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Chances are, the data making up this article has traveled through thousands of miles of data cables to get to your screen. Data makes its way to just about any point in the world through an incredibly vast network of fiber optics, copper cables, and wireless towers.
A big chunk of this network, and the rights to the real estate it runs through, is owned by real estate investment trusts (REITs) known as infrastructure REITs. One such infrastructure REIT that’s worth looking at by anyone interested in this type of investment is Uniti Group Inc. (NASDAQ: UNIT).
Uniti Group company profile
Uniti Group Inc. is an infrastructure REIT that owns a data communications network made up of roughly 123,000 miles of fiber optics, which has a total of 6.9 million miles of fiber strands. This fiber optics network spans across the United States, with its highest concentration in the eastern half of the country. The REIT also owns 2,300 small cells, which are basically small cell towers that provide higher speed within a shorter range.
Uniti Group was formed in 2015 as a spinoff from Windstream Holdings, a data communications network provider. Uniti was originally formed under the name Communication Sales and Leasing. Through the spinoff, the REIT acquired 64,000 route miles of fiber and 235,000 route miles of copper that it leased back to Windstream as its sole tenant on a 15-year triple net lease.
The following year, the REIT also acquired 32 wireless towers from Windstream and began expanding its infrastructure by acquiring other communications network providers. Communication Sales and Leasing then changed its name to Uniti Group Inc. in 2017 and began trading on NASDAQ under the symbol UNIT on February 27, 2017.
Uniti Group news
Less than four years after Uniti was formed, Windstream lost a lawsuit brought on by Aurelius Capital Management and U.S. National Bank Association claiming that the REIT spinoff put them in default on senior bonds the company had issued. With the added debt brought on by this $310.46 million judgment, Windstream filed Chapter 11 bankruptcy just days later in February 2019.
If Uniti’s largest tenant filing bankruptcy wasn’t bad enough, some of Windstream’s creditors argued that the lease between Uniti and Windstream wasn’t a true lease but a financing agreement disguised as a lease. This would mean Windstream wouldn’t be allowed to make the monthly payments of $54 million to Uniti any longer.
This resulted in a lawsuit between Windstream and Uniti, which they eventually settled. While the settlement was expensive to Uniti and its investors, it may have created more opportunity for the REIT moving forward.
The painful part of the settlement for Uniti was that it agreed to make quarterly payments of $400 million to Windstream for five years, as well as sell over 38.6 million common shares in the REIT to certain Windstream creditors and pay the $244.5 million of proceeds to Windstream.
However, it also included Windstream transferring certain fiber rights contracts to Uniti and its rights to use 1.8 million fiber strand miles that were being underutilized, as well as Uniti buying $40 million worth of fiber assets from Windstream that were generating $8 million in annual EBITDA. The settlement also involved Uniti agreeing to invest up to $1.75 billion in growth capital improvements to be leased to Windstream at an annual base rent equal to 8% of the amount invested.
While an 8% return on capital invested into Windstream is nice, the real opportunity is in marketing the same routes built for Windstream to new tenants. This has worked out well for the company in the past where it has built off of an anchor route it was already collecting revenue on and earned much higher margins.
Think of it as a retail developer building a property to lease to an anchor tenant, but building it as a strip center to lease additional space to other retailers. The total cost per square foot on the development goes down by adding these additional lease spaces, so the developer’s return is higher when the spaces get leased up.
In 2020, Uniti invested in anchor builds at a 7% yield and made additional investments to lease up the route to other tenants for an expected 19% yield. The blended yield on the whole route is expected to be 14%.
Uniti Group stock price
Uniti's stock price dropped quickly in February 2019 when Windstream filed for bankruptcy. Its shares went from averaging about $19 for the 12 months leading up Windstream's bankruptcy filing to dropping to $9.23 over the course of just seven days.
While Uniti's share price has been slowly recovering, the company still went into 2021 almost 28% below where it was going into 2019. On March 22, 2021, the REIT's shares were trading at $11.72, which has it priced at an AFFO multiple of only 6.8x. This leaves a lot of upside potential if it's able to lease up its underutilized fiber.
With the infrastructure already in place, any revenue from new leases will go almost entirely straight to the bottom line. With $740 million in revenue already under contract and $1 billion in contract value in the pipeline, Uniti could see some significant increases in its EBITDA over the next few years.
We also can't forget that 5G is continuing to be rolled out to more areas across the United States. Even though 5G is wireless, it still requires fiber to bring data to and from the towers. As 5G becomes more widely used, the demand for Uniti’s fiber network is likely to increase further.
In terms of dividends, the current yield is at about 5%, even though payments are only a quarter of what they were in 2018. After three and a half years of making quarterly dividend payments of $0.60 per share, it had to cut that to $0.05 in 2019 once it was facing the possible loss of $650 million in revenue. The company increased the quarterly payments to $0.15 in 2020 and has maintained that payment since.
Even though revenue is improving, Uniti is still dealing with another expensive consequence of Windstream's bankruptcy: painfully high interest rates on debt. Having its main breadwinner going through bankruptcy made Uniti a higher risk and the capital it needed to raise to settle its lawsuit quite a bit more expensive.
Fortunately, with Windstream out of bankruptcy and the lawsuit behind it, Uniti has already been able to start replacing that debt at lower rates.
As revenue stabilizes over the next year and the company replaces its high-interest debt, there should be plenty of additional funds available to get dividends closer to its previous amounts. If so, Uniti could be a great income producer for investors who buy shares at today's prices.
The bottom line on Uniti Group
This REIT definitely has a lot of upside potential with an increasing demand for reliable data networks. However, this is also dependent on a lot of favorable activity over the next few years. Also, even if the company can utilize its dark fiber strands by leasing them to more companies, it will still be heavily reliant on Windstream.
If everything does go as planned, investors could stand to do very well with Uniti. If you have a moderate risk tolerance and want to make a bet on this REIT, you'll want to keep a close eye on the data communications industry as a whole, as well as a very close eye on the company it's still highly dependent on.
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