Company Reports

After placing the stock under review following the Windstream merger announcement, we are relaunching coverage of Uniti with a $4 fair value estimate. The big decline from our previous Uniti fair value estimate of $12 is a function of stand-alone Uniti’s fractional level of equity relative to debt, the loss of real estate investment trust, or REIT, status, comparable debt leverage given the cash and preferred equity portions of the deal, and absent planned cost savings. It also reflects uncertainty around Windstream, especially the managed services business.

Uniti’s merger with Windstream will primarily result in Windstream’s business going public, while the bulk of Uniti disappears. About 70% of Uniti’s revenue and 90% of profits come from the firm’s master lease agreement with Windstream. This lease expense for Windstream—and lease revenue for Uniti—will disappear when the firms merge, leaving Windstream’s residential and enterprise telecom business and the relatively small amount of other fiber leasing revenue that Uniti currently has.

Along with its first-quarter results, which were uneventful as usual, Uniti announced an agreement to merge with Windstream, the company from which it was originally spun out. Consistent with Uniti’s modus operandi, the transaction appears to be financially complicated and opaque, which we suspect is behind the market’s negative reaction.

As usual, Uniti’s results were stable in the fourth quarter, and guidance for 2024 calls for more of the same. The growth rate can fluctuate from quarter to quarter, mostly as nonrecurring revenue arises. However, the Windstream master lease is still dominating the revenue base, and incremental fiber lease-ups are relatively small and steady. As a result, we see little realistic chance to deviate from low-single-digit growth each year as long as the Windstream lease is in place. That said, financial maneuvering could bring out some value in Uniti. We see the stock as undervalued relative to our unchanged $12 fair value estimate.

Uniti’s business is dominated by its triple-net leases, which results in little variability in operating results. The firm’s lease with Windstream makes up nearly 75% of total revenue and 90% of EBITDA. Following Windstream’s bankruptcy in 2019, Uniti and Windstream renegotiated the lease, which has an initial term that runs through 2030. The renegotiation leaves Uniti with very stable and predictable financial results, but the firm has sought to grow and diversify. We doubt the non-Windstream business can become large enough to move the needle.

Uniti’s third-quarter results were generally in line with our expectations, but the firm’s long-term capital structure continues to take center stage. Management indicated that it is pursuing asset-backed debt financing, similar to what Frontier Communications recently issued. In addition, management sees multiple opportunities to sell or possibly acquire assets. This discussion comes amid the backdrop of a CEO change at Windstream, by far Uniti’s largest customer. We expect Uniti will be able to navigate the capital markets and maintain a reasonably healthy Windstream relationship, and we are not changing our $12 fair value estimate.

Uniti missed FactSet consensus revenue and EBITDA estimates and said activity from some of its customers has slowed. The stock sold off 10% in response, but we think that’s an overreaction to surface-level optics. We are not changing our forecast or $12 fair value estimate. We think the biggest reason for the undervaluation is fear about the firm’s debt level and corporate structure, but we don’t expect Uniti to face financial pressures that force it to make unattractive decisions.

Uniti’s business is dominated by its triple-net leases, which results in little variability in operating results. The firm’s lease with Windstream makes up about 70% of total revenue and nearly 90% of EBITDA. Following Windstream’s bankruptcy in 2019, Uniti and Windstream renegotiated the lease, which has an initial term that runs through 2030. The renegotiation leaves Uniti with very stable and predictable financial results, but the firm has sought to grow and diversify.

While Uniti’s stock has gotten crushed in 2023, the firm reported a typical first quarter. With its Windstream lease still making up most of revenue and nearly 90% of EBITDA, Uniti’s financial results remain very predictable. There was little change to the firm’s level of investment or success in growing the non-Windstream side of the business, and the company took steps in the quarter to solidify its financial footing. While the stock had a nice pop following the results, we think the current price still reflects concern that the company will go bankrupt. We think Uniti will be able to meet its financial obligations and we are maintaining our $12 fair value estimate.

Although Uniti’s revenue came in at the low end of its fourth-quarter guidance range, we believe anyone disappointed with fourth-quarter results or the 2023 outlook has unrealistic expectations. In our view, the results Uniti delivered and foreshadowed for 2023 are indicative of its potential considering so much of its business consists of its stable lease with Windstream. We maintain that bullish commentary about adding new leases to the firm’s fiber footprint will be insufficient to really move the needle. However, we also think the market has become overly bearish, and considering the financing transactions that Uniti announced, we think fears of default would be overblown. We’re maintaining our $12 fair value estimate but see Uniti as a high-risk stock.

Uniti’s business is dominated by its triple-net leases, which results in little variability in operating results. The firm’s lease with Windstream makes up about 70% of total revenue and nearly 90% of EBITDA. Following Windstream’s bankruptcy in 2019, Uniti and Windstream renegotiated the lease, which has an initial term that runs through 2030. The renegotiation leaves Uniti with very stable and predictable financial results, but the firm has sought to grow and diversify.

Uniti continues operating its business well and progressing to provide more communications infrastructure services to more customers. However, as is always the case, the set payments from Windstream dominate the financial results. In our view, any company-specific concern that has contributed to the stock’s recent decline is related to its debt position rather than a deteriorating environment for its operations. With no material near-term maturities and stable EBITDA, we don’t expect financial difficulties for Uniti unless disputes with Windstream return, which we don’t expect. We’re not changing our forecast and are maintaining our $12 fair value estimate.

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

Uniti had a good second quarter, but in the context of its entire stodgy business, it isn’t overly meaningful, and we don’t believe the firm’s stock movement is much affected by quarterly results. We are not changing our $12 fair value estimate, and considering the stock’s decline since last quarter, we think the stock is undervalued at current levels. Nothing short of a big acquisition will be able to materially move the needle on Uniti’s slow-growing top line, which is dominated by the firm’s long-term and very predictable lease with Windstream. Management insinuated that the high-interest-rate environment will hinder potential opportunities for Uniti to acquire other assets, given the firm’s leverage profile.

Uniti continues to execute well and again had good results across the board in the first quarter. Business remains strong, and the firm is managing inflationary and supply chain pressures. For Uniti, the problem remains that its business is dominated by its Windstream lease, and any reasonable amount of success in the rest of its business doesn’t have a major impact on total results. Unless the firm makes a large deal or successfully sells itself—as management continues to promote how the market is undervaluing it relative to other acquisitions—we don’t expect significant events that will propel the stock higher from here. We’re maintaining our $12 fair value estimate and believe the firm is fairly valued.

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

Uniti reported a strong fourth quarter, and management said the fiber leasing environment is very strong. However, even with fourth-quarter results and 2022 guidance coming in slightly ahead of our expectations, the difference is minimal considering that more than 70% of revenue and 90% of EBITDA are essentially fixed due to Uniti's sale-leaseback agreements, with Windstream accounting for the bulk of that segment. Management once again highlighted the value it thinks Uniti’s network has, indicating that it has explored ways to unlock value, including splitting up the company. We don’t expect much change to the status quo for its business and are maintaining our $12 fair value estimate.

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

With its lease renegotiation with Windstream (which makes up more than half of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, sustaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.