All set? Great. I'm John Greenberg, Managing Director in Investment Banking at Morgan Stanley, here with Kenny Gunderman, CEO of Uniti. Quick disclosures for important disclosures: please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Kenny, thanks for joining us.
Jonathan, it's good to be here. Thanks for having us.
Absolutely. 2024 was the year of getting the band back together. 2025, the reunion tour kicks off. Can you tell us a little bit about the prep that's been going on in terms of integration?
Yeah, very excited about it. We're now, I guess, nine months—oh gosh, more than that—about ten months post-signing of our merger with Windstream. Very excited about it. You know, Uniti's strategy has been very simple: focused on owning fiber infrastructure and selling it with owners' economics, with a national wholesale business, and focusing on regions of the country where we have a right to win from an enterprise perspective, where we have better network than our competitors. We have boots on the ground and a brand. That strategy has worked very well for us. You know, we've got one of the best-performing fiber businesses in the country, I believe, growing at 5%, 6%, 7% a year top line, improving margins, improving capital intensity, again, just driving those owners' economics onto the model. The Windstream merger really accelerates all those strategies for us.
Number one, it's recombining our fiber footprint with Windstream's wholesale business. We're really doubling down on that national wholesale strategy, which we're big fans of. It gives us the ability to benefit from all the use cases of fiber, which are many and plentiful and growing every day. We're very excited about that. We definitely are excited about recombining our network with the Kinetic operating business. We're going to have, post the transaction, one of the largest independent fiber-to-the-home providers left in the country that's not in the hands of one of the big three or four. We're really going to drive owners' economics onto that network. Importantly, we're targeting markets around the country where we have a right to win.
The Tier two and tier three markets in the Kinetic footprint, where we're either the first or the early builders of fiber. Really analogous to our Uniti Fiber business, where we're building fiber in Tier two and Tier three markets, we're now going to be building fiber into residential markets where we have the right to win for many years into the future. It accelerates our strategy in a lot of ways. To your point about what the priorities are right now, Jonathan, first of all, very focused on getting out and telling the story. Windstream had been private for a number of years, and the equity market is still a little bit cold on that story. It is very important for us to get out there and tell the story in coordination with Windstream, and we've been doing that.
Secondly, very focused on simplifying the capital structure. A big part of the rationale for this transaction is to simplify our stories. You know, we've had a journey, but we're simplifying that story. We told investors on day one we were going to work to collapse the debt silos. Fast forwarding nine months, we've gotten the consents required to do that. Post-closing of the deal, we have a very clear path to collapse the debt silos and eliminate that complicated MLA structure that we've had historically. Thirdly, very focused on integration and doing all the things we need to do to prepare ourselves for legal day one, but also really to reap the synergy value of the transaction. We talked about this when we announced it, but one of the things we're most excited about is bringing the Windstream business on net.
There is not only owners' economics associated with that, there is not only the ability to control the customer experiences associated with that, but there is also a lot of savings because you are moving off a third-party network onto an own network. That is really one of the biggest cost-saving synergy buckets that we have. Very excited about how that is coming together. Fourthly, and most importantly, or equally importantly, we are really focused on the Kinetic build plan. Kinetic, again, one of the largest independent fiber-to-the-home platforms left, and we are on a journey to really build as much fiber into that footprint as we possibly can. We talked about it when we announced the transaction, about how this was going to free up more capital on the margin to invest in that business.
We have certainly begun delivering on that, and we are deep into the throes of coming out with a more holistic build plan. I am very excited about how all that is coming together.
You mentioned Windstream has been private, and part of this is about telling that story to the equity market. Let's talk about drilling to Kinetic for a moment. One of the largest independent platforms that is out there from a fiber-to-the-home perspective, I think it's a million and a half, give or take, today. You've talked about path to two, then to three and a half to four. Can you talk about the progression there and what you see the timeline to achieving?
Yeah, first of all, Kinetic is an incumbent ILEC, incumbent local exchange carrier. It is not an overbuilder. We think that is important in this space. As an incumbent, you have an advantage relative to overbuilders because you have an embedded network and you have boots on the ground. In Windstream's case, over the past ten years, despite not owning the network, there is a lot of capital that has been invested into that network to build fiber to the node out into these relatively rural markets, building a lot of backhaul into these markets. There is a terrific jumping-off point based on that roughly $2.5 billion of investment over the past 10 years to push fiber to the node. There is now a terrific jumping-off point to build that last mile of fiber into the home.
It's one of the reasons why Windstream has talked historically, and we've certainly validated this, that they're building at what we think is an industry-leading $650 to $700 per passing compared to overbuilders that are well north of $1,000. Even some incumbents are well north of $1,000 because of that historical investment. We think there's a terrific platform to build more off of that. Prior to the combination, Windstream had a stated build plan to get to 1.9 million homes of their 4.5 million footprint. We announced when we announced the transaction that we were going to expand that by a million homes. We were comfortable saying at that time that we could get to 2.9 million homes. To your point, Brian, we're already at about a million seven at Windstream is.
By the end of 2025, we'll be at around 2 million, maybe a little more than 2 million. Last week on our earnings call, we announced we're expanding that target even further to up to 3.5 million targeted homes. Again, because of our growing confidence in the analysis that we're doing and the work that we're doing in coordination with Windstream to look at the footprint, prioritize the markets, and to target areas where we know we can build economically and build economically in a manner that we've got a right to win for many years into the future with good returns. When you think about that 3.5 million on a 4.5 million footprint, and that 4.5 million is plus or minus depending upon whether you're building a little bit out of franchise or not, regardless, that's a substantial amount of fiber coverage.
Very, very excited about that. Not just excited about what it does for us operationally and how it sets us up for future success of low to mid-single-digit growth on the top line, but also improving margins, declining capital intensity, all the things we've seen in Uniti's business over the years. Also, the strategic optionality that that creates is definitely a big part of the transaction for us. We have been on a journey. A substantial amount of investment has been made so far, and we think there is a terrific opportunity to continue making accretive investments on a go-forward basis.
You mentioned the rural geographies plus the incumbent nature of it. It should give you a strong competitive advantage. Are you seeing overbuild risk in those markets?
Not really. And Jonathan, you've been in this industry a long time. You know, when Uniti was first started a few years ago and we started getting into the fiber operating business, people often characterized us as the Zayo of the Tier two and three markets because our strategy was to target those markets, those urban markets and those less trafficked wholesale routes that had less competition. There just wasn't fiber there. And our thesis was there may be a little bit less growth in those markets, but there would be substantially less competition, and the demographics would eventually catch up to a point where people would need that fiber. They would demand that fiber, whether it be for towers or small cells or enterprises or even in some cases government entities. And we've seen that in spades at Uniti.
Targeting those tier two and tier three markets has worked really well for us. One of the reasons why we're super excited about Kinetic, to your point, is in addition to being one of the largest independent fiber, largest independent fiber-to-the-home providers left, it's also one of the most rural. These markets are tier two and tier three. There is less competition. We just believe philosophically, if we build there first or early, we're going to outflank any potential competition. That's proven to be true. Less than 15% of the footprint is overbuilt with an overbuilder today. That has held constant over the past number of years as Windstream has invested in that business.
In our view, if we have the capital and the wherewithal and the mission to continue building aggressively, we will continue to keep that competition out of the market, especially if we're building effectively and we've got an effective go-to-market, which we think we do. We're willing to embrace alternative technologies. I mean, there's certainly going to be elements of the footprint where we may not be able to get to them with fiber either immediately or ever economically. We need to be able to embrace alternative technologies to provide regulatory services where needed and to just provide customers with 100 meg and above services where we can't quite get to one gig in the near term. Finally, we've got to be willing to embrace subsidies. Government subsidies are, in my view, a necessary evil at times.
In this case, with programs like BEAD and others that are specifically designed to get high-speed broadband out to parts of the country that are not currently covered, we're embracing that. I mean, in our view, that's like an anchor customer if we can use those dollars to expand our footprint in an economically attractive way. All that to say, very excited about the competitive dynamic in those markets. It's exactly what we've seen for the past ten years at Uniti, and I think we're going to be able to really exploit that on a go-forward basis.
On the subsidy point, given the rural nature, I imagine a lot of your markets set up nicely for subsidies. Not sure if you've heard we have a new administration in Washington. Any early word yet on how the BEAD program is going to be implemented?
Yeah, lots of early word on that. We have heard about the new administration. Don't really have a definitive point of view on what it's going to look like, but it's starting to really come into focus. We're excited about what we're seeing. You know, Brendan Carr has made it clear that we believe the FCC, the administration embrace broadband, the need for broadband, and the need to get broadband to as many people as possible. Therefore, the BEAD program is going to persist. We also believe that the administration is embracing alternative technologies. Like I just said, I think there is a limit to the investment dollars to make fiber economical. There are certain nether regions of anybody's network that just don't make sense for fiber.
If we can embrace using subsidies to provide alternative technologies where that incremental dollar does not make sense for fiber, but it gives us the ability to cover our footprint, we fully embrace that. We are excited about where that is going directionally. There is work to be done on where you draw the dividing lines on when it is economical to build fiber and when it is not. We are working on that, I think, collaboratively with both the administration and the various regulators around the country. Also, as part of that, regulatory relief on certain obligations that have become somewhat antiquated around the industry are a big part of all of that. I just had the opportunity to listen to John Stankey speak earlier today here at your conference.
AT&T is a leader on advocating for the industry towards a more rational point of view on regulatory obligations and where it makes sense economically. We are a fast follower on all of that. I am very excited about the administration's apparent willingness to embrace those themes. I think, whereas we were making progress before, I think over the coming two, three, four years, we are going to make a lot more progress in that regard.
Last piece on the merger, and then we'll shift topics. Any update on timing in terms of close?
Yeah, so a couple of weeks ago, we just announced or we gave an update. We now have 16 of the 18 PUC and other approvals needed. We are well down the path on that. Our shareholder vote is now scheduled for April the 2nd. Our S4 is active finally. The shareholder vote's on track. Feel good about where that's headed based on all the feedback we're getting so far. We originally stated that we thought the deal would close in the second half of 2025. Still feel very good about that. We recently said we think we could close as early as July. We are well on track, if not ahead of schedule on closing.
Great. Shifting gears, you mentioned others have called you the Zayo of the tier two, tier three markets. There has been a lot of buzz given AI around hyperscale activity. What are you seeing? What does this mean for Uniti?
Yeah, my second favorite topic these days besides fiber-to-the-home, or maybe my first, depending on the audience. Very excited about it. The first thing I always tell people is do not conflate hyperscaler spending with AI spending. They are certainly related, but they are different. The hyperscaler are spending hundreds of billions of dollars on infrastructure investment, and roughly half of that is still being spent on cloud-based investment and the other half on AI. There are another whole subset of companies, including nation-states, which are investing in AI, independent of the hyperscaler. There is an entire ecosystem developing on investing in AI. The hyperscaler are a huge component of that. Together, the incremental TAM that that is creating for fiber businesses like Uniti Fiber are just terrific.
A couple of weeks ago we announced that we believe that AI TAM alone, not the incremental hyperscaler spend, but just the AI TAM alone, was $300 billion today. Roughly $50 billion of that is being spent on digital infrastructure, and probably about $15 billion of that is being spent on fiber infrastructure. That did not exist 24 months ago, right? We were selling to hyperscaler, but not nearly at the pace that we are today and other fiber businesses are today. Almost out of nowhere, we have seen a $15 billion to $20 billion TAM develop. We think over the next four or five years, that is going to grow by another three to four to five times. A terrific opportunity for us. On our own, we are capturing a really nice share of that.
On a combined basis with Windstream's wholesale business, we think we have an opportunity to capture even more. As I said at the outset, the merger here is really accelerating our strategy in that regard as well.
A lot of these hyperscale-led deals more recently, actually for decades at this point, have been structured on the IRU basis where they're providing a lot of upfront capital. It helps fund the build, but then there's less of a recurring revenue. Are those desirable projects for you? How do you think about incorporating more recurring revenue over time into the business?
Yeah, I think that a lot of that's correct, Jonathan. I think as we've tried to remind investors, there's not one cookie-cutter type hyperscaler deal. They're different. We're selling waves. We're selling dark fiber IRUs. We're selling dark fiber leases. We're certainly building new fiber on a greenfield basis, increasing amounts of that. When you look at the range of transactions that we and other fiber companies are doing with hyperscaler, they vary and they're very attractive, ranging from virtually no capital with very, very high margins to capital required to build greenfield fiber. I think that's really to the heart of your question. On those projects, we've always taken a very disciplined approach to any greenfield fiber.
For those of you who are listening who know our story know that in 2017 and 2018, we had a very heavy build cycle where we were building greenfield fiber for wireless carriers in particular, fiber to the tower, small cells. We were building those projects at 5 to 10% anchor yields with a pathway to get to above 10% yields on a lease-up basis. When you look back, we've tracked ourselves and reported this every quarter to investors that we're now well in excess of those anchor yields on those projects. We're now approaching nearly 30% cash flow yields on those anchor projects. We've taken that same disciplined approach and applied it to the hyperscaler transactions where there are upfront capital dollars required to build. We're targeting those same initial anchor yields with a pathway to lease-up.
Ultimately, we reported last week or two weeks ago that we're nearly approaching 20% blended yields on those projects, inclusive of lease-up and the anchor customer. We are well down the path of executing on that anchor lease-up strategy. Our philosophy is you do not always get to choose what the customer wants. Sometimes they prefer an upfront IRU. They prefer an NRC, which by definition is going to mean a lower recurring revenue stream. When we can, we prefer the recurring revenue stream for sure. If we need an NRC or if we need an IRU to get a transaction, then we get that MRR eventually through lease-up. The NRCs and the IRUs help offset capital required. Economically, you can get to the same place.
We recently reported earnings again, and our net CapEx last quarter was less than $1 million because of these NRCs. On a go-forward basis, I think you're going to continue to see that. NRCs are lumpy. IRUs are lumpy. Over an extended period of time, we've seen our capital intensity come down, and we think that's going to continue because of this trend towards higher NRCs.
Have you seen the competitive intensity on the enterprise side ramp up? We talked about the benefits of Kinetic being in those rural markets, having less competition by definition. Do you see the same on the enterprise side, and is that playing to your advantage?
Yes and no. I mean, I did the math before I came down here earlier. I've been around the fiber industry for 27 years, probably a little bit longer than you, Jonathan, but similar. We have seen the competitive dynamics change at different times. We have had periods in the fiber industry where capital was a little bit irrational. Companies were building fiber without customers, building it with the demand to come. A lot of overbuilding. There were periods of time where that happened. I think over the years, partially through bankruptcies and just general rationalization, the industry has learned that that is not a good path forward. There needs to be a much more rational approach from a competitive point of view. We have seen that evolve in the past four or five years in a really positive way.
From our perspective in our metro markets and even generally on our long-haul routes, we do not see a lot of overbuilding. Frankly, we are not overbuilding others either. Just generally, that has been a theme happening over the years. When we take that and we apply it to the AI opportunity and the hyperscaler in particular, we continue to see the same relatively rational approach. I have said it before, but I can count on less than one hand the number of hyperscaler opportunities that we really wanted to win and did not because of competition. That is a really small number compared to the opportunity that we have seen. It is partly a reflection of our disciplined approach towards what we are targeting. It is also a reflection, I think, of a much more disciplined industry. I hope that continues.
I mean, we've seen some overbuilding in the fiber-to-the-home space for sure. When it comes to enterprise fiber and wholesale fiber, I think it's a substantially more rational industry than it has been in the past.
Windstream has a wholesale business. Talk about some of the benefits in combining that with your existing business.
Yeah, great question. Another reason we're excited about the transaction, as I mentioned earlier, I think Uniti's wholesale business today is national in nature, and we're largely selling dark fiber. We've started to light a handful of routes for our Waves product, which is a very small growing product for Uniti. We also have a growing set of customers that are signed up to master lease agreements or master service agreements. Anyone in the industry will tell you that getting those agreements in place is what really elongates a sales cycle. Those take six, nine, 12 months to get into place. Once you do, then you're off to the races selling to a customer.
I say that because when you take that and then you compare that to Windstream's business, on the other hand, Windstream's wholesale business has a lot less fiber because they've been largely off-net using our network and others' networks. We are bringing together our network with Windstream's much more mature wholesale business. They have a lit national network. We are going to be able to use that lit national network and partner that with our dark fiber capabilities. That is a terrific synergy. Windstream's customer relationships are longer dated than ours. Whereas we have been putting in place MLAs and making good progress on that and putting up nice wins in our business as a result, Windstream has over 40 MLAs in place with hyperscaler today, for example. We have four.
Bringing together all of those embedded MLAs and customer relationships with our fiber network and our dark fiber capabilities and their ability to sell Waves is just going to be a terrific combination. I am very excited about it. We have already been collaborating where we can. I think going to industry shows and getting in front of customers together in some cases. I think we have got a terrific opportunity set ahead of us.
We've spoken at length around the operating benefits of the merger, their financial benefits that are clear as well. Can you talk about some of the progress you've made on the balance sheet side of things and how you've prepped yourself for runway with the maturities?
Yeah. We often have talked about the dis-synergy that existed in the prior relationship between Uniti and Windstream because of our unique MLA relationship. Part of that dis-synergy was reflected in our cost of capital, whether it was in the bond market or the equity market. One of the strong views we had was that that particular dis-synergy would begin to dissipate with this transaction, meaning that as we simplify the story, we collapse the debt structures, we would attract a greater level of interest for both the bond market and the equity market. That has proven to be very true in the debt market so far. Our cost of debt has declined materially from the time we announced the transaction, 500-plus basis point improvement. We have seen almost a step function improvement in how our bonds have traded, which is what we expected.
I think that as a result, you've seen both Uniti and Windstream raise capital since the time of the announcement to today to push out maturities, to put capital on the balance sheet to help fund the expanded build that we have in front of us. I am very excited about that. I think when you overlay the fact that we're now issuers in the ABS market at Uniti, we're the first commercial fiber business to issue an ABS, very successful transaction, somewhere between 10 to 15 times oversubscribed, raised money at less than 6.5% when our last secured debt deal we did was at 10.25%. Material improvement in cost of capital there.
We could not be more excited about the ABS opportunity that is in front of us, not only at Uniti Fiber, but when you overlay Kinetic on top of that, we have a tremendous amount of capacity in that market. We are going to continue to be issuers in the high-yield market and the ABS market. We have a great opportunity to finance the business in an accretive way on a go-forward basis. We are excited about that.
Safe to say more ABS in the future.
I think so, but not at the expense of still issuing in the high-yield market. We think there's a terrific opportunity to issue at attractive levels in the high-yield market too. I think you'll see a nice blend between the two.
Great. Maybe shifting to strategic activity and thoughts around that. You do have multiple somewhat discreet business units that are going to be coming together, but you are pairing the services back together with the infrastructure. How do you think about flexibility with respect to each of your assets and segments?
Yeah, that's actually my favorite topic ahead of AI and fiber to the home. Look, we were very candid about this too when we announced the rationale of the transaction, that this transaction would present the combined business with substantial strategic flexibility. Look, go back and read the proxy that's active now about all the various strategic conversations the two companies had independently. Challenges existed because of the unique structure. We felt that by bringing the two businesses together, we would have a substantially better opportunity to pursue strategic opportunities on a combined basis. Since that time, we've seen the theme of fiber to the home consolidation really in spades. We think that's going to continue. We've certainly seen the emergence in a big way of the hyperscaler AI theme, which we think adds value and increasing interest in the wholesale fiber space.
We think the industry themes and winds are blowing in our direction with respect to the assets that we have under the roof. You look at fiber to the home and you look at wholesale fiber, there is a lot of synergy there between those businesses. Having backhaul to the remote markets is really a valuable thing. We definitely think there is synergy in our strategy of targeting tier two and tier three markets. That said, those businesses could be independent in the future or in other people's hands. If I sit here today and guess, I think it is more likely than not that they are in other people's hands or independent. We are really leaning into that.
We have from the beginning, and our history at Uniti is that when we have very valuable assets that are valued more highly by others, we're not afraid to sell things. We're not afraid to lean into that. That's going to be our perspective on a go-forward basis. In the meantime, however, we're going to focus on what we can control, which is execution and building. I often get asked, will we be acquisitive as a new company? My answer is sure if we're presented with an opportunity that makes a lot of sense. The reality is today we've got the ability to invest the marginal dollar in a very accretive fiber-to-the-home business and a very accretive commercial and wholesale fiber business. Very focused on internal execution, investing those marginal dollars on building.
We are absolutely going to be leaning into M&A in general on a go-forward basis.
These are capital-intensive businesses. ABS potentially solves some of that and the ability to raise additional capital against it. Would you say that capital raising from an equity perspective is on the table at one or all of the businesses combined?
Yes and no. I think our ability to deploy capital, we have many opportunities. I mean, today we're at 1.6-1.7 million homes at Kinetic. We have a plan to get up to 3.5. There's a lot of investment that needs to happen in order for that to happen. Those are very accretive investments. There's a tried-and-true plan there. Our go-to-market is we're executing very well right now. There's a lot of opportunity there. Same on the Uniti Fiber side. I mean, as we talked about, the returns that we're driving on the incremental fiber investments are attractive. To me, how we finance that just becomes a corporate finance question right from there. Right now we've got terrific opportunities to finance it in a debt market like we talked about before.
That does not mean we will not see joint venture opportunities or other sort of creative opportunities to accelerate that investment. When we see those opportunities, we will assess those. Our inclination right now is towards simplicity. Keep it simple, number one. Number two, I do not see any need for equity raises to finance the business. I think we have got a clear path in the debt market through ABS and the traditional high-yield market. This business is going to start kicking off some real cash flow in the coming years. I think between those two, we are going to have ample opportunities to finance the business outside of the equity market.
This is a new chapter in the Uniti story and opportunity to reset of sorts. For investors that are listening, what is the sales pitch? Why invest in Uniti in 2025 and beyond?
Yeah, look, I think I mentioned the dis-synergies earlier. I think those existed in terms of the relatively complicated story between Uniti and Windstream prior to the announcement of the transaction. Since then, I think that we announced we were derating and eliminating the dividend. We are sort of in this transition period away from being a REIT to more of an operating business. That is causing or has caused some turnover in the shareholder base. The fact that Windstream was private has caused a scenario where we have the opportunity to go out and educate people on the Windstream business, but the equity market is still somewhat cold on that story. A number of our research analysts are restricted from writing on us right now. That is why you are up here. Your research analyst is restricted.
There is this period of time right now where I think the technicals in our story outweigh the fundamentals. The more we get closer to closing and the more we are able to educate the market on the story, it is going to become more of a fundamental-driven story. Look, my pitch to investors is pick up the proxy, pick up the earnings results, the 10-Ks, do your work now, invest now before this becomes more of a fundamental story. I do think when that happens, people are going to see there is a tremendous disconnect between where we are valued today and what we think the intrinsic value of this business really is.
That's great. I'm confident there are exciting things to come. Kenny, thanks for joining us.
Thank you, Jonathan.