Uniti Group Is Poised To Profit
Last week I wrote an article titled “An Airport REIT, Why Not?
In this article, I framed a bullish case for Infrastructure REIT Investing and the fact that the “Trump Administration has shown a strong preference for funding investments from the private sector to pay for infrastructure priorities.”
I explained that “the idea is to offer financial incentives to private companies that want to back transportation projects” under the “public-private partnership” model in which firms bid on a project, build and maintain it for a set amount of time and recover costs through tolls or set state payments.
President Trump has argued that it’s cheaper and quicker when private investors are in charge, as opposed to the federal government. In a research paper, Cohen & Steers writes,
“Many infrastructure companies have monopolistic businesses that often have regulated or concession-based revenues, features than can help potentially reduce financial risk, generate attractive risk-adjusted returns and provide downside protection.”
As President Trump’s plans progress, there will be growing incentives for increased private investment in infrastructure and privatization of key assets. As Cohen & Steers explains, “the global listed infrastructure universe continues to expand, with a growing emphasis on security structures (i.e. REITs, MLPs, etc..) focused on income delivery.”
Today I am focusing on one such REIT known as Uniti Group, Inc. (UNIT) - previously known as Communications Sales & Leasing - that derives significant revenues from the April 2015 spinoff of assets from Windstream Wireless (WIN). In May Uniti passed the two-year anniversary of its spin-off into a publicly-traded REIT.
As Unit’s CEO, Kenny Gunderman, explained on a recent earnings call, “after a quiet start to develop our strategy and funnel, we rapidly evolved the company over the last 15 months from primarily a single tenant, one property landlord to servicing nearly 15,000 customer connections through three diverse, but complementary business segments.”
I have been kicking the tires on UNIT for some time, and I’ll credit Dane Bowler for fueling the excitement for my research. In a recent article he explained, “we consider Uniti to be the best investment opportunity among tech REITs as it has room for multiple expansion and pays a 9.6% dividend.”
After conducting further research and initiating a position in Uniti, I decided to also include the Infrastructure REIT in my “High Alpha REIT Portfolio” ….and of course you know my feelings – Uniti Group Is Poised To Profit.
PICTURE
A More Diverse Revenue Model
Over the last 15 months Uniti hasinvested over $1.5 billion in seven acquisitions to grow pro forma adjusted EBITDA by $120 million or 18%. Topline revenue has grown 35% to over $950 million on a pro basis and Uniti has diversified revenues from non-Windstream customers from 2% to 30%.
With almost $10 billion in revenues under contract and an average remaining contract term of 12 years with high-quality, creditworthy customers, Uniti has excellent visibility into future cash flows.
Uniti recently acquired Hunt, and the company recently won a multiyear contract with one of the larger school districts in Louisiana to add to their leading market share in the K-12 education segment.Uniti also acquired Southern Light and the company recently added seven new school districts and 41 new school locations.
Hunt and Southern Light each hold multiple-year, multi-dollar contracts to connect over 100 combined locations for two Fortune 500 companies with the potential for follow-on sales.
Hunt also recently completed a new, unique diversified route into New Orleans for a national carrier, and Southern Light won two small cell awards for over 300 nodes. The unique fiber route into New Orleans and the small cell deals have significant lease-up potential.
Uniti has commenced integration planning with both companies, and Unitiexpects they will become accretive realizing $12.5 million of cost savings.
The Southern Light deal is transformative as it will drive Uniti Fiber into one of the largest pure-play fiber operators in the U.S. with Pro-forma 2016 Annualized Adjusted EBITDA of ~$100 Million and $1.2 Billion of Revenues Under Contract. Uniti Fiber boasts 15,500 customers connections and nearly 1.2 Million fiber strand miles.
Uniti Fiber started 2017 with strong sales, with 88% of the bookings for small cell awards. All four of the national carriers are requesting proposals for small cells and Unitis is in the early innings of this new wireless network architecture.
The company expects demand for small cells will grow exponentially in future years as the wireless carriers roll out 5G technology. This fiber infrastructure is the critical component to meet small cell demand and Uniti is well-positioned to win its share of this growing business.
Uniti Fiber is also benefiting from an increase in wireless data usage as all four national carriers are now offering an unlimited data plan. Uniti received bandwidth upgrade orders totaling 175,000 of incremental MRR during the beginning of the year.
In Q1-17 Uniti Fiber reported revenues of $34.8 million and adjusted EBITDA of $11.6 million. These results were in line with previous guidance and include over $1.2 million of realized cost savings (during the quarter). Maintenance CapExwas $0.5 million (or 2% of revenues) and net success-based CapEx was $11.7 million.Uniti Fiber ended Q1-17 with $740 million of revenues under contract with a duration of nearly six years.
Uniti’s Tower strategy is to bundle tower and tower real estate infrastructure with other mission critical communication infrastructure. Uniti’s tower business has strong infrastructure growth potential due to low 4G / 5G penetration.
The company’s focus is on Mexico with strong Macro-Economic fundamentals, backed by communications infrastructure growth potential, and common U.S. / Mexico customers.
Uniti closed on the NMS acquisition at the end of January for initial consideration of $62.6 million. At closing, the NMS portfolio included 366 operating towers and 105 towers under development, all of which are expected to be completed in 2017.
Also, Uniticompleted and closed on 24 development towers during the first quarter for $2.1 million. At quarter-end, Unitihad approximately 90 towers under development and nearly 500 towers completed and in service across the entire towers portfolio.
Uniti’sleasing segment provides reliable and predictable cash flows with virtually no CapEx or working capital requirements and over 99% adjusted EBITDA margins.
The leasing segment revenues in Q1-17 were $170.3 million, with adjusted EBITDA of $170.1 million. Th leasing segment benefited in the first quarter from nearly $34 million of improvements to a network made by Windstream with their capital. On a cumulative basis, since the spinoff, Unitibenefited from almost $260 million of tenant capital improvements completed by Windstream.
As viewed below, Uniti has evolved into a more diversified model with attractive return profiles across all asset classes:
The Balance Sheet
In April Uniti executed two transactions to pre-fund the announced acquisitions of Hunt and Southern Light. First, the company issued 19.5 million shares of common stock at $26.50 per share for net proceeds of about $500 million.
This transaction demonstrated excellent demand of equity and Uniticontinues to broaden the shareholder base with dedicated REIT funds (including me).
Uniti subsequently priced $200 million of 7.125% senior unsecured notes due 2024 and net proceeds were used to fund the cash portion of the purchase price of Southern Light. The bonds are required to be redeemed at 100% of the issue price if Southern Light does not close by October 14, 2017.
Regarding Uniti’s capital market transactions, the company also increased the revolving credit agreement borrowing capacity from $500 million to $750 million. The revolver is priced at LIBOR plus 225 bps or better depending on the secured leverage ratio with no LIBOR floor.
At quarter-end Unitihad $68.7 million of unrestricted cash and the revolving credit facility was completely undrawn. The company’s leverage ratio under its debt agreement was 5.9x based on net debt to annualized adjusted EBITDA.
On a pro forma basis, adjusting for the referenced capital market transactions and announced acquisitions, Uniti’snet debt to annualized adjusted EBITDA would have been 5.6x and the secured debt ratio would have been 3.5x.
Uniti Is Poised To Profit
In May Uniti declared its regular quarterly dividend of $0.60 per share, representing an annual dividend rate of $2.40 per share. The annual dividend (of $2.40/ share) is covered by the company’s AFFO/share of $2.61.
Uniti’s 2017 guidance is based on revenues ranging between $902 million and $910 million and adjusted EBITDA to range between $743 million and $749 million.
During 2017, Hunt is expected to contribute $22 million of revenue and $10 million of adjusted EBITDA. Southern Light is expected to contribute $38 of revenue and $21.5 million of adjusted EBITDA. The expected results for Southern Light and Hunt include aggregate synergies in the post-close period in 2017 of $2.5 million.
Accordingly, Uniti Fiber is expected to report consolidated revenues this year of approximately $198 million and adjusted EBITDA of $84 million, at the midpoint of the guidance range.
Unitiexpects2017 full year reported AFFO to range between $2.48 and $2.52 per diluted common share, with the midpoint of $2.50 per diluted share.
The impact of pre-funding Hunt and Southern Light acquisitions was approximately $0.10 on AFFO per diluted share basis. Excluding the pre-funding impact, the midpoint AFFO guidance would have been $2.60 per share.
Looking at Uniti through a traditional valuation lens you can see that the shares are trading cheap, based on the current dividend of 9.8%.
Now let’s compare Uniti to the infrastructure REIT peers based on P/FFO (note: LMRK is not a REIT).
Clearly, based on the above metrics, Uniti is cheap. However, one thing that the market does not quite understand is the lease-up potential of Uniti’s fiber portfolio. Similar to a shopping center, Uniti lands an anchor tenant with a going-in cash yield of 5% to 7%, but that number quickly grows to 15% and eventually over 20%.
Also, fiber is the new mission critical asset in the communications ecosystem and Uniti is well-positioned to expand its footprint and continue generating reliable earnings and dividends. I believe that Uniti is substantially mis-priced and the dynamics driving Uniti Fiber and Uniti Towers are key differantiators in which Uniti REIT is Poised to Profit.
As noted in previous articles, my target Total Return requirement for a High Alpha REIT is 25% annually and Uniti fits squarely into that bucket. I am initiating a BUY and Uniti will be included in the REIT Lab in the next edition of the Forbes Real Estate Investor.