Uniti Group Inc. (NASDAQ:UNIT) Q4 2023 Earnings Call Transcript February 29, 2024
Uniti Group Inc. misses on earnings expectations. Reported EPS is $0.13 EPS, expectations were $0.34. Uniti Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Uniti Group's Fourth Quarter 2023 Conference Call. My name is Gigi, 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 today 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. The company's remarks this morning will reference slides posted on its website, and you are encouraged 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 the 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.
Kenny Gunderman: Thank you. Good morning, everyone, and thank you for joining. Starting on slide three, I'd like to begin with a review of 2023, and particularly some highlights of a very busy fourth quarter. During the year, despite a challenging backdrop, we successfully refinanced $3.1 billion of debt, resulting in our current business plan now being fully funded having no significant debt maturities until 2027, and over 95% of our debt being fixed rate. We accomplished this while continuing to demonstrate the resiliency of our core recurring Fiber business, with top line growth of 5% in 2023, including Uniti Leasing lease up, and Uniti Fiber enterprise and wholesale growth of 20%, 15%, and 9%, respectively, with continued declining capital intensity.
Just as importantly, by addressing our balance sheet, we afforded ourselves the ability to focus on strategic matters. As we foreshadowed during our third quarter call, we recently sold some non-core assets that included our remaining tower portfolio, our remaining investment interest in Bluebird Network, and our sale leaseback with CableSouth, for total proceeds of $87 million, and almost 10 times blended EBITDA multiple. Also, during the fourth quarter, we decided to largely exit the non-core one-time equipment sale business. As a reminder, this business represents reselling of networking and other IT equipment. Historically, that business has generated anywhere between $20 million and $30 million of annual revenue, with margins of 15% or less, thus representing less than 5% of our total adjusted EBITDA.
Despite the small contribution to profitability, the unpredictable nature of the business regularly contributes the majority of volatility we see in our quarterly earnings, including the most recent third and fourth quarters. As an example, approximately 6 million of contracted equipment sales that were expected to be realized in the fourth quarter of 2023 have slipped into 2024 largely due to delayed USAC funding. On a go-forward basis, one-time equipment sales will now be a negligible part of our results as we'll only pursue those sales that are part of an important fiber network sales, and are desired by our important customers. Deemphasizing this business is also coincidental with the one-time ETL fees related to the T-Mobile Sprint merger being largely completed in 2023, and should also have a minimal impact on earnings on a go-forward basis.
Finally, as we also foreshadowed on our third quarter earnings call, we just announced an ABS bridge financing that will providing funding of up to $350 million. Paul will elaborate further on this, but it's an exciting development which reinforces that fiber truly is a mission-critical communication asset. We believe that ABS will be an important value-creating financing option going forward. Turning to slide four, with our industry-leading 0.3% churn, and no legacy services weighing us down, we believe our runway for mid single-digit growth continues to be long. Our primary focus continues to be executing on our lease-up strategy via lit and dark fiber solutions for our wholesale and enterprise customers within our Southeast footprint, while also further monetizing our long haul national network through long-term IRU agreement with hyperscalers, domestic and international carriers, and other large national strategic accounts.
Slide five illustrates that we expect our growth will continue to be disciplined and profitable. Our substantially underutilized fiber network is helping drive our shared infrastructure economics with continued declining capital intensity. Our anchor plus lease-up model is working, driving cumulative cash flow yields today of 25%, a more than 3.5 times increase from the anchor yield of these projects. Turning to slide six, we continue to grow our 140,000 route mile network. Less than 25% of our available network is lit today. And as we've mentioned before, we own dark metro fiber in about 300 markets nationwide, which represents terrific capital and margin-efficient growth potential for enterprise, wireless backhaul, and small cells. We continue to believe that the wireless carriers will eventually need to identify these non-NFL markets, and Uniti is well-positioned for that growth in the future.
Slide seven shows that the majority of our revenue is wholesale in nature, which comes with longer-term contracts, lower churn, and less required overhead for execution. As a result, our business and underlying performance are less susceptible to macroeconomic conditions, and we're diversified across numerous use cases for fiber and customer segments. As an example, even though wireless carriers have recently been spending less as a collective group than they have in past years, the decline is offset by other buyers such as hyperscalers, internet providers, and fiber-to-the-home providers. We continue to see more use cases weighted to artificial intelligence as well. Turning to slide eight, scale matters in fiber, especially with a wholesale-heavy business like ours.
Having an owned national network is a meaningful competitive advantage for Uniti, and our ability to deploy dark fiber and wave services present Uniti with the unique low-risk growth opportunity with minimal competition. Slide nine illustrates our continued balanced approach to bookings between anchor and lease-up. We had a healthy level of bookings in 2023, and the interest in our network remains robust as our sales funnel remains very strong and underscores the growing demand for fiber. As a result, wholesale bookings can appear lumpy given those deals are typically larger and fewer in quantity. It is not uncommon for one wholesale deal to materially impact bookings in a single quarter from a timing perspective. In fact, our funnel suggests we expect to see multiple sizable new contract [plans] (ph) over the coming months, especially from hyperscalers preparing for generative AI.
Turning to slide 10, our enterprise strategy is highly disciplined and regional in nature. As you can see from the map, we're only offering enterprise services in approximately 30 metros concentrated in the Southeast, which has very favorable demographics. Our local brand is very strong in this region, helping to contribute to industry-leading enterprise churn of around 0.7%. Although enterprise sales represent about 5% of our total revenue today and will likely always represent a minority percentage, it remains a critical element of our profitable lease-up strategy. With that, I'll now turn the call over to Paul.
Paul Bullington: Thank you, Kenny. Good morning, everyone. I'd like to begin by reviewing our fourth quarter performance, followed by an overview of our 2024 outlook. Uniti had another solid year of performance in 2023, with our core recurring strategic fiber business growing at a healthy 5%, while consolidated net success-based capital intensity continues to decline, ending the year at 34%. As expected, non-recurring revenue was lower in 2023 versus 2022 due to lower ETL fee activity primarily related to fewer lit and dark fiber disconnects from the Sprint T-Mobile merger, and to lower one-time equipment sales. We mentioned on our last earnings call that the exact timing of non-recurring revenue and related margins can be difficult to predict, and thus can fluctuate from quarter-to-quarter.
As Kenny already discussed, given the low margin and tough-to-predict nature of one-time equipment sales, we have made the conscious decision not to actively pursue these types of sales going forward. Despite these one-time sales headwinds in the fourth quarter, our full-year 2023 adjusted EBITDA and AFFO were essentially in line with our prior guidance. As I will cover in more detail shortly, our 2024 outlook reflects the robust trends we continue to see in our recurring business, the planned exit from most one-time equipment sales, and the impact from the recently announced ABS bridge financing and asset sales. Finally, I'll end with additional commentary on our current balance sheet and capital structure. Please turn to slide 11, and I'll start with comments on the fourth quarter.
Aerial view of a communication site, showing the breadth of the company's real estate portfolio.
We reported consolidated revenues of $286 million, consolidated adjusted EBITDA of $231 million, AFFO attributed to common shareholders of $92 million, and AFFO per diluted common share of $0.34. Net income attributable to common shareholders for the quarter was approximately $30 million or $0.13 per diluted share. At Uniti Leasing, we reported segment revenues of $215 million and adjusted EBITDA of $209 million, representing growth of approximately 3% for each in the fourth quarter of 2023, compared to the prior-year period. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to slide 12, our growth capital investment program continues to provide positive results for Uniti. Over the past nine years, our tenant has invested over $1 billion of tenant capital improvements in our network.
Uniti continues to invest its own capital in long-term value-accretive fiber, largely focused on highly valuable last-mile fiber. Collectively, these investments have resulted in 25,500 route miles of newly constructed fiber, and over 24% of the legacy copper network being overbuilt with fiber. Based on the investments made to date and our expectation that Windstream will utilize most, if not all, of the GCI program, we expect that nearly half of the legacy copper network will be overbuilt with fiber by 2030. During the fourth quarter, Uniti Leasing deployed approximately $23 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. As expected, Windstream did reach the 2023 GCI funding limit of $250 million in October of last year.
As of December 31, Uniti has invested approximately $794 million of capital to date under the GCI program with Windstream, adding around 19,500 routes miles and 1.1 million strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the one-year anniversary of Uniti making such investment. They are subject to a 0.5% annual escalator and result in nearly 100% margin. The investments we have made to date will ultimately generate approximately $64 million of annualized cash rent and increase the overall value of our network. For full-year 2023, we turned over 728 lit backhaul, dark fiber and small cell sites for our wireless carriers across the Southeast footprint at Uniti Fiber. These installs add annualized revenues of approximately $7.4 million.
We currently have 725 lit backhaul, dark fiber and small cell sites remaining in our backlog that we expect to deploy over the next few years. This wireless backlog represents an incremental $6 million of annualized revenues. At Uniti Fiber, we reported revenues of $71 million and adjusted EBITDA of $27 million during the fourth quarter, achieving margins of 38%. Revenue and adjusted EBITDA during the quarter were lower than expected due to the timing of onetime equipment sales. Slide 13 provides a detailed reconciliation of our 2023 prior outlook to 2023 actual results. This reconciliation illustrates the impact of onetime equipment sales on our 2023 and highlights the fact that our core recurring business performed in line with our expectations.
Uniti Fiber net success-based CapEx was $21 million in the fourth quarter. We also incurred about $2 million of maintenance CapEx during the quarter. Please turn to slide 14, and I'll now cover our 2024 guidance. Our 2024 outlook includes the estimated impact from the recent ABS bridge financing, the planned exit of most onetime equipment sales, the recently completed asset sales, and the upcoming maturity of our 4% exchangeable notes due June 2024. Our outlook excludes future acquisitions, capital market transactions, and future transaction related and other cost not specifically mentioned herein. Actual results could results could differ materially from these forward-looking statements. Our full-year outlook for 2024 includes the following for each segment.
Beginning with Uniti leasing, we expect revenues and adjusted EBITDA to be $874 million and $847 million respectively at the midpoint, representing adjusted EBITDA margins of approximately 97%. As a result of the recent asset sales, we will no longer recognize revenue and adjusted EBITDA in 2024 related to the CableSouth sale leaseback and our investment interest in Bluebird. Excluding the impact of these transactions, revenue and adjusted EBITDA would each have been expected to grow 3% from the prior year. Revenue and adjusted EBITDA each include $55 million of cash rent associated with the GIC investments and $16 million relating to the straight-line rent associated with Windstream master leases and GIC investments. We expect to deploy $260 million of success-based CapEx at the midpoint of our guidance.
Of which, $230 million relates to Windstream GIC investments that will mostly be weighted in the first-half of 2024 versus the second-half. Turning to slide 15, we expect Uniti Fiber to contribute $290 million of revenues and adjusted EBITDA of $150 million at the midpoint for full-year 2024, representing an EBITDA margin of approximately 40%. Core recurring revenue is expected to grow approximately 4% from the prior year. However, non-recurring revenue is expected to be significantly lower in 2024 when compared to the prior year due to exit of most onetime equipment sales and substantially lower ETL fee revenue as a result of working through essentially all of the Sprint-related churn in 2023. Net success-based CapEx for Uniti Fiber this year is expected to be $105 million at the midpoint of our guidance.
And 11% decrease from levels in 2023 and represents a capital intensity of 36%, down from 40% in 2023. Turning to slide 16, for 2024 we expect full-year AFFO to range between $1.38 and $1.45 per diluted common share with a midpoint of $1.41 per diluted share. On a consolidated basis, we expect revenues to be $1.2 billion, and adjusted EBITDA to be $940 million at the midpoint. Our guidance contemplates consolidated interest expense for the full-year of approximately $500 million. Corporate SG&A, excluding amounts allocated to our business segments is expected to be approximately $30 million, including $8 million of stock-based compensation expense. We expect our weighted average diluted common share outstanding for full-year 2024 to be around 284 million shares compared to 290 million shares in 2023, reflecting the diluted share impact related to the upcoming maturity of our existing exchangeable notes due in June of this year.
As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. On slide 17, we have provided a tabular reconciliation of our full-year 2023 results to our 2024 outlook that summarizes the organic contribution from our core operations, the impact from the exit of most equipment sales, lower sprint churn ETL fees, the recent asset sales, and refinancing activities. Turning now to our capital structure, we recently announced that Uniti entered into an asset-backed bridge loan and security agreement for up to $350 million of borrowings pursuant to a multi-draw term loan facility through an indirect bankruptcy remote subsidiary of the company. Borrowings under the facility will bear an initial interest rate equal to the Term SOFR rate for the applicable interest period plus an applicable margin of 3.75% and may include customary step-ups in the applicable margin based on how long the facility remains outstanding.
The facility will mature 18 months from the initial draw date and is subject to customary covenants. The ABS bridge facility represents an important step for Uniti as it provides a path to opening up access to a new source of funding with incremental leverage capacity and an attractive cost of capital. We intend to refinance the current facility in full with proceeds from a long-term ABS facility secured primarily by certain Uniti fiber network assets. At year-end, we had approximately $354 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at year-end stood at 6.03 times based on net debt to last quarter annualized adjusted EBITDA. On February 22, our board declared a dividend of $0.15 per share to stockholders of record on March 28, payable April 12.
With that, I'll now turn the call back over to Kenny.
Kenny Gunderman: Thanks, Paul. Before closing, I'd like to make a few comments on M&A. Please keep in mind that we will not be making any specific comments on rumored potential strategic transactions involving Uniti that have been circulating in recent press reports. As an asset-rich company with one of the largest fiber portfolios in the country, Uniti is uniquely positioned to benefit from M&A trends that continue to highlight the value of quality fiber assets, including wholesale and fiber-to-the-home. Over the past five years, Uniti has sold or monetized nearly a billion dollars of assets at premium multiples, and we expect to continue that disciplined, ongoing review of our current asset portfolio. In addition, given our balance sheet and liquidity runway, we expect to be active this year evaluating transformative transactions including the ongoing review of our current asset portfolio.
Despite that, however, our primary focus, as always, will be execution of disciplined growth of our core business operations. With that, Operator, we're now ready to take questions.
