Uniti Group Inc (Delaware) (UNIT) 2018 Q2 法說會逐字稿

Welcome to the Uniti Group's Second Quarter 2018 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 August 9, 2018, 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. 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 compared 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.

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

Please turn to Slide 4 in our presentation. This afternoon, we announced 2 transactions that demonstrate the continued momentum we are experiencing. First transaction is the fiber acquisition and leaseback with CableSouth Media. This transaction represents our first purchase of fiber from a cable provider and like the previously announced CenturyLink transaction is another example of acquiring an attractive fiber portfolio with significant lease-up potential.

The second transaction we're announcing today is a dark fiber lease with a national MSO on our existing Uniti Leasing portfolio fiber. This agreement reinforces the value of Uniti Leasing's growing portfolio and its lease-up potential.

I'll speak more to the specifics of these transactions later in the call. However, I want to highlight that both the CableSouth and MSO dark fiber lease transactions were proprietary negotiated deals, which reinforced one of Uniti's core competitive advantages in our M&A and lease-up business.

As we foreshadowed, we also continue to see increasing interest in opco/propco structures. These structures allow Uniti to use our unique REIT structure to acquire valuable fiber infrastructure and retain usage lease-up rights, while our operating partner continues to provide service to customers, including residential customers. This structure greatly expands our opportunity set for attractively priced fiber acquisitions.

Let me now provide an update on our operational results for the second quarter of 2018. Uniti Fiber's sales bookings were just over $0.75 million of MRR and MAR, a 45% increase to bookings in the prior quarter. 41% of our sales bookings during the second quarter came from the 4 national wireless carriers, 29% from wholesale and 30% from local enterprises, government and schools.

Wireless sales bookings for the quarter were primarily for leasing dark fiber to the tower. We continue to see robust demand activity for small cells and backhaul from all the carriers in our markets. It is important to note that our bookings will fluctuate somewhat quarter-to-quarter as a big part of our sales -- as a big part of our business is pursuing large anchor wireless backhaul and small cell deals.

Our sales funnel remain strong for these types of transactions, and as a result, we expect booking levels to be higher in the second half of the year when compared to the first half.

Uniti Fiber installed $0.7 million of MRR and MAR during the second quarter 2018 with 18% related to bandwidth upgrades and 15% relating to dark fiber backhaul projects. The bulk of our dark fiber install delays relate to a large customer not being ready to accept sites and rings as we construct them as well as some permitting delays on some of our small cell projects. However, all of these projects are now moving forward, and we expect deployments to accelerate in the second half of this year. And the vast majority of our existing dark fiber and small cell construction projects will still be completed by 2019, as we previously expected.

Also, it is important to emphasize that the revenue associated with these dark fiber and small cell projects are contractual. So even though they may now be delayed, they will be recognized in the near future. On a fully deployed basis, these projects represent approximately $20 million of run rate revenue and $465 million of contracted revenue.

Total churn for the quarter was $0.5 million, resulting in a monthly churn rate of 0.8%. We expect the churn to be somewhat elevated in the first half of the year, as we work through scheduled disconnects and lit to dark fiber conversions. So we continue to expect monthly churn will return to the industry-leading range of 0.6% in the second half of the year.

We continue to make progress in reducing off-net circuit cost 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 2000 -- early 2020.

As we previously mentioned, the capital investment for this project is expected to be $17 million with a payback of about 2.5 years. Despite some of the temporary delays we have experienced on our dark fiber and small cell projects, we continue to remain pleased with our progress at Uniti Fiber and our strategy of focusing on Tier 2 and Tier 3 markets with attractive competitive dynamics.

Turning to Towers. Our development activity in the U.S. continues to ramp as we completed 52 new towers during the quarter. We also added 5 towers in Mexico and our total tower count in the U.S. and Latin America combined now stands at 767 towers.

We continue to see lease-up activity on our Tower portfolio in both the U.S. and Mexico, and our pipeline of co-location leases remains strong. As an example, we recently signed a master lease agreement with a major national wireless carrier to co-locate their equipment on our macro towers and small cell locations within U. S. The initial term of this agreement will be 5 years. We're excited about this partnership and it reiterates our belief that wireless carriers are looking to diversify their vendor relationships, particularly in the tower industry. And it further highlights the value of our multiproduct infrastructure offering, including fiber, small cells and macro towers.

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

Thanks, Kenny. Good afternoon, everyone. Industry dynamics continue to be healthy across all of our businesses and present us with an array of opportunities to capitalize on the long-term investment cycle for communicating infrastructure.

As mentioned in our earnings release, we are pleased to receive a favorable private letter ruling a few weeks ago from the IRS confirming that a substantial portion of our TRS income qualifies as rents from real property. The clarity that the recent PLR establishes is significant as it allows us to confidently execute our M&A and organic growth strategies with maximum tax efficiency and structuring creativity.

We reported solid second quarter results this afternoon that were consistent with our expectations. While we reduced our full year 2018 guidance related to the timing of closing certain transactions and fiber deployment delays, as Kenny mentioned, the revenues from these were contractual and will favorably impact future periods.

I'll walk you through these items in more detail in a moment, but let me start with our second quarter results. Turning to Slide 5. We reported consolidated revenues of $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 cost was $5.6 million or $0.03 per diluted share. Net loss for the quarter included $3.8 million of transaction-related cost and $3.4 million unrealized net loss related to the mark-to-market adjustment on our contingent consideration agreements. These charges have been excluded from both AFFO and adjusted EBITDA.

Our Uniti Leasing segment revenues were $173.9 million, with adjusted EBITDA of $173.4 million for the second quarter. Windstream made $45 million of improvements during the quarter to our network with their capital, bringing the cumulative amount since our spinoff to over $540 million net capital improvements.

Uniti Fiber reported revenues of $67.4 million and adjusted EBITDA of $29.4 million, achieving adjusted EBITDA margins of just under 44% for the quarter. These results include $3.3 million of realized cost savings, representing an annualized run rate of $13 million. The dark fiber and small cell delays reduced quarterly revenue by $1.3 million and adjusted EBITDA by $1 million, given the high incremental margins we realized as sites turn over.

Uniti Fiber net success-based CapEx was $36.2 million, of which approximately 31% was directed towards our major dark fiber and small cell deployment projects. We also incurred $3.3 million of integration CapEx during the quarter, which is principally related to our off-net savings initiatives. Maintenance CapEx for the quarter was $0.7 million or 1% of revenues.

Uniti Towers completed the construction of 52 towers in the U.S. and 4 in Mexico. In addition, we completed and closed on the acquisition of 1 NMS development tower in Mexico during the second quarter, bringing total completions to 66 development towers since we acquired NMS in January 2017. CapEx was $14.5 million for the quarter. Uniti Towers had 305 completed towers in the U.S. and 462 towers in Latin America for a total of 767 towers in service at quarter-end and approximately 230 towers in various stages of development.

Uniti Towers reported revenues of $2.5 million and adjusted EBITDA -- and an adjusted EBITDA loss of $1.2 million for the second quarter. Uniti Towers results included 2 items that negatively impacted the quarter. First was a $600,000 noncash charge related to a correction of accounting for previously reported straight-line rents in our U.S. operations. The adjustment conformed a period over which straight-line rent is calculated to only include the initial term and not renewal periods.

Second, we wrote off $600,000 of costs related to development projects that were canceled by our customers, bringing total year-to-date charges to $1.1 million. As we mentioned last quarter, we believe that some of these costs are recoverable, however, we have charged off these costs until we come to an agreement with our customers regarding the amount of reimbursement.

Excluding these 2 items, Uniti Towers revenue and adjusted EBITDA for the second quarter would have been $3.1 million and near breakeven.

Please turn to Slide 6, and I will cover our updated 2018 guidance. We have updated our current 2018 outlook for the CableSouth and dark fiber lease transactions based on expected close dates. In addition, the outlook has been adjusted based on our operations team current fiber deployment expectations, the impact of changes in the estimated close date of the California tranche of the TPx transaction, assumptions regarding the timing of lease-up at Uniti Leasing's fiber assets and other factors.

Our current outlook excludes any future acquisitions, capital market transactions and transaction cost. Furthermore, our outlook is subject to adjustments based on the finalization of purchase price allocations related to acquisitions and others -- and other factors. A reconciliation of our prior guidance to our current outlook is included in our earnings release and later in this presentation.

Actual results could differ materially from those -- from these forward-looking statements. Our current full year outlook includes the following for each segment. Starting with Uniti Fiber. At the midpoint of our outlook range, our revenue guidance of $283 million represents a growth rate of 7% over full year pro forma 2017 levels. Our annualized 4Q '17 to annualized 4Q '18 core revenue growth rate is expected to be approximately 8% consistent with the range of our expectations for long-term core fiber revenue growth.

Adjusted EBITDA should be approximately $124 million with a margin of 44% for the full year at the midpoint and margins of 45% for the fourth quarter. We expect to realize aggregate cost savings, including off-net of $14 million this year and will exit 2018 with an annual run rate cost savings of about $17 million.

We expect to invest about $17 million also in integration CapEx over the next 3 years, including $11 million in 2018. Net success-based CapEx for Uniti Fiber this year should be about $130 million at the midpoint, of which about 45% will be directed towards dark fiber and small cell projects.

Turning now to Slide 7. We expect Towers revenues in 2018 to be about $15 million with reported adjusted EBITDA of about $1 million. We expect approximately 30 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 capital spend guidance is $85 million to $90 million.

Turning now to Uniti Leasing on Slide 8. Based on our updated assumptions regarding the timing of the close of TPx California assets and expectations regarding the close of the CableSouth and dark fiber lease transactions we announced today, we expect Uniti Leasing 2018 revenues and adjusted EBITDA to be $699 million and $696 million, respectively, at the midpoint. The TPx, CenturyLink, CableSouth transactions combined are expected to add $21 million to revenue and $19 million to adjusted EBITDA on an adjusted full year basis. For 2018, as reported, these transactions will add about $5 million in revenue and adjusted EBITDA, respectively, based on expected closing date and lease-up.

Turning to Slide 9. For 2018, we expect full year AFFO to range between $2.50 and $2.54 per diluted share with the midpoint of $2.52 per diluted share. On a consolidated basis, we expect revenues to be just over $1 billion and adjusted EBITDA to be $802 million at the midpoint of our outlook.

Assuming the TPx, CenturyLink and CableSouth transactions, including expected lease-up closed on January 1, 2018, our pro forma AFFO would have increased by about $0.07 at the midpoint to $2.59 per diluted share. Our guidance assumes weighted average common shares outstanding for 2018 of 176.2 million shares. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation.

Turning to Slide 10. We have provided a reconciliation of our prior 2018 midpoint guidance to our current 2018 midpoint outlook. Most of the change in our 2018 outlook is due to the timing delays related to dark fiber and small cell deployments as well as pushing out the estimated closing date on the TPx California assets and other lease-ups within Uniti Leasing.

And last, at quarter-end, we had approximately $350 million of combined unrestricted cash and cash equivalents and undrawn capacity under our revolving credit agreement. Our leverage ratio under our debt agreements at quarter-end stands at 6.1x based on net debt to our annualized adjusted EBITDA.

Our discussions with private capital partners has continued to progress favorably. And as Kenny mentioned, our opportunity set has expanded considerably from these discussions. Our confidence has certainty increased that we'll be able to successfully partner on one or more investment opportunities in the future.

And with that, I'll now turn the call back to Kenny to discuss today's announced transactions in more depth.

Thanks, Mark. Turning to Slide 11. As I mentioned earlier in the call, we've entered into a sale leaseback agreement with CableSouth, which is a privately-held fiber, cable, Internet and telephone provider with services in Arkansas, Louisiana and Mississippi. We will acquire over 43,000 fiber strand miles for $31 million and simultaneously enter into a 20-year triple-net master lease that will pay Uniti $2.9 million in annual rent plus a 2% annual escalator.

Uniti is well protected with a minimum rent coverage test and a maximum leverage ratio covenant, included in the lease. Our investment will generate cash yields starting at 9.3% and increasing to over 10% over the initial lease term. The triple-net lease structure will create adjusted EBITDA and unlevered free cash flow margins of nearly 100%.

In addition, CableSouth is currently an off-net provider to Uniti Fiber, so there will be immediate savings as that traffic will become on that. Uniti will have exclusive use of 9,000 fiber strand miles across Arkansas, Louisiana and Mississippi, which is mostly adjacent to Uniti Fiber's southern network footprint. Importantly, CableSouth will serve as a nonexclusive strategic partner to Uniti in pursuing other acquisition targets in opco/propco structures. This will allow Uniti to acquire additional valuable fiber without taking on residential customers. We expect this transaction to close in the third quarter of this year.

Moving to Slide 13. We've executed a dark fiber lease with a national MSO on existing Uniti Leasing fiber. The term of the lease is for 20 years and covers almost 10,000 route miles or 41,000 fiber strand miles. The fiber related to this agreement will be delivered in 2 tranches. The 24,000 fiber strand miles delivered in the fourth quarter of this year and the remaining 17,000 fiber strand miles in early 2019.

Altogether, this agreement represents a total upfront payment from the customer of approximately $23 million with annual cash revenue of approximately $4 million. We continue to see very strong demand for Uniti Leasing fiber, and in fact, have over $18 million of annual revenue and over $350 million of contract value in our sales funnel for Uniti Leasing in less than 6 months of development work.

On Slide 14, you'll see our updated network footprint, which includes the CableSouth transaction, including fiber from the TPx and CenturyLink transactions as well as from Uniti Fiber's and Uniti Leasing's network, we now have 5.4 million strand miles in service.

Turning to Slide 15. We own a unique portfolio of assets, some of the fastest-growing segments in telecommunications infrastructure. 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.

In closing, I want to emphasize that Uniti Group currently has an increasing number of strategic options available to us. The value of our portfolio and the outreach to private capital has led to a plethora of discussions with industry participants, ranging from opco/propco transactions, joint M&A, commercial partnerships and even portfolio repositioning over time. The recent PLR will certainly be valuable as we think about -- as we can think creatively about our expanded opportunity set.

With that, operator, we are now ready to take questions.

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

I wonder if you can start by expanding on the discussion on the PLR. What exactly was being asked of the IRS? And what was the extent of the conclusion?

Yes. Phil, this is Mark. So the PLR -- in the PLR, we asked the IRS to give us their guidance on 5 different types of contractual arrangements that are related to fiber. And the PLR concluded doing -- in each case that the rents -- that the revenue generated from those arrangements are, in fact, are rents from real property. So I believe this is the first PLR that specifically addresses revenue for the use of fiber that's outside of DAS systems. I would say, it is limited to facts and circumstances that we presented in the submission request. But as a general rule, what I'd say is, all of the 5 cases, I don't want to get into the contractual arrangements too specifically, but generally I would say that they all -- they do have common characteristics. And the first one would be that all 5 of the contractual arrangements involve the use of fiber when the tenant has the exclusive right to use a dedicated portion of the capacity of the fiber over a specific route. Secondly, the -- in each case, it provides that the TRS would generally own and operate any equipment that is not otherwise operated by the tenant. And then third, I would say that the REIT has permitted in each case to provide customary services in connection with leasing our fiber. So that's probably the best summary I can give you at this point.

Pretty comprehensive. Okay. That's helpful. And then second, the macro tower deal. Is -- was that all for existing towers? You said you signed a new deal with a wireless carrier. Was that with all of your existing towers or just on some subset?

Yes. Phil, I'll take that one. It's Kenny. So first of all, this customer is a very large customer of ours already on fiber-to-the-tower. So we're doing a lot of work for them and doing a good job. And I think that's partly led to the discussions on the MLA. They are an existing co-location tenant on existing towers in the U.S., and they have a growing number of co-location applications for towers as we're growing our portfolio. So because of that backlog, because of the existing relationship on fiber, it led to a logical discussion about a comprehensive MLA between the both, between the 2 of us. And we eventually added small cells to the discussion. So it covered -- it's a comprehensive relationship covering all of our macro towers, some of which they're already tenants on in a comprehensive relationship covering all small cell deployments for them, which we're particularly pleased about because this is the one wireless carrier that we had not previously been deploying small cells for. So I think, I mentioned in the past that we were deploying small cells for 3 of the 4, and this is now the fourth carrier that we will be doing small cell work for.

Got it. Understood. And then lastly, if I can, the delay in the dark fiber build that, that customer was not ready to take possession. I don't really understand why you were -- it sounds like you were building on schedule? Or were you building ahead of time? Give me some broad background there.

Yes. A little bit of both, Phil. So this particular project is the single largest of the 8 projects that we're referencing. So the dark fiber construction and small cell projects, there's basically 8 of those. This one particular project is a -- it's a $100 million build that was started over a year ago. And so it's essentially a 2-year, 2.5-year build cycle. So as you can imagine, our time line doesn't always perfectly match up with the carriers. There may be times when we're a little bit ahead, a little bit behind. And in this case, we are largely on time, if not ahead and our customer just isn't ready in terms of being at the sites at the same time, having the capital available to procure the sites, having the make-ready packages ready and the permitting at times on getting into the site. So it's a combination of different things. But ultimately, given the size of the project and the complexity of it, there's just been some delays and we're working through those.

Our next question comes from Simon Flannery of Morgan Stanley.

Mark, could you just talk about the balance sheet? You've obviously got good liquidity here. But how are you thinking about the leverage? Where do you want to be? And into that, what is the kind of cash flow look like in '19 with some of the committed CapEx for some of the orders in backlog? And what are your various options for funding that?

Yes. Sure. So Simon, as I've kind of said before, we've been leverage-wise, net leverage-wise around 5.9 to 6x and I've indicated that's kind of the mid-term target. I've also indicated that the number will fluctuate as we take down smaller acquisitions and some capital funding on our line and then eventually will turn that out, put the permit, financing and capital structure in place. And we'll do that. We certainly -- to your point, have certainly had very good access to the public capital markets and now have even a very good access to private capital sources as well. So we look to put the permit and capital structure in place when we think it's appropriate. And I'm sure we can do that in a very efficient manner as well from an execution standpoint. Going into 2019, without getting too much into 2019 guidance, as I've said earlier, along the projects that we've got, the large dark fiber and small cell project will start to finish in 2019. We've got a couple that will carry over into early 2020. So I do expect that the capital intensity of Uniti Fiber to go down starting in 2019 and eventually should go down to, what I would call, normalized levels maybe 30% on a revenue basis from a capital intensity standpoint. So we will be able to get that for you...

And then on the tower side?

Well, the tower side, we indicated last time that we thought that tower business could easily grow over the next 5 years to be $50 million revenue business. And with additional scale, tower cash flow margins could certainly be consistent with our peer group. So I would say that on the -- it really depends on towers. But right now, I would say, we would expect to build, kind of, build at the same pace we currently are in 2018 over that 5-year period. So I still expect us to build -- at least are forecasting to build, let's say 300 towers probably over the next 5-year or so. I think capital intensity of the fiber business will probably stay the same, given the build rate. However, as you know, all those towers will start to come on with their anchor tenants and then also start to come on with additional lease-up as well. So there may be additional cash flow coming on.

Great. And can you clarify on the deployment delays? I think you referenced some permitting issues. Can you just explain those in more detail or do you have line of sight to resolution there?

Simon, it's Kenny. I'll take that one. So a lot of -- so, first of all, the permitting is -- the permitting issues are largely related to small cells. And in many of our markets, Tier 2 markets, we're really the first ones deploying small cells in those markets. And so it's really -- there's really some lead time associated with educating the municipality on what the product is and just advancing the ball on explaining the new technology analogies to towers, analogies to fiber deployments, et cetera. So I think that has contributed to the delays, the fact that we're having a lot of conversations that are new conversations in these municipalities. But when you explain the benefits of 5G, explain what small cells really are, that eventually the light bulbs go off and progress is made. And so the most important thing with respect to your question is that we are now moving forward in all of these markets. So we've worked through the real timing delays and we're now progressing.

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

I guess, I have a couple along similar lines. So Mark, you said that the 4Q over 4Q outlook was now going to be about 8% growth versus I think we were looking for 10% before. And you said that was in consistent with your outlook. I was just trying to figure out is that really just about delays and we're going to be going back to the 10% or is 8% the new 10% and we kind of lower the kind of growth expectation? The second one was just when -- again on these delayed contracts, you said the revenues have contracted. So does that mean that you're going to start recognizing revenue even though the tenants not ready to jump on the system? Or does that mean that the total amount of revenue will remain the same, but it just gets shifted back? And then the last question, going back to Phil's question about the PLR. There have been kind of rumors out there that someone's been working on a PLR that touched on SonicGear, for instance, being part of a qualified REIT income. I just wanted to confirm that your PLR really is just about fiber and it's not about kind of the electronics attached to it as well?

Okay. David, it's Mark. So I'll try and take these in order. So first thing, so what we've always communicated on the kind of core fiber growth rate was that we thought the range kind of year-over-year would be 8% to 12%. So I think we -- so the decrease from what we've previously communicated is kind of the midpoint of 10% is really just solely related to the dark fiber and small cell delays, otherwise we would be at that in 2018. So no, we are not changing our outlook in terms of what we think the range is year-to-year. It's just that we've been impacted by delays that we've discussed earlier. On your other question about when we say contractual, so what we're really saying is to your point that the rev -- we are not starting the revenue prior to the site turning over or prior to activation what we really -- what we intend to say is that the revenue simply shifts and it is under contract. So it -- maybe the recognition will be delayed, but the total contract value and the total revenue over the contract will still be recognized. And then regarding the PLR. So as I said in -- as I said regarding the PLR, our PLR really had to do with the revenue being deemed to be rents from real property. And in terms of your question regarding the equipment about the PLR and what we agreed is that any equipment associated with that, that we own will be owned in the TRS. So it's really addressing the revenue coming from -- the revenue coming off of leasing the fiber and the equipment itself while holding the TRS and relative to let's say, as you know the value of the equipment is relatively nominal relative to fiber.

And then I guess my -- just my last one was kind of your -- this private capital partnership exercise you kind of brought up last quarter and sounds like it's been going well and you feel like -- sounds like you're close to kind of pulling the trigger on at least one deal. You said kind of "in the near future." is that -- should we be expecting this is kind of like a -- something to happen in the coming quarter or the coming -- rest of the year? Or kind of just off into the future?

So I'll say, it certainly not off into the future. I would say, we're in very active discussions. And as I said in my comments, it could be one or more. So I think it -- I don't know if it's next quarter or so, but I'd certainly think that -- I think it's very realistic that we'll be talking about at least one if not more than one this year. But as Kenny said, there's a numerous opportunities here. So it's probably this year as well as next year as well.

Our next question comes from Matthew Niknam of Deutsche Bank.

Just 2 if I could. One on the M&A pipeline, I think in the past kind of you've talked about getting to -- wanting to get to a 50% revenue diversification target. Wondering if there are any updates you can give us just in terms of time line and when you anticipate getting there? And then secondly, the MSO dark fiber lease. You mentioned that was held within Uniti Leasing. Is that part of the fiber you acquired as part of the Windstream lease?

Matt, it's Kenny. I'll take both of those. So on the diversification target, we've said 50% in 2019 and we still -- that's still our target, still working towards that and still feel confident in our ability to get there. The -- our opportunity set continues to grow. So it's partly -- the opportunity set is partly related to an increase in Uniti Leasing-type deals, so acquiring asset portfolios in addition to just companies. The opco/propco-type structures that we've been talking about and some of these more structured partnerships, where we're acquiring companies together and our operating partner may be acquiring residential partners. If you think about that, it greatly expands the number of types of businesses that we can transact with in order to get fiber. Not just pure fiber companies, but it could be (inaudible) that have built valuable fiber or cable companies that have built valuable fiber or over builders who have built valuable fiber. So lots of opportunities there. And these private capital discussions have also led to focusing on more transformative-type transactions, where we can move the needle on a big way in one transaction or a couple of transactions. There is a tremendous amount of capital in the industry that's very interested in the types of assets in the infrastructure space that we're focusing on. So all that to say, we still feel good about our opportunity to reach that 50% diversification target, and there are some attractively priced assets available, and we think the capital is there to help us get there. With respect to your question about the MSO lease, this -- so the assets that we're leasing up do not include those assets that we're currently leasing exclusively to Windstream. So these are the assets that we've acquired separately that now make up the Uniti Leasing portfolio.

Our next question comes from Frank Louthan of Raymond James.

With the cable sale leaseback, can you give us some -- a little bit more color on that? Is there anything inherently different with how that structured versus your other telco or fiber sale leaseback? And is there anything you've learned in that process working with an MSO that maybe is going to make a little easier for pitching for additional business from other MSOs and the likelihood of may be closing another one in the next 6 to 12 months?

Frank, it's Kenny. I'll let Mark comment on some of the lease protections and how that's structured relative to our previous leases. The short answer is, we've continued to improve, I'd say, the technology and the protections for ourselves, but Mark can comment on that. But with respect to the -- your comment about what we've learned and how that can help us, we've absolutely learned a lot. I think and not just in this particular transaction, which is now public, but as we've talked about for some time, we've been having conversations with cable companies. The nationwide MSO is a reflection of that in and of itself, the lease-up of Uniti Leasing fiber. So I think the CableSouth deal is a reflection of conversations and I think it will be indicative of more to come. And ultimately, one of the principal takeaways is that there is a lot of valuable fiber embedded in some of these businesses that are not being utilized as completely as they could be, especially for a company like ourselves that are focused on small cells and backhaul. So we think there's lot of opportunities for us to optimize usage of fiber that are in metro markets, Tier 2, Tier 3 metro markets to be used for, what we call, 5G deployments.

Frank, in terms of the lease structure, I mean, I agree with what Kenny said, kind of broadly that every time we do a sale leaseback transaction or a leasing transaction with any counterparty, I mean we're starting to evolve kind of how we -- kind of different elements of the lease structure given -- and in some cases, I would say, even in the future you will start to see us potentially when we're negotiating some of these additional leases that have other elements or different elements or structured, and we really kind of picking and choosing from what you -- things that you may see in other real estate spaces. So we're trying to adapt based on the counterparty's needs and also our need in terms of making sure that we're protected in terms of lease kind of originating sort of a downside scenario.

Our next question comes from Brett Feldman of Goldman Sachs.

I want to go back to this practical significance of the PLR. I think when you were answering Dave's question, you indicated that some of the optronics that support those revenue streams would remain in the TRS. So are you actually taking that income and converting it into the QRS, is that the point? And then I guess, just going forward operationally and from an M&A standpoint, how does this improve your flexibility?

Yes. So I think a couple of things. One, I mean, in terms of their M&A, so both organically as we think about what assets we currently have in the TRS today versus what we need to have in the TRS over time is going to give us the ability to migrate more assets and be certain of what of that those assets going to end up, and more specifically I should say, the income is in fact qualifying REIT income. So it's a question of the confidence level and the certainty that we have when we make those decisions to move assets. And then also from a M&A standpoint, certainly when you evaluate what the assets are and what the -- whether or not the income from the target is qualifying or not qualifying income. Once again, it allows us to be certain and it also allows us to place the assets and the revenues into the right entity at the date of close and not necessarily have to close into a TRS and then figure out later and move them over into the QRS. So I do think it gives us a lot of I would say, we're -- just to say it is -- I think, we're very happy with the PLR ruling. I think it's very -- it will be very valuable to us, both today and overtime. So I would say, we've got a -- we've got what we consider to be a very good ruling and will be very beneficial to us.

And if I could ask a follow-up question. I was looking at the release, you talked about the adjustments you are making to the tower revenues there were some onetime items. Even if we adjust for all that, I still think you had a sequential decline in your tower rents. Is that correct? And if so, what's behind that?

So I believe -- so the tower rents -- so I believe that is related to the -- on the straight-line rent adjustment actually goes through the revenue line. So that's actually will be depressing the revenues.

So in other words, there were some straight-line revenues that were in your last quarter but because of the adjustments you made, there is a -- it looks like a step down, is that the point?

Yes. So we were -- in some cases, the leases were being -- we were in -- when we calculated straight-line rent, we were including renewal periods. And therefore, when you include the renewal periods, you're also getting a longer period of escalators, which then is amortized over the entire period. So we had to -- so the adjustment was to correct that.

Got it. And one last one, just to make sure I'm clear. The customer that wasn't quite ready to take delivery on some of the fiber you are building. You were sort of walking through a range of reasons that caused that, and I thought you said capital availability. Does this customer need to complete a financing in order to commence their lease payments, or did I misunderstand that, that comment?

Brett, it's Kenny. No, you didn't mishear me, but they don't need to complete a financing. This is a very large national wireless carrier with access to capital. But it's really more of prioritization of the various projects they've got around the country. And it's not a question of whether there is capital available, it's just timing of that capital. So I don't think that's the predominant reason for the delay, but it's one that we've experienced.

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

Thank you. And thank you for joining us today. 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.