Key Takeaways From Uniti's Earnings Call

Summary

• Uniti has developed a backlog of beneficial projects that are coming online.
• Uniti is rapidly decreasing its dependence on Windstream.
• Uniti is educating the telecom industry about how sale leaseback works for them.

Uniti Has a Growing Backlog

Uniti (NASDAQ:UNIT) is trying as hard as possible to grow organically, and this generates a backlog of opportunities. Uniti has seven major projects in their fiber division coming online throughout this year and into the next. Furthermore, they expect to add 30 additional contracts to their towers without having to build more towers. This has, however, encouraged Uniti to build additional towers with the corresponding fiber connections and sell them as a bundle, making those tower contracts more appealing to customers.

The consensus projection that Uniti uses is that approximately 25,000 additional cell towers will need to be built in the next five years. Uniti has an ambitious goal to build 5% more, or 1,250 of them. The rate of return by from single tenant towers ranges from 8%-12%, and once a second tenant comes in it goes up to 25%. If they can do this, Uniti towers will have plenty of room to grow from capital earned internally.

Uniti is also taking advantage of the expertise that is found in previous acquisitions. They are developing a sales focused team to sell directly to government agencies, schools and enterprises. This is expected to produce 10 million in new revenue by 2020. Uniti projects will have between $2.52 and $2.57 AFFO per share in 2018, easily covering the dividend of $2.40 per share annually.

The greatest unexpected item Uniti announced was the sale leaseback agreement with TPx. TPx is a privately owned company operating in the western U.S. Uniti is completing a similar agreement with them as they currently have with Windstream (WIN). The contract is a 15-year, triple net lease that is expected in 2018 alone to add an additional 3-cent AFFO per share. This agreement is the result of the second key takeaway from Uniti's earning call.

Uniti Is an Educator

Uniti, being a telecom REIT, has been proactively educating possible future client for the last two years. Their TPx announcement and deal are a direct result of this. Most telecom companies own and operate their fiber optic networks, as well as offer services directly to customers. This greatly limits their ability to grow as they bear the capital expenses of laying down additional infrastructure as well as attracting customers.

Uniti has been courting various telecom companies, extolling the benefits of this sale leaseback contracts. TPx has announced it will use this deal and the purchasing of its infrastructure to pay down debts. Uniti receives full operational and developed infrastructure and guaranteed regular rent payments. I would fully expect that Uniti will continue to pursue and court other private and public companies for additional deals.

Uniti Is Increasingly Independent

When Uniti was spun off from Windstream, it was wholly dependent on a single client for its revenue. This has been a constant sticking point for investors looking into Uniti as an income-earning vehicle. Considering the ongoing legal battles between Windstream and Aurelius, Uniti has an urgent desire to continue to diversify its income streams. Uniti projects to have 33% of its revenue coming from other companies and customers, with 1% of this coming directly from its newly announced deal with TPx. The newest goal by Uniti's management is 50% of its revenue by summer of 2019. This is an ambitious goal considering that they have not announced any new partnerships or sale leaseback agreements that are in the works.

Given the urgency and the managements ability to rapidly yet cost-effectively reduce their dependence on Windstream, this goal is ambitious, but very achievable. My only reservation is that management will fall into the temptation of a deal that will reduce dependence on Windstream, but cause greater risks down the line by signing lease agreements with other weak or debt-laden companies. So far, however, management has proven resilient to this temptation.

Uniti Has No Plans to Issue Additional Shares

The last major takeaway from this earning call is the reiteration that Uniti is expecting to issue no further shares throughout all of 2018. This simply means that Uniti will raise capital either organically or via private means. This is an excellent choice, seeing as Uniti would have to find deals that yield well over 9% to even have them be accretive. Uniti's share price has been down trodden since Windstream slashed its dividend and given Windstreams ongoing legal battles. Uniti is wise to ride that storm out while finding other channels to grow.

Investor Takeaway

What should you as an investor walk away thinking from this earnings call? Rest assured that Uniti's management is doing everything possible to continue to grow effectively, while having the looming concerns of bankruptcy of its largest revenue source. Many Seeking Alpha writers have written masterful pieces explaining in detail the possible outcomes of Windstream's financial and legal woes and the outcome of them on Uniti. The longer Uniti has to develop and grow apart from Windstream, the smaller the impact of those ongoing battles will have on Uniti.

Uniti continues to turn a profit and is growing as effectively as possible. These various takeaways reveal that, in the short term, the deflated share value of Uniti gives a unique chance to pick up a high dividend yield that is being completely covered by the funds available to the company. I would rate Uniti a buy for those who have a higher risk tolerance.

Analyst’s Disclosure: I am/we are long UNIT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Cuip99]

I like your enthusiasm. I am currently in hold status re UNIT. Holding on with my bare teeth.

[claanet]

127 order Order wo 3:37 PM
ORDER re:119 Joint Status Letter. Upon review of the parties' joint status letter, the Court hereby extends the deadline for the close of fact discovery to April 20, 2018, and the deadline for the close of expert discovery to May 4, 2018. (The Court also adopts the parties' proposed interim discovery deadlines, but notes that those deadlines are subject to change by written agreement among the parties; the parties do not need the Court's permission to modify those deadlines unless a modification would affect the deadline for the close of fact or expert discovery.) In light of the foregoing, and the absence of any indication in the parties' joint status letter that there are other issues ripe for the Court to address, the pretrial conference scheduled for tomorrow is ADJOURNED to April 24, 2018, at 2 p.m. (Should any party perceive a need for a conference before that date, that party should file a letter motion to that effect and propose dates and times for a conference that would work for all parties.) By Thursday of the week prior to that conference, the parties shall file on ECF a joint letter, not to exceed three pages, regarding the status of the case, including the required information set forth on pages five and six of90 the Case Management Plan and Scheduling Order. SO ORDERED. (Signed by Judge Jesse M. Furman on 3/7/2018) (Text Only Order) (Furman, Jesse)

[mirekw]

Somebody should get CTL and UNIT into a discussion about a merger

[The Mac]

CTL isv a utility. unit is a REIT. Apples and bananas.

[arnold.bird]

Very happy with the earnings report.

Risk is to the upside. I get the impression they are discussing a lot of deals including some that could be transformative. Shorts could be caught in an extremely bad position, were there to be a significant announcement at some point, and I don’t know what warning there would be.

[Treading Softly]

I could see more sale lease back agreements, especially if it proves beneficial for TPx, we learned of that deal with no warning

[Nils de Graaf]

Can anyone explain how I should interpret the backlog number. If it was 500 million, is that turnover per annum or a present value? Or profit?

[Treading Softly]

Backlogs are generally referred to as the cost to the company, so a 500 million backlog is how much it'd cost to clear it out if you could do it immediately.

[elliot_mllr]

bluedreadreamer:
I have the impression that UNIT already has p/e PIPE financing available for the next acquisition, either by a preferred or debt with an equity kicker or some other structure.
And contrary to your belief that UNIT cannot diversify without a"lot more capital", UNIT could sell part of its WIN rent stream--which is covered more than 3x--and invest that in a transaction with the same return but increased tenant diversity.
Elliot Miller

[User 21446031]

thx for pointing out that UNIT could sell some WIN assets which obviously I was not considering in my comment above, as I was unaware that the master lease with WIN could be carved up, and as I have not heard any talk of such a move in any of UNIT's cc's. But if they could execute that, the market (and credit agencies) would surely view that as positive

will be interesting to see what cost of capitol/yield private equity would demand to provide UNIT capitol, as UNIT needs an adequate spread between acquisition cost/yield and capitol cost/yield to make acquisitions accretive (or just even not dilutive would be fine, as long as they increase diversification away from WIN )

[Joe Lunchbox]

UNIT is like it's on an express elevator going up. Wow! I'm hoping UNIT performs like CORR and ends up in the high $30s. Fingers crossed! Good luck to all. Going UP!

[User 21446031]

The key takeaways i got from the call were:

tower is a growth industry but it contributed only 1.7% of Q4 total adj EBITDA so not substantive for diversification away from WIN

fiber by far their biggest source of EBITDA, has lot of unused capacity, and they invested a lot of cash into that division in 2017, but AFFO/sh fell YOY and even accounting for TPx purchase, 2018 AFFO/sh will be below 2016's

leasing segment also promising given the potential to bundle unused fiber capacity with tower space for new client sales (but were pretty small in 2017) and the TPx sale (for $96 m, adding 0.03 AFFO/sh in "first full year" so 1.2% of total 2018 forecast AFFO) but TPx acquisition reducing revolver capacity down to $374 m

and UNIT is guiding what $266 in growth capex 2018, so that will drain most of the rest of the revolver line (in the absence of capitol raised elsewhere)

so without access to a LOT more capitol, NO WAY UNIT can diversify away from WIN any time soon, given UNIT's 96% payout ratio for the dividend means very little retained capitol, and organic growth has yet to manifest

so will be interesting to see what kind of private capitol they can attract while the WIN BK situation unfolds until WIN's debt maturities in 2020 and 2021 arrive (or if the unlikley case Aurelius wins their pending legal case and forces WIN into BK)

meantime seems like buy in 14;s, sell in 16's pretty good little short term swing trade

[claanet]

FYI, update Auralius vs Windstream

PM
ORDER: If Windstream Services LLC makes a supplemental filing seeking a protective order, oral argument on that request will take place on Tuesday, April 4, 2018, at 3:30 p.m. in Courtroom 6-B, United States Courthouse, 500 Pearl Street, New York, New York. This is the only matter scheduled for this date and time. Please be sure to arrive sufficiently in advance so that the argument may begin on time. Each attorney or unrepresented party is directed to ensure that all other attorneys or unrepresented parties on the case are aware of the oral argument date and time. In addition, any requests for an adjournment must be made in compliance with Judge Gorenstein's rules (available at:http://bit.ly/2D5j87k). (Oral Argument set for 4/4/2018 at 3:30 PM in Courtroom 6B, 500 Pearl Street, New York, NY 10007 before Magistrate Judge Gabriel W. Gorenstein.) (Signed by Magistrate Judge Gabriel W. Gorenstein on 3/6/2018) (ap)
minutes Discovery Hearing di 12:06 PM
Minute Entry for proceedings held before Magistrate Judge Gabriel W. Gorenstein: Discovery conference held on 3/6/2018. Briefing schedule set on Windstream's planned motion for a protective order. Windstream's supplemental filing due March 16, 2018. Any opposition due March 23, 2018. Reply due March 28, 2018. Oral argument scheduled for April 4, 2018, at 3:30 p.m. in Courtroom 6-B. (rch)

[Treading Softly]

Thanks for the update! This could add some additional colour to the coming Earnings call!

[User 48750553]

Can I get a layman's read on this "protective order"?

[MoneyRules]

Here is a link to an explanation of federal court protective orders.

http://bit.ly/2D7DWuU

If Windstream does file the motion for a protective order, it means they are trying to end some part of Aurelius' discovery requests. I don't know if we will learn the specifics, but we have previously seen Aurelius ask for documents outside the dates established by the district court judge. Maybe they are still trying, and Windstream is trying to put an official end to it. But it could be other items, too.

[jackarmstrong]

Speaking of educating the industry about the stock; it is hard to simply explain uniti to anyone.
“they own lots of underground fiber and rent it to companies. It pays a 16% distribution.” I say. “Then why is the stock tanking?” they ask. So I try to explain WIN, aurelius, and dark fiber. Thats when I get smacked with the glazed look. uggh

[Treading Softly]

Thankfully they're educating the industry about how the benefits of the Sale-Lease back model, but yeah people see big yield and run

[jakied]

I have a small position in UNIT, 207 shares. Is there any chance of a monthly div of 20c?

Love the monthly payers!

[Treading Softly]

Thanks for commenting! I love monthly payers too, but it all depends on the business model, STB used to be my favorite one, but they're going private now.

[knownothingguru]

If you like monthly payers, take a look at PBA; no K-1 and a long history of steady dividends.

[Treading Softly]

I have had my eye on them and VET for a period of time, need to due additional research before jumping in. I also quite enjoy CEN for monthly dividends.

[Joe Lunchbox]

I appreciate the article. I have a position and get a little more as it goes along. I'm cautiously optimistic. A couple of years from now I'll probably wish I'd backed up the truck. Good luck to all.

[Treading Softly]

Thanks for commenting! Hindsight is always 20 20, but I am enjoying the ride!

[Fastrack.]

Very encouraging, thanks - I have a significantly higher basis but am holding fast.

[Treading Softly]

I understand, I got in originally around $16, but was able to pickup additional shares with a couple of the drops.

[sid18]

For TPx, they paid $95M to acquire $6M in AFFO. Would it have better to simply buy debt at 10% YTM instead?

[Ryan Bowen]

That's just the part of the deal that is monetized at this point. They also are gaining exclusive access to 7000 strand miles in Texas that are currently unused that they can try to lease out. There's also an additional 22,000 strand miles that are unused in California and Massachusetts that they will be trying to lease out and will share revenue with TPx. So the $6m in AFFO is just the immediate impact but there's potential for further monetization.

[sid18]

Thanks for the info.

[anarchist42]

No - because UNIT gains control of assets which it can use for future profits.

[forager231]

long unit and happy to see the improvements the management team has made so far.

[Treading Softly]

Thanks for commenting! I agree, hears to them keeping it up!

[Librab103]

Nice read and a good Bull breakdown of the earnings call. I think UNIT had a great year and great 4th quarter. I will be keeping an eye on 2018 and to see if they can keep to their expected AFFO and not issue any shares like they promise. I will also be keeping an eye on revenue and profits. I hope the legal battle WIN is in will be settled this year and we can look forward not backwards

[Treading Softly]

Thanks for commenting! I'm watching the AFFO to ensure they're not sinking the ship, but any negative WIN outcomes would instantly decimate the outlook at first.

[maegashira]

So hard to debunk this oft-repeated view, assuming you view WIN bankruptcy as a negative outcome. That would be a positive for UNIT, as WIN could shed the debt load that has clouded its future. Would decimate WIN shareholders, which is why WIN is trying to avoid that, but not a fear for UNIT investors.

[Treading Softly]

I understand the long-term impact may be negligible, however the reactionary selloff and uncertainty would definitely impact Uniti's share price right away

[RealRural]

Appreciate a little "color" in the odd word of the analysts on the earnings call transcript, especially on the TPX sale/leaseback, since I didn't quite get that. If I understand, UNIT bought the fiber, allowing TPX to get some money to pay off debt, and now TPX will lease the fiber from UNIT, since that is a big part of what UNIT's biz model is.

This seems like a reasonable way to get a steady income stream and additional fiber to lease and if TPX does well it will accrue to UNIT's benefit. I like this idea and perhaps it has traction with other enterprises out there.

UNIT had a nice 4.3% jump today, back up to where I bought my speculative 100 shares and wish I had courage to buy some more but diversity of opinion on its future is a cautionary red flag.

[Treading Softly]

An easy way to picture the sale-lease back agreement is if walmart built a store, sold the building to recouperate the invested capital and rented it from who they sold it to. This is a newer way of thinking for this industry but tried and true for companies like Walgreens etc who just lease the space

[toh192]

Triple net leases such as what WAG uses are more than renting. your paying property taxs, rent and repair costs. Taxes go up with appraised value so walgreens pays more but looses out on appreciation. It's really a sucker deal and they would be better holding title.

[AVIowa]

One slide worth noting that caught my eye pointed out that capacity utilization of Uniti assets is in the mid 20% range. Have they ever indicated a goal for that capacity utilization rate and what the value of the unused capacity is?

[anarchist42]

They have not - but with the expected growth in fiber traffic from 5G the potential upside for UNIT’s under utilized assets is significant.

[rex.ter]

i was wondering the same. is this equivalent to an occupancy rate? not sure if utilization rate is just how much capacity is used, not necessarity how much capacity is being leased out?

[Gregg Sterling]

For their dark fiber I believe (UNIT still leases some light fiber but that does not qualify for REIT status) these companies are leasing whole pairs of fiber, not just bandwidth. The leasees have to provide the equipment on both ends (hence the term dark fiber since UNIT doesn't 'light it up').

[AlieGee]

Company backlog should keep them busy for quite some time.

Longer term I see higher prices.

[Treading Softly]

Agreed! As long as they grow carefully and keep it accretive then all will be well!

[Flex68]

Appreciate the article!

I established a substantial position on the drop in early October '17.
Refused to sell in the mid-$18s in late December because I believed that there was still too much mud in the water, and that there was further upside to be realized after the mud continued to clear......plus I love the dividend!

Long UNIT

[Treading Softly]

Thanks for commenting! I plan to hold it as long as the fundamentals are strong! The race to being less dependent on WIN is key in my mind.