Welcome to Uniti Group’s Second Quarter 2020 Conference Call. My name is Dilem and I’ll be your operator for today. A webcast of this call will be available on the company’s website, www.uniti.com beginning August 10, 2020 and will remain available for 14 days. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the company’s prepared comments. The company would like to remind you that today’s remarks include forward-looking statements and actual results could differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in the company’s filings with the SEC. The company’s remarks this afternoon will reference slides posted on its website and you are encouraged to refer to those materials during this call. Discussions during the call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company’s current report on Form 8-K dated today. I would now like to turn the call over to Uniti Group’s, Chief Executive Officer, Kenny Gunderman. Please go ahead, Mr. Gunderman.

Thanks, Dilem. Good afternoon, everyone, and thank you for joining. Please turn to Slide 4 in our presentation. The second quarter showed continued positive momentum for Uniti. Our largest customer received approval for its plan of reorganization putting it on a path to emerge from bankruptcy later this year as a substantially healthier tenant. Our settlement will also become effective providing Uniti with a 90% increase in leasable fiber, approximately $30 million of new third-party revenue and a hardened master lease. We’re also responding well to the COVID-19 crisis. The majority of our employees are working from home, while our remaining employee base is actively working in the field with first responder designation. Our installation activity in the second quarter was one of our strongest ever with a 40% increase in activity from the prior quarter. Our network continues to perform well with no degradation and has normalized after we saw an uptick in traffic last quarter. Today, we have not seen any order nor service cancellations from customers as a result of COVID-19 and we continue to see only marginal delays relating to new sales and install activity. For example, only about $13,000 of MRR to be installed, continues to be delayed compared to $50,000 of MRR last quarter. Depending on how long businesses in our market continue to be impacted, there could be a potential for another $50,000 to $75,000 of MRR delayed in the second half of this year. Less than 5% of our revenue is from enterprise customers and 75% of those enterprises provide essential services. Thus, we expect any future impact from COVID to continue to be minimal. On the flip side, we continue to see increased demand from these critical industries, including healthcare customers, for communications infrastructure upgrades and builds as more providers turn…

Thanks, Kenny. good afternoon, everyone. I’ll start my comments today with a summary of a few developments that affect both our actual results this quarter and our outlook for the full year. First, Windstream received quarter approval of its Chapter 11 plan of reorganization in early May, and Uniti recently received the REIT and true lease opinions pertaining to the bifurcated ILEC and CLEC leases that were important conditions precedent to our settlement becoming effective, which we expect to occur later this summer. Accordingly, we are updating our guidance today for the first time to include our preliminary estimated impact from the settlement. For financial accounting purposes, we are generally required to identify material and separable components of our settlement agreements and record those at estimated fair values. Accordingly, in the second quarter, we recorded a $650 million litigation charge related to the settlement. The charge is an estimate and subject to change in future periods. We have excluded the charge from both adjusted EBITDA and AFFO. The asset purchase, stock issuance and other components of the settlement are not expected to be recorded until closing upon Windstream’s emergence and I’ll cover those more in my guidance comments. Additionally, we closed the sale of our U.S. tower business to Melody in June with proceeds of approximately $220 million and we closed on the sell to Macquarie of an ownership stake in the entity that controls the Bluebird PropCo generating $168 million in proceeds on July 1. Gains related to these transactions are also excluded from both adjusted EBITDA and AFFO. Collectively, these transactions significantly strengthened our balance sheet; secured our future Windstream cash flows and positioned Uniti very well for growth and enhancing value for our stakeholders going forward. With that introduction, please turn to Slide 8 and I’ll provide…

Thanks, Mark. Please turn to slide 13. We recently sold a portion of our ownership stake in the PropCo that controls our Midwest fiber network assets to Macquarie for approximately $168 million. The assets in PropCo include the fiber that was originally leased to Bluebird as part of the opco-PropCo transaction. Uniti will retain an ownership interest in the PropCo and will receive an incremental earn-out payment in 2023, if Bluebird achieves certain milestones. Macquarie and Bluebird are highly-valued partners and discussions remain ongoing to expand our relationship in the future. For example, we’re working to lease Bluebird additional fiber, Uniti owns in adjacent footprints, including strands we’re acquiring as part of the settlement. Importantly, this PropCo partnership also provides a blueprint for future potential PropCo partners and efficient capital sources to expand our real estate portfolio. In closing to reiterate, we are fortunate to operate in an infrastructure industry that should experience secular tailwinds for many years. When compared to other publicly-traded communications infrastructure, REITs as shown on slide 14, many of our fundamentals compare favorably, and we believe there’s a substantial valuation discount applied to uniti as a result of Windstream’s bankruptcy. with that uncertainty resolved with our high recurring revenue, low churn and proven lease-up model, along with ample liquidity, uniti is now poised for accelerated accretive, organic and inorganic growth. with that operator, we’re now ready to take questions.

Thank you, sir. [Operator Instructions] I show our first question comes from the line of Frank Louthan from Raymond James. Please go ahead.

Great. Thank you. Can you give us an idea on a couple of things; one, the additional capital that you can spend for Windstream? Have you begun any of that and how much of that do you expect to spend in 2020? And then can you give some color on the $650 million in costs with the settlement, is any of that to do with any of the payments you’re making the Windstream or is that just full legal cost and so forth? Thanks.

Mark, you want to take this?

Yes. So Frank, I’ll start. The amount of GCIs that we expect for Windstream this year is $108 million, that’s the estimate that is based on their most recent forecast in the bankruptcy proceedings that we have access to. So that’s what we have in, some of that would be in the – that would be primarily. We haven’t spent any of it so far. So, it would only be incurred after they verge from bankruptcy. Now, that number could change depending on what they’ve actually completed this year and the time when they emerge, but that’s our expectation based on the September 30 emergence date. and then on the $650 million, so as I said, in my remarks, a $650 million litigation charge, it’s really just an allocation of the total value as part of the Windstream settlement agreement. And so really, you take the different components. You take the overall settlement valuation, you take the different components and you try – you value each one of those separately using different methodologies that are appropriate for the circumstances. And that’s the number of that working with our auditors and working with outside valuation experts that we thought was the appropriate amount.

Okay, great. Thank you.

Sure. Thanks.

Thank you. Our next question comes from Phil Cusick from JPMorgan. Please go ahead.

Hi guys. Thanks. can you talk about the impact of COVID on the pipeline of potential deals, anything significant in terms of either accelerating, maybe companies that need money more urgently, or holding off?

Phil, it’s Kenny, I’ll take that. So, with respect to our business – our operating business, I think my prepared remarks hit that, and essentially, the impact has been minimal to both installs and bookings. And I’m happy to elaborate on that. but it’s been quite small and we expect that to continue going forward. But I think your question is probably related to M&A and if it’s not, you can correct me. but I don’t – it hasn’t had it – it hasn’t had really much of an impact, I think a lot of the businesses that we would be interested in as an acquirer, are very infrastructure heavy. And of course, that includes fiber predominantly fiber. And I think many of those businesses; certainly the private ones are seeing the same resiliency in their businesses as we are. So, I don’t think there’s any – there’s certainly no feeling of forced sellers out there. In fact, maybe, just the opposite, given the resiliency that these businesses are showing. So, I would say our – and look, our pipeline is not really dependent upon companies that are for sellers. Anyway, it’s not dependent upon companies that our bankers and go and run a process. It’s really much more of a bespoke proprietary pipeline anyway. And that’s always been the case and will continue to be going forward. So, we’ve not seen a pickup nor degradation, I would say.

Okay, thank you. And then second, on the dividend – we’re getting close to the time when you’re going to be sort of a normal company again, which is great. And I’m just curious your thoughts, because you’re not really being paid for your dividend now; or in the past, you weren’t being paid for your dividend. You’re going to need capital, if not this year or next year, which is great. but it sounds like there’s a lot of things you could do with your capital rather than pay it out. How do you think about the need or desire to be paying a bigger dividend over time?

Yes. So Phil, I’ll take that and Mark, you can add on if you want – but it’s a great question. And we actually think we’ve always been a normal company. We’ve just been through a period of time, where the rhetoric and the noise around our story has been – has clouded the fundamentals. And I – but I think your point is well taken. now that we’re about to emerge, it’s certainly a time that we think investors should refocus on our story and our fundamentals, and refocus on us as an investible story. So, I agree with your conclusion and with respect to the dividend, as we say, and the talking points are every quarter, our board evaluates it, and you can bet that we have debates at the board about capital allocation, the best way to spend our capital the best way to spend our cash flow. And I think as we’ve demonstrated, we’ve got ample liquidity and we continue to generate cash flow. We also have great opportunities to invest that capital organically. We’re showing the proof of our model, which is anchor – attractive anchor economics, but really, attractive lease-up successes. We’ve also proven that we’ve got great M&A opportunities, and those are going to continue. So, I think there’s always a healthy debate. I think it’s dependent upon a lot of different things. I can’t give you any more color than that, other than we’ve got lots of good opportunities to spend our capital on, and we’ll continue to evaluate the merits of a higher dividend going forward. Sure. Thank you. Our next question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead. Great. Thanks very much. Could even, I, I wonder if you could just get into the details of the partial sale to blue or blue bar pop code a little bit more what, what’s the percentages there and what was the rationale for going back and kind of doing an a second piece of this deal at this point, and then just more broadly in the past, the goal has been really to reduce your exposure to Windstream. And obviously the lease bifurcation helps with that, but, you know, do you have sort of percentage targets that you’re looking at over the next couple of years on that?

Thanks, Kenny.

Sure.

Thank you. Our next question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead.

Great. Thanks very much. Good evening. I wonder if you could just get into details with the partial sale of Bluebird PropCo a little bit more. What’s the percentages there and what was the rationale for going back and kind of doing in a second piece of this deal at this point and then just more broadly in the past, the goal has been really to reduce your exposure to Windstream. And obviously, the lease bifurcation helps with that, but do you have sort of percentage targets that you’re looking at over the next couple of years on that?

Yes. Simon, it’s Kenny, the rationale on the propco sale to Macquarie was partially that it was something that our partner was interested in doing and that was clear really from the outset. I think many infrastructure investors find the propco component of what we’re doing to be really interesting. there’s – it’s an investment in infrastructure with a highly predictable cash flow stream in a mission critical asset. And that’s – that is right in line with what a lot of the infrastructure funds want to do. And so my comments in my prepared remarks about this being a blueprint for future deals is very important, because we viewed it – we view it as that. in addition to it being something that our partner was interested in doing – our financial partner in this transaction was interested in doing and also, it’s good liquidity at a time when we’re beefing up the balance sheet and beefing up liquidity. So, those three things together are what led us to that conclusion and we’re very pleased with the outcome, very pleased with the valuation in our partners…

And what’s economics you have in it now?

We have not disclosed the split, Simon. but I would tell you that the majority of the – we sold the majority of the partnership and retained a minority stake.

Great. And then on the diversification?

Yes. So, our goal there, Simon continues to be to get Windstream below 50% as the next – as the next goal, which has not changed from what we were saying prior to the bankruptcy. Obviously, that’s been delayed a little bit a year or so because of the bankruptcy, but that continues to be our focus and we think that’s very much within our very much within our reach.

Okay, great. Thank you.

Sure.

Thank you. [Operator Instructions] Our next question comes from David Barden from Bank of America. Please go ahead.

Hey, guys. Thanks so much. So first, Kenny, I think last quarter, we talked about this Windstream settlement being kind of a one plus one equals three type of arrangement. But here, you’ve taken a $650 million charge-off to reflect the negatives. Could you kind of revisit maybe, the positives and how you think that they offset that $650 million charge estimate. and then second, Mark, you’ve given kind of this guidance that you don’t think you need to access the capital markets or raise new funds through 2021, could you kind of give us a sources and uses that backs that up, because the sources is pretty straightforward based on the business with the lease and the fiber business, but the uses have gone up a lot in terms of the capital contributions to Windstream the acquisition of the fiber, the $400 million endowment payments, et cetera. Could you kind of walk us through that and tell us how you get to that conclusion? Thank you.

So, David first, on the settlement charge, I think the first point to make there is that none of the economics of the settlement have changed. This is just how we’re accounting for it from a GAAP perspective and I would also point out that there’s not a lot of precedents for this situation, where we have this massive settlement agreement that was in the context of a bankruptcy and in context of us being sued, not only by our customer, but also by numerous creditors involved in the bankruptcy. So, it’s a highly unprecedented situation and as a result, I wouldn’t try to put it into a typical box that you may have seen in the past. So, it doesn’t change the economics. It’s somewhat unprecedented. In our chosen path of accounting for it here is relatively straight forward. We’re trying to show it in a way that puts it behind us as a one-time charge and keeps the focus for our investors going forward on the benefits of the transaction and our ability to utilize the valuable parts of the settlement, which to your – to the second part of your point, none of those have changed. In fact, as time has gone on in the past several months, I would say I feel better and better about the economics of the settlement to us. So – and they’re all on strategy for what we have pursued with other customers and what we were pursuing with – even with Windstream prior to the bankruptcy, including the majority of the capital here is a CapEx program, where the net dollar amount being invested from our perspective is about $1 billion in the GCI program. So, net of the incremental rent that we will get about a $1 billion spent…

Thank you.

Hey, David, this is Mark. I’ll try to address your question. Obviously, we haven’t given 2021 guidance yet, except for the comment I made regarding not needing to raise any capital or not having a capital raise requirement. But generally the things to consider here and that go into the calculus are, there’s the current liquidity, there’s the lower capital intensity that we’ve talked about it at the Uniti Fiber coming down. There’s also the $1 billion lease-up leasing pipeline at Uniti Leasing that Kenny talked about earlier, some of that we expect you to come to fruition in terms of actually curating revenue, but also as we’ve mentioned previously, I think Kenny mentioned in his remarks in many cases on those types of lease-up deals, in many cases, we also get substantial IRU upfront fees as well. So that also contributes to additional liquidity. And then there’s also – there’s also a transactions in 2021 they’re included in that $1 billion dollar pipeline, as well as others that we’re also contemplating that we’ll go into more detail when we get 2121 guidance. But those are the key things in addition to, what Kenny had already mentioned about the additional $30 million of EBITDA revenue that we’re getting from the Windstream contracts as well.

Got it. Thanks, Mark. So Kenny, if I could ask just one follow-up, I apologize. Relatively soon, I guess, September 30, based on your assumptions you have an investor that’s going to be one of your biggest, if not your – if not the biggest investor in your company. And that investor has been very critical of the fiber investment strategy of another company out there saying that the fiber investments have been subpar returns, and such have you had any conversations with that investor about their views on fiber investment and the kinds of fiber investments you should be making? Have they weighed in on any of that with you at all to this point?

Yes. So David, I don’t want to get into conversations that we may or may not have had with any particular investors. But I will say it’s a good question that I will say, we follow what this particular investor says very closely. We follow our competitors in the industry, and so we’re very familiar with what you’re referring to. And I would say, we think a lot of the observations made are correct. When I – when we look at them through the Uniti lens, I’m not commenting on anyone else’s business, but when we look at it through our lens, we think a lot of those observations are right, including a focus on return on capital and including a focus on the lease-up of those of networks, fiber networks. And from our perspective, it’s really one of the things that has led us to show a little more disclosure this quarter on the success of leasing up our network, including the 16 recent large builds that we’ve been talking about rather publicly. And the distinction I would point out is that in our markets, generally Tier 2 markets that are generally less competitive, we have always talked about the importance of targeting non-wireless customers in addition to wireless customers. So, we don’t have a small cell centric focused business. We never have. We’ve focused on wireless, whether it’s fiber-to-the-tower or small cells as an anchor customer, but then focused on all other customers to lease up the networks and to drive optimal return on capital. And you can see from our prepared remarks that generally we’re doing that. Roughly a quarter of our business is anchor, and then roughly three quarters of the revenue, three quarters of bookings, and three quarters of installs are on the second and third and fourth tenants. And I think that’s important in terms of driving return on capital and driving optimal economics. And I think another part, of what this particular investor was referring to, and not a Uniti specific, but referring to a comparison of fiber to towers. And obviously we know both of those businesses well, and I think we believe one of the things where fiber really compares very favorably to towers is the lease-up potential in fiber. We think is materially higher just because you’ve got a lot more capacity and because you’ve got a lot more customers to pursue and we’ve been demonstrating that success in our business. So long-winded to answer, David, sorry, but we’ve certainly been following that back and forth very closely.

Thank you. I’m showing no further questions in the queue. At this time, I’d like to turn the call back to Mr. Kenny Gunderman for closing remarks. Please go ahead, sir.

Thank you. I’d like to thank all of our employees for their continued dedication during these turbulent times, as well as our loyal customers and stakeholders, who we continue to work hard for every day. We appreciate your interest in Uniti and look forward to updating you further on future calls. Thank you for joining us today.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.