Uniti turns to second quarter profit as Windstream master lease talks continue

Little Rock real estate investment trust (REIT) Uniti Group Inc. Thursday (August 8) posted second quarter profits of nearly $39 million after selling off its Latin America cell tower portfolio and U.S. ground lease business. The Little Rock-based cell tower operator, however, remained relatively mum concerning ongoing talks with former parent Windstream Holdings over a long-term rent agreement.

For the period ended March 31, Uniti reported first quarter net income of $38.6 million, or 20 cents share, compared to losses of nearly $5.6 million, or three cents per share, in the same period of 2018. Quarterly revenues rose 5.8% to $264.4 million, compared to $247.3 million a year earlier.

The former Communications Sales & Leasing (CS&L), which changed its name to Uniti more than two years ago, reported funds from operations (FFO) of $105.3 million, or 55 cents per share. Funds from operations is a closely-watched measure in the REIT industry that takes net income and adds back items such as depreciation and amortization. Wall Street had expected Arkansas’ first publicly-held REIT to report second quarter earnings of nine cents per share on revenue of $266.1 million, according to Thomson Reuters.

“All of our businesses continue to execute well on their operating priorities for this year, and we continue to consider alternatives to maximize the value of our portfolio of infrastructure assets,” said Uniti President and CEO Kenny Gunderman. “Similar to the recent sale of our Latin America tower portfolio, the sale of our ground lease business recycles capital at an attractive return, as well as allows the company to focus solely on its strategy of building towers within the U.S. for our wireless customers.”

As mentioned, Uniti sold off its Latin American tower portfolio in the second quarter to an entity controlled by Phoenix Tower International (PTI) for $100 million in cash. That deal, which closed in April, allows PTI to acquire approximately 500 towers located across Mexico, Colombia and Nicaragua.

On May 23, 2019, Uniti completed the sale of substantially all of its U.S. ground lease business for total consideration of approximately $34 million. A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner.

Uniti said second quarter earnings included $28.8 million of pre-tax gains on the sale of the company’s Latin American tower portfolio and U.S. ground lease business, a $22.3 million gain on changes in fair value of contingent consideration, and $5.8 million of other income related to Hurricane Michael insurance settlement recoveries. Those gains were partially offset by transaction and integration costs of $7 million, officials said.

Across its businesses, Uniti Fiber contributed $81.3 million of revenues and $37 million of adjusted earnings in the second quarter. Uniti Fiber’s net success-based capital expenditures during the quarter were $50.3 million, and maintenance capital expenditures were $1.9 million. At June 30, 2019, Uniti Fiber had approximately $1.3 billion of revenues under contract, officials said.

Uniti Towers contributed $3.1 million of revenues and reported near break-even earnings for the quarter. These flat results included the operation of the company’s Latin American tower portfolio and U.S. ground lease business up to April 2 and May 23, 2019, respectively. Uniti Towers’ total capital expenditures for the second quarter were $30.8 million and included the completed construction of 69 towers.

Uniti Leasing had revenues of $177 million and adjusted quarterly earnings of $175.9 million. The Little Rock telecom REIT’s local landline business had revenues of $2.9 million for the three-month period ended June 30.

On June 28, 2019, Uniti issued $345 million aggregate principal amount of 4% exchangeable senior notes, which will mature on June 15, 2024. In conjunction with the debt offering, Uniti entered into an amendment to its credit agreement to extend the maturity date of $575.9 million of commitments under its revolving credit facility to April 24, 2022. Uniti said a portion of net proceeds from the notes was used to repay outstanding borrowings under the revolving credit facility.

Uniti said it also received a notice from PEG Bandwidth Holdings LLC that it had elected to convert all its shares in the company’s preferred stock related to the Little Rock telecom trust’s $409 million acquisition of the Lewisville, Texas-based wireless tower operator in May 2016. Uniti said it settled the conversion in shares of common stock on July 2, 2019, issuing approximately 8.7 million shares representing a total value of $87.5 million. All of the company’s Series A Preferred Stock has since been cancelled and no longer remain outstanding.

UNITI: MASTER LEASE MEDIATION EXTENDED, 5G FOCUS
Concerning ongoing talks with Windstream over a master lease agreement, Gunderman briefly told investors and shareholders during a conference call that he was encouraged the two Little Rock companies were moving toward a “mutually beneficial outcome.”

Gunderman added that Uniti and Windstream have agreed to further mediation and will extend the assumption deadline for the master lease to Dec. 9, 2019, if Windstream continues making on-time lease payments. However, Gunderman did not respond to comments earlier in the day from Windstream CEO Tony Thomas that the Fortune 500 telecom wishes to re-characterize its relationship with Uniti from a “lease” to a “financing arrangement.”

“To be clear, we did not agree to mediation nor the extension because our view of Windstream and its creditors’ claims has changed,” said Gunderman. “In fact, we continue to believe those claims are not meritorious and encourage interested parties to review our filings with the bankruptcy court to understand the strength of our position.’

Uniti and other parties appeared in federal bankruptcy court in upstate New York Friday, July 26 concerning a request by unsecured creditors and trustees in the Windstream Chapter 11 bankruptcy filing to end or significantly alter the master lease contract between the closely-tied Little Rock telecom concerns.

Earlier this summer, Uniti and Windstream entered into negotiations on the master lease agreement after the latter filed voluntary petitions for reorganization in late February under federal Chapter 11 rules. The controversial lease agreement provides for annual rent of $659 million to Uniti paid in equal monthly installments in advance, with an annual base rent escalator of 0.5%, according to securities filings.

Federal bankruptcy law requires that Windstream continue to make regular rent payments to Uniti during its bankruptcy in order to maintain access to the cell tower landlord’s network.

During the 45-minute after-market conference call, Gunderman also mentioned that Little Rock REIT plans to invest in expanding its fiber network with more backhaul and new-build cell towers as major wireless carriers are rolling out 5G wireless service. The Uniti CEO said once the Little Rock cell tower builder closes its previously announced $319 million deal with Macquarie Infrastructure Partners to acquire Bluebird Network LLC in the third quarter, it will have 6 million miles of strand fiber across the U.S.

“A significant portion of that fiber is uniquely positioned for Uniti Fiber and Uniti Leasing to capture the demand for wireless and non-wireless services,” said Gunderman.

The Uniti executive also said the Little Rock telecom landlord expects to complete the construction of 240 cell towers in 2019. Gunderman said Uniti signed a 25-year master lease cell tower agreement with a “another major wireless carrier” in the second quarter. He said the publicly traded REIT now has deals with three of the four largest wireless carriers, which include Verizon, AT&T, T-Mobile and Sprint.

Gunderman said Uniti should benefit from the $27 billion T-Mobile-Sprint merger, which was recently approved by U.S. regulators.

For the remainder of 2019, Uniti boosted its net income outlook from 44 to 53 cents per share. The Arkansas real estate trust also upgraded its yearly revenue forecast from $1.069 billion to $1.078 billion, Both updated outlooks are largely dependent on Windstream’s reorganization and continued monthly lease payments, which average about $55 million per month or about 60% of Uniti’s yearly revenue.

At the close of business Thursday, Uniti shares ended up 3.65% or 30 cents at $8.52 on the Nasdaq stock exchange.