Uniti Group Inc. (UNIT) Management Presents at Deutsche Bank's 26th Annual Leveraged Financial Conference (Transcript)

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About: Uniti Group Inc. (UNIT)
by: SA Transcripts

Uniti Group Inc. (NASDAQ:UNIT) Deutsche Bank's 26th Annual Leveraged Financial Conference October 3, 2018 3:20 PM ET

Executives

Mark Wallace - EVP, Chief Financial Officer and Treasurer

Bill DiTullio - Director, Finance and Investor Relations

Analysts

Matthew Niknam - Deutsche Bank

Matthew Niknam

Thank you, everyone, for joining us. For those of you who don’t know me, I’m Matt Niknam. I cover telecom and towers on the equity research side at Deutsche Bank. Very pleased to have Uniti CFO, Mark Wallace; and Bill DiTullio from IR joining us. Thank you, guys.

Mark Wallace

Thank you, Matt. Good to be here.

Bill DiTullio

Yes.

Matthew Niknam

So we’re going to just jump right into it and get into Q&A and midway through the presentation. If anyone has any questions, feel free to raise your hands and we’ll address your questions as well. But maybe just to start, Mark, can you talk to some of the bigger priorities for Uniti as we head into the final stretch of 2018 and close out the year?

Mark Wallace

Sure. As we started the year, we kind of had three priorities, which was organic growth. We had integration realization of our integration-related synergies, then we also had continued our diversification strategy. So let me try to talk about each one for just a few minutes.

So I think on the organic growth, we are incredibly pleased about the progress that we’ve made on the organic growth front. If I just kind of go through our different business verticals, so if you start with Uniti Fiber. So Uniti Fiber is a business that should grow – on a top line basis should grow probably 8% to 12% year-over-year going forward, and we’re in – we’ve got all the right elements in place to do that.

Uniti Fiber is also a margin expansion story. So as we realize the synergies from the acquisitions that we have completed over the last couple of years, we should see those synergies, both cost synergies, on-net, off-net synergies and revenue synergies continue to flow through our P&L.

We also should see additional margin expansion from lease-up by the existing network in Uniti Fiber. And then as we also have some of our Dark Fiber projects get completed and those sites are to turn over and become revenue generating and that should add to our EBITDA margins as well. So I think, we’re incredibly pleased with the progress that we’ve made on Uniti Fiber under Andy Newton’s leadership.

On Uniti Towers, Uniti Towers again is a predominantly a start-up business that really didn’t exist a couple of years ago. Lawrence Gleason, who leads the Uniti Tower business. So in Uniti Towers today, we have over 750 towers. Most of those today are in Latin America, but we also are currently constructing a substantial number of towers in the U.S.

So this year and over the next five years, we would expect Uniti Towers in the U.S. to construct probably 300 towers on average per year. So that business would grow to essentially not zero revenues a couple of years ago to about $50 million in revenue over the next five years just in the U.S. and then probably have tower cash flow margins at that level of 60% to 70%. So very substantial growth in that business and very complementary to our fiber business as well.

And then the last business vertical I’ll talk about is Uniti Leasing. And Uniti Leasing is one that we’ve made substantial progress in this year and have announced a number of transactions this year in the Uniti Leasing business. This is much more of your traditional REIT business, where there are long-term triple-net leases to operators on fiber networks.

So these are either sale-leaseback transactions like we did with the TPx transaction that we announced earlier this year or a bulk purchase of fiber assets that we didn’t subsequently preleased and then over time would obtain additional tenants as well.

So in Uniti Leasing, there’s a substantial wide variety of ways that we can create value from networks that are currently owned by other operators, but lease them back to those operators either exclusively or on a non-exclusive basis. This goes back to the existing operators some of the networks we’ve taken and actually intend to lease up to third parties.

So in the network assets, we acquired there. We may be able to utilize in our own operations. And in some cases, we can actually enter into marketing agreements to help the operator and those assets lease up the underutilized fiber that they may lease from us.

So a lot of different ways to create value on Uniti Leasing. It’s about a – most of those transactions would be 100% EBITDA margins, because it’s all lease income with really no substantial working capital or success-based CapEx needed for that business. So that’s kind of on the organic growth front.

In terms of the integration, I think, we’ve done a kind of a very good job on the integration of the four companies that we’ve acquired in Uniti Fiber over the last couple of years. We’ve also have realized our synergy targets, both been on target and frankly, in terms of the dollar cost savings that we have projected.

We’ve also generally been ahead of schedule on those cost savings as well. And I think – so I think, we’ve done a good job with the operations teams, the sales teams and the senior leadership team coming together and making sure that the integration goes smoothly. There’s still work to do on back-office systems, and I think we’ll get that complete over the next six months or so.

And then the last goal that we had this year was on the diversification front. This diversification of our revenue streams, more diversification away from Windstream, we’re at about two-thirds of revenue coming from Windstream and one-third coming from non-Windstream sources. So I think, we’ll continue to make progress on that.

We have a stated goal to try to reach 50% diversification by mid-2019, then we’ve got a great solid M&A pipeline in order to achieve that and so very good prospects to be able to reach that goal that we set for ourselves.

Matthew Niknam

A lot to tackle there. Let me start with Leasing and we’ll kind of get into Fiber and then Towers. On the Leasing front, you mentioned Windstream right now still accounts for a good chunk of revenue and a larger chunk of EBITDA. Is Windstream thinks about organic and inorganic means of delevering? Are there any updates you can share on the status of the lease with them and I guess, more broadly on the relationship? Has anything changed or are there any updates to share of late?

Mark Wallace

No real changes in terms of our relationship. We continue to have a good relationship with Windstream. I think, Windstream certainly has had some challenges over the past year with the litigation that they’ve been involved in. But I think, with that headwind, they certainly have made good progress on a number of fronts.

So I think, we’re very pleased with what they’ve been able to accomplish and what I expect them to accomplish for the balance of this year. In particular, they certainly have been focused on managing their balance sheet and refinancing and pushing out maturities and some of their debt. They’ve made good progress on that, and I would expect they’ll continue to focus on that as well.

Certainly, they have talked about asset sales, and I continue to expect that they’ll have asset sales in the future to announce that will help them to delever. And at the same time, they’ve also talked about taking – trying to take cost out of the business. I know, they talked a lot about trying to reduce interconnection cost. And then also, they’ve continued to invest in their network and invest in additional networks and continue to expand some of the new products and new technologies that they have into additional markets.

So I’d say from our standpoint as landlord, I think, they’re doing all the right things, and so we’ve been very happy on that front. Hopefully, in terms of – just to mention on the litigation front, really nothing new that I can tell you on that. Obviously, the trial has wrapped up. We’re waiting on the judge to make a – have a decision, and then I really don’t know anything in terms of timeline. He’s – he’ll make a decision when he’s ready. But then I really, I think, anybody that tries to predict when that decision will be made, probably doesn’t have very good information. So we’ll know at the same time everyone else knows.

Matthew Niknam

Okay, okay. On the M&A front within Leasing, so I think, you’ve announced four deals to date smaller in scale, but I think largely falling within the Uniti Leasing umbrella. So can you maybe give us a high-level overview of the deals and how they help your financial profile?

Mark Wallace

Sure. Let me start then I’m going to let Bill talk about some of the details on the transaction. But as I said on Uniti Leasing, I think that division has a large kind of opportunities going forward. And that has a number of ways for Uniti Leasing to create value.

So our TPx transaction would be a good example, where that transaction was what we would say is kind of a non-exclusive sale-leaseback, meaning, on that transaction, some of the network assets we purchased and we leased back on an exclusive basis to TPx, some of the network assets that we acquired, we’re going to lease to third parties, some we may use internally in our own network within Uniti Fiber. And at the same time, we also had a market agreement with TPx as well to help them market some of the network assets that they lease as well.

So on that front, I think, there’s a lot of different ways we can work with operators to maximize the value of fiber networks. And then even on the individual leases that we try to negotiate there, generally, you’re going to have traditional. You have a fixed rent component and then you have a market escalator generally between 1% to 3%.

In most cases, we’ll also try to negotiate our right of first refusal. So that on any additional growth CapEx that the operator may need, so that as their net – as they expand their network and as their business model – as their business is successful, we can continue to fund and use deploy our capital and expand the lease relationship that we have with them.

In some cases going forward, you may even see us try to include in the leases a revenue share component or variable rent component on the small basis, so that as their revenue continues to grow, then our revenue stream will grow as well. So a lot of different ways we can create growth initiatives for ourselves and for the – and for our partners as well.

And with that, let’s move it into our overview, I’ll let Bill talk about some of the recent transactions that we have done.

Bill DiTullio

Yes, sure. Thanks, Mark. So we’ve recently announced four different transactions we did under Uniti Leasing. So the first one we announced back in our fourth quarter earnings call was TPx, and that was a sale-leaseback. So we acquired 45,000 fiber strand miles for $95 million. And as part of that, we entered into a 15-year triple-net master lease agreement with TPx for 38,000 of those fiber strand miles, where they will pay us an annual cash rent payment of $8.8 million.

Also, as part of that, we retained exclusive use of 7,000 of those fiber strand miles in Texas that Uniti will have exclusive use of. And then – so we closed on that two different tranches. So we closed on the non-California assets back in early May and we just closed on the California assets two weeks ago.

And then one other point I want to make, I think, Mark touched on is, we had this marketing agreement, where we can market 22,000 of that 38,000 fiber strand miles on TPx’s behalf, both in California and Massachusetts. So that was our first transaction we announced.

The second one was CenturyLink. So that one – that was an acquisition of our fiber portfolio. We acquired 30 long haul intercity routes from CenturyLink. So on that deal, it was 270,000 fiber strand miles. And at the same time, we entered – we secured an anchor tenant as well that took about 11% of those fiber strand miles. So the economics in that deal were very attractive for us. And we said, we got a less than a year payback on that.

The third transaction was CableSouth, and that was another sale-leaseback. So in that one, we acquired 43,000 fiber strand miles for $31 million and CableSouth networks in Arkansas, Louisiana and Mississippi. And at the same time, we entered into a 20-year master lease – triple net master lease agreement with CableSouth, where we get an annual cash payment for $2.9 million for 34,000 of those fiber strand miles. And then we retained exclusive use of 9,000 of those fiber strand miles in the network.

And then lastly, we signed a Dark Fiber lease agreement with the National MSO. Again, this was a 20-year deal for 41,000 fiber strand miles. And the customer was going to pay us an upfront fee of $23 million and then an annual fee of $4 million.

Matthew Niknam

Yes, okay. As you look forward, can you talk maybe to the deal pipeline you see in Uniti Leasing? What kind of network operators are you speaking to? What are they hoping to achieve? And then size wise, are these deals typically smaller in scale like the ones you’ve announced or are there larger ones we should be thinking about as well?

Mark Wallace

Yes. So I’ll speak to a little bit about size wise. So it’s really a pretty diversified mix in terms of what the size of the transactions are. There are some that are on the smaller size, say, $100 million or so like some of the transactions that we’ve entered to – entered into this year.

But at same time, one of the things that we’ve also mentioned is that, we’re also working with some infrastructural fronts on the – on what we have referred to as OpCo/PropCo arrangements. And these would – could be the larger transactions or a series of transactions as well.

So typically, these would be an infrastructure front that’s looking to acquire fiber assets maybe outside of our footprint. So they may not be assets that we would be looking at – looking to acquire, but they’re looking at to acquire platform company maybe [indiscernible] strategy and then what we would be, we would be acquiring the fiber networks and then providing lease agreement through a long-term lease similar to what we have with TPx as well. So it’s a similar type structure.

So on those transactions, they could be both individually kind of medium-sized to larger transactions, but they could also be a series of transactions with the same party, which I think would be very beneficial to us and our certainly, the Uniti Leasing and certainly very beneficial from a EBITDA and AFFO accretion standpoint.

In terms of the type of operators that we’re looking at, it’s probably very similar to ones that we’ve done transactions with already on the sale-leaseback front. So whether it be regional fiber providers, MSOs, content providers, it’s a pretty wide range of people that we’re talking to in Uniti Leasing.

Matthew Niknam

Got it. Let’s shift gears to Uniti Fiber. You talked about targeting sort of 8% to 12% growth in that segment. We’ve heard a lot about strong demand for fiber – quite frankly, from yourself and a lot of your peers throughout this conference, maybe we’ll start just in terms of wireless. Where are you seeing the carriers most active? And I guess, if we can talk to – I don’t want to get into specifics with individual carriers, but has the demand been evenly spread, or are there particular carriers who may be more active than others?

Mark Wallace

Yes, I mean, I would characterize. I think, the demand has been pretty evenly spread between Dark Fiber and small cells, and we’re seeing strong demand from all the four major wireless carriers as well. So, I think, as 5G becomes more prominent and each carrier looks to densify their networks in the markets that we’re operating, which is primarily Tier 2, Tier 3 markets, we continue to see strong demand for both Dark Fiber, backhaul and small cell.

Matthew Niknam

Okay. On the last call, I think, you’d called out some near-term revenue headwinds from a delay with a specific carrier who wasn’t ready to take delivery of a contracted project. Are there any updates you can share?

Mark Wallace

Yes. So, yes, on our second quarter earnings call, we discussed a couple delays that we were seeing and some permitting delays of customer wasn’t ready to take some sites and permitting delays. We continue to work through that. So on the customer delay side, we continue to work with our customers, I think, we’re through most of those sites that they weren’t ready to take care of.

And then on the permitting delays was some on Dark Fiber and our small cell projects. Most of those projects we’ve continued to make good progress on that and working through those issues as well. So I think, we’re making good progress and back on track on most cases.

Matthew Niknam

But – and those revenues from that specific wireless customer, those are contracted?

Mark Wallace

Correct. They are contracting revenues. So it’s a timing issue on that case.

Matthew Niknam

Okay. Okay, any idea of when we may see that resolve itself just timing wise?

Mark Wallace

Yes. I think, if you look at that potential delay we’re talking four to six-month type of delay on those types of revenues. The other thing we said is, once – there’s eight large Dark Fiber projects that we’re working on. And once all those projects are completed, they represent about $20 million run rate annual revenue.

Matthew Niknam

Okay. You talked about permitting delays. So last week, the SEC passed the small cell order. Pretty interesting, I mean, the feedback I’ve gotten from some of your peers has been, this is great, but shock locks in place caps the amount of municipalities can charge in terms of pole attachments. But what are the impacts for your business, particularly in Tier 2 and Tier 3 markets? How do you – how would you sort of view the order?

Mark Wallace

Yes. I mean, obviously, we view the order as a positive for our company and industry as a whole as well. So, I think it provides better guidelines of how to go about the whole proof of process, like you said, to put that stock lock in order to help accelerate the timing, and also, it prevents excessive fees being charged on some of these attachment fees.

So especially in the Tier 2, Tier 3 markets, I mean, some of the projects we’re undertaking for small cells, we’re the first entrant into that market. So in a lot of cases, it’s a learning process, not only for us, but also for the municipality as well. So we view the order as positive and hope – provide hopefully, more concrete guidelines going forward and expedite the whole process.

Matthew Niknam

Okay. I want to touch on something that came out on your last quarter call. So you recently received PLR from the IRS regarding readability of some lit fiber services. Can you maybe expound on what the PLR covered and how that impacts Uniti, shed some more light?

Mark Wallace

Yes, sure. I think in talking to some investors a little bit of confusion. So the PLR, I think, was important for us really from an M&A standpoint. But just to be clear on what the PLR covered. So we didn’t ask they are as really about what assets were readable that I think the literature on that is near-term regulations on that are pretty clearable.

What we really ask about is whether or not the income that’s being generated from communication assets, whether or not it qualifies as rents from real property or whether it’s some type of services income, which would not qualify as rents from real property. And that’s important, because rents from real properly generally are – it’s qualifying income and goes into the REIT or QRS and then other services income needs to go into that TRx and attracted tax.

And so, obviously, the more assets and the more income that you can generate that’s QRS qualifying is a great thing. And so what we really did was go to the service and ask for some assets, like lit services, which involved both fiber and also have some lit component, so there is, I think, optical equipment, for example, involved in providing the service that the customer has requested, whether or not that qualifies as rent from real property.

And I’d say that on the ruling we’ve got a very, very favorable ruling, given where our request was. And so what that really – the practical implication for that is, it will allow us over time to take existing assets that are revenue generating that are currently in our TRx and move them over to our QRS, where we’ll enjoy the benefits of REIT status and reelections on those assets.

And then, in particular, as we look at larger M&A transactions as well, it allows us to analyze those and make sure that we know and get the assets and the revenue in the right entity within Uniti Group upon closing as opposed to having to be uncertain. So it gives us lot of confidence in our analysis as to what’s re-qualifying and what’s not qualifying on the M&A front. So it really gives us more M&A capacity.

Matthew Niknam

So more flexibility, maybe a little bit more clarity in terms of helping you think about getting to that 50% revenue diversification target by middle of next year?

Mark Wallace

[indiscernible]

Matthew Niknam

Okay. While we’re on that topic, M&A multiples valuation in fiber, that’s all in the topic, fairly topical today with some of the presentations I’ve done. What’s the latest you’re seeing in terms of valuation for fiber assets in your markets? I think in the past, you’ve talked about the valuations being a little bit more insulated from some of the inflation or premium valuations we’ve seen in Tier 1 markets. But any updates you can share there?

Mark Wallace

Sure. I think, that’s traditionally been true. Traditionally, we’ve seen lesser movement in multiples in the Tier 2 and Tier 3 markets or more consistency in the multiples. That said, over the last, I’d say, few months, maybe the last year, there has been a number of different infrastructure funds that have been very interested in acquiring fiber assets, in particularly fiber platform companies in the U.S. And so I suspect that the multiples may be moving up. And so – but there is a tremendous interest in fiber operating companies.

Matthew Niknam

Has the higher cost of capital you’ve faced over the last year impacted the types of deals, whether it’s fiber or leasing that you would consider?

Mark Wallace

So our cost of capital is clearly over the last year has been challenged because of the Windstream litigation, in particular, and some of the other uncertainty around some of the issues that Windstream has been addressing there and refinancing of some of their debt maturities.

So clearly, that’s been a – certainly, that’s caused us to be, I think, more cautious and you’ve seen us do smaller transactions this year, where they didn’t require us to go to markets and raise a lot of capital on the public markets, but we’ve been able to warehouse those on our revolving credit facility.

That said, as I mentioned earlier, I expect that the litigation will be favorably settled here for Windstream. We’ll get a ruling from the judge pretty soon. And so I think that overhang will be listed on our securities, and I think some of the efforts that Windstream has accomplished this year and what I expect them to continue to accomplish will also help our cost of capital.

So I would say, I expect that to improve this year. But at the same time, as we’ve also have stated, we’ve worked with a number of different private capital sources, not just on OpCo/PropCo arrangements, as I’ve described earlier, but we’ve also talked to a number of private capital sources about direct investments in Uniti Group.

But we continue to have those discussions, I’d say, that those fronts that we are talking to have substantial amount of capital that they’re interested in deploying and making direct investments in Uniti Group, very interested in communication assets, I’d say, all verticals that we’re currently in, and so we also have private capital sources available to fund transactions as well.

Matthew Niknam

I’m going to pause here and just open it up to the audience. If anyone has any questions, just raise your hands. Okay, let’s keep going on towers. So you talked about the opportunity 300 towers annually looking to add in the U.S., targeting a 50 million revenue target over the next five years. Where do you see the biggest opportunity for Uniti to win share?

Mark Wallace

Yes. So, we view ourselves primarily the fiber company, but we view towers as being complementary to that. So we think we’re uniquely positioned as a company, because we can offer a broad suite of services, that not only can we offer with respect to towers, can we build towers for the wireless carriers, but we can also offer fiber builds as well and also potentially do a sale-leaseback as well.

So with all that said, we feel like we’re uniquely positioned to kind of add that value proposition for them. I think, the other thing is, we also provide vendor diversity from some of the other larger tower operators that they have done business before. So we believe, as a new entrant, we can offer vendor diversity, and also we can offer flexible terms on the MLAs. So with all that flexibility given and also providing vendor diversity, we get better anchor economics on our deals, which also sets up for potential upside in the future.

Matthew Niknam

Okay. And if I understand correctly, it sounds like more of the portfolio growth is going to be from organic investment relative to may be inorganic opportunities?

Mark Wallace

Yes, particularly in the U.S., for sure. We knew that our multiples are still being too high to justify doing an acquisition. So, we’ve committed to building 300 towers a year over the next five years to grow the business.

Matthew Niknam

Okay. Are you seeing anything yet and people like to talk about some of the newer or incremental projects, whether it’s FirstNet, whether it’s Sprint becoming a little bit more active. I mean, would you point to anything specific from a carrier perspective that’s helping drive a little bit more outsized growth, or is it again, like I asked on towers or on small cells’ demand a little more evenly spread?

Mark Wallace

Yes. I think, it’s evenly spread I mean, we’re seeing again strong demand from multiple carriers for tower growth, especially within the United States. So again, every tower build that we do, we’re going to do that with securing an anchor tenant, and then we’re also going to be looking to add additional tenants to lease up those towers as well.

Matthew Niknam

Okay. On the CapEx front, you’ve been investing fairly aggressively. We touched on fiber. You’ve obviously been engaged in some fairly bigger projects on the fiber front as well. So as we think about capital intensity for this business. Right now, obviously, you’re pretty high on the tower side, and I think you’re about 50% on fiber. How do we think about the phasing and timing of CapEx maybe moderating and the company getting to maybe more of that 30% capital intensity target you’ve talked about in the future?

Mark Wallace

Yes, sure. So, on the fiber side, our capital intensity now is a little bit above 50% of Uniti Fiber’s revenues. And we’re in the process, again, we’re in the process of building out the large Dark Fiber and small cell projects, which most of them should wrap up by the end of 2019, a couple may go into 2020. But as we approach 2020, we expect our capital intensity to start to decline and then going forward from there, we return to more than normal industry average of that 30% to 35%.

Now on the tower side, again, since we’re committed – we have a goal of building 300 towers a year over the next five years. And I think for 2018, we guided to that $85 million, $90 million range. We expect the CapEx to be somewhere in that range going forward annually.

Matthew Niknam

Okay. On the fiber side, the way I understand is more of the projects you’re engaged in actually came with the assets that you acquired?

Mark Wallace

That’s correct. Yes, so most of those projects are fiber projects were projects that we acquired when we did the acquisitions.

Matthew Niknam

Okay. And so the forward thinking around 2020 capital intensity moving lower and gradually approaching the sort of 30%-ish cap intensity range. Is the working assumption that maybe you don’t take on as many projects in such a short fine item at a time and they’re more staggered?

Mark Wallace

Yes, I think that’s correct. I think, when we did these acquisitions of Southern Light, PEG and Tower Cloud and Hunt, we acquired a lot of these projects over the same time and we’re doing eight Dark Fiber projects, about six small – major small cell projects. And I think going forward, we’ll have a better way to set that cadence of monitor those projects and being more strategic on how we do those.

Matthew Niknam

Okay. With some of the elevated investments, right, and you combine that with dividend that said 90% of AFFO and with some M&A. You’ve been roughly at about six turns a leverage net debt to EBITDA in recent period. So how should investors think about your longer-term targets? And where you’d like to get the business to over time?

Mark Wallace

Yes. So on the leverage front, I think, people should expect us to stay at about six times levered kind of over the near to mid-term. I think, the only fluctuations on that would really be just as we take down small acquisitions on our revolver and then over time we will put the permanent capital structure in place and increase the availability on the revolver as well. So – but on average, I’d say, the near-term target is going to be about six times, so expect that.

On the AFFO payout ratio, you’re right, it’s about a little bit over 90%. It’s been about the same percentage since we were spun off from Windstream 3.5 years ago. I think, the key thing on really kind of improving the payout ratio over time, as well as some of the things that we mentioned on the capital intensity at Uniti Fiber and the Dark Fiber projects coming on the margin expansion opportunities that we have there, all those kind of executing on those.

I think a big part of it also will be on the M&A front. And as we continue to deploy capital to reach our 50% revenue diversification target, I do think that the significant portion of that capital will be deployed, and we certainly have the opportunities to deploy that into Uniti Leasing.

And again, Uniti Leasing some of it due to the Windstream lease and now the TPx lease and some of the CenturyLink assets and the CableSouth lease, all those are going to be 100% – near 100% EBITDA margins with no working capital or maintenance CapEx requirements. So from – and those will – as we do more and more and deploy more capital in the Uniti Leasing, certainly, that will make a big impact on the payout ratio as well.

Matthew Niknam

Okay. And then as you think about, I think, in the past, you’ve talked about wanting to target AFFO per share growth in forward periods. Does any of that hinge at all on improvements in capital costs to facilitate more M&A, or as you stated, it seems like there’s a more of an organic path as well just as fiber and towers begin to scale up. How do we think about the different components there?

Mark Wallace

Yes. So I think there’s certainly the organic growth will impact the – impacting and we’ll certainly be contributed to improving it. But honestly, the real impact here it’s going to be on the M&A front. And as I said, our M&A pipeline right now is very strong. We’re very active on a number of different fronts from an M&A standpoint. I’d say, the pipeline right now is probably as diversified in terms of size, sourcing, structure, as I remember it being.

Matthew Niknam

And is it still – I think in the past, you said a fairly high percentage was proprietary.

Mark Wallace

Yes. We’ve always had roughly 90% proprietary transactions and continue to have about that mix.

Matthew Niknam

And that has – and that hasn’t wavered or tapered at all just given some of the increased interest in the space from some of the financial sponsors?

Mark Wallace

No, it’s still about that level.

Matthew Niknam

Okay. And is that unique just given your Tier 2 and Tier 3 focus. So I want to get a better understanding of what you...?

Mark Wallace

I think, that’s fair. I think, part of it is the Tier 2 and Tier 3 focus, because we – there’s just not that many other people – other competitors that were focused on those markets. And I think it’s also partly, because the Uniti Leasing, Uniti Leasing is really a proprietary business, There – to my knowledge, there’s nobody else offering sale-leaseback transactions on fiber networks right now. So I think that entire business vertical is proprietary for you guys.

Matthew Niknam

Okay, all right. On the dividend, though, we touched on AFFO a little bit. The dividend is about – the payout right now is about 90% of AFFO. What’s your comfort level around this? And I say this in the context of wanting to have flexibility to invest and wanting to have maybe some cash to put to work towards M&A, particularly for cost of capital moves lower. Do you think you have enough flexibility with the current payout ratio in structure?

Mark Wallace

Certainly, I think, we’re very comfortable with the current dividend. The dividend has been consistent for three years since we spin – since our spinoff from way, I would say, 3.5 years at this point. So I think we’re comfortable with the dividends. In particular, we think about the dividend in context of our entire capital allocation policy. And the capital allocation policy, again, it’s been consistent and it’s – capital is deployed for M&A oriented growth, it’s deployed for organic growth, primarily the Dark Fiber and small cell projects that we talked about, as well as tower construction in the U.S. And it’s also deployed to return – provide a return to shareholders through the dividend.

Matthew Niknam

Okay. I’m going to pause on that front. Is there anybody with any questions, feel free to raise your hands. One at the back.

Question-and-Answer Session

Q - Unidentified Analyst

[Question Inaudible]

Mark Wallace

Yes. So I mean, we’ve continued to take about that all the time and we had those discussions with our Board. I think, one thing I didn’t mention that we continue to have discussions with Windstream is, how we can help them monetize some of their unused fiber that they have, that they currently lease from us.

And one of the kind of contracts that we’ve talked about and even publicly at conferences we talked about is, is ways that we can help them market some of those strands to customers that were in front of routinely. And Ron Mudry, who is our Chief Revenue Officer, is in front of carriers, content providers, MSOs and others who may have a need for those fiber strands. And so we can certainly help market those strands.

And if Windstream under their current lease arrangements, if they have, let’s say, right now they have about 12 years on the initial term of their current lease arrangement with us. They certainly don’t have renewal options, but under the existing arrangements, they had 12 years. If a customer wants a 20-year lease, then we can help enter into a 20-year IRU with the third-party and we can share the revenues kind of proportional to what our lease rights are at the time. So I think, there’s a number of ways that we and Windstream can work together to our mutual benefit.

Matthew Niknam

All right. I think, we’ll end it there. We’re just about out of time. Thank you, Mark. Thank you, Bill. I appreciate it.

Bill DiTullio

Thank you. Thanks, Matt.

Mark Wallace

Thanks.