Notes to the Consolidated Financial Statements
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. 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 December 31, 2022, we are the sole general partner of the Operating Partnership and own approximately 99.96% of the partnership interests in the Operating Partnership.
Note 2. Basis of Presentation and Consolidation
The accompanying 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 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 Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for 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”).
Note 3. Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements, and such differences could be material.
Property, Plant and Equipment—Property, plant and equipment is stated at original cost, net of accumulated depreciation. The Company capitalizes costs incurred in bringing property, plant and equipment to an operational state, including all activities directly associated with the acquisition, construction, and installation of the related assets it owns. The Company capitalizes a portion of the interest costs it incurs for assets that require a period of time to get them ready for their intended use. The amount of interest that is capitalized is based on the average accumulated expenditures made during the period
involved in bringing the assets comprising a network to an operational state at the Company’s weighted average interest rate during the respective accounting period.
The Company also enters into leasing arrangements providing for the long‑term use of constructed fiber that is then integrated into the Company’s network infrastructure. For each lease that qualifies as a finance lease, the present value of the lease payments, which may include both periodic lease payments over the term of the lease as well as upfront payments to the lessor, is capitalized at the inception of the lease and included in property and equipment. As of December 31, 2022 and 2021, the accumulated amortization of our finance lease assets was $22.2 million and $18.4 million, respectively.
On April 24, 2015, we were separated and spun-off (the “Spin-Off”) from Windstream Holdings, Inc. (“Windstream Holdings” and together with Windstream Holdings II, LLC, its successor in interest, and its subsidiaries, “Windstream”) pursuant to which Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) to Uniti. Certain property, plant and equipment acquired as part of our Spin-Off is depreciated using a group composite depreciation method. Under this method, when property is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the disposition of the property. For all other property, which includes amortization of finance lease assets, depreciation is computed using the straight-line method over the estimated useful life of the respective property. When the property is retired or otherwise disposed of, the related cost and accumulated depreciation are written-off, with the corresponding gain or loss reflected in operating results. Construction in progress includes direct materials and labor related to fixed assets during the construction period. Depreciation begins once the construction period has ceased and the related asset is placed into service, and the asset will be depreciated over its useful life.
Costs of maintenance and repairs to property, plant and equipment subject to triple-net leasing arrangements are the responsibility of our tenant. Costs of maintenance and repairs to property, plant and equipment not subject to triple-net leasing arrangements are expensed as incurred.
Tenant Capital Improvements—The leases with Windstream (as discussed below) provide that tenant funded capital improvements (“TCIs”), defined as maintenance, repair, overbuild, upgrade or replacements to the leased network, including, without limitation, the replacement of copper distribution systems with fiber distribution systems, automatically become property of Uniti upon their construction by Windstream. We receive non-monetary consideration related to the TCIs as they automatically become our property, and we recognize the cost basis of TCIs that are capital in nature as property, plant and equipment and deferred revenue. We depreciate the property, plant and equipment over their estimated useful lives and amortize the deferred revenue as additional leasing revenues over the same depreciable life of the TCI assets. At December 31, 2022 and 2021, the net book value of TCIs recorded as a component of property, plant and equipment on our Consolidated Balance Sheet was $884.4 million and $838.8 million, respectively. For the years ended December 31, 2022, 2021 and 2020, we recognized $43.2 million, $39.0 million, and $35.1 million of revenue and depreciation expense related to TCIs, respectively.
Impairment of Long-Lived Assets—We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable from future undiscounted net cash flows we expect the asset group to generate. If the asset group is not fully recoverable, an impairment loss would be recognized for the difference between the carrying value of the asset group and its estimated fair value based on discounted net future cash flows. Assets held for sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. During the years ended December 31, 2022, 2021 and 2020, there were no events or changes in circumstances indicating that the carrying amount of any of our assets groups was not recoverable from future undiscounted net cash flows we expect the asset groups to generate, and no impairment losses were recognized.
Asset Retirement Obligations—The Company records obligations to perform asset retirement activities, primarily including requirements to remove equipment from leased space or customer sites as required under the terms of the related lease and customer agreements. The fair value of the liability for asset retirement obligations, which represents the net present value of the estimated expected future cash outlay, is recognized in the period in which it is incurred and the fair value of the liability can reasonably be estimated. The liability accretes as a result of the passage of time and related accretion expense is recognized in the Consolidated Statements of Income (Loss). The associated asset retirement costs are capitalized as an additional carrying amount of the related long‑lived asset and depreciated on a straight-line basis over the asset’s useful life. As of December 31, 2022 and 2021, our aggregate carrying amount of asset retirement obligations totaled $13.3 million and $11.8 million, respectively. During the year ended December 31, 2022, we incurred no liabilities related to asset retirement obligations. During the year ended December 31, 2021, we incurred $0.4 million related to asset retirement obligations. During the years ended December 31, 2022, 2021, and 2020, we recognized $1.7 million, $1.5
million, and $1.3 million of accretion expense related to asset retirement obligations, respectively, included in depreciation and amortization expense in our Consolidated Statements of Income (Loss).
Cash and Cash Equivalents—Cash and cash equivalents include all non-restricted cash held at financial institutions and other non-restricted highly liquid short-term investments with original maturities of three months or less.
Derivative Instruments and Hedging Activities—We account for our derivatives in accordance with FASB ASC 815, Derivatives and Hedging, in which we reflect all derivative instruments at fair value as either assets or liabilities on our Consolidated Balance Sheet. For derivative instruments that are designated and qualify as hedging instruments, we record the effective portion of the gain or loss on the hedged instruments as a component of accumulated other comprehensive income or loss. Any ineffective portion of a derivative’s change in fair value is immediately recognized within net income. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See Note 8 and Note 10. Exchangeable Notes and Related Transactions—On June 28, 2019, Uniti Fiber Holdings Inc., a subsidiary of the Company, issued $345 million aggregate principal amount of 4.00% Exchangeable Senior Notes due June 15, 2024 (the “Exchangeable Notes”). The Exchangeable Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election. In accordance with ASC 470-20, Debt – Debt with Conversion and Other Options, because the conversion feature in the Exchangeable Notes is not bifurcated pursuant to ASC 815, Derivatives and Hedging, and because the conversion can be settled in cash, shares, or a combination thereof, the Exchangeable Notes were separated into a liability component and an equity component in a manner that reflects Uniti Fiber Holdings Inc.’s non-convertible debt borrowing rate. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. See Note 12. The Company adopted ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2021. ASU 2020-06 (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument. In connection with the offering of the Exchangeable Notes, Uniti Fiber Holdings Inc. 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 “2019 Counterparties”). In addition, the Company entered into warrant transactions to sell to the 2019 Counterparties warrants (the “Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million shares of the Company’s common stock in the aggregate at an exercise price of $16.42 per share. The warrant transactions may have a dilutive effect with respect to the Company’s common stock to the extent the market price per share of the Company’s common stock exceeds the strike price of the Warrants. While the Note Hedge Transactions and the Warrants each meet the definition of a derivative in ASC 815-10-15-83, they each meet the equity scope exception specified in ASC 815-10-15-74(a); as such, the Warrants and the Note Hedge Transactions are not accounted for as derivatives that must be remeasured each reporting period and instead, are recorded in stockholders’ deficit. See Note 10. Intangible Assets—Intangible assets are presented in the financial statements at cost less accumulated amortization and are amortized using the straight-line method over their estimated useful lives.
Transaction Related and Other Costs—The Company expenses non-capitalizable transaction related and other costs in the period in which they are incurred and services are received. Transaction related costs include incremental acquisition pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs. Pursuit and transaction costs include professional services (legal, accounting, advisory, regulatory, etc.), finder’s fees, travel expenses, and other direct expenses associated with a business acquisition. Integration costs include direct costs necessary to integrate an acquired
business, including professional services, systems and data conversion, severance and retention bonuses payable to employees of an acquired business. In addition, other costs, such as costs incurred as a result of Windstream’s bankruptcy filing, costs associated with Windstream’s claims against us (see Note 16), and costs associated with the implementation of our enterprise resource planning system are included within this line item on the Consolidated Statements of Income (Loss). Settlement Expense—On July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services, LLC (“Windstream Services”) filed a complaint with the Bankruptcy Court in an adversary proceeding against Uniti and certain of its affiliates, alleging, among other things, that the Master Lease (as defined in Note 5) should be recharacterized as a financing arrangement, that certain rent payments and TCIs made by Windstream under the Master Lease constitute constructive fraudulent transfers, that the Master Lease is a lease of personal property and that Uniti breached certain of its obligations under the Master Lease. On March 2, 2020, Uniti and Windstream jointly announced that they agreed to the Settlement (as defined below) to resolve any and all claims and causes of action that have been or may be asserted against Uniti by Windstream, including all litigation brought by Windstream and certain of its creditors in the context of Windstream’s bankruptcy, and on May 12, 2020, the Bankruptcy Court entered an order approving Windstream’s assumption of the Master Lease as part of the Settlement. As a result, during the second quarter of 2020, we estimated that $650.0 million of the consideration paid to Windstream should be classified as settlement of litigation, and therefore, recorded a $650.0 million charge. The charge represented our estimated fair value of the litigation settlement component of the Settlement. On May 26, 2020, UMB Bank, National Association and U.S. Bank National Association ("U.S. Bank"), in their respective capacities as indenture trustees of Windstream’s bonds, filed a notice of appeal in the United States District Court for the Southern District of New York from the bankruptcy court’s May 12, 2020 order approving the settlement. On July 20, 2020, UMB Bank, National Association withdrew from the appeal. On June 22, 2021, the district court dismissed the appeal of the bankruptcy court’s order approving the settlement as equitably moot. On July 26, 2021, U.S. Bank filed a notice of appeal in the United States Court of Appeals for the Second Circuit from the district court’s order. On November 8, 2022, U.S. Bank petitioned the Second Circuit for a rehearing or, in the alternative, a rehearing en banc of the October 25 summary opinion affirming the district court's dismissal of U.S. Bank's appeal. On December 16, 2022, the Second Circuit denied the petition for a rehearing or a rehearing en banc.
On September 21, 2020, Windstream emerged from bankruptcy following its voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In connection with Windstream’s emergence from bankruptcy, Uniti entered into several agreements and consummated the transactions, each as described herein, to implement its settlement (the “Settlement”) with Windstream pursuant to the settlement agreement dated as of May 12, 2020 between Uniti and Windstream. Pursuant to the Settlement, Uniti and Windstream agreed to mutual releases with respect to any and all liability related to any claims and causes of action between them, including those brought by Windstream and certain of its creditors relating to Windstream’s Chapter 11 proceedings and the Master Lease. On January 8, 2021, Windstream filed in the bankruptcy court a stipulation and order dismissing the adversary proceeding against Uniti with prejudice subject to the terms set forth in the settlement agreement. The stipulation and order was entered by the bankruptcy court on January 25, 2021.
In accordance with the Settlement, we have a number of obligations including the following:
i.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 we may prepay any installments due on or after the first anniversary of the settlement agreement (discounted at a 9% rate). As of December 31, 2022, the Company has made payments totaling $215.4 million;
ii.we are obligated to reimburse Windstream for Growth Capital Improvements as described in Note 5; iii.we closed the Stock Purchase Agreement with certain first lien creditors of Windstream (see Note 20); and iv.we closed the Asset Purchase Agreement with Windstream (see Note 6). Debt Issuance Costs—The Company recognizes debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The costs, which include
underwriting, legal, and other direct costs related to the issuance of debt, are amortized over the contractual term of the debt using the effective interest method.
Revenue Recognition— The following is a description of principal activities, separated by reportable segments (see Note 15), from which the Company generates its revenues. We exclude from the transaction price any amounts collected from customers for sales taxes and therefore, they are not included in revenue. Leasing
Leasing revenue represents the results from our leasing segment, 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. See discussion in “Leases” in this Note 3 and Note 5. The Windstream Leases (as defined in Note 5) are long-term exclusive triple-net leases, whereby Windstream is responsible for the costs related to operating the Distribution Systems, including property taxes, insurance and maintenance and repair costs. As a result, we do not record an obligation related to the payment of property taxes or insurance, as Windstream makes direct payments to the taxing authorities and insurance carriers, respectively. Fiber Infrastructure
The Fiber Infrastructure segment represents the operations of our fiber business, Uniti Fiber, which provides:
i.Consumer, enterprise, wholesale, and backhaul lit fiber revenue is recognized over the life of the contracts in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.
ii.E-Rate contracts involve providing lit fiber services to schools and libraries, and revenue is recognized over the life of the contract in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.
iii.Small cell contracts provide improved network connection to areas that may not require or accommodate a tower. Small cell arrangements typically contain five streams of revenue: site development, radio frequency (“RF”) design, dark fiber lease, construction services, and maintenance services. Site development, RF design and construction are each separate services and are considered distinct performance obligations. Dark fiber and associated maintenance services constitute a lease, and as such, revenue is recognized under the leasing guidance.
iv.Construction revenue is generated from contracts to provide various construction services such as equipment installation or the laying of fiber. Construction revenue is recognized over time as construction activities occur as we are either enhancing a customer’s owned asset or constructing an asset with no alternative use to us and we would be entitled to our costs plus a reasonable profit margin if the contract was terminated early by the customer. We are utilizing our costs incurred as the measure of progress of satisfying our performance obligation.
v.Dark fiber arrangements represent operating leases and revenue is recognized under the leasing guidance. When (i) a customer makes an advance payment or (ii) a customer is contractually obligated to pay any amounts in advance, which is not deemed a separate performance obligation, deferred leasing revenue is recorded. This leasing revenue is recognized ratably over the expected term of the contract, unless the pattern of service suggests otherwise.
vi.The Company generates revenues from other services, such as consultation services and equipment sales. Revenue from the sale of customer premise equipment and modems that are not provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services is recognized when products are delivered to and accepted by
the customer. Revenue from customer premise equipment and modems provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services are recognized over time in a pattern that reflects the satisfaction of the service performance obligation.
Towers
The Towers segment represents the operations of our former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate, which we then leased to our customers in the United States and Latin America. Revenue from our towers business qualifies as lease revenues under ASC 842 and is outside the scope of ASC 606. The Company completed a series of transactions to largely divest of its towers business and on April 2, 2019, May 23, 2019 and June 1, 2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC
The Consumer CLEC segment represents the operations of our former small consumer competitive local exchange carrier business (the "Consumer CLEC Business" or "Talk America", which provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. Customers were billed monthly for services rendered based on actual usage or contracted amounts. The transaction price is equal to the monthly-recurring charge multiplied by the initial contract term (typically 12 months), plus any non-recurring or variable charges. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC Business.
Commissions – Under Topic 606 and Topic 340, Other Assets and Deferred Costs, we capitalize commission fees as costs of obtaining a contract when those commissions are incremental and expected to be recovered from the revenue contract and we amortize those capitalized costs consistent with the pattern of transfer of the product or service to which the capitalized costs relate. The amortization of these costs are included in general and administrative expense on the Consolidated Statements of Income (Loss).
We are exposed to credit losses primarily through our trade receivables. We assess ability to pay for certain customers by considering a variety of factors, such as the customer’s established credit rating, if available, and our assessment of creditworthiness. We determine the allowance for credit losses on accounts receivable using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are determined using loss rates based on historical experience and economic expectations. We update our estimate of credit loss reserves quarterly, considering recent write-offs, collections information and underlying economic expectations. The allowance for credit losses is recorded in accounts receivable, net on our Consolidated Balance Sheets. At December 31, 2022 and 2021, our allowance for credit losses was $2.9 million and $2.7 million, respectively. Credit losses for the years ended December 31, 2022, 2021 and 2020 were $0.6 million, $1.5 million and $1.8 million, respectively.
Straight-Line Revenue Receivable—We evaluate the collectability of our straight-line revenue receivables in accordance with the provisions of ASC 842, Leases ("ASC 842"), where if the collectability of lease payments is not probable at the commencement date, or at any time during the lease term, then we limit the lease revenue to the lesser of the revenue recognized on a straight-line basis or cash basis. If our assessment of collectability changes after the commencement date, we record the difference between the lease revenue that would have been recognized on a straight-line basis and cash basis as a current period adjustment to lease revenue.
Leases—We classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is comprised of amortization on the right-of-use (“ROU”) asset and interest expense recognized based on an effective interest method (a finance lease) or as a single lease cost recognized on a straight-line basis over the term of the lease (an operating lease). We recognize an ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
We enter into lease contracts including ground, towers, equipment, office, colocation and fiber lease arrangements, in which we are the lessee, and service contracts that may include embedded leases. Operating leases where we are the lessor are included in Leasing, Fiber Infrastructure and Tower revenues on our Consolidated Statements of Income (Loss).
From time to time we may enter into direct financing lease arrangements as a lessee that include (i) a lessee obligation to purchase the leased equipment at the end of the lease term, (ii) a bargain purchase option, (iii) a lease term having a duration that is for the major part of the remaining economic life of the leased equipment or (iv) provides for minimum lease payments with a present value amounting to substantially all of the fair value of the leased asset at the date of lease inception.
ROU assets and lease liabilities related to operating leases where we are the lessee are separately stated on our Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments.
ROU assets and lease liabilities related to finance leases where we are the lessee are included in property, plant and equipment, net and finance lease obligations, respectively, on our Consolidated Balance Sheets. The lease liabilities are initially measured in the same manner as operating leases and are subsequently measured at amortized cost using the effective interest method. ROU assets for finance leases are amortized on a straight-line basis over the remaining lease term.
Key estimates and judgments include how we determined (i) the discount rate we use to discount the unpaid lease payments to present value, (ii) lease term and (iii) lease payments.
i.ASC 842 requires a lessor to discount its unpaid lease payments using the interest rate implicit in the lease and a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As we generally do not know the implicit rate for our leases where we are the lessee, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
ii.The lease term for all of our leases includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.
iii.Lease payments included in the measurement of the lease asset or liability comprise the following: (i) fixed payments (including in-substance fixed payments), (ii) variable payments that depend on index or rate based on the index or rate at lease commencement, and (iii) the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
For operating leases where we are the lessor, we continue recognizing the underlying asset and depreciating it over its estimated useful life. Lease income is recognized on a straight-line basis over the lease term. Leasing revenue is not recognized when collection of all contractual rents over the term of the agreement is not probable. When collection is not probable, we limit the lease revenue to the lesser of the revenue recognized on a straight-line basis or cash basis.
Where we are the lessee, the ROU asset is initially measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.
For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the
underlying asset to us, or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.
Variable lease payments associated with our leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented within Leasing, Fiber Infrastructure and Tower revenues and general and administrative expense and operating expense in our Consolidated Statements of Income (Loss) in the same line item as revenue arising from fixed lease payments (operating leases where we are the lessor) and expense arising from fixed lease payments (operating leases where we are the lessee) or amortization of the ROU asset (finance leases), respectively.
We monitor for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in general and administrative and operating expense in our Consolidated Statements of Income (Loss).
We have lease agreements which include lease and nonlease components. For leases where we are a lessee, we have elected to combine lease and nonlease components for all lease contracts. For leases where we are the lessor, we combine the lease and non-lease components when the components qualify to be combined and we account for the combined arrangement based on whether the lease or non-lease component is predominant. Maintenance services are the primary nonlease components and the combined components typically are treated as leases for revenue recognition purposes.
We have elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term.
We have elected to exclude sales taxes from lease payments in arrangements where we are a lessor.
Stock-Based Compensation—We account for stock-based compensation using the fair value method of accounting. We have determined that our stock-based payment awards granted in exchange for employee services qualify as equity classified awards, which are measured based on the fair value of the award on the date of the grant. The fair value of restricted stock-based payments is based on the market value of our common stock on the date of grant. The fair value of performance-based awards, which have performance conditions, is based on a Monte Carlo simulation. The fair value of all stock-based compensation is recognized over the period during which an employee is required to provide services in exchange for the award. See Note 13. Income Taxes—We elected on our initial U.S. federal income tax return to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and certain subsidiaries of Uniti Leasing, and operated Talk America as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and interest expense as a component of income tax expense. We currently have unrecognized tax benefits of $1.7 million recorded in deferred income taxes on our Consolidated Balance Sheet.
The Company may be subject to state corporate level tax in a certain limited number of states on any built-in gain recognized from a sale of assets occurring within a ten-year recognition period after the Spin-Off. The five-year recognition period applicable for federal corporate level tax on any built-in gain recognized from a sale of assets occurring within five years after the Spin-Off expired in 2020.
Business Combinations and Asset Acquisitions—In accordance with ASC 805, Business Combinations, we apply the acquisition method of accounting for acquisitions meeting the definition of a business combination or asset acquisition, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. The fair value of the acquired assets and liabilities are estimated using the income, market and/or cost approach. The income approach utilizes the present value of estimated future cash flows that a business or asset can be expected to generate, while under the market approach, the fair value of an asset or business reflects the price at which comparable assets are purchased under similar circumstances. Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of operating results, business plans, expected growth rates, capital expenditure plans, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management. Small changes in these assumptions or estimates could materially affect the cash flow projections, and therefore could affect the estimated fair value. Impacts of these assumptions or estimates include customer retention, execution of our business plans, which impact growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including interest rate and stock price fluctuations, impacting our cost of capital.
For acquisitions meeting the definition of a business combination, any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. ASC 805 also requires acquirers to, among other things, estimate the acquisition date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
For acquisitions meeting the definition of an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. There are significant judgments and estimates used in determining the fair values of the assets acquired and liabilities assumed, which include assumptions with respect to items such as replacement cost, land value, assemblage factor, discount rate, lease-up period, implied rents per strand mile, and useful life. No goodwill is recognized in an asset acquisition.
Noncontrolling Interest—The limited partner equity interests in our operating partnership are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. All of the limited partner equity interests in our operating partnership not held by the Company are reflected as noncontrolling interests. In the Consolidated Statements of Income (Loss), we allocate net income (loss) attributable to noncontrolling interests to arrive at net (loss) income attributable to shareholders based on their proportionate share.
For transactions that result in changes to the Company's ownership interest in our operating partnership, the carrying amount of noncontrolling interests is adjusted to reflect such changes. The difference between the fair value of the
consideration received or paid and the amount by which the noncontrolling interest is adjusted is reflected as an adjustment to additional paid-in capital on the Consolidated Balance Sheets.
Investments in Unconsolidated Entities—We report our investments in unconsolidated entities under the equity method of accounting. We adjust our investments in unconsolidated entities for additional contributions made, distributions received as well as our share of the investees’ earnings or losses, which are reported on a 30-day lag for the investment in BB Fiber Holdings LLC (“Fiber Holdings”) and on a 90-day lag for the investment in Harmoni Towers LP (“Harmoni”), and are included in equity in earnings from unconsolidated entities in our Consolidated Statements of Income (Loss). See Note 7. Goodwill—As of December 31, 2022, and 2021, all of our goodwill is included in our Fiber Infrastructure segment. Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is reviewed for impairment at least annually. Our annual impairment test is performed with a valuation date of October 1. In accordance with ASC 350-20, Intangibles-Goodwill and Other ("ASC 350-20"), we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount (a “Triggering Event”). On the occurrence of a Triggering Event, an entity has the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If it is more likely than not that goodwill is impaired, the fair value of the reporting unit must be compared with its carrying value. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. Application of the goodwill impairment test requires significant judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; and the estimation of the fair value of a reporting unit. During the third quarter of 2022, the Company identified a triggering event under ASC 350-20 and, therefore, performed a qualitative and quantitative goodwill impairment test with a valuation date of September 30, 2022. The triggering event was a result of macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate. As a result, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less than its carrying amount. Accordingly, we recorded a $216.0 million goodwill impairment charge in the Fiber Infrastructure reporting unit. During the fourth quarter of 2022, we performed an additional quantitative and qualitative impairment test, and concluded that as a result of the continuing macroeconomic and financial market factors, specifically increased interest rates impacting our discount rate, the fair value of the Fiber Infrastructure reporting unit was less than its carrying amount. As a result, we recorded a $24.5 million goodwill impairment charge in the Fiber Infrastructure reporting unit.
During the year ended December 31, 2021, no impairment losses were recognized. During the year ended December 31, 2020, we performed our annual goodwill impairment analysis during the fourth quarter of 2020 and concluded that, as a result of increased capital expenditure investments in dark fiber and small cell projects and less than anticipated cash flow growth, the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less that its carrying amount. Accordingly, we recorded a $71 million goodwill impairment in the Fiber Infrastructure reporting unit.
We estimate the fair value of our reporting units (which are our segments) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent transactions. We evaluate the appropriateness of each valuation methodology in determining the weighting applied to each methodology in the determination of the concluded fair value. If the carrying amount of a reporting unit's net assets is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, an impairment loss must be recognized for the excess and recorded in the Consolidated Statements of Income (Loss) not to exceed the carrying amount of goodwill.
Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of our operating results and business plans, which includes expected revenue and expense growth rates, capital expenditure plans and cost of capital. In determining these assumptions, we consider our ability to execute on our plans, future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Small changes in these assumptions or estimates could materially affect our cash flow projections, and therefore could affect the likelihood and amount of potential impairment in future periods. Potential events that could negatively impact these assumptions or estimates may include customer losses or poor execution of our business plans, which impact revenue growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital. For example, if we were to experience a significant delay in our permitting process in the construction of our fiber networks, the timing of effected cash flows could impact long term growth rates and negatively impact the income approach, leading to potential impairment. As a result, should our
expectations of average projected revenue growth percentage, average projected EBITDA margin percentage and/or average projected capital expenditures as a percentage of revenue change, we may experience future impairment to goodwill (while other assumptions remain constant). Furthermore, a deterioration in market factors such as stock prices or increased interest rates and/or declines in acquisition multiples utilized in the market approach could affect the likelihood and amount of potential impairment.
Earnings per Share—Outstanding restricted stock awards that contain rights to non-forfeitable dividends are deemed to be participating securities, requiring the application of the two-class method of computing basic and dilutive earnings per share.
Basic earnings per share includes only the weighted average number of common shares outstanding during the period. Dilutive earnings per share includes the weighted average number of common shares and the dilutive effect of restricted stock, performance-based awards outstanding during the period, the Convertible 2027 Notes and the Exchangeable Notes, when such awards are dilutive. See Note 14. Concentration of Credit Risks—Revenue under the Windstream Leases provided 66.5% of our revenue for the year ended December 31, 2022, 66.4% of our revenue for the year ended December 31, 2021, and 65.8% of our revenue for the year ended December 31, 2020. 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 historic filings through their quarter ended June 30, 2020 can be found at www.sec.gov. 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’s filings are not incorporated by reference in this Annual Report on Form 10-K.
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 new 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 Annual Report on Form 10-K, 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. These ratings were both upgrades from Windstream’s pre-bankruptcy ratings. 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. Operating lease right of use assets, net and operating lease liabilities are now presented separately on our Consolidated Balance Sheets.
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 (“ASU 2021-04”), 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. The Company adopted ASU 2021-04 effective January 1, 2022, and there was no impact on our consolidated financial statements.
In July 1, 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 a sales-type or direct financing lease. The Company adopted ASU 2021-05 effective January 1, 2022, and there was no impact on our consolidated financial statements.
Note 4. Revenues
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands) | | 2022 | | 2021 | | 2020 |
Revenue disaggregated by revenue stream | | | | | | |
Revenue from contracts with customers | | | | | | |
Fiber Infrastructure | | | | | | |
Lit backhaul | | $ | 78,977 | | | $ | 86,915 | | | $ | 106,125 | |
Enterprise and wholesale | | 85,820 | | | 86,390 | | | 78,702 | |
E-Rate and government | | 64,219 | | | 74,396 | | | 80,428 | |
Other | | 2,827 | | | 3,272 | | | 4,341 | |
Fiber Infrastructure | | $ | 231,843 | | | $ | 250,973 | | | $ | 269,596 | |
Leasing | | 4,590 | | | 4,449 | | | 1,420 | |
Consumer CLEC | | — | | | — | | | 651 | |
Total revenue from contracts with customers | | 236,433 | | | 255,422 | | | 271,667 | |
Revenue accounted for under leasing guidance | | | | | | |
Leasing | | 822,867 | | | 797,048 | | | 744,495 | |
Fiber Infrastructure | | 69,547 | | | 48,052 | | | 44,767 | |
Towers | | — | | | — | | | 6,112 | |
Total revenue accounted for under leasing guidance | | 892,414 | | | 845,100 | | | 795,374 | |
Total revenue | | $ | 1,128,847 | | | $ | 1,100,522 | | | $ | 1,067,041 | |
At December 31, 2022 and 2021, lease receivables were $26.2 million and $19.4 million, respectively, and receivables from contracts with customers were $16.1 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 receivables, net on our Consolidated Balance Sheets. 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 years ended December 31, 2022, 2021, and 2020, we recognized revenues of $6.4 million, $13.2 million, and $5.4 million, respectively that was included in the December 31, 2021, December 31, 2020, and December 31, 2019 contract liabilities balance, respectively.
The following table provides information about contract assets and contract liabilities accounted for under Topic 606.
| | | | | | | | | | | | | | |
(Thousands) | | Contract Assets | | Contract Liabilities |
Balance at December 31, 2021 | | $ | 4,066 | | | $ | 9,099 | |
Balance at December 31, 2022 | | $ | 173 | | | $ | 8,699 | |
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 December 31, 2022, our future revenues (i.e. transaction price related to remaining performance obligations) under contract accounted for under ASC 606 totaled $563.4 million, of which $463.8 million is related to contracts that are currently being invoiced and have an average remaining contract term of 2.3 years, while $99.7 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of 5.7 years. We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.
Note 5. Leases
Lessor Accounting
We lease communications towers, ground, colocation, other communication equipment 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 years ended December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
Lease income - operating leases | | $ | 892,414 | | | $ | 845,100 | |
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms as of December 31, 2022 are as follows:
| | | | | | | | |
(Thousands) | | December 31, 2022 (1) |
2023 | | $ | 779,794 | |
2024 | | 792,205 | |
2025 | | 793,341 | |
2026 | | 794,728 | |
2027 | | 795,338 | |
Thereafter | | 2,295,504 | |
Total lease receivables | | $ | 6,250,910 | |
(1) Total future minimum lease payments to be received include $5.3 billion relating to the Windstream Leases. |
The underlying assets under operating leases where we are the lessor as of December 31, 2022 and 2021 are summarized as follows:
| | | | | | | | | | | | | | |
(Thousands) | | December 31, 2022 | | December 31, 2021 |
Land | | $ | 26,549 | | | $ | 26,593 | |
Building and improvements | | 346,093 | | | 343,624 | |
Poles | | 296,941 | | | 281,130 | |
Fiber | | 3,529,835 | | | 3,278,276 | |
Equipment | | 437 | | | 428 | |
Copper | | 3,964,439 | | | 3,918,281 | |
Conduit | | 89,963 | | | 89,859 | |
Tower assets | | 1,397 | | | 1,397 | |
Finance lease assets | | 28,126 | | | 28,126 | |
Other assets | | 10,434 | | | 10,649 | |
| | 8,294,214 | | | 7,978,363 | |
Less: accumulated depreciation | | (5,542,726) | | | (5,391,479) | |
Underlying assets under operating leases, net | | $ | 2,751,488 | | | $ | 2,586,884 | |
Depreciation expense for the underlying assets under operating leases where we are the lessor for the years ended December 31, 2022 and 2021 is summarized as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
Depreciation expense for underlying assets under operating leases | | $ | 176,160 | | | $ | 178,348 | |
Lessee Accounting
We have commitments under operating leases for communications towers, ground, colocation, other communication equipment, dark fiber lease arrangements and buildings. We also have finance leases for automobiles and dark fiber lease arrangements. 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 December 31, 2022, we have short term lease commitments amounting to approximately $2.9 million, for colocation and dark fiber arrangements.
The components of lease cost are presented within general and administrative expense and operating expense, while sublease income is presented within revenues in our Consolidated Statements of Income (Loss) for the years ended December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
Finance lease cost | | | | |
Amortization of ROU assets | | $ | 3,793 | | | $ | 4,649 | |
Interest on lease liabilities | | 1,437 | | | 2,383 | |
Total finance lease cost | | 5,230 | | | 7,032 | |
Operating lease cost | | 19,946 | | | 18,886 | |
Short-term lease cost | | 3,109 | | | 2,885 | |
Variable lease cost | | 547 | | | 492 | |
Less sublease income | | (13,683) | | | (12,752) | |
Total lease cost | | $ | 15,149 | | | $ | 16,543 | |
Amounts reported in the Consolidated Balance Sheets for leases where we are the lessee as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Location on Consolidated Balance Sheets | | December 31, 2022 | | December 31, 2021 |
Operating leases | | | | | | |
ROU asset, net | | Operating lease right-of-use assets, net | | $ | 88,545 | | | $ | 80,271 | |
ROU liability | | Operating lease liabilities | | 66,356 | | | 57,349 | |
| | | | | | |
Finance leases | | | | | | |
ROU asset, gross | | Property, plant and equipment, net | | $ | 73,487 | | | $ | 72,284 | |
ROU liability | | Finance lease obligations | | 15,520 | | | 15,348 | |
| | | | | | |
Weighted-average remaining lease term | | | | | | |
Operating leases | | | | 10.1 years | | 9.4 years |
Finance leases | | | | 11.5 years | | 12.8 years |
| | | | | | |
Weighted-average discount rate | | | | | | |
Operating leases | | | | 8.6 | % | | 8.6 | % |
Finance leases | | | | 10.1 | % | | 10.6 | % |
Other information related to leases as of December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows for finance leases | | $ | 1,437 | | | $ | 2,383 | |
Operating cash flows for operating leases | | 19,874 | | | 22,471 | |
Financing cash flows for finance leases | | 1,193 | | | 2,019 | |
| | | | |
Non-cash items: | | | | |
New operating leases and remeasurements, net | | $ | 23,173 | | | $ | 15,230 | |
New finance leases | | 1,314 | | | — | |
Future lease payments under non-cancellable leases as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Operating Leases | | Finance Leases |
2023 | | $ | 16,252 | | | $ | 2,560 | |
2024 | | 13,755 | | | 2,370 | |
2025 | | 11,113 | | | 2,316 | |
2026 | | 8,440 | | | 2,316 | |
2027 | | 5,908 | | | 2,185 | |
Thereafter | | 47,179 | | | 12,718 | |
Total undiscounted lease payments | | $ | 102,647 | | | $ | 24,465 | |
Less: imputed interest | | (36,291) | | | (8,945) | |
Total lease liabilities | | $ | 66,356 | | | $ | 15,520 | |
Future sublease rentals as of December 31, 2022 are as follows:
| | | | | | | | |
(Thousands) | | Sublease Rentals |
2023 | | $ | 9,659 | |
2024 | | 9,763 | |
2025 | | 9,852 | |
2026 | | 9,937 | |
2027 | | 9,961 | |
Thereafter | | 124,096 | |
Total | | $ | 173,268 | |
Windstream Leases
Pursuant to the Spin-Off, Uniti entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream, pursuant to which a substantial portion of our real property is leased to Windstream and from which a substantial portion of our leasing revenues are currently derived. In connection with Windstream’s emergence from bankruptcy, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases that each expire on April 30, 2030 (collectively, the “Windstream Leases”), which Windstream Leases amended and restated the Master Lease in its entirety. The Windstream Leases consist of two leases: (a) a master lease (the “ILEC MLA”) that governs Uniti owned assets used for Windstream’s incumbent local exchange carrier (“ILEC”) operations and (b) a master lease (the “CLEC MLA”) that governs Uniti owned assets used for Windstream’s competitive local exchange carrier (“CLEC”) operations. The aggregate initial annual rent under the Windstream Leases is $663.0 million. The tenants under the ILEC MLA are Windstream Holdings II, LLC (“Windstream Holdings II,” successor in interest to Windstream Holdings, Inc.), Windstream Services II, LLC (“Windstream Services II,” successor in interest to Windstream Services LLC), and certain
subsidiaries and/or newly formed affiliated entities operating the ILECs, and the landlords under the ILEC MLA are the Uniti entities that own the applicable ILEC assets. Similarly, the tenants under the CLEC MLA are Windstream Holdings II, Windstream Services II, and certain subsidiaries and/or newly formed affiliated entities operating CLECs, and the landlords under the CLEC MLA are the Uniti entities that own the CLEC assets. The Windstream Leases contain cross-guarantees and cross-default provisions, which will remain effective as long as Windstream or an affiliate is the tenant under both of the Windstream Leases and unless and until the landlords under the ILEC MLA are different from the landlords under the CLEC MLA. The Windstream Leases permit Uniti to transfer its rights and obligations and otherwise monetize or encumber the Windstream Leases, together or separately, so long as Uniti does not transfer interests in either Windstream Lease to a Windstream competitor.
In addition, the Windstream Leases impose certain financial restrictions on Windstream if Windstream fails to maintain certain financial covenants. Windstream covenants not to incur certain indebtedness (other than certain refinancing in a principal amount that does not exceed the sum of the principal amount of the indebtedness refinanced, the accrued and unpaid interest on such indebtedness refinanced and any other amounts owing thereon and any customary costs incurred in connection with such refinancing or drawings under its third party syndicated revolving credit facility, in an amount not to exceed $750 million) if its total leverage ratio, pro forma for the incurrence of such indebtedness, would exceed 3.00 :1:00. Further, Windstream covenants not to incur certain additional indebtedness, pay dividends, repurchase stock or prepay unsecured debt, or enter into a transaction with an entity controlled by a member of the board without Uniti’s consent if Windstream’s total leverage ratio exceeds 3.50:1.00. Notwithstanding the foregoing, the financial covenants described herein shall not apply at any time in which Windstream maintains a corporate family rating of not less than “B2” by Moody’s and either “B” by Standard & Poor’s or “B” by Fitch Ratings.
Pursuant to the Windstream Leases, Windstream (or any successor tenant under a Windstream Lease) has the right to cause Uniti to reimburse up to an aggregate $1.75 billion for certain growth capital improvements in long-term value accretive fiber and related assets made by Windstream (or the applicable tenant under the Windstream Lease) to certain ILEC and CLEC properties (the “Growth Capital Improvements”). 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 CLEC MLA leased property, 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 $125 million in 2020, $225 million in 2021 and 2022 and are limited to $225 million per year in 2023 and 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, except that, during calendar year 2021, Uniti’s combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2020. 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 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 Improvement 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. No such loans have been made to Windstream as of December 31, 2022.
The Windstream Leases provide that TCIs, defined as maintenance, repair, overbuild, upgrade or replacement to the Distribution Systems, including without limitation, the replacement of copper distribution systems with fiber distribution systems, automatically become property of Uniti upon their construction by Windstream. We receive non-monetary consideration related to TCIs as they automatically become our property, and we recognize the cost basis of TCIs that are capital in nature as real estate investments and deferred revenue. We depreciate the real estate investments over their estimated useful lives and amortize the deferred revenue as additional leasing revenues over the same depreciable life of the TCI assets. TCIs exclude Growth Capital Improvements as an when reimbursed by Uniti.
During the year ended December 31, 2022, Uniti reimbursed $238.0 million of Growth Capital Improvements, of which $30.9 million, as allowed for under the Settlement, represented the reimbursement of capital improvements completed in 2021 that were previously classified as TCIs. Subsequent to December 31, 2022, Windstream requested and we reimbursed $19.5 million of qualifying Growth Capital Improvements that were reported as TCIs as of December 31, 2022. As of the date of this Annual Report on Form 10-K, we have reimbursed a total of $563.6 million of Growth Capital Improvements.
Note 6. Business Combinations, Asset Acquisitions and Dispositions
2021 Transactions
Everstream OpCo-PropCo Transaction
On May 28, 2021, the Company completed its previously announced strategic transaction with Everstream Solutions LLC (“Everstream”). As part of the transaction, Uniti entered into two 20-year dark fiber indefeasible rights of use (“IRU”) lease agreements with Everstream on Uniti owned fiber. Concurrently, Uniti sold its Uniti Fiber Northeast operations and certain dark fiber IRU contracts acquired as part of the Windstream settlement to Everstream. Total cash consideration, including upfront IRU payments, was approximately $135 million. In addition to the upfront proceeds, Uniti will receive fees of approximately $3 million annually from Everstream over the initial 20 -year term of the IRU lease agreements, subject to an annual escalator of 2%. During the quarter ended June 30, 2021, we recorded a gain of $28.1 million related to this transaction, which is included in gain on sale of operations in our Consolidated Statements of Income (Loss).
| | | | | | | | |
(Thousands) | | |
Assets and liabilities sold: | | |
Assets: | | |
Property, plant and equipment, net | | $ | 44,685 | |
Goodwill | | 17,794 | |
Intangible assets, net | | 7,264 | |
Right of use assets, net | | 19,841 | |
Total assets | | $ | 89,584 | |
| | |
Liabilities: | | |
Lease liabilities | | $ | 18,779 | |
Intangible liabilities, net | | 4,492 | |
Finance lease obligations | | 32,343 | |
Total liabilities | | $ | 55,614 | |
| | |
Cash consideration | | $ | 62,113 | |
Less: total assets and liabilities sold, net | | (33,970) | |
Gain on sale of operations | | $ | 28,143 | |
2020 Transactions
Windstream Settlement Agreement
On September 18, 2020, and in furtherance of the settlement agreement (see Note 16), Uniti and Windstream closed an asset purchase agreement, as amended by a letter agreement (collectively, the “Asset Purchase Agreement”), pursuant to which (a) Uniti paid to Windstream approximately $284.6 million and (b) Windstream (i) granted to Uniti exclusive rights to use 1.8 million fiber strand miles leased by Windstream under the CLEC MLA, which fiber strands are either unutilized or utilized under certain dark fiber indefeasible rights of use (“IRUs”) that were simultaneously transferred to Uniti, (ii) conveyed to Uniti fiber assets (and underlying rights) consisting of 0.4 million fiber strand miles (covering 4,000 route miles) owned by Windstream, and (iii) transferred and assigned to subsidiaries of Uniti dark fiber IRUs relating to (x) the fiber strand miles granted to Uniti under the CLEC MLA (and described in clause (i)) and (y) the fiber assets (and underlying rights) for the 0.4 million fiber strand miles conveyed to Uniti (and described in clause (ii)), which IRUs generated $28.9 million of annual EBITDA in the aggregate as of the closing of the Asset Purchase Agreement. In addition, upon the transfer of the Windstream owned fiber assets (described in clause (ii) above), Uniti granted to Windstream a 20-year IRU for certain strands included in the transferred fiber assets. The Company concluded that the Asset Purchase Agreement, and the obligation for Uniti to make cash payments to Windstream in accordance with the terms of the settlement agreement (see Note 16), should be combined for the accounting purpose of ASC 842. As such, total consideration provided to Windstream under the Settlement has been allocated as follows: | | | | | | | | |
(Thousands) | | |
Consideration: | | |
Asset Purchase Agreement | | $ | 284,550 | |
Fair value of settlement obligation | | 438,577 | |
Total consideration | | $ | 723,127 | |
| | |
Fair values of the assets acquired and liabilities assumed as of the acquisition date: | | |
Property, plant and equipment | | $ | 170,754 | |
Intangible assets, net | | 69,832 | |
Other assets | | 27,632 | |
Intangible liabilities, net | | (195,091) | |
Total assets acquired, net | | 73,127 | |
Settlement expense | | 650,000 | |
Total | | $ | 723,127 | |
Of the $69.8 million of intangible assets acquired, $59.3 million is related to contracts (8-year weighted-average life) and $10.5 million is related to underlying rights agreements (30-year life). The Company determined the useful life of the contract intangible assets using the weighted-average remaining term and the rights of way intangible asset by aligning the useful life of the intangible assets with that of the underlying fiber assets acquired. The intangible liabilities represent below market leases, where we are the lessor, and has a weighted-average useful life of 19 years, which aligns with the terms of the agreements. Acquired right of use assets of $27.6 million are recorded within other assets on our Consolidated Balance Sheets.
Sale of Midwest Fiber Network
On July 1, 2020, the Company completed the sale of the entity that controlled the Company’s Midwest fiber network assets (the “Propco”) to Macquarie Infrastructure Partners (“MIP”), selling net assets having a book value of $186.5 million for total cash consideration of $167.6 million. The Company retained a 20% investment interest in the Propco, having a fair value of $41.9 million, through a newly-formed limited liability company with MIP. During the third quarter of 2020, we recorded a gain of $23.0 million related to this transaction.
Sale of U.S. Tower Portfolio
On June 1, 2020, the Company completed the sale of its U.S. tower business to Melody, selling net assets having a book value of $190.0 million for total cash consideration of $225.8 million. The Company retained a 10% investment interest in the tower business, having a fair value of $26.0 million, through a newly-formed limited partnership with Melody, and will receive incremental earn-out payments, estimated to be $1.6 million, which is included in other assets on the Consolidated Balance Sheet as of December 31, 2022. During the second quarter of 2020, we recorded a gain of $63.4 million related to this transaction.
Note 7. Investment in Unconsolidated Entities
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 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, as equity method unconsolidated entity, was approximately $38.7 million as of December 31, 2022. The Company has not provided financial support to Fiber Holdings.
Harmoni
On June 21, 2022, the Company completed the sale of its investment in Harmoni Towers LP to Palistar Communications Infrastructure GP LLC, our partner in the investment, for total cash consideration of $32.5 million. As a result of the transaction, during the second quarter of 2022 we recorded a pre-tax gain of $7.9 million within other income (expense), net and $6.7 million of income tax expense within our Consolidated Statements of Income (Loss).
Note 8. 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 instruments, contingent consideration, 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 December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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, 2022 | | | | | | | | |
Liabilities | | | | | | | | |
Senior secured notes - 7.875%, due February 15, 2025 | | $ | 2,208,319 | | | $ | — | | | $ | 2,208,319 | | | $ | — | |
Senior secured notes - 4.75%, due April 15, 2028 | | 469,740 | | | — | | | 469,740 | | | — | |
Senior unsecured notes - 6.50%, due February 15, 2029 | | 759,917 | | | — | | | 759,917 | | | — | |
Senior unsecured notes - 6.00%, due January 15, 2030 | | 467,401 | | | — | | | 467,401 | | | — | |
Convertible senior notes - 7.50%, due December 1, 2027 | | 297,765 | | | — | | | 297,765 | | | — | |
Exchangeable senior unsecured notes - 4.00%, due June 15, 2024 | | 127,024 | | | — | | | 127,024 | | | — | |
Senior secured revolving credit facility, variable rate, due December 10, 2024 | | 187,981 | | | — | | | 187,981 | | | — | |
Settlement payable | | 232,350 | | | — | | | 232,350 | | | — | |
Total | | $ | 4,750,497 | | | $ | — | | | $ | 4,750,497 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 unsecured 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 Notes and other debt was $5.26 billion at December 31, 2022, with a fair value of $4.52 billion. The estimated fair value of the 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 instruments are carried at fair value. See Note 10. The fair value of our 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 instruments 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 December 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 instruments 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 12) 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 October 2020 (the “Settlement Payable”) (see Note 3). 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 $251.1 million and is reported as settlement payable on our Consolidated Balance Sheet at December 31, 2022. There have been no changes in the valuation methodologies used since the initial recording. We acquired Tower Cloud, Inc. (“Tower Cloud”) on August 31, 2016. As part of the Tower Cloud acquisition, we were obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones from the date of acquisition through December 31, 2021. During the three months ended March 31, 2021, the Company paid $3.0 million for the achievement of the final remaining milestone in accordance with the Tower Cloud merger agreement.
Changes in the fair value of contingent consideration were recorded in our Consolidated Statements of Income (Loss) in the period in which the change occurred. The final measurement of the contingent consideration was recorded during the three months ended March 31, 2021, resulting in an increase in the fair value of less than $0.1 million. For the year ended December 31, 2020, there was a $7.2 million increase in the fair value of the contingent consideration that was recorded in Other (income) expense on the Consolidated Statements of Income (Loss).
Note 9. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Depreciable Lives(1) | | December 31, 2022 | | December 31, 2021 |
Land | | Indefinite | | $ | 28,845 | | | $ | 28,449 | |
Building and improvements | | 3 - 40 years | | 363,077 | | | 359,980 | |
Poles | | 30 years | | 296,941 | | | 281,130 | |
Fiber | | 30 years | | 4,434,506 | | | 4,107,519 | |
Equipment | | 5 - 7 years | | 399,473 | | | 331,761 | |
Copper | | 20 years | | 3,964,439 | | | 3,918,281 | |
Conduit | | 30 years | | 89,963 | | | 89,859 | |
Tower assets | | 20 years | | 5,619 | | | 8,544 | |
Finance lease assets | | See Note 3 | | 73,487 | | | 72,284 | |
Construction in progress | | See Note 3 | | 46,508 | | | 27,366 | |
Other assets | | 15 - 20 years | | 10,436 | | | 10,652 | |
Corporate assets | | 3 - 7 years | | 14,883 | | | 14,326 | |
| | | | 9,728,177 | | | 9,250,151 | |
Less accumulated depreciation | | | | (5,973,630) | | | (5,741,212) | |
Property, plant and equipment, net | | | | $ | 3,754,547 | | | $ | 3,508,939 | |
(1)Certain property acquired from Windstream is depreciated using Windstream's estimated useful lives. Specifically, certain Fiber assets are depreciated using an average 20 year life.
Finance lease assets above predominantly represent fiber leases, where we have the exclusive, unrestricted, and indefeasible right to use one, a pair, or more strands of fiber of a fiber cable.
Depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $263.0 million, $261.2 million and $301.2 million, respectively.
Note 10. 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 facility. These interest rate swaps were designated as cash flow hedges and had a notional value of $2.0 billion. As result of the repayment of the Company’s senior secured term loan facility in February of 2020 (see Note 12), the Company entered into receive-fixed interest rate swaps to offset its existing pay-fixed interest rate swaps, which matured on October 24, 2022. 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, were 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 Consolidated Balance Sheets. The following table presents the gross amounts of our derivative instruments subject to master netting arrangements with the same counterparty as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Assets and Liabilities (Thousands) | | Gross Amounts of Recognized Assets or Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets or Liabilities presented in the 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 Consolidated Balance Sheet:
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Location on Consolidated Balance Sheet | | December 31, 2022 | | December 31, 2021 |
Interest rate swaps | | Derivative liability, net | | $ | — | | | $ | 10,413 | |
As of December 31, 2022, all of the interest rate swaps matured and have no impact on the Consolidated Balance Sheets. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the year ended December 31, 2022 was $9.2 million.
As of December 31, 2021, all of the interest rate swaps were valued in net unrealized loss positions and recognized as a liability balance within the derivative liability, net on the 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. For the year
ended December 31, 2020, the amount recorded in other comprehensive income related to the derivative instruments was a $7.7 million unrealized loss. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the years ended December 31, 2021 and 2020 was $11.3 million and $10.8 million, respectively.
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes (see Note 12), and on June 27, 2019, concurrently with the exercise by the initial purchasers of their option to purchase additional Exchangeable Notes, Uniti Fiber Holdings Inc., the issuer of the Exchangeable Notes, entered into the Note Hedge Transactions with certain of the 2019 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 Holdings Inc. 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 2019 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. Uniti Fiber Holdings Inc. used approximately $70.0 million of the net proceeds from the offering of the Exchangeable Notes to pay the cost of the Note Hedge Transactions. The Note Hedge Transactions meet certain accounting criteria under GAAP and are recorded in additional paid-in capital on our 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 2019 Counterparties Warrants to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million 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 (the “Securities Act”). 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 2019 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 Company received approximately $50.8 million from the offering and sale of the Warrants. The Warrants meet certain accounting criteria under GAAP and are recorded in additional paid-in capital on our Consolidated Balance Sheets are not accounted for as derivatives that are remeasured each reporting period.
Capped Call Transactions
On December 7, 2022, in connection with the pricing of the Convertible 2027 Notes (see Note 12), the Company entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institutions at a cost of $21.1 million. The Capped Calls cover the same number of shares of the Company’s common stock that initially underlie the Convertible 2027 Notes in the aggregate. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Convertible 2027 Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Convertible 2027 Notes its common stock price exceeds the conversion price of the Convertible 2027 Notes. The cap price of the Capped Calls will initially be $10.63 per
share of common stock, which represents a premium of 75% over the last reported sale price of the Company’s common stock of $6.075 per share on December 7, 2022 and is subject to customary anti-dilution adjustments substantially similar to those applicable to the Convertible 2027 Notes. The Company used approximately $21.1 million of the net proceeds from the offering of the Convertible 2027 Notes to pay for the cost of the Capped Calls. The Capped Calls meet the criteria for classification in equity, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity.
Additionally on December 7, 2022, in connection with the Company’s repurchase of the Exchangeable Notes, the Company entered into partial unwind agreements (the “Unwind Agreements”) with the 2019 Counterparties to unwind (see Note 12) a portion of the Note Hedge Transactions and the Warrant described above (collectively, the “Unwind Transactions”). In connection with the Unwind Transactions, the Company received cash as a termination payment for of the portion of the Note Hedge Transactions that were unwound, and the Company delivered cash as a termination payment in respect of the portion of the Warrants that were unwound. The amount of cash that was received, which was approximately $1.2 million, and the amount of cash that was delivered to the 2019 Counterparties, which was approximately $0.5 million, were based generally on the termination values of the unwound portions of such instruments.
Note 11. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Fiber Infrastructure | | Total |
Goodwill at December 31, 2020 | | $ | 672,878 | | | $ | 672,878 | |
Accumulated impairment charges as of December 31, 2020 | | (71,000) | | | (71,000) | |
Balance at December 31, 2020 | | 601,878 | | | 601,878 | |
Balance at December 31, 2021 | | 601,878 | | | 601,878 | |
Goodwill impairment (Note 3) | | (240,500) | | | (240,500) | |
Balance at December 31, 2022 | | $ | 361,378 | | | $ | 361,378 | |
Goodwill at December 31, 2022 | | $ | 672,878 | | | $ | 672,878 | |
Accumulated impairment charges as of December 31, 2022 | | $ | (311,500) | | | $ | (311,500) | |
The carrying value of our other intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | December 31, 2022 | | December 31, 2021 |
| | Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Finite life intangible assets: | | | | | | | | |
Customer lists | | $ | 416,104 | | | $ | (128,728) | | | $ | 416,104 | | | $ | (105,861) | |
Contracts | | 52,536 | | | (14,776) | | | 52,536 | | | (8,209) | |
Underlying rights | | 10,497 | | | (787) | | | 10,497 | | | (437) | |
| | | | | | | | |
Total intangible assets | | $ | 479,137 | | | | | $ | 479,137 | | | |
Less: accumulated amortization | | (144,291) | | | | | (114,507) | | | |
Total intangible assets, net | | $ | 334,846 | | | | | $ | 364,630 | | | |
| | | | | | | | |
Finite life intangible liabilities: | | | | | | | | |
Acquired below-market leases | | $ | 191,154 | | | $ | (24,062) | | | $ | 191,154 | | | $ | (13,368) | |
| | | | | | | | |
Total intangible liabilities | | 191,154 | | | | | 191,154 | | | |
Less: accumulated amortization | | (24,062) | | | | | (13,368) | | | |
Total intangible liabilities, net | | $ | 167,092 | | | | | $ | 177,786 | | | |
| | | | | | | | |
As of December 31, 2022, the remaining weighted average amortization period of the Company’s intangible assets was 14.2 years.
Amortization expense for the years ended December 31, 2022, 2021 and 2020 was $29.8 million, $29.8 million and $28.2 million, respectively. Amortization expense is estimated to be $29.8 million in 2023, $29.7 million in 2024, $29.7 million in 2025, $29.7 million in 2026 and $29.7 million in 2027.
We recognize the amortization of below-market leases in revenue in arrangements where we are the lessor. Revenue related to the amortization of the below-market leases for the years ended December 31, 2022 and December 31, 2021 was $10.7 million and $10.7 million respectively. We recognized no revenue from intangible liabilities for the year ended December 31, 2020. As of December 31, 2022, the remaining weighted average amortization period of the Company’s intangible liabilities was 17.0 years. Revenue due to the amortization of the below-market leases is estimated to be $10.7 million in 2023, $10.7 million in 2024, $10.7 million in 2025, $10.7 million in 2026, and $10.7 million in 2027.
Note 12. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt is as follows:
| | | | | | | | | | | | | | |
(Thousands) | | December 31, 2022 | | December 31, 2021 |
Principal amount | | $ | 5,262,373 | | | $ | 5,175,000 | |
Less unamortized discount, premium and debt issuance costs | | (73,558) | | | (84,463) | |
Notes and other debt less unamortized discount and debt issuance costs | | $ | 5,188,815 | | | $ | 5,090,537 | |
Notes and other debt at December 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 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 | | | (22,239) | | | 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 | | | (7,654) | | | 570,000 | | | (8,886) | |
Exchangeable senior unsecured notes - 4.00%, due June 15, 2024 (discount is based on imputed interest rate of 4.77%) | | 137,873 | | | (1,501) | | | 345,000 | | | (6,187) | |
Convertible senior notes - 7.50%, due December 1, 2027 (discount is based on imputed interest rate of 8.29%) | | 306,500 | | | (9,768) | | | — | | | — | |
Senior unsecured notes - 6.50%, due February 15, 2029 (discount is based on imputed interest rate of 6.83%) | | 1,110,000 | | | (18,245) | | | 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 | | | (10,535) | | | 700,000 | | | (11,689) | |
Senior secured revolving credit facility, variable rate, due December 10, 2024 | | 188,000 | | | (3,616) | | | 200,000 | | | (5,493) | |
Total | | $ | 5,262,373 | | | $ | (73,558) | | | $ | 5,175,000 | | | $ | (84,463) | |
At December 31, 2022, notes and other debt included the following: (i) $188.0 million under the Revolving Credit Facility (as defined below) pursuant to the credit agreement by and among the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, 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 April 15, 2028 (the “2028 Secured Notes”); (iv) $1.11 billion aggregate principal amount of 6.50% Senior Unsecured Notes due February 15, 2029 (the “2029 Notes”); (v) $137.9 million aggregate principal amount of the Exchangeable Notes; (vi) $700.0 million aggregate principal amount of 6.00% Senior Secured Notes due January 15, 2030 (the “2030 Notes” and collectively with the 2025 Secured Notes, 2028 Secured Notes, 2029 Notes, the Exchangeable Notes, and the 2030 Notes, the “Notes”); and (vii) $306.5 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 (the "Convertible 2027 Notes").
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 swing line 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 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 December 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.
The Notes
Secured Notes
The Operating Partnership, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings Inc. (collectively, the “Issuers”), have outstanding $2.25 billion aggregate principal amount of the 2025 Secured Notes, which were issued on February 10, 2020. The 2025 Secured Notes mature on February 15, 2025 and bear interest at a rate of 7.875% per year. Interest on the 2025 Secured Notes is payable on February 15 and August 15 of each year. On February 14, 2023, the Issuers issued $2.6 billion aggregate principal amount of the 10.50% Senior Secured Notes due 2028 (the “Secured Notes due February 2028”). The Issuers used the net proceeds from the offering to fund the redemption in full of the Issuers’ outstanding 2025 Secured Notes, to repay outstanding borrowings under the Revolving Credit Facility and to pay any related premiums, fees and expenses in connection with the foregoing. The Issuers deposited funds with the trustee sufficient to fund the redemption in full of the 2025 Secured Notes and satisfied and discharged their obligations with respect to the 2025 Secured Notes. See Note 23. On April 20, 2021, the Borrowers issued $570.0 million aggregate principal amount of the 2028 Secured Notes (together with the 2025 Secured Notes, the “Secured Notes”) and used the net proceeds from the offering to fund the redemption in full of the $550.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “2023 Secured Notes”) on May 6, 2021. During the three months ended June 30, 2021, we recognized a $4.3 million loss on the extinguishment of the 2023 Secured Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $1.3 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $3.0 million of cash interest expense for the redemption premium. The 2028 Secured Notes mature on April 15, 2028 and bear interest at a rate of 4.750% per year. Interest on the 2028 Secured Notes is payable on April 15 and October 15 of each year.
The Secured Notes and the related guarantees are secured by liens on substantially all of the assets of the issuers and guarantors thereto, which assets also ratably secure obligations under the senior secured credit facilities, in each case, subject to certain exceptions and permitted liens. The collateral does not include real property (below a specified threshold of value), but includes certain fixtures and other equipment as well as cash that we receive pursuant to the Windstream Leases.
The indentures governing the Secured Notes contain customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Borrowers or Issuers, as applicable. These covenants are subject to a number of limitations, qualifications and exceptions. The indentures governing the Secured Notes also contain customary events of default. As of December 31, 2022, the Company was in compliance with all of the covenants under the indentures governing the Secured Notes.
Senior Unsecured Notes
On February 2, 2021, the Borrowers issued $1.11 billion aggregate principal of the 2029 Notes and used the net proceeds to fund the tender offer and subsequent redemption of all outstanding 8.25% Senior Unsecured Notes due October 15, 2023 (the “2023 Notes”). During the year ended December 31, 2021, we recognized a $39.1 million loss on the tendered 2023 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $21.5 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $17.6 million of cash interest expense for the tender premium. The 2029 Notes mature on February 15, 2029 and bear interest at a rate of 6.50% per year. Interest on the 2029 Notes is payable on February 15 and August 15 of each year.
On October 13, 2021, the Issuers issued $700.0 million aggregate principal amount of the 2030 Senior (together with the 2029 Notes, the “Senior Unsecured Notes”) and used the net proceeds to fund redemption in full of the $600.0 million 7.125% Senior Unsecured Notes due December 15, 2024 (the “2024 Notes”) on December 15, 2021. During the year ended December 31, 2021, we recognized a $5.9 million loss on the extinguishment of the 2024 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $1.8 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $4.1 million of cash interest expense for the redemption premium. The Company used the remaining proceeds of $78.0 million to prepay a portion of the settlement obligations under the settlement agreement with Windstream. See Note 3. The 2030 Notes mature on January 15, 2030 and bear interest at a rate of 6.000% per year. Interest on the 2030 Notes is payable on January 15 and July 15 of each year, beginning on July 15, 2022. The indentures governing the Senior Unsecured Notes contain customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Issuers or Borrowers, as applicable. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The indentures governing the Senior Unsecured Notes also contain customary events of default. As of December 31, 2022, the Company was in compliance with all of the covenants under the indentures governing the Senior Unsecured Notes.
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and by each of the Operating Partnership’s existing and future domestic restricted subsidiaries (other than the Borrowers or Issuers, as applicable) that guarantees indebtedness under the Company’s senior secured credit facilities. The guarantees are subject to release under specified circumstances, including certain circumstances in which such guarantees may be automatically released without the consent of the holders of the Notes.
The Exchangeable Notes
On June 28, 2019, Uniti Fiber Holdings Inc., a subsidiary of the Company, issued $345 million aggregate principal amount of the Exchangeable Notes. The Exchangeable Notes are senior unsecured notes and are guaranteed by the Company and each of the Company’s subsidiaries (other than Uniti Fiber Holdings Inc.) that is an issuer, obligor or guarantor under the Company’s Notes. The Exchangeable Notes bear interest at a fixed rate of 4.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election, subject to limitations under the Company's Credit Agreement. The Exchangeable Notes will mature on June 15, 2024, unless earlier exchanged, redeemed or repurchased.
Uniti Fiber Holdings Inc. issued the Exchangeable Notes pursuant to an indenture, dated as of June 28, 2019, among Uniti Fiber Holdings Inc., the Company, the other guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee. Prior to the close of business on the business day immediately preceding March 15, 2024, the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of the Company’s common stock, or a combination thereof, at Uniti Fiber Holdings Inc.’s election, subject to limitations under the Company's Credit Agreement. The exchange rate is initially 80.4602 shares of the Company’s common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $12.43 per share of the Company’s common stock). The exchange rate is subject to adjustment in some
circumstances as described in the Indenture. In addition, following certain corporate events that occur prior to the maturity date or Uniti Fiber Holdings Inc.’s delivery of a notice of redemption, Uniti Fiber Holdings Inc. will increase, in certain circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such corporate event or notice of redemption, as the case may be.
If Uniti Fiber Holdings Inc. or the Company undergoes a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require Uniti Fiber Holdings Inc. to repurchase for cash all or part of their Exchangeable Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.
Uniti Fiber Holdings Inc. may redeem all or a portion of the Exchangeable Notes, at any time, at a cash redemption price equal to 100% of the principal amount of the Exchangeable Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, if the Company’s board of directors determines such redemption is necessary to preserve the Company's status as a real estate investment trust for U.S. federal income tax purposes. Uniti Fiber Holdings Inc. may not otherwise redeem the Exchangeable Notes prior to June 20, 2022. On or after June 20, 2022 and prior to the 42nd scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of the Company’s common stock has been at least 130% of the exchange price for the Exchangeable Notes for certain specified periods, Uniti Fiber Holdings Inc. may redeem all or a portion of the Exchangeable Notes at a cash redemption price equal to 100% of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest to, but not including, the redemption date.
Under GAAP, certain convertible debt instruments that may be settled in cash upon conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.
The carrying amount of the equity component, which was initially recognized as a debt discount, represented the difference between the proceeds from the issuance of the Exchangeable Notes and the fair value of the liability component of the Exchangeable Notes. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense using an effective interest rate of 11.1% over the term of the Exchangeable Notes. The equity component was not remeasured.
Debt issuance costs related to the Exchangeable Notes were comprised of commissions payable to the initial purchasers of $10.4 million and third-party costs of approximately $1.4 million.
In accounting for the debt issuance costs related to the issuance of the Exchangeable Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the Exchangeable Notes balance on our Consolidated Balance Sheets. These costs are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Debt issuance costs of $2.9 million attributable to the equity components were offset against the equity component in stockholders’ equity, which netted to $80.8 million.
As a result of early adopting ASU 2020-06, the Company made certain adjustments to its accounting for the outstanding exchangeable senior unsecured notes. The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument. The carrying value as of December 31, 2020, totaled approximately $275.4 million and as a result of the adoption increased by $61.1 million to $336.5 million as of January 1, 2021. Because of this adoption, the effective interest rate on the exchangeable senior unsecured notes went from 11.1% to 4.8%. Additional paid-in-capital was reduced by $59.9 million and deferred tax liabilities were reduced by $15.8 million. Approximately $14.6 million of cumulative effect of adoption was recognized to the opening balance of distributions in excess of accumulated earnings as of January 1, 2021. See Note 3. On December 12, 2022, in connection with the issuance of the Convertible 2027 Notes (as discussed below), approximately $207.1 million aggregate principal amount was repurchased for $194.0 million. As a result, we recognized a gain on extinguishment of $10.8 million, which is comprised of a $13.1 million gain on the repurchase of the Exchangeable Notes and a $2.3 million write off of the related unamortized deferred financing costs, within interest expense, net on the Consolidated Statements of Income (Loss).
Convertible 2027 Notes
Uniti Group Inc., issued $300 million aggregate principal amount of the Convertible 2027 Notes on December 12, 2022 and, pursuant to an over-allotment option, $6.5 million aggregate principal amount of the Convertible 2027 Notes on December 23, 2022. The Convertible 2027 Notes are guaranteed by each of the Company’s subsidiaries that is an issuer, obligor or guarantor under the Company’s existing senior notes (except initially those subsidiaries that require regulatory approval prior to guaranteeing the Convertible 2027 Notes). The Convertible 2027 Notes bear interest at a fixed rate of 7.50% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2023. The Convertible 2027 Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election at an initial conversion rate of 137.1742 shares of the Company’s common stock per $1,000 principal amount (equal to an initial conversion price of approximately $7.29 per share) subject to adjustment. The Convertible 2027 Notes will mature on December 1, 2027, unless earlier converted, redeemed or repurchased.
The net proceeds from the sale of the Convertible 2027 Notes were approximately $298.1 million, after deducting discounts and commissions to the initial purchasers and other estimated fees and expenses. The Company contributed approximately $198.1 million of the net proceeds of the offering to Uniti Fiber Holdings Inc., a wholly owned subsidiary of the Company (“Uniti Fiber Holdings”), to fund the repurchase of, and to pay accrued and unpaid interest with respect to, approximately $207.1 million aggregate principal amount of the Exchangeable Notes issued by Uniti Fiber Holdings. The Company used $21.1 million of the net proceeds of the offering to pay the cost of certain capped call transactions in connection with the Convertible 2027 Notes offering, as described in Note 10. The Company intends to use the remaining net proceeds from the offering for general corporate purposes, which may include the repurchase or repayment of other outstanding debt, including, but not limited to, additional open market repurchases, redemptions or tender offers of the Exchangeable Notes. Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Facilities. These costs are amortized using the effective interest method over the term of the related indebtedness, and are included in interest expense in our Consolidated Statements of Income (Loss). For the year ended December 31, 2022, 2021 and 2020, we recognized $17.5 million, $16.5 million and $15.3 million of non-cash interest expense, respectively, related to the amortization of deferred financing costs.
Aggregate annual maturities of our long-term obligations at December 31, 2022 are as follows:
| | | | | | | | |
(Thousands) | | |
2023 | | $ | — | |
2024 | | 325,873 | |
2025 | | 2,250,000 | |
2026 | | — | |
2027 | | 306,500 | |
Thereafter | | 2,380,000 | |
Total | | $ | 5,262,373 | |
Note 13. Stock-Based Compensation
The Company’s Board of Directors adopted the Uniti Group Inc. 2015 Equity Incentive Plan (the “Equity Plan”), which is administered by the Compensation Committee of the Board of Directors. Awards issuable under the Equity Plan include incentive stock options, “non-qualified” stock options, stock appreciation rights, performance units and performance shares, restricted shares, and restricted stock units.
Restricted Awards
During the year ended December 31, 2022, the Company granted 925,059 shares of restricted stock to employees, which had a fair value of $8.8 million as of the date of grant. We calculate the grant date fair value of non-vested shares of restricted stock awards using the closing sale prices on the trading day on the grant date. The restricted stock awards are amortized on a straight-line basis to expense over the vesting period, which is generally three years. As of December 31,
2022, there were 1,935,548 shares available for future issuance under the Equity Plan. The following table sets forth the number of unvested restricted stock awards and the weighted-average fair value of these awards at the date of grant:
| | | | | | | | | | | | | | | | | | | | |
| | Restricted Awards | | Weighted Average Fair Value at Grant Date | | Aggregate Intrinsic Value(1)($000s) |
Unvested balance December 31, 2021 | | 1,353,973 | | | $ | 11.58 | | | |
Granted | | 925,059 | | | $ | 9.52 | | | |
Forfeited | | (159,799) | | | $ | 2.92 | | | |
Vested | | (762,844) | | | $ | 11.92 | | | |
Unvested balance, December 31, 2022 | | 1,356,389 | | | $ | 11.11 | | | $ | 7,501 | |
| | | | | |
(1) | The aggregate intrinsic value is calculated using the market value of our common stock as of December 30, 2022. The market value as of December 30, 2022 was $5.53 per share, which was the closing price of our common stock reported for transactions effected on the NASDAQ Global Select Market on December 30, 2022, the final trading day of 2022. |
During the year ended December 31, 2021, there were 691,241 shares of restricted stock granted with a weighted-average fair value of $11.82 per share. During the year ended December 31, 2020, there were 996,037 shares of restricted stock granted with a weighted-average fair value of $10.39 per share.
The total fair value of shares vested for the years ended December 31, 2022, 2021 and 2020 was $9.1 million, $9.9 million and $8.6 million, respectively.
As of December 31, 2022, total unrecognized compensation expense on restricted awards was approximately $8.7 million, and the expense is expected to be recognized over a weighted average vesting period of 0.9 years.
Performance Awards
The Company grants long-term incentives to members of management in the form of performance-based restricted stock units (“PSUs”) under the Equity Plan. The number of PSUs earned is based on the Company’s achievement of specified performance goals, over a specified performance period, and may range from 0% to 200% of the target shares. The PSUs have a service condition that will expire at the end of the three-year performance period provided that the holder continues to be employed by the Company at the end of the performance period. Holders of PSUs are entitled to dividend equivalents, which will be accrued and paid in cash upon the vesting of a PSU. Dividend equivalents are forfeited to the extent that the underlying PSU is forfeited.
On February 23, 2022, we issued 425,010 PSUs equal to 100% of the target amount, with an aggregate fair value of $6.1 million on the grant date. The PSUs, in addition to a service condition, are subject to the Company’s performance versus the total return of the MSCI US REIT Index and a triple-net lease peer group, as defined by the Compensation Committee. Upon evaluating the results of the market conditions, the final number of shares is determined, and such shares vest based on satisfaction of the service condition. The PSUs are amortized on a straight-line basis over the vesting period. During the year ended December 31, 2022, no PSUs were forfeited due to termination of service. The following table sets forth the number of unvested PSUs and the weighted-average fair value of these awards at the date of grant:
| | | | | | | | | | | | | | | | | | | | |
| | Performance Awards | | Weighted Average Fair Value at Grant Date | | Aggregate Intrinsic Value(1)($000s) |
Unvested balance December 31, 2021 | | 623,115 | | | $ | 16.78 | | | |
Granted | | 425,010 | | | $ | 14.42 | | | |
Forfeited | | — | | | $ | — | | | |
Vested | | (200,979) | | | $ | 18.99 | | | |
Unvested balance, December 31, 2022 | | 847,146 | | | $ | 15.07 | | | $ | 4,685 | |
| | | | | |
(1) | The aggregate intrinsic value is calculated using the market value of our common stock as of December 30, 2022. The market value as of December 30, 2022 was $5.53 per share, which was the closing price of our common stock reported for transactions effected on the NASDAQ Global Select Market on December 30, 2022, the final trading day of 2022. |
During the year ended December 31, 2021, there were 216,085 PSUs granted with a weighted-average fair value of $16.27 per share. During the year ended December 31, 2020, there were 322,209 PSUs granted with a weighted-average fair value of $15.45 per share.
As of December 31, 2022, total unrecognized compensation expense related to PSUs was approximately $6.6 million, and the weighted-average vesting period was 1.4 years. The fair value of each PSU award is estimated at the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free return, and dividend yield. Our assumptions include a 0% dividend yield, which is the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs. The following table summarizes the assumptions used to value the PSUs granted during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Expected term (years) | | 3.0 | | 3.0 | | 3.0 |
Expected volatility | | 40.6 | % | | 57.1 | % | | 63.0 | % |
Expected annual dividend | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Risk free rate | | 1.8 | % | | 0.2 | % | | 0.7 | % |
Employee Stock Purchase Plan
On May 17, 2018, our stockholders approved and adopted the Uniti Group Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes us to issue up to 2,000,000 shares of our common stock to any of our employees so long as the employee is employed on the first day of the applicable offering period. Under the ESPP, there are two six-month plan periods during each calendar year, one beginning January 1 and ending on June 30, and one beginning on July 1 and ending on December 31. Under the terms of the ESPP, employees can choose each plan period to have up to 15% of their annual base earnings, limited to $25,000 withheld to purchase our common stock. The purchase price of the stock is 85% of the lower of its beginning-of-period or end-of-period market price. Under the ESPP the Company issued 69,854, 74,950 and 96,788 shares during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there were 1,675,121 shares available for future issuance under the ESPP. The following table summarizes the assumptions used to value the purchase rights granted under the ESPP during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Expected term (years) | | 0.5 | | 0.5 | | 0.5 |
Expected volatility | | 12.0 | % | | 28.0 | % | | 72.0 | % |
Expected annual dividend | | 6.1 | % | | 5.5 | % | | 3.9 | % |
Risk free rate | | 2.5 | % | | 0.1 | % | | 0.2 | % |
For the years ended December 31, 2022, 2021 and 2020, we recognized $12.8 million, $13.8 million and $13.7 million, respectively, of compensation expense related to restricted stock awards, performance-based awards and the ESPP, which is recorded in general and administrative expense on our Consolidated Statements of Income (Loss).
Note 14. Earnings Per Share
Our 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.
We also have outstanding PSUs that contain forfeitable rights to receive dividends. Therefore, the awards are considered non-participating restrictive shares and not dilutive under the two-class method until performance conditions are met.
During the year ended December 31, 2022, approximately 604,000 PSUs were excluded from the computation of diluted net loss per share because the performance conditions had not been met. During the year ended December 31, 2020, approximately 707,000 PSUs were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.
The dilutive effect of the Exchangeable Notes and the Convertible 2027 Notes (see Note 12) are 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 the number of weighted average shares. The dilutive effect of the Warrants (see Note 10) is calculated using the treasury-stock method. During the years ended December 31, 2022, 2021 and 2020, 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. The following sets forth the computation of basic and diluted earnings per share under the two-class method:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands, except per share data) | | 2022 | | 2021 | | 2020 |
Basic earnings per share: | | | | | | |
Numerator: | | | | | | |
Net (loss) income attributable to shareholders | | $ | (8,275) | | | $ | 123,660 | | | $ | (706,301) | |
Less: Income allocated to participating securities | | (1,135) | | | (1,077) | | | (1,078) | |
Dividends declared on convertible preferred stock | | (20) | | | (10) | | | (9) | |
Net (loss) income attributable to common shares | | $ | (9,430) | | | $ | 122,573 | | | $ | (707,388) | |
Denominator: | | | | | | |
Basic weighted-average common shares outstanding | | 235,567 | | | 232,888 | | | 203,600 | |
Basic (loss) earnings per common share | | $ | (0.04) | | | $ | 0.53 | | | $ | (3.47) | |
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
(Thousands, except per share data) | | 2022 | | 2021 | | 2020 |
Diluted earnings per share: | | | | | | |
Numerator: | | | | | | |
Net (loss) income attributable to shareholders | | $ | (8,275) | | | $ | 123,660 | | | $ | (706,301) | |
Less: Income allocated to participating securities | | (1,135) | | | (1,077) | | | (1,078) | |
Dividends declared on convertible preferred stock | | (20) | | | (10) | | | (9) | |
Impact on if-converted dilutive securities | | — | | | 11,926 | | | — | |
Net (loss) income attributable to common shares | | $ | (9,430) | | | $ | 134,499 | | | $ | (707,388) | |
Denominator: | | | | | | |
Basic weighted-average common shares outstanding | | 235,567 | | | 232,888 | | | 203,600 | |
Impact on if-converted dilutive securities | | — | | | 30,809 | | | — | |
Effect of dilutive non-participating securities | | — | | | 380 | | | — | |
Weighted-average shares for dilutive earnings per common share | | 235,567 | | | 264,077 | | | 203,600 | |
Dilutive (loss) earnings per common share | | $ | (0.04) | | | $ | 0.51 | | | $ | (3.47) | |
For the year ended December 31, 2022, 33,472,978 potential common shares related to the Convertible 2027 Notes and the Exchangeable Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive. For the year ended December 31, 2020, 29,777,226 potential common shares related to the Exchangeable Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive.
Note 15. Segment Information
Our management, including our chief executive officer, who is our chief operating decision maker, managed our operations as two reportable segments, Leasing and Fiber Infrastructure, in addition to our corporate operations, as described below.
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.
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.
Towers: Historically represented the operations of our former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate, which we then leased to our customers in the United States and Latin America. Revenue from our towers business qualified as a lease under ASC 842 and was outside the scope of ASC 606. The Company completed a series of transactions to largely divest of its towers business and on April 2, 2019, May 23, 2019 and June 1,2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC: Historically represented the operations of Talk America through which we operated the Consumer CLEC Business, which prior to Uniti’s separation and spin-off from Windstream was reported as an integrated operation within Windstream. Talk America provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC Business.
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, goodwill impairment charges, 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 years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
(Thousands) | | Leasing | | Fiber Infrastructure | | Towers | | Consumer CLEC | | Corporate | | Total of Reportable Segments |
Revenues | | $ | 827,457 | | | $ | 301,390 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,128,847 | |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 806,027 | | | $ | 125,361 | | | $ | — | | | $ | — | | | $ | (25,492) | | | $ | 905,896 | |
Less: | | | | | | | | | | | | |
Interest expense, net | | | | | | | | | | | | 376,832 | |
Depreciation and amortization | | 172,007 | | | 120,666 | | | — | | | — | | | 115 | | | 292,788 | |
Other, net | | | | | | | | | | | | (4,790) | |
Transaction related and other costs | | | | | | | | | | | | 10,340 | |
Gain on sale of operations | | | | | | | | | | | | (176) | |
Gain on sale of real estate | | | | | | | | | | | | (433) | |
Goodwill impairment | | | | | | | | | | | | 240,500 | |
Stock-based compensation | | | | | | | | | | | | 12,751 | |
Income tax benefit | | | | | | | | | | | | (17,365) | |
Adjustments for equity in earnings from unconsolidated entities | | | | | | | | | | | | $ | 3,571 | |
Net loss | | | | | | | | | | | | (8,122) | |
| | | | | | | | | | | | |
Capital expenditures | | $ | 263,269 | | | $ | 163,962 | | | $ | — | | | $ | — | | | $ | 336 | | | $ | 427,567 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
(Thousands) | | Leasing | | Fiber Infrastructure | | Towers | | Consumer CLEC | | Corporate | | Total of Reportable Segments |
Revenues | | $ | 801,497 | | | $ | 299,025 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,100,522 | |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 784,061 | | | $ | 118,452 | | | $ | — | | | $ | — | | | $ | (24,232) | | | $ | 878,281 | |
Less: | | | | | | | | | | | | |
Interest expense, net | | | | | | | | | | | | 446,296 | |
Depreciation and amortization | | 174,622 | | | 116,065 | | | — | | | — | | | 255 | | | 290,942 | |
Other, net | | | | | | | | | | | | 24,917 | |
Transaction related and other costs | | | | | | | | | | | | 7,544 | |
Gain on sale of operations | | | | | | | | | | | | (28,143) | |
Gain on sale of real estate | | | | | | | | | | | | (442) | |
Stock-based compensation | | | | | | | | | | | | 13,847 | |
Income tax benefit | | | | | | | | | | | | (4,916) | |
Adjustments for equity in earnings from unconsolidated entities | | | | | | | | | | | | 3,491 | |
Net Income | | | | | | | | | | | | $ | 124,745 | |
| | | | | | | | | | | | |
Capital expenditures | | $ | 223,251 | | | $ | 162,463 | | | $ | — | | | $ | — | | | $ | 141 | | | $ | 385,855 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
(Thousands) | | Leasing | | Fiber Infrastructure | | Towers | | Consumer CLEC | | Corporate | | Total of Reportable Segments |
Revenues | | $ | 745,915 | | | $ | 314,363 | | | $ | 6,112 | | | $ | 651 | | | $ | — | | | $ | 1,067,041 | |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 737,337 | | | $ | 112,289 | | | $ | 77 | | | $ | (545) | | | $ | (30,323) | | | $ | 818,835 | |
Less: | | | | | | | | | | | | |
Interest expense, net | | | | | | | | | | | | 497,128 | |
Depreciation and amortization | | 201,321 | | | 126,211 | | | 783 | | | 791 | | | 297 | | | 329,403 | |
Other, net | | | | | | | | | | | | 11,703 | |
Settlement expense | | | | | | | | | | | | 650,000 | |
Goodwill impairment | | | | | | | | | | | | 71,000 | |
Transaction related and other costs | | | | | | | | | | | | 63,875 | |
Gain on sale of real estate | | | | | | | | | | | | (86,267) | |
Stock-based compensation | | | | | | | | | | | | 13,721 | |
Income tax benefit | | | | | | | | | | | | (15,203) | |
Adjustments for equity in earnings from unconsolidated entities | | | | | | | | | | | | 2,287 | |
Net loss | | | | | | | | | | | | $ | (718,812) | |
| | | | | | | | | | | | |
Capital expenditures (1) | | $ | 169,306 | | | $ | 197,023 | | | $ | 24,162 | | | $ | — | | | $ | — | | | $ | 390,491 | |
(1)Segment capital expenditures represents capital expenditures and the Windstream Asset Purchase Agreement (see Note 6) as reported in the investing activities section of the Consolidated Statements of Cash Flows. Total assets by business segment as of December 31, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
(Thousands) | | 2022 | | 2021 |
Leasing | | $ | 2,705,934 | | | $ | 2,521,406 | |
Fiber Infrastructure | | 2,076,136 | | | 2,249,860 | |
Corporate | | 69,159 | | | 37,977 | |
Total of reportable segments | | $ | 4,851,229 | | | $ | 4,809,243 | |
Note 16. Commitments and Contingencies
Litigation
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.
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 that the defendants improperly failed to disclose the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. 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, which sought to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The Class Action asserted 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 relating to the Spin-Off and the Master Lease and the risk that the Spin-Off
violated certain debt covenants and/or the Master Lease could be recharacterized as a financing instead of a "true lease." 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. On June 17, 2022, the parties signed a stipulation of settlement and plaintiffs moved for preliminary approval of the settlement. On November 7, 2022, the court granted final approval of the settlement. In accordance with ASC 450, we recorded $38.9 million of settlement expense within general and administrative expense within our Consolidated Statements of Income during the first quarter of 2022 and accounts payable, accrued expenses and other liabilities, net within our Consolidated Balance Sheets as of December 31, 2022. Additionally, we recorded the probable insurance recovery of $38.9 million as a reduction to general and administrative expense during the first quarter of 2022 within our Consolidated Statements of Income, and other assets within Consolidated Balance Sheets as of December 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 Action”). 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 allegations in the Mayer Derivative Action are similar to those in the Class Action. 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.
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. 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. On November 8, 2022, the parties in the Mayer Derivative Action and the
Guzzo Derivative Action signed a term sheet to settle the actions, which contemplate non-monetary settlement consideration. The parties are preparing a stipulation of settlement, after which they will seek court approval of the settlement.
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 Consolidated Balance Sheet as of December 31, 2022.
Note 17. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) by component is as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | 2022 | | 2021 | | 2020 |
Cash flow hedge changes in fair value (loss) gain: | | | | | | |
Balance at beginning of period | | $ | (30,353) | | | $ | (30,353) | | | $ | (23,442) | |
Other comprehensive loss before reclassifications | | — | | | — | | | (7,713) | |
Amounts reclassified from accumulated other comprehensive income | | — | | | — | | | 677 | |
Net other comprehensive loss | | (30,353) | | | (30,353) | | | (30,478) | |
Less: Other comprehensive loss attributable to noncontrolling interest | | — | | | — | | | (125) | |
Balance at end of period | | (30,353) | | | (30,353) | | | (30,353) | |
Interest rate swap termination: | | | | | | |
Balance at beginning of period attributable to common shareholders | | 21,189 | | | 9,986 | | | — | |
Amounts reclassified from accumulated other comprehensive income | | 9,243 | | | 11,317 | | | 10,155 | |
Balance at end of period | | 30,432 | | | 21,303 | | | 10,155 | |
Less: Other comprehensive income attributable to noncontrolling interest | | 79 | | | 114 | | | 169 | |
Balance at end of period attributable to common shareholders | | 30,353 | | | 21,189 | | | 9,986 | |
Accumulated other comprehensive income (loss) at end of period | | $ | — | | | $ | (9,164) | | | $ | (20,367) | |
Note 18. Income Taxes
We elected on our initial U.S. federal income tax return to be treated as a REIT under the Code. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year unless certain relief provisions apply, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and certain subsidiaries of Uniti Leasing, and operated Talk America as TRSs. TRSs enable us to engage in activities that result in income that does not constitute qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
Income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 as reported in the accompanying Consolidated Statements of Income (Loss) was comprised of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands) | | 2022 | | 2021 | | 2020 |
Current | | | | | | |
Federal | | $ | 8,782 | | | $ | (71) | | | $ | (901) | |
State | | 2,762 | | | 1,622 | | | (498) | |
Foreign | | — | | | — | | | 87 | |
Total current expense | | 11,544 | | | 1,551 | | | (1,312) | |
| | | | | | |
Deferred | | | | | | |
Federal | | (22,804) | | | (5,066) | | | (7,665) | |
State | | (6,105) | | | (1,401) | | | (6,226) | |
Total deferred benefit | | (28,909) | | | (6,467) | | | (13,891) | |
Total income tax benefit | | $ | (17,365) | | | $ | (4,916) | | | $ | (15,203) | |
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands) | | 2022 | | 2021 | | 2020 |
Income (loss) from continuing operations, before tax | | $ | (25,487) | | | $ | 119,844 | | | $ | (734,015) | |
Income tax expense (benefit) at U.S. statutory federal rate | | (5,352) | | | 25,167 | | | (154,143) | |
Increases (decreases) resulting from: | | | | | | |
State taxes, net of federal benefit | | (2,255) | | | 288 | | | (3,452) | |
Benefit of REIT status | | (46,604) | | | (30,565) | | | 129,742 | |
Goodwill impairment | | 36,895 | | | — | | | 14,910 | |
Return to accrual | | (44) | | | 193 | | | (2,795) | |
Permanent differences | | (5) | | | 1 | | | 448 | |
Foreign taxes | | — | | | — | | | 87 | |
Income tax benefit | | $ | (17,365) | | | $ | (4,916) | | | $ | (15,203) | |
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a REIT, and goodwill impairment which is not deductible for tax purposes.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The components of the Company's deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | December 31, 2022 | | December 31, 2021 |
Deferred tax assets: | | | | |
Deferred revenue | | $ | 30,616 | | | $ | 29,275 | |
Stock-based compensation | | 528 | | | 503 | |
Accrued expenses and other | | — | | | 183 | |
Asset retirement obligation | | 2,213 | | | 1,791 | |
Inventory reserve | | 140 | | | 140 | |
Excess business interest expense | | 14,037 | | | 306 | |
Lease asset liability | | 14,325 | | | 13,952 | |
Settlement obligation | | 680 | | | 710 | |
Debt discount and interest expense | | 2,593 | | | 10,040 | |
Other | | 3,035 | | | 2,215 | |
Net operating loss carryforwards | | 143,733 | | | 139,020 | |
Deferred tax assets | | $ | 211,900 | | | $ | 198,135 | |
| | | | |
Deferred tax liabilities: | | | | |
Property, plant and equipment | | $ | (94,889) | | | $ | (97,372) | |
Customer list intangible | | (39,125) | | | (40,941) | |
Other intangible amortization | | (18,320) | | | (28,689) | |
Right of use asset | | (15,384) | | | (16,039) | |
Deferred or prepaid costs | | (3,533) | | | (3,373) | |
Other | | (18) | | | — | |
Deferred tax liabilities | | $ | (171,269) | | | $ | (186,414) | |
| | | | |
Deferred tax asset, net | | $ | 40,631 | | | $ | 11,721 | |
As of December 31, 2022, the Company’s deferred tax assets were primarily the result of U.S. federal and state NOL carryforwards.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. Management has evaluated sources of future taxable income, including the Company’s significant deferred tax liabilities and available tax planning strategies, and determined that sufficient positive evidence exists as of December 31, 2022, to conclude that it is more likely than not that all of its deferred tax assets are realizable, and therefore, no valuation allowance has been recorded.
On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc., which had federal NOL carryforwards of approximately $81.2 million at the date of the acquisition. As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to limitations imposed by the Code. Approximately $18.3 million of the Tower Cloud, Inc. NOL carryforward was utilized in 2017. The remaining Tower Cloud, Inc. NOL carryforwards will expire between 2030 and 2036.
We have total federal NOL carryforwards as of December 31, 2022 of approximately $165.2 million which will expire between 2030 and 2037, and approximately $395.6 million which will not expire but the utilization of which will be limited to 80% of taxable income annually under provisions enacted in the Tax Cut and Jobs Act.
With the exception of Tower Cloud, Inc. and Uniti Fiber Holdings Inc., our 2019 returns remain open to examination. As Tower Cloud, Inc. and Uniti Fiber Holdings Inc. have NOLs available to carry forward, the applicable tax years will generally remain open to examination several years after the applicable loss carryforwards have been utilized or expire.
The Company or its subsidiaries file tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain foreign jurisdictions. A reconciliation of the Company’s beginning and ending liability for unrecognized tax benefits is as follows:
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(Thousands) | | 2022 | | 2021 |
Balance at January 1 | | $ | 1,734 | | | $ | 1,734 | |
Balance at December 31 | | $ | 1,734 | | | $ | 1,734 | |
The Company’s entire liability for unrecognized tax benefit would affect the annual effective tax rate if recognized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as additional tax expense. The Company recorded no interest expense and penalties for the period ending December 31, 2022. The Company’s balance of accrued interest and penalties related to unrecognized tax benefits as of December 31, 2022 was $1.3 million.
Note 19. Supplemental Cash Flow Information
Cash paid for interest expense, net of capitalized interest and income taxes, net of refunds for the years ended December 31, 2022, 2021 and 2020 is as follows:
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| | Year Ended December 31, |
(Thousands) | | 2022 | | 2021 | | 2020 |
Cash payments for: | | | | | | |
Interest, net of capitalized interest | | $ | 335,920 | | | $ | 375,578 | | | $ | 314,276 | |
Income taxes, net of refunds | | $ | 9,437 | | | $ | 1,386 | | | $ | 1,155 | |
Note 20. 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 year ended December 31, 2022, the Company exchanged 591,349 OP Units held by third parties, of which 244,683 OP Units were exchanged for an equal number of common shares of the Company and 346,667 OP Units were exchanged for cash consideration of $4.6 million, representing approximately 85% of the OP Units held by third parties with a carrying value of $11.9 million as of the exchange dates.
On September 9, 2020, Uniti entered into stock purchase agreements with certain first lien creditors of Windstream to replace and codify the terms set forth in the previously-filed binding letters of intent, pursuant to which on September 18, 2020 Uniti sold an aggregate of 38,633,470 shares of Uniti common stock, par value $0.0001 per share (the “Settlement Common Stock”), at $6.33 per share, which represents the closing price of Uniti common stock on the date when an agreement in principle of the basic outline of the Settlement was first reached. Uniti transferred the proceeds from the sale of the Settlement Common Stock to Windstream as consideration relating to the Asset Purchase Agreement and settlement of the litigation with Windstream. The issuance and sale of the Settlement Common Stock was made in reliance upon the exemption from registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. Certain recipients of the Settlement Common Stock are subject to a one-year lock up, and all recipients are subject to a customary standstill agreement. No recipient will receive any governance rights in connection with the issuance. The binding letters of intent and the Stock Purchase Agreements also provide for customary registration rights.
On June 22, 2020, we established an at-the-market common stock offering program (the “ATM Program”) to sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $250 million. This offering supersedes and replaces the $250 million program we commenced on September 2, 2016, which had approximately $117.1 million available for issuance under such program. We have not made any sales under the refreshed ATM Program. This program is intended to provide additional financial flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.
We are authorized to issue up to 500,000,000 shares of voting common stock and 50,000,000 shares of preferred stock, of which 235,829,485 and 0 shares, respectively, were outstanding at December 31, 2022. We had 264,170,515 shares of voting common stock available for issuance at December 31, 2022.
Note 21. Dividends (Distributions)
Distributions with respect to our common stock is characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distribution or a combination thereof. For the years ended December 31, 2022, 2021, and 2020, our common stock distribution per share was $0.75, $0.45 and $0.60, respectively, characterized as follows:
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| Year Ended December 31, |
| 2022 | | 2021(1) | | 2020(2) |
Ordinary dividends | $ | 0.75 | | | $ | 0.45 | | | $ | 0.52 | |
Capital gain distribution | $ | — | | | $ | — | | | $ | 0.08 | |
Non-dividend distributions | $ | — | | | $ | — | | | $ | — | |
Total | $ | 0.75 | | | $ | 0.45 | | | $ | 0.60 | |
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(1) | Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 17, 2021, your dividend payment of $0.1500 per share received in January 2022 was reported on Form 1099-DIV for the 2022 taxable year for federal income tax purposes. |
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(2) | Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 15, 2020, your dividend payment of $0.1500 per share received in January 2021 was reported on Form 1099-DIV for the 2020 taxable year for federal income tax purposes. |
Note 22. Employee Benefit Plan
We sponsor a defined contribution plan under section 401(k) of the Internal Revenue Code, which covers employees who are 21 years of age and over. Under this plan, we match voluntary employee contributions at a rate of 100% for the first 3% of an employee’s annual compensation and at a rate of 50% for the next 2% of an employee’s annual compensation. Employees vest in our contribution immediately. Our expense related to the plan recognized for the years ended December 31, 2022, 2021 and 2020 was $2.2 million, $2.1 million and $2.2 million, respectively.
We sponsor a deferred compensation plan. The plan is established and maintained by the Company primarily to permit certain management or highly compensated employees of the Company and its subsidiaries, within the meaning of Section 301(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to defer a percentage of their compensation. The plan is an unfunded deferred compensation plan intended to qualify for the exemptions provided in, and shall be administered in a manner consistent with Section 201, 301 and 401 of ERISA and Section 409A of the Internal Revenue Code of 1986, as amended.
Note 23. Subsequent Events
On February 14, 2023, the Issuers issued $2.6 billion aggregate principal amount of the 10.50% Secured Notes due
February 2028. The Issuers used the net proceeds from the offering to fund the redemption in full of the Issuers’ outstanding 2025 Secured Notes, to repay outstanding borrowings under the Revolving Credit Facility and to pay any related premiums, fees and expenses in connection with the foregoing. On February 14, 2023, the Issuers deposited the full redemption price for the 2025 Secured Notes with the trustee and satisfied and discharged their respective obligations with respect to the indenture governing the 2025 Secured Notes at such time.
The Secured Notes due February 2028 were issued at an issue price of 100% of their principal amount pursuant to an indenture, dated as of February 14, 2023 (the “Secured Notes due February 2028 Indenture”), among the Issuers, the guarantors named therein (collectively, the “Guarantors”) and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. The Secured Notes due February 2028 mature on February 15, 2028 and bear interest at a rate of 10.50% per year. Interest on the Secured Notes due February 2028 is payable on March 15 and September 15 of each year, beginning on September 15, 2023.
The Issuers may redeem the Secured Notes due February 2028, in whole or in part, at any time prior to September 15, 2025 at a redemption price equal to 100% of the principal amount of the Secured Notes due February 2028 redeemed plus
accrued and unpaid interest thereon, if any, to, but not including, the redemption date, plus an applicable “make whole” premium described in the Secured Notes due February 2028 Indenture.
Thereafter, the Issuers may redeem the Secured Notes due February 2028 in whole or in part, at the redemption prices set forth in the Secured Notes due February 2028 Indenture. In addition, prior to February 15, 2025, the Issuers may, on one or more occasions, redeem up to 10% of the aggregate principal amount of the Secured Notes due February 2028 in any twelve month period at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date. Notwithstanding the foregoing, the Issuers may not use the proceeds of any offering of Additional Notes (as defined in the Secured Notes due February 2028 Indenture) with a price to investors equal to or in excess of 103% to finance any such optional redemption. Further, at any time on or prior to September 15, 2025, up to 40% of the aggregate principal amount of the Secured Notes due February 2028 may be redeemed with the net cash proceeds of certain equity offerings at a redemption price of 110.50% of the principal amount plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date; provided that at least 60% of aggregate principal amount of the originally issued Secured Notes due February 2028 remains outstanding. If certain changes of control of the Operating Partnership occur, holders of the Secured Notes due February 2028 will have the right to require the Issuers to offer to repurchase their Notes at 101% of their principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date.
The Secured Notes due February 2028 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and on a senior secured basis by each of the Operating Partnership’s existing and future domestic restricted subsidiaries (other than the Issuers) that guarantees indebtedness under the Company’s senior secured credit facilities and existing secured notes (the “Subsidiary Guarantors”). In addition, the Issuers will use commercially reasonable efforts to obtain necessary regulatory approval to allow certain non-guarantor subsidiaries of the Company to guarantee the Secured Notes due February 2028, including by making filings to obtain such approval within 60 days of the issuance of the Secured Notes due February 2028. The guarantees are subject to release under specified circumstances, including certain circumstances in which such guarantees may be automatically released without the consent of the holders of the Secured Notes due February 2028.
The Secured Notes due February 2028 and the related guarantees are the Issuers’ and the Subsidiary Guarantors’ senior secured obligations and rank equal in right of payment with all of the Issuers’ and the Subsidiary Guarantors’ existing and future unsubordinated obligations; effectively senior to all unsecured indebtedness of the Issuers and the Subsidiary Guarantors, including the Company’s existing senior unsecured notes, to the extent of the value of the collateral securing the Secured Notes due February 2028; effectively equal with all of the Issuers’ and the Subsidiary Guarantors’ existing and future indebtedness that is secured by first-priority liens on the collateral (including indebtedness under the Company’s senior secured credit facilities and existing secured notes); senior in right of payment to any of the Issuers’ and Subsidiary Guarantors’ subordinated indebtedness; and structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries (other than the Issuers) that do not guarantee the Secured Notes due February 2028.
The Secured Notes due February 2028 Indenture contains customary high yield covenants limiting the ability of the Operating Partnership and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; transfer material intellectual property to unrestricted subsidiaries; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The Indenture also contains customary events of default.