Uniti Group Inc. (UNIT, $13.90): “Gust of Wind Behind Uniti”
By: Alexander
Mastalish, AIM Student at Marquette University
Summary
•Uniti Group Inc (NASDAQ: UNIT) is a real estate investment trust (REIT) focused around infrastructure in
the communications industry. The company operates through 5 segments: Leasing,
Fiber Infrastructure, Towers, Consumer CLEC, and Corporate. The company is
entering their 8th year of business and was founded in February
2014. Uniti Group is headquartered in Little Rock, Arkansas and is led by President,
CEO, and Director Kenny Gunderman.
- The
original recommendation and pitch placed a high level of importance upon
the company’s focus on fiber infrastructure and the separation from the Windstream
Holdings bankruptcy situation.
- The
global fiber optic industry is forecasted to continue the COVID-19 pandemic
growth with a projected CAGR of 11.3% over the next 5 years.
- Windstream
Holdings was a major part of Uniti’s business. However, since the initial
recommendation, Windstream Holdings closed out their Chapter 11 bankruptcy
in September of 2021. During this process, Uniti agreed to make a substantial
investment into assets related to Windstream CLEC and ILEC properties
outside of initial lease terms. This debt crisis seems to be behind the company
and benefits both Uniti and Windstream.
- With
uncertainty surrounding the Windstream bankruptcy situation being resolved
and steady growth from the fiber optic industry, Uniti still has involving
its commitment to its dividend policy.
Key
points: Uniti group has emerged through the
bankruptcy of Windstream. Windstream makes up a considerable portion of Uniti’s
revenue share, and the bankruptcy resolution allowed the company to get through
that time positively. During this time, hedge fund and other senior creditors
took control of Windstream and extinguished ~$4 billion in debt. As noted in the
initial pitch and updates, the resolution of Windstream’s bankruptcy was
critical to Uniti as Windstream accounts for nearly 70% of Uniti’s revenue.
Recently,
no major acquisitions have been announced, however a reported acquisition and
takeover of Uniti and Windstream has been discussed and reached negotiation stages
before stalling. Zayo Group LLC, which is owned by the digital infrastructure
firm Digital Bridge Group Inc and private equity firm EQT, was looking to
acquire Uniti for ~$3.5 billion, or ~$15 per share. Discussions began in June
of 2021, and it has appeared to have stalled in the later stages of October.
The
interest in acquiring Uniti Group and Windstream by private equity and hedge
funds can be seen as a positive. Although Uniti and Windstream carry
considerable amounts of debt (around $7 billion total), discussion of an acquisition
indicates the growth potential of Uniti in the industry going forward.
Finally,
the official pitch had dividend commitment as a driver. While Uniti has
remained constant in payment and seen slight increases in growth, the firm has
seen a decrease in dividend payment since previous 5-year marks. With increased
debt levels, a stipulation in the governing of their notes prohibits them from
paying cash dividends in excess of 90% of the firm’s REIT taxable income
without consideration for the shareholder.
What
has the stock done lately?
The
firm has seen growth through strong market share positioning in a relatively
growing industry. The demand for infrastructure for the 5G is strong, and Uniti
has enough market share to capitalize on this. No new major acquisitions have
taken place, however the negotiations between Uniti Group and Zayo Group LLC
helped fuel a 18.98% rally for UNIT share price. The company continued with
their issuance of a $0.15 cash dividend.
Past
Year Performance: Uniti Group Inc has seen
rapid growth in share price over the past year, seeing a 43.89% YoY growth. As
of earnings reported for Q3 on November 4th, the firm has seen their
leverage ratio decrease to 5.76x based on Net Debt to Annualized Adjusted EBITDA.
The firm also had $266.7 million in consolidated revenues and an AFFO of $0.43
per diluted common share, an increase of 19% YoY to Q3 2020.
My
Takeaway
Since the settlement of the
Windstream bankruptcy situation, Uniti Group has seen growth and a new start.
Windstream continues to provide most of the Uniti’s revenue (~70%) while
remaining stable in industry market share. Uniti Group is failing to reduce
their dependence upon Windstream from a total % of their revenue, however
management is confident that this is feasible and achievable. The firm’s negotiations
and discussions with being sold to Zayo brought increased attention and retail
investor support. Due to these factors, Uniti Group Inc. remains a hold inside
of the AIM Small Cap Portfolio.
