the -- early in the first quarter of 2018. But it's also reflective of additional cost as well, which is there's been some increase in some of the -- there's been some increase in cost in some of our incentive compensation programs, including new sales commission plans as well as market expansion cost that Kenny had mentioned, and probably had some additional costs in the health care cost increases as well. But as I've said earlier, we do think that it will increase to 48% in the fourth quarter of this year.

Ladies and gentlemen, our next question comes from Frank Louthan of Raymond James.

Great. Just back to the fiber question. How much more of the lit fiber-to-the-tower do you have at risk? I've seen some overbuilders come in and maybe take back over those contracts. And then talk to us a little bit about some of the -- give us some more color on TelePacific. The sale-leaseback has been a little bit elusive since you started the company. And any color around what you learned or a particular problem you solved for them that maybe you can replicate with some others and be able to do some more sale-leasebacks?

Frank, it's Kenny. I'll take both of those. So on your first question, we don't see any other major markets being lost to another carrier. In fact, Atlanta and Dallas, as I've mentioned in my remarks, we knew those were coming when we acquired both PEG and Tower Cloud. Those were factored into our underwriting model and were expected, and we just -- we don't see any more of those types of events coming. With respect to your second question, look, as I've said before, we -- the first year, 1.5 years or so, even 2 years was really spent out priming the market, educating the telecom universe on our business model, what sale-leasebacks are, how they work, educating the deal, community bankers, private equities. And so we don't believe it was a lack of success or lack of interest, so much as educating the market and really working through our options on who attractive counterparties are. And this particular transaction, I think, was a result of all that work. And I think the ones that are coming, we believe, including more this year, are a result of that work as well.

Our next question comes from Matthew Niknam of Deutsche Bank.

Just 2 quick ones, if I could. First on fiber, the Uniti Fiber CapEx. I think, Mark, you may have mentioned after some of the bigger projects you've got going on in '18 and maybe early '19, capital intensity sort of trending back to average levels. But what do those sort of average normalized type capital intensity levels look like as we look past the near term? And then, secondly, I think, Kenny, just a follow-up on a prior question on subletting some of the other unused capacity that Windstream isn't necessarily using. I know you mentioned you'd be open to it. Just curious if you can give any color on whether those discussions are being had at the present.

Yes. Matt, I think normal levels means probably around the -- about 30% capital intensity. Now it's obviously going to depend about what contracts we win or when those are scheduled to get deployed. But I'd say 30% would be what I would consider more of a normal level.

Yes. And on your second question, I would just say we're in regular dialogue with Windstream as we have been for the past several years about mutually beneficial ways to work together, and I would put this particular opportunity in that category.

Our next question comes from Michael Rollins of Citi Investment Research.

Two, if I could. Can you share with us -- going back to TelePacific, the credit rating in Slide 11 is cited as of April 3, 2017. Do you have an update in terms of maybe what's happened with the company financially with their net debt leverage over the last 12 months? And secondly, when you constructed the lease, can you share with us some of the protections that are in the lease in case there are distressed or worse scenarios that were to emerge in the future?

Yes. Michael, this is Mark. So I'll start. We, unfortunately, cannot share specific financial information about TPx because of -- just because they're a private company. We have limitations on what we can share. I will tell you that since then, their financials have improved. And in fact, as we stated in the presentation, they intend to use the proceeds, part of the proceeds here for debt paydown and to continue to invest in additional network, which we all view as very positive, and we have extremely good lease coverage metrics on that as well. In terms of the protections that are in this lease, in particular, relative to Windstream, I've kind of highlighted a couple of things. One is, as I've mentioned at several conferences, this lease is at a operating entity level, which is different from our Windstream lease as opposed to being at the parent company. It does include a parent company guarantee. It does include guarantees from operating subsidiaries as well with the assets in regulatory approval apply. So that's one distinction. As we mentioned, we do have a number of different financial covenants in the lease as well. And then second, we had -- we also have cross default provisions with debt at TPx, and then we have limitations in terms of some restricted payment in assets also -- as well. So I think the lease here is very strong. I think it's indicative of the type of lease structure that we've talked about doing on triple-net lease transactions in the future. I think it's probably a good template for transactions that we will continue to do.

And in a pipeline of future sale-leaseback opportunities, is there a way to kind of tier or bifurcate the creditworthiness of the opportunities? So are you looking at some opportunities that have credit at a certain level versus maybe somewhat lesser credit?

Look, I think the credit is one key factor. But as I've mentioned, there's a number of others. I mean, there's the credit quality of the tenant. There's also the structure of the lease. Meaning, there's a credit component to the lease itself. There's also an important component, as I mentioned, is what's -- is the use of proceeds and whether or not that is enhancing the company's both their financial position as well as perhaps their competitive position as well. So the tenant credit quality is very important in the analysis, but there are other components as well.

Our next question comes from Simon Flannery of Morgan Stanley.

It's Spencer, for Simon. A couple for me. First, a follow-up and a clarification on your diversification targets. I think you said previously that you wouldn't issue equity at these prices. So in order to get to your 50% target by next year, would that -- does that assumption assume any improvement in stock price from here? Or could you reach that target where -- given where your stock trades today?

Yes. So let me just maybe answer the question more directly about kind of our plans to issue equity and price levels. So let me start by saying we have no need today to issue equity anytime soon. We would expect -- as I said earlier, we would expect to issue any equity predominantly in support of future M&A and other strategic transactions. Sourcing of that equity may also include private capital sources that we've referenced -- have referenced. And that may be structured as either a convertible instrument, part of another equity linked security. So there's -- you have a variety of different transaction structures and a variety of different private capital partners that we're in discussions with, and we'll just see how those turn out.

Okay. And then second, on the tower business. Your outlook projects something like $90 million plus of cash burn this year. Longer term, when do you think that business can get to breakeven from a cash flow standpoint?

Yes. I think -- Spencer, this is Kenny. I think it depends on how many towers we build and, of course, the lease-up assumptions, which we monitor very closely. And so it's -- I wouldn't want to give a specific target because it's still moving around at this point, depending upon how many towers we're going to build. But ultimately, I think the economics that we're operating under are the starting yields of 5% to 12%, like we mentioned, with second tenants adding pretty dramatically to those starting yields. And you can sort of do the math where once you get that second tenant, you're really looking at a pretty attractive investment from a cash flow perspective.

There are no further questions. I'd like to turn to call back over to Kenny Gunderman for any closing remarks.

Thank you. And thank you all for joining us today. And we appreciate your interest in Uniti Group, and we look forward to updating you on our progress next quarter.

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.