Uniti Group today announced its Q2 2021 earnings and provided updates on its fiber and small cell infrastructure portfolio, growth capital improvements (GCI) program with Windstream, leasing sales pipeline, and its perceived valuation discount compared to peers.
Uniti Group – Financial Performance in Q2 2021
In Q2 2021, Uniti Group reported total revenue of $268m, a 1.6% decrease quarter-over-quarter, and adjusted EBITDA of $216m, a 0.7% increase quarter-over-quarter. As a result, the company’s EBITDA margin expanded to 80.4% in Q2 2021 from 78.6% in Q1 2021. Decomposing the results further:
- Uniti Leasing, which is primarily Windstream, contributed revenue of $196m and adjusted EBITDA of $192m (98% margin) for Q2 2021
- Uniti Fiber added revenue of $72.1m and adjusted EBITDA of $29.4m (41% margin) for Q2 2021
Notably, Uniti Group’s previously announced transaction with Everstream Solutions closed during the quarter, which impacted revenue and EBITDA. Finally, the company highlighted consolidated bookings during Q2 2021 of ~$1.0m in monthly recurring revenue (MRR).
Digital Infrastructure – Uniti Group – Fiber and Small Cells – Q2 2021
As of Q2 2021, Uniti Group owns 123k fiber route miles and 7.1 million fiber strand miles. Indeed, this represents an average strand count of 58 strands per route mile. With its dense metro fiber, the company’s network passes 250k+ on-net and near-net buildings.
Beyond fiber, Uniti also has 2.3k small cells in service or in backlog. The company currently has 1.2k lit backhaul, dark fiber, and small cell sites remaining in its backlog which will be deployed over the coming years.
Growth Capital Improvements (GCI)
During the quarter, Uniti Leasing deployed capital expenditures of $50.0m primarily towards its growth capital improvements (GCI) program with Windstream. Through these GCI investments, Uniti constructed ~1.6k new fiber route miles and 56.0k fiber strand miles. In turn, this implies that the company is building fiber with an average strand count of 35 strands per route mile.
As of Q2 2021, Uniti Group has invested, since inception, $177m through its growth capital improvements (GCI) program with Windstream. In turn, this investment has added ~5.0k fiber route miles and 178k fiber strand miles to the company’s network.
Uniti Group’s GCI investments add to the cash rent payments it receives under existing Master Lease Agreements (MLAs) with Windstream. Specifically, the company generates an 8% initial yield, payable one-year following the corresponding investment made. Additionally, a 0.5% annual rental escalator, is applied to the yield, from the prior year.
As of Q2 2021, Uniti generates ~$14m of annualized cash rent on the investments it has made through the GCI program.
Leasing Sales Pipeline – Uniti Group – Q2 2021
Uniti Group is actively marketing 3+ million strand miles of fiber, which is available for lease-up. As a result, Uniti’s leasing sales pipeline currently stands at $1.1bn of total contract value, representing $65m of annual revenue. Additionally, revenues under contract for Q2 2021 are $805m with an average contract term remaining of 14.4 years.
The customer mix of Uniti Group’s pipeline is split between domestic carriers (22%), regional carriers (26%), international carriers (21%), and government (30%).
Demand Drivers
Demand for Uniti’s digital infrastructure is coming from customers that want to enable 5G networks, fiber-to-the-home (FTTH), and cloud-based connectivity.
For example, Uniti’s wireless carrier customers are particularly active in ensuring they have the appropriate digital infrastructure to support the growth in mobile broadband. These carriers are increasingly seeking 10 gigabit per second upgrades on Uniti’s fiber backhaul circuits for their macro towers. Simultaneously, wireless carriers are deploying fiber backhaul to new macro towers and C-RAN small cell deployments in Uniti’s metro markets.
Valuation Discount – Compared to Peers
During its conference call, Uniti Group highlighted what it views as a “material disconnect between how the public market values Uniti’s equity” and its intrinsic valuation. The company deems that its Uniti Fiber and non-Windstream operations at Uniti Leasing should command a 15x to 20x cash flow multiple. Indeed, this view is based on relevant public and private market comparables.
Applying the mid-point of this valuation range (i.e., 17.5x) to Uniti’s 2021 Non-Windstream Adjusted EBITDA of $160m (Outlook), generates a valuation for the Non-Windstream Asset Value of $2.8bn. In turn, this implies a valuation for the remaining Windstream Master Leases of $4.8bn. Based on Uniti’s 2021 Remaining Adjusted EBITDA of $692m (Outlook), this indicates that Uniti’s Windstream Master Leases are being valued at a 14.4% yield or a 6.9x cash flow multiple.
Comparable Yields
Overall, Uniti’s Windstream Master Leases’ implied 6.9x cash flow multiple compares to an 11.1x implied cash flow multiple from the i) third-party valuation that Uniti received in 2015 as part of its spin-off from Windstream and ii) third-party valuation received in 2020 in connection with Windstream’s emergence from bankruptcy.
Additionally, Uniti Group highlights valuation benchmarks from public peers. Specifically, these include Windstream’s debt, and equity valuations for triple net leasing and other digital infrastructure companies.
- Triple Net Lease Peers Average Yield: 14.3x cash flow multiple or 7% yield
- Windstream Senior Notes Yield: 14.3x cash flow multiple or 7% yield
- Tower & Data Center Peers Average Yield: 20.0x cash flow multiple or 5% yield
