Uniti Group Inc (Delaware) (UNIT) 2018 Q1 法說會逐字稿

Welcome to the Uniti Group First Quarter 2018 Conference Call. My name is Imani, 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 10, 2018, and will remain available for 14 days.

(Operator Instructions) Forward-looking statement disclaimer. 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.

Our remarks this afternoon will reference slides posted on our website, and we encourage you to refer to those materials during this call.

Discussions during the call will also include certain financial measures that were not prepared in accordance to 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 Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thank you, Imani. Good afternoon, everyone, and thank you for joining.

Please turn to Slide 4 in our presentation. I'm very pleased to announce that we closed on the first tranche of our TPx sale-leaseback transaction last week, including the Nevada, Texas and Massachusetts markets. We still expect to close on the California assets in the third quarter of this year. We also announced the acquisition of 30 long-haul intercity dark fiber routes from CenturyLink that helped facilitate the U.S. Department of Justice required divestitures from the CenturyLink/Level 3 merger. These are highly strategic routes, and we already have an anchor tenant lease in place with multiple additional lease-up agreements currently in the negotiation. I'll talk more about the specifics of the CenturyLink transactions later in the call, but the TPx and CenturyLink transactions demonstrate both that the telecom industry continues to embrace the idea of shared fiber infrastructure and the momentum we are gaining at Uniti Leasing.

Given the continued growing opportunity we see at Uniti Leasing, we recently asked Ron Mudry to assume the role of Chief Revenue Officer at Uniti Group. Ron was previously Uniti Fiber's President of Sales and Business Development and is a 35-year telecom industry veteran. As CRO, Ron will devote a significant amount of his efforts to leasing up the substantial inventory of available fiber we now have at Uniti Leasing as well as pursuing new sale-leaseback and other related transactions to add more valuable fiber to our growing portfolio. Ron will also be focused on delivering a full suite of services to our large customers, including wireless carriers. We are uniquely positioned as a holistic infrastructure partner to the wireless carriers with our fiber solutions, small cell capabilities, macro tower deployment capabilities and our proprietary Uniti Leasing business.

Andy Newton will now lead all of Uniti Fiber. As you know, Andy was previously the CEO of Southern Light prior to our acquisition last year. Andy has over 20 years of experience operating a fiber company in the Gulf Coast area, which is currently our primary area of focus and growth at Uniti Fiber.

With Lawrence Gleason continuing to lead Uniti Towers, these organizational changes best position each of our business units for continued growth. I'm very pleased with the strong, stable operational leadership at Uniti.

Let me now provide an update on our operational results for the first quarter 2018. Uniti Fiber's sales bookings were just over $0.5 million, which was an increase over fourth quarter of 2017. 40% of our sales bookings during the first quarter came from the 4 national wireless carriers, 29% from wholesale and 31% 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. We continue to see very active RFP activity for small cells and backhaul from all the carriers in our markets.

I will point out that we expect our quarterly bookings to fluctuate somewhat because a big part of our business is pursuing large anchor wireless backhaul and small cell deals. Our funnel for these types of transactions has never been better, including activity from all 4 major carriers.

Accordingly, we expect booking levels to increase throughout the balance of the year as we see some of these major wins.

We expect E-Rate to be a big growth opportunity for us going forward. This season, we had 100% retention on preexisting E-Rate customers across the legacy Uniti Fiber, Southern Light and Hunt customer bases, and we are very pleased by this vote of confidence from our customers.

Our E-Rate bookings on new customers were lower in the first quarter of this year than we expect next season. As you know, the E-Rate sales cycle was long, and we closed on Southern Light and Hunt in the second half of 2017. Thus, for the 2018, '19 season, we will have much more time to fully nurture new customer opportunities under the Uniti brand.

Uniti Fiber installed $0.5 million of MRR and MAR during the first quarter of 2018 with 24% related to bandwidth upgrades driven by the unlimited data plans of the wireless carriers and 5% relating to dark fiber backhaul projects. Some of the dark fiber projects continue to experience varying levels of delay, but mostly related to a large customer not being ready to accept our sites and [range] as we construct them. However, we expect these issues to abate throughout the course of this year.

Our small cell project -- small cell projects continue to see some permitting delays although the situation continues to improve. Total churn for the quarter was 0.6 million, resulting in a monthly churn rate of 0.9%. As I mentioned on our previous call, we expect an increase in churn -- we expected an increase in churn this quarter as lit backhaul disconnects occurred in the Dallas and Atlanta markets that were awarded to another carrier as part of the dark fiber conversion that predated our acquisitions of PEG and Tower Cloud.

We continue to expect monthly churn will return to the 0.6% range in the second half of the year. We are proud of this normalized churn level and consider it to be industry-leading among fiber providers.

Turning to integration. Uniti Fiber continues to make progress either on schedule or ahead of schedule related to numerous important initiatives. These projects include adding a local sales force in 5 legacy Uniti Fiber markets and reducing off-net lit service expenses by migrating off-net circuits onto Uniti on fiber.

In the first quarter, we added 5 new sales reps as part of our local sales expansion and still expect to add a total of 8 new sales reps focused on selling to [near net] enterprises, schools and government offices following the go-to-market approach successfully used in the past by Southern Light and Hunt. These new sales reps are already actively pursuing close to 100 opportunities in 2 of our markets after only being operational for about 2 months.

As a reminder, these new markets were all built with an anchor wireless customer with a long-term contract, and we are now -- where we are now adding sales reps to lease-up those networks further at attractive yields.

As we mentioned previously, we do not expect to see much incremental revenue from these efforts until 2019. However, Slide 5 is an example of how the economics in the market improved from the anchor economics through lease-up over time. We continue to make progress in reducing off-net circuits in the Southeast markets by further interconnecting the legacy fiber networks.

We expect over $6 million in annual expense savings above and beyond our original synergy target of $12.5 million when the project is complete in early 2020. The capital investment for this project is expected to be $17 million with a payback of about 2.5 years. We remain very pleased with our progress at Uniti Fiber and our strategy of focusing on Tier 2 markets. We see a long period of sustained opportunity and growth with attractive competitive dynamics.

Turning to towers. Our development activity in the U.S. is ramping as we completed 26 new towers during the quarter. In addition to the 17 towers we had in Mexico, our tower account now stands at over 700 towers. We continue to see lease-up activity on our tower portfolio on both the U.S. and Mexico, and our pipeline of colocation leases remains very strong.

In addition, during the quarter, we saw orders to build backhaul to the towers that we've constructed. Building fiber to our own towers is a strategic imperative. This bundle enhances our lease-up potential and customer retention potential.

In addition, as distributed network architecture becomes more prevalent, owning fiber to our own towers will provide us optionality for things like distributed data centers.

Before I turn the call over to Mark, I'd like to take a minute to address the recently announced T-Mobile and Sprint merger. It is still early for us to make definitive judgments regarding the likelihood of the deal closing and the implications to Uniti. However, our early observations are that while there could be some near-term indecision with both carriers regarding new orders, the mid- to long-term impact of the deal closing would be very positive to Uniti. In-house network investments of the 2 combined companies appear to be an increase over their investments as standalone companies. Also, importantly, the areas of identified investment appear to be great fits for Uniti and our strategy and would enhance our opportunity set, including by adding approximately 40,000 incremental small cells, approximately 10,000 new macro tower builds and a focus on enhancing network coverage in Tier 2 and rural areas.

Finally, we do believe that enhanced 5G-related capital spend by the new company would lead to greater infrastructure need and spend by competing carriers. We will keep you apprised of our observations and more refined thinking in the coming quarters.

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

Thanks, Kenny. Good afternoon, everyone. We're pleased to be able to raise our full year 2018 guidance today driven by increased activity at Uniti Leasing. Both the TPx and CenturyLink transactions increase our recurring cash flows, add to our portfolio of strategic fiber assets at Uniti Leasing and the transaction structure serve as templates for future deals. Industry dynamics continue to be healthy across all of our business units, and we continue to focus on revenue and cost synergies across all 3 verticals.

With that backdrop, I'm also pleased to report solid first quarter results that were in line with our prior guidance.

Turning to Slide 6 in our presentation. We reported consolidated revenues at $247 million, consolidated adjusted EBITDA of $197 million, AFFO attributable to common shares of $109 million and AFFO per diluted common share of $0.62.

Net loss attributable to common shares for the quarter after transaction and integration-related costs was $0.9 million or $0.01 per diluted share. Net income for the quarter included $3.9 million of unrealized -- included a $3.9 million unrealized noncash gain related to mark-to-market adjustment on our contingent consideration agreements. This gain has been excluded from both AFFO and adjusted EBITDA.

Effective January 1 of this year, we adopted the FASB's new revenue recognition standard utilizing the modified retrospective approach. As a result, we recorded a cumulative adjustment to increase opening equity by $1.9 million. The change primarily related -- the change primarily related to commissions that were previously expensed but that now must be capitalized and amortized over the related contract term. Prior comparative information has not been adjusted and continues to be reported under the prior revenue recognition method.

Our Leasing segment revenues were $172.8 million, with adjusted EBITDA of $172.4 million for the first quarter of 2018. Windstream made over $47 million of improvements during the quarter to our network with their capital.

On a cumulative basis, since our spin-off, we had benefit from over $0.5 billion of tenant capital improvements completed by Windstream. As a reminder, on a cash basis, the 0.5% escalator in the Windstream lease went into effect on May 1 and increases our annual cash ramp by $3.3 million annually.

Uniti Fiber reported revenues of $67 million and adjusted EBITDA of $29.2 million, achieving adjusted EBITDA margins of 43% for the quarter. These results include $3 million of realized cost savings during the quarter, representing an annualized run rate of $12 million.

The dark fiber and small cell delays Kenny mentioned had a modest effect on our first quarter results. However, as indicated in our prior guidance, we expected Uniti Fiber margins to be lower early in 2018 than the average for the full year and then improve throughout 2018, reflecting the higher loading of certain disconnects and investments in market expansions in the first half of this year as well as timing of cost savings realizations and other factors.

Maintenance CapEx for the quarter was $1.5 million or 2.2% of revenues. Uniti Fiber net success-based CapEx was $30.8 million or approximately 60 -- of which, approximately 60% was directed towards our major dark fiber and small cell deployment projects. We also incurred $1.2 million of integration CapEx during the quarter, which is related principally to our off-net savings initiatives.

Uniti Towers completed and closed on the acquisition of 15 NMS development towers in Mexico during the first quarter, bringing total completions to 65 development towers since we acquired NMS in January 2017. We also completed construction at 26 towers in the U.S. and 2 additional towers in Mexico. CapEx was $9.2 million for the quarter.

Uniti Tower had 253 completed towers in the U.S. and 457 towers in Latin America, for a total of 710 towers in service at quarter end and 150 towers in various stages of development. Uniti Towers reported revenues of $3.4 million and is slightly below breakeven adjusted EBITDA for the first quarter.

During the quarter, we wrote off $0.6 million of costs related to development projects that were canceled by our customers. These costs had been capitalized as part of a multisite -- as multisite build opportunities, which our customers subsequently determined to be nonviable. While we believe some of these costs are recoverable from our customer, we decided to charge off the cost until we have our customers' agreement for reimbursement. Excluding this charge, Uniti Towers would have reported adjusted EBITDA of just over breakeven for the first quarter.

Please turn to Slide 7, and I'll cover our updated 2018 guidance. Our current 2018 outlook is unchanged from our prior guidance except for the expected impact of the TPx and CenturyLink transactions being incorporated. Accordingly, my comment on our guidance will be more brief than unusual and focus on the impact of these transactions.

As a reminder, our current outlook does not include any other future M&A or capital markets activities and does not include transaction and integration cost. Our current outlook includes the following for each segment. Starting with Uniti Fiber. At the midpoint of our outlook range, our revenue guidance of $285 million represents a growth rate of 8% over full year pro forma 2017 levels.

Our annualized 4Q '17 to annualized 4Q '18 growth rate is expected to be approximately 10%, consistent with our expectations of long-term core fiber revenue growth. Adjusted EBITDA should be approximately $129 million, with a margin of 45% for the full year at the midpoint, with margins improving to about 48% for the fourth quarter.

We continue to expect to realize aggregate cost savings, including off-net of $12.5 million this year and expect to exit 2018 with annual run-rate cost savings of about $14.5 million. We expect to invest about $17 million in integration CapEx over the next 3 years, including $11 million in 2018.

Net success-based CapEx for Uniti Fiber in 2018 should be about $154 million at the midpoint, of which about 40% will be directed to dark fiber and small cell projects.

Turning to Slide 8. We expect Uniti Towers revenues in 2018 to be about $15 million, with a reported adjusted EBITDA of approximately $2 million. We expect 27 NMS development towers to be completed and acquired in 2018. We expect Uniti Towers to complete the construction of about 300 towers this year. Our Uniti Towers 2018 CapEx spend guidance is $90 million to $95 million.

Turning now to Uniti Leasing on Slide 9. On May 1, we closed the first tranche of the TPx fiber acquisition, which represents the non-California assets. We expect to close on the remaining California assets in the third quarter of this year.

As Kenny mentioned, today, we closed on the acquisition of 30 long-haul intercity dark fiber routes from CenturyLink. The TPx and CenturyLink transactions combined are expected to add $18 million to revenue and $15 million to adjusted EBITDA on a pro forma basis for the full year.

For 2018, as reported, these transactions will add $7 million and $6 million to revenue and adjusted EBITDA, respectively, based on expected closing dates and lease-up. 2018 Leasing segment revenues are now expected to be $697 million, including $36 million of noncash revenue. Adjusted EBITDA for our Leasing segment in 2018 should know be approximately $694 million.

Turning to Slide 10. For 2018, we now expect full year AFFO to range between $2.54 and $2.59 per diluted share, with a midpoint of $2.57. On a consolidated basis, we expect revenues to be just over $1 billion and adjusted EBITDA to be $806 million at the midpoint of our outlook. Assuming the TPx and CenturyLink transactions, including expected lease-up, close on January 1 of this year, our pro forma AFFO would have increased by $0.04 at the midpoint to $2.61 per diluted share.

Our guidance assumes weighted average common shares outstanding for 2018 of 176 million shares. As a reminder, guidance ranges for key components of our current outlook are included in the appendix to our presentation.

In summary, all 3 of our business units have terrific long-term growth potential, and we are excited by the traction we are seeing at Uniti Leasing. Our liquidity and capital markets access continues to be in good shape. At quarter end, we had $57 million of unrestricted cash and cash equivalents and $450 million of undrawn capacity under our $750 million revolving credit agreements. Our leverage ratio under our debt agreements at quarter end stands at 5.9x based on net debt to annualized adjusted EBITDA.

And with that, I'll now turn the call back over to Kenny to discuss the CenturyLink transaction in more detail.

Thanks, Mark. Please turn to Slide 11. We've acquired a strategic fiber portfolio consisting of 30 long-haul intercity dark fiber routes. These attractive, high-demand assets total 11,000 route miles and 270,000 fiber strand miles across 25 states. In connection with this acquisition, we've already executed a material 20-year anchor tenant lease with a Fortune 100 company for 11% of the fiber strand miles and anticipate substantial lease-up activity in the future, including potentially more later this year. Our anchor customer on this transaction represents Uniti's first material win with a large web scale provider. We believe this could lead to more opportunities not only with this customer, but other large web scale providers.

This transaction, along with the acquisition of the 7,000 strand miles of nonexclusive use fiber that we acquired from TPx, demonstrates our ability to acquire fiber in bulk and lease it out at tranches. Further lease-up of these routes will provide attractive economics with incremental adjusted EBITDA margins potentially near 100% on future tenants.

Importantly, these transactions demonstrate that there are substantial portfolios of valuable fiber at both large and small carriers that could more efficiently be owned in our REIT-shared infrastructure model. We will continue to add to our portfolio in the coming quarters. This acquisition is immediately accretive to AFFO in 2018 and will increase our revenue diversification by 1% by the fourth quarter this year.

Turning to Slide 12. You'll see our updated network footprint, which includes the CenturyLink and TPx transactions. 7 of the 30 CenturyLink routes overlap our existing Uniti Fiber footprint and may provide for additional off-net to on-net synergies for Uniti Fiber.

Turning to Slide 13. We own a unique portfolio of assets in some of the fastest-growing segments in telecommunications. We have significant leasable capacity across all of our business units and because the incremental cost of adding new tenants is relatively small, we can drive attractive incremental yields across all of our asset classes. We expect these strategic assets will position us well for sustained organic growth for many years.

Operator, we will now take questions.(Operator Instructions) Our first question comes from Matthew Niknam with Deutsche Bank.

Just 2 if I could. One on the M&A pipeline. I think last quarter, you had talked about getting diversification or targeting revenues sort of ex Windstream at about 50% in the next 12 to 18 months. TPx and the CenturyLink deal appear to sort of help you out by about 4%. But I'm wondering, is that still sort of the target in the next 12 to 18 months? And what's the path to get you there? Is it several larger deals? Is it multiple smaller deals? So if we can get any sort of updated color there. And then secondly, you mentioned sort of increasing guidance. One of the components to increasing guidance was additional lease-up at Uniti Leasing, and I'm wondering is that referencing the TPx or CenturyLink properties? Or is this also additional lease-up you're seeing on the sort of [wind] assets held at the Windstream lease?

Matt, it's Kenny. Thanks for the questions. I'll take the first one, and then Mark can take the second one. So in terms of the 50% goal that we have given for midyear 2019, we still feel good about it. And we don't just use that number and give that time period loosely. We really have put some thought into it just like we have in the past. I think we've set goals around diversification, achieving diversification levels in the past, and we've actually achieved those and think we'll achieve this one. And to give you a little bit of color on how we arrived at that and to your -- directly to your question about, are these smaller deals or larger deals or some combination? We really do look at our funnel and look at specific opportunities that we have in the funnel. We're not speculating about things on the come. We're really including opportunities that are in our funnel where we're having conversations with counterparties, and we probability weight the success of those various opportunities; we probability, look at the valuations of those opportunities, the competitive landscape of those opportunities, and we overlay with that our cost of capital, what we think our cost of capital will be over time. We also look at our access to capital, both public and private, and put all those things together and arrived at where we really think we can be in 12, 18 months and still feel very good about that target. And our funnel includes smaller transactions like the couple that you mentioned. It includes mid-sized transactions, similar to ones we've announced in the past. And it certainly includes larger, more transformative transactions that we've talked about in the past. So good mix of all those things. So we still feel good about it. But again, it's a target. It's not a mandate. We're not going to do it at any cost. We're going to do it where it makes sense for us. So still feel good about it.

And Matt, your second question, the initial lease-up at Uniti Leasing is solely related to the CenturyLink assets.

Our next question comes from Philip Cusick with JPMorgan.

The webscale customer who took down 30,000 strand miles in that CTL deal, can you help us understand the intended use? And how did that transaction come about? Did you develop the customer? Or was it sort of ready there with CTL before?

Phil, it's Kenny. I'll take that. So I can't comment on what the use will be. That's obviously up to our customer. But in terms of the source of it, it was definitely a customer that we developed ourselves. We've obviously been in dialogue with webscale customers over time, and we matched their need with this opportunity. So we're very, very pleased about that. And we've talked in the past about synergies between and among our different businesses, and this is an example of how the wholesale sales force at Uniti Fiber was instrumental in helping bringing this customer to the table.

Okay. You also mentioned the potential for distributed data centers on the call. Have you spent much time on this? And aside from building fiber, how do you prepare your sites for opportunities like that?

Yes. So we've been spending more time on it, Phil, and there'll be more to talk about in future calls. There's a whole subculture of companies out there and professionals out there that are developing this opportunity as you probably are aware. So we're spending time there. But we know that owning the backhaul to our own towers in and of itself is valuable from the standpoint of giving us more leasable connections, whether it'd be on the tower or the fiber or both and definitely enhances our customer retention. And the distributed data center opportunity is really optionality. And it's not something we see in the immediate term, the next 12 months or so. But certainly, beyond that, we do see it as an opportunity.

Okay. And one more if I can. I'm -- how to ask this? An interesting and occasionally activist investor bought a new 4% position in the company back in the fourth quarter. I wonder if they've been involved with the company or the board at all and have they said what they hope the company should do?

Phil, I think, obviously, we know -- I think I know who you're referring to. They can remain unnamed. Look, we've been in dialogue with this particular investor even before the investment, numerous investor relations meetings to help them understand the story and get to know us and our strategy. And frankly, we're pleased when we learned about the investment. They are long holders, and our dialogue with them has been very constructive and look forward to helping them continue to support Uniti going forward.

Yes, Phil. It's Mark. I'll just add that we've had a long dialogue with them I'd say probably over the last year at least, and so we weren't surprised when we saw the investment, and we have a very good relationship with them.

Our next question comes from Michael Rollins with Citi.

If you turn back to Slide 7, you described that the Uniti Fiber business is growing about 8% off of pro forma 2017. Can you help explain how much of that 8% you're able to get with just the maintenance CapEx versus how much CapEx you're spending this year to get the rest of the revenue growth? And just maybe help us understand a little bit more the relationship to Uniti Fiber revenue growth relative to Uniti capital spending within the fiber business.

Yes. So Mike, I'll try to kind of fill that. So try to under -- so the maintenance CapEx, as you know, it generally runs around 3% of revenues for Uniti Fiber. And most of our capital goes towards the dark fiber and small cell projects. I'd say it's not always -- I'd say the kind of the incremental capital that you need kind of varies by what the products are that you're selling. But if you're -- I think, usually, people would try to estimate what the additional capital is that you spend for churn. I would say it's relatively minimal for churn replacement, although I don't have a precise number, but it may be another 1% to 2% for the additional churn replacement.

And just in terms of some of the strategic transactions that you're looking at. In the past, you talked about the opportunity to consider bringing investment to the project level versus at the Uniti corporate level. Can you maybe describe what your feelings are in terms of, to go after larger strategic deals, the types of capital that you may be considering for those projects?

Yes. So Mike, this is Mark, and I'll start, and Kenny may want to add on. So you're exactly correct. So both -- I would say, both in our M&A pipeline but also partly as our discussions with some of the private capital sources, we've discussed -- and I'm trying to describe these previously, we have discussed and people have inquired about making an investment directly at one of our business units. So either Uniti -- primarily either Uniti Fiber or Uniti Towers. And those transaction structures generally involve either a joint venture, kind of a traditional real estate joint venture-type arrangements or they would involve -- may involve opco/propco arrangements. Now I'd say more recently, we've also had some discussions around opco/propco structures on M&A targets where the sale leaseback transactions, at least our investment on sale leaseback of the real estate assets would go into Uniti Leasing. So frankly, we're having those type of -- kind of those type of structural discussions across all 3 verticals that we have. And then as I've mentioned earlier on the -- or I've mentioned previously on the private capital sources, we've also had discussions about those investments being at the Uniti Group level as well.

Yes, and Michael, I'll just -- the only thing I'd add to what Mark said is to emphasize the point about the creative structures that we're seeing in our funnel for both larger and smaller transactions. I think it's challenging for us to communicate what those are given the proprietary nature of them and the confidentiality of them. And so we understand that our investors want more color, but it's harder to give it. What I would say is if you look at what we have done to date, we've made acquisitions of companies outright. We've put in place development programs where we're spending capital over time on, effectively, CapEx programs where we're building infrastructure. We've done triple net, single use sale leasebacks. We've done triple net, multiuse sales leasebacks. And now with the CenturyLink transaction, we're showing an example of us just buying fiber portfolios in bulk with the opportunity for us to lease it up. So there's a fair bit of creativity that we've demonstrated, and I would say there's that plus much more in our funnel that we're excited about.

Our next question comes from Frank Louthan with Raymond James.

This is Alex Sklar here for Frank. I apologize if I missed this but did you disclose the purchase price for the fiber you've got from CenturyLink and the revenue associated with that anchor tenant? And then does that represent the full extent of their intercity fiber divestitures? Or is there potentially another amount you can bid on? I know there was 3 other markets that they needed to divest of as part of the deal.

Alex, this is Kenny. We are not at liberty to disclose the purchase price, unfortunately, and frankly, for competitive reasons, we prefer not to anyway. But we're not at liberty to disclose it. I will say as we referenced in our remarks and the slide deck that we're highly confident that we will recover our capital on the acquisition within a year. So we think the payback on this capital deployed is less than 1 year. So we think it's a win-win for CenturyLink. We helped them achieve a goal of divesting these routes that was mandated by the DOJ. It's certainly a win for our anchor customer and for other customers we're already in dialogue with because these routes -- this as an opportunity for them to acquire routes on a dark fiber basis that we think were otherwise unavailable. And it's certainly a win for us because very, very pleased with the economics of the deal and the opportunity to lease-up and get more better economics going forward. So I think we've disclosed about as much as we can at this point on that. With respect to your question about the other mandated divestitures, I believe they've announced buyers for 2 of the markets publicly, which leads one other market. And I don't have anything to comment on with respect to that.

Okay, maybe switching topics. Could you just give us an update on the opportunity you're seeing from the FirstNet builds, if that started materially at all in any of your markets?

Yes, Alex. So we've chosen not to comment on specific customers and activity with customers. But what I would say is that we, like many infrastructure companies, we identified FirstNet as an opportunity many months ago, over a year ago and began positioning ourselves for that. We thought there would be tremendous opportunity, not only on macro tower builds, new macro tower builds but also on fiber. And I would say that we feel extremely good about where we are positioned with respect to that opportunity. So I think there's going to be a lot of opportunity for infrastructure companies, and we think we're uniquely positioned to benefit there.

Our next question comes from David Barden with Bank of America Merrill Lynch.

This is Angela Zhao on for David Barden. I want to ask about capital allocation. If I take cash from operations and subtract CapEx this quarter, I get to about $105 million in free cash flow, which barely covers the $106 million of quarterly dividend. How does this relationship play out through time as returns flow from upfront project-based CapEx? And then can you talk about how you think about capital allocation going forward? And I have 1 more after this.

Yes, sure. So I'll start. So in terms of our capital allocation policy, it's really been pretty consistent since our spin-off nearly 3 years ago. So our capital allocation policy is investing for organic growth. So primarily in Uniti Fiber, [and] now in Uniti Towers. And a lot of that going to the development of towers as well as our fiber and small cell projects. But we've certainly realized that in Uniti Fiber that, that is consuming all of the cash flow we are investing in Uniti Fiber, and we're confident in doing that because of the kind of the underwriting work that we do with the dark fiber and small cell projects and making sure that we don't do speculative projects, that we actually have anchor tenants for any of the transactions that we embark on and then we underwrite the lease up pretty carefully as well. So as I've said previously on Uniti Fiber, most of those projects, the large projects will be completed 2019, 2020. And then I think our capital intensity in Uniti Fiber will come down over time. On Uniti Towers, just to address that. So we are investing -- I think we have great opportunities for growth in the tower business. We expect to build about 300 towers this year and frankly, as I -- we kind of articulated in our last call, we think we can grow that over the next 5 years to be a $50 million revenue business and certainly hope to continue to invest in tower. So we think both of those businesses offer very good returns, and we are happy to continue to invest in those businesses. And then frankly, also as kind of Kenny alluded today on Uniti Leasing, we're getting a lot of traction there as well. So anyway, so back on our capital allocation, it's to grow through organic growth. It's to grow through M&A, which we also expect and have deployed a significant amount of capital. And then it's to enhance our shareholder returns through the dividend as well.

Got it. And then one more question. Can you talk about the competitive environment for the assets you've acquired from CenturyLink without disclosing? Or you can't?

Yes. Angela, I'm afraid I can't really comment in any detail on that question, unfortunately.

Okay, no worries. And then the investment -- the invested capital that you talked about in the slide, is that just the EBITDA minus CapEx? In regards to the bullet about the 1 year payback?

Oh, you mean on the CenturyLink transaction? Yes. That's a -- well, there's actually no CapEx on this. There will be no CapEx on this project. So it's really just the purchase price less upfront payments that we're going to -- we're receiving from our anchor tenant plus additional lease-up tenants.

Our next question comes from Simon Flannery with Morgan Stanley.

It's Spencer for Simon. Just to follow-up on leverage, you guys, I think, in the past have said you want to stay below 6x. So now you're at 5.9. What's the appetite for taking up leverage higher to do a big deal? Or do you want to stay below 6x?

Yes. So our target hasn't changed. So we still intend to maintain leverage about where it is now. Now what I have said, just to -- is that the leverage will fluctuate somewhat as we take transactions down on our line and periodically, we'll go back to the capital markets to replace our revolver. But other than that, our target leverage has not changed.

Okay. And then obviously, your stock price has done better recently. Does that -- you've said before you're uncomfortable issuing stock at the price it was before. Is it -- are you approaching a price where it gets -- the [complications] become easier? Or are you still trying to avoid issuing equity?

Look, I mean, we still view the stock as undervalued, and so I would think that any transaction or any issuance of stock would be in connection with a more strategic deal, M&A or otherwise, that we would have to announce, and I would hope that the stock buys would reflect that transaction announcement at the time.

And at this time, I'm showing no further questions. I would now like to turn the call back over to Kenny Gunderman for closing remarks.

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. Good afternoon.

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