There we go. Green.
All right, well, thank you everybody for joining us. My name is David Barden. I am the communications infrastructure and telecommunications analyst with Bank of America, and I'm very pleased to be here to host the president and CEO of Uniti, Kenny Gunderman, for yet another year here at NAREIT. You know, it's, it's been a bit of a journey. You know, a number of years ago, Uniti once called Communications Sales and Leasing was created through an opco/propco spinout, which created Windstream and ultimately Uniti.
And there's been a lot of news of late, we're gonna talk about here, very recently, about the recombination of that. What I wanna start off with is a year ago, we were sitting in this very room, and there was worry that Uniti could cut the dividend, could de-REIT. And Kenny, you gave an impassioned articulation of all the reasons why not being a REIT was a terrible idea.
And that Uniti would never do that. And yet, here we are, you've now announced that you will de-REIT, you've announced that you will no longer pay a dividend, and that you're merging now with your largest tenant, Windstream. So could you talk us through how you got there?
Yeah, of course. And David, as always, thanks for doing this with us. It's always fun, and it's great to be at NAREIT, and this hopefully will not be our last year. Yeah, we've defended the REIT structure in the past for a variety of reasons. Number one, because we were never not investing in our business to pay a dividend. We were always investing heavily in our fiber business and still paying a dividend. That was always the case. Secondly, there were always material tax savings to being a REIT for us. We talked about $1 billion plus of NPV tax savings from being a REIT.
And thirdly, we talked about the strategic value of being a fiber REIT in particular, because it's very hard to become a fiber REIT. It was historically, it is today, and we thought that was a very valuable thing to have. We also said we were not dogmatic about any corporate or tax structures. We were gonna do what was right for shareholders, and we were also saying along the way that we were evaluating transformative transactions, which almost by definition mean everything means that everything's on the table in terms of looking at corporate structures and tax structures.
So today, we're we've recently announced merging with our largest tenant, Windstream, which will require us to de-REIT because we don't have enough REIT-able income at the corporate level. Number two, we do have internal uses of capital that are very value accretive. So Kinetic is a big part of this new business.
It's a terrific copper-to-fiber conversion story, and there's an expansive copper footprint to be overbuilt with fiber. There's sort of a green land grab going on in fiber to the home, and so deploying that capital sooner rather than later to build fiber is very value accretive. I mean, people are paying 20x plus cash flow for fiber-to-the-home businesses today, so deploying that capital into the business is a better use of our capital than paying a dividend.
Secondly, ironically, we're saving corporate taxes by de-REITing, because we're gonna get a step up at Uniti by de-REITing, which will give us a tax shield at the corporate level, and so we will probably be paying some corporate taxes on a go-forward basis, but not a material amount of corporate taxes. And so again, just letting the numbers drive our decision making, it sort of led to that decision. And lastly, and importantly, we are likely to retain some REIT status within the corporate entity somewhere, because we will have the ability to do that at the Uniti Fiber level, and we do think that has a lot of strategic value on a go-forward basis.
So net-net, we think we've held true to what we said last year in terms of our defense and rationale around the REIT structure and applying that to this current deal, which has tremendous strategic value, which I'm sure we're gonna get into some of that, David. But the deal itself has tremendous strategic value and fitting that strategic value into the new corporate structure and the new tax structure, we think this is a terrific outcome for Uniti shareholders.
So, you know, the Uniti business as it stands today is really kind of two businesses. It's a sale leasing business, with Windstream being the largest tenant, and then there's a fiber business that you've built in second and third tier markets, mostly a wholesale business for wireless carriers and others. So the deal is not planning to close for another year.
Mm-hmm.
But you're not gonna be paying the dividend. What's Uniti gonna do with the money that you're gonna save? Is there anything that's gonna change in the next year at Uniti as a standalone company?
So, not within Uniti. We're gonna continue investing in our fiber business, and continue growing that business at mid-single-digit top line, continued margin improvement, continued capital intensity coming down. But a big part of something that was very important to us when we announced this transaction and planned for this transaction was for the business plan on a consolidated basis to be fully funded.
So leverage out of the gate is gonna be around 4.8, 4.9, 5x, depending on what you include in the numerator and denominator. And over the next two years, the two companies on a combined basis are gonna be burning cash flow, so 2024 and 2025, the companies will be burning cash flow. And then in 2026, the combined company will turn cash flow positive.
And that's inclusive of an expanded build, of the fiber business at Kinetic. So over 2024 and 2025, we wanted to make sure that we had liquidity, ample liquidity on day one, in the bank, that funded that cash burn for the next two years. And so we have that with a nice cushion, and part of that is inclusive of the cash flow that the business will be generating in the next two years. So having that fully funded plan with a slightly higher leverage than what we want, gives us the ability to have confidence that leverage is gonna tick down over time. It may tick up a little bit, but then tick down over time.
We have ample liquidity, and we've got a fully funded business plan, with plans to expand that build, which is also part of the fully funded, plan. So, that's the use of capital. It goes back to what I was saying earlier, you know, looking at, our capital allocation policy and, and sacrificing that dividend, but in lieu of investing in very value-accretive, fiber builds.
So when we get to the end, and I'm assuming you don't see any reason regulatory-wise, on a statewide basis, you know, how hard you guys worked to get this thing taken apart, putting it back together, you don't see any kind of reasons why that's gonna be a problem?
No, and, you know, we've talked about the deal closing in the second half of 2025, which a lot of people are questioning that. You know, why should it take so long? And that's a long period of time for us to really do the work on the story. And our answer is no. There's really no issues that we see on regulatory approval, whether that be at the federal level or the state level. So we're really just leaving ourselves a cushion on timing because of timing-related issues.
We operate in almost 50 states, and so that means interacting with close to 50 PUCs, which means you can't always predict the timing of this. But looking at prior transactions, I think anywhere from 9 to 18 months is kind of the norm, and that's, that's really what we think.
So when we do get to the end of this road, the new business is gonna be the kind of consumer Windstream Kinetic overbuilding copper with fiber opportunity.
Mm-hmm.
And then it will be the, the other stuff. And roughly at Windstream, it's a little bit more than 50% is the consumer business, and the other 45% is wholesale, enterprise, other things, managed services. And Uniti will bring the, the second, third-tier market fiber business to the, to the table. And I think that there's a philosophical conversation happening.
Right now, in another room, Crown Castle's explaining why towers and fibers maybe belong together or maybe they don't belong together, and why maybe each other stronger, or maybe they'd be stronger separately. As you think about the new company that you know, that Uniti Windstream will be, why should all that stuff be together? Do you think it's optimal that it stays together, or does the Uniti Windstream have to go through another evolution to maximize value for everybody?
Yeah, great questions, and I you know, for those of you who know Uniti, we had a tower business at one point, and I thought then and think now that there's terrific synergies to having towers and fiber together. But we sold our tower business at what I still think is the industry, at the highest multiple in the industry at 35 times cash flow. So that convinced us to move away from the tower business. So yeah, on a pro forma basis, there will be three business units. There will be Kinetic, which is a copper-to-fiber conversion story, very analogous to Frontier, as you mentioned, and that will be roughly 50% of the EBITDA.
Then there will be the fiber infrastructure business, which will be the Uniti Fiber business combined with Windstream's wholesale business, and that will represent close to 30% of the EBITDA. And then the third piece will be a managed services business, which I'll come back to. That piece is non-core to the fiber-to-the strategy going forward and to the fiber infrastructure business. Kinetic and the fiber infrastructure businesses, those strategies are very similar.
It's building fiber in smaller markets and getting there first or early, and if you do that, you have a less competitive environment, and you dissuade competitors from coming into those markets because the economics just don't work. And so over the past seven to eight years, we've been demonstrating that at Uniti repeatedly.
Our fiber business is focused on tier two and tier three markets from a wholesale and enterprise perspective only, and we've been growing that business consistently, consistent margin improvement, consistent capital intensity coming down. We've kept competitors out of our markets, and we've talked about our markets as having terrific growth runways. So we've got a very underutilized fiber network, and our market share in a lot of these markets is very low, sub 10%, sub 5%, after years and years of lease-up activity in those markets.
When you apply that strategy to Kinetic, it's very, very, very similar to what Kinetic's doing today. They're building fiber in markets where there's either no fiber competition or very little fiber competition. They're going into those markets with anywhere from 25% to 30% initial penetration and then progressively leasing up those markets after the fact. When you compare the economics of the two, they're actually quite comparable. A very similar strategy, very similar economics, and so together, those two businesses create a terrific, unique story. It's not just a fiber to the home story, or it's not just a commercial fiber story.
It's a consolidated, tier two, tier three-focused enterprise, residential and wholesale fiber story that I think is unique relative to any of the public stories that are out there today. And there's synergy with those two companies being together. When you think about fiber to the home providers today, they're spending tens of millions of dollars, hundreds of millions of dollars procuring backhaul, which is basically inter-city fiber connectivity to support their markets.
And this new business, and it's been a terrific opportunity for Uniti on the wholesale side, because a lot of those companies are customers of ours. But this business, on a combined basis, will have the synergy of not having to procure backhaul in the same way that a lot of these fiber-to-the-home providers are today. So there is nice synergy there. With all of that said, those two businesses could exist separate from each other, and so I think one of the-
I've said it repeatedly, but one of the reasons for doing this transaction is not only the strategic value that I just talked about, but also it does create M&A optionality for us down the road, and that could mean separating those businesses.
Do you want to talk about managed services?
Oh, so managed services is. There's a part of Windstream's business today that they characterize as their enterprise business. We're calling it managed services, just to distinguish it from Uniti's enterprise business. It's a terrific product-based business. It's UCaaS, it's SASE, it's security, it's SD-WAN. It's a business that's analogous to a Masergy or to a Nitel. These are businesses that have been bought and sold for 10x+ multiples over the past number of years, and it's connected with an IP connectivity business. So on a combined basis, it's about $1 billion of revenue.
So it's a good business, but it is not on owned fiber infrastructure, and it's a complicated cloud-based product business that's just not core to the fiber infrastructure strategy that we talked about. So it's a business that we plan to and Windstream currently is today, managing it largely for cash, and it could be an interesting divestiture candidate down the road.
So I wanna get back to that, the pieces, parts, and kind of what that might mean for the equity story. But, you know, when we think about long-haul fiber, you know, the cost to build a mile between New York and Washington, D.C., is gonna be kind of the same as between Savannah and Tybee Island, right? You know, it's just not gonna be all that different. But I think that there's a strong sense in the market that building a mile of fiber to the home, which passes 100 homes, versus 1 mile that passes 10 homes, is a very different economic proposition.
Mm-hmm.
So why is it that building fiber to the home in second and third markets is a good idea? Because for the longest time, the big guys, Verizon, AT&T, told us that was a terrible idea.
Yeah, and Verizon and AT&T, and now T-Mobile, are spending $ billions investing in fiber to the home, and that's notable. The three biggest wireless carriers in the country, also three of the largest fixed wireless providers in the country, are investing $ billions in the very business that we're talking about here. So we're trying to skate to where the puck's going, and I think they are too. And I think the economic model works for a number of reasons here. So first of all, Kinetic is spending roughly 650 per home per passing, which is one of the leading costs in the industry.
Most people are spending $1,000+ per home, and the reason for that is Kinetic has invested heavily in that fiber network over the past few years, so building fiber to the node, which means building. Well, it means building all the way out to a node near the home, but not going all the way to the home. And so over the past number of years, Kinetic's already spent $500 million doing that. So that last mile of fiber to be built is cheaper than building all the way back to the core.
Secondly, Kinetic has their own internal construction team, so almost 100% of their construction is done by internal resources, which gives roughly a 20% to 30% cost savings relative to people who outsource. Kinetic is building cheaper than others. To your point, David, yeah, I think building inter-city fiber is roughly the same, regardless of whether you're building from big cities or connecting small cities. But I would argue that tearing up streets in Greenbrier, Arkansas, versus tearing up streets in Chicago or New York City, it's a heck of a lot cheaper in Greenbrier, Arkansas. I can promise you.
So when you apply your analogy to local markets, it is cheaper to build in smaller local markets, especially if you have the relationships and the boots on the ground in those markets where you might know personally the permitting people or the mayor, certainly.
But I would also say, and this is, you know, comparing today versus 5 years ago or 10 years ago, there are use cases for fiber to the home that actually justify having 500 or 1 Gb, or 2 or 5 Gb of speed, whereas 5 years ago or 10 years ago, there just weren't. And so, today, people are actually willing to pay a fair price for those speeds because they have use cases, whether it be for them or their kids or the entire family, and that was just not the case 5 or 10 years ago.
So when you're building a model, looking at the fiber to the home, honestly, the input cost is actually the least important variable.
Right.
The two variables that really matter are the penetration and the ARPU.
Right.
What has to happen for you to be successful in that return proposition?
So today, Kinetic underwrites to roughly 20% IRRs on their models, and those models are outperforming relative to initial expectations. I think that the inputs on. If you look at ARPU, I talked about when Kinetic's cost to build being one of the leading in the industry. Windstream's ARPU is close to $90, which is also one of the best in the industry. I think when you're in the smaller markets, you have a little bit of pricing power. You don't wanna overuse that or exploit it, but you do have a little bit of pricing power because you do have less competition.
In about 15% of Kinetic's markets, there's a second fiber provider. So 85% of Kinetic's markets have one fiber provider. That's Kinetic. So a little bit of pricing power. So ARPU is a positive. And with respect to penetration, as I said, initial penetrations have been very positive. Later cohorts at Kinetic have been more positive than the earlier cohorts, and the lease-up and the progression of additional subscribers in those markets has also been on track. And so when you take all those things together with a very predictable build cost, the models are working.
And I think that the proof of all that will be: When will the business grow? When will EBITDA start to grow, and when will capital intensity come down? And we forecast all those things to happen. So, I think I'm not gonna get into multiyear guidance beyond what we've said previously, but we're highly confident that the business is gonna grow and the capital intensity is gonna come down.
So this is a question you used to get a lot, which is how BEAD would impact your business. This is the Biden infrastructure funding, funding $42 billion coming in to support broadband builds in underserved and unserved markets. And your answer for Uniti was always: "Well, you know, it's gonna, it's gonna affect our customers, and maybe we'll have a side benefit."
But now, you know, you're squarely in the middle of that. So when you talk about free cash flow positive and all these things and the things that could make you successful, is that anticipating something from BEAD, or is BEAD something incremental that we're gonna have to really think about being incremental to the model in 2025, 2026?
Yeah. So back to your earlier question about the economics of building in rural, more rural markets. Another benefit of being in those markets is there tends to be a federal or state subsidy to help you build in those markets. So today, for example, Kinetic is executing on hundreds of millions of dollars of RDOF funding and public-private partnership funding to build into these markets. It's one of the, it's gets talked about in telecom a lot, but it's one of the remaining, last remaining bipartisan issues about getting broadband out to the masses. It's something that's consistently supported, and BEAD is a by-product of that.
This is billions of dollars of federal and state funding that will be used to help build into more rural markets, whether it's served or underserved or non-served markets. Kinetic is. We expect Kinetic to be a large participant in that program and a large beneficiary of that program, and it's one of the reasons why we're doing this transaction today, because we want to have the company, on a combined basis, be able to exploit that program in a positive way versus separate. We think we'll be able to participate in a bigger way in that program on a combined basis.
So to your question, yes, we absolutely intend to be active there. And when we talk about Kinetic's current build plan, they're targeting roughly building fiber to about 45% of the entire footprint. On a combined basis, we're targeting close to 60% coverage of the fiber footprint, and a big contributor to that will be BEAD. And so for those of you who don't know how that program works, it's really essentially federal and state dollars subsidizing build to more rural markets, and then there's a matching portion of it coming from us.
And we believe that the majority of the subsidy funds will come in first, and the matching portion will come in later. And so when we think about our fully funded plan, even up to 1 million homes, that additional spending comes in 2026 and 2027 and beyond when the business is cash flow positive, so that incremental spending will be from cash flow generated in the business.
So before we kind of get into the equity story, the valuation stuff, real quick, you mentioned about how AT&T is investing in fiber, about how T-Mobile now just recently announced it's investing in fiber. You know, and there's this big talk about convergence. What role does wireless play in your success, if any?
Well, first of all, I think another benefit of the combined business is that you've got a fiber business that has a big wholesale business, a successful enterprise business, and this residential fiber business, and so we've always talked about being diversified across different use cases. So wireless is terrific for us because the wireless carriers are terrific customers of ours. They have been for years and will continue to be going forward, and so when people ask me about fixed wireless, I always say, "Well, it's a tale of two cities."
It may hurt Kinetic in some ways, but it's a terrific opportunity for additional backhaul for us to sell in our wholesale business. So we want the wireless carriers to be successful, and we think that they will be on a go-forward basis. With respect to wireless as part of a bundle, personally, I'm not sold on that. I think one of the great things about telecom is that, we're all consumers of it. You all have iPhones and iPads, you all use your, you have your personal home email, and your internet, and all these different things, so you can judge for yourself.
Do you really care whether you have two separate bills for wireless or for your home internet? Most of us are on auto pay anyway. And so personally, I don't care, and so when I talk to people, just anecdotally, I get a lot of the same. So I don't, I don't view the bundle as an opportunity to necessarily sell more, and I think it's more of a maybe, maybe, minimizing churn, as opposed to selling more.
But that's a debate that's raged in telecom for years and will persist for many years going forward. So for us, on a go-forward basis, Kinetic does have an MVNO with AT&T. That's not been talked about much publicly, but there is one in place, and that will continue. But I don't see it being a huge driver of the business.
So obviously, you know, Uniti stock, for a long time was, you know, really a dividend story. Now it's not a dividend story, but now it's an investment story. Maybe it's a divestment story. Can you kind of walk us through, if you have the patience, like, what's your vision for what the equity story is on the other side of this merger?
Well, for starters, Uniti's better off with this deal with versus without it. It's de-leveraging, it's free cash flow positive. We're replacing a complicated and hard to understand MLA relationship and renewal math with... That's going away. We're cleaning up the story from an operational point of view. It's now better, easier to understand. There's real comps to point to, and as I've said, there's more M and A optionality for the businesses on a combined basis versus separately.
But very importantly, we're basically replacing MLA revenue with operating revenue that, in my view, has the opportunity for multiple appreciation, whereas the MLA revenue that we historically had was perpetually discounted by the market, in my view. And despite our efforts on educating the market as to why we disagreed, we just never got over that hump. And so now we have the ability to replace that revenue with essentially the surrogate cash flow from Windstream and get a fiber multiple arbitrage on that business.
So that's a big part of the equity story, is buying into the fact that when you look at how this business is valued today at a 6x multiple, I would argue that is a ridiculously low and attractive entry point if you really value fiber and you want to invest in an attractive digital infrastructure business. And so that's number one, and number two, we need the ability to get out and tell the story. Windstream has been private, and so getting more information out there is necessary, and the time to close is long. So we know this is a journey. This is not something that's gonna happen overnight.
And I think ultimately, it leads to execution. So if we get out, we tell the story, we convince folks that there's a multiple arbitrage, which we vehemently, vehemently believe that there is, we then have to execute. And one of the things over the years that has been frustrating to me is that we have executed at Uniti in our core business, but it's been hard to get the attention of the market to focus on that. And so we're gonna continue to execute, and I'm highly confident that Kinetic is gonna continue to execute as well, and when you put all those things together, I think the equity story is gonna work.
You did not rule out the possibility that on the far side of getting to free cash flow positive, there might be a dividend again?
There absolutely could be a dividend again. We've suspended it. We have not, we have not said there will never be a dividend. So we, we have always been fans of it. Our, our board has always been fans of it, and so there could be that, that point in the future when we, we institute a dividend.
You're gonna be the CEO of the new company?
Yes.
What's your tenure?
I've said it many times, but I'm a shareholder first. I own close to 4 million shares, which I think makes me a top 10 shareholder. So I care about the company and shareholder value first, as opposed to my job. And so I'm in this role as long as I'm the right person for it, and as soon as that changes, I'll be the first person to raise my hand and move on to the next thing.
Kenny, thanks so much for joining us today. I really appreciate it.
David, thank you.
Thank you, everybody.