Uniti(UNIT) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets (March 31, 2024 vs. December 31, 2023) | Metric | March 31, 2024 (Thousands) | December 31, 2023 (Thousands) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Total Assets | $4,984,569 | $5,025,129 | | Total Liabilities | $7,462,052 | $7,509,250 | | Total Shareholders' Deficit | $(2,477,483) | $(2,484,121) | Condensed Consolidated Statements of Income (Loss) (Three Months Ended March 31, 2024 vs. 2023) | Metric | 2024 (Thousands) | 2023 (Thousands) | Change (YoY) | | :----------------------------------- | :--------------- | :--------------- | :----------- | | Total Revenues | $286,418 | $289,822 | $(3,404) | | Net Income (Loss) | $41,348 | $(19,211) | $60,559 | | Net Income (Loss) Attributable to Common Shareholders | $40,888 | $(19,454) | $60,342 | | Basic EPS | $0.17 | $(0.08) | $0.25 | | Diluted EPS | $0.16 | $(0.08) | $0.24 | Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2024 vs. 2023) | Metric | 2024 (Thousands) | 2023 (Thousands) | | :----------------------------------- | :--------------- | :--------------- | | Net Cash Provided by Operating Activities | $6,190 | $14,562 | | Net Cash Used in Investing Activities | $(87,587) | $(114,374) | | Net Cash Provided by Financing Activities | $69,875 | $126,355 | | Cash, Restricted Cash and Cash Equivalents at End of Period | $50,742 | $70,346 | Notes to Condensed Consolidated Financial Statements Provides detailed disclosures and explanations for the condensed consolidated financial statements 1. Organization and Description of Business The company operates as a REIT focused on communications infrastructure through an up-REIT structure - Uniti Group Inc is an independent, internally managed real estate investment trust (REIT) focused on acquiring, constructing, and leasing mission-critical communications infrastructure, primarily fiber optic, copper, and coaxial broadband networks and data centers[29] - The company operates through an "up-REIT" structure, holding substantially all assets via Uniti Group LP, where Uniti Group Inc is the sole general partner, owning approximately 99.96% of partnership interests as of March 31, 2024[30] 2. Basis of Presentation and Summary of Significant Accounting Policies Outlines the U.S. GAAP basis for the interim statements and highlights key accounting policies - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, and should be read in conjunction with the Annual Report on Form 10-K[33] - Restricted cash and cash equivalents represent funds that are restricted for an obligation under the ABS Loan Facility to maintain three months of interest and other expenses[34] - Revenue from Windstream Leases accounted for 68.8% and 66.0% of total revenue for the three months ended March 31, 2024 and 2023, respectively, highlighting a significant concentration of credit risk[36] 3. Revenues Details the disaggregation of total revenue and discusses contract liabilities and future performance obligations Total Revenue Disaggregation (Three Months Ended March 31, 2024 vs. 2023) | Revenue Stream | 2024 (Thousands) | 2023 (Thousands) | | :----------------------------------- | :--------------- | :--------------- | | Revenue from contracts with customers | $58,263 | $57,902 | | Revenue accounted for under leasing guidance | $228,155 | $231,920 | | Total Revenue | $286,418 | $289,822 | - Contract liabilities (deferred revenue) decreased from $11.1 million at December 31, 2023, to $9.5 million at March 31, 2024, with $1.3 million recognized as revenue during the quarter[43][45] - Future revenues from remaining performance obligations under ASC 606 totaled $627.1 million as of March 31, 2024, with an average remaining contract term of 3.3 years for invoiced contracts and 5.0 years for backlog[46] 4. Leases Discloses lease income from operating leases and details the underlying assets Lease Income - Operating Leases (Three Months Ended March 31) | Year | Amount (Thousands) | | :--- | :----------------- | | 2024 | $228,155 | | 2023 | $231,920 | - Total future minimum lease payments to be received under non-cancellable operating leases as of March 31, 2024, are $5.44 billion, with $4.6 billion relating to the Windstream Leases[48] Underlying Assets Under Operating Leases, Net (March 31, 2024 vs. December 31, 2023) | Asset Type | March 31, 2024 (Thousands) | December 31, 2023 (Thousands) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Fiber | $3,950,464 | $3,862,635 | | Copper | $3,978,023 | $3,974,410 | | Total Underlying Assets, Net | $2,991,249 | $2,938,605 | 5. Fair Value of Financial Instruments Reports the fair value of the company's outstanding debt and other financial instruments - The total principal balance of outstanding notes and other debt was $5.76 billion at March 31, 2024, with a fair value of $5.36 billion, based on Level 2 inputs[57] - The Settlement Payable to Windstream was $141.0 million as of March 31, 2024, recorded at fair value using Level 2 inputs based on discounted future cash flows[58] 6. Property, Plant and Equipment Details the composition of property, plant, and equipment and related depreciation expense Net Property, Plant and Equipment (March 31, 2024 vs. December 31, 2023) | Asset Type | March 31, 2024 (Thousands) | December 31, 2023 (Thousands) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Fiber | $4,941,964 | $4,835,623 | | Copper | $3,978,023 | $3,974,410 | | Total Net Property, Plant and Equipment | $4,042,485 | $3,982,069 | - Depreciation expense for the three months ended March 31, 2024, was $70.1 million, an increase from $69.3 million in the prior year[60] - The company completed the CableSouth Transaction on January 31, 2024, selling fiber assets and buying out a triple-net lease for $40.0 million cash, recording a $19 million gain on sale of real estate[62] 7. Derivative Instruments and Hedging Activities Describes the company's use of interest rate caps as cash flow hedges - On March 1, 2024, the Company entered into an interest rate cap agreement (ABS Loan Interest Rate Cap) with a notional value of $275.0 million, capping the 1-month SOFR at 4.50%, designated as a cash flow hedge[65] - The fair value of interest rate caps as a derivative asset was $1.845 million at March 31, 2024, compared to zero at December 31, 2023[66] - The company estimates that an additional $0.4 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense over the next twelve months[66] 8. Goodwill and Intangible Assets and Liabilities Reports the carrying amounts of goodwill and net intangible assets - Goodwill remained stable at $157.38 million for the Uniti Fiber segment as of March 31, 2024, with accumulated impairment charges of $515.498 million[73] Intangible Assets, Net (March 31, 2024 vs. December 31, 2023) | Asset Type | March 31, 2024 (Thousands) | December 31, 2023 (Thousands) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Customer lists | $258,866 | $264,562 | | Contracts | $29,552 | $31,193 | | Underlying Rights | $9,271 | $9,360 | | Total Intangible Assets, Net | $297,689 | $305,115 | - Amortization expense for intangible assets was $7.4 million for both the three months ended March 31, 2024 and 2023[76] 9. Notes and Other Debt Provides a detailed breakdown of the company's outstanding debt obligations Notes and Other Debt (March 31, 2024 vs. December 31, 2023) | Metric | March 31, 2024 (Thousands) | December 31, 2023 (Thousands) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Principal Amount | $5,757,442 | $5,617,442 | | Net of Discount/Costs | $5,660,696 | $5,523,579 | - On February 23, 2024, the company entered into an ABS Loan Agreement for a secured, multi-draw term loan facility of up to $350 million, with an initial drawing of $275 million on March 1, 2024[86] - The ABS Loan Facility bears interest at a floating rate (SOFR + 3.75% or Base Rate + 2.75%), with spreads increasing after 12 and 15 months, and SOFR interest expense capped at 4.50% via an interest rate cap[87] 10. Earnings Per Share Presents the calculation of basic and diluted earnings per share - Basic EPS for Q1 2024 was $0.17, up from $(0.08) in Q1 2023; Diluted EPS for Q1 2024 was $0.16, up from $(0.08) in Q1 2023[19][96] - The computation of EPS uses the two-class method for time-based restricted stock awards and the "if-converted" method for Exchangeable Notes and Convertible 2027 Notes[92][94] 11. Segment Information Details financial performance for the Uniti Leasing and Uniti Fiber operating segments - Uniti manages operations in two reportable segments: Uniti Leasing (REIT operations, leasing communications assets) and Uniti Fiber (infrastructure solutions, cell site backhaul, dark fiber)[98][99] Adjusted EBITDA by Segment (Three Months Ended March 31, 2024 vs. 2023) | Segment | 2024 (Thousands) | 2023 (Thousands) | | :---------------- | :--------------- | :--------------- | | Uniti Leasing | $210,677 | $204,966 | | Uniti Fiber | $23,838 | $33,674 | | Corporate | $(5,887) | $(7,439) | | Total Adjusted EBITDA | $228,628 | $231,201 | 12. Commitments and Contingencies Outlines significant financial commitments, primarily related to Windstream - Uniti is obligated to make $490.1 million in cash payments to Windstream in 20 consecutive quarterly installments, with $337.9 million paid as of March 31, 2024[105] - Uniti is committed to reimburse Windstream up to $1.75 billion for Growth Capital Improvements through 2029, with annual limits ($225M in 2024, $175M in 2025-2026, $125M in 2027-2029)[106] - As of March 31, 2024, Uniti reimbursed $131.3 million for Growth Capital Improvements during the quarter, bringing the total reimbursed to $952.4 million[106] 13. Accumulated Other Comprehensive Loss Reports changes in accumulated other comprehensive loss attributable to shareholders - Accumulated other comprehensive loss attributable to shareholders was $(167) thousand at March 31, 2024, compared to $0 at March 31, 2023, primarily due to changes in the fair value of derivative assets[109] 14. Subsequent Events Discloses significant events after the reporting period, including the proposed merger with Windstream - On May 3, 2024, Uniti entered into a Merger Agreement with Windstream Holdings II, LLC, to combine the companies, forming "New Uniti," with Uniti and Windstream stockholders expected to hold approximately 62% and 38% respectively[110][112] - The merger involves a $425 million cash payment to Windstream equityholders, new non-voting preferred stock with an 11% dividend rate, and warrants for New Uniti Common Stock[113] - The merger is expected to close in 2025, subject to stockholder and regulatory approvals, and Uniti will suspend dividend payments and cease to be a REIT post-merger[114][116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial performance, liquidity, and capital resources, including key business developments and non-GAAP measures 1. Overview Summarizes the company's business, operating segments, and recent significant developments - Uniti Group Inc is an independent, internally managed REIT focused on acquiring and constructing mission-critical communications infrastructure, operating through Uniti Leasing (REIT operations) and Uniti Fiber (infrastructure solutions)[118][123][124] - The company's proposed merger with Windstream aims to create an integrated telecommunications company, with Uniti and Windstream stockholders holding approximately 62% and 38% of New Uniti, respectively[127][129] - Uniti completed the CableSouth Transaction on January 31, 2024, selling fiber assets and buying out a triple-net lease for $40.0 million cash, resulting in a $19 million gain on sale of real estate[140] 2. Results of Operations Provides a detailed comparison of operating results for the current and prior year periods Total Revenues (Three Months Ended March 31, 2024 vs. 2023) | Segment | 2024 (Thousands) | 2023 (Thousands) | % of Total 2024 | % of Total 2023 | | :---------------- | :--------------- | :--------------- | :-------------- | :-------------- | | Uniti Leasing | $217,621 | $210,808 | 76.0% | 72.7% | | Uniti Fiber | $68,797 | $79,014 | 24.0% | 27.3% | | Total Revenues | $286,418 | $289,822 | 100.0% | 100.0% | - Net income increased significantly to $41.3 million in Q1 2024 from a net loss of $19.2 million in Q1 2023, primarily due to a decrease in interest expense and a gain on sale of real estate[143] - Uniti Fiber revenues decreased by $10.2 million, mainly due to a $10.1 million decrease in dark fiber and small cells revenue and a $2.7 million decrease in E-rate and government revenues, partially offset by a $4.3 million increase in Enterprise and wholesale revenues[158] - Interest expense, net, decreased by $25.7 million YoY, primarily attributable to a $32.3 million loss on extinguishment of debt recognized in Q1 2023 that did not recur in Q1 2024[160] 3. Non-GAAP Financial Measures Defines and reconciles non-GAAP financial measures such as EBITDA, FFO, and AFFO to their GAAP equivalents - The company uses non-GAAP measures like EBITDA, Adjusted EBITDA, FFO, and AFFO to supplement GAAP net income, believing they provide additional insights into operating performance for a REIT[174][175][178] Adjusted EBITDA (Three Months Ended March 31, 2024 vs. 2023) | Metric | 2024 (Thousands) | 2023 (Thousands) | | :---------------- | :--------------- | :--------------- | | EBITDA | $236,681 | $204,015 | | Adjusted EBITDA | $228,628 | $231,201 | AFFO Attributable to Common Shareholders (Three Months Ended March 31, 2024 vs. 2023) | Metric | 2024 (Thousands) | 2023 (Thousands) | | :----------------------------------- | :--------------- | :--------------- | | FFO attributable to common shareholders | $77,462 | $35,472 | | AFFO attributable to common shareholders | $87,626 | $107,393 | 4. Liquidity and Capital Resources Discusses the company's sources of liquidity, cash flows, and capital expenditure plans - Principal liquidity needs include funding operating expenses, meeting debt service obligations, funding investment activities, and making dividend distributions, alongside a $1.75 billion commitment for Growth Capital Improvements through 2029[182] - As of March 31, 2024, liquidity sources included $50.7 million cash, $427.0 million borrowing availability under the Revolving Credit Facility, and up to $75.0 million under the ABS Loan Facility[184] - Net cash provided by operating activities decreased to $6.2 million in Q1 2024 from $14.6 million in Q1 2023, primarily due to an increase in cash interest expense associated with secured notes[185] - Capital expenditures totaled $167.9 million in Q1 2024, including $131.3 million for Growth Capital Improvements, which are classified as success-based[200] - The company plans to fund the $425 million Merger Cash Consideration with up to $300 million of secured debt and cash on hand[196] Item 3. Quantitative and Qualitative Disclosures About Market Risk States that there have been no material changes in market risk disclosures from the Annual Report - There have been no material changes from the information reported under Item 7A of the Annual Report[209] Item 4. Controls and Procedures Reports that disclosure controls were ineffective due to a material weakness in internal control over financial reporting - Disclosure controls and procedures were not effective as of March 31, 2024, due to a material weakness in internal control over financial reporting[211][212] - The material weakness relates to ineffective controls over the annual goodwill impairment assessment, specifically a lack of sufficient personnel with appropriate technical expertise for determining the income tax impact[212] - Management is continuing to implement a remediation plan, expecting completion later in fiscal year 2024, and believes the Condensed Consolidated Financial Statements are prepared in accordance with US GAAP[213][215] PART II. OTHER INFORMATION Item 1. Legal Proceedings Refers to the financial statement notes for a description of legal proceedings - Legal proceedings are described in Note 12 - Commitments and Contingencies, and none are believed to be material[104][218] Item 1A. Risk Factors Details risks related to the proposed merger, business operations, REIT status, and common stock Risks Related to our Proposed Merger with Windstream Outlines risks associated with the successful completion and integration of the Windstream merger - A failure to complete the merger could cause irreparable reputational harm and negatively impact business, operations, earnings, financial results, and the trading and pricing of common stock[219] - Realizing expected benefits depends on successful and efficient integration, which is complex and time-consuming[221] - The merger agreement limits Uniti's ability to pursue alternatives and could discourage competing offers, with a potential termination fee of $55 million payable to Windstream under certain circumstances[228] - Uniti shareholders may recognize taxable gain or loss upon exchanging Uniti shares for New Uniti shares, even without receiving cash, depending on the final merger structure[231][232] - Post-merger, the Windstream Leases will become intercompany agreements, and New Uniti's performance will still depend on Windstream's ability to meet its lease obligations[234] Risks Related to our Business Describes operational risks including customer concentration, lease renewals, indebtedness, and internal controls - Uniti is highly dependent on Windstream for lease payments, which constitute a substantial portion of its revenues; a default by Windstream could materially adversely affect Uniti's business[236][237] - The initial term of the Windstream Leases expires on April 30, 2030; there's no assurance of renewal on commercially attractive terms[240][241] - Uniti's outstanding long-term indebtedness was approximately $5.8 billion as of March 31, 2024, with an additional $300 million expected for the Windstream merger, which could limit operational flexibility[242] - A material weakness in internal control over financial reporting related to goodwill impairment assessment could lead to material misstatements if not remediated[248] Risks Related to the Status of Uniti as a REIT Highlights risks associated with maintaining REIT qualification and its distribution requirements - If Uniti fails to qualify as a REIT, it would be subject to U.S. federal income tax as a regular corporation, reducing cash available for distributions and debt service[259][262] - REIT distribution requirements (at least 90% of taxable income annually) may force Uniti to borrow, sell assets, or reduce investments to make distributions[266][267] - A deterioration in Windstream's financial condition could adversely affect Uniti's ability to meet REIT asset and income tests, potentially leading to loss of REIT qualification[269][270] Risks Related to Our Common Stock Discusses risks affecting common stock, including dividend uncertainty and ownership restrictions - Uniti cannot guarantee future dividend payments, especially if the Windstream merger is completed and it ceases to be a REIT[274][276] - The market price and trading volume of common stock may fluctuate widely due to various factors, including the success of the Windstream merger[277] - Uniti's charter restricts stock ownership and transfer (e.g., 9.8% limit) to maintain REIT status, which could delay or prevent a change of control[278] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on shares withheld from employees to cover tax withholding obligations Shares Withheld for Tax Obligations (Q1 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | February 1, 2024 to February 29, 2024 | 281,521 | $5.59 | | Total | 281,521 | $5.59 | Item 3. Defaults Upon Senior Securities States that there were no defaults upon senior securities - None[282] Item 4. Mine Safety Disclosures States that this item is not applicable - Not Applicable[282] Item 5. Other Information Reports that no directors or officers adopted or terminated Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the three months ended March 31, 2024[282] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including key merger and loan agreements - Includes the Agreement and Plan of Merger, dated as of May 3, 2024, by and between Uniti Group Inc and Windstream Holdings II, LLC (Exhibit 2.1)[283] - Includes the Bridge Loan and Security Agreement, dated as of February 23, 2024 (Exhibit 10.1)[283] - Includes various Voting Agreement, Unitholder Agreement, and Form Stockholder Agreement related to the proposed merger[283][284] Signatures Signatures Contains the signatures of the authorized officers certifying the report - Signed by Paul E Bullington, Senior Vice President – Chief Financial Officer and Treasurer[288] - Signed by Travis T Black, Senior Vice President – Chief Accounting Officer[288]