Uniti posts delayed 4Q, yearly financial reports amid ‘going concern’ warning from auditor

Uniti Corp. on Wednesday (March 20) posted its delayed fourth quarter and yearly earnings report after the company’s independent auditor warned there is “substantial doubt” about the company’s future over the next year due to former parent Windstream Holding Inc.’s bankruptcy filing last month.

Despite that notice, the Little Rock-based real estate investment trust (REIT) was able to close out the eventful year and fourth quarter with a small profit and several key deals to strengthen and diversify the company’s portfolio and balance sheet, which is largely dependent on revenues from a four-year old landlord-tenant agreement with Windstream.

For the period ended Dec. 31, Uniti reported fourth quarter net income of $14.7 million, or five cents per share, compared to $20.5 million or 12 cents per share, in the same period of 2017. Quarterly revenues rose 57.8% to $270.8 million, compared to $172.2 million a year ago.

The former Communications Sales & Leasing (CS&L), which changed its name to Uniti two years ago, reported funds from operations (FFO) of $115.7 million, or 64 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 fourth quarter earnings of five cents per share on revenue of $269 million, according to Thomson Reuters.

For the full year, Uniti reported net income of $16.5 million, or four cents per share, compared to a net loss of $212,000 or four cents per share in 2017. Yearly revenue rose nearly 32% to $1.02 billion, compared to $770.4 million in the same period of 2017.

“Uniti enters this year with an exceptional portfolio of infrastructure assets we have acquired and developed over the last few years. All of our businesses are seeing strong demand as the multi-year investment cycle in communication assets remains healthy,” said Uniti President and CEO Kenny Gunderman. “We expect to see solid organic revenue growth across our comprehensive product and service offerings as industry dynamics continue to drive increasing customer requirements for towers, small cells, and fiber solutions.”

On Jan. 15, Uniti entered into a partnership with the MIP subsidiary of United Kingdom’s Macquarie Infrastructure and Real Assets to acquire Bluebird Network LLC, which holds nearly 178,000 fiber strand miles in the Midwest across Missouri, Kansas, Illinois, and Oklahoma. In the transaction, Uniti has agreed to purchase the Bluebird fiber network and MIP will purchase the Bluebird’s operations.

As part of that deal, Uniti also agreed to sell its Midwest operations to MIP, while Uniti will retain its existing Midwest fiber network. After the deal closes, Uniti will lease the Bluebird fiber network and its Midwest fiber network to MIP under a 20-year triple net lease with initial annual cash rent of $20.3 million, which represents a cash yield of 9.6%.

Uniti said it is acquiring the fiber network of Bluebird for $319 million, split between cash and pre-paid rent received from MIP at closing. That deal is expected to close in the third quarter of 2019, subject to regulatory and other closing conditions.

In late February, Uniti announced another deal to sell its Latin American tower portfolio to an entity controlled by Phoenix Tower International (PTI) for $100 million in cash. PTI will acquire approximately 500 towers located across Mexico, Colombia and Nicaragua. Uniti hopes to close that deal by the end of this month.

UNITI: ‘OUTCOME IS UNCERTAIN’
Despite those deals, Uniti on Feb. 18 postponed its fourth quarter and yearly financial reports due to Windstream’s bankruptcy filing three days earlier. On Monday, Uniti said it received a limited waiver from its lenders under the company’s $750 million credit line, which had approximately $38 million of unrestricted cash and $110 million of undrawn borrowing availability at the end of fiscal 2018.

Uniti said the waiver was received after the Little Rock real estate landlord received a “going concern opinion” from auditor PricewaterhouseCoopers (PWC) on Dec. 31, 2018. According to a 10K filing with the federal Securities and Exchange Commission, the PWC audit “expressed substantial doubt as to whether [Uniti] could continue as a going concern within one year after the date the financial statements are issued as a result of Windstream’s bankruptcy petition and the bankruptcy’s uncertain effects on the Master Lease.”

“While the outcome is uncertain, we expect Windstream will continue to perform on the Master Lease and believe the probability of Windstream rejecting the lease in bankruptcy to be remote because the Master Lease is central to Windstream’s operations,” Uniti said in the SEC filing. “We intend to reduce our capital expenditures and dividend as well as seek external funding in order to sustain our operations. If we do not succeed in raising such funds and reducing such expenditures and if Windstream elects to reject the Master Lease, we could experience a material adverse effect on our business and our stockholders may lose some or all of their investment in us.”

Uniti also noted in the securities filing that there are no assurances that Windstream will have sufficient assets, income and access to financing to satisfy its landlord-tenant obligations under the master lease agreement, which provides the Little Rock REIT with 60% of its annual revenues.

“In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow, and has had its credit ratings downgraded by nationally recognized credit rating agencies multiple times over the past 12 months,” Uniti stated in the SEC filing.

Windstream first announced in late February that its holding company and subsidiary, Windstream Services LLC, had filed voluntary petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York. That default was precipitated by a Feb. 15 court ruling by U.S. District Judge Jesse Furman for the Southern District of New York that Windstream violated bond agreements after splitting off Arkansas’ Uniti in April 2015.

Furman’s decisive ruling arose from challenges by Aurelius Capital Management and U.S. Bank National Association that the 2015 deal was invalid under the terms of a debt exchange offer and consent solicitations in respect to senior notes issued by its Windstream Services LLC to finance the 2015 spinoff. The court further ruled that Aurelius was entitled to a $310.5 million judgement, plus interest from and after July 23, 2018.

On Friday, Windstream reported a net loss of $549 million on revenues of $1.39 billion. Windstream, which now trades as a penny stock, has not yet filed any details of its reorganization plan with federal bankruptcy officials in New York. Company officials would not offer a timetable on those plans, which must be completed by late June.

At the end of fiscal 2018, Uniti had outstanding long-term debt of nearly $4.5 billion consisting of a combination of senior notes and term loans. If the Windstream lease fully remains in place, Uniti said it expects net income of between $48 million and $61 million on revenues of more than $1.08 billion in fiscal 2019.

At the close of business on the Nasdaq stock exchange, Uniti stock was up 14 cents to $10 per share. Over the past 52 weeks, the telecom REIT’s shares have traded in the range of $8.06 as a low and $23.42 as a high.