Notes to the Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”) was incorporated in the state of Maryland on September 4, 2014. We are an independent internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers. We manage our operations focused on our two primary lines of business: Uniti Fiber and Uniti Leasing.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”) that we control as general partner. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of March 31, 2023, 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 Summary of Significant Accounting Policies
The accompanying Condensed Consolidated Financial Statements include all accounts of the Company and its wholly-owned and/or controlled subsidiaries, including the Operating Partnership. Under the Accounting Standards Codification 810, Consolidation (“ASC 810”), the Operating Partnership is considered a variable interest entity and is consolidated in the Condensed Consolidated Financial Statements of Uniti Group Inc. because the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 28, 2023, as amended by Amendment No. 1 thereto filed on Form 10-K/A with the SEC on March 29, 2023 (the “Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our Annual Report.
Concentration of Credit Risks—Prior to September 2020, we were party to a long-term exclusive triple-net lease (the “Master Lease”) with Windstream Holdings, Inc. (together with Windstream Holdings II, LLC, its successor in interest, and its subsidiaries, “Windstream”) pursuant to which a substantial portion of our real property was leased to Windstream and from which a substantial portion of our leasing revenues were derived. On September 18, 2020, Uniti and Windstream
bifurcated the Master Lease and entered into two structurally similar master leases (collectively, the “Windstream Leases”), which amended and restated the Master Lease in its entirety. The Windstream Leases consist of (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 consumer competitive local exchange carrier ("CLEC") operations. Revenue under the Windstream Leases provided 66.0% and 66.9% of our revenue for the three months ended March 31, 2023 and 2022, respectively. Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay dividends and service debt if Windstream were to default under the Windstream Leases or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us.
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing credit ratings of Windstream by nationally recognized credit agencies, (ii) reviewing the financial statements of Windstream that are required to be delivered to us pursuant to the Windstream Leases, (iii) monitoring news reports regarding Windstream and its business, (iv) conducting research to ascertain industry trends potentially affecting Windstream, (v) monitoring Windstream’s compliance with the terms of the Windstream Leases and (vi) monitoring the timeliness of its payments under the Windstream Leases.
As of the date of this Quarterly Report on Form 10-Q, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. Both ratings remain current as of the date of this filing. In order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream.
Recently Adopted Accounting Pronouncements
In March 2022, the FASB issued Accounting Standards Update ("ASU") 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"), which eliminates the accounting guidance for troubled debt restructurings and requires the disclosure of current-period gross write-offs of financing receivables and net investment in leases by year of origination. The Company adopted ASU 2022-02 on January 1, 2023, and the adoption had no impact on the Company's consolidated financial statements.
In December 2022, the FASB issued Accounting Standards Update ("ASU") 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"), which provides additional relief for contract modifications completed after the December 31, 2022 LIBOR sunset date. The amendment allows for a deferral until December 31, 2024. The Company adopted ASU 2022-06 at issuance, and the adoption had no impact on the Company's consolidated financial statements.
Note 3. Revenues
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands) | | 2023 | | 2022 |
Revenue disaggregated by revenue stream | | | | |
Revenue from contracts with customers | | | | |
Fiber Infrastructure | | | | |
Lit backhaul | | $ | 19,522 | | | $ | 19,438 | |
Enterprise and wholesale | | 22,576 | | | 20,935 | |
E-Rate and government | | 13,891 | | | 14,276 | |
Other | | 748 | | | 661 | |
Fiber Infrastructure | | $ | 56,737 | | | $ | 55,310 | |
Leasing | | 1,165 | | | 1,159 | |
Total revenue from contracts with customers | | 57,902 | | | 56,469 | |
Revenue accounted for under leasing guidance | | | | |
Leasing | | 209,643 | | | 203,482 | |
Fiber Infrastructure | | 22,277 | | | 18,083 | |
Total revenue accounted for under leasing guidance | | 231,920 | | | 221,565 | |
Total revenue | | $ | 289,822 | | | $ | 278,034 | |
At March 31, 2023 and December 31, 2022, lease receivables were $35.5 million and $26.2 million, respectively, and receivables from contracts with customers were $17.9 million and $16.1 million, respectively.
Contract Assets (Unbilled Revenue) and Liabilities (Deferred Revenue)
Contract assets primarily consist of unbilled construction revenue where we are utilizing our costs incurred as the measure of progress of satisfying our performance obligation. Contract assets are reported within accounts receivable, net on our Condensed Consolidated Balance 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 three months ended March 31, 2023, we recognized revenues of $0.6 million which was included in the December 31, 2022 contract liabilities balance.
The following table provides information about contract assets and contract liabilities accounted for under ASC 606.
| | | | | | | | | | | | | | |
(Thousands) | | Contract Assets | | Contract Liabilities |
Balance at December 31, 2022 | | $ | 173 | | | $ | 8,699 | |
Balance at March 31, 2023 | | $ | 69 | | | $ | 10,217 | |
Transaction Price Allocated to Remaining Performance Obligations
Performance obligations within contracts to stand ready to provide services are typically satisfied over time or as those services are provided. Contract liabilities primarily relate to deferred revenue from upfront customer payments. The deferred revenue is recognized, and the liability reduced, over the contract term as the Company completes the performance obligation. As of March 31, 2023, our future revenues (i.e., transaction price related to remaining performance obligations) under contract accounted for under ASC 606 totaled $544.4 million, of which $461.1 million is related to contracts that are currently being invoiced and have an average remaining contract term of 2.3 years, while $83.3 million represents our backlog for sales bookings which have yet to be installed and have an average contract term of 5.4 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 4. Leases
Lessor Accounting
We lease communications towers, ground space, colocation space and dark fiber to tenants under operating leases. Our leases have initial lease terms ranging from less than one year to 35 years, most of which include options to extend or renew the leases for less than one year to 20 years (based on the satisfaction of certain conditions as defined in the lease agreements), and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
The components of lease income for the three months ended March 31, 2023 and 2022 respectively, are as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands) | | 2023 | | 2022 |
Lease income - operating leases | | $ | 231,920 | | | $ | 221,565 | |
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms as of March 31, 2023 are as follows:
| | | | | | | | |
(Thousands) | | March 31, 2023⁽¹⁾ |
2023 | | $ | 583,407 | |
2024 | | 797,561 | |
2025 | | 799,672 | |
2026 | | 801,051 | |
2027 | | 801,727 | |
Thereafter | | 2,318,910 | |
Total lease receivables | | $ | 6,102,328 | |
(1) Total future minimum lease payments to be received include $5.2 billion relating to the Windstream Leases. |
The underlying assets under operating leases where we are the lessor are summarized as follows:
| | | | | | | | | | | | | | |
(Thousands) | | March 31, 2023 | | December 31, 2022 |
Land | | $ | 26,549 | | | $ | 26,549 | |
Building and improvements | | 346,636 | | | 346,093 | |
Poles | | 299,799 | | | 296,941 | |
Fiber | | 3,638,160 | | | 3,529,835 | |
Equipment | | 437 | | | 437 | |
Copper | | 3,972,704 | | | 3,964,439 | |
Conduit | | 89,963 | | | 89,963 | |
Tower assets | | 1,397 | | | 1,397 | |
Finance lease assets | | 28,126 | | | 28,126 | |
Other assets | | 10,434 | | | 10,434 | |
| | 8,414,205 | | | 8,294,214 | |
Less: accumulated depreciation | | (5,586,881) | | | (5,542,726) | |
Underlying assets under operating leases, net | | $ | 2,827,324 | | | $ | 2,751,488 | |
Depreciation expense for the underlying assets under operating leases where we are the lessor for the three months ended March 31, 2023 and 2022, respectively, is summarized as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands) | | 2023 | | 2022 |
Depreciation expense for underlying assets under operating leases | | $ | 45,206 | | | $ | 43,187 | |
Lessee Accounting
We have commitments under operating leases for communications towers, ground space, colocation space, dark fiber and buildings. We also have finance leases for dark fiber and automobiles. Our leases have initial lease terms ranging from less than one year to 30 years, most of which include options to extend or renew the leases for less than one year to 20 years, and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
As of March 31, 2023, we have short term lease commitments amounting to approximately $3.1 million.
Future lease payments under non-cancellable leases as of March 31, 2023 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Operating Leases | | Finance Leases |
2023 | | $ | 12,340 | | | $ | 2,103 | |
2024 | | 14,031 | | | 2,616 | |
2025 | | 11,346 | | | 2,562 | |
2026 | | 8,663 | | | 2,562 | |
2027 | | 6,103 | | | 2,444 | |
Thereafter | | 45,502 | | | 12,708 | |
Total undiscounted lease payments | | $ | 97,985 | | | $ | 24,995 | |
Less: imputed interest | | (33,940) | | | (8,809) | |
Total lease liabilities | | $ | 64,045 | | | $ | 16,186 | |
Note 5. Investments in Unconsolidated Entities
Fiber Holdings
BB Fiber Holdings LLC (“Fiber Holdings”) was primarily established to develop fiber networks as real estate property for long-term investment. On July 1, 2020, the Company completed the sale of an ownership stake in the entity that controls the Company’s Midwest fiber network assets (the “Propco”). Fiber Holdings has a 47.5% ownership in the Propco that is under a long-term, triple net lease with our joint venture partner. Our ownership interest in Fiber Holdings represents approximately a 20% economic interest in the Propco. The Company’s current investment and maximum exposure to loss as a result of its involvement with Fiber Holdings, an equity method unconsolidated entity, was approximately $38.3 million as of March 31, 2023. The Company has not provided financial support to Fiber Holdings.
Note 6. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date;
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Unobservable inputs for the asset or liability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, our outstanding notes and other debt, settlement payable, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Total | | Quoted Prices in Active Markets (Level 1) | | Prices with Other Observable Inputs (Level 2) | | Prices with Unobservable Inputs (Level 3) |
At March 31, 2023 | | | | | | | | |
Liabilities | | | | | | | | |
Senior secured notes - 10.50%, due February 15, 2028 | | $ | 2,531,945 | | | $ | — | | | $ | 2,531,945 | | | $ | — | |
Senior secured notes - 4.75%, due April 15, 2028 | | 444,560 | | | — | | | 444,560 | | | — | |
Exchangeable senior notes - 4.00%, due June 15, 2024 | | 111,751 | | | — | | | 111,751 | | | — | |
Convertible senior notes - 7.50% due December 1, 2027 | | 230,215 | | | — | | | 230,215 | | | — | |
Senior unsecured notes - 6.50%, due February 15, 2029 | | 680,003 | | | — | | | 680,003 | | | — | |
Senior unsecured notes - 6.00%, due January 15, 2030 | | 415,342 | | | — | | | 415,342 | | | — | |
Senior secured revolving credit facility, variable rate, due December 10, 2024 | | 74,992 | | | — | | | 74,992 | | | — | |
Settlement payable | | 211,725 | | | — | | | 211,725 | | | — | |
| | | | | | | | |
Total | | $ | 4,700,533 | | | $ | — | | | $ | 4,700,533 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | | | — | |
Exchangeable senior notes - 4.00%, due June 15, 2024 | | 127,024 | | | — | | | 127,024 | | | — | |
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 | | | — | |
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 | | | $ | — | |
The carrying value of cash and cash equivalents, accounts and other receivables, and accounts, interest and dividends payable approximate fair values due to the short-term nature of these financial instruments.
The total principal balance of our outstanding notes and other debt was $5.48 billion at March 31, 2023, with a fair value of $4.49 billion. The estimated fair value of our outstanding notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy.
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 13. The Settlement Payable was initially 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. As of March 31, 2023, the remaining Settlement Payable is $229.6 million and is reported on our Condensed Consolidated Balance Sheets. There have been no changes in the valuation methodologies used since the initial recording.
Note 7. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Depreciable Lives | | March 31, 2023 | | December 31, 2022 |
Land | | Indefinite | | $ | 28,963 | | | $ | 28,845 | |
Building and improvements | | 3 - 40 years | | 363,913 | | | 363,077 | |
Poles | | 30 years | | 299,799 | | | 296,941 | |
Fiber | | 30 years | | 4,556,716 | | | 4,434,506 | |
Equipment | | 5 - 7 years | | 426,127 | | | 399,473 | |
Copper | | 20 years | | 3,972,704 | | | 3,964,439 | |
Conduit | | 30 years | | 89,963 | | | 89,963 | |
Tower assets | | 20 years | | 5,361 | | | 5,619 | |
Finance lease assets | | (1) | | 74,585 | | | 73,487 | |
Other assets | | 15 - 20 years | | 10,436 | | | 10,436 | |
Corporate assets | | 3 - 7 years | | 15,266 | | | 14,883 | |
Construction in progress | | (1) | | 56,387 | | | 46,508 | |
| | | | 9,900,220 | | | 9,728,177 | |
Less accumulated depreciation | | | | (6,045,031) | | | (5,973,630) | |
Net property, plant and equipment | | | | $ | 3,855,189 | | | $ | 3,754,547 | |
(1) See our Annual Report for property, plant and equipment accounting policies.
Depreciation expense for the three months ended March 31, 2023 and 2022 was $69.3 million and $64.0 million, respectively.
Note 8. Derivative Instruments and Hedging Activities
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes, and on June 27, 2019, concurrently with the exercise by the initial purchasers involved in the offering of the Exchangeable Notes (the “Initial Purchasers”) of their option to purchase additional Exchangeable Notes, Uniti Fiber Holdings Inc., the issuer of the Exchangeable Notes, entered into exchangeable note hedge transactions with respect to the Company’s common stock (the “Note Hedge Transactions”) with certain of the Initial Purchasers or their respective affiliates (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of the Company’s common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions have an initial strike price that corresponds to the initial exchange price of the Exchangeable Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are intended to reduce potential dilution to the Company’s common stock upon any exchange of the Exchangeable Notes and/or offset any cash payments Uniti Fiber is required to make in excess of the principal amount of exchanged Exchangeable Notes, as the case may be, in the event that the market value per share of the Company’s common stock, as measured under the Note Hedge Transactions, at the time of exercise is greater than the strike price of the Note Hedge Transactions.
The Note Hedge Transactions are separate transactions, entered into by Uniti Fiber Holdings Inc. with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. The Note Hedge Transactions meet certain accounting criteria under GAAP, are recorded in additional paid-in capital on our Condensed Consolidated Balance Sheets and are not accounted for as derivatives that are remeasured each reporting period.
Warrant Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes, and on June 27, 2019 concurrently with the exercise by the Initial Purchasers of their option to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 27.8 million shares of the Company’s common stock in the aggregate at an exercise price of approximately $16.42 per share. The initial maximum number of shares of the Company’s common stock that could be issued pursuant to the Warrants was approximately 55.5 million. The maximum number of shares of the Company's common stock that could be issued pursuant to the Warrants has subsequently decreased due to the partial unwind agreements that the Company entered into with the Counterparties in connection with each repurchase of Exchangeable Notes. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended. If the market value per share of the Company’s common stock, as measured under the Warrants, at the time of exercise exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants will expire over a period beginning in September 2024.
The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Warrants meet certain accounting criteria under GAAP, are recorded in additional paid-in capital on our Condensed Consolidated Balance Sheets and are not accounted for as derivatives that are remeasured each reporting period.
Note 9. Goodwill and Intangible Assets and Liabilities
Changes in the carrying amount of goodwill occurring during the three months ended March 31, 2023 are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | Fiber Infrastructure | | Total |
Goodwill at December 31, 2022 | | $ | 672,878 | | | $ | 672,878 | |
Accumulated impairment charges as of December 31, 2022 | | (311,500) | | | (311,500) | |
Balance at December 31, 2022 | | $ | 361,378 | | | $ | 361,378 | |
| | | | |
Goodwill at March 31, 2023 | | $ | 672,878 | | | $ | 672,878 | |
Accumulated impairment charges as of March 31, 2023 | | (311,500) | | | (311,500) | |
Balance at March 31, 2023 | | $ | 361,378 | | | $ | 361,378 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | March 31, 2023 | | December 31, 2022 |
| | Original Cost | | Accumulated Amortization | | Original Cost | | Accumulated Amortization |
Finite life intangible assets: | | | | | | | | |
Customer lists | | $ | 416,104 | | | $ | (134,443) | | | $ | 416,104 | | | $ | (128,728) | |
Contracts | | 52,536 | | | (16,417) | | | 52,536 | | | (14,776) | |
Underlying Rights | | 10,497 | | | (875) | | | 10,497 | | | (787) | |
| | | | | | | | |
Total intangible assets | | $ | 479,137 | | | | | $ | 479,137 | | | |
Less: accumulated amortization | | (151,735) | | | | | (144,291) | | | |
Total intangible assets, net | | $ | 327,402 | | | | | $ | 334,846 | | | |
| | | | | | | | |
Finite life intangible liabilities: | | | | | | | | |
Below-market leases | | $ | 191,154 | | | (26,736) | | | $ | 191,154 | | | (24,062) | |
| | | | | | | | |
Finite life intangible liabilities: | | | | | | | | |
Below-market leases | | $ | 191,154 | | | | | $ | 191,154 | | | |
Less: accumulated amortization | | (26,736) | | | | | (24,062) | | | |
Total intangible liabilities, net | | $ | 164,418 | | | | | $ | 167,092 | | | |
As of March 31, 2023, the remaining weighted average amortization period of the Company’s intangible assets was 14.0 years.
Amortization expense for the three months ended March 31, 2023 and 2022 was $7.4 million and $7.4 million, respectively. Amortization expense is estimated to be $29.8 million for the full year of 2023, $29.7 million in 2024, $29.7 million in 2025, $29.7 million in 2026, and $29.7 million for 2027.
We recognize the amortization of below-market leases in revenue. Revenue related to the amortization of the below-market leases for the three months ended March 31, 2023 and 2022 was $2.7 million and $2.7 million, respectively. As of March 31, 2023, the remaining weighted average amortization period of the Company’s intangible liabilities was 16.7 years. Revenue due to the amortization of the below-market leases is estimated to be $10.7 million for the full year of 2023, $10.7 million in 2024, $10.7 million in 2025, $10.7 million in 2026, and $10.7 million in 2027.
Note 10. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and/or certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt are as follows:
| | | | | | | | | | | | | | |
(Thousands) | | March 31, 2023 | | December 31, 2022 |
Principal amount | | $ | 5,484,442 | | | $ | 5,262,373 | |
Less unamortized discount, premium and debt issuance costs | | (107,129) | | | (73,558) | |
Notes and other debt less unamortized discount, premium and debt issuance costs | | $ | 5,377,313 | | | $ | 5,188,815 | |
Notes and other debt at March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
(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) | |
Senior secured notes - 10.50% due February 15, 2028 (discount is based on imputed interest rate of 11.06%) | | 2,600,000 | | | (54,994) | | | — | | | — | |
Senior secured notes - 4.75%, due April 15, 2028 (discount is based on imputed interest rate of 5.04%) | | 570,000 | | | (7,337) | | | 570,000 | | | (7,654) | |
Exchangeable senior notes - 4.00%, due June 15, 2024 (discount is based on imputed interest rate of 4.77%) | | 122,942 | | | (1,107) | | | 137,873 | | | (1,501) | |
Convertible senior notes - 7.50%, due December 1, 2027 (discount is based on imputed interest rate of 8.29%) | | 306,500 | | | (9,362) | | | 306,500 | | | (9,768) | |
Senior unsecured notes - 6.00% due January 15, 2030 (discount is based on imputed interest rate of 6.27%) | | 700,000 | | | (10,234) | | | 700,000 | | | (10,535) | |
Senior unsecured notes - 6.50%, due February 15, 2029 (discount is based on imputed interest rate of 6.83%) | | 1,110,000 | | | (17,641) | | | 1,110,000 | | | (18,245) | |
Senior secured revolving credit facility, variable rate, due December 10, 2024 | | 75,000 | | | (6,454) | | | 188,000 | | | (3,616) | |
Total | | $ | 5,484,442 | | | $ | (107,129) | | | $ | 5,262,373 | | | $ | (73,558) | |
| | | | | | | | |
At March 31, 2023, notes and other debt included the following: (i) $75.0 million under the Revolving Credit Facility (as defined below) pursuant to that certain credit agreement, dated as of April 24, 2015, by and among the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, the “Borrowers”), the guarantors party thereto, Bank of America, N.A., as administrative agent, collateral agent, swing line lender and an L/C issuer and certain other lenders named therein (the “Credit Agreement”); (ii) $2.6 billion aggregate principal amount of 10.50% Senior Secured Notes due 2028 (the “February 2028 Secured Notes”); (iii) $570.0 million aggregate principal amount of 4.75% Senior Secured Notes due April 15, 2028 (the “April 2028 Secured Notes”); (iv) $1.1 billion aggregate principal amount of 6.50% Senior Unsecured Notes due February 15, 2029 (the “2029 Notes”); (v) $122.9 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 (vii) $306.5 million aggregate principal amount of 7.50% Convertible Senior Notes due 2027 (the "Convertible 2027 Notes" and, together with the February 2028 Secured Notes, April 2028 Secured Notes, 2029 Notes, 2030 Notes and the Exchangeable Notes, the "Notes"). The terms of the Notes are as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Credit Agreement
On March 24, 2023, the Borrowers, each a subsidiary of Uniti Group Inc., entered into Amendment No. 8 (the “Amendment”) to the Credit Agreement.
The Amendment extends the maturity of the $500 million revolving credit facility to, upon receipt of routine regulatory approvals, September 24, 2027 (the “Revolving Credit Facility”). The Amendment also transitioned the Revolving Credit Facility from LIBOR to Term SOFR, and in connection with that change, set the credit spread adjustment to ten basis points for all interest periods. 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 March 31, 2023, 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 Term SOFR 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 Term SOFR borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
Secured Notes
On February 14, 2023, The Operating Partnership, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings Inc. (collectively, the “Issuers”) issued $2.6 billion aggregate principal amount of the February 2028 Secured Notes. The Issuers used the net proceeds from the offering to fund the redemption in full of the Issuers’ outstanding 7.875% senior secured notes due 2025 (the "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. During the three months ended March 31, 2023, we recognized a $32.3 million loss on the extinguishment of the 2025 Secured Notes within interest expense, net on the Condensed Consolidated Statements of Income (Loss), which included $10.3 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $22.0 million of cash interest expense for the redemption premium.
The February 2028 Secured Notes were issued at an issue price of 100% of their principal amount pursuant to an indenture, dated as of February 14, 2023 (the “February 2028 Secured Notes Indenture”), among the Issuers, the guarantors named therein (collectively, the “Guarantors”) and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. The February 2028 Secured Notes mature on February 15, 2028 and bear interest at a rate of 10.50% per year. Interest on the February 2028 Secured Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2023.
The Issuers may redeem the February 2028 Secured Notes, 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 February 2028 Secured Notes 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 February 2028 Secured Notes Indenture.
Thereafter, the Issuers may redeem the February 2028 Secured Notes in whole or in part, at the redemption prices set forth in the February 2028 Secured Notes 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 February 2028 Secured Notes 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 February 2028 Secured Notes 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 February 2028 Secured Notes 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 February 2028 Secured Notes remains outstanding. If certain changes of control of the Operating Partnership occur, holders of the February 2028 Secured Notes 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 February 2028 Secured Notes 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 February 2028 Secured Notes, including by making filings to obtain such approval within 60 days of the issuance of the February 2028 Secured Notes. 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 February 2028 Secured Notes.
The February 2028 Secured Notes 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 February 2028 Secured Notes; 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 February 2028 Secured Notes.
The February 2028 Secured Notes 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.
Exchangeable Notes
On March 21, 2023, the Company repurchased approximately $15.0 million of the Exchangeable Notes for total cash consideration of $13.7 million. During the three months ended March 31, 2023, we recorded a $1.1 million gain on extinguishment of debt, net within interest expense on our Condensed Consolidated Statements of Income (Loss), which included $0.1 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs. In connection with these repurchases, the Company entered into partial unwind agreements with the Counterparties to unwind a portion of the Note Hedge Transactions and the Warrants described above (see Note 8).
Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Revolving Credit Facility. These costs are amortized using the effective interest method over the term of the related indebtedness and are included in interest expense in our Condensed Consolidated Statements of Income. For the three months ended March 31, 2023 and 2022, we recognized $4.8 million and $4.3 million, respectively, of non-cash interest expense related to the amortization of deferred financing costs.
Note 11. Earnings Per Share
Our time-based restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we included these instruments in the computation of earnings per share under the two-class method described in FASB ASC 260, Earnings per Share (“ASC 260”).
We also have outstanding performance-based restricted stock units that contain forfeitable rights to receive dividends. Therefore, the awards are considered non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are met.
The dilutive effect of the Exchangeable Notes and the Convertible 2027 Notes is calculated by using the “if-converted” method. This assumes an add-back of interest, net of income taxes, to net income attributable to shareholders as if the securities were converted at the beginning of the reporting period (or at time of issuance, if later) and the resulting common shares included in number of weighted average shares. The dilutive effect of the Warrants (see Note 8) is calculated using the treasury-stock method. During the three months ended March 31, 2023 and 2022, 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:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands, except per share data) | | 2023 | | 2022 |
Basic earnings per share: | | | | |
Numerator: | | | | |
Net (loss) income attributable to shareholders | | $ | (19,202) | | | $ | 52,730 | |
Less: Income allocated to participating securities | | (247) | | | (331) | |
Dividends declared on convertible preferred stock | | (5) | | | (5) | |
Net (loss) income attributable to common shares | | $ | (19,454) | | | $ | 52,394 | |
Denominator: | | | | |
Basic weighted-average common shares outstanding | | 236,090 | | | 235,046 | |
Basic (loss) earnings per common share | | $ | (0.08) | | | $ | 0.22 | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands, except per share data) | | 2023 | | 2022 |
Diluted earnings per share: | | | | |
Numerator: | | | | |
Net (loss) income attributable to shareholders | | $ | (19,202) | | | $ | 52,730 | |
Less: Income allocated to participating securities | | (247) | | | (331) | |
Dividends declared on convertible preferred stock | | (5) | | | (5) | |
Impact on if-converted dilutive securities | | — | | | 2,994 | |
Net (loss) income attributable to common shares | | $ | (19,454) | | | $ | 55,388 | |
Denominator: | | | | |
Basic weighted-average common shares outstanding | | 236,090 | | | 235,046 | |
Effect of dilutive non-participating securities | | — | | | 1,226 | |
Impact on if-converted dilutive securities | | — | | | 31,032 | |
Weighted-average shares for dilutive earnings per common share | | 236,090 | | | 267,304 | |
Dilutive (loss) earnings per common share | | $ | (0.08) | | | $ | 0.21 | |
For the three months ended March 31, 2023, 1,053,189 non-participating securities were excluded from the computation of earnings per share, as their performance conditions have not been met, and 54,748,359 potential common shares related to the Exchangeable Notes and the Convertible Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive.
Note 12. Segment Information
Our management, including our chief executive officer, who is our chief operating decision maker, manages our operations as two reportable segments, in addition to our corporate operations, which include:
Leasing: Represents the operations of our leasing business, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing dark fiber network assets that we either constructed or acquired. While the Leasing segment represents our REIT operations, certain aspects of the Leasing segment are also operated through taxable REIT subsidiaries.
Fiber Infrastructure: Represents the operations of our fiber business, Uniti Fiber, which is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
Corporate: Represents our corporate office and shared service functions. Certain costs and expenses, primarily related to headcount, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance measure we define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, costs associated with the implementation of our enterprise resource planning system, executive severance costs, costs related to the settlement with Windstream, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. The Company believes that net income, as defined by GAAP, is the most appropriate earnings metric; however, we believe that Adjusted EBITDA serves as a useful supplement to net income because it allows investors, analysts and management to evaluate the performance of our segments in a manner that is comparable period over period. Adjusted EBITDA should not be considered as an alternative to net income as determined in accordance with GAAP.
Selected financial data related to our segments is presented below for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
(Thousands) | | Leasing | | Fiber Infrastructure | | Corporate | | Subtotal of Reportable Segments |
Revenues | | $ | 210,808 | | | $ | 79,014 | | | $ | — | | | $ | 289,822 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 204,966 | | | $ | 33,674 | | | $ | (7,439) | | | $ | 231,201 | |
Less: | | | | | | | | |
Interest expense | | | | | | | | 148,863 | |
Depreciation and amortization | | 44,173 | | | 32,586 | | | 16 | | | 76,775 | |
Transaction related and other costs | | | | | | | | 2,788 | |
Other, net | | | | | | | | 20,513 | |
Stock-based compensation | | | | | | | | 3,130 | |
Income tax benefit | | | | | | | | (2,412) | |
Adjustments for equity in earnings from unconsolidated entities | | | | | | | | 755 | |
Net loss | | | | | | | | $ | (19,211) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
(Thousands) | | Leasing | | Fiber Infrastructure | | Corporate | | Subtotal of Reportable Segments |
Revenues | | $ | 204,641 | | | $ | 73,393 | | | $ | — | | | $ | 278,034 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 198,973 | | | $ | 31,459 | | | $ | (5,643) | | | $ | 224,789 | |
Less: | | | | | | | | |
Interest expense | | | | | | | | 96,172 | |
Depreciation and amortization | | 42,102 | | | 29,319 | | | 36 | | | 71,457 | |
Transaction related and other costs | | | | | | | | 1,714 | |
Other, net | | | | | | | | 361 | |
Stock-based compensation | | | | | | | | 3,312 | |
Income tax benefit | | | | | | | | (2,071) | |
Adjustments for equity in earnings from unconsolidated entities | | | | | | | | 986 | |
Net income | | | | | | | | $ | 52,858 | |
Note 13. Commitments and Contingencies
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
Windstream Commitments
Following the consummation of our settlement agreement with Windstream, including entry into the Windstream Leases, we are obligated to make $490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning in October 2020, and Uniti may prepay any installments due on or after the first anniversary of the settlement agreement (discounted at a 9% rate). On October 14, 2021, the Company prepaid four installments for a total of $92.9 million. As of March 31, 2023, the Company has made payments totaling $239.9 million.
Further, beginning in October 2020, we became obligated to reimburse Windstream for up to an aggregate of $1.75 billion for certain growth capital improvements in long-term fiber and related assets made by Windstream (“Growth Capital Improvements”) through 2029. Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the property leased under the competitive local exchange carrier master lease agreement, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to $225 million in 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. During the three months ended March 31, 2023, Uniti reimbursed $67.5 million of Growth Capital Improvements, of which $35.1 million represented the reimbursement of capital improvements completed in 2022 that were previously classified as tenant funded capital improvements. As of the date of this Quarterly Report on Form 10-Q, we have reimbursed a total of $642.0 million of Growth Capital Improvements. Upon reimbursement, the Company reduced the unamortized portion of deferred revenue related to these capital improvements and capitalized the difference between the cash provided to Windstream and the unamortized deferred revenue as a lease incentive. This lease incentive, which is $0.7 million and reported within other assets on our Condensed Consolidated Balance Sheets as of March 31, 2023, will be amortized as a reduction to revenue over the initial term of the Windstream Leases.
Starting on the first anniversary of each installment of reimbursement for a Growth Capital Improvement, the rent payable by Windstream under the applicable Windstream Lease will increase by an amount equal to 8.0% (the “Rent Rate”) of such installment of reimbursement. The Rent Rate will thereafter increase to 100.5% of the prior Rent Rate on each anniversary of each reimbursement. In the event that the tenant’s interest in either Windstream Lease is transferred by Windstream under the terms thereof (unless transferred to the same transferee), or if Uniti transfers its interests as landlord under either Windstream Lease (unless to the same transferee), the reimbursement rights and obligations will be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that the maximum that may be allocated to the CLEC MLA following such transfer is $20 million per year. If Uniti fails to reimburse any Growth Capital Improvement reimbursement payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the 1.75 billion of Growth Capital Improvements commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these loans will accrue at 8% from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans.
Other Litigation
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 our spin-off from Windstream (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. The consolidated amended complaint seeks to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The Class Action asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements by allegedly failing to disclose, among other things, the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The Class Action seeks class certification, unspecified monetary damages, costs and attorneys’ fees and other relief. On July 10, 2020, defendants moved to dismiss the consolidated amended complaint. On April 1, 2021, the court issued an order denying defendants’ motion to dismiss. On April 15, 2021, defendants filed a motion for reconsideration of the order or, in the alternative, for certification of an appeal of the decision to the Eighth Circuit. On October 25, 2021, plaintiffs filed a motion for class certification, which defendants opposed. On December 22, 2021, the court issued an order denying defendants’ motion for reconsideration or, in the alternative, certification of an appeal. On March 25, 2022, the parties reached an agreement to settle the Class Action, on behalf of a settlement class, for $38.9 million, to be funded entirely by the Company’s insurance carriers. On June 17, 2022, the parties signed a stipulation of settlement and plaintiffs moved for preliminary approval of the settlement. The court granted preliminary approval on July 20, 2022. The court granted final approval on November 7, 2022. In accordance with ASC 450, we recorded $38.9 million of settlement expense within general and administrative expense within our Condensed Consolidated Statements of Income during the first quarter of 2022 and accounts payable, accrued expenses and other liabilities, net within our Condensed Consolidated Balance Sheets as of March 31, 2022. Additionally, we recorded the probable insurance recovery of $38.9 million as a reduction to general and administrative expense during the three months ended March 31, 2022 within our Condensed Consolidated Statements of Income, and other assets within Condensed Consolidated Balance Sheets as of March 31, 2022.
On August 17, 2021, two purported shareholders filed a derivative action on behalf of Uniti in the Circuit Court for Baltimore City, Maryland, under the caption Mayer et al. v. Gunderman et al., 24-C-21-003488 (the “Mayer Derivative 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 complaint alleges that the individual defendants caused the Company to issue certain false and misleading statements relating to the Spin-Off and/or the Master Lease. In particular, as in the Shareholder Actions, the complaint alleges, among other things, that defendants failed to disclose the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The complaint seeks unspecified damages, unspecified equitable relief, and related costs and fees. On December 23, 2021, the court entered a joint stipulation to stay the Mayer Derivative Action, including the time for the defendants to respond to the complaint, pending the outcome of the Class Action.
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 March 3, 2023, the parties to the Mayer and Guzzo Derivative Actions signed a stipulation of settlement agreeing to settle the actions in exchange for non-monetary damages, and also agreeing to an award of attorney’s fees and expenses to plaintiffs’ counsel in both actions in the amount of $0.8 million. On March 3, 2023, plaintiff’s counsel in the Mayer Derivative Action sought preliminary approval of the settlement, which the court presiding over the action granted on March 23, 2023. The settlement remains subject to final court approval, and a final hearing on the settlement is scheduled in the Mayer Derivative Action for May 9, 2023.
We maintain insurance policies that would provide coverage to various degrees for potential liabilities arising from the legal proceedings described above.
Under the terms of the tax matters agreement entered into on April 24, 2015 by the Company, Windstream Services, LLC and Windstream (the “Tax Matters Agreement”), in connection with the Spin-Off, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided in connection with the tax opinion. We believe that the probability of us incurring obligations under the Tax Matters Agreement are remote; and therefore, we have recorded no such liabilities in our Condensed Consolidated Balance Sheets as of March 31, 2023.
Note 14. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component is as follows for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands) | | 2023 | | 2022 |
Cash flow hedge changes in fair value: | | | | |
Balance at beginning of period attributable to shareholders | | $ | (30,353) | | | $ | (30,353) | |
Balance at end of period attributable to shareholders | | (30,353) | | | (30,353) | |
Interest rate swap termination: | | | | |
Balance at beginning of period attributable to shareholders | | 30,353 | | | 21,189 | |
Amounts reclassified from accumulated other comprehensive income | | — | | | 2,830 | |
Balance at end of period | | 30,353 | | | 24,019 | |
Less: Other comprehensive income attributable to noncontrolling interest | | — | | | 7 | |
Balance at end of period attributable to shareholders | | 30,353 | | | 24,012 | |
Accumulated other comprehensive loss at end of period | | $ | — | | | $ | (6,341) | |