Item 1. Financial Statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”) was incorporated in the state of Maryland on September 4, 2014. We are an independent internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers. We manage our operations focused on our two primary lines of business: Uniti Fiber and Uniti Leasing.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner, with the only significant difference between the financial position and results of operations of the Operating Partnership and its subsidiaries compared to the consolidated financial position and consolidated results of operations of Uniti is that the results for the Operating Partnership and its subsidiaries do not include Uniti’s Talk America Services (“Talk America”) business, the wind down of which was substantially completed as of the end of the second quarter of 2020. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of March 31, 2022, we are the sole general partner of the Operating Partnership and own approximately 99.8% of the partnership interests in the Operating Partnership.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying Condensed Consolidated Financial Statements include all accounts of the Company and its wholly-owned and/or controlled subsidiaries, including the Operating Partnership. Under the Accounting Standards Codification 810, Consolidation (“ASC 810”), the Operating Partnership is considered a variable interest entity and is consolidated in the Condensed Consolidated Financial Statements of Uniti Group Inc. because the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 25, 2022, as amended by Amendment No. 1 thereto filed on Form 10-K/A with the SEC on March 22, 2022 (the “Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our Annual Report.
Concentration of Credit Risks—Prior to September 2020, we were party to a long-term exclusive triple-net lease (the “Master Lease”) with Windstream Holdings, Inc. (together with Windstream Holdings II, LLC, its successor in interest, and its subsidiaries,
10
Table of Contents
“Windstream”) pursuant to which a substantial portion of our real property was leased to Windstream and from which a substantial portion of our leasing revenues were derived. On September 18, 2020, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases (collectively, the “Windstream Leases”), which amended and restated the Master Lease in its entirety. Revenue under the Windstream Leases provided 66.9% and 66.3% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay dividends and service debt if Windstream were to default under the Windstream Leases or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us.
Prior to its emergence from bankruptcy on September 21, 2020, Windstream was a publicly traded company subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Windstream’s historic filings through their quarter ended June 30, 2020 can be found at www.sec.gov. Additionally, the Windstream audited financial statements as of December 31, 2021, and for the year ended December 31, 2021, as of December 31, 2020 and for the period from September 22, 2020 to December 31, 2020 and for the period from January 1, 2020 to September 21, 2020 and for the year ended December 31, 2019 are included as an exhibit to our Annual Report. On September 22, 2020, Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream filings are not incorporated by reference in this Quarterly Report on Form 10-Q.
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing credit ratings of Windstream by nationally recognized credit agencies, (ii) reviewing the financial statements of Windstream that are required to be delivered to us pursuant to the Windstream Leases, (iii) monitoring news reports regarding Windstream and its business, (iv) conducting research to ascertain industry trends potentially affecting Windstream, (v) monitoring Windstream’s compliance with the terms of the Windstream Leases and (vi) monitoring the timeliness of its payments under the Windstream Leases.
As of the date of this Quarterly Report on Form 10-Q, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. Both ratings remain current as of the date of this filing. In order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream.
Reclassifications—Certain prior year asset and liability categories and related amounts have been reclassified to conform with current year presentation.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange (“ASU 2021-04”). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted ASU 2021-04 effective January 1, 2022, and there was no impact on our consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments (“ASU 2021-05”), which requires lessors to classify leases as operating leases if they (1) have variable lease payments that do not depend on a reference index or rate, and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. ASU 2021-05 is effective for all entities which have previously adopted Topic 842 for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted ASU 2021-05 effective January 1, 2022, and there was no impact on our consolidated financial statements.
11
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Note 3. Revenues
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Thousands) |
|
2022 |
|
|
2021 |
|
Revenue disaggregated by revenue stream |
|
|
|
|
|
|
|
|
Revenue from contracts with customers |
|
|
|
|
|
|
|
|
Fiber Infrastructure |
|
|
|
|
|
|
|
|
Lit backhaul |
|
$ |
19,438 |
|
|
$ |
25,044 |
|
Enterprise and wholesale |
|
|
20,935 |
|
|
|
21,000 |
|
E-Rate and government |
|
|
14,276 |
|
|
|
19,364 |
|
Other |
|
|
661 |
|
|
|
816 |
|
Fiber Infrastructure |
|
$ |
55,310 |
|
|
$ |
66,224 |
|
Leasing |
|
|
1,159 |
|
|
|
1,167 |
|
Total revenue from contracts with customers |
|
|
56,469 |
|
|
|
67,391 |
|
Revenue accounted for under leasing guidance |
|
|
|
|
|
|
|
|
Leasing |
|
|
203,482 |
|
|
|
193,769 |
|
Fiber Infrastructure |
|
|
18,083 |
|
|
|
11,426 |
|
Total revenue accounted for under leasing guidance |
|
|
221,565 |
|
|
|
205,195 |
|
Total revenue |
|
$ |
278,034 |
|
|
$ |
272,586 |
|
At March 31, 2022, and December 31, 2021, lease receivables were $19.0 million and $19.4 million, respectively, and receivables from contracts with customers were $19.3 million and $14.7 million, respectively.
Contract Assets (Unbilled Revenue) and Liabilities (Deferred Revenue)
Contract assets primarily consist of unbilled construction revenue where we are utilizing our costs incurred as the measure of progress of satisfying our performance obligation. Contract assets are reported within accounts receivable, net on our Condensed Consolidated Balance Sheet. When the contract price is invoiced, the related unbilled receivable is reclassified to trade accounts receivable, where the balance will be settled upon the collection of the invoiced amount. Contract liabilities are generally comprised of upfront fees charged to the customer for the cost of establishing the necessary components of the Company’s network prior to the commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are deferred until such time the customer accepts the Company’s network and then are recognized as service revenues ratably over a period in which substantive services required under the revenue arrangement are expected to be performed, which is the initial term of the arrangement. During the three months ended March 31, 2022, we recognized revenues of $1.8 million which was included in the December 31, 2021 contract liabilities balance.
The following table provides information about contract assets and contract liabilities accounted for under ASC 606.
(Thousands) |
|
Contract Assets |
|
|
Contract Liabilities |
|
Balance at December 31, 2021 |
|
$ |
4,066 |
|
|
$ |
9,099 |
|
Balance at March 31, 2022 |
|
$ |
159 |
|
|
$ |
9,869 |
|
Transaction Price Allocated to Remaining Performance Obligations
Performance obligations within contracts to stand ready to provide services are typically satisfied over time or as those services are provided. Contract liabilities primarily relate to deferred revenue from upfront customer payments. The deferred revenue is recognized, and the liability reduced, over the contract term as the Company completes the performance obligation. As of March 31, 2022, our future revenues (i.e., transaction price related to remaining performance obligations) under contract accounted for under ASC 606 totaled $441.9 million, of which $336.1 million is related to contracts that are currently being invoiced and have an average remaining contract term of 1.7 years, while $105.8 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of 5.6 years. We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.
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Table of Contents
Note 4. Leases
Lessor Accounting
We lease communications towers, ground, colocation, and dark fiber to tenants under operating leases. Our leases have initial lease terms ranging from less than one year to 35 years, most of which include options to extend or renew the leases for less than one year to 20 years (based on the satisfaction of certain conditions as defined in the lease agreements), and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
The components of lease income for the three months ended March 31, 2022 and 2021, respectively, are as follows:
|
|
Three Months Ended March 31, |
|
(Thousands) |
|
2022 |
|
|
2021 |
|
Lease income - operating leases |
|
$ |
221,565 |
|
|
$ |
205,195 |
|
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms are as of March 31, 2022 are as follows:
(Thousands) |
|
March 31, 2022 (1) |
|
2022 |
|
$ |
566,495 |
|
2023 |
|
|
772,167 |
|
2024 |
|
|
774,111 |
|
2025 |
|
|
775,326 |
|
2026 |
|
|
776,735 |
|
Thereafter |
|
|
3,033,462 |
|
Total lease receivables |
|
$ |
6,698,296 |
|
(1) Total future minimum lease payments to be received include $5.7 billion relating to the Windstream Leases. |
|
The underlying assets under operating leases where we are the lessor are summarized as follows:
(Thousands) |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Land |
|
$ |
26,580 |
|
|
$ |
26,593 |
|
Building and improvements |
|
|
343,934 |
|
|
|
343,624 |
|
Poles |
|
|
285,474 |
|
|
|
281,130 |
|
Fiber |
|
|
3,317,265 |
|
|
|
3,278,276 |
|
Equipment |
|
|
428 |
|
|
|
428 |
|
Copper |
|
|
3,933,940 |
|
|
|
3,918,281 |
|
Conduit |
|
|
89,859 |
|
|
|
89,859 |
|
Tower assets |
|
|
1,397 |
|
|
|
1,397 |
|
Finance lease assets |
|
|
28,126 |
|
|
|
28,126 |
|
Other assets |
|
|
10,577 |
|
|
|
10,649 |
|
|
|
|
8,037,580 |
|
|
|
7,978,363 |
|
Less: accumulated depreciation |
|
|
(5,433,927 |
) |
|
|
(5,391,479 |
) |
Underlying assets under operating leases, net |
|
$ |
2,603,653 |
|
|
$ |
2,586,884 |
|
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Table of Contents
Depreciation expense for the underlying assets under operating leases where we are the lessor for the three months ended March 31, 2022 and 2021, respectively, is summarized as follows:
|
|
Three Months Ended March 31, |
|
(Thousands) |
|
2022 |
|
|
2021 |
|
Depreciation expense for underlying assets under operating leases |
|
$ |
43,187 |
|
|
$ |
45,913 |
|
Lessee Accounting
We have commitments under operating leases for communications towers, ground, colocation, dark fiber lease arrangements, and buildings. We also have finance leases for dark fiber lease arrangements and other communications equipment. Our leases have initial lease terms ranging from less than one year to 30 years, most of which include options to extend or renew the leases for less than one year to 20 years, and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
As of March 31, 2022, we have short term lease commitments amounting to approximately $2.5 million.
Future lease payments under non-cancellable leases as of March 31, 2022 are as follows:
(Thousands) |
|
Operating Leases |
|
|
Finance Leases |
|
2022 |
|
$ |
11,387 |
|
|
$ |
1,724 |
|
2023 |
|
|
13,515 |
|
|
|
2,281 |
|
2024 |
|
|
11,204 |
|
|
|
2,082 |
|
2025 |
|
|
8,590 |
|
|
|
2,021 |
|
2026 |
|
|
5,964 |
|
|
|
2,021 |
|
Thereafter |
|
|
37,309 |
|
|
|
14,749 |
|
Total undiscounted lease payments |
|
$ |
87,969 |
|
|
$ |
24,878 |
|
Less: imputed interest |
|
|
(28,290 |
) |
|
|
(9,734 |
) |
Total lease liabilities |
|
$ |
59,679 |
|
|
$ |
15,144 |
|
|
|
Note 5. Investments in Unconsolidated Entities
As of March 31, 2022, the Company had an aggregate investment of $64.3 million in its equity method unconsolidated entities, which included a 42% interest in BB Fiber Holdings LLC (“Fiber Holdings”) and a 7% interest in Harmoni Towers LP (“Harmoni”).
Fiber Holdings
Fiber Holdings was primarily established to develop fiber networks as real estate property for long-term investment. On July 1, 2020, the Company completed the sale of an ownership stake in the entity that controls the Company’s Midwest fiber network assets (the “Propco”). Fiber Holdings has a 47.5% ownership in the Propco that is under a long-term, triple net lease with our joint venture partner. Our ownership interest in Fiber Holdings represents approximately a 20% economic interest in the Propco. The Company’s current investment and maximum exposure to loss as a result of its involvement with Fiber Holdings was approximately $39.6 million as of March 31, 2022. The Company has not provided financial support to Fiber Holdings.
Harmoni
Harmoni was primarily established to develop wireless communication towers as real estate property for long-term investment. We concluded that Harmoni is a VIE; however, the Company determined that it was not the primary beneficiary of Harmoni because the Company lacks the power to direct the activities that most significantly impact its economic performance. The Company’s current investment and maximum exposure to loss as a result of its involvement with Harmoni was approximately $24.7 million as of March 31, 2022. The Company has not provided financial support to Harmoni.
14
Table of Contents
We provided transition services to Harmoni through January 31, 2022 in exchange for fees and reimbursements. Total transition service fees earned in connection with Harmoni were less than $0.1 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, which is included in operating expense on a net basis in our Condensed Consolidated Statements of Income (Loss).
Note 6. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date;
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Unobservable inputs for the asset or liability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, derivative assets and liabilities, our outstanding notes and other debt, settlement payable, contingent consideration and accounts, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at March 31, 2022 and December 31, 2021:
(Thousands) |
|
Total |
|
Quoted Prices in Active Markets
(Level 1) |
|
Prices with Other Observable Inputs
(Level 2) |
|
Prices with Unobservable Inputs (Level 3) |
|
At March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured notes - 7.875%, due February 15, 2025 |
|
$ |
2,318,873 |
|
$ |
- |
|
$ |
2,318,873 |
|
$ |
- |
|
Senior secured notes - 4.75%, due April 15, 2028 |
|
|
522,419 |
|
|
- |
|
|
522,419 |
|
|
- |
|
Senior unsecured notes - 6.50% , due February 15, 2029 |
|
|
995,226 |
|
|
- |
|
|
995,226 |
|
|
- |
|
Senior unsecured notes - 6.00%, due January 15, 2030 |
|
|
605,822 |
|
|
- |
|
|
605,822 |
|
|
- |
|
Exchangeable senior notes - 4.00%, due June 15, 2024 |
|
|
460,354 |
|
|
- |
|
|
460,354 |
|
|
- |
|
Senior secured revolving credit facility, variable rate, due December 10, 2024 |
|
|
224,978 |
|
|
- |
|
|
224,978 |
|
|
- |
|
Settlement payable |
|
|
245,750 |
|
|
- |
|
|
245,750 |
|
|
- |
|
Derivative liability, net |
|
|
7,269 |
|
|
- |
|
|
7,269 |
|
|
- |
|
Total |
|
$ |
5,380,691 |
|
$ |
- |
|
$ |
5,380,691 |
|
$ |
- |
|
15
Table of Contents
(Thousands) |
|
Total |
|
Quoted Prices in Active Markets
(Level 1) |
|
Prices with Other Observable Inputs
(Level 2) |
|
Prices with Unobservable Inputs (Level 3) |
|
At December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured notes - 7.875%, due February 15, 2025 |
|
$ |
2,351,576 |
|
$ |
- |
|
$ |
2,351,576 |
|
$ |
- |
|
Senior secured notes - 4.75%, due April 15, 2028 |
|
|
560,857 |
|
|
- |
|
|
560,857 |
|
|
- |
|
Senior unsecured notes - 6.50% , due February 15, 2029 |
|
|
1,087,844 |
|
|
- |
|
|
1,087,844 |
|
|
- |
|
Senior unsecured notes - 6.00%, due January 15, 2030 |
|
|
659,992 |
|
|
- |
|
|
659,992 |
|
|
- |
|
Exchangeable senior notes - 4.00%, due June 15, 2024 |
|
|
453,104 |
|
|
- |
|
|
453,104 |
|
|
- |
|
Senior secured revolving credit facility, variable rate, due December 10, 2024 |
|
|
199,980 |
|
|
- |
|
|
199,980 |
|
|
- |
|
Settlement payable |
|
|
254,725 |
|
|
- |
|
|
254,725 |
|
|
- |
|
Derivative liability, net |
|
|
10,413 |
|
|
- |
|
|
10,413 |
|
|
- |
|
Total |
|
$ |
5,578,491 |
|
$ |
- |
|
$ |
5,578,491 |
|
$ |
- |
|
The carrying value of cash and cash equivalents, accounts and other receivables, and accounts, interest and dividends payable approximate fair values due to the short-term nature of these financial instruments.
The total principal balance of our outstanding notes and other debt was $5.20 billion at March 31, 2022, with a fair value of $5.13 billion. The estimated fair value of our outstanding notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy. Derivative assets and liabilities are carried at fair value. See Note 8. The fair value of an interest rate swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both Uniti’s own non-performance risk and non-performance risk of the respective counterparties. The Company has determined that the majority of the inputs used to value its derivative assets and liabilities fall within Level 2 of the fair value hierarchy; however, the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit spreads, to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value of the derivatives. As such, the Company classifies its derivative assets and liabilities valuation in Level 2 of the fair value hierarchy.
Given the limited trade activity of the Exchangeable Notes, the fair value of the Exchangeable Notes (see Note 10) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy. Specifically, we estimated the fair value of the Exchangeable Notes based on readily available external pricing information, quoted market prices, and current market rates for similar convertible debt instruments.
Uniti is required to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning the first month after Windstream’s emergence (the “Settlement Payable”). See Note 13. The Settlement Payable was recorded at fair value, using the present value of future cash flows. The future cash flows are discounted using discount rate input based on observable market data. Accordingly, we classify inputs used as Level 2 in the fair value hierarchy. The remaining Settlement Payable is $242.3 million and is reported on our Condensed Consolidated Balance Sheet at March 31, 2022. There have been no changes in the valuation methodologies used since the initial recording.
16
Table of Contents
Note 7. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
(Thousands) |
|
Depreciable Lives |
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Land |
|
Indefinite |
|
|
$ |
28,683 |
|
|
$ |
28,449 |
|
Building and improvements |
|
3 - 40 years |
|
|
|
360,572 |
|
|
|
359,980 |
|
Poles |
|
30 years |
|
|
|
285,474 |
|
|
|
281,130 |
|
Fiber |
|
30 years |
|
|
|
4,164,962 |
|
|
|
4,107,519 |
|
Equipment |
|
5 - 7 years |
|
|
|
348,114 |
|
|
|
331,761 |
|
Copper |
|
20 years |
|
|
|
3,933,940 |
|
|
|
3,918,281 |
|
Conduit |
|
30 years |
|
|
|
89,859 |
|
|
|
89,859 |
|
Tower assets |
|
20 years |
|
|
|
8,544 |
|
|
|
8,544 |
|
Finance lease assets |
|
|
(1 |
) |
|
|
72,284 |
|
|
|
72,284 |
|
Other assets |
|
15 - 20 years |
|
|
|
10,578 |
|
|
|
10,652 |
|
Corporate assets |
|
3 - 7 years |
|
|
|
14,581 |
|
|
|
14,326 |
|
Construction in progress |
|
|
(1 |
) |
|
|
32,873 |
|
|
|
27,366 |
|
|
|
|
|
|
|
|
9,350,464 |
|
|
|
9,250,151 |
|
Less accumulated depreciation |
|
|
|
|
|
|
(5,803,963 |
) |
|
|
(5,741,212 |
) |
Net property, plant and equipment |
|
|
|
|
|
$ |
3,546,501 |
|
|
$ |
3,508,939 |
|
(1) See our Annual Report for property, plant and equipment accounting policies. |
|
Depreciation expense for the three months ended March 31, 2022 and 2021 was $64.0 million and $66.2 million, respectively.
Note 8. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.
On April 27, 2015, we entered into fixed for floating interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate senior secured term loan B facility. These interest rate swaps were designated as cash flow hedges and have a notional value of $2.0 billion and mature on October 24, 2022. As result of the repayment of the Company’s senior secured term loan B facility in February 2020, the Company entered into receive-fixed interest rate swaps to offset its existing pay-fixed interest rate swaps. As a result, the Company discontinued hedge accounting as the hedge accounting requirements were no longer met. Amounts in accumulated other comprehensive (loss) income as of the date of de-designation, will be reclassified to interest expense as the hedged transactions impact earnings. Prospectively, changes in fair value of all interest rate swaps will be recorded directly to earnings.
The Company has elected to offset derivative positions that are subject to master netting arrangements with the same counterparty in our Condensed Consolidated Balance Sheets. The following tables present the gross amounts of our derivative instruments subject to master netting arrangements with the same counterparty as of March 31, 2022 and December 31, 2021:
Offsetting of Derivative Assets and Liabilities (Thousands) |
|
Gross Amounts of
Recognized Assets or
Liabilities |
|
|
Gross Amounts Offset in
the Condensed
Consolidated Balance
Sheets |
|
|
Net Amounts of Assets or
Liabilities presented in the
Condensed Consolidated
Balance Sheets |
|
At March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
900 |
|
|
$ |
(900 |
) |
|
$ |
- |
|
Total |
|
$ |
900 |
|
|
$ |
(900 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
8,169 |
|
|
$ |
(900 |
) |
|
$ |
7,269 |
|
Total |
|
$ |
8,169 |
|
|
$ |
(900 |
) |
|
$ |
7,269 |
|
17
Table of Contents
Offsetting of Derivative Assets and Liabilities (Thousands) |
|
Gross Amounts of
Recognized Assets or
Liabilities |
|
|
Gross Amounts Offset in
the Condensed
Consolidated Balance
Sheets |
|
|
Net Amounts of Assets or
Liabilities presented in the
Condensed Consolidated
Balance Sheets |
|
At December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
10,788 |
|
|
$ |
(10,788 |
) |
|
$ |
- |
|
Total |
|
$ |
10,788 |
|
|
$ |
(10,788 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
21,201 |
|
|
$ |
(10,788 |
) |
|
$ |
10,413 |
|
Total |
|
$ |
21,201 |
|
|
$ |
(10,788 |
) |
|
$ |
10,413 |
|
The following table summarizes the fair value and the presentation in our Condensed Consolidated Balance Sheets:
(Thousands) |
|
Location on Condensed
Consolidated Balance
Sheets |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Interest rate swaps |
|
Derivative liability, net |
|
$ |
7,269 |
|
|
$ |
10,413 |
|
As of March 31, 2022, all of the interest rate swaps were valued in net unrealized loss positions and recognized as liability balances within the derivative liability, net in our Condensed Consolidated Balance Sheets. As hedge accounting is no longer applied beginning in February 2020, the unrealized loss amounts are now being recorded directly to earnings. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statements of Income (Loss) for the three months ended March 31, 2022 and 2021 was $2.8 million and $2.8 million, respectively.
During the next twelve months, beginning April 1, 2022, we estimate that $6.4 million will be reclassified as an increase to interest expense.
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes, and on June 27, 2019, concurrently with the exercise by the initial purchasers involved in the offering of the Exchangeable Notes (the “Initial Purchasers”) of their option to purchase additional Exchangeable Notes, Uniti Fiber Holdings Inc., the issuer of the Exchangeable Notes, entered into exchangeable note hedge transactions with respect to the Company’s common stock (the “Note Hedge Transactions”) with certain of the Initial Purchasers or their respective affiliates (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of the Company’s common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions have an initial strike price that corresponds to the initial exchange price of the Exchangeable Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are intended to reduce potential dilution to the Company’s common stock upon any exchange of the Exchangeable Notes and/or offset any cash payments Uniti Fiber is required to make in excess of the principal amount of exchanged Exchangeable Notes, as the case may be, in the event that the market value per share of the Company’s common stock, as measured under the Note Hedge Transactions, at the time of exercise is greater than the strike price of the Note Hedge Transactions.
The Note Hedge Transactions are separate transactions, entered into by Uniti Fiber Holdings Inc. with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. The Note Hedge Transactions meet certain accounting criteria under GAAP, are recorded in additional paid-in capital on our Condensed Consolidated Balance Sheets and are not accounted for as derivatives that are remeasured each reporting period.
Warrant Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes, and on June 27, 2019 concurrently with the exercise by the Initial Purchasers of their option to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties Warrants (the “Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million
18
Table of Contents
shares of the Company’s common stock in the aggregate at an exercise price of approximately $16.42 per share. The maximum number of shares of the Company’s common stock that could be issued pursuant to the Warrants is approximately 55.5 million. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended. If the market value per share of the Company’s common stock, as measured under the Warrants, at the time of exercise exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants will expire over a period beginning in September 2024.
The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Warrants meet certain accounting criteria under GAAP, are recorded in additional paid-in capital on our Condensed Consolidated Balance Sheets and are not accounted for as derivatives that are remeasured each reporting period.
Note 9. Goodwill and Intangible Assets and Liabilities
There were no changes in the carrying amount of goodwill occurring during the three months ended March 31, 2022. The balance of goodwill recorded in our Fiber Infrastructure segment as of March 31, 2022 and December 31, 2021 is as follows:
(Thousands) |
|
Fiber Infrastructure |
|
|
Total |
|
Goodwill at December 31, 2021 |
|
$ |
601,878 |
|
|
$ |
601,878 |
|
Goodwill at March 31, 2022 |
|
$ |
601,878 |
|
|
$ |
601,878 |
|
(Thousands) |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
Original
Cost |
|
|
Accumulated
Amortization |
|
|
Original
Cost |
|
|
Accumulated
Amortization |
|
Finite life intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists |
|
$ |
416,104 |
|
|
$ |
(111,579 |
) |
|
$ |
416,104 |
|
|
$ |
(105,861 |
) |
Contracts |
|
|
52,536 |
|
|
|
(9,850 |
) |
|
|
52,536 |
|
|
|
(8,209 |
) |
Underlying Rights |
|
|
10,497 |
|
|
|
(525 |
) |
|
|
10,497 |
|
|
|
(437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
479,137 |
|
|
|
|
|
|
$ |
479,137 |
|
|
|
|
|
Less: accumulated amortization |
|
|
(121,954 |
) |
|
|
|
|
|
|
(114,507 |
) |
|
|
|
|
Total intangible assets, net |
|
$ |
357,183 |
|
|
|
|
|
|
$ |
364,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market leases |
|
$ |
191,154 |
|
|
|
(16,042 |
) |
|
$ |
191,154 |
|
|
|
(13,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market leases |
|
$ |
191,154 |
|
|
|
|
|
|
$ |
191,154 |
|
|
|
|
|
Less: accumulated amortization |
|
|
(16,042 |
) |
|
|
|
|
|
|
(13,368 |
) |
|
|
|
|
Total intangible liabilities, net |
|
$ |
175,112 |
|
|
|
|
|
|
$ |
177,786 |
|
|
|
|
|
As of March 31, 2022, the remaining weighted average amortization period of the Company’s intangible assets was 14.7 years.
Amortization expense for the three months ended March 31, 2022 and 2021 was $7.4 million and $4.8 million, respectively. Amortization expense is estimated to be $29.7 million for the full year of 2022, $29.8 million in 2023, $29.7 million in 2024, $29.7 million in 2025, and $29.7 million for 2026.
We recognize the amortization of below-market leases in revenue. Revenue related to the amortization of the below-market leases for the three months ended March 31, 2022 was $2.7 million. During the three months ended March 31, 2021, $2.7 million was recorded as a benefit to amortization expense, and subsequently reclassified to revenue during the fourth quarter of 2021. As of March 31, 2022, the remaining weighted average amortization period of the Company’s intangible liabilities was 17.7 years. Revenue due to the amortization of the below-market leases is estimated to be $10.7 million for the full year of 2022, $10.7 million in 2023, $10.7 million in 2024, $10.7 million in 2025, and $10.7 million in 2026.
19
Table of Contents
Note 10. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and/or certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt are as follows:
(Thousands) |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Principal amount |
|
$ |
5,200,000 |
|
|
$ |
5,175,000 |
|
Less unamortized discount, premium and debt issuance costs |
|
|
(79,719 |
) |
|
|
(84,463 |
) |
Notes and other debt less unamortized discount, premium and debt issuance costs |
|
$ |
5,120,281 |
|
|
$ |
5,090,537 |
|
Notes and other debt at March 31, 2022 and December 31, 2021 consisted of the following:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
(Thousands) |
|
Principal |
|
|
Unamortized
Discount,
Premium and
Debt Issuance
Costs |
|
|
Principal |
|
|
Unamortized
Discount,
Premium and
Debt Issuance
Costs |
|
Senior secured notes - 7.875%, due February 15, 2025
(discount is based on imputed interest rate of 8.38%) |
|
$ |
2,250,000 |
|
|
$ |
(29,191 |
) |
|
$ |
2,250,000 |
|
|
$ |
(31,411 |
) |
Senior secured notes - 4.75%, due April 15, 2028
(discount is based on imputed interest rate of 5.04%) |
|
|
570,000 |
|
|
|
(8,584 |
) |
|
|
570,000 |
|
|
|
(8,886 |
) |
Senior unsecured notes - 4.00%, due June 15, 2024
(discount is based on imputed interest rate of 4.77%) |
|
|
345,000 |
|
|
|
(5,590 |
) |
|
|
345,000 |
|
|
|
(6,187 |
) |
Senior unsecured notes - 6.50%, due February 15, 2029
(discount is based on imputed interest rate of 6.83%) |
|
|
1,110,000 |
|
|
|
(20,000 |
) |
|
|
1,110,000 |
|
|
|
(20,797 |
) |
Senior unsecured notes - 6.00% due January 15, 2030
(discount is based on imputed interest rate of 6.27%) |
|
|
700,000 |
|
|
|
(11,407 |
) |
|
|
700,000 |
|
|
|
(11,689 |
) |
Senior secured revolving credit facility, variable rate, due December 10, 2024 |
|
|
225,000 |
|
|
|
(4,947 |
) |
|
|
200,000 |
|
|
|
(5,493 |
) |
Total |
|
$ |
5,200,000 |
|
|
$ |
(79,719 |
) |
|
$ |
5,175,000 |
|
|
$ |
(84,463 |
) |
At March 31, 2022, notes and other debt included the following: (i) $225.0 million under the Revolving Credit Facility (as defined below) pursuant to the credit agreement by and among Uniti Group LP, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (the “Borrowers”), the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”); (ii) $2.25 billion aggregate principal amount of 7.875% Senior Secured Notes due 2025 (the “2025 Secured Notes”); (iii) $570.0 million aggregate principal amount of 4.75% Senior Secured Notes due 2028 (the “2028 Secured Notes”); (iv) $1.11 billion aggregate principal amount of 6.50% Senior Notes due February 15, 2029 (the “2029 Notes”); and (v) $345.0 million aggregate principal amount of 4.00% Exchangeable Senior Notes due June 15, 2024 (the “Exchangeable Notes”); and (vi) $700.0 million aggregate principal amount of 6.00% Senior Unsecured Notes due January 15, 2030 (the “2030 Notes” and collectively with the 2025 Secured Notes, the 2028 Secured Notes, the 2029 Notes and the Exchangeable Notes, the “Notes”). Until our net leverage ratio is below 5.75 : 1.00, our 2025 Secured Notes limit our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains. The terms of the Notes are as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Credit Agreement
The Borrowers are party to the Credit Agreement, which provides for a $500 million revolving credit facility that will mature on December 10, 2024 (the “Revolving Credit Facility”) and provides us with the ability to obtain revolving loans as well as swingline loans and letters of credit from time to time. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of
20
Table of Contents
the Operating Partnership’s subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and, if such debt is secured, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of March 31, 2022, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
A termination of either Windstream Lease would result in an “event of default” under the Credit Agreement if a replacement lease is not entered into within ninety (90) calendar days and we do not maintain pro forma compliance with a consolidated secured leverage ratio, as defined in the Credit Agreement, of 5.00 to 1.00.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 2.75% to 3.50% or a eurodollar rate plus an applicable margin ranging from 3.75% to 4.50%, in each case, calculated in a customary manner and determined based on our consolidated secured leverage ratio. We are required to pay a quarterly commitment fee under the Revolving Credit Facility equal to 0.50% of the average amount of unused commitments during the applicable quarter (subject to a step-down to 0.40% per annum of the average amount of unused commitments during the applicable quarter upon achievement of a consolidated secured leverage ratio not to exceed a certain level), as well as quarterly letter of credit fees equal to the product of (A) the applicable margin with respect to eurodollar borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Revolving Credit Facility. These costs are amortized using the effective interest method over the term of the related indebtedness and are included in interest expense in our Condensed Consolidated Statements of Income (Loss). For the three months ended March 31, 2022 and 2021, we recognized $4.3 million and $4.1 million, respectively, of non-cash interest expense related to the amortization of deferred financing costs.
Note 11. Earnings Per Share
Our time-based restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we included these instruments in the computation of earnings per share under the two-class method described in FASB ASC 260, Earnings per Share (“ASC 260”).
We also have outstanding performance-based restricted stock units that contain forfeitable rights to receive dividends. Therefore, the awards are considered non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are met.
The dilutive effect of the Exchangeable Notes is calculated by using the “if-converted” method. This assumes an add-back of interest, net of income taxes, to net income attributable to shareholders as if the securities were converted at the beginning of the reporting period (or at time of issuance, if later) and the resulting common shares included in number of weighted average shares. The dilutive effect of the Warrants (see Note 8) is calculated using the treasury-stock method. During the three months ended March 31, 2022 and 2021, the Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock for the reporting period.
21
Table of Contents
The following sets forth the computation of basic and diluted earnings per share under the two-class method:
|
|
Three Months Ended March 31, |
|
(Thousands, except per share data) |
|
2022 |
|
|
2021 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders |
|
$ |
52,730 |
|
|
$ |
(4,438 |
) |
Less: Income allocated to participating securities |
|
|
(331 |
) |
|
|
(248 |
) |
Dividends declared on convertible preferred stock |
|
|
(5 |
) |
|
|
(3 |
) |
Net income (loss) attributable to common shares |
|
$ |
52,394 |
|
|
$ |
(4,689 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
|
235,046 |
|
|
|
231,469 |
|
Basic earnings (loss) per common share |
|
$ |
0.22 |
|
|
$ |
(0.02 |
) |
|
|
Three Months Ended March 31, |
|
(Thousands, except per share data) |
|
2022 |
|
|
2021 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders |
|
$ |
52,730 |
|
|
$ |
(4,438 |
) |
Less: Income allocated to participating securities |
|
|
(331 |
) |
|
|
(248 |
) |
Dividends declared on convertible preferred stock |
|
|
(5 |
) |
|
|
(3 |
) |
Impact on if-converted dilutive securities |
|
|
2,994 |
|
|
|
- |
|
Net income (loss) attributable to common shares |
|
$ |
55,388 |
|
|
$ |
(4,689 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
|
235,046 |
|
|
|
231,469 |
|
Effect of dilutive non-participating securities |
|
|
1,226 |
|
|
|
- |
|
Impact on if-converted dilutive securities |
|
|
31,032 |
|
|
|
- |
|
Weighted-average shares for dilutive earnings per common share |
|
|
267,304 |
|
|
|
231,469 |
|
Dilutive earnings (loss) per common share |
|
$ |
0.21 |
|
|
$ |
(0.02 |
) |
For the three months ended March 31, 2021, 30,052,433 potential common shares related to the Exchangeable Notes and 762,355 non-participating securities were excluded from the computation of earnings per share, as their effect would have been anti-dilutive.
Note 12. Segment Information
Our management, including our chief executive officer, who is our chief operating decision maker, manages our operations as two reportable segments, in addition to our corporate operations, which include:
Leasing: Represents the operations of our leasing business, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing dark fiber network assets that we either constructed or acquired. While the Leasing segment represents our REIT operations, certain aspects of the Leasing segment are also operated through taxable REIT subsidiaries.
Fiber Infrastructure: Represents the operations of our fiber business, Uniti Fiber, which is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
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Corporate: Represents our corporate office and shared service functions. Certain costs and expenses, primarily related to headcount, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance measure we define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, costs associated with the implementation of our enterprise resource planning system, executive severance costs, costs related to the settlement with Windstream, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. The Company believes that net income, as defined by GAAP, is the most appropriate earnings metric; however, we believe that Adjusted EBITDA serves as a useful supplement to net income because it allows investors, analysts and management to evaluate the performance of our segments in a manner that is comparable period over period. Adjusted EBITDA should not be considered as an alternative to net income as determined in accordance with GAAP.
Selected financial data related to our segments is presented below for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, 2022 |
|
(Thousands) |
|
Leasing |
|
|
Fiber Infrastructure |
|
|
Corporate |
|
|
Subtotal of Reportable Segments |
|
Revenues |
|
$ |
204,641 |
|
|
$ |
73,393 |
|
|
$ |
- |
|
|
$ |
278,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
198,973 |
|
|
$ |
31,459 |
|
|
$ |
(5,643 |
) |
|
$ |
224,789 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,172 |
|
Depreciation and amortization |
|
|
42,102 |
|
|
|
29,319 |
|
|
|
36 |
|
|
|
71,457 |
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361 |
|
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,714 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,312 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,071 |
) |
Adjustments for equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,858 |
|
23
Table of Contents
|
|
Three Months Ended March 31, 2021 |
|
(Thousands) |
|
Leasing |
|
|
Fiber Infrastructure |
|
|
Corporate |
|
|
Subtotal of Reportable Segments |
|
Revenues |
|
$ |
194,936 |
|
|
$ |
77,650 |
|
|
$ |
- |
|
|
$ |
272,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
191,497 |
|
|
$ |
29,721 |
|
|
$ |
(6,970 |
) |
|
$ |
214,248 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,581 |
|
Depreciation and amortization |
|
|
42,226 |
|
|
|
28,670 |
|
|
|
68 |
|
|
|
70,964 |
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,318 |
|
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,137 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,335 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557 |
) |
Adjustments for equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
972 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,502 |
) |
Note 13. Commitments and Contingencies
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
Windstream Commitments
Following the consummation of our settlement agreement with Windstream, including entry into the Windstream Leases, we are obligated to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning in October 2020, and Uniti may prepay any installments due on or after the first anniversary of the settlement agreement (discounted at a 9% rate). On October 14, 2021, the Company prepaid four installments for a total of $92.9 million. As of March 31, 2022, the Company has made payments totaling $215.4 million.
Further, we are obligated to reimburse Windstream for up to an aggregate of $1.75 billion for certain growth capital improvements in long-term fiber and related assets made by Windstream (“Growth Capital Improvements”) through 2029. Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the property leased under the competitive local exchange carrier master lease agreement, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to $225 million per year in 2021, and are limited to $225 million per year in 2022 through 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year. During the three months ended March 31, 2022, Uniti reimbursed $48.2 million of Growth Capital Improvements, of which $29.0 million represented the reimbursement of capital improvements completed in 2021 that were previously classified as tenant funded capital improvements. Upon reimbursement, the Company reduced the unamortized portion of deferred revenue related to these capital improvements and capitalized the difference between the cash provided to Windstream and the unamortized deferred revenue as a lease incentive. This lease incentive, which is $0.9 million and reported within other assets on our Condensed Consolidated Balance Sheets as of March 31, 2022, will be amortized as a reduction to revenue over the initial term of the Windstream Leases.
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Starting on the first anniversary of each installment of reimbursement for a Growth Capital Improvement, the rent payable by Windstream under the applicable Windstream Lease will increase by an amount equal to 8.0% (the “Rent Rate”) of such installment of reimbursement. The Rent Rate will thereafter increase to 100.5% of the prior Rent Rate on each anniversary of each reimbursement. In the event that the tenant’s interest in either Windstream Lease is transferred by Windstream under the terms thereof (unless transferred to the same transferee), or if Uniti transfers its interests as landlord under either Windstream Lease (unless to the same transferee), the reimbursement rights and obligations will be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that the maximum that may be allocated to the CLEC MLA following such transfer is $20 million per year. If Uniti fails to reimburse any Growth Capital Improvement reimbursement payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the $1.75 billion of Growth Capital Improvements commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these loans will accrue at 8% from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans.
Other Litigation
On July 3, 2019, SLF Holdings, LLC (“SLF”) filed a complaint against the Company, Uniti Fiber, and certain current and former officers of the Company (collectively, the “Defendants”) in the United States District Court for the Southern District of Alabama, in connection with Uniti Fiber’s purchase of Southern Light, LLC from SLF in July 2017. The complaint asserted claims for fraud and conspiracy, as well as claims under federal and Alabama securities laws, alleging that Defendants improperly failed to disclose to SLF the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. On September 26, 2019, the action was transferred to United States District Court for the District of Delaware. On November 18, 2019, SLF filed an amended complaint, adding allegations that Defendants also failed to fully disclose the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The amended complaint seeks compensatory and punitive damages, as well as reformation of the purchase agreement for the sale. On December 18, 2019, Defendants moved to dismiss the amended complaint in its entirety. That motion was fully briefed as of February 7, 2020, and a hearing on the motion was heard on May 12, 2020. On November 4, 2020, the court granted the Defendants’ motion and dismissed SLF’s amended complaint, in its entirety, with prejudice. On December 1, 2020, SLF filed a notice of appeal to the United States Court of Appeals for the Third Circuit from the district court’s dismissal order. The appeal was fully briefed on September 10, 2021. We have evaluated this matter under the guidance provided by ASC 450, Contingencies (“ASC 450”), and as of the date of this Quarterly Report on Form 10-Q, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Condensed Consolidated Balance Sheets.
Beginning on October 25, 2019, several purported shareholders filed separate putative class actions in the U.S. District Court for the Eastern District of Arkansas against the Company and certain of our officers, alleging violations of the federal securities laws based on claims similar to those asserted in the SLF Action. On March 12, 2020, the U.S. District Court for the Eastern District of Arkansas consolidated the Shareholder Actions and appointed lead plaintiffs and lead counsel in the consolidated cases under the caption In re Uniti Group Inc. Securities Litigation (the “Class Action”). On May 11, 2020, lead plaintiffs filed a consolidated amended complaint in the Class Action. The consolidated amended complaint seeks to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The Class Action asserts claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements by allegedly failing to disclose, among other things, the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The Class Action seeks class certification, unspecified monetary damages, costs and attorneys’ fees and other relief. On July 10, 2020, defendants moved to dismiss the consolidated amended complaint. On April 1, 2021, the court issued an order denying defendants’ motion to dismiss. On April 15, 2021, defendants filed a motion for reconsideration of the order or, in the alternative, for certification of an appeal of the decision to the Eighth Circuit. On October 25, 2021, plaintiffs filed a motion for class certification, which defendants opposed. On December 22, 2021, the court issued an order denying defendants’ motion for reconsideration or, in the alternative, certification of an appeal. On March 25, 2022, the parties reached an agreement to settle the Class Action, on behalf of a settlement class, for $38.9 million, to be funded entirely by the Company’s insurance carriers. The settlement remains subject to negotiation of definitive settlement documents, notice to the settlement class and court approval. In accordance with ASC 450, we recorded $38.9 million of settlement expense within general and administrative expense within our Condensed Consolidated Statements of Income (Loss) during the three months ended March 31, 2022 and accounts payable, accrued expenses and other liabilities, net within our Condensed Consolidated Balance Sheets as of March 31, 2022. Additionally, we recorded the probable
25
Table of Contents
insurance recovery of $38.9 million as a reduction to general and administrative expense during the three months ended March 31, 2022 within our Condensed Consolidated Statements of Income (Loss), and other assets within Condensed Consolidated Balance Sheets as of March 31, 2022.
On August 17, 2021, two purported shareholders filed a derivative action on behalf of Uniti in the Circuit Court for Baltimore City, Maryland, under the caption Mayer et al. v. Gunderman et al., 24-C-21-003488 (the “Mayer Derivative Complaint”). The Mayer Derivative Action names Kenneth Gunderman and Mark Wallace as defendants and the Company as a nominal defendant and asserts claims for breach of fiduciary duty and unjust enrichment. The complaint alleges that the individual defendants caused the Company to issue certain false and misleading statements relating to the Spin-Off and/or the Master Lease. In particular, as in the Shareholder Actions, the complaint alleges, among other things, that defendants failed to disclose the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The complaint seeks unspecified damages, unspecified equitable relief, and related costs and fees. On December 23, 2021, the court entered a joint stipulation to stay the Mayer Derivative Action, including the time for the defendants to respond to the complaint, pending the outcome of the Class Action. Because this matter is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. We have evaluated this matter under the guidance provided by ASC 450, and as of the date of this Quarterly Report on Form 10-Q, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Condensed Consolidated Balance Sheets.
On February 11, 2022, a purported shareholder filed a derivative action on behalf of Uniti in the federal District Court for the District of Maryland, under the caption Guzzo et al. v. Gunderman et al., 1:22-cv-00366-GLR (the “Guzzo Derivative Action”). The complaint names Kenneth Gunderman, Mark Wallace, Francis Frantz, David Solomon, Jennifer Banner, and Scott Bruce as defendants and the Company as a nominal defendant and asserts claims for contribution against Gunderman and Wallace if the Company is found to be liable for violations of the federal securities laws in the Class Action and claims against all the individual defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment against. The allegations in the Guzzo Derivative Action are similar to those in the Mayer Derivative Action and the Class Action. The complaint seeks unspecified damages, equitable relief, and related costs and fees. On March 16, 2022, the court entered a joint stipulation to stay the Guzzo Derivative Action, including the time for the defendants to respond to the complaint, pending the outcome of the Class Action. We intend to defend this matter vigorously, and, because it is still in its relatively early stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
We maintain insurance policies that would provide coverage to various degrees for potential liabilities arising from the legal proceedings described above.
Under the terms of the tax matters agreement entered into on April 24, 2015 by the Company, Windstream Services, LLC and Windstream (the “Tax Matters Agreement”), in connection with the Spin-Off, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided in connection with the tax opinion. We believe that the probability of us incurring obligations under the Tax Matters Agreement are remote; and therefore, we have recorded no such liabilities in our Condensed Consolidated Balance Sheets as of March 31, 2022.
26
Table of Contents
Note 14. Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income by component is as follows for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
(Thousands) |
|
2022 |
|
|
2021 |
|
Cash flow hedge changes in fair value (loss) gain: |
|
|
|
|
|
|
|
|
Balance at beginning of period attributable to shareholders |
|
$ |
(30,353 |
) |
|
$ |
(30,353 |
) |
Balance at end of period attributable to shareholders |
|
|
(30,353 |
) |
|
|
(30,353 |
) |
Interest rate swap termination: |
|
|
|
|
|
|
|
|
Balance at beginning of period attributable to shareholders |
|
|
21,189 |
|
|
|
9,986 |
|
Amounts reclassified from accumulated other comprehensive income |
|
|
2,830 |
|
|
|
2,829 |
|
Balance at end of period |
|
|
24,019 |
|
|
|
12,815 |
|
Less: Other comprehensive income attributable to noncontrolling interest |
|
|
7 |
|
|
|
42 |
|
Balance at end of period attributable to shareholders |
|
|
24,012 |
|
|
|
12,773 |
|
Accumulated other comprehensive loss at end of period |
|
$ |
(6,341 |
) |
|
$ |
(17,580 |
) |
Note 15. Capital Stock
The limited partner equity interests in our operating partnership (commonly called “OP Units”), are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. During the three months ended March 31, 2022, the Company exchanged 157,733 OP Units held by third parties for an equal number of common shares of the Company. The OP Units exchanged represented approximately 23% of the OP Units held by a third party with a carrying value of $3.2 million as of the exchange date.