Despite macroeconomic headwinds and mounting concerns from investors, Uniti is optimistic that it will reach a free cash flow by 2025 by sticking to its “disciplined” lease-up fiber strategy. The company is also confident in its real estate investment trust (REIT) status and evolving relationship with Windstream, according to CEO Kenny Gunderman.
The Uniti fiber model relies on anchor tenants that yield a small percent on an initial basis, and then the company can lease up multiple tenancies on each route for a higher yield.
“The concept of anchor plus lease up is tried and true in the tower space,” Gunderman said at the Nareit 2023 REITweek Investor Conference. “We believe fiber is as good of a shared infrastructure asset as towers if you have a disciplined approach.”
Uniti only builds a new network for anchor customers such as Verizon or AT&T when it already sees “a very clear path” to that second, third, fourth and even fifth tenant. This enables Uniti to secure 20% yields or more from fiber lease ups alone, explained Gunderman.
“We've proven that on the projects that we've built today,” he said, “and it's a combination of a second wireless customer, or it may be a hyperscaler or it may be an enterprise customer. It's all the above. We're leasing up those networks to customers that are on or near that network initially.”
When Uniti adds a new fiber customer, the company occasionally must build a lateral -- from the network to an office location or from the backbone to a new tower, for example.
But the capital to build a lateral can be less than $50,000 or even lower, Gunderman said, “so it's de minimis incremental capex in order to get to incremental yields of 40, 50, 60% that lead to those blended yields of 20%.”
“Our lease up strategy is very disciplined. We don't build greenfield unless we know there's a lease up strategy around it, which is why we're not building greenfield in Portland, Oregon or Los Angeles or even New York City,” he added.
“We're building greenfield in our southeastern markets where we have a brand, we've got boots on the ground. It’s a low relatively low risk investment because we know how much it's going to cost, and we've got customers lined up after the anchor customer.”
Uniti outlook remains positive
A number of hedge funds have recently modified their holdings of Uniti, and investors have expressed concerned over the company’s low-valued stock – which has already dropped 65% in the past year to $4 per share – and overpaying dividends as a REIT in a high-interest market.
As a REIT, Uniti needs to pay out 90% or more of its taxable profits to shareholders in the form of dividends. TDCowen estimates that the company is overpaying by around $50 million each year.
This has prompted Uniti investors to question whether the company should lose its REIT status. However, at this week’s conference Gunderman doubled down on his opinion that Uniti should remain a REIT, which he had also expressed during an earnings call last month.
“Our story is very M&A heavy, and we have said that the REIT structure has a lot of strategic value,” he said. “In the conversations that we have with strategic counterparties, whether it be strategics or financials, there's a lot of value put on that REIT structure.”
Gunderman acknowledged that if the cash flow gets tight, Uniti might have to pull dividends back, but for several reasons he feels confident that won’t have to happen.
“We're in a unique place where we're investing very heavily in our business right now. We're investing in fiber to the home, we're investing in commercial fiber, backhaul fiber. And as a result, liquidity is tight,” he said.
“We've been in that place many times over the years investing heavily in our business. But at the same time, our core business is performing extremely well, very predictable long-term contracts, very cashflow generative outside of capex and we put up quarter after quarter of solid results.”
Investors have also expressed what TDCowen called “unfounded fears” over the value of Uniti’s remaining Windstream business. Windstream spun off from Uniti Group in 2015 and filed for Chapter 11 bankruptcy four years later after defaulting on bonds, but has since exited bankruptcy through acquisition.
As part of that spinoff, Windstream transferred copper-based network assets to Uniti, which Windstream leases back from Uniti to serve its 1.4 million residential and business customers across its 18-state footprint. Windstream pays $54 million per month to Uniti for access to Uniti's network assets.
One major concern from investors is that Windstream won’t be able to pay that rent, but Gunderman said payment “has come in every single month on time,” and he’s confident that won’t change as the network is mission-critical for Windstream.
Gunderman assured investors that capital intensity on the core business is continuing to come down, and settlement obligations to Windstream are going to taper off. Specifically, he said Uniti’s capital commitment to Windstream to build fiber to the home will step down from “roughly $250 million a year to $175 and then eventually $150” over the next few years.
These contractual changes, along with the positive performance of Uniti’s core business and continued M&A activity, will help the company reach its goal of a free cash flow by 2025, Gunderman said.
He added, “When we put all that together, and I think investors and analysts who know us, these are not anywhere close to Herculean assumptions, they're pretty logical, well understood assumptions about how we get there.”
TDCowen in a note this week said that Uniti’s “elongation of decision making” is nothing for investors to be overly concerned about, as “the funnel is now the strongest it has been.”
“To that end, with the good funnel we believe Uniti could see upside 2023 guidance,” TDCowen added. “Overall, there are three notable pieces to the organic growth equation: Uniti Fiber, the Windstream lease portion of Uniti Leasing and the dark fiber portion of Uniti Leasing.”