Uniti Group Inc. (NASDAQ:UNIT) Q2 2018 Earnings Conference Call August 9, 2018 4:15 PM ET
Kenny Gunderman - CEO
Mark Wallace - CFO, EVP and Treasurer
Philip Cusick - JPMorgan
Simon Flannery - Morgan Stanley
David Barton - Bank of America
Matthew Niknam - Deutsche Bank
Frank Louthan - Raymond James
Brett Feldman - Goldman Sachs
Welcome to the Uniti Group 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. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the company’s prepared comments.
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 with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's current report on Form 8-K dated today.
I would now like to turn the call over to Uniti Group's Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.
Thank you. Good afternoon, everyone and thank you for joining. Please turn to slide 4 in our presentation. This afternoon, we announced two transactions that demonstrate the continued momentum we are experiencing. The 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 attractive fiber portfolio with significant lease up potential.
The second transaction we are announcing today is a Dark Fiber lease with a national MSO on our existing Uniti leasing portfolio of 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 CableSouth and MSO Dark Fiber lease transactions were proprietary and negotiated deals which reinforced one of Uniti’s core competitive advantages in our M&A and lease up business.
As we've 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 2018. Uniti fiber 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 four national wireless carriers, 29% from wholesale and 30% from local enterprises, government, and schools. Wireline 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 business is pursuing large anchor wireless backhaul small cell deals. Our sales funnel remains strong for these types of transactions and as a result we expect bookings 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 of 2018 with 18% related to bandwidth upgrades and 15% relating to Dark Fiber backhaul projects. The bulk of our Dark Fiber installed 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 emphasis 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. Our 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 expected churn to be somewhat elevated in the first half of the year as we work through scheduled disconnects and [indiscernible] 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 on reducing alternate circuit costs in the southeast markets by further interconnecting the legacy fiber networks. We expect over 6 million in annual expenses savings above and beyond our original synergy target of 12.5 when the project is complete in early 2020.
As we previously mentioned the capital investment for this project is expected to be $17 million with a payback of about two and a half 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 credit dynamics.
Turnings to towers, our development activity in the U.S. continues to ramp as we completed 52 new towers during the quarter. We also added five 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 of both the U.S. and Mexico and our pipeline of co-location leases remain strong. As an example, we recently signed a mass release agreement with a major national wireless carrier to co-locate their equipment on our macro towers and small cell locations within the U.S. the initial term of this agreement will be five 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 multi-product infrastructure offering including fiber, small cells and macro towers.
With that I will now turn the call over to Mark.
Thanks Kenny, and 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 communication 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 in fiber deployment delays, as Kenny mentioned, the revenues from these were contractual and will favorably impact future period. 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 five, 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 share 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 had 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 improvements during the quarter to our network with their capital bringing the cumulative amount since our spin off to over $540 million 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 aside churn 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 encourage 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 contraction of 52 towers in the U.S. and 4 in Mexico. In addition we completed and closed on the acquisition of one 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 in Latin America for a total of 767 towers in service at quarter end and approximately 230 in various stages of development. Uniti Towers reported revenues of 2.5 million and adjusted EBITDA loss of 1.2 million for the second quarter.
Uniti Towers results included two items that negatively impacted the quarter. First was a $600,000 non-cash charge related to a correction of accounting for previously reported freightliner arranged in our U.S. operations. The adjustment confirmed a period over which freightliner 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 all of these costs until we come to an agreement with our customers regarding the amount of reimbursement. Excluding these two 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 and TPS transaction, assumptions regarding the timing of lease up at Uniti Leasing fiber assets and other factors. Our current outlook excludes any future acquisitions, capital market transactions, and transaction costs.
Furthermore, our outlook is subject to adjustments based on the finalization purchase price allocation related to acquisitions 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 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 2017 to annualized 4Q 2018 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 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 three years including $11 million in 2018. Net success rate 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 the TPX California assets and expectations regarding the close of the Cable South 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 that TPX, CenturyLink and CableSouth transactions including expected lease up close 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 share 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 delay related to Dark Fiber and small cell deployments as well as pushing out the estimated closing date of the TPX California assets and other lease ups within Uniti Leasing. And last, at quarter end, we have approximately $350 million of combined unrestricted cash and cash equivalents and undraw capacity under our revolving credit agreement. Our leverage ratio under our debt agreements at quarter end stands at 6.1 times based on net debt to an 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 certainly increased that will be able to successfully partner on one of 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 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 acquired over 43,000 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 2% annualized later.
Uniti is well protected with a minimum rent coverage chest and a maximum leverage ratio covenant included in the lease. Our investment will generate cash yield starting at 9.3% and increasing to over 10% over the initial lease term. The triple net lease structure will create adjusted EBITDA 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-net. 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 non-exclusive strategic partner to Uniti in pursuing other acquisition targets and 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 two tranches. With 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 six months of development work. On slide 14, you will 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 to some of the fastest growing segments and telecommunications infrastructure. We have significant leaseable capacity across all of our business units and because 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 as 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 plethora discussions with industry participants ranging from because it's ranging from OpCo/PropCo transactions joined M&A commercial partnerships and even portfolio repositioning over time. The recent PLR will certainly be valuable as we think creatively about our expanded opportunity set.
With that operator, we are now ready to take question.
[Operator Instruction] Our first question comes from Philip Cusick of JPMorgan. Your line is open.
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? Thanks.
Phil, this is Mark. In the PLR we asked the IRS to give us their guidance on five different types of contractual arrangements that are related to fiber. And the PLR concluded in each case that the revenue generated from those arrangements are in fact 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 [indiscernible] systems. I would say it is limited to facts and circumstances that we presented in the submission request, but as a general ruel what I'd say is, all of the five cases, I don't want to get into their 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 five of the contractual arrangements involved the use of fiber where the tenant has the exclusive right to use a dedicated portion of the capacity of the fiber over a specific route.
Secondly, in each case it provides a 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 is permitted in each case to provide customary services in connection with leasing 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. 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.
Phil, I’ll take that one, it’s Kenny. 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 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 portfolios. So because of the backlog because of the existing relationship on fiber, it led to a logical discussion about a comprehensive MLA between the two of us and we eventually added small cells to the discussions.
So, it covered - it’s comprehensive relationship covering all of our macro towers some of which they're already tenants on and 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 we mentioned in the past that we were deploying small cells for three of the four and this is now the fourth carrier that we will be doing small cell work for.
God it understood. And then, lastly if I can, the delay in the Dark Fiber build 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? Can you give me some background there?
Yeah, a little bit of both, Phil. So this particular project is the single largest of the 8 projects that we’re referencing. So Dark Fiber construction is small cell projects, there's basically eight of those. This one particular project is - it's $100 million build that was started over a year ago. And so it's essentially a two and half year build cycle, so as you can imagine, our timeline 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're largely on time if not ahead and our customer just isn't ready in terms of being at the sides at the same time, adding 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. Your line is open.
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 into that, what is the kind of cash flow look like in 2019 with some of the committed CapEx for some of the orders in backlog and what are your various options for funding that? Thanks.
So, as I said before, we've been net leverage wise around 5.9 to 6 times, and I've indicated that’s kind of mid-term target. I have also indicated that the number will fluctuate as we take down smaller acquisitions and some capital funding on our line and then eventually we’ll turn that out but the permit financing and capital structure in place. And we will do that. We recently, to your point, have certainly had very good access to the public capital markets and now have even very good access to private capital sources as well.
So we’ll look to put the permit 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 projects, we’ll 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.
On the towers side?
Well, on the tower side, we indicated last time that we thought the tower business could easily grow over the next five 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’d say we would expect to build kind of build at the same pace we currently are in 2018 or that five-year period. So I still expect us to build or at least are forecasting to build let’s say 300 towers per year over the next five years. So, I think capital intensity of the fiber business will probably stay the same given the build rates. However, as you know, all those towers will start to come on with their anchor tenant and then also start to come up with additional lease up as well. So there maybe additional cash flow coming on.
Can you clarify on the deployment delays, I think you referenced some permitting issues, can you just explain those in more detail and do you have line of sight to resolution there?
Hey Simon, it’s Kenny, I will take that one. So, first of all, 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 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 the towers, analogies to the fiber deployment 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, you explain what small cells really 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 time delays and we're now progressing.
Our next question comes from David Barton of Bank of America. Your line is open.
I guess I've 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 ten or is eight the new ten and we kind of lowered the kind of growth expectation. The second one was just when again on these delays 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's been kind of rumors out there that someone has been working on PLR that touched on SonicGear for instance being part of 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. Thanks.
Dave, this is Mark. I’ll try to take these in order. First, what we’ve already 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 had previous communicated is kind of midpoint of 10% is really just solely related to Dark Fiber and small cells delays otherwise we would be at that in 2018. So, no, we're 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 the other question about when we say contractual, so what we're really saying is to your point that we are not starting the revenue prior to the site turning over our part activation, what we intend to say is that the revenue-ish - the revenue simply shifts and it is under contract, so it may be - 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 regarding the PLR, our PLR really had to deal with the revenue being deemed to be rent from real property and in terms of your question regarding the equipment, but what the PLR and what we agreed it that any equipment associated with that that we own would be owned in the TRS. So really addressing the revenue coming from - the revenue coming off of leasing the fiber at the equipment itself while holding the TRS and relative to say as you know the value of the equipment that is relatively nominal.
And then I guess just my last one was kind of your, this private capital partnership exercise that you kind of brought up last quarter and it sounds like it’s been going well, and you feel like you’re – sounds like you’re close to kind of pulling the trigger on at least one deal, that you said, quote in the near future. Should we be expecting this as kind of like a, something that happened in the coming quarter or the coming or the rest of the year or kind of just off into the future?
So I’ll say it’s certainly not off into the future. I’d 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, I think it’s very realistic that we’ll be talking about at least 1, if not more than 1 this year. But as Kenny said, there are numerous opportunities here. So it’s probably this year as well as next year as well.
Our next question comes from Matthew Niknam with Deutsche Bank.
Just two if I could. One on the M&A pipeline. I think in the past, Kenny, you’ve talked about, wanting to get to a 50% revenue diversification target. Wondering if there are any updates you can give us just in terms of timeline 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?
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 requiring 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 [indiscernible].
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 and 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, so the assets that we are leasing up do not include those assets that we’re currently leasing exclusively to Windstream. So these are the assets that we have acquired separately that met, 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 more color on that, is there anything inherently different with how that structured versus your other telco or fiber leaseback, is there anything you learn in that process working with an MSO that maybe make a little easier for pitching for additional business from other MSOs and the likelihood of maybe closing another one in the next 6 to 12 months?
I’ll let Mark comment on some of the lease protections and how that’s structured relative to our previous leases. The short answers is, we’ve continued to improve the, I would say the technology and the protections for ourselves, but comment on that. With respect to 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 opportunity. 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 is lots 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 way structure, I mean, I agree with what Kenny said kind of broadly that every time we do a sale leaseback transaction, or leasing transaction with any counterparty, I mean, we’re starting to evolve kind of how we kind of different elements of the restructure, and in some cases, even in the future, you will start to see us potentially and we’re negotiating some of these additional leases that have other elements or different elements are structured and we’re really kind of picking and choosing from what things that you may see in other real estate spaces. So we’re trying to adapt, we’re trying to adapt based on counterparty’s needs and also our needs in terms of making sure that we’re protected in terms of downsized scenario.
Our next question comes from Brett Feldman of Goldman Sachs.
I will go back to the 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 things is one, I mean, in terms of their M&A, so both organically as we think about what assets we currently have in TRS today versus what we need to have in the TRS overtime, it's going to give us the ability to migrate more assets and be certain of what those assets are and more specifically I should say, the income is in fact qualifying 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 an M&A standpoint, certainly, when we evaluate what the assets are and what the -- whether or not the income from the target is qualifying or non-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 data close and not necessarily have to close in to a TRS and then figure out later and move them over to the QRS.
So I do think it gives us a lot of, I'd say, we're just a, say, it is, I think we're very happy with the PLR ruling. I think it's a very -- it will be very valuable to us, both today and over time. So I'd say, we've got what we consider to be a very good ruling and we’ll be very good with that.
And if I could ask a follow-up a question. I was looking at the release, you talked about the adjustment you are making to the tower revenues, because there are some one-time 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 that revenue -- actually goes through the revenue run line. So that's actually would be depressing revenues.
So were there some straight line revenues that were in there last quarter, but because of the adjustments you made, it looks like a step down, is that the point?
Yeah. In some cases, the leases were being anchored -- we were – when we calculated shipment rent, we were including renewal periods and therefore when you include 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.
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 were building, you were sort of walking through a range of reasons I 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 that I misunderstand that comment.
It’s Kenny. You didn't mishear, 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 a prioritization of the various projects they've got around the country and it's not a question of whether there's 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 and we appreciate your interest in Uniti Group and we look forward to updating you on our progress next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.