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Edited Transcript of UNIT.OQ earnings conference call or presentation 9-Nov-20 9:15pm GMT

·42 min read

Q3 2020 Uniti Group Inc Earnings Call Little Rock Nov 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Uniti Group Inc earnings conference call or presentation Monday, November 9, 2020 at 9:15:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kenneth A. Gunderman Uniti Group Inc. - President, CEO & Director * Mark A. Wallace Uniti Group Inc. - Executive VP, CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Brett Joseph Feldman Goldman Sachs Group, Inc., Research Division - Equity Analyst * David William Barden BofA Merrill Lynch, Research Division - MD * Frank Garrett Louthan Raymond James & Associates, Inc., Research Division - MD of Equity Research * Philip A. Cusick JPMorgan Chase & Co, Research Division - MD and Senior Analyst * Simon William Flannery Morgan Stanley, Research Division - MD * Timothy Patrick Long Barclays Bank PLC, Research Division - MD and Senior Technology Hardware & Networking Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to Uniti Group's Third Quarter 2020 Conference Call. My name is Sonia, and I'll be your operator for today. A webcast of this call will be available on the company's website, www.uniti.com, beginning November 9, 2020, and will remain available for 14 days. (Operator Instructions) The company would like to remind you that today's remarks include forward-looking statements, and actual results could differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in the company's filings with the SEC. The company's remarks this afternoon 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 general 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. -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone, and thank you for joining. Please turn to Slide 4 in our presentation. We had another successful quarter at Uniti with our fiber and leasing businesses both performing well. We continue to see strong demand for our wireless and nonwireless service offerings at Uniti Fiber, while focusing on meaningful lease-up of our major wireless anchor builds. At Uniti Leasing, we're also driving incremental lease-up on our national fiber network of 124,000 route miles. This is underscored by the strategic OpCo transaction that we are announcing today with Everstream. I'll have more comments later in my prepared remarks regarding this transaction, but this deal reinforces the substantial value of our national network, including the fiber required in our settlement with Windstream. During the third quarter, our settlement with Windstream became effective and was in connection with Windstream's fully emerging from bankruptcy. The settlement provides Uniti with a 90% increase in leasable fiber, $29 million of new third-party revenue and strengthened master leases. With 124,000 route miles of fiber, Uniti is one of the largest independent fiber providers in the country with a national network spanning across 42 states. As it relates to COVID-19, we continue to see minimal disruption within our businesses. The majority of our employees continue to work from home, while our remaining employee base is actively working in the field with first-responder designation. Although there was a decrease in IP traffic on our network early on during the pandemic and then leveled off, we saw traffic levels return to pre-COVID levels during September. Our installation activity in the third quarter remained robust, and we've not seen any order nor service cancellations from customers as a result of COVID-19 with only marginal delays relating to new sales and install activity. As a reminder, less than 5% of our revenues is from enterprise customers and 75% of those enterprises provide essential services. Thus, we expect any future impact from COVID to continue to be minimal. Demand from critical industries, such as health care, education and government, remains strong as the need for high bandwidth usage technologies continues to grow. In fact, September was a record month for enterprise bookings at Uniti Fiber, driven in part by the demand from these critical industries. Demand in install activity from our wireless customers remains robust, driven by the broader rollout of 5G services in our markets. As I mentioned earlier, we continue to focus on leasing up our existing fiber network, both at fiber and leasing, with high-margin, highly accretive opportunities. Over 90% of our new sales at Uniti Fiber during the quarter were to nonanchor customers. At Uniti Leasing, including the upfront proceeds from the Everstream transaction we are announcing today, we generated total proceeds of approximately $225 million from OpCo-PropCo and IRU transactions in the past 2 years, and the fiber we're acquiring as part of the settlement will increase our leasable capacity by 90%. Our highly proprietary funnel is healthy, and we are currently evaluating numerous opportunities, including additional OpCo and sale-leaseback transactions. Finally, the quality of our portfolio of 124,000 route miles and 6.7 million strand miles of owned fiber and 2,400 small cell locations, either in service or in backlog, remains highly underappreciated. We're one of the select few providers of these critical components that are enabling new technologies, such as 5G. And as a result, the opportunity set is tremendous for sustainable growth for many years to come. Our infrastructure provides highly predictable revenue and cash flow with material lease-up potential at attractive margins. Turning to an operational update for the quarter. As I discussed last quarter, the focus at Uniti Fiber continues to be leasing up our wireless anchor builds including additional wireless customers and nonwireless customers. As Slide 5 illustrates, over the past 4 years, we've sold incremental lease-up MRR of $5.2 million, almost 3x the recurring revenue on the major wireless anchor builds that have either been completed or will be later this year. We continue to see significant lease-up progress this year, having sold $10 million of annualized lease-up revenue that is expected to generate incremental cash flow yields of approximately 50% by leveraging our existing network. Including the lease-up to date, we've sold since we began construction on our major wireless builds, we expect to generate a cumulative cash yield of 14% on these projects, doubling the initial anchor yield within a 4-year time frame. These relatively new networks are still highly underutilized, and we expect to yield additional lease-up in the coming years. We'll continue to pursue select anchored greenfield deals and lease up those networks with a mix of additional wireless and nonwireless customers as well. Uniti Fiber sales bookings in the quarter were approximately $0.4 million of MRR, and approximately 93% of our sales bookings came from nonwireless customers. Enterprise bookings during the quarter increased over 15% from the second quarter, reflecting our continued focus to drive incremental lease-up in our Southeast markets. Uniti Fiber installed $0.7 million of MRR during the third quarter with 76% of gross installs related to nonwireless opportunities, 22% related to wireless and 2% related to upgrades. The continued solid performance of Uniti Fiber not only validates our strategy of focusing on less competitive Tier 2 and 3 markets, but also highlights the mission-critical nature of our fiber network. Turning to Slide 6. Through lease-up of our fiber infrastructure at Uniti Leasing, including the upfront proceeds from the Everstream transaction, we've generated an additional $225 million of proceeds through OpCo and IRU transactions over the past 2 years. We continue to expect similar activities in the coming 12 to 24 months could generate meaningful proceeds. Now that our settlement with Windstream is effective, we've begun actively marketing the fiber we acquired as part of that settlement. As a result, we continue to see significant interest from our wholesale customers. Our sales pipeline represents over $1 billion of total contract value, $358 million of upfront IRU payments and $57 million of annual recurring revenue, reflecting the significant opportunity that is expected to be realized over several years, and the strategic value these additional fiber strands provide Uniti. The opportunities we're currently pursuing utilize 500,000 strand miles of fiber and approximately 75% of the deals utilize fiber we're acquiring as part of the settlement. Turning to Slide 7. When combining the lease-up we've sold to date on the major wireless anchor projects with the lease-up we've generated at Uniti Leasing, Uniti has sold approximately $67 million of annualized lease-up revenue, resulting in more than doubling the initial anchor cash yield from approximately 7% to a cumulative yield of 16%. This does not include potential lease-up from the fiber we've acquired as part of the settlement which we expect will provide significant additional upside. We recently realigned our sales teams to ensure we're targeting the right mix of customers while ensuring we address the needs of our customers effectively. Our national strategic accounts team is led by Greg Ortyl and will focus on large wireless and other national accounts, such as cable and content providers, domestic and international carriers and data centers. Our regional wholesale and enterprise sales efforts are being led by Joe McCourt. And our strategy continues to deploy local salespeople into several of our major wireless anchor markets to further drive incremental lease-up through wholesale, enterprise, health care and government. Our first investments were made during the quarter under the GCI program as part of our settlement with Windstream. And as a result, we're now generating incremental revenue from that program. As a reminder, the investments Uniti is committed to make must meet certain underwriting criteria, including being long-term, value-accretive fiber and generating minimal threshold returns for our tenant. Said differently, the program is designed to not only ensure investments are being made to help our tenant now but also future-proofing Uniti's network for future renewals. The majority of investments are likely to be fiber-to-the-home in markets with favorable demographics, capitalizing on the demand for broadband. As first movers in many of these markets, our network will be defensible for many years to come. The investments that qualify under the program will be added to the master leases at an 8% initial yield at the 1-year anniversary of Uniti making such investment, subject to 0.5% annual escalator and results in near 100% margin revenue. With that, I'll turn the call over to Mark. -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Thanks, Ken, and good afternoon, everyone. Our settlement agreement with Windstream became effective this quarter. And accordingly, our financial results and our revised outlook reflect the impact of the various elements of the settlement agreement, and our guidance has been updated from the estimates provided on our last earnings call. Therefore, I'll start with a summary of the major components, how each is expected to affect our financial statements, and then I'll refer to certain aspects of the agreements during the balance of my prepared remarks. As you know, Windstream emerged from Chapter 11 on September 21, concurrent with our settlement agreement becoming effective. The bifurcated ILEC and CLEC leases, which are cross-defaulted and cross-guaranteed, are now in effect with current aggregate annual cash rent of approximately $665 million. At closing, we acquired and received rights to 2.2 million fiber strand miles and dark fiber IRU contracts, generating annualized revenues of approximately $29 million. We issued 38.6 million shares of common stock, receiving $244.5 million in proceeds that were transferred to Windstream as settlement consideration. We also made cash payments totaling $40 million relating to the purchase of fiber assets and the IRU contracts. For financial accounting purposes, we are generally required to combine the consideration provided to Windstream and allocate that consideration to the identifiable and separable components of the settlement at their estimated fair values. During the third quarter, we recorded assets of $73 million, principally representing the 400,000 strand miles of fiber and dark fiber IRU contracts Uniti acquired from Windstream. Our balance sheet at quarter end reflects a settlement obligation payable that is valued at $438 million and represents the discounted value of the $490 million of settlement payments we are required to make to Windstream over the next 5 years, subject to certain prepayment options at our discretion. The settlement liability will be accreted over the term of the obligation with the accretion being reported as a component of interest expense, which we expect to be $18 million over the next 12 months. Our first quarterly settlement payment of $24.5 million was made on October 7. Now that Windstream has emerged from bankruptcy, we expect to recognize incremental straight-line noncash revenue of approximately $25 million over the next 12 months relating to the new Windstream MLAs and GCI investments. Although we will not receive incremental cash rent on the GCI investments until their 1-year anniversary, under GAAP, we will record a straight-line revenue impact from the time the GCI investment is made. Moving now to Bluebird. As I mentioned on our last call, we closed on the sale to Macquarie of an ownership stake in an entity that controls the Bluebird PropCo, generating $168 million of proceeds on July 1. The book gain of $23 million related to the Bluebird transaction is excluded from both adjusted EBITDA and AFFO. Last, as Kenny mentioned, we announced today a strategic OpCo-PropCo transaction with Everstream that is expected to generate $135 million of upfront proceeds and $3 million of annual recurring revenue upon closing. The transaction is expected to close in the second quarter of 2021. Together, these transactions further strengthen our balance sheet and position us very well to execute our strategy going forward. With that, please turn to Slide 8, and I'll provide a review of our third quarter results. We reported consolidated revenues of $259 million, consolidated adjusted EBITDA of $199 million, AFFO attributable to common shares of $93 million and AFFO per diluted common share of $0.42. Net income attributable to common shares for the quarter was $7 million or $0.04 per diluted common share, including a $23 million gain on the sale of our ownership stake in the entity that controls the Uniti's Midwest Fiber network and $21 million of transaction-related and other costs. At Uniti Leasing, we reported segment revenues of $182 million and adjusted EBITDA of $181 million. During the quarter, Uniti Leasing deployed $31 million of capital, including $29 million of investments related to the Windstream GCI program. These investments added about 35,000 strand miles of valuable fiber to Uniti's own network and were primarily deployed across 13 ILEC markets. As you will recall, these investments are added to the rent payments of the master leases at an 8% initial yield, subject to a 0.5% annual escalator on the 1-year anniversary of Uniti making the investment. The investments made during the third quarter are expected to add $2.3 million of annualized revenue. At Uniti Fiber, we turned over 180 dark fiber and small cell sites for wireless carriers across our southeast footprint, adding annualized revenues of $1.1 million. Year-to-date, we have turned over approximately 680 dark fiber and small cells, representing about $5 million of annualized revenue. We currently have 750 dark fiber and small cell sites remaining in our backlog that we expect to deploy over the next 2 years, representing an incremental $4 million of annualized revenue. Uniti Fiber core revenues were in line with our expectations, while adjusted EBITDA margins were slightly lower than expected due to restoration costs associated with Hurricane Sally and Laura and slightly higher employee costs. Excluding these items, core margins would have been about 38% and consistent with our expectations. When compared to the same quarter last year, remember that our third quarter 2020 results do not include revenue or adjusted EBITDA related to Uniti Fiber's Midwest operations that were sold to Macquarie as part of the Bluebird transaction on August 30, 2020 -- 2019. Uniti Fiber net success-based CapEx was $35 million in the third quarter or approximately $10 million higher than expected due to the accelerated deployment of capital in support of several of our fiber build-outs that were previously expected to occur in 2021. We also incurred $1 million of integration CapEx and $2 million of maintenance CapEx or about 2% of revenues. We continue to complete deployment of our major dark fiber and small cell builds with the 2 remaining projects expected to be completed in the fourth quarter of this year. Please turn to Slide 9, and I'll cover our updated 2020 guidance. We're revising our prior outlook primarily for the following items: first, the revised impact from the effectiveness of the settlement agreement with Windstream; second, transaction-related costs and other items reported in the third quarter of this year; and last, other relatively modest business unit-level revisions. Our current outlook excludes future acquisitions, capital market transactions and future and transaction-related and other costs not specifically mentioned herein. Actual results could differ materially from these forward-looking statements. A reconciliation of our prior 2020 outlook to our current outlook is included in the presentation materials posted on our website today. Our current full year outlook for 2020 includes the following for each segment, beginning with Uniti Leasing. We have updated our full year guidance for the timing of our settlement with Windstream becoming effective on September 21, whereas our prior guidance assumed effectiveness at the beginning of the fourth quarter. As I mentioned, we will recognize cash rental revenues on the bifurcated ILEC and CLEC master leases with aggregate annual rent remaining unchanged at $665 million. We are including revenue and adjusted EBITDA of $6 million, respectively, relating to the straight-line rent associated with master leases and GCI investments post Windstream's emergence for bankruptcy. Revenue and adjusted EBITDA related to assets and dark fiber IRU contracts we are acquiring from Windstream is still expected to be $8 million and $6 million, respectively, in 2020, reflecting the period from when our settlement became effective. On an annualized basis, and excluding the dark fiber contracts we are selling as part of the Everstream transaction, we expect revenue and adjusted EBITDA of approximately $26 million and $19 million, respectively. After incorporating all of the aforementioned items, we now expect Uniti Leasing revenues and adjusted EBITDA to be $746 million and $736 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 99%. Our current guidance reflects $104 million of net success-based CapEx at Uniti Leasing, of which $90 million relates to estimated GCI investments that are part of the Windstream settlement agreement. Turning to Slide 10. We are maintaining our full year revenue guidance for Uniti Fiber of $306 million. We now expect adjusted EBITDA of $114 million at the midpoint of our outlook, which is slightly lower due to compressed margins in our noncore construction business. As a reminder, our noncore construction business is expected to be wound down by the end of this year and the annual revenue of $30 million we expect this year will not recur in 2021. Excluding our construction business, margins would be in line with our prior guidance. Due to the acceleration of various project build-outs that were previously expected to occur early next year, net success-based CapEx for Uniti Fiber this year is expected to be approximately $120 million at the midpoint, up $20 million from our prior guidance. We now expect Uniti Fiber's net success-based capital intensity to be about 40% this year with capital intensity averaging approximately 33% for the second half of 2020. We expect integration CapEx of approximately $5 million to $7 million, respectively. We do not expect further integration CapEx after 2020. While we have accelerated our capital deployment on some projects, we remain focused on managing down Uniti Fiber's capital intensity. We continue to expect Uniti Fiber's net success-based capital intensity to be in the 30% to 35% range or lower going forward as we pursue a handful of greenfield dark fiber and small cell builds and leverage our existing anchor fiber networks that drive incremental lease-up opportunities that are substantially less capital intensity. Turning to Slide 11. For 2020, we continue to expect full year AFFO to range between $1.69 and $1.73 per diluted common share with a midpoint of $1.71. On a consolidated basis, we expect revenues to be $1.1 billion and adjusted EBITDA to be $817 million at the midpoint. Our guidance now contemplates consolidated interest expense for the full year of approximately $424 million, excluding any deferred financing cost write-offs. Reported interest expense in 2020 includes an additional $73 million write-off of deferred financing cost that was reported in the first quarter of this year related to the payoff of term loans and interest accretion on a settlement obligation of $5 million. Corporate SG&A, including amounts allocated to our business segments, should be approximately $41 million including $9 million of stock-based compensation expense. We now expect weighted average diluted common shares outstanding for the full year 2020 to be approximately [233] million shares compared to 232 million shares in our prior guidance, reflecting the timing of incremental shares we issued to discern creditors of the Windstream as part of the settlement agreement. We expect weighted average diluted common shares outstanding for the fourth quarter of this year to be approximately 261 million shares. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. On Slide 12, we have provided a tabular reconciliation of our prior guidance to our current outlook, which summarizes my comments this afternoon. Turning now to capital markets. On November 5, our Board declared a dividend of $0.15 per share to stockholders of record on December 15, payable January 4. At quarter end, we had approximately $484 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at the end of the third quarter stood at 6.1x based on net debt to annualized adjusted EBITDA. Following Windstream's emergence, all 3 rating agencies issued upgrades and our senior notes have continued to trade well. We continue to be focused on refinancing our revolver and expect to launch that initiative this quarter. As a reminder, we continuously monitor capital markets closely and may take advantage of attractive opportunities. And with that, I'll turn the call back over to Kenny. -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Mark. Please turn to Slide 13. We've entered into a strategic OpCo-PropCo agreement with Everstream for total upfront consideration to Uniti of $135 million. In addition to the upfront proceeds, Uniti will receive annual fees of approximately $3 million from Everstream over the initial 20-year term of the IRU lease agreements, subject to an annual escalator of 2%. As part of the transaction, Uniti will enter into two 20-year IRU agreements to lease Everstream 220,000 strand miles of Uniti-owned fiber across 10,000 route miles in 8 states within the Northeast and Midwest, including 165,000 strand miles of fiber Uniti acquired as part of the settlement. Also Uniti has agreed to sell Everstream a portion of Uniti Fiber's Northeast operations and certain dark fiber IRU contracts Uniti acquired as part of the settlement that on a combined basis currently generate approximately $24 million of annual revenue and $17 million of annual adjusted EBITDA. With this transaction, there are several key themes to highlight on Slide 14. First, the transaction increases the total contract value to Uniti by approximately $107 million. Secondly, we're replacing actively managed lit services revenue with passively managed dark fiber revenue. This not only extends the average contract term from approximately 4 years to 20 years but also improves the average margins from 73% to 100% and virtually eliminates any churn risk. Lastly, this is a material lease-up transaction on the recently acquired settlement fiber and highlights the strategic value of this network to Uniti. We continue to have substantial fiber available for further lease-up, including in these northeastern markets. In closing, we continue to focus on driving high-margin, low-churn, recurring revenue in all of our businesses. We've deemphasized or sold noncore operations that do not fit this profile, such as our nonstrategic construction business, which we expect to be wound down by the end of this year. We also fully wound down our residential CLEC business Talk America last quarter. As a result of our actions, 97% of our revenue is now recurring with an average term of approximately 9 years, while company-wide churn remains low and for the quarter was 0.3%. With the addition of the Everstream deal and our expectation to pursue similar transactions in the future, we are actively working to improve and build upon each of these key metrics. With that, operator, we're now ready to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Frank Louthan of Raymond James. -------------------------------------------------------------------------------- Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [2] -------------------------------------------------------------------------------- Great. So you mentioned -- Mark, you mentioned refinancing the revolver. Is that -- I guess I would assume that would include a path to getting out of the current covenant restrictions you have with your current revolver? And just to be clear, does the guidance all include sort of the puts and takes for all these different transactions that you've talked about and the close in the quarter and so forth as well? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Yes. So the guidance does include all the transactions, absent Everstream, which obviously, as I mentioned, it's going to close next year. In terms of the revolver, yes, I would expect that any revolver refinancing would eliminate the covenant restrictions that are currently in the revolver. Now keep in mind that those similar restrictions are also in the last series of notes that we issued, and those will be in effect until we meet the criteria in those notes, which primarily would be we need to get leverage to 5.75% on a net-net basis. So they won't be in the -- I wouldn't expect them to continue in the revolver, but they will stay -- be in the bonds until we meet those criteria. -------------------------------------------------------------------------------- Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [4] -------------------------------------------------------------------------------- And what is your outlook for getting there? Does this Everstream transaction help a bit? I mean how should we think about that? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [5] -------------------------------------------------------------------------------- Yes. So I don't want to give a specific time frame. There's different ways that we can get there. We can get there partly by doing additional transactions that bring in upfront proceeds, like the Everstream transaction or over IRU sales. We can get there just by growing EBITDA and cash flows over time, and we can also get there by doing things -- doing transactions to the capital markets. So I would expect us to get there sometime in 2021. But when we get there and how we get there, it just depends on a little bit -- partly opportunistic and partly when transactions get closed. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Brett Feldman of Goldman Sachs. -------------------------------------------------------------------------------- Brett Joseph Feldman, Goldman Sachs Group, Inc., Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- You sort of reiterated during your remarks that you're going to be increasingly focusing on winning business where you can lease up the existing fiber assets you have that have a positive impact on your capital intensity. So I have 2 follow-up questions to that. First, it would seem like if that's really the way you're operating the business organically, other than maybe looking to accelerate delevering, it seems like you could probably fund your business with cash that you generate and maybe incremental debt, I mean you can do off the balance sheet without equity. And I'm curious if that's a fair way of thinking about it. We've kind of thought that equity might be predominantly used for M&A, but if you have a different view on how equity fits into the cap structure, that would be helpful. And then second, putting aside some of the near-term puts and takes in terms of just kind of completing the process of getting out of all of the residual elements of the Windstream deal, including some of the covenants, why not look to deploy more capital? I mean you can make the case that you've never had more attractive access to the capital markets in light of all of the deals you've done to resolve the Windstream situation. So why ratchet down CapEx now? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Brett, this is Kenny. I'll take those, and Mark may want to add. But first, on your first question, I think your instincts are correct. I mean when you look at our pivot away from being largely construction and greenfield to now being increasingly and eventually predominantly lease-up, you're going to see lower capital intensity and better margins in the business. And you're starting to see early signs of that now, but you'll certainly see that going into 2021. And as a result, you're going to have an organic -- effectively an organic deleveraging by EBITDA growing. So funding the business through cash flow and debt is certainly -- new debt is certainly a possibility and -- or strong possibility. And using equity for M&A is something we've done in the past. It's something we're doing as part of the settlement which I consider essentially M&A. And so I think your instincts are all right there. Personally, equity is not even on my radar screen for raising capital right now. We've got plenty of other alternatives and attractive opportunities. With respect to your second question, I think you're right that there's a terrific opportunity to put capital to work today in our business, both organically and through M&A and that opportunity has probably never been better. And when we look at organically, greenfield builds or just carrier projects, they're not all greenfield builds, but even the nongreenfield builds require capital. There's just really strong tailwinds in the business, a strong pipeline of opportunities. For example, today, we have, within our grasp, $7 million to $10 million to $12 million of recurring revenue for wireless projects that we could easily -- I think, relatively easily take on, then add capital next year and the year after, that would certainly increase our capital intensity and lower our margins, but are really attractive projects that could add to growth. So it's really just a balance between how much we want our capital intent -- how -- what level we want our capital intensity to be, what we want our margins to be. And so the -- but the opportunity is there. There's no demand problem, there's no shortage of demand, there's no shortage of opportunities. And particularly with the success that we're showing on leasing up these markets and leasing up these anchor awards, I feel a great deal of confidence, and I think our Board feels a great deal of confidence in pursuing more anchor builds and more greenfield builds because we've proven that we can drive those yields to 14%, 16%, like we talked about in our prepared remarks. But with all that said, it's a balance with capital efficiency and balancing that with the balance sheet and with cash flow. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from David Barden of Bank of America Merrill Lynch. -------------------------------------------------------------------------------- David William Barden, BofA Merrill Lynch, Research Division - MD [10] -------------------------------------------------------------------------------- So Kenny, maybe the first question for me is, as a function of the settlement with Windstream, you've got a new cohort of equity holders. I'm wondering if you have any sense, and specifically with respect to the Elliott cohort, kind of what their intentions are with respect to those shares? Are they working with you? Are they looking to just monetize in the short term? Are they looking to see the long term and hold? I was -- if you had any color, that would be super helpful. I guess the second question is for Mark. On Slide 6, if I do the math on contract value minus upfront IRU payments and annual revenue minus the $18 million of IRU amortization, it implies about 4.7% yield. And I'm wondering if I'm doing that math right. And if I am, how are you getting there from a cost of capital perspective in terms of explaining those opportunities? And then I guess the last question, if I could, would be, there's so many moving parts now in the fiber business because you're doing all these transactions and you're selling this piece and you're buying that piece. And I know that there's been a slowdown with respect to permitting with COVID and all these things. But what is -- what do you guys think we should all assume is the underlying core growth rate for Uniti's Fiber services business right now? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Thank so David, it's Kenny. On your first question, we have a regular dialogue with our shareholders, more -- some more, some less, but certainly don't want to give any color on what shareholders share with us. With respect to the new shareholders who got equity as part of the settlement, we have a very good dialogue there and have preceding the bankruptcy. So we think that will continue. The one tangible thing I can tell you is with respect to Elliott, there is a 1-year lockup on their shares. And Mark, keep me honest on that, but I think it's a 1-year lockup on their shares. With -- and I'll come back to -- let Mark come back to the second question. On the third question, David, you're right, there's a lot of moving pieces. And some of these are as a part of businesses winding down and part of this is because of lease-up and part of this is because of M&A and part of this is because of just the pivot from construction -- more of a construction mode to lease-up mode. I think when we get to 2021, a lot of these moving pieces will be in our rearview mirror. So when it comes down to give guidance for 2021, we intentionally planned a lot of the changes that we've -- that have been in process to coincide with Windstream's exit from bankruptcy and coincide with being able to give a much clearer picture for 2021. And ultimately, the end result will be nice growth in the fiber business. And we'll be able to give a more clear picture of that. Mark, do you want to take the second question? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [12] -------------------------------------------------------------------------------- Yes, Dave, I think I would follow what you're saying on the math, right. I think your math is assuming that the total contract value of the $1.2 billion is capital deployed. I mean the total contract value, if you look at the definition that we have, total contract value is just the annual recurring payments times with lengths of contracts. So realistically here, there's almost -- there's very little capital that has to be deployed because these are -- this is lease-up on existing network. So I don't think your math is exactly right. But if you want to call back when we get off the call, I'm happy to kind of work through the numbers with you. But the total contract value is not capital deployed. There's virtually no capital deployment for incremental lease-up. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from Simon Flannery of Morgan Stanley. -------------------------------------------------------------------------------- Simon William Flannery, Morgan Stanley, Research Division - MD [14] -------------------------------------------------------------------------------- Great. Mark, on Windstream, I noticed in the queue that you didn't attach financials and -- but you are monitoring their performance. Where do you stand? And how much information we will get over time in terms of the 10-Ks or whatever? And anything you can tell us about how Windstream's Q3 was, would be great. And I wonder if you could just also help us with the Everstream accounting a little bit. How do we think about next year? You got a $73 million IRU or upfront from the IRU. So call that $4 million a year of straight-line and then another $3 million in payments. So you're recognizing maybe $7 million a year. Is that right? And then on the other side, you're losing, at least for the first 4 years, the EBITDA from the Northeast ops, which is I think you said was $17 million or something like that and EBITDA. Is that the right way to think about the near-term impact of those transactions? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [15] -------------------------------------------------------------------------------- Yes. So I'll start with Windstream. So in connection with filing our 10-Q, we do expect to attach their annual financial statements. It's part of our annual filing. And then I would expect on the quarterly filings... -------------------------------------------------------------------------------- Simon William Flannery, Morgan Stanley, Research Division - MD [16] -------------------------------------------------------------------------------- The 10-K, not the 10-Q, right? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [17] -------------------------------------------------------------------------------- I'm sorry. Yes, yes, yes, sorry. I said the wrong thing. So on the 10-K -- as part of our annual 10-K filing, I do expect that we'll be including Windstream's annual financial statements as part of the 10-K. And then on the quarters, we will continue to give quarterly updates as part of our quarterly 10-Q filings. I can't tell you exactly what the format of that will be, but we'll continue to give updates. We don't have the third quarter information for Windstream quite yet. So I can't really tell about how all that looks yet, but we will be getting -- you will be getting updates in connection with them... -------------------------------------------------------------------------------- Simon William Flannery, Morgan Stanley, Research Division - MD [18] -------------------------------------------------------------------------------- So you might do an amended 10-Q, might you, with those filings? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [19] -------------------------------------------------------------------------------- We could do it that way, depending on whatever information is available at the time of the Q filing, and same thing with the 10-K. The 10-K information may be attached with the 10-K or maybe done separately with a separate 10-K/A or an 8-K/A subsequent to year-end. And then on your question about the Everstream accounting. So just in terms of the way it would affect 2021 and keep in mind that we expect closing probably in the second quarter of next year. So what you would have is you'd have -- so I'll kind of give you this on an EBITDA base. Let me get it to you on a revenue basis, maybe we can kind of work through it. So on the operations that are being sold on an annual basis, you would be subtracting out about $20 million of the dark fiber contracts that we get from Windstream that are being sold as part of that transaction, that would be a negative of about $3.5 million. And then on the Everstream IRU on the upfront payments, there'll be an amortization component to that of about $3.6 million. And then on the annual payments that we mentioned, that would be about $3 million a year as well. So those would be the primary revenue components that would affect 2021. Now keep in mind, again, those are full year numbers. So you really have to take a prorated amount to reflect the transaction expecting to close in April. -------------------------------------------------------------------------------- Simon William Flannery, Morgan Stanley, Research Division - MD [20] -------------------------------------------------------------------------------- Great. And then any update on the thoughts on dividends? It sounds like that you're obviously part of the revolver, renegotiation will be part of that conversation. If anything new to add there? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [21] -------------------------------------------------------------------------------- I don't think the dividend is so much tied into the revolver discussions. It's really just Board decisions that we'll make. And we expect to communicate when we give guidance on the next call. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Tim Long of Barclays. -------------------------------------------------------------------------------- Timothy Patrick Long, Barclays Bank PLC, Research Division - MD and Senior Technology Hardware & Networking Analyst [23] -------------------------------------------------------------------------------- Just 2 questions, if I could. First, I do want to follow up on the slide with the leasing sales pipeline. Can you just give us a little color on what you think timing could look like for that? And any of those buckets mentioned from a customer side that might be a little bit more upfront loaded in that opportunity set? And then secondly, if we just get back to the wireless customer base, and you talked about 5G service rollout. Are you starting to see uptick of activity there with new spectrum coming, et cetera? And any impact on what we'd expect to see from small cells over the next year or 2? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Tim, it's Kenny. On your first question, on timing, it's hard to predict, specifically because the sales cycle on many of these transactions are longer because they're generally larger transactions, negotiated transactions as opposed to cookie-cutter because your -- these are really network solutions and you're piecing together, in many cases, numerous routes. So in the past, we've not given specific guidance on our national infrastructure lease-up. What I would point you to, however, is the cadence of activity that you saw after we did the CenturyLink national network acquisition. And what you saw were -- you generally saw 1 or 2 larger deals initially, and then you saw a sort of a steady drip of smaller deals and then occasionally a larger deal. And so it was a little bit steady drip and then midsize to larger transactions. And I think that's probably the cadence you'll see here based upon the funnel and the timing that I see in the funnel based on conversations. So -- but with all that said, in general, it's a very, very healthy funnel, very good conversations with a good cross-section of customers and carriers, which we show you graphically. So feel very, very good about it. With respect to wireless activity in our markets, we continue to see very strong activity. And as I was suggesting earlier, we're actually at a point where we're deciding how many new opportunities we want to take on. It's sort of a luxury position to be in versus spending our capital on lease-up. So it's a nice place to be. Plenty of activity on both traditional backhaul, fiber-to-the-tower, in addition to an increasing amount of small cells. And to your point there, we -- small cells have never been a huge part of the opportunity set in our markets generally because we're in the Tier 2-ish, 3-ish markets, but we have always said that they are coming eventually. NFL cities first and then our market is second, and we are starting to see more activity. And we're starting to see that activity across all of our customers as opposed to just 1 or maybe 2. So still too early to say it's like the dam bursting, but perhaps later in 2021, maybe into 2022, we'll see a substantial pickup. But for now, we're just seeing the early stages of it on small cells, in particular. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Our next question comes from Phil Cusick of JPMorgan. -------------------------------------------------------------------------------- Philip A. Cusick, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [26] -------------------------------------------------------------------------------- I saw that Windstream took some of the GCI funding down. How do you think about that, both for the fourth quarter and for 2021 at this point? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Mark, do you want to take that? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [28] -------------------------------------------------------------------------------- So for this year, we forecast $90 million of GCI investments. I don't really have a forecast to give you yet for 2021. Hopefully, we'll be in a position to do that on the next call, but I don't have a forecast on next year to give you. -------------------------------------------------------------------------------- Philip A. Cusick, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [29] -------------------------------------------------------------------------------- And can you share with us some of where that money is being used so far? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Phil, it's Kenny. I can start, and then Mark can add a little more color because there was -- he gave some color in his prepared remarks. Just as a reminder, the program is designed to have underwriting standards and those underwriting standards are fairly well laid out in the lease agreements, which are public. But the upshot is the investments are -- they have to be in -- largely in long-term, value-accretive fiber. And they also have to come with a minimum return threshold for our tenant. So there has to be basically a business case for the investments in long-term, value-accretive fiber. And there's some other criteria, but those are the sort of the headline criteria. What we have seen so far and what we expect is that the vast majority of this is going to be built -- is going to be fiber-to-the-home, which will be extending our current network into the home and then tying back into the metro and long haul aspects of our fiber business. So -- but we think a lot of it is going to be spent in the ILEC, upgrading copper to fiber, and there will be some of it spent on -- in the CLEC, either building new routes where we have the ability to joint build cost efficiently for both us and Windstream, and potentially overbuilding some routes in the CLEC. But we're very happy with the investment program as we've seen it and as we understand it. And obviously, we're going to have a proactive hand in that plan as part of our underwriting standards. But Mark, do you want to comment on where some of the current investments have been made over the past quarter? -------------------------------------------------------------------------------- Mark A. Wallace, Uniti Group Inc. - Executive VP, CFO & Treasurer [31] -------------------------------------------------------------------------------- Kenny, I think you covered it well. I mean I said in my prepared remarks, those 35,000 fiber strand miles that we're in 13 different ILEC markets. But I think in -- I mean the markets, generally, we're in kind of Alabama, Arkansas, Florida, Georgia, Iowa, there are a vast number of markets in ILEC territories. But I think other than that, I think Kenny covered everything. -------------------------------------------------------------------------------- Philip A. Cusick, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [32] -------------------------------------------------------------------------------- Okay. That's helpful. And last one for me. The Everstream deal, wasn't that, I guess, predicated on the Windstream close? Or was that sort of waiting on that Windstream close? And if so, are there other substantial deals that we're waiting on that Windstream close that can now sort of fall in line? -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- Phil, we definitely started negotiating well with -- engaging with Everstream well in advance of the settlement closing, but after knowing that we had a deal on the settlement. So with that said, I don't think the deal would have happened -- could have happened without the settlement. So discussions started well in advance, but in anticipation of the settlement closing. To your second question -- so point being the settlement was a critically important part of bringing that deal together for us. There have certainly been other conversations that have started and are progressing through the sales funnel. And so in terms of timing and just general cadence, I don't want to give any specific guidance there, but these are long sales cycles, many of them have started months in advance, and they're progressing very well through the sales funnel. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Kenny Gunderman for any closing remarks. -------------------------------------------------------------------------------- Kenneth A. Gunderman, Uniti Group Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Thank you. We appreciate your interest in Uniti Group, and look forward to updating you further on future calls. Thank you all for joining us today. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.